Exhibit 99.6
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
Page 1 of 10
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
AS AT 2005 2004
- ----- ----------- ------------
ASSETS
CURRENT
Cash and cash equivalents (Note 7) 19,654,600 13,754,818
Accounts receivable 1,609,279 2,024,342
Prepaids and sundry assets 1,352,473 1,229,091
----------- -----------
22,616,352 17,008,251
PROPERTY, PLANT AND EQUIPMENT 3,118,364 2,056,282
GOODWILL AND INTANGIBLE ASSETS 8,152,308 8,282,453
DEFERRED COSTS 2,097,804 2,242,868
FUTURE INCOME TAXES RECOVERABLE 590,000 590,000
----------- -----------
13,958,476 13,171,603
----------- -----------
$36,574,828 $30,179,854
=========== ===========
Page 2 of 10
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
AS AT 2005 2004
- ----- ------------ ------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 1,694,133 1,894,599
Deposits 17,776,537 13,153,623
Current portion of loan payable 33,515 29,860
Current portion of acquisition loan payable 765,123 777,443
Convertible Debenture (Note 8) -- 8,920,373
------------ ------------
20,269,308 24,775,898
============ ============
LOAN PAYABLE 55,614 67,186
ACQUISITION LOAN PAYABLE -- 380,118
CONVERTIBLE DEBENTURE (NOTE. 8) 9,150,169 --
CONVERTIBLE PREFERRED SHARES (NOTE 9) 17,564,089 13,892,478
------------ ------------
26,769,872 14,339,782
------------ ------------
47,039,180 39,115,680
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK 23,659,566 22,705,734
WARRANTS 2,610,992 2,610,992
CONTRIBUTED SURPLUS 567,949 482,092
DEFICIT (37,302,859) (34,734,644)
------------ ------------
(10,464,352) (8,935,826)
============ ============
$ 36,574,828 $ 30,179,854
============ ============
Page 3 of 10
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED
STATEMENTS OF OPERATIONS AND DEFICIT
MARCH 31, MARCH 31,
FOR THE THREE MONTHS ENDED 2005 2004
- -------------------------- ------------ ------------
REVENUES
Points operations $ 2,540,658 $ 1,532,513
Interest income 37,251 85,052
------------ ------------
2,577,909 1,617,565
GENERAL AND ADMINISTRATION EXPENSES 4,005,639 2,711,438
------------ ------------
LOSS- Before interest, amortization and other items (1,427,730) (1,093,874)
------------ ------------
Interest on convertible debenture 229,796 207,024
Interest on Series Two Preferred Share 217,000 217,000
Interest and bank charges 4,791 261
Amortization of property, plant and equipment,
intangible assets and deferred costs 688,898 443,917
------------ ------------
1,140,485 868,202
------------ ------------
LOSS (2,568,215) (1,962,076)
DEFICIT - Beginning of period (34,734,644) (25,926,361)
DEFICIT - End of period (37,302,859) (27,888,437)
============ ============
LOSS PER SHARE (Note 2) ($0.04) ($0.03)
============ ============
Page 4 of 10
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED
STATEMENTS OF CASH FLOWS
MARCH 31, MARCH 31,
FOR THE THREE MONTHS ENDED 2005 2004
- -------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($2,568,215) ($1,962,076)
Items not affecting cash
Amortization of property, plant and equipment 102,467 56,354
Amortization of deferred costs 132,925 199,346
Amortization of intangible assets 453,506 188,217
Deferred costs on convertible debenture 12,139 --
Employee stock option expense (Note 5) 99,503 60,482
Cancellation of warrants issued for services -- (1,167)
Interest on Series Two Preferred Shares 217,000 217,000
Interest accrued on convertible debenture 229,796 207,024
------------ ------------
(1,320,879) (1,034,820)
Changes in non-cash balances related to operations (Note 6 (a)) 4,714,130 5,159,380
------------ ------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 3,393,251 4,124,560
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment, net of proceeds (1,164,548) (211,664)
Purchase of intangible assets (9,662) (17,004)
Payments for the acquisition of MilePoint, Inc. (400,000) --
Costs related to the acquisition of MilePoint, Inc. (306,138) (200,000)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES (1,880,348) (428,668)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Series Four Preferred Share (Note 9) 3,454,611 --
Repayments on loan payable (7,917) --
Deferred financing costs -- 70,018
Issuance of capital stock, net of share issue costs 940,186 202,485
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 4,386,880 272,503
------------ ------------
INCREASE (DECREASE) IN CASH 5,899,782 3,968,395
CASH AND CASH EQUIVALENTS - Beginning of period 13,754,818 $ 20,274,836
------------ ------------
CASH AND CASH EQUIVALENTS - End of period $ 19,654,600 $ 24,243,231
============ ============
Page 5 of 10
POINTS INTERNATIONAL LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
1. Accounting policies
The company's interim financial statements have been prepared using accounting
policies consistent with those used for the preparation of its annual financial
statements. These interim financial statements should be read in conjunction
with the company's 2004 audited consolidated financial statements. These
financial statements contain all adjustments which management believes necessary
for fair presentation of the financial position, results of operations and cash
flows.
a) Basis of presentation
The consolidated financial statements include the accounts of the
Company and from their respective dates of acquisition of control or
formation of its wholly owned subsidiaries. All inter-company
transactions and amounts have been eliminated on consolidation.
2. Loss per share
a) Loss per share
Loss per share is calculated on the basis of the weighted average
number of common shares outstanding for the three months ended March
31, 2005 that amounted to 71,561,017 shares (March 31, 2004 -
63,394,531).
b) Fully-diluted loss per share
The fully-diluted loss per share has not been computed, as the effect
would be anti-dilutive.
3. Segmented information
Reportable segments: The company has only one operating segment whose operating
results are regularly reviewed by the company's chief operating decision maker
and for which complete and discrete financial information is available. The
company's business is carried on in the industry of loyalty program asset
management. The attached consolidated balance sheets as at March 31, 2005 and
December 31, 2004 present the financial position of this segment. The continuing
operations reflected on the attached consolidated statements of operations are
those of this operating segment.
Enterprise-wide disclosures: $2,389,066 (March 31, 2004 - $1,475,886) of the
company's revenues were generated in the U.S. for the quarter, with the
remaining revenues generated in Canada, Europe and Asia. A significant majority
of the company's assets are located in Canada.
page 6 of 10
4. Major Customers
For the quarter ended March 31, 2005, there are four customers that individually
represent greater than ten percent of the Corporation's consolidated revenues.
In aggregate, the four customers represent approximately 64% of the
Corporation's consolidated revenues. Two customers individually represented
greater than ten percent of consolidated revenues in the first quarter of 2004
(65% in aggregate) and two customers individually represented greater than ten
percent of consolidated revenues in the fourth quarter of 2004 (34% in
aggregate). In addition, as at March 31, 2005, 63% (first quarter 2004 - 80% and
fourth quarter 2004 - 59%) of the Corporation's deposits are due to these
customers.
5. Stock-based compensation
The Corporation accounts for stock options granted in this stock option plan in
accordance with the fair value based method of accounting for stock-based
compensation. The compensation cost that has been charged against income for
this plan is $99,503 for the three months ended March 31, 2005 ($60,482 for the
three months ended March 31, 2004).
During the quarter ended March 31, 2005, 200,000 options were issued to
employees and 40,000 options previously granted were cancelled (no options were
issued in the first quarter of 2004).
6. Statement of Cash Flows
a) Changes in non-cash balances related to operations are as follows:
THREE MONTHS ENDED
MAR, 31
-----------------------
2005 2004
---------- ----------
Decrease (Increase) in accounts receivable $ 415,063 $ 117,270
Decrease (Increase) in prepaid and sundry assets $ (123,382) $ (300,445)
Increase in liability related to the Acquisition of MilePoint, Inc. $ -- $ 74,509
Increase (Decrease) in accounts payable and accrued liabilities $ (200,466) $ (225,791)
Increase (Decrease) in deposits $4,622,914 $5,493,837
---------- ----------
$4,714,130 $5,159,380
========== ==========
b) Supplemental information
Interest and taxes
Interest of $4,631 was paid during the quarter ended March 31, 2005.
Interest of $35,412 was received during the quarter ended March 31,
2005. No income taxes have been paid.
Non-cash transactions
page 7 of 10
Non-cash transactions for the quarter ended March 31, 2005 are as
follows:
(i) 475,600 shares of Points.com Inc. were acquired in exchange for
1,190,856 shares of the Corporation.
(ii) $9,000 of revenue earned for hosting services provided was paid
in loyalty currency. The currency was valued at the purchase
price of the miles and the amount is included in prepaid and
sundry assets. The expense will be recognized as the currency is
used.
(iii) $39,786 of revenue earned for membership fees provided was paid
in one-week accommodation certificates. The certificates are
valued at their average cost and are included in prepaid and
sundry assets. The expense will be recognized as the
accommodation certificates are used.
(iv) The Corporation received $43,539 of loyalty currency from a
partner as reimbursement of a portion of the partner's direct
expenses for the services provided by the Corporation. This
amount is included in prepaid and sundry assets and will be
expensed as the currency is used.
(v) Interest of $7,562 was accrued on the acquisition of MilePoint,
Inc.
(vi) Interest of $229,796 was accrued on the convertible debenture.
(vii) Interest of $217,000 was accrued on the Series Two Preferred
Share.
c) Cash and cash equivalents consist of:
March 31, December 31,
AS AT 2005 2004
- ----- ----------- ------------
Cash $16,124,713 $10,086,111
Short -Term Investments 46,073 544,945
Cash held by credit card processor 3,483,814 3,123,762
----------- -----------
Total 19,654,600 13,754,818
=========== ===========
7. Private Placement
On March 29, 2005, the Corporation entered into binding agreements to issue
approximately 18.1 million common shares at $0.683 per share and one Series Four
Preferred Share for approximately $3.5 million (collectively, the "Private
Placement Transaction"). On the same date CIBC Capital Partners, a division of
Canadian Imperial Bank of Commerce, ("CIBC") agreed to sell to the purchasers in
the Private Placement Transaction an amended version of the $6 million debenture
issued by the Corporation to CIBC in 2001 (the "Debenture") and the Series One
Preferred Share in the capital of the Corporation held by CIBC (the "Debenture
Transaction"). The Private Placement Transaction and the Debenture Transaction
closed on April 4, 2005.
The Series Four Preferred Share has been included, and the Debenture
reclassified to long-term liabilities, in the Corporation's unaudited
consolidated balance sheet as at March 31, 2005. See Notes 8 and 9 for
additional information.
Page 8 of 10
The Pro Forma effect of the Private Placement Transaction is an increase to
share capital and cash of approximately $11 million. As a result the
Corporation's working capital at March 31, 2005 on a Pro Forma basis would be
increased to $13.3 million.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEETS
MARCH 31, TRANSACTION MARCH 31,
AS AT 2005 ADJUSTMENTS 2005
- ----- ---------------- ----------- ------------
POST TRANSACTION ACTUAL
ASSETS
CURRENT
Cash and cash equivalents $ 30,654,600 $11,000,000 $ 19,654,600
Accounts receivable 1,609,279 -- 1,609,279
Prepaids and sundry assets 1,352,473 -- 1,352,473
------------ ----------- ------------
33,616,352 11,000,000 22,616,352
PROPERTY, PLANT AND EQUIPMENT 3,118,364 -- 3,118,364
GOODWILL AND INTANGIBLE ASSETS 8,152,308 -- 8,152,308
DEFERRED COSTS 2,097,804 -- 2,097,804
FUTURE INCOME TAXES RECOVERABLE 590,000 -- 590,000
------------ ----------- ------------
13,958,476 -- 13,958,476
$ 47,574,828 $11,000,000 $ 36,574,828
============ =========== ============
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 1,694,133 $ -- 1,694,133
Deposits 17,776,537 -- 17,776,537
Current portion of loan payable 33,515 -- 33,515
Current portion of acquisition loan payable 765,123 -- 765,123
------------ ----------- ------------
20,269,308 -- 20,269,308
LOAN PAYABLE 55,614 -- 55,614
ACQUISITION LOAN PAYABLE -- -- --
CONVERTIBLE DEBENTURE 9,150,169 -- 9,150,169
CONVERTIBLE PREFERRED SHARES 17,564,089 -- 17,564,089
------------ ----------- ------------
47,039,180 -- 47,039,180
------------ ----------- ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK(1) 34,472,862 10,813,296 23,659,566
CONTRIBUTED SURPLUS 567,949 567,949
WARRANTS 2,797,696 186,704 2,610,992
DEFICIT (37,302,859) -- (37,302,859)
------------ ----------- ------------
535,648 11,000,000 (10,464,352)
------------ ----------- ------------
$ 47,574,828 $11,000,000 $ 36,574,828
============ =========== ============
Note:
(1) - Capital stock is net of share issue costs of CAD $1.3M.
Page 9 of 10
8. Sale of the Convertible Debenture
On March 29, 2005 the Corporation and the purchasers in the Private Placement
Transaction had entered into a binding agreement to purchase the Debenture (in
its amended and restated form) from CIBC. As a result, the Debenture was
reclassified to long-term liabilities in the Corporation's unaudited
consolidated balance sheet as at March 31, 2005.
In connection with this transaction, the Debenture was amended to, among other
things, (i) reduce the interest rate from 11% to 8%, (ii) eliminate all negative
covenants, (iii) eliminate certain positive covenants, (iv) remove certain
events of default and (v) release all security over the assets of Points and its
subsidiaries.
Under the terms of the Debenture, (i) the Debenture is repayable (without
accrued interest, the repayment of which is waived) by the Corporation within 30
days of a change of control of the Corporation resulting from the exercise of
certain warrants issued by the Corporation on April 11, 2003 to Points
Investments, Inc, an affiliate of InterActiveCorp and (ii) the principal amount
of the Debenture will automatically convert into Common Shares immediately
preceding certain liquidity events and, unless previously repaid, will
automatically convert in 18,908,070 common shares in April 2006. Except in
connection with the exercise of the Warrants, Points is not entitled to pre-pay
the Debenture.
9. Issuance of Series Four Preferred Share
In the 2005 investment, Points issued one Series Four Preferred Share for
aggregate cash consideration of $3,454,611. On March 29, 2005 the Corporation
and IAC entered into a binding agreement to issue the Series Four Preferred
Share and the cash was received by the Corporation prior to quarter end. As a
result, the cash and the preferred share are included in the Corporation's
unaudited consolidated balance sheet as at March 31, 2005.
The Series Four Preferred Share is convertible, for no additional consideration,
into 4,504,069 Common Shares. The Series Four Preferred Share contains
anti-dilution protection provisions identical to the Series Two Preferred Share
(see the Corporation's 2004 audited consolidated financial statements for
information with respect to the terms of the Series Two Preferred Share).
Page 10 of 10
POINTS INTERNATIONAL LTD.
INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS
The following interim management's discussion and analysis ("MD&A") of the
performance, financial condition and future prospects of Points International
Ltd. (which is also referred to herein as "Points" or the "Corporation") should
be read in conjunction with the Corporation's consolidated financial statements
(including the notes thereon) for the quarter ended March 31, 2005 and with the
Corporation's 2004 audited consolidated financial statements. Further
information, including Points' Annual Information Form ("AIF") for the year
ended December 31, 2004, 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 May 11, 2005.
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 the AIF filed
with Canadian securities regulators and the factors detailed in Points' other
filings with Canadian securities regulators, including the factors detailed in
Points' annual and interim financial statements and the notes thereto. Points
does not undertake any obligation to update or release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this MD&A or to reflect the occurrence of unanticipated events, except as
required by law.
Page 1 of 33
OVERVIEW OF POINTS' BUSINESS
CORE BUSINESS - Points Solutions
The Corporation 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
Points.com, a consumer reward program management portal, and a suite of
Points.com Business Solutions available to loyalty program operators. The
Corporation's business is primarily conducted over the internet (other than
functions such as customer support) allowing its two primary customers (loyalty
program operators and loyalty programs' consumers) to be virtually anywhere in
the world.
Points.com
The Corporation's cornerstone product is the proprietary Points.com Web site.
Points.com 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.
As at March 31, 2005, Points.com had partnered with 26 loyalty program operators
including the loyalty programs of leading airlines, hotels, online and retail
businesses, and gift certificate programs, and with an additional 21 gift
certificate or retail partners.
Points.com version 3.0 Launched
On April 10, 2005, the Corporation launched a new Web site incorporating some
important changes designed to improve consumers' ability to manage their loyalty
assets. The new Points.com Web site, referred to as "Points.com version 3.0",
represents a major enhancement in the relationship with both reward program
partners as well as the consumer. Points.com version 3.0 will broaden the Web
site's offerings, and present consumers with a personalized view of their reward
program universe.
Through this personalized view of consumers' reward program universe, Points.com
will be able to help consumers release more value from their favourite programs
and "Get More Rewards, Faster(TM)". This is accomplished by adding new mile and
point management tools such as ways to join new rewards programs ("Join"), to
purchase ("Buy") and earn ("Earn") more miles or points in their favourite
programs. In addition, the system will be driven by the ATG Marketing Enterprise
System that will use consumers' unique program reward goals and point mix to
suggest ("Suggest") ways to Join, Buy, Earn and Swap their reward program
currencies most effectively.
As a result of these changes, Points.com will become a reward program management
portal, providing a more comprehensive and engaging consumer experience.
This functionality is expected to add new revenue streams to the Points.com
business model. Most significantly, the loyalty management utility of the Web
site is expected to allow Points.com to focus on a subscription membership model
as a core aspect of the business.
Page 2 of 33
Management expects that Points.com version 3.0 will be phased in over the course
of 2005, with monthly releases beginning at the end of the second quarter. Over
the course of the spring and summer, Points.com will add or expand its Buy, Earn
and Suggest functionalities.
In the second half of 2005, management will begin driving consumer traffic to
the new Points.com Web site to leverage the Web site's ongoing evolution through
online communications with members of the Corporation's reward program partners
and through other online channels.
In accordance with GAAP and Canadian Institute of Chartered Accountants ("CICA")
Handbook Sections 3061 and 3062, web site development costs incurred in the web
site application and infrastructure development associated with Points.com
version 3.0 will be capitalized. For additional information, see page 13,
"General and Administrative Expenses", page 22, "Property, Plant and Equipment",
and page 29 "Capital Resources - Planned Capital Expenditures".
Points.com Business Solutions
At March 31, 2005, the Corporation had 55 Points.com Business Solutions products
in the marketplace. This suite of technologies includes:
Buy and Gift - facilitates the online sale and gift of miles, points and other
loyalty program currencies.
Corporate - facilitates the sale of loyalty program currencies to corporate
customers.
Transfer - facilitates the amalgamation or transfer of loyalty program
currencies among multiple accounts.
Integrate - 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.
Elite - facilitates the online sale of tier status to members of loyalty
programs.
Systems Design - custom applications developed for select large loyalty program
partners. See page 6 "Status of New Products" of the AIF for an example of the
redeemAAmiles program, an application built for the American Airlines AAdvantage
Program.
SIGNIFICANT 2005 BUSINESS DEVELOPMENTS TO THE DATE HEREOF
1. The Corporation completes a $15.8 million private placement; CIBC
restructures and sells the Debenture
On March 29, 2005, Points entered into binding agreements to issue
approximately 18.1 million common shares at $0.683 per share and one Series
Four Preferred Share for approximately $3.5 million (collectively, the
"Private Placement Transaction"). On the same date CIBC Capital Partners, a
division of Canadian Imperial Bank of Commerce, ("CIBC") agreed to sell to
the purchasers in the Private Placement Transaction an amended and restated
Page 3 of 33
version of the $6 million debenture issued by Points to CIBC in 2001 ("the
Debenture") and the Series One Preferred Share in the capital of Points
held by CIBC (the "Debenture Transaction"). The Private Placement
Transaction and the Debenture Transaction closed on April 4, 2005.
See page 20, "InterActiveCorp Investment" for a description of the terms of
the Series Four Preferred Share and page 25, "Debenture and Series One
Preferred Share" for a description of the amended and restated Debenture.
2. American Express Membership Rewards to join Points.com
American Express Travel Related Services Company Inc. has entered into an
agreement to enable the Membership Rewards Program(R) from American Express
to participate on the Points.com portal. In addition, the Membership
Rewards Program will use Points.com technology services to offer real-time
point transfers for select partners. Public launch is expected during the
second quarter of this year.
3. Cendant partners with Points.com
The Cendant Hotel Group, a subsidiary of Cendant Corporation, has entered
into an agreement with Points.com that allows its TripRewards members to
transfer points and miles from one loyalty program to another utilizing
Points.com. Points.com will offer more than 3,600 exchange opportunities
and over 46 redemption partners to Cendant's customers. TripRewards members
have points-earning opportunities at more than 6,000 participating hotels
(e.g., Ramada, Days Inn, etc.) and 46 partners.
REVENUE RECOGNITION POLICIES
The revenue recognition policies for the suite of Points Solutions are as
follows:
Points.com:
- Swap commissions are a percentage of the exchanged value and are
recognized as the services are provided under the terms of
related contracts.
- Membership dues received in advance for services are recognized
over the term of service. In the first quarter of 2005 membership
dues were $29.95 annually for a PointsPlus membership.
- On April 10, 2005, PointsPlus membership sales were discontinued
and replaced with a subscription service. Subscription revenues
received in advance for services are recognized over the term of
service. Subscription fees are currently $19.95 for a one-month
membership, $44.85 for a three-month membership and $59.70 for a
six-month membership. The Corporation will continue to test
different subscription rates, resulting in subscription fees
different from the above pricing.
- One-time trading fees ($9.95 per trade) were recognized at the
time of the trade (for non-PointsPlus members). On April 10,
2005, one-time trading fees were discontinued and replaced with a
one-month subscription fee.
Page 4 of 33
- Non-refundable partner sign-up fees, for which the Corporation is
under no further obligations, are recognized when the program
becomes available as an exchange partner on the Points.com Web
site.
Points.com Business Solutions:
- Revenues from the sale of loyalty program points are recorded net
of costs.
- Hosting and management fees are recognized in the period of
service.
- Non-refundable partner sign-up fees with no fixed term, and for
which the Corporation is under no further obligations, are
recognized as revenue when received.
- Technology design, development and maintenance revenues are
recorded on a "percentage-of-completion" basis.
KEY BUSINESS DRIVERS
Revenue growth has historically been, and will continue to be, generated by
growth of membership in and use of the suite of Points Solutions.
Growth in the number of individual members using Points.com is driven by three
factors that contribute to increased Web site traffic and the ease with which a
consumer can join Points.com to conduct exchange transactions. These factors are
Web site usability and enhancements, marketing (awareness and brand) and partner
activity. For additional information, see "Points.com Growth" on page 7 hereof.
Growth in Points.com Business Solutions will occur through growth of existing
partner relationships, supplemented with new business relationships established
throughout the year. For additional information, see "Points.com Business
Solutions Growth" on page 8 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 12 hereof.
RESULTS OF OPERATIONS - REVENUES
OVERVIEW
Revenue for the quarter ended March 31, 2005 was $2,577,909 representing a
year-over-year increase of $960,344 (59%) and a quarter over quarter increase of
$414,960 (19%). The provision of Points Solutions accounted for greater than
98.6% of the revenue (interest income accounted for the remaining approximately
1.4%). Year over year, revenues from operations increased due to growth in
Points Solutions, the MilePoint Acquisition (see "Commitments Related to
MilePoint Acquisition" on page 27) and offset by a weakening U.S. dollar while
quarter over quarter the revenues improved due to an increase in the use of
existing Points.com Business Solutions, the seasonal nature of Elite and also
offset by a weakening U.S. dollar. For additional information see "Revenue
Growth" on page 7. Interest and other revenue increased by 26% quarter over
quarter due to a better yield on invested assets and a larger average period
cash balance but declined year over year as a smaller average period cash
balance was invested in
Page 5 of 33
shorter-term, lower yielding securities. See "Other Factors Contributing to
Revenue Growth - Interest Income" on page 10 for additional information.
FOR THE THREE MONTHS ENDED
------------------------------------
MARCH 31 DEC. 31 MARCH 31
REVENUES 2005 2004 2004
- -------- ---------- ---------- ----------
Points Operations $2,540,658 $2,133,330 $1,532,513
Interest and other revenue 37,251 29,618 85,052
---------- ---------- ----------
TOTAL REVENUE $2,577,909 $2,162,948 $1,617,565
========== ========== ==========
A substantial portion of Points' revenue is generated through the provision of
Points.com Business 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.
The Corporation earns revenue from Points.com in three principal ways. First,
loyalty program members pay Points either a fee for each Swap transaction
conducted at Points.com or an annual fee for a membership that includes
unlimited Swap transactions (on April 10, 2005, the annual membership fee was
discontinued and replaced with a subscription fee whereby consumers can join for
one, three or six months). Second, Points charges a commission on all Swaps,
based on a value of the loyalty currency tendered for exchange by the loyalty
program member. Through the Swap 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. As part of Points.com version 3.0, the
Corporation will be launching its Earn and Buy product features which are
expected to be revenue generating services. Finally, Points may earn a
non-refundable partner sign-up fee when a partner joins Points.com.
There are four customers that individually represent greater than ten percent of
the Corporation's consolidated revenues. In aggregate, the four customers
represent approximately 64% of the Corporation's consolidated revenues. Two
customers individually represented greater than ten percent of consolidated
revenues in the first quarter of 2004 (65% in aggregate) and two customers
individually represented greater than ten percent of consolidated revenues in
the fourth quarter of 2004 (34% in aggregate). In addition, 63% (first quarter
2004 - 80% and fourth quarter 2004 - 59%) of the Corporation's deposits are due
to these customers.
In the first quarter of 2005, approximately 96% of the Corporation's revenues
were recurring revenues (e.g., revenues from monthly management fees, membership
fees, transaction fees and interest) and 4% were from non-recurring sources
(e.g., one-time web development and integration fees). The percentage of
recurring revenues was consistent with both the first and fourth quarters of
2004. Management of the Corporation believes that, in the long term, focusing on
growing recurring revenues, which generate revenues for both the partners and
Points.com, is in the best interests of the Corporation.
Page 6 of 33
FOR THE THREE MONTHS ENDED
------------------------------------
MARCH 31 DEC. 31 MARCH 31
REVENUES 2005 2004 2004
- -------- ---------- ---------- ----------
Recurring revenues $2,474,115 $2,025,134 $1,572,115
Non-recurring revenues 103,793 137,815 45,449
---------- ---------- ----------
TOTAL REVENUE $2,577,909 $2,162,948 $1,617,565
========== ========== ==========
Management recognizes that the Corporation must achieve profitability through
revenue growth and cost management. Management expects that Points' revenues
will exceed its general and administration costs in 2006.
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 growth of existing relationships,
supplemented with new business relationships established throughout the year.
Management expects the existing contracts to continue to generate growing
revenues and, based on continuing business development efforts, is optimistic
about new revenue sources in future quarters.
Growth in Use of 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)
AS AT
-------------------------------
MARCH 31 DEC. 31 MARCH 31
NUMBER OF PARTNERS AS AT 2005 2004 2004
- ------------------------ -------- -------- ---------
Points.com(2) 47 45 36
Points.com Business Solutions 21 21 18
Cumulative Points Transacted (000,000's) 9,568 7,944 3,810
Notes:
(1) Partners may be included in both Points.com Business Solutions and
Points.com.
(2) On March 31, 2005, Points.com partners included 26 loyalty program
operators and 21 gift certificate programs.
Points.com Growth
Currently, the Points.com business model is dependent on the number of consumer
members paying for a Points.com membership and / or completing a Swap
transaction. In addition, at the end of the third quarter of 2005, the
Corporation expects to begin generating revenues through the Earn and Buy
functionalities currently being developed. The number of consumers that will
conduct a transaction is driven by three factors: Web site usability and
enhancements; marketing (awareness and brand); and partner activity. As the
Corporation's primary efforts have been focused on the April 10, 2005 launch of
Points.com version 3.0, there were only moderate changes in the usability and
marketing of the existing Web site. However, progress has continued
Page 7 of 33
in expanding and improving Points.com's partner mix. The number of loyalty
program partners added and their industry mix are two important elements in the
growth of Points.com as they directly impact the consumers' value proposition.
Said differently, the more loyalty programs that a consumer participates in,
that are also Points.com partners, the greater the opportunity for that consumer
to maximize the value of his or her collective loyalty programs. The number of
loyalty programs participating on Points.com has increased by 31% since March
31, 2004 and 4% since December 31, 2004 and the Corporation made significant
progress by announcing a partnership with its first financial services partner
and adding another significant travel partner. See page 7, "Growth in Use of
Points Solutions" for a summary of growth in the number of partners. Management
expects to continue to round out the partner industry mix and add new partners
in 2005.
Points.com version 3.0 will add a number of new features and improved
functionality to the Web site. This functionality is expected to incorporate new
revenue streams into the Points.com business model by improving consumers'
ability to manage and derive value from their loyalty program universe. The
launch of Points.com version 3.0 will allow the Corporation to begin to market
and merchandise to its consumer base in a more effective manner than the
previous version of Points.com. Testing of marketing programs are expected to
begin at the end of the second quarter of 2005 and ramp up during the course of
the third and fourth quarters.
Points.com Business Solutions Growth
The Points.com Business 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' Web sites. However, Points has seen
continuous growth in the products since each launch. Management expects this
trend to continue for new and existing Points.com Business Solutions.
FOR THE THREE MONTHS ENDED
-----------------------------
MARCH 31 DEC. 31 MARCH 31
POINTS.COM BUSINESS SOLUTIONS METRICS AS AT 2005 2004 2004
- ------------------------------------------- -------- ------- --------
Total Unique Partners 21 21 18
Total Points.com Business Solutions 55 55 45
Page 8 of 33
FOR THE THREE MONTHS ENDED
-----------------------------
POINTS.COM BUSINESS SOLUTIONS(1) MARCH 31 DEC. 31 MARCH 31
NUMBER OF PRODUCTS AS AT 2005 2004 2004
- -------------------------------- -------- ------- --------
Buy 16 16 13
Gift 16 16 13
Transfer 5 5 3
Corporate 8 8 7
Elite 2 2 2
Systems Design 4 4 3
Integrate partners(2)(3) 4 4 4
--- --- ---
Total Points.com Business Solutions 55 55 45
=== === ===
Notes:
(1) Includes products sold to new and existing customers.
(2) Each Integrate partner will have third-parties integrated into its
technology platform.
(3) There are 24 existing partner integration add-ons among the four Integrate
partners as at March 31, 2005.
SOURCES OF REVENUE GROWTH
Approximately 98.6% of the Corporation's revenue in the first quarter of 2005
(approximately 95% in first quarter and 98% in the fourth quarter of 2004) was
generated through its Points Solutions, which have two primary sources for
growth: growth and increased use of existing contracted Points Solutions; and
the development of new contracted Points Solutions. The remaining 1.4% of
revenues is interest income. The following table indicates the split between
existing Points Solutions and excludes revenues from interest income.
FOR THE THREE MONTHS ENDED
-----------------------------
MARCH 31 DEC. 31 MARCH 31
PERCENTAGE OF REVENUES BY SOURCE 2005 2004 2004
- -------------------------------- -------- ------- --------
Existing Points Solutions (including
growth of existing solutions) 96% 89% 97%
New contracted Points Solutions with
new and existing partners 4% 11% 3%
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 significant
revenues from its existing products.
Revenue from existing Points Solutions grew by 64% from $1.49 million year over
year and 29% quarter over quarter to $2.44 million in the first quarter of 2005
(i.e., 96% of the total Points Solutions revenue). Revenue in the first quarter
of 2004 does not include the MilePoint Acquisition which was completed on March
31, 2005. Management expects this trend to continue as the base of existing
products continues to grow.
Page 9 of 33
New Contracted Points Solutions
Selling additional Points Solutions is an important source of new revenue. New
Points Solutions sold to loyalty program partners grow the base of products
being managed and therefore the existing 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. Revenues from new Points Solutions
during the quarter decreased from $237,169 to $103,793 in the first quarter
ended March 31, 2005 as the Corporation focused on the development and launch of
Points.com version 3.0 and the launch of Points.com Business Solutions ordered
by partners in prior periods.
Points has grown the number of products placed with partners from 45 to 55 as at
March 31, 2005 from March 31, 2004. In addition, 24 third-party integrations
have been implemented with the four Integrate partners.
Management believes that the suite of Points Solutions is applicable to all
large loyalty program partners and will continue to focus business development
resources on both the sale of new products to current partners and on sales to
new partners. Management is continuing to focus on expanding the Points.com
partnership base in 2005 across various loyalty markets. In particular, Points
will continue to focus on new partnerships in the financial services, hotel,
retail, car rental, and online categories throughout 2005.
Projected revenues for 2005 attributed to the deployment of new Points Solutions
are more difficult to project than growth in existing Points Solutions. Future
revenue growth is still substantially dependent on generating new contracts for
the suite of Points Solutions products. While management expects continued
business development success, there is no certainty that Points.com 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 Income
The Corporation earned interest income of $37,251 for the first quarter of 2005,
compared with $85,052 in the same quarter last year and $29,618 compared to the
fourth quarter of 2004. The decrease in interest income year over year is
largely a function of reduced cash reserves, the strengthening U.S. / Canadian
foreign exchange rate, the shorter duration of the investment portfolio and the
subsequently lower average yield of the investments. The increase in interests
income quarter over quarter is a function of better yielding investments during
the time period. Management expects the interest income to significantly
increase over the remainder of the year due entirely to the completion of the
Private Placement Transaction. The proceeds raised from the Private Placement
Transaction have been invested in a combination of short-term liquid assets and
short-term bonds. The bond and money market portfolio has a duration of less
than two years. Foreign currency continues to be invested in short-term and
money market instruments. Points' cash and short-term investments are valued
quarterly at the lower of cost or
Page 10 of 33
market value. In the long term, as Points' business continues to grow, cash
reserves and related interest income are also expected to increase, although
this growth is not expected to be a material portion of the Corporation's
revenue going forward. Interest rates will continue to influence interest
earnings. The Corporation's bond portfolio is exposed to financial risk that
arises from the credit quality of the underlying bond issuers. The Corporation
seeks to mitigate the credit risk by diversifying its bond holdings and only
investing in securities with a credit rating of "A" or higher. A summary of the
Corporation's investments is as follows:
US$ OTHER
AS AT MAR. 31, 2005 YIELD %(2) CREDIT RATING C$ TOTAL DENOMINATED DENOMINATED
- ----------------------- ---------- ------------- ----------- ----------- -----------
Cash held at bank(1) 1.385 n/a $19,608,527 $11,160,114 E 1,081,443
GBP 316,885
CHF 13,473
Money market securities 2.28 R1-High 46,073 n/a n/a
Bonds(3) n/a A - AAA -- n/a n/a
----------- -----------
TOTAL $19,654,600 $11,160,114
=========== ===========
Notes:
(1) C$ Total represents total cash held at bank inclusive of all denominations;
US$ Denominated and Other Denominated currencies are a subset of the C$
Total and are represented in their local currency amount.
(2) Yield as at March 31, 2005.
(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 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 93% of the Corporation's revenues
are in U.S. dollars and the remaining 7% are split between Canadian dollars,
Euros, British Pounds and Swiss Francs. Management expects that the percentage
of U.S. dollar-based revenue will not decrease significantly throughout 2005.
Approximately 75% of the Corporation's general and administration expenses were
in Canadian dollars and 25% were U.S. dollar-based. The Corporation does not
have material foreign exchange risk with its cash expenses as it has sufficient
foreign currency reserves to meet its foreign obligations.
The three-month average FX Rate used to translate revenues and expenses into
Canadian dollars has declined in each of the two comparable quarters. The FX
rate differential compared to the fourth quarter of 2004 was negative and
resulted in 5% lower revenue growth, or approximately $129,782 offset by a 1%
decrease in expense growth, or approximately $53,617.
Page 11 of 33
FOR THE THREE MONTHS ENDED
-----------------------------
MARCH 31 DEC. 31 MARCH 31
U.S. / CANADIAN FX RATES 2005 2004 2004
- ------------------------ -------- ------- --------
Period Start 1.205 1.262 1.297
Period End 1.217 1.205 1.308
Three-Month Average 1.232 1.299 1.318
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", and that "roughly half of all miles are now earned on the
ground, not in the air". In an updated article, dated January 6, 2005, and
titled "In Terminal Decline, The dollar has already been toppled as the world's
leading currency") The Economist reported that, by the end of 2004, "the
world-wide stock of unredeemed frequent flyer miles is almost 14 trillion miles
.. . . and the total global stock of frequent flyer miles is worth over US$700
billion".
Management understands that members of loyalty programs are much more likely to
utilize Points.com 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 5,000 points). Therefore, growth in consumer loyalty program
account balances will create demand for Points Solutions. Growth in program
balances is a function of the growth in the number of programs, the number of
participating consumers, time and the number of consumers moving through a
loyalty redemption (for example, receiving an award of some type).
Several respected periodicals estimate strong growth in the popularity of and
participation in loyalty programs. For example, in addition to The Economist,
cited above, according to the "frequent flyer facts" section of the Web site 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." (sic)
Page 12 of 33
RESULTS OF OPERATIONS - GENERAL AND ADMINISTRATION EXPENSES
GENERAL AND ADMINISTRATION EXPENSES
General and administration expenses increased by 48% relative to the first
quarter of 2004 and 21% relative to the fourth quarter. Material changes in
expenses will be described in each section below.
FOR THE THREE MONTHS ENDED
------------------------------------
MARCH 31 DEC. 31 MARCH 31
GENERAL AND ADMINISTRATION EXPENSES 2005 2004 2004
- ----------------------------------- ---------- ---------- ----------
Employment Costs(1) $2,474,711 $1,843,784 $1,891,596
Technology Services(2) 326,055 231,572 161,306
Marketing and Communications 390,006 512,135 202,102
Sales Commission and Related Expenses 158,464 141,210 24,703
Other(3) 656,402 591,159 431,731
---------- ---------- ----------
TOTAL $4,005,639 $3,319,861 $2,711,438
========== ========== ==========
Notes:
(1) Wages and employment costs include salaries, employee stock option expense,
contract labour charges, recruiting, benefits and government charges (CPP
and EI).
(2) Technology expenses include online hosting and managed services, equipment
rental, software licenses and capital lease expenses.
(3) Other expenses include foreign exchange losses (or gains), travel expenses,
professional fees, insurance, office rent and expenses and regulatory
expenses.
As the Corporation is still in the process of increasing loyalty program
participation in and sales of the Points Solutions, significant resources
continue to be required. Management has made growing revenues and the underlying
business the highest priority, while continuing to be diligent about controlling
costs and capital expenditures. Management does not expect that the general and
administration expenses or capital expenditures in the second through fourth
quarters of 2005 will be higher than in the first quarter of 2005. In the latter
half of the year, more comprehensive marketing and branding programs and fewer
employment costs capitalized in the development of Points.com Web site
technology will be offset by lower overall employment costs and capital
expenditures.
Points expects that a series of significant marketing and branding programs will
begin in mid 2005 to support the launch of Points.com version 3.0. The actual
expense incurred will be a function of the types of marketing media employed and
incentives offered, as well as the timing of the programs' launch dates. If
actual revenue growth projected from the marketing plan does not meet
expectations, the expenditures can either be reduced or reallocated to more
successful programs.
EMPLOYMENT COSTS
Employment costs increased by 31% over the first quarter of 2004 and by 34% over
the fourth quarter of 2004. The increase over the prior year is the result of an
increase in total bonuses paid versus the amount that had been accrued, higher
contractor expenses and the increase in the number of full-time employees hired
between the second quarter of 2004 through first quarter of
Page 13 of 33
2005. The increase is partially offset by an increase in capitalized employment
costs associated with the Points.com version 3.0 technology development. The
increase over the fourth quarter of 2004 was due to similar factors as the prior
year increases, with the most significant factor being the increase in bonuses
paid. Effective January 1, 2004, the CICA Handbook Section 3870, "Stock-Based
Compensation and Other Stock-Based Payments" was amended to require expense
treatment of all stock-based compensation and payments for options granted
beginning on or after January 1, 2002. For stock-based compensation issued to
employees, the Corporation recognizes an expense. The Corporation accounts for
its grants in accordance with the fair value based method of accounting for
stock-based compensation. As permitted by this standard, this change in
accounting policy had been applied retroactively in 2004 without restatement of
the prior years' financial statements; the amounts charged to expense for costs
relating to the quarter ended March 31, 2005 are $99,503, compared to $60,482
for the quarter ended March 31, 2004 and $106,498 for the quarter ended December
31, 2004.
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31 DEC. 31 MARCH 31
2005 2004 2004
-------- -------- --------
Employee Stock Option Expense $99,503 $106,498 $60,482
As at March 31, 2005, the Corporation had 76 full-time employees (including
three contractors replacing employees on temporary leaves of absence) and ten
short-term contractors.
FOR THE THREE MONTHS ENDED
-----------------------------
MARCH 31 DEC. 31 MARCH 31
FULL TIME HEADCOUNT(1) BY DEPARTMENT AS AT 2005 2004 2004
- ------------------------------------------ -------- ------- --------
Technology 44 43 42
Finance and Administration 13 13 10
Business Development 5 8 8
Marketing and Customer Service 14 15 8
--- --- ---
TOTAL(2) 76 79 68
=== === ===
Notes:
(1) Headcount includes active employees and contractors covering a leave of
absence, for full-time positions within the departments.
(2) In addition to the full-time positions employed, the Corporation had ten
short-term contractors on staff at March 31, 2005.
The majority of the new hires and short-term contractors are directly dedicated
to the Points.com version 3.0 technology development and ongoing maintenance.
TECHNOLOGY SERVICES
Technology services expenses increase in increments based on business growth and
product performance. As Technology services costs are a function of the number
of partners and Points
Page 14 of 33
Solutions products, these costs grow as revenue grows. In general, as loyalty
program partners and products are added to the infrastructure and transactional
volume increases, additional servers, processors, bandwidth, memory, etc., are
required to provide a secure and robust production environment. The first
quarter of 2005 saw an increase of $164,749 (102%) versus the prior year and
$94,483 (41%) over the fourth quarter of 2004 as additional software licences
were purchased for Points.com version 3.0 and for new products associated with
the MilePoint Acquisition. Management expects these costs to grow marginally in
2005 with the continued expansion of Points Solutions. Products launched and
loyalty program partners acquired are the key drivers of Technology Services
expenses.
MARKETING AND COMMUNICATIONS
Marketing costs increased by $187,905 (93%) relative to the quarter ending March
31, 2004 as more marketing promotions were in the market during the period.
Marketing expenditures decreased $122,129 (24%) relative to the fourth quarter
of 2004 as fewer campaigns were in market. The decrease relative to the prior
quarter was deliberate as the marketing team was focused on the launch of the
new Web site in the second quarter of 2005.
The Corporation expects to increase its marketing expenditures at the end of the
second quarter of 2005 to support the launch of Points.com version 3.0. The
marketing and branding foundation built in 2004 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 well
as online media. This approach dovetails with business development strategies
and is the most cost-effective means to reach Points' target audience. 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.com activity.
SALES COMMISSIONS AND EXPENSES
Sales commissions and expenses have increased by $133,761 (541%) year over year
and $17,254 (12%) quarter over quarter. Sales commissions will continue to vary
according to partners contracted and growth of existing products. Management
expects sales commissions to increase throughout the remainder of 2005 through
growth in existing Points Solutions.
OTHER OPERATING EXPENSES
Other operating expenses include office overhead, travel expenses, professional
fees and foreign exchange gain and/or loss. Other operating expenses increased
by $224,671 (52%) year over year and by $65,243 (11%) quarter over quarter.
Approximately 5% of the quarter over quarter increase relates to the foreign
exchange loss from re-valuing certain balance sheet accounts (e.g., U.S. dollar
denominated cash and U.S. dollar denominated deposits). Each quarter, certain
balance sheet accounts are re-valued in accordance with the period ending FX
Rate. To the extent that the foreign denominated assets and liabilities are not
equal, the net effect after translating the
Page 15 of 33
balance sheet accounts on the income statement. Management has no control over
the foreign exchange gain or loss from one period to the next.
Excluding the foreign exchange gain and loss, other operating expenses increased
by approximately $199,462 (46%) compared against the first quarter of 2004 and
by $82,927 (15%) compared against the fourth quarter of 2004. Year over year,
the material variances include the relocation to larger facilities, increased
professional fees and one-time legal fees associated with the second amendment
and restatement of the Debenture. Management expects other operating expenses
(excluding foreign exchange gain and loss) to remain stable in 2005.
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31 DEC. 31 MARCH 31
OTHER OPERATING EXPENSES 2005 2004 2004
- ------------------------ -------- -------- --------
Foreign Exchange Gain/Loss(1) $ 22,900 $ 40,584 $(2,309)
Other Operating Expenses 633,502 550,575 434,040
-------- -------- --------
TOTAL $656,402 $591,159 $431,731
======== ======== ========
Note:
(1) See definition on page 15, "Other Operating Expenses".
RESULTS OF OPERATIONS - NON-CASH EXPENSES
Forward-looking statements contained in this section with respect to future
expenses of the Corporation are not guarantees of such future expenses and
involve certain risks and uncertainties that are difficult to predict. Any
changes in the Corporation's amortizing assets will subsequently change the
Corporation's amortizing expenses.
AMORTIZATION EXPENSES
The Corporation recorded amortization expenses of $688,898 in the first quarter
of 2005 compared to $443,917 for the quarter ending March 31, 2004 and $674,416
for the period ending December 31, 2004. The change was attributed to the
charges outlined in the following table:
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31 DEC. 31 MARCH 31
AMORTIZATION EXPENSES 2005 2004 2004
- --------------------- -------- -------- --------
Deferred Costs $132,925 $133,386 $199,346
Intangible Assets 453,506 457,538 188,217
Property, Plant and Equipment 102,467 83,492 56,354
-------- -------- --------
TOTAL $688,898 $674,416 $443,917
======== ======== ========
AMORTIZATION OF DEFERRED COSTS
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31 DEC. 31 MARCH 31
DEFERRED COSTS 2005 2004 2004
- -------------- -------- -------- --------
Amortization $132,925 $133,386 $199,346
Page 16 of 33
Charges incurred in respect of certain financings are deferred and charged to
income on a straight-line basis over an applicable time period. Deferred finance
charges represent legal, accounting and other related fees incurred to obtain
the financings. Points has incurred deferred costs in connection with the
following financial transactions:
a. In prior quarters, Points reported deferred financing charges in connection
with the Debenture issued to CIBC in 2001. The first quarter of 2004 was
the final amortization period for the deferred costs associated with the
Debenture.
b. The Corporation reports deferred financing charges in connection with the
Series Two Preferred Share as this financial instrument is also classified
as debt. The Series Two Preferred Share has 32 amortization quarters
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 five-year period.
There are 14 amortization quarters remaining.
d. Selected Points.com Business Solution technology costs incurred ($123,390)
have been deferred over the expected lifetime of certain partner
relationships. The two relationships have 7 and 8 amortization quarters
remaining.
AMORTIZATION OF INTANGIBLE ASSETS
The excess of the cost over the value attributed to the underlying net assets of
the shares of Points.com acquired in 2002 is amortized on a straight-line basis
over a period of three years. The amortization of the intangible asset related
to the acquired technology in Points.com was completed during the first quarter
of 2005. The increase in the amortization expense of intangible assets which
started in the second quarter of 2004 is related to the intangible assets (i.e.,
partner contracts) acquired through the MilePoint Acquisition. Goodwill related
to the acquisition will not be amortized. If the assets are deemed to have
become impaired, the goodwill will be written off in the appropriate period.
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31 DEC. 31 MARCH 31
INTANGIBLE ASSETS 2005 2004 2004
- ----------------- -------- -------- --------
Amortization $453,506 $457,538 $188,217
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
The increase in the amortization expenses reflects that purchased assets have
been capitalized and the amortizations have period begun.
Page 17 of 33
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31 DEC. 31 MARCH 31
PROPERTY, PLANT AND EQUIPMENT 2005 2004 2004
- ----------------------------- -------- ------- --------
Amortization $102,467 $83,492 $56,354
OTHER NON-CASH EXPENSES
Interest on the 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 (see "Liquidity - InterActiveCorp Investment" on page 20 hereof)
results in a change of control of Points, accrued interest on the Debenture will
be waived and the principal amount of the Debenture will be repayable within 30
days. See "Commitments Related to the Terms of Certain Financing Arrangements"
on page 25 herein.
INTEREST ON DEBENTURE 2008 2007 2006 2005 2004 2003 2002 2001
- --------------------- ---- ---- ----- ----- ----- ----- ----- -----
Accrued Interest ($000's) nil nil 185 778 884 854 660 522
Debenture Value ($000's) nil nil 9,884 9,699 8,920 8,036 7,183 6,522
During the first quarter of 2005, interest on the outstanding principal amount
of the Debenture accrued 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. Effective April 4, 2005, the
interest on the outstanding principal amount of the Debenture accrues at 8% per
annum.
Interest on the Series Two and Series Four Preferred Shares
INTEREST ON SERIES TWO PREFERRED
SHARE 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003
- --------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Series Two Preferred Accrued 244 868 868 868 868 868 868 868 868 868 624
Interest ($000's)
Series Two Preferred Share Value 21.1 20.8 19.9 19.1 18.2 17.3 16.5 15.6 14.7 13.9 13.0
($000,000's)
Series Four Preferred Accrued 60 242 242 242 242 242 242 242 181 nil nil
Interest ($000's)
Series Four Preferred Share Value 5.4 5.3 5.1 4.8 4.6 4.4 4.1 3.9 3.6 nil nil
($000,000's)
Page 18 to 33
RESULTS OF OPERATIONS - EARNINGS AND SHAREHOLDER'S EQUITY
LOSS
The Corporation reported a net loss of $2,568,215 for the first quarter of 2005,
compared with a net loss of $1,962,076 for the same period in 2004 and a net
loss of $2,496,011 during the fourth quarter of 2004.
SHAREHOLDER'S EQUITY
The deficit in shareholder's equity increased from $8,935,826 at December 31,
2004 to $10,464,352 at March 31, 2005. The increase was a result of the net loss
for the period of $2,568,215 partially offset by an increase in capital stock of
$940,186 during the first quarter of 2005.
LOSS PER SHARE
The Corporation's loss per share is calculated on the basis of the weighted
average number of outstanding Common Shares for the period, which amounted to
71,561,017 shares at March 31, 2005, compared with 63,394,531 shares at March
31, 2004 and 67,744,345 Common Shares at December 31, 2004.
The Corporation reported a net loss of $0.04 per share for the quarter ending
March 31, 2005, compared with a net loss of $0.03 per share for the quarter
ending March 31, 2004 and $0.04 for the quarter ending December 31, 2004. For
the comparable periods, the impact on the loss per share of the 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).
Therefore, in accordance with GAAP, fully diluted loss per share is not
provided. The fully diluted calculation 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 (losses) before interest, amortization
and other deductions ("EBITDA") is 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 Points.com Business
Solutions and to Points.com, revenues are expected to grow, resulting in
increased liquidity.
EBITDA
Management believes that EBITDA is an important internal measure and financial
benchmark for its shareholders because it is a recognizable and understandable
measure of the Corporation's
Page 19 of 33
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.
Primarily as a result of the Points.com version 3.0 related expenditures,
including those costs that are not capitalized, management expects that Points'
revenues will exceed its general and administrative costs in 2006.
For the quarter ending March 31, 2005, the Corporation's EBITDA was
($1,427,730). This compares with EBITDA of ($1,093,874) for the quarter ending
March 31, 2004 and ($1,156,912) for the quarter ending December 31, 2004.
INTERACTIVECORP INVESTMENT
The following is a general summary of the terms of two investments in the
Corporation by InterActiveCorp ("IAC"), through its affiliate Points
Investments, Inc. Comprehensive disclosure of these investments is set out in
Points' Material Change Reports dated March 21, 2003 and April 5, 2005, which
are incorporated by reference herein. See also "Commitments Related to the Terms
of Certain Financing Arrangements" on page 25 below.
In the 2003 investment, Points issued one 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 19,999,105 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 102,107,118
Common Shares at an effective price per Common Share of $0.94 (resulting in an
additional investment by IAC in Points of up to approximately $95.7 million).
Each of the Series Two Preferred Share and the Warrants contain anti-dilution
protection provisions.
In the 2005 investment, Points issued one Series Four Preferred Share for
aggregate cash consideration of $3,454,611. On March 29, 2005 the Corporation
and IAC entered into a binding agreement to issue the Series Four Preferred
Share and the cash was received by the Corporation prior to quarter end. As a
result, the cash and the preferred share are included in the Corporation's
unaudited consolidated balance sheet as at March 31, 2005. The Series Four
Preferred Share is convertible, for no additional consideration, into 4,504,069
Common Shares. The Series Four Preferred Share contains anti-dilution protection
provisions identical to the Series Two Preferred Share.
CASH AND CURRENT ASSETS
The Corporation had cash and cash equivalents of $19,654,600 at March 31, 2005,
compared to $24,243,231 at March 31, 2004, and $13,754,818 at December 31, 2004.
Page 20 of 33
FOR THE THREE MONTHS ENDED
---------------------------------------
MARCH 31 DEC. 31 MARCH 31
AS AT 2005 2004 2004
- ----- ----------- ----------- -----------
Cash and Cash Equivalents $19,654,600 $13,754,818 $24,243,231
Accounts Receivable 1,609,279 2,024,342 887,100
Prepaids and Sundry Assets 1,352,473 1,229,091 1,125,666
----------- ----------- -----------
TOTAL CURRENT ASSETS $22,616,352 $17,008,251 $26,255,997
=========== =========== ===========
Cash and cash equivalents decreased by $4,588,631 from March 31, 2004 and
increased by $5,899,782 compared to December 31, 2005. The primary reasons for
the year over year decrease in cash relative were related to the operating loss
for the year, expenditures on capitalized costs directly attributable to
Points.com version 3.0, expenditures on capital assets and the MilePoint
Acquisition. See page 20 "InterActiveCorp Investment" for the impact of the
issuance of the Series Four Preferred Share on the Corporation's March 31, 2005
cash position and Note 7 of the Corporation's first quarter 2005 interim
financial statements for the proforma impact of the changes directly
attributable to the issuance of Common Shares in the Private Placement
Transaction.
Cash From Exercise of Certain Warrants and Options
Certain "in-the-money" or "at-the-money" warrants and options are currently due
to expire within twelve months. Assuming that the market price of the Common
Shares remains above the exercise price of these securities, management expects
the securities to be exercised. If exercised in full, the proceeds from the
exercise of these securities would increase cash by approximately $96 million.
Assuming the exercise in full of these securities, issued and outstanding Common
Shares would increase by over 107 million shares.
Securities with Near-Term Expiry Dates - Outstanding Amounts as at March 31,
2005
SECURITY TYPE EXPIRY DATE NUMBER STRIKE PRICE PROCEEDS
- ------------- ----------- ----------- ----------------- ----------
Warrants 7/18/2005 166,667 0.25 41,667
Warrants 3/15/2006 595,667 0.25 148,917
Warrants 4/11/2006 102,107,118 0.94 95,655,615
Points International Ltd. Options 8/22/2005 25,000 0.69 17,250
Points International Ltd. Options 5/7/2005 657,500 0.56 368,200
Options in subsidiary with liquidity put(1, 2) 2/17/2005 187,793 Fair Market Value 4,125
Options in subsidiary with liquidity put(1, 2) 3/31/2005 3,749,151 Fair Market Value 55,772
Options in subsidiary with liquidity put(1) 7/9/2005 802,433 Fair Market Value 8,892
Options in subsidiary with liquidity put(1) 8/13/2005 355,803 Fair Market Value 7,816
Options in subsidiary with liquidity put(1) 8/20/2005 200,312 Fair Market Value 4,400
----------- ----------
TOTAL 107,488,896 96,291,546
=========== ==========
Note:
(1) The Corporation currently intends to seek regulatory and shareholder
approval for a two-year extension of the expiry date of certain options
held in the subsidiary with liquidity put rights.
(2) Points.com options have been conditionally exercised and the common shares
conditionally put to the Corporation for 3,936,944 Common Shares. If the
shareholders to not vote to extend the options, the conditionally exercised
options will be deemed to have been exercised on the original notice date
prior to expiry.
Subsequent to quarter end, and as at May 11, 2005, the following securities have
been exercised or expired:
Page 21 of 33
SECURITY TYPE(1) EXPIRY DATE NUMBER STRIKE PRICE PROCEEDS
- ---------------- ----------- --------- ------------------ --------
Points International Ltd. Options- cancelled 2/16/2008 6,670 $ 0.22 $ --
Points International Ltd. Options- cancelled 2/27/2008 3,340 $ 0.28 $ --
Points International Ltd. Options-- exercised 2/21/2007 1,000 0.25 250
Points International Ltd. Options-- exercised 2/21/2007 30,000 0.25 7,500
Points International Ltd. Options-- exercised 11/14/2007 3,330 0.25 833
Points International Ltd. Options-- exercised 11/14/2007 3,330 0.25 833
Points International Ltd. Options-- exercised 2/16/2008 13,334 0.22 2,934
Points International Ltd. Options-- exercised 4/17/2007 3,333 0.38 1,267
Points International Ltd. Options-- exercised 2/16/2008 13,330 $ 0.22 2,933
Points International Ltd. Options-- exercised 2/27/2008 6,660 $ 0.28 1,865
Options in subsidiary with liquidity put(1) 2/17/2005 187,793 Fair Market Value 4,125
Options in subsidiary with liquidity put(1) 3/31/2005 3,749,151 Fair Market Value 55,772
--------- --------
TOTAL 4,021,271 $78,061
========= ========
Note:
(1) Points.com options have been conditionally exercised and the common shares
conditionally put to the Corporation for 3,936,944 Common Shares. If the
shareholders do not vote to extend the options, the conditionally exercised
options will be deemed to have been exercised on the original notice date
prior to expiry.
Accounts Receivables
The Corporation expects accounts receivables to grow proportionately with growth
in revenues; however there is some variability in this trend. Management deems
the risk of bad debts to be minimal based on the structure and nature of the
Corporation's business and the corresponding cash flows.
ABILITY TO FUND FUTURE GROWTH
In the quarter ending March 31, 2005, the Corporation had cash flows provided by
operating activities of 3,393,251 after changes in non-cash balances related to
operations. Management is confident that the Private Placement and Debenture
Transactions afford the Corporation the time to build the business and the
revenues, through to profitability. However, the Corporation is currently not
generating an operating profit (revenues minus general and administration
expenses) and has never had a profitable quarter in its operating history.
PROPERTY, PLANT AND EQUIPMENT
The Corporation reported an increase in property, plant and equipment in the
first quarter of 2005 primarily due to capitalized employment costs and the
purchase of software for Points.com version 3.0. See "Capital Resources -
Planned Capital Expenditures" on page 29 for additional information. Existing
technology costs under capital lease are depreciated on a straight-line basis
over three years. Management continues to make controlling the Corporation's
technology costs a priority.
Additional capitalized development costs associated with the Points.com version
3.0 technology increase property, plant and equipment and the corresponding
amortization in 2005 and beyond.
Page 22 of 33
FOR THE THREE MONTHS ENDED
-----------------------------------
MARCH 31 DEC. 31 MARCH 31
AS AT 2005 2004 2004
- ----- ---------- ----------- --------
Furniture and equipment $ 290,134 $ 294,615 $119,489
Computer equipment 307,543 308,003 213,686
Software 557,799 70,612 116,827
Technology costs -- 10,164 21,815
Points.com version 3.0 direct development costs 1,480,427 860,286 --
Leasehold improvements 482,460 512,602 197,215
---------- ----------- --------
TOTAL PLANT, PROPERTY AND EQUIPMENT $3,118,364 $ 2,056,282 $669,032
========== =========== ========
GOODWILL
The MilePoint Acquisition resulted in $3,740,000 allocated to amortizing
intangible assets and $3,910,000 ($3,710,000 from goodwill and $200,000 for
other costs) to goodwill. In accordance with CICA Handbook Section 3062,
goodwill will not be expensed unless it is deemed to have become impaired. In
accordance with GAAP, management selected March 31, 2005 as the anniversary date
of the transaction and tested the acquisition goodwill for impairment at that
time. The acquisition goodwill was deemed to not be impaired.
In the quarter, $306,138 of charges relating to incremental transition services
and additional direct costs related to the MilePoint Acquisition were incurred
and charged to goodwill. Management does not expect to incur any additional
material expenses related to the MilePoint Acquisition.
CURRENT LIABILITIES
Current liabilities at March 31, 2005 were $20,269,308, compared with
$19,670,674 at March 31, 2004 and $24,775,898 at December 31, 2004. The decrease
compared to the fourth quarter of 2004 was primarily related to the
reclassification of the Debenture from short-term liabilities to long-term
liabilities subsequent to the completion of Debenture Transaction. The
reclassification of the Debenture is in accordance with Canadian GAAP. The
decrease in current liabilities compared to the fourth quarter was partially
offset by an increase in deposits.
Through arrangements with partner loyalty programs such as those for Buy and
Corporate 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 until 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 growth with existing
partners, establishes new partner relationships and integrates the assets from
the MilePoint Acquisition. The customers that represented greater than ten
percent of consolidated revenues in the first quarter of 2004 represented 63% of
the Corporation's deposits (first quarter 2004 - 80% and fourth quarter 2004 -
59%).
Page 23 of 33
FOR THE THREE MONTHS ENDED
---------------------------------------
MARCH 31 DEC. 31 MARCH 31
CURRENT LIABILITIES AS AT 2005 2004 2004
- ------------------------- ----------- ----------- -----------
Accounts payable and accrued liabilities $ 1,694,133 $ 1,894,599 $ 961,808
Deposits 17,776,537 13,153,623 15,949,483
Current portion of obligation under capital lease -- --
Current portion of loan payable 33,515 29,860 --
Current portion of acquisition loan payable 765,123 777,443 2,759,384
Debenture -- 8,920,373 --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES $20,269,308 $24,775,898 $19,670,676
=========== =========== ===========
In each period, the accounts payable and accrued liabilities account includes an
accrual for projected employee bonuses to be paid in March of the following
year, and other accrued charges. The Corporation has sufficient foreign currency
reserves to meet its foreign currency obligations and, as such, does not utilize
any hedging or other strategies involving interest rate or currency derivatives.
WORKING CAPITAL
Working capital (defined as current assets minus current liabilities) has
improved relative to December 31, 2004 by $10,114,692. The significant changes
are the reclassification of the Debenture to a long-term liability (positive
$8,920,373 impact) (see page 25, commitments related to the terms of certain
financing arrangements - debenture and series one preferred share), the proceeds
received for the issuance of the Series Four Preferred Share (positive
$3,454,611 impact) and offset by the cash spent in funding the operating loss
for the quarter (negative $1,320,879 impact). Gross proceeds of approximately
$12.3 million (approximately $11 million net proceeds) from the sale of Common
Shares (Private Placement Transaction) further improved the Corporation's
working capital subsequent to quarter end. See Notes 7 and 9 of the
Corporation's first quarter 2005 interim financial statements for the proforma
impact of the transaction. See page 20 through 23 for additional information
regarding the Corporation's current assets and current liabilities. As the
Corporation increases the rate of expenditure to successfully launch Points.com
version 3.0, it is highly likely that working capital will decline throughout
2005. Management expects that, through growth of its products, working capital
will improve in 2006. See page 8 of the Corporation's Annual Information Form,
"Risk Factors" for additional information.
Page 24 of 33
LONG-TERM LIABILITIES AND COMMITMENTS
PAYMENTS DUE BY PERIOD
(AGGREGATE AMOUNT FOR MULTI-PERIODS)
--------------------------------------------------
FUTURE OBLIGATIONS (000,000'S) TOTAL(1) 2009+ 2008 2007 2006 2005
- ------------------------------ -------- ------ ----- ----- ------ -----
Long-Term Debt(2) $ 9.88 $ -- $ -- $ -- $ 9.11 $0.78
(non-cash until repayment)
Series Two Preferred Share 21.08 16.12 0.87 0.87 0.87 0.87
(non-cash until repayment)
Series Four Preferred Share (3)
(non-cash until repayment) 5.39 4.48 0.24 0.24 0.24 0.18
Loan Payable 0.10 -- 0.01 0.03 0.03 0.03
Operating Leases(4) 2.47 0.01 0.10 0.50 0.85 1.00
Partner Purchase Commitments(5) 3.19 0.08 0.14 1.12 0.90 0.96
MilePoint Acquisition(6) 1.48 -- -- -- 0.40 1.08
------ ------ ----- ----- ------ -----
Total Contractual Obligations $43.59 $20.69 $1.36 $2.76 $12.40 $4.90
====== ====== ===== ===== ====== =====
Notes:
(1) Represents the aggregate amount for the full duration of the contractual
obligations (including years post 2009 and prior to 2005).
(2) The Debenture is due on March 15, 2008.
(3) The Series Four Preferred Share was issued on April 4, 2005.
(4) Includes technology services commitments and hardware and software
operating leases.
(5) Includes mileage purchase and co-marketing commitments, see "Partner
Purchase Commitments" below.
(6) Cash commitments related to the MilePoint Acquisition include the payments
relating to the acquisition.
Elements of the foregoing table are explained in more detail in the following
sections.
Commitments Related to the Terms of Certain Financing Arrangements
Debenture and Series One Preferred Share
The Corporation has outstanding $6 million principal amount of Debentures. The
original instrument was issued to CIBC on March 15, 2001 and was subsequently
amended and amended and restated prior to the sale thereof by CIBC on April 4,
2005 to the purchasers in the Private Placement Transaction. These purchasers
also acquired from CIBC the Series One Preferred Share.
On March 29, 2005 the Corporation and the purchasers in the Private Placement
Transaction had entered into a binding agreement to purchase the Debenture (in
its amended and restated form) from CIBC. As a result, the Debenture was
reclassified to long-term liabilities in the Corporation's unaudited
consolidated balance sheet as at March 31, 2005.
In connection with this transaction, the Debenture was amended to, among other
things, (i) reduce the interest rate from 11% to 8%, (ii) eliminate all negative
covenants, (iii) eliminate
Page 25 of 33
certain positive covenants, (iv) remove certain events of default and (v)
release all security over the assets of Points and its subsidiaries.
Under the terms of the Debenture, (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 principal amount of the Debenture will automatically convert into
Common Shares immediately preceding certain liquidity events and, unless
previously repaid, will automatically convert in 18,908,070 common shares in
April 2006. Except in connection with the exercise of the Warrants, Points is
not entitled to pre-pay the Debenture.
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,
the holder of the Debenture is entitled to accelerate all amounts owing under
the Debenture and the Corporation is entitled to repay the Debenture.
In the event of the exercise of the Warrants resulting in a Change of Control
under the Series One Preferred Share, 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.
Exercise of IAC Warrants ("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 approximately $95.7
million. 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 the Corporation would have sufficient cash to make such payments.
Page 26 of 33
Redemption Rights of Series Two and Series Four Preferred Share Holder
(Collectively the "Preferred Shares")
Unless the Preferred Shares have been converted at the option of the holder,
Points will be required to redeem the Preferred Shares upon the earlier of (i)
March 31, 2013, and (ii) a person (other than the holder of the Preferred
Shares) acquiring shares of Points sufficient to elect a majority of the board
of directors of Points (a "Preferred Share Change of Control").
In the event of redemption of the Preferred Shares on a Preferred 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 Preferred Shares
plus (B) a return on that subscription price equal to 7% per annum, calculated
from the date of issue of the Preferred Shares to the date on which the
Preferred Shares are redeemed and (ii) the greater of (A) the value of the
Common Shares into which the Preferred Shares then could be converted on the day
immediately prior to public announcement of the Preferred Share Change of
Control and (B) the product of the Common Shares into which the Preferred Shares
then could be converted and the fair market value of the consideration paid per
Common Share in the transaction resulting in the Preferred Share Change of
Control.
Other Change of Control Event
Upon the occurrence of an event that is a Change of Control and a Preferred
Share Change of Control, and is unrelated to the exercise of the Warrants,
Points may not have sufficient cash to pay the Dividend, the amounts due under
the Debenture and/or the redemption amount on the Preferred Shares. 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
FOR THE THREE MONTHS ENDED
------------------------------------
MARCH 31 DEC. 31 MARCH 31
ASSET RELATED TO MILEAGE PURCHASES AS AT 2005 2004 2004
- ---------------------------------------- ---------- ---------- ----------
Prepaid Mileage $ 774,027 $ 639,644 $ 655,294
Sundry assets and other prepaid expenses 578,446 589,447 470,372
---------- ---------- ----------
TOTAL $1,352,473 $1,229,091 $1,125,666
========== ========== ==========
As part of the contractual requirements of certain commercial agreements, Points
has committed to purchase miles and points from partners at predetermined rates.
When purchased, the points are recorded as an asset (i.e., prepaid expense)
until expensed as marketing expenditures in the period of use.
A large portion of the current prepaids and sundry assets of the Corporation
include prepaid mileage commitments purchased from the Corporation's partners.
Management expects that, in the near term, the prepaid miles may remain
approximately the same as an overall percentage of prepaids and sundry assets.
Page 27 of 33
Commitments Related to MilePoint Acquisition
On March 31, 2004, Points completed the acquisition of substantially all of the
assets of MilePoint, Inc. ("MilePoint") (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 ("Acquisition Payable") and four
million Common Shares (worth approximately $4 million at the time of the
transaction). An initial $1.9 million was paid in cash on closing, with the
balance payable semi-annually over two years. The four million shares were
issued into escrow on closing and will be released to MilePoint in four unequal
tranches over two years. To date, professional fees of approximately $420,000
and payments for transition services of $671,653 have been incurred in the
transaction and have been capitalized and allocated to goodwill. A portion of
the Acquisition Payable (short-term and long-term) is interest-free and
discounted at the appropriate current market rate. The total discount of $50,000
will be charged to interest expense over the life of the Acquisition Payable.
Points' business objective in acquiring the assets of MilePoint was to increase
its volume of business at minimal additional costs outside of the purchase price
and transition costs. Management expects that the acquisition will continue to
increase revenues and, including all amortizations, continue to be accretive to
net income through 2005. 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.
Page 28 of 33
The impact of the acquisition to Points' balance sheet in 2004 was an increase
to intangible assets by $3,740,000 and goodwill by $3,910,000. The amortization
of the assets is based on the estimated life of the acquired assets (i.e., the
partner contracts).
The amortization and the balance of the purchased intangible assets are
approximately as follows:
AMOUNT IN) MAR. 31, 2005
- ---------- -------------
Accumulated Amortization $ 927,067
Intangible Asset - Closing Balance 2,828,056
Goodwill 4,800,722
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.
The payment of the purchase price under the terms of the MilePoint Acquisition
is as follows:
Months from Closing
---------------------------------------------
Payout (000's) 0 4 6 12 18 24 SHARES CASH
- -------------- ------ ------ ---- ---- ------ ---- ------ ------
Cash $1,900 $ -- $400 $400 $ 400 $400 $3,500
Shares -- 1,300 -- 700 1,500 500 4,000
Share Value(1) -- 1,300 -- 700 1,500 500 4,000
----- ------
TOTAL 4,000 $7,500
===== ======
Note:
(1) Based on the simple 20-day weighted average Common Share price of $1.00 per
share at signing.
Management continues to expect 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
The Corporation has several operating leases for hardware and its premises
outstanding.
In the second quarter of 2004, the Corporation signed a 45-month sublease
agreement in a larger facility. In exchange for a 27-month lease extension, the
landlord advanced the Corporation $107,000 for leasehold improvements (see "Loan
Payable" in table below). The Loan Payable is to be repaid over the term of the
original sub-lease. Each payment is approximately $2,600 and there are 35
monthly payment periods remaining. The Corporation's lease at its former
premises expired in February 2005.
In the first quarter of 2005, the Corporation paid approximately $25,000 for its
former office facilities (approximately 8,050 square feet) and $109,000 for its
new office facilities (approximately 18,000 square feet). Property lease costs
are outlined in the table below.
Page 29 of 33
Beginning June 1, 2004, the Corporation was able to complete a sublet
arrangement for a portion of the former premises. The sublet covered
approximately 25% of the cost of the premises lease that expired 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
capital expenditures (see "Capital Resources-Planned Capital Expenditures"
below). The operating leases primarily relate to specific office technology and
technology service commitments.
ANNUAL AMOUNTS IN ($000'S) 2009 2008 2007 2006 2005
- -------------------------- ---- ---- ---- ---- ------
OPERATING LEASES $-- $88 $351 $355 $ 430
Property lease
Technology services 11 11 153 492 575
commitment
OPERATING LEASES TOTAL $11 $99 $504 $847 $1,005
LOAN PAYABLE $-- $ 5 $ 30 $ 30 $ 30
CAPITAL RESOURCES
PLANNED CAPITAL EXPENDITURES
The Corporation expects to incur some nominal expenditures related to the
leasehold improvements to continue to maintain the premises.
FOR THE THREE MONTHS ENDED
--------------------------------
MARCH 31 DEC. 31 MARCH 31
CAPITAL EXPENDITURES AS AT 2005 2004 2005
- -------------------------- ---------- -------- --------
Leasehold Improvements -- $ 7,339 $158,248
Points.com version 3.0 Technology 612,098 387,225 --
Computer Hardware, Software and Other 552,450 44,309 53,416
---------- -------- --------
TOTAL $1,164,548 $438,872 $211,664
========== ======== ========
In 2005, the Corporation expects to incur capital expenditures related to
computer software, hardware and other to approximately $1,000,000, with the
majority of the expenses relating to software in support of Points.com version
3.0 and approximately $250,000 relating to protecting the Corporation's
intellectual/intangible property (filing of patents and trademarks, etc.).
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.
The Corporation has incurred and expects to continue to incur significant
capital expenditures related to the development of Points.com version 3.0. In
accordance with CICA Handbook, Sections 3061 and 3062, and GAAP, Web site
development costs incurred in the Web site application and infrastructure
development is and will be capitalized and subsequently amortized in accordance
with the Corporation's accounting policies. Direct net new technology developed
Page 30 of 33
subsequent to the launch of Points.com version 3.0 will be capitalized in
accordance with the Corporation's accounting policies. Costs to maintain
Points.com version 3.0 will be expensed in the period the costs are incurred.
Web site development costs incurred to date and capitalized to the Web site
under property, plant and equipment consist of employment related costs of
$1,303,908 and other direct costs of $168,477.
The capitalized costs in 2005 will likely be greater than the costs incurred in
2004. The expected increase in the capitalized costs will be impacted by whether
management decides to contract any of the development to third-parties and by
annualizing the costs of employees hired during the third and fourth quarter.
Estimates are provided for the capitalized expenses for the fiscal year 2005 in
the table below.
WEB SITE DEVELOPMENT COSTS Q1 2005 Q2 2005 Q3 2005 Q4 2005
- -------------------------- -------- -------- -------- --------
Employment related costs $575,786 $368,790 $278,323 $131,116
Other direct costs 36,312 15,000 15,000 15,000
-------- -------- -------- --------
TOTAL $612,098 $383,790 $293,323 $146,116
======== ======== ======== ========
Management will continue to fund 2005 capital expenditures from its working
capital and/or cash flow from operations.
UNPLANNED SECURITIES ISSUANCES
Pursuant to the terms of 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 has significant control over the Corporation's ability to
raise capital whether by way of an equity issuance or the incurrence of debt.
However, in the event the Corporation requires additional capital, it does not
expect that consent would be unreasonably withheld.
OUTSTANDING SHARE DATA
As at the date hereof, the Corporation has 92,386,073 Common Shares outstanding,
one Series One Preferred Share, one Series Two Preferred Share and one Series
Four 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 19,999,105 Common Shares and the one Series Four Preferred
Share is convertible into 4,504,069 Common Shares.
The Corporation has outstanding options exercisable to acquire up to 4,236,751
Common Shares. The options have exercise prices ranging from $0.22 to $1.37 with
a weighted average exercise price of $0.80. The expiration dates of the options
range from August 22, 2005 to March 7, 2010.
The Corporation's subsidiary, Points.com Inc., has outstanding options
exercisable to acquire up to 2,114,899 common shares of Points.com. The holders
of these options have been granted the
Page 31 of 33
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 5,295,492 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 Corporation has asked the shareholders to consider at the
annual and special meeting a resolution to extend the term of the Points.com
options by two years. 1,572,325 Points.com options have been conditionally
exercised and conditionally put the common shares to the Corporation for
3,936,944 Common Shares. If the shareholders do not vote to extend the options,
the conditionally exercised options will be deemed to have been exercised on the
original notice date prior to expiry. The expiration dates of the options not
conditionally exercised ranges from July 9, 2005 to August 20, 2005.
The Corporation has outstanding warrants exercisable to acquire up to
103,775,700 Common Shares. The warrants have exercise prices ranging from $0.25
to $0.94 with a weighted average exercise price of $0.94. The expiration dates
of the options range from July 18, 2005 to April 4, 2008.
The Corporation has outstanding an 8% $6,000,000 convertible Debenture which is
convertible into 18,908,070 Common Shares. The Debenture is not convertible into
Common Shares at the option of the holder as long as the Warrants are
outstanding. The Debenture matures on March 15, 2008. However, unless previously
repaid, the Debenture, as amended, will automatically convert in 18,908,070
common shares in April 2006.
Selected Financial Results and Highlights
INCOME STATEMENT FOR THE YEAR ENDED MARCH 31, 2005 DEC. 31, 2004 MARCH 31, 2004
- ----------------------------------- -------------- ------------- --------------
Total Revenue $ 2,577,909 $ 2,162,948 $ 1,617,565
General and administrative expenses 4,005,639 3,319,861 2,711,438
Loss before interest, amortization and other deductions (1,427,730) (1,156,912) (1,093,874)
Net income (loss) (2,568,215) (2,496,011) (1,962,076)
Net income (loss) per share (1)(2)
- basic ($0.04) ($0.04) ($0.03)
- fully diluted n/a n/a n/a
Notes:
(1) The fully diluted loss per share has not been computed, as the effect would
be anti-dilutive.
(2) In 2004, the Corporation's loss per share was increased by approximately
$0.01 as a result of the requirement to expense stock options granted in
2004 (Section 3870, Stock-Based Compensation and Other Stock-Based Payments
of the Canadian Institute of Chartered Accountants Handbook). See Page 11
of the Corporation's Audited Consolidated Financial Statements Note 3, for
additional information on the accounting policy change relating to stock
options.
Page 32 of 33
BALANCE SHEET AS AT MARCH 31, 2005 DEC. 31, 2004 MARCH 31, 2004
- ------------------- -------------- ------------- --------------
Cash and cash equivalents $ 19,654,600 $ 13,754,818 $ 24,243,231
Total assets 36,574,828 30,179,854 38,997,588
Total liabilities 47,039,180 39,115,680 41,920,672
CASH DIVIDENDS DECLARED PER SHARE -- -- --
SHAREHOLDERS EQUITY
- warrants 2,610,992 2,610,992 2,766,610
- capital stock and contributed surplus 24,227,515 23,187,826 22,198,743
- deficit (37,302,859) (34,734,644) (27,888,437)
TOTAL $(10,464,352) $ (8,935,827) $ (2,923,084)
POINTS INTERNATIONAL LTD.
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
QUARTER ENDED REVENUES NET LOSS LOSS PER SHARE(1)
- ------------- ---------- ----------- -----------------
March 31, 2005 $2,577,909 ($2,568,215) ($0.04)
December 31, 2004 $2,162,948 ($2,496,011) ($0.04)
September 30, 2004 $1,978,942 ($2,103,413) ($0.03)
June 30, 2004 $2,032,136 ($2,246,784) ($0.03)
March 31, 2004 $1,617,565 ($1,962,076) ($0.03)
December 31, 2003 $1,449,378 ($2,605,974) ($0.04)
September 30, 2003 $1,647,566 ($1,628,391) ($0.03)
June 30, 2003 $1,457,568 ($1,283,337) ($0.02)
Note: (1) The fully diluted loss per share has not been computed, as the effect
would be anti-dilutive.
Page 33 of 33
FORM 52-109FT2 - CERTIFICATION OF INTERIM FILINGS
DURING TRANSITION PERIOD
I, T. Robert MacLean, Chief Executive Officer of Points International Ltd.,
certify that:
1. I have reviewed the interim filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of Points International Ltd., (the issuer) for
the interim period ending March 31, 2005;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated or that is necessary to make a statement not misleading in light
of the circumstances under which it was made, with respect to the period
covered by the interim filings; and
3. Based on my knowledge, the interim financial statements together with the
other financial information included in the interim filings fairly present
in all material respects the financial condition, results of operations and
cash flows of the issuer, as of the date and for the periods presented in
the interim filings.
DATED this 11th day of May, 2005.
[original signature]
----------------------------------------
T. Robert MacLean
Chief Executive Officer
FORM 52-109FT2 - CERTIFICATION OF INTERIM FILINGS
DURING TRANSITION PERIOD
I, Stephen Yuzpe, Chief Financial Officer of Points International Ltd.,
certify that:
1. I have reviewed the interim filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of Points International Ltd., (the issuer) for
the interim period ending March 31, 2005;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated or that is necessary to make a statement not misleading in light
of the circumstances under which it was made, with respect to the period
covered by the interim filings; and
3. Based on my knowledge, the interim financial statements together with the
other financial information included in the interim filings fairly present
in all material respects the financial condition, results of operations and
cash flows of the issuer, as of the date and for the periods presented in
the interim filings.
DATED this 11th day of May, 2005.
[original signature]
----------------------------------------
Stephen Yuzpe
Chief Financial Officer