Investments — Madison Grant Limited Partnership III

• Net results before income taxes improved by 62 per cent, or $0.7 million year-over-year.
• Cash flow from operating activities was close to breakeven for the quarter. Consolidated gross margin during the second quarter improved 23 per cent year over the year.
• Gross margin percentage increased 38 per cent year-over-year, from 9.6 per cent to 13.3 per cent; all business units were positive contributors.
• The number of active merchants has been steadily increasing from the low reached in March 2004. Merchant terminations are down substantially and new merchant sales are up.
• Online Shopping Mall revenue increased 159 per cent year-over-year, along with significant improvements in gross margin. The dynamic growth of Advantex's Online Shopping Mall business is expected to continue in terms of enrolment, online shopping volume, and the introduction of new malls.

Revenue growth is more clearly seen when comparing consecutive quarters, year-over-year. Revenue increased in the Advantex Group from Q1 to Q2 this year, a successful reversal of the revenue decline the company experienced last year. Operating costs associated with the U.S. Credit Card Loyalty pilot programs have been substantially reduced. No significant revenues and direct expenses are expected from the U.S. pilot programs in the near term as Advantex works towards finding a reliable and cost-effective cardholder transaction processing solution.

Fiscal 2005: Six-month results: Sales and fees for the six-month period ended December 31, 2004 were $39.7 million, compared to $47.4 million during the same period last year. The $7.7 million (16 per cent) net change was principally the result of a restructuring of certain merchant contracts from a pre-purchase model to a post-settlement model. Under the pre-purchase model, Advantex records the gross amount of the cardholder transactions as sales and fees, while under the post-settlement model the net amount is used. Year-to-date revenue last year included $3.3 million from the company's discontinued Canadian retail program. The program was terminated at the end of Q2 last year, after Air Canada repudiated its commercial agreements with Advantex as part of the airline's restructuring process under the Companies' Creditor Arrangement Act. These factors were partially offset by a $1 million increase in sales and fees from other businesses, primarily Advantex Online Shopping Malls.

The Company reported an operating loss before amortization, interest and income taxes of $0.7 million for the six-month period ended December 31, 2004, compared to $0.9 million in the same period last year.

Net results for the six-month period ended December 31, 2004, were a loss of $1.2 million or $0.02 per share, compared to net income of $0.1 million or $0.00 per share for the same period last year. Net income last year includes a one-time realization of income tax benefits of $1.5 million. Before this, the net loss for the six-month period ending December 31 was $1.2 million in fiscal 2005 versus $1.4 million in fiscal 2004.

Outlook: In addition to the healthy growth in the company's current business lines, there are a number of new initiatives planned that are expected to accelerate Advantex's momentum. The dynamic growth of Advantex's Online Shopping Mall business is anticipated to continue, in terms of enrolment, online shopping volume and the introduction of new malls. There are approximately 400,000 frequent flyer members enrolled in Advantex Online Shopping Mall programs and there are over 250 participating national brand and boutique e-retailers. Discussions are underway with several prospective organizations that have the potential to more than double the size of this business unit.

Advantex and The New York Times are developing a major new loyalty initiative, scheduled for launch in calendar 2005. The new program will be considerably broader in scope than the current TimesCard program, with a tenfold increase in the cardholder base. Advantex has been engaged by The New York Times to design and manage the expanded program. As well, Advantex plans to grow its national Canadian merchant base and improve margins by re-introducing the Cash Funding model in its loyalty marketing business. Merchants are attracted to the Cash Funding model as it improves their cash flow. Importantly, the gross margins generated by the Cash Funding model are significantly higher than the margins realized through the current marketing-only model.

Partner Initiatives: The Board of Directors is pleased with the progress made in the company's plans to establish a strategic partnership with a view towards maximizing shareholder value. The special committee of the Advantex Board of Directors, established to manage this initiative, is reviewing several options.

— Randall Munger
Chairman and Chief Executive Officer