Exhibit 99.7
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
Page 1 of 9
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
AS AT 2004 2003
- ----- ------------- ------------
ASSETS
CURRENT
Cash and cash equivalents 15,251,307 20,274,836
Accounts receivable 1,196,865 1,004,370
Prepaid and sundry assets 1,228,039 825,221
----------- -----------
17,676,211 22,104,427
LONG-TERM INVESTMENTS 161,629 161,629
PROPERTY, PLANT AND EQUIPMENT 1,700,903 513,723
INTANGIBLE ASSETS 8,705,708 1,320,692
DEFERRED COSTS 2,375,793 2,790,816
FUTURE INCOME TAXES RECOVERABLE 590,000 590,000
----------- -----------
13,534,032 5,376,859
$31,210,243 $27,481,286
=========== ===========
Page 2 of 9
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
AS AT 2004 2003
- ----- ------------- ------------
LIABILITIES
CURRENT
Accounts payable and accrued liabilities 1,199,546 1,187,598
Deposits 12,974,925 10,455,646
Current portion of loan payable 29,860 --
Current portion of acquisition loan payable 1,174,921 --
------------ ------------
15,379,252 11,643,244
LOAN PAYABLE 72,163 --
ACQUISITION LOAN PAYABLE 380,118 --
CONVERTIBLE DEBENTURE 8,694,714 8,036,372
CONVERTIBLE PREFERRED SHARES 13,675,478 13,024,478
------------ ------------
38,201,725 32,704,094
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK 22,057,996 17,728,461
WARRANTS 2,743,957 2,785,737
RETAINED EARNINGS (31,793,434) (25,737,007)
------------ ------------
(6,991,482) (5,222,809)
------------ ------------
$ 31,210,243 $ 27,481,286
============ ============
Page 3 of 9
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED
STATEMENTS OF OPERATIONS AND DEFICIT
9 Month Period 3 Month Period
----------------------------- -----------------------------
FOR THE PERIOD ENDED SEPTEMBER 30, 2004 Jan-Sep 30/04 Jan-Sep 30/03 Jul-Sep 30/04 Jul-Sep 30/03
- --------------------------------------- ------------- ------------- ------------- -------------
REVENUES
Points operations $ 5,426,681 $ 4,166,147 $ 1,945,599 $ 1,539,780
Interest income 201,961 243,179 33,343 107,786
------------ ------------ ------------ ------------
5,628,642 4,409,326 1,978,942 1,647,566
GENERAL AND ADMINISTRATION 8,654,946 5,378,154 2,905,198 2,160,979
------------ ------------ ------------ ------------
LOSS- Before interest, amortization and other items (3,026,304) (968,828) (926,256) (513,413)
------------ ------------ ------------ ------------
Interest on Convertible Debenture 658,342 495,000 225,659 165,000
Interest on Series Two Preferred Shares 651,000 407,478 217,000 217,000
Interest and Bank Charges 72,448 9,537 1,745 2,625
Amortization of Capital & Intangible Assets and
Deferred Costs 1,648,334 2,049,372 631,105 730,353
------------ ------------ ------------ ------------
3,030,123 2,961,386 1,075,509 1,114,978
------------ ------------ ------------ ------------
LOSS (6,056,427) (3,930,215) (2,001,764) (1,628,391)
------------ ------------ ------------ ------------
DEFICIT - Beginning of period (25,737,007) (19,200,816) (29,791,670) (21,502,641)
DEFICIT - End of period (31,793,434) (23,131,031) (31,793,434) (23,131,032)
============ ============ ============ ============
LOSS PER SHARE (Note 2) ($0.09) ($0.07) ($0.03) ($0.03)
============ ============ ============ ============
Page 4 of 9
POINTS INTERNATIONAL LTD.
UNAUDITED CONSOLIDATED
STATEMENTS OF CASH FLOWS
9 Month Period 3 Month Period
----------------------------- -----------------------------
FOR THE PERIOD ENDED SEPTEMBER 30, 2004 Jan-Sep 30/04 Jan-Sep 30/03 Jul-Sep 30/04 Jul-Sep 30/03
- --------------------------------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($6,056,427) ($3,930,215) ($2,001,764) ($1,628,391)
Items not affecting cash
Amortization of property, plant and equipment 229,125 1,162,453 80,064 403,842
Amortization of deferred costs 467,934 319,766 140,461 137,460
Amortization of intangible assets 951,275 567,150 410,579 189,050
Cancellation of warrants issued for services (1,167) -- --
Interest on Series Two Preferred Shares 651,000 407,478 217,000 217,000
Interest accrued on convertible debenture 658,342 495,000 225,659 165,000
------------ ------------ ------------ ------------
(3,099,918) (978,368) (928,001) (516,039)
Changes in non-cash balances related to operations (Note 6 (a)) 1,812,985 778,853 (1,335,031) (1,987,151)
------------ ------------ ------------ ------------
CASH FLOWS USED IN OPERATING ACTIVITIES (1,286,934) (199,515) (2,263,031) (2,503,190)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment, net of proceeds (1,416,305) (234,774) (664,810) (113,063)
Purchase of intangible assets (96,646) (118,155) (76,362) (26,193)
Payments for the acquisition of MilePoint, Inc. (1,900,000) --
Costs related to the acquisition of MilePoint, Inc. (Note 7) (784,608) -- (332,554) --
------------ ------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES (4,197,558) (352,929) (1,073,726) (139,256)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Warrants -- 2,700,000 -- --
Issuance of Series Two Preferred Share -- 12,400,000 -- --
Loan payable 102,023 -- 102,023 --
Deferred financing costs 70,018 (717,048) -- --
Repayment of obligations under capital leases -- (252,230) -- (16,514)
Issuance of capital stock, net of share issue costs 288,921 913,309 58,867 95,367
------------ ------------ ------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 460,963 15,044,031 160,890 78,853
------------ ------------ ------------ ------------
INCREASE (DECREASE) IN CASH (5,023,529) 14,491,587 (3,175,867) (2,563,592)
CASH AND CASH EQUIVALENTS - Beginning of period 20,274,836 7,341,700 18,427,174 24,396,879
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS - End of period $ 15,251,307 $ 21,833,287 $ 15,251,307 $ 21,833,287
============ ============ ============ ============
Page 5 of 9
POINTS INTERNATIONAL LTD.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
1. Accounting policies
The company's interim financial statements have been prepared using accounting
policies consistent with those used for the preparation of its annual financial
statements. These interim financial statements should be read in conjunction
with the company's 2003 audited consolidated financial statements. These
financial statements contain all adjustments which management believes necessary
for fair presentation of the financial position, results of operations and cash
flows.
a) Basis of presentation
The consolidated financial statements include the accounts of the
Company and from their respective dates of acquisition of control or
formation of its wholly owned subsidiaries. All inter-company
transactions and amounts have been eliminated on consolidation.
b) Goodwill
Goodwill represents the excess of the purchase price of acquired
companies over the estimated fair value of the tangible and intangible
net assets acquired. Goodwill is not amortized. The company currently
compares the carrying amount of the goodwill to the fair value, at
least annually, and recognizes in net income any impairment in value.
c) Intangible assets
Intangible assets represent the fair value of contracts acquired by
the company on MilePoint, Inc, acquisition. The carrying value of
these contracts will be amortized on a straight-line basis over the
life of the contracts.
2. Loss per share
a) Loss per share
Loss per share is calculated on the basis of the weighted average
number of common shares outstanding for the nine months ended
September 30, 2004 that amounted to 65,810,352 shares (September 30,
2003 - 56,773,936).
b) Fully-diluted loss per share
The fully-diluted loss per share has not been computed, as the effect
would be anti-dilutive.
Page 6 of 9
3. Segmented information
Reportable segments: The company has only one operating segment whose operating
results are regularly reviewed by the company's chief operating decision maker
and for which complete and discrete financial information is available. The
company's business is carried on in the industry of loyalty program asset
management. The attached consolidated balance sheets as at September 30, 2004
and December 31, 2003 present the financial position of this segment. The
continuing operations reflected on the attached consolidated statements of
operations are those of this operating segment.
Enterprise-wide disclosures: $5,204,733 (September 30, 2003 - $4,110,915) of the
company's revenues were generated in the U.S. for the nine month period, with
the remaining revenues generated in Canada, Europe and Asia. A significant
majority of the company's assets are located in Canada.
4. Economic dependence
For the nine-month period ended September 30, 2004, approximately 46% of the
company's revenues are from its two largest customers (65% at September 30,
2003). In addition, as at September 30, 2004, 64% of the company's deposits are
due to these customers (59% as at September 30, 2003).
5. Stock-based compensation
Effective January 1, 2002 the company adopted CICA 3870 ("Stock-based
Compensation and Other Stock-based Payments"). As permitted by CICA 3870 the
company has applied this change prospectively for new awards granted on or after
January 1, 2002. The company has chosen to recognize no compensation when stock
options are granted to employees and directors under stock option plans with no
cash settlement features. In periods prior to January 1, 2002 the company
recognized no compensation when stock or stock options were issued to employees.
Supplementary pro forma information regarding net income is required by CICA
3870 as if the company had accounted for its employee stock options granted
after December 31, 2001 under the fair value method.
During the quarter ended September 30, 2004, 510,000 options were issued to
employees. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting periods. The
company's pro forma net income under Canadian GAAP would be reduced [loss
increased] by approximately $288,290 for the nine months ended September 30,
2004. Loss-per-share figures would not have changed.
Page 7 of 9
6. Statement of Cash Flows
a) Changes in non-cash balances related to operations are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 30, SEPT 30,
------------------------- -----------------------
2004 2003 2004 2003
----------- ----------- ---------- ----------
Decrease (Increase) in accounts receivable $ 142,373 $ 189,234 $ (192,495) $ (502,911)
Decrease (Increase) in prepaid and sundry assets $ 43,411 $ (52,506) $ (402,819) $ (189,090)
Decrease (Increase) in deferred costs $ (95,509) $ (122,929)
Increase (Decrease) in accounts payable and accrued liabilities $ 268,358 $ (346,789) $ 11,948 $ (128,100)
Increase (Decrease) in deposits $(1,693,663) $(1,777,089) $2,519,279 $1,598,953
----------- ----------- ---------- ----------
$(1,335,031) $(1,987,151) $1,812,985 $ 778,852
=========== =========== ========== ==========
b) Supplemental information
Interest and taxes
Interest of $72,488 was paid during the nine month period ended
September 30, 2004. Interest of $194,408 was received during the nine
month period ended September 30, 2004. No income taxes have been paid.
Non-cash transactions
Non-cash transactions for the nine months ended September 30, 2004 are
as follows:
(i) 406,954 shares of Points.com Inc. were acquired in exchange for
1,018,974 shares of the Corporation.
(ii) 4,000,000 shares (valued at $4,000,000) of the Corporation were
issued as part consideration in the acquisition of MilePoint,
Inc. (see Note 7).
(iii) $30,000 of revenue earned for hosting services provided was paid
in loyalty currency. The currency was valued at the purchase
price of the miles. The expense will be recognized as the
currency is used.
(iv) $82,044 of revenue earned for membership fees provided was paid
in one week accommodation certificates. The certificates are
valued at their average cost. The expense will be recognized as
the accommodation certificates are used.
(v) The Corporation received $107,905 of loyalty currency from a
partner as reimbursement of a portion of the partner's direct
expenses for the services provided by the Corporation.
(vi) Interest of $5,062 was accrued on the acquisition of MilePoint,
Inc.
(vii) Interest of $658,342 was accrued on the convertible debenture.
(viii) Interest of $651,000 was accrued on the Series Two Preferred.
Page 8 of 9
c) Cash and cash equivalents consist of:
September 30, December 31,
AS AT 2004 2003
- ----- ------------- ------------
Cash $11,360,089 $ 9,046,701
Short -Term Investments 1,236,162 9,627,468
Cash held by credit card processor 2,655,055 1,600,667
----------- -----------
Total 15,251,307 20,274,836
=========== ===========
7. MilePoint Inc. Acquisition
On March 31, 2004 Points acquired substantially all of the assets of MilePoint,
Inc., a loyalty program technology provider and operator. The purchase price of
$7.5 million was satisfied through a combination of $3.5 million in cash
payable, without interest, over two years and four million common shares.
The cost of the acquisition and the fair values assigned are as follows:
Intangibles $ 225,000
Contracts with Partners 3,455,062
Goodwill 4,559,584
----------
$8,239,646
==========
Consideration:
Cost of Transaction $ 784,584
Capital Stock Issued 4,000,000
Acquisition Loan Payable 3,455,062
----------
$8,239,646
==========
The acquired contracts with partners will be amortized over the life of the
contracts. The goodwill and other intangibles will not be amortized; these will
be reviewed annually and any permanent impairment will be recorded and charged
to income in the year that the impairment has occurred.
The loan payable, which has a face value of $3,500,000, is discounted to its
fair value as it is non interest bearing and due over two years.
8. MilePoint Inc. Acquisition Payments
Remaining payments under the terms of the acquisition loan payable are as
follows:
Acquisition Loan Payable
Current Portion $1,174,921
Long-Term Portion 380,118
Accretion of Interest 44,961
----------
Total $1,600,000
==========
Page 9 of 9
POINTS INTERNATIONAL LTD.
INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS
The following interim management's discussion and analysis ("MD&A") of the
performance, financial condition and future prospects of Points International
Ltd. (which is also referred to herein as "Points" or the "Corporation") should
be read in conjunction with the Corporation's consolidated financial statements
(including the notes thereon) for the quarter ended September 30, 2004 and with
the Corporation's 2003 audited consolidated financial statements. Further
information, including Points' Annual Information Form ("AIF") for the year
ended December 31, 2003, may be accessed at www.sedar.com. All financial data
herein has been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and all dollar amounts herein are in Canadian
dollars unless otherwise specified. This MD&A is dated as of September 30, 2004.
FORWARD-LOOKING STATEMENTS
Some of the statements contained or incorporated by reference in this MD&A,
including those relating to Points' strategies and other statements that are
predictive in nature, that depend upon or refer to future events or conditions,
or that include words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates" or similar expressions, are forward-looking statements
within the meaning of Canadian securities laws. Forward-looking statements
include, without limitation, the information concerning possible or assumed
future results of operations of Points as set forth herein. These statements are
not historical facts but instead represent only Points' expectations, estimates
and projections regarding future events.
The forward-looking statements contained or incorporated by reference in this
MD&A are not guarantees of future performance and involve certain risks and
uncertainties that are difficult to predict. The future results and shareholder
value of Points may differ materially from those expressed in the
forward-looking statements contained or incorporated by reference in this MD&A
due to, among other factors, the risks and uncertainties discussed herein, the
matters set forth under "Risks and Uncertainties" contained in Points' AIF filed
with Canadian securities regulators and the factors detailed in Points' other
filings with Canadian securities regulators, including the factors detailed in
Points' annual and interim financial statements and the notes thereto. Points
does not undertake any obligation to update or release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this MD&A or to reflect the occurrence of unanticipated events, except as
required by law.
Page 1 of 32
OVERVIEW OF POINTS' BUSINESS
CORE BUSINESS - Points Solutions
Points has developed a proprietary technology platform that allows it to offer a
portfolio of solutions, referred to as the Points Solutions, to the loyalty
program industry. The Points platform was designed to create value for consumers
and loyalty programs alike. The Points Solutions are comprised of Points.com
(referred to as the Points Exchange in past disclosures) and a suite of Private
Branded Solutions available to loyalty program operators.
Points.com
In April 2001, Points launched its cornerstone product, the proprietary
Points.com website. 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. Points.com also
serves as a central resource to help individuals track their account balances
with a number of their major loyalty programs.
As at September 30, 2004, Points.com had attracted 43 loyalty program
participants (as at the date hereof 3 additional partners are under contract but
not yet launched), including the loyalty programs of leading airlines, hotels,
online and retail businesses, and gift certificate programs.
Development Initiated for Points.com Version 3.0
At the beginning of the second quarter of 2005, Points International Ltd. will
begin making some important changes to the Points.com consumer Web site.
Currently, Points.com is a transactional site that allows consumers to exchange
miles and points between over 40 reward programs. In addition to this unique
functionality, consumers may also track balances in many of their valued reward
programs. While established as the world's only service of its kind, Points.com
in its current form represents only a small part of the Company's opportunity to
service consumers' total reward program experience.
The new Points.com internally referred to as "Points.com version 3.0",
represents a major enhancement in our relationship with both reward program
partners as well as the consumer. Today, the consumer interacts with a site that
centers on a single feature: Exchange. The new Points.com version 3.0 will
broaden its offerings, and present each consumer with a personalized view of
their reward program universe.
Because of this personalized view of the consumer's reward program universe, we
will be able to help the consumer release more value from their favourite
programs, so that they can "Get More Rewards, Faster(TM)". This is accomplished
by adding new mile and point management tools such as ways to purchase and earn
more miles or points in their favourite programs. In addition, the system will
be driven by an Amazon-style associative relevance suggestion engine that will
use the consumer's unique program and point balance mix to suggest ways to use
the Earn, Buy and Exchange tools to "Get More Rewards, Faster(TM)".
Page 2 of 32
The result of these changes is that Points.com will become a "reward management
portal", providing a more comprehensive and engaging consumer experience.
Importantly, this functionality will add new revenue streams to the Points.com
business model. Most significantly, the loyalty management utility of the site
will allow us to focus more on subscription membership as a core aspect of the
business. Additionally, management anticipates significant revenue streams from
the additional functionality incorporated into the site.
These changes will be phased in over the course of 2005, with monthly releases
beginning in the second quarter. In April 2005, Points.com users will
immediately notice a new look and feel that will reflect our more
consumer-focused approach. Over the course of the spring and summer, Points.com
will add Purchase, Earn, and Suggestion functionality.
In the second half of 2005, management will begin driving significant consumer
traffic to the new Points.com to leverage the site's ongoing evolution.
In accordance with Canadian GAAP and CICA handbook sections 3061 and 3062,
website development costs incurred in the website application and infrastructure
development associated with Points.com Version 3.0 will be capitalized. For
additional information, see "General and Administrative Expenses", page 13, and
"Capital Resources - Planned Capital Expenditures", page 29.
Private Branded Solutions
In addition to Points.com, Points offers a portfolio of Private Branded
Solutions to loyalty programs. This suite of technologies includes:
POINTSpurchase and POINTSgift - facilitates the online sale and gift of miles,
points and other loyalty program currencies.
POINTScorporate - facilitates the sale of loyalty program currencies to
corporate customers.
POINTStransfer - facilitates the amalgamation or transfer of loyalty program
currencies among multiple accounts.
POINTSintegrate - functions as a common platform to process transactions between
third-party loyalty programs, to simplify and automate a complex and
resource-intensive process, with a single integration.
POINTSelite - facilitates the online sale of tier status to members of loyalty
programs.
POINTScustom - custom applications developed for select large loyalty program
partners.
Page 3 of 32
SIGNIFICANT BUSINESS DEVELOPMENTS IN THE THIRD QUARTER OF 2004
1. Points International partners with British Airways (BA), enabling Executive
Club Members worldwide to Buy BA Miles online
Members of the British Airways Executive Club program in over 190 countries
can now buy BA Miles online at www.ba.com, enabling them to reach reward
redemption levels faster.
2. Hawaiian Airline's HawaiianMiles teams up with Points.com
HawaiianMiles members now have the opportunity to consolidate their other
loyalty currencies into HawaiianMiles or exchange their HawaiianMiles for
the currencies of other loyalty programs in order to reach their reward
goals faster. Members of Points.com have the added convenience of being
able to earn, redeem, exchange, and manage their loyalty currencies in one
place.
3. Prime Hospitality partners with Points.com
Prime Hospitality, which owns and operates three proprietary brands, Prime
Hotels & Resort, AmeriSuites, and Wellesley Inns & Suites(R), has joined
Points.com. Now their loyalty program members will have exciting new ways
to acquire Prime Rewards points. By exchanging points or miles into their
Prime Rewards account, customers can top up their account and achieve their
award levels faster than ever before.
4. Gold Points Reward Network partners with Points.com
The Gold Points Reward Network has over 8 million members that can earn and
redeem their points at more than 1,000 Gold Points partner locations. The
relationship between Goldpoints and Points.com allows all Goldpoints
members, apart from those holding a membership card in one of their hotel
properties, to exchange into and out of the Goldpoints currency.
5. ACCENT Becomes the First Online Training Program to Join Points.com
Beginning in September, ACCENT Training will join Points.com as an official
partner, which will allow Smart Rewards members to exchange their Smart
Rewards for redemption opportunities on Points.com.
6. Starbucks Duetto(TM) Card - joins Points.com
The original partnership that allowed Points.com members to exchange
loyalty currencies into Starbucks Gift cards has been expanded so that
Starbucks members can now also exchange Points.com partner currencies into
their Starbucks Duetto(TM) Visa. The Duetto card is a multi-functional
credit card that combines a re-loadable stored value card with a Visa
credit card. Loyalty currencies exchanged into either Starbucks gift cards
or Duetto dollars can then be redeemed at over 4000 Starbucks retail
locations in Canada and the United States for products and merchandise.
Page 4 of 32
7. American Airlines - launched a Private Branded Exchange (POINTScustom
Solution)
With the September 17th launch of the redemption platform for American
Airlines, AAdvantage members may now redeem their miles online for hotel
stays and hotel and other program points. Participating companies to date
include Marriott, Diners Club, Intercontinental Hotels and Hilton. The
participant list will be expanded in first quarter of 2005 to include other
partner options. The redeem AAmiles program adds value to the AAdvantage
Program and its members by increasing the utility of miles earned, and
facilitating an online process that reduces transaction processing time
from weeks to days.
REVENUE RECOGNITION POLICIES
The revenue recognition policies for the suite of Points Solutions are as
follows:
Points.com:
- Exchange commissions are a percentage of the exchanged value and are
recognized as the services are provided under the terms of related
contracts.
- Membership dues received in advance for services are recognized over
the term of service. Membership dues are $29.95 annually for a
PointsPlus membership. The annual membership increased from $19.95 on
Sept. 30, 2004.
- One-time trading fees ($9.95 per trade) are recognized at the time of
the trade (for non-PointsPlus members). The one-time trading fee
increased from $5.95 on Sept. 30, 2004.
- 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.
Private Branded Solutions:
- Revenues from the sale of loyalty program points are recorded net of
costs.
- Hosting and management fees are recognized in the period of service.
- Non-refundable partner sign-up fees with no fixed term, and for which
the Corporation is under no further obligations, are recognized as
revenue when received.
- Technology design, development and maintenance revenues are recorded
on a "percentage-of-completion" basis.
KEY BUSINESS DRIVERS
Revenue growth has historically been, and will continue to be, generated by
growth of membership in and use of the suite of Points Solutions (i.e.,
Points.com and Private Branded Solutions).
Growth in the number of individual members using Points.com is driven by three
factors that contribute to increased site traffic and the ease with which a
consumer can join Points.com to
Page 5 of 32
conduct exchange transactions. These factors are website usability and
enhancements, marketing (awareness and brand) and partner activity. For
additional information, see "Points.com Growth" on page 8 hereof.
Growth in Private Branded Solutions will occur from organic growth of existing
partner relationships, supplemented with new business relationships established
throughout the year. For additional information, see "Private Branded Solutions
Growth" on page 9 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 three months ended September 30, 2004 was $1,978,942
representing a year over year increase of 20% and a decrease of 2.6% over the
prior quarter (June 30, 2004). The provision of Points Solutions accounted for
approximately 98% of the revenues in the third quarter (interest income
accounted for the remaining two percent). The results for the nine-month period
ended September 30, 2004 represented a 28% increase in revenues year over year.
Revenues declined in the third quarter relative to the second quarter due to a
decrease in interest earned. See "Other factors Contributing to Revenue Growth -
Interest Income, page 9" for additional information. Revenues from operations
were flat. Revenues from operations are expected to increase in the fourth
quarter as additional Private Branded Solutions are launched. For additional
information see "Revenue Growth", page 7.
For the three months ended For the nine months ended
------------------------------------ -------------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
REVENUES 2004 2004 2003 2004 2003
- -------- ---------- ---------- ---------- ---------- ----------
Points Operations $1,945,599 $1,948,570 $1,539,780 $5,426,681 $4,166,147
Interest and other revenue 33,343 83,566 107,786 201,961 243,179
---------- ---------- ---------- ---------- ----------
TOTAL REVENUE $1,978,942 $2,032,136 $1,647,566 $5,628,642 $4,409,326
========== ========== ========== ========== ==========
A substantial portion of Points' revenue is generated through the provision of
Private Branded Solutions for loyalty programs by way of fees for technology
services and transaction fees or commissions paid to Points by the operators of
the loyalty programs.
Points earns revenue from Points.com in three principal ways. First, Points
charges a commission on all exchanges, based on a value of the loyalty currency
tendered for exchange by the loyalty program member. Through the exchange model,
the participating loyalty program sets a value on the currency tendered for
"sale". Based on this valuation, a percentage is remitted to Points and the
remaining balance is used to purchase the currency of another participating
loyalty program. Second, loyalty program members pay Points either a fee for
each exchange transaction at Points.com or an annual fee for a membership that
includes unlimited exchange transactions. Finally, Points may earn a
non-refundable partner sign-up fee when a partner joins Points.com.
Page 6 of 32
For the three-month period ended September 30, 2004, two key customers
represented approximately 37% of the Corporation's gross revenues (for the
three-month period ended September 30, 2003, two key customers represented 65%
of the Corporation's gross revenues). In addition, two key customers, measured
by revenue, represented approximately 64% (September 30, 2003 - 59%) of the
Corporation's deposits. One of the two customers in 2004 is not the same
customer as in 2003. As additional partner relationships are established and
revenues grow, management expects the economic dependence on any key customer to
be reduced.
In the third quarter of 2004, approximately 92% of the Corporation's revenues
were recurring revenues (e.g. revenues from monthly management fees, membership
fees and transaction fees) and 8% were from non-recurring sources (e.g. one-time
web development and integration fees).
For the three months ended For the nine months ended
------------------------------------ -------------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
REVENUES 2004 2004 2003 2004 2003
- -------- ---------- ---------- ---------- ---------- ----------
Recurring revenues $1,829,762 $1,973,231 $1,257,890 $5,375,109 $3,481,564
Non-recurring revenues 149,180 58,905 389,676 253,534 927,762
---------- ---------- ---------- ---------- ----------
TOTAL REVENUE $1,978,942 $2,032,136 $1,647,566 $5,628,642 $4,409,326
========== ========== ========== ========== ==========
Management recognizes that the Corporation must eventually achieve profitability
through revenue growth and cost management. As significant resources have and
will be allocated to the launch of Points.com Version 3.0, management now
expects that Points' revenues will exceed its general and administrative in 2006
rather than, as previously stated, in 2005.
REVENUE GROWTH
Revenue growth has historically been, and will continue to be, generated by
growth of membership in and use of the suite of Points Solutions products.
Growth in product usage will occur from the organic growth of existing
relationships, supplemented with new business relationships established
throughout the year. Management expects the existing contracts to continue to
generate growing revenues and, based on continuing business development efforts,
is optimistic about new revenue sources in future quarters. 12.
Growth in Use of the Points Solutions
The suite of Points Solutions experiences revenue growth based on the number of
loyalty program partners and consumer members who participate in the various
programs.
Page 7 of 32
Partner Summary - Total Number of Partners(1)
SEPT. 30 JUNE 30 SEPT. 30
NUMBER OF PARTNERS AS AT 2004 2004 2003
- ------------------------ -------- ------- --------
Points.com 43 40 30
Private Branded Solutions(2) 20 19 11
Cumulative Points Transacted (000,000's) 6,492 5,318 2,487
Notes:
(1) Partners may be included in both the Private Branded Solutions and the
Points.com.
(2) Includes seven additional partners acquired in the MilePoint Acquisition as
at March 31, 2004.
Points.com Growth
Growth in the number of consumer members paying for a Points.com PointsPlus
membership and/or completing an exchange transaction is driven by three factors
that contribute to both increased site traffic and the ease with which a
consumer can join Points.com and then conduct exchange transactions: website
usability and enhancements; marketing (awareness and brand) and partner
activity. Continued enhancements have been made to the website that simplify
processes and will allow Points to grow while incurring fewer costs. The release
of Points.com version 3.0 will also add a significant number of new features and
improved functionality. Growth in activity at Points.com is also heavily
impacted by partner activity. The number of loyalty program partners and their
industry mix are two important elements in the growth of Points.com because it
directly impacts 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. Management expects to round out the
partner industry mix and add several partners over the next two quarters.
Another measure of the value received by consumers upon completing a transaction
is the "Trade Ratio", defined as the number of points or miles of one program
required to acquire one point or mile of another loyalty currency. The Trade
Ratio is an average for all exchange transactions completed in a period.
For the three months ended
---------------------------------
SEPT. 30 JUNE 30 SEPT. 30
POINT.COM METRICS 2004 2004 2003
- ------------------ --------- --------- ---------
Total Loyalty Programs - cumulative 43 40 30
Trade Ratio(1) 1.78 to 1 1.48 to 1 1.70 to 1
Notes:
(1) Average rates are based on all miles and points exchanged and excludes
exchanges into gift certificates. The results are based on actual trades
made during the applicable period.
The number of loyalty programs participating on Points.com has increased by 47%
since the third quarter of 2003 and 8% since June 30, 2004. Points continues to
focus its business development efforts on adding the optimal partners by size
and industry to Points.com. Management continuously works with new and existing
program participants in an effort to
Page 8 of 32
improve the Trade Ratio. Management believes that the Trade Ratio is an
important (and relative) measure since a lower ratio implies a more attractive
consumer value proposition. An improved consumer value proposition should lead
to more members and more trades. The Trade Ratio is, however, impacted by the
number and type of promotions run by the Corporation and by the partners. It can
be expected that the Trade Ratio will fluctuate (positively and negatively) over
time. Total trades grew by 187% compared to the third quarter of 2003.
Management expects to continue to see improvement throughout 2004.
Private Branded Solutions Growth
The Private Branded Solutions have been designed with each partner's look and
branding. As a result, Points has little impact on driving traffic and
transactions through its partners' sites. However, Points has seen continuous
growth in the products since each launch. Management expects this trend to
continue for new and existing Private Branded Solutions.
SEPT. 30 JUNE 30 SEPT. 30
PRIVATE BRANDED SOLUTIONS METRICS AS AT 2004 2004 2003
- --------------------------------------- -------- ------- --------
Total Unique Partners(1) 20 19 11
Total Private Branded Solutions(2) 51 48 27
Notes:
(1) Includes seven additional partners acquired in the MilePoint Acquisition as
at March 31, 2004.
(2) Includes 17 additional products acquired in the MilePoint Acquisition as at
March 31, 2004.
PRIVATE BRANDED SOLUTIONS(1)(2) SEPT. 30 JUNE 30 SEPT. 30
NUMBER OF PRODUCTS AS AT 2004 2004 2003
- ------------------------------- -------- ------- --------
POINTSpurchase 15 14 8
POINTSgift 15 14 7
POINTStransfer 3 3 2
POINTScorporate 8 8 4
POINTSelite 2 2 2
POINTScustom 4 3 1
POINTSintegrate partners(3)(4) 4 4 3
Total Private Branded Solutions 51 48 27
Notes:
(1) Includes products sold to new and existing customers.
(2) Includes 17 additional products acquired in the MilePoint Acquisition as at
March 31, 2004.
(3) Each POINTSintegrate partner will have third parties integrated into its
technology platform.
(4) There are 23 existing partner integration add-ons among the four
POINTSintegrate partner as at Sept. 30, 2004.
SOURCES OF REVENUE GROWTH
Approximately 98% of the Corporation's revenue in the third quarter (96% year to
date) is generated through its Points Solutions, which have two primary sources
for growth: organic growth through increased use of existing contracted Points
Solutions; and the development of new contracted Points Solutions. The remaining
2% of revenues (4% year to date) is interest income.
Page 9 of 32
For the three months ended For the nine months ended
----------------------------- -------------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
PERCENTAGE OF REVENUES BY SOURCE 2004 2004 2003 2004 2003
- -------------------------------- -------- ------- -------- -------- --------
Organic Growth of existing Points Solutions 90% 97% 76% 94% 56%
New contracted Points Solutions with new and
existing partners 10% 3% 24% 6% 44%
Organic Growth of Existing Points Solutions
The large majority of existing products that Points operates, including those on
behalf of partner loyalty programs, continue to grow through increased consumer
awareness, consumer adoption and loyalty program growth. As Points earns
transaction fees or commissions on the majority of these products and as the
products continue to grow, Points expects to continue to derive a large portion
of its revenues in this manner.
Organic growth of existing Points Solutions accounted for 90% of revenues in the
third quarter of 2004. Revenue from organic growth grew by 42% from $1.26
million in the third quarter of 2003 to $1.78 million in the third quarter of
2004. Management expects this trend to continue as the base of existing products
continues to grow. Revenues from existing Points Solutions generated less
revenue in the third quarter than the second quarter of 2004. This is the result
of reduced sales during the summer months and the strengthening Canadian dollar
(impact of negative FX Rate movement).
New Contracted Points Solutions
Selling additional Points Solutions is an important source of new revenue. New
Points Solutions sold to loyalty program partners grow the base of products
being managed and therefore the organic revenue base and, in the case of sales
to new loyalty program partners, provide an opportunity to place additional
Points Solutions with the same partner.
Points has grown the number of products placed with partners from 27 to 51 as at
September 30, 2004 from September 30, 2003. In addition, 23 third party
integrations have been implemented with the four POINTSintegrate partners.
Points believes that its suite of Points Solutions is applicable to all of its
large loyalty program partners and will continue to focus business development
resources on both the sale of new products to current partners and on sales to
new partners. Management is continuing to focus on expanding the Points.com
partnership base in 2004 across various loyalty verticals. In particular, Points
will continue to focus on new partnerships in the financial services, hotel,
retail, car rental, and online categories throughout 2004.
Projected revenues for 2004 attributed to the deployment of Points Solutions to
new loyalty program partners are considerably riskier than organic growth of
existing Points Solutions. Revenue growth is still substantially dependent on
generating new contracts for the purchase of Points Solutions products. While
management expects continued business development success, there is no certainty
that Points will continue with its past success of acquiring new contracts with
new or existing partners.
Page 10 of 32
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 $33,343 for the third quarter of 2004,
compared with $107,786 in the third quarter of 2003 and $83,566 in the second
quarter of 2004. The decrease in interest income year over year and quarter over
quarter is largely a function of reduced cash reserves, the strengthening
Canadian/US foreign exchange rate, the shorter duration of the investment
portfolio and the subsequently lower average yield of the investments.
Management expects the interest income to continue to decline in the short term
as cash reserves are reduced as a consequence of the MilePoint Acquisition and
growth of its operations. Interest income is a function of the Corporation's
cash balances and the prevailing interest rates. Canadian cash reserves are
invested in a combination of short-term liquid assets and short-term bonds. The
bond and money market portfolio has a duration of less than two years. Foreign
currency continues to be invested in short-term and money market instruments.
Points' cash and short-term investments are valued quarterly at the lower of
cost and market value. In the longer term, as Points' business continues to
grow, cash reserves and related interest income are also expected to increase,
although this growth is not expected to be a material portion of the
Corporation's revenue going forward. Interest rates will continue to influence
interest earnings. The Corporation's bond portfolio is exposed to financial risk
that arises from the credit quality of the underlying bond issuers. The
Corporation seeks to mitigate the credit risk by diversifying its bond holdings
and only investing in securities with a credit rating of "A" or higher. A
summary of the Corporation's investments is as follows:
US$ OTHER
AS AT SEPT. 30, 2004 YIELD % CREDIT RATING C$ TOTAL DENOMINATED DENOMINATED
- -------------------- ------- ------------- ----------- ----------- -----------
Cash held at bank(1) 1.30 n/a $14,017,542 $8,426,304 E 1,311,872
GBP 223,456
CHF 9,246
Money market securities n/a n/a n/a
Bonds(3) 3.11 A - AAA 1,233,765 n/a n/a
----------- ----------
TOTAL $15,251,307 $8,426,304
=========== ==========
Notes:
(1) C$ Total represents total cash held at bank inclusive of all denominations;
US$ and Other Denominated currencies are a subset of the C$ Total and are
represented in their local currency amount.
(2) Yield as at September 30, 2004.
(3) Bond yield is calculated as the simple average of the portfolio's
semi-annual yield to maturity.
Foreign Exchange Rates
The translation of the Corporation's revenues and expenses 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 94% of
Page 11 of 32
the Corporation's revenues are in U.S. dollars and the remaining 6% are split
between Canadian dollars, Euros, Great Britain Pounds and Swiss Francs.
Management expects that the percentage of U.S. dollar-based revenue will not
decrease significantly in 2004. Approximately 63% of the Corporation's expenses
were in Canadian dollars, 32% are U.S. dollar-based and 5% are based in other
foreign currencies. The Corporation does not have material foreign exchange risk
with its cash expenses as it has sufficient foreign currency reserves to meet
its foreign obligations.
The average FX Rate (the nine-month average rate) with which revenues and
expenses are translated into Canadian dollars has stabilized relative to the
second quarter 2004 (the six-month average rate). The FX rate differential was
negative, but not material.
The translation of the Corporation's revenues will be lower in Canadian dollar
terms if the Canadian dollar strengthens relative to the U.S. dollar.
Conversely, Points' expenses would decrease, dampening the negative impact to
net income. The opposite would be true if the Canadian dollar weakened relative
to the U.S. dollar.
For the nine
For the three months ended months ended
----------------------------- -------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
U.S. - CANADIAN FX RATES 2004 2004 2003 2004 2003
- ------------------------ -------- ------- -------- -------- --------
Period Start 1.334 1.311 1.347 1.297 1.573
Period End 1.270 1.345 1.351 1.270 1.351
Period Average 1.309 1.359 1.383 1.327 1.428
Growth of Loyalty Program Industry
The Economist reported on the growing importance of loyalty programs in an
article from its May 2, 2002 issue, entitled "Fly me to the moon", noting that
on an annual basis, airlines sold "roughly US$10 billion worth of miles to
partners, such as credit card firms". In another article (entitled
"Frequent-flyer economics," from the same issue), The Economist reported that
"frequent flyer miles started as a marketing gimmick, but they have become a
lucrative business," that "roughly half of all miles are now earned on the
ground, not in the air," and that with "the world-wide stock of unredeemed miles
.. . . close to 8.5 trillion . . . the total global stock of frequent flyer miles
may now be worth almost US$500 billion".
Management understands that members of loyalty programs are much more likely to
utilize 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 10,000 points). Therefore, growth in consumer loyalty program
account balances will create demand for Points Solutions. Growth in program
balances is a function of the growth in the number of programs, the number of
participating consumers, time and the number of consumers moving through a
loyalty redemption (for example, receiving an award of some type).
Several respected periodicals estimate strong growth in the popularity of and
participation in loyalty programs. For example, in addition to The Economist,
cited above, according to the
Page 12 of 32
"frequent flyer facts" section of the website of InsideFlyer magazine
(www.webflyer.com), a leading publication for members of frequent traveler
programs:
"loyalty programs grow at a rate of 11% per annum, with over 120 million
members worldwide. While there are about 92 frequent flyer/guest programs
in the world, American AAdvantage, the largest frequent flyer program in
the world, began with 283,000 members in 1981 and has grown to more than 45
million members".
RESULTS OF OPERATIONS - GENERAL AND ADMINISTRATIVE EXPENSES
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses declined by 6% relative to the second
quarter of 2004 and grew by 34% over the third quarter of 2003. Material changes
in expenses will be described in each section below.
For the nine
For the three months ended months ended
------------------------------------ -----------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
GENERAL AND ADMINISTRATIVE EXPENSES 2004 2004 2003 2004 2003
- ----------------------------------- ---------- ---------- ---------- ---------- ----------
Employment Costs(1) $1,522,691 $1,665,730 $1,398,813 $5,019,535 $3,675,509
Technology Services(2) 274,069 264,856 262,154 700,231 716,535
Marketing and Communications 336,623 452,521 49,634 991,246 102,341
Sales Commission and Related Expenses 119,841 132,754 31,724 277,298 182,507
Other(3) 651,973 582,931 418,655 1,666,636 701,262
---------- ---------- ---------- ---------- ----------
TOTAL $2,905,198 $3,098,792 $2,160,979 $8,654,946 $5,378,154
========== ========== ========== ========== ==========
Notes:
(1) Wages and employment costs include salaries, contract labour charges,
recruiting, benefits and government charges (CPP and EI).
(2) Technology expenses include online hosting and managed services, equipment
rental, software licenses and capital lease expenses.
(3) Other expenses include foreign exchange losses (or gains), travel expenses,
professional fees, insurance, office rent and expenses and regulatory
expenses.
As the Corporation is still in the process of increasing loyalty program
participation in and sales of the Points Solutions, significant resources
continue to be required. While management has made controlling costs a priority,
costs and/or capital expenditures will continue to increase in 2004 and 2005.
Management expects the general and administrative expenses in the fourth quarter
to be marginally higher than in the third quarter. A large percentage of the
marketing expenses expected to be incurred will continue to be non-cash, as the
Corporation is expensing its pre-paid mileage asset account. The Corporation
will continue to scale its infrastructure, add new partners to its suite of
products, move from trial/test marketing to a more comprehensive marketing and
branding program.
Points still expects that a series of significant marketing and branding
programs will begin in mid 2005 to coincide with 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
Page 13 of 32
plan does not meet expectations, the expenditures can either be reduced or
reallocated to more successful programs.
EMPLOYMENT COSTS
As at September 30, 2004, Points had 77 full-time employees.
SEPT.30 JUNE 30 SEPT.30
HEADCOUNT BY DEPARTMENT AS AT 2004 2004 2003
- ----------------------------- ------- ------- -------
Technology 43 36 34
Finance and Administration 13 12 11
Business Development 8 8 7
Marketing and Customer Service 13 10 10
--- --- ---
TOTAL 77 66 62
=== === ===
During the third quarter, 11 employees joined the Corporation. Ten of the eleven
new hires, and several existing employees, are directly dedicated to the
Points.com Version 3.0 technology development. Employment costs decreased as a
result of lower recruiting charges and several employees being re-allocated from
supporting the existing businesses to the development team for Points.com
Version 3.0. Total employment costs in the fourth quarter are likely to remain
flat relative to the third quarter.
TECHNOLOGY SERVICES
Technology Services expenses increase in increments based on business growth and
product performance. As Technology Services costs are a function of the number
of partners and Points Solutions products, these costs grow as revenue grows. In
general, as loyalty program partners and products are added to the
infrastructure and transactional volume increases, additional servers,
processors, bandwidth, memory, etc., are required to provide a secure and robust
production environment. The third quarter of 2004 saw a quarter over quarter
increase of $9,213 (3.5%) as additional services were required for new products
associated with the MilePoint Acquisition and the expansion of other Points
Solutions. Management expects these costs to be flat for the fourth quarter of
2004. Products launched and loyalty program partners acquired are the key
drivers of Technology Services expenses.
MARKETING AND COMMUNICATIONS
Marketing costs decreased by $115,898 (26%) relative to the second quarter of
2004 as fewer marketing promotions were in market during the quarter. Beginning
in the first quarter of 2003, an accounting adjustment related to the expense
recognition of promotional points tied to PointsPlus membership purchases was
enacted. Prior to the first quarter of 2003, the cost of these points was
recorded as an expense in the period they were issued. Beginning January 1,
2003, marketing expenses associated with the sale of PointsPlus memberships are
being amortized over the term of the membership, while the other marketing
expenditures are recognized in the period of use.
Page 14 of 32
The Corporation expects to increase its marketing expenditures at the beginning
of the second quarter in 2005, to coincide with the launch of Point.com Version
3.0. The marketing and branding foundation built in 2003 has made it possible to
expand audience reach and effectively execute large-scale, multi-channel
promotions. Advertising expenditures will continue to be focused on partner
media as this approach dovetails with business development strategies and is the
most cost-effective means to reach Points' target audience. A smaller portion of
the budget will be used for targeted non-partner advertising. It is anticipated
that marketing and communication expenses could increase substantially if the
programs are successful at customer acquisition and retention. If the programs
do not meet management's expectations in driving revenue growth, marketing
expenses can be eliminated or reallocated in the short term. Management expects
that the results of the carefully planned marketing strategy will accelerate
Points.com activity.
SALES COMMISSIONS AND EXPENSES
Sales Commissions and Expenses have decreased by $12,913 (10%) in the third
quarter of 2004 over the second quarter. Sales Commissions will continue to
adjust according to partners' contracted, and growth of existing, products.
OTHER OPERATING EXPENSES
Other Operating Expenses include office overhead, travel expenses professional
fees and foreign exchange gain and/or loss. Other Operating Expenses increased
by $69,042 (12%) in the third quarter relative to the second quarter. The most
significant component of the increase in the general and administrative expenses
relates to the foreign exchange loss from re-valuing certain balance sheet
accounts (e.g. US dollar denominated cash and US 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 balance sheet
accounts at the period ending FX Rate is accounted for as a foreign exchange
gain or loss 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 in the
third quarter decreased by almost $90,000 compared to the second quarter of
2004. Management expects Other Operating Expenses (excluding foreign exchange
gain and loss) to remain flat in the fourth quarter relative to the third
quarter.
For the three months ended For the nine months ended
------------------------------- -------------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
OTHER OPERATING EXPENSES 2004 2004 2003 2004 2003
- ------------------------ -------- --------- -------- ---------- ---------
Foreign Exchange Gain/Loss(1) $ 97,687 ($61,061) $ 89,974 $ 33,424 ($98,939)
Other Operating Expenses 554,286 643,992 328,680 1,632,319 800,202
-------- --------- -------- ---------- ---------
TOTAL $651,973 $ 582,931 $418,654 $1,665,743 $ 701,262
======== ========= ======== ========== =========
Note:
(1) See definition above.
page 15 of 32
RESULTS OF OPERATIONS - NON-CASH EXPENSES
Forward-looking statements contained in this section, "Results of Operations -
Non-Cash Expenses", with respect to future expenses of the Corporation, are not
guarantees of such future expenses and involve certain risks and uncertainties
that are difficult to predict. Any changes in the Corporation's amortizing
assets will subsequently change the Corporation's amortizing expenses.
AMORTIZATION EXPENSES
The Corporation recorded amortization expenses of $631,105 in the third quarter
compared to $573,312 for the quarter ended June 30, 2004 and $730,353 for the
quarter ending September 30, 2003. The increase was attributed to the charges
outlined in the following table:
For the three months ended For the nine months ended
------------------------------ -------------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
AMORTIZATION EXPENSES 2004 2004 2003 2004 2003
- --------------------- -------- -------- -------- ---------- ----------
Deferred Costs $140,461 $128,126 $137,460 $ 467,934 $ 319,766
Intangible Assets 410,579 352,479 189,050 $ 951,275 $ 567,150
Property, Plant and Equipment 80,064 92,707 403,842 $ 229,125 $1,162,453
-------- -------- -------- ---------- ----------
TOTAL $631,105 $573,312 $730,352 $1,648,334 $2,049,369
======== ======== ======== ========== ==========
AMORTIZATION OF DEFERRED COSTS
For the three months ended For the nine months ended
------------------------------ -------------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
DEFERRED COSTS 2004 2004 2003 2004 2003
- -------------- -------- -------- -------- -------- --------
Amortization $140,461 $128,126 $137,460 $467,934 $319,766
Charges incurred in respect of certain financings are deferred and charged to
income on a straight-line basis over an applicable time period. Deferred finance
charges represent legal, accounting and other related fees incurred to obtain
the financings. Points has incurred deferred costs in connection with the
following financial transactions:
a. In prior quarters, Points reported deferred financing charges in connection
with the 11%, $6,000,000 senior secured convertible debenture (the
"Debenture") issued to CIBC Capital Partners. The first quarter of 2004 was
the final amortization period for the deferred costs associated with the
Debenture.
b. The Corporation reports deferred financing charges in connection with the
Series Two Preferred Share issued pursuant to the IAC Investment, as this
financial instrument is also classified as debt. The Series Two Preferred
Share has 34 amortization periods remaining.
c. In consideration of the value to the Corporation of the Alignment Agreement
with American Airlines, the Corporation issued 2,196,635 Common Shares to
American Airlines valued at $2,240,568. The Common Shares have been
classified as deferred
Page 16 of 32
costs and will be amortized over a five year period. There are 16
amortization periods remaining.
d. Selected Private Branded Solution technology costs incurred ($123,390) have
been deferred over the expected lifetime of certain partner relationships.
The two relationships have 28 and 30 amortization periods remaining.
AMORTIZATION OF INTANGIBLE ASSETS
The excess of the cost over the value attributed to the underlying net assets of
the shares of Points.com acquired in 2002 is amortized on a straight-line basis
over a period of three years. The increase in the amortization expense of
intangible assets in the second quarter is related to the intangible assets
(i.e., partner contracts) acquired through the MilePoint Acquisition (see
"Commitments Related to MilePoint Acquisition" on page 26 for additional
information). 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 For the nine months ended
------------------------------ -------------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
INTANGIBLE ASSETS 2004 2004 2003 2004 2003
- ----------------- -------- -------- -------- -------- --------
Amortization $410,579 $352,479 $189,050 $951,275 $567,150
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
The decrease in the amortization expenses relative to the second quarter of 2004
reflects that certain assets have been amortized to a zero cost base.
For the three months ended For the nine months ended
------------------------------ -------------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
PROPERTY, PLANT AND EQUIPMENT 2004 2004 2003 2004 2003
- ----------------------------- -------- -------- -------- -------- ----------
Amortization $80,064 $92,707 $403,842 $229,125 $1,162,453
OTHER NON-CASH EXPENSES
Interest on Convertible Debenture
Accrued interest on any principal amount of the Debenture that is converted into
common shares ceases to be payable. In addition, in the event that an exercise
of the Warrants (as defined in "Liquidity - IAC Investment" on page 19) 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 23.
Page 17 of 32
INTEREST ON CONVERTIBLE DEBENTURE 2008 2007 2006 2005 2004 2003 2002 2001
- --------------------------------- ------ ------ ------ ----- ------ ----- ----- -----
Accrued Interest ($000's) 257 1,209 1,089 981 884 854 660 522
Debenture Value ($000's) 12,456 12,199 10,990 9,901 8,920 8,036 7,182 6,522
Interest on the outstanding principal amount of the Debenture accrues at a rate
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.
Interest on the Series Two Preferred Share
INTEREST ON SERIES TWO PREFERRED
SHARED 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003
- -------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Accrued Interest ($000's) 244 868 868 868 868 868 868 868 868 868 624
Series Two Preferred Share Value
($000,000's) 21.1 20.8 19.9 19.1 18.2 17.3 16.5 15.6 14.7 13.9 13.0
RESULTS OF OPERATIONS - EARNINGS AND SHAREHOLDER EQUITY
LOSS
The Corporation reported a net loss of $2,001,764 for the third quarter of 2004,
compared with a net loss of $1,628,391 for the third quarter of 2003 and a net
loss of $2,153,069 for the second quarter of 2004. The net loss decreased
relative to the second quarter of 2004.
SHAREHOLDER EQUITY
The deficit in shareholder equity increased from $5,048,584 at June 30, 2004 to
$6,991,482 at September 30, 2004. The increase was a result of the net loss for
the period of $2,001,764.
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
65,810,352 shares at September 30, 2004, compared with 64,250,018 shares at June
30, 2004 and 56,773,936 at September 30, 2003.
The Corporation reported a net loss of $0.03 per share for each of the quarters
ending September 30 and June 30, 2004, compared with a net loss of $0.03 per
share for the third quarter of 2003. For 2004 and 2003, the number of fully
diluted shares outstanding has not been computed as the effect would be
anti-dilutive (meaning that the loss per share would decrease on a fully diluted
basis) and therefore, in accordance with Canadian generally accepted accounting
principles, fully diluted loss per share is not computed. The fully diluted
calculation for both 2004 and 2003
Page 18 of 32
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 (loss) before interest, amortization
and other deductions ("EBITDA") are the key indicator of the change in the
liquidity of Points' operations over a defined period of time. As the
Corporation continues to add contracts to its portfolio of Private Branded
Solutions and to Points.com, revenues are expected to grow, resulting in
increased liquidity.
EARNINGS (LOSS) BEFORE INTEREST, AMORTIZATION AND OTHER DEDUCTIONS
Management believes that EBITDA is an important internal measure and financial
benchmark for its shareholders because it is a recognizable and understandable
measure of the Corporation's cash burn or growth, and is a standard often
scrutinized by investors in small to mid-capitalization companies. For example,
the Corporation has incurred large non-cash expenses (depreciation and
amortization) over the past several fiscal years that distort the financial and
strategic gains the Corporation has made. Primarily as a result of the
Points.com Version 3.0 related expenditures, including those costs that are not
capitalized, management now expects that Points' revenues will exceed its
general and administrative in 2006 rather than 2005.
For the quarter ending September 30, 2004, the Corporation's EBITDA was ($0.926
million). This compares with EBITDA of ($1.07 million) for the quarter ending
June 30, 2004.
IAC INVESTMENT
The following is a general summary of the terms of the IAC Investment. More
comprehensive disclosure of the IAC Investment is contained in Points' Material
Change Report dated March 21, 2003, which is hereby incorporated by reference.
See also "Commitments Related to the Terms of Certain Financing Arrangements" on
page 23 below.
Under the IAC Investment, Points issued one convertible preferred share (the
"Series Two Preferred Share") and Common Share purchase warrants (the
"Warrants") for aggregate cash consideration of $12.4 million and $2.7 million,
respectively. Based on Points' capitalization as at the date hereof, the Series
Two Preferred Share is convertible, for no additional consideration, into
22,030,844 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 81,160,080 Common Shares at an effective
price per Common Share of $1.01 between April 11, 2004 and April 10, 2005 and
$1.13 between April 11, 2005 and April 10, 2006 (resulting in an additional
investment by IAC in Points, if
Page 19 of 32
exercised in full and depending on the year of exercise, of up to approximately
$82.3 million or $91.5 million). Each of the Series Two Preferred Share and the
Warrants contain anti-dilution protection provisions.
CASH AND CURRENT ASSETS
The Corporation had consolidated cash and cash equivalents of $15,251,307 at
September 30, 2004, compared to the $18,427,174 at June 30, 2004, and
$21,833,287 at September 30, 2003.
SEPT. 30 JUNE 30 SEPT. 30
AS AT 2004 2004 2003
- ----- ----------- ----------- -----------
Cash and Cash Equivalents $15,251,307 $18,427,174 $21,833,287
Accounts Receivable 1,196,865 1,339,237 770,543
Prepaids and Sundry Assets 1,228,039 1,271,451 846,469
----------- ----------- -----------
TOTAL CURRENT ASSETS $17,676,211 $21,037,862 $23,450,299
=========== =========== ===========
Cash and cash equivalents decreased by $3,175,867 from June 30, 2004. The
primary reasons for the decrease in cash relative to the second quarter of 2004
was related to the operating loss for the quarter, expenditures on capitalized
costs directly attributable to Points.com Version 3.0, expenditures on capital
assets and the decrease in deposits.
CASH FROM EXERCISE OF CERTAIN WARRANTS AND OPTIONS
Certain "in-the-money" warrants and options are due to expire within 12 months.
Assuming that the market price of the Common Shares remains above the exercise
price of these securities, management expects the securities to be exercised. If
exercised in full, the proceeds from the exercise of these securities will
increase cash by approximately $1.57 million assuming the exercise in full of
these securities, issued and outstanding Common Shares will increase by over
10.64 million shares.
Securities with Near-Term Expiry Dates - Outstanding Amounts as at September 30,
2004
SECURITY TYPE EXPIRY DATE NUMBER STRIKE PRICE PROCEEDS
------------- ----------- ---------- ------------------ ----------
Warrants 10/21/2004 2,500 $ 0.28 $ 700
Broker Warrants 11/30/2004 88,525 0.25 22,131
Warrants 11/30/2004 1,646,191 0.25 411,548
Warrants 7/18/2005 166,667 0.25 41,667
Points International Ltd. Options 2/14/2005 1,727,000 0.50 863,500
Points International Ltd. Options 3/14/2005 201,400 0.50 100,700
Points International Ltd. Options 8/22/2005 25,000 0.69 17,250
Options in subsidiary with liquidity put 2/17/2005 627,479 Fair Market Value 13,783
Options in subsidiary with liquidity put 3/31/2005 4,794,780 Fair Market Value 78,740
Options in subsidiary with liquidity put 7/9/2005 802,433 Fair Market Value 8,892
Options in subsidiary with liquidity put 8/13/2005 355,803 Fair Market Value 7,816
Options in subsidiary with liquidity put 8/20/2005 200,312 Fair Market Value 4,400
---------- ----------
TOTAL 10,638,090 $1,571,127
========== ==========
Subsequent to quarter end, and as at October 25, 2004, the following securities
have been exercised or expired:
Page 20 of 32
SECURITY TYPE NUMBER STRIKE PRICE PROCEEDS
- ------------- ------- ------------ --------
Warrants - expired 2,500 $0.28 $ 700
Broker Warrants - exercised 88,525 0.25 22,131
Warrants - exercised 830,536 0.25 207,634
------- --------
TOTAL 921,561 230,465
======= ========
Accounts Receivable
The Corporation expects accounts receivable to grow proportionately with growth
in revenues, however there is some variability in this trend. Management deems
the risk of bad debts to be minimal based on the structure and nature of the
Corporation's cash flows.
ABILITY TO FUND FUTURE GROWTH
In the third quarter of 2004, the Corporation had cash flows used in operating
activities of ($2,292,324) after changes in non-cash balances related to
operations. Management is confident that the Corporation's cash position is
adequate to cover expenses and commitments in the short term, even if revenue
growth is slower than planned, and expects that the revenue from the Points
Solutions will generate sufficient cash to maintain capacity in the short term
and grow capacity and resources in the long term. However, the Corporation is
currently not generating an operating profit (revenues minus general and
administrative expenses) and cannot be assured that revenue growth will be
sufficient to meet liabilities as they come due.
PROPERTY, PLANT AND EQUIPMENT
The Corporation reported an increase in property, plant and equipment in the
third quarter due to the capitalized costs of Points.com Version 3.0 and an
increase in office computer equipment. Refer to "Capital Resources - Planned
Capital Expenditure" on page 29 for additional information. Existing technology
costs under capital lease are depreciated on a straight-line basis over three
years. The Corporation's technology costs are currently, and are expected to
remain, below industry averages as a result of prudent cost containment
initiatives.
Additional leasehold improvements at the Corporation's new facility will
increase property, plant and equipment and the corresponding amortization in
2004 and beyond.
SEPT. 30 JUNE 30 SEPT. 30
AS AT 2004 2004 2003
- ----- ---------- ---------- --------
Furniture and equipment $ 296,360 $ 295,979 $131,345
Computer equipment 301,087 234,339 168,600
Software 84,122 100,756 83,162
Technology costs 13,568 16,973 393,952
Points.com Version 3.0 Direct Development Costs 473,067 -- --
Leasehold improvements 532,703 468,109 59,460
---------- ---------- --------
TOTAL PLANT, PROPERTY AND EQUIPMENT $1,700,903 $1,116,157 $836,520
========== ========== ========
Page 21 of 32
GOODWILL
The MilePoint Acquisition resulted in $3,675,000 allocated to amortizing
intangible assets and $3,975,000 ($3,775,000 from goodwill and $200,000 for
other costs and deductions) to goodwill. In accordance with CICA handbook,
Section 3062 goodwill will not be expensed unless it is deemed to have become
impaired. Management has tested, and concluded, that none of the Corporation's
goodwill has become impaired.
In the third quarter, $303,262 of charges relating to incremental transition
services and additional direct costs related to the MilePoint acquisition were
incurred and charged to Goodwill.
CURRENT LIABILITIES
Current liabilities at September 30, 2004 were $15,379,252, compared with
$16,418,985 at June 30. The decrease was primarily related to the decrease in
deposits, the strengthening Canadian dollar (FX rate) and lower activity during
the quarter. The decrease was offset by higher accounts payable and $385,005 of
the long term MilePoint Acquisition liability allocated to current liabilities
from long-term liabilities.
Through arrangements with partner loyalty programs such as those for
POINTSpurchase and POINTScorporate solutions, Points processes transactions
involving the online sale of loyalty currencies and collects the funds on behalf
of the loyalty program partner. Gross proceeds received on the sale of loyalty
program points, net of the commissions earned, are included in deposits and
deferred revenue in the attached consolidated balance sheets until ultimately
remitted. The level of deposits is influenced by partner activity and trends in
the overall loyalty industry. As activity increases, the Corporation's deposits
increase. The Corporation expects deposits to increase as it experiences organic
growth with existing partners, establishes new partner relationships and
integrates the MilePoint Acquisition.
SEPT. 30 JUNE 30 SEPT. 30
CURRENT LIABILITIES AS AT 2004 2004 2003
- ------------------------- ----------- ----------- -----------
Accounts payable and accrued liabilities $ 1,199,546 $ 931,188 $ 889,869
Deposits 12,974,925 14,668,589 10,545,585
Current portion of obligation under capital lease -- -- 154,898
Current portion of loan payable 29,860
Current portion of acquisition loan payable 1,174,921 819,208 --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES $15,379,252 $16,418,985 $11,590,352
=========== =========== ===========
The September 30, 2004 accounts payable and accrued liabilities includes 2004
employee bonus accruals to be paid in January 2005, and other accrued charges.
The Corporation has sufficient foreign currency reserves to meet its foreign
currency obligations and, as such, does not utilize any hedging or other
strategies involving interest rate or currency derivatives.
Page 22 of 32
WORKING CAPITAL
Working capital (defined as current assets minus current liabilities) has
declined relative to the second quarter of 2004 to $2,296,958. Management
expects working capital to remain positive throughout the remainder of 2004.
However, as previously stated, as the Corporation increases the rate of
expenditure to successfully launch Points.com Version 3.0, it is probable that
working capital will be negative in 2005. The Corporation is confident that it
can fund its operations, while it is in a negative working capital position in
2005. Management believes that through growth of its products, working capital
will improve in 2006.
LONG-TERM LIABILITIES AND COMMITMENTS
PAYMENTS DUE BY PERIOD (AGGREGATE AMOUNT FOR MULTI-PERIODS)
-----------------------------------------------------------
FUTURE OBLIGATIONS (000,000'S) TOTAL(1) 2009+ 2008 2007 2006 2005 2004
- ------------------------------- -------- ------ ----- ----- ----- ----- -----
Long-Term Debt(2)
(non-cash until repayment) $12.46 -- $6.26 $1.21 $1.09 $0.98 $0.88
Series Two Preferred Share
(non-cash until repayment) 21.08 16.12 0.87 0.87 0.87 0.87 0.87
Loan Payable -- -- .01 .03 .03 .03 .01
Operating Leases(3) 2.74 0.11 0.11 0.40 0.41 0.50 1.21
Partner Purchase Commitments(4) 4.61 0.02 0.35 1.49 1.14 0.87 0.74
MilePoint Acquisition(5) 4.22 -- -- -- 0.40 0.83 2.99
------ ------ ----- ----- ----- ----- -----
Total Contractual Obligations $45.10 $16.24 $7.59 $3.99 $3.94 $4.09 $6.70
====== ====== ===== ===== ===== ===== =====
Notes:
(1) Represents the aggregate amount for the full duration of the contractual
obligations (including years post 2008 and prior to 2004).
(2) The Debenture is due on March 15, 2005. However, for the purposes of the
above table, the maximum obligation with all four extensions exercised has
been included. The holder of the Debenture has the right to extend the term
by one year for up to three consecutive years. See "Interest on Convertible
Debenture" above for a summary of payments in a fiscal year if the
Debenture matures.
(3) Includes technology services commitments and hardware and software
operating leases.
(4) Includes mileage purchase and co-marketing commitments, see "Partner
Purchase Commitments" below.
(5) Cash commitments related to the MilePoint Acquisition include the purchase
price ($3.5 million), anticipated transition costs (up to US$417,000) and
anticipated consulting fees (US$120,000).
Elements of the foregoing table are explained in more detail in the following
sections.
Commitments Related to the Terms of Certain Financing Arrangements
Background
On March 15, 2001, Points issued to CIBC Capital Partners, a division of
Canadian Imperial Bank of Commerce ("CIBC Capital Partners"), the 11% $6,000,000
Debenture, which was amended and restated on February 8, 2002 and further
amended effective April 11, 2003. The full principal amount of the Debenture was
set to mature on March 15, 2004. However, in December 2003, CIBC Capital
Partners exercised its right to extend the maturity date until
Page 23 of 32
March 15, 2005. CIBC Capital Partners has the option to extend the maturity date
from March 15, 2005 for up to three more one-year extensions. Accrued interest
on the Debenture as of September 30, 2004 is $2,694,714 and is included with the
Debenture in long-term debt as a non-current liability in the consolidated
balance sheet.
The $6,000,000 principal amount of the Debenture is convertible at the option of
CIBC Capital Partners into up to 18,908,070 Common Shares. Accrued interest on
any principal amount as converted ceases to be payable. The Debenture will also
automatically convert in full into Common Shares immediately preceding certain
liquidity events. The Debenture contains certain negative covenants in favour of
CIBC Capital Partners.
As part of the reorganization of Points completed on February 8, 2002, Points
issued to CIBC Capital Partners one preference share (the "Series One Preferred
Share"). The holder of the Series One Preferred Share is entitled to a dividend
(the "Dividend") in the event that, prior to an automatic conversion of the
Debenture, (i) there is a merger or consolidation of Points (or a subsidiary of
Points which owns all or substantially all of the assets of Points) with another
corporation where, following such event, the shareholders of Points will not
hold at least a majority of the voting power of the surviving/acquiring
corporation, (ii) any person (other than CIBC Capital Partners) or persons
acting jointly or in concert acquire 50% voting control or 50% of the equity of
Points (a "Change of Control"), or (iii) there is a sale of all or substantially
all of the assets of Points. The Dividend is approximately equal to $4,000,000
plus an amount calculated on the basis of a notional dissolution of the
Corporation where the holder of the Series One Preferred Share is entitled to
share pro rata (on the basis that the Series One Preferred Share represents that
number of Common Shares into which the Debenture is then convertible) with the
holders of all other participating shares in distributions from the assets of
Points and assuming, for this purpose, that the value of the assets of Points
available for distribution on this notional dissolution is the value
attributable to the equity of Points implied by the transaction giving rise to
the dividend event, as adjusted for the value of non Common Share equity not
valued in the transaction giving rise to the Dividend. In no event may the
Dividend exceed $24,000,000. Where an event occurs giving rise to the Dividend,
CIBC Capital Partners is entitled to accelerate all amounts owing under the
Debenture.
In connection with the IAC Investment, the Debenture was amended such that (i)
the Debenture is repayable (without accrued interest, the repayment of which is
waived) by Points within 30 days of a Change of Control of Points resulting from
the exercise of the Warrants and (ii) the Debenture is not convertible for so
long as the Warrants are outstanding and will not be convertible after the
Warrants are exercised if the Debenture is repaid within 30 days of the Change
in Control resulting from the exercise of the Warrants. Points and CIBC Capital
Partners also acknowledged, in connection with the IAC Investment, that in the
event of the exercise of the Warrants resulting in a Change of Control, the
application of the terms of the Series One Preferred Share in that situation
results in the Dividend equalling the lesser of (i) $24,000,000 and (ii)
$4,000,000 plus the number of Common Shares into which the Debenture is then
convertible, multiplied by the exercise price paid per Common Share on the
exercise of the Warrants. Points has agreed that, within 30 days of the exercise
of the Warrants in full, it will pay all amounts owing under the Debenture and
the Series One Preferred Share. Except in connection with the exercise of the
Warrants by IAC, Points is not entitled to pre-pay the Debenture.
Page 24 of 32
Maturity of Debenture
Assuming the Warrants have not been exercised and the Debenture matures on March
15, 2005, the Corporation will be required to repay $6 million of principal and
$3,108,422 of accrued interest. The repayment of $9,108,422 of principal and
accrued interest will cause the Corporation to be in a negative working capital
position, may materially threaten its solvency and/or may severely restrict the
ability to grow its business. There is no certainty that the Corporation would
have sufficient cash at such time to make the repayment. However, CIBC Capital
Partners has the option to extend the maturity date from March 15, 2005 for up
to three additional one-year extensions.
Exercise of Warrants
If the Warrants are exercised resulting in a Change of Control prior to the
maturity of the Debenture, as at the date hereof and based on the Corporation's
current share capitalization, the Corporation would receive between
approximately $82.3 million and $91.5 million, depending on the year of
exercise. On the exercise of the Warrants resulting in a Change of Control, the
Corporation would be required to repay the $6 million principal amount of the
Debenture and pay the Dividend, which would then be payable on the Series One
Preferred Share (up to a maximum of $24 million). In this situation, management
expects that Points would have sufficient cash to make such payments.
Redemption Rights of Series Two Preferred Share Holder
Unless the Series Two Preferred Share has been converted at the option of the
holder, Points will be required to redeem the Series Two Preferred Share upon
the earlier of (i) March 31, 2013 and (ii) a person (other than the holder of
the Series Two Preferred Share) acquiring shares of Points sufficient to elect a
majority of the board of directors of Points (a "Series Two Share Change of
Control").
In the event of redemption of the Series Two Preferred Share on a Series Two
Share Change of Control, the redemption amount payable will be equal to the
greater of (i) 125% of the amount equal to (A) the subscription price of the
Series Two Preferred Share plus (B) a return on that subscription price equal to
7% per annum, calculated from the date of issue of the Series Two Preferred
Share to the date on which the Series Two Preferred Share is redeemed and (ii)
the greater of (A) the value of the Common Shares into which the Series Two
Preferred Share then could be converted on the day immediately prior to public
announcement of the Series Two Share Change of Control and (B) the product of
the Common Shares into which the Series Two Preferred Share then could be
converted and the fair market value of the consideration paid per Common Share
in the transaction resulting in the Series Two Share Change of Control.
Other Change of Control Event
Upon the occurrence of an event that is a Change of Control and a Series Two
Share Change of Control, and is unrelated to the exercise of the Warrants by
IAC, Points may not have sufficient cash to pay the Dividend, the amounts due
under the Debenture and/or the redemption amount on the Series Two Preferred
Share. As such, it is unlikely that management would consider a
Page 25 of 32
transaction that triggered the above payments unless the transaction provided
for payment of the outstanding obligations.
Partner Purchase Commitments
SEPT. 30 JUNE 30 SEPT. 30
ASSET RELATED TO MILEAGE PURCHASES AS AT 2004 2004 2003
- ---------------------------------------- ---------- ---------- --------
Prepaid Mileage $ 575,950 $ 592,707 $517,977
Sundry assets and other prepaid expenses 652,090 678,744 328,492
---------- ---------- --------
TOTAL $1,228,040 $1,271,451 $846,469
========== ========== ========
As part of the contractual requirements of certain commercial agreements, Points
has committed to purchase miles and points from partners at predetermined rates.
When purchased, the points are recorded as an asset (i.e., prepaid expense)
until expensed as marketing expenditures in the period of use.
A large portion of the current prepaids and sundry assets of the Corporation
include prepaid mileage commitments purchased from the Corporation's partners.
While prepaid points may remain the same or lower as an overall percentage of
prepaids and sundry assets, management expects the prepaid points account to
increase as a result of the mileage purchase commitments from various partners.
Commitments Related to MilePoint Acquisition
On March 31, 2004 Points completed the MilePoint Acquisition. The purchase price
for the assets of MilePoint was $7.5 million and was satisfied through a
combination of $3.5 million in cash and four million Common Shares (worth
approximately $4 million 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 $425,000 and payments for transition services
of $365,515 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) are interest free and discounted at the appropriate current market rate.
The total discount of $50,000 will be charged to interest expense over the life
of the Acquisition Payable.
Points' business objective in acquiring the assets of MilePoint was to increase
its volume of business at minimal additional costs outside of the purchase price
and transition costs. Management expects that the acquisition will increase
revenues and, including all amortizations, be accretive to net income by the end
of 2004. It is expected that the revenue/cash flow from the acquired assets will
be sufficient to pay the cash portion of the purchase price over the 24-month
period following the acquisition.
Management believes that the Corporation's established facilities and existing
employees, working in conjunction with MilePoint resources retained during the
transition period, will be sufficient to sustain the additional volume of
business from the acquired assets.
Page 26 of 32
The impact of the acquisition to Points' balance sheet in 2004 will be to
increase intangible assets by $3,675,000 and goodwill by $3,975,000. The
amortization of the assets is based on the estimated life of the acquired assets
(i.e., the partner contracts).
The amortization and the balance of the purchased intangible assets are
approximately as follows:
AMOUNT IN ($000'S) SEPT 30, 2004
- ------------------ -------------
Accumulated Amortization $ 387
Intangible Asset - Closing Balance 3,293
Goodwill 4,559
In addition to the existing revenue streams acquired from MilePoint, offering
Points Solutions to the customers acquired from MilePoint represents a
potentially valuable stream of revenue.
As with any acquisition, the smooth transition into the Corporation's operations
poses challenges. Transition risks include difficulties in integrating
MilePoint's business into the Corporation's and the possibility of human
resources capacity limits to launch additional new partners during the
transition.
The payment of the purchase price under the terms of the MilePoint Acquisition
is as follows:
Months from Closing
----------------------------------------------
Payout (000's) 0 4 6 12 18 24 SHARES CASH
- -------------- ------ ------ ---- ---- ------ ----- ------ ------
Cash $1,900 $ -- $400 $400 $ 400 $400 $3,500
Shares -- 1,300 -- 700 1,500 500 4,000
Share Value(1) -- 1,300 -- 700 1,500 500 4,000
----- ------
TOTAL 4,000 $7,500
===== ======
Note:
(1) Based on the simple 20-day weighted average Common Share price of $1.00 per
share at signing.
In 2004, the Corporation paid $1.9 million on April 1st and $400,000 on October
1st in cash in partial satisfaction of the purchase price for MilePoint's
business. In addition, MilePoint and the Corporation are party to a Transition
Services Agreement ("TSA") whereby MilePoint employees and resources will
continue to support the products and partner relationships throughout 2004.
Under the TSA, the Corporation has agreed to reimburse MilePoint for expenses
incurred in providing transition services, to a maximum of US$417,000 (of which
C$312,819 or US$235,000 has been paid to date). Points has also entered into a
consulting agreements with MilePoint and one of its senior business development
principals. The consultant will be focused on supporting existing relationships
and selling Points Solutions to existing and new partners.
Page 27 of 32
Management of Points expects that the cash cost of the MilePoint Acquisition
will largely be recaptured through the new revenue provided by the purchased
assets over the 24-month period following March 31, 2004.
Commitments Related to Lease Financing Arrangements
While the Corporation has completed its capital lease obligations in 2003,
several operating leases for hardware and premises remain outstanding.
In the second quarter, 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 41 payment periods
remaining. The Corporation's lease at its former premises will expire in
February 2005.
In 2004, the Corporation will be paying approximately $226,000 for its former
office facilities (approximately 8,050 square feet) and $190,000 for its new
office facilities (approximately 18,000 square feet). Property lease costs are
outlined in the table below. Beginning June 1, 2004, the Corporation was able to
complete a sublet arrangement for a portion of the former premises. The sublet
covers approximately 25% of the cost of the premises and expires in February
2005.
The projected figures do not include leasehold improvement amounts for Points'
new facilities. Leasehold improvements for the new facilities are included in
2004 capital expenditures (see "Planned Capital Expenditures" below). The
operating leases primarily relate to specific office technology and technology
service commitments.
ANNUAL AMOUNTS IN ($000'S) 2008 2007 2006 2005 2004
- -------------------------- ---- ---- ---- ---- ------
OPERATING LEASES $ 96 $384 $401 $418 $ 346
Property lease
Technology services
commitment 11 11 11 84 866
---- ---- ---- ---- ------
OPERATING LEASES TOTAL 107 396 412 502 1,212
==== ==== ==== ==== ======
LOAN PAYABLE $ 5 $ 30 $ 30 $ 30 $ 12
==== ==== ==== ==== ======
Page 28 of 32
CAPITAL RESOURCES
Planned Capital Expenditures
In the second quarter of 2004, the Corporation incurred significant Leasehold
Improvement costs in connection with its move to new facilities (see table
below). The project is complete and management does not expect to incur any
additional material expenditures related to the leasehold improvements.
For the three months ended For the nine months ended
------------------------------ -------------------------
SEPT. 30 JUNE 30 SEPT. 30 SEPT. 30 SEPT. 30
CAPITAL EXPENDITURES AS AT 2004 2004 2003 2004 2003
- -------------------------- -------- -------- -------- ---------- --------
Leasehold Improvements $ 84,098 $305,158 $ -- $ 547,504 $ --
Points.com Version 3.0 Technology 473,062 $ -- $ -- 473,062 --
Computer Hardware, Software and Other 107,650 234,673 113,063 395,739 $234,774
-------- -------- -------- ---------- --------
TOTAL $664,810 $539,831 $113,063 $1,416,305 $234,774
======== ======== ======== ========== ========
The Corporation expects to increase its capital expenditures related to computer
hardware and software to approximately $156,000. Expected software expenditures
include: licenses ($87,000), upgrades to internal reporting tools ($49,000) and
hardware ($20,000). Management believes that the hardware and software capital
expenditures are necessary to keep the development of the Corporation's primary
technology assets in line with industry standards.
The Corporation expects to incur significant capital expenditure related to the
development of Points.com Version 3.0. In accordance with CICA handbook sections
3061 and 3062 and Canadian GAAP, website development costs incurred in the
website application and infrastructure development will be capitalized and
subsequently amortized in accordance with the Corporation's accounting policies.
The Corporation will begin amortizing the capital asset when Points.com Version
3.0 is launched (expected to be on or around April 1, 2005). Direct net new
technology developed 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.
Website development costs incurred to date and capitalized to the website under
property, plant and equipment consist of employment related costs of $384,796
and other direct costs of $88,266.
The capitalized costs in each of the fourth quarter 2004 and the first three
quarters of 2005 will likely be greater than the costs incurred in the third
quarter of 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
quarter. Estimates are provided for the capitalized expenses for the fourth
quarter of 2004 and the fiscal year 2005 in the table below.
Page 29 of 32
For the three months ended
---------------------------------------------------------------
SEPT 30 DEC 31 MAR 31 JUNE 30 SEPT 30 DEC 31
WEBSITE DEVELOPMENT COSTS 2004 2004 2005 2005 2005 2005
- ------------------------- -------- -------- -------- -------- -------- --------
Employment related costs $384,796 $613,521 $692,377 $468,929 $453,955 $409,421
Other direct costs 88,266 115,000 125,000 75,000 50,000 50,000
-------- -------- -------- -------- -------- --------
TOTAL $473,062 $758,521 $817,377 $543,929 $503,955 $459,421
======== ======== ======== ======== ======== ========
Management will continue to fund 2004 and 2005 capital expenditures from its
working capital and/or cash flow from operations.
UNPLANNED SECURITIES ISSUANCES
Pursuant to the terms of the Debenture, the Investor's Rights Agreement dated
April 11, 2003 between IAC, Points and an affiliate of IAC and the terms of the
Series Two Preferred Share, IAC and CIBC Capital Partners have significant
control over the Corporation's ability to raise capital whether by way of an
equity issuance or the incurrence of debt. However, in the event the Corporation
requires additional capital, it does not expect that any required consents would
be unreasonably withheld. Based on expected revenue and available resources,
Points does not expect to require any additional equity financing to facilitate
growth of the business or current operations. 34.
Outstanding Share Data
As at the date hereof, the Corporation has 69,928,403 Common Shares outstanding,
one Series One Preferred Share and one Series Two Preferred Share. The Series
One Preferred Share is convertible into one Common Share in certain
circumstances. Subject to anti-dilution adjustment, based on Points' current
capitalization, the Series Two Preferred Share is convertible into 22,030,844
Common Shares.
The Corporation has outstanding options exercisable to acquire up to 6,050,558
Common Shares. The options have exercise prices ranging from $0.22 to $1.37 with
a weighted average exercise price of $0.71. The expiration dates of the options
range from Feb. 14, 2005 to April 21, 2009.
The Corporation's subsidiary, Points.com, has outstanding options exercisable to
acquire up to 2,590,499 common shares of Points.com. The holders of these
options have been granted the right to put the shares acquired on the exercise
thereof to the Corporation in return for Common Shares with a fair market value
equal to the fair market value so put. The Corporation has used a ratio of
2.5039 Common Shares to one Points.com share for this purpose and has authorized
the issuance of up to a maximum of 6,486,347 Common Shares in this regard. The
Points.com options have exercise prices ranging from $0.005 to $0.055 with a
weighted average exercise price of $0.04. The expiration dates of the options
range from February 17, 2005 to September 1, 2005.
Page 30 of 32
The Corporation has outstanding warrants exercisable to acquire up to 82,740,569
Common Shares. The warrants have exercise prices ranging from $0.25 to $1.01
with a weighted average exercise price of $1.00. The expiration dates of the
options range from October 21, 2004 to April 11, 2006.
The Corporation has outstanding an 11% $6,000,000 senior secured convertible
Debenture which is convertible into 18,908,070 Common Shares. The Debenture is
not convertible for the period that the Warrants are outstanding. At the option
of the Debenture holder, the maturity of the Debenture is extendible for up to
three additional one-year periods. Assuming the Warrants have not been exercised
and the Debenture matures on March 15, 2005, the Corporation will be required to
repay $6 million of principal and $3,108,422 of accrued interest. It is possible
that the repayment of $9,108,422 million of principal and accrued interest will
cause the Corporation to be in a negative working capital position, may
materially threaten its solvency and/or may severely restrict the ability to
grow its business. There is no certainty that the Corporation would have
sufficient cash at such time to make the repayment.
Page 31 of 32
Selected Financial Results and Highlights
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- -------------------------
SEPT. 30, JUNE 30, SEPT. 30, SEPT. 30, SEPT. 30,
INCOME STATEMENT 2004 2004 2003 2004 2003
- ---------------- ----------- ----------- ----------- ----------- -----------
Revenue $ 1,978,942 $ 2,032,136 $ 1,647,566 $ 5,628,642 $ 4,409,326
General and administrative expenses 2,905,198 3,098,792 2,160,979 8,654,946 5,378,154
Loss before interest, amortization
and other deductions (926,256) (1,066,656) (513,413) (3,026,304) (968,828)
Net income (loss) (2,001,764) (2,153,069) (1,628,391) (6,056,427) (3,930,215)
Net income (loss) per share
- - basic ($0.03) ($0.03) ($0.03) ($0.09) ($0.07)
- - fully diluted n/a n/a n/a n/a n/a
BALANCE SHEET AS AT SEPT. 30, 2004 JUNE 30, 2004 DEC 31, 2003 SEPT. 30, 2003
- ------------------- -------------- ------------- ------------ --------------
Cash and cash equivalents $ 15,251,307 $ 18,427,174 $ 20,274,836 $ 21,833,287
Total assets(1) $ 31,210,243 $ 34,063,056 27,481,286 29,456,796
Long-term liabilities 22,822,472 22,692,655 21,060,850 20,484,978
CASH DIVIDENDS DECLARED PER SHARE -- -- -- --
SHAREHOLDERS EQUITY
- - warrants 2,743,957 2,759,390 2,785,737 2,785,737
- - capital stock 22,057,996 21,983,696 17,728,461 17,726,761
- - retained earnings (31,793,434) (29,791,670) (25,737,007) (23,131,031)
------------ ------------ ------------ ------------
TOTAL $ (6,991,482) $ (5,048,584) $ (5,222,809) $ (2,618,533)
============ ============ ============ ============
Note:
(1) Financial results from minority holdings are not consolidated into the
Corporation's consolidated financial statements, as the Corporation does
not exercise control in these entities.
POINTS INTERNATIONAL LTD.
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
QUARTER ENDED REVENUES NET LOSS LOSS PER SHARE(1)
- ------------- ---------- ----------- -----------------
September 30, 2004 $1,978,942 ($2,001,764) ($0.03)
June 30, 2004 $2,032,136 ($2,153,069) ($0.03)
March 31, 2004 $1,617,565 ($1,901,594) ($0.03)
December 31, 2003 $1,449,378 ($2,605,974) ($0.04)
September 30, 2003 $1,647,566 ($1,628,391) ($0.03)
June 30, 2003 $1,457,568 ($1,283,337) ($0.02)
March 31, 2003 $1,304,192 ($1,018,489) ($0.02)
December 31, 2002 $ 911,940 ($1,762,000) ($0.03)
September 30, 2002 $ 729,467 ($1,725,072) ($0.03)
Note: (1) The fully diluted loss per share has not been computed, as the effect
would be anti-dilutive.
Page 32 of 32
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 September 30, 2004;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated or that is necessary to make a statement not misleading in light
of the circumstances under which it was made, with respect to the period
covered by the interim filings; and
3. Based on my knowledge, the interim financial statements together with the
other financial information included in the interim filings fairly present
in all material respects the financial condition, results of operations and
cash flows of the issuer, as of the date and for the periods presented in
the interim filings.
DATED this 9th day of November, 2004.
[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 September 30, 2004;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated or that is necessary to make a statement not misleading in light
of the circumstances under which it was made, with respect to the period
covered by the interim filings; and
3. Based on my knowledge, the interim financial statements together with the
other financial information included in the interim filings fairly present
in all material respects the financial condition, results of operations and
cash flows of the issuer, as of the date and for the periods presented in
the interim filings.
DATED this 9th day of November, 2004.
[original signature]
----------------------------------------
Stephen Yuzpe
Chief Financial Officer