UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
---------------
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: MAY 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 001-15503
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WORKSTREAM INC.
(Exact name of Registrant as specified in its charter)
CANADA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
495 MARCH ROAD, SUITE 300
OTTAWA, ONTARIO K2K 3G1
(Address of principal executive offices) (zip code)
(613) 270-0619
(Registrant's telephone number,
including area code)
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
COMMON SHARES, NO PAR BOSTON STOCK EXCHANGE
VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, NO PAR VALUE
---------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K./X/
The aggregate market value of the outstanding voting and non-voting
common equity held by non-affiliates of the registrant, computed by reference to
the price at which the common equity was last sold as of the last business day
of the registrant's most recently completed second fiscal quarter, was
$24,023,659. Common shares held by each executive officer and director and by
each person who owned 10% or more of the outstanding common shares as of such
date have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The total number of common shares, no par value per share, outstanding
on August 18, 2003 was 21,684,904, excluding 654,204 escrow shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
WORKSTREAM INC.
FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business ..................................................................................... 2
2. Properties ................................................................................... 14
3. Legal Proceedings ............................................................................ 15
4. Submission of Matters to a Vote of Security Holders .......................................... 15
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters ........................ 16
6. Selected Financial Data ...................................................................... 25
7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 26
7A. Quantitative and Qualitative Disclosures About Market Risk ................................... 48
8. Financial Statements and Supplementary Data .................................................. 49
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......... 85
9A. Control and Procedures ....................................................................... 86
PART III
10. Directors and Executive Officers of the Registrant ........................................... 87
11. Executive Compensation ....................................................................... 87
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .......................................................................... 87
13. Certain Relationships and Related Transactions ............................................... 87
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................. 88
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE," AND WORDS OF SIMILAR IMPORT WHICH EXPRESS
MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS REGARDING OUR FUTURE
PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE HAVE NO OBLIGATION TO
UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS AND FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE SET FORTH UNDER "RISK FACTORS" WHICH BEGINS ON PAGE 39
ON THIS FORM 10-K AND OTHER FACTORS AND UNCERTAINTIES CONTAINED ELSEWHERE IN
THIS FORM 10-K AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We were incorporated on May 24, 1996 under the Canada Business
Corporation Act under the name CareerBridge Corporation. In February 1999, we
changed our name to E-Cruiter.com Inc. and in November 2001 we changed our name
to Workstream Inc. (the "Company"). In 1997, we began operating an online
regional job board, on which applicants posted their resumes and employers
posted available positions, focused on the high-technology industry. In February
1999, we changed our business focus from the job board business to providing
on-line recruitment services. In the twelve months ended May 31, 2001 ("fiscal
2001"), we expanded our focus by guiding the Company into being a leading
provider of Web-enabled tools and professional services for Human Capital
Management ("HCM"). We offer a diversified suite of high-tech and high-touch
services to address the full lifecycle of the employer/employee relationship and
seek to ensure more effective management of corporate assets via automation and
outsourcing. Our HCM technology backbone enables companies to streamline the
management of enterprise human capital processes, including recruitment,
assessment, deployment, development, retention and career transitions. We offer
a full-range of HCM products and services.
ACQUISITIONS
We continually focus on increasing our market share in the HCM market.
Our business strategy has included a strong emphasis on acquiring companies
offering services similar or complementary to ours. The HCM market has
experienced significant consolidation in the last several years as companies
attempt to increase their service offerings and broaden their revenue bases to
achieve revenue growth and profitability. We have actively pursued acquisition
opportunities as part of our overall strategy and completed three acquisitions
during the twelve months ended May 31, 2003 ("fiscal 2003") and six acquisitions
during the twelve months ended May 31, 2002 ("fiscal 2002") that met our
criteria.
FISCAL 2003 ACQUISITIONS
ICARIAN, INC.
On June 28, 2002, we acquired via merger 100% of the outstanding shares
of Icarian Inc., a California based company. As consideration for the sale, we
issued to the shareholders of Icarian 2,800,000 of our common shares valued at
approximately $9.9 million. Icarian is a provider of Web-enabled solutions and
professional services. Icarian's Recruitment Management Suite is Web-native
software, offered on an Application Service Provider ("ASP") basis, with a user
interface that provides functionality for management of the hiring process.
Icarian's Connectivity, Interactive Job Site and Reporting modules offer human
resource professionals capabilities to integrate with human resource management
systems, to manage candidates' applications and job campaigns, and to produce
reporting for both compliance and cost reporting for a corporation's employee
acquisition process. Icarian had revenues of approximately $5.7 million and it
recorded a net loss of approximately $25.8 million for the twelve months ended
December 31, 2001. We recorded approximately $8.4 million in intangible assets
and $5.4 million in goodwill from the acquisition.
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PURECARBON, INC.
On July 1, 2002, we acquired certain assets and liabilities of
PureCarbon, Inc., a California based company. As consideration for the sale, we
issued to the shareholders of PureCarbon 263,158 of our common shares valued at
$1,000,000. We recorded approximately $0.8 million in intangible assets related
to the acquisition. Under the acquisition agreement, additional common shares
valued at $500,000 may be issued if PureCarbon achieves certain revenue targets
for the twelve months ending June 30, 2003. Management has determined that the
revenue targets were not met, and believes that those contingently issuable
common shares will not be issued. As required under the purchase agreement, an
audit confirming whether the revenue targets were met is currently being
performed. PureCarbon is the provider of award-winning Internet software
(JobPlanet) designed to integrate easily with behind-the-scenes human resources
and recruiting technology. JobPlanet is built on a technology platform that
enables clients to build and implement an employment web site that mirrors the
client's corporate brand image. We believe this front-end platform fits well
with our back-end Hiring Management Systems to create a compelling end-to-end
solution, that our corporate clients desire.
XYLO, INC.
On September 13, 2002, we acquired via merger 100% of the outstanding
shares of Xylo, Inc., a Washington based provider of Web-based Employee
Retention Management ("ERM") solutions focused on providing customized retention
solutions to Fortune 500 companies. Xylo's work/life customizable software
offers employee programs in one externally-hosted platform, giving clients
control over content and applications. As consideration for the purchase, we
issued to the shareholders of Xylo 702,469 common shares valued at approximately
$1.7 million. We recorded approximately $1.3 million in intangible assets and
$0.7 million in goodwill from the acquisition. Pursuant to the acquisition
agreement with Xylo, an additional 330,579 of our common shares may be released
from escrow, subject to achievement of certain revenue targets for the twelve
month period ending September 30, 2003. The release from escrow of any
additional common shares will result in additional goodwill being recorded.
FISCAL 2002 ACQUISITIONS
During fiscal 2002, we significantly expanded our operations through
the completion of six acquisitions of companies that offered services that
allowed us to provide a full spectrum of HCM solutions.
PAULA ALLEN HOLDINGS, INC.
In July 2001, we acquired 100% of the outstanding shares of Paula Allen
Holdings, Inc. and its subsidiaries, doing business as Allen And Associates, in
exchange for our common shares. Headquartered in Orlando, Florida, Paula Allen
Holdings is focused on providing career transition, job placement and recruiting
services within the information technology, engineering, finance and marketing
areas.
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OMNIPARTNERS, INC.
In July 2001, we acquired 100% of the outstanding shares of
OMNIpartners, Inc. and its affiliates in exchange for Workstream common shares.
OMNIpartners was founded in 1990 and developed the concept of recruitment
research at an hourly rate, as a lower-cost recruitment alternative.
OMNIpartners offers a range of executive and professional recruitment research
services to a wide array of industries including retail, hotel, restaurant,
gaming, food service, telecommunications, insurance, distribution,
manufacturing, financial services and information technology.
REZLOGIC, INC.
In August 2001, we acquired via merger 100% of the outstanding shares
of RezLogic, Inc. in exchange for Workstream common shares. RezLogic provides
recruiting process automation, offering Web-based recruiting process automation
solutions for employers, staffing agencies, executive recruiters, contract
placement firms and independent recruiters. The acquisition of RezLogic provided
us with an established U.S. sales channel for our applicant tracking systems, or
ATS platform, and enabled us to integrate additional functionality into existing
platforms, such as Equal Employment Opportunity ("EEO") tracking. We believe
that this reporting capability is essential to achieve a significant penetration
of the U.S. market.
RESUMEXPRESS
In August 2001, we acquired the technology and assets of Gonyea Career
Marketing Inc., known as ResumeXpress, in consideration for a certain amount of
cash. ResumeXpress enables job seekers to distribute their resumes to thousands
of employers, recruiters and online resume database services across the U.S. and
Canada. Resumes are distributed to those parties whose keywords are matched to
the keywords found in each job seeker's resume. Using the ResumeXpress Web site,
job seekers can post their resumes in a matter of minutes, and their resumes are
posted for a six-month period on a personal resume Web page with a unique
uniform resource locator, or URL.
6FIGUREJOBS.COM, INC.
In October 2001, we acquired via merger 100% of the outstanding shares
of 6FigureJobs.com, Inc. in exchange for Workstream common shares.
6FigureJobs.com provides career management, recruitment advertising, resume
database and targeted research services for senior-level executives, employers
and executive recruiters. 6FigureJobs.com's online candidate recruitment and
placement technology enables employers to search for candidates for employment
in real time, reducing time to hire.
TECH ENGINE, INC.
In October 2001, we acquired the technology and assets of Tech Engine,
Inc. in exchange for the assumption of a promissory note. Tech Engine's software
enables us to more quickly develop career sites and job boards.
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Some of these acquisitions were also made in consideration of
additional common shares that were held in escrow to be released upon
achievement of certain profit and/or revenue targets. As at May 31, 2003, only
323,625 common shares related to these acquisitions completed in fiscal 2002
were held in escrow. These shares are related to the 6FigureJobs.com acquisition
which management believes will not be released from escrow because management
believes that the applicable revenue and profit targets were not achieved.
However, pursuant to the request of the representative of the former
shareholders of 6FigureJobs.com, an accounting firm was hired to review whether
the revenue and profit targets were achieved. The accounting firm determined
that one of the profit targets was achieved which would result in 64,725 of the
323,625 common shares held in escrow being released to the former
6FigureJobs.com shareholders. We are in the process of disputing the accounting
firm's determination and believe that none of the profit or revenue targets were
achieved. The shares are currently being held in escrow while our dispute is
ongoing.
COMPANY SEGMENTS
The Company has two distinct operating segments, which are the
Enterprise Recruiting Services and Career Transition Services segments. The
Enterprise Recruiting Services segment consists of automated talent acquisition
systems, recruitment research, online exchange, and employee management and
retention systems services. The Career Transition Services segment consists of
outplacement services.
INDUSTRY BACKGROUND
Our market includes any organization needing to hire employees,
especially, but not exclusively, companies seeking information technology skills
and expertise. We believe that several factors require companies to hire
additional personnel and therefore increase demand for our services:
o recovering economy in the United States;
o increased employee turnover; and
o the acute shortage of knowledge workers in North America.
We believe many organizations continue to look to the Internet to
increase the effectiveness of their recruiting processes and attract the quality
candidates that are strategic to their businesses. The Internet provides for
speed of communication as well as a medium for the development of tools to
facilitate a more efficient recruitment process. We believe that many
organizations are beginning to overhaul their human resources information
systems to take advantage of both new technologies and new recruiting concepts
and we anticipate that recruitment spending will continue to shift away from the
client-server human resources services to Web-based media hiring processes
because of their lower cost and ease of implementation. Moreover, we believe
that most of the advantages offered by Internet technology have not been
implemented to date in the recruiting market.
We believe that our suite of workforce management solutions directly
addresses the major challenges facing employers, mainly, time-to-hire,
quality-of-hire and cost-of-hire.
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STRATEGY
Our objective is to become the leading supplier of comprehensive
adaptive workforce solutions in North America. Our services can be used by any
size organization, and therefore we believe that our products can address the
needs of the entire human capital market. We have clients who employ more than
10,000 employees using our E-Cruiter Enterprise solution. We are able to provide
corporate outplacement and recruitment research services to companies of any
size. We believe that our solutions provide a comprehensive service for
corporate human resources in managing workforce turnover. Our services include:
o talent acquisition services ranging from job posting outreach to job
boards;
o hosting a corporate career site;
o automating and monitoring the recruitment process and the provision of
links to external service providers, such as companies that specialize
in skill testing or personality profiling;
o talent utilization services with job posting to internal company
intranets;
o talent retention services; and
o talent separation services that encompass pre-termination planning,
individual coaching, opportunity research and job marketing campaign
development.
We believe we have developed a strategy that will achieve revenue
growth in most economic conditions and we are focused on achieving profitability
through a combination of organic revenue growth, cost management and strategic
acquisitions. Key elements of our strategy for business development are as
follows:
o ENHANCING AND WIDENING OUR SERVICE PORTFOLIO. We continue to integrate
our recruitment research and corporate outplacement services within our
technology platform and sales and service operations, and continue to
expand our services to provide a more complete workforce management
process through further product development and strategic acquisitions.
We believe that this will give us the ability to grow revenues with
each client, acquire new clients with different requirements, and
further develop revenue stability in almost any market condition.
o PURSUING STRATEGIC ACQUISITIONS. From time-to-time we will evaluate
acquisition and investment opportunities in complementary businesses,
products and/or technologies. Our objective is to increase our revenue
growth, add new services or new technologies for our existing client
base and penetrate new markets.
o CONTINUED EXPANSION INTO THE U.S. MARKET. We initially expanded our
business outside of Canada in fiscal 2002 by penetrating the U.S.
market through our acquisitions and by providing additional products
and services. We intend to continue to penetrate the U.S. market by
pursuing acquisitions of additional U.S.-based companies with
complementary services and indirect and direct sales operations.
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o BUILDING A WIDER INDIRECT SALES CHANNEL FOR DISTRIBUTION OF OUR
PRODUCTS AND SERVICES. We plan to pursue reseller agreements for all of
our services with human capital solution providers and recruiting
companies.
o EXPANDING DIRECT SALES WITH VERTICAL FOCUS. We will continue to
emphasize our direct sales efforts into targeted vertical industries,
especially those with good current economic outlooks including
healthcare, pharmaceuticals and biotech, food services and some
manufacturing sectors.
o MAINTAINING TECHNOLOGICAL LEADERSHIP. We plan to remain at the
forefront of Web-based human capital solutions by developing or
licensing the latest available technologies.
We designed our services to take advantage of the Internet and offer
our clients a comprehensive recruitment service. By linking organizations'
recruiting efforts with on-line sources of applicants such as job boards and
news groups and by allowing clients to download resumes from paper-based sources
into their applicant database, we believe our services allow organizations of
every size to significantly improve their recruiting and hiring cycles. Our
services can be accessed with any standard Web browser and require no additional
software or hardware deployment by clients.
We believe our clients use our services to significantly reduce their
time-to-hire, provide streamlined access to qualified candidates, lower
opportunity cost losses and significantly reduce costs. Based on past
experience, we believe that hiring cycles of organizations employing traditional
recruiting methods can extend beyond 25 to 50 days. With the utilization of
technology, candidates are often hired within five to ten business days.
Therefore, we believe that organizations that employ Internet-based recruiting
processes will be in a better position to compete effectively for good
candidates.
PRINCIPAL SERVICES AND OPERATIONS
ENTERPRISE RECRUITING SERVICES
Our Enterprise Recruiting Services segment consists of automated talent
acquisition systems, recruitment research, online exchange, and employee
management and retention systems services.
In fiscal 2003 and fiscal 2002, approximately 60% and 44%,
respectively, of our revenue was generated by our Enterprise Recruiting
Services. In fiscal 2001 and prior years we only provided online recruiting
services, and therefore such services represented 100% of our revenue.
AUTOMATED TALENT ACQUISITION SYSTEMS
We provide Automated Talent Acquisition services through E-Cruiter,
Icarian, JobPlanet and RezKeeper software. These applications offer automated
solutions through the Internet to help companies manage their entire recruitment
process including creating job requisitions, advertising job opportunities,
tracking candidates, screening the applicants, making an offer, and processing
the hiring information. In addition, these applications provide human resources
professionals with reporting tools to prepare compliance reporting information
such as Equal Employment Opportunity, as well as other reporting tools to
evaluate the staffing process. The applications also allow our clients to design
customized career web sites that are maintained by us and reside in our data
center.
7
Our different applications, E-Cruiter, E-Cruiter Lite, Icarian,
JobPlanet and Rezkeeper, have been integrated into a suite of services in order
to offer a full automated talent acquisition solution. Each application has some
special features which help complement the total suite of services. For example,
E-Cruiter and E-Cruiter Lite software, provide a complete recruitment process
solution for small and medium size customers for career site hosting and resume
and candidate management. They further allow for the seamless posting to the
major job boards while creating only one requisition. The E-Cruiter applications
are integrated with our clients' Microsoft Outlook Calendar and Global Address
Book for a more integrated approach to recruiting. Icarian software, which we
acquired in June 2002, provides Web-enabled solutions and professional services,
supporting larger clients with thousands of users, employees and job seekers.
Icarian's Human Resources Management System Connectivity, Interactive Job Site
and Reporting modules offer human resource professionals capabilities to
integrate with human resource management systems such as payroll and benefits.
JobPlanet software, an award-winning Internet software, acquired through our
acquisition of PureCarbon, is designed to integrate easily with
behind-the-scenes human resources and recruiting technology. JobPlanet software
enables clients to build and implement an employment web site that mirrors the
client's corporate brand image. JobPlanet software is integrated with the
Icarian software to provide a full automated talent acquisition solution.
RezKeeper software, acquired through our acquisition of Rezlogic, allows us to
provide an online recruiting suite of products and services to different markets
such as staffing agencies, executive recruiters, contingent placement firms and
independent recruiters.
Through our different applications, we provide an Automated Talent
Acquisition System to our corporate clients that require comprehensive
recruiting management services. Our services include the posting of resumes as
well as the following features:
o A corporate career site, which is a job site hosted on our servers and
linked to a client's corporate Web site. This recruiting portal is
linked to job posting and management services within our applications;
o Resume processing tools which enable clients to rate, score, screen,
search, organize and manage resumes submitted by job seekers;
o Applicant communication tools, including our proprietary e-mail system
which automatically keeps records of the electronic communication
associated with each job opening and generates automatic messages to
job seekers; and
o A suite of multi-user workflow features which allows for collaborative
hiring between human resources personnel and hiring managers within the
same organization.
Our Automated Talent Acquisition Systems are Web-outsourced
applications. The cost benefit to organizations of Web-outsourcing is that all
software and hardware infrastructure is physically located at the service
provider's facility, with clients only requiring standard Web browsers on their
employees' workstations. Therefore, because our clients are not required to
8
make a significant initial investment, and our services do not require
additional software or hardware, our services are more economical to use and
easier to implement.
Our Automated Talent Acquisition Systems suite is a complete recruiting
portal solution that allows companies of all sizes to manage the entire hiring
process on-line. Using our applications, clients have a central,
multi-functional hiring platform for all recruiting activities, including
posting to their external career site, intranet career site, job boards, news
groups and agency suppliers. We license our applications to our clients together
with one or more concurrent user licenses. Each concurrent license enables
another user within the organization to access the service. One concurrent
license is sufficient for small organizations that have only a few individuals
actively recruiting. More than one concurrent license provides for additional
simultaneous users and permits clients to take full advantage of our multi-user
functionality.
Our Automated Talent Acquisitions Systems allow organizations to post
jobs to multiple Internet boards through a posting manager function. Clients
write a job requisition only once, and the job requisition is ready to be
advertised on numerous Internet job boards, newsgroups and the client's own
corporate Web site. Our write-once, post-to-many capability saves time in
re-writing job requisitions for specific boards and in making arrangements with
numerous job boards. We currently post job requisitions to several job boards
including, Hotjobs.ca, Workopolis, Monster.ca, Careerbuilder, JobBoom, and
Jobviber. We continue to add new job boards to our service so that our clients
can post job requisitions to national, regional and skill-specific boards that
assist them in targeting and attracting the right candidates for the posted
positions.
Our applications allow clients to quickly establish a high quality
company career site. We believe that career sites maximize the value of our
recruiting portal solution and are the most strategic way to help clients
attract quality candidates. In particular, our clients can purchase career sites
from us that include functionality, such as job seeker agent, a capability that
notifies registered candidates of employment opportunities when they are posted
to the career site, and search, a capability that allows job seekers to search
the jobs posted on the career site for positions of interest to them. Our
clients can track the effectiveness of their career site by reviewing statistics
on the volume and source of job seeker traffic received.
Our Automated Talent Acquisition Systems provide for enhanced
communication among candidates, hiring managers and human resources personnel.
Clients can use a set of generic corporate messages to automatically respond to
resumes or other applicant communications using our auto-acknowledgement tool.
For example, an e-mail acknowledging receipt of a resume can be automatically
sent to an applicant, an administrative function which is now automated, making
corporate recruiters' job more efficient and cost effective.
We believe our applications' selection capabilities, including
automatic screening and skills ranking, improve our clients' recruiting efforts
and increase the speed at which they gain access to top candidates. Applicants
who apply on-line are ranked after they have answered screening questions either
pulled by the corporate recruiter from our suggested list, or created for the
specific job by that corporate recruiter. These applicants are then matched
against the screening criteria determined by the corporate recruiter. Applicants
who do not meet the screening criteria are placed in a rejected folder, while
those that meet the screening criteria are flagged for review by employers and
automatically become qualified candidates. Clients also receive lists of the
applicants in ranked order, and this ranking is determined by the applicant's
responses to the screening questions, and the manner in which the applicant
matches against the set criteria. This feature assists recruiters in determining
quickly if an applicant is qualified for a given position.
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Our Automated Talent Acquisition Systems also allow clients to utilize
the services of our selection partners over the Internet and have the results
flow back into their database on our servers. As part of our comprehensive
hiring management system, we resell skills and selection testing services of
Brainbench Inc. and the Self-Management Resources Corporation. Clients direct
their applicants to a specific Web site in which tests are completed by the
applicant. The test results are made available to our clients for use in their
recruitment process. We have an agreement with a verification services company
that allows our clients access to reference checking, educational verification
and other similar services.
Our Automated Talent Acquisition Systems' subscription contract is
typically for a one-year term with automatic renewal, one or more simultaneous
user licenses, user training and set up and a menu of Internet posting services.
Clients are charged a monthly subscription fee for concurrent user access
licenses, career site hosting, on-line reporting and other services. We charge
one-time fees for initial career site development and other set up and product
education. We also provide professional consultation services on a time and
materials basis. Job site posting, skills testing, personality profiling and
verification services are provided on a pay-per-use basis.
We believe that the Automated Talent Acquisition Systems services'
pricing formula provides clients with a lower-risk avenue to access the benefits
of on-line recruiting at a reasonable cost compared to client-server technology.
Furthermore, since the required technology infrastructure investments are
nominal by comparison, clients experience lower initial costs for full access to
the comprehensive services that our applications provide. We believe that the
subscription formula provides us with the opportunity to earn annuity-based
returns as subscriptions are renewed. This pricing practice is consistent with
similarly offered Web-based services.
RECRUITMENT RESEARCH SERVICES
We currently provide recruitment research services on a cost-per-hour
basis through our subsidiary OMNIpartners, which we acquired in July 2001.
Recruitment research is the outsourcing of the sourcing and screening work
associated with recruiting. We believe this outsourcing formula allows clients
to lower costs and gain access to specialized expertise that provides
objectivity and ongoing value to the hiring process. OMNIpartners's research
employees look for potential employees, interview and qualify them, and deliver
all the information to the clients' human resource departments. The OMNIresearch
Report, delivered after completion of the recruitment assignment, details
information about each individual uncovered during the search. OMNIresearch
Reports may include information about candidates' work histories, technical
abilities, educational backgrounds, people skills, decision-making abilities,
availability and salary expectations. The client can offer to hire any or all of
the individuals presented, at any time, for no additional charge.
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ONLINE EXCHANGE
6FigureJobs.com, which we acquired in October 2001, is an online
exchange where job seeking candidates and recruiting companies can interact. We
believe that 6FigureJobs.com customizes this experience to satisfy the needs of
the upper-echelon management candidate and the companies looking to hire them.
The site provides content appropriate for senior executives, directors and other
managers, as well as containing job postings that meet their qualifications. We
employ screening to create this exclusive community of job seekers. On the
candidate side, each job seeker is reviewed before his or her resume is allowed
to reside in the site's candidate database. On the recruiting side, all job
openings must have a minimum aggregate compensation of $100,000.
EMPLOYEE MANAGEMENT AND RETENTION SYSTEMS
Xylo, which we acquired in September 2002, is a provider of a Web-based
employee discount platform used by Fortune 500 and other thought-leading
companies to offer a unique benefit to build upon employee satisfaction and
efficiency. Through this hosted web site, we allow our corporate clients the
ability to make available to their employees everday savings on computers,
movies, amusement park tickets, travel, entertainment, insurance, and
professional services from over 220 nationally recognized providers. In
addition, clients are able to integrate into our system, their existing
discounts from other businesses and corporate partnerships. Other feature
components include an internal Survey application and Information Center,
featuring life event content and resource information. Our service is customized
to match our corporate client's culture and its employees' expectations, while
we maintain the web site and coordinate all the savings on the products offered
through national and local deals and ticketing programs. We believe that our
service enables our corporate clients to help employees balance work and life
needs, increasing retention rates within their workforce.
CAREER TRANSITION SERVICES
Our Career Transition Services segment consists of our outplacement
services. Outplacement revenues accounted for approximately 40% of total revenue
for fiscal 2003 compared to 56% for fiscal 2002. We currently provide
outplacement services through our subsidiary Paula Allen Holdings, which we
acquired in July 2001. Paula Allen Holdings, which does business under the name
Allen And Associates, is an outplacement and employment marketing firm. Paula
Allen Holdings provides professional assistance to approximately 10,000 job
seekers each year in the areas of information technology, engineering, finance
and marketing. Services provided to the job seeker include development and
preparation of a professional resume and cover letter, industry employment
research, as well as fulfillment, administrative, and clerical services.
We market our outplacement services to individuals seeking employment
or other career opportunities in the marketplace. Outplacement services are
marketed to individuals predominantly by advertising on the Internet as well as
in local newspapers throughout North America. During fiscal 2003, we developed a
Corporate Outplacement program providing services to companies that are
separating existing employees.
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Individuals are charged on average between $900 to $2,800 for our
resume development, career consulting and market research services. Our
Corporate Outplacement program is based on a similar pricing structure.
FOREIGN OPERATIONS
We have operations in Canada and the U.S., and therefore are subject to
the risks typical of an international business, including, but not limited to,
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility.
Our operations center is located in Ottawa, Canada and maintains our
servers, which support all of our locations and the software that is accessed by
our clients in an Application Service Provider ("ASP") environment. Financial
information about geographical areas and segments can be found in note 21 to our
consolidated financial statements.
WORKING CAPITAL ITEMS
We bill our clients monthly, quarterly and annually for subscription
sales or when a project or assignment is completed for non-subscription sales.
Subscription sales are for our clients that are being hosted in an ASP
environment and sign service licenses that range from one month to multiple
years. Non-subscription sales are project or assignment based and are billed
when the project is completed. Career Transition Services bills clients 50% when
the assignment starts and the remaining 50% when the assignment is completed.
Career Transition Services completes assignments in approximately 10 days.
RESEARCH AND DEVELOPMENT
During fiscal 2001 we internally developed our software products
spending approximately $2.2 million. Beginning in fiscal 2002 we changed our
strategy for obtaining new technology to acquiring companies that have already
developed technology platforms that have proven successful in the market place.
Research and development expense was approximately $749,000 and $1,086,000 in
fiscal 2002 and fiscal 2003, respectively. In fiscal 2003, the majority of
research and development expense was incurred in the Enterprise Recruiting
Services segment, particularly in the fiscal 2003 acquired companies. This
expense was mainly related to software development and enhancements.
INTELLECTUAL PROPERTY
We rely upon a combination of copyright, trade secret and trademark
laws and non-disclosure and other contractual arrangements to protect our
proprietary rights. Many of the copyrights and trademarks we hold were obtained
in connection with the acquisitions we made in fiscal 2003 and fiscal 2002.
Currently we have five registered trademarks in Canada and three in the United
States. These trademarks include E-Cruiter, E-Cruiter Enterprise, E-Cruiting,
Careerbridge, 6FigureJobs.com and RezLogic. In addition, we have two service
marks for OMNIpartners and OMNIresearch. We also have copyrights on some of our
training manuals and internally developed software programs.
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In 1999, we changed our name and primary identifying trademark from
"Careerbridge" to "E-Cruiter". In 2001, we changed our name to "Workstream". We
currently have pending registration applications for the Workstream trademark in
Canada and in the U.S.
The following registered trademarks are current in use, are registered
and expire as follows: E-Cruiter - December 2013, E-Cruiter Enterprise -
December 2013, E-Cruiting - January 2014. These trademarks are renewable for
fifteen years at a time. Our 6FigureJobs.com and Rezlogic trademark
registrations expire in September 2010 and March 2010, respectively, and are
renewable for ten years at a time.
We believe that these trademarks and service marks are important to our
business. The measures we have taken to protect our proprietary rights, however,
may not be adequate to deter misappropriation of proprietary information or
protect us if misappropriation occurs. Policing unauthorized use of our
technologies and other intellectual property is difficult, particularly because
of the global nature of the Internet. We may not be able to detect unauthorized
use of our proprietary information and take appropriate steps to enforce our
intellectual property rights.
We are not aware of any patent infringement charge or any violation of
other proprietary rights claim by any third party relating to us or our
products. However, the computer technology market is characterized by frequent
and substantial intellectual property litigation.
SALES AND MARKETING
We market our services in both Canada and the United States to support
our National Accounts Sales team as well as our local sales personnel in 14
locations in North America. We utilize the Internet, trade shows, seminars and
newspapers to market our services. The Enterprise Recruiting Services segment's
sales cycle, with the exception of Online Exchange, is approximately four to
eight weeks depending on the size of the potential client. Career Transition and
Online Exchange recruiting sales is relatively short and higher volume. We have
a centralized Marketing group in Connecticut that supports both Enterprise
Recruiting and Career Transition Services. Our National Accounts sales team
located in Canada supports both Canadian and United States sales personnel. Both
Career Transition Services and Enterprise Recruiting Services sales teams sell
only within their segment. Our Career Transition Services sales team has 46
dedicated sales personnel and Enterprise Recruiting Services has 14. Our
Marketing group consists of 5 support personnel and professionals.
COMPETITION
The market for HCM services is highly fragmented and competitive. We
compete within the United States and Canada with Internet recruitment services
companies, outplacement services companies and human resource service providers.
We compete for a portion of employer's recruiting budgets with many types of
competitors such as offline recruiting firms, offline advertising, resume
processing companies and web-based recruitment companies. We believe that the
primary competitive factors affecting our market include product functionality,
product performance, quality service support and implementation and the cost of
delivery. We believe that our principal competitive advantages include:
o our unique combination of high-tech and high-touch services;
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o our technology;
o our network of offices and personnel throughout North America;
o our performance and reliability as an application service provider;
o our service reputation; and
o our experienced staff of human resources professionals.
Although we believe we compete favorably with respect to such
factors, there can be no assurance that we can maintain our position against
current and potential competitors. A number of our competitors have longer
operating histories and greater financial, technology and marketing resources,
as well as better name recognition than we do.
EMPLOYEES
As of May 31, 2003, we had 169 full-time employees, consisting of 65 in
sales and marketing, 32 in research and development, 5 in professional services,
43 in maintaining daily operating functions, 10 in finance/accounting and 14 in
administration. Our employees are not represented by a collective bargaining
organization and we have never experienced any work stoppage. We consider our
relations with our employees to be good.
ITEM 2. PROPERTIES
Our corporate headquarters and principal research and development,
customer support, network operations and human resource administration are
located in approximately 17,000 square feet of leased office space in Ottawa,
Ontario, Canada. Our lease for this facility expires in December 2010. All
segments use this facility.
We lease approximately 14,775 square feet of office space in Fort
Lauderdale, Florida, which serves as the headquarters of our subsidiary,
OMNIpartners. Our lease for these premises expires in January 2004.
In addition, we lease approximately 9,396 square feet of office space
in Maitland, Florida, which serves as the headquarters of our subsidiary, Paula
Allen Holdings. Our lease for these premises expires in May 2006.
We also lease approximately 1,900 square feet of office space in
Norwalk, Connecticut, which serves as the headquarters of our subsidiary,
6FigureJobs.com. Our lease for these premises expires in July 2004.
We also lease space for sales offices in another 10 locations,
primarily under one to three year leases, usually with renewal options. We
believe that our facilities are adequate for our current needs.
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ITEM 3. LEGAL PROCEEDINGS
Two of our wholly-owned subsidiaries, Paula Allen Holdings, doing
business as Allen And Associates, and OMNIpartners, were named as defendants in
a lawsuit filed by 11263 Mississippi, LLC and 14617 Vanowen LLC. The complaint
was filed on May 16, 2003 in the Clark County District Court in Nevada.
OMNIpartners leased office space from 11263 Mississippi, LLC and 14617 Vanowen
LLC in Las Vegas, Nevada and then subleased certain portions of the office space
to Allen And Associates and an unrelated third party, U.S. Vehicle. In this
action, 11263 Mississippi, LLC and 14617 Vanowen LLC allege that OMNIpartners
breached the lease agreement and seek approximately $178,274 for unpaid rents,
maintenance charges and other charges as well as an undetermined amount for
attorneys' fees. OMNIpartners alleges the plaintiffs tortiously interfered with
its sublease agreement with U.S. Vehicle by moving U.S. Vehicle into a nearby
facility and leasing space to it. OMNIpartners also filed a lawsuit against U.S.
Vehicle and its principals alleging a breach of its sublease agreement with
OMNIpartners. This action was filed on April 18, 2002 in the Clark County
District Court in Nevada. In this action, OMNIpartners seeks approximately
$115,000 for unpaid rents, maintenance charges and other charges as well as an
undetermined amount for attorneys' fees. We believe OMNIpartners has meritorious
defenses to the allegations contained in the complaint brought by 11263
Mississippi, LLC and 14617 Vanowen LLC and intend to vigorously defend this
action. Meredith and Marvin Cohen, former shareholders of OMNIpartners, were
also named as defendants in the complaint as guarantors under the lease
agreement. OMNIpartners has agreed to defend and indemnify Mr. and Mrs. Cohen in
the lawsuit.
We are subject to other legal proceedings and claims which arise in the
ordinary course of our business. We do not believe that the resolution of such
actions will materially affect our business, results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON SHARES
Our common shares are listed on the NASDAQ Small Cap Market under
the symbol "WSTM" and on the Boston Stock Exchange under the symbol "ERM." The
principal United States market for our common shares is the NASDAQ Small Cap
Market. The following table sets forth, for the periods indicated, the high and
low sales prices of our common shares as reported on the NASDAQ Small Cap
Market. As of August 18, 2003, there were approximately 128 holders of record of
our common shares.
PRICE OF COMMON SHARES
Period High Low
June 1, 2001 - August 31, 2001 $4.69 $2.68
September 1, 2001 - November 30, 2001 $3.99 $2.00
December 1, 2001 - February 28, 2002 $5.04 $3.06
March 1, 2002 - May 31, 2002 $4.40 $3.01
June 1, 2002 - August 31, 2002 $4.14 $1.95
September 1, 2002 - November 30, 2002 $3.50 $1.51
December 1, 2002 - February 28, 2003 $1.99 $0.46
March 1, 2003 - May 31, 2003 $1.45 $0.71
DIVIDEND POLICY
We have not paid any cash dividends on our common shares and do not
anticipate paying cash dividends in the foreseeable future. We intend to retain
any future earnings for use in our business. As long as our 8% Senior
Subordinated Convertible Notes remain outstanding and unpaid, we are not
permitted to pay or declare any cash or in kind dividends or other distributions
with respect to our capital stock, except for dividends consisting solely of
additional shares of stock.
There is no law or government decree or regulation in Canada that
restricts the export or import of capital, or that affects the remittance of
dividends, interest or other payments to a non-resident holder of common shares,
other than withholding tax requirements. See "Taxation."
There is no limitation imposed by Canadian law or by our articles or
other charter documents on the right of a non-resident of Canada to hold or vote
our common shares, other than as provided in the Investment Canada Act, as
amended, referred to as the Investment Act.
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The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in the
Investment Act, referred to as a non-Canadian, unless, after review, the
minister responsible for the Investment Act is satisfied that the investment is
likely to be of net benefit to Canada. If an investment by a non-Canadian is not
a reviewable investment, it nevertheless requires the filing of a short notice
which may be given at any time up to 30 days after the implementation of the
investment.
An investment in our common shares by a non-Canadian that is a WTO
investor (defined below) would be reviewable under the Investment Act if it were
an investment to acquire direct control, through a purchase of our assets or
voting interests, and the gross book value of our assets equaled or exceeded
$223 million, the threshold established for 2003, as indicated in our financial
statements for our fiscal year immediately preceding the implementation of the
investment. In subsequent years, such threshold amount may be increased or
decreased in accordance with the provisions of the Investment Act. A WTO
investor is an investment by an individual or other entity that is a national
of, or has the right of permanent residence in, a member of the World Trade
Organization, current members of which include the European Community, Germany,
Japan, Mexico, the United Kingdom and the United States, or a WTO
investor-controlled entity, as defined in the Investment Act.
An investment in our common shares by a non-Canadian, other than a WTO
investor, would be subject to review under the Investment Act if it were an
investment to acquire our direct control and the value of the assets were $5.0
million or more, as indicated on our financial statements for our fiscal year
immediately preceding the implementation of the investment.
A non-Canadian, whether a WTO investor or otherwise, would acquire
control in us for the purposes of the Investment Act if he, she or it acquired a
majority of our common shares or acquired all or substantially all of the assets
used in conjunction with our business. The acquisition of less than a majority,
but one-third or more of our common shares, would be presumed to be an
acquisition of control in us unless it could be established that we were not
controlled in fact by the acquirer through the ownership of common shares.
The Investment Act would not apply to certain transactions in relation
to our common shares including:
(a) an acquisition of our common shares by any person if the acquisition were
made in the ordinary course of that person's business as a trader or dealer
in securities;
(b) an acquisition of control in us in connection with the realization of
security granted for a loan or other financial assistance and not for any
purpose related to the provisions of the Investment Act; and
(c) an acquisition of control in us by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate
direct or indirect control in fact in us through the ownership of voting
interests, remains unchanged.
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TAXATION
MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material Canadian federal income tax
considerations generally applicable to a person who acquires our common shares
and who, for purposes of the Income Tax Act (Canada) and the Canada-United
States Income Tax Convention, 1980, as applicable, and at all relevant times, is
a U.S. holder. Readers are cautioned that this is not a complete technical
analysis or listing of all potential tax effects that may be relevant to holders
of our common shares. In particular, this discussion does not deal with the tax
consequences applicable to all categories of investors, some of which may be
subject to special rules, and does not address the tax consequences under
Canadian provincial or territorial tax laws, or tax laws of jurisdictions
outside of Canada. Accordingly, you should consult your own advisor regarding
the particular tax consequences to you of an investment in our common shares.
This summary is based on the advice of our Canadian counsel, Perley-Robertson,
Hill & McDougall.
For purposes of the Income Tax Act (Canada) and the Canada-United
States Income Tax Convention, 1980, a U.S. holder is a person that:
o Through the period during which the person owns our common shares is not
resident in Canada and is a resident of the United States;
o Holds our common shares as capital assets, that is generally as
investments; o Deals at arm's length with us within the meaning of the
Income Tax Act (Canada);
o Does not have a permanent establishment or fixed base in Canada, as defined
by the Canada-United States Income Tax Convention, 1980; and
o Does not own and is not treated as owning, 10% or more of our outstanding
voting shares.
Special rules, which we do not address in this discussion, may apply to
a U.S. holder that is (a) an insurer that carries on an insurance business in
Canada and elsewhere, or (b) a financial institution subject to special
provisions of the Income Tax Act (Canada) applicable to income gain or loss
arising from mark-to-market property.
This discussion is based on the current provisions of the Canada-United
States Income Tax Convention, 1980, the Income Tax Act (Canada) and their
regulations, all specific proposals to amend the Income Tax Act (Canada) and
regulations, all specific proposals to amend the Income Tax Act (Canada) and
regulations announced by the Minster of Finance (Canada) before the date of this
annual report and counsel's understanding of the current published
administrative practices of Canada Customs and Revenue Agency. This discussion
is not exhaustive of all potential Canadian tax consequences to a U.S. holder
and does not take into account or anticipate any other changes in law, whether
by judicial, governmental or legislative decision or action, nor does it take
into account the tax legislation or considerations of any province, territory or
foreign jurisdiction.
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TAXATION OF DIVIDENDS
Dividends paid or credited or deemed to be paid or credited on common
shares owned by a U.S. holder will be subject to Canadian withholding tax under
the Income Tax Act (Canada) at a rate of 25% on the gross amount of the
dividends. The rate of withholding tax generally is reduced under the
Canada-United States Income Tax Convention, 1980 to 15% where the U.S. holder is
the beneficial owner of the dividends. Under the Canada-United States Income Tax
Convention, 1980, dividends paid to religious, scientific, charitable and
similar tax exempt organizations and pension organizations that are resident and
exempt from tax in the United States and that have complied with the
administrative procedures specified in the Tax Convention are exempt from this
Canadian withholding tax.
TAXATION OF CAPITAL GAINS
Gain realized by a U.S. holder on a sale, disposition or deemed
disposition of our common shares generally will not be subject to tax under the
Income Tax Act (Canada) unless the common shares constitute taxable Canadian
property within the meaning of the Income Tax Act (Canada) at the time of the
sale, disposition or deemed disposition. Our common shares generally will not be
taxable Canadian property provided that: (a) they are listed on a prescribed
stock exchange, and (b) at no time during the five-year period immediately
preceding the sale, disposition or deemed disposition, did the U.S. holder,
persons with whom the U.S. holder did not deal at arm's length, or the U.S.
Holder acting together with those persons, own or have an interest in or a right
to acquire 25% or more of the issued shares of any class or series of our
shares. A deemed disposition of common shares will occur on the death of a U.S.
holder.
If our common shares are taxable Canadian property to a U.S. holder,
any capital gain realized on a disposition or deemed disposition of those shares
will generally be exempt from tax under the Income Tax Act (Canada) by the
Canada-United States Income Tax Convention, 1980, so long as the value of our
common shares at the time of the sale, disposition or deemed disposition is not
derived principally from real property situated in Canada, as defined by the
Canada-United States Income Tax Convention, 1980. We have advised that currently
our common shares do not derive their value principally from real property
situated in Canada; however, the determination as to whether Canadian tax would
be applicable on a sale, disposition or deemed disposition of common shares must
be made at the time of that sale, disposition or deemed disposition.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
Subject to the limitations described below, the following discussion
describes the material United States federal income tax consequences to a U.S.
Holder (as defined below) that is a beneficial owner of the common shares of
Workstream Inc. and that holds them as capital assets. For purposes of this
summary, a "U.S. Holder" is a beneficial owner of common shares who or that is
for United States federal income tax purposes (i) a citizen or resident of the
United States, (ii) a corporation (or other entity treated as a corporation for
United States federal tax purposes) created or organized in the United States or
under the laws of the United States or of any state or the District of Columbia,
(iii) an estate, the income of which is includible in gross income for United
States federal income tax purposes regardless of its source, or (iv) a trust, if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust.
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This summary is for general information purposes only. It does not
purport to be a comprehensive description of all of the tax considerations that
may be relevant to owning the common shares. AS THIS IS A GENERAL SUMMARY,
OWNERS OF COMMON SHARES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH
RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS TO
NON-U.S. TAX CONSEQUENCES, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
COMMON SHARES APPLICABLE TO THEIR PARTICULAR TAX SITUATIONS.
This discussion is based on current provisions of the U.S. Internal
Revenue Code of 1986, as amended, current and proposed U.S. Treasury regulations
promulgated thereunder, and administrative and judicial decisions, as of the
date hereof, all of which are subject to change, possibly on a retroactive
basis. This discussion does not address all aspects of United States federal
income taxation that may be relevant to any particular holder based on such
holder's individual circumstances. In particular, this discussion does not
address the potential application of the alternative minimum tax or the United
States federal income tax consequences to holders that are subject to special
treatment, including:
o broker-dealers, including dealers in securities or currencies;
o insurance companies, regulated investment companies or real estate
investment trusts;
o taxpayers that have elected mark-to-market accounting;
o tax-exempt organizations;
o financial institutions or "financial services entities";
o taxpayers who hold common shares as part of a straddle, "hedge" or
"conversion transaction" with other investments;
o holders owning directly, indirectly or by attribution at least 10% of
our voting power;
o non-resident aliens of the United States;
o taxpayers whose functional currency is not the U.S. dollar; and
o taxpayers who acquire common shares as compensation.
This discussion does not address any aspect of United States federal
gift or estate tax, or state, local or non-United States laws. Additionally, the
discussion does not consider the tax treatment of partnerships or persons who
hold common shares through a partnership or other pass-through entity. Certain
material aspects of United States federal income tax relevant to a beneficial
owner other than a U.S. Holder (a "Non-U.S. Holder") also are discussed below.
20
EACH HOLDER OF COMMON SHARES IS ADVISED TO CONSULT SUCH PERSON'S OWN
TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF
PURCHASING, HOLDING OR DISPOSING OF COMMON SHARES.
TAXATION OF DIVIDENDS PAID ON COMMON SHARES
We have never paid cash dividends, and we currently do not intend to
pay cash dividends in the foreseeable future. In the event that we do pay a
dividend, and subject to the discussion of the passive foreign investment
company, or PFIC, rules below, a U.S. Holder will be required to include in
gross income as ordinary income the amount of any distribution paid on our
common shares, including any Canadian taxes withheld from the amount paid, on
the date the distribution is received to the extent the distribution is paid out
of our current or accumulated earnings and profits, as determined for United
States federal income tax purposes. In the case of noncorporate U.S. Holders,
dividends may qualify for favorable tax treatment. Distributions in excess of
such earnings and profits will be applied against and will reduce the U.S.
Holder's basis in the common shares and, to the extent in excess of such basis,
will be treated as a gain from the sale or exchange of the common shares.
Distributions of current or accumulated earnings and profits paid in a
currency other than the U.S. dollar to a U.S. Holder will be includible in the
income of a U.S. Holder in a U.S. dollar amount calculated by reference to the
exchange rate on the date the distribution is received. A U.S. Holder that
receives a distribution in a currency other than the U.S. dollar and converts
the non-U.S. currency into U.S. dollars subsequent to its receipt will have
foreign exchange gain or loss based on any appreciation or depreciation in the
value of the non-U.S. currency against the U.S. dollar, which will generally be
U.S. source ordinary income or loss.
U.S. Holders will have the option of claiming the amount of any
Canadian income taxes withheld at source either as a deduction from gross income
or as a dollar-for-dollar credit against their United States federal income tax
liability. Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of any Canadian
income taxes withheld, but such individuals may still claim a credit against
their United States federal income tax liability. The amount of foreign income
taxes which may be claimed as a credit in any year is subject to complex
limitations and restrictions, which must be determined on an individual basis by
each shareholder. The total amount of allowable foreign tax credits in any year
cannot exceed the pre-credit U.S. tax liability for the year attributable to
foreign source taxable income.
A U.S. Holder will be denied a foreign tax credit with respect to
Canadian income tax withheld from dividends received on our common shares:
o if such U.S. Holder has not held the common shares for at least 16 days of
the 30-day period beginning on the date which is 15 days before the
ex-dividend date; or
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o to the extent such U.S. Holder is under an obligation to make related
payments on substantially similar or related property.
Any days during which a U.S. Holder has substantially diminished its risk
of loss on the common shares are not counted toward meeting the 15 day holding
period required by the statute. In addition, distributions of current or
accumulated earnings and profits will be foreign source passive income for
United States foreign tax credit purposes and will not qualify for the dividends
received deduction otherwise available to corporations.
TAXATION OF THE DISPOSITION OF COMMON SHARES
Subject to the discussion of the PFIC rules below, upon the sale,
exchange or other disposition of our common shares, a U.S. Holder will generally
recognize capital gain or loss in an amount equal to the difference between the
amount realized on the disposition and such U.S. Holder's tax basis in the
common shares (tax basis is usually the U.S. dollar cost of such common shares).
If the common shares are publicly traded, a disposition of common shares will be
considered to occur on the "trade date," regardless of the U.S. Holder's method
of accounting. A U.S. Holder that uses the cash method of accounting calculates
the U.S. dollar value of the proceeds received on the sale as of the date that
the sale settles. However, a U.S. Holder that uses the accrual method of
accounting is required to calculate the value of the proceeds of the sale as of
the "trade date" and may therefore realize foreign currency gain or loss, unless
such U.S. Holder has elected to use the settlement date to determine its
proceeds of sale for purposes of calculating such foreign currency gain or loss.
Capital gain from the sale, exchange or other disposition of the common shares
held more than one year is long-term capital gain. Gain or loss recognized by a
U.S. Holder on a sale, exchange or other disposition of common shares generally
will be treated as United States source income or loss for United States foreign
tax credit purposes. The deductibility of a capital loss recognized on the sale,
exchange or other disposition of common shares is subject to limitations. In
addition, a U.S. Holder that receives non-U.S. currency upon disposition of our
common shares and converts the non-U.S. currency into U.S. dollars subsequent to
its receipt will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the non-U.S. currency against the U.S. dollar,
which will generally be United States source ordinary income or loss.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
We will be a passive foreign investment company, or PFIC, for United
States federal income tax purposes, if 75% or more of our gross income in a
taxable year, including the pro rata share of the gross income of any company,
U.S. or foreign, in which we are considered to own 25% or more of the shares by
value, is passive income. Alternatively, we will be considered to be a PFIC if
50% or more of our assets in a taxable year, averaged over the year and
ordinarily determined based on fair market value and including the pro rata
share of the assets of any company in which we are considered to own 25% or more
of the shares by value, are held for the production of, or produce, passive
income. Passive income includes amounts derived by reason of the temporary
investment of funds raised in our public offerings.
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If we were a PFIC, and a U.S. Holder did not make a qualifying election
either to (i) treat us as a "qualified electing fund" (a "QEF") (as described
below), or (ii) mark our common shares to market (as discussed below), excess
distributions by us to a U.S. Holder would be taxed under special rules. "Excess
distributions" are amounts received by a U.S. Holder with respect to shares in a
PFIC in any taxable year that exceed 125% of the average distributions received
by such U.S. Holder from the PFIC in the shorter of either the three previous
years or such U.S. Holder's holding period for such shares before the present
taxable year. Excess distributions must be allocated ratably to each day that a
U.S. Holder has held shares in a PFIC. A U.S. Holder must include amounts
allocated to the current taxable year in its gross income as ordinary income for
that year. Further, a U.S. Holder must pay tax on amounts allocated to each
prior PFIC taxable year at the highest rate in effect for that year on ordinary
income and the tax is subject to an interest charge at the rate applicable to
deficiencies for income tax. The entire amount of gain that is realized by a
U.S. Holder upon the sale or other disposition of our common shares will also be
treated as an excess distribution and will be subject to tax as described above.
A. U.S. Holder's tax basis in our common shares that were acquired from a
decedent who was a U.S. Holder would not receive a step-up to fair market value
as of the date of the decedent's death but would instead be equal to the
decedent's basis, if lower. If we were a PFIC, a U.S. Holder of our common
shares will be subject to the PFIC rules as if such holder owned its pro-rata
share of any of our direct or indirect subsidiaries which are themselves PFICs.
Accordingly, a U.S. Holder of our common shares will be subject to tax under the
PFIC rules with respect to distributions to us by, and dispositions by us of
stock of, any direct or indirect PFIC stock held by us, as if such holder
received directly its pro-rata share of either the distribution or proceeds from
such disposition.
The special PFIC rules described above will not apply to a U.S. Holder
if the U.S. Holder makes an election to treat us as a "qualified electing fund"
in the first taxable year in which the U.S. Holder owns common shares and if we
comply with certain reporting requirements. Instead, a shareholder of a QEF is
required for each taxable year to include in income a pro rata share of the
ordinary earnings of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the QEF as long-term capital gain, subject
to a separate election to defer payment of taxes, which deferral is subject to
an interest charge. The QEF election is made on a shareholder-by-shareholder
basis and can be revoked only with the consent of the U.S. Internal Revenue
Service, ("IRS"). A shareholder makes a QEF election by attaching a completed
IRS Form 8621, including the PFIC annual information statement, to a timely
filed United States federal income tax return and by filing such form with the
IRS Service Center in Philadelphia, Pennsylvania. Even if a QEF election is not
made, a shareholder in a PFIC who is a U.S. person must file a completed IRS
Form 8621 every year. We have agreed to supply U.S. Holders with the information
needed to report income and gain pursuant to a QEF election in the event we are
classified as a PFIC.
A U.S. Holder of PFIC stock which is publicly traded could elect to
mark the stock to market annually, recognizing as ordinary income or loss each
year an amount equal to the difference as of the close of the taxable year
between the fair market value of the PFIC stock and the U.S. Holder's adjusted
tax basis in the PFIC stock. Losses would be allowed only to the extent of net
mark-to-market gain previously included by the U.S. Holder under the election
for prior taxable years. If the mark-to-market election were made, then the
rules set forth above would not apply for periods covered by the election.
23
We believe that we were not a PFIC for the fiscal years ending May 2003
and May 2002 and we believe that we will not be a PFIC for the fiscal year
ending May 2004. The tests for determining PFIC status, however, are applied
annually, and it is difficult to make accurate predictions of future income and
assets, which are relevant to this determination. Accordingly, there can be no
assurance that we will not become a PFIC. U.S. Holders who hold common shares
during a period when we are a PFIC will be subject to the foregoing rules, even
if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who
made a QEF election. U.S. Holders are strongly urged to consult their tax
advisors about the PFIC rules, including the consequences to them of making a
mark-to-market or QEF election with respect to common shares in the event that
we qualify as a PFIC.
TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON SHARES
Except as described in "U.S. Information Reporting and Backup
Withholding" below, a Non-U.S. Holder who is a beneficial owner of our common
shares will not be subject to United States federal income or withholding tax on
the payment of dividends on, and the proceeds from the disposition of, our
common shares, unless:
o Such item is effectively connected with the conduct by the Non-U.S. Holder
of a trade or business in the United States and, in the case of a resident
of a country which has a treaty with the United States, such item is
attributable to a permanent establishment or, in the case of an individual,
a fixed place of business, in the United States;
o The Non-U.S. Holder is an individual who holds the common shares as capital
assets and is present in the United States for 183 days or more in the
taxable year of the disposition and does not qualify for an exemption; or
o The Non-U.S. Holder is subject to tax pursuant to the provisions of United
States tax law applicable to U.S. expatriates.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Holders generally are subject to information reporting
requirements with respect to dividends paid in the United States on common
shares. In addition, U.S. Holders are subject to U.S. backup withholding at a
rate of up to 28% on dividends paid in the United States on common shares unless
the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption.
U.S. Holders are subject to information reporting and backup withholding at a
rate of up to 28% on proceeds paid from the sale, exchange, redemption or other
disposition of common shares unless the U.S. Holder provides an IRS Form W-9 or
otherwise establishes an exemption.
Non-U.S. Holders generally are not subject to information reporting or
backup withholding with respect to dividends paid on, or proceeds upon the sale,
exchange, redemption or other disposition of, common shares, provided that such
Non-U.S. Holder provides a taxpayer identification number, certifies to its
foreign status, or otherwise establishes an exemption.
24
The amount of any backup withholding will be allowed as a credit
against such U.S. Holder's or Non-U.S. Holder's United States federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
RECENT SALES OF UNREGISTERED SECURITIES
In March 2003, we entered into an agreement with Icarian and the
landlord of certain property being leased by Icarian to terminate the lease
between Icarian and the landlord. The landlord agreed to terminate the lease and
release Icarian from its financial obligations under the lease in exchange for
certain furniture and equipment previously used at the property, cash and
275,000 common shares of Workstream valued at $0.92 per share. The common shares
were sold to one accredited investor in reliance on the exemption from
registration provided by Rule 506 promulgated under the Securities Act of 1933.
In May 2003, we raised additional capital by issuing an individual
266,666 common shares at $0.75 per share and warrants to purchase 133,333 common
shares at an exercise price of $1.50 per share, subject to adjustment upon the
occurrence of certain events. In May 2003, we also entered into agreements with
another individual and two institutional investors whereby we agreed to sell and
the investors agreed to purchase an aggregate of 933,334 common shares at $0.75
per share and warrants to purchase an aggregate of 333,334 common shares at an
exercise price of $1.50 per share, subject to adjustment upon the occurrence of
certain events. The closing on the sale of these additional common shares and
warrants occurred in June 2003. The common shares and warrants that were issued
in May and June 2003 were sold to a limited number of accredited investors in
reliance on the exemption from registration provided by Rule 506 promulgated
under the Securities Act of 1933. The proceeds from the sale of these securities
are being used for general working capital purposes and potential future
acquisitions.
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Form 10-K.
25
FISCAL YEAR ENDED MAY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002 2001 2000 1999
Statement of operations data:
Revenue $ 17,837 $ 14,752 $ 1,992 $ 1,170 $ 950
Cost of revenues 3,040 2,858 1,483 1,085 576
Selling and marketing 6,058 6,649 2,416 2,430 1,058
General and administrative 9,582 6,724 984 1,156 420
Research and development 1,086 750 2,164 1,643 332
Amortization and depreciation 6,097 1,796 501 250 80
Impairment write-down of goodwill 2,133 2,810 -- -- --
--------------------------------------------------------
Operating loss (10,159) (6,835) (5,556) (5,394) (1,516)
Other (expense) income, net (1,146) (155) 452 346 (1,701)
--------------------------------------------------------
Loss before income taxes (11,305) (6,990) (5,104) (5,048) (3,217)
Recovery of deferred income taxes 1,586 29 -- -- --
Current income tax recovery 42 -- -- -- --
--------------------------------------------------------
Net loss for the year $ (9,677) $ (6,961) $ (5,104) $ (5,048) $ (3,217)
========================================================
Basic and diluted net loss
Per common share $ (0.52) $ (0.52) $ (0.66) $ (0.89) $ (0.83)
========================================================
Weighted average number of
common shares outstanding 18,608 13,281 7,710 5,650 3,855
========================================================
MAY 31,
(IN THOUSANDS)
2003 2002 2001 2000 1999
Balance sheet data:
Working capital (deficit) $ (3,412) $ (1,677) $ 3,200 $ 8,548 $ (1,294)
Total assets 30,618 23,276 5,389 10,805 1,439
Long-term obligations and
redeemable preferred stock 5,312 1,557 213 28 27
Total liabilities 11,594 8,519 1,347 1,570 2,569
Shareholders' equity 19,024 14,757 4,042 9,235 (1,130)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "ANTICIPATES," "BELIEVES," "
EXPECTS," "INTENDS," "FUTURE," AND WORDS OF SIMILAR IMPORT WHICH EXPRESS
MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS REGARDING OUR FUTURE
PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE HAVE NO OBLIGATION TO
UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS AND FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE SET FORTH BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS REPORT AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
26
OVERVIEW
We are a leading provider of human capital management ("HCM") services.
We offer a combination of high-tech and high-touch services, providing customers
with the ability to manage their complete recruiting, retention and outplacement
needs on a single Workstream platform.
The past two fiscal years have resulted in significant changes in our
business. During the first six months of fiscal 2003 we completed the
acquisition of Icarian, PureCarbon and Xylo. During the first six months of
fiscal 2002, we completed the acquisition of Paula Allen Holdings, OMNIpartners,
6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine. Subsequent to the
acquisitions, we have concentrated on integrating the acquired entities and
expanding the reach of the existing business. These acquisitions have enabled us
to increase our service offerings and revenue streams.
Due to the substantive change these acquisitions have made to our
business, this management's discussion and analysis includes comparisons of pro
forma results of operations for fiscal 2003 and fiscal 2002. These pro forma
results assume that the above acquisitions had been completed as at June 1, 2001
and therefore compare revenues and expenses of us and all our subsidiaries for
both fiscal years.
CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies relate to the assessment of
goodwill impairment, impairments in intangible assets and the valuation of net
deferred tax assets. Management applies judgment to value these assets. Changes
in assumptions used would impact our financial results.
Goodwill is assessed for impairment on an annual basis or more
frequently if circumstances warrant. We assess goodwill related to reporting
units for impairment, and write down the carrying amount of goodwill as
required. We estimate the fair value of each reporting unit by preparing a
discounted cash flow model, using a 15% discount rate. The model is
27
prepared by projecting results for five years making different assumptions for
each business unit. We assumed that the economy would begin to improve starting
in fiscal 2004, revenue growth rates would range from 0% to 10%, gross profit
would remain consistent with current trends, and operating expense would be
reduced in the first year due to rent reductions and would grow 3.5% to 4.0% in
the latter years. An impairment charge is recorded if the implied fair value of
goodwill of a reporting unit is less than the book value of goodwill for that
unit. Changes in the discount rate used, or in other assumptions in the model,
would result in wide fluctuations in the value of goodwill that is supported.
Any such changes may result in additional impairment write-downs.
We value intangible assets, such as a customer base acquired in an
acquisition, based on estimated future income applying historical customer
retention rates. If the customer base acquired discontinues using our service
earlier than historical experience, we may be required to record an impairment
of intangible assets. Changes in circumstances impacting other assumptions used
to value intangible assets could also lead to future impairments.
We apply significant judgment in recording net deferred tax assets,
which result from the loss carry forwards of companies that we acquire. The
recording of deferred tax assets requires estimates of future profits from the
acquired company to be forecast. Actual results may differ from amounts
estimated.
The table below sets forth pro forma results and the percentage
difference between fiscal year 2003 and fiscal year 2002, assuming all fiscal
2003 and fiscal 2002 acquisitions were acquired at the beginning of fiscal 2002.
28
Workstream Inc.
Pro forma comparative
Twelve months ending May 31,
2003 2002 Var %
------------------------------- ------------
REVENUE
Enterprise recruiting $ 6,323,878 $ 8,833,788 -28.41%
Executive search recruiting 2,563,103 3,568,785 -28.18%
Recruitment research 1,320,370 2,616,913 -49.54%
Retention 1,576,692 2,807,548 -43.84%
-------------------------------
Total recruiting/retention 11,784,043 17,827,034 -33.90%
Career transition 7,059,696 9,677,173 -27.05%
-------------------------------
Total revenue 18,843,739 27,504,207 -31.49%
DIRECT COSTS
Enterprise recruiting 990,841 5,129,623 -80.68%
Executive search 229,811 267,818 -14.19%
Recruitment research 549,606 1,021,966 -46.22%
Retention 346,726 729,133 -52.45%
Career transition 1,108,418 1,330,694 -16.70%
--------------------------------
Total 3,225,402 8,479,234 -61.96%
% of revenues 17.1% 30.8%
GROSS PROFIT
Enterprise recruiting 5,333,037 3,704,165 43.97%
Executive search 2,333,292 3,300,967 -29.31%
Recruitment research 770,764 1,594,947 -51.67%
Retention 1,229,966 2,078,415 -40.82%
Career transition 5,951,278 8,346,479 -28.70%
--------------------------------
Total 15,618,337 19,024,973 -17.91%
Gross profit % 82.9% 69.2%
EXPENSES
Sales & marketing 6,259,393 16,039,391 -60.97%
General & administration 10,498,155 11,642,199 - 9.83%
Research and development 1,551,022 6,888,143 -77.48%
Amortization and depreciation 6,762,784 8,916,033 -24.15%
Impairment write-down of goodwill 2,133,242 8,129,619 -73.76%
Restructuring charge 71,137 415,872 -82.89%
--------------------------------
Total 27,275,733 52,031,257 -47.58%
--------------------------------
Operating loss (11,657,396) (33,006,284) 64.68%
Other income (expense) (1,134,529) (997,095) 13.78%
Recovery of deferred income taxes 1,734,490 1,567,974 10.62%
Current income tax recovery 42,128 - -
--------------------------------
Net operating loss $(11,015,307) $(32,435,405) 66.03%
================================
Weighted average number of common
shares outstanding 19,338,731 18,684,426
===============================
Pro forma loss per share $ (0.57) $ (1.74)
===============================
Our revenues have declined on a pro forma basis for fiscal 2003 due
primarily to the overall economic slowdown, closure of offices in the Career
Transition Services segment as well as due to the impact of clients that Icarian
lost subsequent to November 30, 2001 but prior to being acquired by us.
Following completion of the fiscal 2003 and fiscal 2002 acquisitions,
we focused on integrating the acquired entities and expanding the reach of the
existing businesses. We have also made efforts to reduce costs by consolidating
operations, resulting in staff reductions of redundant positions and related
overhead and reducing research and development expenditures. Certain actions
taken to reduce costs have also caused reductions in revenue.
29
FISCAL 2003 COMPARED TO FISCAL 2002
REVENUES
Consolidated revenues were $17,836,990 for fiscal 2003 compared to
$14,751,620 for fiscal 2002, an increase of $3,085,370 or 21%. Fiscal 2003
revenues from companies we acquired during fiscal 2003 represented $4,831,432
for the year ended May 31, 2003. Revenues other than from companies we acquired
in fiscal 2003 declined 12% to $13,005,558 from $14,751,619 in fiscal 2002
mainly due to lower Career Transition Service revenues (15% lower from fiscal
2002) caused by our consolidation of office locations and lower Enterprise
Recruitment Services revenues (8% lower from fiscal 2002). We believe that
Enterprise Recruitment Services revenues (other than those resulting from
acquisitions) decreased in fiscal 2003 as a result of the continued softness in
the economy which we believe has led to fewer companies hiring additional staff.
Career Transition Services revenues for fiscal 2003 were $7,059,696
compared to $8,301,246 for fiscal 2002. The major reason for the decline in
Career Transition Services revenues was due to the closure of two office
locations in the fourth quarter of fiscal 2002 and four office locations in the
first six months of fiscal 2003. These closures are a result of our plan to
consolidate sales locations and develop larger centers in fewer locations in
order to leverage management costs and improve internal controls.
Enterprise Recruiting Services revenues for fiscal 2003 were
$10,777,294 compared to $6,450,374 for fiscal 2002. The increase in revenues was
primarily due to the acquisition of Icarian, PureCarbon, and Xylo in fiscal
2003. This increase was partially offset by a decline in sales in recruiting
research and some sectors of recruiting software which we believe is due to the
weak economy.
Pro forma revenues for fiscal 2003 were $18,843,739 compared to
$27,504,207 for fiscal 2002. Pro forma revenues include the revenues of all
acquired companies for the full reporting periods, instead of from their
acquisition dates. The decline in pro forma revenues is primarily due to the
impact of clients that Icarian lost subsequent to November 30, 2001 but prior to
being acquired by us. The majority of these clients produced little or no profit
margins due to extensive customer service needs. Additionally, pro forma
revenues declined as a result of the closure of the Career Transition Services'
offices. We also believe that the economic downturn has continued to negatively
impact our recruiting research and software services.
We believe that the acquisitions we made in fiscal 2002 and fiscal 2003
allow us to deliver a broader range of recruiting and outplacement products and
services through our 14 offices across North America. Management believes that
the acquisitions will have a significant impact on future revenues.
COST OF REVENUES
Cost of revenues for fiscal 2003 were $3,040,132 compared to $2,858,294
for fiscal 2002, an increase of $181,838 or 6%. Cost of revenues includes the
cost of network operations, client support and charges related to third-party
services. Career Transition Services cost of revenues accounted for $1,108,418
and Enterprise Recruiting Services cost of revenues accounted for $1,931,714 of
the total cost of revenues for fiscal 2003. Cost of revenues in the Enterprise
Recruiting Services segment increased $197,319 from fiscal 2002. The
acquisitions done in fiscal 2003 contributed $803,336 to this increase which was
partially offset by reduced costs as a result of an effort to eliminate
redundant operations. Cost of revenues for the Career Transition Services
segment decreased $15,421 from fiscal 2002.
30
On a pro forma basis, cost of revenues decreased from $8,479,234 for
fiscal 2002 to $3,225,402 for fiscal 2003. Since the consummation of the
acquisitions, management has proceeded with the consolidation of certain cost
centers and the elimination of redundant operations. This has resulted in a
decrease compared to the pro forma cost of revenues for fiscal 2002.
GROSS PROFITS
Consolidated gross profits were $14,796,858 for fiscal 2003 or 83% of
revenues compared to $11,893,326 or 81% for fiscal 2002.
Career Transition Services gross profit was $5,951,277 or 84% of Career
Transition Services revenues for fiscal 2003 compared to $7,177,347 or 86% of
Career Transition Service revenues for fiscal 2002. In the Career Transition
Services segment, although cost of revenues has been reduced, the timing of the
reduction of costs in relation to the loss of revenue in the closed offices has
resulted in a slight decrease in its gross profit margin. Enterprise Recruiting
Services gross profit was $8,845,581 or approximately 82% of Enterprise
Recruiting Services revenues for fiscal 2003 compared to $4,715,979 or 73% of
Enterprise Recruiting Service revenues for fiscal 2002. As mentioned above, the
reduction in redundant costs in the Enterprise Recruiting Services segment has
improved gross profit margins compared to the prior year.
Pro forma gross profits were $15,618,337 or 83% of revenues for fiscal
2003 compared to $19,024,973 or 69% of revenues for fiscal 2002. Reduction in
redundant costs as well as the loss of low margin clients that were acquired
prior to the purchase of the Icarian business resulted in improved margin
percentages.
OPERATING EXPENSES
Total operating expenses were $24,956,020 for fiscal 2003 compared to
$18,728,105 for fiscal 2002, an increase of $6,227,915 or 33%. Acquisitions
completed in fiscal 2003 accounted for $9,565,079 in total operating expenses.
Operating expenses for non-acquired operations were $15,390,941 for fiscal 2003,
representing an approximate 18% decline compared to fiscal 2002. The primary
reason for the decline in operating expenses for the operations that existed
prior to the fiscal 2003 acquisitions is the consolidation of operating
functions and the impairment of goodwill recorded in fiscal 2002.
On a pro forma basis, operating expenses were $27,275,733 for fiscal
2003 compared to $52,031,257 for fiscal 2002. The decline in pro forma operating
expense is due to the elimination of redundant costs, disposal of purchased
intangibles and restructuring charges recorded by the acquired companies prior
to their acquisition.
31
SELLING AND MARKETING
Selling and marketing expenses were $6,057,788 for fiscal 2003 compared
to $6,649,057 for fiscal 2002, a decline of $591,269 or 9%. This decrease is
attributed mainly to a reduction in advertising expense ($458,450) and a
reduction in employee costs for existing operations ($472,552) partially offset
by an increase in employee costs as a result of the acquisitions made in fiscal
2003 ($428,877). Advertising expense was reduced by $322,748 in the Career
Transition Services segment by shifting advertising from newspapers and print
media to the Internet. In addition, advertising expense was reduced in the
Enterprise Recruiting Services segment by $135,702 by implementing a more direct
sales approach compared to an indirect approach used by prior management of the
acquired operations and initially continued after the acquisitions.
On a pro forma basis, selling and marketing expenses were $6,259,393
for fiscal 2003 compared to $16,039,391 for fiscal 2002. The decline in selling
and marketing expenses was due to the consolidation of marketing, advertising
and public relations programs. Additionally, we have significantly reduced the
sales and marketing staff in the acquired companies as part of the consolidation
and integration into Workstream.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $9,581,554 for fiscal 2003
compared to $6,724,211 for fiscal 2002, an increase of $2,857,343 or 42%, due
principally to increased employee costs ($277,600), space occupancy ($271,367),
equipment leasing costs ($297,528), computing and communication expense
($304,779), bad debt expense ($57,206), postage ($22,705), and professional fees
($26,703) related to the companies we acquired during fiscal 2003, as well as
director fees for serving on our board ($114,750), higher audit and accounting
fees ($179,370), and the impact of a full year of costs from the acquisitions
made in fiscal 2002.
On a pro forma basis, general and administrative expenses decreased
from $11,642,199 for fiscal 2002 to $10,498,155 for fiscal 2003. The decrease is
due to the elimination of redundant costs associated with the acquired
companies.
RESEARCH AND DEVELOPMENT
Research and development costs were $1,086,295 for fiscal 2003 compared
to $749,392 for fiscal 2002, an increase of $336,903 or 45%. The acquisitions
completed during fiscal 2003 accounted for $678,309 in research and development
costs. This increase was partially offset by a decline in research and
development costs related to our existing operations as part of our strategy to
acquire technology through acquisitions. We believe that we can acquire new
technology at a lower cost and more efficiently than developing new software
platforms with internal resources. We implemented this strategy in fiscal 2002.
Since fiscal 2002 most of our research and development efforts have been
incurred in the Enterprise Recruiting Services segment.
On a pro forma basis, research and development expenses were $1,551,022
for fiscal 2003 compared to $6,888,143 for fiscal 2002. Significant reductions
were made in research and development staff, most notably relating to the
Icarian operations.
32
AMORTIZATION AND DEPRECIATION EXPENSE
Amortization and depreciation expense was $6,097,141 for fiscal 2003
compared to $1,795,445 for fiscal 2002, an increase of $4,301,696 or 240%. The
majority of the increase ($4,322,272) is due to the amortization of acquired
intangible assets arising from acquisitions.
On a pro forma basis, amortization and depreciation expense was
$6,762,784 for fiscal 2003 compared to $8,916,033 for fiscal 2002. The decline
in amortization and depreciation expense on a pro forma basis was due primarily
to the write-down of software licenses and website development costs associated
with the Icarian and Xylo acquisitions prior to and at the time of the
acquisition.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $47,245 for fiscal 2003 compared to
$146,061 for fiscal 2002, a decrease of $98,816 or 68%. The decline was due to
the reduction in short-term investments. Short-term investments as of May 31,
2003 were $38,419 compared to $345,206 at May 31, 2002.
INTEREST EXPENSE AND OTHER EXPENSE
Interest and other expense was $1,193,045 for fiscal 2003 compared to
$300,983 for fiscal 2002, an increase of $892,062 or 296%. The primary reason
for the increase in interest and other expense was due to interest expense
incurred as a result of the issuance of $2.9 million aggregate principal amount
of 8% Senior Subordinated Convertible Notes in April and May 2002. Future period
interest expense related to those Notes will increase significantly as the Notes
accrete to their current face value of $2.7 million over the remaining period to
maturity.
GOODWILL
Goodwill was $17,383,437 as of May 31, 2003 compared to $12,738,172
as of May 31, 2002, an increase of $4,645,265 or 36%. The increase in goodwill
relates to the acquisitions completed during fiscal 2003 and includes
adjustments during the year for shares released from escrow to the former owners
of Paula Allen Holdings, as we achieved the specific revenue and profit targets
set by the Paula Allen Holdings acquisition agreement for the period ended
December 31, 2002. Additionally, management recorded during fiscal 2003 and
fiscal 2002, goodwill impairment charges totaling $2,133,242 related to the
Icarian, Rezlogic and Tech Engine acquisitions, and $2,810,000 related to the
Paula Allen Holdings and OMNIpartners acquisitions, respectively.
FISCAL 2002 COMPARED TO FISCAL 2001
REVENUES
Consolidated revenues were $14,751,620 for fiscal 2002 compared to
$1,991,971 for fiscal 2001, an increase of $12,759,649 or 641%. Fiscal 2002
revenues from companies we acquired during fiscal 2002 represented $13,068,905
for the year ended May 31, 2002. Revenues other than from companies we acquired
in fiscal 2002 declined 16% to $1,682,715 from $1,991,971 in fiscal 2001 as a
result of discontinuing the E-Cruiter express product. The E-Cruiter express
product serviced companies with under 500 employees. We discontinued that
product in an effort to focus more resources on companies with more than 500
employees.
33
Career Transition Services revenues for fiscal 2002 were $8,301,246 and
were the largest contributor to total revenues in fiscal 2002. All of the
revenue in this segment is attributable to the acquisition of Paula Allen
Holdings, acquired in July of fiscal 2002 and the addition of new offices during
fiscal 2002.
Enterprise Recruiting Services revenues for fiscal 2002 were $6,450,374
compared to $1,991,971 for fiscal 2001. The increase in revenues was primarily
due to the acquisition of RezLogic, OMNIpartners and 6FigureJobs.com in fiscal
2002.
COST OF REVENUES
Cost of revenues for fiscal 2002 were $2,858,294 compared to $1,482,730
for fiscal 2001, an increase of $1,375,564 or 93%. While the total cost of
revenues increased significantly due to the acquisitions made in fiscal 2002, as
a percentage of revenue these costs declined from approximately 74% for fiscal
2001 to 19% for fiscal 2002. The decline as a percentage of revenue is due to
the fiscal 2002 acquisitions' lower cost of delivery of products and services
and our ability to consolidate technology. Career Transition Services cost of
revenues accounted for $1,123,899 and Enterprise Recruiting Services cost of
revenues accounted for $1,734,395 of the total cost for fiscal 2002.
GROSS PROFITS
Consolidated gross profits were $11,893,326 for fiscal 2002 or 81% of
revenues compared to $509,241 or 26% for fiscal 2001. The increase in gross
profits is due to the fiscal 2002 acquisitions.
Career Transition Services gross profit was $7,177,347 or 86% of Career
Transition Services revenues for fiscal 2002 and Enterprise Recruiting Services
gross profit was $4,715,979 or approximately 73% of Enterprise Recruiting
Services revenues for fiscal 2002.
OPERATING EXPENSES
Total operating expenses were $18,728,105 for fiscal 2002 compared to
$6,065,293 for fiscal 2001, an increase of $12,662,812 or 209%. The acquisitions
made in fiscal 2002 accounted for $15,628,353 of total operating expenses for
fiscal 2002. Operating expenses for non-acquired operations were $3,099,752 for
fiscal 2002, representing an approximately 49% decline compared to fiscal 2001.
The primary reason for the decline in operating expenses for the operations that
existed prior to the fiscal 2002 acquisitions is the consolidation of operating
functions and technology.
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SELLING AND MARKETING
Selling and marketing expenses were $6,649,057 for fiscal 2002 compared
to $2,415,831 for fiscal 2001, an increase of $4,233,226 or 175%. This increase
is attributed to the acquisitions we made in fiscal 2002. Commission expense for
fiscal 2002 was approximately 10% of the total selling and marketing expense.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $6,724,211 for fiscal 2002
compared to $984,033 for fiscal 2001, an increase of $5,740,178 or 583%,
reflecting increased costs related to the companies we acquired during fiscal
2002.
RESEARCH AND DEVELOPMENT
Research and development costs were $749,392 for fiscal 2002 compared
to $2,164,045 for fiscal 2001, a decrease of $1,14,653 or 65%. The decline is
primarily due to the completion of various projects under development in prior
periods and our strategy to acquire technology through acquisition.
AMORTIZATION EXPENSE
Amortization expense was $1,795,445 for fiscal 2002 compared to
$501,384 for fiscal 2001, an increase of $1,294,061 or 258%, with the
amortization of acquired intangible assets representing the entire increase over
the prior year.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $146,061 for fiscal 2002 compared to
$494,635 for fiscal 2001, a decrease of $348,574 or 70%. The significant decline
was due to the decline in short-term investments. Short-term investments,
including restricted cash, as of May 31, 2002 were $2,302,296 compared to
$3,518,962 at May 31, 2001, which represented the remaining capital raised from
our public offering in December 1999.
INTEREST EXPENSE AND OTHER EXPENSE
Interest and other expense was $300,983 for fiscal 2002 compared to
$42,418 for fiscal 2001, an increase of $258,565 or 610%. The primary reason for
the increase in interest and other expense was due to the increase in both short
and long-term debt. As of May 31, 2002, short and long-term debt totaled
$6,158,059 compared to $248,859 at May 31, 2001. The primarily reason for the
increase was a result of the fiscal 2002 acquisitions and the expansion of
operating units. During fiscal 2002, we recorded $33,364 of interest expense
relating to our 8% Senior Subordinated Convertible Notes issued in April and May
of 2002. Future period interest expense related to the Notes will increase
significantly as the Notes accrete to their current face value of $2.7 million
over the remaining term to maturity.
35
GOODWILL
Goodwill was $12,738,172 as of May 31, 2002 compared to nil as of May
31, 2001. The goodwill relates to the acquisitions completed during fiscal 2002
and includes adjustments during the year for shares released from escrow to the
former owners of Paula Allen Holdings, as we achieved the specific revenue and
profit targets set by the Paula Allen Holdings acquisition agreement for the
period ended December 31, 2001. Additionally, management recorded goodwill
impairment charges totaling $2,810,000 during fiscal 2002 related to the Paula
Allen Holdings and OMNIpartners acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2003, we had $1,601,031 in cash and cash equivalents,
restricted cash and short-term investments and a working capital deficit of
$3,411,579. We have made a significant investment in acquiring new service lines
which has reduced working capital. During fiscal 2003, as a result of acquiring
Icarian, PureCarbon and Xylo, we assumed current liabilities which exceeded
acquired current assets by $3,439,133, as of the respective dates of
acquisition.
At May 31, 2003, $1,307,439 of short-term investment balances were
restricted from use because they were collateral for various borrowing or
leasing arrangements. Merchant banks have required us to place reserve deposits
on our merchant accounts due to the high volume of credit card usage by our
clients. As of May 31, 2003, approximately $399,786 was held by such banks.
These deposits are reviewed quarterly and may be returned to us or increased
based on activity surrounding credits issued. Additional deposits of $907,653
are restricted by two banks as security for an outstanding term loan, lines of
credit and a letter of guarantee provided to a landlord for a facility lease.
These restricted cash balances will be reduced annually for rent payments and
for any repayments on lines of credit.
For fiscal 2003, cash used in operations totaled $2,833,189, consisting
primarily of the net loss for the year of $9,676,602 offset mainly by non-cash
expenses such as amortization ($6,080,763), non-cash interest ($720,486) and
impairment write-down of goodwill ($2,133,242). The net change in operating
components of working capital, excluding acquisitions, for fiscal 2003 used cash
of $602,839 primarily due to a decrease in current liabilities ($1,860,539)
partially offset by a decrease in accounts receivable ($1,119,483).
Net cash from investing activities during fiscal 2003 was $2,873,891.
In fiscal 2003, we acquired cash of $1,914,884 from acquisitions consummated
through share issuance. Additionally, $761,170 was generated as a release of
some of our restricted cash by the security holders.
Net cash used in financing activities was $1,024,132 for fiscal 2003.
Financing outflows consisted primarily of the repayment of bank debt of
$1,323,335, the repayment of loans to shareholders of $391,600, and capital
lease payments of $297,282. In fiscal 2003, we received $200,000 from a private
investor in exchange of issuance of common stock and warrants. Michael
Mullarkey, our Chief Executive Officer provided us with short-term loans in the
aggregate of $500,000 during fiscal 2003 and $750,000 during fiscal 2002. In
fiscal 2003 those loans were consolidated into a term loan maturing in five
years. The consolidated term loan is collateralized by certain inventory,
equipment, accounts receivable and other assets and bears interest at 8% per
annum. Under the consolidated term loan, we are required to make monthly
interest only payments during the first 24 months and monthly interest and
principal payments thereafter. As at May 31, 2003, the total amount of the
consolidated term loan was $1,287,