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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 001-14813
THINKPATH INC.
------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ONTARIO, CANADA 52-209027
----------------------------------- -----------------
(JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
201 WESTCREEK BOULEVARD, BRAMPTON, ONTARIO CANADA L6T 5S6
--------------------------------------------- -------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(905) 460-3040
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE
EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. YES X NO ___
THE ISSUER'S REVENUES FOR THE MOST RECENT FISCAL YEAR WERE $10,817,667.
THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING STOCK HELD BY
NON-AFFILIATES BASED UPON THE LAST SALE PRICE ON APRIL 13, 2004 WAS
APPROXIMATELY $3,438,159.
AS OF APRIL 13, 2004 THERE WERE 3,441,280,633 SHARES OF COMMON STOCK, NO PAR
VALUE PER SHARE, ISSUED AND OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
THINKPATH INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Shareholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
compliance with Section 16(a) of the Exchange Act
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits, Financial Statements and Reports on Form 8-K
Signatures
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein including, without limitation,
those concerning (i) Thinkpath Inc.'s ("Thinkpath") strategy, (ii) Thinkpath's
expansion plans, and (iii) Thinkpath's capital expenditures, contain
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") concerning Thinkpath's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Thinkpath
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
EXCHANGE RATE DATA
Thinkpath maintains its books of account in Canadian dollars, but has
provided the financial data in this Form 10-K in United States dollars and on
the basis of generally accepted accounting principles as applied in the United
States, and Thinkpath's audit has been conducted in accordance with generally
accepted auditing standards in the United States. All references to dollar
amounts in this Form 10-K, unless otherwise indicated, are to United States
dollars.
The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On April 13, 2004, the exchange rate was
Cdn$0.7485 per US$1.00.
Year ended December 31, 2001 2002 2003
---- ---- ----
Rate at end of period $0.62870 $0.63440 $0.7727
Average rate during period 0.64612 0.63724 0.7163
High 0.67140 0.66560 0.7747
Low 0.62270 0.61750 0.6327
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Unless otherwise indicated, all reference to "Thinkpath", "us", "our"
and "we" refer to Thinkpath Inc. and its wholly-owned subsidiaries: Thinkpath US
Inc. (formerly Cad Cam Inc.), an Ohio corporation, Thinkpath Michigan Inc.
(formerly Cad Cam of Michigan Inc.), a Michigan corporation and Thinkpath
Technical Services Inc. (formerly Cad Cam Technical Services Inc.), an Ohio
corporation. In addition, Thinkpath owns the following companies which are
currently inactive: Systemsearch Consulting Services Inc., an Ontario
corporation, International Career Specialists Ltd., an Ontario corporation,
E-Wink Inc. (80%), a Delaware corporation, Thinkpath Training Inc. (formerly
ObjectArts Inc.), an Ontario corporation, Thinkpath Training US Inc. (formerly
ObjectArts US Inc.), a New York corporation, MicroTech Professionals Inc., a
Massachusetts corporation, and TidalBeach Inc., an Ontario corporation. In 2002,
Thinkpath sold Njoyn Software Incorporated, a wholly-owned subsidiary.
OVERVIEW
We are a global provider of engineering services including design,
build, drafting, technical publishing and documentation, and on-site engineering
support. Our customers include defense contractors, aerospace, automotive,
health care and manufacturing companies, including Lockheed Martin, General
Dynamics, General Electric, General Motors, Ford Motors, Magna, ABB and Hill-Rom
Company.
We were incorporated under the laws of the Province of Ontario, Canada
in 1994.
Our principal executive offices are located at 201 Westcreek Boulevard,
Brampton, Ontario, Canada and our website is www.thinkpath.com.
ENGINEERING AND DESIGN SERVICES
Our engineering and design services cover every facet of a project from
concept to SLA prototyping to a complete turnkey package that delivers a
finished, operating system. Our engineers handle the drafting, the detailing and
the parametric modeling. We have experienced engineers on staff as well as a
pool of skilled consultants whom we can call on to provide internal design
services.
We have provided CAD drafting and modeling services to countless
customers incorporating many industries. We have developed the technical skill
base and management structure to organize CAD services for programs of any size
and currently manage these services for large projects in the aerospace,
defense, automotive, medical equipment, packaging, and many other high tech
industries.
We have expert-level engineering and design capability that ranges from
traditional 2-D and 3-D AutoCAD programs to the most sophisticated parametric
and solid modeling platforms, including, Unigraphics NX, Pro/Engineer, Solid
Works, SDRC Ideas, and Catia. In all, we have nearly two-dozen engineering
design programs along with the specialty modules to perform surface modeling,
hydraulic, electrical, large weldments, casting, and other design functions. Our
software inventory includes ancillary programs to perform Finite Element and
other engineering analyses.
Our staff encompasses the entire range of disciplines including
mechanical, civil, structural, and electrical engineering. Our design services
range from drafting and design, to detailing and geometric dimensioning and
tolerancing (GD&T).
-2-
As a component of our engineering design efforts, we are ISO 9001
certified, and subscribe to the Six Sigma Principles of continuous quality
improvement. This uncompromising commitment to quality is built into every phase
of a project we manage for all of our clients. Our offices maintain and follow a
complete set of ISO compliant policies, procedures, and work instructions, and
our branches in Detroit, Michigan and Cincinnati, Ohio are current ISO 9001
practitioners.
TECHNICAL PUBLICATIONS AND DOCUMENTATION
We provide technical publishing programs for complete integration into
engineering and design departments of government, military contractors,
aerospace and automotive customers.
Our technical publications expertise covers every aspect of the
documentation milieu, from pre-installation (site preparation), through
installation, operation, service, maintenance, and repair. We have the
capability to produce the full range of ATA compliant manuals, and our clients
range from the airframe, electrical, hydraulic, pneumatic, and mechanical
components to aircraft interiors, and jet propulsion systems. In the military
arena, we produce MIL-SPEC compliant documentation for equipment that ranges
from naval engines through the most advanced weapons systems.
As with our engineering and design services, our technical publications
group uses cutting edge technology to produce the documentation. Our publishing
and technical illustration libraries include 20 programs that range from
Microsoft Word for Windows (the Navy standard publishing platform), through
SGML, HTML, and XML authoring and publishing suites. Although we still produce
manuals on paper, we are now focused to a greater extent on e-documentation and
interactive electronic technical manuals (IETMs).
We maintain a complete staff of technical publication personnel
consisting of highly skilled engineers and drafters. As a result, we can draw
heavily upon our engineering resources to handle every step of the documentation
process, including researching, writing, editing, illustration, printing and
distribution.
ON-SITE ENGINEERING SUPPORT
On-site engineering support is a core Thinkpath business, and a natural
outgrowth of our pioneering work in the computer aided design and drafting
field. Initially, the need for on-site support involved both the training of the
operators and their placement with manufacturers who needed people with the
knowledge to operate the new (and at the time arcane) design software. Gradually
the software became more user-friendly, and the basic business model for most
large manufacturers demanded a leaner, more flexible staffing paradigm. This has
lead to an increased demand for experienced engineers, designers, and draftsmen
who are not only proficient using a diverse range of design programs, but who
also have the requisite industry knowledge to step in and be immediately
productive during periods of peak demand or new product introduction operations.
Our success in this field can be attributed to two primary factors.
First, we perform in depth screening and pre-interviewing of all candidates to
ensure that there is an absolute match between the client's need and the
candidates' capabilities. Secondly, all Thinkpath on-site employees are, indeed,
members of staff, earning a wage commensurate with their skills and experience.
They also enjoy a full range of company benefits including medical/prescription
coverage, holiday pay and pension privileges. These elements of course, offer
our clients far greater security utilizing people with the incentive to remain
with the company throughout the project cycle and beyond.
-3-
Another factor that has contributed to the success of our on-site
engineering support operation is our ability to provide an employee packaged
with the hardware and software required to complete the assignment. Employers
appreciate the ability to pay an hourly fee that covers the cost of the
employee, computer, and the software they need to operate while using it, and
surrendering the hardware and software when it's no longer needed rather than
paying the steep depreciation and maintenance costs associated with ownership.
The combination of offering only quality employees as a turnkey package
and then helping to ensure that they stay with the job is a powerful one, and
has gained us strong relationships with many of the major automotive, aerospace,
defense, medical equipment, and other manufacturers in our area of operations.
Our clients are large and high-growth corporations from a wide variety of
industries across North America. These customers include Fortune 500 companies
and other high-profile companies. The majority of our relationships are
long-term built on exceptional service, rigorous quality standards, and highly
competitive pricing.
The following is a partial listing of our clients:
o General Motors Corporation: 25 years
o Cummins, Inc.: 18 years
o General Electric Aircraft Engines: 17 years
o Heidelberg Web Systems: 12 years
o Hill-Rom, Inc.: 12 years
o General Dynamics Corporation: 11 years
o Curtiss-Wright Flight Systems: 10 years
o Johnson & Johnson (Ethicon and Depuy Groups): 10 years
o B/E Aerospace (SPG and AMP Groups): 9 years
o Daimler Chrysler Corporation: 9 years
o Lockheed Martin Aeronautics Corporation: 7 years
o ABB: 1 year
o Magna: 1 year
COMPETITION
The engineering services industry is highly competitive with high
barriers to entry due to significant capital costs for tools and equipment and
the specialized skills and knowledge required. We compete for potential
customers with other providers of engineering services, and on-site consultants.
Many of our current and potential competitors have longer operating histories,
greater financial, marketing and human resources, and a larger base of
professionals and customers than we do, all of which may provide these
competitors with a competitive advantage. In addition, many of these
competitors, including numerous smaller privately held companies, may be able to
respond more quickly to customer requirements and to devote greater resources to
the marketing of services than we are.
Increased competition could result in price reductions, reduced margins
or loss of market share, any of which could materially and adversely affect our
business, prospects, financial condition and results of operations. Further, we
cannot assure you that we will be able to compete successfully against current
or future competitors or that the competitive pressures we face will not have a
material adverse effect on our business, prospects, financial condition and
results of operations. We believe that the principal factors relevant to
competition in the engineering services industry are the recruitment and
retention of highly qualified engineering professionals, rapid and accurate
response to customer requirements and, to a lesser extent, pricing.
-4-
BUSINESS STRATEGY
We plan to exploit our track record in engineering services by offering
a unique blend of design engineering, technical publishing and documentation. In
early 2002, we began to focus our marketing efforts on the defense, aerospace,
automotive, manufacturing and health care industries and it is here that we
expect our opportunity to generate significant growth in 2003 is most likely. By
combining design engineering and technical publishing we believe we have become
experts experienced in content management and thus are positioned to deliver
high margin customized knowledge management products.
Our business objective is to increase our gross revenue and improve our
gross margins by replacing fixed priced projects with time and materials based
contracts. We intend to increase our market share through the addition of
engineering sales staff and through the marketing and promotion support services
of outside consultants. The primary components of our strategy to achieve this
objective are as follows:
- - Expand our DOD contractor customer base;
- - Grow our aerospace, automotive, manufacturing and health care customer base;
and
- - Further penetrate existing customer base, including Fortune 500 companies.
We have established an extensive technology strategy and
infrastructure that we believe provides us with a competitive advantage over
less technologically advanced competitors.
BACK OFFICE INFRASTRUCTURE
We have invested heavily in the creation and support of an integrated
technological infrastructure that links all offices and employees and promotes
uniformity in certain functions. Our accounting program provides for real-time
financial reporting across dispersed branch offices. Our intranet and
recruitment management software and sales management software, provide each of
our employees with access to the tools and information that help them to be
successful and productive. This infrastructure allows us to integrate our
acquisitions more easily and cost-effectively than would otherwise be possible.
MARKETING AND PROMOTION
Our marketing and brand strategy is to position us as experts of
content in engineering knowledge management. As a provider of engineering
services, we will emphasize our flexible service options, the depth of our
expertise, and the global delivery capabilities of our North American offices.
We believe this positioning will be achieved through a variety of
means, including:
- - Strong and easy-to-access sales and marketing support at the branch level; -
Investment in awareness and branding campaigns; and, - Exploration and
establishment of various business partnerships and alliances.
COLLATERAL AND SALES SUPPORT
A major marketing and promotion program is underway to update our
collateral material and Web site to more accurately reflect our renewed focus on
engineering services.
TARGET MARKETS
Our target customers are defense contractors, aerospace, automotive,
manufacturing and health care corporations located primarily in the Eastern
states and Great Lakes region of North America.
-5-
EMPLOYEES AND CONSULTANTS
EMPLOYEES
As of April 13, 2004 we have 34 full-time employees, including 21
sales personnel and 13 administrative and technical employees. Our staff at
December 31, 2003 consisted of 37 full-time employees, including 24 sales
personnel and 13 administrative and technical employees. Our staff at December
31, 2002 consisted of 46 full-time employees, including 32 sales personnel and
16 administrative and technical employees. Our staff at December 31, 2001
consisted of 98 full-time employees, including 46 sales personnel and 52
administrative and technical employees. We are not party to any collective
bargaining agreements covering any of our employees, have never experienced any
material labor disruption and are unaware of any current efforts or plans to
organize our employees.
CONSULTANTS
We enter into consulting agreements with engineering professionals at
hourly rates based on each individual's technical skills and experience. As of
April 13, 2004, approximately 160 professionals were performing services for our
customers. At December 31, 2003, there were 150 professionals placed by us,
performing services for our customers. At December 31, 2002 there were 225
professionals placed by us, performing services for our customers. At December
31, 2001 there were 309 professionals placed by us, performing services for our
customers.
RECENT EVENTS
Subsequent to December 31, 2003, we closed an additional $25,000 in
convertible debentures together with 1,428,571 warrants. The debentures will
become due twelve months from the date of issuance. The investors will have the
right to acquire up to $25,000 worth of our common stock at a price the lesser
of $.0175 or 50% of the average of the three lowest prices on three separate
trading days during the sixty-day trading period prior to conversion. The
warrants are exercisable at any time and in any amount for a period of 7 years
from the original purchase date at a purchase price of $.0175 per share. We are
required to pay interest to the debenture holder on the aggregate unconverted
and outstanding principal amount of the debenture at the rate of 12% per annum,
payable on each conversion date and maturity date in cash or shares of common
stock.
On March 25, 2004, we entered into a share purchase agreement with
Bristol Investment Fund, Ltd. for the issuance and sale of debentures of up to
$1,000,000. The first debenture of $350,000 was purchased together with
924,000,000 warrants on closing. The debenture will become due twelve months
from the date of issuance. Bristol will have the right to acquire up to $350,000
worth of our common stock at a price equal to the lesser of $.0175 or 50% of the
average of the three lowest prices on three separate trading days during the
sixty-day trading period prior to conversion. The warrants are exercisable at
any time and in any amount until March 25, 2011 at a purchase price of $.000417
per share. We are required to pay interest to Bristol on the aggregate
unconverted and outstanding principal amount of the debenture at the rate of 12%
per annum, payable on each conversion date and maturity date in cash or shares
of common stock.
As of April 13, 2004, we have issued 2,948,806,496 shares of our
common stock to the convertible debenture holders upon the conversion of
$2,825,000 of debentures and accrued interest.
-6-
ITEM 2. DESCRIPTION OF PROPERTY
We maintain our headquarters in 9,500 square foot offices located at
201 Westcreek Boulevard, Brampton, Ontario, Canada. We have leased such facility
for a term of five years terminating in May 2008. We pay annual base rent of
$90,000. We lease additional offices at the following locations:
Current Rent
Location Square Feet Lease Expiration Per Annum
- -------- ------------- ------------------- -------------
Cincinnati, Ohio 3,820 05/31/05 $53,289
Columbus, Ohio 1,600 01/31/05 $27,000
Dayton, Ohio 6,421 12/31/05 $92,591
Detroit, Michigan 15,328 08/31/05 $168,025
The lease commitments do not include two operating leases for premises
that we are currently sub leasing to the purchasers of the Canadian and United
States training divisions. If the purchasers were to default on payment or
abandon the premises, we would be liable for annual payments of $282,096
expiring August 31, 2006 and $150,534 expiring September 30, 2010.
The lease commitments do not include an operating lease for premises
located in the United States that were closed in the fourth quarter of 2002. We
have not made any payments on this lease since the premises were abandoned, nor
has the lessor tried to enforce payment. We may be liable for a lease balance of
$44,597, which expires November 30, 2004.
ITEM 3. LEGAL PROCEEDINGS
We are party to the following pending legal proceedings:
On October 1, 2003, SITQ National Inc. ("SITQ'), a former landlord,
filed a statement against us and our Directors, with the Superior Court of
Justice of Ontario, Canada, Court File No. 03-CV-256327CM3, demanding payment of
rent arrears of approximately $760,000 and alleging damages for breach of lease
for future rent in the sum of $3,250,000. The lease covered premises located in
Ontario, Canada that we abandoned in April 2003. The term of the lease does not
expire until December 31, 2010. The rent arrears of $760,000 has been accrued
but we believe there is no merit for the breach of lease for future rent of
$3,250,000 and accordingly have made no provision in the accounts with respect
to this matter. We intend to defend this claim vigorously.
On March 17, 2004, Johnston & Associates, LLC, a South Carolina
corporation, filed a statement against us with the Superior Court of Justice of
Ontario, Canada, Court File No. C-294-04, demanding payment of $60,000 pursuant
to a consulting agreement entered into April 2002. We intend to defend this
claim vigorously.
We are not party to any other material litigation, pending or
otherwise.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 2, 2003, we held an Annual Meeting of Shareholders at which
the shareholders: (i) elected the Board of Directors for the ensuing year; (ii)
ratified the appointment of Schwartz Levitsky Feldman LLP, as our independent
chartered accountants for the ensuing year; (iii) did not ratify the adoption of
our 2003 Stock Option Plan; and, (iv) amended our Articles of Incorporation to
increase the authorized number of shares of our common stock from 800,000,000
shares to an unlimited number of shares.
-7-
(i) The following directors were elected to the Board of Directors
and received the votes indicated: For Withheld
Declan French 513,828,523 22,747,118
John Dunne 516,784,578 19,791,063
Arthur Marcus 516,984,153 19,591,488
Lloyd MacLean 516,984,578 19,591,063
(ii) The appointment of Schwartz Levitsky Feldman LLP, to serve as our
independent chartered accountants for the ensuing year was approved by the votes
indicated:
For Against Withheld
519,008,303 16,342,425 1,224,913
(iii) The adoption of our 2003 Stock Option Plan was not approved by the
votes indicated:
For Against Withheld
155,455,276 25,621,596 355,498,679
(iv) The amendment of our Articles of Incorporation to increase the
authorized number of shares of our common stock from 800,000,000 shares to an
unlimited number of shares.
For Against Withheld
503,296,380 32,817,961 461,300
-8-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock began trading on the Nasdaq SmallCap Market on June 8,
1999, when we completed our initial public offering. Our common stock is
currently listed on the Over-the-Counter Bulletin Board (OTC:BB) under the
symbol "THTH-F". As of April 13, 2004, we had 3,441,280,633 shares of common
stock outstanding. The following table sets forth the high and low sale prices
for our common stock as reported on the OTC:BB.
Fiscal 2001 High Low
- ----------- ---- ---
First Quarter $1.6880 $0.5630
Second Quarter $0.5700 $0.3000
Third Quarter $0.6300 $0.2500
Fourth Quarter $0.3700 $0.1300
Fiscal 2002
First Quarter $0.2400 $0.1400
Second Quarter $0.2400 $0.1000
Third Quarter $0.1400 $0.0800
Fourth Quarter $0.0900 $0.0400
Fiscal 2003
First Quarter $0.0500 $0.0070
Second Quarter $0.0095 $0.0039
Third Quarter $0.0063 $0.0016
Fourth Quarter $0.0034 $0.0016
Fiscal 2004
First Quarter $0.0023 $0.0008
Second Quarter (through to April 13, 2004) $0.0010 $0.0008
As of April 13, 2004, we had 410 holders of record and approximately
4,818 beneficial shareholders.
On April 13, 2004, the last sale price of our common stock as reported
on the OTC:BB was $.0008.
DIVIDEND POLICY
We have never paid or declared dividends on our common stock. The
payment of cash dividends, if any, in the future is within the discretion of our
Board of Directors and will depend upon our earnings, capital requirements,
financial condition and other relevant factors. We intend to retain future
earnings for use in our business.
-9-
ITEM 6. SELECTED FINANCIAL DATA
SELECTED INCOME STATEMENT DATA
For the years ended, 2003 2002 2001
---- ---- ----
Revenue 10,817,667 12,283,828 17,224,335
Operating loss from continuing operations (1,267,714) (4,013,235) (7,541,882)
Net loss from continuing operations (9,292,090) (8,508,568) (9,482,208)
Income (loss) from discontinued operations 258,462 361,916 (201,233)
Net loss before preferred stock dividends (9,033,628) (8,146,652) (9,683,441)
Preferred stock dividends -- 100,387 728,740
Net loss applicable to common stock (9,033,628) (8,247,039) (10,412,181)
=============== =============== ===============
Weighted average number of common stock
outstanding basic and fully diluted 719,412,600 29,000,252 14,943,306
=============== =============== ==============
Loss from continuing operations per weighted
average common stock before preferred
dividends basic and fully diluted (0.01) (0.29) (0.63)
=============== =============== ===============
Loss from continuing operations per weighted
average common stock after preferred
dividends basic and fully diluted (0.01) (0.30) (0.68)
=============== =============== ===============
SELECTED BALANCE SHEET DATA
2003 2002 2001
---- ---- ----
Current Assets 2,378,116 2,974,524 6,801,561
Current Liabilities 5,134,521 6,692,642 10,155,923
Working Capital Deficiency (2,756,405) (3,718,118) (3,354,362)
Total Assets 7,408,589 8,787,531 17,174,978
Long-term debt and notes payable, net
of current portion 13,176 771,459 2,922,432
Stockholders' equity 2,260,892 1,323,430 3,246,946
-10-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the selected historical financial data, financial statements and notes
thereto and our other historical financial information contained elsewhere in
this Annual Report on Form 10-K. The statements contained in this Annual Report
on Form 10-K that are not historical are forward looking statements within the
meaning of Section 27A of the Securities Act of and Section 21E of the Exchange
Act, including statements regarding our expectations, intentions, beliefs or
strategies regarding the future. Forward-looking statements include our
statements regarding liquidity, anticipated cash needs and availability and
anticipated expense levels. All forward-looking statements included herein are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statement. It is important to note
that our actual results could differ materially from those in such
forward-looking statements.
OVERVIEW
We are a global provider of engineering services including design,
build, drafting, technical publishing and documentation, and on-site engineering
support. Our customers include defense contractors, aerospace, automotive,
health care and manufacturing companies, including Lockheed Martin, General
Dynamics, General Electric, General Motors, Ford Motors, Magna, ABB and Hill-Rom
Company.
On December 12, 2001, the Securities and Exchange Commission issued
FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting
Policies, which encourages additional disclosure with respect to a company's
critical accounting policies, the judgments and uncertainties that affect a
company's application of those policies, and the likelihood that materially
different amounts would be reported under different conditions and using
different assumptions.
Management is required to make certain estimates and assumptions during
the preparation of the consolidated financial statements in accordance with
GAAP. These estimates and assumptions impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the consolidated financial statements. They also impact the reported amount
of net earnings during any period. Actual results could differ from those
estimates. Certain of our accounting policies and estimates have a more
significant impact on our financial statements than others, due to the magnitude
of the underlying financial statement elements.
CONSOLIDATION
Our determination of the appropriate accounting method with respect to
our investments in subsidiaries is based on the amount of control we have,
combined with our ownership level, in the underlying entity. Our consolidated
financial statements include the accounts of our parent company and our
wholly-owned subsidiaries. All of our investments are accounted for on the cost
method. If we had the ability to exercise significant influence over operating
and financial policies of a company, but did not control such company, we would
account for these investments on the equity method.
Accounting for an investment as either consolidated or by the equity
method would have no impact on our net income (loss) or stockholders' equity in
any accounting period, but would impact individual income statement and balance
sheet items, as consolidation would effectively "gross up" our income statement
and balance sheet. However, if control aspects of an investment accounted for by
the cost method were different, it could result in us being required to account
for an investment by consolidation or the equity method. Under the cost method,
the investor only records its share of the investee's earnings to the extent
that it receives dividends from the investee; when the dividends received exceed
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the investee's earnings subsequent to the date of the investor's investment, the
investor records a reduction in the basis of its investment. Under the cost
method, the investor does not record its share of losses of the investee.
Conversely, under either consolidation or equity method accounting, the investor
effectively records its share of the investee's net income or loss, to the
extent of its investment or its guarantees of the investee's debt.
At December 31, 2003, all of our investments in non-related companies
totaling $45,669 were accounted for using the cost method. Accounting for an
investment under either the equity or cost method has no impact on evaluation of
impairment of the underlying investment; under either method, impairment losses
are recognized upon evidence of permanent losses of value.
REVENUE RECOGNITION
We recognize revenue in accordance with Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, which has four basic criteria
that must be met before revenue is recognized:
- - Existence of persuasive evidence that an arrangement exists;
- - Delivery has occurred or services have been rendered;
- - The seller's price to the buyer is fixed and determinable; and,
- - Collectibility is reasonably assured.
Our various revenue recognition policies are consistent with these
criteria. We provide the services of engineering staff on a project basis. The
services provided are defined by guidelines to be accomplished by clearly
defined milestones and revenue is recognized upon the accomplishment of the
relevant milestone. As services are rendered, the costs incurred are reflected
as Work in Progress. Revenue is recognized upon the persuasive evidence of an
agreement, delivery has occurred, the fee is fixed or determinable and
collection reasonably assured.
Prior to the sale of our IT recruitment division, we provided the
services of information technology consultants on a contract basis and revenue
was recognized as services were performed. We also placed information technology
professionals on a permanent basis and revenue was recognized upon candidates'
acceptance of employment. If we received non-refundable upfront fees for
"retained searches", the revenue was recognized upon the candidates' acceptance
of employment.
Prior to the sale of our training division, we provided advanced training
and certification in a variety of technologies and revenue was recognized on
delivery.
Prior to the sale of our technology division, we licensed software in the
form of a Human Capital Management System called Njoyn. The revenue associated
with providing this software consisted of an initial set up fee, customization
and training as agreed and an ongoing monthly per user fee. The allocation of
revenue to the various elements was based on our determination of the fair value
of the elements if they had been sold separately. The customers had the right to
choose a provider to host the software which was unrelated to us. The set-up fee
and customization revenue was recognized upon delivery of access to the software
with customization completed in accordance with milestones determined by the
contract. Revenue was recognized on a percentage of completion basis for
contracts with significant amounts of customization and clearly defined
milestones agreed to by the customer and an enforceable right to invoice and
collect on a partial completion basis. For contracts which required significant
customization, without clearly defined milestones, and an inability to estimate
costs, revenue was reflected on a completed contract basis. Substantial
completion was determined based on customer acceptance of the software.
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Prior to the sale of our technology division, we also signed contracts
for the customization or development of SecondWave, a web development software
in accordance with specifications of our clients. The project plan defined
milestones to be accomplished and the costs associated. These amounts were
billed as they were accomplished and revenue was recognized as the milestones
were reached. The work in progress for costs incurred beyond the last
accomplished milestone was reflected at the period end. The contracts did not
include any post-contract customer support. Additional customer support services
were provided at standard daily rates, as services were required.
CARRYING VALUE GOODWILL AND INTANGIBLE ASSETS
Prior to January 1, 2002, our goodwill and intangible assets were
accounted for in accordance with Statement of Financial Accounting Standards No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. This statement required us to evaluate the carrying
value of our goodwill and intangible assets upon the presence of indicators of
impairment. Impairment losses were recorded when estimates of undiscounted
future cash flows were less than the value of the underlying asset. The
determination of future cash flows or fair value was based upon assumptions and
estimates of forecasted financial information that may differ from actual
results. If different assumptions and estimates were used, carrying values could
be adversely impacted, resulting in write downs that would adversely affect our
earnings. In addition, we amortized our goodwill balances on a straight-line
basis over 30 years. The evaluation of the useful life of goodwill required our
judgment, and had we chosen a shorter time period over which to amortize
goodwill, amortization expense would have increased, adversely impacting our
operations.
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. This statement requires
us to evaluate the carrying value of goodwill and intangible assets based on
assumptions and estimates of fair value and future cash flow information. These
assumptions and estimates may differ from actual results. If different
assumptions and estimates are used, carrying values could be adversely impacted,
resulting in write downs that could adversely affect our earnings.
At December 31, 2003, we performed our annual impairment test for
goodwill and determined that no adjustment to the carrying value of goodwill was
needed.
The IT recruitment unit was tested for impairment in the third quarter
of 2002, after the annual forecasting process. Due to a decrease in margins and
the loss of key sales personnel, operating profits and cash flows were lower
than expected in the first nine months of 2002. Based on that trend, the
earnings forecast for the next two years was revised. At September 30, 2002, we
recognized a goodwill impairment loss of $57,808 in the IT recruitment unit. The
fair value of that reporting unit was estimated using the expected present value
of future cash flows.
During the fourth quarter of 2002, the IT recruitment unit experienced
further decline, indicating impairment. The fair value of the unit was estimated
using the expected present value of future cash flows. At December 31, 2002, a
further goodwill impairment loss of $87,489 was recognized.
The Technical Publications and Engineering unit was also tested for
impairment in the fourth quarter of 2002, as operating profits, cash flows and
forecasts were lower than expected. At December 31, 2002, a goodwill impairment
loss of $1,234,962 was recognized. The fair value of that reporting unit was
estimated using the expected present value of future cash flows.
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On an ongoing basis, absent any impairment indicators, we expect to
perform a goodwill impairment test as of the end of the fourth quarter of each
year.
FOREIGN CURRENCY TRANSLATION
The books and records of our Canadian operations are recorded in
Canadian dollars. The financial statements are converted to US dollars as we
have elected to report in US dollars consistent with Regulation S-X, Rule 3-20.
The translation method used is the current rate method which is the method
mandated by FAS 52 where the functional currency is the foreign currency. Under
the current method all assets and liabilities are translated at the current
rate, stockholders' equity accounts are translated at historical rates and
revenues and expenses are translated at average rates for the year.
Due to the fact that items in the financial statements are being
translated at different rates according to their nature, a translation
adjustment is created. This translation adjustment has been included in
accumulated other comprehensive income.
There can be no assurance that we would have been able to exchange
currency on the rates used in these calculations. We do not engage in exchange
rate-hedging transactions. A material change in exchange rates between United
States and Canadian dollars could have a material effect on our reported
results.
THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
REVENUE
For the year ended December 31, 2003, we derived 92% of our revenue in
the United States compared to 99.5% for the year ended December 31, 2002. The
decrease in total revenue derived from the United States is a result of the
slight increase in engineering sales in Canada. At the beginning of this year, a
division was started in Ontario to focus on building engineering services in
lieu of IT recruitment services which had traditionally dominated our sales in
Canada.
As a result of this shift in focus, effective June 27, 2003, we
sold certain assets of our IT recruitment division to Brainhunter.com, an
Ontario company, for a nominal amount of cash and the assumption of all employee
liabilities. The gain on disposal of $190,627 has been reflected in the Income
(loss) from discontinued operations in 2003. Of the $190,627, $146,627 was
received in cash on closing with the balance of $44,000 due in a promissory note
payable by June 27, 2004. As a result of this transaction, the Company will not
have future revenues from its IT recruitment division and therefore the
operations have been reported as discontinued.
For the year ended December 31, 2003, our primary source of revenue was
engineering services including engineering design and build, technical
publications and documentation and on-site engineering support. Engineering
services represented 96% of total revenue compared to 88% for the year ended
December 31, 2002. Revenue from engineering services for the year ended December
31, 2003 was $10,380,000 representing an decrease of $410,000 or 4% from
$10,790,000 for the year ended December 31, 2002.
Our engineering services include the complete planning, staffing,
development, design, implementation and testing of a project. It can also
involve enterprise-level planning and project anticipation. Our specialized
engineering services include: design, build and drafting, technical publications
and documentation. We outsource our technical publications and engineering
services on both a time and materials and project basis. For project work, the
services provided are defined by guidelines to be accomplished by clearly
defined milestones and revenue is recognized upon the accomplishment of the
relevant milestone. As services are rendered, the costs incurred are reflected
as Work in Progress. Revenue is recognized upon the persuasive evidence of an
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agreement, delivery of the service, and when the fee is fixed or determinable
and collection is probable. Customers we provide engineering services to include
General Dynamics, General Electric, General Motors, Lockheed Martin, Boeing,
Caterpillar, Cummins Engines, Magna and ABB.
For the year ended December 31, 2003, information technology
documentation services represented approximately 4% of our revenue compared to
12% for the year ended December 31, 2002. Revenue from information technology
documentation services for the year ended December 31, 2003 decreased by
$1,050,000 or 70% to $440,000 compared to $1,490,000 for the year ended December
31, 2002.
The substantial decrease in revenue from information technology
documentation services is primarily due to the loss of sales personnel and the
general economic slowdown in this industry. This division offers a very
specialized service, and relied on several key customers in a very localized
market. Many of these customers have either cancelled projects or have put a
number of their projects on hold. In response to these conditions, we terminated
the staff in this division and transferred the existing contracts to another
office.
We provide outsourced information technology documentation services in
two ways: complete project management and the provision of skilled project
resources to supplement a customer's internal capabilities. Revenue is
recognized on the same basis as technical publications and engineering
outsourcing services. Selected information technology documentation services
customers include Fidelity Investments, SMD Tech Aid Corporation, CDI
Corporation, and the Gillette Company.
GROSS PROFIT
Gross profit is calculated by subtracting all direct costs from net
revenue. The direct costs of engineering services include wages, benefits,
software training and project expenses. The average gross profit for the
engineering division was 33% for the year ended December 31, 2003 which is
consistent with the year ended December 31, 2002.
The direct costs of information technology documentation services
include contractor wages, benefits, and project expenses. The average gross
profit for the information technology division for the year ended December 31,
2003 was 22% compared to 25% for the year ended December 31, 2002. The decline
in gross profit in the current period is a result of the decrease in higher
margin permanent placements and increase in lower margin contract placements of
documentation specialists.
THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
REVENUE
For the year ended December 31, 2002, we derived 99.5% of our revenue
in the United States compared to 98% for the year ended December 31, 2001. The
slight increase in total revenue derived from the United States is a result of
corporate sales of approximately $400,000 which occurred in Canada during 2001.
For the year ended December 31, 2002, our primary source of revenue was
engineering services including engineering design and build, technical
publications and documentation and on-site engineering support. Engineering
services represented 88% of total revenue compared to 80% for the year ended
December 31, 2001. The increase is primarily a result of the dramatic decline in
information technology documentation sales. Revenue from engineering services
for the year ended December 31, 2002 was $10,790,000 representing a decrease of
$3,010,000 or 22% from $13,800,000 for the year ended December 31, 2001. The
decrease in engineering services is a result of the reduction in sales personnel
and office closures that occurred in 2002.
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For the year ended December 31, 2002, information technology
documentation services represented approximately 12% of our revenue compared to
20% for the year ended December 31, 2001. Revenue from information technology
documentation services for the year ended December 31, 2002 decreased by
$1,930,000 or 56% to $1,490,000 compared to $3,420,000 for the year ended
December 31, 2001.
The substantial decrease in revenue from information technology
documentation services is primarily due to the loss of sales personnel and the
general economic slowdown in this industry. This division offers a very
specialized service, and relied on several key customers in a very localized
market. Many of these customers have either cancelled projects or have put a
number of their projects on hold. In response to these conditions, we terminated
the staff in this division and transferred the existing contracts to another
office.
GROSS PROFIT
The average gross profit for the engineering division was 33% for the
year ended December 31, 2002 which is consistent with the year ended December
31, 2001.
The average gross profit for the information technology division for
the year ended December 31, 2002 was 25% compared to 38% for the year ended
December 31, 2001. The decline in gross profit in 2002 is a result of the
decrease in higher margin permanent placements and increase in lower margin
contract placements of documentation specialists.
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RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS--PERCENTAGES
2003 2002 2001
---- ---- ----
REVENUE 100 % 100 % 100 %
---- ---- ----
COST OF SERVICES 68 % 68 % 66 %
---- ---- ----
GROSS PROFIT 32 % 32 % 34 %
---- ---- ----
EXPENSES
Administrative 27 % 34 % 27 %
Selling 11 % 18 % 18 %
Financing Expenses -- % 10 % 4 %
Depreciation and amortization 6 % 11 % 12 %
Write down goodwill -- % 11 % 17 %
Debt forgiveness -- % (19)% -- %
---- ---- ----
Operating loss from continuing
operations (12)% (33)% (44)%
Gain (loss) on Investment -- % (5)% (2)%
Loss from continuing operations
before interest charges (12)% (38)% (46)%
Interest charges 74 % 32 % 5 %
---- ---- ----
Loss from continuing operations
before income taxes (86)% (70)% (51)%
Income taxes -- % -- % 4 %
---- ---- ----
Loss from continuing operations (86)% (70)% (55)%
Income (loss) from discontinued
operations 2 % 3 % (1)%
Net Loss (84)% (67)% (56)%
---- ---- ----
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THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Revenue. Revenue for the year ended December 31, 2003 decreased by
$1,460,000 or 12%, to $10,820,000, as compared to $12,280,000 for the year ended
December 31, 2002. The decrease is primarily attributable to the reduction in
sales staff as a result of our cost cutting initiatives undertaken in 2002 and
early 2003.
Cost of Services. The cost of services for the year ended December 31,
2003 decreased by $990,000, or 12%, to $7,340,000, as compared to $8,330,000 for
the year ended December 31, 2002. The decrease in cost of services for the year
ended December 31, 2003 is consistent with the decrease in revenue. The cost of
services as a percentage of revenue in 2003 was consistent with 2002.
Gross Profit. Gross profit for the year ended December 31, 2003
decreased by $480,000, or 12%, to $3,470,000 compared to $3,950,000 for the year
ended December 31, 2002. As a percentage of revenue, gross profit in 2003 was
consistent with 2002.
Expenses. Expenses for the year ended December 31, 2003 decreased by
$3,220,000, or 40%, to $4,740,000 compared to $7,960,000 for the year ended
December 31, 2002.
Administrative Expenses. Administrative expenses decreased by
$1,240,000 or 30% to $2,920,000 for the year ended December 31, 2003 compared to
$4,160,000 for the year ended December 31, 2002. General administrative expenses
including salaries and rent have decreased significantly over last year as a
result of restructuring and general cost cutting.
Selling Expenses. Selling expenses for the year ended December 31, 2003
decreased by $1,090,000, or 49%, to $1,150,000 from $2,240,000 for the year
ended December 31, 2002. This decrease is attributable to the considerable
downsizing in sales staff and the decrease in commissions, as a result of the
reduction in sales. In addition, in 2003 we continued to eliminate certain
advertising and promotional expenses.
Financing Expenses. There were no financing expenses for the year ended
December 31, 2003 compared to $1,200,000 for the year ended December 31, 2002.
The expenses in 2002 include due diligence fees and commissions paid to various
financial brokers and the expensing of approximately $770,000 for cash, shares
and warrants issued to Tazbaz Holdings in consideration of a loan agreement
whereby Tazbaz securitized our overdraft position with Bank One in the amount of
$650,000.
Depreciation and Amortization. For the year ended December 31, 2003,
depreciation and amortization expenses decreased by $625,000, or 48%, to
$665,000 from $1,290,000 for the year ended December 31, 2002. During 2002, we
assessed the financial impact SFAS No. 141 and No. 142 had on our consolidated
Financial Statements and recorded a goodwill impairment of $1,380,259 as
required based on our evaluation of carrying value and projected cash flows.
Debt Forgiveness. At December 31, 2002, the company recognized debt
forgiveness of approximately $2,310,000 related to discounts received on the
repayment of our line of credit with Bank One for a net discount of $935,000;
repayment of long-term debt to the Business Development Bank of Canada for a net
discount of $300,000; and, debt forgiveness on the restructuring of our notes
payable totaling $1,075,000.
0perating Loss from Continuing Operations. For the year ended December
31, 2003, operating losses from continuing operations decreased by $2,740,000 or
68% to a loss of $1,270,000 as compared to a loss of $4,010,000 for the year
ended December 31, 2002.
Loss on investments. During the year ended December 31, 2002, we wrote
down our investment in Conexys by $667,510 to a carrying value of $1. Of the
total writedown, $102,310 occurred in TidalBeach Inc., which is now being
reported as discontinued.
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Loss from Continuing Operations Before Interest Charges. For the year
ended December 31, 2003, losses from continuing operations before interest
charges decreased by $3,310,000 or 72% to a loss of $1,270,000 as compared to a
loss of $4,580,000 for the year ended December 31, 2002.
Interest Charges. For the year ended December 31, 2003, interest charges
increased by $4,030,000, or 102%, to $7,990,000 from $3,960,000 for the year
ended December 31, 2002. This increase is largely attributable to the interest
expense of $7,250,000 on the beneficial conversion feature recognized on the
convertible debentures issued in 2003 pursuant to a financing arrangement
entered into on December 5, 2002.
Loss from Continuing Operations before Income Taxes. Loss from
continuing operations before income taxes for the year ended December 31, 2003
increased by $720,000 or 8% to a loss of $9,260,000 as compared to a loss of
$8,540,000 for the year ended December 31, 2002.
Income Taxes. Income tax expense for the year ended December 31, 2003
increased by $60,000 to an expense of $30,000 as compared to a recovery of
$30,000 for the year ended December 31, 2002.
Loss from Continuing Operations. Loss from continuing operations for
the year ended December 31, 2003 increased by $780,000 or 9% to a loss of
$9,290,000 compared to a loss of $8,510,000 for the year ended December 31,
2002.
Income (Loss) from Discontinued Operations. Operations of the
technology, training and IT recruitment divisions have been reported as
discontinued for the year ended December 31, 2003 and 2002.
Effective March 8, 2002, we sold our technology division, Njoyn
Software Incorporated to Cognicase Inc., a Canadian company. Net proceeds after
broker fees were $1,350,000 of which we received $800,000 in cash and $550,000
worth of unrestricted common shares on closing. The shares were sold on March
11, 2002 for value of $524,673. As part of the transaction, Cognicase assumed
all of the staff in our technology division, including the employees of
TidalBeach Inc. We will not have future revenues from either the Njoyn or
SecondWave products.
There was no technology revenue for the year ended December 31, 2003,
and $59,000 in 2002. The net income for the year ended December 31, 2003 was
$13,000 compared to a net loss of $280,000 in 2002. On disposal, Njoyn had
approximately $950,000 in assets consisting primarily of deferred development
charges and approximately $30,000 in liabilities consisting primarily of capital
lease obligations. The gain on disposal of $400,229 has been reflected in the
Income (loss) from discontinued operations in 2002. No income taxes have been
reflected on this disposition as the sale of the shares gives rise to a capital
loss, the benefit of which, is more likely than not to be realized.
Effective May 1, 2002, we signed an agreement with triOS Training
Centres Limited, an Ontario company, for the purchase of certain assets of our
Toronto training division, Thinkpath Training for a nominal amount of cash and
the assumption of all prepaid training liabilities. As part of the transaction,
triOS assumed the Toronto training staff and is subletting the classroom
facilities. The gain on disposal of $97,350 has been reflected in the Income
(loss) from discontinued operations in 2002.
On November 1, 2002, we entered into a series of agreements with
Thinkpath Training LLC, a New York company, for the purchase of certain assets
of our New York training division, Thinkpath Training for a nominal amount of
cash and the assumption of all prepaid training liabilities. As part of the
transaction, Thinkpath Training LLC assumed the New York training staff, some
assets and is subletting the classroom facilities.
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As a result of these two transactions, we will not have future
revenues from the training division and therefore the operations have been
reported as discontinued.
Training revenue for the year ended December 31, 2003 was $160,000
compared to $1,350,000 in 2002. The net loss from the training division for the
year ended December 31, 2003 was $20,000 compared to $360,000 in 2002.
Effective June 27, 2003, we signed an agreement with Brainhunter.com
Ltd., an Ontario company, for the purchase of certain assets of our Toronto IT
recruitment division for a nominal amount of cash and the assumption of all
employee liabilities. The gain on disposal of $190,627 has been reflected in the
Income (loss) from discontinued operations in 2003. Of the $190,627, $146,627
was received in cash on closing with the balance of $44,000 due in a promissory
note payable by June 27, 2004. As a result of this transaction, we will not have
future revenues from our IT recruitment division and therefore the operations
have been reported as discontinued.
IT recruitment revenue for the year ended December 31, 2003 was
$1,460,000 compared to $12,780,000 in 2002. Net income from the IT recruitment
division for the year ended December 31, 2003 was $75,000 compared to $505,000
in 2002.
Net Loss Before Preferred Stock Dividends. Net loss before preferred
stock dividends for the year ended December 31, 2003 increased by $880,000 or
11% to a net loss of $9,030,000 as compared to a net loss of $8,150,000 for the
year ended December 31, 2002.
Net Loss Applicable to Common Stock. Net loss applicable to common
stock increased by $780,000 or 9% to $9,030,000 for the year ended December 31,
2003 compared to $8,250,000 for the year ended December 31, 2002. During the
year ended December 31, 2002 we issued preferred stock dividends of $100,000.
THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Revenue. Revenue for the year ended December 31, 2002 decreased by
$4,940,000 or 29%, to $12,280,000, as compared to $17,220,000 for the year ended
December 31, 2001. The decrease is primarily attributable to the reduction in
sales staff as a result of our cost cutting initiatives undertaken in 2002.
Cost of Services. The cost of services for the year ended December 31,
2002 decreased by $3,090,000, or 27%, to $8,330,000, as compared to $11,420,000
for the year ended December 31, 2001. The decrease in cost of services for the
year ended December 31, 2002 is consistent with the decrease in revenue. The
cost of services as a percentage of revenue increased from 66% for the year
ended December 31, 2001 to 68% for the year ended December 31, 2002.
Gross Profit. Gross profit for the year ended December 31, 2002
decreased by $1,850,000, or 32%, to $3,950,000 compared to $5,800,000 for the
year ended December 31, 2001. As a percentage of revenue, gross profit decreased
from 34% for the year ended December 31, 2001 to 32% for the year ended December
31, 2002. This decrease is largely a result of the decline in higher margin
permanent placement services in the information technology division.
Expenses. Expenses for the year ended December 31, 2002 decreased by
$5,380,000, or 40%, to $7,960,000 compared to $13,340,000 for the year ended
December 31, 2001.
Administrative Expenses. Administrative expenses decreased by $420,000
or 9% to $4,160,000 for the year ended December 31, 2002 compared to $4,580,000
for the year ended December 31, 2001. General administrative expenses including
salaries and rent decreased as a result of restructuring and general cost
cutting.
-20-
Selling Expenses. Selling expenses for the year ended December 31, 2002
decreased by $870,000, or 28%, to $2,240,000 from $3,110,000 for the year ended
December 31, 2001. This decrease is attributable to the considerable downsizing
in sales staff and the decrease in commissions, as a result of the reduction in
sales. In addition, in 2002 we eliminated certain advertising and promotional
expenses.
Financing Expenses. For the year ended December 31, 2002, financing
expenses increased $530,000 or 79% to $1,200,000 from $670,000 for the year
ended December 31, 2001. This increase is attributable to the expensing of
approximately $770,000 for cash, shares and warrants issued to Tazbaz Holdings
in consideration of a loan agreement whereby Tazbaz securitized our overdraft
position with Bank One in the amount of $650,000.
Depreciation and Amortization. For the year ended December 31, 2002,
depreciation and amortization expenses decreased by $690,000, or 35%, to
$1,290,000 from $1,980,000 for the year ended December 31, 2001. This decrease
is primarily attributable to our adoption of Statements of Financial Accounting
Standards No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. Under these statements, we are no longer required to amortize
goodwill. Amortization of goodwill for the year ended December 31, 2001 amounted
to $450,000.
During 2002, we assessed the financial impact SFAS No. 141 and No. 142
will have on our consolidated Financial Statements and recorded a goodwill
impairment of $1,380,259 as required based on our evaluation of carrying value
and projected cash flows. In accordance with SFAS 121, we recorded a write down
of goodwill of $3,001,391 in 2001.
Debt Forgiveness. At December 31, 2002, the company recognized debt
forgiveness of approximately $2,310,000 related to discounts received on the
repayment of our line of credit with Bank One for a net discount of $935,000;
repayment of long-term debt to the Business Development Bank of Canada for a net
discount of $300,000; and, debt forgiveness on the restructuring of our notes
payable totaling $1,075,000.
0perating Loss from Continuing Operations. For the year ended December
31, 2002, losses from continuing operations decreased by $3,530,000 or 47% to a
loss of $4,010,000 as compared to a loss of $7,540,000 for the year ended
December 31, 2001.
Loss on Investments. During the year ended December 31, 2002, we wrote
down our investment in Conexys by $667,510 to a carrying value of $1. Of the
total writedown, $102,309 occurred in TidalBeach Inc., which is now being
reported as discontinued. During the year ended December 31, 2001, we wrote down
our investments in Tillyard Management, SCM Dialtone, and Lifelogix of $130,242,
$75,000 and $123,920 respectively.
Interest Charges. For the year ended December 31, 2002, interest
charges increased by $3,070,000, or 345%, to $3,960,000 from $890,000 for the
year ended December 31, 2001. This increase is largely attributable to the
interest expense of $2,900,000 on the beneficial conversion feature on the
convertible debentures issued in December 2002.
Loss from Continuing Operations before Income Taxes. Loss from
continuing operations before income taxes for the year ended December 31, 2002
decreased by $220,000 or 3% to a loss of $8,540,000 as compared to a loss of
$8,760,000 for the year ended December 31, 2001.
Income Taxes. Income tax expense for the year ended December 31, 2002
decreased by $750,000 to a recovery of $30,000 in 2002 compared to an expense of
$720,000 for the year ended December 31, 2001. The expense in 2001 was a write
down of the deferred income tax asset.
Loss from Continuing Operations. Loss from continuing operations for
the year ended December 31, 2002 decreased by $970,000, or 10%, to a loss of
$8,510,000 compared to a loss of $9,480,000 for the year ended December 31,
2001.
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Income (Loss) from Discontinued Operations. Operations of the
technology, training and IT recruitment divisions for the years ended December
31, 2002 and 2001 have been reported as discontinued.
Technology revenue for the year ended December 31, 2002 was $59,000
compared to $555,000 in 2001. The net loss for the year ended December 31, 2002
was $280,000 compared to $730,000 in 2001. Training revenue for the year ended
December 31, 2002 was $1,350,000 compared to $3,190,000 in 2001. The net loss
from the training division for the year ended December 31, 2002 was $360,000
compared to $390,000 in 2001. IT recruitment revenue for the year ended December
31, 2002 was $12,780,000 and $15,960,000 in 2001. Net income from the IT
recruitment division for the year ended December 31, 2002 was $505,000 compared
to $920,000 in 2001.
Net Loss Before Preferred Stock Dividends. Net loss before preferred
stock dividends for the year ended December 31, 2002 decreased by $1,530,000 or
16% to a net loss of $8,150,000 compared to a net loss of $9,680,000 for the
year ended December 31, 2001.
Net Loss Applicable to Common Stock. Net loss applicable to common
stock decreased by $2,160,000 or 21% to $8,250,000 for the year ended December
31, 2002 compared to $10,410,000 for the year ended December 31, 2001. During
2002 we issued preferred stock dividends of $100,000 and $730,000 in 2001.
LIQUIDITY AND CAPITAL RESOURCES
With insufficient working capital from operations, our primary sources
of cash are a receivable discount facility with Morrison Financial Services
Limited and proceeds from the sale of equity securities. Our primary capital
requirements include debt service and working capital needs.
Our facility with Morrison Financial Services Limited is a receivable
discount facility whereby we are able to borrow up to 75% of qualifying
receivables to a maximum of $3,000,000 at 30% interest per annum. At December
31, 2003, the balance on the receivable discount facility was approximately
$1,130,000.
During the year ended December 31, 2003, we sold $2,075,000 in
convertible debentures along with 770,033,457 warrants pursuant to a financing
arrangement entered into on December 5, 2002. The debentures will become due
twelve months from the date of issuance. The investors will have the right to
acquire up to $2,075,000 worth of our common stock at a price the lesser of
$.0175 or 50% of the average of the three lowest prices on three separate
trading days during the sixty-day trading period prior to conversion. The
warrants are exercisable at any time and in any amount for a period of seven
years from closing at purchase prices ranging from $.0175 to $.00075 per share.
We are required to pay interest to the debenture holder on the aggregate
unconverted and outstanding principal amount of the debenture at the rate of 12%
per annum, payable on each conversion date and maturity date in cash or shares
of common stock.
The proceeds of $2,075,000 were allocated between the warrants and
the debenture without warrants on a pro rata basis. Paid in capital has been
credited by the value of the warrants in the amount of $1,150,625. At December
31, 2003, the value of the beneficial conversion feature on all issued
convertible debentures was determined to be $6,865,928 which was credited to
paid in capital and charged to earnings as interest expense.
At December 31, 2003, we had cash of $480,000 and a working capital
deficiency of $2,760,000. At December 31, 2003, we had a cash flow deficiency
from operations of $170,000. At December 31, 2002, we had cash of $114,000 and a
working capital deficiency of $3,720,000. At December 31, 2002, we had a cash
flow deficiency from operations of $330,000. At December 31, 2001, we had cash
of $480,000 and a working capital deficiency of $3,360,000. At December 31,
2001, we had a cash flow deficiency from operations of $200,000.
-22-
At December 31, 2003, we had a cash flow deficiency from investing
activities of $17,000 related to the purchase of capital assets of $163,000
which was partially offset by the proceeds on the disposal of the IT recruitment
division of $146,000. At December 31, 2002, we had cash flow from investing
activities of $1,142,000 primarily related to the proceeds on the disposal of
Njoyn of $1,248,000 and other assets of $89,000 which was partially offset by
the purchase of capital assets of $195,000. At December 31, 2001, we had a cash
flow deficit from investing activities of $380,000 attributable primarily to the
purchase of capital assets of $370,000.
At December 31, 2003 we had cash flow from financing activities of
$560,000 attributable primarily to proceeds of $2,165,000 from the sale of
common stock, convertible debentures and warrants which was offset by a
reduction in debt of $1,570,000 related to the Morrison Financial receivable
discount facility and partial repayment of notes payable of $35,000. At December
31, 2002, we had a cash flow deficit from financing activities of $1,050,000
attributable primarily to the repayment of notes of $120,000, and long-term debt
of $640,000 and reduction in bank indebtedness of $3,790,000 which was offset by
an increase in long term debt of $2,600,000 and proceeds of $900,000 from the
sale of convertible debentures. At December 31, 2001, we had cash flow from
financing activities of $790,000 attributable primarily to proceeds from the
issuance of common stock of $400,000, the issuance of preferred stock of
$1,125,000 and the repayment of notes of $200,000, long-term debt of $505,000,
dividend payable of $10,000 and bank debt of $20,000.
At December 31, 2003 we had a loan balance of $260,000 with an
individual, Terry Lyons. The loan is payable in twelve monthly payments of
$21,613 which were to begin November 30, 2002 and bears interest at 30% per
annum. This loan is subordinated to Morrison Financial Services Limited and no
principal payments have been made.
At December 31, 2003, we had approximately $30,000 outstanding on
various capital leases with various payment terms and interest rates. The
average balance on the terms of leases are 12 months and cover primarily the
hardware and various software applications required to support our engineering
division.
At December 31, 2003, we had a note payable of $224,000 owed to Roger
Walters, the former shareholder of CadCam Inc. Principal payments of $4,000 per
month were to begin September 1, 2002 until August 1, 2007. This note is
subordinated to Morrison Financial Services Limited and to the 12% Senior
Secured Convertible Debenture holders. We have not made any principal payments
to Mr. Walters since December 2002 and we are currently in default of the loan
agreement. As a result of the default, the note is due on demand and now bears
interest at 12% per annum until payment is made. We intend to make payments as
cash becomes available.
At December 31, 2003, we had a note payable of $636,000 owed to Denise
Dunne-Fushi, the vendor of MicroTech Professionals Inc. Principal payments of
$10,000 per month were to begin November 1, 2002 bearing 5% interest until
October 1, 2007. In addition, we are obligated to cover the monthly expense
associated with Ms. Dunne-Fushi's family health benefits until May 2004 and a
vehicle lease until August 2004.
The note is secured under a general security agreement but is
subordinated to Morrison Financial Services Limited and to the 12% Senior
Secured Convertible Debenture holders. We have not made scheduled principal
payments to Ms. Dunne-Fushi since December 2002 and are currently in default of
the note agreement. As a result of the default, Ms. Dunne-Fushi has the option
of enforcing the security she holds. We intend to make payments as cash becomes
available.
Although we believe that our current working capital and cash flows
from restructured operations will be adequate to meet our anticipated cash
requirements going forward, we have accrued liabilities and potential
settlements of outstanding claims that may require additional funds. We will
-23-
have to raise these funds through equity or debt financing. There can be no
assurance that additional financing will be available at all or that if
available, such financing will be obtainable on terms favorable to us and would
not be dilutive.
Despite our recurring losses and negative working capital, we believe
that we have developed a business plan that, if successfully implemented, could
substantially improve our operational results and financial condition. However,
we can give no assurances that our current cash flows from operations, if any,
borrowings available under our receivable discount facility, and proceeds from
the sale of securities, will be adequate to fund our expected operating and
capital needs for the next twelve months. The adequacy of our cash resources
over the next twelve months is primarily dependent on our operating results and
our ability to raise additional financing, which are subject to substantial
uncertainties. Cash flow from operations for the next twelve months will depend,
among other things, upon the effect of the current economic slowdown on our
sales and management's ability to implement our business plan. The failure to
return to profitability and optimize operating cash flow in the short term, and
to successfully raise additional financing, could have a material adverse effect
on our liquidity position and capital resources which may force us to curtail
our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, FASB issued SFAS No. 145, which, among other factors,
changed the presentation of gains and losses on the extinguishments of debt. Any
gain or loss on extinguishments of debt that does not meet the criteria in APB
Opinion 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", shall be included in operating earnings and
not presented separately as an extraordinary item. We adopted SFAS No. 145 at
the beginning of fiscal year 2003 and the provisions of SFAS No. 145 did not
have any impact on our financial position, results of operations or cash flows.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No.146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue, or EITF, No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit on
Activity (including Certain Costs Incurred in a Restructuring)". We adopted the
provisions of SFAS No. 146 for restructuring activities initiated after December
31, 2002. SFAS No. 146 may affect the timing of recognizing future restructuring
costs as well as the amounts recognized.
In January 2003, FASB issued SFAS No. 148, "Accounting for Stock -Based
Compensation - Transition and Disclosures". This statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
also amends the disclosure requirements of SFAS No. 123 to require more
prominent and frequent disclosures in the financial statements about the effects
of stock-based compensation. The transitional guidance and annual disclosure
provisions of this Statement was effective for the December 31, 2002 financial
statements.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation
elaborates on the existing disclosure requirement for most guarantees including
loan guarantees, and clarifies that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair market value of the
obligations it assumes under that guarantee and must disclose that information
in its interim and annual financial statements. The initial recognition and
measurement provisions of the Interpretation apply on a prospective basis to
guarantees issued or modified after December 31, 2002.
-24-
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables, real estate or
other property. A variable interest entity may be essentially passive or it may
engage in research and development or other activities on behalf of another
company. The objective of Interpretation No. 46 is not to restrict the use of
variable interest entities but to improve financial reporting by companies
involved with variable interest entities. Until now, a company generally has
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Interpretation No. 46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of Interpretation No.
46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to entities created before January
31, 2003, in the first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. We do not have any variable interest entities, and
accordingly, adoption will not have a material effect on our financial position,
results of operations or cash flows.
In April 2003, FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. The amendments set forth in Statement 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative as discussed in Statement 133. In addition, it clarifies when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. This Statement is effective for contracts entered into
or modified after June 30, 2003 with certain exceptions. The adoption of
Statement No. 149 will not have a material effect on our financial position,
results of operations or cash flows.
In May 2003, FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". The
Statement specifies that certain instruments within its scope embody obligations
of the issuer and that, therefore, the issuer must classify them as liabilities.
This Statement is effective immediately for all financial instruments entered
into or modified after May 31, 2003. For all other instruments, the Statement
goes into effect at the beginning of the first interim period beginning after
June 15, 2003. For contracts that were created or modified before May 31, 2003
and still exist at the beginning of the first interim period beginning after
June 30, 2003, entities should record the transition to Statement No. 150 by
reporting the cumulative effect of a change in an accounting principle.
Statement No. 150 prohibits entities from restating financial statements for
earlier years presented. The adoption of Statement No. 150 will not have a
material effect on our financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-25-
ITEM 8. FINANCIAL STATEMENTS
THINKPATH INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001
TOGETHER WITH REPORT OF INDEPENDENT AUDITORS
(AMOUNTS EXPRESSED IN US DOLLARS)
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF THINKPATH INC.
We have audited the accompanying consolidated balance sheets of Thinkpath Inc.
(incorporated in Ontario) as of December 31, 2003, 2002 and 2001 and the related
consolidated statements of operations, cash flows and changes in stockholders'
equity for each of the years ended December 31, 2003, 2002 and 2001. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Thinkpath Inc. (formerly Thinkpath.com Inc.) as of December 31, 2003, 2002 and
2001 and the consolidated results of its operations and its cash flows for each
of the years ended December 31, 2003, 2002 and 2001 in conformity with generally
accepted accounting principles in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2(a) to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has recurring negative working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Should the company be unable to continue as a going
concern, certain assets and liabilities will have to be adjusted to their
liquidated values.
Since the accompanying consolidated financial statements have not been prepared
and audited in accordance with generally accepted accounting principles and
standards in Canada, they may not satisfy the reporting requirements of Canadian
statutes and regulations.
Schwartz Levitsky Feldman LLP
Chartered Accountants
Toronto, Ontario
April 13, 2004
F-1
THINKPATH INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003, 2002, AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
---------- ---------- ----------
ASSETS
CURRENT ASSETS
Cash $ 483,443 $ 114,018 $ 482,233
Accounts receivable 1,766,061 2,663,823 5,502,113
Inventory -- -- 40,057
Income taxes receivable -- -- 431,817
Prepaid expenses 128,612 196,683 345,341
---------- ---------- ----------
2,378,116 2,974,524 6,801,561
PROPERTY AND EQUIPMENT 1,182,751 1,915,379 2,859,340
GOODWILL 3,748,732 3,748,732 5,128,991
INVESTMENT IN NON-RELATED COMPANIES 45,669 45,669 1,013,926
LONG-TERM RECEIVABLE -- 53,924 83,450
OTHER ASSETS 53,321 49,303 1,287,710
---------- ---------- ----------
7,408,589 8,787,531 17,174,978
========== ========== ==========
F-2
THINKPATH INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003, 2002, AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
----------- ----------- -----------
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness $ -- $ 209,776 $ 5,039,171
Receivable Discount Facility 1,128,444 2,340,579 --
Accounts payable 2,650,783 3,197,286 4,073,444
Deferred revenue -- 163,609 365,023
Current portion of long-term debt 279,800 380,188 528,285
Current portion of notes payable 859,936 208,254 150,000
12% Convertible Debenture 215,558 192,950 --
----------- ----------- -----------
5,134,521 6,692,642 10,155,923
DEFERRED INCOME TAXES -- -- 150,380
LONG-TERM DEBT 13,176 84,756 582,432
NOTES PAYABLE -- 686,703 2,340,000
LIABILITIES PAYABLE IN CAPITAL STOCK -- -- 699,297
----------- ----------- -----------
5,147,697 7,464,101 13,928,032
=========== =========== ===========
COMMITMENTS AND CONTINGENCIES (NOTE 22)
STOCKHOLDERS' EQUITY
CAPITAL STOCK 43,576,292 33,367,034 26,571,481
DEFICIT (39,999,711) (30,966,083) (22,719,044)
ACCUMULATED OTHER COMPREHENSIVE LOSS (1,315,689) (1,077,521) (605,491)
----------- ----------- -----------
2,260,892 1,323,430 3,246,946
----------- ----------- -----------
7,408,589 8,787,531 17,174,978
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements
F-3
THINKPATH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
------------ ------------ ------------
REVENUE $ 10,817,667 $ 12,283,828 $ 17,224,335
COST OF SERVICES 7,344,114 8,334,682 11,421,847
------------ ------------ ------------
GROSS PROFIT 3,473,553 3,949,146 5,802,488
------------ ------------ ------------
EXPENSES
Administrative 2,923,813 4,161,599 4,576,791
Selling 1,152,311 2,240,990 3,114,967
Financing Expenses -- 1,197,240 669,358
Depreciation and amortization 665,143 1,290,651 1,981,863
Write down goodwill -- 1,380,259 3,001,391
Debt Forgiveness -- (2,308,358) --
------------ ------------ ------------
4,741,267 7,962,381 13,344,370
OPERATING LOSS FROM CONTINUING OPERATIONS (1,267,714) (4,013,235) (7,541,882)
Gain (Loss) on Investment -- (565,201) (329,162)
LOSS FROM CONTINUING OPERATIONS
BEFORE INTEREST CHARGES (1,267,714) (4,578,436) (7,871,044)
Interest Charges 7,994,211 3,962,769 891,244
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (9,261,925) (8,541,205) (8,762,288)
Income Taxes (recovery) 30,165 (32,637) 719,920
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (9,292,090) (8,508,568) (9,482,208)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
(INCLUDING GAIN ON DISPOSAL) 258,462 361,916 (201,233)
------------ ------------ ------------
NET LOSS BEFORE PREFERRED STOCK DIVIDENDS (9,033,628) (8,146,652) (9,683,441)
PREFERRED STOCK DIVIDENDS -- 100,387 728,740
NET LOSS APPLICABLE TO COMMON STOCK (9,033,628) (8,247,039) (10,412,181)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND FULLY DILUTED 719,412,600 29,000,252 14,943,306
============ ============ ============
LOSS FROM CONTINUING OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK BEFORE PREFERRED
DIVIDENDS BASIC AND FULLY DILUTED (0.01) (0.29) (0.63)
============ ============ ============
LOSS FROM CONTINUING OPERATIONS PER WEIGHTED
AVERAGE COMMON STOCK AFTER PREFERRED
DIVIDENDS BASIC AND FULLY DILUTED (0.01) (0.30) (0.68)
============ ============ ============
The accompanying notes are an integral part of
these consolidated financial statements
F-4
THINKPATH INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED
COMMON STOCK PREFERRED STOCK CAPITAL OTHER
NUMBER OF NUMBER OF SHARES STOCK COMPREHENSIVE COMPREHENSIVE
SHARES A B C AMOUNTS DEFICIT LOSS LOSS
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2000 11,915,138 1,050 750 -- 23,759,415 (12,306,862) (653,547)
=========== =========== =========== =========== =========== =========== ===========
Net loss for the year
before preferred
stock dividends -- -- -- -- (9,683,441) (9,683,441)
-----------
Other comprehensive income
(loss), net of tax:
Foreign currency translation -- -- -- -- -- -- 209,506
Adjustment to market value -- -- -- -- -- -- (161,450)
-----------
Other comprehensive income 48,056 48,056
-----------
Comprehensive loss (9,635,385)
===========
Issuance of common stock for cash 525,000 -- -- -- 400,000 --
Issuance of preferred stock -- -- -- 1,230 1,230,000 --
Reduction in common stock payable 596,667 -- -- -- 709,005 --
Dividend on preferred stock -- -- -- -- 414,848 (444,647)
Conversion of preferred stock to
common stock 3,864,634 (1,050) (750) (285) -- -- --
Beneficial conversion on
Issuance of preferred stock -- -- -- -- 284,093 (284,093)
Options exercised 22,122 -- -- -- 1 --
Debt settled through the issuance
of common stock 93,883 -- -- -- 44,125 --
Common stock and warrants issued
in consideration of services 714,267 -- -- -- 519,994 --
Allowance for deferred taxes
Recoverable on issue expenses -- -- -- -- (790,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2001 17,731,711 -- -- 945 26,571,481 (22,719,044) (605,491)
=========== =========== =========== =========== =========== =========== ===========
Net loss for the year
before preferred
stock dividends -- -- -- -- -- (8,146,652) (8,146,652)
-----------
Other comprehensive income
(loss), net of tax:
Foreign currency translation -- -- -- -- -- -- (171,283)
Adjustment to market value -- -- -- -- -- -- (300,747)
-----------
Other comprehensive income (loss) (472,030) (472,030)
-----------
Comprehensive loss (8,618,682)
===========
Reduction in common stock payable 8,387,840 -- -- -- 1,098,955 --
Dividend on preferred stock -- -- -- -- 67,530 (67,530)
Conversion of preferred stock to
common stock 23,278,448 -- -- (945) -- --
Beneficial conversion on
issuance of preferred stock -- -- -- -- 32,857 (32,857)
Debt settled through the issuance
of common stock 2,982,018 -- -- -- 434,348 --
Common stock and warrants issued
in consideration of services 13,878,026 -- -- -- 1,556,485 --
Warrants issued for cash -- -- -- -- 707,050 --
Beneficial conversion on issuance
of convertible debt -- -- -- -- 2,898,328 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2002 66,258,043 -- -- -- 33,367,034 (30,966,083) (1,077,521)
=========== =========== =========== =========== =========== =========== ===========
Net loss for the year -- -- -- -- -- (9,033,628) (9,033,628)
-----------
Other comprehensive income
(loss), net of tax:
Foreign currency translation -- -- -- -- -- -- (238,168)
Adjustment to market value -- -- -- -- -- -- --
-----------
Other comprehensive income (loss) (238,168) (238,168)
-----------
Comprehensive loss (9,271,796)
===========
Conversion of 12% senior secured
convertible debenture 2,368,413,224 -- -- -- 901,891 --
Interest on 12% senior secured
convertible debenture 153,405,397 -- -- -- 142,875 --
Debt settled through the issuance
of common stock 16,997,854 -- -- -- 449,333 --
Common stock and warrants issued
in consideration of services 10,980,000 -- -- -- 226,500 --
Warrants issued for cash 121,184,669 -- -- -- 1,241,514 --
Beneficial conversion on issuance
of convertible debt -- -- -- -- 7,247,145 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2003 2,737,239,187 -- -- -- 43,576,292 (39,999,711) (1,315,689)
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
THINKPATH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities
Net loss before preferred stock dividends $(9,033,628) $(8,146,652) $(9,683,441)
---------- ---------- ----------
Adjustments to reconcile net loss to net
cash (used in) provided by
operating activities:
Amortization 716,781 1,291,233 2,469,638
Loss on disposition 167,802 149,251 --
Amortization of beneficial conversion (included in interest) 7,247,145 2,898,328 --
Interest on 12% senior secured convertible debentures 142,875 -- --
Write down of long-term investment -- 667,511 344,279
Write down of goodwill -- 1,380,259 3,001,391
Decrease in accounts receivable 1,000,368 2,914,575 2,045,045
Decrease (increase) in prepaid expenses 72,115 159,093 (21,660)
Increase (decrease) in accounts payable (831,697) (837,634) 416,109
Decrease (increase) in deferred income taxes -- (150,380) 993,806
Decrease in inventory -- 38,784 53,144
Decrease in long-term receivable 57,775 -- --
Increase (decrease) in deferred revenue (163,754) (99,942) 147,077
Increase in income taxes payable -- 428,885 2,459
Common stock and warrants issued for services 226,500 1,556,485 519,994
Accounts payable settled with common stock 449,333 434,348 (88,152)
Long-term investment received for services -- -- (206,072)
Debt forgiveness (30,565) (2,308,358) (190,629)
Expenses on debt forgiveness -- (210,000) --
Gain on disposal of subsidiary -- (497,579) --
Gain on disposal of IT Recruitment division assets (190,627) -- --
---------- ---------- ----------
Net cash used in operating activities (169,577) (331,793) (197,012)
---------- ---------- ----------
Cash flows from investing activities
Purchase of capital assets (163,549) (194,866) (368,260)
Disposal (purchase) of other assets -- 16,156 (15,353)
Proceeds on sale of fixed assets -- 72,892 --
Proceeds on disposal of subsidiary -- 1,247,894 --
Proceeds on disposal of IT Recruitment division assets 146,406 -- --
---------- ---------- ----------
Net cash provided from (used in) investing activities (17,143) 1,142,076 (383,613)
---------- ---------- ----------
Cash flows from financing activities
Repayment of notes payable (35,021) (119,027) (197,437)
Repayment of long-term debt (1,573,697) (643,896) (505,651)
Dividend payable -- -- (12,560)
Cash received on long-term debt -- 2,599,929 --
Proceeds from issuance of common stock 90,889 -- 400,000
Proceeds from issuance of preferred stock -- -- 1,125,000
Proceeds from issuance of debentures and warrants 2,075,000 900,000 --
Decrease in bank indebtedness -- (3,786,107) (22,239)
---------- ---------- ----------
Net cash provided by (used in) financing activities 557,171 (1,049,101) 787,113
---------- ---------- ----------
Effect of foreign currency exchange rate changes (1,026) (129,397) 275,745
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 369,425 (368,215) 482,233
Cash and cash equivalents
Beginning of year 114,018 482,233 --
---------- ---------- ----------
End of year 483,443 114,018 482,233
========== ========== ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 788,260 1,052,108 340,000
========== ========== ==========
Income taxes paid 29,720 19,237 38,000
========== ========== ==========
SUPPLEMENTAL NON-CASH ITEMS:
Preferred stock dividend -- 100,387 728,740
Common shares issued for liabilities 449,333 1,556,485 44,125
Reduction in notes payable -- 1,197,942 --
========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
F-6
THINKPATH INC.
NOTES TO CONSOLIDATED FINAN