UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
---------------
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: MAY 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 001-15503
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WORKSTREAM INC.
(Exact name of Registrant as specified in its charter)
CANADA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
495 MARCH ROAD, SUITE 300
OTTAWA, ONTARIO K2K 3G1
(Address of principal executive offices) (zip code)
(613) 270-0619
(Registrant's telephone number,
including area code)
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
COMMON SHARES, NO PAR BOSTON STOCK EXCHANGE
VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, NO PAR VALUE
---------------------------
(TITLE OF CLASS)
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 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 the 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./X/
The aggregate market value of the outstanding voting and non-voting
common equity held by non-affiliates of the registrant, computed by reference to
the price at which the common equity was last sold as of the last business day
of the registrant's most recently completed second fiscal quarter, was
$24,023,659. Common shares held by each executive officer and director and by
each person who owned 10% or more of the outstanding common shares as of such
date have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The total number of common shares, no par value per share, outstanding
on August 18, 2003 was 21,684,904, excluding 654,204 escrow shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
WORKSTREAM INC.
FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business ..................................................................................... 2
2. Properties ................................................................................... 14
3. Legal Proceedings ............................................................................ 15
4. Submission of Matters to a Vote of Security Holders .......................................... 15
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters ........................ 16
6. Selected Financial Data ...................................................................... 25
7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 26
7A. Quantitative and Qualitative Disclosures About Market Risk ................................... 48
8. Financial Statements and Supplementary Data .................................................. 49
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......... 85
9A. Control and Procedures ....................................................................... 86
PART III
10. Directors and Executive Officers of the Registrant ........................................... 87
11. Executive Compensation ....................................................................... 87
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .......................................................................... 87
13. Certain Relationships and Related Transactions ............................................... 87
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................. 88
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE," AND WORDS OF SIMILAR IMPORT WHICH EXPRESS
MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS REGARDING OUR FUTURE
PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE HAVE NO OBLIGATION TO
UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS AND FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE SET FORTH UNDER "RISK FACTORS" WHICH BEGINS ON PAGE 39
ON THIS FORM 10-K AND OTHER FACTORS AND UNCERTAINTIES CONTAINED ELSEWHERE IN
THIS FORM 10-K AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We were incorporated on May 24, 1996 under the Canada Business
Corporation Act under the name CareerBridge Corporation. In February 1999, we
changed our name to E-Cruiter.com Inc. and in November 2001 we changed our name
to Workstream Inc. (the "Company"). In 1997, we began operating an online
regional job board, on which applicants posted their resumes and employers
posted available positions, focused on the high-technology industry. In February
1999, we changed our business focus from the job board business to providing
on-line recruitment services. In the twelve months ended May 31, 2001 ("fiscal
2001"), we expanded our focus by guiding the Company into being a leading
provider of Web-enabled tools and professional services for Human Capital
Management ("HCM"). We offer a diversified suite of high-tech and high-touch
services to address the full lifecycle of the employer/employee relationship and
seek to ensure more effective management of corporate assets via automation and
outsourcing. Our HCM technology backbone enables companies to streamline the
management of enterprise human capital processes, including recruitment,
assessment, deployment, development, retention and career transitions. We offer
a full-range of HCM products and services.
ACQUISITIONS
We continually focus on increasing our market share in the HCM market.
Our business strategy has included a strong emphasis on acquiring companies
offering services similar or complementary to ours. The HCM market has
experienced significant consolidation in the last several years as companies
attempt to increase their service offerings and broaden their revenue bases to
achieve revenue growth and profitability. We have actively pursued acquisition
opportunities as part of our overall strategy and completed three acquisitions
during the twelve months ended May 31, 2003 ("fiscal 2003") and six acquisitions
during the twelve months ended May 31, 2002 ("fiscal 2002") that met our
criteria.
FISCAL 2003 ACQUISITIONS
ICARIAN, INC.
On June 28, 2002, we acquired via merger 100% of the outstanding shares
of Icarian Inc., a California based company. As consideration for the sale, we
issued to the shareholders of Icarian 2,800,000 of our common shares valued at
approximately $9.9 million. Icarian is a provider of Web-enabled solutions and
professional services. Icarian's Recruitment Management Suite is Web-native
software, offered on an Application Service Provider ("ASP") basis, with a user
interface that provides functionality for management of the hiring process.
Icarian's Connectivity, Interactive Job Site and Reporting modules offer human
resource professionals capabilities to integrate with human resource management
systems, to manage candidates' applications and job campaigns, and to produce
reporting for both compliance and cost reporting for a corporation's employee
acquisition process. Icarian had revenues of approximately $5.7 million and it
recorded a net loss of approximately $25.8 million for the twelve months ended
December 31, 2001. We recorded approximately $8.4 million in intangible assets
and $5.4 million in goodwill from the acquisition.
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PURECARBON, INC.
On July 1, 2002, we acquired certain assets and liabilities of
PureCarbon, Inc., a California based company. As consideration for the sale, we
issued to the shareholders of PureCarbon 263,158 of our common shares valued at
$1,000,000. We recorded approximately $0.8 million in intangible assets related
to the acquisition. Under the acquisition agreement, additional common shares
valued at $500,000 may be issued if PureCarbon achieves certain revenue targets
for the twelve months ending June 30, 2003. Management has determined that the
revenue targets were not met, and believes that those contingently issuable
common shares will not be issued. As required under the purchase agreement, an
audit confirming whether the revenue targets were met is currently being
performed. PureCarbon is the provider of award-winning Internet software
(JobPlanet) designed to integrate easily with behind-the-scenes human resources
and recruiting technology. JobPlanet is built on a technology platform that
enables clients to build and implement an employment web site that mirrors the
client's corporate brand image. We believe this front-end platform fits well
with our back-end Hiring Management Systems to create a compelling end-to-end
solution, that our corporate clients desire.
XYLO, INC.
On September 13, 2002, we acquired via merger 100% of the outstanding
shares of Xylo, Inc., a Washington based provider of Web-based Employee
Retention Management ("ERM") solutions focused on providing customized retention
solutions to Fortune 500 companies. Xylo's work/life customizable software
offers employee programs in one externally-hosted platform, giving clients
control over content and applications. As consideration for the purchase, we
issued to the shareholders of Xylo 702,469 common shares valued at approximately
$1.7 million. We recorded approximately $1.3 million in intangible assets and
$0.7 million in goodwill from the acquisition. Pursuant to the acquisition
agreement with Xylo, an additional 330,579 of our common shares may be released
from escrow, subject to achievement of certain revenue targets for the twelve
month period ending September 30, 2003. The release from escrow of any
additional common shares will result in additional goodwill being recorded.
FISCAL 2002 ACQUISITIONS
During fiscal 2002, we significantly expanded our operations through
the completion of six acquisitions of companies that offered services that
allowed us to provide a full spectrum of HCM solutions.
PAULA ALLEN HOLDINGS, INC.
In July 2001, we acquired 100% of the outstanding shares of Paula Allen
Holdings, Inc. and its subsidiaries, doing business as Allen And Associates, in
exchange for our common shares. Headquartered in Orlando, Florida, Paula Allen
Holdings is focused on providing career transition, job placement and recruiting
services within the information technology, engineering, finance and marketing
areas.
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OMNIPARTNERS, INC.
In July 2001, we acquired 100% of the outstanding shares of
OMNIpartners, Inc. and its affiliates in exchange for Workstream common shares.
OMNIpartners was founded in 1990 and developed the concept of recruitment
research at an hourly rate, as a lower-cost recruitment alternative.
OMNIpartners offers a range of executive and professional recruitment research
services to a wide array of industries including retail, hotel, restaurant,
gaming, food service, telecommunications, insurance, distribution,
manufacturing, financial services and information technology.
REZLOGIC, INC.
In August 2001, we acquired via merger 100% of the outstanding shares
of RezLogic, Inc. in exchange for Workstream common shares. RezLogic provides
recruiting process automation, offering Web-based recruiting process automation
solutions for employers, staffing agencies, executive recruiters, contract
placement firms and independent recruiters. The acquisition of RezLogic provided
us with an established U.S. sales channel for our applicant tracking systems, or
ATS platform, and enabled us to integrate additional functionality into existing
platforms, such as Equal Employment Opportunity ("EEO") tracking. We believe
that this reporting capability is essential to achieve a significant penetration
of the U.S. market.
RESUMEXPRESS
In August 2001, we acquired the technology and assets of Gonyea Career
Marketing Inc., known as ResumeXpress, in consideration for a certain amount of
cash. ResumeXpress enables job seekers to distribute their resumes to thousands
of employers, recruiters and online resume database services across the U.S. and
Canada. Resumes are distributed to those parties whose keywords are matched to
the keywords found in each job seeker's resume. Using the ResumeXpress Web site,
job seekers can post their resumes in a matter of minutes, and their resumes are
posted for a six-month period on a personal resume Web page with a unique
uniform resource locator, or URL.
6FIGUREJOBS.COM, INC.
In October 2001, we acquired via merger 100% of the outstanding shares
of 6FigureJobs.com, Inc. in exchange for Workstream common shares.
6FigureJobs.com provides career management, recruitment advertising, resume
database and targeted research services for senior-level executives, employers
and executive recruiters. 6FigureJobs.com's online candidate recruitment and
placement technology enables employers to search for candidates for employment
in real time, reducing time to hire.
TECH ENGINE, INC.
In October 2001, we acquired the technology and assets of Tech Engine,
Inc. in exchange for the assumption of a promissory note. Tech Engine's software
enables us to more quickly develop career sites and job boards.
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Some of these acquisitions were also made in consideration of
additional common shares that were held in escrow to be released upon
achievement of certain profit and/or revenue targets. As at May 31, 2003, only
323,625 common shares related to these acquisitions completed in fiscal 2002
were held in escrow. These shares are related to the 6FigureJobs.com acquisition
which management believes will not be released from escrow because management
believes that the applicable revenue and profit targets were not achieved.
However, pursuant to the request of the representative of the former
shareholders of 6FigureJobs.com, an accounting firm was hired to review whether
the revenue and profit targets were achieved. The accounting firm determined
that one of the profit targets was achieved which would result in 64,725 of the
323,625 common shares held in escrow being released to the former
6FigureJobs.com shareholders. We are in the process of disputing the accounting
firm's determination and believe that none of the profit or revenue targets were
achieved. The shares are currently being held in escrow while our dispute is
ongoing.
COMPANY SEGMENTS
The Company has two distinct operating segments, which are the
Enterprise Recruiting Services and Career Transition Services segments. The
Enterprise Recruiting Services segment consists of automated talent acquisition
systems, recruitment research, online exchange, and employee management and
retention systems services. The Career Transition Services segment consists of
outplacement services.
INDUSTRY BACKGROUND
Our market includes any organization needing to hire employees,
especially, but not exclusively, companies seeking information technology skills
and expertise. We believe that several factors require companies to hire
additional personnel and therefore increase demand for our services:
o recovering economy in the United States;
o increased employee turnover; and
o the acute shortage of knowledge workers in North America.
We believe many organizations continue to look to the Internet to
increase the effectiveness of their recruiting processes and attract the quality
candidates that are strategic to their businesses. The Internet provides for
speed of communication as well as a medium for the development of tools to
facilitate a more efficient recruitment process. We believe that many
organizations are beginning to overhaul their human resources information
systems to take advantage of both new technologies and new recruiting concepts
and we anticipate that recruitment spending will continue to shift away from the
client-server human resources services to Web-based media hiring processes
because of their lower cost and ease of implementation. Moreover, we believe
that most of the advantages offered by Internet technology have not been
implemented to date in the recruiting market.
We believe that our suite of workforce management solutions directly
addresses the major challenges facing employers, mainly, time-to-hire,
quality-of-hire and cost-of-hire.
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STRATEGY
Our objective is to become the leading supplier of comprehensive
adaptive workforce solutions in North America. Our services can be used by any
size organization, and therefore we believe that our products can address the
needs of the entire human capital market. We have clients who employ more than
10,000 employees using our E-Cruiter Enterprise solution. We are able to provide
corporate outplacement and recruitment research services to companies of any
size. We believe that our solutions provide a comprehensive service for
corporate human resources in managing workforce turnover. Our services include:
o talent acquisition services ranging from job posting outreach to job
boards;
o hosting a corporate career site;
o automating and monitoring the recruitment process and the provision of
links to external service providers, such as companies that specialize
in skill testing or personality profiling;
o talent utilization services with job posting to internal company
intranets;
o talent retention services; and
o talent separation services that encompass pre-termination planning,
individual coaching, opportunity research and job marketing campaign
development.
We believe we have developed a strategy that will achieve revenue
growth in most economic conditions and we are focused on achieving profitability
through a combination of organic revenue growth, cost management and strategic
acquisitions. Key elements of our strategy for business development are as
follows:
o ENHANCING AND WIDENING OUR SERVICE PORTFOLIO. We continue to integrate
our recruitment research and corporate outplacement services within our
technology platform and sales and service operations, and continue to
expand our services to provide a more complete workforce management
process through further product development and strategic acquisitions.
We believe that this will give us the ability to grow revenues with
each client, acquire new clients with different requirements, and
further develop revenue stability in almost any market condition.
o PURSUING STRATEGIC ACQUISITIONS. From time-to-time we will evaluate
acquisition and investment opportunities in complementary businesses,
products and/or technologies. Our objective is to increase our revenue
growth, add new services or new technologies for our existing client
base and penetrate new markets.
o CONTINUED EXPANSION INTO THE U.S. MARKET. We initially expanded our
business outside of Canada in fiscal 2002 by penetrating the U.S.
market through our acquisitions and by providing additional products
and services. We intend to continue to penetrate the U.S. market by
pursuing acquisitions of additional U.S.-based companies with
complementary services and indirect and direct sales operations.
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o BUILDING A WIDER INDIRECT SALES CHANNEL FOR DISTRIBUTION OF OUR
PRODUCTS AND SERVICES. We plan to pursue reseller agreements for all of
our services with human capital solution providers and recruiting
companies.
o EXPANDING DIRECT SALES WITH VERTICAL FOCUS. We will continue to
emphasize our direct sales efforts into targeted vertical industries,
especially those with good current economic outlooks including
healthcare, pharmaceuticals and biotech, food services and some
manufacturing sectors.
o MAINTAINING TECHNOLOGICAL LEADERSHIP. We plan to remain at the
forefront of Web-based human capital solutions by developing or
licensing the latest available technologies.
We designed our services to take advantage of the Internet and offer
our clients a comprehensive recruitment service. By linking organizations'
recruiting efforts with on-line sources of applicants such as job boards and
news groups and by allowing clients to download resumes from paper-based sources
into their applicant database, we believe our services allow organizations of
every size to significantly improve their recruiting and hiring cycles. Our
services can be accessed with any standard Web browser and require no additional
software or hardware deployment by clients.
We believe our clients use our services to significantly reduce their
time-to-hire, provide streamlined access to qualified candidates, lower
opportunity cost losses and significantly reduce costs. Based on past
experience, we believe that hiring cycles of organizations employing traditional
recruiting methods can extend beyond 25 to 50 days. With the utilization of
technology, candidates are often hired within five to ten business days.
Therefore, we believe that organizations that employ Internet-based recruiting
processes will be in a better position to compete effectively for good
candidates.
PRINCIPAL SERVICES AND OPERATIONS
ENTERPRISE RECRUITING SERVICES
Our Enterprise Recruiting Services segment consists of automated talent
acquisition systems, recruitment research, online exchange, and employee
management and retention systems services.
In fiscal 2003 and fiscal 2002, approximately 60% and 44%,
respectively, of our revenue was generated by our Enterprise Recruiting
Services. In fiscal 2001 and prior years we only provided online recruiting
services, and therefore such services represented 100% of our revenue.
AUTOMATED TALENT ACQUISITION SYSTEMS
We provide Automated Talent Acquisition services through E-Cruiter,
Icarian, JobPlanet and RezKeeper software. These applications offer automated
solutions through the Internet to help companies manage their entire recruitment
process including creating job requisitions, advertising job opportunities,
tracking candidates, screening the applicants, making an offer, and processing
the hiring information. In addition, these applications provide human resources
professionals with reporting tools to prepare compliance reporting information
such as Equal Employment Opportunity, as well as other reporting tools to
evaluate the staffing process. The applications also allow our clients to design
customized career web sites that are maintained by us and reside in our data
center.
7
Our different applications, E-Cruiter, E-Cruiter Lite, Icarian,
JobPlanet and Rezkeeper, have been integrated into a suite of services in order
to offer a full automated talent acquisition solution. Each application has some
special features which help complement the total suite of services. For example,
E-Cruiter and E-Cruiter Lite software, provide a complete recruitment process
solution for small and medium size customers for career site hosting and resume
and candidate management. They further allow for the seamless posting to the
major job boards while creating only one requisition. The E-Cruiter applications
are integrated with our clients' Microsoft Outlook Calendar and Global Address
Book for a more integrated approach to recruiting. Icarian software, which we
acquired in June 2002, provides Web-enabled solutions and professional services,
supporting larger clients with thousands of users, employees and job seekers.
Icarian's Human Resources Management System Connectivity, Interactive Job Site
and Reporting modules offer human resource professionals capabilities to
integrate with human resource management systems such as payroll and benefits.
JobPlanet software, an award-winning Internet software, acquired through our
acquisition of PureCarbon, is designed to integrate easily with
behind-the-scenes human resources and recruiting technology. JobPlanet software
enables clients to build and implement an employment web site that mirrors the
client's corporate brand image. JobPlanet software is integrated with the
Icarian software to provide a full automated talent acquisition solution.
RezKeeper software, acquired through our acquisition of Rezlogic, allows us to
provide an online recruiting suite of products and services to different markets
such as staffing agencies, executive recruiters, contingent placement firms and
independent recruiters.
Through our different applications, we provide an Automated Talent
Acquisition System to our corporate clients that require comprehensive
recruiting management services. Our services include the posting of resumes as
well as the following features:
o A corporate career site, which is a job site hosted on our servers and
linked to a client's corporate Web site. This recruiting portal is
linked to job posting and management services within our applications;
o Resume processing tools which enable clients to rate, score, screen,
search, organize and manage resumes submitted by job seekers;
o Applicant communication tools, including our proprietary e-mail system
which automatically keeps records of the electronic communication
associated with each job opening and generates automatic messages to
job seekers; and
o A suite of multi-user workflow features which allows for collaborative
hiring between human resources personnel and hiring managers within the
same organization.
Our Automated Talent Acquisition Systems are Web-outsourced
applications. The cost benefit to organizations of Web-outsourcing is that all
software and hardware infrastructure is physically located at the service
provider's facility, with clients only requiring standard Web browsers on their
employees' workstations. Therefore, because our clients are not required to
8
make a significant initial investment, and our services do not require
additional software or hardware, our services are more economical to use and
easier to implement.
Our Automated Talent Acquisition Systems suite is a complete recruiting
portal solution that allows companies of all sizes to manage the entire hiring
process on-line. Using our applications, clients have a central,
multi-functional hiring platform for all recruiting activities, including
posting to their external career site, intranet career site, job boards, news
groups and agency suppliers. We license our applications to our clients together
with one or more concurrent user licenses. Each concurrent license enables
another user within the organization to access the service. One concurrent
license is sufficient for small organizations that have only a few individuals
actively recruiting. More than one concurrent license provides for additional
simultaneous users and permits clients to take full advantage of our multi-user
functionality.
Our Automated Talent Acquisitions Systems allow organizations to post
jobs to multiple Internet boards through a posting manager function. Clients
write a job requisition only once, and the job requisition is ready to be
advertised on numerous Internet job boards, newsgroups and the client's own
corporate Web site. Our write-once, post-to-many capability saves time in
re-writing job requisitions for specific boards and in making arrangements with
numerous job boards. We currently post job requisitions to several job boards
including, Hotjobs.ca, Workopolis, Monster.ca, Careerbuilder, JobBoom, and
Jobviber. We continue to add new job boards to our service so that our clients
can post job requisitions to national, regional and skill-specific boards that
assist them in targeting and attracting the right candidates for the posted
positions.
Our applications allow clients to quickly establish a high quality
company career site. We believe that career sites maximize the value of our
recruiting portal solution and are the most strategic way to help clients
attract quality candidates. In particular, our clients can purchase career sites
from us that include functionality, such as job seeker agent, a capability that
notifies registered candidates of employment opportunities when they are posted
to the career site, and search, a capability that allows job seekers to search
the jobs posted on the career site for positions of interest to them. Our
clients can track the effectiveness of their career site by reviewing statistics
on the volume and source of job seeker traffic received.
Our Automated Talent Acquisition Systems provide for enhanced
communication among candidates, hiring managers and human resources personnel.
Clients can use a set of generic corporate messages to automatically respond to
resumes or other applicant communications using our auto-acknowledgement tool.
For example, an e-mail acknowledging receipt of a resume can be automatically
sent to an applicant, an administrative function which is now automated, making
corporate recruiters' job more efficient and cost effective.
We believe our applications' selection capabilities, including
automatic screening and skills ranking, improve our clients' recruiting efforts
and increase the speed at which they gain access to top candidates. Applicants
who apply on-line are ranked after they have answered screening questions either
pulled by the corporate recruiter from our suggested list, or created for the
specific job by that corporate recruiter. These applicants are then matched
against the screening criteria determined by the corporate recruiter. Applicants
who do not meet the screening criteria are placed in a rejected folder, while
those that meet the screening criteria are flagged for review by employers and
automatically become qualified candidates. Clients also receive lists of the
applicants in ranked order, and this ranking is determined by the applicant's
responses to the screening questions, and the manner in which the applicant
matches against the set criteria. This feature assists recruiters in determining
quickly if an applicant is qualified for a given position.
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Our Automated Talent Acquisition Systems also allow clients to utilize
the services of our selection partners over the Internet and have the results
flow back into their database on our servers. As part of our comprehensive
hiring management system, we resell skills and selection testing services of
Brainbench Inc. and the Self-Management Resources Corporation. Clients direct
their applicants to a specific Web site in which tests are completed by the
applicant. The test results are made available to our clients for use in their
recruitment process. We have an agreement with a verification services company
that allows our clients access to reference checking, educational verification
and other similar services.
Our Automated Talent Acquisition Systems' subscription contract is
typically for a one-year term with automatic renewal, one or more simultaneous
user licenses, user training and set up and a menu of Internet posting services.
Clients are charged a monthly subscription fee for concurrent user access
licenses, career site hosting, on-line reporting and other services. We charge
one-time fees for initial career site development and other set up and product
education. We also provide professional consultation services on a time and
materials basis. Job site posting, skills testing, personality profiling and
verification services are provided on a pay-per-use basis.
We believe that the Automated Talent Acquisition Systems services'
pricing formula provides clients with a lower-risk avenue to access the benefits
of on-line recruiting at a reasonable cost compared to client-server technology.
Furthermore, since the required technology infrastructure investments are
nominal by comparison, clients experience lower initial costs for full access to
the comprehensive services that our applications provide. We believe that the
subscription formula provides us with the opportunity to earn annuity-based
returns as subscriptions are renewed. This pricing practice is consistent with
similarly offered Web-based services.
RECRUITMENT RESEARCH SERVICES
We currently provide recruitment research services on a cost-per-hour
basis through our subsidiary OMNIpartners, which we acquired in July 2001.
Recruitment research is the outsourcing of the sourcing and screening work
associated with recruiting. We believe this outsourcing formula allows clients
to lower costs and gain access to specialized expertise that provides
objectivity and ongoing value to the hiring process. OMNIpartners's research
employees look for potential employees, interview and qualify them, and deliver
all the information to the clients' human resource departments. The OMNIresearch
Report, delivered after completion of the recruitment assignment, details
information about each individual uncovered during the search. OMNIresearch
Reports may include information about candidates' work histories, technical
abilities, educational backgrounds, people skills, decision-making abilities,
availability and salary expectations. The client can offer to hire any or all of
the individuals presented, at any time, for no additional charge.
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ONLINE EXCHANGE
6FigureJobs.com, which we acquired in October 2001, is an online
exchange where job seeking candidates and recruiting companies can interact. We
believe that 6FigureJobs.com customizes this experience to satisfy the needs of
the upper-echelon management candidate and the companies looking to hire them.
The site provides content appropriate for senior executives, directors and other
managers, as well as containing job postings that meet their qualifications. We
employ screening to create this exclusive community of job seekers. On the
candidate side, each job seeker is reviewed before his or her resume is allowed
to reside in the site's candidate database. On the recruiting side, all job
openings must have a minimum aggregate compensation of $100,000.
EMPLOYEE MANAGEMENT AND RETENTION SYSTEMS
Xylo, which we acquired in September 2002, is a provider of a Web-based
employee discount platform used by Fortune 500 and other thought-leading
companies to offer a unique benefit to build upon employee satisfaction and
efficiency. Through this hosted web site, we allow our corporate clients the
ability to make available to their employees everday savings on computers,
movies, amusement park tickets, travel, entertainment, insurance, and
professional services from over 220 nationally recognized providers. In
addition, clients are able to integrate into our system, their existing
discounts from other businesses and corporate partnerships. Other feature
components include an internal Survey application and Information Center,
featuring life event content and resource information. Our service is customized
to match our corporate client's culture and its employees' expectations, while
we maintain the web site and coordinate all the savings on the products offered
through national and local deals and ticketing programs. We believe that our
service enables our corporate clients to help employees balance work and life
needs, increasing retention rates within their workforce.
CAREER TRANSITION SERVICES
Our Career Transition Services segment consists of our outplacement
services. Outplacement revenues accounted for approximately 40% of total revenue
for fiscal 2003 compared to 56% for fiscal 2002. We currently provide
outplacement services through our subsidiary Paula Allen Holdings, which we
acquired in July 2001. Paula Allen Holdings, which does business under the name
Allen And Associates, is an outplacement and employment marketing firm. Paula
Allen Holdings provides professional assistance to approximately 10,000 job
seekers each year in the areas of information technology, engineering, finance
and marketing. Services provided to the job seeker include development and
preparation of a professional resume and cover letter, industry employment
research, as well as fulfillment, administrative, and clerical services.
We market our outplacement services to individuals seeking employment
or other career opportunities in the marketplace. Outplacement services are
marketed to individuals predominantly by advertising on the Internet as well as
in local newspapers throughout North America. During fiscal 2003, we developed a
Corporate Outplacement program providing services to companies that are
separating existing employees.
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Individuals are charged on average between $900 to $2,800 for our
resume development, career consulting and market research services. Our
Corporate Outplacement program is based on a similar pricing structure.
FOREIGN OPERATIONS
We have operations in Canada and the U.S., and therefore are subject to
the risks typical of an international business, including, but not limited to,
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility.
Our operations center is located in Ottawa, Canada and maintains our
servers, which support all of our locations and the software that is accessed by
our clients in an Application Service Provider ("ASP") environment. Financial
information about geographical areas and segments can be found in note 21 to our
consolidated financial statements.
WORKING CAPITAL ITEMS
We bill our clients monthly, quarterly and annually for subscription
sales or when a project or assignment is completed for non-subscription sales.
Subscription sales are for our clients that are being hosted in an ASP
environment and sign service licenses that range from one month to multiple
years. Non-subscription sales are project or assignment based and are billed
when the project is completed. Career Transition Services bills clients 50% when
the assignment starts and the remaining 50% when the assignment is completed.
Career Transition Services completes assignments in approximately 10 days.
RESEARCH AND DEVELOPMENT
During fiscal 2001 we internally developed our software products
spending approximately $2.2 million. Beginning in fiscal 2002 we changed our
strategy for obtaining new technology to acquiring companies that have already
developed technology platforms that have proven successful in the market place.
Research and development expense was approximately $749,000 and $1,086,000 in
fiscal 2002 and fiscal 2003, respectively. In fiscal 2003, the majority of
research and development expense was incurred in the Enterprise Recruiting
Services segment, particularly in the fiscal 2003 acquired companies. This
expense was mainly related to software development and enhancements.
INTELLECTUAL PROPERTY
We rely upon a combination of copyright, trade secret and trademark
laws and non-disclosure and other contractual arrangements to protect our
proprietary rights. Many of the copyrights and trademarks we hold were obtained
in connection with the acquisitions we made in fiscal 2003 and fiscal 2002.
Currently we have five registered trademarks in Canada and three in the United
States. These trademarks include E-Cruiter, E-Cruiter Enterprise, E-Cruiting,
Careerbridge, 6FigureJobs.com and RezLogic. In addition, we have two service
marks for OMNIpartners and OMNIresearch. We also have copyrights on some of our
training manuals and internally developed software programs.
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In 1999, we changed our name and primary identifying trademark from
"Careerbridge" to "E-Cruiter". In 2001, we changed our name to "Workstream". We
currently have pending registration applications for the Workstream trademark in
Canada and in the U.S.
The following registered trademarks are current in use, are registered
and expire as follows: E-Cruiter - December 2013, E-Cruiter Enterprise -
December 2013, E-Cruiting - January 2014. These trademarks are renewable for
fifteen years at a time. Our 6FigureJobs.com and Rezlogic trademark
registrations expire in September 2010 and March 2010, respectively, and are
renewable for ten years at a time.
We believe that these trademarks and service marks are important to our
business. The measures we have taken to protect our proprietary rights, however,
may not be adequate to deter misappropriation of proprietary information or
protect us if misappropriation occurs. Policing unauthorized use of our
technologies and other intellectual property is difficult, particularly because
of the global nature of the Internet. We may not be able to detect unauthorized
use of our proprietary information and take appropriate steps to enforce our
intellectual property rights.
We are not aware of any patent infringement charge or any violation of
other proprietary rights claim by any third party relating to us or our
products. However, the computer technology market is characterized by frequent
and substantial intellectual property litigation.
SALES AND MARKETING
We market our services in both Canada and the United States to support
our National Accounts Sales team as well as our local sales personnel in 14
locations in North America. We utilize the Internet, trade shows, seminars and
newspapers to market our services. The Enterprise Recruiting Services segment's
sales cycle, with the exception of Online Exchange, is approximately four to
eight weeks depending on the size of the potential client. Career Transition and
Online Exchange recruiting sales is relatively short and higher volume. We have
a centralized Marketing group in Connecticut that supports both Enterprise
Recruiting and Career Transition Services. Our National Accounts sales team
located in Canada supports both Canadian and United States sales personnel. Both
Career Transition Services and Enterprise Recruiting Services sales teams sell
only within their segment. Our Career Transition Services sales team has 46
dedicated sales personnel and Enterprise Recruiting Services has 14. Our
Marketing group consists of 5 support personnel and professionals.
COMPETITION
The market for HCM services is highly fragmented and competitive. We
compete within the United States and Canada with Internet recruitment services
companies, outplacement services companies and human resource service providers.
We compete for a portion of employer's recruiting budgets with many types of
competitors such as offline recruiting firms, offline advertising, resume
processing companies and web-based recruitment companies. We believe that the
primary competitive factors affecting our market include product functionality,
product performance, quality service support and implementation and the cost of
delivery. We believe that our principal competitive advantages include:
o our unique combination of high-tech and high-touch services;
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o our technology;
o our network of offices and personnel throughout North America;
o our performance and reliability as an application service provider;
o our service reputation; and
o our experienced staff of human resources professionals.
Although we believe we compete favorably with respect to such
factors, there can be no assurance that we can maintain our position against
current and potential competitors. A number of our competitors have longer
operating histories and greater financial, technology and marketing resources,
as well as better name recognition than we do.
EMPLOYEES
As of May 31, 2003, we had 169 full-time employees, consisting of 65 in
sales and marketing, 32 in research and development, 5 in professional services,
43 in maintaining daily operating functions, 10 in finance/accounting and 14 in
administration. Our employees are not represented by a collective bargaining
organization and we have never experienced any work stoppage. We consider our
relations with our employees to be good.
ITEM 2. PROPERTIES
Our corporate headquarters and principal research and development,
customer support, network operations and human resource administration are
located in approximately 17,000 square feet of leased office space in Ottawa,
Ontario, Canada. Our lease for this facility expires in December 2010. All
segments use this facility.
We lease approximately 14,775 square feet of office space in Fort
Lauderdale, Florida, which serves as the headquarters of our subsidiary,
OMNIpartners. Our lease for these premises expires in January 2004.
In addition, we lease approximately 9,396 square feet of office space
in Maitland, Florida, which serves as the headquarters of our subsidiary, Paula
Allen Holdings. Our lease for these premises expires in May 2006.
We also lease approximately 1,900 square feet of office space in
Norwalk, Connecticut, which serves as the headquarters of our subsidiary,
6FigureJobs.com. Our lease for these premises expires in July 2004.
We also lease space for sales offices in another 10 locations,
primarily under one to three year leases, usually with renewal options. We
believe that our facilities are adequate for our current needs.
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ITEM 3. LEGAL PROCEEDINGS
Two of our wholly-owned subsidiaries, Paula Allen Holdings, doing
business as Allen And Associates, and OMNIpartners, were named as defendants in
a lawsuit filed by 11263 Mississippi, LLC and 14617 Vanowen LLC. The complaint
was filed on May 16, 2003 in the Clark County District Court in Nevada.
OMNIpartners leased office space from 11263 Mississippi, LLC and 14617 Vanowen
LLC in Las Vegas, Nevada and then subleased certain portions of the office space
to Allen And Associates and an unrelated third party, U.S. Vehicle. In this
action, 11263 Mississippi, LLC and 14617 Vanowen LLC allege that OMNIpartners
breached the lease agreement and seek approximately $178,274 for unpaid rents,
maintenance charges and other charges as well as an undetermined amount for
attorneys' fees. OMNIpartners alleges the plaintiffs tortiously interfered with
its sublease agreement with U.S. Vehicle by moving U.S. Vehicle into a nearby
facility and leasing space to it. OMNIpartners also filed a lawsuit against U.S.
Vehicle and its principals alleging a breach of its sublease agreement with
OMNIpartners. This action was filed on April 18, 2002 in the Clark County
District Court in Nevada. In this action, OMNIpartners seeks approximately
$115,000 for unpaid rents, maintenance charges and other charges as well as an
undetermined amount for attorneys' fees. We believe OMNIpartners has meritorious
defenses to the allegations contained in the complaint brought by 11263
Mississippi, LLC and 14617 Vanowen LLC and intend to vigorously defend this
action. Meredith and Marvin Cohen, former shareholders of OMNIpartners, were
also named as defendants in the complaint as guarantors under the lease
agreement. OMNIpartners has agreed to defend and indemnify Mr. and Mrs. Cohen in
the lawsuit.
We are subject to other legal proceedings and claims which arise in the
ordinary course of our business. We do not believe that the resolution of such
actions will materially affect our business, results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON SHARES
Our common shares are listed on the NASDAQ Small Cap Market under
the symbol "WSTM" and on the Boston Stock Exchange under the symbol "ERM." The
principal United States market for our common shares is the NASDAQ Small Cap
Market. The following table sets forth, for the periods indicated, the high and
low sales prices of our common shares as reported on the NASDAQ Small Cap
Market. As of August 18, 2003, there were approximately 128 holders of record of
our common shares.
PRICE OF COMMON SHARES
Period High Low
June 1, 2001 - August 31, 2001 $4.69 $2.68
September 1, 2001 - November 30, 2001 $3.99 $2.00
December 1, 2001 - February 28, 2002 $5.04 $3.06
March 1, 2002 - May 31, 2002 $4.40 $3.01
June 1, 2002 - August 31, 2002 $4.14 $1.95
September 1, 2002 - November 30, 2002 $3.50 $1.51
December 1, 2002 - February 28, 2003 $1.99 $0.46
March 1, 2003 - May 31, 2003 $1.45 $0.71
DIVIDEND POLICY
We have not paid any cash dividends on our common shares and do not
anticipate paying cash dividends in the foreseeable future. We intend to retain
any future earnings for use in our business. As long as our 8% Senior
Subordinated Convertible Notes remain outstanding and unpaid, we are not
permitted to pay or declare any cash or in kind dividends or other distributions
with respect to our capital stock, except for dividends consisting solely of
additional shares of stock.
There is no law or government decree or regulation in Canada that
restricts the export or import of capital, or that affects the remittance of
dividends, interest or other payments to a non-resident holder of common shares,
other than withholding tax requirements. See "Taxation."
There is no limitation imposed by Canadian law or by our articles or
other charter documents on the right of a non-resident of Canada to hold or vote
our common shares, other than as provided in the Investment Canada Act, as
amended, referred to as the Investment Act.
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The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in the
Investment Act, referred to as a non-Canadian, unless, after review, the
minister responsible for the Investment Act is satisfied that the investment is
likely to be of net benefit to Canada. If an investment by a non-Canadian is not
a reviewable investment, it nevertheless requires the filing of a short notice
which may be given at any time up to 30 days after the implementation of the
investment.
An investment in our common shares by a non-Canadian that is a WTO
investor (defined below) would be reviewable under the Investment Act if it were
an investment to acquire direct control, through a purchase of our assets or
voting interests, and the gross book value of our assets equaled or exceeded
$223 million, the threshold established for 2003, as indicated in our financial
statements for our fiscal year immediately preceding the implementation of the
investment. In subsequent years, such threshold amount may be increased or
decreased in accordance with the provisions of the Investment Act. A WTO
investor is an investment by an individual or other entity that is a national
of, or has the right of permanent residence in, a member of the World Trade
Organization, current members of which include the European Community, Germany,
Japan, Mexico, the United Kingdom and the United States, or a WTO
investor-controlled entity, as defined in the Investment Act.
An investment in our common shares by a non-Canadian, other than a WTO
investor, would be subject to review under the Investment Act if it were an
investment to acquire our direct control and the value of the assets were $5.0
million or more, as indicated on our financial statements for our fiscal year
immediately preceding the implementation of the investment.
A non-Canadian, whether a WTO investor or otherwise, would acquire
control in us for the purposes of the Investment Act if he, she or it acquired a
majority of our common shares or acquired all or substantially all of the assets
used in conjunction with our business. The acquisition of less than a majority,
but one-third or more of our common shares, would be presumed to be an
acquisition of control in us unless it could be established that we were not
controlled in fact by the acquirer through the ownership of common shares.
The Investment Act would not apply to certain transactions in relation
to our common shares including:
(a) an acquisition of our common shares by any person if the acquisition were
made in the ordinary course of that person's business as a trader or dealer
in securities;
(b) an acquisition of control in us in connection with the realization of
security granted for a loan or other financial assistance and not for any
purpose related to the provisions of the Investment Act; and
(c) an acquisition of control in us by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate
direct or indirect control in fact in us through the ownership of voting
interests, remains unchanged.
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TAXATION
MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material Canadian federal income tax
considerations generally applicable to a person who acquires our common shares
and who, for purposes of the Income Tax Act (Canada) and the Canada-United
States Income Tax Convention, 1980, as applicable, and at all relevant times, is
a U.S. holder. Readers are cautioned that this is not a complete technical
analysis or listing of all potential tax effects that may be relevant to holders
of our common shares. In particular, this discussion does not deal with the tax
consequences applicable to all categories of investors, some of which may be
subject to special rules, and does not address the tax consequences under
Canadian provincial or territorial tax laws, or tax laws of jurisdictions
outside of Canada. Accordingly, you should consult your own advisor regarding
the particular tax consequences to you of an investment in our common shares.
This summary is based on the advice of our Canadian counsel, Perley-Robertson,
Hill & McDougall.
For purposes of the Income Tax Act (Canada) and the Canada-United
States Income Tax Convention, 1980, a U.S. holder is a person that:
o Through the period during which the person owns our common shares is not
resident in Canada and is a resident of the United States;
o Holds our common shares as capital assets, that is generally as
investments; o Deals at arm's length with us within the meaning of the
Income Tax Act (Canada);
o Does not have a permanent establishment or fixed base in Canada, as defined
by the Canada-United States Income Tax Convention, 1980; and
o Does not own and is not treated as owning, 10% or more of our outstanding
voting shares.
Special rules, which we do not address in this discussion, may apply to
a U.S. holder that is (a) an insurer that carries on an insurance business in
Canada and elsewhere, or (b) a financial institution subject to special
provisions of the Income Tax Act (Canada) applicable to income gain or loss
arising from mark-to-market property.
This discussion is based on the current provisions of the Canada-United
States Income Tax Convention, 1980, the Income Tax Act (Canada) and their
regulations, all specific proposals to amend the Income Tax Act (Canada) and
regulations, all specific proposals to amend the Income Tax Act (Canada) and
regulations announced by the Minster of Finance (Canada) before the date of this
annual report and counsel's understanding of the current published
administrative practices of Canada Customs and Revenue Agency. This discussion
is not exhaustive of all potential Canadian tax consequences to a U.S. holder
and does not take into account or anticipate any other changes in law, whether
by judicial, governmental or legislative decision or action, nor does it take
into account the tax legislation or considerations of any province, territory or
foreign jurisdiction.
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TAXATION OF DIVIDENDS
Dividends paid or credited or deemed to be paid or credited on common
shares owned by a U.S. holder will be subject to Canadian withholding tax under
the Income Tax Act (Canada) at a rate of 25% on the gross amount of the
dividends. The rate of withholding tax generally is reduced under the
Canada-United States Income Tax Convention, 1980 to 15% where the U.S. holder is
the beneficial owner of the dividends. Under the Canada-United States Income Tax
Convention, 1980, dividends paid to religious, scientific, charitable and
similar tax exempt organizations and pension organizations that are resident and
exempt from tax in the United States and that have complied with the
administrative procedures specified in the Tax Convention are exempt from this
Canadian withholding tax.
TAXATION OF CAPITAL GAINS
Gain realized by a U.S. holder on a sale, disposition or deemed
disposition of our common shares generally will not be subject to tax under the
Income Tax Act (Canada) unless the common shares constitute taxable Canadian
property within the meaning of the Income Tax Act (Canada) at the time of the
sale, disposition or deemed disposition. Our common shares generally will not be
taxable Canadian property provided that: (a) they are listed on a prescribed
stock exchange, and (b) at no time during the five-year period immediately
preceding the sale, disposition or deemed disposition, did the U.S. holder,
persons with whom the U.S. holder did not deal at arm's length, or the U.S.
Holder acting together with those persons, own or have an interest in or a right
to acquire 25% or more of the issued shares of any class or series of our
shares. A deemed disposition of common shares will occur on the death of a U.S.
holder.
If our common shares are taxable Canadian property to a U.S. holder,
any capital gain realized on a disposition or deemed disposition of those shares
will generally be exempt from tax under the Income Tax Act (Canada) by the
Canada-United States Income Tax Convention, 1980, so long as the value of our
common shares at the time of the sale, disposition or deemed disposition is not
derived principally from real property situated in Canada, as defined by the
Canada-United States Income Tax Convention, 1980. We have advised that currently
our common shares do not derive their value principally from real property
situated in Canada; however, the determination as to whether Canadian tax would
be applicable on a sale, disposition or deemed disposition of common shares must
be made at the time of that sale, disposition or deemed disposition.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
Subject to the limitations described below, the following discussion
describes the material United States federal income tax consequences to a U.S.
Holder (as defined below) that is a beneficial owner of the common shares of
Workstream Inc. and that holds them as capital assets. For purposes of this
summary, a "U.S. Holder" is a beneficial owner of common shares who or that is
for United States federal income tax purposes (i) a citizen or resident of the
United States, (ii) a corporation (or other entity treated as a corporation for
United States federal tax purposes) created or organized in the United States or
under the laws of the United States or of any state or the District of Columbia,
(iii) an estate, the income of which is includible in gross income for United
States federal income tax purposes regardless of its source, or (iv) a trust, if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust.
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This summary is for general information purposes only. It does not
purport to be a comprehensive description of all of the tax considerations that
may be relevant to owning the common shares. AS THIS IS A GENERAL SUMMARY,
OWNERS OF COMMON SHARES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH
RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS TO
NON-U.S. TAX CONSEQUENCES, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
COMMON SHARES APPLICABLE TO THEIR PARTICULAR TAX SITUATIONS.
This discussion is based on current provisions of the U.S. Internal
Revenue Code of 1986, as amended, current and proposed U.S. Treasury regulations
promulgated thereunder, and administrative and judicial decisions, as of the
date hereof, all of which are subject to change, possibly on a retroactive
basis. This discussion does not address all aspects of United States federal
income taxation that may be relevant to any particular holder based on such
holder's individual circumstances. In particular, this discussion does not
address the potential application of the alternative minimum tax or the United
States federal income tax consequences to holders that are subject to special
treatment, including:
o broker-dealers, including dealers in securities or currencies;
o insurance companies, regulated investment companies or real estate
investment trusts;
o taxpayers that have elected mark-to-market accounting;
o tax-exempt organizations;
o financial institutions or "financial services entities";
o taxpayers who hold common shares as part of a straddle, "hedge" or
"conversion transaction" with other investments;
o holders owning directly, indirectly or by attribution at least 10% of
our voting power;
o non-resident aliens of the United States;
o taxpayers whose functional currency is not the U.S. dollar; and
o taxpayers who acquire common shares as compensation.
This discussion does not address any aspect of United States federal
gift or estate tax, or state, local or non-United States laws. Additionally, the
discussion does not consider the tax treatment of partnerships or persons who
hold common shares through a partnership or other pass-through entity. Certain
material aspects of United States federal income tax relevant to a beneficial
owner other than a U.S. Holder (a "Non-U.S. Holder") also are discussed below.
20
EACH HOLDER OF COMMON SHARES IS ADVISED TO CONSULT SUCH PERSON'S OWN
TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF
PURCHASING, HOLDING OR DISPOSING OF COMMON SHARES.
TAXATION OF DIVIDENDS PAID ON COMMON SHARES
We have never paid cash dividends, and we currently do not intend to
pay cash dividends in the foreseeable future. In the event that we do pay a
dividend, and subject to the discussion of the passive foreign investment
company, or PFIC, rules below, a U.S. Holder will be required to include in
gross income as ordinary income the amount of any distribution paid on our
common shares, including any Canadian taxes withheld from the amount paid, on
the date the distribution is received to the extent the distribution is paid out
of our current or accumulated earnings and profits, as determined for United
States federal income tax purposes. In the case of noncorporate U.S. Holders,
dividends may qualify for favorable tax treatment. Distributions in excess of
such earnings and profits will be applied against and will reduce the U.S.
Holder's basis in the common shares and, to the extent in excess of such basis,
will be treated as a gain from the sale or exchange of the common shares.
Distributions of current or accumulated earnings and profits paid in a
currency other than the U.S. dollar to a U.S. Holder will be includible in the
income of a U.S. Holder in a U.S. dollar amount calculated by reference to the
exchange rate on the date the distribution is received. A U.S. Holder that
receives a distribution in a currency other than the U.S. dollar and converts
the non-U.S. currency into U.S. dollars subsequent to its receipt will have
foreign exchange gain or loss based on any appreciation or depreciation in the
value of the non-U.S. currency against the U.S. dollar, which will generally be
U.S. source ordinary income or loss.
U.S. Holders will have the option of claiming the amount of any
Canadian income taxes withheld at source either as a deduction from gross income
or as a dollar-for-dollar credit against their United States federal income tax
liability. Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of any Canadian
income taxes withheld, but such individuals may still claim a credit against
their United States federal income tax liability. The amount of foreign income
taxes which may be claimed as a credit in any year is subject to complex
limitations and restrictions, which must be determined on an individual basis by
each shareholder. The total amount of allowable foreign tax credits in any year
cannot exceed the pre-credit U.S. tax liability for the year attributable to
foreign source taxable income.
A U.S. Holder will be denied a foreign tax credit with respect to
Canadian income tax withheld from dividends received on our common shares:
o if such U.S. Holder has not held the common shares for at least 16 days of
the 30-day period beginning on the date which is 15 days before the
ex-dividend date; or
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o to the extent such U.S. Holder is under an obligation to make related
payments on substantially similar or related property.
Any days during which a U.S. Holder has substantially diminished its risk
of loss on the common shares are not counted toward meeting the 15 day holding
period required by the statute. In addition, distributions of current or
accumulated earnings and profits will be foreign source passive income for
United States foreign tax credit purposes and will not qualify for the dividends
received deduction otherwise available to corporations.
TAXATION OF THE DISPOSITION OF COMMON SHARES
Subject to the discussion of the PFIC rules below, upon the sale,
exchange or other disposition of our common shares, a U.S. Holder will generally
recognize capital gain or loss in an amount equal to the difference between the
amount realized on the disposition and such U.S. Holder's tax basis in the
common shares (tax basis is usually the U.S. dollar cost of such common shares).
If the common shares are publicly traded, a disposition of common shares will be
considered to occur on the "trade date," regardless of the U.S. Holder's method
of accounting. A U.S. Holder that uses the cash method of accounting calculates
the U.S. dollar value of the proceeds received on the sale as of the date that
the sale settles. However, a U.S. Holder that uses the accrual method of
accounting is required to calculate the value of the proceeds of the sale as of
the "trade date" and may therefore realize foreign currency gain or loss, unless
such U.S. Holder has elected to use the settlement date to determine its
proceeds of sale for purposes of calculating such foreign currency gain or loss.
Capital gain from the sale, exchange or other disposition of the common shares
held more than one year is long-term capital gain. Gain or loss recognized by a
U.S. Holder on a sale, exchange or other disposition of common shares generally
will be treated as United States source income or loss for United States foreign
tax credit purposes. The deductibility of a capital loss recognized on the sale,
exchange or other disposition of common shares is subject to limitations. In
addition, a U.S. Holder that receives non-U.S. currency upon disposition of our
common shares and converts the non-U.S. currency into U.S. dollars subsequent to
its receipt will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the non-U.S. currency against the U.S. dollar,
which will generally be United States source ordinary income or loss.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
We will be a passive foreign investment company, or PFIC, for United
States federal income tax purposes, if 75% or more of our gross income in a
taxable year, including the pro rata share of the gross income of any company,
U.S. or foreign, in which we are considered to own 25% or more of the shares by
value, is passive income. Alternatively, we will be considered to be a PFIC if
50% or more of our assets in a taxable year, averaged over the year and
ordinarily determined based on fair market value and including the pro rata
share of the assets of any company in which we are considered to own 25% or more
of the shares by value, are held for the production of, or produce, passive
income. Passive income includes amounts derived by reason of the temporary
investment of funds raised in our public offerings.
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If we were a PFIC, and a U.S. Holder did not make a qualifying election
either to (i) treat us as a "qualified electing fund" (a "QEF") (as described
below), or (ii) mark our common shares to market (as discussed below), excess
distributions by us to a U.S. Holder would be taxed under special rules. "Excess
distributions" are amounts received by a U.S. Holder with respect to shares in a
PFIC in any taxable year that exceed 125% of the average distributions received
by such U.S. Holder from the PFIC in the shorter of either the three previous
years or such U.S. Holder's holding period for such shares before the present
taxable year. Excess distributions must be allocated ratably to each day that a
U.S. Holder has held shares in a PFIC. A U.S. Holder must include amounts
allocated to the current taxable year in its gross income as ordinary income for
that year. Further, a U.S. Holder must pay tax on amounts allocated to each
prior PFIC taxable year at the highest rate in effect for that year on ordinary
income and the tax is subject to an interest charge at the rate applicable to
deficiencies for income tax. The entire amount of gain that is realized by a
U.S. Holder upon the sale or other disposition of our common shares will also be
treated as an excess distribution and will be subject to tax as described above.
A. U.S. Holder's tax basis in our common shares that were acquired from a
decedent who was a U.S. Holder would not receive a step-up to fair market value
as of the date of the decedent's death but would instead be equal to the
decedent's basis, if lower. If we were a PFIC, a U.S. Holder of our common
shares will be subject to the PFIC rules as if such holder owned its pro-rata
share of any of our direct or indirect subsidiaries which are themselves PFICs.
Accordingly, a U.S. Holder of our common shares will be subject to tax under the
PFIC rules with respect to distributions to us by, and dispositions by us of
stock of, any direct or indirect PFIC stock held by us, as if such holder
received directly its pro-rata share of either the distribution or proceeds from
such disposition.
The special PFIC rules described above will not apply to a U.S. Holder
if the U.S. Holder makes an election to treat us as a "qualified electing fund"
in the first taxable year in which the U.S. Holder owns common shares and if we
comply with certain reporting requirements. Instead, a shareholder of a QEF is
required for each taxable year to include in income a pro rata share of the
ordinary earnings of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the QEF as long-term capital gain, subject
to a separate election to defer payment of taxes, which deferral is subject to
an interest charge. The QEF election is made on a shareholder-by-shareholder
basis and can be revoked only with the consent of the U.S. Internal Revenue
Service, ("IRS"). A shareholder makes a QEF election by attaching a completed
IRS Form 8621, including the PFIC annual information statement, to a timely
filed United States federal income tax return and by filing such form with the
IRS Service Center in Philadelphia, Pennsylvania. Even if a QEF election is not
made, a shareholder in a PFIC who is a U.S. person must file a completed IRS
Form 8621 every year. We have agreed to supply U.S. Holders with the information
needed to report income and gain pursuant to a QEF election in the event we are
classified as a PFIC.
A U.S. Holder of PFIC stock which is publicly traded could elect to
mark the stock to market annually, recognizing as ordinary income or loss each
year an amount equal to the difference as of the close of the taxable year
between the fair market value of the PFIC stock and the U.S. Holder's adjusted
tax basis in the PFIC stock. Losses would be allowed only to the extent of net
mark-to-market gain previously included by the U.S. Holder under the election
for prior taxable years. If the mark-to-market election were made, then the
rules set forth above would not apply for periods covered by the election.
23
We believe that we were not a PFIC for the fiscal years ending May 2003
and May 2002 and we believe that we will not be a PFIC for the fiscal year
ending May 2004. The tests for determining PFIC status, however, are applied
annually, and it is difficult to make accurate predictions of future income and
assets, which are relevant to this determination. Accordingly, there can be no
assurance that we will not become a PFIC. U.S. Holders who hold common shares
during a period when we are a PFIC will be subject to the foregoing rules, even
if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who
made a QEF election. U.S. Holders are strongly urged to consult their tax
advisors about the PFIC rules, including the consequences to them of making a
mark-to-market or QEF election with respect to common shares in the event that
we qualify as a PFIC.
TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON SHARES
Except as described in "U.S. Information Reporting and Backup
Withholding" below, a Non-U.S. Holder who is a beneficial owner of our common
shares will not be subject to United States federal income or withholding tax on
the payment of dividends on, and the proceeds from the disposition of, our
common shares, unless:
o Such item is effectively connected with the conduct by the Non-U.S. Holder
of a trade or business in the United States and, in the case of a resident
of a country which has a treaty with the United States, such item is
attributable to a permanent establishment or, in the case of an individual,
a fixed place of business, in the United States;
o The Non-U.S. Holder is an individual who holds the common shares as capital
assets and is present in the United States for 183 days or more in the
taxable year of the disposition and does not qualify for an exemption; or
o The Non-U.S. Holder is subject to tax pursuant to the provisions of United
States tax law applicable to U.S. expatriates.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Holders generally are subject to information reporting
requirements with respect to dividends paid in the United States on common
shares. In addition, U.S. Holders are subject to U.S. backup withholding at a
rate of up to 28% on dividends paid in the United States on common shares unless
the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption.
U.S. Holders are subject to information reporting and backup withholding at a
rate of up to 28% on proceeds paid from the sale, exchange, redemption or other
disposition of common shares unless the U.S. Holder provides an IRS Form W-9 or
otherwise establishes an exemption.
Non-U.S. Holders generally are not subject to information reporting or
backup withholding with respect to dividends paid on, or proceeds upon the sale,
exchange, redemption or other disposition of, common shares, provided that such
Non-U.S. Holder provides a taxpayer identification number, certifies to its
foreign status, or otherwise establishes an exemption.
24
The amount of any backup withholding will be allowed as a credit
against such U.S. Holder's or Non-U.S. Holder's United States federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
RECENT SALES OF UNREGISTERED SECURITIES
In March 2003, we entered into an agreement with Icarian and the
landlord of certain property being leased by Icarian to terminate the lease
between Icarian and the landlord. The landlord agreed to terminate the lease and
release Icarian from its financial obligations under the lease in exchange for
certain furniture and equipment previously used at the property, cash and
275,000 common shares of Workstream valued at $0.92 per share. The common shares
were sold to one accredited investor in reliance on the exemption from
registration provided by Rule 506 promulgated under the Securities Act of 1933.
In May 2003, we raised additional capital by issuing an individual
266,666 common shares at $0.75 per share and warrants to purchase 133,333 common
shares at an exercise price of $1.50 per share, subject to adjustment upon the
occurrence of certain events. In May 2003, we also entered into agreements with
another individual and two institutional investors whereby we agreed to sell and
the investors agreed to purchase an aggregate of 933,334 common shares at $0.75
per share and warrants to purchase an aggregate of 333,334 common shares at an
exercise price of $1.50 per share, subject to adjustment upon the occurrence of
certain events. The closing on the sale of these additional common shares and
warrants occurred in June 2003. The common shares and warrants that were issued
in May and June 2003 were sold to a limited number of accredited investors in
reliance on the exemption from registration provided by Rule 506 promulgated
under the Securities Act of 1933. The proceeds from the sale of these securities
are being used for general working capital purposes and potential future
acquisitions.
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
25
FISCAL YEAR ENDED MAY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002 2001 2000 1999
Statement of operations data:
Revenue $ 17,837 $ 14,752 $ 1,992 $ 1,170 $ 950
Cost of revenues 3,040 2,858 1,483 1,085 576
Selling and marketing 6,058 6,649 2,416 2,430 1,058
General and administrative 9,582 6,724 984 1,156 420
Research and development 1,086 750 2,164 1,643 332
Amortization and depreciation 6,097 1,796 501 250 80
Impairment write-down of goodwill 2,133 2,810 -- -- --
--------------------------------------------------------
Operating loss (10,159) (6,835) (5,556) (5,394) (1,516)
Other (expense) income, net (1,146) (155) 452 346 (1,701)
--------------------------------------------------------
Loss before income taxes (11,305) (6,990) (5,104) (5,048) (3,217)
Recovery of deferred income taxes 1,586 29 -- -- --
Current income tax recovery 42 -- -- -- --
--------------------------------------------------------
Net loss for the year $ (9,677) $ (6,961) $ (5,104) $ (5,048) $ (3,217)
========================================================
Basic and diluted net loss
Per common share $ (0.52) $ (0.52) $ (0.66) $ (0.89) $ (0.83)
========================================================
Weighted average number of
common shares outstanding 18,608 13,281 7,710 5,650 3,855
========================================================
MAY 31,
(IN THOUSANDS)
2003 2002 2001 2000 1999
Balance sheet data:
Working capital (deficit) $ (3,412) $ (1,677) $ 3,200 $ 8,548 $ (1,294)
Total assets 30,618 23,276 5,389 10,805 1,439
Long-term obligations and
redeemable preferred stock 5,312 1,557 213 28 27
Total liabilities 11,594 8,519 1,347 1,570 2,569
Shareholders' equity 19,024 14,757 4,042 9,235 (1,130)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "ANTICIPATES," "BELIEVES," "
EXPECTS," "INTENDS," "FUTURE," AND WORDS OF SIMILAR IMPORT WHICH EXPRESS
MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS REGARDING OUR FUTURE
PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE HAVE NO OBLIGATION TO
UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS AND FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE SET FORTH BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS REPORT AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
26
OVERVIEW
We are a leading provider of human capital management ("HCM") services.
We offer a combination of high-tech and high-touch services, providing customers
with the ability to manage their complete recruiting, retention and outplacement
needs on a single Workstream platform.
The past two fiscal years have resulted in significant changes in our
business. During the first six months of fiscal 2003 we completed the
acquisition of Icarian, PureCarbon and Xylo. During the first six months of
fiscal 2002, we completed the acquisition of Paula Allen Holdings, OMNIpartners,
6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine. Subsequent to the
acquisitions, we have concentrated on integrating the acquired entities and
expanding the reach of the existing business. These acquisitions have enabled us
to increase our service offerings and revenue streams.
Due to the substantive change these acquisitions have made to our
business, this management's discussion and analysis includes comparisons of pro
forma results of operations for fiscal 2003 and fiscal 2002. These pro forma
results assume that the above acquisitions had been completed as at June 1, 2001
and therefore compare revenues and expenses of us and all our subsidiaries for
both fiscal years.
CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies relate to the assessment of
goodwill impairment, impairments in intangible assets and the valuation of net
deferred tax assets. Management applies judgment to value these assets. Changes
in assumptions used would impact our financial results.
Goodwill is assessed for impairment on an annual basis or more
frequently if circumstances warrant. We assess goodwill related to reporting
units for impairment, and write down the carrying amount of goodwill as
required. We estimate the fair value of each reporting unit by preparing a
discounted cash flow model, using a 15% discount rate. The model is
27
prepared by projecting results for five years making different assumptions for
each business unit. We assumed that the economy would begin to improve starting
in fiscal 2004, revenue growth rates would range from 0% to 10%, gross profit
would remain consistent with current trends, and operating expense would be
reduced in the first year due to rent reductions and would grow 3.5% to 4.0% in
the latter years. An impairment charge is recorded if the implied fair value of
goodwill of a reporting unit is less than the book value of goodwill for that
unit. Changes in the discount rate used, or in other assumptions in the model,
would result in wide fluctuations in the value of goodwill that is supported.
Any such changes may result in additional impairment write-downs.
We value intangible assets, such as a customer base acquired in an
acquisition, based on estimated future income applying historical customer
retention rates. If the customer base acquired discontinues using our service
earlier than historical experience, we may be required to record an impairment
of intangible assets. Changes in circumstances impacting other assumptions used
to value intangible assets could also lead to future impairments.
We apply significant judgment in recording net deferred tax assets,
which result from the loss carry forwards of companies that we acquire. The
recording of deferred tax assets requires estimates of future profits from the
acquired company to be forecast. Actual results may differ from amounts
estimated.
The table below sets forth pro forma results and the percentage
difference between fiscal year 2003 and fiscal year 2002, assuming all fiscal
2003 and fiscal 2002 acquisitions were acquired at the beginning of fiscal 2002.
28
Workstream Inc.
Pro forma comparative
Twelve months ending May 31,
2003 2002 Var %
------------------------------- ------------
REVENUE
Enterprise recruiting $ 6,323,878 $ 8,833,788 -28.41%
Executive search recruiting 2,563,103 3,568,785 -28.18%
Recruitment research 1,320,370 2,616,913 -49.54%
Retention 1,576,692 2,807,548 -43.84%
-------------------------------
Total recruiting/retention 11,784,043 17,827,034 -33.90%
Career transition 7,059,696 9,677,173 -27.05%
-------------------------------
Total revenue 18,843,739 27,504,207 -31.49%
DIRECT COSTS
Enterprise recruiting 990,841 5,129,623 -80.68%
Executive search 229,811 267,818 -14.19%
Recruitment research 549,606 1,021,966 -46.22%
Retention 346,726 729,133 -52.45%
Career transition 1,108,418 1,330,694 -16.70%
--------------------------------
Total 3,225,402 8,479,234 -61.96%
% of revenues 17.1% 30.8%
GROSS PROFIT
Enterprise recruiting 5,333,037 3,704,165 43.97%
Executive search 2,333,292 3,300,967 -29.31%
Recruitment research 770,764 1,594,947 -51.67%
Retention 1,229,966 2,078,415 -40.82%
Career transition 5,951,278 8,346,479 -28.70%
--------------------------------
Total 15,618,337 19,024,973 -17.91%
Gross profit % 82.9% 69.2%
EXPENSES
Sales & marketing 6,259,393 16,039,391 -60.97%
General & administration 10,498,155 11,642,199 - 9.83%
Research and development 1,551,022 6,888,143 -77.48%
Amortization and depreciation 6,762,784 8,916,033 -24.15%
Impairment write-down of goodwill 2,133,242 8,129,619 -73.76%
Restructuring charge 71,137 415,872 -82.89%
--------------------------------
Total 27,275,733 52,031,257 -47.58%
--------------------------------
Operating loss (11,657,396) (33,006,284) 64.68%
Other income (expense) (1,134,529) (997,095) 13.78%
Recovery of deferred income taxes 1,734,490 1,567,974 10.62%
Current income tax recovery 42,128 - -
--------------------------------
Net operating loss $(11,015,307) $(32,435,405) 66.03%
================================
Weighted average number of common
shares outstanding 19,338,731 18,684,426
===============================
Pro forma loss per share $ (0.57) $ (1.74)
===============================
Our revenues have declined on a pro forma basis for fiscal 2003 due
primarily to the overall economic slowdown, closure of offices in the Career
Transition Services segment as well as due to the impact of clients that Icarian
lost subsequent to November 30, 2001 but prior to being acquired by us.
Following completion of the fiscal 2003 and fiscal 2002 acquisitions,
we focused on integrating the acquired entities and expanding the reach of the
existing businesses. We have also made efforts to reduce costs by consolidating
operations, resulting in staff reductions of redundant positions and related
overhead and reducing research and development expenditures. Certain actions
taken to reduce costs have also caused reductions in revenue.
29
FISCAL 2003 COMPARED TO FISCAL 2002
REVENUES
Consolidated revenues were $17,836,990 for fiscal 2003 compared to
$14,751,620 for fiscal 2002, an increase of $3,085,370 or 21%. Fiscal 2003
revenues from companies we acquired during fiscal 2003 represented $4,831,432
for the year ended May 31, 2003. Revenues other than from companies we acquired
in fiscal 2003 declined 12% to $13,005,558 from $14,751,619 in fiscal 2002
mainly due to lower Career Transition Service revenues (15% lower from fiscal
2002) caused by our consolidation of office locations and lower Enterprise
Recruitment Services revenues (8% lower from fiscal 2002). We believe that
Enterprise Recruitment Services revenues (other than those resulting from
acquisitions) decreased in fiscal 2003 as a result of the continued softness in
the economy which we believe has led to fewer companies hiring additional staff.
Career Transition Services revenues for fiscal 2003 were $7,059,696
compared to $8,301,246 for fiscal 2002. The major reason for the decline in
Career Transition Services revenues was due to the closure of two office
locations in the fourth quarter of fiscal 2002 and four office locations in the
first six months of fiscal 2003. These closures are a result of our plan to
consolidate sales locations and develop larger centers in fewer locations in
order to leverage management costs and improve internal controls.
Enterprise Recruiting Services revenues for fiscal 2003 were
$10,777,294 compared to $6,450,374 for fiscal 2002. The increase in revenues was
primarily due to the acquisition of Icarian, PureCarbon, and Xylo in fiscal
2003. This increase was partially offset by a decline in sales in recruiting
research and some sectors of recruiting software which we believe is due to the
weak economy.
Pro forma revenues for fiscal 2003 were $18,843,739 compared to
$27,504,207 for fiscal 2002. Pro forma revenues include the revenues of all
acquired companies for the full reporting periods, instead of from their
acquisition dates. The decline in pro forma revenues is primarily due to the
impact of clients that Icarian lost subsequent to November 30, 2001 but prior to
being acquired by us. The majority of these clients produced little or no profit
margins due to extensive customer service needs. Additionally, pro forma
revenues declined as a result of the closure of the Career Transition Services'
offices. We also believe that the economic downturn has continued to negatively
impact our recruiting research and software services.
We believe that the acquisitions we made in fiscal 2002 and fiscal 2003
allow us to deliver a broader range of recruiting and outplacement products and
services through our 14 offices across North America. Management believes that
the acquisitions will have a significant impact on future revenues.
COST OF REVENUES
Cost of revenues for fiscal 2003 were $3,040,132 compared to $2,858,294
for fiscal 2002, an increase of $181,838 or 6%. Cost of revenues includes the
cost of network operations, client support and charges related to third-party
services. Career Transition Services cost of revenues accounted for $1,108,418
and Enterprise Recruiting Services cost of revenues accounted for $1,931,714 of
the total cost of revenues for fiscal 2003. Cost of revenues in the Enterprise
Recruiting Services segment increased $197,319 from fiscal 2002. The
acquisitions done in fiscal 2003 contributed $803,336 to this increase which was
partially offset by reduced costs as a result of an effort to eliminate
redundant operations. Cost of revenues for the Career Transition Services
segment decreased $15,421 from fiscal 2002.
30
On a pro forma basis, cost of revenues decreased from $8,479,234 for
fiscal 2002 to $3,225,402 for fiscal 2003. Since the consummation of the
acquisitions, management has proceeded with the consolidation of certain cost
centers and the elimination of redundant operations. This has resulted in a
decrease compared to the pro forma cost of revenues for fiscal 2002.
GROSS PROFITS
Consolidated gross profits were $14,796,858 for fiscal 2003 or 83% of
revenues compared to $11,893,326 or 81% for fiscal 2002.
Career Transition Services gross profit was $5,951,277 or 84% of Career
Transition Services revenues for fiscal 2003 compared to $7,177,347 or 86% of
Career Transition Service revenues for fiscal 2002. In the Career Transition
Services segment, although cost of revenues has been reduced, the timing of the
reduction of costs in relation to the loss of revenue in the closed offices has
resulted in a slight decrease in its gross profit margin. Enterprise Recruiting
Services gross profit was $8,845,581 or approximately 82% of Enterprise
Recruiting Services revenues for fiscal 2003 compared to $4,715,979 or 73% of
Enterprise Recruiting Service revenues for fiscal 2002. As mentioned above, the
reduction in redundant costs in the Enterprise Recruiting Services segment has
improved gross profit margins compared to the prior year.
Pro forma gross profits were $15,618,337 or 83% of revenues for fiscal
2003 compared to $19,024,973 or 69% of revenues for fiscal 2002. Reduction in
redundant costs as well as the loss of low margin clients that were acquired
prior to the purchase of the Icarian business resulted in improved margin
percentages.
OPERATING EXPENSES
Total operating expenses were $24,956,020 for fiscal 2003 compared to
$18,728,105 for fiscal 2002, an increase of $6,227,915 or 33%. Acquisitions
completed in fiscal 2003 accounted for $9,565,079 in total operating expenses.
Operating expenses for non-acquired operations were $15,390,941 for fiscal 2003,
representing an approximate 18% decline compared to fiscal 2002. The primary
reason for the decline in operating expenses for the operations that existed
prior to the fiscal 2003 acquisitions is the consolidation of operating
functions and the impairment of goodwill recorded in fiscal 2002.
On a pro forma basis, operating expenses were $27,275,733 for fiscal
2003 compared to $52,031,257 for fiscal 2002. The decline in pro forma operating
expense is due to the elimination of redundant costs, disposal of purchased
intangibles and restructuring charges recorded by the acquired companies prior
to their acquisition.
31
SELLING AND MARKETING
Selling and marketing expenses were $6,057,788 for fiscal 2003 compared
to $6,649,057 for fiscal 2002, a decline of $591,269 or 9%. This decrease is
attributed mainly to a reduction in advertising expense ($458,450) and a
reduction in employee costs for existing operations ($472,552) partially offset
by an increase in employee costs as a result of the acquisitions made in fiscal
2003 ($428,877). Advertising expense was reduced by $322,748 in the Career
Transition Services segment by shifting advertising from newspapers and print
media to the Internet. In addition, advertising expense was reduced in the
Enterprise Recruiting Services segment by $135,702 by implementing a more direct
sales approach compared to an indirect approach used by prior management of the
acquired operations and initially continued after the acquisitions.
On a pro forma basis, selling and marketing expenses were $6,259,393
for fiscal 2003 compared to $16,039,391 for fiscal 2002. The decline in selling
and marketing expenses was due to the consolidation of marketing, advertising
and public relations programs. Additionally, we have significantly reduced the
sales and marketing staff in the acquired companies as part of the consolidation
and integration into Workstream.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $9,581,554 for fiscal 2003
compared to $6,724,211 for fiscal 2002, an increase of $2,857,343 or 42%, due
principally to increased employee costs ($277,600), space occupancy ($271,367),
equipment leasing costs ($297,528), computing and communication expense
($304,779), bad debt expense ($57,206), postage ($22,705), and professional fees
($26,703) related to the companies we acquired during fiscal 2003, as well as
director fees for serving on our board ($114,750), higher audit and accounting
fees ($179,370), and the impact of a full year of costs from the acquisitions
made in fiscal 2002.
On a pro forma basis, general and administrative expenses decreased
from $11,642,199 for fiscal 2002 to $10,498,155 for fiscal 2003. The decrease is
due to the elimination of redundant costs associated with the acquired
companies.
RESEARCH AND DEVELOPMENT
Research and development costs were $1,086,295 for fiscal 2003 compared
to $749,392 for fiscal 2002, an increase of $336,903 or 45%. The acquisitions
completed during fiscal 2003 accounted for $678,309 in research and development
costs. This increase was partially offset by a decline in research and
development costs related to our existing operations as part of our strategy to
acquire technology through acquisitions. We believe that we can acquire new
technology at a lower cost and more efficiently than developing new software
platforms with internal resources. We implemented this strategy in fiscal 2002.
Since fiscal 2002 most of our research and development efforts have been
incurred in the Enterprise Recruiting Services segment.
On a pro forma basis, research and development expenses were $1,551,022
for fiscal 2003 compared to $6,888,143 for fiscal 2002. Significant reductions
were made in research and development staff, most notably relating to the
Icarian operations.
32
AMORTIZATION AND DEPRECIATION EXPENSE
Amortization and depreciation expense was $6,097,141 for fiscal 2003
compared to $1,795,445 for fiscal 2002, an increase of $4,301,696 or 240%. The
majority of the increase ($4,322,272) is due to the amortization of acquired
intangible assets arising from acquisitions.
On a pro forma basis, amortization and depreciation expense was
$6,762,784 for fiscal 2003 compared to $8,916,033 for fiscal 2002. The decline
in amortization and depreciation expense on a pro forma basis was due primarily
to the write-down of software licenses and website development costs associated
with the Icarian and Xylo acquisitions prior to and at the time of the
acquisition.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $47,245 for fiscal 2003 compared to
$146,061 for fiscal 2002, a decrease of $98,816 or 68%. The decline was due to
the reduction in short-term investments. Short-term investments as of May 31,
2003 were $38,419 compared to $345,206 at May 31, 2002.
INTEREST EXPENSE AND OTHER EXPENSE
Interest and other expense was $1,193,045 for fiscal 2003 compared to
$300,983 for fiscal 2002, an increase of $892,062 or 296%. The primary reason
for the increase in interest and other expense was due to interest expense
incurred as a result of the issuance of $2.9 million aggregate principal amount
of 8% Senior Subordinated Convertible Notes in April and May 2002. Future period
interest expense related to those Notes will increase significantly as the Notes
accrete to their current face value of $2.7 million over the remaining period to
maturity.
GOODWILL
Goodwill was $17,383,437 as of May 31, 2003 compared to $12,738,172
as of May 31, 2002, an increase of $4,645,265 or 36%. The increase in goodwill
relates to the acquisitions completed during fiscal 2003 and includes
adjustments during the year for shares released from escrow to the former owners
of Paula Allen Holdings, as we achieved the specific revenue and profit targets
set by the Paula Allen Holdings acquisition agreement for the period ended
December 31, 2002. Additionally, management recorded during fiscal 2003 and
fiscal 2002, goodwill impairment charges totaling $2,133,242 related to the
Icarian, Rezlogic and Tech Engine acquisitions, and $2,810,000 related to the
Paula Allen Holdings and OMNIpartners acquisitions, respectively.
FISCAL 2002 COMPARED TO FISCAL 2001
REVENUES
Consolidated revenues were $14,751,620 for fiscal 2002 compared to
$1,991,971 for fiscal 2001, an increase of $12,759,649 or 641%. Fiscal 2002
revenues from companies we acquired during fiscal 2002 represented $13,068,905
for the year ended May 31, 2002. Revenues other than from companies we acquired
in fiscal 2002 declined 16% to $1,682,715 from $1,991,971 in fiscal 2001 as a
result of discontinuing the E-Cruiter express product. The E-Cruiter express
product serviced companies with under 500 employees. We discontinued that
product in an effort to focus more resources on companies with more than 500
employees.
33
Career Transition Services revenues for fiscal 2002 were $8,301,246 and
were the largest contributor to total revenues in fiscal 2002. All of the
revenue in this segment is attributable to the acquisition of Paula Allen
Holdings, acquired in July of fiscal 2002 and the addition of new offices during
fiscal 2002.
Enterprise Recruiting Services revenues for fiscal 2002 were $6,450,374
compared to $1,991,971 for fiscal 2001. The increase in revenues was primarily
due to the acquisition of RezLogic, OMNIpartners and 6FigureJobs.com in fiscal
2002.
COST OF REVENUES
Cost of revenues for fiscal 2002 were $2,858,294 compared to $1,482,730
for fiscal 2001, an increase of $1,375,564 or 93%. While the total cost of
revenues increased significantly due to the acquisitions made in fiscal 2002, as
a percentage of revenue these costs declined from approximately 74% for fiscal
2001 to 19% for fiscal 2002. The decline as a percentage of revenue is due to
the fiscal 2002 acquisitions' lower cost of delivery of products and services
and our ability to consolidate technology. Career Transition Services cost of
revenues accounted for $1,123,899 and Enterprise Recruiting Services cost of
revenues accounted for $1,734,395 of the total cost for fiscal 2002.
GROSS PROFITS
Consolidated gross profits were $11,893,326 for fiscal 2002 or 81% of
revenues compared to $509,241 or 26% for fiscal 2001. The increase in gross
profits is due to the fiscal 2002 acquisitions.
Career Transition Services gross profit was $7,177,347 or 86% of Career
Transition Services revenues for fiscal 2002 and Enterprise Recruiting Services
gross profit was $4,715,979 or approximately 73% of Enterprise Recruiting
Services revenues for fiscal 2002.
OPERATING EXPENSES
Total operating expenses were $18,728,105 for fiscal 2002 compared to
$6,065,293 for fiscal 2001, an increase of $12,662,812 or 209%. The acquisitions
made in fiscal 2002 accounted for $15,628,353 of total operating expenses for
fiscal 2002. Operating expenses for non-acquired operations were $3,099,752 for
fiscal 2002, representing an approximately 49% decline compared to fiscal 2001.
The primary reason for the decline in operating expenses for the operations that
existed prior to the fiscal 2002 acquisitions is the consolidation of operating
functions and technology.
34
SELLING AND MARKETING
Selling and marketing expenses were $6,649,057 for fiscal 2002 compared
to $2,415,831 for fiscal 2001, an increase of $4,233,226 or 175%. This increase
is attributed to the acquisitions we made in fiscal 2002. Commission expense for
fiscal 2002 was approximately 10% of the total selling and marketing expense.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $6,724,211 for fiscal 2002
compared to $984,033 for fiscal 2001, an increase of $5,740,178 or 583%,
reflecting increased costs related to the companies we acquired during fiscal
2002.
RESEARCH AND DEVELOPMENT
Research and development costs were $749,392 for fiscal 2002 compared
to $2,164,045 for fiscal 2001, a decrease of $1,14,653 or 65%. The decline is
primarily due to the completion of various projects under development in prior
periods and our strategy to acquire technology through acquisition.
AMORTIZATION EXPENSE
Amortization expense was $1,795,445 for fiscal 2002 compared to
$501,384 for fiscal 2001, an increase of $1,294,061 or 258%, with the
amortization of acquired intangible assets representing the entire increase over
the prior year.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $146,061 for fiscal 2002 compared to
$494,635 for fiscal 2001, a decrease of $348,574 or 70%. The significant decline
was due to the decline in short-term investments. Short-term investments,
including restricted cash, as of May 31, 2002 were $2,302,296 compared to
$3,518,962 at May 31, 2001, which represented the remaining capital raised from
our public offering in December 1999.
INTEREST EXPENSE AND OTHER EXPENSE
Interest and other expense was $300,983 for fiscal 2002 compared to
$42,418 for fiscal 2001, an increase of $258,565 or 610%. The primary reason for
the increase in interest and other expense was due to the increase in both short
and long-term debt. As of May 31, 2002, short and long-term debt totaled
$6,158,059 compared to $248,859 at May 31, 2001. The primarily reason for the
increase was a result of the fiscal 2002 acquisitions and the expansion of
operating units. During fiscal 2002, we recorded $33,364 of interest expense
relating to our 8% Senior Subordinated Convertible Notes issued in April and May
of 2002. Future period interest expense related to the Notes will increase
significantly as the Notes accrete to their current face value of $2.7 million
over the remaining term to maturity.
35
GOODWILL
Goodwill was $12,738,172 as of May 31, 2002 compared to nil as of May
31, 2001. The goodwill relates to the acquisitions completed during fiscal 2002
and includes adjustments during the year for shares released from escrow to the
former owners of Paula Allen Holdings, as we achieved the specific revenue and
profit targets set by the Paula Allen Holdings acquisition agreement for the
period ended December 31, 2001. Additionally, management recorded goodwill
impairment charges totaling $2,810,000 during fiscal 2002 related to the Paula
Allen Holdings and OMNIpartners acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2003, we had $1,601,031 in cash and cash equivalents,
restricted cash and short-term investments and a working capital deficit of
$3,411,579. We have made a significant investment in acquiring new service lines
which has reduced working capital. During fiscal 2003, as a result of acquiring
Icarian, PureCarbon and Xylo, we assumed current liabilities which exceeded
acquired current assets by $3,439,133, as of the respective dates of
acquisition.
At May 31, 2003, $1,307,439 of short-term investment balances were
restricted from use because they were collateral for various borrowing or
leasing arrangements. Merchant banks have required us to place reserve deposits
on our merchant accounts due to the high volume of credit card usage by our
clients. As of May 31, 2003, approximately $399,786 was held by such banks.
These deposits are reviewed quarterly and may be returned to us or increased
based on activity surrounding credits issued. Additional deposits of $907,653
are restricted by two banks as security for an outstanding term loan, lines of
credit and a letter of guarantee provided to a landlord for a facility lease.
These restricted cash balances will be reduced annually for rent payments and
for any repayments on lines of credit.
For fiscal 2003, cash used in operations totaled $2,833,189, consisting
primarily of the net loss for the year of $9,676,602 offset mainly by non-cash
expenses such as amortization ($6,080,763), non-cash interest ($720,486) and
impairment write-down of goodwill ($2,133,242). The net change in operating
components of working capital, excluding acquisitions, for fiscal 2003 used cash
of $602,839 primarily due to a decrease in current liabilities ($1,860,539)
partially offset by a decrease in accounts receivable ($1,119,483).
Net cash from investing activities during fiscal 2003 was $2,873,891.
In fiscal 2003, we acquired cash of $1,914,884 from acquisitions consummated
through share issuance. Additionally, $761,170 was generated as a release of
some of our restricted cash by the security holders.
Net cash used in financing activities was $1,024,132 for fiscal 2003.
Financing outflows consisted primarily of the repayment of bank debt of
$1,323,335, the repayment of loans to shareholders of $391,600, and capital
lease payments of $297,282. In fiscal 2003, we received $200,000 from a private
investor in exchange of issuance of common stock and warrants. Michael
Mullarkey, our Chief Executive Officer provided us with short-term loans in the
aggregate of $500,000 during fiscal 2003 and $750,000 during fiscal 2002. In
fiscal 2003 those loans were consolidated into a term loan maturing in five
years. The consolidated term loan is collateralized by certain inventory,
equipment, accounts receivable and other assets and bears interest at 8% per
annum. Under the consolidated term loan, we are required to make monthly
interest only payments during the first 24 months and monthly interest and
principal payments thereafter. As at May 31, 2003, the total amount of the
consolidated term loan was $1,287,901. In addition, Mr. Mullarkey has agreed to
provide us with an additional $1,200,000 credit facility bearing interest at 8%
per annum. With respect to each draw against the credit facility, we are
required to make monthly interest only payments during the first 24 months from
the draw date and thereafter monthly interest and principal payments over a
three year period. We are allowed to draw against this credit facility as
needed. Mr. Mullarkey also agreed to defer until June 1, 2004, a total of
$797,880 in compensation earned as of May 31, 2003, with interest accruing on
the balance at an annual rate of 8%. After June 1, 2004, Mr. Mullarkey and
Workstream will mutually agree on the repayment terms of his deferred
compensation. Management believes this credit facility and compensation deferral
provided by Mr. Mullarkey, and the closure of offices and reduction of costs
made in fiscal 2002 and fiscal 2003, along with further consolidation of cost
centers and elimination of redundancies will result in cash flows from
operations which, together with current cash reserves, will be sufficient to
meet our working capital and capital expenditure requirements through May 31,
2004.
36
At May 31, 2003, we had Convertible Notes with an outstanding balance
of $2.7 million. In June 2003, $600,000 of the Convertible Notes were converted
into Series A Convertible Preferred Shares, which were immediately converted
into common shares. The outstanding balance as of June 2003 is $2.1 million
which matures $1.5 million in April 2004 and $.6 million in May 2004. We believe
that the holders of the Convertible Notes will convert the Notes into Series A
Preferred shares or common shares before maturity, however, if they do not, we
will be required to repay any outstanding balance remaining at the maturity
date.
At May 31, 2003 maturities of debt outstanding, capital leases,
operating leases and contractual obligations are as follows:
Year ended May 31,
2004 2005 2006 2007 2008 Thereafter Total
--------------------------------------------------------------------------------------------------------------
Debt $ 2,975,500 $ 1,180,206 $ 616,027 $ 456,091 $ 286,200 $ -- $ 5,514,024
Capital leases 112,402 53,724 27,194 -- -- -- 193,320
Operating leases 1,529,242 839,785 666,134 393,543 432,240 1,116,621 4,977,565
Contractual
obligations 120,000 -- -- -- -- -- 120,000
--------------------------------------------------------------------------------------------------------------
Total $ 4,737,144 $ 2,073,715 $ 1,309,355 $ 849,634 $ 718,440 $ 1,116,621 $10,804,909
==============================================================================================================
ACQUISITIONS
We constantly endeavor to increase our share of, and strengthen our
position in, the HCM market. A key component of our business strategy is to
continue to acquire companies offering services similar or complementary to
ours. The HCM market has experienced significant consolidation in the last years
as companies attempt to expand their service offerings and broaden their revenue
bases to achieve growth and profitability. By implementing our business strategy
and identifying the consolidation trend in its relatively early stages, we have
been able to complete acquisitions of several companies which we believe
complement our business.
37
On June 28, 2002, we acquired via merger 100% of the outstanding
shares of Icarian, a California based company. As consideration for the sale, we
issued to the shareholders of Icarian 2,800,000 common shares valued at
approximately $9.9 million. Icarian is a provider of Web-enabled solutions and
professional services. Icarian's Recruitment Management Suite is Web-native
software, offered on an ASP basis, with a user interface that provides
functionality for management of the hiring process. Icarian's Connectivity,
Interactive Job Site and Reporting modules offer human resource professionals
capabilities to integrate with human resource management systems, to manage
candidates' applications and job campaigns, and to produce reporting for both
compliance and cost reporting for a corporation's employee acquisition process.
Icarian had revenues of approximately $5.7 million and it recorded a net loss of
approximately $25.8 million for the twelve months ended December 31, 2001. We
recorded $8,393,337 in intangible assets and $5,356,222 in goodwill related to
the acquisition of Icarian. In total, we have incurred approximately $1.5
million in exit costs which were primarily associated with severance pay and
facility closure costs to integrate the Icarian acquisition. In March 2003, we
entered into an agreement with Icarian and the landlord of certain property
being leased by Icarian to terminate the lease between Icarian and the landlord.
The landlord agreed to terminate the lease and release Icarian from its
financial obligations under the lease in exchange for certain furniture and
equipment previously used at the property, $220,000 in the form of a promissory
note, 275,000 common shares of Workstream and cash of $109,000. The costs
associated with the termination of this lease were applied against the accrual
for exit costs. As at May 31, 2003, $117,702 remains outstanding, payable in
monthly payments through October, 2003.
On July 1, 2002, we acquired certain assets and liabilities of
PureCarbon, a California based company. As consideration for the sale, we issued
to the shareholders of PureCarbon 263,158 common shares valued at $1,000,000. We
have recorded $837,273 in intangible assets related to the acquisition of
PureCarbon. The purchase agreement provides for additional common shares valued
at $500,000 to be issued if PureCarbon achieves certain revenue targets for the
twelve months ending June 30, 2003. Management has determined that the revenue
targets were not met, and believes that those contingent shares will not be
issued. As required under the purchase agreement, an audit confirming whether
the revenue targets were met is currently being performed. PureCarbon is the
provider of award-winning Internet software (JobPlanet) designed to integrate
easily with behind-the-scenes human resources and recruiting technology.
JobPlanet is built on a technology platform that enables clients to build and
implement an employment web site that mirrors the client's corporate brand
image. We believe this front-end platform fits well with our back-end Hiring
Management Systems to create an end-to-end solution that our corporate clients
desire.
On September 13, 2002, we acquired via merger 100% of the outstanding
shares of Xylo, a Washington-based provider of Web-based Employee Retention
Management ("ERM") solutions focused on providing customized retention solutions
to Fortune 500 companies. Xylo's work/life customizable software offers employee
programs in one externally-hosted platform, giving clients control over content
and applications. Xylo had revenues of $3.4 million and it recorded a net loss
of approximately $18 million for the twelve months ended December 31, 2001. As
consideration for the sale, we issued to the shareholders of Xylo 702,469 common
shares, valued at approximately $1.7 million. We recorded $1,311,282 in
intangible assets and $672,286 in goodwill related to the acquisition of Xylo.
Under the purchase agreement, an additional 330,579 common shares may be issued
if certain revenue targets are met for the twelve month period ending September
30, 2003.
38
We believe that these acquisitions have been important to our evolution
from a recruitment application service provider into an HCM business process
aggregator. We believe that these additions will continue to broaden our revenue
base and diversify our product offerings.
RISK FACTORS
You should carefully consider the following risk factors that pertain
to our Company. The realization of these risks could result in a material
adverse effect on our results of operations, financial condition, cash flows,
business or the market for our common shares. We cannot assure you that we will
successfully address any of these risks or address them on a continuing basis.
Keep these risk factors in mind when reading "forward-looking"
statements elsewhere in this Form 10-K. (See "Cautionary Statement Concerning
Forward-Looking Statements" in Item 7)
WE MAY NOT BECOME PROFITABLE.
Since our inception, we have incurred losses which have been
substantial in relation to our operations. As of May 31, 2003, the end of our
most recent fiscal year, we had an accumulated deficit of $31,962,444. We
reported a net loss of $9,676,602 for the year ended May 31, 2003. Prior to our
fiscal 2002 acquisitions, we generated relatively small amounts of revenue.
During fiscal 2003 and fiscal 2002, of the nine companies that we acquired, six
reported in the aggregate net losses of approximately $35.2 million in their
immediately preceding fiscal years. Our ability to reduce our losses will be
adversely affected if we continue to acquire companies reporting losses, if
revenue grows slower than we anticipate or if operating expenses exceed our
expectations. The accounting for the beneficial conversion feature relating to
our Convertible Notes (upon issuance the Notes were recorded at a discount to
the face value of the Notes and will accrete over time to the full face value)
will result in significant interest charges to income over the term to maturity
of the Convertible Notes, further affecting our ability to become profitable.
(See note 15 to our consolidated financial statements) Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis. Failure to achieve or maintain profitability would materially
adversely affect the market price of our common shares. We expect our operating
expenses to continue to grow as we expand our operations.
39
WE MAY ENCOUNTER DIFFICULTIES WITH ACQUISITIONS, WHICH COULD HARM OUR
BUSINESS.
During fiscal 2003 and fiscal 2002, we made several investments in, and
acquisitions of, other companies and businesses, as part of our efforts to
expand our operations and we may continue to make investments in, or
acquisitions of, complementary companies, products and businesses. If we acquire
a company, we may have difficulty integrating that company's personnel,
operations and products. We cannot assure you that we will successfully
integrate in a timely manner or at all these acquired companies, products or
businesses into our operations. These difficulties may increase our expenses,
and our ability to achieve profitability may be adversely affected.
OUR LARGEST SHAREHOLDER MAY HAVE INTERESTS THAT ARE DIFFERENT THAN
OTHER SHAREHOLDERS AND MAY INFLUENCE CERTAIN ACTIONS.
As of August 18, 2003, Michael Mullarkey, our Chief Executive Officer,
beneficially owned approximately 19% of our outstanding common shares. We owe
Mr. Mullarkey approximately $1,287,901 under a consolidated term loan he
provided to us. The consolidated term loan is collateralized by certain
inventory, equipment, accounts receivable and other assets. Mr. Mullarkey has
also agreed to provide us with a $1,200,000 credit facility bearing interest at
8% per annum which is also collateralized by the same assets. These interests
may influence how Mr. Mullarkey votes on certain matters that require
shareholder approval. As our largest shareholder, Mr. Mullarkey may influence
the outcome of various actions that require shareholder approval including the
election of our directors, delaying or preventing a transaction in which
shareholders might receive a premium over the prevailing market price for their
shares and preventing changes in control or management.
THE CURRENT ECONOMIC DOWNTURN AND FUTURE ECONOMIC DOWNTURNS MAY
ADVERSELY AFFECT THE DEMAND FOR OUR SERVICES.
Historically, the general level of economic activity has significantly
affected the demand for employment and recruitment services. We believe that we
are currently experiencing the effects of the current economic downturn and as a
result the demand for our employment and recruitment services has decreased. If
the general level of economic activity continues to slow, our clients may not
require additional personnel and may delay or cancel plans that involve
recruiting new personnel using our services and technology. Consequently, the
time from initial contact with a potential client to the time of sale could
increase and the demand for our services could decline, resulting in a loss of
revenue harming our business, operating results and financial condition. In
addition, it is expected that in times of economic growth, demand for our
outplacement business may decline.
40
WE MAY NOT BE ABLE TO GROW OUR CLIENT BASE AND REVENUE BECAUSE OF THE
NUMBER OF COMPETITORS AND THE VARIETY OF SOURCES OF COMPETITION WE
FACE.
Our future success will depend to a large extent on our ability to
grow and maintain our client base and revenue. This requires that we offer
services that are superior to the services being offered by our competitors and
that we price our services competitively. We compete for a portion of employers'
recruiting budgets with many types of competitors, as employers typically
utilize a variety of sources for recruiting, including:
o traditional offline recruiting firms;
o traditional offline advertising, such as print media;
o resume processing companies;
o Web-based recruitment companies;
o Internet job posting companies; and
o client-server-based software services.
In addition, many employers are developing or may develop their own
software to satisfy their recruitment needs. If we are unable to grow our client
base and revenue, our business, operating results and financial condition could
be materially adversely affected.
THE INCREASING COMPETITION IN OUR MARKETS COULD AFFECT OUR ABILITY TO
EXPAND.
The market for human capital management, or HCM, services is highly
fragmented and competitive. We compete nationally and internationally with
Internet recruitment services companies, outplacement service companies and
human resource, or HR, service providers. We expect competition to increase and
intensify in the future, with increased price competition developing for our
services. A number of our current and potential competitors have longer
operating histories and greater financial, technical and marketing resources and
name recognition than we do which could give them a competitive advantage. Our
competitors may develop products or services that are equal or superior to ours
or that achieve greater market acceptance than ours. It is also possible that
new competitors may emerge and rapidly acquire significant market share. As a
result, we may not be able to expand or maintain our market share and our
ability to penetrate new markets may be adversely affected.
IF WE EXPERIENCE CLIENT ATTRITION, OUR OPERATING RESULTS WILL BE
ADVERSELY AFFECTED.
Since we generally enter into subscription agreements with our
E-Cruiter Enterprise clients for terms of one year or less, we have no assurance
that the client will maintain a long-term relationship with us. If we lose
clients after the expiration of their initial subscription, our business,
revenues, operating results and financial condition will be adversely affected.
Since we have only been offering our services for a limited period of time, we
do not know what rate of client attrition to expect. To the extent we experience
significant client attrition, we must attract additional clients to maintain
revenue.
WE MAY NOT BE ABLE TO STRENGTHEN AND MAINTAIN AWARENESS OF OUR BRAND
NAME.
We believe that our success will depend to a large extent on our
ability to successfully develop, strengthen and maintain our brand recognition
and reputation. In order to strengthen and maintain our brand recognition and
reputation, we invest and will need to continue to invest substantial resources
in our marketing efforts and maintain high standards for actual and perceived
quality, usefulness, reliability, security and ease of use of our services. If
we fail to successfully promote and maintain our brand name, particularly after
incurring significant expenses in promoting our brand name, or encounter legal
obstacles which prevent our continued use of our brand name, our business,
operating results and financial condition could be materially adversely affected
and the market price of our common shares could decline. Moreover, even if we
continue to provide quality service to our clients, factors outside of our
control, including actions by organizations that are mistaken for us and factors
generally affecting our industry, could affect our brand and the perceived
quality of our services.
41
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO ENTER INTO STRATEGIC
RELATIONSHIPS WITH JOB POSTING AND OTHER ON-LINE RECRUITMENT SERVICES
TO OFFER AN ATTRACTIVE SERVICE TO OUR CLIENTS AND WITH A VARIETY OF
THIRD PARTIES TO EXPAND THE DISTRIBUTION OF OUR SERVICES.
If we are unable to enter into successful strategic relationships, our
business will suffer. We must maintain our existing relationships with job
posting boards and other on-line recruitment services and enter into additional
similar relationships to continue to offer an attractive service. We also must
enter into arrangements with third parties, such as value-added service
providers, to expand the distribution of our services. Because many of these
third parties compete with each other, the existence of a relationship with any
particular third party may limit or preclude us from entering into a
relationship with that third party's competitors. In addition, some of the third
parties with which we seek to enter into relationships may view us as a
competitor and refuse to do business with us. Any loss of an existing
relationship or failure to establish new relationships may adversely affect our
ability to improve our services, offer an attractive service in the new markets
that we enter, or expand the distribution of our services.
WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS SUCCESSFULLY INTO NEW
GEOGRAPHIC MARKETS.
Until the fourth quarter of fiscal 2001, we marketed our services
primarily in Canada. Since that time, we completed several acquisitions. Through
these acquisitions we endeavored to enhance our business by penetrating the
United States market. Our success and ability to grow our business will depend
to a significant degree on our ability to market our services successfully in
new geographic markets, including the United States. Penetrating new geographic
markets involves the expenditure of substantial resources, including retaining
additional highly qualified personnel. Failure to effectively penetrate new
geographical markets may result in increasing losses and the loss of our
investment, in whole or in part, in our acquisitions. This could materially
adversely affect our business, operating results and financial condition.
WE MAY LOSE BUSINESS IF WE ARE UNABLE TO SUCCESSFULLY DEVELOP AND
INTRODUCE NEW PRODUCTS, SERVICES AND FEATURES.
If we are unable to develop and introduce new products, services, or
enhancements to, or new features for, existing products or services, in a timely
and successful manner, we may lose sales opportunities. The market for our
services is characterized by rapid and significant technological advancements,
the introduction of new products and services, changes in client demands and
evolving industry standards. The adoption of new technologies or new industry
standards may render our products obsolete and unmarketable. The process of
developing new services or technologies is complex and requires significant
continuing efforts. We may experience difficulties or funding shortages that
could delay or prevent the successful development, introduction and sale of
enhancements or new products and services. Moreover, new products, services or
features which we introduce may not adequately address the needs of the
marketplace or achieve significant market acceptance.
42
OUR BUSINESS COULD SUFFER IF FINANCING IS NOT AVAILABLE WHEN REQUIRED
OR IS NOT AVAILABLE ON ACCEPTABLE TERMS.
Our future capital requirements depend on a number of factors,
including our ability to grow our revenue. We believe that we have sufficient
credit facilities, cash flow from operations and cash reserves, which, together
with further cost reductions, will permit us to meet our working capital
requirements and capital expenditure requirements through the end of fiscal
2004. However, it is possible that we may need to raise additional funds sooner
than expected in order to fund expansion, develop new, and enhance existing,
services or acquire complementary businesses or technologies or if our revenues
are less or our expenses are greater than we expect. Our business could suffer
if financing is not available when required or is not available on acceptable
terms.
FUTURE FINANCING MAY BE ON TERMS ADVERSE TO YOUR INTERESTS.
In the past we have issued and, in the future we may issue, equity or
convertible debt securities to raise additional funds. As a result of new
issuances, our shareholders may experience significant dilution of their
ownership interest and holders of those new securities may have rights senior to
those of the holders of our common shares.
IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY, OUR
U.S. SHAREHOLDERS MAY SUFFER ADVERSE TAX CONSEQUENCES.
We believe that we were not a passive foreign investment company for
U.S. federal income tax purposes for fiscal years 2001, 2002 and 2003.
Generally, we may be characterized as a passive foreign investment company for
U.S. federal income tax purposes if for any taxable year 75% of our gross income
is passive income, or at least 50% of our assets are held for the production of,
or produce, passive income. This characterization could result in adverse U.S.
tax consequences to our shareholders. These consequences may include having
gains realized on the sale of our common shares treated as ordinary income,
rather than capital gain income, and having potentially punitive interest
charges apply to the proceeds of share sales. U.S. shareholders should consult
with their own U.S. tax advisors with respect to the U.S. tax consequences of
investing in our common shares.
43
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT
OUR PROPRIETARY TECHNOLOGIES.
Our success depends to a significant degree upon the protection of our
proprietary technologies and brand names. The unauthorized reproduction or other
misappropriation of our proprietary technologies could provide third parties
with access to our technologies without payment. If this were to occur, our
proprietary technologies would lose value and our business, operating results
and financial condition could be materially adversely affected. We rely upon a
combination of copyright, trade secret and trademark laws and non-disclosure and
other contractual arrangements to protect our proprietary rights. The measures
we have taken to protect our proprietary rights, however, may not be adequate to
deter misappropriation of proprietary information or protect us if
misappropriation occurs. Policing unauthorized use of our technologies and other
intellectual property is difficult, particularly because of the global nature of
the Internet. We may not be able to detect unauthorized use of our proprietary
information and take appropriate steps to enforce our intellectual property
rights. If we resort to legal proceedings to enforce our intellectual property
rights, the proceedings could be burdensome and expensive and could involve a
high degree of risk.
THIRD PARTIES COULD CLAIM THAT WE INFRINGE UPON THEIR PROPRIETARY
TECHNOLOGIES.
Our products, services, content and brand names may be found to
infringe valid copyrights, trademarks or other intellectual property rights held
by third parties. In the event of a successful infringement claim against us and
our failure or inability to modify our technologies or services, develop
non-infringing technology or license the infringed or similar technology, we may
not be able to offer our services. Any claims of infringement, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management attention, require us to enter into costly royalty or licensing
arrangements, modify our technologies or services or prevent us from using
important technologies or services, any of which could harm our business,
operating results and financial condition.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION WHICH COULD
INCREASE OUR COSTS OF DOING BUSINESS, RESTRICT OUR ACTIVITIES AND/OR
SUBJECT US TO LIABILITY.
Uncertainty and new regulations relating to the Internet could increase
our costs of doing business, prevent us from providing our services, slow the
growth of the Internet or subject us to liability, any of which could adversely
affect our business, operating results and prospects. In addition to new laws
and regulations being adopted, existing laws may be applied to the Internet.
There are currently few laws and regulations directly governing access to, or
commerce on, the Internet. However, due to the increasing popularity and use of
the Internet, the legal and regulatory environment that pertains to the Internet
is uncertain and continues to change. New and existing laws may cover issues
which include:
o user privacy;
o pricing controls;
o consumer protection;
o libel and defamation;
o copyright and trademark protection;
44
o characteristics and quality of services;
o sales and other taxes; and
o other claims based on the nature and control of Internet materials.
COMPUTER VIRUSES OR SOFTWARE ERRORS MAY DISRUPT OUR OPERATIONS, SUBJECT
US TO A RISK OF LOSS AND/OR EXPOSE US TO LIABILITY.
Computer viruses may cause our systems to incur delays or other service
interruptions. In addition, the inadvertent transmission of computer viruses or
software errors in new services or products not detected until after their
release could expose us to a material risk of loss or litigation and possible
liability. Moreover, if a computer virus affecting our system is highly
publicized or if errors are detected in our software after it is released, our
reputation and brand name could be materially damaged and we could lose clients.
WE MAY EXPERIENCE REDUCED REVENUE, LOSS OF CLIENTS AND HARM TO OUR
REPUTATION AND BRAND NAME IN THE EVENT OF SYSTEM failures.
We may experience reduced revenue, loss of clients and harm to our
reputation and brand name in the event of unexpected network interruptions
caused by system failures. Our servers and software must be able to accommodate
a high volume of traffic. We have experienced minor system interruptions in the
past, and we believe that system interruptions will continue to occur from time
to time in the future. If we are unable to add additional software and hardware
to accommodate increased demand, we could experience unanticipated system
disruptions and slower response times. Any catastrophic failure at our network
operations center could prevent us from serving our clients for a number of
days, or possibly weeks, and any failure of our Internet service provider may
adversely affect our network's performance. Our clients may become dissatisfied
by any system failure that interrupts our ability to provide our services to
them or results in slower response times. Our business interruption insurance
may not adequately compensate us for any losses that may occur due to any
failures in our system or interruptions in our services.
BREACHES OF OUR NETWORK SECURITY COULD BE COSTLY.
If unauthorized persons penetrate our network security, they could
misappropriate proprietary information or cause interruptions in our services.
We may be required to spend capital and resources to protect against or to
alleviate these problems. In addition, because we host data for our clients, we
may be liable to any of those clients that experience losses due to our security
failures. As a result, security breaches could have a material adverse effect on
our business and the market price of our common shares may decline.
OUR BUSINESS DEPENDS ON INTERNET SERVICE PROVIDERS TO PROVIDE
SATISFACTORY SERVICE TO OUR CLIENTS TO ENABLE THEM TO USE OUR SERVICES
AND ACCESS JOB SEEKER CANDIDATES ON-LINE.
Failure of Internet service providers or on-line service providers to
provide access to the Internet to our clients and job seekers would prevent them
from accessing our Web board, which would cause our business to suffer. Many of
the Internet service providers, on-line service providers and other Web site
operators on which we depend have experienced significant service slowdowns,
malfunctions, outages and capacity limitations. If users experience difficulties
using our services due to the fault of third parties, our reputation and brand
name could be harmed.
45
OUR BUSINESS DEPENDS ON THE DEVELOPMENT AND MAINTENANCE OF THE INTERNET
INFRASTRUCTURE.
We cannot assure you that the Internet infrastructure will continue to
effectively support the demands placed on it as the Internet continues to
experience increased numbers of users, greater frequency of use and increased
bandwidth requirements of users. In the past, the Internet has experienced a
variety of outages and other delays. The Internet is also subject to actions of
terrorists or hackers who may attempt to disrupt specific web sites or Internet
traffic generally. Any future outages or delays could affect the willingness of
employers to use our on-line recruitment offerings and of job seekers to post
their resumes on the Internet. If any of these events occur, our business,
operating results and financial condition could be materially adversely
affected.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR SHAREHOLDERS COULD DEPRESS THE
MARKET PRICE FOR OUR COMMON SHARES.
We have an effective registration statement registering the resale by
certain holders of our securities of 11,051,034 common shares which are either
outstanding or are issuable upon the exercise of warrants or conversion of
convertible notes. The common shares registered under the registration statement
are eligible for resale in the public market without restriction at any time. In
addition, we have agreed to file a registration statement prior to September 27,
2003 registering the resale of 1,000,002 common shares, 333,334 of which are
issuable upon the exercise of warrants. We also have granted a holder of 275,000
common shares "piggyback" registration rights. This means that any registration
statement that we file in the future registering common shares may require the
registration of these shares, subject to certain restrictions. We cannot predict
the effect, if any, that the sale of these additional securities or the
availability of these additional securities for sale will have on the market
prices of our common shares prevailing from time to time, but it could depress
the market price for our common shares.
OUR COMMON SHARES HAVE TRADED AT PRICES BELOW $1.00 AND COULD BE
SUBJECT TO DELISTING BY NASDAQ.
Our common stock currently trades on the NASDAQ Small Cap Market and
the Boston Stock Exchange. Under the NASDAQ requirements, a stock can be
delisted and not allowed to trade on the NASDAQ if the closing bid price of the
stock over a 30 consecutive trading-day period is less than $1.00. The Boston
Stock Exchange, however, does not maintain a similar minimum price requirement.
During the fourth quarter of fiscal 2003, our common stock failed to meet the
NASDAQ minimum bid price requirement because the closing bid price for 30
consecutive trading days was below $1.00. On May 20, 2003, NASDAQ gave us notice
of this fact and gave us six months to cure this problem or our common stock
would be delisted. On July 8, 2003, NASDAQ gave us notice that we regained
compliance with the minimum bid price rule because the closing bid price of our
common shares had been $1.00 or more for at least 10 consecutive trading days.
No assurance can be given that the closing bid price of our common shares will
continue to satisfy the NASDAQ minimum bid price requirements and thus continue
to trade on the NASDAQ Small Cap Market. Although our common shares may remain
listed on the Boston Stock Exchange, if our common shares are delisted from the
NASDAQ Small Cap Market, there may be a limited market for our shares, trading
our stock may become more difficult and our share price could decrease even
further. If our common shares are not listed on a national securities exchange
or NASDAQ, potential investors may be prohibited from or be less likely to
purchase our common shares, limiting the trading market for our stock even
further.
46
THE CONVERSION OF OUR CONVERTIBLE NOTES AND PREFERRED STOCK COULD
RESULT IN SUBSTANTIAL NUMBERS OF ADDITIONAL COMMON SHARES BEING ISSUED.
Our 8% Senior Subordinated Convertible Notes are convertible into a
class of preferred shares designated Series A Convertible Preferred Shares, no
par value per share (the "Series A Shares"). The conversion price of the Notes
into Series A Shares is $100 per share, subject to adjustment upon the
occurrence of certain events. The Series A Shares are convertible into a number
of common shares determined by dividing $100 by a floating conversion price
based on the market price of our common shares, provided that the conversion
price cannot exceed the lesser of $0.75 or 80% of the market price of our common
shares for the five day period immediately preceding conversion. The conversion
price for the Series A Shares into common shares is subject to further
adjustment upon the occurrence of certain events. At the election of the holder,
the Notes may be converted directly into our common shares at a conversion price
equal to 80% of the average closing price of our common shares for the five day
period before such conversion. As a result, the lower that the price of our
common shares is at the time of conversion, the greater the number of common
shares the holder may receive. To the extent the Notes or Series A Shares are
converted into common shares, a significant number of common shares may be sold
into the market, which could decrease the price of our common shares.
THE PRICE OF OUR COMMON SHARES HISTORICALLY HAS BEEN VOLATILE, WHICH
MAY MAKE IT MORE DIFFICULT FOR YOU TO RESELL OUR COMMON SHARES WHEN YOU
WANT AT PRICES YOU FIND ATTRACTIVE.
The market price of our common shares has been highly volatile in the
past, and may continue to be volatile in the future. For example, since June 1,
2002, the closing sale price of our common shares on the NASDAQ Small Cap Market
has fluctuated between $0.81 and $3.99 per share. The following factors may
significantly affect the market price of our common shares:
o quarterly variations in our results of operations;
o announcement of new products, product enhancements, joint ventures and
other alliances by our competitors or us;
o technological innovations by our competitors or us;
o general market conditions or market conditions specific to particular
industries; and
47
o the operating and stock price performance of other companies that
investors may deem comparable to us.
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the price of
our common shares, regardless of our operating performance. (See Risk Factor
"Our common shares have traded at prices below $1.00 and could be subject to
delisting by NASDAQ.")
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are primarily exposed to market risks associated with fluctuations
in interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
Our exposure to interest rate fluctuations relates primarily to our
short-term investment portfolio and our bank loans. We invest our surplus cash
in an investment trust established by a Canadian chartered bank, and in a
Certificate of Deposit in a bank in the United States. The investment trust
holds various short-term, low-risk instruments, and can be withdrawn without
penalty at any time. The interest income from these investments is subject to
interest rate fluctuations which we believe will not have a material impact on
our financial position.
We have established a CDN $1,000,000 line of credit with the Bank of
Montreal which bears interest at the bank's prime rate plus 1%. We have drawn
CDN $812,139 on this facility as of May 31, 2003. We can draw an additional CDN
$17,861 before additional collateral would be required. We also have a term loan
with the bank in the amount of CDN $159,981 as of May 31, 2003. The term loan
bears interest at the bank's prime rate plus 2%. Additionally, we have a letter
of credit issued in May 2002 as collateral on leased facilities in the amount of
CND $270,000 that will renew annually. We pay an annual fee of 1.2% on this
letter of credit.
We also have a term loan and a credit facility from Michael Mullarkey,
our Chief Executive Officer, and Convertible Notes, which all bear interest at
8.0% per annum. The terms of these financing instruments are fixed and therefore
do not expose us to interest rate fluctuations.
The majority of our interest rates are fixed, therefore we have limited
exposure to risks associated with interest rate fluctuations.
The impact on net interest income of a 100 basis point adverse change
in interest rates for the fiscal year ended May 31, 2003 would have been less
than $14,000.
48
FOREIGN CURRENCY RISK
We have monetary assets and liabilities denominated in Canadian
Dollars. As a result, fluctuations in the exchange rate of the Canadian dollar
against the U.S. dollar will impact our reported net asset position. A 10%
change in foreign exchange rates would result in a change in our reported net
asset position of approximately $76,000.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT STATEMENT OF RESPONSIBILITY
Workstream's management is responsible for the preparation and
presentation of the consolidated financial statements and all the information in
this annual report on Form 10-K. The consolidated financial statements were
prepared by management in accordance with generally accepted accounting
principles in the United States. Where alternative accounting methods exist,
management has selected those it considered to be most appropriate in the
circumstances. Financial statements include certain amounts based on estimates
and judgments. Management has determined such amounts on a reasonable basis with
the objective of ensuring that the consolidated financial statements are
presented fairly, in all material respects. Financial information presented
elsewhere in this annual report has been prepared by management to ensure
consistency with that in the financial statements. The consolidated financial
statements have been reviewed and approved by the Company's Audit Committee.
Management is responsible for the development and maintenance of
systems of internal accounting and administrative controls of high quality,
consistent with reasonable cost. Such systems are designed to provide reasonable
assurance that the financial information is accurate, relevant and reliable and
that the Company's assets are appropriately accounted for and adequately
safeguarded.
The Company's Audit Committee is appointed by its Board of Directors
annually and consists solely of outside directors. The committee meets
periodically with management, as well as with the independent auditors, to
satisfy itself that each is properly discharging its responsibilities, to review
the consolidated financial statements and the independent auditors' report, and
to discuss significant financial reporting issues and auditing matters. The
Audit Committee reports its findings to the Board of Directors for consideration
when approving the consolidated financial statements for issuance to the
shareholders.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, the independent auditors, in accordance with
Canadian and United States generally accepted auditing standards on behalf of
the shareholders. The Auditors' Report outlines the nature of the examination
and their opinion on the consolidated financial statements of the Company. The
independent auditors have full and unrestricted access to the Audit Committee.
/s/ Michael Mullarkey /s/ David Polansky
- -------------------------------- -----------------------------
(Signed) Michael Mullarkey, CEO (Signed) David Polansky, CFO
49
AUDITORS' REPORT
TO THE SHAREHOLDERS OF WORKSTREAM INC.
We have audited the consolidated balance sheets of Workstream Inc. as
at May 31, 2003 and 2002, and the consolidated statements of operations,
comprehensive loss, shareholders' equity and cash flows for the three-year
period ending May 31, 2003. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States
generally accepted auditing standards. Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at May 31,
2003 and 2002, and the results of its operations and its cash flows for the
three-year period ending May 31, 2003, in accordance with United States
generally accepted accounting principles.
PricewaterhouseCoopers LLP
Chartered Accountants
Ottawa, Canada
July 25, 2003
50
WORKSTREAM, INC.
CONSOLIDATED BALANCE SHEETS
(UNITED STATES DOLLARS)
MAY 31, 2003 MAY 31, 2002
---------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 255,173 $ 1,297,656
Restricted cash 1,307,439 1,957,090
Short-term investments 38,419 345,206
Accounts receivable, net of allowance for doubtful
accounts of $55,828 (May 31, 2002 - $98,188) 933,889 1,314,958
Prepaid expenses 133,551 144,400
Deferred tax asset -- 135,000
Other assets 201,877 91,188
---------------------------------------------
CAPITAL ASSETS 2,870,348 5,285,498
1,138,276 1,557,303
DEFERRED TAX ASSET -- 694,148
OTHER ASSETS 143,500 146,605
ACQUIRED INTANGIBLE ASSETS 9,082,926 2,853,871
GOODWILL 17,383,437 12,738,172
---------------------------------------------
$ 30,618,487 23,275,597
=============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,909,896 1,136,662
Accrued liabilities 1,093,133 839,078
Accrued exit costs 117,702 --
Line of credit 593,452 1,364,723
Accrued compensation 443,144 900,360
Current portion of convertible notes 449,071 --
Current portion of long-term obligations 31,662 26,175
Current portion of related party obligation 178,623 1,116,943
Deferred income tax liability -- 490,862
Current portion of capital lease obligations 97,882 48,411
Deferred revenue 1,367,362 1,038,886
---------------------------------------------
6,281,927 6,962,100
DEFERRED INCOME TAX LIABILITY 2,607,981 650,686
CAPITAL LEASE OBLIGATIONS 73,316 119,939
LEASEHOLD INDUCEMENTS 142,274 143,866
CONVERTIBLE NOTES -- 131,597
LONG-TERM OBLIGATIONS 85,243 102,521
RELATED PARTY OBLIGATIONS 2,403,407 408,070
---------------------------------------------
11,594,148 8,518,779
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued and outstanding, no par value - 19,951,210
common shares (May 31, 2002 - 14,851,905) 47,158,583 33,135,734
Additional paid-in capital 4,721,516 4,792,887
Accumulated other comprehensive loss (893,316) (885,961)
Accumulated deficit (31,962,444) (22,285,842)
---------------------------------------------
19,024,339 14,756,818
---------------------------------------------
$ 30,618,487 $ 23,275,597
=============================================
The accompanying notes are an integral part of these consolidated financial statements.
51
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNITED STATES DOLLARS)
YEARS ENDED MAY 31,
2003 2002 2001
--------------------------------------------------
REVENUE $ 17,836,990 $ 14,751,620 $ 1,991,971
COST OF REVENUES (exclusive of
depreciation, shown below) 3,040,132 2,858,294 1,482,730
--------------------------------------------------
GROSS PROFIT 14,796,858 11,893,326 509,241
--------------------------------------------------
EXPENSES
Selling and marketing 6,057,788 6,649,057 2,415,831
General and administrative 9,581,554 6,724,211 984,033
Research and development 1,086,295 749,392 2,164,045
Amortization and depreciation 6,097,141 1,795,445 501,384
Impairment write-down of goodwill 2,133,242 2,810,000 --
--------------------------------------------------
24,956,020 18,728,105 6,065,293
--------------------------------------------------
OPERATING LOSS (10,159,162) (6,834,779) (5,556,052)
--------------------------------------------------
OTHER INCOME AND (EXPENSES)
Interest and other income 47,245 146,061 494,635
Interest and other expense (1,193,045) (300,983) (42,418)
--------------------------------------------------
(1,145,800) (154,922) 452,217
--------------------------------------------------
LOSS BEFORE INCOME TAX (11,304,962) (6,989,701) (5,103,835)
Recovery of deferred income taxes 1,586,232 28,396 --
Current income tax recovery 42,128 -- --
--------------------------------------------------
NET LOSS FOR THE YEAR $ (9,676,602) $ (6,961,305) $ (5,103,835)
==================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE YEAR $ 18,607,725 $ 13,281,374 $ 7,710,284
==================================================
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.52) $ (0.52) $ (0.66)
==================================================
The accompanying notes are an integral part of these consolidated financial statements.
52
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNITED STATES DOLLARS)
YEARS ENDED MAY 31,
2003 2002 2001
---------------------------------------------------------
Net loss for the year $ (9,676,602) $ (6,961,305) $ (5,103,835)
Other comprehensive loss:
Cumulative translation adjustment (net of tax of $nil) (7,355) (346,043) (272,182)
---------------------------------------------------------
Comprehensive loss for the year $ (9,683,957) $ (7,307,348) $ (5,376,017)
=========================================================
The accompanying notes are an integral part of these consolidated financial statements.
53
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNITED STATES DOLLARS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------------------- PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT LOSS EQUITY
-------------------------------------------------------------------------------------------
Balance at May 31, 2000 7,701,628 $ 17,773,437 $ 1,949,670 $(10,220,702) $(267,736) $ 9,234,669
Issuance of shares through
exercise of stock options 10,634 16,455 -- -- -- 16,455
Issuance of options to employees -- -- 166,950 -- -- 166,950
Net loss for the year -- -- -- (5,103,835) -- (5,103,835)
Cumulative translation adjustment -- -- -- -- (272,182) (272,182)
-------------------------------------------------------------------------------------------
Balance at May 31, 2001 7,712,262 17,789,892 2,116,620 (15,324,537) (539,918) 4,042,057
Issuance of shares for acquisitions 7,220,810 15,500,533 -- -- -- 15,500,533
Share repurchases (100,000) (200,000) -- -- -- (200,000)
Issuance of shares through
exercise of stock options 11,833 19,269 -- -- -- 19,269
Issuance of shares for services 7,000 26,040 -- -- -- 26,040
Issuance of options to employees -- -- 162,500 -- -- 162,500
Beneficial conversion feature
related to convertible notes,
net of issue costs -- -- 1,584,078 -- -- 1,584,078
Detachable warrants issued with
convertible notes, net of
issue costs -- -- 929,689 -- -- 929,689
Net loss for the year -- -- -- (6,961,305) -- (6,961,305)
Cumulative translation adjustment -- -- -- -- (346,043) (346,043)
------------------------------------------------------------------------------------------
Balance at May 31, 2002 14,851,905 33,135,734 4,792,887 (22,285,842) (885,961) 14,756,818
Issuance of shares for acquisitions 3,765,627 12,618,640 -- -- -- 12,618,640
Issuance of shares through
exercise of stock options 46,173 53,535 -- -- -- 53,535
Issuance of shares through
exercise of stock warrants 35,674 35,674 (35,674) -- -- --
Finance costs associated with the
issuance of convertible notes -- -- (123,697) -- -- (123,697)
Issuance of shares for exit costs 275,000 253,000 -- -- -- 253,000
Conversion of convertible note 210,525 200,000 -- -- -- 200,000
Issuance of shares held in escrow 500,000 750,000 -- -- -- 750,000
Issuance of shares and warrants 266,666 112,000 88,000 -- -- 200,000
Net loss for the year -- -- -- (9,676,602) -- (9,676,602)
Cumulative translation adjustment -- -- -- -- (7,355) (7,355)
------------- ----------------------------------------------------------------------------
Balance at May 31, 2003 19,951,570 $ 47,158,583 $ 4,721,516 $(31,962,444) $(893,316) $ 19,024,339
==========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
54
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNITED STATES DOLLARS)
YEARS ENDED MAY 31,
2003 2002 2001
-----------------------------------------------
CASH USED IN OPERATING ACTIVITIES
Net loss for the year $(9,676,602) $(6,961,305) $(5,103,835)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation 6,080,763 1,766,995 533,138
Non-cash interest on convertible notes and notes payable 720,486 33,364 --
Shares issued to service providers -- 26,040 --
Impairment write-down of goodwill 2,133,242 2,810,000 --
Write-off of deferred charges -- 17,993 --
Recovery of deferred income taxes (1,586,232) (109,000) --
Non-cash compensation expense -- 312,500 163,094
Loss on sale of capital asset 97,993 -- --
Net change in operating components of working capital (602,839) 263,371 (268,652)
-----------------------------------------------
(2,833,189) (1,840,042) (4,676,255)
-----------------------------------------------
CASH FROM INVESTING ACTIVITIES
Acquisition of capital assets (56,708) (204,297) (796,044)
Cash acquired in/(paid for) business acquisitions
(net of acquired cash of $569,566-May 31, 2002) 1,914,884 (1,824,272) --
Proceeds from sale of capital asset 14,950 -- --
Acquisition of intangible assets -- (68,810) --
(Increase)/decrease in restricted cash 761,170 (1,957,090) --
Sale of short-term investments 239,595 3,173,756 5,295,008
-----------------------------------------------
2,873,891 (880,713) 4,498,964
-----------------------------------------------
CASH FROM FINANCING ACTIVITIES
Proceeds from share and warrants issuance 200,000 -- --
Costs related to issuance of convertible promissory notes (123,697) (288,000) --
Proceeds from issuance of convertible notes -- 2,900,000 --
Capital lease payments (297,282) -- (39,052)
Proceeds from lease inducement -- -- 162,545
Proceeds from exercise of options 53,534 19,269 15,825
Shareholder loan proceeds 500,000 750,000 --
Shareholder loan repayment (391,600) (428,092) --
Repayment of bank debt (1,323,335) (1,693,712) --
Proceeds from bank financing 482,087 3,058,434 103,520
Repayment related to lease settlement (100,000) -- --
Long-term debt repayments (23,839) (61,156) (164,985)
-----------------------------------------------
(1,024,132) 4,256,743 77,853
-----------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES (59,053) (303,815) --
-----------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS FOR THE YEAR (1,042,483) 1,232,173 (99,438)
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE YEAR 1,297,656 65,483 164,921
-----------------------------------------------
CASH AND CASH EQUIVALENTS, END OF
THE YEAR $ 255,173 $ 1,297,656 $ 65,483
===============================================
The accompanying notes are an integral part of these consolidated statements.
55
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNITED STATES DOLLARS)
YEARS ENDED MAY 31,
2003 2002 2001
-----------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Purchases of capital assets under capital lease -- -- $(68,486)
Proceeds from capital leases -- -- $ 68,486
Interest paid $340,605 $97,796 $(15,441)
Non cash lease settlement $631,654 -- --
The accompanying notes are an integral part of these consolidated statements.
56
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Workstream Inc. ("Workstream" or the "Company"), formerly
E-Cruiter.com, is a provider of Web-enabled tools and professional services for
human capital management ("HCM"). The Company offers a diversified suite of
high-tech and high-touch services aimed at addressing the full life cycle of the
employer-employee relationship. Workstream's HCM technology backbone enables
companies to streamline the management of enterprise human processes, including
recruitment, assessment, retention, deployment and career transitions.
NOTE 2: BASIS OF PRESENTATION
The consolidated financial statements included herein have been
prepared by Workstream in accordance with United States generally accepted
accounting principles. All amounts presented in these financials statements are
presented in United States dollars unless otherwise noted. Prior to September 1,
2001, the Company prepared its financial statements in accordance with Canadian
generally accepted accounting principles and presented its financial statements
in Canadian dollars. The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. The earnings of the
subsidiaries are included from the date of acquisition. At May 31, 2003, the
Company's subsidiaries are Workstream USA Inc., 3451615 Canada Inc., Paula Allen
Holdings, Inc., OMNIpartners, Inc. RezLogic, Inc., 6FigureJobs.com, Inc.,
Icarian Inc. and Xylo, Inc.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Significant estimates are made in the methodology used to assess
goodwill impairment. These estimates include future cash flows, future
short-term and long-term growth rates, and cost of capital. It is reasonably
possible that those estimates may change in the near-term, significantly
affecting future assessments of goodwill impairment.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents and short-term investments are stated at cost plus
accrued interest, which approximates fair value. Cash equivalents are defined as
highly liquid investments with terms to maturity at acquisition of three months
or less. Short-term investments are defined as highly liquid investments with
terms to maturity of one year or less. All cash equivalents and short-term
investments are classified as available for sale.
57
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT TAX CREDITS
Investment tax credits, which are earned as a result of qualifying
research and development expenditures, are recognized when the expenditures are
made and their realization is reasonably assured and are applied to reduce the
related research and development capital costs and expenses in the year.
CAPITAL ASSETS
Capital assets are recorded at cost. Amortization is based on the
estimated useful life of the asset and is recorded as follows:
Furniture and fixtures....................... 5 years straight line
Office equipment............................. 5 years straight line
Computers and software....................... 3 years straight line
Leasehold improvements....................... Term of lease
LEASE INDUCEMENTS
Lease inducements are amortized over the term of the lease as a
reduction of rent expense.
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method that requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
carrying amounts and tax basis of assets and liabilities. The Company provides a
valuation allowance on net deferred tax assets when it is more likely than not
that such assets will not be realized.
CAPITAL STOCK
Capital stock is recorded as the net proceeds received on issuance
after deducting all share issue costs.
REVENUE RECOGNITION
The Company recognizes revenue when all of the following criteria are
met: persuasive evidence of an agreement exists, the services have been
provided, the price is fixed and determinable and collection is reasonably
assured. Consequently, revenue is generally recognized as services are
performed.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, defines a fair value method of accounting for
issuance of stock options and other equity investments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. Pursuant to SFAS No. 123, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, but if they do so are required to disclose in a
note to the financial statements pro forma net income amounts as if the Company
had applied the fair value method of accounting.
58
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for employee stock-based compensation under APB
No. 25 and has complied with the disclosure requirements of SFAS No. 123 and a
related standard SFAS No. 148.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred.
Software development costs are expensed in the year incurred unless a
development project meets the criteria under generally accepted accounting
principles for deferral and amortization. No amounts have been capitalized to
date. Research and development expenses consist mainly of payroll related costs.
GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Goodwill represents the excess of the costs over the estimated fair
value of the net assets of businesses acquired. During 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 141, "BUSINESS COMBINATIONS".
This standard is effective for all business combinations initiated after June
30, 2001, and requires that the purchase method of accounting be used for all
business combinations initiated after that date. The Company has applied SFAS
No. 141 to each of its acquisitions completed during fiscal 2002 and fiscal
2003.
During 2001, the FASB issued SFAS No. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS". This standard is effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS No.142 on June 1, 2001, the start of
fiscal 2002. Under SFAS No. 142, goodwill, including goodwill recorded in past
business combinations, and intangible assets deemed to have indefinite lives are
no longer amortized, but are subject to annual impairment tests in accordance
with the new guidelines. Other intangible assets continue to be amortized over
their useful lives.
Management assesses goodwill related to reporting units for impairment
at least annually, and writes down the carrying amount of goodwill as required.
The Company estimates the fair value of each reporting unit by preparing a
discounted cash flow model. An impairment charge is recorded if the implied fair
value of goodwill of a reporting unit is less than the book value of goodwill
for that unit.
Intangible assets with a finite useful life recorded as a result of
acquisition transactions are amortized over their estimated useful lives as
follows:
Acquired technologies............ 3 years straight line
Customer base.................... 3 years straight line
Intellectual property............ 5 years straight line
59
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORTING CURRENCY
During fiscal 2002, the Company adopted the US dollar as its reporting
currency. As a result of the change in reporting currency, the financial
statements for all periods prior to June 1, 2001 were translated from Canadian
dollars to US dollars in accordance with SFAS No. 52, FOREIGN CURRENCY
TRANSLATION. Income statement balances were translated at the average rate over
the period while balance sheet accounts were translated at the exchange rate as
of the balance sheet date.
FOREIGN CURRENCY TRANSLATION AND FOREIGN TRANSACTIONS
The financial statements of the parent company have been translated
into United States dollars in accordance with SFAS No. 52, FOREIGN CURRENCY
TRANSLATION. The Company's subsidiaries use their local currency, which is the
United States dollar, as their functional currency. The functional currency of
the parent company is the Canadian dollar, and all balance sheet amounts of the
parent company with the exception of Shareholders' Equity have been translated
using the exchange rates in effect at year-end. Income statement amounts have
been translated using the average exchange rate for the year. The gains and
losses resulting from the translation of foreign currency statements into the
United States dollar are reported in comprehensive income for the year and
accumulated other comprehensive income.
Gains or losses on foreign currency transactions are recognized in
income when incurred.
NOTE 4: RESTRICTED CASH AND SHORT-TERM INVESTMENTS
The following is a summary of the Company's restricted cash and
short-term investments as at May 31, 2003 and May 31, 2002:
MAY 31,
2003 2002
---------------------------------
Restricted cash.......................................... $ 1,307,439 $ 1,957,090
Short-term investments................................... $ 38,419 $ 345,206
Excess funds are used to purchase units of an investment trust
established by a Canadian chartered bank, as well as bonds issued by Canadian
corporations. The investment trust holds various short-term, low-risk
instruments that accrue interest daily, and monies held in trust can be
withdrawn without penalty at any time.
60
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEARS ENDED MAY 31,
2003 2002 2001
----------------------------------------
Balance at beginning of year ..... $ 98,188 $ 13,142 $ 33,382
Charged to costs and expenses .... 186,581 111,000 (20,240)
Write-offs ....................... (228,941) (25,954) --
----------------------------------------
Balance at end of year ........... $ 55,828 $ 98,188 $ 13,142
========================================
NOTE 6: ACQUISITION TRANSACTIONS
ACQUISITION OF ICARIAN
On June 28, 2002, the Company acquired 100% of the outstanding stock of
Icarian, a California based company. As consideration for the purchase, the
Company issued to the shareholders of Icarian 2,800,000 common shares valued at
approximately $9.9 million. Icarian is a provider of HCM Web-enabled solutions
and professional services.
The consolidated financial statements presented herein include the
results of operations of Icarian from June 29, 2002.
Management prepared a valuation of the net tangible and intangible
assets acquired. The excess of the purchase price over the value of the net
tangible and identifiable intangible assets acquired has been allocated to
goodwill. The acquired current liabilities included $1,458,577 for exit costs
associated with $345,340 of employee severance pay and $1,113,237 for
elimination of office space. In March 2003, the Company and Icarian entered into
an agreement with the landlord of certain property being leased by Icarian to
terminate the lease between Icarian and the landlord. The landlord agreed to
terminate the lease and release Icarian from its financial obligations under the
lease in exchange for certain furniture and equipment previously used at the
property, $220,000 in the form of a promissory note, 275,000 common shares of
Workstream and cash of $109,000. The costs associated with the termination of
this lease were applied against the accrual for exit costs. As at May 31, 2003,
$117,702 remains outstanding, payable in monthly payments through October, 2003.
The goodwill resulting from the transaction has been allocated to the
Enterprise Recruiting Services business segment.
The purchase price has been allocated as follows:
Share consideration ............................ $ 9,908,640
Cash consideration ............................. 10,000
Acquisition costs .............................. 308,479
------------
10,227,119
------------
Current assets ................................. 2,279,980
Tangible long-term assets ...................... 1,187,907
Current liabilities ............................ (3,754,709)
Long-term liabilities assumed .................. 121,682
Intangible assets:
Acquired technology ...................... 7,670,000
Customer base ............................ 723,337
Deferred income tax liability .................. (3,357,300)
------------
Total net identifiable assets .................. 4,870,897
------------
Goodwill ....................................... $ 5,356,222
============
61
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACQUISITION OF PURECARBON
On July 1, 2002, the Company acquired certain assets and liabilities of
PureCarbon, a California based company. As consideration for the purchase, the
Company issued to the shareholders of PureCarbon 263,158 common shares, valued
at approximately $1,000,000. PureCarbon is the provider of Internet software
(JobPlanet) designed to integrate with behind-the-scenes human resources and
recruiting technology. The purchase agreement provided for additional common
shares to be issued to PureCarbon shareholders, with the number of shares equal
to $500,000 divided by the closing price of the Company's common shares on or
prior to August 15, 2003 should certain revenue targets for the twelve month
period ending June 30, 2003 be realized. Management has determined that those
revenue targets were not met and believes that those additional contingent
common shares will not be issued. As required under the purchase agreement, an
audit confirming whether the revenue targets were met is required to be
performed. The issuance of any additional common shares will result in
additional goodwill being recorded.
The consolidated financial statements presented herein include the
results of operations of PureCarbon from July 2, 2002.
Management prepared a valuation of the net tangible and intangible
assets acquired. The excess of the purchase price over the value of the net
tangible and identifiable intangible assets acquired has been allocated to
goodwill.
The goodwill resulting from the transaction has been allocated to the
Enterprise Recruiting Services business segment.
The purchase price has been allocated as follows:
Share consideration .................. $ 1,000,000
Acquisition costs 28,000
-----------
1,028,000
-----------
Current assets ....................... 180,069
Tangible long-term assets ............ 144,819
Current liabilities .................. (134,161)
Intangible assets:
Acquired technology ............ 667,000
Customer base .................. 161,923
Trademarks, domain names ....... 8,350
-----------
Total net identifiable assets ........ 1,028,000
-----------
Goodwill ............................. $ --
===========
62
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACQUISITION OF XYLO
On September 13, 2002, the Company acquired 100% of the outstanding
stock of Xylo, a Washington based company. As consideration for the purchase,
the Company issued to the shareholders of Xylo 702,469 common shares valued at
approximately $1.7 million. Xylo is a provider of Web-based Employee Retention
Management ("ERM") solutions. Pursuant to the merger agreement with Xylo, an
additional 330,579 common shares may be released from escrow subject to
achievement of certain revenue targets for the twelve month period ending
September 30, 2003. The issuance of any additional common shares will result in
additional goodwill being recorded.
The consolidated financial statements presented herein include the
results of operations of Xylo from September 14, 2002.
Management prepared a valuation of the net tangible and intangible
assets acquired. The excess of the purchase price over the value of the net
tangible and identifiable intangible assets acquired has been allocated to
goodwill.
The goodwill resulting from the transaction has been allocated to the
Enterprise Recruiting Services business segment.
Share consideration ......... $ 1,700,000
Acquisition costs ........... 150,000
-----------
1,850,000
-----------
Current assets .............. 352,501
Tangible long-term assets ... 447,572
Current liabilities ......... (409,128)
Intangible assets:
Acquired technology ... 1,125,000
Customer base ......... 186,282
Deferred income tax liability (524,513)
-----------
Total net identifiable assets 1,177,714
-----------
Goodwill .................... $ 672,286
===========
During fiscal 2002, the Company significantly expanded its operations
through the completion of six acquisitions of companies that offered services
that allow the Company to provide a full spectrum of HCM solutions. Those
acquisitions consisted of acquiring 100% of the outstanding shares of the
following companies: Paula Allen Holdings and its subsidiaries, OMNIpartners and
its affiliates, RezLogic, and 6 FigureJobs.com. These acquisitions were made in
consideration of issuance of our common shares at the time of the acquisition,
as well as additional common shares held in escrow to be released upon
achievement of certain profit and/or revenue targets. In addition, the Company
acquired the technology and assets of Gonyea Career Marketing Inc., known as
ResumeXpress, in consideration of a cash amount. The Company also acquired the
technology and assets of Tech Engine in exchange for the assumption of a
promissory note.
63
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINGENT CONSIDERATION RELATING TO PRIOR ACQUISITIONS
As at May 31, 2003 a total of 654,204 common shares were held in escrow
relating to prior acquisitions as further described below. This total includes
323,625 common shares relating to 6FigureJobs.com which management believes will
not be issued, as well as 330,579 common shares relating to Xylo. In addition to
the escrowed shares, an estimated number of 520,833 common shares are
contingently issuable related to the PureCarbon acquisition, which management
believes will not be issued.
Pursuant to the purchase agreement for OMNIpartners, an additional
500,000 common shares were held in escrow pending the achievement of certain
revenue targets for the twelve months ended June 30, 2002. Management evaluated
revenue results and determined that the targets were not achieved. Therefore,
the 500,000 common shares held in escrow were cancelled in September 2002.
Pursuant to the purchase agreement for RezLogic, an additional 297,021
common shares were held in escrow pending the achievement of certain revenue and
profit targets for the twelve months ending June 30, 2002. Management evaluated
results achieved and determined that the targets were not met. Therefore, the
297,021 common shares held in escrow were cancelled in November 2002.
Pursuant to the purchase agreement for 6FigureJobs.com, an additional
323,625 common shares were to be released from escrow and issued to the former
shareholders of 6FigureJobs.com provided that certain revenue and profit targets
for the twelve month period ending September 30, 2002 were achieved. The Company
determined that the revenue and profit targets were not achieved. However, the
representative of the former shareholders of 6FigureJobs.com requested an audit
to review the Company's calculations used in determining that the revenue and
profit targets were not achieved. Management continues to believe that the
targets were not met and that the shares currently held in escrow will be
cancelled once the audit is completed.
In March 2003, the Board of Directors of the Company approved the
release of the final 500,000 common shares from escrow related to the purchase
of Paula Allen Holdings following the achievement of certain targets at December
31, 2002. As a result, capital stock increased by $750,000 representing the
value of 500,000 shares at $1.50 per share and goodwill also increased by
$750,000. The escrow shares were distributed to the former owners of Paula Allen
Holdings, which included Michael Mullarkey, the Company's Chief Executive
Officer, who owned a majority of the outstanding shares of Paula Allen Holdings.
Mr. Mullarkey's portion of the total escrow shares distributed is 437,500
shares.
Pursuant to the purchase agreement for Xylo, an additional 330,579
common shares may be released from escrow subject to achievement of certain
revenue targets for the twelve month period ending September 30, 2003. The
issuance of any additional common shares will result in additional goodwill
being recorded.
64
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the purchase agreement for PureCarbon, the Company may
issue additional shares equal to $500,000 divided by the closing price of the
Company's common shares on or prior to August 15, 2003 should certain revenue
targets for the twelve month period ended June 30, 2003 be realized. Management
has determined that the revenue targets were not met and believes that those
common shares will not be issued. As required under the purchase agreement, an
audit confirming whether the revenue targets were met is required to be
performed. As at May 31, 2003, based on a market price per common share of
$0.96, 520,833 common shares are contingently issuable.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to
the acquisitions made by Workstream as if the transactions occurred at the
beginning of the year ended May 31, 2002.
YEARS ENDED MAY 31,
2003 2002
-------------------------------
Revenues ............................... $ 18,843,739 $ 27,504,207
Cost of revenues ....................... 3,225,402 8,479,234
-------------------------------
Gross profit ........................... 15,618,337 19,024,973
Expenses ............................... 27,275,733 52,031,257
-------------------------------
Operating loss ......................... (11,657,396) (33,006,284)
Interest and other income (expense) .... (1,134,529) (997,095)
Recovery of deferred income taxes ...... 1,734,490 1,567,974
Current income tax recovery ............ 42,128 --
-------------------------------
Net loss ............................... $(11,015,307) $(32,435,405)
===============================
Weighted average number of common shares 19,338,731 18,684,426
===============================
Pro forma loss per share ............... $ (0.57) $ (1.74)
===============================
NOTE 7: CAPITAL ASSETS
Property and equipment consists of the following:
65
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31,
2003 2002
------------------------------
Furniture, equipment and leaseholds $ 1,388,873 $ 1,441,436
Office equipment .................. 241,659 222,518
Computers and software ............ 3,461,678 2,254,455
-------------------------------
5,092,210 3,918,409
Less accumulated amortization ..... (3,953,934) (2,361,106)
-------------------------------
Net capital assets ................ $ 1,138,276 $ 1,557,303
===============================
As of May 31, 2003 capital assets include net assets under capital
lease of $27,410 (2002 - $119,342) net of accumulated amortization of $216,664
(2002 - $125,931).
NOTE 8: ACQUIRED INTANGIBLE ASSETS
Depreciable intangible assets consists of the following:
MAY 31,
2003 2002
-------------------------------
Customer base .................................... $ 3,559,543 $ 2,488,000
Acquired technologies ............................ 10,281,632 819,632
Trademarks, domain names and intellectual property 457,760 449,410
Other ............................................ -- 2,260
------------------------------
Total cost ....................................... 14,298,935 3,759,302
------------------------------
Accumulated amortization:
Customer base .................................... (1,760,860) (619,611)
Acquired technologies ............................ (3,292,215) (212,039)
Trademarks, domain names and intellectual property (162,934) (71,521)
Other ............................................ -- (2,260)
------------------------------
Total accumulated amortization ................... (5,216,009) (905,431)
------------------------------
Net acquired intangible assets ................... $ 9,082,926 $ 2,853,871
==============================
66
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: GOODWILL
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
-------------------------------------------------
Goodwill at May 31, 2001 ................ $ -- $ -- $ --
Acquisitions during the year ............ 6,984,835 8,563,337 $ 15,548,172
Impairment during the year .............. (1,310,000) (1,500,000) (2,810,000)
------------------------------------------------
Goodwill at May 31, 2002 ................ 5,674,835 7,063,337 12,738,172
------------------------------------------------
Acquisitions during the year............. 6,028,507 -- 6,028,507
Issuance of contingent
consideration ...................... -- 750,000 750,000
Impairment during the year .............. (2,133,242) -- (2,133,242)
------------------------------------------------
Goodwill at May 31, 2003 ................ $ 9,570,100 $ 7,813,337 $ 17,383,437
================================================
NOTE 10: LINES OF CREDIT
At May 31, 2003, the Company had an aggregate of $593,452 outstanding
on a line of credit from the Bank of Montreal. Certain assets of the Company,
including short-term investments, property and receivables, are pledged as
collateral for this facility.
MAY 31,
2003 2002
------------------------
Line of credit - SunTrust ............ -- $ 992,892
Line of credit - Bank of Montreal .... 593,452 221,831
Line of credit - Harris Bank ......... -- 150,000
------------------------
Total line of credit ................. $593,452 $1,364,723
========================
At May 31, 2003, the Company had a line of credit with the Bank of
Montreal at an effective interest rate of 6.0%. The Company is permitted to draw
up to $1,000,000 Canadian dollars against this facility based on compensating
balances on deposit with the bank. The Company has drawn CDN $812,139 as of May
31, 2003. The Company has provided collateral of CDN $830,000, leaving CDN
$17,861 available to be drawn on this line.
Certain of the Company's short-term investments were provided as
collateral for the SunTrust line of credit. This line of credit bore interest at
the rate of return on these short-term investments plus 1.5%. The Company was
permitted to draw up to $1,000,000 against this facility. In December 2002, the
Company paid down the line of credit to $nil with restricted cash that had been
used as collateral for the credit line and subsequently cancelled the facility.
The operating line of credit with the Harris Bank was authorized for up
to $150,000. The interest rate on this line of credit was subject to change from
time to time based on changes in the lender's prime rate. The line of credit was
paid down to $nil in June 2002 and was subsequently cancelled.
As at May 31, 2003, and May 31, 2002, a total of $1,307,439 and
$1,957,090, respectively, of short-term deposits were pledged as collateral for
these facilities and the Company's leases and therefore restricted from the
Company's use, to the following institutions:
67
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31,
2003 2002
-----------------------
SunTrust Bank ........................................................................... $ -- $ 992,892
SunTrust Bank - credit card department .................................................. -- 37,086
Bank of America - credit card reserve ................................................... 399,786 399,883
Bank of Montreal - Term loan, line of credit and a
letter of credit for facility lease ................................................. 907,653 527,229
-----------------------
Total restricted cash ................................................................... $1,307,439 $1,957,090
=======================
NOTE 11: LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
MAY 31,
2003 2002
-----------------------
Term loan ............................................................................... $ 116,905 $ 128,696
Less: current portion ................................................................... 31,662 26,175
-----------------------
$ 85,243 $ 102,521
=======================
Long-term obligations represents a five year term loan maturing in May
2007 with monthly principal payments of CND $3,333 with the Bank of Montreal
that bears interest at the Bank's prime rate plus 2.0%. Collateral has been
provided as described in note 10.
As at May 31, 2003 the maturities for long-term obligations are as
follows:
Year ended May 31,
2004 $ 31,662
2005 29,226
2006 29,226
2007 26,791
---------------------
$ 116,905
=====================
NOTE 12: RELATED PARTY OBLIGATIONS
Related party obligations consist of the following:
MAY 31,
2003 2002
-----------------------
Note payable ............................................................................ $ 33,838 $ 115,437
Deferred compensation ................................................................... 797,880 --
Shareholder loans ....................................................................... 1,750,312 1,409,576
-----------------------
2,582,030 1,525,013
Less: current portion ................................................................... 178,623 1,116,943
-----------------------
$2,403,407 $ 408,070
=======================
68
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The note payable to a related party is non-interest bearing and
repayable in monthly installments of $10,200 beginning in October 2001 and
ending in April 2003. As at May 31, 2003, the last three payments have not been
made due to a disagreement with the related party.
During fiscal 2003, Michael Mullarkey, the Company's Chief Executive
Officer, agreed to defer until June 1, 2004, a total of $797,880 in compensation
earned as of May 31, 2003, accruing interest at 8.0% annually. After June 1,
2004, Mr. Mullarkey and the Company will mutually agree on the repayment terms
of his deferred compensation.
During the fiscal years 2003 and 2002, the Company received $500,000
and $750,000 respectively, in working capital loans from Mr. Mullarkey. These
loans accrued interest at 4.75%. During fiscal 2003, the Company consolidated
the loans made by Mr. Mullarkey to the Company along with the interest accrued
thereon into a five year term loan. The consolidated term loan is collateralized
by certain inventory, equipment, accounts receivable and other assets. The
consolidated term loan balance at May 31, 2003 is $1,287,901 and bears interest
at 8% per annum. The Company is required to make monthly interest only payments
during the first 24 months and monthly interest and principal payments
thereafter. In addition, Mr. Mullarkey has agreed to provide the Company with a
$1,200,000 credit facility bearing interest at 8% per annum. With respect to
each draw against the credit facility, the Company is required to make monthly
interest only payments during the first 24 months from the draw date and
thereafter monthly interest and principal payments over a three year period. The
Company is allowed to draw against this credit facility as needed.
The balance of the shareholder loans consists of a term loan assumed as
part of the acquisition of Paula Allen Holdings which is non-interest bearing
and is repayable in quarterly installments of $52,500 beginning in April 2001
and ending in January 2006. The Company recorded the present value of these
shareholder notes at the time of the acquisition utilizing a 15% discount rate.
Imputed interest is charged to expense over the term to maturity.
As at May 31, 2003 the related party obligations maturities are as
follows:
Year ended May 31,
2004 $ 178,623
2005 1,111,349
2006 576,558
2007 429,300
2008 286,200
---------------
$ 2,582,030
===============
69
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist of the following:
MAY 31,
2003 2002
----------------------------------
Capital leases................................................. $ 171,198 $ 168,350
Less: current portion.......................................... 97,882 48,411
----------------------------------
$ 73,316 $ 119,939
==================================
Capital lease obligations relate to office equipment, computers and
software and bear interest at rates that range from 7.5% to 15.1% per annum.
These leases mature at various times through October 2005.
NOTE 14: COMMITMENTS AND CONTINGENCIES
The Company has obligations under non-cancelable capital leases and
operating leases for office equipment, computer software and hardware, vehicles
and facilities. The leases expire at various dates through fiscal 2007 and, in
many cases, provide for renewal options. Most of the leases require the payment
of related executory costs, which include payment of taxes, maintenance and
insurance.
A summary of the future minimum lease payments under the Company's
non-cancelable leases as of May 31, 2003 is as follows:
Capital Operating
Leases Leases
--------------------------------------
Year ended May 31:
2004 $ 112,402 $ 1,529,242
2005 53,724 839,785
2006 27,194 666,134
2007 -- 393,543
2008 -- 432,240
Thereafter -- 1,116,621
--------------------------------------
Total minimum lease payments 193,320 $ 4,977,565
===============
Less amount representing interest (22,122)
----------------
Total minimum lease payments 171,198
Less current maturities (97,882)
----------------
$ 73,316
================
Rent expense totaled $1,988,955, $1,495,726, and $436,085 for the years
ended May 31, 2003, 2002 and 2001, respectively, under operating leases. The
Company has provided the landlord of the corporate headquarters location in
Ottawa with a letter of credit in the amount of $197,296. (See note 10)
70
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Two of the Company's wholly-owned subsidiaries, Paula Allen Holdings,
doing business as Allen And Associates, and OMNIpartners, were named as
defendants in a lawsuit filed by 11263 Mississippi, LLC and 14617 Vanowen LLC.
The complaint was filed on May 16, 2003 in the Clark County District Court in
Nevada. OMNIpartners leased office space from 11263 Mississippi, LLC and 14617
Vanowen LLC in Las Vegas, Nevada and then subleased certain portions of the
office space to Allen And Associates and an unrelated third party, U.S. Vehicle.
In this action, 11263 Mississippi, LLC and 14617 Vanowen LLC allege that
OMNIpartners breached the lease agreement and seek approximately $178,274 for
unpaid rents, maintenance charges and other charges as well as an undetermined
amount for attorneys' fees. OMNIpartners alleges the plaintiffs tortiously
interfered with its sublease agreement with U.S. Vehicle by moving U.S. Vehicle
into a nearby facility and leasing space to it. OMNIpartners also filed a
lawsuit against U.S. Vehicle and its principals alleging a breach of its
sublease agreement with OMNIpartners. This action was filed on April 18, 2002 in
the Clark County District Court in Nevada. In this action, OMNIpartners seeks
approximately $115,000 for unpaid rents, maintenance charges and other charges
as well as an undetermined amount for attorneys' fees. The Company believes
OMNIpartners has meritorious defenses to the allegations contained in the
complaint brought by 11263 Mississippi, LLC and 14617 Vanowen LLC and intends to
vigorously defend this action. Meredith and Marvin Cohen, former shareholders of
OMNIpartners, were also named as defendants in the complaint as guarantors under
the lease agreement. OMNIpartners has agreed to defend and indemnify Mr. and
Mrs. Cohen in the lawsuit.
The Company is subject to other legal proceedings and claims which
arise in the ordinary course of our business. The Company does not believe that
the resolution of such actions will materially affect the Company's business,
results of operations or financial condition.
NOTE 15: CONVERTIBLE NOTES
MAY 31,
2003 2002
-----------------------------
Convertible notes, face value at issue date .............. $ 2,900,000 $ 2,900,000
Less: Amount allocated to detachable warrants ............ (1,038,380) (1,038,380)
Amount allocated to beneficial
conversion feature ......................... (1,763,387) (1,763,387)
-----------------------------
Discounted value of convertible notes .................... 98,233 98,233
Note conversion .......................................... (200,000) --
Amortization of discount ................................. 550,838 33,364
-----------------------------
Convertible notes ........................................ $ 449,071 $ 131,597
=============================
71
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2002, the Company issued 8% Senior Subordinated
Convertible Notes (the "Convertible Notes") with detachable warrants as further
described below. The total gross proceeds received upon issuance of the
convertible notes totaling $2,900,000 was allocated between the convertible debt
and warrants based on their relative fair values. The fair value of the
detachable warrants was calculated using the Black Scholes pricing model.
Additionally, the Convertible Notes have a non-detachable conversion feature
where the fair value of the underlying equity securities exceeds the conversion
price of the debt ("beneficial conversion feature"). The value of the beneficial
conversion feature is measured as the excess of the fair value of the underlying
shares over the conversion price up to, but not exceeding, the net proceeds
received upon issuance of the Convertible Notes. The value ascribed to the
beneficial conversion feature is recorded as paid-in capital. The total discount
on the Convertible Notes is recognized as interest expense using the effective
yield method over the two year term to maturity of the Convertible Notes.
The detachable warrants entitle the Convertible Note holders to
purchase 658,000 common shares at an exercise price of $3.70 per share, subject
to adjustment upon the occurrence of certain events. The Convertible Notes are
convertible into a class of preferred shares designated Series A Convertible
Preferred Shares, no par value per share (the "Series A Shares"). The conversion
price of the Convertible Notes into Series A Shares is $100 per share, subject
to adjustment upon the occurrence of certain events. The Series A Shares are
convertible into a number of common shares determined by dividing $100 by a
floating conversion price based on the market price of our common shares,
provided that the conversion price cannot exceed the lesser of $0.75 or 80% of
the market price of our common shares for the five day period immediately
preceding conversion. The conversion price for the Series A Shares into common
shares is subject to further adjustment upon the occurrence of certain events.
At the election of the holder, the Convertible Notes may be converted directly
into our common shares at a conversion price equal to 80% of the average closing
price of our common shares for the five day period before such conversion.
During fiscal year 2003, certain holders of the Company's Convertible
Notes exercised their option to convert a portion of the Convertible Notes. This
resulted in a conversion of $200,000 of the Convertible Notes into Series A
Shares, which were immediately converted into common shares. As a result of the
foregoing conversions, 210,525 common shares were issued at a conversion price
equal to 80% of the average market price of the Company's common shares for the
five days prior to conversion, resulting in a conversion price of $0.95 per
share. The Convertible Notes mature $1,500,000 in April, 2004, and $1,200,000 in
May, 2004. (Also see note 24)
During May 2003, the Company raised additional capital by issuing an
individual 266,666 common shares at $0.75 per share and warrants to purchase
133,333 common shares at an exercise price of $1.50 per share, subject to
adjustment upon the occurrence of certain events. In May 2003, the Company also
entered into agreements with another individual and two institutional investors
whereby the Company agreed to sell and they agreed to purchase 933,334 common
shares at $0.75 per share and warrants to purchase 333,334 common shares at an
exercise price of $1.50 per share, subject to adjustment upon the occurrence of
certain events. The closing on the sale of these additional common shares and
warrants occurred in June 2003. As a result of these sales, any future
conversion of Series A Shares will be made at a price per share not to exceed
the lesser of $0.75 or 80% of the market price of our common shares for the five
day period immediately preceding conversion.
72
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: INCOME TAXES
The Company operates in several tax jurisdictions. Its income is
subject to varying rates of tax, and losses incurred in one jurisdiction cannot
be used to offset income taxes payable in another.
The loss before income taxes consisted of the following:
YEARS ENDED MAY 31,
2003 2002 2001
-----------------------------------------------
Canada ............................................$ 1,174,000 $ 1,577,000 $5,104,000
United States ..................................... 10,131,000 5,413,000 --
-----------------------------------------------
Loss before income taxes ..........................$ 11,305,000 $ 6,990,000 $5,104,000
===============================================
The provision (recovery) for income taxes consists of the following:
YEARS ENDED MAY 31,
2003 2002 2001
-----------------------------------------------
Canadian domestic:
Current income taxes ..............................$ (46,000) $ -- $ --
Deferred income taxes ............................. -- -- --
United States:
Current income taxes .............................. 4,000 81,000 --
Deferred income taxes ............................. (1,586,000) (109,000) --
-----------------------------------------------
Provision for (recovery of)
income taxes .................................$ (1,628,000) $ (28,000) $ --
===============================================
73
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the combined Canadian federal and provincial income
tax rate with the Company's effective income tax rate is as follows:
YEAR ENDED MAY 31,
2003 2002 2001
-----------------------------------------------------
Combined Canadian federal and
provincial tax rate ............................. 37.8% 40.50% 42.30%
Income tax recovery based on
combined Canadian federal and
provincial rate ................................. $ 4,273,000 $ 2,831,000 $ 2,060,000
Effect of foreign tax rate differences ............... 223,000 (12,000) --
Deductible amounts charged to equity ................. 47,000 563,000 261,000
Change in enacted tax rates .......................... (410,000) (870,000) (162,000)
Non-deductible amounts ............................... (362,000) (125,000) (4,000)
Write-down of non deductible goodwill ................ (853,000) (1,138,000) --
Change in valuation allowance ........................ (9,463,000) (1,369,000) (2,239,000)
Utilization of losses ................................ -- (252,000) --
Reversal of basis difference relating to
acquired intangibles ............................ -- 361,000 --
Effect of changes in carryforward amounts ............ 911,000 -- --
Deferred tax assets arising from
acquisitions ..................................... 6,633,000 -- --
Effect of foreign exchange rate differences .......... 627,000 69,000 84,000
Other ................................................ 2,000 (30,000) --
-----------------------------------------------------
Recovery of income taxes ............................. $ 1,628,000 $ 28,000 $ --
====================================================
The components of the Company's net deferred income taxes are as follows:
YEAR ENDED MAY 31,
2003 2002 2001
---------------------------------------------------
Deferred income tax assets:
Scientific Research and Experimental
Development ("SR&ED") expenses ................. $ 291,000 $ 341,000 $ 201,000
Loss carryforwards ................................... 14,213,000 6,435,000 5,319,000
Asset basis differences .............................. 2,354,000 535,000 --
Share issue costs .................................... 314,000 362,000 --
Investment tax credits ............................... 195,000 186,000 --
Other ................................................ 36,000 139,000 280,000
--------------------------------------------------
17,403,000 7,998,000 5,800,000
Less: valuation allowance ........................... (16,632,000) (7,169,000) (5,800,000)
--------------------------------------------------
771,000 829,000 --
--------------------------------------------------
Deferred income tax liabilities:
Intangible assets .................................... (3,379,000) (1,142,000) --
--------------------------------------------------
Net deferred income tax liabilities .................. $ (2,608,000) $ (313,000) $ --
==================================================
74
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has incurred net losses since inception. At May 31, 2003,
the Company had approximately $19,000,000 in net operating loss carryforwards
for U.S. federal income tax purposes that expire in various amounts through
2023, and approximately $23,000,000 in net operating loss carryforwards for
Canadian federal and provincial income tax purposes that expire in various years
through 2010. Management has determined that it is more likely than not that a
component of deferred tax assets relating to United States operations will be
realized; therefore deferred tax assets relating to those operations have been
recognized. A valuation allowance has been provided for the balance of net tax
assets. The change in the valuation allowance for the year ended May 31, 2003,
2002 and 2001 was an increase of $9,463,000, $1,369,000, and $2,239,000,
respectively, resulting primarily from net operating losses generated during the
periods.
NOTE 17: FINANCIAL INSTRUMENTS
INTEREST RATE AND FOREIGN EXCHANGE RISK
The Company has short-term investments and deposits that earn interest
at fixed rates ranging from 1.75% to 2.25%.
As explained in note 10, the Company has a line of credit with the Bank
of Montreal that bears interest based on the bank's prime rate plus 2%.
Fluctuations in the Bank's prime rate or exchange rates would result in an
impact on financial results. The Company also has a letter of credit with a
Canadian bank based on a fixed rate of 1.2% and fluctuations in exchange rates
would have a financial impact.
The Company has outstanding $2.7 million in convertible notes with a
two year term that bear interest at 8% annually. The notes were discounted for
the fair value of the warrants attached and a beneficial conversion feature,
which resulted in recording the notes at $98,000 which will be accreted up to
$2.7 million over the two year period.
The Company has a five year term loan of $1,287,901 maturing in January
31, 2008 with our Chief Executive Officer, Michael Mullarkey. The consolidated
term loan bears interest at 8% per annum. Under the term loan, the Company is
required to make monthly interest only payments during the first 24 months and
monthly interest and principal payments thereafter. In addition, Mr. Mullarkey
has agreed to provide us with a $1,200,000 credit facility bearing interest at
8% per annum. With respect to each draw against the credit facility, the Company
is required to make monthly interest only payments during the first 24 months
from the draw date and thereafter monthly interest and principal payments over a
three year period. The Company is allowed to draw against this credit facility
as needed. Mr. Mullarkey also agreed to defer until June 1, 2004, a total of
$797,880 in compensation earned as of May 31, 2003, with interest accruing on
the balance at 8% annually. After June 1, 2004, Mr. Mullarkey and the Company
will mutually agree on the repayment terms of his deferred compensation.
75
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk consist primarily of cash, short-term
investments and accounts receivable. Management believes the use of credit
quality financial institutions minimizes the risk of loss associated with cash
and short-term investments. Accounts receivable primarily represent amounts due
under the Company's contracts with its customers. The Company generally does not
require collateral from its customers.
NOTE 18: SHARE CAPITAL
The authorized share capital consists of an unlimited number of no par
value common shares, an unlimited number of Class A Preferred Shares, no par
value per share (the "Class A Preferred Shares"), and an unlimited number of
Series A Convertible Preferred Shares, no par value per share (the "Series A
Shares"). There were 19,951,570 common shares outstanding as of May 31, 2003
(May 31, 2002 - 14,851,905). As of May 31, 2003, an additional 654,204 shares
were being held in escrow as a result of the terms of acquisitions and an
estimated 520,833 are contingently issuable related to the PureCarbon
acquisition. (See note 6) These shares are to be released from escrow or issued
if certain profit and/or revenue targets are achieved. Management believes that
the profit and/or revenue targets of the 6FigureJobs.com and PureCarbon
acquisitions have not been met, and believes that the escrow shares related to
the 6FigureJobs.com acquisition will be cancelled and that the contingently
issuable common shares related to the PureCarbon acquisition will not be issued.
The periods covered by the escrow agreements extend until September 30, 2003. As
at May 31, 2003, there were no Class A Preferred Shares or Series A Shares
outstanding.
As a result of the acquisitions completed during fiscal 2003, 3,765,627
common shares were issued as follows: Icarian acquisition - 2,800,000 shares,
PureCarbon acquisition - 263,158, and Xylo acquisition - 702,469. The aggregate
value ascribed to these shares issued for acquisitions was $12,618,640. (See
note 6)
In February 2003, certain holders of the Company's Convertible Notes
converted $200,000 of the Convertible Notes into Series A Shares, which were
immediately converted into common shares. As a result of the foregoing
conversions, 210,525 common shares were issued at a conversion price equal to
80% of the average market price of the Company's common shares for the five days
prior to conversion, resulting in a conversion price of $0.95 per share.
In March 2003, a former landlord of Icarian was issued 275,000 common
shares valued at $253,000 as part of an agreement to terminate a lease between
Icarian and the landlord.
In March 2003, the Board of Directors of the Company approved the
release to the former shareholders of Paula Allen Holdings of the final 500,000
shares valued at $750,000 from escrow related to the Paula Allen Holdings
acquisition.
In May 2003, the Company received $200,000 from a private investor, in
exchange for the issuance of 266,666 common shares and warrants.
76
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fiscal year 2003, 46,173 shares were issued through exercise
of stock options for an aggregate cash amount of $53,535.
In addition to common shares outstanding, warrants were issued in
December 1999 to the underwriters of the Company's initial public offering in
December 1999. In December 1999, 245,000 warrants were issued with an exercise
price of $9.90 and in March 2001, 245,000 warrants were issued with an exercise
price of $1.00. The term of the warrants issued are both four years from the
issue date. In April and May of fiscal 2002, 658,000 detachable warrants were
issued in conjunction with the Convertible Notes. These warrants have an
exercise price of $3.70 per share, subject to adjustment upon the occurrence of
certain events and a five year term. In May 2003, 133,333 warrants were issued
in conjunction with the common shares issued to the private investor. These
warrants have an exercise price of $1.50 per share, subject to adjustment upon
the occurrence of certain events and a four year term.
During the fiscal year 2003, 50,000 of the previously issued
underwriter warrants were exercised on a cashless basis resulting in the
issuance of 35,674 common shares.
NOTE 19: STOCK BASED COMPENSATION PLANS
The Company has an employee and directors stock option plan (the "1997
Plan"). Under the terms of the 1997 Plan, the options to purchase common shares
generally vest ratably over a period of three years and expire five years from
the date of grant. The 1997 Plan provides that the number of options and the
option exercise price are to be fixed by the Board of Directors, but the
exercise price may not be lower than the fair value of the underlying common
shares on the date of grant. The Board of Directors has the right to accelerate
the vesting date for any options granted. In the event of a third-party offer to
acquire control of the Company that is accepted by a majority of the
shareholders, any options that are not exercisable at that time become fully
exercisable.
On October 29, 1999, the shareholders approved the 1999 Employees Stock
Option Plan (the "1999 Plan") to replace the 1997 Plan. The 1999 Plan is similar
to the 1997 Plan but includes provisions for directors and employees who reside
in the United States.
On October 5, 2000, the shareholders approved the 2000 Amended and
Restated Employee and Directors Stock Option Plan (the "2000 Plan") to replace
the 1999 Plan. The 2000 Plan is similar to the 1999 Plan but increased the
number of shares available for issuance under the 1999 Plan from 250,000 to
1,150,000.
On July 26, 2001, the shareholders approved the 2001 Amended and
Restated Employee and Directors Stock Option Plan (the "2001 Plan") to replace
the 2000 Plan. The 2001 Plan is similar to the 2000 Plan but definitions of
`affiliate' and `consultant' have been added and the definition of `participant'
has been amended to mean current or former full-time employee, consultant or
director of the Company or an affiliate. The number of shares available was also
increased from 1,150,000 to 2,500,000.
77
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 7, 2002, the shareholders approved the 2002 Amended and
Restated Employee and Directors Stock Option Plan (the "2002 Plan") to replace
the 2001 Plan. The number of shares available was increased from 2,500,000 to
3,000,000.
Pro forma information regarding net loss is required by SFAS No. 123
and has been determined as if the Company had accounted for its employee stock
options under the fair value method. The fair value of options granted is
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
YEAR ENDED MAY 31,
2003 2002 2001
---------------------------------------------------
Weighted average risk free interest rates 2.94% 3.12% 4.50%
Expected dividend yield 0% 0% 0%
Expected volatility 115% 50% 196%
Expected lives (in years) 3.5 3.5 3.5
The following reflects the impact on earnings as if the Company had
recorded additional compensation expense:
YEAR ENDED MAY 31,
2003 2002 2001
-------------------------------------------------------
Net loss, as reported $ (9,676,602) $ (6,961,305) $ (5,103,835)
Estimated incremental share based
compensation expense (798,700) (1,036,847) (650,764)
-------------------------------------------------------
Pro forma net loss $ (10,475,302) $ (7,998,152) $ (5,754,599)
=======================================================
Weighted average common shares
outstanding during the year 18,607,725 13,281,374 7,710,284
=======================================================
Basic and diluted loss per share, as
reported $ (0.52) $ (0.52) $ (0.66)
=======================================================
Pro forma basic and diluted loss
per share $ (0.56) $ (0.60) $ (0.75)
=======================================================
78
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity and related information is summarized as follows:
Weighted
Number Average
of Options Exercise Price
---------------------------------------
Balance outstanding - May 31, 2000 571,300 $3.43
Granted 1,074,569 $2.61
Exercised (10,634) $1.52
Forfeited (308,199) $2.70
---------------
Balance outstanding - May 31, 2001 1,327,036 $2.85
Granted 1,189,700 $2.57
Exercised (11,833) $1.63
Forfeited (623,608) $2.97
---------------
Balance outstanding - May 31, 2002 1,881,295 $2.64
Granted 463,500 $1.34
Exercised (46,173) $1.20
Forfeited (509,570) $2.57
---------------
Balance outstanding - May 31, 2003 1,789,052 $2.33
===============
The weighted average exercise price of options granted during the year
is as follows:
FOR THE YEAR ENDED MAY 31,
2003 2002 2001
--------------------- -------------------------- -------------------------
Options issued with exercise
price at market price 463,500 $1.34 479,700 $2.47 1,074,569 $2.61
Options issued with exercise
price above market price -- -- 210,000 $3.11 -- --
Options issued with exercise
price below market price -- -- 500,000 $2.45 -- --
79
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value of options granted during the year is
as follows:
FOR THE YEAR ENDED MAY 31,
2003 2002 2001
-------------------- ------------------------- --------------------------
Options issued with exercise
price at market price 463,500 $1.02 479,700 $0.99 1,074,569 $2.38
Options issued with exercise
price above market price -- -- 210,000 $1.10 -- --
Options issued with exercise
below market price -- -- 500,000 $1.22 -- --
Information about options outstanding at May 31, 2003 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Life Exercise Exercise
Exercise Price Shares (Years) Price Shares Price
- ----------------------- --------------- ----------------- -------------- -------------- ----------------
$1.00-1.99 550,260 4.03 $1.04 174,836 $1.07
$2.00-2.99 936,200 3.27 $2.46 540,326 $2.47
$3.00 and over 302,592 1.99 $4.28 281,446 $4.33
NOTE 20: NET CHANGE IN OPERATING COMPONENTS OF WORKING CAPITAL:
YEARS ENDED MAY 31,
2003 2002 2001
-------------------------------------------
Accounts receivable $ 1,119,483 $ (42,935) $ 146,103
Prepaid expenses 117,277 223,522 44,674
Deposits (97,559) (146,605) --
Other assets 118,499 70,332 (117,678)
Accounts payable and accrued liabilities (1,172,995) (272,414) 142,939
Accrued compensation (352,353) 498,124 57,995
Deferred revenue (335,191) (66,653) (506,596)
-------------------------------------------
(602,839) 263,371 (232,563)
Amounts included in accounts payable
related to capital asset purchases -- -- (36,089)
-------------------------------------------
$ (602,839) $ 263,371 $(268,652)
===========================================
80
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21: SEGMENTED AND GEOGRAPHIC INFORMATION
Prior to the acquisitions described in note 6, the Company had one
reportable segment: Enterprise Recruiting Services and all sales were in Canada
during fiscal 2001. As a result of the acquisitions, Workstream now has two
distinct operating segments: Enterprise Recruiting Services and Career
Transition Services. Operations are conducted in Canada and the United States.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
corporation's chief decision maker in deciding how to allocate resources and
assess performance. The Company's chief decision maker is the Chief Executive
Officer. The following is a summary of the Company's operations by business
segment and by geographic region for the years ended May 31, 2003 and May 31,
2002:
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
-------------------------------------------------------------
BUSINESS SEGMENT
YEAR ENDED MAY 31,2003
Revenue $ 10,777,294 $ 7,059,696 $ 17,836,990
Expenses 15,301,033 7,610,637 22,911,670
-------------------------------------------------------------
Business segment loss $ (4,523,739) $ (550,941) (5,074,680)
=======================================
Corporate overhead, other revenues
and expenses (4,601,922)
-----------------
Net loss $ (9,676,602)
=================
AS AT MAY 31, 2003
Tangible assets $ 3,354,100 $ 107,428 $ 3,461,528
Intangible assets 8,576,138 506,788 9,082,926
Goodwill 9,570,099 7,813,338 17,383,437
-------------------------------------------------------------
$ 21,500,337 $ 8,427,554 29,927,891
=======================================
Assets not allocated to business
segments 690,596
-----------------
Total assets $ 30,618,487
=================
YEAR ENDED MAY 31, 2002
Revenue $ 6,450,374 $ 8,301,246 $ 14,751,620
Expenses 10,123,277 10,290,488 20,413,765
-------------------------------------------------------------
Business segment loss $ (3,672,903) $ (1,989,242) (5,662,145)
======================================
Corporate overhead, other revenues
and expenses (1,299,160)
-----------------
Net loss $ (6,961,305)
=================
AS AT MAY 31, 2002
Tangible assets $ 6,032,404 $ 550,538 $ 6,582,942
Intangible assets 1,834,599 767,415 2,602,014
Goodwill 5,674,838 7,063,337 12,738,175
-------------------------------------------------------------
$ 13,541,841 $ 8,381,290 21,923,131
======================================
Assets not allocated to business
segments 1,352,466
-----------------
Total assets $ 23,275,597
=================
81
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CANADA USA TOTAL
---------------------------------------------------------
GEOGRAPHY
YEAR ENDED MAY 31, 2003
Revenue $ 2,338,404 $ 15,498,586 $ 17,836,990
Expenses 4,574,968 23,421,183 27,996,151
----------------------------------------------------------
Geographical loss $ (2,236,564) $ (7,922,597) (10,159,161)
===========================================
Other revenues and expenses 482,559
---------------
Net loss $ (9,676,602)
===============
AS AT MAY 31, 2003
Geographic segment assets $ 2,572,495 $ 28,045,992 $ 30,618,487
=====================-=====================================
YEAR ENDED MAY 31, 2002
Revenue $ 2,527,412 $ 12,224,208 $ 14,751,620
Expenses 4,182,544 17,826,295 22,008,839
----------------------------------------------------------
Geographical loss $ (1,655,132) $ (5,602,087) (7,257,219)
===========================================
Other revenues and expenses 295,914
---------------
Net loss $ (6,961,305)
===============
AS AT MAY 31, 2002
Geographic segment assets $ 4,469,560 $ 18,806,037 $ 23,275,597
==========================================================
82
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22: RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB approved the issuance of SFAS No. 143,
ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which is effective for fiscal years
beginning after June 15, 2002, which for the Company is the fiscal year
beginning June 1, 2003. This standard establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. The Company has adopted this new standard and it
has not had an impact on its financial statements.
In December 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard replaces FAS 121, but retains its fundamental provisions with
respect to the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. This standard is effective for fiscal years beginning after
December 15, 2001, which for the Company is the fiscal year beginning June 1,
2002. The Company has adopted this new standard and it has not had an impact on
its financial statements.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTION, which, among other technical changes, eliminates the classification
of extinguishment of debt as an extraordinary item. This statement is effective
for fiscal years beginning after May 15, 2002, which for the Company is the
fiscal year beginning June 1, 2002. The Company has adopted this new standard
and it has not had an impact on its financial statements.
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 changes the accounting
and reporting for costs associated with exit or disposal activities, termination
benefits and other costs to exit an activity, including certain costs incurred
in a restructuring. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB
STATEMENT NO. 123. SFAS No. 148 amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances, which for the Company is the
year ending May 31, 2003. The Company has adopted the disclosure requirements of
FAS 148.
83
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, to amend and clarify financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
The provisions of this statement are effective for contracts entered into or
modified after June 30, 2003.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. The
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement will be effective for financial instruments entered into
or modified after May 31, 2003. The Company does not expect the adoption of SFAS
No. 150 to have a material effect on our financial position or results of
operations.
NOTE 23: EARNINGS PER SHARE
For all the periods presented, diluted net loss per share equals basic
net loss per share due to the anti-dilutive effect of employee stock options,
warrants and escrowed shares.
Weighted average number of shares outstanding is computed as follows:
Shares outstanding at May 31, 2000 7,701,627
Weighted average number of shares issued for acquisitions -
Weighted average number of shares issued for employee options 8,657
---------------
Weighted average number of shares outstanding for the year
ended May 31, 2001 7,710,284
===============
Shares outstanding at May 31, 2001 7,712,262
Weighted average number of shares issued for acquisitions 5,601,472
Weighted average number of shares issued for employee options 3,947
Weighted average number of shares issued for services rendered 5,063
Weighted average number of shares cancelled (41,370)
---------------
Weighted average number of shares outstanding for the year
ended May 31, 2002 13,281,374
===============
Shares outstanding at May 31, 2002 14,851,905
Weighted average number of shares issued for acquisitions 3,534,622
Weighted average number of shares issued for employee options 32,011
Weighted average number of shares issued for exercise of warrants 29,810
Weighted average number of shares issued for exit costs 91,164
Weighted average number of shares issued for conversion
of convertible note 67,483
Weighted average number of shares issued to investors 730
---------------
Weighted average number of shares outstanding for the year
ended May 31, 2003 18,607,725
===============
84
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following outstanding instruments could potentially dilute basic
earnings per share in the future:
MAY 31, 2003
---------------------
Convertible notes 2,112,381
Stock options 1,789,052
Escrowed shares 654,204
PureCarbon contingent shares 520,833
Warrants issued to investor 133,333
Warrants issued with convertible notes 658,000
Underwriter warrants 440,000
---------------------
Potential increase in number of shares from dilutive instruments 6,307,803
=====================
NOTE 24: SUBSEQUENT EVENTS
In June 2003, the Company received $700,000 from private investors in
exchange for the issuance of 933,334 common shares and 333,334 warrants. The
proceeds from these funds will be used for potential acquisitions and for
working capital needs.
In June 2003, certain holders of the Company's 8% Senior Subordinated
Convertible Notes exercised their option to convert a portion of the Convertible
Notes. This resulted in a conversion of $600,000 of the Convertible Notes into
Series A Convertible Preferred Shares, which were immediately converted into
common shares. As a result of the foregoing conversions, 800,000 common shares
were issued at a conversion price equal to $0.75 per share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
85
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of fiscal 2003, our management, with the participation of
our Chief Executive Officer and Chief Financial Officer, carried out an
evaluation of the effectiveness of our disclosure controls and procedures. Based
on this evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There were no changes during the fourth
quarter of fiscal 2003 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
86
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be included in an amendment to this Form 10-K,
which will be filed within 120 days after the end of the fiscal year covered by
this report.
ITEM 11. EXECUTIVE COMPENSATION
This information will be included in an amendment to this Form 10-K,
which will be filed within 120 days after the end of the fiscal year covered by
this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This information will be included in an amendment to this Form 10-K,
which will be filed within 120 days after the end of the fiscal year covered by
this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be included in an amendment to this Form 10-K,
which will be filed within 120 days after the end of the fiscal year covered by
this report.
87
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements. (See Page 49)
2. Financial Statement Schedule. (None)
3. Exhibits. (See (c) below)
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the last quarter of the period
covered by this report:
(1) Current Report on Form 8-K with respect to Item 5 filed on
April 11, 2003
(2) Current Report on Form 8-K with respect to Item 9 filed on May
5, 2003; and
(3) Current Report on Form 8-K with respect to Item 5 filed on May
14, 2003.
(c) Exhibits.
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parentheses.
Exhibit
NUMBER DESCRIPTION
3.1 Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form F-1 (File No. 333-87537)).
3.2 Articles of Amendment, dated July 26, 2001 (incorporated by reference to Exhibit 1.2 of Form 20-F of
Workstream Inc. for the fiscal year ended May 31, 2001).
3.3 Articles of Amendment, dated November 6, 2001 (incorporated by reference to Exhibit 1.3 of Form 20-F of
Workstream Inc. for the fiscal year ended May 31, 2001).
3.4 Articles of Amendment, dated November 7, 2002 (incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form F-3 (File No. 333-101502).
88
NUMBER DESCRIPTION
3.5 By-law No. 1 and No. 2 (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form F-1
(File No. 333-87537)).
3.6 By-law No. 3 (incorporated by reference to Exhibit 1.5 of Form 20-F of Workstream Inc. for the fiscal year
ended May 31, 2001).
4.1 Form of common share certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on
Form F-1 (File No. 333-87537)).
4.2 Warrant Agreement dated as of March 22, 2001 between Workstream Inc. (formerly E-Cruiter.com Inc.) and
BlueStone Capital Corp. (incorporated by reference to Exhibit 4.11 of Form 20-F of Workstream Inc. for the
fiscal year ended May 31, 2001).
4.3 Form of Underwriter's Warrant Agreement (incorporated by reference to Exhibit 1.1 to the Registration
Statement on Form F-1 (File No. 333-87537)).
4.4 Form of 8% Senior Subordinated Convertible Note (incorporated by reference to Exhibit 4.5 to the annual
report on Form 10-K for the year ended May 31, 2002).
4.5 Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.6 to the annual report on
Form 10-K for the year ended May 31, 2002).
4.6 Amended and Restated Registration Rights Agreement dated May 14, 2002 by and among Workstream Inc., Sands
Brothers Venture Capital III LLC, Sands Brothers Venture Capital IV LLC and Sands Brothers & Co., Ltd.
(incorporated by reference to Exhibit 4.7 to the annual report on Form 10-K for the year ended May 31,
2002).
4.7 Common Stock Purchase Warrant dated May 30, 2003 between Michael Weiss and Workstream Inc.*
4.8 Form of Common Stock Purchase Warrant.*
10.1** Workstream Inc. 2002 Amended and Restated Stock Option Plan, as amended as of November 7, 2002
(incorporated by reference to Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter ended
November 30, 2002).
10.2 Lease Agreement between Workstream Inc. (formerly E-Cruiter.com Inc.) and RT Twenty-Second Pension
Properties Limited, dated March 21, 2000 (incorporated by reference to Exhibit 2.1 to the annual report on
Form 20-F for the period ended May 31, 2000).
10.3 Service Agreement between Positionwatch Limited and Workstream Inc. (formerly E-Cruiter.com Inc.), dated
February 23, 1999 (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form F-1
(File No. 333-87537)).
10.4 Agreement and Plan of Merger dated May 23, 2002, among Workstream Inc., Workstream Acquisition, Inc. and
Icarian Inc. (incorporated by reference to Exhibit 2.1 to the report on Form 8-K filed May 24, 2002).
89
NUMBER DESCRIPTION
10.5 Amendment to Agreement and Plan of Merger dated June 20, 2002, among Workstream Inc., Icarian, Inc. and
Workstream Acquisition, Inc. (incorporated by reference to Exhibit 2.1 to the report on Form 8-K filed June
27, 2002).
10.6 Asset Purchase Agreement dated June 24, 2002, between Workstream USA Inc. and PureCarbon, Inc.
(incorporated by reference to Exhibit 2.2 to the report on Form 8-K filed June 27, 2002).
10.7 Amended and Restated Securities Purchase Agreement dated May 14, 2002 by and among Workstream Inc. Sands
Brothers Venture Capital III LLC and Sands Brothers Venture Capital IV LLC (incorporated by reference to
Exhibit 10.18 to the annual report on Form 10-K for the year ended May 31, 2002).
10.8 Security Agreement dated April 18, 2002 between Workstream Inc. and Sands Brothers Venture Capital III LLC,
as Security Agent for the holders of the Senior Secured Convertible Notes (incorporated by reference to
Exhibit 10.19 to the annual report on Form 10-K for the year ended May 31, 2002).
10.9 Guarantee Agreement dated as of April 18, 2002 by Workstream USA, Inc. in favor of the holders of 8% Senior
Subordinated Secured Convertible Notes (incorporated by reference to Exhibit 10.20 to the annual report on
Form 10-K for the year ended May 31, 2002).
10.10 Joinder Agreement dated May 14, 2002 by and among Workstream Inc., Workstream USA, Inc., Sands Brothers
Venture Capital IV LLC, Sands Brothers Venture Capital III LLC, Crestview Capital Fund, L.P., Crestview
Capital Fund II, L.P. and Crestview Capital Offshore Fund, Inc. (incorporated by reference to Exhibit 10.21
to the annual report on Form 10-K for the year ended May 31, 2002).
10.11** Employment Agreement dated as of January 27, 2003 between Michael Mullarkey and Workstream Inc.*
10.12** Employment Agreement dated as of May 12, 2003 between David Polansky and Workstream Inc.* 10.13**
Settlement Agreement dated as of May 9, 2003 between Paul Haggard and Workstream Inc.*
10.14 Merger Agreement dated August 30, 2002, among Workstream Inc., Workstream Acquisition II, Inc. and Xylo,
Inc. (incorporated by reference to Exhibit 2.1 to the report on Form 8-K filed September 4, 2002).
10.15 Term Note dated January 31, 2003 by Workstream Inc., Workstream USA, Inc., 6FigureJobs.com, Inc., Icarian,
Inc., RezLogic, Inc., OMNIpartners, Inc. and Xylo, Inc. in favor of Michael Mullarkey (incorporated by
reference to Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter ended February 28, 2003).
10.16 Security Agreement dated January 31, 2003 by and among Michael Mullarkey, Workstream Inc., Workstream USA,
Inc., 6FigureJobs.com, Inc., Icarian, Inc., RezLogic, Inc., OMNIpartners, Inc., and Xylo, Inc.
(incorporated by reference to Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter ended
February 28, 2003).
90
NUMBER DESCRIPTION
10.17 General Security Agreement dated January 31, 2003 between Workstream Inc. and Michael Mullarkey
(incorporated by reference to Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter ended
February 28, 2003).
10.18 Securities Purchase Agreement dated as of May 30, 2003 by and among Workstream Inc. and William J. Ritger.*
10.19 Securities Purchase Agreement dated as of May 30, 2003 by and among Workstream Inc. and Michael Weiss.*
10.20 Form of Securities Purchase Agreement.*
10.21 Agreement to Terminate Lease dated as of March 6, 2003 by and between Sequoia M&M LLC, Icarian Inc. and
Workstream.*
21.1 List of Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers LLP.*
31.1 Certifications pursuant to Rule 13a-14(a)/15d-14(a).*
32.1 Certifications pursuant to 18 U.S.C. Section 1350.*
- ---------------------
* Filed herewith.
** Constitutes a management contract for compensatory plan or arrangement.
91
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.
WORKSTREAM INC.
By: /s/ Michael Mullarkey
-------------------------------------------
Michael Mullarkey,
Chairman of the Board and Chief
Executive Officer
Dated: August 27, 2003
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.
SIGNATURE TITLE DATE
/s/ MICHAEL MULLARKEY Chairman of the Board of August 27, 2003
- ------------------------------------- Directors and Chief Executive
Michael Mullarkey Officer (Principal Executive Officer)
/s/ David Polansky Chief Financial Officer and August 27, 2003
- -------------------------------------- Secretary (Principal Financial
David Polansky and Accounting Officer)
/s/ Arthur Halloran Director August 27, 2003
- -------------------------------------
Arthur Halloran
/s/ Matthew Ebbs Director August 27, 2003
- -------------------------------------
Matthew Ebbs
/s/ Michael A. Gerrior Director August 27, 2003
- -------------------------------------
Michael A. Gerrior
/s/ Thomas Danis Director August 27, 2003
- -------------------------------------
Thomas Danis
/s/ Cholo Manso Director August 27, 2003
- -------------------------------------
Cholo Manso
92