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 February 29, 2004
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
(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)
(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 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 April 8, 2004, there were 29,045,621* common shares, without par
value, outstanding.
* Excluding 323,625 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
February 29, 2004 and May 31, 2003...............................2
Unaudited Consolidated Statements of Operations for
each of the Three and Nine months Ended
February 29, 2004 and February 28, 2003..........................3
Unaudited Consolidated Statements of Comprehensive Loss
for each of the Three and Nine months Ended
February 29, 2004 and February 28, 2003..........................4
Unaudited Consolidated Statements of Cash Flows
for the Nine months Ended February 29, 2004
and February 28, 2003............................................5
Notes to Unaudited Consolidated Financial Statements................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................25
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........33
Item 4. Controls and Procedures............................................34
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds............................34
Item 6. Exhibits and Reports on Form 8-K ....................................35
Signatures...........................................................................38
1
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
WORKSTREAM, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(UNITED STATES DOLLARS)
FEBRUARY 29, 2004 MAY 31, 2003
----------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,806,285 $ 255,173
Restricted cash 2,759,392 1,307,439
Short-term investments 544,922 38,419
Accounts receivable, net of allowance for doubtful
accounts of $85,973 (May 31, 2003 - $55,828) 939,495 933,889
Prepaid expenses 448,612 133,551
Other assets 226,410 201,877
------------ ------------
8,725,116 2,870,348
CAPITAL ASSETS 959,098 1,138,276
OTHER ASSETS 95,850 143,500
ACQUIRED INTANGIBLE ASSETS 6,082,285 9,082,926
GOODWILL 17,472,946 17,383,437
------------ ------------
$ 33,335,295 $ 30,618,487
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,123,247 $ 1,909,896
Accrued liabilities 1,070,744 1,093,133
Accrued exit costs -- 117,702
Line of credit 1,765,550 593,452
Accrued compensation 528,436 443,144
Current portion of convertible notes -- 449,071
Current portion of long-term obligations 29,944 31,662
Current portion of related party obligation 163,578 178,623
Current portion of capital lease obligations 53,869 97,882
Deferred revenue 1,203,386 1,367,362
------------ ------------
5,938,754 6,281,927
DEFERRED INCOME TAX LIABILITY 1,289,443 2,607,981
CAPITAL LEASE OBLIGATIONS 36,058 73,316
LEASEHOLD INDUCEMENTS 130,304 142,274
LONG-TERM OBLIGATIONS 67,374 85,243
RELATED PARTY OBLIGATIONS 976,349 2,403,407
------------ ------------
8,438,282 11,594,148
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued and outstanding, no par value - 28,458,954
common shares (May 31, 2003 - 19,951,570) 56,911,035 47,158,583
Additional paid-in capital 5,595,681 4,721,516
Accumulated other comprehensive loss (1,018,506) (893,316)
Accumulated deficit (36,591,197) (31,962,444)
------------ ------------
24,897,013 19,024,339
------------ ------------
$ 33,335,295 $ 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 Three Months Nine Months Nine Months
Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUE $ 4,169,074 $ 4,142,244 $ 12,609,359 $ 13,763,386
COST OF REVENUES (exclusive of
depreciation, shown below) 356,490 688,953 1,189,247 2,586,675
------------ ------------ ------------ ------------
GROSS PROFIT 3,812,584 3,453,291 11,420,112 11,176,711
------------ ------------ ------------ ------------
EXPENSES
Selling and marketing 978,803 1,156,644 3,150,690 4,860,608
General and administrative 2,357,744 2,229,713 7,074,416 7,292,871
Research and development 116,798 249,979 387,777 970,557
Amortization and depreciation 1,366,337 1,735,166 4,174,633 4,733,651
------------ ------------ ------------ ------------
4,819,682 5,371,502 14,787,516 17,857,687
------------ ------------ ------------ ------------
OPERATING LOSS (1,007,098) (1,918,211) (3,367,404) (6,680,976)
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSES)
Interest and other income 4,797 1,814 6,793 38,340
Interest and other expense (1,248,366) (464,587) (2,600,355) (806,830)
------------ ------------ ------------ ------------
(1,243,569) (462,773) (2,593,562) (768,490)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX (2,250,667) (2,380,984) (5,960,966) (7,449,466)
Recovery of deferred income taxes 439,513 479,101 1,318,538 1,274,733
Recovery of current income taxes 14,837 12,387 13,675 12,387
------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD $ (1,796,317) $ (1,889,496) $ (4,628,753) $ (6,162,346)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE PERIOD 26,912,938 19,174,247 23,692,099 18,241,912
============ ============ ============ ============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.07) $ (0.10) $ (0.20) $ (0.34)
============ ============ ============ ============
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 Three Months Nine Months Nine Months
Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
--------------- -------------- -------------- --------------
Net loss for the year $(1,796,317) $(1,889,496) $(4,628,753) $(6,162,346)
Other comprehensive loss:
Cumulative translation adjustment (net
of tax of $nil) (111,508) (4,165) (125,190) (9,956)
--------------- -------------- -------------- --------------
Comprehensive loss for the period $(1,907,825) $(1,893,661) $(4,753,943) $(6,172,302)
=============== ============== ============== ==============
The accompanying notes are an integral part of these unaudited financial
statements.
4
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNITED STATES DOLLARS)
Nine Months Nine Months
Ended Ended
February 29, February 28,
2004 2003
----------- -----------
CASH USED IN OPERATING ACTIVITIES
Net loss for the year $(4,628,753) $(6,162,346)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation 4,157,541 4,721,563
Non-cash interest on convertible notes and notes payable 2,407,326 538,141
Recovery of deferred income taxes (1,318,538) (1,274,733)
Gain on sale of capital asset (460) (8,545)
Net change in operating components of working capital (839,691) (450,662)
----------- -----------
(222,575) (2,636,582)
----------- -----------
CASH (USED IN)/ FROM INVESTING ACTIVITIES
Proceeds from sale of capital assets 6,310 14,950
Acquisition of capital assets (116,304) (43,707)
Cash (paid for) acquired in business acquisitions (522,019) 1,914,884
(Increase)/decrease in restricted cash (1,516,884) 671,366
(Purchase)/sale of short term investments (476,858) 222,359
----------- -----------
(2,625,755) 2,779,852
----------- -----------
CASH FROM (USED IN) FINANCING ACTIVITIES
Proceeds from exercise of options 33,333 53,534
Costs related to issuance of convertible debt -- (112,401)
Costs related to the registration and issuance of common stock (604,917) --
Proceeds from share and warrants issuance 7,550,000 --
Repayment of line of credit and note payable (763,505) (1,272,423)
Shareholder loan proceeds -- 500,000
Shareholder loan repayment (1,479,239) (339,100)
Capital lease payments (72,085) (284,474)
Proceeds from bank financing 1,985,287 392,002
Repayment related to lease settlement (120,000) --
----------- -----------
6,528,874 (1,062,862)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
----------- -----------
CASH EQUIVALENTS (129,432) 15,412
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS FOR THE PERIOD 3,551,112 (904,180)
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE PERIOD 255,173 1,297,656
----------- -----------
CASH AND CASH EQUIVALENTS, END OF
THE PERIOD $ 3,806,285 $ 393,476
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ 292,046 $ 330,328
Non-cash payments to consultants $ 604,320 --
Conversion of notes to common shares $ 2,700,000 $ 200,000
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 services and Web-based software for Human
Capital Management ("HCM"). HCM is the process by which companies recruit,
train, evaluate, motivate and retain their employees. Workstream offers software
and services that address the needs of companies to more effectively manage
their human capital management function. Workstream's software provides a range
of solutions for their needs, including creating and managing job requisitions,
advertising job opportunities, tracking candidates, screening applicants,
searching resumes, operating customized career web sites, processing hiring
information, creating internal and external reports to evaluate the staffing
process, evaluating employee's job performance, and offering benefits that
promote employee retention. Workstream also provides services through a web-site
where job-seeking senior executives can search job databases and post their
resumes, and companies and recruiters can post position openings and search for
qualified senior executive candidates. In addition, Workstream offers
recruitment research and outplacement services.
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. As of February 29, 2004, the Company's
subsidiaries are Workstream USA, Inc., Paula Allen Holdings, Inc. ("Paula Allen
Holdings"), OMNIpartners, Inc. ("OMNIpartners"), RezLogic, Inc. ("Rezlogic"),
6FigureJobs.com, Inc. ("6FigureJobs.com"), Icarian, Inc. ("Icarian") and Xylo,
Inc. ("Xylo").
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: SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
Significant estimates are made in the methodology used to assess goodwill
impairment. These estimates include future cash flows, future short-term and
long-term growth rates, and cost of capital. It is reasonably possible that
those estimates may change in the near-term, significantly affecting future
assessments of goodwill impairment.
Cash Equivalents and Short-Term Investments
Cash equivalents and short-term investments are stated at cost plus
accrued interest, which approximates fair value. Cash equivalents are defined as
highly liquid investments with terms to maturity at acquisition of three months
or less. Short-term investments are defined as highly liquid investments with
terms to maturity of one year or less. All cash equivalents and short-term
investments are classified as available for sale.
6
Investment Tax Credits
Investment tax credits, which are earned as a result of qualifying
research and development expenditures, are recognized when the expenditures are
made and their realization is reasonably assured and are applied to reduce the
related research and development capital costs and expenses in the year.
Capital Assets
Capital assets are recorded at cost. Amortization is based on the
estimated useful life of the asset and is recorded as follows:
Furniture and fixtures................. 5 years straight line
Office equipment....................... 5 years straight line
Computers and software................. 3 years straight line
Leasehold improvements................. Term of lease
Fixed assets are tested for impairment when evidence of a decline in value
exists and are adjusted to estimated fair value if the asset is impaired.
Lease Inducements
Lease inducements are amortized over the term of the lease as a reduction
of rent expense.
Income Taxes
The Company accounts for income taxes under the asset and liability method
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between the carrying
amounts and tax basis of assets and liabilities. The Company provides a
valuation allowance on net deferred tax assets when it is more likely than not
that such assets will not be realized.
Capital Stock
Capital stock is recorded as the net proceeds received on issuance after
deducting all share issue costs.
Revenue Recognition
The Company recognizes revenue when all of the following criteria are met:
persuasive evidence of an agreement exists, the services have been provided, the
price is fixed and determinable and collection is reasonably assured.
Consequently, revenue is generally recognized as services are performed, which
is in accordance with SAB 101.
The Company's Enterprise Recruitment Services revenue consists of
Automated Talent Acquisition Services, Recruitment Research Services, Online
Exchange Services, and Employee Management and Retention Systems Services.
The Company makes sales to Automated Talent Acquisition Services' clients
based on contracts typically for a one-year term with automatic renewal. Clients
are charged a monthly subscription fee for concurrent user access licenses,
career site hosting, on-line reporting and other services. Revenue is recognized
ratably over the contract period. For Recruitment Research Services, the Company
bills its clients based on a per-hour fee and recognizes the revenue once the
7
project is completed. For Online Exchange Services and Employee Management and
Retention Services, the Company bills based on subscription basis and recognizes
the revenue ratably over the term of the subscription. The Company also bills
its clients for product sales through some of its websites. The Company
recognizes the related revenue when the product has been shipped.
For Career Transition Services, the Company bills the client 50% when the
assignment starts and the remaining 50% when the assignment is completed. The
Company recognizes this revenue when services have been completed.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, defines a fair value method of accounting for issuance
of stock options and other equity investments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period. Pursuant to SFAS No. 123, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but if they do so are required to disclose in a note to the financial
statements pro forma net income amounts as if the Company had applied the fair
value method of accounting.
The Company accounts for employee stock-based compensation under APB No.
25 and has complied with the disclosure requirements of SFAS No. 123 and a
related standard SFAS No. 148.
Research and Development Costs
The Company expenses all research and development costs as incurred.
Software development costs are expensed in the year incurred unless a
development project meets the criteria under generally accepted accounting
principles for deferral and amortization. No amounts have been capitalized to
date. Research and development expenses consist mainly of payroll related costs.
Goodwill and Acquired Intangible Assets
Goodwill represents the excess of the costs over the estimated fair value
of the net assets of businesses acquired. During 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141, "Business Combinations". This
standard is effective for all business combinations initiated after June 30,
2001, and requires that the purchase method of accounting be used for all
business combinations initiated after that date. The Company has applied SFAS
No. 141 to each of its acquisitions completed during fiscal 2002, fiscal 2003
and the nine months ended February 29, 2004.
During 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This standard is effective for fiscal years beginning after December
15, 2001. The Company adopted SFAS No.142 on June 1, 2001, the start of fiscal
2002. Under SFAS No. 142, goodwill, including goodwill recorded in past business
combinations, and intangible assets deemed to have indefinite lives are no
longer amortized, but are subject to annual impairment tests in accordance with
the new guidelines. Other intangible assets continue to be amortized over their
useful lives.
Management assesses goodwill related to reporting units for impairment at
least annually, and writes down the carrying amount of goodwill as required. The
Company estimates the fair value of each reporting unit by preparing a
discounted cash flow model. An impairment charge is recorded if the implied fair
value of goodwill of a reporting unit is less than the book value of goodwill
for that unit.
Intangible assets with a finite useful life recorded as a result of
acquisition transactions are amortized over their estimated useful lives as
follows:
8
Acquired technologies............ 3 years straight line
Customer base.................... 3 years straight line
Intellectual property............ 5 years straight line
The Company evaluates its intangible assets for impairment whenever events
or changes in circumstances indicate that the carrying value of such assets may
not be recoverable. To determine recoverability, the Company compares the
carrying value of the assets to the estimated future undiscounted cash flows. If
the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
Reporting Currency
During fiscal 2002, the Company adopted the United States dollar as its
reporting currency. As a result of the change in reporting currency, the
financial statements for all periods prior to June 1, 2001 were translated from
Canadian dollars to United States dollars in accordance with SFAS No. 52,
Foreign Currency Translation. Income statement balances were translated at the
average rate over the period while balance sheet accounts were translated at the
exchange rate as of the balance sheet date.
Foreign Currency Translation and Foreign Transactions
The financial statements of the parent company have been translated into
United States dollars in accordance with SFAS No. 52, Foreign Currency
Translation. The Company's subsidiaries use their local currency, which is the
United States dollar, as their functional currency. The functional currency of
the parent company is the Canadian dollar, and all balance sheet amounts of the
parent company with the exception of Shareholders' Equity have been translated
using the exchange rates in effect at year-end. Shareholder's Equity accounts
are translated using the exchange rate in effect at the time of each equity
transaction. Income statement amounts have been translated using the average
exchange rate for the year. The gains and losses resulting from the translation
of foreign currency statements into the United States dollar are reported in
comprehensive income for the year and accumulated other comprehensive income.
Gains or losses on foreign currency transactions are recognized in income
when incurred.
Note 4: ACQUISITION TRANSACTIONS
Acquisition of Perform, Inc.
On September 11, 2003, the Company acquired certain assets of Perform,
Inc. ("Perform"), a Delaware corporation, in connection with Perform's voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. As
consideration for the sale, the Company issued Perform 189,873 of its common
shares valued at $300,000 and cash in an amount equal to $450,000. In addition,
the Company advanced $72,000 to Perform to fund its operations prior to the
finalization of the asset purchase agreement with Perform. Perform designs,
develops and markets Human Resource Information Systems and Performance
Management Information Systems for mid-size and Global 2000 companies.
The consolidated financial statements presented herein include the results
of operations of Perform from September 12, 2003.
Management prepared a valuation of the net tangible and intangible assets
acquired.
9
The purchase price has been allocated as follows:
Share consideration $300,000
Cash consideration 522,000
Acquisition costs 72,373
--------
894,373
--------
Current assets 4,919
Tangible long-term assets 232,362
Intangible assets:
Acquired technology 657,092
--------
Total net identifiable assets 894,373
--------
Goodwill $ 0
========
Contingent consideration relating to prior acquisitions
As of February 29, 2004, a total of 654,204 common shares were held in
escrow relating to prior acquisitions as further described below. This total
consists of 323,625 common shares relating to the Company's acquisition of
6FigureJobs.com as well as 330,579 common shares relating to the Company's
acquisition of Xylo. Subsequent to the quarter ended February 29, 2004, the
common shares related to the Xylo acquisition were released from escrow and
cancelled by the Company (see Note 18: Subsequent Events). Management believes
that the common shares related to the 6FigureJobs.com acquisition will not be
released from escrow and issued to the former shareholders of 6FigureJobs.com.
Pursuant to the purchase agreement with 6FiguresJobs.com, 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. The Company has been named as defendants in a lawsuit with regard to
the escrow shares filed by Christopher Miller, the representative of the former
shareholders of 6FigureJobs.com.
Pursuant to the purchase agreement with PureCarbon, the Company agreed to
issue additional common 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 have been
realized. As required under the purchase agreement, an audit confirming whether
the revenue targets were met was performed. The audit was completed in August
2003 and confirmed that the targets were not met. In October 2003, PureCarbon
filed an action with the Supreme Court of the State of New York seeking to
compel arbitration under the purchase agreement to determine whether the targets
were achieved. PureCarbon's action to compel arbitration was later dismissed by
the Supreme Court of the State of New York. The Company will therefore not be
issuing any additional common shares related to the PureCarbon acquisition.
Pursuant to the purchase agreement with Xylo, 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 determined that the revenue
targets were not met and notified the escrow agent and shareholder
representative that the revenue targets were not met. The shares were then
released from escrow and cancelled by the Company subsequent to the quarter
ended February 29, 2004.
10
Note 5: ALLOWANCE FOR DOUBTFUL ACCOUNTS
February 29, 2004 May 31, 2003
----------------- ------------
Balance at beginning of period $ 55,828 $ 98,188
Charged to costs and expenses 73,628 186,581
Write-offs (43,483) (228,941)
--------- ---------
Balance at end of period $ 85,973 $ 55,828
========= =========
Note 6: CAPITAL ASSETS
February 29, 2004 May 31, 2003
--------------------------------- --------------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
----------- ----------- ----------- -----------
Furniture, equipment
and leaseholds $ 1,173,940 $ 657,121 $ 1,388,873 $ 710,603
Office equipment 260,049 226,300 241,659 194,597
Computers and software 3,753,409 3,344,879 3,461,678 3,048,734
----------- ----------- ----------- -----------
5,187,398 $ 4,228,300 5,092,210 $ 3,953,934
----------- ----------- ----------- -----------
Less accumulated amortization (4,228,300) (3,953,934)
----------- ----------- ----------- -----------
Net capital assets $ 959,098 $ 1,138,276
=========== =========== =========== ===========
As of February 29, 2004 capital assets include net assets under
capital lease of $4,776 (May 31, 2003 - $27,410) net of accumulated amortization
of $240,171 (May 31, 2003 - $216,664).
Note 7: ACQUIRED INTANGIBLE ASSETS
February 29, 2004 May 31, 2003
------------ ------------
Customer contracts $ 3,533,182 $ 3,559,543
Acquired technologies 10,938,724 10,281,632
Trademarks, domain names and intellectual property 457,760 457,760
------------ ------------
Total cost 14,929,666 14,298,935
------------ ------------
Accumulated amortization:
Customer contracts (2,636,083) (1,760,860)
Acquired technologies (5,979,700) (3,292,215)
Trademarks, domain names and intellectual property (231,598) (162,934)
------------ ------------
Total accumulated amortization (8,847,381) (5,216,009)
------------ ------------
Net acquired intangible assets $ 6,082,285 $ 9,082,926
============ ============
Amortization of intangible assets was $1,231,472, and $1,197,417, for the
quarters ended February 29, 2004 and February 28, 2003, respectively. For the
nine months ended February 29, 2004 and February 28, 2003, amortization of
intangible assets was $3,636,090 and $3,180,466 respectively.
11
The estimated amortization expense related to intangible assets in
existence as of February 29, 2004 is as follows:
Last three months of fiscal year 2004: $1,213,640
Fiscal year 2005: $4,081,997
Fiscal year 2006: $ 711,722
Fiscal year 2007: $ 74,787
Fiscal year 2008: $ 139
Note 8: GOODWILL
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
Goodwill at May 31, 2001 $ -- $ -- $ --
Acquisitions during the year 6,984,835 8,563,337 15,548,172
Impairment during the year (1,310,000) (1,500,000) (2,810,000)
------------ ------------ ------------
Goodwill at May 31, 2002 5,674,835 7,063,337 12,738,172
------------ ------------ ------------
Acquisitions during the year 6,028,507 -- 6,028,507
Issuance of contingent consideration -- 750,000 750,000
Impairment during the year (2,133,242) -- (2,133,242)
------------ ------------ ------------
Goodwill at May 31, 2003 9,570,100 7,813,337 17,383,437
------------ ------------ ------------
Purchase price allocation adjustments
made within one year of
acquisition date 89,509 -- 89,509
------------ ------------ ------------
Goodwill at February 29, 2004 $ 9,659,609 $ 7,813,337 $ 17,472,946
============ ============ ============
Management evaluates goodwill impairment for each of its reporting units
at least annually. The Company prepares a discounted cash flow model that is
used in estimating the fair value of each reporting unit. For each reporting
unit, if the implied fair value of goodwill is less than the book value of
goodwill, an impairment charge is recorded in accordance with FASB 142.
During fiscal 2002, the Company revaluated its revenue forecasts for both
its Enterprise Recruiting and Career Transition businesses after both segments
of its operations experienced lost revenues due to the economic downturn along
with the increased unemployment suffered in the United States after the events
of September 11, 2001. As a result of this, the Company recorded impairment
charges of $2,810,000 during fiscal 2002.
In fiscal 2003, the Company recognized an additional impairment charge for
its Enterprise Recruiting business related principally to reduced revenue
forecasts as a result of revenue shortfalls for the Icarian business acquired in
June 2002.
Note 9: LINES OF CREDIT AND RESTRICTED CASH
At February 29, 2004, the Company had an aggregate of $1,765,550
outstanding on a line of credit from the Bank of Montreal.
12
February 29, 2004 May 31, 2003
------------------ -------------------
Line of credit - Bank of Montreal $ 1,765,550 $ 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 CDN (Canadian
dollars) $3,000,000 against this facility based on compensating balances on
deposit with the bank. The Company has drawn CDN $2,358,245 as of February 29,
2004. The Company has provided collateral of CDN $3,000,000, leaving CDN
$641,755 available to be drawn on this line.
At February 29, 2004, and May 31, 2003, a total of $2,759,392 and
$1,307,439, respectively, of cash and short-term deposits were pledged to the
institutions below as collateral for the line of credit, credit card reserve,
term loan, letters of credit for a facility lease and the build out of the
Maitland office, as well as for Workstream's credit card with the Bank of
Montreal ("BMO") and therefore were restricted from the Company's use:
February 29, 2004 May 31, 2003
------------------------- ------------------------
Bank of America - credit card reserve $ 399,786 $ 399,786
Bank of Montreal - Term loan, line of credit and
letters of credit for facility leases, and BMO 2,359,606 907,653
credit card
------------------------- ------------------------
$ 2,759,392 $ 1,307,439
========================= ========================
Restricted cash is held in term deposits to support mainly the current
credit card activity and the Company's line of credit. The Company's customer
credit card accounts and its line of credit form part of its current operations
and accordingly, the restricted cash has been classified as a current asset.
Note 10: CONVERTIBLE NOTES
February 29, 2004 May 31, 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
Conversion of notes to common shares (2,900,000) (200,000)
Amortization of discount 2,801,767 550,838
------------ -----------
Convertible notes $ -- $ 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 Notes 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
13
feature was 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 was recorded as paid-in capital. The total discount on the
Convertible Notes was 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 January 11, 2004, the warrant
holders were entitled to warrants to purchase 733,619 common shares at an
exercise price of $3.32 per share. On January 12, 2004, the Company and the
holders of the Convertible Notes entered into an agreement that modified the
warrants outstanding and their exercise price. (See the description of the
modification agreement below). As of February 29, 2004, the warrant holders were
entitled to purchase 712,179 common shares at an exercise price of $2.00 per
share. The warrants have a five year term from their original issuance date,
expiring in April and May 2007.
The Convertible Notes were convertible into a class of preferred shares
designated Class A Series A Preferred Shares, no par value per share (the
"Series A Shares"). The conversion price of the Convertible Notes into Series A
Shares was $100 per share, subject to adjustment upon the occurrence of certain
events. The Series A Shares were 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 could not 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 was subject to further adjustment upon the
occurrence of certain events. At the election of the holder, the Convertible
Notes may be converted directly into our common shares at a conversion price
equal to 80% of the average closing price of our common shares for the five day
period before such conversion.
During May 2003, the Company raised additional capital by issuing 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 subsequent conversion of Series A Shares would have
been 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.
In December 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 $337,500 of the Convertible Notes into Series A
Shares, which were immediately converted into common shares. As a result of the
foregoing conversions, 450,000 common shares were issued at a conversion price
equal to $0.75 per share.
14
In January 2004, the Company entered into an agreement with the holders of
the Convertible Notes to amend the Convertible Notes and the warrants to
purchase common shares that were issued in connection with the sale of the
Convertible Notes. Under the agreement, the holders of the Convertible Notes
agreed that on January 12, 2004 the remaining outstanding balance of $1,762,500
of the Convertible Notes would be automatically converted into a total of
1,174,999 common shares at a conversion price of $1.50 per common share. In
consideration for the noteholders' agreement to convert the Convertible Notes
into common shares, the Company agreed to reduce the exercise price on the
warrants to purchase common shares from $3.3186 per common share to an exercise
price of $2.00 per common share. As a result of this conversion, all of the
Convertible Notes have been converted into common shares and any remaining
unamortized discount as of January 12, 2004 related to the Convertible Notes was
charged as non-cash interest expense during the quarter ended February 29, 2004.
NOTE 11: LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
February 29, 2004 May 31, 2003
----------------- -----------------
Term loan $ 97,318 $ 116,905
Less: current portion 29,944 31,662
----------------- -----------------
$ 67,374 $ 85,243
================= =================
Long-term obligations represents a five year term loan maturing in May
2007 with monthly principal payments of CDN $3,333 with the Bank of Montreal
that bears interest at the Bank's prime rate plus 2.0%. Collateral has been
provided as described in note 8.
As at February 29, 2004 the maturities for long-term obligations are as
follows:
Last three months of fiscal year 2004 $ 7,486
Fiscal year 2005 29,944
Fiscal year 2006 29,944
Fiscal year 2007 29,944
-------
$97,318
=======
Note 12: RELATED PARTY OBLIGATIONS
February 29, 2004 May 31, 2003
----------------- -----------------
Note payable $ -- $ 33,838
Deferred compensation 783,867 797,880
Shareholder loans 356,060 1,750,312
----------------- -----------------
1,139,927 2,582,030
Less: current portion 163,578 178,623
----------------- -----------------
976,349 $ 2,403,407
================= =================
15
As of February 29, 2004, the note payable to a related party has been paid
in full. The note payable was non-interest bearing and repayable in monthly
installments of $10,200 beginning in October 2001 and ending in April 2003. As
of May 31, 2003, the last three payments had not been made due to a disagreement
with the related party. This was subsequently resolved and the final payments
were made during the second quarter of fiscal 2004.
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 repayment date under the agreement is automatically extended each
month after June 1, 2004 for an additional month, which results in the amounts
continuing to remain due and outstanding for greater than 365 days. In February
2004, the Company agreed to pay to Mr. Mullarkey $149,468 related to this
compensation, of which $49,468 was withheld for taxes. The remaining $100,000
was not paid to Mr. Mullarkey in the form of a cash payment, but was applied as
payment in full for Mr. Mullarkey's exercise of options to purchase 100,000
common shares at an exercise price of $1.00 per share. As of February 29, 2004,
Mr. Mullarkey's total deferred compensation was $783,867. Subsequent to the end
of the quarter, the Company and Mr. Mullarkey agreed to terminate his deferred
compensation agreement and the Company paid in full any outstanding deferred
compensation and any accrued interest incurred through March 31, 2004. (see Note
18: Subsequent Events)
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 accruing interest at 8% per annum. During the third
quarter ended February 29, 2004, the entire amount of the loan of $1,287,901 and
accrued interest in an amount equal to $51,506 was paid in full. In January
2003, Mr. Mullarkey 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. As of February 29, 2004, no
drawings have been made against this facility. Subsequent to the quarter ended
February 29, 2004, the Company and Mr. Mullarkey agreed to terminate Mr.
Mullarkey's commitment to provide the credit facility (see Note 18: Subsequent
Events).
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 13: CAPITAL LEASE OBLIGATIONS
February 29, 2004 May 31, 2003
----------------- -----------------
Capital leases $ 89,927 $ 171,198
Less: current portion 53,869 97,882
----------------- -----------------
$ 36,058 73,316
================= =================
Capital lease obligations relate to office equipment, computers and
software, and bear interest at rates that range from 7.5% to 32.2% per annum.
These leases mature at various times through October 2005.
16
Note 14: COMMON SHARES AND WARRANTS
The authorized share capital consists of an unlimited number of no par
value common shares, an unlimited number of Class A Preferred Shares, no par
value per share (the "Class A Preferred Shares"), and an unlimited number of
Class A Series A Preferred Shares, no par value per share (the "Series A
Shares"). The Company has 28,458,954 shares that are outstanding as of February
29, 2004 (May 31, 2003 - 19,951,570). As of February 29, 2004, an additional
654,204 common shares were being held in escrow as a result of the terms of
acquisitions. (see Note 4: Acquisition Transactions). As at February 29, 2004,
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 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 an aggregate of $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 sales 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. Stern
& Co. directed that the 125,000 common shares be issued in the name of Shai
Stern.
In June 2003, the Company entered into an agreement with The Research
Works, Inc. whereby the Company agreed to issue an aggregate of 107,000 common
shares 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 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.
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. In addition, the
Company advanced $72,000 to Perform, Inc. to fund its operations prior to the
finalization of the asset purchase agreement with Perform, Inc.
In October 2003, the Company issued 33,333 common shares to an individual
as a result of the individual's exercise of an option to purchase 33,333 common
shares.
In December 2003, the Company issued an aggregate of 4,125,000 common
shares at $1.60 per common share to institutional and other accredited investors
in a private placement resulting in aggregate proceeds of approximately $6.6
million. The proceeds from the sale will be used to repay or otherwise cause the
satisfaction in full of the amounts outstanding under the Company's Convertible
Notes, to pay the expenses incurred in connection with the issuance and for
general working capital requirements. In connection with the issuance of the
4,125,000 common shares, the Company paid commissions to placement agents in an
aggregate amount equal to $540,000, of which $100,000 was paid in 62,500 common
shares in lieu of cash. The Company also issued the placement agents or their
designees warrants to purchase an aggregate of 412,500 common shares at an
exercise price of $1.60 per share.
In December 2003, the Company issued to Legend Merchant Group a warrant to
purchase 50,000 common shares at an exercise price of $1.50 per share, and a
17
warrant to purchase an additional 50,000 common shares at an exercise price of
$1.75 per share. The warrants have a two year term. This issuance of the
warrants was made in exchange for business advisory services to be provided over
a period of 12 months by Legend Merchant Group to the Company.
In December 2003, the Company entered into a consulting agreement with
Sunrise Financial Group, Inc. whereby the Company agreed to issue 100,000 common
shares valued at $145,000 to Sunrise Financial Group, Inc. in consideration for
certain consulting services Sunrise Financial Group, Inc. provided to the
Company. Sunrise Financial Group, Inc. directed that the 100,000 common shares
be issued in the name of Nathan Low.
In December 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 $337,500 of the Convertible Notes into
Series A Shares which were immediately converted into common shares. As a result
of the foregoing conversions, 450,000 common shares were issued at a conversion
price equal to $0.75 per share.
In January 2004, the Company entered into an agreement with the holders of
the Convertible Notes to amend the Convertible Notes and the warrants to
purchase common shares that were issued in connection with the sale of the
Convertible Notes. Under the agreement, the holders of the Convertible Notes
agreed that on January 12, 2004 the remaining outstanding balance of $1,762,500
of the Convertible Notes would be automatically converted into a total of
1,174,999 common shares at a conversion price of $1.50 per common share. The new
conversion price of $1.50 was an increase from the original terms which provided
a conversion price of $0.75 per common share. In consideration for the
noteholders' agreement to convert the Convertible Notes into common shares, the
Company and the noteholders agreed to reduce the exercise price on the warrants
to purchase common shares from $3.3186 per common share to an exercise price of
$2.00 per common share.
In February 2004, the Company issued 100,000 common shares to Mr.
Mullarkey as a result of his exercise of an option to purchase 100,000 common
shares. The Company did not receive a cash payment for this transaction, as it
was settled with a partial release of deferred compensation owed to Mr.
Mullarkey by the Company. In February 2004, the Company agreed to pay to Mr.
Mullarkey approximately $149,468 related to deferred compensation owed to him by
the Company, of which, $49,468 was withheld for taxes. The remaining $100,000
was not paid to Mr. Mullarkey in the form of a cash payment but was applied as
payment in full for Mr. Mullarkey's exercise of his options to purchase 100,000
common shares at an exercise price of $1.00 per share. (see Note 12: Related
Party Transactions).
Note 15: SEGMENTED AND GEOGRAPHIC INFORMATION
The following is a summary of the Company's operations by business segment
and by geographic region for the three and nine month periods ended February 29,
2004 and February 28, 2003.
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
----------- ----------- -----------
BUSINESS SEGMENT
THREE MONTHS ENDED
FEBRUARY 29, 2004
Revenue $ 2,638,645 $ 1,530,429 $ 4,169,074
Expenses 2,967,347 1,770,030 4,737,377
----------- ----------- -----------
Business segment loss $ (328,702) $ (239,601) (568,303)
=========== ===========
Corporate overhead, other revenues
and expenses (1,228,014)
-----------
Net loss $(1,796,317)
===========
18
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
NINE MONTHS ENDED
FEBRUARY 29, 2004
Revenue $ 7,949,618 $ 4,659,741 $ 12,609,359
Expenses 9,344,814 5,360,724 14,705,538
------------ ------------ ------------
Business segment loss $ (1,395,196) $ (700,983) (2,096,179)
============ ============
Corporate overhead, other revenues
and expenses (2,532,574)
------------
Net loss $ (4,628,753)
============
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
AS AT FEBRUARY 29, 2004
Business segment assets $ 7,351,149 $ 150,090 $ 7,501,239
Intangible assets 5,833,555 248,730 6,082,285
Goodwill 9,659,608 7,813,338 17,472,946
------------ ------------ ------------
$ 22,844,312 $ 8,212,158 31,056,470
============ ============
Assets not allocated to business
segments 2,278,825
------------
Total assets $ 33,335,295
============
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
THREE MONTHS ENDED
FEBRUARY 28, 2003
Revenue $ 2,682,947 $ 1,459,297 $ 4,142,244
Expenses 3,010,762 1,564,958 4,575,720
------------ ------------ ------------
Business segment loss $ (327,815) $ (105,661) (433,476)
============ ============
Corporate overhead, other revenues
and expenses (1,456,020)
------------
Net loss $ (1,889,496)
============
19
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
NINE MONTHS ENDED
FEBRUARY 28, 2003
Revenue $ 8,182,521 $ 5,580,865 $ 13,763,386
Expenses 10,605,009 6,155,003 16,760,012
------------ ------------ ------------
Business segment loss $ (2,422,488) $ (574,138) (2,996,626)
============ ============
Corporate overhead, other revenues
and expenses (3,165,720)
------------
Net loss $ (6,162,346)
============
ENTERPRISE CAREER
RECRUITING TRANSITION
SERVICES SERVICES TOTAL
------------ ------------ ------------
AS AT FEBRUARY 28, 2003
Business segment assets $ 5,006,470 $ 431,204 $ 5,437,674
Intangible assets 9,832,354 570,917 10,403,271
Goodwill 12,048,729 7,823,084 19,871,813
------------ ------------ ------------
$ 26,887,553 $ 8,825,205 37,712,758
============ ============
Assets not allocated to business
segments 752,376
------------
Total assets $ 36,465,134
============
CANADA USA TOTAL
------------ ------------ ------------
GEOGRAPHY
THREE MONTHS ENDED
FEBRUARY 29, 2004
Revenue $ 588,866 $ 3,580,208 $ 4,169,074
Expenses 508,538 4,667,634 5,176,172
------------ ------------ ------------
Geographical gain (loss) $ 80,328 $ (1,087,426) (1,007,098)
============ ============
Other revenues and expenses (789,219)
------------
Net loss $ (1,796,317)
============
20
CANADA USA TOTAL
------------ ------------ ------------
NINE MONTHS ENDED
FEBRUARY 29, 2004
Revenue $ 1,529,726 $ 11,079,633 $ 12,609,359
Expenses 1,667,988 14,308,774 15,976,762
------------ ------------ ------------
Geographical loss $ (138,262) $ (3,229,141) (3,367,403)
============ ============
Other revenues and expenses (1,261,350)
------------
Net loss $ (4,628,753)
============
CANADA USA TOTAL
------------ ------------ ------------
AS AT FEBRUARY 29, 2004
Geographic segment assets $ 6,002,748 $ 27,332,547 $ 33,335,295
============ ============ ============
CANADA USA TOTAL
------------ ------------ ------------
THREE MONTHS ENDED
FEBRUARY 28, 2003
Revenue $ 545,752 $ 3,596,492 $ 4,142,244
Expenses 1,181,880 4,878,575 6,060,455
------------ ------------ ------------
Geographical loss $ (636,128) $ (1,282,083) (1,918,211)
============ ============
Other revenues and expenses 28,715
------------
Net loss $ (1,889,496)
============
CANADA USA TOTAL
------------ ------------ ------------
NINE MONTHS ENDED
FEBRUARY 28, 2003
Revenue $ 1,940,599 $ 11,822,787 $ 13,763,386
Expenses 3,485,273 16,959,089 20,444,362
------------ ------------ ------------
Geographical loss $ (1,544,674) $ (5,136,302) (6,680,976)
============ ============
Other revenues and expenses 518,630
------------
Net loss $ (6,162,346)
============
CANADA USA TOTAL
------------ ------------ ------------
AS AT FEBRUARY 28, 2003
Geographic segment assets $ 3,330,724 $ 33,134,410 $ 36,465,134
============ ============ ============
21
Note 16: 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:
FEBRUARY 29, 2004
-----------------
Stock options 1,463,265
Escrowed shares 654,204
Warrants issued to investors 633,334
Warrants issued with convertible notes 712,179
Warrants issued to private placement agents 412,500
Warrants issued to consultant 100,000
Underwriter warrants 440,000
---------
Potential increase in number of shares from dilutive instruments 4,415,482
=========
The weighted average exercise price of the options exercisable at February 29,
2004 was $2.25 per common share.
Note 17: STOCK BASED COMPENSATION PLANS
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 weighted average assumptions:
Three Months Three Months Nine months Nine months
Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
---------------- ------------------ ---------------- -----------------
Risk free interest rates 3.06% 2.99% 2.60% 3.01%
Expected dividend yield 0% 0% 0% 0%
Expected volatility 81% 115% 105% 115%
Expected lives (in years) 3.5 3.5 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:
22
Three Months Three Months Nine months Nine months
Ended Ended Ended Ended
February 29, February 28, February 29, February 28,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss, as reported $ (1,796,317) $ (1,889,496) $ (4,628,753) $ (6,162,346)
Estimated incremental share based
compensation expense (net
of tax of $nil) (99,177) (200,627) (381,820) (599,760)
------------ ------------ ------------ ------------
Pro forma net loss $ (1,895,494) $ (2,090,123) $ (5,010,573) $ (6,762,106)
============ ============ ============ ============
Weighted average common shares
outstanding during the period 26,912,938 19,174,247 23,692,099 18,241,912
============ ============ ============ ============
Basic and diluted loss per share, as
reported $ (0.07) $ (0.10) $ (0.20) $ (0.34)
============ ============ ============ ============
Pro forma basic and diluted loss
per share $ (0.07) $ (0.11) $ (0.21) $ (0.37)
============ ============ ============ ============
Note 18: SUBSEQUENT EVENTS
In March 2004, the Company acquired certain assets of Peopleview, Inc., a
Nevada corporation. As consideration for the sale, the Company issued
Peopleview, Inc. 350,000 of its common shares valued at $875,000, cash of
$300,000 and a warrant to purchase 50,000 of the Company's common shares at an
exercise price of $3.00 per share.
In March 2004, the Company and Mr. Mullarkey, the Company's Chairman, CEO
and President, agreed to terminate Mr. Mullarkey's commitment to provide the
Company with a $1,200,000 line of credit. As of the date of termination, the
Company had never drawn down on the line of credit that Mr. Mullarkey agreed to
provide.
In March 2004, 330,579 common shares held in escrow relating to the Xylo
acquisition were released from escrow and cancelled by the Company as a result
of certain performance objectives not being achieved.
In April 2004, the Company and Mr. Mullarkey agreed to terminate his
deferred compensation agreement and the Company paid the entire outstanding
balance of $800,533.81 of his deferred compensation as of March 31, 2004 as well
as interest of $56,841.84 accrued through that period. As a result, the Company
does not owe Mr. Mullarkey any additional deferred compensation and any
compensation earned in the future by Mr. Mullarkey will be paid in accordance
with the terms of his employment agreement.
In April 2004, the Company paid a bonus of $150,000 to Mr. Mullarkey, of
which $95,000 was based on Mr. Mullarkey having met certain performance
objectives during 2003 set forth in his employment agreement and $55,000 was a
discretionary bonus determined by the Company's audit committee.
In April 2004, Platinum Partners Value Arbitrage exercised a warrant to
purchase 166,667 common shares at an exercise price of $1.50 for an aggregate
amount of $250,000. The proceeds from this exercise will be used for general
working capital purposes.
23
In April 2004, Countrywide Partners exercised a warrant to purchase 70,000
common shares at an exercise price of $1.50 for an aggregate amount of $105,000.
The proceeds from this exercise will be used for general working capital
purposes.
Note 19: CONTINGENCIES
Two of the Company's wholly-owned subsidiaries, Paula Allen Holdings,
doing business as Allen And Associates, and OMNIpartners, were named as
defendants in a lawsuit filed by 11263 Mississippi, LLC and 14617 Vanowen LLC.
The complaint was filed on May 16, 2003 in the Clark County District Court in
Nevada. OMNIpartners leased office space from 11263 Mississippi, LLC and 14617
Vanowen LLC in Las Vegas, Nevada and then subleased certain portions of the
office space to Allen And Associates and an unrelated third party, U.S. Vehicle.
In this action, 11263 Mississippi, LLC and 14617 Vanowen LLC allege that
OMNIpartners breached the lease agreement and seek approximately $178,274 for
unpaid rents, maintenance charges and other charges as well as an undetermined
amount for attorneys' fees. OMNIpartners alleges the plaintiffs tortiously
interfered with its sublease agreement with U.S. Vehicle by moving U.S. Vehicle
into a nearby facility and leasing space to it. OMNIpartners also filed a
lawsuit against U.S. Vehicle and its principals alleging a breach of its
sublease agreement with OMNIpartners. This action was filed on April 18, 2002 in
the Clark County District Court in Nevada. In this action, OMNIpartners seeks
approximately $115,000 for unpaid rents, maintenance charges and other charges
as well as an undetermined amount for attorneys' fees. Meredith and Marvin
Cohen, former shareholders of OMNIpartners, were also named as defendants in the
complaint as guarantors under the lease agreement. OMNIpartners has agreed to
defend and indemnify Mr. and Mrs. Cohen in the lawsuit. The status of these
cases have not changed since May 31, 2003.
The Company is subject to other legal proceedings and claims which arise
in the ordinary course of our business. The Company does not believe that the
resolution of such actions will materially affect the Company's business,
results of operations or financial condition.
Note 20: FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including accounts
receivables, accounts payables, and other accrued charges, the carrying amounts
approximate the fair value to their short-term maturities. Cash and cash
equivalents, short-tem investments, long-term debt and long-term liabilities are
carried at cost, which approximates their fair value.
Interest rate and foreign exchange risk
The Company has short-term investments and deposits that earn interest at
fixed rates ranging from 0.5% to 2.35%.
As explained in note 9, the Company has a line of credit with the Bank of
Montreal that bears interest based on the bank's prime rate plus 1%. The Company
also has a term loan with the Bank of Montreal bearing interest at the bank's
prime rate plus 2%. Fluctuations in the Bank's prime rate or exchange rates
would have an impact on financial results. The Company also has letters of
credit with the Bank of Montreal based on a fixed rate of 1.2% and fluctuations
in exchange rates would have a financial impact.
24
Concentrations of Credit Risk
Concentrations of credit risk consist primarily of cash, short-term
investments and accounts receivable. Management believes the use of credit
quality financial institutions minimizes the risk of loss associated with cash
and short-term investments. Accounts receivable primarily represent amounts due
under the Company's contracts with its customers. The Company generally does not
require collateral from its customers.
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 and 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 and nine month periods ended February 29, 2004. All figures are in United
States dollars, except as otherwise noted.
OVERVIEW
We are a provider of services and Web-based software for Human Capital
Management ("HCM"). HCM is the process by which companies recruit, train,
evaluate, motivate and retain their employees. We offer software and services
that address the needs of companies to more effectively manage their human
capital management function. We believe that our "one-stop-shopping" approach
for our clients' HCM needs is more efficient and effective than traditional
methods of human resource management.
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, job performance evaluation 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. In addition, we acquired certain assets of
Perform, Inc. during the three months ended November 30, 2003 ("second quarter
2004") (see Note 4: Acquisition Transactions). Subsequent to the acquisitions,
we concentrated on integrating the acquired businesses and expanding the reach
of our existing business. These acquisitions have enabled us to increase our
service offerings. We have also made efforts to reduce costs by consolidating
25
operations, resulting in staff reductions of redundant positions and related
overhead and reducing research and development expenditures. Certain actions
taken to reduce costs, such as the closure of offices and a change in our
marketing strategy, have also caused reductions in revenue. We have shifted our
marketing strategy from advertising in newspapers to advertising on the
Internet. While this has resulted in reduced revenue due to fewer new sales, we
believe that it is more profitable because it is easier to manage and less
costly than advertising in newspapers. In the nine months ended February 29,
2004, operating expenses for existing operations declined by $3,571,763
including an advertising expense decline of $809,010 and a decline of $1,155,530
related to the closure of offices.
To monitor our business, we review key financial information including net
revenues, gross profit, earnings per share, and cash flow from operations. As
our businesses are integrated, we continue to seek ways to more efficiently
manage and monitor our business performance. We review other key operating
metrics such as sales per employee, days of sales outstanding(1), liquidity
ratio(2) and debt to equity ratio(3). In addition, as our business is impacted
by the job market, we review economic indicators such as the unemployment rate.
We have recently made the following changes in our approach to grow
revenues:
o in our Career Transition Services segment, we implemented automated
processes to reach clients, track leads and monitor the status of projects,
which we believe provides us with a more efficient and less costly method to
increase sales;
o we also improved the quality of our services in the Career Transition
Services segment, by hiring additional professional staff involved in the
preparation of the service which we believe has resulted in fewer cancellations;
o we are pursuing cross-marketing opportunities that deepen our
relationships with existing customers by actively introducing them to other
services we offer;
o in our Enterprise Recruiting Services segment, we are seeking to grow
recurring revenue by focusing selling efforts on increasing business from
advertisers on our websites and increasing renewals from existing subscription
based clients; and
o we are strengthening our sales resources by replacing non-producing
employees and increasing our sales force in our different segments.
We believe that these changes, along with our expanded service line which
now includes performance job management, our continued emphasis in improving
efficiencies, our strengthened financial condition as well as recent economic
data indicating improvement in the job market, will provide us with the ability
to expand our business.
- -----------------------
1 Days Sales Outstanding represents both the age, in terms of days, of a
company's accounts receivable and the average time it takes to turn the
receivables into cash. It is calculated by dividing accounts receivables by
daily revenue. Daily revenue is calculated by dividing revenue for a month by
the number of days in that month.
2 Liquidity ratio represents the number of times that current assets can cover
current liabilities and it is calculated by dividing current assets by current
liabilities.
3 Debt to equity ratio represents the level of debt in relation to shareholders'
equity measuring a company's financial leverage. The ratio is calculated by
dividing total liabilities by shareholders' equity.
26
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, 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 contracts and relationships
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. Currently, 69% of the net book value of acquired technology, and
35% of the net book value of acquired customer base, representing a net book
value of $3,730,372, is related to the intangible assets acquired through our
acquisition of Icarian in June 2002. As the subscription agreements with the
customers we acquired in our acquisition of Icarian have expired, certain of
these customers have been switching to our E-cruiter software. If there is a
significant change on the future income of Icarian due to either the transition
of clients into other Workstream service-lines or changes in the demand of
Icarian's technology, we could incur a significant intangible impairment charge.
REVENUES
Consolidated revenues were $4,169,074 for the three months ended February
29, 2004 ("third quarter 2004") compared to $4,142,244 for the three months
ended February 28, 2003 ("third quarter 2003"), an increase of $26,830 or 1%.
$219,823 of the total revenue for the third quarter 2004 was attributable to the
operations we acquired from Perform, Inc. during the three months ended November
30, 2003 ("second quarter 2004"). Revenues for non-acquired operations decreased
by $192,993 mainly due to lower Enterprise Recruitment Service sales (10% lower
than third quarter 2003 for non-acquired operations). We believe that the
decrease in Enterprise Recruitment Service sales was caused by existing clients
seeking to cut costs by changing from our Icarian software solution to our
E-cruiter software solution, which is more economical for the client and more
profitable for us. The Icarian software demands more maintenance while the
E-cruiter software is less expensive for us to maintain and results in greater
profits as a percentage of sales. We also believe that the Enterprise
Recruitment Service sales declined in part because of the continued weak job
market which resulted in fewer companies hiring additional staff, partially
offset by an increase in revenue in the Career Transition Services.
Career Transition Service revenues for third quarter 2004 were $1,530,429
compared to $1,459,297 in third quarter 2003. The main reason for the increase
in Career Transition Service revenue was due to improved efficiencies in the
speed and quality of the delivery of our services resulting in fewer
cancellations. The improved efficiencies have been accomplished through the
hiring of more professional personnel involved in the preparation of the product
and implementing better software tools to track customer leads as well as to
monitor the status of projects.
27
Enterprise Recruiting Service revenues for third quarter 2004 were
$2,638,645 compared to $2,682,947 for third quarter 2003. The decrease in
revenues was primarily due to a decrease in recruitment research and software
sales which we believe is due in part to the continued weak job market causing
fewer companies to hire additional staff. In addition, we believe that the
decrease in revenues is due to our effort to shift clients from our Icarian
software into our E-cruiter software. The Icarian software demands more
maintenance while the E-cruiter software is less expensive for us to maintain
and results in greater profits as a percentage of sales. The decrease in revenue
in the Enterprise Recruiting Services segment was partially offset by revenue of
$219,823 of revenue generated in the third quarter 2004 from the operations we
acquired from Perform, Inc. during the second quarter 2004.
Consolidated revenues were $12,609,359 for the nine months ended February
29, 2004 compared to $13,763,386 for the nine months ended February 28, 2003, a
decrease of $1,154,027 or 8%. The overall decrease in revenues is mainly due to
a 17% decrease in Career Transition Services revenue (a decrease of $921,124),
mainly as a result of lower sales during the first six months of fiscal 2004,
caused by our closure of seven office locations in the first six months of
fiscal 2003, as well as lower sales as a result of a change in marketing
strategy. Enterprise Recruitment Services revenues were 3% lower than the nine
months ended February 28, 2003 (a decrease of $232,903) due to lower recruitment
research and software sales which we believe is due in part to the weak job
market and the transition of Icarian clients from our Icarian software to our
E-cruiter software, which is more economical for the client but results in
greater profits as a percentage of sales for Workstream.
During the nine months ended February 29, 2004, the amount of sales per
employee increased to $72,468 compared to sales of $69,865 per employee for the
nine months ended February 28, 2003. We believe that this increase reflects our
effort to improve efficiencies and eliminate redundant positions.
We believe that our business is impacted by the job market. The
unemployment rate as of March 2004 was 5.7% decreasing from a nine-year high of
6.2% for June 2003. Although the unemployment rate still remains significantly
higher than the pre-recession unemployment rate of 3.9% for December 2000, the
past few months have shown improvement. We believe that as the job market
improves, the demand for our recruitment research and software services will
increase and our revenues will grow.
COST OF REVENUES
Cost of revenues for third quarter 2004 were $356,490 compared to $688,953
for third quarter 2003, a decrease of $332,463 or 48%. The operations we
acquired from Perform, Inc. in the second quarter 2004 did not incur any cost of
revenues in the third quarter 2004. Career Transition Service cost of revenues
accounted for $192,659 and Enterprise Recruiting Service cost of revenues
accounted for $163,831 of the total cost of revenues for third quarter 2004.
Cost of revenues for the Career Transition Services segment decreased by $39,732
and cost of revenues for the Enterprise Recruiting Service decreased by $292,731
as a result of consolidating operations and improving efficiencies in the
recruitment software area by relocating tasks to our headquarters in Ottawa,
Canada, which is a lower cost market for technology personnel. Management has
made a concentrated effort to reduce costs by eliminating redundant operations.
Cost of revenues for the nine months ended February 29, 2004 were
$1,189,247 compared to $2,586,675 for the nine months ended February 28, 2003, a
decrease of $1,397,428 or 54%. Career Transition Service cost of revenues
accounted for $556,006 and Enterprise Recruiting Service cost of revenues
accounted for $633,241 of the total cost of revenues for the nine months ended
February 29, 2004. Cost of revenues for the Career Transition Services segment
decreased by $385,711 caused partially by a decrease in revenue and by a
reduction of staffing in an effort to improve productivity through automation.
Cost of revenues for the Enterprise Recruiting Service cost of revenues
decreased by $1,011,718 as a result of lower costs in recruitment software due
to management's effort to eliminate redundant operations.
28
GROSS PROFITS
Consolidated gross profits were $3,812,584 for third quarter 2004 or 91%
of revenues compared to $3,453,291 or 83% of revenues for the third quarter
2003. $219,823 of the total gross profit for third quarter 2004 was attributable
to the operations we acquired from Perform, Inc. during the second quarter 2004.
Career Transition Services gross profit was $1,337,770 or 87% of Career
Transition Services revenues and Enterprise Recruiting Services gross profit
represented $2,474,814 or 94% of Enterprise Recruiting Services revenues for
third 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 by shifting towards more profitable products and
changing marketing strategies resulting in sales with higher gross margin.
Consolidated gross profits were $11,420,112 or 91% of revenues for the
nine months ended February 29, 2004 compared to $11,176,711 or 81% of revenues
for the nine months ended February 28, 2003. Career Transition Services gross
profit was $4,103,735 or 88% of Career Transition Services revenues and
Enterprise Recruiting Services gross profit represented $7,316,377 or 92% of
Enterprise Recruiting Services revenues for the nine months ended February 29,
2004.
OPERATING EXPENSES
Total operating expenses were $4,819,682 for third quarter 2004, compared
to $5,371,502 for third quarter 2003, a decrease of $551,820 or 10%. $230,621of
operating expenses incurred in the third quarter 2004 was attributable to the
operations we acquired from Perform, Inc. during the second quarter 2004. The
primary reason for the overall decline in operating expenses is the
consolidation of operating functions, which includes lower selling and marketing
expenses, lower research and development costs as well as lower amortization and
depreciation expense.
Total operating expenses were $14,787,516 for the nine months ended
February 29, 2004, compared to $17,857,687 for the nine months ended February
28, 2003, a decrease of $3,070,171 or 17%. The primary reason for the overall
decline in operating expenses is the consolidation of operating functions,
partially offset by additional operating expenses of $891,861 due to the
acquisitions completed at different times during the first six months of fiscal
2003 and additional operating expenses of $501,592 attributable to the
operations we acquired from Perform, Inc. in the second quarter 2004. We believe
that after we complete an acquisition, our operating expenses will increase in
the first three to twelve months after the date of acquisition, but that
operating expenses will decrease after that as a result of our effort to
consolidate operations. Any future acquisitions will increase operating expenses
from the date of the acquisition, in which case we believe that proforma results
would provide a more comparable analysis.
SELLING AND MARKETING
Selling and marketing expenses were $978,803 for third quarter 2004
compared to $1,156,644 for third quarter 2003, a decrease of $177,841 or 15%.
$37,604 of selling and marketing expenses in the third quarter 2004 was
attributable to the operations we acquired from Perform, Inc. in the second
quarter 2004. The overall decrease in selling and marketing expense is mainly
attributed to a reduction of $143,718 in employee costs due to the consolidation
of operations resulting in the hiring of fewer personnel as well as the
transitioning of positions to our headquarters in Ottawa, Canada where we have
replaced positions at lower salaries, and a decrease of $38,026 in travel and
entertainment expense.
Selling and marketing expenses were $3,150,690 for the nine months ended
February 29, 2004, compared to $4,860,608 for the nine months ended February 28,
2003, a decrease of $1,709,918 or 35%. The overall decrease in selling and
marketing expense is mainly attributed to a reduction of $808,010 in advertising
expense, a reduction of $766,712 in employee costs due to the consolidation of
operations resulting in the hiring of fewer personnel as well as the
transitioning of positions to our headquarters in Ottawa, Canada where we have
29
replaced positions at lower salaries, and a decrease of $126,024 in travel and
entertainment expense. Advertising was reduced by $626,892 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 $181,118 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 $2,357,744 for third quarter
2004, compared to $2,229,713 for third quarter 2003, an increase of $128,031 or
6%. $48,164 of general and administrative expenses incurred in the third quarter
2004 was attributable to the operations that we acquired from Perform, Inc. in
the second quarter 2004. The overall increase in general and administrative
expenses was due mainly to an increase of $243,169 in employee costs due to an
increase in personnel in corporate supporting functions at our headquarters in
Ottawa, Canada, and an increase of $264,124 in professional fees due mainly to
agreements entered into this year for consulting services. The increase was
partially offset by a decrease of $104,424 in communication expense and $109,120
in rent expense as a result of our consolidation of operations, a reduction of
$94,172 in bad debt expense due to improved collection efforts, as well as a
credit of $139,155 for the recovery and settlement of certain claims and the
reversal of reserves for certain other claims related to the operations of
Icarian and Xylo that arose prior to their acquisition.
General and administrative expenses were $7,074,416 for the nine months
ended February 29, 2004, compared to $7,292,871 for the nine months ended
February 28, 2003, a decrease of $218,455 or 3%. The expenses decreased mainly
due to the consolidation of operations in areas such as rent expense (a decrease
of $578,191), communications expense (a decrease of $184,144) and computing
expense (a decrease of $111,228). In addition, expenses decreased due to a
reduction of $174,756 in bad debt expense, net of recoveries, as a result of
better collection efforts, as well as due to a credit of $289,393 related to the
recovery and settlement of certain claims and the reversal of reserves for
certain other claims related to the operations of Icarian and Xylo that arose
prior to their acquisition. These decreases were partially offset by increases
of $784,237 in employee costs due to an increase in personnel at our
headquarters in Ottawa, Canada, in corporate supporting functions, $337,999 in
professional fees due mainly to agreements entered this year for consulting
services and $97,223 in insurance expense due to higher director and officer
insurance premiums. The decrease in general and administrative expenses was
partially offset by $348,695 in additional general and administrative expenses
due to the acquisitions completed at different times during the first six months
of fiscal 2003 and additional general and administrative expenses of $97,079
attributable to the operations we acquired from Perform, Inc. in the second
quarter 2004. We believe that general and administrative expenses will continue
to increase in the first three to twelve months after we complete an acquisition
but that general and administrative expenses will decrease after that as a
result of our effort to eliminate redundant costs. Any future acquisitions will
increase general and administrative expenses from the date of the acquisition,
in which case we believe that proforma results would provide a more comparable
analysis.
RESEARCH AND DEVELOPMENT
Research and development costs were $116,798 for third quarter 2004
compared to $249,979 for third quarter 2003, a decrease of $133,181 or 53%.
Research and development costs were $387,777 for the nine months ended February
29, 2004 compared to $970,557 for the nine months ended February 28, 2003, a
decrease of $582,780 or 60%. $70,530 of the research and development costs
incurred in the third quarter 2004 was attributable to the operations we
acquired from Perform, Inc. in the second quarter 2004. 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.
30
DEPRECIATION/AMORTIZATION EXPENSE
Depreciation and amortization expenses were $1,366,337 for third quarter
2004, compared to $1,735,166 for third quarter 2003, a decrease of $368,829 or
21%. $74,323 of the depreciation and amortization expenses incurred in the third
quarter 2004 was attributable to the operations we acquired from Perform, Inc.
in the second quarter 2004. Depreciation for existing operations decreased by
$422,247 in the third quarter 2004 due to lower computer equipment and leasehold
improvement expense as a result of the disposal of certain assets in connection
with the termination of a lease of certain real property formerly leased to
Icarian and certain other assets becoming fully amortized. Depreciation and
amortization expenses were $4,174,633 for the nine months ended February 29,
2004, compared to $4,733,651 for the nine months ended February 28, 2003, a
decrease of $559,018 or 12%. Depreciation decreased by $1,014,642 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 other assets
becoming fully amortized, while amortization of intangibles increased by
$455,624 as a result of the timing of the acquisitions completed in fiscal 2004
and fiscal 2003.
INTEREST INCOME/EXPENSE
Interest income was $4,797 for third quarter 2004 compared to $1,814 for
third quarter 2003, an increase of $2,983 or 64%. Interest expense was
$1,248,366 for third quarter 2004, compared to $464,587 for third quarter 2003,
and increase of $783,779 or 169%. The increased interest expense was mainly due
to interest expense incurred as a result of a non-recurring $910,672 non-cash
charge for the write-off of the remaining discount related to the conversion of
the 8% Senior Subordinated Convertible Notes. This increase was partially offset
by lower cash interest expense ($53,111) due to the conversion of the notes, and
lower non-cash charge related to the discount on the Paula Allen note payable
($44,278).
Interest income was $6,793 for the nine months ended February 29, 2004
compared to $38,340 for the nine months ended February 28, 2003, a decrease of
$31,547 or 82%. Interest expense was $2,600,355 for the nine months ended
February 29, 2004, compared to $806,830 for the nine months ended February 28,
2003, an increase of $1,793,525 or 222%. The increased interest expense was
mainly due to a non-recurring increase of $1,700,091 incurred as a result of the
non-cash charge for amortization of the discount related to the conversion of
$2,700,000 of our 8% Senior Subordinated Convertible Notes and the accretion of
the notes to their full face value during the third quarter 2004.
GOODWILL
Goodwill was $17,472,946 as of February 29, 2004 compared to $17,383,437
as of May 31, 2003, an increase of $89,509 or 1%. In the nine months ended
February 29, 2004, the increase in goodwill of $89,509 was due mainly as a
result of additional liabilities related to periods prior to the acquisitions
and recorded as part of the purchase equation within twelve months after the
acquisition in accordance with FASB 142. Goodwill represents the excess of the
costs over the estimated fair value of the net assets of businesses acquired
recorded at the time of the acquisition. Goodwill also reflects any write-downs
subsequent to the acquisitions resulting from annual testing for impairment
conducted in accordance with FASB 142. See Note 3: Significant Accounting
Policies and Note 8: Goodwill. During fiscal 2003, management recorded goodwill
impairment charges totaling $2,133,242 related to the Enterprise Recruiting
Services segment and in fiscal 2002 charges totaling $1,310,000 and $1,500,000
related to the Enterprise Recruiting Services segment and the Career Transition
Services segment, respectively. In addition, goodwill includes increases made
during fiscal 2003 for common shares released from escrow to the former owners
of Paula Allen Holdings. The acquisition agreement with Paula Allen Holdings
provided that the 500,000 common shares held in escrow were to be released to
the former owners of Paula Allen Holdings upon certain revenue and profit
targets of Workstream on a consolidated basis being achieved or at any other
time in the discretion of our board of directors. In March 2003, our board of
directors exercised its discretion and approved the release of the final 500,000
shares from escrow. Although Workstream's profits on a consolidated basis did
not exceed the profit targets in the acquisition agreement, our board of
directors determined to release the shares from escrow based upon, among other
31
things, the revenue targets being achieved and ambiguities contained in the
acquisition agreement regarding the inclusion of additional operating expenses
incurred from subsequent acquisitions for purposes of calculating profit.
Michael Mullarkey, our Chairman and a former shareholder of Paula Allen
Holdings, did not participate in the board discussions and did not vote on the
decision to release the shares from escrow due to his conflict of interest.
Prior to our acquisition of Paula Allen Holdings, Mr. Mullarkey served as an
officer and director of Paula Allen Holdings but was not a shareholder or an
employee of Workstream. As an officer, director and shareholder of Paula Allen
Holdings, Mr. Mullarkey participated in the negotiation and structuring of our
acquisition of Paula Allen Holdings.
LIQUIDITY AND CAPITAL RESOURCES
As of February 29, 2004, we had $7,110,599 in cash, cash equivalents,
restricted cash and short-term investments. As of February 29, 2004, $2,759,392
of these cash and short- term investment balances were restricted from use
because they were collateral for debt, leases and letters 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 the nine months ended February 29, 2004, cash used in operations
totaled $222,575, consisting primarily of the net loss for the period of
$4,628,753, offset by non-cash expenses such as depreciation, amortization, and
non-cash interest. We shifted from a working capital deficiency of $3,411,579 as
of May 31, 2003, to a positive working capital of $2,786,362. The improvement in
working capital was mainly as a result of the cash we received in connection
with the sale of $6.6 million of our common shares in December 2003.
Net cash used in investing activities during the nine months ended
February 29, 2004 was $2,626,755 due mainly to an increase in restricted cash
and payments related to the acquisition of Perform.
Net cash generated by financing activities was $6,528,874 for the nine
months ended February 29, 2004. During the nine months ended February 29, 2004,
we received $7,550,000 in cash from individuals and institutional investors in
connection with our sales of common shares and warrants to purchase common
shares. We also received proceeds of $1,985,287 from our line of credit and
$33,333 from the exercise of options to purchase common shares. Financing
outflows consisted primarily of the payment of $120,000 related to a lease
settlement, repayment of bank debt of $763,505, repayment of shareholder loans
of $1,479,239, payment of $604,917 of costs incurred in the sale of common
shares and warrants, and payments for capital leases of $72,085.
We have had operating losses since our inception, and through the end of
this quarter we continued to have operating losses as a result of non-cash
charges such as amortization and depreciation, and non-cash interest expense
related to our 8% Senior Subordinated Convertible Notes. However, management
believes that our operations will generate operating cash flow in the future as
a result of the elimination of redundant costs in the businesses we acquired in
fiscal 2002, fiscal 2003 and the first nine months of fiscal 2004, the
consolidation of ongoing operations, cost reduction efforts in selling and
marketing as well as in research and development previously discussed, and
improved efficiencies in the delivery of our services. Management believes that
the expected generation of operating cash flow will contribute to our positive
working capital condition.
During the third quarter 2004, we satisfied the entire outstanding amounts
owed under our 8% Senior Subordinated Convertible Notes as well as the entire
amount owed under the term loan provided to us by Michael Mullarkey, our
Chairman, President and Chief Executive Officer. In January 2003, we entered
into an agreement with the holders of our convertible notes whereby we agreed to
convert the remaining outstanding balance of $1,762,500 of the convertible notes
into a total of 1,174,999 common shares at a conversion price of $1.50 per
common share (see Note 10: Convertible Notes). In addition, during the third
quarter 2004, we repaid the entire outstanding principal and interest on the
term loan provided to us by Michael Mullarkey in an amount equal to $1,339,407
(see Note 12: Related Party Transactions).
32
In January 2003, Mr. Mullarkey agreed to provide us with a $1,200,000
credit facility bearing interest at 8% per annum. With respect to each draw
against the credit facility, we were 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. In March 2004, Mr.
Mullarkey and Workstream agreed to terminate Mr. Mullarkey's commitment to
provide this credit facility as a result of our improved working capital
condition. As of the date of termination, we had never drawn down on the line of
credit Mr. Mullarkey agreed to provide.
In May 2003, 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 repayment date under the agreement is
automatically extended each month after June 1, 2004 for an additional month,
which results in the amounts continuing to remain due and outstanding for
greater than 365 days. In February 2004, we agreed to pay to Mr. Mullarkey
$149,468 of his deferred compensation, of which $49,468 was withheld for taxes.
The remaining $100,000 was not paid to Mr. Mullarkey in the form of a cash
payment but was applied as payment in full for Mr. Mullarkey's exercise of
options to purchase 100,000 common shares at an exercise price of $1.00 per
share. As of February 29, 2004, Mr. Mullarkey's total deferred compensation was
$783,867. In April 2004, Mr. Mullarkey and Workstream agreed to terminate his
deferred compensation agreement and we paid the entire outstanding balance of
$800,533.81 of his deferred compensation as of March 31, 2004 as well as
interest of $56,841.84 accrued through that period. As a result, we do not owe
Mr. Mullarkey any additional deferred compensation and any compensation earned
in the future by Mr. Mullarkey will be paid in accordance with the terms of his
employment agreement.
We believe that our financial strength has improved this quarter as a
result of the funds we raised through the sale of $6.6 million of our common
shares in December 2003, the conversion of our 8% Senior Subordinated Notes into
common shares and the repayment of our term loan and deferred compensation to
Michael Mullarkey. We believe that our liquidity ratio, which improved from .5X
as of May 31, 2003 to 1.5X as of February 29, 2004, and our debt to equity
ratio, which improved from .61 as of May 31, 2003 to.34 as of February 29, 2004,
reflect our increased financial strength. We have also accomplished efficiencies
in the area of receivables management as indicated by our improved Days of Sales
Outstanding of 17.8 as of February 29, 2004 from 21.6 as of May 31, 2003.
Management believes the proceeds from the sale of $6.6 million of our
common shares in December 2003, the closure of offices and reduction of costs
made in fiscal 2002, fiscal 2003 and the first nine months of fiscal 2004, along
with further consolidation of cost centers and elimination of redundant costs
will result in continued improvement of working capital and positive generation
of cash flows from operations which, together with current cash reserves, will
be sufficient to meet our working capital and capital expenditure requirements
through at least February 28, 2005.
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
33
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 $3,000,000 line of credit with the Bank of
Montreal which bears interest at the bank's prime rate plus 1%. We have drawn
CDN $2,358,245 on this facility as of February 29, 2004. We can draw an
additional CDN $641,755. We also have a term loan with the bank in the amount of
CDN $129,987 as of February 29, 2004. The term loan bears interest at the bank's
prime rate plus 2%. Additionally, we have letters of credit issued as collateral
on leased facilities in the amount of CDN $400,000 that renew annually, and a
letter of credit issued as collateral for Workstream's Bank of Montreal credit
card in the amount of CDN $100,000. We pay an annual fee of 1.2% on these
letters of credit.
The majority of our interest rates are variable, and therefore we have
exposure to risks associated with interest rate fluctuations. However,
management believes that the exposure is limited as the majority of the exposure
is related to the CDN $3,000,000 line of credit, which is fully collaterized
with our restricted cash and therefore can be liquidated immediately if faced
with a rising interest rate environment.
The impact on net interest income of a 100 basis point adverse change in
interest rates for the quarter ended February 29, 2004 would have been less than
$56,000.
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 $331,797.
ITEM 4. CONTROLS AND PROCEDURES
As of February 29, 2004, 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 February 29, 2004 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In December 2003, we sold an aggregate of 4,125,000 common shares at $1.60
per common share to institutional and other accredited investors in a private
placement resulting in aggregate proceeds of approximately $6.6 million. In
connection with the issuance of the 4,125,000 common shares, we paid commissions
to placement agents in an aggregate amount equal to $540,000, of which $100,000
34
was paid in 62,500 common shares in lieu of cash. We also issued the placement
agents or their designees warrants to purchase an aggregate of 412,500 common
shares at an exercise price of $1.60 per share. The common shares and warrants
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.
In December 2003, we issued to Legend Merchant Group, Inc. a warrant to
purchase 50,000 common shares at an exercise price of $1.50 per share, and a
warrant to purchase an additional 50,000 common shares at an exercise price of
$1.75 per share. This issuance of the warrants was made in exchange for business
advisory services to be provided over a period of 12 months by Legend Merchant
Group, Inc. to us. The warrants 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 December 2003, Crestview Capital Fund, L.P. and its affiliates that
hold our 8% Senior Subordinated Convertible Notes converted an aggregate of
$337,500 of the notes into 3,375 of our Class A Series A Preferred Shares at a
conversion price of $100 per share. Immediately upon converting the notes into
Class A Series A Preferred Shares, Crestview Capital Fund, L.P. and its
affiliates converted all 3,375 Class A Series A Preferred Shares into an
aggregate of 450,000 common shares. The common shares were issued at a
conversion price equal to $0.75 per share. The Class A Series A Preferred Shares
and the common shares were issued 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.
In December 2003, we entered into a consulting agreement with Sunrise
Financial Group, Inc. whereby we agreed to issue 100,000 common shares valued at
$145,000 to Sunrise Financial Group, Inc. in consideration for certain
consulting services Sunrise Financial Group, Inc. provided to us. Sunrise
Financial Group, Inc. directed that the 100,000 common shares be issued in the
name of Nathan Low. 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 January 2004, we entered into an agreement with the holders of our 8%
Senior Subordinated Convertible Notes to amend the notes and the warrants to
purchase common shares that were issued in connection with the sale of the notes
in April and May 2002. Under the agreement, the holders of the notes agreed that
on January 12, 2004 the remaining outstanding balance of $1,762,500 of the notes
would be automatically converted into a total of 1,174,999 common shares at a
conversion price of $1.50 per common share. The common shares were issued 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.
In February 2004, we issued Michael Mullarkey, our Chairman, President and
Chief Executive Officer, 100,000 shares in connection with his exercise of an
option to purchase 100,000 common shares at an exercise price of $1.00 per
share. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
4.1 Note and Warrant Amendment Agreement dated
as of January 12, 2004, by and among
Workstream Inc., Sands Brothers Venture
Capital III LLC, Sands Brothers Venture
35
Capital IV LLC and Sands Brothers & Co.,
LTD.
4.2 Note and Warrant Amendment Agreement dated
as of January 12, 2004, by and among
Workstream Inc., Crestview Capital Fund,
L.P., Crestview Capital Fund II, L.P. and
Crestview Capital Offshore Fund, Inc.
4.3 Warrant to Acquire Common Shares from
Workstream Inc. to Standard Securities
Capital Corporation dated December 9, 2003.
4.4 Warrant to Acquire Common Shares from
Workstream Inc. to Nathan Low dated December
11, 2003.
4.5 Warrant to Acquire Common Shares from
Workstream Inc. to Nathan Low dated December
31, 2003.
4.6 Form of Common Stock Purchase Warrant.
4.7 Registration Rights Agreement dated as of
December 9, 2003, by and among Workstream
Inc., Standard Securities Capital
Corporation and certain purchasers.
4.8 Registration Rights Agreement dated as of
December 11, 2003, by and among Workstream
Inc., Nathan Low and Smithfield Fiduciary
LLC.
4.9 Registration Rights Agreement dated as of
December 31, 2003 by and among Workstream
Inc. and certain purchasers.
10.1 Form of Subscription Agreement.
10.2 Form of Securities Purchase Agreement.
10.3 Agency Agreement dated December 9, 2003
between Standard Securities Capital
Corporation and Workstream Inc.
10.4 Securities Purchase Agreement dated as of
December 11, 2003 by and between Workstream
Inc. and Sunrise Securities Corporation.
10.5 Securities Purchase Agreement dated as of
December 31, 2003 by and between Workstream
Inc. and Sunrise Securities Corporation.
10.6 Institutional Public Relations Retainer
Agreement dated December 1, 2003 between
Sunrise Financial Group, Inc. and Workstream
Inc.
10.7 Business Advisory Agreement dated as of
December 3, 2003, by and between Workstream
Inc. and Legend Merchant Group, Inc.
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
36
We filed the following reports on Form 8-K during the quarter ended
February 29, 2004:
(1) Current Report on Form 8-K with respect to Items 5 and 7 on December
15, 2003;
(2) Current Report on Form 8-K with respect to Items 5 and 7 on January 6,
2004; and
(3) Current Report on Form 8-K with respect to Items 5 and 7 on January
13, 2004.
37
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: April 14, 2004 By: /s/ Michael Mullarkey
------------------------
Michael Mullarkey,
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
DATE: April 14, 2004 By: /s/ David Polansky
---------------------
David Polansky,
Chief Financial Officer and Secretary
(Principal Financial Officer)
38