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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 001-14813
THINKPATH INC.
------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ONTARIO, CANADA 52-209027
----------------------------------- -----------------
(JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
201 WESTCREEK BOULEVARD, BRAMPTON, ONTARIO CANADA L6T 5S6
--------------------------------------------- -------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 460-3040
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE
EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. YES X NO ___
THE ISSUER'S REVENUES FOR THE MOST RECENT FISCAL YEAR WERE $10,817,667.
THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING STOCK HELD BY
NON-AFFILIATES BASED UPON THE LAST SALE PRICE ON APRIL 13, 2004 WAS
APPROXIMATELY $3,438,159.
AS OF APRIL 13, 2004 THERE WERE 3,441,280,633 SHARES OF COMMON STOCK, NO PAR
VALUE PER SHARE, ISSUED AND OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
THINKPATH INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
compliance with Section 16(a) of the Exchange Act
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits, Financial Statements and Reports on Form 8-K
Signatures
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein including, without limitation,
those concerning (i) Thinkpath Inc.'s ("Thinkpath") strategy, (ii) Thinkpath's
expansion plans, and (iii) Thinkpath's capital expenditures, contain
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") concerning Thinkpath's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Thinkpath
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
EXCHANGE RATE DATA
Thinkpath maintains its books of account in Canadian dollars, but has
provided the financial data in this Form 10-K in United States dollars and on
the basis of generally accepted accounting principles as applied in the United
States, and Thinkpath's audit has been conducted in accordance with generally
accepted auditing standards in the United States. All references to dollar
amounts in this Form 10-K, unless otherwise indicated, are to United States
dollars.
The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On April 13, 2004, the exchange rate was
Cdn$0.7485 per US$1.00.
Year ended December 31, 2001 2002 2003
---- ---- ----
Rate at end of period $0.62870 $0.63440 $0.7727
Average rate during period 0.64612 0.63724 0.7163
High 0.67140 0.66560 0.7747
Low 0.62270 0.61750 0.6327
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Unless otherwise indicated, all reference to "Thinkpath", "us", "our"
and "we" refer to Thinkpath Inc. and its wholly-owned subsidiaries: Thinkpath US
Inc. (formerly Cad Cam Inc.), an Ohio corporation, Thinkpath Michigan Inc.
(formerly Cad Cam of Michigan Inc.), a Michigan corporation and Thinkpath
Technical Services Inc. (formerly Cad Cam Technical Services Inc.), an Ohio
corporation. In addition, Thinkpath owns the following companies which are
currently inactive: Systemsearch Consulting Services Inc., an Ontario
corporation, International Career Specialists Ltd., an Ontario corporation,
E-Wink Inc. (80%), a Delaware corporation, Thinkpath Training Inc. (formerly
ObjectArts Inc.), an Ontario corporation, Thinkpath Training US Inc. (formerly
ObjectArts US Inc.), a New York corporation, MicroTech Professionals Inc., a
Massachusetts corporation, and TidalBeach Inc., an Ontario corporation. In 2002,
Thinkpath sold Njoyn Software Incorporated, a wholly-owned subsidiary.
OVERVIEW
We are a global provider of engineering services including design,
build, drafting, technical publishing and documentation, and on-site engineering
support. Our customers include defense contractors, aerospace, automotive,
health care and manufacturing companies, including Lockheed Martin, General
Dynamics, General Electric, General Motors, Ford Motors, Magna, ABB and Hill-Rom
Company.
We were incorporated under the laws of the Province of Ontario, Canada
in 1994.
Our principal executive offices are located at 201 Westcreek Boulevard,
Brampton, Ontario, Canada and our website is www.thinkpath.com.
ENGINEERING AND DESIGN SERVICES
Our engineering and design services cover every facet of a project from
concept to SLA prototyping to a complete turnkey package that delivers a
finished, operating system. Our engineers handle the drafting, the detailing and
the parametric modeling. We have experienced engineers on staff as well as a
pool of skilled consultants whom we can call on to provide internal design
services.
We have provided CAD drafting and modeling services to countless
customers incorporating many industries. We have developed the technical skill
base and management structure to organize CAD services for programs of any size
and currently manage these services for large projects in the aerospace,
defense, automotive, medical equipment, packaging, and many other high tech
industries.
We have expert-level engineering and design capability that ranges from
traditional 2-D and 3-D AutoCAD programs to the most sophisticated parametric
and solid modeling platforms, including, Unigraphics NX, Pro/Engineer, Solid
Works, SDRC Ideas, and Catia. In all, we have nearly two-dozen engineering
design programs along with the specialty modules to perform surface modeling,
hydraulic, electrical, large weldments, casting, and other design functions. Our
software inventory includes ancillary programs to perform Finite Element and
other engineering analyses.
Our staff encompasses the entire range of disciplines including
mechanical, civil, structural, and electrical engineering. Our design services
range from drafting and design, to detailing and geometric dimensioning and
tolerancing (GD&T).
-2-
As a component of our engineering design efforts, we are ISO 9001
certified, and subscribe to the Six Sigma Principles of continuous quality
improvement. This uncompromising commitment to quality is built into every phase
of a project we manage for all of our clients. Our offices maintain and follow a
complete set of ISO compliant policies, procedures, and work instructions, and
our branches in Detroit, Michigan and Cincinnati, Ohio are current ISO 9001
practitioners.
TECHNICAL PUBLICATIONS AND DOCUMENTATION
We provide technical publishing programs for complete integration into
engineering and design departments of government, military contractors,
aerospace and automotive customers.
Our technical publications expertise covers every aspect of the
documentation milieu, from pre-installation (site preparation), through
installation, operation, service, maintenance, and repair. We have the
capability to produce the full range of ATA compliant manuals, and our clients
range from the airframe, electrical, hydraulic, pneumatic, and mechanical
components to aircraft interiors, and jet propulsion systems. In the military
arena, we produce MIL-SPEC compliant documentation for equipment that ranges
from naval engines through the most advanced weapons systems.
As with our engineering and design services, our technical publications
group uses cutting edge technology to produce the documentation. Our publishing
and technical illustration libraries include 20 programs that range from
Microsoft Word for Windows (the Navy standard publishing platform), through
SGML, HTML, and XML authoring and publishing suites. Although we still produce
manuals on paper, we are now focused to a greater extent on e-documentation and
interactive electronic technical manuals (IETMs).
We maintain a complete staff of technical publication personnel
consisting of highly skilled engineers and drafters. As a result, we can draw
heavily upon our engineering resources to handle every step of the documentation
process, including researching, writing, editing, illustration, printing and
distribution.
ON-SITE ENGINEERING SUPPORT
On-site engineering support is a core Thinkpath business, and a natural
outgrowth of our pioneering work in the computer aided design and drafting
field. Initially, the need for on-site support involved both the training of the
operators and their placement with manufacturers who needed people with the
knowledge to operate the new (and at the time arcane) design software. Gradually
the software became more user-friendly, and the basic business model for most
large manufacturers demanded a leaner, more flexible staffing paradigm. This has
lead to an increased demand for experienced engineers, designers, and draftsmen
who are not only proficient using a diverse range of design programs, but who
also have the requisite industry knowledge to step in and be immediately
productive during periods of peak demand or new product introduction operations.
Our success in this field can be attributed to two primary factors.
First, we perform in depth screening and pre-interviewing of all candidates to
ensure that there is an absolute match between the client's need and the
candidates' capabilities. Secondly, all Thinkpath on-site employees are, indeed,
members of staff, earning a wage commensurate with their skills and experience.
They also enjoy a full range of company benefits including medical/prescription
coverage, holiday pay and pension privileges. These elements of course, offer
our clients far greater security utilizing people with the incentive to remain
with the company throughout the project cycle and beyond.
-3-
Another factor that has contributed to the success of our on-site
engineering support operation is our ability to provide an employee packaged
with the hardware and software required to complete the assignment. Employers
appreciate the ability to pay an hourly fee that covers the cost of the
employee, computer, and the software they need to operate while using it, and
surrendering the hardware and software when it's no longer needed rather than
paying the steep depreciation and maintenance costs associated with ownership.
The combination of offering only quality employees as a turnkey package
and then helping to ensure that they stay with the job is a powerful one, and
has gained us strong relationships with many of the major automotive, aerospace,
defense, medical equipment, and other manufacturers in our area of operations.
Our clients are large and high-growth corporations from a wide variety of
industries across North America. These customers include Fortune 500 companies
and other high-profile companies. The majority of our relationships are
long-term built on exceptional service, rigorous quality standards, and highly
competitive pricing.
The following is a partial listing of our clients:
o General Motors Corporation: 25 years
o Cummins, Inc.: 18 years
o General Electric Aircraft Engines: 17 years
o Heidelberg Web Systems: 12 years
o Hill-Rom, Inc.: 12 years
o General Dynamics Corporation: 11 years
o Curtiss-Wright Flight Systems: 10 years
o Johnson & Johnson (Ethicon and Depuy Groups): 10 years
o B/E Aerospace (SPG and AMP Groups): 9 years
o Daimler Chrysler Corporation: 9 years
o Lockheed Martin Aeronautics Corporation: 7 years
o ABB: 1 year
o Magna: 1 year
COMPETITION
The engineering services industry is highly competitive with high
barriers to entry due to significant capital costs for tools and equipment and
the specialized skills and knowledge required. We compete for potential
customers with other providers of engineering services, and on-site consultants.
Many of our current and potential competitors have longer operating histories,
greater financial, marketing and human resources, and a larger base of
professionals and customers than we do, all of which may provide these
competitors with a competitive advantage. In addition, many of these
competitors, including numerous smaller privately held companies, may be able to
respond more quickly to customer requirements and to devote greater resources to
the marketing of services than we are.
Increased competition could result in price reductions, reduced margins
or loss of market share, any of which could materially and adversely affect our
business, prospects, financial condition and results of operations. Further, we
cannot assure you that we will be able to compete successfully against current
or future competitors or that the competitive pressures we face will not have a
material adverse effect on our business, prospects, financial condition and
results of operations. We believe that the principal factors relevant to
competition in the engineering services industry are the recruitment and
retention of highly qualified engineering professionals, rapid and accurate
response to customer requirements and, to a lesser extent, pricing.
-4-
BUSINESS STRATEGY
We plan to exploit our track record in engineering services by offering
a unique blend of design engineering, technical publishing and documentation. In
early 2002, we began to focus our marketing efforts on the defense, aerospace,
automotive, manufacturing and health care industries and it is here that we
expect our opportunity to generate significant growth in 2003 is most likely. By
combining design engineering and technical publishing we believe we have become
experts experienced in content management and thus are positioned to deliver
high margin customized knowledge management products.
Our business objective is to increase our gross revenue and improve our
gross margins by replacing fixed priced projects with time and materials based
contracts. We intend to increase our market share through the addition of
engineering sales staff and through the marketing and promotion support services
of outside consultants. The primary components of our strategy to achieve this
objective are as follows:
- - Expand our DOD contractor customer base;
- - Grow our aerospace, automotive, manufacturing and health care customer base;
and
- - Further penetrate existing customer base, including Fortune 500 companies.
We have established an extensive technology strategy and
infrastructure that we believe provides us with a competitive advantage over
less technologically advanced competitors.
BACK OFFICE INFRASTRUCTURE
We have invested heavily in the creation and support of an integrated
technological infrastructure that links all offices and employees and promotes
uniformity in certain functions. Our accounting program provides for real-time
financial reporting across dispersed branch offices. Our intranet and
recruitment management software and sales management software, provide each of
our employees with access to the tools and information that help them to be
successful and productive. This infrastructure allows us to integrate our
acquisitions more easily and cost-effectively than would otherwise be possible.
MARKETING AND PROMOTION
Our marketing and brand strategy is to position us as experts of
content in engineering knowledge management. As a provider of engineering
services, we will emphasize our flexible service options, the depth of our
expertise, and the global delivery capabilities of our North American offices.
We believe this positioning will be achieved through a variety of
means, including:
- - Strong and easy-to-access sales and marketing support at the branch level; -
Investment in awareness and branding campaigns; and, - Exploration and
establishment of various business partnerships and alliances.
COLLATERAL AND SALES SUPPORT
A major marketing and promotion program is underway to update our
collateral material and Web site to more accurately reflect our renewed focus on
engineering services.
TARGET MARKETS
Our target customers are defense contractors, aerospace, automotive,
manufacturing and health care corporations located primarily in the Eastern
states and Great Lakes region of North America.
-5-
EMPLOYEES AND CONSULTANTS
EMPLOYEES
As of April 13, 2004 we have 34 full-time employees, including 21
sales personnel and 13 administrative and technical employees. Our staff at
December 31, 2003 consisted of 37 full-time employees, including 24 sales
personnel and 13 administrative and technical employees. Our staff at December
31, 2002 consisted of 46 full-time employees, including 32 sales personnel and
16 administrative and technical employees. Our staff at December 31, 2001
consisted of 98 full-time employees, including 46 sales personnel and 52
administrative and technical employees. We are not party to any collective
bargaining agreements covering any of our employees, have never experienced any
material labor disruption and are unaware of any current efforts or plans to
organize our employees.
CONSULTANTS
We enter into consulting agreements with engineering professionals at
hourly rates based on each individual's technical skills and experience. As of
April 13, 2004, approximately 160 professionals were performing services for our
customers. At December 31, 2003, there were 150 professionals placed by us,
performing services for our customers. At December 31, 2002 there were 225
professionals placed by us, performing services for our customers. At December
31, 2001 there were 309 professionals placed by us, performing services for our
customers.
RECENT EVENTS
Subsequent to December 31, 2003, we closed an additional $25,000 in
convertible debentures together with 1,428,571 warrants. The debentures will
become due twelve months from the date of issuance. The investors will have the
right to acquire up to $25,000 worth of our common stock at a price the lesser
of $.0175 or 50% of the average of the three lowest prices on three separate
trading days during the sixty-day trading period prior to conversion. The
warrants are exercisable at any time and in any amount for a period of 7 years
from the original purchase date at a purchase price of $.0175 per share. We are
required to pay interest to the debenture holder on the aggregate unconverted
and outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of common
stock.
On March 25, 2004, we entered into a share purchase agreement with
Bristol Investment Fund, Ltd. for the issuance and sale of debentures of up to
$1,000,000. The first debenture of $350,000 was purchased together with
924,000,000 warrants on closing. The debenture will become due twelve months
from the date of issuance. Bristol will have the right to acquire up to $350,000
worth of our common stock at a price equal to the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during the
sixty-day trading period prior to conversion. The warrants are exercisable at
any time and in any amount until March 25, 2011 at a purchase price of $.000417
per share. We are required to pay interest to Bristol on the aggregate
unconverted and outstanding principal amount of the debenture at the rate of 12%
per annum, payable on each conversion date and maturity date in cash or shares
of common stock.
As of April 13, 2004, we have issued 2,948,806,496 shares of our
common stock to the convertible debenture holders upon the conversion of
$2,825,000 of debentures and accrued interest.
-6-
ITEM 2. DESCRIPTION OF PROPERTY
We maintain our headquarters in 9,500 square foot offices located at
201 Westcreek Boulevard, Brampton, Ontario, Canada. We have leased such facility
for a term of five years terminating in May 2008. We pay annual base rent of
$90,000. We lease additional offices at the following locations:
Current Rent
Location Square Feet Lease Expiration Per Annum
- -------- ------------- ------------------- -------------
Cincinnati, Ohio 3,820 05/31/05 $53,289
Columbus, Ohio 1,600 01/31/05 $27,000
Dayton, Ohio 6,421 12/31/05 $92,591
Detroit, Michigan 15,328 08/31/05 $168,025
The lease commitments do not include two operating leases for premises
that we are currently sub leasing to the purchasers of the Canadian and United
States training divisions. If the purchasers were to default on payment or
abandon the premises, we would be liable for annual payments of $282,096
expiring August 31, 2006 and $150,534 expiring September 30, 2010.
The lease commitments do not include an operating lease for premises
located in the United States that were closed in the fourth quarter of 2002. We
have not made any payments on this lease since the premises were abandoned, nor
has the lessor tried to enforce payment. We may be liable for a lease balance of
$44,597, which expires November 30, 2004.
ITEM 3. LEGAL PROCEEDINGS
We are party to the following pending legal proceedings:
On October 1, 2003, SITQ National Inc. ("SITQ'), a former landlord,
filed a statement against us and our Directors, with the Superior Court of
Justice of Ontario, Canada, Court File No. 03-CV-256327CM3, demanding payment of
rent arrears of approximately $760,000 and alleging damages for breach of lease
for future rent in the sum of $3,250,000. The lease covered premises located in
Ontario, Canada that we abandoned in April 2003. The term of the lease does not
expire until December 31, 2010. The rent arrears of $760,000 has been accrued
but we believe there is no merit for the breach of lease for future rent of
$3,250,000 and accordingly have made no provision in the accounts with respect
to this matter. We intend to defend this claim vigorously.
On March 17, 2004, Johnston & Associates, LLC, a South Carolina
corporation, filed a statement against us with the Superior Court of Justice of
Ontario, Canada, Court File No. C-294-04, demanding payment of $60,000 pursuant
to a consulting agreement entered into April 2002. We intend to defend this
claim vigorously.
We are not party to any other material litigation, pending or
otherwise.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 2, 2003, we held an Annual Meeting of Shareholders at which
the shareholders: (i) elected the Board of Directors for the ensuing year; (ii)
ratified the appointment of Schwartz Levitsky Feldman LLP, as our independent
chartered accountants for the ensuing year; (iii) did not ratify the adoption of
our 2003 Stock Option Plan; and, (iv) amended our Articles of Incorporation to
increase the authorized number of shares of our common stock from 800,000,000
shares to an unlimited number of shares.
-7-
(i) The following directors were elected to the Board of Directors
and received the votes indicated: For Withheld
Declan French 513,828,523 22,747,118
John Dunne 516,784,578 19,791,063
Arthur Marcus 516,984,153 19,591,488
Lloyd MacLean 516,984,578 19,591,063
(ii) The appointment of Schwartz Levitsky Feldman LLP, to serve as our
independent chartered accountants for the ensuing year was approved by the votes
indicated:
For Against Withheld
519,008,303 16,342,425 1,224,913
(iii) The adoption of our 2003 Stock Option Plan was not approved by the
votes indicated:
For Against Withheld
155,455,276 25,621,596 355,498,679
(iv) The amendment of our Articles of Incorporation to increase the
authorized number of shares of our common stock from 800,000,000 shares to an
unlimited number of shares.
For Against Withheld
503,296,380 32,817,961 461,300
-8-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock began trading on the Nasdaq SmallCap Market on June 8,
1999, when we completed our initial public offering. Our common stock is
currently listed on the Over-the-Counter Bulletin Board (OTC:BB) under the
symbol "THTH-F". As of April 13, 2004, we had 3,441,280,633 shares of common
stock outstanding. The following table sets forth the high and low sale prices
for our common stock as reported on the OTC:BB.
Fiscal 2001 High Low
- ----------- ---- ---
First Quarter $1.6880 $0.5630
Second Quarter $0.5700 $0.3000
Third Quarter $0.6300 $0.2500
Fourth Quarter $0.3700 $0.1300
Fiscal 2002
First Quarter $0.2400 $0.1400
Second Quarter $0.2400 $0.1000
Third Quarter $0.1400 $0.0800
Fourth Quarter $0.0900 $0.0400
Fiscal 2003
First Quarter $0.0500 $0.0070
Second Quarter $0.0095 $0.0039
Third Quarter $0.0063 $0.0016
Fourth Quarter $0.0034 $0.0016
Fiscal 2004
First Quarter $0.0023 $0.0008
Second Quarter (through to April 13, 2004) $0.0010 $0.0008
As of April 13, 2004, we had 410 holders of record and approximately
4,818 beneficial shareholders.
On April 13, 2004, the last sale price of our common stock as reported
on the OTC:BB was $.0008.
DIVIDEND POLICY
We have never paid or declared dividends on our common stock. The
payment of cash dividends, if any, in the future is within the discretion of our
Board of Directors and will depend upon our earnings, capital requirements,
financial condition and other relevant factors. We intend to retain future
earnings for use in our business.
-9-
ITEM 6. SELECTED FINANCIAL DATA
SELECTED INCOME STATEMENT DATA
For the years ended, 2003 2002 2001
---- ---- ----
Revenue 10,817,667 12,283,828 17,224,335
Operating loss from continuing operations (1,267,714) (4,013,235) (7,541,882)
Net loss from continuing operations (9,292,090) (8,508,568) (9,482,208)
Income (loss) from discontinued operations 258,462 361,916 (201,233)
Net loss before preferred stock dividends (9,033,628) (8,146,652) (9,683,441)
Preferred stock dividends -- 100,387 728,740
Net loss applicable to common stock (9,033,628) (8,247,039) (10,412,181)
=============== =============== ===============
Weighted average number of common stock
outstanding basic and fully diluted 719,412,600 29,000,252 14,943,306
=============== =============== ==============
Loss from continuing operations per weighted
average common stock before preferred
dividends basic and fully diluted (0.01) (0.29) (0.63)
=============== =============== ===============
Loss from continuing operations per weighted
average common stock after preferred
dividends basic and fully diluted (0.01) (0.30) (0.68)
=============== =============== ===============
SELECTED BALANCE SHEET DATA
2003 2002 2001
---- ---- ----
Current Assets 2,378,116 2,974,524 6,801,561
Current Liabilities 5,134,521 6,692,642 10,155,923
Working Capital Deficiency (2,756,405) (3,718,118) (3,354,362)
Total Assets 7,408,589 8,787,531 17,174,978
Long-term debt and notes payable, net
of current portion 13,176 771,459 2,922,432
Stockholders' equity 2,260,892 1,323,430 3,246,946
-10-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the selected historical financial data, financial statements and notes
thereto and our other historical financial information contained elsewhere in
this Annual Report on Form 10-K. The statements contained in this Annual Report
on Form 10-K that are not historical are forward looking statements within the
meaning of Section 27A of the Securities Act of and Section 21E of the Exchange
Act, including statements regarding our expectations, intentions, beliefs or
strategies regarding the future. Forward-looking statements include our
statements regarding liquidity, anticipated cash needs and availability and
anticipated expense levels. All forward-looking statements included herein are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statement. It is important to note
that our actual results could differ materially from those in such
forward-looking statements.
OVERVIEW
We are a global provider of engineering services including design,
build, drafting, technical publishing and documentation, and on-site engineering
support. Our customers include defense contractors, aerospace, automotive,
health care and manufacturing companies, including Lockheed Martin, General
Dynamics, General Electric, General Motors, Ford Motors, Magna, ABB and Hill-Rom
Company.
On December 12, 2001, the Securities and Exchange Commission issued
FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, which encourages additional disclosure with respect to a company's
critical accounting policies, the judgments and uncertainties that affect a
company's application of those policies, and the likelihood that materially
different amounts would be reported under different conditions and using
different assumptions.
Management is required to make certain estimates and assumptions during
the preparation of the consolidated financial statements in accordance with
GAAP. These estimates and assumptions impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount
of net earnings during any period. Actual results could differ from those
estimates. Certain of our accounting policies and estimates have a more
significant impact on our financial statements than others, due to the magnitude
of the underlying financial statement elements.
CONSOLIDATION
Our determination of the appropriate accounting method with respect to
our investments in subsidiaries is based on the amount of control we have,
combined with our ownership level, in the underlying entity. Our consolidated
financial statements include the accounts of our parent company and our
wholly-owned subsidiaries. All of our investments are accounted for on the cost
method. If we had the ability to exercise significant influence over operating
and financial policies of a company, but did not control such company, we would
account for these investments on the equity method.
Accounting for an investment as either consolidated or by the equity
method would have no impact on our net income (loss) or stockholders' equity in
any accounting period, but would impact individual income statement and balance
sheet items, as consolidation would effectively "gross up" our income statement
and balance sheet. However, if control aspects of an investment accounted for by
the cost method were different, it could result in us being required to account
for an investment by consolidation or the equity method. Under the cost method,
the investor only records its share of the investee's earnings to the extent
that it receives dividends from the investee; when the dividends received exceed
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the investee's earnings subsequent to the date of the investor's investment, the
investor records a reduction in the basis of its investment. Under the cost
method, the investor does not record its share of losses of the investee.
Conversely, under either consolidation or equity method accounting, the investor
effectively records its share of the investee's net income or loss, to the
extent of its investment or its guarantees of the investee's debt.
At December 31, 2003, all of our investments in non-related companies
totaling $45,669 were accounted for using the cost method. Accounting for an
investment under either the equity or cost method has no impact on evaluation of
impairment of the underlying investment; under either method, impairment losses
are recognized upon evidence of permanent losses of value.
REVENUE RECOGNITION
We recognize revenue in accordance with Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, which has four basic criteria
that must be met before revenue is recognized:
- - Existence of persuasive evidence that an arrangement exists;
- - Delivery has occurred or services have been rendered;
- - The seller's price to the buyer is fixed and determinable; and,
- - Collectibility is reasonably assured.
Our various revenue recognition policies are consistent with these
criteria. We provide the services of engineering staff on a project basis. The
services provided are defined by guidelines to be accomplished by clearly
defined milestones and revenue is recognized upon the accomplishment of the
relevant milestone. As services are rendered, the costs incurred are reflected
as Work in Progress. Revenue is recognized upon the persuasive evidence of an
agreement, delivery has occurred, the fee is fixed or determinable and
collection reasonably assured.
Prior to the sale of our IT recruitment division, we provided the
services of information technology consultants on a contract basis and revenue
was recognized as services were performed. We also placed information technology
professionals on a permanent basis and revenue was recognized upon candidates'
acceptance of employment. If we received non-refundable upfront fees for
"retained searches", the revenue was recognized upon the candidates' acceptance
of employment.
Prior to the sale of our training division, we provided advanced training
and certification in a variety of technologies and revenue was recognized on
delivery.
Prior to the sale of our technology division, we licensed software in the
form of a Human Capital Management System called Njoyn. The revenue associated
with providing this software consisted of an initial set up fee, customization
and training as agreed and an ongoing monthly per user fee. The allocation of
revenue to the various elements was based on our determination of the fair value
of the elements if they had been sold separately. The customers had the right to
choose a provider to host the software which was unrelated to us. The set-up fee
and customization revenue was recognized upon delivery of access to the software
with customization completed in accordance with milestones determined by the
contract. Revenue was recognized on a percentage of completion basis for
contracts with significant amounts of customization and clearly defined
milestones agreed to by the customer and an enforceable right to invoice and
collect on a partial completion basis. For contracts which required significant
customization, without clearly defined milestones, and an inability to estimate
costs, revenue was reflected on a completed contract basis. Substantial
completion was determined based on customer acceptance of the software.
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Prior to the sale of our technology division, we also signed contracts
for the customization or development of SecondWave, a web development software
in accordance with specifications of our clients. The project plan defined
milestones to be accomplished and the costs associated. These amounts were
billed as they were accomplished and revenue was recognized as the milestones
were reached. The work in progress for costs incurred beyond the last
accomplished milestone was reflected at the period end. The contracts did not
include any post-contract customer support. Additional customer support services
were provided at standard daily rates, as services were required.
CARRYING VALUE GOODWILL AND INTANGIBLE ASSETS
Prior to January 1, 2002, our goodwill and intangible assets were
accounted for in accordance with Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. This statement required us to evaluate the carrying
value of our goodwill and intangible assets upon the presence of indicators of
impairment. Impairment losses were recorded when estimates of undiscounted
future cash flows were less than the value of the underlying asset. The
determination of future cash flows or fair value was based upon assumptions and
estimates of forecasted financial information that may differ from actual
results. If different assumptions and estimates were used, carrying values could
be adversely impacted, resulting in write downs that would adversely affect our
earnings. In addition, we amortized our goodwill balances on a straight-line
basis over 30 years. The evaluation of the useful life of goodwill required our
judgment, and had we chosen a shorter time period over which to amortize
goodwill, amortization expense would have increased, adversely impacting our
operations.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. This statement requires
us to evaluate the carrying value of goodwill and intangible assets based on
assumptions and estimates of fair value and future cash flow information. These
assumptions and estimates may differ from actual results. If different
assumptions and estimates are used, carrying values could be adversely impacted,
resulting in write downs that could adversely affect our earnings.
At December 31, 2003, we performed our annual impairment test for
goodwill and determined that no adjustment to the carrying value of goodwill was
needed.
The IT recruitment unit was tested for impairment in the third quarter
of 2002, after the annual forecasting process. Due to a decrease in margins and
the loss of key sales personnel, operating profits and cash flows were lower
than expected in the first nine months of 2002. Based on that trend, the
earnings forecast for the next two years was revised. At September 30, 2002, we
recognized a goodwill impairment loss of $57,808 in the IT recruitment unit. The
fair value of that reporting unit was estimated using the expected present value
of future cash flows.
During the fourth quarter of 2002, the IT recruitment unit experienced
further decline, indicating impairment. The fair value of the unit was estimated
using the expected present value of future cash flows. At December 31, 2002, a
further goodwill impairment loss of $87,489 was recognized.
The Technical Publications and Engineering unit was also tested for
impairment in the fourth quarter of 2002, as operating profits, cash flows and
forecasts were lower than expected. At December 31, 2002, a goodwill impairment
loss of $1,234,962 was recognized. The fair value of that reporting unit was
estimated using the expected present value of future cash flows.
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On an ongoing basis, absent any impairment indicators, we expect to
perform a goodwill impairment test as of the end of the fourth quarter of each
year.
FOREIGN CURRENCY TRANSLATION
The books and records of our Canadian operations are recorded in
Canadian dollars. The financial statements are converted to US dollars as we
have elected to report in US dollars consistent with Regulation S-X, Rule 3-20.
The translation method used is the current rate method which is the method
mandated by FAS 52 where the functional currency is the foreign currency. Under
the current method all assets and liabilities are translated at the current
rate, stockholders' equity accounts are translated at historical rates and
revenues and expenses are translated at average rates for the year.
Due to the fact that items in the financial statements are being
translated at different rates according to their nature, a translation
adjustment is created. This translation adjustment has been included in
accumulated other comprehensive income.
There can be no assurance that we would have been able to exchange
currency on the rates used in these calculations. We do not engage in exchange
rate-hedging transactions. A material change in exchange rates between United
States and Canadian dollars could have a material effect on our reported
results.
THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
REVENUE
For the year ended December 31, 2003, we derived 92% of our revenue in
the United States compared to 99.5% for the year ended December 31, 2002. The
decrease in total revenue derived from the United States is a result of the
slight increase in engineering sales in Canada. At the beginning of this year, a
division was started in Ontario to focus on building engineering services in
lieu of IT recruitment services which had traditionally dominated our sales in
Canada.
As a result of this shift in focus, effective June 27, 2003, we
sold certain assets of our IT recruitment division to Brainhunter.com, an
Ontario company, for a nominal amount of cash and the assumption of all employee
liabilities. The gain on disposal of $190,627 has been reflected in the Income
(loss) from discontinued operations in 2003. Of the $190,627, $146,627 was
received in cash on closing with the balance of $44,000 due in a promissory note
payable by June 27, 2004. As a result of this transaction, the Company will not
have future revenues from its IT recruitment division and therefore the
operations have been reported as discontinued.
For the year ended December 31, 2003, our primary source of revenue was
engineering services including engineering design and build, technical
publications and documentation and on-site engineering support. Engineering
services represented 96% of total revenue compared to 88% for the year ended
December 31, 2002. Revenue from engineering services for the year ended December
31, 2003 was $10,380,000 representing an decrease of $410,000 or 4% from
$10,790,000 for the year ended December 31, 2002.
Our engineering services include the complete planning, staffing,
development, design, implementation and testing of a project. It can also
involve enterprise-level planning and project anticipation. Our specialized
engineering services include: design, build and drafting, technical publications
and documentation. We outsource our technical publications and engineering
services on both a time and materials and project basis. For project work, the
services provided are defined by guidelines to be accomplished by clearly
defined milestones and revenue is recognized upon the accomplishment of the
relevant milestone. As services are rendered, the costs incurred are reflected
as Work in Progress. Revenue is recognized upon the persuasive evidence of an
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agreement, delivery of the service, and when the fee is fixed or determinable
and collection is probable. Customers we provide engineering services to include
General Dynamics, General Electric, General Motors, Lockheed Martin, Boeing,
Caterpillar, Cummins Engines, Magna and ABB.
For the year ended December 31, 2003, information technology
documentation services represented approximately 4% of our revenue compared to
12% for the year ended December 31, 2002. Revenue from information technology
documentation services for the year ended December 31, 2003 decreased by
$1,050,000 or 70% to $440,000 compared to $1,490,000 for the year ended December
31, 2002.
The substantial decrease in revenue from information technology
documentation services is primarily due to the loss of sales personnel and the
general economic slowdown in this industry. This division offers a very
specialized service, and relied on several key customers in a very localized
market. Many of these customers have either cancelled projects or have put a
number of their projects on hold. In response to these conditions, we terminated
the staff in this division and transferred the existing contracts to another
office.
We provide outsourced information technology documentation services in
two ways: complete project management and the provision of skilled project
resources to supplement a customer's internal capabilities. Revenue is
recognized on the same basis as technical publications and engineering
outsourcing services. Selected information technology documentation services
customers include Fidelity Investments, SMD Tech Aid Corporation, CDI
Corporation, and the Gillette Company.
GROSS PROFIT
Gross profit is calculated by subtracting all direct costs from net
revenue. The direct costs of engineering services include wages, benefits,
software training and project expenses. The average gross profit for the
engineering division was 33% for the year ended December 31, 2003 which is
consistent with the year ended December 31, 2002.
The direct costs of information technology documentation services
include contractor wages, benefits, and project expenses. The average gross
profit for the information technology division for the year ended December 31,
2003 was 22% compared to 25% for the year ended December 31, 2002. The decline
in gross profit in the current period is a result of the decrease in higher
margin permanent placements and increase in lower margin contract placements of
documentation specialists.
THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
REVENUE
For the year ended December 31, 2002, we derived 99.5% of our revenue
in the United States compared to 98% for the year ended December 31, 2001. The
slight increase in total revenue derived from the United States is a result of
corporate sales of approximately $400,000 which occurred in Canada during 2001.
For the year ended December 31, 2002, our primary source of revenue was
engineering services including engineering design and build, technical
publications and documentation and on-site engineering support. Engineering
services represented 88% of total revenue compared to 80% for the year ended
December 31, 2001. The increase is primarily a result of the dramatic decline in
information technology documentation sales. Revenue from engineering services
for the year ended December 31, 2002 was $10,790,000 representing a decrease of
$3,010,000 or 22% from $13,800,000 for the year ended December 31, 2001. The
decrease in engineering services is a result of the reduction in sales personnel
and office closures that occurred in 2002.
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For the year ended December 31, 2002, information technology
documentation services represented approximately 12% of our revenue compared to
20% for the year ended December 31, 2001. Revenue from information technology
documentation services for the year ended December 31, 2002 decreased by
$1,930,000 or 56% to $1,490,000 compared to $3,420,000 for the year ended
December 31, 2001.
The substantial decrease in revenue from information technology
documentation services is primarily due to the loss of sales personnel and the
general economic slowdown in this industry. This division offers a very
specialized service, and relied on several key customers in a very localized
market. Many of these customers have either cancelled projects or have put a
number of their projects on hold. In response to these conditions, we terminated
the staff in this division and transferred the existing contracts to another
office.
GROSS PROFIT
The average gross profit for the engineering division was 33% for the
year ended December 31, 2002 which is consistent with the year ended December
31, 2001.
The average gross profit for the information technology division for
the year ended December 31, 2002 was 25% compared to 38% for the year ended
December 31, 2001. The decline in gross profit in 2002 is a result of the
decrease in higher margin permanent placements and increase in lower margin
contract placements of documentation specialists.
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RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS--PERCENTAGES
2003 2002 2001
---- ---- ----
REVENUE 100 % 100 % 100 %
---- ---- ----
COST OF SERVICES 68 % 68 % 66 %
---- ---- ----
GROSS PROFIT 32 % 32 % 34 %
---- ---- ----
EXPENSES
Administrative 27 % 34 % 27 %
Selling 11 % 18 % 18 %
Financing Expenses -- % 10 % 4 %
Depreciation and amortization 6 % 11 % 12 %
Write down goodwill -- % 11 % 17 %
Debt forgiveness -- % (19)% -- %
---- ---- ----
Operating loss from continuing
operations (12)% (33)% (44)%
Gain (loss) on Investment -- % (5)% (2)%
Loss from continuing operations
before interest charges (12)% (38)% (46)%
Interest charges 74 % 32 % 5 %
---- ---- ----
Loss from continuing operations
before income taxes (86)% (70)% (51)%
Income taxes -- % -- % 4 %
---- ---- ----
Loss from continuing operations (86)% (70)% (55)%
Income (loss) from discontinued
operations 2 % 3 % (1)%
Net Loss (84)% (67)% (56)%
---- ---- ----
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THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Revenue. Revenue for the year ended December 31, 2003 decreased by
$1,460,000 or 12%, to $10,820,000, as compared to $12,280,000 for the year ended
December 31, 2002. The decrease is primarily attributable to the reduction in
sales staff as a result of our cost cutting initiatives undertaken in 2002 and
early 2003.
Cost of Services. The cost of services for the year ended December 31,
2003 decreased by $990,000, or 12%, to $7,340,000, as compared to $8,330,000 for
the year ended December 31, 2002. The decrease in cost of services for the year
ended December 31, 2003 is consistent with the decrease in revenue. The cost of
services as a percentage of revenue in 2003 was consistent with 2002.
Gross Profit. Gross profit for the year ended December 31, 2003
decreased by $480,000, or 12%, to $3,470,000 compared to $3,950,000 for the year
ended December 31, 2002. As a percentage of revenue, gross profit in 2003 was
consistent with 2002.
Expenses. Expenses for the year ended December 31, 2003 decreased by
$3,220,000, or 40%, to $4,740,000 compared to $7,960,000 for the year ended
December 31, 2002.
Administrative Expenses. Administrative expenses decreased by
$1,240,000 or 30% to $2,920,000 for the year ended December 31, 2003 compared to
$4,160,000 for the year ended December 31, 2002. General administrative expenses
including salaries and rent have decreased significantly over last year as a
result of restructuring and general cost cutting.
Selling Expenses. Selling expenses for the year ended December 31, 2003
decreased by $1,090,000, or 49%, to $1,150,000 from $2,240,000 for the year
ended December 31, 2002. This decrease is attributable to the considerable
downsizing in sales staff and the decrease in commissions, as a result of the
reduction in sales. In addition, in 2003 we continued to eliminate certain
advertising and promotional expenses.
Financing Expenses. There were no financing expenses for the year ended
December 31, 2003 compared to $1,200,000 for the year ended December 31, 2002.
The expenses in 2002 include due diligence fees and commissions paid to various
financial brokers and the expensing of approximately $770,000 for cash, shares
and warrants issued to Tazbaz Holdings in consideration of a loan agreement
whereby Tazbaz securitized our overdraft position with Bank One in the amount of
$650,000.
Depreciation and Amortization. For the year ended December 31, 2003,
depreciation and amortization expenses decreased by $625,000, or 48%, to
$665,000 from $1,290,000 for the year ended December 31, 2002. During 2002, we
assessed the financial impact SFAS No. 141 and No. 142 had on our consolidated
Financial Statements and recorded a goodwill impairment of $1,380,259 as
required based on our evaluation of carrying value and projected cash flows.
Debt Forgiveness. At December 31, 2002, the company recognized debt
forgiveness of approximately $2,310,000 related to discounts received on the
repayment of our line of credit with Bank One for a net discount of $935,000;
repayment of long-term debt to the Business Development Bank of Canada for a net
discount of $300,000; and, debt forgiveness on the restructuring of our notes
payable totaling $1,075,000.
0perating Loss from Continuing Operations. For the year ended December
31, 2003, operating losses from continuing operations decreased by $2,740,000 or
68% to a loss of $1,270,000 as compared to a loss of $4,010,000 for the year
ended December 31, 2002.
Loss on investments. During the year ended December 31, 2002, we wrote
down our investment in Conexys by $667,510 to a carrying value of $1. Of the
total writedown, $102,310 occurred in TidalBeach Inc., which is now being
reported as discontinued.
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Loss from Continuing Operations Before Interest Charges. For the year
ended December 31, 2003, losses from continuing operations before interest
charges decreased by $3,310,000 or 72% to a loss of $1,270,000 as compared to a
loss of $4,580,000 for the year ended December 31, 2002.
Interest Charges. For the year ended December 31, 2003, interest charges
increased by $4,030,000, or 102%, to $7,990,000 from $3,960,000 for the year
ended December 31, 2002. This increase is largely attributable to the interest
expense of $7,250,000 on the beneficial conversion feature recognized on the
convertible debentures issued in 2003 pursuant to a financing arrangement
entered into on December 5, 2002.
Loss from Continuing Operations before Income Taxes. Loss from
continuing operations before income taxes for the year ended December 31, 2003
increased by $720,000 or 8% to a loss of $9,260,000 as compared to a loss of
$8,540,000 for the year ended December 31, 2002.
Income Taxes. Income tax expense for the year ended December 31, 2003
increased by $60,000 to an expense of $30,000 as compared to a recovery of
$30,000 for the year ended December 31, 2002.
Loss from Continuing Operations. Loss from continuing operations for
the year ended December 31, 2003 increased by $780,000 or 9% to a loss of
$9,290,000 compared to a loss of $8,510,000 for the year ended December 31,
2002.
Income (Loss) from Discontinued Operations. Operations of the
technology, training and IT recruitment divisions have been reported as
discontinued for the year ended December 31, 2003 and 2002.
Effective March 8, 2002, we sold our technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. Net proceeds after
broker fees were $1,350,000 of which we received $800,000 in cash and $550,000
worth of unrestricted common shares on closing. The shares were sold on March
11, 2002 for value of $524,673. As part of the transaction, Cognicase assumed
all of the staff in our technology division, including the employees of
TidalBeach Inc. We will not have future revenues from either the Njoyn or
SecondWave products.
There was no technology revenue for the year ended December 31, 2003,
and $59,000 in 2002. The net income for the year ended December 31, 2003 was
$13,000 compared to a net loss of $280,000 in 2002. On disposal, Njoyn had
approximately $950,000 in assets consisting primarily of deferred development
charges and approximately $30,000 in liabilities consisting primarily of capital
lease obligations. The gain on disposal of $400,229 has been reflected in the
Income (loss) from discontinued operations in 2002. No income taxes have been
reflected on this disposition as the sale of the shares gives rise to a capital
loss, the benefit of which, is more likely than not to be realized.
Effective May 1, 2002, we signed an agreement with triOS Training
Centres Limited, an Ontario company, for the purchase of certain assets of our
Toronto training division, Thinkpath Training for a nominal amount of cash and
the assumption of all prepaid training liabilities. As part of the transaction,
triOS assumed the Toronto training staff and is subletting the classroom
facilities. The gain on disposal of $97,350 has been reflected in the Income
(loss) from discontinued operations in 2002.
On November 1, 2002, we entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the purchase of certain assets
of our New York training division, Thinkpath Training for a nominal amount of
cash and the assumption of all prepaid training liabilities. As part of the
transaction, Thinkpath Training LLC assumed the New York training staff, some
assets and is subletting the classroom facilities.
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As a result of these two transactions, we will not have future
revenues from the training division and therefore the operations have been
reported as discontinued.
Training revenue for the year ended December 31, 2003 was $160,000
compared to $1,350,000 in 2002. The net loss from the training division for the
year ended December 31, 2003 was $20,000 compared to $360,000 in 2002.
Effective June 27, 2003, we signed an agreement with Brainhunter.com
Ltd., an Ontario company, for the purchase of certain assets of our Toronto IT
recruitment division for a nominal amount of cash and the assumption of all
employee liabilities. The gain on disposal of $190,627 has been reflected in the
Income (loss) from discontinued operations in 2003. Of the $190,627, $146,627
was received in cash on closing with the balance of $44,000 due in a promissory
note payable by June 27, 2004. As a result of this transaction, we will not have
future revenues from our IT recruitment division and therefore the operations
have been reported as discontinued.
IT recruitment revenue for the year ended December 31, 2003 was
$1,460,000 compared to $12,780,000 in 2002. Net income from the IT recruitment
division for the year ended December 31, 2003 was $75,000 compared to $505,000
in 2002.
Net Loss Before Preferred Stock Dividends. Net loss before preferred
stock dividends for the year ended December 31, 2003 increased by $880,000 or
11% to a net loss of $9,030,000 as compared to a net loss of $8,150,000 for the
year ended December 31, 2002.
Net Loss Applicable to Common Stock. Net loss applicable to common
stock increased by $780,000 or 9% to $9,030,000 for the year ended December 31,
2003 compared to $8,250,000 for the year ended December 31, 2002. During the
year ended December 31, 2002 we issued preferred stock dividends of $100,000.
THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Revenue. Revenue for the year ended December 31, 2002 decreased by
$4,940,000 or 29%, to $12,280,000, as compared to $17,220,000 for the year ended
December 31, 2001. The decrease is primarily attributable to the reduction in
sales staff as a result of our cost cutting initiatives undertaken in 2002.
Cost of Services. The cost of services for the year ended December 31,
2002 decreased by $3,090,000, or 27%, to $8,330,000, as compared to $11,420,000
for the year ended December 31, 2001. The decrease in cost of services for the
year ended December 31, 2002 is consistent with the decrease in revenue. The
cost of services as a percentage of revenue increased from 66% for the year
ended December 31, 2001 to 68% for the year ended December 31, 2002.
Gross Profit. Gross profit for the year ended December 31, 2002
decreased by $1,850,000, or 32%, to $3,950,000 compared to $5,800,000 for the
year ended December 31, 2001. As a percentage of revenue, gross profit decreased
from 34% for the year ended December 31, 2001 to 32% for the year ended December
31, 2002. This decrease is largely a result of the decline in higher margin
permanent placement services in the information technology division.
Expenses. Expenses for the year ended December 31, 2002 decreased by
$5,380,000, or 40%, to $7,960,000 compared to $13,340,000 for the year ended
December 31, 2001.
Administrative Expenses. Administrative expenses decreased by $420,000
or 9% to $4,160,000 for the year ended December 31, 2002 compared to $4,580,000
for the year ended December 31, 2001. General administrative expenses including
salaries and rent decreased as a result of restructuring and general cost
cutting.
-20-
Selling Expenses. Selling expenses for the year ended December 31, 2002
decreased by $870,000, or 28%, to $2,240,000 from $3,110,000 for the year ended
December 31, 2001. This decrease is attributable to the considerable downsizing
in sales staff and the decrease in commissions, as a result of the reduction in
sales. In addition, in 2002 we eliminated certain advertising and promotional
expenses.
Financing Expenses. For the year ended December 31, 2002, financing
expenses increased $530,000 or 79% to $1,200,000 from $670,000 for the year
ended December 31, 2001. This increase is attributable to the expensing of
approximately $770,000 for cash, shares and warrants issued to Tazbaz Holdings
in consideration of a loan agreement whereby Tazbaz securitized our overdraft
position with Bank One in the amount of $650,000.
Depreciation and Amortization. For the year ended December 31, 2002,
depreciation and amortization expenses decreased by $690,000, or 35%, to
$1,290,000 from $1,980,000 for the year ended December 31, 2001. This decrease
is primarily attributable to our adoption of Statements of Financial Accounting
Standards No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. Under these statements, we are no longer required to amortize
goodwill. Amortization of goodwill for the year ended December 31, 2001 amounted
to $450,000.
During 2002, we assessed the financial impact SFAS No. 141 and No. 142
will have on our consolidated Financial Statements and recorded a goodwill
impairment of $1,380,259 as required based on our evaluation of carrying value
and projected cash flows. In accordance with SFAS 121, we recorded a write down
of goodwill of $3,001,391 in 2001.
Debt Forgiveness. At December 31, 2002, the company recognized debt
forgiveness of approximately $2,310,000 related to discounts received on the
repayment of our line of credit with Bank One for a net discount of $935,000;
repayment of long-term debt to the Business Development Bank of Canada for a net
discount of $300,000; and, debt forgiveness on the restructuring of our notes
payable totaling $1,075,000.
0perating Loss from Continuing Operations. For the year ended December
31, 2002, losses from continuing operations decreased by $3,530,000 or 47% to a
loss of $4,010,000 as compared to a loss of $7,540,000 for the year ended
December 31, 2001.
Loss on Investments. During the year ended December 31, 2002, we wrote
down our investment in Conexys by $667,510 to a carrying value of $1. Of the
total writedown, $102,309 occurred in TidalBeach Inc., which is now being
reported as discontinued. During the year ended December 31, 2001, we wrote down
our investments in Tillyard Management, SCM Dialtone, and Lifelogix of $130,242,
$75,000 and $123,920 respectively.
Interest Charges. For the year ended December 31, 2002, interest
charges increased by $3,070,000, or 345%, to $3,960,000 from $890,000 for the
year ended December 31, 2001. This increase is largely attributable to the
interest expense of $2,900,000 on the beneficial conversion feature on the
convertible debentures issued in December 2002.
Loss from Continuing Operations before Income Taxes. Loss from
continuing operations before income taxes for the year ended December 31, 2002
decreased by $220,000 or 3% to a loss of $8,540,000 as compared to a loss of
$8,760,000 for the year ended December 31, 2001.
Income Taxes. Income tax expense for the year ended December 31, 2002
decreased by $750,000 to a recovery of $30,000 in 2002 compared to an expense of
$720,000 for the year ended December 31, 2001. The expense in 2001 was a write
down of the deferred income tax asset.
Loss from Continuing Operations. Loss from continuing operations for
the year ended December 31, 2002 decreased by $970,000, or 10%, to a loss of
$8,510,000 compared to a loss of $9,480,000 for the year ended December 31,
2001.
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Income (Loss) from Discontinued Operations. Operations of the
technology, training and IT recruitment divisions for the years ended December
31, 2002 and 2001 have been reported as discontinued.
Technology revenue for the year ended December 31, 2002 was $59,000
compared to $555,000 in 2001. The net loss for the year ended December 31, 2002
was $280,000 compared to $730,000 in 2001. Training revenue for the year ended
December 31, 2002 was $1,350,000 compared to $3,190,000 in 2001. The net loss
from the training division for the year ended December 31, 2002 was $360,000
compared to $390,000 in 2001. IT recruitment revenue for the year ended December
31, 2002 was $12,780,000 and $15,960,000 in 2001. Net income from the IT
recruitment division for the year ended December 31, 2002 was $505,000 compared
to $920,000 in 2001.
Net Loss Before Preferred Stock Dividends. Net loss before preferred
stock dividends for the year ended December 31, 2002 decreased by $1,530,000 or
16% to a net loss of $8,150,000 compared to a net loss of $9,680,000 for the
year ended December 31, 2001.
Net Loss Applicable to Common Stock. Net loss applicable to common
stock decreased by $2,160,000 or 21% to $8,250,000 for the year ended December
31, 2002 compared to $10,410,000 for the year ended December 31, 2001. During
2002 we issued preferred stock dividends of $100,000 and $730,000 in 2001.
LIQUIDITY AND CAPITAL RESOURCES
With insufficient working capital from operations, our primary sources
of cash are a receivable discount facility with Morrison Financial Services
Limited and proceeds from the sale of equity securities. Our primary capital
requirements include debt service and working capital needs.
Our facility with Morrison Financial Services Limited is a receivable
discount facility whereby we are able to borrow up to 75% of qualifying
receivables to a maximum of $3,000,000 at 30% interest per annum. At December
31, 2003, the balance on the receivable discount facility was approximately
$1,130,000.
During the year ended December 31, 2003, we sold $2,075,000 in
convertible debentures along with 770,033,457 warrants pursuant to a financing
arrangement entered into on December 5, 2002. The debentures will become due
twelve months from the date of issuance. The investors will have the right to
acquire up to $2,075,000 worth of our common stock at a price the lesser of
$.0175 or 50% of the average of the three lowest prices on three separate
trading days during the sixty-day trading period prior to conversion. The
warrants are exercisable at any time and in any amount for a period of seven
years from closing at purchase prices ranging from $.0175 to $.00075 per share.
We are required to pay interest to the debenture holder on the aggregate
unconverted and outstanding principal amount of the debenture at the rate of 12%
per annum, payable on each conversion date and maturity date in cash or shares
of common stock.
The proceeds of $2,075,000 were allocated between the warrants and
the debenture without warrants on a pro rata basis. Paid in capital has been
credited by the value of the warrants in the amount of $1,150,625. At December
31, 2003, the value of the beneficial conversion feature on all issued
convertible debentures was determined to be $6,865,928 which was credited to
paid in capital and charged to earnings as interest expense.
At December 31, 2003, we had cash of $480,000 and a working capital
deficiency of $2,760,000. At December 31, 2003, we had a cash flow deficiency
from operations of $170,000. At December 31, 2002, we had cash of $114,000 and a
working capital deficiency of $3,720,000. At December 31, 2002, we had a cash
flow deficiency from operations of $330,000. At December 31, 2001, we had cash
of $480,000 and a working capital deficiency of $3,360,000. At December 31,
2001, we had a cash flow deficiency from operations of $200,000.
-22-
At December 31, 2003, we had a cash flow deficiency from investing
activities of $17,000 related to the purchase of capital assets of $163,000
which was partially offset by the proceeds on the disposal of the IT recruitment
division of $146,000. At December 31, 2002, we had cash flow from investing
activities of $1,142,000 primarily related to the proceeds on the disposal of
Njoyn of $1,248,000 and other assets of $89,000 which was partially offset by
the purchase of capital assets of $195,000. At December 31, 2001, we had a cash
flow deficit from investing activities of $380,000 attributable primarily to the
purchase of capital assets of $370,000.
At December 31, 2003 we had cash flow from financing activities of
$560,000 attributable primarily to proceeds of $2,165,000 from the sale of
common stock, convertible debentures and warrants which was offset by a
reduction in debt of $1,570,000 related to the Morrison Financial receivable
discount facility and partial repayment of notes payable of $35,000. At December
31, 2002, we had a cash flow deficit from financing activities of $1,050,000
attributable primarily to the repayment of notes of $120,000, and long-term debt
of $640,000 and reduction in bank indebtedness of $3,790,000 which was offset by
an increase in long term debt of $2,600,000 and proceeds of $900,000 from the
sale of convertible debentures. At December 31, 2001, we had cash flow from
financing activities of $790,000 attributable primarily to proceeds from the
issuance of common stock of $400,000, the issuance of preferred stock of
$1,125,000 and the repayment of notes of $200,000, long-term debt of $505,000,
dividend payable of $10,000 and bank debt of $20,000.
At December 31, 2003 we had a loan balance of $260,000 with an
individual, Terry Lyons. The loan is payable in twelve monthly payments of
$21,613 which were to begin November 30, 2002 and bears interest at 30% per
annum. This loan is subordinated to Morrison Financial Services Limited and no
principal payments have been made.
At December 31, 2003, we had approximately $30,000 outstanding on
various capital leases with various payment terms and interest rates. The
average balance on the terms of leases are 12 months and cover primarily the
hardware and various software applications required to support our engineering
division.
At December 31, 2003, we had a note payable of $224,000 owed to Roger
Walters, the former shareholder of CadCam Inc. Principal payments of $4,000 per
month were to begin September 1, 2002 until August 1, 2007. This note is
subordinated to Morrison Financial Services Limited and to the 12% Senior
Secured Convertible Debenture holders. We have not made any principal payments
to Mr. Walters since December 2002 and we are currently in default of the loan
agreement. As a result of the default, the note is due on demand and now bears
interest at 12% per annum until payment is made. We intend to make payments as
cash becomes available.
At December 31, 2003, we had a note payable of $636,000 owed to Denise
Dunne-Fushi, the vendor of MicroTech Professionals Inc. Principal payments of
$10,000 per month were to begin November 1, 2002 bearing 5% interest until
October 1, 2007. In addition, we are obligated to cover the monthly expense
associated with Ms. Dunne-Fushi's family health benefits until May 2004 and a
vehicle lease until August 2004.
The note is secured under a general security agreement but is
subordinated to Morrison Financial Services Limited and to the 12% Senior
Secured Convertible Debenture holders. We have not made scheduled principal
payments to Ms. Dunne-Fushi since December 2002 and are currently in default of
the note agreement. As a result of the default, Ms. Dunne-Fushi has the option
of enforcing the security she holds. We intend to make payments as cash becomes
available.
Although we believe that our current working capital and cash flows
from restructured operations will be adequate to meet our anticipated cash
requirements going forward, we have accrued liabilities and potential
settlements of outstanding claims that may require additional funds. We will
-23-
have to raise these funds through equity or debt financing. There can be no
assurance that additional financing will be available at all or that if
available, such financing will be obtainable on terms favorable to us and would
not be dilutive.
Despite our recurring losses and negative working capital, we believe
that we have developed a business plan that, if successfully implemented, could
substantially improve our operational results and financial condition. However,
we can give no assurances that our current cash flows from operations, if any,
borrowings available under our receivable discount facility, and proceeds from
the sale of securities, will be adequate to fund our expected operating and
capital needs for the next twelve months. The adequacy of our cash resources
over the next twelve months is primarily dependent on our operating results and
our ability to raise additional financing, which are subject to substantial
uncertainties. Cash flow from operations for the next twelve months will depend,
among other things, upon the effect of the current economic slowdown on our
sales and management's ability to implement our business plan. The failure to
return to profitability and optimize operating cash flow in the short term, and
to successfully raise additional financing, could have a material adverse effect
on our liquidity position and capital resources which may force us to curtail
our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, FASB issued SFAS No. 145, which, among other factors,
changed the presentation of gains and losses on the extinguishments of debt. Any
gain or loss on extinguishments of debt that does not meet the criteria in APB
Opinion 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", shall be included in operating earnings and
not presented separately as an extraordinary item. We adopted SFAS No. 145 at
the beginning of fiscal year 2003 and the provisions of SFAS No. 145 did not
have any impact on our financial position, results of operations or cash flows.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No.146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue, or EITF, No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit on
Activity (including Certain Costs Incurred in a Restructuring)". We adopted the
provisions of SFAS No. 146 for restructuring activities initiated after December
31, 2002. SFAS No. 146 may affect the timing of recognizing future restructuring
costs as well as the amounts recognized.
In January 2003, FASB issued SFAS No. 148, "Accounting for Stock -Based
Compensation - Transition and Disclosures". This statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
also amends the disclosure requirements of SFAS No. 123 to require more
prominent and frequent disclosures in the financial statements about the effects
of stock-based compensation. The transitional guidance and annual disclosure
provisions of this Statement was effective for the December 31, 2002 financial
statements.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirement for most guarantees including
loan guarantees, and clarifies that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair market value of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
measurement provisions of the Interpretation apply on a prospective basis to
guarantees issued or modified after December 31, 2002.
-24-
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables, real estate or
other property. A variable interest entity may be essentially passive or it may
engage in research and development or other activities on behalf of another
company. The objective of Interpretation No. 46 is not to restrict the use of
variable interest entities but to improve financial reporting by companies
involved with variable interest entities. Until now, a company generally has
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Interpretation No. 46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of Interpretation No.
46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to entities created before January
31, 2003, in the first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. We do not have any variable interest entities, and
accordingly, adoption will not have a material effect on our financial position,
results of operations or cash flows.
In April 2003, FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The amendments set forth in Statement 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative as discussed in Statement 133. In addition, it clarifies when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. This Statement is effective for contracts entered into
or modified after June 30, 2003 with certain exceptions. The adoption of
Statement No. 149 will not have a material effect on our financial position,
results of operations or cash flows.
In May 2003, FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". The
Statement specifies that certain instruments within its scope embody obligations
of the issuer and that, therefore, the issuer must classify them as liabilities.
This Statement is effective immediately for all financial instruments entered
into or modified after May 31, 2003. For all other instruments, the Statement
goes into effect at the beginning of the first interim period beginning after
June 15, 2003. For contracts that were created or modified before May 31, 2003
and still exist at the beginning of the first interim period beginning after
June 30, 2003, entities should record the transition to Statement No. 150 by
reporting the cumulative effect of a change in an accounting principle.
Statement No. 150 prohibits entities from restating financial statements for
earlier years presented. The adoption of Statement No. 150 will not have a
material effect on our financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-25-
ITEM 8. FINANCIAL STATEMENTS
THINKPATH INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
TOGETHER WITH REPORT OF INDEPENDENT AUDITORS
(AMOUNTS EXPRESSED IN US DOLLARS)
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF THINKPATH INC.
We have audited the accompanying consolidated balance sheets of Thinkpath Inc.
(incorporated in Ontario) as of December 31, 2003, 2002 and 2001 and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity for each of the years ended December 31, 2003, 2002 and 2001. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Thinkpath Inc. (formerly Thinkpath.com Inc.) as of December 31, 2003, 2002 and
2001 and the consolidated results of its operations and its cash flows for each
of the years ended December 31, 2003, 2002 and 2001 in conformity with generally
accepted accounting principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2(a) to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has recurring negative working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Should the company be unable to continue as a going
concern, certain assets and liabilities will have to be adjusted to their
liquidated values.
Since the accompanying consolidated financial statements have not been prepared
and audited in accordance with generally accepted accounting principles and
standards in Canada, they may not satisfy the reporting requirements of Canadian
statutes and regulations.
Schwartz Levitsky Feldman LLP
Chartered Accountants
Toronto, Ontario
April 13, 2004
F-1
THINKPATH INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003, 2002, AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
---------- ---------- ----------
ASSETS
CURRENT ASSETS
Cash $ 483,443 $ 114,018 $ 482,233
Accounts receivable 1,766,061 2,663,823 5,502,113
Inventory -- -- 40,057
Income taxes receivable -- -- 431,817
Prepaid expenses 128,612 196,683 345,341
---------- ---------- ----------
2,378,116 2,974,524 6,801,561
PROPERTY AND EQUIPMENT 1,182,751 1,915,379 2,859,340
GOODWILL 3,748,732 3,748,732 5,128,991
INVESTMENT IN NON-RELATED COMPANIES 45,669 45,669 1,013,926
LONG-TERM RECEIVABLE -- 53,924 83,450
OTHER ASSETS 53,321 49,303 1,287,710
---------- ---------- ----------
7,408,589 8,787,531 17,174,978
========== ========== ==========
F-2
THINKPATH INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003, 2002, AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
----------- ----------- -----------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness $ -- $ 209,776 $ 5,039,171
Receivable Discount Facility 1,128,444 2,340,579 --
Accounts payable 2,650,783 3,197,286 4,073,444
Deferred revenue -- 163,609 365,023
Current portion of long-term debt 279,800 380,188 528,285
Current portion of notes payable 859,936 208,254 150,000
12% Convertible Debenture 215,558 192,950 --
----------- ----------- -----------
5,134,521 6,692,642 10,155,923
DEFERRED INCOME TAXES -- -- 150,380
LONG-TERM DEBT 13,176 84,756 582,432
NOTES PAYABLE -- 686,703 2,340,000
LIABILITIES PAYABLE IN CAPITAL STOCK -- -- 699,297
----------- ----------- -----------
5,147,697 7,464,101 13,928,032
=========== =========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 22)
STOCKHOLDERS' EQUITY
CAPITAL STOCK 43,576,292 33,367,034 26,571,481
DEFICIT (39,999,711) (30,966,083) (22,719,044)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,315,689) (1,077,521) (605,491)
----------- ----------- -----------
2,260,892 1,323,430 3,246,946
----------- ----------- -----------
7,408,589 8,787,531 17,174,978
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements
F-3
THINKPATH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
------------ ------------ ------------
REVENUE $ 10,817,667 $ 12,283,828 $ 17,224,335
COST OF SERVICES 7,344,114 8,334,682 11,421,847
------------ ------------ ------------
GROSS PROFIT 3,473,553 3,949,146 5,802,488
------------ ------------ ------------
EXPENSES
Administrative 2,923,813 4,161,599 4,576,791
Selling 1,152,311 2,240,990 3,114,967
Financing Expenses -- 1,197,240 669,358
Depreciation and amortization 665,143 1,290,651 1,981,863
Write down goodwill -- 1,380,259 3,001,391
Debt Forgiveness -- (2,308,358) --
------------ ------------ ------------
4,741,267 7,962,381 13,344,370
OPERATING LOSS FROM CONTINUING OPERATIONS (1,267,714) (4,013,235) (7,541,882)
Gain (Loss) on Investment -- (565,201) (329,162)
LOSS FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES (1,267,714) (4,578,436) (7,871,044)
Interest Charges 7,994,211 3,962,769 891,244
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (9,261,925) (8,541,205) (8,762,288)
Income Taxes (recovery) 30,165 (32,637) 719,920
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (9,292,090) (8,508,568) (9,482,208)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
(INCLUDING GAIN ON DISPOSAL) 258,462 361,916 (201,233)
------------ ------------ ------------
NET LOSS BEFORE PREFERRED STOCK DIVIDENDS (9,033,628) (8,146,652) (9,683,441)
PREFERRED STOCK DIVIDENDS -- 100,387 728,740
NET LOSS APPLICABLE TO COMMON STOCK (9,033,628) (8,247,039) (10,412,181)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND FULLY DILUTED 719,412,600 29,000,252 14,943,306
============ ============ ============
LOSS FROM CONTINUING OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK BEFORE PREFERRED
DIVIDENDS BASIC AND FULLY DILUTED (0.01) (0.29) (0.63)
============ ============ ============
LOSS FROM CONTINUING OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK AFTER PREFERRED
DIVIDENDS BASIC AND FULLY DILUTED (0.01) (0.30) (0.68)
============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-4
THINKPATH INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED
COMMON STOCK PREFERRED STOCK CAPITAL OTHER
NUMBER OF NUMBER OF SHARES STOCK COMPREHENSIVE COMPREHENSIVE
SHARES A B C AMOUNTS DEFICIT LOSS LOSS
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2000 11,915,138 1,050 750 -- 23,759,415 (12,306,862) (653,547)
=========== =========== =========== =========== =========== =========== ===========
Net loss for the year
before preferred
stock dividends -- -- -- -- (9,683,441) (9,683,441)
-----------
Other comprehensive income
(loss), net of tax:
Foreign currency translation -- -- -- -- -- -- 209,506
Adjustment to market value -- -- -- -- -- -- (161,450)
-----------
Other comprehensive income 48,056 48,056
-----------
Comprehensive loss (9,635,385)
===========
Issuance of common stock for cash 525,000 -- -- -- 400,000 --
Issuance of preferred stock -- -- -- 1,230 1,230,000 --
Reduction in common stock payable 596,667 -- -- -- 709,005 --
Dividend on preferred stock -- -- -- -- 414,848 (444,647)
Conversion of preferred stock to
common stock 3,864,634 (1,050) (750) (285) -- -- --
Beneficial conversion on
Issuance of preferred stock -- -- -- -- 284,093 (284,093)
Options exercised 22,122 -- -- -- 1 --
Debt settled through the issuance
of common stock 93,883 -- -- -- 44,125 --
Common stock and warrants issued
in consideration of services 714,267 -- -- -- 519,994 --
Allowance for deferred taxes
Recoverable on issue expenses -- -- -- -- (790,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2001 17,731,711 -- -- 945 26,571,481 (22,719,044) (605,491)
=========== =========== =========== =========== =========== =========== ===========
Net loss for the year
before preferred
stock dividends -- -- -- -- -- (8,146,652) (8,146,652)
-----------
Other comprehensive income
(loss), net of tax:
Foreign currency translation -- -- -- -- -- -- (171,283)
Adjustment to market value -- -- -- -- -- -- (300,747)
-----------
Other comprehensive income (loss) (472,030) (472,030)
-----------
Comprehensive loss (8,618,682)
===========
Reduction in common stock payable 8,387,840 -- -- -- 1,098,955 --
Dividend on preferred stock -- -- -- -- 67,530 (67,530)
Conversion of preferred stock to
common stock 23,278,448 -- -- (945) -- --
Beneficial conversion on
issuance of preferred stock -- -- -- -- 32,857 (32,857)
Debt settled through the issuance
of common stock 2,982,018 -- -- -- 434,348 --
Common stock and warrants issued
in consideration of services 13,878,026 -- -- -- 1,556,485 --
Warrants issued for cash -- -- -- -- 707,050 --
Beneficial conversion on issuance
of convertible debt -- -- -- -- 2,898,328 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2002 66,258,043 -- -- -- 33,367,034 (30,966,083) (1,077,521)
=========== =========== =========== =========== =========== =========== ===========
Net loss for the year -- -- -- -- -- (9,033,628) (9,033,628)
-----------
Other comprehensive income
(loss), net of tax:
Foreign currency translation -- -- -- -- -- -- (238,168)
Adjustment to market value -- -- -- -- -- -- --
-----------
Other comprehensive income (loss) (238,168) (238,168)
-----------
Comprehensive loss (9,271,796)
===========
Conversion of 12% senior secured
convertible debenture 2,368,413,224 -- -- -- 901,891 --
Interest on 12% senior secured
convertible debenture 153,405,397 -- -- -- 142,875 --
Debt settled through the issuance
of common stock 16,997,854 -- -- -- 449,333 --
Common stock and warrants issued
in consideration of services 10,980,000 -- -- -- 226,500 --
Warrants issued for cash 121,184,669 -- -- -- 1,241,514 --
Beneficial conversion on issuance
of convertible debt -- -- -- -- 7,247,145 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2003 2,737,239,187 -- -- -- 43,576,292 (39,999,711) (1,315,689)
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
THINKPATH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities
Net loss before preferred stock dividends $(9,033,628) $(8,146,652) $(9,683,441)
---------- ---------- ----------
Adjustments to reconcile net loss to net
cash (used in) provided by
operating activities:
Amortization 716,781 1,291,233 2,469,638
Loss on disposition 167,802 149,251 --
Amortization of beneficial conversion (included in interest) 7,247,145 2,898,328 --
Interest on 12% senior secured convertible debentures 142,875 -- --
Write down of long-term investment -- 667,511 344,279
Write down of goodwill -- 1,380,259 3,001,391
Decrease in accounts receivable 1,000,368 2,914,575 2,045,045
Decrease (increase) in prepaid expenses 72,115 159,093 (21,660)
Increase (decrease) in accounts payable (831,697) (837,634) 416,109
Decrease (increase) in deferred income taxes -- (150,380) 993,806
Decrease in inventory -- 38,784 53,144
Decrease in long-term receivable 57,775 -- --
Increase (decrease) in deferred revenue (163,754) (99,942) 147,077
Increase in income taxes payable -- 428,885 2,459
Common stock and warrants issued for services 226,500 1,556,485 519,994
Accounts payable settled with common stock 449,333 434,348 (88,152)
Long-term investment received for services -- -- (206,072)
Debt forgiveness (30,565) (2,308,358) (190,629)
Expenses on debt forgiveness -- (210,000) --
Gain on disposal of subsidiary -- (497,579) --
Gain on disposal of IT Recruitment division assets (190,627) -- --
---------- ---------- ----------
Net cash used in operating activities (169,577) (331,793) (197,012)
---------- ---------- ----------
Cash flows from investing activities
Purchase of capital assets (163,549) (194,866) (368,260)
Disposal (purchase) of other assets -- 16,156 (15,353)
Proceeds on sale of fixed assets -- 72,892 --
Proceeds on disposal of subsidiary -- 1,247,894 --
Proceeds on disposal of IT Recruitment division assets 146,406 -- --
---------- ---------- ----------
Net cash provided from (used in) investing activities (17,143) 1,142,076 (383,613)
---------- ---------- ----------
Cash flows from financing activities
Repayment of notes payable (35,021) (119,027) (197,437)
Repayment of long-term debt (1,573,697) (643,896) (505,651)
Dividend payable -- -- (12,560)
Cash received on long-term debt -- 2,599,929 --
Proceeds from issuance of common stock 90,889 -- 400,000
Proceeds from issuance of preferred stock -- -- 1,125,000
Proceeds from issuance of debentures and warrants 2,075,000 900,000 --
Decrease in bank indebtedness -- (3,786,107) (22,239)
---------- ---------- ----------
Net cash provided by (used in) financing activities 557,171 (1,049,101) 787,113
---------- ---------- ----------
Effect of foreign currency exchange rate changes (1,026) (129,397) 275,745
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 369,425 (368,215) 482,233
Cash and cash equivalents
Beginning of year 114,018 482,233 --
---------- ---------- ----------
End of year 483,443 114,018 482,233
========== ========== ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 788,260 1,052,108 340,000
========== ========== ==========
Income taxes paid 29,720 19,237 38,000
========== ========== ==========
SUPPLEMENTAL NON-CASH ITEMS:
Preferred stock dividend -- 100,387 728,740
Common shares issued for liabilities 449,333 1,556,485 44,125
Reduction in notes payable -- 1,197,942 --
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
F-6
THINKPATH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
1. MANAGEMENT'S INTENTIONS AND GOING CONCERN
Certain principal conditions and events are prevalent which indicate that
there could be substantial doubt about the company's ability to continue as
a going concern for a reasonable period of time. These conditions and
events include significant operating losses, working capital deficiencies,
and violation of certain loan covenants. At December 31, 2003, the Company
had a working capital deficiency of $2,756,405, a deficit of $39,999,711
and has suffered recurring losses from operations.
With insufficient working capital from operations, the Company's primary
sources of cash are a receivable discount facility with Morrison Financial
Services Limited and proceeds from the sale of equity securities. At
December 31, 2003, the balance on the receivable discount facility was
approximately $1,130,000. The company is currently within margin of its
receivable discount facility with Morrison Financial Services Limited based
on 75% of qualifying accounts receivable.
During the year ended December 31, 2003, the company closed $2,075,000 in
12% senior secured convertible debentures pursuant to a financing
arrangement entered into on December 5, 2002. The funds were used for
various debt settlements and critical payables.
As at April 13, 2004, management's plans to mitigate and alleviate these
adverse conditions and events include:
a) Commitment from investors for additional convertible debentures of up
to $650,000 to be used for working capital. Although there can be no
assurances, it is anticipated that continued cash flow improvements
will be sufficient to cover current operating costs and will permit
payments to certain vendors and interest payments on debt.
b) Ongoing restructuring of debt obligations and settlement of
outstanding claims.
c) Focus on growth in the engineering division, including design services
and technical publications and expansion of the engineering service
offerings to Ontario, Canada to replace existing lower margin
information staffing services.
Despite its negative working capital and deficit, the company believes that
its management has developed a business plan that if successfully
implemented could substantially improve the company's operational results
and financial condition. However, the company can give no assurances that
its current cash flows from operations, if any, borrowings available under
its receivable discounting facility with Morrison Financial Services
Limited, and proceeds from the sale of securities, will be adequate to fund
its expected operating and capital needs for the next twelve months. The
adequacy of cash resources over the next twelve months is primarily
dependent on its operating results, and the closing of new financing, all
of which are subject to substantial uncertainties. Cash flows from
operations for the next twelve months will be dependent, among other
factors, upon the effect of the current economic slowdown on sales, the
impact of the restructuring plan and management's ability to implement its
business plan. The failure to return to profitability and optimize
operating cash flows in the short term, and close alternate financing,
could have a material adverse effect on the company's liquidity position
and capital resources.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Going Concern
These consolidated financial statements have been prepared on the going
concern basis, which assumes the realization of assets and liquidation of
liabilities and commitments in the normal course of business. The
application of the going concern concept is dependent on the Company's
ability to generate sufficient working capital from operations and external
investors. These consolidated financial statements do not give effect to
any adjustments should the Company be unable to continue as a going concern
and, therefore, be required to realize its assets and discharge its
liabilities in other than the normal course of business and at amounts
differing from those reflected in the consolidated financial statements.
Management plans to obtain sufficient working capital from operations and
external financing to meet the Company's liabilities and commitments as
they become payable over the next twelve months. There can be no assurance
that management's plans will be successful. Failure to obtain sufficient
working capital from operations and external financing will cause the
Company to curtail operations. These consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
F-7
THINKPATH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
b) Change of Name
On June 6, 2001, the company changed its name from Thinkpath.com Inc. to
Thinkpath Inc.
c) Principal Business Activities
Thinkpath Inc. is an engineering services company which, along with its
wholly-owned subsidiaries Thinkpath US Inc. (formerly Cad Cam Inc.),
Thinkpath Michigan Inc. (formerly Cad Cam of Michigan Inc.), Thinkpath
Technical Services Inc. (formerly Cad Cam Technical Services Inc.),
provides engineering, design, technical publications and staffing, services
to enhance the resource performance of clients. In addition, the company
owns the following companies which are currently inactive: Systemsearch
Consulting Services Inc., International Career Specialists Ltd., Microtech
Professionals Inc., E-Wink Inc. (80%), Thinkpath Training Inc. (formerly
ObjectArts Inc.), Thinkpath Training US Inc. (formerly ObjectArts US Inc.)
and TidalBeach Inc. In 2002, the company sold Njoyn Software Incorporated,
a wholly-owned subsidiary.
d) Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts of the company
and its controlled subsidiaries. The earnings of the subsidiaries are
included from the date of acquisition for acquisitions accounted for using
the purchase method. For subsidiaries accounted for by the pooling of
interest method their earnings have been included for all periods reported.
All significant inter-company accounts and transactions have been
eliminated.
e) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts from and to banks,
and any other highly liquid investments purchased with a maturity of three
months or less. The carrying amount approximates fair value because of the
short maturity of those instruments.
f) Other Financial Instruments
The carrying amounts of the company's other financial instruments
approximate fair values because of the short maturity of these instruments
or the current nature of interest rates borne by these instruments.
g) Long-Term Financial Instruments
The fair value of each of the company's long-term financial assets and debt
instruments is based on the amount of future cash flows associated with
each instrument discounted using an estimate of what the company's current
borrowing rate for similar instruments of comparable maturity would be.
h) Property and Equipment
Property and equipment are recorded at cost and are amortized over the
estimated useful lives of the assets principally using the declining
balance method.
The company's policy is to record leases, which transfer substantially all
benefits and risks incidental to ownership of property, as acquisition of
property and equipment and to record the occurrences of corresponding
obligations as long-term liabilities. Obligations under capital leases are
reduced by rental payments net of imputed interest.
i) Net Income (Loss) and Fully Diluted Net Income (Loss) Per Weighted
Average Common Stock
Net income (Loss) per common stock is computed by dividing net income
(loss) for the year by the weighted average number of common stock
outstanding during the year.
Fully diluted net income (loss) per common stock is computed by dividing
net income for the year by the weighted average number of common stock
outstanding during the year, assuming that all convertible preferred stock,
stock options and warrants as described in note 13 were converted or
exercised. Stock conversions stock options and warrants which are
anti-dilutive are not included in the calculation of fully diluted net
income (loss) per weighted average common stock.
F-8
THINKPATH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
j) Inventory
Inventory is valued at the lower of cost and the net realizable value.
k) Revenue
1) The company provides the services of engineering staff on a project
basis. The services provided are defined by guidelines to be accomplished
by clearly defined milestones and revenue is recognized upon the
accomplishment of the relevant milestone. As services are rendered, the
costs incurred are reflected as Work in Progress. Revenue is recognized
upon the persuasive evidence of an agreement, delivery has occurred, the
fee is fixed or determinable and collection reasonably assured.
2) Prior to the sale of the IT recruitment division (Note 18), the company
provided the services of information technology consultants on a contract
basis and revenue was recognized as services were performed.
3) Prior to the sale of the IT recruitment division (Note 18), the company
placed information technology professionals on a permanent basis and
revenue was recognized upon candidates' acceptance of employment. If the
company received non-refundable upfront fees for "retained searches", the
revenue was recognized upon the candidates' acceptance of employment.
4) Prior to the sale of the training division (Note 18), the company
provided advanced training and certification in a variety of technologies
and revenue was recognized on delivery.
5) Prior to the sale of the technology division (Note 18), the company
licensed software in the form of a Human Capital Management System called
Njoyn. The revenue associated with providing this software consisted of an
initial set up fee, customization and training as agreed and an ongoing
monthly per user fee. The allocation of revenue to the various elements was
based on the company's determination of the fair value of the elements if
they had been sold separately. The customers had the right to choose a
provider to host the software which was unrelated to the company. The
set-up fee and customization revenue was recognized upon delivery of access
to the software with customization completed in accordance with milestones
determined by the contract.
Revenue was recognized on a percentage of completion basis for contracts
with significant amounts of customization and clearly defined milestones
agreed to by the customer and an enforceable right to invoice and collect
on a partial completion basis.
For contracts which required significant customization, without clearly
defined milestones, and an inability to estimate costs, revenue was
reflected on a completed contract basis. Substantial completion was
determined based on customer acceptance of the software.
6) Prior to the sale of the technology division (Note 18), the company also
signed contracts for the customization or development of SecondWave, a web
development software in accordance with specifications of its clients. The
project plan defined milestones to be accomplished and the costs
associated. These amounts were billed as they were accomplished and revenue
was recognized as the milestones were reached. The work in progress for
costs incurred beyond the last accomplished milestone was reflected at the
period end. The contracts did not include any post-contract customer
support. Additional customer support services were provided at standard
daily rates, as services are required.
l) Goodwill
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." Under
the new rules, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company began applying the new
accounting rules effective January 1, 2002.
Thinkpath completed SFAS No.142 impairment test and concluded that there
was no impairment of recorded goodwill, as the fair value of its reporting
units exceeded their carrying amount.
F-9
THINKPATH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
m) Income Taxes
The company accounts for income tax under the provision of SFAS No. 109,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statement or tax returns. Deferred income taxes are provided
using the liability method. Under the liability method, deferred income
taxes are recognized for all significant temporary differences between the
tax and financial statement bases of assets and liabilities.
Effects of changes in enacted tax laws on deferred tax assets and
liabilities are reflected as adjustments to tax expense in the period of
enactment. Deferred tax assets may be reduced, if deemed necessary based on
a judgmental assessment of available evidence, by a valuation allowance for
the amount of any tax benefits which are more likely, based on current
circumstances, not expected to be realized.
n) Foreign Currency
The company is a foreign private issuer and maintains its books and records
in Canadian dollars (the functional currency). The financial statements are
converted to US dollars as the company has elected to report in US dollars
consistent with Regulation S-X, Rule 3-20. The translation method used is
the current rate method which is the method mandated by FAS 52 where the
functional currency is the foreign currency. Under the current method all
assets and liabilities are translated at the current rate, stockholders'
equity accounts are translated at historical rates and revenues and
expenses are translated at average rates for the year.
Due to the fact that items in the financial statements are being translated
at different rates according to their nature, a translation adjustment is
created. This translation adjustment has been included in accumulated other
comprehensive income. Gains and losses on foreign currency transactions are
included in financial expenses.
o) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. These estimates
are reviewed periodically and as adjustments become necessary, they are
reported in earnings in the period in which they become known.
p) Long-Lived Assets
On January 1, 1996, the company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 121 requires that long-lived assets held
and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Management used its best estimate of the undiscounted cash
flows to evaluate the carrying amount and have reflected the impairment.
In August 2001, FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company
adopted SFAS 144, effective January 1, 2002. The adoption of SFAS 144 did
not have a material impact on the Company's results of operations or
financial condition.
q) Comprehensive Income
In 1999, the company adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income". This standard requires companies to disclose
comprehensive income in their financial statements. In addition to items
included in net income, comprehensive income includes items currently
charged or credited directly to stockholders' equity, such as the changes
in unrealized appreciation (depreciation) of securities and foreign
currency translation adjustments.
F-10
THINKPATH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
r) Accounting for Stock-Based Compensation
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued. It introduced the use of a fair value-based method of
accounting for stock-based compensation. It encourages, but does not
require, companies to recognize stock-based compensation expenses to
employees based on the new fair value accounting rules. Companies that
choose not to adopt the new rules will continue to apply the existing
accounting rules continued in Accounting Principles Board Option No. 25,
Accounting for stock issued to employees. However, SFAS No. 123 requires
companies that choose not to adopt the new fair value accounting rules to
disclose pro forma net income and earnings per share under the new method.
SFAS No. 123 is effective for financial statements for fiscal years
beginning after December 31, 1995. The company has adopted the disclosure
provisions of SFAS No. 123. SFAS No. 123 was amended by SFAS No. 148 which
requires more prominent disclosure of stock based compensation.
s) Computer software costs
Prior to the sale of its wholly-owned subsidiary Njoyn Software
Incorporated, the company accounted for the cost of developing computer
software. The company recorded these costs as research and development
expenses until the technological feasibility of the product had been
established at which time the costs were deferred. At the end of each year,
the company compared the unamortized costs represented by deferred
development costs in Other Assets to the net realizable value of the
product to determine if a reduction in carrying value is warranted. The
software developed for own use which may be sold as a separate product is
the Njoyn software and during development, the company decided to market
the software and therefore for the costs incurred after technological
feasibility was reached has been treated as Deferred Development costs and
the amount evaluated on an annual basis to determine if a reduction in
carrying value is warranted. On March 8, 2002, Thinkpath sold all of its
shares in Njoyn Software Incorporated.
t) Investments in Non-Related Companies
The company records its investments in companies in which it holds a 20% or
more interest and in which the company can exercise significant influence
over the investee's operating and financial policies on the equity basis.
The company records its investment in companies in which it holds less than
20% interest or in which the company has a 20% or greater interest but the
company is unable to exercise significant influence at fair market value.
Changes in fair market value are adjusted in comprehensive income, unless
the impairments are of a permanent nature, in which case the adjustments
are recorded in earnings.
u) Recent Pronouncements
In April 2002, FASB issued SFAS No. 145, which, among other factors,
changed the presentation of gains and losses on the extinguishments of
debt. Any gain or loss on extinguishments of debt that does not meet the
criteria in APB Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
shall be included in operating earnings and not presented separately as an
extraordinary item. The new standard is effective for companies with fiscal
years beginning after May 15, 2002. However, the company has elected to
adopt the standard as the debt restructuring gain in the current period, as
permitted by SFAS No. 145.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No.146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit on Activity (including Certain Costs Incurred in a
Restructuring)". The company will adopt the provisions of SFAS No. 146 for
restructuring activities initiated after December 31, 2002. SFAS No. 146
may affect the timing of recognizing future restructuring costs as well as
the amounts recognized.
In January 2003, FASB issued SFAS No. 148, Accounting for Stock -Based
Compensation - Transition and Disclosures. This statement provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, this statement also amends the disclosure requirements of SFAS
No. 123 to require more prominent and frequent disclosures in the financial
statements about the effects of stock-based compensation. The transitional
guidance and annual disclosure provisions of this Statement was effective
for the December 31, 2002 financial statements. The interim reporting
disclosure requirements was effective for the March 31, 2003 financial
statements.
F-11
THINKPATH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This
Interpretation elaborates on the existing disclosure requirement for most
guarantees including loan guarantees, and clarifies that at the time a
company issues a guarantee, the company must recognize an initial liability
for the fair market value of the obligations it assumes under that
guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
the Interpretation apply on a prospective basis to guarantees issued or
modified after December 31, 2002.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure
used for business purposes that either (a) does not have equity investors
with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may
be essentially passive or it may engage in research and development or
other activities on behalf of another company. The objective of
Interpretation No. 46 is not to restrict the use of variable interest
entities but to improve financial reporting by companies involved with
variable interest entities. Until now, a company generally has included
another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Interpretation No. 46
changes that by requiring a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority
of the entity's residual returns or both. The consolidation requirements of
Interpretation No. 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not have any
variable interest entities, and, accordingly, adoption is not expected to
have a material effect on the Company.
In April 2003, FASB issued Statement No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. The amendments set forth in Statement 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this Statement
clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in
Statement 133. In addition, it clarifies when a derivative contains a
financing component that warrants special reporting in the statement of
cash flows. This Statement is effective for contracts entered into or
modified after June 30, 2003 with certain exceptions. The Company does not
believe that the adoption of Statement No. 149 will have a material effect
on the Company.
In May 2003, FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity".
The Statement specifies that certain instruments within its scope embody
obligations of the issuer and that, therefore, the issuer must classify
them as liabilities. This Statement is effective immediately for all
financial instruments entered into or modified after May 31, 2003. For all
other instruments, the Statement goes into effect at the beginning of the
first interim period beginning after June 15, 2003. For contracts that were
created or modified before May 31, 2003 and still exist at the beginning of
the first interim period beginning after June 30, 2003, entities should
record the transition to Statement No. 150 by reporting the cumulative
effect of a change in an accounting principle. Statement No. 150 prohibits
entities from restating financial statements for earlier years presented.
The Company does not believe that the adoption of Statement No. 150 will
have a material effect on the Company.
v) Advertising Costs
Advertising costs are expensed as incurred.
F-12
THINKPATH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
3. STOCK OPTION PLANS
OPTIONS WEIGHTED
AVERAGE
EXERCISE
PRICE
-------- ---------
a) Options outstanding at January 1, 2001 1,419,617 2.21
Options granted to key employees and directors 35,000 .68
Options granted to consultant 50,000 .70
Options exercised during the year (22,125) .01
Options forfeited during the year (257,500) 3.21
Options expired during the year -
---------
Options outstanding at December 31, 2001 1,224,992
Options forfeited during the year (114,500) 3.22
---------
Options outstanding at December 31, 2002 1,110,492
=========
Options forfeited during the year (13,000) 3.19
---------
Options outstanding at December 31, 2003 1,097,492
=========
Options exercisable December 31, 2001 1,059,659 1.75
Options exercisable December 31, 2002 1,065,992 1.83
Options exercisable December 31, 2003 1,097,492 1.90
Options available for future grant December 31, 2001 261,500
Options available for future grant December 31, 2002 6,614,500
Options available for future grant December 31, 2003 20,013,000
b) Range of Exercise Prices at December 31, 2003
Outstanding Weighted Options Options Weighted
Options Average Outstanding exercisable Average
Remaining Average Exercise
Life Exercise Price Price
$2.10 - $3.25 552,492 1.61 years $2.81 552,492 $2.79
$1 and under 545,000 2.06 years $0.75 545,000 $0.75
F-13
THINKPATH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
c) Pro-forma net income
At December 31, 2003, the company has five stock-based employee
compensation plans, which are described more fully in Note 13(f). The
company accounts for those plans under the recognition and measurement
principles of APB Opinion No.25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the
company had applied the fair value recognition provisions of FASB
Statement No. 123 Accounting for Stock-Based Compensation, to
stock-based employee compensation. SFAS No.123 was amended by SFAS No.
148 which requires more prominent disclosure of stock based
compensation.
2003 2002 2001
----------- ----------- ----------
Net loss, as reported (9,033,628) (8,146,652) (9,683,441)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (101,581) (292,552) (445,120)
----------- ----------- -----------
Pro forma net loss (9,135,209) (8,439,204) (10,128,561)
=========== =========== ===========
Net loss, after preferred share
dividends (9,033,628) (8,247,039) (10,412,181)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (101,581) (292,552) (445,120)
----------- ----------- -----------
Pro forma net loss after
preferred share dividends (9,135,209) (8,539,591) (10,857,301)
=========== =========== ===========
Earnings per share:
Basic and fully diluted
loss per share, as reported (0.01) (0.28) (0.65)
=========== =========== ===========
pro forma loss per share (0.01) (0.29) (0.68)
=========== =========== ===========
loss per share, after preferred
dividends (0.01) (0.28) (0.70)
=========== =========== ===========
pro forma loss per share,
after preferred dividends (0.01) (0.29) (0.73)
=========== =========== ===========
d) Black Scholes Assumptions
The fair value of each option grant used for purposes of estimating the
pro forma amounts summarized above is estimated on the date of grant
using the Black-Scholes option price model with the weighted average
assumptions shown in the following table:
2001 GRANTS
-----------
Risk free interest rates 4.76%
Volatility factors 100%
Weighted average expected life 4.90 years
Weighted average fair value per share .74
Expected dividends --
There were no option grants in the year ended December 31, 2002. There
were no option grants in the year ended December 31, 2003.
F-14
THINKPATH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
4. ACCOUNTS RECEIVABLE
2003 2002 2001
----------- ----------- -----------
Accounts receivable $ 1,952,908 $ 2,900,616 $ 6,079,676
Less: Allowance for doubtful accounts (186,847) (236,793) (577,563)
----------- ----------- -----------
1,766,061 2,663,823 5,502,113
=========== =========== ===========
2003 2002 2001
--------- --------- ---------
Allowance for doubtful accounts
Balance, beginning of period $ 236,793 $ 577,563 $ 458,833
Provision 44,359 (292,764) 118,730
Recoveries (94,305) (48,006) --
--------- --------- ---------
Balance, end of year 186,847 236,793 577,563
========= ========= =========
5. PROPERTY AND EQUIPMENT
2003 2002 2001
------------------------------------ ---------- ---------
Accumulated
Cost Amortization Net Net Net
---------- ---------- ---------- ---------- ----------
Furniture and equipment $ 506,404 $ 343,860 $ 162,544 $ 255,118 $ 344,693
Computer equipment
and software 5,347,713 4,333,173 1,014,540 1,593,937 2,322,887
Leasehold improvements 90,988 85,321 5,667 66,324 191,760
---------- ---------- ---------- ---------- ----------
5,945,105 4,762,354 1,182,751 1,915,379 2,859,340
========== ========== ========== ========== ==========
Assets under capital lease 437,414 411,950 25,464 326,365 474,485
========== ========== ========== ========== ==========
Amortization of property and equipment for the year ended December 31,
2003 amounted to $716,781 including amortization of assets under
capital lease of $67,875.
Amortization of property and equipment for the year ended December 31,
2002 amounted to $973,347 including amortization of assets under
capital lease of $110,763.
Amortization for the year ended December 31, 2001 amounted to
$1,504,692 including amortization of assets under capital lease of
$146,217.
F-15
PAGE>
6. INVESTMENT IN NON-RELATED COMPANIES
Investment in non-related companies are represented by the following:
2003 2002 2001
-------- ---------- ----------
Conexys $ 1 $ 1 $667,511
Digital Cement 45,668 45,668 346,415
-------- ---------- ----------
Total $ 45,669 $ 45,669 $1,013,926
======== ========== ==========
i) Conexys
During the year ended December 31, 1999, $383,146 of the Conexys investment
was included as a short-term investment as the company had intended to sell
these shares on the open market. During fiscal 2000, the company acquired
additional shares of Conexys at a cost of approximately $284,365 in
consideration of services rendered and reclassified the total investment as
available for sale.
Effective February 26, 2003, the common shares of Conexys were temporarily
suspended from trading on the Bermuda Stock Exchange as it does not have
adequate sources of funding for its immediate operating requirements and is
currently investigating various options to retain and maximize shareholder
value including the restructuring of its debt and refinancing of the
company.
At December 31, 2002, the company wrote down its investment by $667,510 to
a carrying value of $1. The write down was considered a permanent decline
in value and as such was recorded as a charge to operations.
ii) Digital Cement
During fiscal 2000, the company acquired 1,125,000 shares of Digital
Cement, representing approximately 4% of that company's shares in
consideration of the co- licensing of SecondWave, software developed by
TidalBeach Inc., a wholly-owned subsidiary of Thinkpath Inc. The value of
these shares was determined to be approximately $507,865 based on a offer
to a third party to purchase shares in the company at a price of $0.50 per
share. During 2001, the fair value was adjusted to $346,415 with a charge
of $161,450 to comprehensive income. During 2002, the fair value was
adjusted to $45,668 with a charge of $300,747 to comprehensive income.
During 2003, the company collected a long-term receivable in the amount of
$53,924, owed by Digital Cement.
iii) Lifelogix
During 2000, the company acquired a twenty percent interest in LifeLogix in
consideration of The source code for Secondwave, the software which
supports LifeLogix's human stress and emotions management systems. The
value of these shares was approximately $142,715. This investment has been
accounted for on the cost basis as the company does not have the ability to
exercise significant influence over LifeLogix as the majority ownership of
the investee is concentrated among a small group of shareholders who
operate Lifelogix without regard to the views of the company and the
company has been unable to obtain quarterly information. This investment
was written off in 2001.
iv) Tillyard Management
During the year ended December 31, 2001, the company acquired an interest
of $130,242 in Tillyard Management Inc., a property management company, in
consideration of a real estate management software system developed by
Thinkpath Inc. This investment has been accounted for using the cost
method. Tillyard was formed to utilize and market the real estate
management software. The value of the investment was established based upon
the capitalization for the investee and our share of that capitalization.
As sufficient funding and interest was not forthcoming, the operations of
Tillyard were abandoned and the Company wrote down its investment at
December 31, 2001.
F-16
7. GOODWILL
Goodwill is the excess of cost over the value of assets acquired over
liabilities assumed in the purchase of the subsidiaries. Goodwill has been
allocated to reporting units as follows:
2003 2002 2001
------------------------------------------------- ---------- ---------
Accumulated
Accumulated Impairment
Cost Amortization Losses Net Net Net
---------- ---------- ---------- ---------- ---------- ----------
IT Recruitment $ 448,634 $ 303,337 $ 145,297 $ -- $ -- $ 145,297
(Systemsearch
Consulting Services)
Technical Publications
& Engineering 5,518,858 535,164 1,234,962 3,748,732 3,748,732 4,983,694
(CadCam Inc.)
---------- ---------- ---------- ---------- ---------- ----------
5,967,492 838,501 1,380,259 3,748,732 3,748,732 5,128,991
========== ========== ========== ========== ========== ==========
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets. This statement requires the Company to
evaluate the carrying value of goodwill and intangible assets based on
assumptions and estimates of fair value and future cash flow
information. These assumptions reflect management's best estimates and
may differ from actual results. If different assumptions and estimates
are used, carrying values could be adversely impacted, resulting in
write downs that could adversely affect the Company's earnings.
During the third quarter of 2002, the company completed its
transitional goodwill impairment test as of January 1, 2002 and
determined that no adjustment to the carrying value of goodwill was
needed.
The IT recruitment unit was tested for impairment in the third quarter,
after the annual forecasting process. Due to a decrease in margins and
the loss of key sales personnel, operating profits and cash flows were
lower than expected in the first nine months of 2002. Based on that
trend, the earnings forecast for the next two years was revised. At
September 30, 2002, a goodwill impairment loss of $57,808 was
recognized in the IT recruitment reporting unit. The fair value of that
reporting unit was estimated using the expected present value of future
cash flows.
During the fourth quarter, the IT recruitment unit experienced further
decline, indicating impairment. The fair value of the unit was
estimated using the expected present value of future cash flows. At
December 31, 2002, a further goodwill impairment loss of $87,489 was
recognized.
The Technical Publications and Engineering unit was tested for
impairment in the fourth quarter, as operating profits, cash flows and
forecasts were lower than expected. At December 31, 2002, a goodwill
impairment loss of $1,234,962 was recognized. The fair value of that
reporting unit was estimated using the expected present value of future
cash flows.
At December 31, 2003, the company performed its annual impairment test
for goodwill and determined that no adjustment to the carrying value of
goodwill was needed.
On an ongoing basis, absent any impairment indicators, the company
expects to perform a goodwill impairment test as of the end of the
fourth quarter of every year.
F-17
The following table presents the impact of adopting SFAS No. 142 on net
loss and net loss per share had the standard been in effect for the
year ended December 31, 2001.
2001
-----------
Reported loss from continuing operations (9,482,208)
Adjustments:
Amortization of goodwill 454,908
-----------
Adjusted loss from continuing operations (9,027,300)
===========
Reported loss from continuing operations, before preferred dividends,
(0.63) basic and fully diluted loss per common share
Impact of amortization of goodwill 0.03
-----------
Adjusted loss from continuing operations, before preferred
dividends, basic and fully diluted loss per common share (0.60)
===========
Reported loss from continuing operations after preferred dividends (10,210,948)
Adjustments:
Amortization of goodwill 454,908
-----------
Adjusted loss from continuing operations after preferred dividends (9,756,040)
===========
Reported loss from continuing operations, after preferred dividends,
basic and fully diluted loss per common share (0.68)
Impact of amortization of goodwill 0.03
-----------
Adjusted loss from continuing operations, after preferred (0.65)
dividends, basic and fully diluted loss per common share ===========
In accordance with the requirements of SFAS 121 and SFAS 142, the
impairment of goodwill has resulted in the writedown of the following
amounts;
2002 2001
-------- ---------
Systemsearch Consulting Services 145,297 238,673
CadCam Inc. 1,234,962 --
MicroTech Professionals Inc. -- 2,762,718
International Career Specialists -- --
E-Wink Inc. -- --
--------- ----------
1,380,259 3,001,391
========= ==========
Systemsearch Consulting Services Inc., MicroTech Professionals Inc.,
International Career Specialists and E-Wink Inc. are inactive companies.
F-18
8. OTHER ASSETS
2003 2002 2001
-------- --------- ---------
Deferred development cost $ -- $ -- $ 993,765
Deferred contracts -- -- 250,000
Cash surrender value of life insurance 53,321 49,303 43,945
-------- --------- ---------
53,321 49,303 1,287,710
======== ========= =========
Amortization of other assets for the year ended December 31, 2003
amounted to nil. Amortization for the year ended December 31, 2002
amounted to $317,886 and $510,038 for year ended December 31, 2001.
9. BANK INDEBTEDNESS
i) December 31, 2003
At December 31, 2003, the company had a receivable discount facility in the
amount of $1,130,000 with Morrison Financial Services Limited which allowed
the company to borrow up to 75% of the value of qualified accounts
receivables to a maximum of $3,000,000, bearing interest at 30% per annum.
ii) December 31, 2002
On December 5, 2002, Bank One's security and indebtedness were purchased by
Morrison Financial Services Limited. Bank One accepted a $1,100,000
discount on the payoff of its debt. On July 1, 2002 the company entered
into a Forbearance and Modification Agreement with Bank One which was
subsequently amended on August 1, 2002, August 15, 2002, September 1, 2002,
September 16, 2002, September 30, 2002, October 15, 2002, November 15,
2002, and November 30, 2002. Under the terms of the agreement, the Bank was
entitled to forbearance fees and payment of related legal fees and
expenses. The Bank charged the company approximately $250,000 in
forbearance fees and $18,000 in legal fees.
Morrison Financial Services Limited charged the company a 15% fee or
$165,000 for the discount negotiation with Bank One. The discount amount of
$1,100,000 was recognized by the company as debt forgiveness and the fee of
$165,000 was netted against this amount for total debt forgiveness of
$935,000.
iii) December 31, 2001
At December 31, 2001, the Company had $4,870,000 outstanding with Bank
One. The revolving line of credit provided for a maximum borrowing amount
of $4,760,000 at variable interest rates based on eligible accounts
receivable. At December 31, 2001, the Company had an overdraft of
$110,000. The Company did not have an authorized overdraft facility with
Bank One, however the bank allowed an overdraft of up to $500,000 on a
regular basis for approximately ten weeks.
F-19
10. CONVERTIBLE DEBENTURE
Pursuant to a share purchase agreement dated December 5, 2002, the Company
entered into an agreement (the "12% Senior Secured Convertible Debenture
Agreement"), with a syndicate of investors for debentures of up to
$3,000,000. The first debenture of $800,000 was purchased together with
50,285,714 warrants on closing. The debenture will become due twelve
months from the date of issuance. The investors will have the right to
acquire up to $800,000 worth of the Company's common stock at a price the
lesser of $.0175 or 50% of the average of the three lowest prices on three
separate trading days during the sixty-day trading period prior to
conversion. The warrants are exercisable at any time and in any amount
until December 5, 2009 at a purchase price of $.0175 per share. The
Company is required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock. On June 30, 2003 and July 22,
2003, 12,571,428 of these warrants were repriced from $.0175 to $.00137
per share. On October 14, 2003, 12,571,428 of these warrants were repriced
from $.00137 to $.00075 per share.
On December 18, 2002, the Company entered into a share purchase agreement
with Tazbaz Holdings Limited for the issuance and sale by the Company of a
$100,000 principal amount Convertible Debenture and 5,625,000 warrants to
purchase shares of the Company's common stock. The debenture will become
due twelve months from the date of issuance. Tazbaz Holdings Limited will
have the right to acquire up to $100,000 worth of our common stock at a
price the lesser of $.0175 or 50% of the average of the three lowest
prices on three separate trading days during the sixty-day trading period
prior to conversion. The warrants are exercisable at any time and in any
amount until December 18, 2009 at a purchase price of $.0175 per share.
The Company is required to pay interest to Tazbaz Holdings Limited on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock.
The proceeds of $900,000 received by the company were allocated between
the warrants and the debenture without warrants on a pro rata basis. Paid
in capital has been credited by the value of the warrants in the amount of
$707,050. The value of the beneficial conversion feature was determined to
be $2,898,328 which was credited to paid in capital and charged to
earnings as interest expense in 2002.
During the year ended December 31, 2003, the company sold an additional
$2,075,000 in convertible debentures along with 770,033,457 warrants. The
debentures will become due twelve months from the date of issuance. The
investors will have the right to acquire up to $2,075,000 worth of the
Company's common stock at a price the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during
the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of seven years from
closing at purchase prices ranging from $.0175 to $.00075 per share. The
Company is required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture at
the rate of 12% per annum, payable on each conversion date and maturity
date in cash or shares of common stock.
The proceeds of $2,075,000 received by the company were allocated between
the warrants and the debenture without warrants on a pro rata basis. Paid
in capital has been credited by the value of the warrants in the amount of
$1,150,625.
At December 31, 2003, the value of the beneficial conversion feature on
all issued convertible debentures was determined to be $6,865,928 which
was credited to paid in capital and charged to earnings as interest
expense.
F-20
11. LONG-TERM DEBT
i) December 31, 2003
At December 31, 2003, the company had a loan balance of $259,356 with
Terry Lyons and no principal payments had been made.
ii) December 31, 2002
At December 31, 2002, the Company had a loan balance of $31,397 with the
Business Development Bank of Canada. The loan was assigned to the Company
when it combined with TidalBeach Inc. in November 2000. The loan was
secured by a general security agreement with monthly payments of $950.00
and bears interest at 12.5%.
On December 5, 2002, Morrison Financial Services Limited purchased
additional debt belonging to the Business Development Bank of Canada of
approximately $440,000 in consideration of $100,000.
Morrison Financial Services Limited charged the company a 15% fee or
$45,000 for the discount negotiation with the Business Development Bank of
Canada. The discount amount of $341,467 was recognized by the company as
debt forgiveness and the fee of $45,000 was netted against this amount for
total debt forgiveness of $296,467.
In May 2002, the company secured a loan of $259,356 from an individual,
Terry Lyons which was secured by the company's IRS refund. The company
paid a placement fee of 10% to Mr. Lyons. Although the company received
its IRS refund in July 2002, Mr. Lyons agreed to an extension of the loan
until October 31, 2003. The loan was payable in twelve monthly payments of
$21,613 beginning November 30, 2002 and bears interest at 30% per annum.
This loan is subordinated to Morrison Financial Services Limited and no
principal payments have been made.
iii) December 31, 2001
At December 31, 2001, the Company had $419,079 in subordinated debt
outstanding to the Business Development Bank of Canada.
2003 2002 2001
---------- ---------- ----------
a) Included therein:
A loan with Business Development Bank of Canada ("BDC") secured by a
general security agreement at the bank's floating base rate plus a
variance of 6% per year on the principal outstanding. On July 17, 2003,
the Company settled the loan amount of approximately $38,000 including
accrued interest for a one-time payment of $10,000. The discount amount
of approximately $30,565 was recognized as debt forgiveness and
included in discontinued operations. $ -- $ 31,397 $ 419,079
A loan with T. Lyons payable in monthly
payments of $21,613 which were to begin November 30, 2002 259,356 259,356 --
and bearing interest at 30% per annum. This loan is subordinated to
Morrison Financial Services Limited and no principal payments have been
made
A loan with Bank One payable in 19 remaining monthly payments of
$13,889 plus interest based on prime
This loan was paid in full on March 31, 2002 -- -- 263,889
Various capital leases with various payment terms and
interest rates 33,620 174,191 427,749
---------- ---------- ----------
292,976 464,944 1,110,717
Less: current portion 279,800 380,188 528,285
---------- ---------- ----------
$ 13,176 $ 84,756 $ 582,432
========== ========== ==========
F-21
b) Future principal payments obligations as at December 31, 2003, were as
follows:
2004 279,800
2005 13,176
2006 --
2007 --
2008 --
----------
$ 292,976
==========
c) Interest expense related to long-term debt was $119,339 for the year
ended December 31, 2003. Interest expense related to long-term debt was
$138,240 for the year ended December 31, 2002 ($99,651 in 2001).
12. NOTES PAYABLE
a) On August 1, 2002, the company restructured its note payable to Roger
Walters, reducing the principal from $675,000 to $240,000 in
consideration of the issuance of 1,000,000 shares of its common stock.
Principal payments of $4,000 were to be made monthly starting September
1, 2002 until August 1, 2007. This loan is non-interest bearing.
Also as part of the restructuring, the company agreed to price
protection on the 1,756,655 shares that were issued to Mr. Walters in
January 2002. In the event that the bid price is less than $.27 per
share when Mr. Walters seeks to sell his shares in an open market
transaction, the Company will be obligated to issue additional shares
of unregistered common stock with a value equal to the difference
between $.27 per share and the closing bid price to a floor of $.14 per
share.
The company has accounted for its modification in the terms of its
notes payable as troubled debt restructuring. Accordingly, the company
has recognized a gain on the restructuring of the old debt based upon
the difference between the total carrying value of the original debt
(with any accrued interest) and the total future cash flows of the
restructured debt. The gain on the restructured debt, included in
expenses in the consolidated statement of operations is as follows:
Old debt
Principal balance $ 675,000
Accrued interest --
---------
Carrying value 675,000
Common stock issued (2,631,185 shares at $0.0942) (247,858)
Principle balance of new debt (240,000)
Interest (payable through maturity) --
---------
Gain on restructured debt $ 187,142
=========
All future cash payments under the modified terms will be accounted for
as reductions of note payable and no interest expense will be
recognized for any period between the closing date and the maturity
date.
The note is subordinated to Morrison Financial Services Limited and to
the 12% Senior Secured Convertible Debenture holders. The company has
not made any principal payments to Mr. Walters since December 2002 and
is currently in default of the loan agreement. As a result of the
default, the principal balance bears interest at 12% per annum until
payment is made and the note is due on demand. The entire note payable
has been reclassified as current. The company intends to make payments
as cash becomes available.
F-22
b) On August 1, 2002, the company restructured its note payable to Denise
Dunne-Fushi, reducing the principal from $1,740,536 to $600,000 in
consideration of the issuance of 4,000,000 shares of its common stock.
In addition a prior debt conversion of $225,000 that was to be paid in
capital was forgiven. Principal payments of $10,000 per month were to
begin November 1, 2002 bearing 5% interest until October 1, 2007. In
addition, the company agreed to cover the monthly expense associated
with Ms. Dunne-Fushi's family health benefits until May 2004 and
vehicle lease until August 2004.
The company has accounted for its modification in the terms of its
notes payable as troubled debt restructuring. Accordingly, the company
has recognized a gain on the restructuring of the old debt based upon
the difference between the total carrying value of the original debt
(with any accrued interest) and the total future cash flows of the
restructured debt. The gain on the restructured debt, included in
expenses in the consolidated statement of operations is as follows:
Old debt
Principal balance $ 1,740,536
Accrued interest --
Capital stock payable 225,000
----------
Carrying value 1,965,536
Common stock issued (4,000,000 shares at $0.0942) (376,800)
Principle balance of new debt (600,000)
Interest, insurance and vehicle lease costs (98,987)
----------
Gain on restructured debt $ 889,749
==========
All future cash payments under the modified terms will be accounted for
as reductions of note payable and no interest, insurance or vehicle
expense will be recognized for any period between the closing date and
the maturity date.
The note is secured under a general security agreement but is
subordinated to Morrison Financial Services Limited and to the 12%
Senior Secured Convertible Debenture holders. The company has not made
any principal payments to Ms. Dunne-Fushi since December 2002 and is
currently in default of the loan agreement. As a result of the default,
Ms. Dunne-Fushi has the option of enforcing the security she holds and
therefore the entire note payable has been reclassified as current. The
company intends to make further payments as cash becomes available.
2003 2002 2001
--------- --------- ----------
Note Payable to Roger Walters $ 224,000 $ 224,000 $ 750,000
Note Payable to Denise Dunne 635,936 670,957 1,740,000
--------- --------- ----------
859,936 894,957 2,490,000
Less: current portion 859,936 208,254 150,000
--------- --------- ----------
-- $686,703 $2,340,000
========= ========= ==========
F-23
13. CAPITAL STOCK
a) Authorized
Unlimited Common stock, no par value (100,000,000 at December 31,
1,000,000 2002) Preferred stock, issuable in series, rights to be
determined by the Board of Directors
b) Issued
During January 2001, the Company agreed to issue 250,000 warrants to
acquire shares of the company at $1.50 and to re-price a total of
330,693 options to an exercise price of $1.00. In consideration of the
foregoing, a total of 275,000 shares were issued for an amount of
$275,000 in cash. The terms of the warrants are indicated in note
13(e). The value of the repricing of the warrants and the new warrants
issued have been treated as the part of the allocation of the proceeds
on the issuance of the common stock.
On June 6, 2001, the Company amended its Articles of Incorporation to
increase its authorized common stock from 15,000,000 to 30,000,000.
During the year December 31, 2001, the Company issued 400,000 shares of
its common stock in consideration of $203,000 in cash.
During the year ended December 31, 2001, the Company issued 30,632 shares
of its common stock in consideration of legal services, 300,000 shares of
its common stock in consideration of investment banking services, 596,667
shares to reduce common stock payable of $709,005, and 93,883 shares in
settlement of accounts payable. The shares were valued at the date of
issue based upon the trading price.
On May 24, 2002, the company entered into a loan agreement with Tazbaz
Holdings Inc., an Ontario Corporation. Pursuant to the agreement, Tazbaz
securitized an overdraft position of the company with Bank One in the
amount of $650,000 in consideration of an aggregate of 3,221,126 shares
of its common stock.
On June 24, 2002, the company entered into consulting agreements with
each of Mark Young and George Georgiou pursuant to which Messrs. Young
and Georgiou shall perform consulting services with respect to corporate
and debt restructuring. In consideration for such services the company
issued 2,250,000 and 1,000,000 shares of its common stock to Messrs.
Young and Georgiou, respectively. Pursuant to the agreement the company
registered such shares of common stock under an S-8 registration
statement. The shares were valued at the date of issue based upon the
trading price.
On October 1, 2002, the company entered into consulting agreements with
a group of seven consultants with expertise in restructuring, financing,
legal and management services for one-year terms to assist the company
with its restructuring and refinancing efforts. In consideration for
such services the Company issued warrants to purchase 10,600,000 shares
of our common stock at an exercise price of $0.025 per share.
On October 4, 2002, the company's securities were delisted from The
Nasdaq SmallCap Market, for failure to comply with the minimum bid price
or net tangible assets requirements for continued listing, as set forth
in Nasdaq's Marketplace Rule 4310(c)(4). The company also failed to meet
the initial inclusion requirements under Nasdaq's Marketplace Rule
4310(c)(2)(A) including minimum stockholders' equity of $5 million,
market capitalization of $50 million or net income of $750,000
(excluding extraordinary or non-recurring items) in the most recently
completed fiscal year or in two of the last three most recently
completed fiscal years.
On October 16, 2002, the Company amended its Articles of Incorporation
to increase its authorized common stock from 30,000,000 to 100,000,000.
During the year ended December 31, 2002, the Company issued 588,235
shares of its common stock as payment of an executive bonus in the
amount of $100,000, 8,387,840 shares to reduce common stock payable of
$1,098,955, and 2,393,783 shares in settlement of various accounts
payable and liabilities in the amount of $334,348.
F-24
During the year ended December 31, 2002, the company issued both shares
of its common stock and warrants as payment for a variety of services:
1,230,000 shares in consideration of investor relations and marketing
services in the amount of $79,000; 1,651,495 shares and warrants in
consideration of finance services in the amount of $719,664; 546,531
shares in consideration of restructuring services in the amount of
$45,321; 3,250,000 shares pursuant to the June 24, 2002 consulting
agreements with Mr. Young and Mr. Georgiou in the amount of $520,000;
and 7,200,000 shares on the exercise of warrants pursuant to the October
1, 2002 consulting agreements in the amount of $192,500. The shares were
valued at the date of issue based upon the trading price.
On January 24, 2003, the company amended its Articles of Incorporation
to increase its authorized common stock from 100,000,000 to
800,000,000.
On October 2, 2003, the company amended its Articles of Incorporation to
increase its authorized common stock from 800,000,000 to an unlimited
number of shares.
During the year ended December 31, 2003, the company issued 16,997,854
shares of its common stock in settlement of various accounts payable and
liabilities in the amount of $449,333. This amount includes 12,427,535
shares of common stock, no par value per share, issued and registered on
January 28, 2003 to Declan A. French, the company's Chief Executive
Officer, pursuant to an amendment to his employment agreement. Also
included are 2,423,744 shares of common stock, no par value per share,
issued to an employee as a signing bonus pursuant to his employment
agreement. The company also issued 2,146,575 shares to Vantage Point
Capital, an investor relations firm, in settlement of accounts payable.
During the year ended December 31, 2003, the company issued 10,980,000
shares of its common stock and warrants as payment for a variety of
services in the amount of $226,500. This includes 4,000,000 shares of
common stock, no par value per share, issued to Rainery Barba pursuant
to a consulting agreement with the company dated February 7, 2003 for
provision of legal and advisory services for a period of one year. Also
included, are 4,200,000 shares of common stock, no par value per share
issued to Dailyfinancial.com Inc. pursuant to a consulting agreement
with the company dated February 7, 2003 for the provision of corporate
consulting services in connection with mergers and acquisitions,
corporate finance and other financial services. The company also issued
2,780,000 shares and warrants to various parties in consideration of
financial services rendered.
During the year ended December 31, 2003 the company issued 121,184,669
shares of its common stock to the 12% Senior Secured Convertible
Debenture Holders on the exercise of warrants.
During the year ended December 31, 2003, the company issued
2,521,818,621 shares of its common stock upon the conversion of 12%
Senior Secured Convertible Debentures in the amount of $2,309,712.
c) Liabilities payable in common stock
During the year ended December 31, 2001, the company issued 316,667
shares to reduce a note payable of $625,000 to Denise Dunne related to
the purchase of MicroTech Professionals Inc. The company also issued
280,000 shares in relation to a settlement with an Njoyn employee. The
balance at December 31, 2001, represents $474,297 to Roger Walters in
settlement of a note payable, and $225,000 to Denise Dunne also in
settlement of a note payable.
During the year ended December 31, 2002, the company issued 4,387,840
shares of its common stock to reduce a note payable of $909,297 to Roger
Walters related to the purchase of CadCam Inc.
During the year ended December 31, 2002, the company issued 4,000,000
shares of its common stock to reduce a note payable of $1,140,536 to
Denise Dunne related to the purchase of MicroTech Professionals Inc.
F-25
d) Preferred Stock
Pursuant to a share purchase agreement dated April 18, 2001, the Company
issued 1,105 shares of Series C 7% Cumulative Convertible Preferred
Stock (Series C Preferred Stock). Each share of Series C Preferred Stock
had a stated value of $1,000 per share. The shares of Series C Preferred
Stock were convertible into shares of the Company's common stock at the
option of the holders, at any time after issuance until such shares of
Series C Preferred Stock were manditorily converted or redeemed by the
Company, under certain conditions. The Company was required to register
200% of the shares of common stock issuable upon the conversion of the
1,105 shares of Series C Preferred Stock. In addition, upon the
effective date of such registration statement, the Company was obligated
to issue to the holders of Series C Preferred Stock an aggregate of 500
shares of Series C Preferred Stock in consideration for $500,000, under
certain conditions.
The holders of the shares of Series C Preferred Stock were entitled to
receive preferential dividends in cash, on a quarterly basis commencing
on June 30, 2001, out of any of the Company's funds legally available at
the time of declaration of dividends before any other dividend
distribution or declared and set apart for payment on any shares of the
Company's common stock, or other class of stock presently authorized, at
the rate of 7% simple interest per annum on the stated value per share
plus any accrued but unpaid dividends, when as and if declared. The
Company had the option to pay such dividends in shares of the Company's
common stock to be paid (based on an assumed value of $1,000 per share)
in full shares only, with a cash payment equal to any fractional shares.
The number of shares of the Company's common stock into which the Series
C Preferred stock was convertible into that number of shares of common
stock equal to (i) the sum of (A) the stated value per share and (B) at
the holder's election, accrued and unpaid dividends on such share,
divided by (ii) the "Conversion Price". The "Conversion Price" was the
lesser of (x) 87.5% of the average of the 5 lowest daily volume weighted
average prices of the Company's common stock during the period of 60
consecutive trading days immediately prior the date of the conversion
notice; or (y) 90% of the average of the daily volume weighted average
prices during the period of the 5 trading days prior to the applicable
closing date ($.4798 with respect to the 1,105 shares of Series C 7%
Preferred Stock issued and outstanding). The Conversion Price was
subject to certain floor and time limitations.
During the year ended December 31, 2001, the Company issued 3,864,634
common stock on the conversion of 1,050 Series A preferred stock, 750
Series B preferred stock and 285 Series C preferred stock. The Company
paid dividends of $723,607 on the conversions.
During the year ended December 31, 2002, the Company issued 23,278,448
shares of its common stock on the conversion of 945 Series C preferred
stock. The Company paid dividends of $100,387 on the conversions. As of
December 31, 2003, there were no Series C preferred stock outstanding.
The proceeds received on the issue of Class C preferred shares have been
allocated between the value of detachable warrants issued and the
preferred shares outstanding on the basis of their relative fair values.
Paid in capital has been credited by the value of the warrants and
retained earnings charged for the amount of preferred dividends
effectively paid. The conversion benefit existing at the time of issue
of the preferred Class C shares has been computed and this amount has
been credited to paid in capital for the Class C preferred shares and
charged to retained earnings as dividends on the Class C preferred
shares.
e) Warrants
On December 30, 1999, 475,000 warrants were issued in conjunction with
the private placement of the Series A, preferred stock. They are
exercisable at any time and in any amount until December 30, 2004 at a
purchase price of $3.24 per share. These warrants have been valued at
$1,091,606 based on the Black Scholes model utilizing a volatility rate
of 100% and a risk-less interest rate of 6.33%. This amount has been
treated as a cumulative effect adjustment to retained earnings. For
purposes of earnings per share, this amount has been included with
preferred share dividend in the 2000 financial statements.
In connection with the Initial Public Offering, the underwriters
received 110,000 warrants. They are exercisable at a purchase price of
$8.25 per share until June 1, 2004.
F-26
On April 16, 2000, we issued 50,000 warrants in connection with a
private placement of Series A stock and 300,000 warrants on the issue of
Class B preferred shares. The warrants were issued with a strike price
of $3.71 and expire April 16, 2005. These warrants have been valued at
$939,981 based on the Black Scholes model utilizing a volatility rate of
100% and a risk-less interest rate of 6.18%. This amount has been
treated as a preferred share dividend in the 2000 financial statements.
In connection with the private placement of Series B preferred stock
225,000 warrants were issued. They are exercisable at a purchase price
of $3.58. These warrants have been valued at $533,537 based on the Black
Scholes model utilizing a volatility rate of 100% and a risk-less
interest rate of 6.13%. This amount has been treated as a preferred
share dividend in the 2000 financial statements.
In 2000, in connection with the purchase of the investment in E-Wink
500,000 warrants were issued. They are exercisable at a purchase price
of $3.25 and expire March 6, 2005. These warrants have been valued at
$1,458,700 based on the Black Scholes model utilizing a volatility rate
of 100% and a risk-less interest rate of 6.50%. This amount has been
treated as part of the cost of the E-Wink investment.
In 2000, in connection with the private placement of August 22, 2000,
560,627 warrants were issued. They are exercisable at a purchase price
of $2.46 and expire August 22, 2005. These warrants have been valued at
$1,295,049 based on the Black Scholes model utilizing a volatility rate
of 100% and a risk-less interest rate of 6.13%. This amount has been
treated as an allocation of the proceeds on the common stock issuance.
On January 26, 2001, the Company: (i) repriced warrants to purchase up
to 100,000 shares of its common stock, which warrant was issued to a
certain investor in our April 2000 private placement offering of Series
B 8% Cumulative Preferred Stock, so that such warrant is exercisable at
any time until April 16, 2005 at a new purchase price of $1.00 per
share; (b) repriced warrants to purchase an aggregate of up to 280,693
shares of its common stock, which warrants were issued to the placement
agent, certain financial advisors, and the placement agent's counsel in
our August 2000 private placement offering of units, so that such
warrants are exercisable at any time until August 22, 2005 at a new
purchase price of $1.00 per share; and (c) issued warrants to purchase
up to 250,000 shares of its common stock exercisable at any time and in
any amount until January 26, 2006 at a purchase price of $1.50 per
share. In February 2001, 150,000 of such warrants were exercised by KSH
Investment Group, the placement agent in the Company's August 2000
private placement offering. The exercise prices of the revised and newly
issued warrants are equal to, or in excess of, the market price of our
common stock on the date of such revision or issuance.
Following verbal agreements in December 2000, on January 24, 2001, the
company signed an agreement with The Del Mar Consulting Group, a
California corporation, to represent it in investors' communications and
public relations with existing shareholders, brokers, dealers and other
investment professionals. The company issued a non-refundable retainer
of 400,000 shares to Del Mar and are required to pay $4,000 per month
for on-going consulting services. In addition, Del Mar has a warrant to
purchase 400,000 shares of common stock at $1.00 per share and 100,000
shares at $2.00 which expires January 24, 2005 and which are exercisable
commencing August 1, 2001. As the agreement to issue the non- refundable
retainer was reached in December 2000, the 400,000 shares with a value
of $268,000 has been included in the shares issued for services rendered
and has been included in financing expenses for December 31, 2000. The
commitment to issue the non-refundable deposit was effected in December
2000. The value of the warrants of $216,348 has been included in paid in
capital in January 2001 and the expense was reflected over the six month
period ending August 1, 2001. In April 2001, the warrants were cancelled
and new warrants were issued which are exercisable at $0.55. 200,000 of
the warrants are exercisable commencing April 2001 and the balance are
exercisable commencing August 1, 2001. The value of the change in the
warrants of $29,702 has been included in the paid in capital in April
2001 and the additional expense was amortized in the period ending
August 1, 2001.
During the year ended December 31, 2001, the company issued 22,122
shares to the Business Development Bank of Canada on the exercise of
warrants at $1.00.
During the year ended December 31, 2001, the Company issued 723,436
warrants to the Series C Preferred Stock investors of which 663,484 have
a strike price of $0.54 and expire on April 18, 2005. The balance of
59,952 have a strike price of $0.63 and expire on June 8, 2005. As of
December 31, 2003, all 723,436 warrants issued in connection with the
purchase of the Series C Preferred Stock remain outstanding and none
have been exercised.
F-27
On May 24, 2002, the company entered into an agreement with Tazbaz
Holdings Limited, pursuant to which Tazbaz securitized an overdraft
position of the company with Bank One in the amount of $650,000 until
the Bank's repayment on December 5, 2002. Pursuant to this agreement the
company issued 10,000,000 warrants; 6,000,000 of which are exercisable
at any time and in any amount until November 15, 2009 at a purchase
price of $.08 per share, and 4,000,000 of which are exercisable at any
time and in any amount until November 15, 2009 at a purchase price of
$.04 per share.
On October 1, 2002, the company entered into consulting agreements with
a group of seven consultants with expertise in restructuring, financing,
legal and management services for one-year terms to assist the company
with its restructuring and refinancing efforts. In consideration for
such services the company issued 10,600,000 warrants which are
exercisable at any time and in any amount until September 30, 2003 at a
purchase price of $.025 per share. As of December 31, 2003, 7,200,000
warrants had been exercised with net proceeds of $192,500.
On December 5, 2002, the company issued 50,285,714 warrants to holders
of the 12% Senior Secured Convertible Debentures which are exercisable
at any time and in any amount until December 5, 2009 at a purchase price
of $.0175 per share. On June 30, 2003 and July 22, 2003, 12,571,428 of
these warrants were repriced from $.0175 to $.00137 per share. On
October 14, 2003, 12,571,428 of these warrants were repriced from
$.00137 to $.00075 per share.
Pursuant to the December 18, 2002 convertible debenture, the company
issued 5,625,000 warrants to Tazbaz Holdings Limited, which are
exercisable at any time and in any amount until December 18, 2009 also
at a purchase price of $0.175 per share.
During the year ended December 31, 2003, the company issued 770,033,457
warrants to holders of the 12% Senior Secured Convertible Debentures
which are exercisable at any time and in any amount for seven years from
the date of closing at purchase prices ranging from $.0175 to $.00075
per share. On June 30, 2003, 45,714,286 of these warrants were repriced
from $.0175 to $.00875 per share. October 14, 2003, 314,576,307 of these
warrants were repriced from $.00137 to $.00075 per share.
f) Stock Options
In June 2001, the directors approved the adoption of the 2001 Stock
Option Plan. Each of the plans provides for the issuance of 435,000
options. In October 2002, the directors of the company adopted and the
stockholders approved the adoption of the company's 2002 Stock Option
Plan which provides for the issuance of 6,500,000 options. In October
2003, the directors of the company adopted and the stockholders approved
the adoption of the company's 2003 Stock Option Plan which provides for
the issuance of 20,000,000 options.
The plans are administrated by the Compensation Committee or the Board
of Directors, which determine among other things, those individuals who
shall receive options, the time period during which the options may be
partially or fully exercised, the number of common stock to be issued
upon the exercise of the options and the option exercise price.
The plans are effective for a period of ten years and options may be
granted to officers, directors, consultants, key employees, advisors and
similar parties who provide their skills and expertise to the company.
F-28
Options granted under the plans generally require a three-year vesting
period, and shall be at an exercise price that may not be less than the
fair market value of the common stock on the date of the grant. Options
are non-transferable and if a participant ceases affiliation with the
company by reason of death, permanent disability or retirement at or
after age 65, the option remains exercisable for one year from such
occurrence but not beyond the option's expiration date. Other types of
termination allow the participant 90 days to exercise the option, except
for termination for cause, which results in immediate termination of the
option.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the company become available again for
issuance under the plans, subject to applicable securities regulation.
The plans may be terminated or amended at any time by the Board of
Directors, except that the number of common stock reserved for issuance
upon the exercise of options granted under the plans may not be
increased without the consent of the stockholders of the company.
14. FINANCING EXPENSES
Financing expenses represent the following;
a) Acquisition costs incurred which are not related to a successfully
completed acquisition and the costs incurred on the merger with entities
treated as a pooling of interest.
b) Financing expenses include consulting services for financing and the
cost of options and warrants.
15. RESTRUCTURING COSTS -- DISCONTINUED OPERATIONS
Included in discontinued operations (see note 18) are restructuring costs
as outlined below:
i) December 31, 2002
At the end of December 31, 2001 the Company had a restructuring reserve
balance of $79,118 as a result of certain of the Company's actions to
better align its cost structure with expected revenue growth rates. The
restructuring activities related to the closure of one training location
in London, Ontario resulting in costs to sever 3 employees with
long-term contracts until December 2002 and the lease commitment for the
premises in London Ontario. These long-term contracts do not require the
employees to provide services until the date of involuntary termination.
Other employees at the London location, without contracts, were
terminated during March 2001 and April 2001.
The accrual was relieved throughout fiscal 2002 as severance payments
were completed. Details of the restructuring costs and reserve balance
is as follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance
non/cash December 31,2001 Costs December 31, 2002
-------------------------------------------------------------------------------------------
Severance packages
London-Training Cash 66,518 -- (66,518) --
Lease cancellations
London-Training Cash 12,600 -- (12,600) --
------- ------- ------- -------
Commitments 79,118 -- (79,118) --
======= ======= ======= =======
F-29
ii) December 31, 2001
At the end of December 31, 2000 the Company had a restructuring reserve
balance of $571,339 as a result of certain of the Company's actions to
better align its cost structure with expected revenue growth rates. The
restructuring activities related to the closure of one training
location in London, Ontario resulting in costs to sever 3 employees
with long-term contracts until December 2002 and the lease commitment
for the premises in London Ontario. These long-term contracts do not
require the employees to provide services until the date of involuntary
termination. Other employees at the London location, without contracts,
have been terminated during March 2001 and April 2001. During the three
months ended September 2001, the lease cancellation costs for London
have been reduced by $30,700 and the severance costs for London have
been reduced by $56,000. These amounts represent settlements reached
with the landlord and one of the three employees with long term
contracts. The employee agreed to a reduction in the term of the
contract which resulted in a reduction of the liability of $56,000.
In February 2001, the company started to close down one of its research
and development (R&D) Operations located in Toronto. The company
continued to terminate employees until April 2001. The premises are
subject to a long-term lease and will be utilized for corporate needs
in the future. Restructuring costs include rent for the current period
for the Toronto R&D space. The company moved its operations into this
space at the end of October 2001.
The remaining accrual will be relieved throughout fiscal 2001, as
leases expire and severance payments, some of which are paid on a
monthly basis, are completed. Details of the restructuring costs and
reserve balance is as follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance
non/cash December 31, 2000 Costs December 31, 2001
Severance packages
London-Training Cash 435,173 50,696 (419,351) 66,518
Toronto-R&D Cash 17,640 (25,348) 7,708 --
Lease cancellations
London-Training Cash 118,526 27,159 (133,085) 12,600
Toronto-R&D Cash 439,714 (439,714) --
------- ------- ------- -------
Commitments 571,339 492,221 (984,442) 79,118
======= ======= ======= =======
16. DEFERRED INCOME TAXES AND INCOME TAXES
a) Deferred Income Taxes
The components of the future tax liability classified by source of
temporary differences that gave rise to the benefit are as follows:
2003 2002 2001
--------- --------- ---------
Accounting amortization in excess of tax
amortization $ -- $ 9,875 $ 9,875
Losses available to offset future income
taxes 4,046,200 3,113,829 2,909,873
Share issue costs 115,154 429,785 532,405
Adjustment cash to accrual method -- (148,461) (496,879)
Investment tax credit -- -- --
--------- --------- ---------
4,161,354 3,405,028 2,955,274
Less: Valuation allowance 4,161,354 3,405,028 3,105,654
--------- --------- ---------
-- -- (150,380)
========= ========= =========
F-30
As part of the acquisitions of Cad Cam Inc. and MicroTech Professionals
Inc., there was a change of control which resulted in the subsidiaries
being required to change from the cash method to the accrual method of
accounting for income tax purposes.
b) Current Income Taxes
Current income taxes consist of:
2003 2002 2001
---------- ---------- ---------
Amount calculated at Federal and
Provincial statutory rates $(3,704,770) $(3,416,482) $(3,533,461)
---------- ---------- ---------
Increase (decrease) resulting from:
Permanent differences 2,978,164 3,147,511 1,629,464
Timing differences -- -- (141,868)
Valuation allowance 756,326 299,374 2,895,654
--------- ---------- ---------
3,734,490 3,446,885 4,383,250
--------- ---------- ---------
Current income taxes 29,720 30,403 849,789
========= ========== =========
Issue expenses totaling approximately $1,300,000 may be claimed at the
rate of 20% per year until 2005. To the extent that these expenses
create a loss, the loss is available to be carried forward for seven
years from the year the loss is incurred. The company has not
reflected the benefit of utilizing non-capital losses totaling
approximately $13,600,000 or a capital loss totaling $750,000 in the
future as a deferred tax asset as at December 31, 2003. As at the
completion of the December 31, 2003 financial statements, management
believed it was more likely than not that the results of future
operations would not generate sufficient taxable income to realize the
deferred tax assets.
17. OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the year ended December 31, 2003:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
--------- ---------- --------
Foreign currency translation adjustments (238,168) -- (238,168)
Adjustment to market value -- -- --
--------- --------- ---------
Other comprehensive income (loss) (238,168) -- (238,168)
========= ========== =========
Comprehensive income (loss) for the year ended December 31, 2002:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments (171,283) -- (171,283)
Adjustment to market value (300,747) -- (300,747)
--------- ------- ---------
Other comprehensive income (loss) (472,030) -- (472,030)
========= ======== =========
F-31
Comprehensive income (loss) for the year ended December 31, 2001:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
--------- ------------ ---------
Foreign currency translation adjustments 209,506 - 209,506
Adjustment to market value (230,643) 69,193 (161,450)
--------- ------- ---------
Other comprehensive income (loss) (21,137) 69,193 48,056
========= ======== =========
The foreign currency translation adjustments are not currently adjusted
for income taxes since the company is situated in Canada and the
adjustments relate to the translation of the financial statements from
Canadian dollars into United States dollars done only for the
convenience of the reader.
18. DISCONTINUED OPERATIONS
Effective March 8, 2002, the Company sold its technology division,
Njoyn Software Incorporated to Cognicase Inc., a Canadian company. Net
proceeds after broker fees were $1,350,000 of which the company
received $800,000 in cash and $550,000 worth of unrestricted common
shares on closing. The shares were sold on March 11, 2002 for value of
$524,673. As part of the transaction, Cognicase assumed all of the
staff in the Company's technology division, including the employees of
TidalBeach Inc. The company will not have future revenues from either
its Njoyn or Secondwave products and therefore the technology
operations have been reported as discontinued.
There was no technology revenue for the year ended December 31, 2003,
$59,000 in 2002 and $555,000 in 2001. The net income for the year ended
December 31, 2003 was $13,000 and the net loss for the years ended
December 31, 2002 and 2001 was $280,000 and $730,000. On disposal,
Njoyn had approximately $950,000 in assets consisting primarily of
deferred development charges and approximately $30,000 in liabilities
consisting primarily of capital lease obligations. The gain on disposal
of $400,229 has been reflected in the Income (loss) from discontinued
operations in 2002. No income taxes have been reflected on this
disposition as the sale of the shares gives rise to a capital loss, the
benefit of which, is more likely than not to be realized.
Effective May 1, 2002, the Company signed an agreement with triOS
Training Centres Limited, an Ontario company, for the purchase of
certain assets of the Toronto training division, Thinkpath Training for
a nominal amount of cash and the assumption of all prepaid training
liabilities. As part of the transaction, triOS assumed the Toronto
training staff and is subletting the classroom facilities. The gain on
disposal of $97,350 has been reflected in the Income (loss) from
discontinued operations in 2002.
On November 1, 2002, the Company entered into a series of agreements
with Thinkpath Training LLC, a New York company, for the purchase of
certain assets of the New York training division, Thinkpath Training
for a nominal amount of cash and the assumption of all prepaid training
liabilities. As part of the transaction, Thinkpath Training LLC assumed
the New York training staff, some assets and is subletting the
classroom facilities.
As a result of these two transactions, the company will not have future
revenues from its training division and therefore the operations have
been reported as discontinued.
Training revenue for the years ended December 31, was $160,000 in 2003,
$1,350,000 in 2002 and $3,190,000 in 2001. The net loss from the
training division for the years ended December 31, was $20,000 in 2003,
$360,000 in 2002 and $390,000 in 2001.
Effective June 27, 2003, the Company signed an agreement with
Brainhunter.com Ltd., an Ontario company, for the purchase of certain
assets of the Toronto IT recruitment division for a nominal amount of
cash and the assumption of all employee liabilities. The gain on
disposal of $190,627 has been reflected in the Income (loss) from
discontinued operations in 2003. Of the $190,627, $146,627 was received
in cash on closing with the balance of $44,000 due in a promissory note
payable by June 27, 2004. As a result of this transaction, the Company
will not have future revenues from its IT recruitment division and
therefore the operations have been reported as discontinued.
F-32
IT recruitment revenue for the years ended December 31, was $1,460,000
in 2003, $12,780,000 in 2002 and $15,960,000 in 2001. Net income from
the IT recruitment division for the years ended December 31, was $75,000
in 2003, $505,000 in 2002 and $920,000 in 2001.
The following table presents the revenues, loss from operations and
other components attributable to the discontinued operations of Njoyn
Software Incorporated, TidalBeach Inc., Thinkpath Training Inc. and
Thinkpath Training US Inc. and the IT recruitment division for the years
ending:
2003 2002 2001
----------- ----------- -----------
Revenues 1,622,699 14,187,336 19,701,876
----------- ----------- -----------
Income (loss) from operations
before income taxes
67,390 (72,623) (71,364)
Provision for Income Taxes
(recovery) (445) 63,040 129,869
Gain on disposal of Njoyn Software
-- 400,229 --
Gain on disposal of Training Canada
-- 97,350 --
Gain on disposal of IT Recruitment
division assets 190,627 -- --
----------- ----------- -----------
Income (loss) from discontinued
operations 258,462 361,916 (201,233)
=========== =========== ===========
19. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 2003, the company issued common
shares and warrants for the following:
Services rendered $ 226,500
Accounts payable 449,333
----------
$ 675,833
==========
During the year ended December 31, 2002, the company issued common
shares and warrants for the following;
Services rendered $1,556,485
Liabilities payable in common stock 1,197,942
Accounts payable 434,348
----------
$3,188,775
==========
During the year ended December 31, 2001, the company issued common
shares and warrants for the following;
Services rendered $ 519,994
Liabilities payable in common stock 709,005
Accounts payable 44,125
----------
$1,273,124
==========
F-33
20. SEGMENTED INFORMATION
a) Sales by Geographic Area
2003 2002 2001
---------- ---------- ----------
Canada $ 833,281 $ 50,085 $ 396,438
United States of America 9,984,386 12,233,743 16,827,897
---------- ---------- ----------
10,817,667 12,283,828 17,224,335
========== ========== ==========
b) Net Income (Loss) by Geographic Area
2003 2002 2001
---------- ---------- ----------
Canada $(8,953,301) $(6,503,473) $(4,378,396)
United States of America (80,327) (1,643,179) (5,305,045)
---------- ---------- ----------
(9,033,628) (8,146,652) (9,683,441)
========== ========== ==========
c) Identifiable Assets by Geographic Area
2003 2002 2001
---------- ---------- ----------
Canada $ 1,369,904 $2,644,647 $ 4,995,715
United States of America 6,038,685 6,142,884 12,179,263
---------- ---------- ----------
7,408,589 8,787,531 17,174,978
========== ========== ==========
d) Revenue and Gross Profit by Operating Segment
2003 2002 2001
---------- ---------- ----------
Revenue
Tech Pubs and Engineering $10,379,327 $10,792,373 $13,801,965
IT Documentation 438,340 1,491,455 3,422,370
---------- ---------- ----------
10,817,667 12,283,828 17,224,335
========== ========== ==========
Gross Profit
Tech Pubs and Engineering 3,378,519 3,574,629 4,496,853
IT Documentation 95,034 374,517 1,305,635
---------- ---------- ----------
3,473,553 3,949,146 5,802,488
========== ========== ==========
e) Revenues from Major Customers
The consolidated entity had the following revenues from major
customers:
For the year ended December 31, 2003, one customer had sales of
$1,568,232, representing approximately 15% of total revenue.
For the years ended December 31, 2002 and 2001, no single customer
consisted of more than 10% of the company's revenues.
f) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
F-34
21. EARNINGS PER SHARE
The company has adopted Statement No. 128, Earnings Per Share, which
requires presentation, in the consolidated statement of income, of both
basic and diluted earnings per share.
2003 2002 2001
----------------- ----------------- -----------------
NUMERATOR
Net loss from continuing operations (9,292,090) (8,508,568) (9,482,208)
Preferred stock dividends -- 100,387 728,740
----------------- ----------------- -----------------
Loss available to common stockholders (9,292,090) (8,608,955) (10,210,948)
----------------- ----------------- -----------------
Income (loss) from discontinued operations 258,462 361,916 (201,233)
----------------- ----------------- -----------------
Net loss (9,033,628) (8,247,039) (10,412,181)
================= ================= =================
DENOMINATOR
Weighted Average common stock outstanding 719,412,600 29,000,252 14,943,306
================= ================= =================
Basic and fully diluted loss per common share
from continuing operations (0.01) (0.29) (0.63)
================= ================= =================
Basic and fully diluted loss per common share
after preferred stock dividends (0.01) (0.30) (0.68)
================= ================= =================
Basic and fully diluted loss per common share
after discontinued operations (0.01) (0.28) (0.70)
================= ================= =================
2003 2002 2001
----------- ----------- -----------
Average common stock outstanding
719,412,600 29,000,252 14,943,306
Average common stock issuable -- -- --
----------- ----------- -----------
Average common stock outstanding assuming
dilution 719,412,600 29,000,252 14,943,306
=========== =========== ===========
The outstanding options and warrants as detailed in note 13 were not
included in the computation of the fully diluted earnings per common
share as the effect would be anti-dilutive.
The earnings per share calculation (basic and fully diluted) does not
include any common stock for common stock payable as the effect would be
anti-dilutive.
As indicated in Note 24, the company has issued 2,948,806,496 shares of
its common stock to the convertible debenture holders upon the
conversion of $2,825,000 of debentures and accrued interest.
F-35
22. COMMITMENTS AND CONTINGENCIES
a) Lease Commitments
Minimum payments under operating leases for premises occupied by the
company and its subsidiaries offices, located throughout Ontario, Canada
and the United States, exclusive of most operating costs and realty
taxes, as at December 31, 2003, for the next five years are as follows:
2004 $427,532
2005 338,315
2006 112,343
2007 112,343
2008 37,448
Thereafter --
---------
$1,027,981
==========
The lease commitments do not include two operating leases for premises
that the company is currently sub leasing to the purchasers of the
Canadian and United States training divisions. If the purchasers were to
default on payment or abandon the premises, the company would be liable
for annual payments of $282,096 expiring August 31, 2006 and $150,534
expiring September 30, 2010.
The lease commitments do not include an operating lease for premises
located in the United States that was closed in the fourth quarter of
2002. The company has not made any payments on this lease since the
premises were abandoned. The company does not intend to make any further
payments and the lessor has not tried to enforce payment. The company may
be liable for a lease balance of $44,597 which expires November 30, 2004.
b) On July 29, 2003, the Company entered into a settlement agreement with
Christopher Killarney, a former employee, in the sum of $3,600. This
settlement was pursuant to a claim filed against the Company on June 14,
2002, with the Superior Court of Justice of Ontario, Canada, Court File
No. 02- CV-229385CMS, alleging wrongful dismissal and breach of contract.
Mr. Killarney was seeking $650,000 in damages plus attorney's fees.
On August 7, 2003, the Company entered into a settlement agreement with
AT&T Corp., in the sum of $15,000. This settlement was pursuant to a
claim filed against the Company by AT&T Corp. with the United States
District Court for the Southern District of New York, No. 02 CV 3132,
alleging that the Company breached an agreement to pay AT&T certain
monies in exchange for Internet and Web Hosting services purportedly
performed by AT&T. AT&T was seeking $150,000 in damages plus interest and
attorney's fees.
On October 1, 2003, SITQ National Inc. ("SITQ'), a former landlord, filed
a statement against the Company and its Directors, with the Superior
Court of Justice of Ontario, Canada, Court File No. 03-CV-256327CM3,
demanding payment of rent arrears of approximately $760,000 and alleging
damages for breach of lease for future rent in the sum of $3,250,000. The
lease covered premises located in Ontario, Canada that were abandoned by
the Company in April 2003. The term of the lease does not expire until
December 31, 2010. The rent arrears of $760,000 has been accrued but
management believes there is no merit for the breach of lease for future
rent of $3,250,000 and accordingly has made no provision in the accounts
or in these financial statements with respect to this matter. The Company
intends to defend this claim vigorously.
On October 6, 2003, the Company entered into a settlement agreement with
the Canadian Imperial Bank of Commerce ("CIBC") in the sum of $150,000.
This settlement was pursuant to a claim filed against Thinkpath Training
Inc., a subsidiary of the Company, with the Superior Court of Justice of
Ontario, Canada, Court File No. 41967, demanding payment of damages in
the sum of $150,000 pursuant to an operating account overdraft balance.
The settlement includes payment of the overdraft, accrued interest and
legal fees and will be paid in monthly installments over fifteen months
beginning October 25, 2003. At December 31, 2003 an amount of $141,000
related to the above settlement is included in accounts payable.
c) The Company is party to various lawsuits arising from the normal
course of business and its restructuring activities. No material
provision has been recorded in the accounts for possible losses or
gains. Should any expenditure be incurred by the Company for the
resolution of these lawsuits, they will be charged to the operations of
the year in which such expenditures are incurred.
23. RELATED PARTY TRANSACTIONS
On November 1, 2002, the Company entered into a series of agreements
with Thinkpath Training LLC, a New York company, for the purchase of
certain assets of the New York training division, Thinkpath Training for
a nominal amount of cash and the assumption of all prepaid training
liabilities. As part of the transaction, Thinkpath Training LLC assumed
the New York training staff, some assets and is subletting the classroom
facilities. The owner of Thinkpath Training LLC, is the daughter of the
Company's Chief Executive Officer. As a result of this transaction,
included in the Accounts Receivable at December 31, 2002, is an amount
of approximately $13,351 due to the Company by Thinkpath Training LLC.
As at December 31, 2003, There are no balances owing to or from the
Company by Thinkpath Training LLC.
F-36
24. SUBSEQUENT EVENTS
On March 17, 2004, Johnston & Associates, LLC, a South Carolina
corporation, filed a statement against the Company with the Superior
Court of Justice of Ontario, Canada, Court File No. C-294-04, demanding
payment of $60,000 pursuant to a consulting agreement entered into April
2002. The company intends to defend this claim vigorously.
Subsequent to December 31, 2003, the Company closed an additional
$25,000 in convertible debentures together with 1,428,571 warrants. The
debentures will become due twelve months from the date of issuance. The
investors will have the right to acquire up to $25,000 worth of the
Company's common stock at a price the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during
the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount for a period of 7 years from
the original purchase date at a purchase price of $.0175 per share. The
Company is required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture
at the rate of 12% per annum, payable on each conversion date and
maturity date in cash or shares of common stock.
On March 25, 2004, the Company entered into a share purchase agreement
with Bristol Investment Fund, Ltd. for the issuance and sale by the
Company of debentures of up to $1,000,000. The first debenture of
$350,000 was purchased together with 924,000,000 warrants on closing.
The debenture will become due twelve months from the date of issuance.
Bristol will have the right to acquire up to $350,000 worth of the
Company's common stock at a price the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during
the sixty-day trading period prior to conversion. The warrants are
exercisable at any time and in any amount until March 25, 2011 at a
purchase price of $.000417 per share. The Company is required to pay
interest to Bristol on the aggregate unconverted and outstanding
principal amount of the debenture at the rate of 12% per annum, payable
on each conversion date and maturity date in cash or shares of common
stock.
As of April 13, 2004, the Company has issued 2,948,806,496 shares of its
common stock to the convertible debenture holders upon the
conversion of $2,825,000 of debentures and accrued interest.
25. FINANCIAL INSTRUMENTS
a) Credit Risk Management
The company is exposed to credit risk on the accounts receivable from
its customers. In order to reduce its credit risk, the company has
adopted credit policies which include the analysis of the financial
position of its customers and the regular review of their credit limits.
In some cases, the company requires bank letters of credit or subscribes
to credit insurance.
b) Concentration of Credit Risk
The company does not believe it is subject to any significant
concentration of credit risk. Cash and short-term investments are in
place with major financial institutions and corporations.
c) Interest Risk
The long-term debt bears interest rates that approximate the interest
rates of similar loans. Consequently, the long-term debt risk exposure
is minimal.
d) Fair Value of Financial Instruments
The carrying value of the accounts receivable, bank indebtedness, and
accounts payable on acquisition of subsidiary company approximates the
fair value because of the short-term maturities on these items.
The carrying amount of the long-term assets approximates the fair value
of these assets.
The fair value of the company's long-term debt is estimated on the
quoted market prices for the same or similar debt instruments. The fair
value of the long-term debt approximates the carrying value.
26. COMPARATIVE FIGURES
Certain figures in the December 31, 2002 and 2001 financial statements
have been reclassified to conform with the basis of presentation used at
December 31, 2003.
F-37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no changes in or disagreements with our accountants.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934,
as amended (the "Exchange Act")) as of a date within 90 days prior to the filing
date of Form 10-K filed for the year ended December 31, 2003 (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to us
(including our wholly owned subsidiaries) required to be included in our reports
filed or submitted under the Exchange Act.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in our
internal controls or in other factors that could significantly affect such
controls.
-26-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Our officers and directors, and further information concerning each of
them, are as follows as at the date of this Annual Report on Form 10-K:
Position
Name Age Position with the Company Held Since
Declan A. French 59 Chairman of the Board of 1994
Directors, Chief Executive
Officer and President
Kelly Hankinson 34 Chief Financial Officer 2000
Secretary/Treasurer
Arthur S. Marcus 37 Director 2000
Lloyd MacLean 50 Director 2003
Patrick Power 43 Director Nominee 2004
Set forth below is a biographical description of each of our officers
and directors based on information supplied by each of them:
DECLAN A. FRENCH has served as our Chairman of the Board of
Directors, Chief Executive Officer and President since our inception in February
1994. Prior to founding Thinkpath, Mr. French was President and Chief Executive
Officer of TEC Partners Ltd., an information technology recruiting firm in
Toronto, Canada. Mr. French has a diploma in Psychology and Philosophy from the
University of St. Thomas in Rome, Italy.
KELLY HANKINSON has served as our Chief Financial Officer since May
2000, as a member of our Board of Directors from June 2000 until February 14,
2003 and as Secretary and Treasurer since March 2001. Ms. Hankinson served as
our Vice President, Finance and Administration and Group Controller from
February 1994 to May 2000. Ms. Hankinson has a Masters Degree and a Bachelors
Degree from York University. Ms. Hankinson resigned from the Board of Directors
on February 14, 2003.
ARTHUR S. MARCUS has served on our Board of Directors since April
2000. Mr. Marcus is a partner at the New York law firm of Gersten, Savage,
Kaplowitz, Wolf and Marcus, LLP, our United States securities counsel. Mr.
Marcus joined Gersten, Savage & Kaplowitz, LLP in 1991 and became a partner in
1996. Mr. Marcus specializes in the practice of United States Securities Law and
has been involved in approximately 50 initial public offerings and numerous
mergers and acquisitions. Mr. Marcus received a Juris Doctorate from Benjamin N.
Cardozo School of Law in 1989.
LLOYD MACLEAN has served on our Board of Directors since February 14,
2003. Mr. MacLean served as our Chief Financial Officer and a Director from
September 1997 until May 2000, at which time he departed to pursue other
business opportunities. Mr. MacLean is the sole officer and director of Globe
Capital Corporation. From 1996 to 1997, Mr. MacLean was Vice-President and Chief
Financial Officer of ING Direct Bank of Canada. From 1994 until 1996, he was
Vice-President and Chief Financial Officer of North American Trust, Inc., where
he also served as a Vice President from 1990 until 1994. Mr. MacLean has an MBA
from Harvard University and is a member of the Canadian Institute of Chartered
Accountants.
-27-
PATRICK POWER, director nominee, is Director of Business Development
for Thinkpath Training LLC, a Microsoft partner for Learning Solutions in New
York. In 1997, Mr. Power opened the New York IT recruitment office of Thinkpath
Inc. where he served as Business Development Manager from 1997 until 2001. In
2001 Mr. Power was transferred to Thinkpath's New York training division. In
2002 Thinkpath sold this division, to Thinkpath Training, LLC, a privately held
independent company. Mr. Power has a National Diploma in Civil Engineering
(NDEA) from The Waterford Institute of Technology in Ireland. Mr. Power is the
nephew of Mr. French, our Chief Executive Officer.
COMMITTEES OF THE BOARD OF DIRECTORS
In July 1998, our Board of Directors formalized the creation of a
Compensation Committee, which is currently comprised of Arthur S. Marcus, Lloyd
MacLean and Patrick Power. The Compensation Committee has: (i) full power and
authority to interpret the provisions of, and supervise the administration of,
our 1998 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock Option Plan, 2002
Stock Option Plan, and 2003 Stock Option Plan, as well as any stock option plans
adopted in the future; and (ii) the authority to review all compensation matters
relating to us. The Compensation Committee has not yet formulated compensation
policies for senior management and executive officers. However, it is
anticipated that the Compensation Committee will develop a company-wide program
covering all employees and that the goals of such program will be to attract,
maintain, and motivate our employees. It is further anticipated that one of the
aspects of the program will be to link an employee's compensation to his or her
performance, and that the grant of stock options or other awards related to the
price of the shares of our common stock will be used in order to make an
employee's compensation consistent with shareholders' gains.
It is expected that salaries will be set competitively relative to the
information technology and engineering services and consulting industry and that
individual experience and performance will be considered in setting such
salaries.
In July 1998, our Board of Directors also formalized the creation of an
Audit Committee, which currently consists of Lloyd MacLean and Patrick Power.
The Audit Committee is charged with reviewing the following matters and advising
and consulting with our entire Board of Directors with respect thereto: (i) the
preparation of our annual financial statements in collaboration with our
chartered accountants; (ii) annual review of our financial statements and annual
reports; and (iii) all contracts between us and our officers, directors and
other of our affiliates. The Audit Committee, like most independent committees
of public companies, does not have explicit authority to veto any actions of our
entire Board of Directors relating to the foregoing or other matters; however,
our senior management, recognizing their own fiduciary duty to us and our
shareholders, is committed not to take any action contrary to the recommendation
of the Audit Committee in any matter within the scope of its review.
We have established an Executive committee, comprised of certain of our
executive officers and key employees, which allows for the exchange of
information on industry trends and promotes "best practices" among our business
units. Currently, the Executive Committee consists of Declan A. French, Kelly
Hankinson, and Robert Trick.
During the year ended December 31, 2003, the Board of Directors met four
times on the following dates: April 15, 2003, May 19, 2003, August 14, 2003 and
November 10, 2003 at which all of the directors were present; and acted by
written consent in lieu of a meeting four times on the following dates: January
24, 2003, January 31, 2003, February 14, 2003 and June 26, 2003. During the year
ended December 31, 2003, the Compensation Committee met on January 31, 2003, the
Audit Committee met on April 15, 2003 and the Executive Committee met monthly.
-28-
BOARD AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed our audited financial
statements for the fiscal year ended December 31, 2003 with management and has
received the written disclosures and the letter from Schwartz Levitsky Feldman
llp, our independent auditors, required by Independence Standards Board Standard
No. 1 (Independent Discussions with Audit Committee). The Audit Committee has
also discussed with Schwartz Levitsky Feldman llp our audited financial
statements for the fiscal year ended December 31, 2003, including among other
things the quality of our accounting principles, the methodologies and
accounting principles applied to significant transactions, the underlying
processes and estimates used by management in its financial statements and the
basis for the auditor's conclusions regarding the reasonableness of those
estimates, and the auditor's independence, as well as the other matters required
by Statement on Auditing Standards No. 61 of the Auditing Standards Board of the
American Institute of Certified Public Accountants.
Based on these discussions with Schwartz Levitsky Feldman llp and the
results of the audit of our financial statements, the Audit Committee members
recommended unanimously to the Board of Directors that the audited financial
statements be included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2003. The members of the Audit Committee are Lloyd MacLean
and Patrick Power. Each of the above named Audit Committee members is an
independent director as defined by Rule 4200 (a)(14) of the National Association
of Securities Dealers, Inc.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors has a Compensation Committee comprised of Arthur
S. Marcus, Lloyd MacLean and Patrick Power. Each of Lloyd MacLean and Patrick
Power are independent pursuant to Rule 4200 (a)(14) of the National Association
of Securities Dealers, Inc. Arthur Marcus is a partner in the Law Firm of
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, our outside U.S. securities
counsel.
BOARD COMPENSATION REPORT
EXECUTIVE COMPENSATION POLICY
Our executive compensation policy is designed to attract, motivate,
reward and retain the key executive talent necessary to achieve our business
objectives and contribute to our long-term success. In order to meet these
goals, our compensation policy for our executive officers focuses primarily on
determining appropriate salary levels and providing long-term stock-based
incentives. To a lesser extent, our compensation policy also contemplates
performance-based cash bonuses. Our compensation principles for the Chief
Executive Officer are identical to those of our other executive officers.
CASH COMPENSATION. In determining its recommendations for adjustments
to officers' base salaries for Fiscal 2003, we focused primarily on the scope of
each officer's responsibilities, each officer's contributions to Thinkpath's
success in moving toward its long-term goals during the fiscal year, the
accomplishment of goals set by the officer and approved by the Board for that
year, our assessment of the quality of services rendered by the officer,
comparison with compensation for officers of comparable companies and an
appraisal of our financial position. In certain situations, relating primarily
to the completion of important transactions or developments, we may also pay
cash bonuses, the amount of which will be determined based on the contribution
of the officer and the benefit to Thinkpath of the transaction or development.
EQUITY COMPENSATION. The grant of stock options to executive officers
constitutes an important element of long-term compensation for the executive
officers. The grant of stock options increases management's equity ownership in
us with the goal of ensuring that the interests of management remain closely
-29-
aligned with those of our stockholders. The Board believes that stock options in
Thinkpath provide a direct link between executive compensation and stockholder
value. By attaching vesting requirements, stock options also create an incentive
for executive officers to remain with us for the long term.
CHIEF EXECUTIVE OFFICER COMPENSATION
As indicated above, the factors and criteria upon which the
compensation of Declan French, our Chief Executive Officer, is based are
identical to the criteria used in evaluating the compensation packages of our
other executive officers. The Chief Executive Officer's individual contributions
to us include his leadership role in establishing and retaining a strong
management team, developing and implementing our business plans and attracting
investment capital to Thinkpath. In addition, we have reviewed compensation
levels of chief executive officers at comparable companies within our industry.
RESPECTFULLY SUBMITTED:
BY THE MEMBERS OF THINKPATH'S COMPENSATION COMMITTEE
LLOYD MACLEAN, ARTHUR MARCUS AND PATRICK POWER
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our By-laws provide that we shall indemnify to the fullest extent
permitted by Canadian law our directors and officers (and former officers and
directors). Such indemnification includes all costs and expenses and charges
reasonably incurred in connection with the defense of any civil, criminal or
administrative action or proceeding to which such person is made a party by
reason of being or having been our officer or director if such person was
substantially successful on the merits in his or her defense of the action and
he or she acted honestly and in good faith with a view to our best interests,
and if a criminal or administrative action that is enforced by a monetary
penalty, such person had reasonable grounds to believe his or her conduct was
lawful.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted, our directors, officers
and controlling persons pursuant to the foregoing provisions, or otherwise, we
have been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses, incurred or paid by one of our directors, officers or
controlling persons in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person, we will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933, as amended, and will be governed by the final adjudication of such
issue.
-30-
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by us during each of the last three fiscal years to our Chief
Executive Officer and to each of our executive officers who earned in excess of
$100,000 during the year ended December 31, 2003:
SUMMARY COMPENSATION TABLE
Name and Restricted
Principal Annual Stock Other
Position Year Salary Bonus Awards Options/SARs Compensation
- -------- ---- ------ ----- ------ ------------ -------------
Declan A. French 2003 150,000 100,000(1) -0- -0- -0-
Chief Executive Officer 2002 150,000 100,000(2) -0- -0- -0-
and Chairman of the Board 2001 150,000 100,000(2) -0- -0- -0-
(1) This reflects a cash bonus of $100,000 accrued but not paid as at December
31, 2003 pursuant to Mr. French's employment agreement.
(2) This reflects the dollar value of 3,571,429 shares of common stock issued to
Mr. French in lieu of cash bonuses for the fiscal year 2002 and 588,235
shares for the fiscal year 2001.
EMPLOYMENT AGREEMENTS
We have entered into an employment agreement with Declan A. French
whereby he will serve as Chairman of the Board, Chief Executive Officer and
President for a period of two years commencing on November 28, 2001. Mr. French
shall be paid a base salary of $150,000 and a bonus to be determined by our
EBITDA (earnings before interest, taxes, depreciation and amortization) as a
percentage of annual gross revenue with a minimum guaranteed bonus of $100,000.
The bonus will be paid in cash or shares at our discretion. In January 2003, we
issued an aggregate of 12,427,535 shares of our common stock to Mr. French for
extinguishment of certain indebtedness of the company to Mr. French pursuant to
the amendment to his employment agreement dated January 27, 2003. This included
3,571,429 shares as payment in full for the bonus due for the fiscal year ended
2002. In April 2002, we issued 588,235 shares of its common stock to Mr. French
as payment in full for the bonus due for the fiscal year 2001. In February 2001,
we issued 1,200,000 shares of its common stock as payment in full for the
bonuses due to Mr. French for the fiscal years of 1999 and 2000 pursuant to the
terms of his previous employment agreement. Mr. French continues to serve as
Chairman, Chief Executive Officer and President.
On March 1, 2001, the Company entered into an employment agreement
with Kelly Hankinson whereby she will serve as Chief Financial Officer. Ms.
Hankinson shall be paid an annual salary of $100,000. The employment agreement
is for an indeterminate period of time. In 2003, Ms. Hankinson was paid
approximately $75,000. In the event Ms. Hankinson is terminated for any reason,
including but not limited to, the acquisition of Thinkpath, Ms. Hankinson shall
be entitled to a severance payment equal to one year's salary.
No other officer or director has an employment contract with us.
COMPENSATION OF DIRECTORS
Effective August 28, 2002, each non-employee member of our Board of
Directors shall receive the following annual compensation in consideration for
services rendered as a director: (i) 5 year option to purchase up to 50,000
shares of our common stock exercisable at a price equal to fair market value of
our common stock as of the date of grant; (ii) a cash amount of $4,000 per
annum, paid on a quarterly basis; and, (iii) reimbursement of reasonable and
ordinary expenses in connection with such member's attendance at Board or
committee meetings. To date, we have not made any such payments to its outside
directors.
Directors who receive a salary from the company shall not be entitled to
receive any additional compensation for their services as a member of our Board
of Directors.
Board of Directors and shareholders have adopted the 1998 Stock Option
Plan, 2000 Stock Option Plan, 2001 Stock Option Plan, 2002 Stock Option Plan,
and 2003 Stock Option Plan pursuant to which options have been or may be granted
to officers, directors, consultants, key employees, advisors and similar parties
who provide their skills and expertise to the company.
-31-
OPTIONS, WARRANTS OR RIGHTS
No options were issued to any of our officers or directors during 2002
or 2003.
CONSULTING AGREEMENTS
As a result of an oral agreement between us and Del Mar Consulting
Group entered into in December 2000, on January 24, 2001, we executed a written
agreement pursuant to which Del Mar Consulting Group shall provide investors'
communications and public relations services. Pursuant to the agreement, we
issued a non-refundable retainer of 400,000 shares common stock to Del Mar and
are required to pay $4,000 per month for on-going consulting services. In
addition, we issued Del Mar warrants to purchase 400,000 shares of our common
stock at $1.00 per share and 100,000 shares at $2.00 per share which
collectively expire January 24, 2005 and are exercisable commencing August 1,
2001. As the agreement to issue the non-refundable retainer was reached in
December 2000, the 400,000 shares with a value of $268,000 has been included in
the shares issued for services rendered and has been included in acquisition
costs and financing expenses for December 31, 2000. The value of the warrants of
$216,348 has been included in paid in capital in January 2001 and the expense is
being reflected over the six-month period ending August 1, 2001. In April 2001,
the warrants were cancelled and new warrants were issued which are exercisable
commencing April 2001 and the balance are exercisable commencing August 1, 2001.
The value of the change in the warrants of $29,702 has been included in the paid
in capital in April 2001. On August 22, 2001, we issued 93,883 shares of our
common stock in lieu of fees, for investor communications and public relations
services rendered.
On January 30, 2001, we issued an additional 20,000 shares of our
common stock to International Consulting Group for financial consulting services
rendered pursuant to the December 14, 2000 consulting agreement between Tsunami
Trading Corp. d/b/a Tsunami Financial Communications, International Consulting
Group and us.
On April 1, 2001, we entered into an agreement with
Dailyfinancial.com, Inc., a New York corporation, pursuant to which
Dailyfinancial will provide services with respect to investor communications and
public relations. Dailyfinancial acts a liaison between us and our shareholders,
brokers, broker-dealers and other investment professionals. In lieu of fees, we
issued Dailyfinancial 90,000 shares of our common stock for services to be
rendered for the period between April 1, 2001 to September 30, 2001. On October
3, 2001 we issued an additional 75,000 shares of our common stock in lieu of
fees for services rendered for the period October 1, 2001 to December 31, 2001.
On January 9, 2002, we entered into an agreement with Ogilvie
Rothchild Inc., an Ontario company, to perform public relations and marketing
services. In consideration of these services, we paid Ogilvie Rotchild a
retainer of $16,000 and issued 500,000 shares of our common stock. The agreement
can be cancelled by either party at any time.
On January 15, 2002, we entered into an agreement with David J.
Wodar, a consultant operating in Ontario, to assist with investor communications
and the development of marketing plans and strategies. In consideration of these
services, Mr. Wodar was paid a monthly fee of $6,500 and was issued 480,000
shares of our common stock. The agreement expired on January 15, 2003.
On April 4, 2002, we retained Johnston & Associates, LLC, a
Washington company, to provide strategic governmental relations counseling and
marketing representation before the United Stated Department of Defense, the
United States Congress and targeted companies in connection with marketing our
engineering services related to specific government contracts. Johnston &
Associates will be compensated at a rate of $10,000 per month for twelve months
beginning April 2002 and ending March 31, 2003. This agreement was terminated in
August 2002.
-32-
On June 24, 2002, we company entered into consulting agreements with
each of Mark Young and George Georgiou pursuant to which Messrs. Young and
Georgiou shall perform consulting services with respect to corporate and debt
restructuring. In consideration for such services we issued 2,250,000 and
1,000,000 shares of its common stock to Messrs. Young and Georgiou,
respectively. Pursuant to the agreement we registered such shares of common
stock under an S-8 registration statement. The shares were valued at the date of
issue based upon the trading price.
On October 1, 2002, we entered into consulting agreements with Peter
Benz, Michael Rudolph, Karim Souki, Howard Schraub, George Furla, and Owen
Naccarato to perform consulting services with respect to corporate and debt
restructuring. In consideration for such services we issued warrants to purchase
10,600,000 shares of our common stock at an exercise price of $0.025 per share.
On February 7, 2003, we entered into a consulting agreement with
Rainery Barba who shall perform legal and advisory services for a period of one
year. In consideration for such services we issued and registered 4,000,000
shares of our common stock, no par value per share.
On February 7, 2003, we entered into a consulting agreement with
Dailyfinancial.com Inc., which shall perform corporate consulting services in
connection with mergers and acquisitions, corporate finance and other financial
services. In consideration for such services we issued 4,200,000 shares of our
common stock, no par value per share.
STOCK OPTION PLANS
THE 1998 STOCK OPTION PLAN
The 1998 Stock Option Plan is effective for a period for ten years, expiring in
2008. Options to acquire 435,000 shares of our common stock may be granted to
officers, directors, consultants, key employees, advisors and similar parties
who provide us with their skills and expertise. As of April 13, 2004, we have
issued options to purchase 435,000 shares of our common stock underlying the
1998 Stock Option Plan to certain of our directors, employees and consultants.
As of April 13, 2004, 259,000 of these options have been forfeited.
THE 2000 STOCK OPTION PLAN
The 2000 Stock Option Plan is effective for a period for ten years,
expiring in 2010. Options to acquire 435,000 shares of our common stock may be
granted to officers, directors, consultants, key employees, advisors and similar
parties who provide us with their skills and expertise. As of April 13, 2004, we
have issued options to purchase 435,000 shares of our common stock underlying
the 2000 Stock Option Plan to certain of our directors, employees and
consultants. As of April 13, 2004, 130,000 of these options have been forfeited.
THE 2001 STOCK OPTION PLAN
The 2001 Stock Option Plan is effective for a period for ten years,
expiring in 2011. Options to acquire 1,000,000 shares of our common stock may be
granted to officers, directors, consultants, key employees, advisors and similar
parties who provide us with their skills and expertise. As of April 13, 2004, we
have issued options to purchase 1,000,000 shares of our common stock underlying
the 2001 Stock Option Plan to certain of our directors, employees and
consultants.
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THE 2002 STOCK OPTION PLAN
The 2002 Stock Option Plan is effective for a period for ten years,
expiring in 2012. Options to acquire 6,500,000 shares of our common stock may be
granted to officers, directors, consultants, key employees, advisors and similar
parties who provide us with their skills and expertise. As of April 13, 2004, we
have not issued any options to purchase shares of our common stock underlying
the 2002 Stock Option Plan to certain of our directors, employees and
consultants.
THE 2003 STOCK OPTION PLAN
The 2003 Stock Option Plan is administered by our Compensation
Committee, which will determine among other things, those individuals who shall
receive options, the time period during which the options may be partially or
fully exercised, the number of shares of our common stock issuable upon the
exercise of the options and the option exercise price. As of April 13, 2004, we
have not issued any options to purchase shares of our common stock underlying
the 2002 Stock Option Plan to certain of our directors, employees and
consultants.
The 2003 Stock Option Plan is effective for a period for ten years,
expiring in 2013. Options to acquire 20,000,000 shares of our common stock may
be granted to officers, directors, consultants, key employees, advisors and
similar parties who provide their skills and expertise. The 2003 Stock Option
Plan is designed to enable management to attract and retain qualified and
competent directors, employees, consultants and independent contractors. Options
granted under the 2003 Stock Option Plan may be exercisable for up to ten years,
generally require a minimum three-year vesting period, and shall be at an
exercise price all as determined by our Compensation Committee provided that,
the exercise price of any options may not be less than the fair market value of
the shares of our common stock on the date of the grant. Options are
non-transferable, and are exercisable only by the participant (or by his or her
guardian or legal representative) during his or her lifetime or by his or her
legal representatives following death.
If: (i) we shall not be the surviving entity in any merger,
consolidation or other reorganization (or survives only as a subsidiary of an
entity); (ii) we sell, lease or exchange all or substantially all of our assets
to any other person or entity; (iii) we are to be dissolved and liquidated; (iv)
any person or entity, including a "group" as contemplated by Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended, acquires or gains ownership or
control (including, without limitation, power to vote) of more than 50% of the
outstanding shares of our voting stock (based upon voting power); or (v) as a
result of or in connection with a contested election of directors, the persons
who were our directors before such election shall cease to constitute a majority
of the Board of Directors (each such event is referred to herein as a "Corporate
Change"); no later than (a) ten days after the approval by our shareholders of
such merger, consolidation, reorganization, sale, lease or exchange of assets or
dissolution or such election of directors or (b) 30 days after a change of
control of the type described in clause (iv), our Compensation Committee, acting
in its sole discretion without the consent or approval of any optionee, shall
act to effect 1 or more of the following alternatives, which may vary among
individual optionees and which may vary among options held by any individual
optionee: (1) accelerate the time at which options then outstanding may be
exercised so that such options may be exercised in full for a limited period of
time on or before a specified date (before or after such Corporate Change) fixed
by our Compensation Committee, after which specified date all unexercised
options and all rights of optionees thereunder shall terminate; (2) require the
mandatory surrender by selected optionees of some or all of the outstanding
Options held by such optionees (irrespective of whether such options are then
exercisable under the provisions of the 2003 Stock Option Plan) as of a date
before or after such Corporate Change, specified by our Compensation Committee,
in which event our Compensation Committee shall thereupon cancel such options
and we shall pay to each optionee an certain amount of cash per share; (3) make
such adjustments to options then outstanding as our Compensation Committee deems
appropriate to reflect such Corporate Change (provided, however, that our
Compensation Committee may determine in its sole discretion that no adjustment
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is necessary to options then outstanding); or (4) provide that the number and
class of shares covered by an option theretofore granted shall be adjusted so
that such option shall thereafter cover the number and class of shares or other
securities or property (including, without limitation, cash) to which the
optionee would have been entitled pursuant to the terms of the agreement of
merger, consolidation or sale of assets and dissolution if, immediately prior to
such merger, consolidation or sale of assets, and dissolution, the optionee had
been the holder of record of the number of shares of common stock then covered
by such option.
If a participant ceases affiliation with us by reason of death,
permanent disability or retirement at or after age 65, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other types of termination allow the participant 90 days to
exercise the option, except for termination for cause, which results in
immediate termination of the option.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by us become available again for issuance
under the 2003 Stock Option Plan, subject to applicable securities regulation.
The 2003 Stock Option Plan may be terminated or amended at any time by
our Board of Directors, except that the number of shares of our common stock
reserved for issuance upon the exercise of options granted under the 2003 Stock
Option Plan may not be increased without the consent of our shareholders.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 13, 2004, the names and
ownership of our common stock beneficially owned, directly or indirectly, by:
(i) each person who is a director or executive officer of Thinkpath; (ii) all
directors and executive officers of Thinkpath as a group; and (iii) all holders
of 5% or more of the outstanding shares of the common stock of Thinkpath:
Name and Address of Amount and Nature of Percentage of
Beneficial Owner (1) Beneficial Ownership (2) Shares Outstanding
Declan A. French 2,910,694 (3) *
Kelly Hankinson 180,167 (4) *
Lloyd MacLean -- *
Patrick Power -- *
Arthur S. Marcus 30,500 (5) *
Bristol Investment Fund, Ltd. 168,622,751 (6) 4.9%
Tazbaz Holdings Limited 168,622,751 (6) 4.9%
All Directors and Officers as a
Group (5 persons) (3 - 5) 3,121,361 *%
* Less than 1%.
(1) Except as set forth above, the address of each individual is 201 Westcreek
Boulevard, Brampton, Ontario, L6T 5S6
(2) Based upon information furnished to us by the directors and executive
officers or obtained from our stock transfer books. We have been informed that
these persons hold the sole voting and dispositive power with respect to the
common stock except as noted herein. For purposes of computing "beneficial
ownership" and the percentage of outstanding common stock held by each person or
group of persons named above as of April 13, 2004, or 3,441,280,633 shares, any
security which such person or group of persons has the right to acquire within
60 days after such date is deemed to be outstanding for the purpose of computing
beneficial ownership and the percentage ownership of such person or persons, but
is not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
(3) Includes 101,333 shares of common stock issuable upon the exercise of
options granted to Declan A. French that are currently exercisable or
exercisable within the next 60 days. Also includes 1,647,103 shares of common
stock issued to Declan A. French as a bonus pursuant to his employment
agreement.
(4) Includes 1,333 shares of common stock issuable upon the exercise of options
that are currently exercisable or exercisable within the next 60 days.
(5) Includes 27,500 shares of common stock issuable upon the exercise of options
that are currently exercisable or exercisable within the next 60 days. Excludes
347,902 shares of common stock issued in the name of Gersten, Savage, Kaplowitz,
Wolf & Marcus, LLP, our United States legal counsel, of which Mr. Marcus is a
partner.
(6) Includes 1,007,244,016 shares of common stock issuable upon the exercise of
warrants. Pursuant to the warrant agreement, in no event shall the holder be
permitted to exercise outstanding warrants to the extent that the number of
shares of common stock owned by such holder will be equal to or exceed 4.9% of
the number of shares of common stock then issued and outstanding. Does not
include up to 838,621,265 of warrants that may be exercised upon 60 days prior
notice or shares of common stock issuable upon the conversion of $350,000
principal amount convertible debentures.
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(7) Includes 250,000,000 shares of common stock issuable upon the exercise of
warrants. Pursuant to the warrant agreement, in no event shall the holder be
permitted to exercise outstanding warrants to the extent that the number of
shares of common stock owned by such holder will be equal to or exceed 4.9% of
the number of shares of common stock then issued and outstanding. Does not
include up to 81,377,249 of warrants that may be exercised upon 60 days prior
notice or shares of common stock issuable upon the conversion of $100,000
principal amount convertible debentures.
Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available
outstanding options, options, warrants and for future issuance
warrants and rights rights under equity
compensation plans
Equity compensation plans 1,110,492 1.80 26,889,000
approved by security holders
Equity compensation plans not
approved by security holders -- -- --
Total 1,110,492 1.80 26,889,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In November 1998, we purchased certain assets of Southport Consulting,
Inc. from Michael Carrazza, one of our former directors, for an aggregate of
$250,000.00 in cash and shares of our common stock. In February 2001, Mr.
Carrazza instituted an action against us in the Supreme Court of the State of
New York alleging breach of contract and unjust enrichment and seeking at least
$250,000 in damages. Specifically, Mr. Carrazza claimed that we failed to
deliver cash or stock under an asset purchase agreement, and that he was
entitled to recovery of his attorney's fees. We filed a counterclaim against Mr.
Carrazza, seeking $162,000 in damages, plus punitive damages and attorneys'
fees, on the ground that Mr. Carrazza, as then president and sole stockholder of
Southport Consulting Co., fraudulently induced us into executing the asset
purchase agreement by misrepresenting the value of the assets being purchased.
After the commencement of discovery, Mr. Carrazza filed a motion for summary
judgment, which was granted in his favor in the sum of $264,602. On October 21,
2002, we entered into a settlement agreement with Michael Carrazza, in the sum
of $330,000 to be paid $50,000 on October 31, 2002 and $17,500 per month
thereafter until paid in full, bearing interest at 9% per annum. As of April 13,
2004, we have one remaining payment on such balance.
In September 1999, we completed the acquisition of all the issued and
outstanding capital stock of Cad Cam, Inc. for $2,000,000 in cash, $2,500,000
pursuant to a promissory note and the issuance of $1,500,000 worth of shares of
our common stock to Roger W. Walters, Cad Cam, Inc.'s former president. As part
of the transaction, Mr. Walters was elected to serve on our Board of Directors.
The share purchase agreement was executed on January 1, 1999 and the transaction
was effective as of September 16, 1999. Mr. Walters was not affiliated with us
prior to the acquisition.
On January 1, 2000, our share purchase agreement with Mr. Walters was
amended. Pursuant to the amendment, the parties agreed that $1,000,000 of the
$2,000,000 cash payment to be made to Mr. Walters was to be paid in 4 equal
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quarterly payments of $250,000 commencing on January 1, 2000. In consideration
for accepting the cash payment in installments, the we issued Mr. Walters
options to purchase an aggregate of 100,000 shares of common stock at an
exercise prices ranging from $2.12 to $3.25 per share, which options expired on
December 31, 2000. On March 14, 2001, we repriced such options belonging to Mr.
Walters to an exercise price of $1.00 per share in consideration of debt
forgiveness of $75,000 and restructuring of debt totaling $250,000 on the notes
payable Mr. Walters in connection with our purchase of Cad Cam, Inc. In
addition, the term of such option was extended to April 4, 2004.
In September 2001, the note payable to Mr. Walters was further amended
whereby the principal was reduced from $1,200,000 to $750,000 in consideration
of capital stock of $450,000 or 1,756,655 shares. In addition, all principal
payments were postponed until January 1, 2003, at which time, we were to pay
$12,500 per month plus interest at 4.5% until December 31, 2006. The balance of
$150,000 was to be due on December 31, 2006.
On August 1, 2002, we further restructured our note payable to Mr.
Walters, reducing the principal from $675,000 to $240,000 in consideration of
the issuance of 1,000,000 shares of our common stock. Principal payments of
$4,000 were to be made monthly beginning September 1, 2002 until August 1, 2007.
This loan is non-interest bearing.
In addition, we agreed to price protection on the 1,756,655 shares
that were issued to Mr. Walters in January 2002. In the event that the bid price
is less than $.27 per share when Mr. Walters seeks to sell his shares in an open
market transaction, we will be obligated to issue additional shares of
unregistered common stock with a value equal to the difference between $.27 per
share and the closing bid price to a floor of $.14 per share. Pursuant to this
agreement, we issued Mr. Walters 1,631,185 shares of our common stock in
December 2002.
The price of the shares at the time of conversion of Mr. Walter's
debt on August 1, 2002 was 0.0942, representing approximately $340,800 in debt
forgiveness. In accordance with FAS 15, the gain was measured by the excess of
the carrying amount of the note payable settled less accrued interest, finance
charges or other debt obligations. On December 5, 2002, the shares were issued
to Mr. Walters and we debited liabilities payable in capital stock and credited
capital stock in the amount of $247,858 and debt forgiveness in the amount of
$187,142.
The note is subordinated to Morrison Financial Services Limited and
the 12% Senior Secured Convertible Debenture holders. We have not made any
principal payments to Mr. Walters since December 2002 and are currently in
default of the loan agreement. As a result of the default, the note is due on
demand and the principal balance bears interest at 12% per annum until payment
is made.
On April 1, 2000, we completed the acquisition of all of the issued
and outstanding capital stock of Micro Tech Professionals, Inc., a Massachusetts
corporation in consideration of up to an aggregate of $4,500,000 in a
combination of cash, notes payable and shares of our common stock, subject to
specific performance criteria be met. On April 25, 2000, the we paid to Denise
Dunne-Fushi, the sole shareholder of Micro Tech Professionals, Inc., $2,500,000
of the aggregate of $4,500,000, which was paid in accordance with the following
schedule: (i) $1,250,000 in cash; (ii) the issuance of a $750,000 principal
amount unsecured promissory note; and (iii) the issuance of 133,333 shares of
our common stock. As part of the transaction, we entered into an employment
agreement with Mrs. Dunne-Fushi, the former President of Micro Tech
Professionals, Inc. Such employment agreement was for a term of one year
commencing on April 25, 2000, the effective date of the acquisition, with an
annual salary of $125,000 per year and a bonus of $25,000. Mrs. Dunne-Fushi was
not affiliated with us prior to the acquisition.
On August 1, 2002, we restructured our note payable to Denise
Dunne-Fushi, reducing the principal from $1,740,536 to $600,000 in consideration
of the issuance of 4,000,000 shares of our common stock. In addition a prior
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debt conversion of $225,000 that was to be paid in capital was forgiven.
Principal payments of $10,000 per month were to begin November 1, 2002 bearing
5% interest until October 2, 2007. In addition, we agreed to cover the monthly
expense associated with Ms. Dunne-Fushi's family health benefits and vehicle
lease for a period of four years.
The price of the shares at the time of conversion was 0.0942,
representing approximately $763,763 in debt forgiveness. In accordance with FAS
15, the gain was measured by the excess of the carrying amount of the note
payable settled less accrued interest, benefits and car lease payments as per
the settlement agreement. On December 5, 2002, the shares were issued to Denise
Dunne and we debited liabilities payable in capital stock and credited capital
stock in the amount of $475,787 and debt forgiveness in the amount of $889,749.
The note is secured under a general security agreement but is
subordinated to Morrison Financial Services Limited and the 12% Senior Secured
Convertible Debenture holders. We have not made any principal payments to Ms.
Dunne-Fushi since December 2002 and are currently in default of the loan
agreement. As a result of the default, Ms. Dunne-Fushi has the option of
enforcing the security she holds.
During the fiscal year ended December 31, 2001, we paid to Gersten,
Savage, Kaplowitz, Wolf & Marcus, LLP, our United States legal counsel,
approximately $180,000 and issued 158,635 shares of common stock in
consideration for legal services rendered. Arthur S. Marcus, one of our
directors, is a partner of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP. We
agreed that in the event that our stock traded below $0.10 for ten consecutive
trading days or more, we would be obliged to issue shares for the differential.
During the fiscal year ended December 31, 2002, we paid to Gersten,
Savage, Kaplowitz, Wolf & Marcus, LLP, approximately $113,000 for legal services
rendered. We issued an additional 158,635 shares of common stock pursuant to our
agreement regarding price protection on the share issuance in 2001.
During the fiscal year ended December 31, 2003, we paid to Gersten,
Savage, Kaplowitz, Wolf & Marcus, LLP, approximately $96,000 for legal services
rendered.
During the fiscal year ended December 31, 2002, we issued 100,336
shares of common stock to Katherine Seto Evans, a former director, in
consideration for financial and accounting advisory services rendered.
On November 1, 2002, we entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the sale of certain assets of
our New York training division for a nominal amount of cash and the assumption
of all prepaid training liabilities. As part of the transaction, Thinkpath
Training LLC assumed the New York training staff, some assets and is subletting
the classroom facilities. The owner of Thinkpath Training LLC, is the daughter
of Declan French, our Chief Executive Officer and President. As a result of this
transaction, included in the Accounts Receivable at December 31, 2002, is an
amount of approximately $13,351 due to us by Thinkpath Training LLC. At December
31, 2003, there are no balances owing to or from us by Thinkpath Training LLC.
All future transactions between us and our officers, directors or 5%
shareholders, and their respective affiliates, will be on terms no less
favorable than could be obtained from unaffiliated third parties. In the event
that we enter into future affiliated transactions, they will be approved by our
independent directors who do not have an interest in the transactions and who
have access, at our expense, to our counsel or independent legal counsel.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
INDEPENDENT AUDITORS
The following summarizes the fees paid to Schwartz Levitsky Feldman, LLP for the
years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
- ----------------------------------------------------------
Audit $45,000 $100,000 $90,000
Tax $5,000 $10,000 $10,000
ALL OTHER $15,000 $22,000 $15,500
- ----------------------------------------------------------
TOTAL FEES $65,000 $132,000 $115,500
- ----------------------------------------------------------
Schwartz Levitsky Feldman, LLP were engaged as our independent auditors
in 1999. In connection with the audit of our annual financial statements for the
fiscal years ended December 31, 2003, 2002 and 2001, we paid Schwartz Levitsky
Feldman, LLP, $45,000 $100,000 and $90,000.
Tax fees are primarily attributable to various corporate tax planning
activities and preparation of our tax returns for which we were billed by
Schwartz Levitsky Feldman, LLP, $5,000, $10,000 and $10,000 for the fiscal years
ended December 31, 2003, 2002 and 2001.
All other fees are attributable to consultations on accounting
standards and other miscellaneous services for which we were billed by Schwartz
Levitsky Feldman, LLP, $15,000 $22,000 and $15,500 for the fiscal years ended
December 31, 2003, 2002 and 2001.
The Audit Committee has considered whether provision of the services
described above under "Tax" and "All Other" by Schwartz Levitsky Feldman, LLP,
are compatible with maintaining that firm's independence.
From and after the effective date of the SEC rule requiring Audit
Committee pre-approval of all audit and permissible non-audit services provided
by independent auditors, the Audit Committee has pre-approved all audit and
permissible non-audit services by Schwartz Levitsky Feldman, LLP.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) Financial Statements. See pages F-1 through to F-42.
(b) Reports on Form 8-K.
On March 30, 2004, Thinkpath filed a report on Form 8-K to disclose the
sales of securities in the form of convertible debentures and warrants in the
amount up to $1,000,000 to Bristol Investment Fund, Ltd.
(c) Exhibits.
1.1 Form of Underwriting Agreement(1)
3.1 Bylaws of Thinkpath Inc.(1)
3.2 Articles of Incorporation dated February 11, 1994(1)
3.3 Articles of Amendment dated February 15, 1996(1)
3.4 Articles of Amendment dated April 15, 1998(1)
3.5 Articles of Amendment dated August 6, 1998(1)
3.6 Articles of Amendment dated January 19, 1999(1)
4.2 Form of Underwriters' Warrant(1)
4.3 Specimen Common Share Certificate(1)
10.1 Form of Financial Consulting Agreement(1)
10.2 1998 Stock Option Plan(1)
10.3(a) Lease of Thinkpath Inc.'s headquarters in Toronto, Ontario(1)
10.3(b) Lease of Thinkpath Inc.'s office in New York, New York(1)
10.3(c) Lease of Thinkpath Inc.'s office in Etobicoke, Ontario(1)
10.3(d) Lease of Thinkpath Inc.'s office in Scarborough, Ontario(1)
10.3(e) Lease of Thinkpath Inc.'s office in Ottawa, Ontario(1)
10.4 Employment Agreement between Thinkpath Inc. and Declan French dated
August 1998(1)
10.5 Employment Agreement between Thinkpath Inc. and John A. Irwin dated
May 18, 1998(1)
10.6 Employment Agreement between Thinkpath Inc. and John R. Wilson dated
February 8, 1998(1)
10.7 Employment Agreement between Thinkpath Inc. and Roger Walters dated
September 16, 1999(2)
10.8 Form of consulting agreement for Thinkpath Inc.'s independent
contractors(1)
10.9 Form of services agreement for Thinkpath Inc.'s customers(1)
10.10 Agreement for the acquisition of the capital stock of International
Career Specialists Ltd.(1)
10.11 Agreement for the acquisition of the capital stock of Systemsearch
Consulting Services Inc. and Systems PS Inc.(1)
10.12 Agreement for the acquisition of the capital stock of Cad Cam,
Inc.(2)
10.13 License Agreement between Thinkpath Inc. and International Officer
Centers Corp. dated August 1, 1998(2)
10.13 License Agreement between Thinkpath Inc. and International Officer
Centers Corp. dated August 1, 1998(1)
10.14 Consulting Agreement between Thinkpath Inc. and Robert M. Rubin(1)
10.15 Form of Employment Agreement with Confidentiality Provision(1)
10.16 Asset Purchase Agreement between Thinkpath Inc. and Southport
Consulting Company(1)
10.17 2000 Stock Option Plan(3)
10.18 Share Purchase Agreement between Thinkpath Inc. and MicroTech
Professionals, Inc. dated April 25, 2000(4)
10.19 Non-Binding Letter of Intent between Thinkpath Inc. and Aquila
Holdings Limited dated October 4, 2000(4)
10.20 Share Purchase Agreement between Thinkpath Inc. and TidalBeach Inc.
dated October 31, 2000(5)
10.21 Consulting Agreement between Thinkpath Inc., and Tsunami Trading
Corp. d/b/a Tsunami Financial Communications and International
Consulting Group, Inc. dated December 14, 2000(5)
10.23 Share Purchase Agreement by and among Cognicase Inc. and Thinkpath
nc. dated March 1, 2002 (7)
10.24 Employment Agreement between Thinkpath Inc. and Declan French dated
November 28, 2001 (8)
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10.25 Employment Agreement between Thinkpath Inc. and Laurie Bradley dated
January 29, 2001 (8)
10.26 Employment Agreement between Thinkpath Inc. and Tony French dated
arch 1, 2001 (8)
10.27 Employment Agreement dated between Thinkpath Inc. and Kelly Hankinson
dated March 1, 2001 (8)
10.28 Agreement between Thinkpath Inc. and entrenet(2) Capital Advisors,
LLC dated November 5, 2001.
10.29 Agreement between Thinkpath Inc. and Olgivie Rothchild Inc. dated
January 9, 2002 (8)
10.30 Agreement between Thinkpath Inc. and Dave Wodar dated January 15,
2002 (8)
1.1 Consulting Agreement between Thinkpath Inc. and Mark Young dated June
24, 2002. (9)
10.32 Consulting Agreement between Thinkpath Inc. and George Georgiou dated
June 24, 2002 (9)
10.33 Consulting Agreement between Thinkpath Inc. and Peter Benz dated
October 1, 2002. (10)
10.34 Consulting Agreement between Thinkpath Inc. and George Furla dated
October 1, 2002. (10)
10.35 Consulting Agreement between Thinkpath Inc. and Owen Naccarato dated
October 1, 2002. (10)
10.36 Consulting Agreement between Thinkpath Inc. and Michael Rudolph dated
October 1, 2002. (10)
10.37 Consulting Agreement between Thinkpath Inc. and Karim Souki dated
October 1, 2002. (10)
10.38 Consulting Agreement between Thinkpath Inc. and Howard Schraub dated
October 1, 2002. (10)
10.39 Agreement between Thinkpath Inc. and Declan French dated January 27,
2003. (11)
10.40 Agreement between Thinkpath Inc. and Rainery Barba dated February 12,
2003. (12)
10.41 Agreement between Thinkpath Inc. and Brainhunter.com dated June 27,
2003 (13)
23 Consent of Schwartz, Levitsky, Feldman LLP, Independent Auditors (13)
31.1 Certification of Declan A. French, Chief Executive Officer
31.2 Certification of Kelly L. Hankinson, Chief Financial Officer
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
- ------
(1) Incorporated by reference to Thinkpath Inc.'s Registration Statement on
Form SB-2 filed on May 26, 1999.
(2) Incorporated by reference to Thinkpath Inc.'s report on Form 8-K filed on
October 1, 1999.
(3) Incorporated by reference to Thinkpath Inc.'s Proxy Statement on Form
Def-14A filed on May 22, 2000.
(4) Incorporated by reference to Thinkpath Inc.'s Registration Statement on
Form SB-2 filed on April 25, 2000.
(5) Incorporated by reference to Thinkpath Inc.'s Registration Statement on
Form SB-2 filed on January 12, 2001.
(6) Incorporated by reference to Thinkpath Inc.'s Proxy Statement on Form
Def-14A filed on May 21, 2001.
(7) Incorporated by reference to Thinkpath Inc.'s report on Form 8-K filed on
March 21, 2002.
(8) Incorporated by reference to Thinkpath Inc., report on Form 10-KSB filed on
April April 15, 2002
(9) Incorporated by reference to Thinkpath Inc.'s Registration Statement on
Form S-8 filed on June 28, 2002
(10) Incorporated by reference to Thinkpath Inc.'s Registration Statement on
Form S-8 filed on December 11, 2002
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(11) Incorporated by reference to Thinkpath Inc., Registration Statement on Form
S-8 filed on January 28, 2003.
(12) Incorporated by reference to Thinkpath Inc., Registration Statement on Form
S-8 filed on February 14, 2003.
(13) Included herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THINKPATH INC.
By: /s/ DECLAN A. FRENCH
-------------------------------------
Declan A. French
Chairman and Chief Executive Officer
Dated: April 13, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/S/ DECLAN A. FRENCH
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Declan A. French (Principal Executive Officer)
Chairman and Chief Executive Officer
April 13, 2004
/S/ KELLY HANKINSON
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Kelly Hankinson (Principal Accounting Officer)
Chief Financial Officer
April 13, 2004
/S/ ARTHUR S. MARCUS
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Arthur S. Marcus
Director
April 13, 2004
/S/ LLOYD MACLEAN
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Lloyd MacLean
Director
April 13, 2004
/S/ PATRICK POWER
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Patrick Power
Director Nominee
April 13, 2004
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