UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 001-14813
THINKPATH INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ONTARIO, CANADA 52-209027
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(JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
55 UNIVERSITY AVENUE, SUITE 400, TORONTO, ONTARIO, CANADA M5J 2H7
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(416) 364-8800
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE
EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. YES X NO ___
THE ISSUER'S REVENUES FOR THE MOST RECENT FISCAL YEAR WERE $25,064,074.
THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING STOCK HELD BY
NON-AFFILIATES BASED UPON THE LAST SALE PRICE ON APRIL 11, 2003 WAS
APPROXIMATELY $1,023,126.
AS OF APRIL 11, 2003 THERE WERE 143,551,288 SHARES OF COMMON STOCK, NO PAR VALUE
PER SHARE,ISSUED AND OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
THINKPATH INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Description of Business.............................................
Item 2. Description of Property ............................................
Item 3. Legal Proceedings.................. ................................
Item 4. Submission of Matters to a Vote of Security Holders.................
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters...........................................................
Item 6. Selected Financial Data ............................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..........
Item 8. Financial Statements....................................... F-1 - F-38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.............................................
PART III
Item 10. Directors and Executive Officers of the Registrant; Compliance
with Section 16(a) ...............................................
Item 11. Executive Compensation........................................ .....
Item 12. Security Ownership of Certain Beneficial Owners and Management......
Item 13. Certain Relationships and Related Transactions......................
Item 14. Controls and Procedures.............................................
Item 15. Exhibits, List and Reports on Form 8-K..............................
Signatures...................................................................
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein including, without limitation,
those concerning (i) Thinkpath Inc.'s ("Thinkpath") strategy, (ii) Thinkpath's
expansion plans, and (iii) Thinkpath's capital expenditures, contained
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) concerning Thinkpath's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Thinkpath
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
EXCHANGE RATE DATA
Thinkpath maintains its books of account in Canadian dollars, but has
provided the financial data in this Form 10-K in United States dollars and on
the basis of generally accepted accounting principles as applied in the United
States, and Thinkpath's audit has been conducted in accordance with generally
accepted auditing standards in the United States. All references to dollar
amounts in this Form 10-K, unless otherwise indicated, are to United States
dollars.
The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On April 11, 2003, the exchange rate was
Cdn$0.6880 per US$1.00.
Year ended December 31, 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Rate at end of period $0.6991 $0.6532 $0.6929 $0.6676 $0.62870 $0.63440
Average rate during period 0.7223 0.6745 0.6730 0.6739 0.64612 0.63724
High 0.6945 0.7061 0.6929 0.6983 0.67140 0.66560
Low 0.7749 0.6376 0.6582 0.6397 0.62270 0.61750
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Unless otherwise indicated, all reference to "Thinkpath", "us", "our" and "we"
refer to Thinkpath Inc. and its wholly-owned subsidiaries: Systemsearch
Consulting Services Inc., an Ontario corporation, International Career
Specialists Ltd., an Ontario corporation, Thinkpath Inc. (formerly Cad Cam,
Inc.), an Ohio corporation, Thinkpath Technical Services Inc. (formerly Cad Cam
Technical Services Inc.), an Ohio corporation, Thinkpath Michigan Inc. (formerly
Cad Cam Michigan Inc.), a Michigan corporation, Thinkpath Training Inc.
(formerly ObjectArts Inc.), an Ontario corporation, Thinkpath Training US Inc.
(formerly ObjectArts US Inc.), a New York corporation, MicroTech Professionals
Inc., a Massachusetts corporation, and TidalBeach Inc., an Ontario corporation.
OVERVIEW
Thinkpath provides technological solutions and services in engineering knowledge
management including design, drafting, technical publishing, e-learning and
staffing. Our customers include Department of Defense ("DOD") contractors,
aerospace, automotive and financial services companies, Canadian and American
governmental entities and large multinational companies, including Lockheed
Martin, General Dynamics, General Electric, General Motors, Ford Motors, CIBC
and EDS Canada.
We were incorporated under the laws of the Province of Ontario, Canada in 1994.
Our principal executive offices are located at 55 University Avenue, Suite 400,
Toronto, Ontario, Canada, M5J 2H7, telephone number (416) 364-8800 and our
website is www.thinkpath.com.
TECHNICAL PUBLISHING
We provide technical publishing programs for complete integration into
engineering and design departments of government, military contractors,
aerospace and automotive customers. Our software performs technical
documentation through desktop publishing, technical illustration and web
animation and produces printed materials, e-publications for CD rom and web, and
SGML/XML tagged electronic manuals. Our technology can also capture existing
publications and convert the data to assemble electronic publications specific
to a customer's requirements.
We maintain a complete staff of technical publication personnel consisting of
highly skilled engineers and drafters. As a result, we can draw heavily upon our
engineering resources to handle every step of the documentation process,
including researching, writing, editing, illustration, printing and
distribution. We have also made a substantial investment into high-end
engineering software tools in order to fully use existing engineering data in
developing new material. We believe this gives us an advantage over competitors
because it reduces the time needed not only to generate illustrations, but also
the amount of customer support time required in developing new documentation.
We provide technical translation services in over 30 different languages ranging
from Spanish to Mandarin Chinese. Our translators come from diverse technical
and cultural backgrounds, which results in an accurate translation within the
customer's industrial discipline. In addition, our typesetters work with
cutting-edge software specific to each language conversion.
We can guide a company's entire ISO documentation process, from developing
requirements to delivering detailed publications that meet all ISO9001
regulations.
Our technical publication library includes hundreds of documents written to meet
a variety of military, industrial, and individual corporate specifications. We
practice the MIL-SPEC (Military Specifications guidelines) rules for graphics,
the ATA(American Transportation Association) rules for content, as well as the
AICC*(Aviation Industry Computer Based Training Committee) rules for format and
interchangeability. We also produce CE (Communaute Europeenne) compliant
documentation for CE and compliant machinery.
-1-
DESIGN ENGINEERING
Our engineering and design services cover every facet of a project from concept
to SLA prototyping to a complete turnkey package that delivers a finished,
operating system. Our engineers handle the drafting, the detailing and the
parametric modeling. We have experienced engineers on staff as well as a pool of
skilled consultants whom we can call on to provide internal design services.
RECRUITMENT
We offer full-service recruitment services, including permanent placement,
contract placement, and executive search in the IT and engineering fields. We
have particular expertise in recruiting for Web-based and e-commerce
applications, Customer Relationship Management (CRM) technologies, technical
documentation and technical training. We can and do find candidates from the
entire spectrum of responsibility levels -- from newly graduated junior
technicians to senior technical executives.
Our careful evaluation process tests candidates on their technical proficiency,
soft skills, fit with company culture, and attitude towards finding a new
position. We guarantee that all potential hires are interviewed and reference
checked and that no resume is ever forwarded to a customer without the
candidate's prior permission and knowledge.
TRAINING
We provide technical and e-learning training in Catia, ProEngineer and
Unigraphics products.
Our focus going forward will be on the engineering services group and the
training derived from those services. Some of engineering products we train on
include:
- - Archibus;
- - AutoCAD;
- - AutoCAD LT;
- - AutoDesk Mechanical Desktop;
- - CADPLUS;
- - Computer Aided Facilities Management (CAFM);
- - MicroStation;
- - SDRC;
- - Solid Edge;
- - Solid Works;
- - ProENGINEER; and
- - Unigraphics.
We have developed and delivered custom engineering courses on engines, presses,
weaponry and various equipment and machinery to General Electric, J&L,
Caterpillar, Kellogg, DOW Brands, Heidelberg, and many others. In addition, we
have developed e-learning programs that teach engineering design software usage,
machine operation, aircraft jet engine repairs, CIM programs that register
students and monitor their progress and accomplishments, pretests, in-process
testing and final exams.
CUSTOMERS
Our customers are large and high-growth corporations from a wide variety of
industries across North America, including Fortune 500 companies as well as
other high-profile companies. We believe that our customer base provides
credibility when pursuing other customers.
-2-
The following is a partial listing of our customers:
Hill-Rom Company
Lockheed Martin
General Dynamics
General Electric
General Motors
Bank of Montreal
Cummins Engine
FUJITSU Group
ESI Fiscal
Ford Motor Co.
COMPETITION
The information technology staffing industry is highly competitive, fragmented
and characterized by low barriers to entry. We compete for potential customers
with other providers of information technology staffing services, systems
integrators, internet-based recruitment management systems, computer
consultants, employment listing services and temporary personnel agencies. Many
of our current and potential competitors have longer operating histories,
significantly greater financial, marketing and human resources, greater name
recognition and a larger base of information technology professionals and
customers than we do, all of which may provide these competitors with a
competitive advantage. In addition, many of these competitors, including
numerous smaller privately held companies, may be able to respond more quickly
to customer requirements and to devote greater resources to the marketing of
services than we are. Because there are relatively low barriers to entry, we
expect that competition will increase in the future.
The engineering services, technical publishing and e-learning industry are also
very competitive but have much higher barriers to entry due to high capital
costs for tools and equipment and the specialized skills and knowledge required.
Increased competition could result in price reductions, reduced margins or loss
of market share, any of which could materially and adversely affect our
business, prospects, financial condition and results of operations. Further, we
cannot assure you that we will be able to compete successfully against current
or future competitors or that the competitive pressures we face will not have a
material adverse effect on our business, prospects, financial condition and
results of operations. We believe that the principal factors relevant to
competition in the information technology, staffing and engineering services
industry are the recruitment and retention of highly qualified information
technology and engineering professionals, rapid and accurate response to
customer requirements and, to a lesser extent, price.
BUSINESS STRATEGY
We plan to exploit our track record in engineering services by offering a unique
blend of design engineering, technical publishing and customized e-learning
courseware. In early 2002, we began to focus our marketing efforts on the
defense, aerospace and automotive industries and it is here that we expect our
opportunity to generate significant growth in 2003 is most likely. By combining
design engineering and technical publishing we believe we have become experts
experienced in content management and thus are positioned to deliver high margin
customized e-learning products. Engineering services offer higher margins and
growth as well as more predictability and stability than the IT services arena
does. Although our focus will be on growing the engineering services division,
we plan to maintain our current level of activity in IT services without
investing further capital.
Our business objective is to increase our gross revenue and improve our gross
margins by replacing fixed priced projects with time and materials based
contracts. We intend to increase our market share through the addition of
engineering sales staff and through the marketing and promotion support services
of outside consultants. The primary components of our strategy to achieve this
objective are as follows:
- - Expand our DOD contractor customer base;
- - Grow our aerospace and automotive customer base; and
- - Further penetrate existing customer base, including Fortune 500 companies.
We have established an extensive technology strategy and infrastructure that we
believe provides us with a competitive advantage over less technologically
advanced competitors. The primary components of this strategy and infrastructure
are described below.
-3-
BACK OFFICE INFRASTRUCTURE
We have invested heavily in the creation and support of an integrated
technological infrastructure that links all offices and employees and promotes
uniformity in certain functions. Our accounting program provides for real-time
financial reporting across dispersed branch offices. Our intranet and
recruitment management software application, Njoyn, provides each of our
employees with access to the tools and information that help them to be
successful and productive. This infrastructure allows us to integrate our
acquisitions more easily and cost-effectively than would otherwise be possible.
MARKETING AND PROMOTION
Our marketing and brand strategy is to position us as experts of content in
engineering knowledge management. As a provider of engineering services, we will
emphasize our flexible service options, the depth of our expertise, and the
global delivery capabilities of our North American offices.
We believe this positioning will be achieved through a variety of means,
including:
- - Strong and easy-to-access sales and marketing support at the branch level;
- - Investment in awareness and branding campaigns; and,
- - Exploration and establishment of various business partnerships and alliances.
COLLATERAL AND SALES SUPPORT
A major marketing and promotion program is underway to update our collateral
material and Web sites to more accurately reflect our renewed focus on
engineering services.
TARGET MARKETS
Our target customers are Department of Defense contractors, and aerospace and
automotive corporations located primarily in the South Eastern states and Great
Lake regions of North America.
EMPLOYEES AND CONSULTANTS
EMPLOYEES
Our staff as of April 11, 2003, consists of 46 full-time employees, including 30
sales personnel and 16 administrative and technical employees. Our staff at
December 31, 2002 consisted of 46 full-time employees, including 32 sales
personnel and 16 administrative and technical employees. Our staff at December
31, 2001 consisted of 98 full-time employees, including 46 sales personnel and
52 administrative and technical employees. We are not party to any collective
bargaining agreements covering any of our employees, have never experienced any
material labor disruption and are unaware of any current efforts or plans to
organize our employees.
CONSULTANTS
We enter into consulting agreements with information technology and engineering
professionals at hourly rates based on each individual's technical skills and
experience. As of April 11, 2003, approximately 205 professionals were
performing services for our customers. At December 31, 2002 there were 225
professionals placed by us, performing services for our customers. At December
31, 2001 there were 309 professionals placed by us, performing services for our
customers.
RECENT EVENTS
On January 24, 2003, we held a Special Meeting of Shareholders at which a
resolution amending our Articles of Incorporation to increase our authorized
capital stock from 100,000,000 to 800,000,000 was approved.
On January 28, 2003, we registered an aggregate of 12,427,535 shares of common
stock, no par value per share, issued to Declan A. French, our Chief Executive
Officer, pursuant to an amendment to his employment agreement.
-4-
On February 7, 2003, we entered into a consulting agreement with Rainery Barba
who shall perform legal and advisory services for a period of one year. In
consideration for such services we registered 4,000,000 shares of our common
stock, no par value per share.
On February 7, 2003, we entered into a consulting agreement with
Dailyfinancial.com Inc. which shall perform corporate consulting services in
connection with mergers and acquisitions, corporate finance and other financial
services. In consideration for such services we issued 4,200,000 shares of our
common stock, no par value per share.
Subsequent to December 31, 2002, we closed an additional $1,100,000 in
convertible debentures and warrants. The funds were used for various debt
settlements and critical payables. The debentures will become due twelve months
from the date of issuance. The investors will have the right to acquire up to
$1,100,000 worth of our common stock at the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during the
sixty-day trading period prior to conversion. The warrants are exercisable at
any time and in any amount for a period of 7 years from the original purchase
date at a purchase price of $.0175 per share. We are required to pay interest to
the debenture holder on the aggregate unconverted and outstanding principal
amount of the debenture at the rate of 12% per annum, payable on each conversion
date and maturity date in cash or shares of common stock.
The proceeds received were allocated between the warrants and the debenture
without warrants on a pro rata basis. Paid in capital was credited by the value
of the warrants in the amount of $517,448. The value of the beneficial
conversion feature was determined to be $623,313. As of April 11, 2003, the
beneficial conversion was recalculated as the conversion price from time of
issuance had declined. An amount of $6,517,670 will be reflected in the first
quarter.
As of April 11, 2003, we have issued 43,958,652 shares of our common stock to
the convertible debenture holders upon the conversion of $285,400 of debentures
and accrued interest.
-5-
ITEM 2. DESCRIPTION OF PROPERTY
We maintain our headquarters in 6,462 square foot offices located at 55
University Avenue, Suite 400 in Toronto, Ontario, Canada. We have leased such
facility for a term of ten years terminating in December 2007. We pay annual
base rent of $290,000. We lease additional offices at the following locations:
Location Square Feet Lease Expiration Current Rent
Per Annum
- -------- ------------- ------------------- ------------------
Cincinnati, Ohio 3,820 05/31/05 $53,289
Columbus, Ohio 1,600 01/31/05 $27,000
Dayton, Ohio 6,421 12/31/05 $89,894
Detroit, Michigan 15,328 08/31/05 $168,025
Toronto, Ontario 6,462 12/31/10 $223,826
The lease commitments do not include two operating leases for premises that we
currently sub lease to the purchasers of the Canadian and United States training
divisions. If the purchasers were to default on payment or abandon the premises,
we would be liable for annual payments of $282,096 expiring August 31, 2006 and
$150,534 expiring September 30, 2010.
The lease commitments also do not include two operating leases for premises
located in the United States that were closed in the fourth quarter of 2002. We
have not made any payments on these leases since the premises were abandoned. We
do not intend to make any further payments on these leases and the lessors have
not tried to enforce payment. However, we may be liable for a lease balance of
$44,597 which expires November 30, 2004 and $103,686 which expires September 30,
2005.
ITEM 3. LEGAL PROCEEDINGS
We are party to the following pending legal proceedings:
Christopher Killarney, a former employee, filed a statement of claim against us
on June 14, 2002, with the Superior Court of Justice of Ontario, Canada, Court
File No. 02-CV-229385CMS, alleging wrongful dismissal and breach of contract.
Mr. Killarney is seeking between approximately $120,000 and $650,000 in damages.
We intend to defend this claim vigorously.
AT&T Corp. instituted an action against us in the United States District Court
for the Southern District of New York, No. 02 CV 3132, alleging that we breached
an agreement to pay AT&T certain monies in exchange for Internet and web hosting
services purportedly performed by AT&T. AT&T is seeking $153,669.36 in damages,
plus interest and reasonable attorneys' fees. We have answered the complaint and
vigorously dispute AT&T Corp.'s allegations. Discovery has not yet begun, and we
are endeavoring to resolve this matter without further litigation. Should
settlement discussions fail, we intend to defend this action vigorously.
We are not party to any other material litigation, pending or otherwise.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 16, 2002, we held our Annual Meeting of Shareholders at
which the shareholders were invited to consider and vote upon proposals to: (i)
elect the members of our board of directors for the ensuing year; (ii) ratify
the appointment of Schwartz, Levitsky, Feldman, llp, as our independent
chartered accountants for the ensuing year; (iii) ratify the adoption of our
2002 Stock Option Plan; (iv) vote upon the proposal to amend our Articles of
Incorporation to increase the authorized number of the shares of our common
stock from 30,000,000 to 100,000,000; and, (v) transact such other business as
may properly come before the Meeting and any continuations and adjournments
thereof.
-6-
(i) The following directors were elected to our board of directors and received
the votes indicated:
For Against Withheld
Declan A. French 24,416,848 - 756,001
Kelly Hankinson 24,856,972 - 315,877
John Dunne 24,957,017 - 215,832
Arthur S. Marcus 24,961,092 - 211,757
Katherine Seto Evans 24,955,687 - 217,162
Set forth below is a biographical description of each of our directors
elected:
Declan A. French has served as our Chairman of our board of directors and
Chief Executive Officer since our inception in February 1994. Prior to founding
Thinkpath, Mr. French was President and Chief Executive Officer of TEC Partners
Ltd., an information technology recruiting firm in Toronto, Canada. Mr. French
has a diploma in Psychology and Philosophy from the University of St. Thomas in
Rome, Italy.
Kelly Hankinson has served as our Chief Financial Officer since May 2000,
as a member of its Board of Directors from June 2000 until February 14, 2003 and
as Secretary and Treasurer since March 2001. Ms. Hankinson served as our Vice
President, Finance and Administration and Group Controller from February 1994 to
May 2000. Ms. Hankinson has a Masters Degree and a Bachelors Degree from York
University. Ms. Hankinson resigned from the Board of Directors on February 14,
2003.
John Dunne has served on our board of directors since June 1998. Mr. Dunne
has served as Chairman and Chief Executive Officer of the Great Atlantic &
Pacific Company of Canada, Ltd. since August 1997, where he also served as
President and Chief Operating Officer from September 1996 until August 1997.
From November 1995 until September 1996, Mr. Dunne was Chairman and Chief
Executive Officer of Food Basics Ltd.
Arthur S. Marcus has served on our board of directors since April 2000.
Mr. Marcus is a partner at the New York law firm of Gersten, Savage, Kaplowitz,
Wolf and Marcus, LLP, our United States securities counsel. Mr. Marcus joined
Gersten, Savage & Kaplowitz, LLP in 1991 and became a partner in 1996. Mr.
Marcus practices United States Securities Law and has been involved in
approximately 50 initial public offerings and numerous mergers and acquisitions.
Mr. Marcus received a Juris Doctorate from Benjamin N. Cardozo School of Law in
1989.
Katherine Seto Evans is an independent consultant with extensive and
diversified experience in financial management, human resource leadership and
organizational administration. From 1974 to 2001, Ms. Evans was a partner at
Schwartz, Levitsky, Feldman, llp, our independent auditors. From 2001 to
present, Ms. Evans has been an independent consultant to various companies.
During this period she has consulted with us and has assisted us with various
financial and accounting projects. Ms. Evans became a Certified Public
Accountant in1999 and a Chartered Accountant in 1978. Ms. Evans received a
Bachelors Degree in Science from McGill University in 1972. Ms. Evans served on
the Board of Directors from October 16, 2002 until her resignation on February
14, 2003.
(ii) The appointment of Schwartz, Levitsky Feldman, llp, to serve as our
independent chartered accountants for the ensuing year was approved by the votes
indicated:
For: 25,177,514
Against: 199,262
Withheld: 138,975
Non-votes: 0
(iii) The adoption of our Stock Option Plan was approved by the votes indicated:
For: 11,161,695
Against: 1,554,095
Withheld: 12,681,461
Non-votes: 0
-7-
The 2002 Stock Option Plan
The 2002 Stock Option Plan will be administered by our Compensation
Committee, which will determine among other things, those individuals who shall
receive options, the time period during which the options may be partially or
fully exercised, the number of shares of our common stock issuable upon the
exercise of the options and the option exercise price
The 2002 Stock Option Plan is effective for a period for ten
years, expiring in 2012. Options to acquire 6,500,000 shares of our common stock
may be granted to officers, directors, consultants, key employees, advisors and
similar parties who provide us with their skills and expertise. The 2002 Stock
Option Plan is designed to enable management to attract and retain qualified and
competent directors, employees, consultants and independent contractors. Options
granted under the 2002 Stock Option Plan may be exercisable for up to ten years,
generally require a minimum three-year vesting period, and shall be at an
exercise price all as determined by the our Compensation Committee provided
that, the exercise price of any options may not be less than the fair market
value of the shares of our common stock on the date of the grant. Options are
non-transferable, and are exercisable only by the participant (or by his or her
guardian or legal representative) during his or her lifetime or by his or her
legal representatives following death.
If: (i) we are not the surviving entity in any merger, consolidation or
other reorganization (or survives only as a subsidiary of an entity); (ii) we
sell, lease or exchange all or substantially all of our assets to any other
person or entity; (iii) we are dissolved and liquidated; (iv) any person or
entity, including a "group" as contemplated by Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended, acquires or gains ownership or
control (including, without limitation, power to vote) of more than 50% of our
outstanding shares (based upon voting power); or (v) as a result of or in
connection with a contested election of directors, the persons who were
directors before such election shall cease to constitute a majority of the Board
of Directors (each such event is referred to herein as a "Corporate Change"); no
later than (a) ten days after the approval by our shareholders of such merger,
consolidation, reorganization, sale, lease or exchange of assets or dissolution
or such election of directors or (b) 30 days after a change of control of the
type described in clause (iv), our Compensation Committee, acting in its sole
discretion without the consent or approval of any optionee, shall act to effect
1 or more of the following alternatives, which may vary among individual
optionees and which may vary among options held by any individual optionee: (1)
accelerate the time at which options then outstanding may be exercised so that
such options may be exercised in full for a limited period of time on or before
a specified date (before or after such Corporate Change) fixed by our
Compensation Committee, after which specified date all unexercised options and
all rights of optionees thereunder shall terminate; (2) require the mandatory
surrender to us by selected optionees of some or all of the outstanding Options
held by such optionees (irrespective of whether such options are then
exercisable under the provisions of the 2002 Stock Option Plan) as of a date
before or after such Corporate Change, specified by our Compensation Committee,
in which event our Compensation Committee shall thereupon cancel such options
and the we shall pay to each optionee an certain amount of cash per share; (3)
make such adjustments to options then outstanding as our Compensation Committee
deems appropriate to reflect such Corporate Change (provided, however, that our
Compensation Committee may determine in its sole discretion that no adjustment
is necessary to options then outstanding); or (4) provide that the number and
class of shares covered by an option theretofore granted shall be adjusted so
that such option shall thereafter cover the number and class of shares or other
securities or property (including, without limitation, cash) to which the
optionee would have been entitled pursuant to the terms of the agreement of
merger, consolidation or sale of assets and dissolution if, immediately prior to
such merger, consolidation or sale of assets, and dissolution, the optionee had
been the holder of record of the number of shares of common stock then covered
by such option.
If a participant ceases affiliation with us by reason of death, permanent
disability or retirement at or after age 65, the option remains exercisable for
one year from such occurrence but not beyond the option's expiration date. Other
types of termination allow the participant 90 days to exercise the option,
except for termination for cause, which results in immediate termination of the
option.
-8-
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by us become available again for issuance under the 2002
Stock Option Plan, subject to applicable securities regulation.
The 2002 Stock Option Plan may be terminated or amended at any time by
our board of directors, except that the number of shares of our common stock
reserved for issuance upon the exercise of options granted under the 2002 Stock
Option Plan may not be increased without the consent of our shareholders.
iv) the amendment of our Articles of Incorporation to increase the authorized
number of the shares of our common stock from 30,000,000 to 100,000,000
For: 24,473,632
Against: 1,052,269
Withheld: 43,850
Non-votes: 0
-9-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock began trading on the Nasdaq SmallCap Market on June 8,
1999, when we completed our initial public offering. Our common stock is listed
on the Over-the-Counter Bulletin Board (OTC:BB) under the symbol "THTH-F". As of
April 11, 2003, we had 143,551,288 shares of common stock outstanding. The
following table sets forth the high and low sale prices for our common stock as
reported on the OTC:BB.
Fiscal 2001 High Low
- ----------- ---- ---
First Quarter $1.688 $0.563
Second Quarter $0.57 $0.30
Third Quarter $0.63 $0.25
Fourth Quarter $0.37 $0.13
Fiscal 2002
First Quarter $0.24 $0.14
Second Quarter $0.24 $0.10
Third Quarter $0.14 $0.08
Fourth Quarter $0.09 $0.04
Fiscal 2003
First Quarter $0.05 $0.007
Second Quarter (through to April 11, 2003) 0.0095 0.0071
As of April 11, 2003, we had 100 holders of record and approximately
1,756 beneficial shareholders.
On April 11, 2003, the last sale price of our common stock as reported
on the OTC:BB was $0.0071.
DIVIDEND POLICY
We have never paid or declared dividends on our common stock. The
payment of cash dividends, if any, in the future is within the discretion of our
Board of Directors and will depend upon our earnings, capital requirements,
financial condition and other relevant factors. We intend to retain future
earnings for use in our business.
-10-
ITEM 6. SELECTED FINANCIAL DATA
Selected Income Statement Data
For the years ended, 2002 2001 2000
---- ---- ----
Revenue 25,064,674 33,183,661 35,736,076
Operating loss from continuing operations (3,465,954) (6,710,650) (7,354,288)
Net loss from continuing operations (8,004,164) (8,559,402) (7,040,644)
Loss from discontinued operations (142,488) (1,124,040) (1,357,673)
Preferred stock dividends 100,387 728,740 3,646,595
Net loss (8,247,039) (10,412,182) (12,044,912)
============= =============== ===============
Weighted average number of common stock
outstanding basic and fully diluted 29,000,252 14,943,306 5,296,442
============= =============== ==============
Loss from continuing operations per weighted
average common stock before preferred
dividends basic and fully diluted (0.28) (0.57) (1.33)
============= =============== ===============
Loss from continuing operations per weighted
average common stock after preferred
dividends basic and fully diluted (0.28) (0.62) (2.02)
============= =============== ===============
Selected Balance Sheet Data
2002 2000 2001
---- ---- ----
Current Assets 2,974,524 6,801,561 8,646,035
Current Liabilities 6,692,642 10,155,923 11,733,166
Working Capital (3,718,118) (3,354,362) (3,087,131)
Total Assets 8,787,531 17,174,978 25,685,940
Long-term debt and notes payable, net
of current portion 771,459 2,922,432 2,401,980
Stockholders' equity 1,323,430 3,246,946 10,799,006
-11-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the selected historical financial data, financial statements and notes
thereto and our other historical financial information contained elsewhere in
this Annual Report on Form 10-K. The statements contained in this Annual Report
on Form 10-K that are not historical are forward looking statements within the
meaning of Section 27A of the Securities Act of and Section 21E of the Exchange
Act, including statements regarding our expectations, intentions, beliefs or
strategies regarding the future. Forward-looking statements include our
statements regarding liquidity, anticipated cash needs and availability and
anticipated expense levels. All forward-looking statements included herein are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statement. It is important to note
that our actual results could differ materially from those in such
forward-looking statements.
Overview
We are a global provider of technological solutions and services in
engineering knowledge management including design, drafting, technical
publishing, e-learning and staffing. Our customers include DOD contractors,
aerospace, automotive and financial services companies, Canadian and American
governmental entities and large multinational companies, including Lockheed
Martin, General Dynamics, General Electric, General Motors, Ford Motors, and
Hill-Rom Company.
On December 12, 2001, the Securities and Exchange Commission issued FR-60,
Cautionary Advice Regarding Disclosure About Critical Accounting Policies, which
encourages additional disclosure with respect to a company's critical accounting
policies, the judgments and uncertainties that affect a company's application of
those policies, and the likelihood that materially different amounts would be
reported under different conditions and using different assumptions.
Management is required to make certain estimates and assumptions during
the preparation of the consolidated financial statements in accordance with
GAAP. These estimates and assumptions impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount
of net earnings during any period. Actual results could differ from those
estimates. Certain of our accounting policies and estimates have a more
significant impact on our financial statements than others, due to the magnitude
of the underlying financial statement elements.
Consolidation
Our determination of the appropriate accounting method with respect to
our investments in subsidiaries is based on the amount of control we have,
combined with our ownership level, in the underlying entity. Our consolidated
financial statements include the accounts of our parent company and our
wholly-owned subsidiaries. All of our investments are accounted for on the cost
method. If we had the ability to exercise significant influence over operating
and financial policies of a company, but did not control such company, we would
account for these investments on the equity method.
Accounting for an investment as either consolidated or by the equity
method would have no impact on our net income (loss) or stockholders' equity in
any accounting period, but would impact individual income statement and balance
sheet items, as consolidation would effectively "gross up" our income statement
and balance sheet. However, if control aspects of an investment accounted for by
the cost method were different, it could result in us being required to account
for an investment by consolidation or the equity method. Under the cost method,
the investor only records its share of the investee's earnings to the extent
that it receives dividends from the investee; when the dividends received exceed
the investee's earnings subsequent to the date of the investor's investment, the
investor records a reduction in the basis of its investment. Under the cost
method, the investor does not record its share of losses of the investee.
Conversely, under either consolidation or equity method accounting, the investor
effectively records its share of the investee's net income or loss, to the
extent of its investment or its guarantees of the investee's debt.
-12-
At December 31, 2002, all of our investments in non-related companies
totaling $45,669 were accounted for using the cost method. Accounting for an
investment under either the equity or cost method has no impact on evaluation of
impairment of the underlying investment; under either method, impairment losses
are recognized upon evidence of permanent losses of value.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, which has four basic criteria
that must be met before revenue is recognized:
- - Existence of persuasive evidence that an arrangement exists;
- - Delivery has occurred or services have been rendered;
- - The seller's price to the buyer is fixed and determinable; and,
- - Collectibility is reasonably assured.
Our various revenue recognition policies are consistent with these
criteria. We have developed proprietary technology in two areas: human capital
management and Web development. Njoyn is a Web-based human capital management
system that automates and manages the hiring process. The revenue associated
with providing this software is allocated to an initial set-up fee,
customization and training fees as agreed with the customer and an ongoing
monthly per user fee. The allocation of revenue to the various elements is based
on our determination of the fair value of the elements as if they had been sold
separately. The set-up fee and customization revenue is recognized upon delivery
of access to the software with customization completed in accordance with
milestones determined by the contract. Revenue for the training is recorded as
the services are rendered and the ongoing monthly fee is recorded each calendar
month. There is no additional fee charged to customers for hosting.
Effective March 8, 2002, we sold our technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. As part of the
transaction, Cognicase assumed all of the (eight employees) staff in our
technology division and is contracting the services of our Chief Information
Officer for a period of six months from March 8, 2002. As a result of the sale
to Cognicase, we will not have future revenues from Njoyn and the operations
have been reported as discontinued.
Our other proprietary technology, SecondWave, is a Web development
product that allows companies to create, manage and automate their own dynamic,
adaptive Web sites. The software learns from each visitor's behavior and targets
his or her needs and interests with customized content and communications. We
enter into contracts for the customization or development of SecondWave in
accordance with the specifications of our customers. The project plan defines
milestones to be accomplished and the costs associated with this project. These
amounts are billed as they are accomplished and revenue is recognized as the
milestones are reached. The work in progress for costs incurred beyond the last
accomplished milestone is reflected at the period end. To date these amounts
have not been material and have not been set up at the period ends. The
contracts do not include any post-contract customer support. Additional customer
support services are provided at standard daily rates, as services are required.
As part of the sale of Njoyn, Cognicase Inc. assumed all of our
technology staff. As a result, we do not anticipate future revenues from
SecondWave Inc. and the operations have been reported as discontinued.
Carrying Value Goodwill and Intangible Assets
Prior to January 1, 2002, our goodwill and intangible assets were
accounted for in accordance with Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. This statement required us to evaluate the carrying
value of our goodwill and intangible assets upon the presence of indicators of
impairment. Impairment losses were recorded when estimates of undiscounted
future cash flows were less than the value of the underlying asset. The
-13-
determination of future cash flows or fair value was based upon assumptions and
estimates of forecasted financial information that may differ from actual
results. If different assumptions and estimates were used, carrying values could
be adversely impacted, resulting in write downs that would adversely affect our
earnings. In addition, we amortized our goodwill balances on a straight-line
basis over 30 years. The evaluation of the useful life of goodwill required our
judgment, and had we chosen a shorter time period over which to amortize
goodwill, amortization expense would have increased, adversely impacting our
operations.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. This statement requires
us to evaluate the carrying value of goodwill and intangible assets based on
assumptions and estimates of fair value and future cash flow information. These
assumptions and estimates may differ from actual results. If different
assumptions and estimates are used, carrying values could be adversely impacted,
resulting in write downs that could adversely affect our earnings.
During the third quarter of 2002, we completed our transitional
goodwill impairment test as of December 31, 2001 and determined that no
adjustment to the carrying value of goodwill was needed.
The IT recruitment unit was tested for impairment in the third quarter,
after the annual forecasting process. Due to a decrease in margins and the loss
of key sales personnel, operating profits and cash flows were lower than
expected in the first nine months of 2002. Based on that trend, the earnings
forecast for the next two years was revised. At September 30, 2002, we
recognized a goodwill impairment loss of $57,808 in the IT recruitment unit. The
fair value of that reporting unit was estimated using the expected present value
of future cash flows.
During the fourth quarter, the IT recruitment unit experienced further
decline, indicating impairment. The fair value of the unit was estimated using
the expected present value of future cash flows. At December 31, 2002, a further
goodwill impairment loss of $87,489 was recognized.
The Technical Publications and Engineering unit was tested for
impairment in the fourth quarter, as operating profits, cash flows and forecasts
were lower than expected. At December 31, 2002, a goodwill impairment loss of
$1,234,962 was recognized. The fair value of that reporting unit was estimated
using the expected present value of future cash flows.
On an ongoing basis, absent any impairment indicators, we expect to
perform a goodwill impairment test as of the end of the third quarter during the
fourth quarter of each year.
Had the standard been in effect for the year ended December 31, 2001,
our net loss would decrease by $454,908 from a loss of $8,559,402 to a loss of
$8,104,494 and our net loss per share would decrease by $0.03 from a net loss
per share of $0.57 to a net loss per share of $0.54. Had the standard been in
effect for the year ended December 31, 2000, our net loss would decrease by
$319,879 from a loss of $7,040,644 to a loss of $6,720,765 and our net loss per
share would decrease by $0.06 from a net loss per share of $1.32 to a net loss
per share of $1.26.
The books and records of our Canadian operations are recorded in
Canadian dollars. For purposes of financial statement presentation, we convert
balance sheet data to United States dollars using the exchange rate in effect at
the balance sheet date. Income and expense accounts are translated using an
average exchange rate prevailing during the relevant reporting period. There can
be no assurance that we would have been able to exchange currency on the rates
used in these calculations. We do not engage in exchange rate-hedging
transactions. A material change in exchange rates between United States and
Canadian dollars could have a material effect on our reported results.
-14-
The Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Revenue
For the year ended December 31, 2002, we derived 50% of our revenue in
the United States compared to 56% for the year ended December 31, 2001. The
decrease in the total revenue derived from the United States is a result of the
increase in IT recruitment sales in Canada and the decrease in engineering and
IT documentation sales in the United States.
For the year ended December 31, 2002, our primary source of revenue was
IT recruitment, representing 51% of total revenue which is consistent with the
year ended December 31, 2001. Recruitment revenue for the year ended December
31, 2002 decreased by $3,970,000 or 24% to $12,830,000 compared to $16,800,000
for the year ended December 31, 2001. The decrease in recruitment revenue is a
result of cutbacks and reduced hiring in the telecommunications, network and
financial services industries.
In April 2002, we closed one of our IT recruitment offices,
Systemsearch Consulting Services Inc., and transferred the existing contracts to
our Toronto head office. As a result of the closing, eight of employees were
terminated. The prior owner of Systemsearch, John Wilson, was also terminated.
Mr. Wilson is subletting the space from us in consideration of certain assets
including furniture and equipment.
We perform permanent, contract and executive searches for IT and
engineering professionals. Most searches are performed on a contingency basis
with fees due upon candidate acceptance of permanent employment or on a
time-and-materials basis for contracts. Retained searches are also offered, and
are paid by a non-refundable portion of one fee prior to performing any
services, with the balance due upon candidates' acceptance. The revenue for
retained searches is recognized upon a candidate's acceptance of employment.
Selected recruitment customers include Fujitsu, Bank of Montreal, EDS
Canada Inc., Goldman Sachs, and Sprint Canada. In the case of contract services,
we provide our customers with independent contractors or "contract workers" who
usually work under the supervision of the customer's management. Generally, we
enter into a time-and-materials contract with our customer whereby the customer
pays us an agreed upon hourly rate for the contract worker. We pay the contract
worker pursuant to a separate consulting agreement. The contract worker
generally receives between 75% and 80% of the amount paid to us by the customer;
however, such payment is usually not based on any formula and may vary for
different engagements. We seek to gain "preferred supplier status" with our
larger customers to secure a larger percentage of those customers' businesses.
While such status is likely to result in increased revenue and gross profit, it
is likely to reduce gross margin percentage because we are likely to accept a
lower hourly rate from our customers and there can be no assurance that we will
be able to reduce the hourly rate paid to our consultants. In the case of
permanent placement services, we identify and provide candidates to fill
permanent positions for our customers.
For the year ended December 31, 2002, 43% of our revenue came from
engineering services including technical publications, engineering design and
e-learning compared to 39% for the year ended December 31, 2001. Revenue from
engineering services for the year ended December 31, 2002 decreased by
$2,220,000 or 17% to $10,740,000 compared to $12,960,000 for the year ended
December 31, 2001`. The decrease in engineering sales is a result of the
reduction of the sales force for this division.
Our engineering services include the complete planning, staffing,
development, design, implementation and testing of a project. It can also
involve enterprise-level planning and project anticipation. Our specialized
engineering services include: technical publications, design, e-learning and Web
development. We outsource our technical publications and engineering services on
both a time and materials and project basis. For project work, the services
provided are defined by guidelines to be accomplished by milestone and revenue
is recognized upon the accomplishment of the relevant milestone. As services are
rendered, the costs incurred are reflected as Work in Progress. Revenue is
recognized upon the persuasive evidence of an agreement, delivery of the
service, and when the fee is fixed or determinable and collection is probable.
Customers we provide engineering services to include General Dynamics, General
Electric, General Motors, Lockheed Martin, Boeing, Caterpillar and Cummins
Engines.
-15-
For the year ended December 31, 2002, information technology
documentation services represented approximately 6% of our revenue compared to
10% for the year ended December 31, 2001. Revenue from information technology
documentation services for the year ended December 31, 2002 decreased by
$1,930,000 or 56% to $1,490,000 compared to $3,420,000 for the year ended
December 31, 2001.
The substantial decrease in revenue from information technology
documentation services is primarily due to the loss of sales personnel and the
general economic slowdown in this industry. This division offers a very
specialized service, and relied on several key customers in a very localized
market. Many of these customers have either cancelled projects or have put a
number of their projects on hold. In response to these conditions, we reduced
terminated the staff in this division and transferred the existing contracts to
another office. The staff terminations in this division represent approximately
$400,000 in annual savings.
We provide outsourced information technology documentation services in
two ways: complete project management and the provision of skilled project
resources to supplement a customer's internal capabilities. Revenue is
recognized on the same basis as technical publications and engineering
outsourcing services. Selected information technology documentation services
customers include Fidelity Investments, SMD Tech Aid Corporation, CDI
Corporation, and the Gillette Company.
Gross Profit
Gross profit is calculated by subtracting all direct costs from net
revenue. The direct costs of contract recruitment include contractor fees and
benefits. Gross profit for IT recruitment services for the year ended December
31, 2002 declined to 14% from 25% for the year ended December 31, 2001. The
decline in gross profit is a result of our focus on contract sales and our
preferred vendor status with large clients for information technology contract
recruitment services. It is often necessary to lower billing rates and markups
to be successful in the bid process. One client, with an average gross profit
margin of 12% represented 67% of the total revenue for the recruitment division
and 34% of the company's total revenues for the year ended December 31, 2002.
Revenue from permanent placements has declined considerably from last year,
which has also contributed to the decline in gross profit in this division.
The direct costs of technical publications and engineering services
include wages, benefits, software training and project expenses. The average
gross profit for the engineering division was 32% for the year ended December
31, 2002 compared to 30% for the year ended December 31, 2001. The increase in
gross profit for technical publications and engineering services is a result of
the increase in higher margin contracts in technical publications and e-learning
compared to the traditional engineering services. In addition, we are engaging
in more time-and-materials based contracts versus fixed cost which prevents
against project and costs overruns.
The direct costs of information technology documentation services
include contractor wages, benefits, and project expenses. The average gross
profit for the information technology division for the year ended December 31,
2002 was 25% compared to 38% for the year ended December 31, 2001. The decline
in gross profit in the current period is a result of the decrease in higher
margin permanent placements and increase in lower margin contract placements of
documentation specialists.
The Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Revenue
For the year ended December 31, 2001, we derived 56% of our revenue in
the United States compared to 70% for the year ended December 31, 2000. The
decrease in the total revenue derived from the United States is a result of the
increase in IT recruitment sales in Canada and the decrease in engineering and
IT documentation sales in the United States.
-16-
For the year ended December 31, 2001, our primary source of revenue was
recruitment, representing 51% of total revenue compared to 37% for the year
ended December 31, 2000. Recruitment revenue for the year ended December 31,
2001 increased $3,460,000 or 26% to $16,800,000 compared to $13,340,000 for the
year ended December 31, 2000. The increase in revenue from recruitment is a
result of the added revenues associated with certain preferred vendor agreements
we secured in 2001. We are now a preferred vendor to AT&T, CIBC, EDS Canada
Inc., Fidelity, and the Management Board Secretariat of the Ontario Government.
For the year ended December 31, 2001, 39% of our revenue came from
engineering services including technical publications, engineering design and
e-learning compared to 45% for the year ended December 31, 2000. Revenue from
engineering services for the year ended December 31, 2001 decreased $3,210,000
or 20% to $12,960,000 compared to $16,170,000 for the year ended December 31,
2000. Although the majority of our revenue came from IT Recruitment in 2001, our
focus was on strengthening the engineering services division. In particular, we
focused on expanding into the defense, aerospace and automotive industries and
leveraging off existing engineering customers to secure new higher margin
technical publication and e-learning business.
During the year 2001, we terminated seven employees of this division,
representing $390,000 in annual expenses. In addition, we closed our Atlanta
office, representing $80,000 in annual rent expense. Revenues from the Atlanta
office were $1,345,000 for 2001 and $1,800,000 for 2000. We successfully
transitioned the sales contracts to more effective engineering offices, and
therefore do not anticipate a material decline in revenue as a result of
closure.
For the year ended December 31, 2001, information technology
documentation services represented approximately 10% of our revenue compared to
17% for the year ended December 31, 2000. Revenue from information technology
documentation services for the year ended December 31, 2001 decreased $2,800,000
or 45% to $3,420,000 compared to $6,220,000 for the year ended December 31,
2000.
The substantial decrease in revenue from information technology
documentation services was primarily due to the general economic slowdown. This
division offers a very specialized service, and relied on several key customers
in a very localized market. Many of these customers have either cancelled
projects or have put a number of their projects on hold. In response to these
conditions, we have recently expanded the marketing of our documentation
services to other regions and to existing recruitment and engineering services
customers. In addition, we have reduced our operating overheads for this
division to support the current levels of revenue. During 2001, we restructured
salaries and eliminated eight employees representing annual expenses of
$425,000.
Gross Profit
Gross profit for information technology recruitment services for the
year ended December 31, 2001 declined to 25% from 51% for the year ended
December 31, 2000. The decline in gross profit is a result of becoming a
preferred vendor for information technology contract recruitment services and
the resulting lower margins. In addition, revenue from permanent placements had
declined significantly from 2000, and contributed to the decline in gross
profit. As we do not attribute any direct costs to permanent placement services,
the gross profit on such services is 100% of revenue.
The average gross profit for the engineering division was 30% for the
year ended December 31, 2001 which is consistent with the year ended December
31, 2000
The average gross profit for the IT documentation division for the year
ended December 31, 2001 was 38% compared to 44% for the year ended December 31,
2000. The decline in gross profit for 2001 is a result of the decrease in higher
margin permanent placements and increase in lower margin contract placements of
documentation specialists.
-17-
Results of Operations
The Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Revenue. Revenue for the year ended December 31, 2002 decreased by
$8,120,000 or 24%, to $25,060,000, as compared to $33,180,000 for the year ended
December 31, 2001. The decrease is primarily attributable to the decline in
revenues from each division including 24% for IT recruitment, 17% for technical
publications and engineering, and 56% for IT documentation.
Cost of Sales. The cost of sales for the year ended December 31, 2002
decreased by $4,330,000, or 18%, to $19,460,000, as compared to $23,790,000 for
the year ended December 31, 2001. The cost of sales as a percentage of revenue
increased to 78% compared to 72% for the year ended December 31, 2001. The
increase in cost as a percentage of sales corresponds with the increase in lower
margin IT recruitment sales.
Gross Profit. Gross profit for the year ended December 31, 2002
decreased by $3,800,000, or 40%, to $5,600,000 compared to $9,400,000 for the
year ended December 31, 2001. This decrease was attributable to the overall
decrease in revenue and the increase in cost of sales during the year ended
December 31, 2002. As a percentage of revenue, gross profit decreased from 28%
for the year ended December 31, 2001 to 22% for the year ended December 31,
2002. This decrease in gross profit is a direct result of the increase in direct
costs associated with IT recruitment sales.
Expenses. Expenses for the year ended December 31, 2002 decreased by
$7,040,000, or 44%, to $9,070,000 compared to $16,110,000 for the year ended
December 31, 2001.
Administrative expenses decreased by $790,000 or 15% to $4,530,000 for
the year ended December 31, 2002 compared to $5,320,000 for the year ended
December 31, 2001. General administrative expenses including salaries and rent
have decreased significantly over last year as a result of restructuring and
general cost cutting. Included in administrative expenses are the costs of
$980,000 of shares of our common stock issued to various consultants for
corporate and debt restructuring services rendered during 2002.
Selling expenses for the year ended December 31, 2002 decreased by
$2,040,000, or 41%, to $2,980,000 from $5,020,000 for the year ended December
31, 2001. This decrease is attributable to the considerable downsizing in sales
staff and the decrease in commissions, as a result of the reduction in sales. In
addition, in 2002 we eliminated certain advertising and promotional expenses.
For the year ended December 31, 2002, financing expenses increased 79%
to $1,200,000 from $670,000 for the year ended December 31, 2001. This increase
is attributable to the expensing of approximately $770,000 for cash, shares and
warrants issued to Tazbaz Holdings in consideration of a loan agreement whereby
Tazbaz securitized our overdraft position with Bank One in the amount of
$650,000.
For the year ended December 31, 2002, depreciation and amortization
expenses decreased by $700,000, or 35%, to $1,290,000 from $1,990,000 for the
year ended December 31, 2001. This decrease is primarily attributable to our
adoption of Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets. Under these
statements, we are no longer required to amortize goodwill. Amortization of
goodwill for the year ended December 31, 2001 amounted to $450,000.
During 2002, we assessed the financial impact SFAS No. 141 and No. 142
will have on our consolidated Financial Statements and recorded a goodwill
impairment of $1,380,259 as required based on our evaluation of carrying value
and projected cash flows. In accordance with SFAS 121, we recorded a write down
of goodwill of $3,001,291 in 2001.
For the year ended December 31, 2002, there were no restructuring
charges related to the termination of personnel and the closure of
non-productive branch offices. For the year ended December 31, 2001, our
restructuring charges were $120,000 related to the closure of our London
training office and termination of personnel.
-18-
0perating Loss from Continuing Operations. For the year ended December
31, 2002, losses from continuing operations decreased by $3,240,000 or 48% to a
loss of $3,470,000 as compared to a loss of $6,710,000 for the year ended
December 31, 2001. This decrease is largely attributable to the recognition of
debt forgiveness of approximately $2,310,000 related to discounts received on
the repayment of our line of credit with Bank One for a net discount of
$935,000; repayment of long-term debt to the Business Development Bank of Canada
for a net discount of $300,000; and, debt forgiveness of on the restructuring of
our notes payable totaling $1,075,000.
Loss on investments. During the year ended December 31, 2002, we wrote
down our investment in Conexys by $667,510. During the year ended December 31,
2001, we wrote down our investments in Tillyard Management, SCM Dialtone, and
Lifelogix of $130,242, $75,000 and $121,947 respectively.
Interest Charges. For the year ended December 31, 2002, interest
charges increased by $3,070,000, or 341%, to $3,970,000 from $900,000 for the
year ended December 31, 2001. This increase is largely attributable to the
interest expense on the beneficial conversion feature of on the convertible
debentures issued in December 2002, in the amount of $2,900,000.
Loss from Continuing Operations before Income Tax. Loss from continuing
operations before income tax for the year ended December 31, 2002 increased by
$60,000 or 1% to a loss of $8,000,000 as compared to a loss of $7,940,000 for
the year ended December 31, 2001.
Income Taxes. Income tax expense for the year ended December 31, 2002
decreased by $616,000 or 99% to $4,000 compared to an expense of $620,000 for
the year ended December 31, 2001. The expense in 2001 was a write down of the
deferred income tax asset.
Income (Loss) from Continuing Operations. Loss from continuing
operations for the year ended December 31, 2002 decreased by $560,000, or 6%, to
a loss of $8,000,000 compared to a loss of $8,560,000 for the year ended
December 31, 2001.
Income (Loss) from Discontinued Operations. Operations of the
technology and training divisions for the years ended December 31, 2002 and 2001
have been reported as discontinued.
Effective March 8, 2002, we sold our technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. Net proceeds after
broker fees were $1,320,000 of which we received $800,000 in cash and $550,000
worth of unrestricted common shares on closing. The shares were sold on March
11, 2002 for value of $524,673. As part of the transaction, Cognicase assumed
all of the staff in our technology division, including the employees of
TidalBeach Inc. We will not have future revenues from either the Njoyn or
Secondwave products.
Technology revenue for the year ended December 31, 2002 was $59,000 and
$555,000 in 2001. The operating loss from the technology division for the year
ended December 31, 2002 was $164,000 and $732,000 in 2001. On disposal, Njoyn
had approximately $950,000 in assets consisting primarily of deferred
development charges and approximately $30,000 in liabilities consisting
primarily of capital lease obligations. The gain on disposal of $400,229 has
been reflected in the loss from discontinued operations. No income taxes have
been reflected on this disposition as the sale of the shares gives rise to a
capital loss, the benefit of which, is more likely than not to be realized.
Effective May 1, 2002, we signed an agreement with triOS Training
Centres Limited, an Ontario company, for the purchase of certain assets of the
Toronto training division, Thinkpath Training for a nominal amount of cash and
the assumption of all prepaid training liabilities. As part of the transaction,
triOS assumed the Toronto training staff and is subletting the classroom
facilities.
On November 1, 2002, we entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the sale of certain assets of
the New York training division, Thinkpath Training for a nominal amount of cash
and the assumption of all prepaid training liabilities. As part of the
transaction, Thinkpath Training LLC assumed the New York training staff, some
assets and is subletting the classroom facilities.
-19-
As a result of these two transactions, we will not have future
revenues from either training division. Training revenue for the year ended
December 31, 2002 was $1,347,000, and $3,187,000 in 2001. The operating loss
from the training division for the year ended December 31, 2002 was $362,000 and
$391,000 in 2001.
Net Loss Before Preferred Stock Dividends. Net loss before preferred
stock dividends for the year ended December 31, 2002 decreased by $1,530,000 or
16% to a net loss of $8,150,000 compared to a net loss of $9,680,000 for the
year ended December 31, 2001.
Net Loss Applicable to Common Stock. Net loss applicable to common
stock decreased by $2,160,000 or 21% to $8,250,000 for the year ended December
31, 2002 compared to $10,410,000 for the year ended December 31, 2001. During
2002 we issued preferred stock dividends of $100,000 and $730,000 in 2001.
THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Revenue. Revenue for the year ended December 31, 2001 decreased by
$2,560,000 or 7%, to $33,180,000, as compared to $35,740,000 for the year ended
December 31, 2000. The decrease is primarily attributable to the decline in
revenues from our technical publications and engineering and information
technology documentation divisions of 20% and 45% respectively.
Cost of Sales. The cost of sales for the year ended December 31, 2001
increased by $2,490,000, or 10%, to $23,790,000, as compared to $21,300,000 for
the year ended December 31, 2000. As a percentage of revenue, the cost of sales
was 72% compared to 60% for the year ended December 31, 2000. The increase in
cost as a percentage of sales corresponds with the increase in lower margin IT
recruitment sales.
Gross Profit. Gross profit for the year ended December 31, 2001
decreased by $5,030,000, or 35%, to $9,400,000 compared to $14,430,000 for the
year ended December 31, 2000. This decrease was attributable to the overall
decrease in revenue and the increase in cost of sales during the year ended
December 31, 2001. As a percentage of revenue, gross profit decreased from 40%
for the year ended December 31, 2000 to 28% for the year ended December 31,
2001. This decrease in gross profit is a direct result of the increase in direct
costs associated with IT recruitment sales.
Expenses. Expenses for the year ended December 31, 2001 decreased by
$5,940,000 or 27% to $16,110,000 compared to $22,050,000 for the year ended
December 31, 2000.
Administrative expenses decreased by $710,000 or 12% to $5,320,000
compared to $6,030,000 for the year ended December 31, 2000. This decrease is
related to the reduction of administrative salaries and overhead as a result of
restructuring and general cost reduction.
Selling expenses for the year ended December 31, 2001 decreased by
$1,330,000 or 21% to $5,020,000 from $6,350,000 for the year ended December 31,
2000. This decrease is attributable to the decrease in sales personnel and
commissions corresponding with the decline in revenue.
Financing expenses for the year ended December 31, 2001 decreased by
$3,920,000 or 85% to $670,000 compared to $4,590,000 for the year ended December
31, 2000. The charges in 2000 related to the costs of acquisitions and the
repricing of options and warrants in connection with financing and acquisitions.
For the year ended December 31, 2001, depreciation and amortization
expense increased by $60,000 or 3% to $1,980,000 from $1,920,000 for the year
ended December 31, 2000. This increase is primarily attributable to the increase
in capital assets and the acquisition of other assets.
-20-
In accordance with SFAS 121, a goodwill impairment of $3,001,391 was
recorded in 2001 and an impairment of $3,113,268 recorded in 2000.
For the year ended December 31, 2001, restructuring charges related to
the termination of personnel and the closure of non-productive branch offices
increased $70,000 or 140% to $120,000 compared to $50,000 for the year ended
December 31, 2000.
Operating Loss from Continuing Operations. For the year ended December
31, 2001, operating losses decreased by $640,000 or 9% to an operating loss of
$6,710,000 as compared to an operating loss of $7,350,000 for the year ended
December 31, 2000. This decrease is primarily attributable to the significant
reduction in financing expenses related to acquisitions and financing activities
during the year ended December 31, 2001 compared to 2000.
Loss on investments. For the year ended December 31, 2001, we lost
$330,000 on investments, compared to zero for the year ended December 31, 2000.
During the year 2001, we wrote down our investments in Tillyard Management, SCM
Dialtone, and Lifelogix of $130,242, $75,000 and $121,947 respectively.
Interest Charges. For the year ended December 31, 2001, interest
charges increased by $350,000 or 38% to $900,000 from $650,000 for the year
ended December 31, 2000. The increase in interest charges is primarily
attributable to higher interest and penalties being charged by Bank One on the
overdraft facility which ranged between $400,000 and $750,000 during the period
August until December. The interest charges also represent interest paid and
accrued for on the notes payable.
Loss from Continuing Operations before Income Tax. Loss from continuing
operations before income tax for the year ended December 31, 2001 decreased by
$70,000 or 1% to a loss of $7,940,000 as compared to a loss of $8,010,000 for
the year ended December 31, 2000.
Income Taxes. Income tax expense for the year ended December 31, 2001
increased $1,590,000 to $620,000 compared to a tax recovery in 2000 of $970,000
related to deferred tax asset. The increase in income taxes in 2001 is a result
of the write down of the deferred income tax asset.
Loss from Continuing Operations. Loss from continuing operations for
the year ended December 31, 2001 increased by $1,520,000, or 22%, to a loss of
$8,560,000 compared to a loss of $7,040,000 for the year ended December 31,
2000.
Loss from Discontinued Operations. Operations of the technology and
training divisions for the years ended December 31, 2001 and 2000 have been
reported as discontinued.
Technology revenue for the year ended December 31, 2001 was $600,000
and $827,000 in 2000. The operating loss from the technology division for the
year ended December 31, 2001 was $732,000 and $448,000 in 2000.
Training revenue for the year ended December 31, 2001 was $3,187,000
and $7,197,000 in 2000. The operating loss from the training division for the
year ended December 31, 2001 was $391,000 and $910,000 in 2000.
Net Loss Before Preferred Stock Dividends. Net loss before preferred
stock dividends for the year ended December 31, 2001 increased by $1,280,000 or
15% to a net loss of $9,680,000 compared to a net loss of $8,400,000 for the
year ended December 31, 2000.
Net Loss Applicable to Common Stock. Net loss applicable to common
stock decreased by $1,630,000 or 14% to $10,410,000 for the year ended December
31, 2001 compared to $12,040,000 for the year ended December 31, 2000. During
2001 we issued preferred stock dividends of $730,000 and $3,650,000 in 2001.
-21-
LIQUIDITY AND CAPITAL RESOURCES
We have incurred substantial operating losses during the last two
fiscal years. Due to these factors, we had taken additional cost cutting steps
during the year 2002 to reduce our expenses. Specifically, we sold certain
non-performing divisions and assets of such divisions and reduced our staff by
approximately 50 employees.
In March 2002, we sold our technology division, Njoyn Software
Incorporated to Cognicase Inc., a Canadian company. Our net proceeds after
broker fees were $1,350,000 of which we received $800,000 in cash and $550,000
worth of unrestricted common shares on closing. The shares were sold on March
11, 2002 for value of $ 524,673. As part of the transaction, Cognicase assumed
all of the staff in our technology division (eight employees) and contracted the
services of our CIO for a period of six months. The proceeds were used to pay
down bank indebtedness with Bank One of $500,000 and a term loan with Bank One
for $260,000. We also used the proceeds to pay accrued liabilities. We believe
the sale of Njoyn and the corresponding reduction in technology expenses will
improve our cash flow, as the operations had recurring losses since inception.
As a result of the sale of this division, we expect our annual revenues to
decrease by approximately $200,000.
In April 2002, we closed one of our IT recruitment offices,
Systemsearch Consulting Services Inc., and transferred the existing contracts to
our Toronto head office. As a result of the closing, eight of our employees were
terminated. The prior owner of Systemsearch, John Wilson, was also terminated.
Mr. Wilson is subletting the space from us in consideration of certain assets
including furniture and equipment. As a result of the closure of this office, we
expect our annual revenues to decrease by approximately $700,000.
In May 2002, we entered into a series of agreements with triOS Training
Centres Limited, an Ontario company, for the sale of certain assets of our
Toronto training division, Thinkpath Training. As part of the transaction, triOS
assumed the Toronto training staff (six employees) and is subletting our
classroom facilities. As a result of the sale of this office, our annual revenue
will decline by approximately $1,000,000.
Effective November 1, 2002, we entered into a series of agreements
with Thinkpath Training LLC, a New York company, for the sale of certain assets
of our New York training division for a nominal amount of cash and the
assumption of all prepaid training liabilities. As part of the transaction,
Thinkpath Training LLC will assume the New York training staff, some assets and
sublet the classroom facilities. As a result of the sale of this office, our
annual revenue will decline by approximately $1,000,000.
We expect the reduction of our staff during 2002 will save
approximately $2,000,000 on an annualized basis. Despite the steps that we have
taken, to the extent we experience a shortfall in required revenue or are unable
to bill and collect our receivables and unbilled work-in-progress in a timely
manner, it could have a material adverse impact on our ability to continue as a
going-concern and meet our intended business objectives. Also, a continued
slowdown in the economy or the postponement of large engineering contracts could
adversely affect our working capital and/or operating cash flow.
With insufficient working capital from operations, our primary sources
of cash during 2002 were a revolving line of credit with Bank One and proceeds
from the sale of equity securities. Our primary capital requirements included
debt service, capital expenditures and working capital needs.
On December 5, 2002, Bank One's security and indebtedness were
purchased by Morrison Financial Services Limited. Bank One accepted a $1,100,000
discount on the payoff of its debt. On July 1, 2002 we had entered into a
Forbearance and Modification Agreement with Bank One which was subsequently
amended on August 1, 2002, August 15, 2002, September 1, 2002, September 16,
2002, September 30, 2002, October 15, 2002, November 15, 2002, and November 30,
2002. Under the terms of the agreement, the Bank was entitled to forbearance
fees and payment of related legal fees and expenses. The Bank charged us
approximately $250,000 in forbearance fees and $18,000 in legal fees.
-22-
Morrison Financial Services Limited charged us a 15% fee or $165,000
for the discount negotiation with Bank One. The discount amount of $1,100,000
was recognized as debt forgiveness and the fee of $165,000 was netted against
this amount for total debt forgiveness of $935,000.
Our facility with Morrison Financial Services Limited is a receivable
discount facility whereby we are able to borrow up to 75% of qualifying
receivables at 30% interest per annum. At December 31, 2002, the balance on the
receivable discount facility was approximately $2,340,000 and exceeded our
borrowing capacity based on qualifying receivables. Subsequent to December 31,
2002, we used proceeds from the sale of equity to pay down the facility. We are
currently within margin of our receivable discount facility with Morrison
Financial Services Limited based on 75% of qualifying accounts receivable.
On December 5 2002, we closed a 12% Senior Secured Convertible Debt
financing arrangement with a syndicate of investors for debentures of up to
$3,000,000. The first debenture of $800,000 was purchased together with
45,714,285 warrants on closing. The debenture will become due twelve months from
the date of issuance. The investors will have the right to acquire up to
$800,000 worth of our common stock at a price the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during the
sixty-day trading period prior to conversion. The warrants are exercisable at
any time and in any amount until December 5, 2009 at a purchase price of $.0175
per share. We are required to pay interest to the debenture holder on the
aggregate unconverted and outstanding principal amount of the debenture at the
rate of 12% per annum, payable on each conversion date and maturity date in cash
or shares of common stock.
On December 18, 2002, we closed an additional debenture of $100,000
with Tazbaz Holdings Limited together with 5,625,000 warrants. The debenture
will become due twelve months from the date of issuance. Tazbaz Holdings Limited
will have the right to acquire up to $100,000 worth of our common stock at a
price the lesser of $.0175 or 50% of the average of the three lowest prices on
three separate trading days during the sixty-day trading period prior to
conversion. The warrants are exercisable at any time and in any amount until
December 18, 2009 at a purchase price of $.0175 per share. We are required to
pay interest to Tazbaz Holdings Limited on the aggregate unconverted and
outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of common
stock.
The proceeds of $900,000 received by us were allocated between the
warrants and the debenture without warrants on a pro rata basis. Paid in capital
has been credited by the value of the warrants in the amount of $707,050. The
value of the beneficial conversion feature was determined to be $2,898,328 which
has been credited to paid in capital and charged to earnings as interest expense
in 2002.
Subsequent to the year end, the beneficial conversion has been
recalculated as the conversion price has declined from $.0175. An amount of
$14,794,613 will be reflected in the first quarter as an additional interest
expense and additional paid in capital.
At December 31, 2002, we had cash of $114,000 and a working capital
deficiency of $3,720,000. At December 31, 2002, we had a cash flow deficiency
from operations of $330,000. At December 31, 2001, we had cash of $480,000 and a
working capital deficiency of $3,360,000. At December 31, 2001, we had a cash
flow deficiency from operations of $200,000. At December 31, 2000, we had
negative cash or cash equivalents and a working capital deficiency of
$3,080,000. At December 31, 2000, we had a cash flow deficiency from operations
of $3,500,000, due primarily to expenditures on research and development of
Njoyn, and restructuring costs associated with the closure of non-performing
branch offices.
-23-
At December 31, 2002, we had cash flow from investing activities of
$1,140,000 attributable primarily to the proceeds on the disposal of Njoyn of
$1,250,000, which was offset by the purchase of capital assets of approximately
$190,000. At December 31, 2001, we had a cash flow deficit from investing
activities of $380,000 attributable primarily to the purchase of capital assets
of $370,000. At December 31, 2000, we had a cash flow deficit from investing
activities of $3,720,000 attributable to the acquisition of MicroTech
Professionals Inc.
At December 31, 2002, we had a cash flow deficit from financing
activities of $1,050,000 attributable primarily to a reduction in bank
indebtedness of $3,790,000 which was offset by an increase in debt of $260,000
related to the Terry Lyons loan received in May 2002 and $2,340,000 related to
the Morrision Financial receivable discount facility and proceeds of $900,000
from the sale of convertible debentures. At December 31, 2001, we had cash flow
from financing activities of $790,000 attributable primarily to proceeds from
the issuance of common stock of $400,000, the issuance of preferred stock of
$1,200,000 and the repayment of notes of $198,000 and long-term debt of
$500,000. At December 31, 2000, we had cash flow from financing activities of
$6,020,000, attributable primarily to share capital issue of $5,530,000 an
increase in long-term debt of $1,110,000 and a increase in bank indebtedness of
$630,000.
At December 31, 2002, we had a loan balance of $31,403 with the
Business Development Bank of Canada. The loan was assigned to us when we
combined with TidalBeach Inc. in November 2000. The loan is secured by a general
security agreement with monthly payments of $950.00 and interest at 12.5% per
annum.
On December 5, 2002, Morrison Financial Services Limited purchased
additional debt belonging to the Business Development Bank of Canada of
approximately $440,000 in consideration of $100,000. Morrison Financial Services
charged us a 15% fee or $45,000 for the discount negotiation with the Business
Development Bank of Canada. The discount amount of $341,467 was recognized as
debt forgiveness and the fee of $45,000 was netted against this amount for total
debt forgiveness of $296,467.
In May 2002, we secured a loan of $259,356 from an individual, Terry
Lyons which was secured by our IRS refund. We paid a placement fee of 10% to Mr.
Lyons. Although we received our IRS refund in July 2002, Mr. Lyons agreed to an
extension of the loan until October 31, 2003. The loan is payable in twelve
monthly payments of $21,613 beginning November 30, 2002 and bears interest at
30% per annum. This loan is subordinated to Morrison Financial Services Limited
and no principal payments have been made.
At December 31, 2002, we had approximately $174,191 outstanding on
various capital leases with various payment terms and interest rates. The
average balance on the terms of leases are 12 months and cover primarily the
hardware and various software applications required to support our engineering
division.
At December 31, 2002, we had a note payable of $224,000 owed to Roger
Walters, the sole shareholder of CadCam Inc. On August 1, 2002, we further
restructured our note payable to Roger Walters, reducing the principal from
$675,000 to $240,000 in consideration of the issuance of 1,000,000 shares of our
common stock. Principal payments of $4,000 will be made monthly and started
September 1, 2002 until August 1, 2007. This loan is non-interest bearing.
The price of the shares at the time of conversion of Mr. Walter's debt
on August 1, 2002 was 0.0942, representing approximately $340,800 in debt
forgiveness. In accordance with FAS 15, the gain was measured by the excess of
the carrying amount of the note payable settled less accrued interest, finance
charges or other debt obligations. On December 5, 2002, the shares were issued
to Roger Walters and we debited liabilities payable in capital stock and
credited capital stock in the amount of $247,858 and debt forgiveness in the
amount of $187,142.
In addition, we agreed to price protection on the 1,756,655 shares that
were issued to Mr. Walters in January 2002. In the event that the bid price is
less than $.27 per share when Mr. Walters seeks to sell his shares in an open
market transaction, we will be obligated to issue additional shares of
unregistered common stock with a value equal to the difference between $.27 per
share and the closing bid price to a floor of $.14 per share. Pursuant to this
agreement, we issued Mr. Walters 1,631,185 shares of our common stock in
December 2002.
The loan is subordinated to Morrison Financial Services Limited and the
12% Senior Secured Convertible Debenture holders. We have not made any principal
payments to Mr. Walters since December 2002 and we are currently in default of
the loan agreement. In the event that we default on payment, the principal
balance will bear interest at 12% per annum until payment is made.
-24-
At December 31, 2002, we had a note payable of $670,957 owed to Denise
Dunne-Fushi, the vendor of MicroTech Professionals Inc. On August 1, 2002, we
restructured our note payable to Denise Dunne-Fushi, reducing the principal from
$1,740,536 to $600,000 in consideration of the issuance of 4,000,000 shares of
our common stock. In addition a prior debt conversion of $225,000 that was to be
paid in capital was forgiven. We agreed to issue and register the shares upon
obtaining shareholder approval of an amendment to our Articles of Incorporation
increasing our authorized capital stock. Principal payments of $10,000 per month
will begin November 1, 2002 bearing 5% interest until October 1, 2007. In
addition, we agreed to cover the monthly expense associated with Ms.
Dunne-Fushi's family health benefits and vehicle lease for a period of four
years.
The price of the shares at the time of conversion was 0.0942,
representing approximately $763,763 in debt forgiveness. In accordance with FAS
15, the gain was measured by the excess of the carrying amount of the note
payable settled less accrued interest, benefits and car lease payments as per
the settlement agreement. On December 5, 2002, the shares were issued to Denise
Dunne and we debited liabilities payable in capital stock and credited capital
stock in the amount of $475,787 and debt forgiveness in the amount of $889,749.
The loan is secured under a general security agreement but is
subordinated to Morrison Financial Services Limited and the 12% Senior Secured
Convertible Debenture holders. We have not made any principal payments to Ms.
Dunne-Fushi since December 2002 and are currently in default of the loan
agreement. In the event of default, Ms. Dunne-Fushi has the option of enforcing
the security she holds.
Although we believe that our current working capital and cash flows
from restructured operations will be adequate to meet our anticipated cash
requirements going forward, we have accrued liabilities and potential
settlements of outstanding claims that may require additional funds. We will
have to raise these funds through equity or debt financing. There can be no
assurance that additional financing will be available at all or that if
available, such financing will be obtainable on terms favorable to us and would
not be dilutive.
Despite our recurring losses and negative working capital, we believe
that we have developed a business plan that, if successfully implemented, could
substantially improve our operational results and financial condition. However,
we can give no assurances that our current cash flows from operations, if any,
borrowings available under our line of credit, and proceeds from the sale of
securities, will be adequate to fund our expected operating and capital needs
for the next twelve months. The adequacy of our cash resources over the next
twelve months is primarily dependent on our operating results and our ability to
secure alternate financing, and settlement of our insurance claim, all of which
are subject to substantial uncertainties. Cash flow from operations for the next
twelve months will be dependent, among other things, upon the effect of the
current economic slowdown on our sales, the impact of the restructuring plan and
management's ability to implement our business plan. The failure to return to
profitability and optimize operating cash flow in the short term, and to
successfully secure alternate financing, could have a material adverse effect on
our liquidity position and capital resources which may force us to curtail our
operations.
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, which, among other
factors, changed the presentation of gains and losses on the extinguishments of
debt. Any gain or loss on extinguishments of debt that does not meet the
criteria in APB Opinion 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", shall be included in operating
earnings and not presented separately as an extraordinary item. The new standard
is effective for companies with fiscal years beginning after May 15, 2002.
However, the company has elected to adopt the standard as the debt restructuring
gain in the current period, as permitted by SFAS No. 145.
-25-
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No.146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit on Activity (including Certain Costs Incurred in a Restructuring)". We
will adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized.
In January 2003, the FASB issued SFAS No. 148, Accounting for Stock
- -Based Compensation - Transition and Disclosures. This statement provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement also amends the disclosure requirements of SFAS No. 123 to require
more prominent and frequent disclosures in the financial statements about the
effects of stock-based compensation. The transitional guidance and annual
disclosure provisions of this Statement is effective for the December 31, 2002
financial statements. The interim reporting disclosure requirements will be
effective for our March 31, 2003 10-Q.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirement for most guarantees including
loan guarantees, and clarifies that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair market value of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
measurement provisions of the Interpretation apply on a prospective basis to
guarantees issued or modified after December 31, 2002.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," which
addresses consolidation by business enterprises of variable interest entities.
In general, a variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
A variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The objective of Interpretation No. 46
is not to restrict the use of variable interest entities but to improve
financial reporting by companies involved with variable interest entities. Until
now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
Interpretation No. 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of Interpretation No. 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. We do not have any variable interest entities,
and, accordingly, adoption is not expected to have a material effect our
financial position, results of operations or cash flows.
-26-
Year 2000 Compliance
We have developed and implemented a Year 2000 compliance program to
address internal systems, suppliers, processes and procedures, as well as the
internally developed Njoyn solution. All phases and actions of this program were
successfully completed as planned. Remediation measures, where required, were
successfully implemented and tested. The total cost of the compliance program
was not material. Although we believe that we have taken the appropriate steps
to assess, implement and test Year 2000 compliance, it is not possible to
ascertain whether the efforts of customers, suppliers or other third parties,
will have a material adverse effect on our business, results of operations and
financial condition.
Fluctuations in Quarterly Results
Our quarterly operating results have in the past and, may in the
future, fluctuate significantly, depending on factors such as the demand for our
services; our ability to attract and retain employees, information technology
and engineering professionals, and customers; the timing and significance of new
services and products introduced by us and our competitors; the level of
services provided and prices charged by us and our competitors; unexpected
changes in operating expenses; and general economic factors. Our operating
expenses are based on anticipated revenue levels in the short term, are
relatively fixed, and are incurred throughout the quarter. Accordingly, there
may be significant variations in our quarterly operating results.
Management of Growth
Our business has grown rapidly in the last five years. The growth of
our business and expansion of our customer base and service offerings has placed
a significant strain on management and operations. Our expansion by acquisition
resulted in substantial growth in the number of our employees, the scope of our
operating and financial systems and the geographic area of our operations,
resulting in increased responsibility for management personnel. Our future
operating results will depend on the ability of management to continue to
implement and improve our operational and financial control systems, and to
expand, train and manage our employee base. In addition, our failure to generate
or raise sufficient capital to fund continued growth may result in the delay or
abandonment of some or all future expansion plans or expenditures or and the
continued reduction in the scope of some or all of our present operations, which
could materially adversely effect our business, results of operations and
financial condition.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no changes in or disagreements with our accountants.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Our officers and directors, and further information concerning each of
them, are as follows as at the date of this Annual Report on Form 10-K:
Name Age Position
- ---- --- --------
Declan A. French 56 Chairman of the Board of Directors and Chief
Executive Officer
Tony French 30 Executive Vice President
Kelly Hankinson 33 Chief Financial Officer
John Dunne 63 Director
Arthur S. Marcus 36 Director
Lloyd MacLean 50 Director
Katherine Evans 50 Director
Each director is elected for a period of one year at our annual meeting of
shareholders and serves until the next such meeting and until his or her
successor is duly elected and qualified. Directors may be re-elected annually
without limitation. Officers are appointed by, and serve at the discretion of,
our Board of Directors.
Our Bylaws provide that the authorized number of directors shall be as set
by our Board of Directors, but shall not be less than one. We have paid our
directors fees for service on the Board of Directors by the issuance of options
under our 1998 Stock Option Plan, 2000 Stock Option Plan and 2001 Stock Option
Plan.
Set forth below is a biographical description of each of our officers and
directors based on information supplied by each of them:
Declan A. French has served as our Chairman of our board of directors and
Chief Executive Officer since our inception in February 1994. Prior to founding
Thinkpath, Mr. French was President and Chief Executive Officer of TEC Partners
Ltd., an information technology recruiting firm in Toronto, Canada. Mr. French
has a diploma in Psychology and Philosophy from the University of St. Thomas in
Rome, Italy.
Tony French has served as our Executive Vice President since September
1999. In his capacity of Executive Vice President, Mr. French is responsible for
overseeing our recruitment services division. Prior to becoming Executive Vice
President, Mr. French served as our Vice President of Sales, since our inception
in 1994. Mr. French is the son of Declan A. French, our Chairman of the Board of
Directors and Chief Executive Officer.
Kelly Hankinson has served as our Chief Financial Officer since May 2000,
as a member of its Board of Directors from June 2000 until February 14, 2003 and
as Secretary and Treasurer since March 2001. Ms. Hankinson served as our Vice
President, Finance and Administration and Group Controller from February 1994 to
May 2000. Ms. Hankinson has a Masters Degree and a Bachelors Degree from York
University. Ms. Hankinson resigned from the Board of Directors on February 14,
2003.
John Dunne has served on our board of directors since June 1998. Mr. Dunne
has served as Chairman and Chief Executive Officer of the Great Atlantic &
Pacific Company of Canada, Ltd. since August 1997, where he also served as
President and Chief Operating Officer from September 1996 until August 1997.
From November 1995 until September 1996, Mr. Dunne was Chairman and Chief
Executive Officer of Food Basics Ltd.
Arthur S. Marcus has served on our board of directors since April 2000. Mr.
Marcus is a partner at the New York law firm of Gersten, Savage, Kaplowitz, Wolf
and Marcus, LLP, our United States securities counsel. Mr. Marcus joined
Gersten, Savage & Kaplowitz, LLP in 1991 and became a partner in 1996. Mr.
Marcus practices United States Securities Law and has been involved in
approximately 50 initial public offerings and numerous mergers and acquisitions.
Mr. Marcus received a Juris Doctorate from Benjamin N. Cardozo School of Law in
1989.
31
Lloyd MacLean joined our Board of Directors on February 14, 2003. Mr.
MacLean served as our Chief Financial Officer and a Director from September 1997
until May 2000, at which time he departed to pursue other business
opportunities. Mr. MacLean is the sole officer and director of Globe Capital
Corporation. From 1996 to 1997, Mr. MacLean was Vice-President and Chief
Financial Officer of ING Direct Bank of Canada. From 1994 until 1996, he was
Vice-President and Chief Financial Officer of North American Trust, Inc., where
he also served as a Vice President from 1990 until 1994. Mr. MacLean has an MBA
from Harvard University and is a member of the Canadian Institute of Chartered
Accountants.
Katherine Seto Evans is an independent consultant with extensive and
diversified experience in financial management, human resource leadership and
organizational administration. From 1974 to 2001, Ms. Evans was a partner at
Schwartz, Levitsky, Feldman, llp, our independent auditors. From 2001 to
present, Ms. Evans has been an independent consultant to various companies.
During this period she has consulted with us and has assisted us with various
financial and accounting projects. Ms. Evans became a Certified Public
Accountant in1999 and a Chartered Accountant in 1978. Ms. Evans received a
Bachelors Degree in Science from McGill University in 1972. Ms. Evans served on
the Board of Directors from October 16, 2002 until her resignation on February
14, 2003.
Committees of the Board of Directors
In July 1998, our Board of Directors formalized the creation of a
Compensation Committee, which is currently comprised of John Dunne, Arthur S.
Marcus and Lloyd MacLean. The Compensation Committee has: (i) full power and
authority to interpret the provisions of, and supervise the administration of,
our 1998 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock Option Plan, and
2002 Stock Option Plan as well as any stock option plans adopted in the future;
and (ii) the authority to review all compensation matters relating to us. The
Compensation Committee has not yet formulated compensation policies for senior
management and executive officers. However, it is anticipated that the
Compensation Committee will develop a company-wide program covering all
employees and that the goals of this program will be to attract, maintain, and
motivate our employees. It is further anticipated that one of the aspects of the
program will be to link an employee's compensation to his or her performance,
and that the grant of stock options or other awards related to the price of the
shares of our common stock will be used in order to make an employee's
compensation consistent with shareholders' gains.
It is expected that salaries will be set competitively relative to the
information technology and engineering services and consulting industry and that
individual experience and performance will be considered in setting such
salaries.
In July 1998, our Board of Directors also formalized the creation of an
Audit Committee, which currently consists of Lloyd MacLean and John Dunne. The
Audit Committee is charged with reviewing the following matters and advising and
consulting with our entire Board of Directors with respect to: (i) the
preparation of our annual financial statements in collaboration with our
chartered accountants; (ii) annual review of our financial statements and annual
reports; and (iii) all contracts between us and our officers, directors and
other of our affiliates. The Audit Committee, like most independent committees
of public companies, does not have explicit authority to veto any actions of our
entire Board of Directors relating to the foregoing or other matters; however,
our senior management, recognizing their own fiduciary duty to us and our
shareholders, is committed not to take any action contrary to the recommendation
of the Audit Committee in any matter within the scope of its review.
We have established an Executive committee, comprised of certain of our
executive officers and key employees, which allows for the exchange of
information on industry trends and promotes "best practices" among our business
units. Currently, the Executive Committee consists of Declan A. French, Tony
French, Kelly Hankinson, and Robert Trick.
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During the year ended December 31, 2002, our Board of Directors met five
times on the following dates: March 7, 2002, April 15, 2002, May 17, 2002,
August 28, 2002 and October 16, 2002, at which all of the directors were
present; and acted by written consent in lieu of a meeting five times on the
following dates: February 6, 2002, June 28, 2002, November 21, 2002, November
25, 2002 and December 11, 2002. During the year ended December 31, 2002, the
Compensation Committee met on August 28, 2002, the Audit Committee met on April
15, 2002 and the Executive Committee met monthly.
Indemnification of Officers and Directors
Our Bylaws provide that we shall indemnify, to the fullest extent permitted
by Canadian law, our directors and officers (a