UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 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
WORKSTREAM INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Canada N/A
- ------------------------------- (IRS Employer Identification No.)
(State or Other Jurisdiction of
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)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes ____ No __X__
As of August 31, 2003, there were 22,223,249* common shares, without
par value, outstanding.
* Excluding 654,204 common shares held in escrow under acquisition agreements.
WORKSTREAM INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Unaudited Financial Statements
Unaudited Consolidated Balance Sheets as of
August 31, 2003 and May 31, 2003....................................2
Unaudited Consolidated Statements of Operations for
the Quarters Ended August 31, 2003 and 2002.........................3
Unaudited Consolidated Statements of Comprehensive Loss
for the Quarters Ended August 31, 2003 and 2002.....................4
Unaudited Consolidated Statements of Cash Flows
for the Quarters Ended August 31, 2003 and 2002.....................5
Notes to Unaudited Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk............20
Item 4. Controls and Procedures...............................................21
Part II. Other Information
Item 1. Legal Proceedings.....................................................21
Item 2. Changes in Securities and Use of Proceeds ............................21
Item 6. Exhibits and Reports on Form 8-K .....................................23
Signatures......................................................................................24
1
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
WORKSTREAM INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(UNITED STATES DOLLARS)
AUGUST 31, MAY 31,
2003 2003
------------ ------------
ASSETS
CURRENTASSETS
Cash and cash equivalents $ 477,466 $ 255,173
Restricted cash 1,221,552 1,307,439
Short-term investments 112,703 38,419
Accounts receivable, net of allowance for doubtful 1,170,145 933,889
accounts of $55,969 (May 31, 2003 - $55,828)
Prepaid expenses 423,724 133,551
Other assets 402,492 201,877
------------ ------------
3,808,082 2,870,348
CAPITAL ASSETS 905,631 1,138,276
OTHER ASSETS 121,809 143,500
ACQUIRED INTANGIBLE ASSETS 7,904,220 9,082,926
GOODWILL 17,446,585 17,383,437
------------ ------------
$ 30,186,327 $ 30,618,487
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,882,557 $ 1,909,896
Accrued liabilities 1,032,117 1,093,133
Accrued exit costs 44,570 117,702
Line of credit 518,681 593,452
Accrued compensation 542,947 443,144
Current portion of convertible notes 619,459 449,071
Current portion of long-term obligations 28,863 31,662
Current portion of related party obligation 184,634 178,623
Current portion of capital lease obligations 76,700 97,882
Deferred revenue 1,312,938 1,367,362
------------ ------------
6,243,466 6,281,927
DEFERRED INCOME TAX LIABILITY 2,168,468 2,607,981
CAPITAL LEASE OBLIGATIONS 59,241 73,316
LEASEHOLD INDUCEMENTS 135,976 142,274
LONG-TERM OBLIGATIONS 79,374 85,243
RELATED PARTY OBLIGATIONS 2,398,831 2,403,407
------------ ------------
11,085,356 11,594,148
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued and outstanding, no par value - 22,223,249
common shares (May 31, 2003 - 19,951,570) 48,467,521 47,158,583
Additional paid-in capital 5,239,850 4,721,516
Accumulated other comprehensive loss (894,397) (893,316)
Accumulated deficit (33,712,003) (31,962,444)
------------ ------------
19,100,971 19,024,339
------------ ------------
$ 30,186,327 $ 30,618,487
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
2
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNITED STATES DOLLARS)
Three Months Ended August 31,
2003 2002
------------ ------------
REVENUE $ 4,178,514 $ 4,645,714
COST OF REVENUES (exclusive of
depreciation, shown below) 443,350 878,997
------------ ------------
GROSS PROFIT 3,735,164 3,766,717
------------ ------------
EXPENSES
Selling and marketing 1,067,331 2,051,149
General and administrative 2,424,432 2,553,944
Research and development 111,028 308,240
Amortization and depreciation 1,404,436 1,256,366
------------ ------------
5,007,227 6,169,699
------------ ------------
OPERATING LOSS (1,272,063) (2,402,982)
------------ ------------
OTHER INCOME AND (EXPENSES)
Interest and other income 1,697 12,932
Interest and other expense (919,665) (158,608)
------------ ------------
(917,968) (145,676)
------------ ------------
LOSS BEFORE INCOME TAX (2,190,031) (2,548,658)
Recovery of deferred income taxes 439,513 331,869
Other income tax recovery 959 -
------------ ------------
NET LOSS FOR THE PERIOD $ (1,749,559) $ (2,216,789)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 21,777,379 16,983,809
============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.08) $ (0.13)
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
3
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNITED STATES DOLLARS)
Three Months Ended August 31,
2003 2002
------------ ------------
Net loss for the period $(1,749,559) $(2,216,789)
Other comprehensive loss:
Cumulative translation adjustment (net of tax of $nil) (1,081) 1,648
------------ ------------
Comprehensive loss for the period $(1,750,640) $(2,215,141)
============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
4
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNITED STATES DOLLARS
Three Months Ended August 31,
2003 2002
----------- -----------
CASH USED IN OPERATING ACTIVITIES
Net loss for the period $(1,749,559) $(2,216,789)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation 1,399,872 1,249,819
Non-cash interest on convertible notes and notes payable 833,423 61,721
Recovery of deferred income taxes (439,513) (331,869)
Net change in operating components of working capital (365,284) (367,880)
----------- -----------
(321,061) (1,604,998)
----------- -----------
CASH (USED IN) FROM INVESTING ACTIVITIES
Acquisition of capital assets - (34,598)
Cash (paid)/ acquired in business acquisitions (169,971) 1,649,671
(Increase)/decrease in restricted cash 74,658 (179,475)
(Purchase)/sale of short-term investments (74,658) 213,494
----------- -----------
(169,971) 1,649,092
----------- -----------
CASH FROM (USED IN) FINANCING ACTIVITIES
Proceeds from share and warrants issuance 950,000 13,207
Costs related to issuance of convertible promissory notes - (82,197)
Capital lease payments (42,091) (53,023)
Shareholder loan repayment (52,500) (143,300)
Repayment of bank debt (67,316) (156,302)
Proceeds from bank financing - 213,048
Repayment related to lease settlement (75,000) -
Long-term debt repayments (7,342) -
----------- -----------
705,751 (208,567)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES 7,574 (5,536)
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENT FOR THE PERIOD 222,293 (170,009)
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE PERIOD 255,173 1,297,656
----------- -----------
CASH AND CASH EQUIVALENTS, END OF
THE PERIOD $ 477,466 $ 1,127,647
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ 133,490 $ 91,101
Non-cash payments to consultants $ 331,250 -
The accompanying notes are an integral part of these unaudited financial
statements.
5
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: NATURE OF OPERATIONS
Workstream Inc. ("Workstream" or the "Company"), formerly known as
E-Cruiter.com Inc., is a provider of Web-enabled tools and professional services
for human capital management ("HCM"). The Company offers a diversified suite of
high-tech and high-touch services aimed at addressing the full life cycle of the
employer-employee relationship. Workstream's HCM technology backbone enables
companies to streamline the management of enterprise human processes, including
recruitment, assessment, retention, deployment and career transitions.
Note 2: BASIS OF PRESENTATION
The consolidated interim unaudited financial statements included herein
have been prepared by management, without audit, in accordance with United
States generally accepted accounting principles. All amounts presented in these
financial statements are presented in United States dollars unless otherwise
noted. The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. The earnings of the subsidiaries are included
from the date of acquisition. At August 31, 2003, the Company's subsidiaries are
Workstream USA, Inc., 3451615 Canada Inc., Paula Allen Holdings, Inc.,
OMNIpartners, Inc., RezLogic, Inc., 6FigureJobs.com, Inc., Icarian, Inc. and
Xylo, Inc.
These unaudited financial statements should be read in conjunction with
the Company's most recent annual financial statements for the year ended May 31,
2003. These interim unaudited financial statements are prepared following
accounting policies consistent with the Company's financial statements for the
year ended May 31, 2003. In management's opinion, all adjustments necessary for
a fair presentation are reflected in the interim periods presented. All
adjustments are of a normal, recurring nature.
Note 3: ACQUISITION TRANSACTIONS
During the twelve months ended May 31, 2003 ("fiscal 2003") and the
twelve months ended May 31, 2002 ("fiscal 2002"), the Company significantly
expanded its operations through the completion of three and six acquisitions,
respectively, of companies that offered services that allow the Company to
provide a full spectrum of HCM solutions. The acquisitions completed in fiscal
2003 consisted of acquiring 100% of the outstanding shares of Icarian, Inc. and
Xylo, Inc. In addition, the Company acquired certain assets and liabilities of
PureCarbon, Inc. The acquisitions completed in fiscal 2002 consisted of
acquiring 100% of the outstanding shares of the following companies: Paula Allen
Holdings and its subsidiaries, OMNIpartners and its affiliates, RezLogic, and
6FigureJobs.com . These acquisitions, and the acquisitions completed in fiscal
2003, were made in consideration of issuance of our common shares at the time of
the acquisition, as well as additional common shares held in escrow or
potentially issuable to be released or issued upon achievement of certain profit
and/or revenue targets. In addition, during fiscal 2002, the Company acquired
the technology and assets of Gonyea Career Marketing Inc., known as
ResumeXpress, in consideration of a cash amount. In fiscal 2002, the Company
also acquired the technology and assets of Tech Engine in exchange for the
assumption of a promissory note.
Contingent consideration relating to prior acquisitions
As of August 31, 2003, a total of 654,204 common shares were held in
escrow relating to prior acquisitions as further described below. This total
includes 323,625 common shares relating to 6FigureJobs.com as well as 330,579
common shares relating to Xylo. Management believes that those issues related to
the 6FigureJobs.com and Xylo acquisitions will not be released from escrow. In
addition to the escrowed shares, an estimated number of 316,456 common shares
6
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
are contingently issuable related to the PureCarbon acquisition, which
management believes will not be issued.
Pursuant to the purchase agreement for 6FiguresJobs.com, an additional
323,625 common shares were to be released from escrow and issued to the former
shareholders of 6FigureJobs.com provided that certain revenue and profit targets
for the twelve month period ending September 30, 2002 were achieved. The Company
determined that the revenue and profit targets were not achieved. However, the
representative of the former shareholders of 6FigureJobs.com requested an audit
to review the Company's calculations used in determining that the revenue and
profit targets were not achieved. Management continues to believe that the
targets were not met and that the shares currently held in escrow will be
cancelled. We have been named as defendants in a lawsuit with regards to the
escrow shares filed by Christopher Miller, the representative of the former
shareholders of 6FigureJobs.com. (See Part II, Item 1 under Legal Proceedings)
Pursuant to the purchase agreement for PureCarbon, the Company would
issue additional shares equal to $500,000 divided by the closing price of the
Company's common shares on or prior to August 15, 2003 should certain revenue
targets for the twelve month period ending June 30, 2003 be realized. As
required under the purchase agreement, an audit confirming whether the revenue
targets were met was required. The audit was completed in August 2003 and
confirmed that the targets were not met. Management therefore believes that
those common shares will not be issued. Currently the shareholder
representatives are reviewing the conclusions of the audit. As of August 31,
2003, based on the market price on August 15, 2003 of $1.58, 316,456 common
shares would be contingently issuable.
Pursuant to the purchase agreement for Xylo, an additional 330,579
common shares were to be released from escrow subject to achievement of certain
revenue targets for the twelve months ended August 31, 2003. Management has
determined that the revenue targets were not met and believes that those common
shares will be cancelled. Management has notified the escrow agent and
shareholder representative that the revenue targets were not met, and pursuant
to the agreement, is allowing a response time to expire in order to cancel the
shares.
Note 4: CAPITAL ASSETS
August 31, May 31,
2003 2003
----------- -----------
Furniture, equipment and leaseholds $ 1,378,581 $ 1,388,873
Office equipment 239,691 241,659
Computers and software 3,442,582 3,461,678
----------- -----------
5,060,854 5,092,210
Less accumulated amortization (4,155,223) (3,953,934)
----------- -----------
Net capital assets $ 905,631 $ 1,138,276
=========== ===========
7
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 5: ACQUIRED INTANGIBLE ASSETS
August 31, May 31,
2003 2003
------------ ------------
Customer base $ 3,559,543 $ 3,559,543
Acquired technologies 10,281,632 10,281,632
Trademarks, domain names and intellectual property 457,760 457,760
------------ ------------
Total cost 14,298,935 14,298,935
------------ ------------
Accumulated amortization:
Customer base (2,057,489) (1,760,860)
Acquired technologies (4,151,404) (3,292,215)
Trademarks, domain names and intellectual property (185,822) (162,934)
------------ ------------
Total accumulated amortization (6,394,715) (5,216,009)
------------ ------------
Net acquired intangible assets $ 7,904,220 $ 9,082,926
============ ============
Note 6: LINES OF CREDIT, RESTRICTED CASH AND SHORT-TERM INVESTMENTS
At August 31, 2003, the Company had an aggregate of $518,681
outstanding on a line of credit from the Bank of Montreal.
August 31, 2003 May 31, 2003
------------------ -------------------
Line of credit - Bank of Montreal $ 518,681 $ 593,452
================== ===================
The line of credit with the Bank of Montreal bears interest at the
bank's prime rate plus 1%. The Company is permitted to draw up to $1,000,000
(Canadian dollars) against this facility based on compensating balances on
deposit with the bank. The Company has drawn CDN $718,737 as of August 31, 2003.
The Company has provided collateral of CDN $830,000, leaving CDN $111,263
available to be drawn on this line.
At August 31, 2003, and May 31, 2003, a total of $1,221,552 and
$1,307,439, respectively, of cash and short-term deposits were pledged to the
institutions below as collateral for the line of credit, a term loan and a
letter of credit for a facility lease and therefore were restricted from the
Company's use:
August 31, 2003 May 31, 2003
----------------- ------------------
Bank of America - credit card reserve $ 399,786 $ 399,786
Bank of Montreal - Term loan, line of credit and
letter of credit for facility lease 821,766 907,653
----------------- ------------------
$ 1,221,552 $ 1,307,439
================= ==================
8
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 7: RELATED PARTY OBLIGATIONS
August 31, May 31,
2003 2003
---------- ----------
Note payable $ 33,838 $ 33,838
Deferred compensation 833,333 797,880
Shareholder loans 1,716,294 1,750,312
---------- ----------
2,583,465 2,582,030
Less: current portion 184,634 178,623
---------- ----------
$2,398,831 $2,403,407
========== ==========
The note payable to a related party is non-interest bearing and
repayable in monthly installments of $10,200 beginning in October 2001 and
ending in April 2003. As of August 31, 2003, the last three payments have not
been made due to a disagreement with the related party. This now has been
resolved and payments will be made monthly starting in September 2003.
During fiscal 2003, Michael Mullarkey, the Company's Chief Executive
Officer, agreed to defer until after June 1, 2004, a total of $797,880 in
compensation earned as of May 31, 2003, as well as any additional compensation
earned thereafter, with interest accruing on the balance at a rate of 8.0% per
annum. The agreement is extended each month for an additional month continuing
to keep the amounts due and outstanding for greater than 365 days. After June 1,
2004, Mr. Mullarkey and the Company will mutually agree on the repayment terms
of his deferred compensation. As of August 31, 2003, Mr. Mullarkey's total
deferred compensation was $833,333.
During fiscal years 2003 and 2002, the Company received $500,000 and
$750,000 respectively, in working capital loans from Mr. Mullarkey. These loans
accrued interest at 4.75%. In January 2003, the Company consolidated the loans
made by Mr. Mullarkey to the Company along with the interest accrued thereon
into a five year term loan. The consolidated term loan is collateralized by
certain inventory, equipment, accounts receivable and other assets. The
consolidated term loan balance at August 31, 2003 is $1,287,901 and bears
interest at 8% per annum. The Company is required to make monthly interest only
payments during the first 24 months and monthly interest and principal payments
beginning in January 2005. In addition, Mr. Mullarkey has agreed to provide the
Company with a $1,200,000 credit facility bearing interest at 8% per annum. With
respect to each draw against the credit facility, the Company is required to
make monthly interest only payments during the first 24 months from the draw
date and thereafter monthly interest and principal payments over a three year
period. The Company is allowed to draw against this credit facility as needed.
The balance of the shareholder loans consists of a term loan assumed as
part of the acquisition of Paula Allen Holdings which is non-interest bearing
and is repayable in quarterly installments of $52,500 beginning in April 2001
and ending in January 2006. The Company recorded the present value of these
shareholder notes at the time of the acquisition utilizing a 15% discount rate.
Imputed interest is charged to expense over the term to maturity.
Note 8: CAPITAL LEASE OBLIGATIONS
August 31, 2003 May 31, 2003
------------------- -----------------
Capital leases $ 135,941 $ 171,198
Less: current portion 76,700 97,882
------------------- -----------------
$ 59,241 $ 73,316
=================== =================
9
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Capital lease obligations relate to office equipment, computers and
software, and bear interest at rates that range from 7.5% to 15.1% per annum.
These leases mature at various times through October 2005.
Note 9: CONVERTIBLE NOTES
August 31, May 31,
2003 2003
----------- -----------
Convertible notes, face value at issue date $ 2,900,000 $ 2,900,000
Less: Amount allocated to detachable warrants (1,038,380) (1,038,380)
Amount allocated to beneficial
conversion feature (1,763,387) (1,763,387)
----------- -----------
Discounted value of convertible notes 98,233 98,233
Note conversion (800,000) (200,000)
Amortization of discount 1,321,226 550,838
----------- -----------
Convertible notes $ 619,459 $ 449,071
=========== ===========
During fiscal 2002, the Company issued 8% Senior Subordinated
Convertible Notes (the "Convertible Notes") with detachable warrants as further
described below. The total gross proceeds received upon issuance of the
convertible notes totaling $2,900,000 was allocated between the convertible debt
and warrants based on their relative fair values. The fair value of the
detachable warrants was calculated using the Black Scholes pricing model.
Additionally, the Convertible Notes have a non-detachable conversion feature
where the fair value of the underlying equity securities exceeds the conversion
price of the debt ("beneficial conversion feature"). The value of the beneficial
conversion feature is measured as the excess of the fair value of the underlying
shares over the conversion price up to, but not exceeding, the net proceeds
received upon issuance of the Convertible Notes. The value ascribed to the
beneficial conversion feature is recorded as paid-in capital. The total discount
on the Convertible Notes is recognized as interest expense using the effective
yield method over the two year term to maturity of the Convertible Notes.
At the original date of issuance, the detachable warrants entitled the
Warrant holders to purchase 658,000 common shares at an exercise price of $3.70
per share, subject to adjustment upon the occurrence of certain dilution events.
As a result of our sales of securities, as of August 31, 2003 the Warrant
holders are entitled to warrants to purchase 733,619 common shares at an
exercise price of $3.32 per share. The warrants have a five year term.
The Convertible Notes are convertible into a class of preferred shares
designated Class A Series A Convertible Preferred Shares, no par value per share
(the "Series A Shares"). The conversion price of the Convertible Notes into
Series A Shares is $100 per share, subject to adjustment upon the occurrence of
certain events. The Series A Shares are convertible into a number of common
shares determined by dividing $100 by a floating conversion price based on the
market price of our common shares, provided that the conversion price cannot
exceed the lesser of $0.75 or 80% of the market price of our common shares for
the five day period immediately preceding conversion. The conversion price for
the Series A Shares into common shares is subject to further adjustment upon the
occurrence of certain events. At the election of the holder, the Convertible
Notes may be converted directly into our common shares at a conversion price
equal to 80% of the average closing price of our common shares for the five day
period before such conversion.
10
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
During May 2003, the Company raised additional capital by issuing an
individual 266,666 common shares at $0.75 per share and warrants to purchase
133,333 common shares at an exercise price of $1.50 per share, subject to
adjustment upon the occurrence of certain events. In May 2003 and June 2003, the
Company also entered into agreements with an individual and two institutional
investors whereby the Company agreed to sell and they agreed to purchase an
aggregate of 1,266,668 common shares at $0.75 per share and warrants to purchase
an aggregate of 500,001 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 and July
2003. As a result of these sales, any future conversion of Series A Shares will
be made at a price per share not to exceed the lesser of $0.75 or 80% of the
market price of our common shares for the five day period immediately preceding
conversion.
During fiscal year 2003, certain holders of the Company's Convertible
Notes exercised their option to convert a portion of the Convertible Notes. This
resulted in a conversion of $200,000 of the Convertible Notes into Series A
Shares, which were immediately converted into common shares. As a result of the
foregoing conversions, 210,525 common shares were issued at a conversion price
equal to 80% of the average market price of the Company's common shares for the
five days prior to conversion, resulting in a conversion price of $0.95 per
share.
In June 2003, certain holders of the Company's Convertible Notes
exercised their option to convert a portion of the Convertible Notes. This
resulted in a conversion of $600,000 of the Convertible Notes into Series A
Shares, which were immediately converted into common shares. As a result of the
foregoing conversions, 800,000 common shares were issued at a conversion price
of $0.75 per share. The Convertible Notes mature $1,500,000 in April, 2004, and
$600,000 in May 2004.
Note 10: COMMON SHARES AND WARRANTS
The authorized share capital consists of an unlimited number of no par
value common shares. The Company has 22,223,249 shares that are outstanding as
of August 31, 2003 (May 31, 2003 - 19,951,570). As of August 31, 2003, an
additional 654,204 common shares were being held in escrow as a result of the
terms of acquisitions and an estimated 316,456 are contingently issuable related
to the PureCarbon acquisition. (See note 3) As at August 31, 2003 there were no
Class A Preferred Shares or Series A Shares outstanding.
In June 2003, certain holders of the Company's 8% senior Subordinated
Convertible Notes exercised their option to convert a portion of the Convertible
Notes. This resulted in a conversion of $600,000 of the Convertible Notes into
Series A Convertible Preferred Shares, which were immediately converted into
common shares. As a result of the foregoing conversions, 800,000 common shares
were issued at a conversion price equal to $0.75 per share.
In June 2003 and July 2003, the Company received $950,000 from an
individual and two institutional investors in exchange for the issuance of an
aggregate of 1,266,668 common shares at a purchase price equal to $0.75 per
share and warrants to purchase an aggregate of 500,001 common shares at an
exercise price of $1.50 per share, subject to adjustment upon the occurrence of
certain events. The proceeds from these funds will be used for potential
acquisitions and for working capital needs.
In June 2003, the Company entered into a consulting agreement with
Stern & Co. whereby the Company agreed to issue 125,000 common shares to Stern &
Co. in consideration of Stern & Co. providing consulting services to the
Company.
In June 2003, the Company entered into an agreement with The Research
Works, Inc. whereby we agreed to issue an aggregate of 107,000 common shares to
The Research Works, Inc. in consideration of The Research Works, Inc. providing
certain research services to the Company.
In August 2003, a shareholder surrendered and the Company subsequently
cancelled 26,989 common shares as a reimbursement for legal fees owed to the
Company.
11
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Note 11: SEGMENTED AND GEOGRAPHIC INFORMATION
The following is a summary of the Company's operations by business
segment and by geographic region for the three month periods ended August 31,
2003 and August 31, 2002.
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
BUSINESS SEGMENT
THREE MONTHS ENDED
AUGUST 31, 2003
Revenue $ 2,672,814 $ 1,505,700 $ 4,178,514
Expenses 3,246,289 1,788,498 5,034,787
------------ ------------ ------------
Business segment loss $ (573,475) $ (282,798) (856,273)
============ ============
Corporate overhead, other revenues
and expenses (893,286)
------------
Net loss $ (1,749,559)
============
AS AT AUGUST 31, 2003
Business segment assets $ 3,372,037 $ 129,452 $ 3,501,489
Intangible assets 7,483,451 420,770 7,904,221
Goodwill 9,633,247 7,813,338 17,446,585
------------ ------------ ------------
$ 20,488,735 $ 8,363,560 28,852,295
============ ============
Assets not allocated to business
segments 1,334,032
------------
Total assets $ 30,186,327
============
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------- ------------- -------------
THREE MONTHS ENDED
AUGUST 31, 2002
Revenue $ 2,303,761 $ 2,341,953 $ 4,645,714
Expenses 3,610,072 2,502,796 6,112,868
------------- ------------- -------------
Business segment loss $ (1,306,311) $ (160,843) (1,467,154)
============= =============
Corporate overhead, other revenues
and expenses (749,635)
-------------
Net loss $ (2,216,789)
=============
12
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AS AT AUGUST 31, 2002
Business segment assets $ 7,164,693 $ 387,563 $ 7,552,256
Intangible assets 10,713,259 730,064 11,443,323
Goodwill 11,050,753 7,073,084 18,123,837
------------ ------------ ------------
$ 28,928,705 $ 8,190,711 37,119,416
============ ============
Assets not allocated to business
segments 1,591,731
------------
Total assets $ 38,711,147
============
CANADA USA TOTAL
------------- ------------- -------------
GEOGRAPHY
THREE MONTHS ENDED
AUGUST 31, 2003
Revenue $ 444,370 $ 3,734,144 $ 4,178,514
Expenses 578,533 4,841,911 5,420,444
------------- ------------- -------------
Geographical loss $ (134,163) $ (1,107,767) (1,241,930)
============= =============
Other revenues and expenses (459,213)
-------------
Net loss $ (1,701,143)
=============
AS AT AUGUST 31, 2003
Geographic segment assets $ 2,725,195 $ 27,461,132 $ 30,186,327
============= ============= =============
THREE MONTHS ENDED
AUGUST 31, 2002
Revenue $ 758,417 $ 3,887,297 $ 4,645,714
Expenses 1,083,924 5,961,945 7,045,869
------------- ------------- -------------
Geographical loss $ (325,507) $ (2,074,648) (2,400,155)
============= =============
Other revenues and expenses 183,366
-------------
Net loss $ (2,216,789)
=============
CANADA USA TOTAL
------------- ------------- -------------
AS AT AUGUST 31, 2002
Geographic segment assets $ 4,434,254 $ 34,276,893 $ 38,711,147
============= ============= =============
Note 12: EARNINGS PER SHARE
For all the periods presented, diluted net loss per share equals basic
net loss per share due to the antidilutive effect of employee stock options,
warrants and escrowed shares. The following outstanding instruments could
potentially dilute basic earnings per share in the future:
13
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AUGUST 31, 2003
Stock options 1,599,798
Escrowed shares 654,204
Convertible Notes 1,237,009
PureCarbon contingent shares
316,456
Warrants issued to investors 633,334
Warrants issued with Convertible Notes 658,000
Underwriter warrants 440,000
---------------------------------
Potential increase in number of shares
from dilutive instruments 5,538,801
=================================
The weighted average price of the options exercisable at August 31, 2003 was
$2.27
Note 13: STOCK BASED COMPENSATION PLANS
In June, 2003, we granted our non-employee directors, Cholo Manso,
Thomas Danis, Matthew Ebbs, Michael Gerrior and Arthur Halloran, options to
purchase 40,000, 40,000, 40,000, 23,000 and 20,000 of our common shares,
respectively. These options have an exercise price of $0.98 per share and vest
in three equal annual installments commencing on the first anniversary of the
grant date. These options terminate on the fifth anniversary of the grant date.
Pro forma information regarding compensation expense related to
employee stock options is required by SFAS No. 123 and SFAS No. 148, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of those statements. The fair value of options
granted was estimated at the date of grant using the Black Scholes option
pricing model with the following assumptions:
Three Months Ended August 31,
2003 2002
-------------- ----------------
Weighted average risk free interest rates 2.37% 3.25%
Expected dividend yield 0% 0%
Expected volatility 111% 115%
Expected lives (in years) 3.5 3.5
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense ratably over the option's vesting period.
Because the determination of the fair value of all options is based on the
assumptions described in the preceding paragraph, and because additional option
grants are expected to be made in future periods, this pro forma information is
not likely to be representative of the pro forma effects on reported net income
or loss for future years.
The following reflects the impact on results of operations if the
Company had recorded additional compensation expense relating to the employee
stock options:
14
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended August 31,
2003 2002
------------- -------------
Net loss, as reported $ (1,749,559) $ (2,216,789)
Estimated incremental share based
compensation expense (175,930) (249,692)
------------- -------------
Pro forma net loss $ (1,925,489) $ (2,466,481)
============= =============
Weighted average common shares
outstanding during the period 21,777,379 16,983,809
============= =============
Basic and diluted loss per share, as
reported $ (0.08) $ (0.13)
============= =============
Pro forma basic and diluted loss
per share $ (0.09) $ (0.15)
============= =============
Note 14: SUBSEQUENT EVENTS
In September, 2003, the Company acquired certain assets of Perform,
Inc., a Delaware corporation, in connection with Perform, Inc.'s voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. As
consideration for the sale, the Company issued Perform, Inc. 189,873 of its
common shares valued at $300,000 and cash in an amount equal to $450,000.
Perform, Inc. designs, develops and markets Human Resource Information Systems
and Performance Management Information Systems for mid-size and Global 2000
companies. During the first quarter 2004, we advanced $169,971 in cash to
Perform, which was set off against the cash portion of the purchase price.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The forward-looking statements contained in this report
involve risks and uncertainties. The statements contained in this report that
are not purely historical are forward-looking statements. Forward-looking
statements include, without limitation, statements containing the words
"anticipates," "believes," "expects," "intends," "future," and words and terms
of similar substance express management's belief, expectations or intentions
regarding future performance. 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 in our Annual Report on Form 10-K and other factors
and uncertainties contained in our other filings with the Securities and
Exchange Commission. You are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of the date they were made. We
disclaim any obligation or undertaking to provide any updates or revisions to
any forward-looking statement to reflect any change in our expectations or any
change in events, conditions or circumstances on which the forward-looking
statement is based.
The following discussion and analysis should be read in conjunction
with our unaudited consolidated financial statements and accompanying notes for
the three month period ended August 31, 2003. All figures are in United States
dollars, except as otherwise noted.
OVERVIEW
We are a leading provider of human capital management (HCM) services.
We offer a combination of high-tech and high-touch services, giving customers
the ability to manage their complete recruiting and outplacement needs on a
single Workstream platform.
We have 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,
recruiting research, online exchange, and employee management and retention
system services. The Career Transition Services segment consists of outplacement
services.
Fiscal year 2003 and fiscal year 2002 resulted in significant changes
in our business. We completed three and six acquisitions during fiscal year 2003
and fiscal year 2002, respectively. (See Note 3) Subsequent to the acquisitions,
we concentrated on integrating the acquired entities and expanding the reach of
the existing business. These acquisitions have enabled us to increase our
service offerings. 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.
CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies relate to the assessment of
goodwill impairment and impairments in intangible 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 prepared by
projecting results for five years making different assumptions for each business
unit. Assumptions are made with regard to the economy direction, revenue growth,
16
gross profit margins and operating expense estimates. 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. The valuation of acquired technology is based on the cost
incurred to develop the software that is then licensed to our clients.
Consideration is also given to the useful life and the technology's continued
demand in the marketplace. Changes in circumstances impacting other assumptions
used to value intangible assets could also lead to future impairments.
REVENUES
Consolidated revenues were $4,178,514 for the three months ended August
31, 2003 ("first quarter 2004") compared to $4,645,714 for the three months
ended August 31, 2002 ("first quarter 2003"), a decrease of $467,200 or 10%.
Revenues other than from the companies we acquired during and subsequent to
first quarter 2003 were $2,965,647 for first quarter 2004 compared to $3,879,261
for first quarter 2004. The overall decrease in revenues is mainly due to lower
Career Transition Service revenues ( 36% lower than first quarter 2003) caused
by our consolidation of office locations in the first six months of fiscal 2003
as well as lower sales as a result of a change in marketing strategy.
Career Transition Service revenues for first quarter 2004 were
$1,505,700 compared to $2,341,953 in first quarter 2003. The main reason for the
decline in Career Transition Service revenue was due to the closure of office
locations during the first six months of fiscal 2003 as well as lower sales as a
result of a change in marketing strategy in order to generate more profitable
business. The office 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 Service revenues for first quarter 2004 were
$2,672,814 compared to $2,303,761 for first quarter 2003. The increase in
revenues was primarily due to the timing of the acquisitions completed during
and subsequent to first quarter 2003. This increase was partially offset by a
decrease in recruitment research and software sales which we believe is due to
the continued weak economy causing fewer companies hiring additional staff.
COST OF REVENUES
Cost of revenues for first quarter 2004 were $443,350 compared to
$878,997 for first quarter 2003, a decrease of $435,647 or 50%. Cost of revenues
other than from the companies we acquired during and subsequent to first quarter
2003 were $326,450 for first quarter 2004 compared to $685,259 for first quarter
2003. Career Transition Service cost of revenues accounted for $172,591 and
Enterprise Recruiting Service cost of revenues accounted for $270,759 of the
total cost of revenues for first quarter 2004. Cost of revenues for the Career
Transition Services segment decreased $203,786 as a result of lower revenues and
cost of revenues for the Enterprise Recruiting Service decreased $231,861 as a
result of lower costs in recruitment software partially offset by cost
associated with the acquisitions completed during and subsequent to first
quarter 2003. Management has concentrated in an effort to eliminate redundant
operations.
GROSS PROFITS
Consolidated gross profits were $3,735,164 for first quarter 2004 or
89% of revenues compared to $3,766,717 or 81% of revenues for the first quarter
2003. Gross profit other than from the companies we acquired during and
subsequent to first quarter 2003, were $2,639,197 or 89% of revenues for first
quarter 2004 compared to $3,194,002 or 82% of revenues for first quarter 2003.
17
Career Transition Services gross profit was $1,333,110 or 89% of Career
Transition Services revenues and Enterprise Recruiting Services gross profit
represented $2,402,054 or 90% of Enterprise Recruiting Services revenues for
first quarter 2004. The improvement in gross profit as a percent of revenues is
due to the efforts to eliminate redundant operations and costs and to pursue
more profitable business.
OPERATING EXPENSES
Total operating expenses were $5,007,227 for first quarter 2004,
compared to $6,169,699 for first quarter 2003, a decrease of $1,162,472 or 19%.
Total Operating expenses other than from the companies we acquired during and
subsequent to first quarter 2003 were $3,150,347 for first quarter 2004 compared
to $4,623,801 for first quarter 2003.The primary reason for the overall decline
in operating expenses is the consolidation of operating functions, partially
offset by additional expense of $881,178 related to due to the timing of the
acquisitions completed subsequent to the beginning of first quarter 2003 and
subsequent to the end of first quarter 2003.
SELLING AND MARKETING
Selling and marketing expenses were $1,067,331 for first quarter 2004
compared to $2,051,149 for first quarter 2003, a decrease of $983,818 or 48%.
Selling and marketing expenses other than from the companies we acquired during
and subsequent to first quarter 2003 were $1,028,322 for first quarter 2004
compared to $1,899,995 for first quarter 2003. The overall decrease in selling
and marketing expense is mainly attributed to a reduction in advertising expense
($609,422) and a reduction in employee costs ($356,078). Advertising was reduced
by $456,544 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 Recruitment Services segment by $152,878
by implementing a more direct sales approach compared to an indirect approach
used by prior management of the acquired companies and initially continued after
the acquisitions.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,424,432 for first quarter
2004, compared to $2,553,944 for first quarter 2003, a decrease of $129,512 or
5%. General and administrative expenses other than from the companies we
acquired during and subsequent to first quarter 2003 were $1,650,589 for first
quarter 2004 compared to $2,078,006 for first quarter 2003. The overall decrease
in expenses was a combination of a $348,012 increase due to due to the timing of
the acquisitions completed subsequent to the beginning of first quarter 2003 and
subsequent to the end of first quarter 2003, and a $507,655 reduction associated
with the elimination of redundant general and administrative expenses.
RESEARCH AND DEVELOPMENT
Research and development costs were $111,028 for first quarter 2004
compared to $308,240 for first quarter 2003, a decrease of $197,212 or 64%.
Research and development costs other than from the companies we acquired during
and subsequent to first quarter 2003 were $31,955 for first quarter 2004
compared to $123,620 for first quarter 2003. The overall decline in research and
development costs is primarily due to 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.
Since fiscal 2002, most of our research and development efforts have been
incurred in the Enterprise Recruiting Services segment.
18
DEPRECIATION/AMORTIZATION EXPENSE
Depreciation and amortization expenses were $1,404,436 for first
quarter 2004, compared to $1,256,366 for first quarter 2003, an increase of
$148,070 or 12%. Depreciation and amortization expenses other than from the
companies we acquired during and subsequent to first quarter 2003 were $439,482
for first quarter 2004 compared to $522,181 for first quarter 2003. Amortization
of acquired intangibles arising from acquisitions made during and subsequent to
first quarter 2003 accounted for $369,124 of the increase in amortization. This
increase in amortization expense was partially offset by lower depreciation
expense due to the disposal of certain assets in connection with the termination
of a lease of certain real property formerly leased to Icarian and certain
assets other assets becoming fully amortized.
INTEREST INCOME/EXPENSE
Interest income was $1,697 for first quarter 2004 compared to $12,932
for first quarter 2003, a decrease of $11,235 or 87%. Interest expense was
$919,665 for first quarter 2004, compared to $158,608 for first quarter 2003.
The increased interest expense was mainly due to interest expense incurred as a
result of a non-cash charge of $770,387 for amortization of the discount related
to the conversion of $600,000 of 8% Senior Subordinated Convertible Notes and
the accretion of the Notes to their current face value.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2003, we had $1,811,721 in cash, cash equivalents,
restricted cash and short-term investments. We have made significant investment
in acquiring new service lines which has reduced available cash and increased
long-term debt. Furthermore, capital requirements have exceeded cash flows from
operations in the quarter. As of August 31, 2003, $1,221,552 of these cash and
short- term investment balances were restricted from use because they were
collateral for debt, leases and a letter of guarantee. These restricted cash
balances could be reduced in the future by lease payments, any repayments on
lines of credit and improvement in the return rate on credit card charges
accepted by us for our services.
For first quarter 2004, cash used in operations totaled $321,061,
consisting primarily of the net loss for the period of $1,749,559, offset by
non-cash expenses such as depreciation, amortization, and non-cash interest. Our
working capital deficiency decreased to $2,435,384 as of August 31, 2003, a
decrease of $976,195 from May 31, 2003 as a result of cash received from
investors, higher prepaid balances as a result of payments to consultants,
higher other assets due to cash advanced related to the Perform acquisition, and
higher receivables.
Net cash used in investing activities during first quarter 2004, was
$169,971 due to cash advancements made related to the Perform acquisition.
Net cash generated by financing activities was $705,751 for first
quarter 2004. We received $950,000 in cash from an individual and two
institutional investors upon the issuance of common shares. Financing outflows
consisted primarily of the payments of $75,000 related to a lease settlement,
repayment of bank debt of $67,316, repayment of shareholder loans $52,500, and
payments for capital leases $42,091.
We have had operating losses since our inception and have had negative
cash flow from operations for first quarter 2004. However, management believes
the elimination of redundancies in the companies acquired in fiscal 2002 and
2003, the consolidation of ongoing operations and reductions in research and
development efforts previously discussed, will improve cash flow in the future.
We believe this is already reflected in the fact that the cash flow used in
operations of $321,061 includes a net repayment of $365,284 of short term
liabilities, thereby improving our working capital position. Michael Mullarkey,
our Chief Executive Officer, provided us with $500,000 and $750,000 in short
term loans during fiscal 2003 and fiscal 2002, respectively. In January 2003,
those loans were consolidated into a term loan maturing in five years. The
consolidated term loan is collaterized 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 beginning
19
in January 2005. As of August 31, 2003, the total amount of the consolidated
term loan was $1,287,901. In addition, Mr. Mullarkey has agreed to provide us
with an additional $1,200,000 credit facility bearing interest at 8% per annum.
With respect to each draw against the credit facility, we are required to make
monthly interest only payments during the first 24 months from the draw date and
thereafter monthly interest and principal payments over a three year period. We
are allowed to draw against this credit facility as needed. Mr. Mullarkey also
agreed to defer until after June 1, 2004, a total of $797,880 in compensation
earned as of May 31, 2003, as well as any additional compensation earned
thereafter, with interest accruing on the balance at a rate of 8% per annum. The
agreement is extended each month for an additional month continuing to keep the
amounts due and outstanding for greater than 356 days. After June 1, 2004, Mr.
Mullarkey and Workstream will mutually agree on the repayment terms of his
deferred compensation. As of August 31, 2003, total deferred compensation was
$833,333. Management believes this credit facility and compensation deferral
provided by Mr. Mullarkey, and the closure of offices and reduction of costs
made in fiscal 2002 and fiscal 2003, along with further consolidation of cost
centers and elimination of redundancies will result in cash flows from
operations which, together with current cash reserves, will be sufficient to
meet our working capital and capital expenditure requirements through August 31,
2004.
As of August 31, 2003, we had Convertible Notes with an outstanding
balance of $2.1 million. The Convertible Notes mature $1.5 million in April 2004
and $.6 million in May 2004. We believe that the holders of the Convertible
Notes will convert the Notes into Series A Preferred shares or common shares
before maturity, however, if they do not, we will be required to repay any
outstanding balance remaining at the maturity date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are primarily exposed to market risks associated with fluctuations
in interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
Our exposure to interest rate fluctuations relates primarily to our
short-term investment portfolio and our bank loans. We invest our surplus cash
in an investment trust established by a Canadian chartered bank and in a
Certificate of Deposit in a bank in the United States. The investment trust
holds various short-term, low-risk instruments, and can be withdrawn without
penalty at any time. The interest income from these investments is subject to
interest rate fluctuations which our management believes will not have a
material impact on our financial position.
We have established a CDN $1,000,000 line of credit with the Bank of
Montreal which bears interest at the bank's prime rate plus 1%. We have drawn
CDN $718,737 on this facility as of August 31, 2003. We can draw an additional
CDN $111,263 before additional collateral would be required. We also have a term
loan with the bank in the amount of CDN $149,985 as of August 31, 2003. The term
loan bears interest at the bank's prime rate plus 2%. Additionally, we have a
letter of credit issued in May 2002 as collateral on leased facilities in the
amount of CDN $270,000 that will renew annually. We pay an annual fee of 1.2% on
this letter of credit.
We also have a term loan and a credit facility from Michael Mullarkey,
our Chief Executive Officer, and Convertible Notes, which all bear interest at
8.0% per annum. The terms of these financing instruments are fixed and therefore
do not expose us to interest rate fluctuations.
The majority of our interest rates are fixed, and therefore we have
limited exposure to risks associated with interest rate fluctuations.
The impact on net interest income of a 100 basis point adverse change
in interest rates for the quarter ended August 31, 2003 would have been less
than $14,000.
20
FOREIGN CURRENCY RISK
We have monetary assets and liability balances denominated in Canadian
Dollars. As a result, fluctuations in the exchange rate of the Canadian dollar
against the U.S. dollar will impact our reported net asset position. A 10%
change in foreign exchange rates would result in a change in our reported net
asset position of approximately $258,000.
ITEM 4. CONTROLS AND PROCEDURES
As of August 31, 2003, our management, with the participation of our
Chief Executive Officer and Chief Financial Officer carried out an evaluation of
the effectiveness of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There were no changes during the quarter
ended August 31, 2003 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 2003, we were named as a defendant in a lawsuit filed by
Christopher Miller, the representative of the former shareholders of our
wholly-owned subsidiary 6FigureJobs.com, Inc., and 6FigureJobs in the United
States District Court for the District of Connecticut. We acquired 6FigureJobs
in October 2001 via merger. The complaint alleges, among other things, that
Workstream breached the merger agreement and the escrow agreement entered into
in connection with the merger. The escrow agreement provides that 323,625 common
shares of Workstream are to be held in escrow as a source of payment for
breaches of the merger agreement and the payment of an earnout if certain
revenue and profit targets were achieved by 6FigureJobs for the twelve months
ended September 30, 2002. The plaintiffs allege that one of the profit targets
was achieved by 6FigureJobs entitling the plaintiffs to receive 20% of the
shares held in escrow and that the plaintiffs are entitled to the other shares
remaining in escrow because Workstream breached its obligation to operate
6FigureJobs in a manner consistent with the merger agreement. Perley-Robertson,
Hill & McDougall LLP, our Canadian counsel and the escrow agent under the escrow
agreement, was also named a defendant in the lawsuit. The plaintiffs also seek
compensatory, statutory and punitive damages as well as attorney's fees and
other costs. Management will defend this action vigorously as it believes that
the revenue and profit targets were not met and that the escrow agreement and
merger agreement were not breached.
We are also 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In June 2003, Crestview Capital Fund, L.P. and its affiliates that hold
our 8% Senior Subordinated Convertible Notes converted an aggregate of $600,000
of the notes into 6,000 of our Class A Series A Convertible Preferred Shares, no
par value per share (the "Series A Shares"), at a conversion price of $100 per
Series A Share. Immediately upon converting the notes into Series A Shares,
Crestview Capital Fund, L.P. and its affiliates converted all 6,000 Series A
Shares into an aggregate of 800,000 common shares. The common shares were issued
at a conversion price equal to $0.75 per share. The Series A Shares and the
common shares were issued to Crestview Capital Fund, L.P. and its affiliates,
consisting of a limited number of accredited investors, in reliance on the
exemption from registration provided by Rule 506 promulgated under the
Securities Act of 1933.
21
In May 2003, we entered into agreements with an 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. These common shares and warrants that were issued in 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.
In June 2003, we entered into an agreement with an institutional
investor whereby we agreed to sell and the investor agreed to purchase 333,334
common shares at $0.75 per share and warrants to purchase 166,667 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 July 2003. These common shares and warrants that
were issued in July 2003 were sold to one accredited investor 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.
In June 2003, we entered into a consulting agreement with Stern & Co.
whereby we agreed to issue 125,000 common shares for $197,500 to Stern & Co. in
consideration of Stern & Co. providing consulting services to us. Stern & Co.
directed that the 125,000 common shares be issued in the name of Shai Stern. The
common shares were issued to one investor in a transaction not involving a
public offering. Such issuance was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933.
In June 2003, we entered into an agreement with The Research Works,
Inc. whereby we agreed to issue an aggregate of 107,000 common shares for
$133,750 to The Research Works, Inc. and certain individuals designated by The
Research Works, Inc. in consideration of The Research Works, Inc. providing
certain research services to us. The common shares issued to a limited number of
investors in a transaction not involving a public offering. Such issuance was
made in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933.
In September, 2003, we acquired certain assets of Perform, Inc., a
Delaware corporation, in connection with Perform, Inc.'s voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. As consideration
for the sale, we issued Perform, Inc. 189,873 of our common shares valued at
$300,000 and cash in an amount equal to $450,000. The common shares were issued
to one investor in a transaction not involving a public offering. Such issuance
was made in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
31.1. Certifications pursuant to Rule 13a-14(a)/15d 14(a).
32.1 Certification pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
During the quarter ended August 31, 2003, we filed a Current Report on
Form 8-K with respect to Items 7 and 9 on August 28, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Workstream Inc.
(Registrant)
DATE: October 10, 2003 By: /s/ Michael Mullarkey
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Michael Mullarkey,
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
DATE: October 10, 2003 By: /s/ David Polansky
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David Polansky,
Chief Financial Officer and Secretary
(Principal Financial Officer)