UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
---------------
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED: MAY 31, 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)
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON SHARES, NO PAR BOSTON STOCK EXCHANGE
VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, NO PAR VALUE
---------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.|X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
The aggregate market value of the outstanding voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
price at which the common equity was last sold as of the last business day of
the registrant's most recently completed second fiscal quarter, was $23,208,513.
Common shares held by each executive officer and director and by each person who
owned 10% or more of the outstanding common shares as of such date have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The total number of common shares, no par value per share, outstanding on
August 9, 2004 was 40,631,223, excluding 1,446,549 escrow shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
WORKSTREAM INC.
FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business .............................................................. 2
2. Properties ............................................................ 17
3. Legal Proceedings ..................................................... 17
4. Submission of Matters to a Vote of Security Holders ................... 18
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters . 19
6. Selected Financial Data ............................................... 29
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................. 30
7A. Quantitative and Qualitative Disclosures About Market Risk ............ 60
8. Financial Statements and Supplementary Data ........................... 61
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. 103
9A. Control and Procedures ................................................ 103
PART III
10. Directors and Executive Officers of the Registrant .................... 104
11. Executive Compensation ................................................ 104
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ........................................... 104
13. Certain Relationships and Related Transactions ........................ 104
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..... 104
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE," AND WORDS OF SIMILAR IMPORT WHICH EXPRESS
MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS REGARDING OUR FUTURE
PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE HAVE NO OBLIGATION TO
UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS AND FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE SET FORTH UNDER "RISK FACTORS" WHICH BEGINS ON PAGE 39
ON THIS FORM 10-K AND OTHER FACTORS AND UNCERTAINTIES CONTAINED ELSEWHERE IN
THIS FORM 10-K AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
1
PART I
ITEM 1. BUSINESS
OVERVIEW
We were incorporated on May 24, 1996 under the Canada Business Corporation
Act under the name CareerBridge Corporation. In February 1999, we changed our
name to E-Cruiter.com Inc. and in November 2001 we changed our name to
Workstream Inc. (the "Company"). In 1997, we began operating an online regional
job board, on which applicants posted their resumes and employers posted
available positions, focused on the high-technology industry. In February 1999,
we changed our business focus from the job board business to providing on-line
recruitment services. In the twelve months ended May 31, 2001 ("fiscal 2001"),
we expanded our focus to provide a full range 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. Our 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, managing the compensation
process and offering benefits that promote employee retention. We also provide
services through a website 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. We also offer
software that enables companies to survey their employees regarding their
corporate environment and corporate compliance. In addition, we offer
recruitment services and career marketing and outplacement services. 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.
ACQUISITIONS
As part of our overall strategy, we have pursued growth through the
acquisition of other companies offering services similar or complementary to
ours. Through the acquisition of those companies we have expanded our service
offerings enabling us to grow our revenue and to position ourselves for future
profitability by consolidating operations and improving efficiencies. We
completed three acquisitions during the twelve months ended May 31, 2004
("fiscal 2004"), three acquisitions during the twelve months ended May 31, 2003
("fiscal 2003") and six acquisitions during the twelve months ended May 31, 2002
("fiscal 2002") that met our criteria.
FISCAL 2004 ACQUISITIONS
Kadiri, Inc.
On May 28, 2004, we acquired via merger 100% of the outstanding shares of
Kadiri Inc. ("Kadiri"), a California based company. As consideration for the
sale, we issued to the shareholders of Kadiri 4,450,000 of our common shares
valued at approximately $12.4 million. Kadiri is a provider of Enterprise
Compensation Management solutions which enable companies to plan and manage
compensation, to conduct performance evaluation and monitor the granting of
rewards. Kadiri had revenues of approximately $3.8 million and it recorded a net
loss of approximately $7.2 million for the twelve months ended December 31,
2003. We recorded approximately $3.6 million in intangible assets and $11.1
million in goodwill from the acquisition. Pursuant to the acquisition agreement
with Kadiri, an additional 950,000 of our common shares may be released from
escrow, if certain revenue and cash generation targets are met during each
fiscal quarter through November 30, 2005 or for any indemnification claims for
breaches of representation and warranties. The release from escrow of any
additional common shares will result in additional goodwill being recorded.
2
Peopleview, Inc.
On March 27, 2004 as amended and effective for accounting purposes on May
27, 2004, the Company acquired certain assets of Peopleview, Inc.
("Peopleview"), a Nevada corporation. As consideration for the sale, the Company
issued Peopleview 246,900 of its common shares valued at $688,851 and cash in an
amount equal to $250,000. Pursuant to the acquisition agreement, 50,000 of the
common shares were to be released from escrow if certain representation were
met. Subsequent to May 31, 2004, the representations were met and the shares
were released from escrow. We recorded approximately $0.9 million in intangible
assets related to the acquisition. Peopleview designs, develops and markets
software that helps companies evaluate employee skills, competency and
performance. In addition, Peopleview offers software that enables companies to
survey their employees regarding the company's environment and assess compliance
to the Sarbanes-Oxley Act.
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. We recorded
approximately $0.7 million in intangible assets related to the acquisition.
Perform designs, develops and markets Human Resource Information Systems and
Performance Management Information Systems for mid-size and Global 2000
companies, enabling them to automate and have an effective performance
management process of goal setting, employee appraisal and feedback.
FISCAL 2003 ACQUISITIONS
Icarian, Inc.
On June 28, 2002, we acquired via merger 100% of the outstanding shares of
Icarian Inc., a California based company. As consideration for the sale, we
issued to the shareholders of Icarian 2,800,000 of our common shares valued at
approximately $9.9 million. Icarian is a provider of Web-enabled solutions and
professional services. Icarian's Recruitment Management Suite is Web-native
software, offered on an Application Service Provider ("ASP") basis, with a user
interface that provides functionality for management of the hiring process.
Icarian's Connectivity, Interactive Job Site and Reporting modules offer human
resource professionals capabilities to integrate with human resource management
systems, to manage candidates' applications and job campaigns, and to produce
reporting for both compliance and cost reporting for a corporation's employee
acquisition process. Icarian had revenues of approximately $5.7 million and it
recorded a net loss of approximately $25.8 million for the twelve months ended
December 31, 2001. We recorded approximately $8.4 million in intangible assets
and $5.4 million in goodwill from the acquisition.
3
PureCarbon, Inc.
On July 1, 2002, we acquired certain assets and liabilities of PureCarbon,
Inc., a California based company. As consideration for the sale, we issued to
the shareholders of PureCarbon 263,158 of our common shares valued at
$1,000,000. We recorded approximately $0.8 million in intangible assets related
to the acquisition. PureCarbon's Internet software (JobPlanet) is designed to
integrate easily with behind-the-scenes human resources and recruiting
technology. JobPlanet was named one of the "Top Ten HR Products of 2000" by
Human Resource Executive Magazine in December 2000. JobPlanet is built on a
technology platform that enables clients to build and implement an employment
web site that mirrors the client's corporate brand image. We believe this
front-end platform fits well with our back-end Hiring Management Systems to
create a compelling end-to-end solution, that our corporate clients desire.
Xylo, Inc.
On September 13, 2002, we acquired via merger 100% of the outstanding
shares of Xylo, Inc., a Washington based provider of Web-based Employee
Retention Management ("ERM") solutions focused on providing customized retention
solutions to Fortune 500 companies. Xylo's work/life customizable software
offers employee programs in one externally-hosted platform, giving clients
control over content and applications. As consideration for the purchase, we
issued to the shareholders of Xylo 702,469 common shares valued at approximately
$1.7 million. We recorded approximately $1.3 million in intangible assets and
$0.7 million in goodwill from the acquisition.
FISCAL 2002 ACQUISITIONS
During fiscal 2002, we significantly expanded our operations through the
completion of six acquisitions of companies that offered services that allowed
us to provide a full spectrum of HCM solutions.
Paula Allen Holdings, Inc.
In July 2001, we acquired 100% of the outstanding shares of Paula Allen
Holdings, Inc. and its subsidiaries, doing business as Allen And Associates, in
exchange for our common shares. Headquartered in Orlando, Florida, Paula Allen
Holdings is focused on providing career transition, job placement and recruiting
services in different corporate areas such as information technology,
engineering, finance and marketing areas.
4
OMNIpartners, Inc.
In July 2001, we acquired 100% of the outstanding shares of OMNIpartners,
Inc. and its affiliates in exchange for Workstream common shares. OMNIpartners
was founded in 1990 and developed the concept of recruitment research at an
hourly rate, as a lower-cost recruitment alternative. OMNIpartners offers a
range of executive and professional recruitment research services to a wide
array of industries including retail, hotel, restaurant, gaming, food service,
telecommunications, insurance, distribution, manufacturing, financial services
and information technology.
RezLogic, Inc.
In August 2001, we acquired via merger 100% of the outstanding shares of
RezLogic, Inc. in exchange for Workstream common shares. RezLogic provides
recruiting process automation, offering Web-based recruiting process automation
solutions for employers, staffing agencies, executive recruiters, contract
placement firms and independent recruiters. The acquisition of RezLogic provided
us with an established U.S. sales channel for our recruitment systems, and
enabled us to integrate additional functionality into existing platforms, such
as Equal Employment Opportunity ("EEO") tracking. We believe that this reporting
capability is essential to achieve a significant penetration of the U.S. market.
ResumeXpress
In August 2001, we acquired the technology and assets of Gonyea Career
Marketing Inc., known as ResumeXpress, in consideration for a certain amount of
cash. ResumeXpress enables job seekers to distribute their resumes to thousands
of employers, recruiters and online resume database services across the U.S. and
Canada. Resumes are distributed to those parties whose keywords are matched to
the keywords found in each job seeker's resume. Using the ResumeXpress Web site,
job seekers can post their resumes in a matter of minutes, and their resumes are
posted for a six-month period on a personal resume Web page with a unique
uniform resource locator, or URL.
6FigureJobs.com, Inc.
In October 2001, we acquired via merger 100% of the outstanding shares of
6FigureJobs.com, Inc. in exchange for Workstream common shares. 6FigureJobs.com
provides career management, recruitment advertising, resume database and
targeted research services for senior-level executives, employers and executive
recruiters. 6FigureJobs.com's online candidate recruitment and placement
technology enables employers to search for candidates for employment in real
time, reducing time to hire.
Tech Engine, Inc.
In October 2001, we acquired the technology and assets of Tech Engine,
Inc. in exchange for the assumption of a promissory note. Tech Engine's software
enables us to more quickly develop career sites and job boards.
5
Some of these acquisitions were also made in consideration of additional
common shares that were held in escrow to be released upon achievement of
certain profit and/or revenue targets. As of May 31, 2004, only 323,625 common
shares related to these acquisitions completed in fiscal 2002 were held in
escrow. These shares are related to the 6FigureJobs.com acquisition which
management believes will not be released from escrow because management believes
that the applicable revenue and profit targets were not achieved. However,
pursuant to the request of the representative of the former shareholders of
6FigureJobs.com, an accounting firm was hired to review whether the revenue and
profit targets were achieved. The accounting firm determined that one of the
profit targets was achieved which would result in 64,725 of the 323,625 common
shares held in escrow being released to the former 6FigureJobs.com shareholders.
We are in the process of disputing the accounting firm's determination and
believe that none of the profit or revenue targets were achieved. The shares are
currently being held in escrow while our dispute is ongoing.
COMPANY SEGMENTS
The Company has two distinct operating segments, which are the Enterprise
Workforce Services and Career Transition Services segments. During fiscal 2004,
in an effort to integrate our services and create brand awareness, we renamed
the services that we provide. Our Enterprise Workforce Services segment,
previously called Enterprise Recruiting Services, now consists of recruiting
systems, recruitment services, applicant sourcing and exchange, and employee
portal which were previously known as automated talent acquisition systems,
recruitment research, online exchange, and employee management and retention
services, respectively. In addition, during fiscal 2004, through our
acquisitions, we added performance management systems services and compensation
management systems services.
The Career Transition Services segment consists of career marketing and
outplacement services. Financial information about our segments and geographical
areas can be found in note 21 to our consolidated financial statements.
INDUSTRY BACKGROUND
Our market includes any organization needing to manage their human capital
function from recruiting, training, evaluating, motivating and retaining their
employees, to evaluating performance and compensation, and planning the
outplacement of their employees. Our market includes especially, but not
exclusively, companies seeking to fulfill those functions through information
technology skills and expertise. We believe that several factors require
companies to hire additional personnel and place an emphasis on fulfilling the
human capital function and therefore increase demand for our services:
o recovering economy in the United States;
o increased employee turnover; and
o the shortage of knowledge workers in North America.
We believe that many organizations are seeking to overhaul their human
resources information systems to take advantage of both new technologies and new
human capital management concepts and we anticipate that spending in human
capital management will continue to shift away from the client-server human
resources services to Web-based and hosted services because of their lower cost
and ease of implementation.
6
We believe that our suite of workforce management solutions directly
addresses the major challenges facing employers, mainly, time, quality and cost
of hiring and retention.
STRATEGY
Our objective is to become the leading supplier of comprehensive adaptive
workforce solutions in North America. Our services can be used by any size
organization, and therefore we believe that our products can address the needs
of the entire human capital market. We have clients who employ more than 10,000
employees using our Recruiting solutions. We are able to provide corporate
outplacement, recruitment services, and performance and compensation management
to companies of any size. We believe that our solutions provide a comprehensive
service for corporate human resources in managing workforce turnover. Our
services include:
o talent acquisition services ranging from job posting outreach to job
boards;
o hosting a corporate career site;
o automating and monitoring the recruitment process and the provision of
links to external service providers, such as companies that specialize in
skill testing or personality profiling;
o talent utilization services with job posting to internal company
intranets;
o evaluation of talent performance;
o management of talent compensation;
o talent retention services; and
o talent separation services that encompass pre-termination planning,
individual coaching, opportunity research and job marketing campaign
development.
We believe we have developed a strategy that will achieve revenue growth
in most economic conditions and we are focused on achieving profitability
through a combination of organic revenue growth, cost management and strategic
acquisitions. Key elements of our strategy for business development are as
follows:
o Enhancing and widening our service portfolio. We continue to integrate our
different services within our technology platform and sales and service
operations, and continue to expand our services to provide a more complete
workforce management process through further product development and
strategic acquisitions. We believe that this will give us the ability to
grow revenues with each client, acquire new clients with different
requirements, and further develop revenue stability in almost any market
condition.
o Pursuing strategic acquisitions. From time-to-time we will evaluate
acquisition and investment opportunities in complementary businesses,
products and/or technologies. Our objective is to increase our revenue
growth, add new services or new technologies for our existing client base
and penetrate new markets.
7
o Continued expansion into the U.S. market. We initially expanded our
business outside of Canada in fiscal 2002 by penetrating the U.S. market
through our acquisitions and by providing additional products and
services. We intend to continue to penetrate the U.S. market by pursuing
acquisitions of additional U.S.-based companies with complementary
services and indirect and direct sales operations.
o Building a wider indirect sales channel for distribution of our products
and services. We plan to pursue reseller agreements for all of our
services with human capital solution providers and recruiting companies.
o Expanding direct sales with vertical focus. We will continue to emphasize
our direct sales efforts into targeted vertical industries, especially
those with good current economic outlooks including healthcare,
pharmaceuticals and biotech, food services and some manufacturing sectors.
o Maintaining technological leadership. We plan to remain at the forefront
of Web-based human capital solutions by developing or licensing the latest
available technologies taking advantage of the Internet and offering our
clients a comprehensive human capital management service in a hosted
environment.
We believe that our services allow organizations of every size to
significantly improve their recruiting, hiring, evaluation, compensation,
retention and outplacement cycles. Our systems automate those human capital
management functions and most are accessible with any standard Web browser and
require no additional software or hardware deployment by clients.
PRINCIPAL SERVICES AND OPERATIONS
ENTERPRISE WORKFORCE SERVICES
During fiscal 2004, in an effort to integrate our services and create
brand awareness, we renamed the services that we provide. Our Enterprise
Workforce Services segment, previously called Enterprise Recruiting Services,
now consists of recruiting systems, recruitment services, applicant sourcing and
exchange, and employee portal which were previously known as automated talent
acquisition systems, recruitment research, online exchange, and employee
management and retention systems services, respectively. In addition, during
fiscal 2004, through our acquisitions, we added performance management systems
services and compensation management systems services.
In fiscal 2004, fiscal 2003, and fiscal 2002 approximately 63% and 60% and
44%, respectively, of our revenue was generated by our Enterprise Workforce
Services.
Recruitment Systems
We provide Recruitment Systems services through E-Cruiter, Icarian,
JobPlanet and RezKeeper software. These applications offer automated solutions
through the Internet to help companies manage their entire recruitment process
including creating job requisitions, advertising job opportunities, tracking
candidates, screening the applicants, making an offer, and processing the hiring
information. In addition, these applications provide human resources
professionals with reporting tools to prepare compliance reporting information
such as Equal Employment Opportunity, as well as other reporting tools to
evaluate the staffing process. The applications also allow our clients to design
customized career web sites that are maintained by us and reside in our data
center.
8
Our different applications, E-Cruiter, E-Cruiter Lite, Icarian, JobPlanet
and RezKeeper, have been integrated into a suite of services in order to offer a
full recruiting solution. Each application has some special features which help
complement the total suite of services. For example, E-Cruiter and E-Cruiter
Lite software, provide a complete recruitment process solution for small and
medium size customers for career site hosting and resume and candidate
management. They further allow for the seamless posting to the major job boards
while creating only one requisition. The E-Cruiter applications are integrated
with our clients' Microsoft Outlook Calendar and Global Address Book for a more
integrated approach to recruiting. Icarian software, which we acquired in June
2002, provides Web-enabled solutions and professional services, supporting
larger clients with thousands of users, employees and job seekers. Icarian's
Human Resources Management System Connectivity, Interactive Job Site and
Reporting modules offer human resource professionals capabilities to integrate
with human resource management systems such as payroll and benefits. JobPlanet
software, an award-winning Internet software, acquired through our acquisition
of PureCarbon, is designed to integrate easily with behind-the-scenes human
resources and recruiting technology. JobPlanet software enables clients to build
and implement an employment web site that mirrors the client's corporate brand
image. JobPlanet software is integrated with the Icarian software to provide a
full recruitment system solution. RezKeeper software, acquired through our
acquisition of Rezlogic, allows us to provide an online recruiting suite of
products and services to different markets such as staffing agencies, executive
recruiters, contingent placement firms and independent recruiters.
Through our different applications, we provide a Recruitment System to our
corporate clients that require comprehensive recruiting management services. Our
services include the posting of resumes as well as the following features:
o A corporate career site, which is a job site hosted on our servers and
linked to a client's corporate Web site. This recruiting portal is linked
to job posting and management services within our applications;
o Resume processing tools which enable clients to rate, score, screen,
search, organize and manage resumes submitted by job seekers;
o Applicant communication tools, including our proprietary e-mail system
which automatically keeps records of the electronic communication
associated with each job opening and generates automatic messages to job
seekers; and
o A suite of multi-user workflow features which allows for collaborative
hiring between human resources personnel and hiring managers within the
same organization.
Our Recruiting Systems are Web-outsourced applications. The cost benefit
to organizations of Web-outsourcing is that all software and hardware
infrastructure is physically located at the service provider's facility, with
clients only requiring standard Web browsers on their employees' workstations.
Therefore, because our clients are not required to make a significant initial
investment, and our services do not require additional software or hardware, our
services are more economical to use and easier to implement.
9
Our Recruitment Systems suite is a complete recruiting portal solution
that allows companies of all sizes to manage the entire hiring process on-line.
Using our applications, clients have a central, multi-functional hiring platform
for all recruiting activities, including posting to their external career site,
intranet career site, job boards, news groups and agency suppliers. We license
our applications to our clients together with one or more concurrent user
licenses. Each concurrent license enables another user within the organization
to access the service. One concurrent license is sufficient for small
organizations that have only a few individuals actively recruiting. More than
one concurrent license provides for additional simultaneous users and permits
clients to take full advantage of our multi-user functionality.
Our Recruitment Systems allow organizations to post jobs to multiple
Internet boards through a posting manager function. Clients write a job
requisition only once, and the job requisition is ready to be advertised on
numerous Internet job boards, newsgroups and the client's own corporate Web
site. Our write-once, post-to-many capability saves time in re-writing job
requisitions for specific boards and in making arrangements with numerous job
boards. We currently post job requisitions to several job boards including,
Hotjobs, Workopolis, Monster, Careerbuilder, JobBoom, America's Job bank and
Jobviber. We continue to add new job boards to our service so that our clients
can post job requisitions to national, regional and skill-specific boards that
assist them in targeting and attracting the right candidates for the posted
positions.
Our applications allow clients to quickly establish a high quality company
career site. We believe that career sites maximize the value of our recruiting
portal solution and are the most strategic way to help clients attract quality
candidates. In particular, our clients can purchase career sites from us that
include functionality, such as job seeker agent, a capability that notifies
registered candidates of employment opportunities when they are posted to the
career site, and search, a capability that allows job seekers to search the jobs
posted on the career site for positions of interest to them. Our clients can
track the effectiveness of their career site by reviewing statistics on the
volume and source of job seeker traffic received.
Our Recruitment Systems provide for enhanced communication among
candidates, hiring managers and human resources personnel. Clients can use a set
of generic corporate messages to automatically respond to resumes or other
applicant communications using our auto-acknowledgement tool. For example, an
e-mail acknowledging receipt of a resume can be automatically sent to an
applicant, an administrative function which is now automated, making corporate
recruiters' job more efficient and cost effective.
We believe our applications' selection capabilities, including automatic
screening and skills ranking, improve our clients' recruiting efforts and
increase the speed at which they gain access to top candidates. Applicants who
apply on-line are ranked after they have answered screening questions either
pulled by the corporate recruiter from our suggested list, or created for the
specific job by that corporate recruiter. These applicants are then matched
against the screening criteria determined by the corporate recruiter. Applicants
who do not meet the screening criteria are placed in a rejected folder, while
those that meet the screening criteria are flagged for review by employers and
automatically become qualified candidates. Clients also receive lists of the
applicants in ranked order, and this ranking is determined by the applicant's
responses to the screening questions, and the manner in which the applicant
matches against the set criteria. This feature assists recruiters in determining
quickly if an applicant is qualified for a given position.
10
Our Recruitment Systems' subscription contract is typically for a one-year
term with automatic renewal, one or more simultaneous user licenses, user
training and set up and a menu of Internet posting services. Clients are charged
a monthly subscription fee for concurrent user access licenses, career site
hosting, on-line reporting and other services. We charge one-time fees for
initial career site development and other set up and product education. We also
provide professional consultation services on a time and materials basis. Job
site posting, skills testing, personality profiling and verification services
are provided on a pay-per-use basis.
We believe that the Recruitment Systems services' pricing formula provides
clients with a lower-risk avenue to access the benefits of on-line recruiting at
a reasonable cost compared to client-server technology. Furthermore, since the
required technology infrastructure investments are nominal by comparison,
clients experience lower initial costs for full access to the comprehensive
services that our applications provide. We believe that the subscription formula
provides us with the opportunity to earn annuity-based returns as subscriptions
are renewed. This pricing practice is consistent with similarly offered
Web-based services.
Recruitment Services
We currently provide recruitment services through our subsidiary
OMNIpartners, which we acquired in July 2001. Our recruitment services are based
on the outsourcing of the sourcing and screening work associated with
recruiting. Our services are based on research provided to our clients on an
hourly fee basis, and clients are billed once the project is completed. We
believe this outsourcing formula allows clients to lower costs and gain access
to specialized expertise that provides objectivity and ongoing value to the
hiring process. OMNIpartners's research employees look for potential employees,
interview and qualify them, and deliver all the information to the clients'
human resource departments. The OMNIresearch Report, delivered after completion
of the recruitment assignment, details information about each individual
uncovered during the search. OMNIresearch Reports may include information about
candidates' work histories, technical abilities, educational backgrounds, people
skills, decision-making abilities, availability and salary expectations. The
client can offer to hire any or all of the individuals presented, at any time,
for no additional charge.
Applicant Sourcing and Exchange
6FigureJobs.com, which we acquired in October 2001, is an applicant
sourcing and exchange where job seeking candidates and recruiting companies can
interact. We believe that 6FigureJobs.com customizes this experience to satisfy
the needs of the upper-echelon management candidate and the companies looking to
hire them. The site provides content appropriate for senior executives,
directors and other managers, as well as containing job postings that meet their
qualifications. We employ screening to create this exclusive community of job
seekers. On the candidate side, each job seeker is reviewed before his or her
resume is allowed to reside in the site's candidate database. On the recruiting
side, all job openings must have a minimum aggregate compensation of $100,000.
We generate revenue through 6FigureJobs.com on a subscription basis from
employers and recruiters that access our database of job seekers and use our
tools to post, track and manage job openings. We also generate revenue by
charging companies that advertise on our 6FigureJobs.com website, which includes
charging certain advertisers a fee based on a percentage of their sales
generated through the advertisement on our website.
11
Employee Portal
Xylo, which we acquired in September 2002, is a provider of a Web-based
employee discount platform used by Fortune 500 and other innovative companies to
offer a unique benefit to build upon employee satisfaction and efficiency.
Through this hosted web site, we allow our corporate clients the ability to make
available to their employees everyday savings on computers, movies, amusement
park tickets, travel, entertainment, insurance, and professional services from
over 220 nationally recognized providers. In addition, clients are able to
integrate into our system, their existing discounts from other businesses and
corporate partnerships. Other feature components include an internal Survey
application and Information Center, featuring life event content and resource
information. Our service is customized to match our corporate client's culture
and its employees' expectations, while we maintain the web site and coordinate
all the savings on the products offered through national and local deals and
ticketing programs. We believe that our service enables our corporate clients to
help employees balance work and life needs, increasing retention rates within
their workforce. We generate revenue through Xylo on a subscription basis by
charging our clients for hosting a website where their employees can access
discounted products and services. We also generate revenue on the tickets
purchased and sold by us to the client's employees via the hosted website. We
also charge companies that advertise their products and services on the hosted
website, which includes charging certain advertisers a fee based on a percentage
of their sales generated through the advertisement on the hosted website.
Performance Management Systems
Perform, which we acquired in September 2003, and Peopleview which we
acquired in March 2004 as amended and effective for accounting purposes in May
2004, are providers of a Web-based performance appraisal, competency measurement
and corporate compliance systems. Through our systems, our corporate clients
have the ability to ensure that performance appraisals are linked to
compensation based on merit, and avoid the creation of disjointed pay scales.
Our clients are also able to gather employee feedback from across the entire
organization, providing support to senior management's decisions regarding their
corporate environment and corporate compliance to the Sarbanes-Oxley
legislation. We generate revenue through Perform and Peopleview on a
subscription basis by charging our clients for hosting and access to our
software.
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Compensation Systems
Kadiri, which we acquired at the end of May 2004 is a provider of
compensation management software. Through the software, our corporate clients
have the ability to automate their compensation management functions such as
monitoring salary and variable pay and the granting of stock across the company,
evaluating employee's promotions and planning salary organizational changes.
Starting in June 2004, we will generate revenue through Kadiri from the licenses
of the software products and from services that the we will provide to our
customers such as professional services, maintenance and hosting.
CAREER TRANSITION SERVICES
Our Career Transition Services segment consists of our outplacement
services. Outplacement revenues accounted for approximately 37% of total revenue
for fiscal 2004 compared to 40% and 56% for fiscal 2003 and fiscal 2002,
respectively. We currently provide outplacement services through our subsidiary
Paula Allen Holdings, which we acquired in July 2001. Paula Allen Holdings,
which does business under the name Allen And Associates, is an outplacement and
employment marketing firm. Paula Allen Holdings provides professional assistance
to approximately 10,000 job seekers each year in the areas of information
technology, engineering, finance and marketing. Services provided to the job
seeker include development and preparation of a professional resume and cover
letter, industry employment research, as well as fulfillment, administrative,
and clerical services. We market our outplacement services to individuals
seeking employment or other career opportunities in the marketplace.
Outplacement services are marketed to individuals predominantly by advertising
on the Internet as well as in local newspapers throughout North America. During
fiscal 2003, we developed a Corporate Outplacement program providing services to
companies that are separating existing employees.
Individuals are charged on average between $900 to $2,800 for our resume
development, career consulting and market research services. Our Corporate
Outplacement program is based on a similar pricing structure.
FOREIGN OPERATIONS
We have operations in Canada and the U.S., and therefore are subject to
the risks typical of an international business, including, but not limited to,
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility.
Our operations center is located in Ottawa, Canada and maintains our
servers, which support all of our locations and the software that is accessed by
our clients in an Application Service Provider ("ASP") environment. Financial
information about geographical areas and segments can be found in note 21 to our
consolidated financial statements.
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WORKING CAPITAL ITEMS
The terms of our subscription sales agreements can range from one month to
multiple years. Clients that agree to use our software and to have their
information hosted with us in an ASP environment and companies that advertise on
our Xylo and 6FigureJobs.com websites are billed on a subscription basis. For
subscription sales, we generally bill our clients in advance according to the
terms of the contract. In the case of annual or multiple year contracts, we bill
our clients in advance monthly, quarterly or annually over the period in which
the service is provided as deemed necessary when negotiating the contract. Any
unearned revenue is disclosed in the balance sheet as deferred revenue and is
recognized when the service is provided. Nonsubscription sales are project or
assignment based and are billed when the project is completed. With the
acquisition of Kadiri, starting in June 2004, we will recognize revenue on
Kadiri's clients for our software products when the product has been delivered,
a signed contract exits, the license fee is fixed and when we are certain that
the collection is reasonably assured. In addition, we will bill Kadiri's clients
for service revenues consisting of professional services provided and
maintenance fees. Professional services will be billed once the project is
completed, while maintenance fees will be billed and recognized per the contract
over the period in which the service is provided.
Career Transition (outplacement) Service clients are billed 50% when the
assignment starts and the remaining 50% when the assignment is completed, which
is generally in approximately 10 days. We believe that our billing practices are
typical of companies that operate in our industry.
RESEARCH AND DEVELOPMENT
During fiscal 2001 we internally developed our software products spending
approximately $2.2 million. Beginning in fiscal 2002 we changed our strategy for
obtaining new technology to acquiring companies that have already developed
technology platforms that have proven successful in the market place. Research
and development expense was approximately $453,247, $1,086,000 and $749,000 in
fiscal 2004, fiscal 2003, and fiscal 2002, respectively. In fiscal 2004, all
research and development expense was incurred in the Enterprise Workforce
Services segment. This expense was mainly related to software development and
enhancements.
INTELLECTUAL PROPERTY
We rely upon a combination of copyright, trade secret and trademark laws
and non-disclosure and other contractual arrangements to protect our proprietary
rights. Many of the copyrights and trademarks we hold were obtained in
connection with the acquisitions we made in fiscal 2004, fiscal 2003 and fiscal
2002. Currently we have eight registered trademarks in Canada, and eight in the
United States. With the acquisition of Kadiri, we now have four registered
trademarks in the European Union and two in Mexico. Our trademarks include
Workstream, E-Cruiter, E-Cruiter Enterprise, E-Cruiting, Careerbridge,
6FigureJobs.com, RezLogic, Kadiri, Kadiri TotalComp, and Decisis. In addition,
we have two service marks for OMNIpartners and OMNIresearch. We also have
copyrights on some of our training manuals and internally developed software
programs.
In 1999, we changed our name from "Careerbridge" to "E-Cruiter". In 2001,
we changed our name to "Workstream". We have registered the Workstream trademark
in the U.S. and Canada, and such registrations expire in May 2014 and in May
2019, respectively. The U.S. trademark renews ten years at a time and the
Canadian trademark renews fifteen years at a time.
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The following registered trademarks are current in use, are registered and
expire as follows: E-Cruiter - December 2013, E-Cruiter Enterprise - December
2013, E-Cruiting - January 2014. These trademarks are renewable for fifteen
years at a time. Our 6FigureJobs.com and Rezlogic trademark registrations expire
in September 2010 and March 2010, respectively, and are renewable for ten years
at a time.
Our Kadiri trademarks are registered and expire as follows: United States:
Kadiri, Decisis, and Kadiri TotalComp - January 2011. These trademarks are
renewable for ten years at a time. Canada: Kadiri - September 2018, and Kadiri
TotalComp - June 2019. These trademarks are renewable for fifteen years at a
time. European Union: Decisis - October 2006, Kadiri - December 2010, and Kadiri
TotalComp - June 2011. These trademarks are renewable for ten years at a time.
Mexico: Kadiri and Kadiri TotalComp - July 2011. These trademarks are renewable
for ten years at a time.
In connection with our acquisition with Kadiri we acquired one U.S. patent
issued July 31, 2001 for Automated Process Guidance System and Method Using
Knowledge Management System by Kadiri Inc. In addition, we have three pending
patent applications: (1) a Canadian patent application for Method for Traversing
a Flowchart by Kadiri Inc, (2) a European patent application for Method for
Traversing a Flowchart by Kadiri Inc, and (3) a U.S. patent application for
Automated Process Guidance System and Method by Kadiri Inc.
We believe that the proprietary rights created by these trademarks,
service marks and patents are important to our business. The measures we have
taken to protect our proprietary rights, however, may not be adequate to deter
misappropriation of proprietary information or protect us if misappropriation
occurs. Policing unauthorized use of our technologies and other intellectual
property is difficult, particularly because of the global nature of the
Internet. We may not be able to detect unauthorized use of our proprietary
information and take appropriate steps to enforce our intellectual property
rights.
We are not aware of any patent infringement charge or any violation of
other proprietary rights claim by any third party relating to us or our
products. However, the computer technology market is characterized by frequent
and substantial intellectual property litigation.
SALES AND MARKETING
We market our services in both Canada and the United States to support our
National Accounts Sales team as well as our local sales personnel in 11
locations in North America. We utilize the Internet, trade shows, seminars and
newspapers to market our services. The Enterprise Workforce Services segment's
sales cycle, with the exception of Applicant Sourcing and Exchange, is
approximately four to eight weeks depending on the size of the potential client.
Career Transition and Applicant Sourcing and Exchange recruiting sales cycle is
relatively short and of higher volume. We have marketing personnel in
Connecticut and California that supports both Enterprise Workforce and Career
Transition Services. Our National Accounts sales team located in Canada supports
both Canadian and United States sales personnel. Both Career Transition Services
and Enterprise Workforce Services sales teams sell only within their segment.
Our Career Transition Services sales team has 52 dedicated sales personnel and
Enterprise Workforce Services has 23. Our Marketing group consists of 9 support
personnel and professionals.
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COMPETITION
The market for HCM services is highly fragmented and competitive with
thousands of companies offering products or services that compete with one or
more of the services that we offer. We compete within the United States and
Canada with Internet recruitment services companies, outplacement services
companies and human resource service providers. We compete for a portion of
employer's recruiting budgets with many types of competitors such as offline
recruiting firms, offline advertising, resume processing companies and web-based
recruitment companies. While we do not believe that any of our competitors offer
the full suite of services that we provide, there are a number of companies that
have products or services that compete with one or more of the services we
provide. For instance, companies that compete with our recruiting systems
services include Taleo Corporation (formerly RecruitSoft), Webhire and Kenexa.
Companies such as Monster Worldwide, Execunet and Netshare have products or
services that compete with our applicant sourcing and exchange services. We also
compete with vendors of enterprise resource planning software, such as
PeopleSoft, Oracle, SAP and Performaworks. In the area of outplacement services,
we compete with companies such as McKenzie Scott and WSA Corp. Finally,
companies such as LifeCare, Next Jump and SparkFly compete with our employee
portal.
We believe that the primary competitive factors affecting our market
include product functionality, product performance, quality service support and
implementation and the cost of delivery. We believe that our principal
competitive advantages include:
o our unique combination of services; o our technology;
o our network of offices and personnel throughout North America;
o our performance and reliability as an application service provider;
o our service reputation; and
o our experienced staff.
Although we believe we compete favorably with respect to such factors,
there can be no assurance that we can maintain our position against current and
potential competitors. A number of our competitors have longer operating
histories and greater financial, technology and marketing resources, as well as
better name recognition than we do.
EMPLOYEES
As of May 31, 2004, we had 199 full-time employees, consisting of 84 in
sales and marketing, 40 in research and development, 18 in professional
services, 39 in maintaining daily operating functions, 9 in finance/accounting
and 9 in administration. Our employees are not represented by a collective
bargaining organization and we have never experienced any work stoppage. We
consider our relations with our employees to be good.
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ITEM 2. PROPERTIES
Our corporate headquarters and principal research and development,
customer support, network operations and human resource administration are
located in approximately 17,000 square feet of leased office space in Ottawa,
Ontario, Canada. Our lease for this facility expires in December 2008. All
segments use this facility.
In addition, we lease approximately 11,946 square feet of office space in
Maitland, Florida, which serves as the headquarters of our subsidiary, Paula
Allen Holdings. Our lease for these premises expires in April 2009.
We also lease approximately 8,427 square feet of office space in
Burlingame, California, which serves as the headquarters of our subsidiary,
Kadiri. Our lease for these premises expires in April 2005.
We also lease space for sales offices in another 8 locations, primarily
under one to three year leases, usually with renewal options. We believe that
our facilities are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
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.
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 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 sought compensation for
unpaid rents, maintenance charges and other charges as well as an undetermined
amount for attorneys' fees. As of May 31, 2004, the lawsuit was settled
requiring OMNIpartners to pay $250,000 to 11263 Mississippi, LLC and 14617
Vanowen LLC. The Company has accrued for the full amount as of May 31, 2004.
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.
17
We are currently in a lawsuit with the former shareholders of
6FigureJobs.com, a company we acquired in October 2001. Under the terms of the
purchase agreement pursuant to which we acquired 6FigureJobs.com, 323,625 common
shares were held in escrow to be released to the former shareholders of
6FigureJobs.com provided that certain revenue and profit targets were achieved.
The Company determined that the revenue and profit targets were not achieved,
but the representative of the former 6FigureJobs.com shareholders disputed that
determination and filed a lawsuit against the Company with regard to the
escrowed shares.
We are subject to other legal proceedings and claims which arise in the
ordinary course of our business. We do not believe that the resolution of such
actions will materially affect our business, results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON SHARES
Our common shares are listed on the NASDAQ Small Cap Market under the
symbol "WSTM" and on the Boston Stock Exchange under the symbol "ERM." The
principal United States market for our common shares is the NASDAQ Small Cap
Market. The following table sets forth, for the periods indicated, the high and
low sales prices of our common shares as reported on the NASDAQ Small Cap
Market. As of August 10, 2004, there were approximately 210 holders of record of
our common shares.
PRICE OF COMMON SHARES
Period High Low
- --------------------------------------------------------------------------------
June 1, 2002 - August 31, 2002 $4.14 $1.95
September 1, 2002 - November 30, 2002 $3.50 $1.51
December 1, 2002 - February 28, 2003 $1.99 $0.46
March 1, 2003 - May 31, 2003 $1.45 $0.71
June 1, 2003 - August 31, 2003 $2.17 $0.89
September 1, 2003 - November 30, 2003 $1.95 $1.37
December 1, 2003 - February 29, 2004 $2.68 $1.42
March 1, 2004 - May 31, 2004 $3.33 $2.22
DIVIDEND POLICY
We have not paid any cash dividends on our common shares and do not
anticipate paying cash dividends in the foreseeable future. We intend to retain
any future earnings for use in our business.
There is no law or government decree or regulation in Canada that
restricts the export or import of capital, or that affects the remittance of
dividends, interest or other payments to a non-resident holder of common shares,
other than withholding tax requirements. See "Taxation."
There is no limitation imposed by Canadian law or by our articles or other
charter documents on the right of a non-resident of Canada to hold or vote our
common shares, other than as provided in the Investment Canada Act, as amended,
referred to as the Investment Act.
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in the
Investment Act, referred to as a non-Canadian, unless, after review, the
minister responsible for the Investment Act is satisfied that the investment is
likely to be of net benefit to Canada. If an investment by a non-Canadian is not
a reviewable investment, it nevertheless requires the filing of a short notice
which may be given at any time up to 30 days after the implementation of the
investment.
19
An investment in our common shares by a non-Canadian that is a WTO
investor (defined below) would be reviewable under the Investment Act if it were
an investment to acquire direct control, through a purchase of our assets or
voting interests, and the gross book value of our assets equaled or exceeded
$237 million, the threshold established for 2004, as indicated in our financial
statements for our fiscal year immediately preceding the implementation of the
investment. In subsequent years, such threshold amount may be increased or
decreased in accordance with the provisions of the Investment Act. A WTO
investor is an investment by an individual or other entity that is a national
of, or has the right of permanent residence in, a member of the World Trade
Organization, current members of which include the European Community, Germany,
Japan, Mexico, the United Kingdom and the United States, or a WTO
investor-controlled entity, as defined in the Investment Act.
An investment in our common shares by a non-Canadian, other than a WTO
investor, would be subject to review under the Investment Act if it were an
investment to acquire our direct control and the value of the assets were $5.0
million or more, as indicated on our financial statements for our fiscal year
immediately preceding the implementation of the investment.
A non-Canadian, whether a WTO investor or otherwise, would acquire control
in us for the purposes of the Investment Act if he, she or it acquired a
majority of our common shares or acquired all or substantially all of the assets
used in conjunction with our business. The acquisition of less than a majority,
but one-third or more of our common shares, would be presumed to be an
acquisition of control in us unless it could be established that we were not
controlled in fact by the acquirer through the ownership of common shares.
The Investment Act would not apply to certain transactions in relation to
our common shares including:
(a) an acquisition of our common shares by any person if the acquisition were
made in the ordinary course of that person's business as a trader or
dealer in securities;
(b) an acquisition of control in us in connection with the realization of
security granted for a loan or other financial assistance and not for any
purpose related to the provisions of the Investment Act; and
(c) an acquisition of control in us by reason of an amalgamation, merger,
consolidation or corporate reorganization following which the ultimate
direct or indirect control in fact in us through the ownership of voting
interests, remains unchanged.
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TAXATION
MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material Canadian federal income tax
considerations generally applicable to a person who acquires our common shares
and who, for purposes of the Income Tax Act (Canada) and the Canada-United
States Income Tax Convention, 1980, as applicable, and at all relevant times, is
a U.S. holder. Readers are cautioned that this is not a complete technical
analysis or listing of all potential tax effects that may be relevant to holders
of our common shares. In particular, this discussion does not deal with the tax
consequences applicable to all categories of investors, some of which may be
subject to special rules, and does not address the tax consequences under
Canadian provincial or territorial tax laws, or tax laws of jurisdictions
outside of Canada. Accordingly, you should consult your own advisor regarding
the particular tax consequences to you of an investment in our common shares.
This summary is based on the advice of our Canadian counsel, Perley-Robertson,
Hill & McDougall.
For purposes of the Income Tax Act (Canada) and the Canada-United States
Income Tax Convention, 1980, a U.S. holder is a person that:
o Through the period during which the person owns our common shares is not
resident in Canada and is a resident of the United States;
o Holds our common shares as capital assets, that is generally as
investments;
o Deals at arm's length with us within the meaning of the Income Tax Act
(Canada);
o Does not have a permanent establishment or fixed base in Canada, as
defined by the Canada-United States Income Tax Convention, 1980; and
o Does not own and is not treated as owning, 10% or more of our outstanding
voting shares.
Special rules, which we do not address in this discussion, may apply to a
U.S. holder that is (a) an insurer that carries on an insurance business in
Canada and elsewhere, or (b) a financial institution subject to special
provisions of the Income Tax Act (Canada) applicable to income gain or loss
arising from mark-to-market property.
This discussion is based on the current provisions of the Canada-United
States Income Tax Convention, 1980, the Income Tax Act (Canada) and their
regulations, all specific proposals to amend the Income Tax Act (Canada) and
regulations, all specific proposals to amend the Income Tax Act (Canada) and
regulations announced by the Minster of Finance (Canada) before the date of this
annual report and counsel's understanding of the current published
administrative practices of Canada Customs and Revenue Agency. This discussion
is not exhaustive of all potential Canadian tax consequences to a U.S. holder
and does not take into account or anticipate any other changes in law, whether
by judicial, governmental or legislative decision or action, nor does it take
into account the tax legislation or considerations of any province, territory or
foreign jurisdiction.
21
TAXATION OF DIVIDENDS
Dividends paid or credited or deemed to be paid or credited on common
shares owned by a U.S. holder will be subject to Canadian withholding tax under
the Income Tax Act (Canada) at a rate of 25% on the gross amount of the
dividends. The rate of withholding tax generally is reduced under the
Canada-United States Income Tax Convention, 1980 to 15% where the U.S. holder is
the beneficial owner of the dividends. Under the Canada-United States Income Tax
Convention, 1980, dividends paid to religious, scientific, charitable and
similar tax exempt organizations and pension organizations that are resident and
exempt from tax in the United States and that have complied with the
administrative procedures specified in the Tax Convention are exempt from this
Canadian withholding tax.
TAXATION OF CAPITAL GAINS
Gain realized by a U.S. holder on a sale, disposition or deemed
disposition of our common shares generally will not be subject to tax under the
Income Tax Act (Canada) unless the common shares constitute taxable Canadian
property within the meaning of the Income Tax Act (Canada) at the time of the
sale, disposition or deemed disposition. Our common shares generally will not be
taxable Canadian property provided that: (a) they are listed on a prescribed
stock exchange, and (b) at no time during the five-year period immediately
preceding the sale, disposition or deemed disposition, did the U.S. holder,
persons with whom the U.S. holder did not deal at arm's length, or the U.S.
Holder acting together with those persons, own or have an interest in or a right
to acquire 25% or more of the issued shares of any class or series of our
shares. A deemed disposition of common shares will occur on the death of a U.S.
holder.
If our common shares are taxable Canadian property to a U.S. holder, any
capital gain realized on a disposition or deemed disposition of those shares
will generally be exempt from tax under the Income Tax Act (Canada) by the
Canada-United States Income Tax Convention, 1980, so long as the value of our
common shares at the time of the sale, disposition or deemed disposition is not
derived principally from real property situated in Canada, as defined by the
Canada-United States Income Tax Convention, 1980. We have advised that currently
our common shares do not derive their value principally from real property
situated in Canada; however, the determination as to whether Canadian tax would
be applicable on a sale, disposition or deemed disposition of common shares must
be made at the time of that sale, disposition or deemed disposition.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
Subject to the limitations described below, the following discussion
describes the material United States federal income tax consequences to a U.S.
Holder (as defined below) that is a beneficial owner of the common shares of
Workstream Inc. and that holds them as capital assets. For purposes of this
summary, a "U.S. Holder" is a beneficial owner of common shares who or that is
for United States federal income tax purposes (i) a citizen or resident of the
United States, (ii) a corporation (or other entity treated as a corporation for
United States federal tax purposes) created or organized in the United States or
under the laws of the United States or of any state or the District of Columbia,
(iii) an estate, the income of which is includible in gross income for United
States federal income tax purposes regardless of its source, or (iv) a trust, if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust.
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This summary is for general information purposes only. It does not purport
to be a comprehensive description of all of the tax considerations that may be
relevant to owning the common shares. AS THIS IS A GENERAL SUMMARY, OWNERS OF
COMMON SHARES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS TO NON-U.S. TAX
CONSEQUENCES, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF COMMON SHARES
APPLICABLE TO THEIR PARTICULAR TAX SITUATIONS.
This discussion is based on current provisions of the U.S. Internal
Revenue Code of 1986, as amended, current and proposed U.S. Treasury regulations
promulgated thereunder, and administrative and judicial decisions, as of the
date hereof, all of which are subject to change, possibly on a retroactive
basis. This discussion does not address all aspects of United States federal
income taxation that may be relevant to any particular holder based on such
holder's individual circumstances. In particular, this discussion does not
address the potential application of the alternative minimum tax or the United
States federal income tax consequences to holders that are subject to special
treatment, including:
o broker-dealers, including dealers in securities or currencies;
o insurance companies, regulated investment companies or real estate
investment trusts;
o taxpayers that have elected mark-to-market accounting;
o tax-exempt organizations;
o financial institutions or "financial services entities";
o taxpayers who hold common shares as part of a straddle, "hedge" or
"conversion transaction" with other investments;
o holders owning directly, indirectly or by attribution at least 10% of our
voting power;
o non-resident aliens of the United States;
o taxpayers whose functional currency is not the U.S. dollar; and
o taxpayers who acquire common shares as compensation.
This discussion does not address any aspect of United States federal gift
or estate tax, or state, local or non-United States laws. Additionally, the
discussion does not consider the tax treatment of partnerships or persons who
hold common shares through a partnership or other pass-through entity. Certain
material aspects of United States federal income tax relevant to a beneficial
owner other than a U.S. Holder (a "Non-U.S. Holder") also are discussed below.
23
EACH HOLDER OF COMMON SHARES IS ADVISED TO CONSULT SUCH PERSON'S OWN TAX
ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF
PURCHASING, HOLDING OR DISPOSING OF COMMON SHARES.
TAXATION OF DIVIDENDS PAID ON COMMON SHARES
We have never paid cash dividends, and we currently do not intend to pay
cash dividends in the foreseeable future. In the event that we do pay a
dividend, and subject to the discussion of the passive foreign investment
company, or PFIC, rules below, a U.S. Holder will be required to include in
gross income as ordinary income the amount of any distribution paid on our
common shares, including any Canadian taxes withheld from the amount paid, on
the date the distribution is received to the extent the distribution is paid out
of our current or accumulated earnings and profits, as determined for United
States federal income tax purposes. In the case of noncorporate U.S. Holders,
dividends may qualify for favorable tax treatment. Distributions in excess of
such earnings and profits will be applied against and will reduce the U.S.
Holder's basis in the common shares and, to the extent in excess of such basis,
will be treated as a gain from the sale or exchange of the common shares.
Distributions of current or accumulated earnings and profits paid in a
currency other than the U.S. dollar to a U.S. Holder will be includible in the
income of a U.S. Holder in a U.S. dollar amount calculated by reference to the
exchange rate on the date the distribution is received. A U.S. Holder that
receives a distribution in a currency other than the U.S. dollar and converts
the non-U.S. currency into U.S. dollars subsequent to its receipt will have
foreign exchange gain or loss based on any appreciation or depreciation in the
value of the non-U.S. currency against the U.S. dollar, which will generally be
U.S. source ordinary income or loss.
U.S. Holders will have the option of claiming the amount of any Canadian
income taxes withheld at source either as a deduction from gross income or as a
dollar-for-dollar credit against their United States federal income tax
liability. Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of any Canadian
income taxes withheld, but such individuals may still claim a credit against
their United States federal income tax liability. The amount of foreign income
taxes which may be claimed as a credit in any year is subject to complex
limitations and restrictions, which must be determined on an individual basis by
each shareholder. The total amount of allowable foreign tax credits in any year
cannot exceed the pre-credit U.S. tax liability for the year attributable to
foreign source taxable income.
A U.S. Holder will be denied a foreign tax credit with respect to Canadian
income tax withheld from dividends received on our common shares:
o if such U.S. Holder has not held the common shares for at least 16 days of
the 30-day period beginning on the date which is 15 days before the
ex-dividend date; or
o to the extent such U.S. Holder is under an obligation to make related
payments on substantially similar or related property.
Any days during which a U.S. Holder has substantially diminished its risk
of loss on the common shares are not counted toward meeting the 15 day holding
period required by the statute. In addition, distributions of current or
accumulated earnings and profits will be foreign source passive income for
United States foreign tax credit purposes and will not qualify for the dividends
received deduction otherwise available to corporations.
24
TAXATION OF THE DISPOSITION OF COMMON SHARES
Subject to the discussion of the PFIC rules below, upon the sale, exchange
or other disposition of our common shares, a U.S. Holder will generally
recognize capital gain or loss in an amount equal to the difference between the
amount realized on the disposition and such U.S. Holder's tax basis in the
common shares (tax basis is usually the U.S. dollar cost of such common shares).
If the common shares are publicly traded, a disposition of common shares will be
considered to occur on the "trade date," regardless of the U.S. Holder's method
of accounting. A U.S. Holder that uses the cash method of accounting calculates
the U.S. dollar value of the proceeds received on the sale as of the date that
the sale settles. However, a U.S. Holder that uses the accrual method of
accounting is required to calculate the value of the proceeds of the sale as of
the "trade date" and may therefore realize foreign currency gain or loss, unless
such U.S. Holder has elected to use the settlement date to determine its
proceeds of sale for purposes of calculating such foreign currency gain or loss.
Capital gain from the sale, exchange or other disposition of the common shares
held more than one year is long-term capital gain. Gain or loss recognized by a
U.S. Holder on a sale, exchange or other disposition of common shares generally
will be treated as United States source income or loss for United States foreign
tax credit purposes. The deductibility of a capital loss recognized on the sale,
exchange or other disposition of common shares is subject to limitations. In
addition, a U.S. Holder that receives non-U.S. currency upon disposition of our
common shares and converts the non-U.S. currency into U.S. dollars subsequent to
its receipt will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the non-U.S. currency against the U.S. dollar,
which will generally be United States source ordinary income or loss.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
We will be a passive foreign investment company, or PFIC, for United
States federal income tax purposes, if 75% or more of our gross income in a
taxable year, including the pro rata share of the gross income of any company,
U.S. or foreign, in which we are considered to own 25% or more of the shares by
value, is passive income. Alternatively, we will be considered to be a PFIC if
50% or more of our assets in a taxable year, averaged over the year and
ordinarily determined based on fair market value and including the pro rata
share of the assets of any company in which we are considered to own 25% or more
of the shares by value, are held for the production of, or produce, passive
income. Passive income includes amounts derived by reason of the temporary
investment of funds raised in our public offerings.
If we were a PFIC, and a U.S. Holder did not make a qualifying election
either to (i) treat us as a "qualified electing fund" (a "QEF") (as described
below), or (ii) mark our common shares to market (as discussed below), excess
distributions by us to a U.S. Holder would be taxed under special rules. "Excess
distributions" are amounts received by a U.S. Holder with respect to shares in a
PFIC in any taxable year that exceed 125% of the average distributions received
by such U.S. Holder from the PFIC in the shorter of either the three previous
years or such U.S. Holder's holding period for such shares before the present
taxable year. Excess distributions must be allocated ratably to each day that a
U.S. Holder has held shares in a PFIC. A U.S. Holder must include amounts
allocated to the current taxable year in its gross income as ordinary income for
that year. Further, a U.S. Holder must pay tax on amounts allocated to each
prior PFIC taxable year at the highest rate in effect for that year on ordinary
income and the tax is subject to an interest charge at the rate applicable to
deficiencies for income tax. The entire amount of gain that is realized by a
U.S. Holder upon the sale or other disposition of our common shares will also be
treated as an excess distribution and will be subject to tax as described above.
A. U.S. Holder's tax basis in our common shares that were acquired from a
decedent who was a U.S. Holder would not receive a step-up to fair market value
as of the date of the decedent's death but would instead be equal to the
decedent's basis, if lower. If we were a PFIC, a U.S. Holder of our common
shares will be subject to the PFIC rules as if such holder owned its pro-rata
share of any of our direct or indirect subsidiaries which are themselves PFICs.
Accordingly, a U.S. Holder of our common shares will be subject to tax under the
PFIC rules with respect to distributions to us by, and dispositions by us of
stock of, any direct or indirect PFIC stock held by us, as if such holder
received directly its pro-rata share of either the distribution or proceeds from
such disposition.
25
The special PFIC rules described above will not apply to a U.S. Holder if
the U.S. Holder makes an election to treat us as a "qualified electing fund" in
the first taxable year in which the U.S. Holder owns common shares and if we
comply with certain reporting requirements. Instead, a shareholder of a QEF is
required for each taxable year to include in income a pro rata share of the
ordinary earnings of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the QEF as long-term capital gain, subject
to a separate election to defer payment of taxes, which deferral is subject to
an interest charge. The QEF election is made on a shareholder-by-shareholder
basis and can be revoked only with the consent of the U.S. Internal Revenue
Service, ("IRS"). A shareholder makes a QEF election by attaching a completed
IRS Form 8621, including the PFIC annual information statement, to a timely
filed United States federal income tax return and by filing such form with the
IRS Service Center in Philadelphia, Pennsylvania. Even if a QEF election is not
made, a shareholder in a PFIC who is a U.S. person must file a completed IRS
Form 8621 every year. We have agreed to supply U.S. Holders with the information
needed to report income and gain pursuant to a QEF election in the event we are
classified as a PFIC.
A U.S. Holder of PFIC stock which is publicly traded could elect to mark
the stock to market annually, recognizing as ordinary income or loss each year
an amount equal to the difference as of the close of the taxable year between
the fair market value of the PFIC stock and the U.S. Holder's adjusted tax basis
in the PFIC stock. Losses would be allowed only to the extent of net
mark-to-market gain previously included by the U.S. Holder under the election
for prior taxable years. If the mark-to-market election were made, then the
rules set forth above would not apply for periods covered by the election.
We believe that we were not a PFIC for the fiscal years ending May 2004
and May 2003 and we believe that we will not be a PFIC for the fiscal year
ending May 2005. The tests for determining PFIC status, however, are applied
annually, and it is difficult to make accurate predictions of future income and
assets, which are relevant to this determination. Accordingly, there can be no
assurance that we will not become a PFIC. U.S. Holders who hold common shares
during a period when we are a PFIC will be subject to the foregoing rules, even
if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who
made a QEF election. U.S. Holders are strongly urged to consult their tax
advisors about the PFIC rules, including the consequences to them of making a
mark-to-market or QEF election with respect to common shares in the event that
we qualify as a PFIC.
26
TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON SHARES
Except as described in "U.S. Information Reporting and Backup Withholding"
below, a Non-U.S. Holder who is a beneficial owner of our common shares will not
be subject to United States federal income or withholding tax on the payment of
dividends on, and the proceeds from the disposition of, our common shares,
unless:
o Such item is effectively connected with the conduct by the Non-U.S. Holder
of a trade or business in the United States and, in the case of a resident
of a country which has a treaty with the United States, such item is
attributable to a permanent establishment or, in the case of an
individual, a fixed place of business, in the United States;
o The Non-U.S. Holder is an individual who holds the common shares as
capital assets and is present in the United States for 183 days or more in
the taxable year of the disposition and does not qualify for an exemption;
or
o The Non-U.S. Holder is subject to tax pursuant to the provisions of United
States tax law applicable to U.S. expatriates.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Holders generally are subject to information reporting requirements
with respect to dividends paid in the United States on common shares. In
addition, U.S. Holders are subject to U.S. backup withholding at a rate of up to
28% on dividends paid in the United States on common shares unless the U.S.
Holder provides an IRS Form W-9 or otherwise establishes an exemption. U.S.
Holders are subject to information reporting and backup withholding at a rate of
up to 28% on proceeds paid from the sale, exchange, redemption or other
disposition of common shares unless the U.S. Holder provides an IRS Form W-9 or
otherwise establishes an exemption.
Non-U.S. Holders generally are not subject to information reporting or
backup withholding with respect to dividends paid on, or proceeds upon the sale,
exchange, redemption or other disposition of, common shares, provided that such
Non-U.S. Holder provides a taxpayer identification number, certifies to its
foreign status, or otherwise establishes an exemption.
The amount of any backup withholding will be allowed as a credit against
such U.S. Holder's or Non-U.S. Holder's United States federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
RECENT SALES OF UNREGISTERED SECURITIES
In March 2004 and as amended and effective for accounting purposes in May
2004, we acquired certain assets of Peopleview, Inc., a Nevada corporation. As
consideration for the sale, we issued Peopleview, Inc. 246,900 common shares
valued at $688,851, cash of $250,000 and a warrant to purchase 50,000 of the
Company's common shares at an exercise price of $3.00 per share. 50,000 of the
common shares were held in escrow to be released if certain representations were
met. Subsequent to May 31, 2004, the representations were met and the escrowed
shares were released. The common shares were issued to one investor in reliance
on the exemption from registration provided by Rule 506 promulgated under the
Securities Act of 1933.
27
In May 2004, the Company acquired 100% of the outstanding stock of Kadiri,
Inc., a California based company. As consideration for the sale, the Company
issued to the shareholders of Kadiri 4,450,000 common shares valued at
approximately $12.4 million, and 950,000 common shares held in escrow to be
released if certain revenue and cash generation targets are achieved during each
fiscal quarter through November 20, 2005 or for any indemnification claims for
breaches of representation and warranties. The common shares were issued to
several investors in reliance on the exemption from registration provided by
Rule 506 promulgated under the Securities Act of 1933.
28
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Form 10-K.
FISCAL YEAR ENDED MAY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2004 2003 2002 2001 2000
--------------------------------------------------------
Statement of operations data
Revenue $ 17,167 $ 17,837 $ 14,752 $ 1,992 $ 1,170
Cost of revenues 1,587 3,040 2,858 1,483 1,085
Selling and marketing 4,362 6,058 6,649 2,416 2,430
General and administrative 9,799 9,582 6,724 984 1,156
Research and development 453 1,086 750 2,164 1,643
Amortization and depreciation 5,602 6,097 1,796 501 250
Impairment write-down of
goodwill -- 2,133 2,810 -- --
--------------------------------------------------------
Operating loss (4,636) (10,159) (6,835) (5,556) (5,394)
Other (expense) income, net (2,635) (1,146) (155) 452 346
--------------------------------------------------------
Loss before income taxes (7,271) (11,305) (6,990) (5,104) (5,048)
Recovery of deferred income taxes
1,789 1,586 29 -- --
Current income tax (expense) recovery
(55) 42 -- -- --
--------------------------------------------------------
Net loss for the year $ (5,537) $ (9,677) $ (6,961) $(5,104) $ (5,048)
========================================================
Basic and diluted net loss
per common share $ (0.22) $ (0.52) $ (0.52) $ (0.66) $ (0.89)
========================================================
Weighted average number of
common stock outstanding 25,036 18,608 13,281 7,710 5,650
========================================================
MAY 31,
(IN THOUSANDS)
2004 2003 2002 2001 2000
--------------------------------------------------------
Balance Sheet Data
Working capital (deficit) $ (351) $ (3,412) $ (1,677) $ 3,200 $ 8,548
Total assets 48,882 30,618 23,276 5,389 10,805
Long term obligations and
redeemable preferred stock
1,259 5,312 1,557 213 28
Total liabilities 11,143 11,594 8,519 1,347 1,570
Stockholders' equity 37,739 19,024 14,757 4,042 9,235
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "ANTICIPATES," "BELIEVES," "
EXPECTS," "INTENDS," "FUTURE," AND WORDS OF SIMILAR IMPORT WHICH EXPRESS
MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS REGARDING OUR FUTURE
PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE HAVE NO OBLIGATION TO
UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS AND FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE SET FORTH BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS REPORT AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
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
Workforce Services and Career Transition Services segments. The Enterprise
Workforce Services segment consists of recruiting systems, recruitment services,
applicant sourcing and exchange, employee portal, performance management systems
services and compensation management systems services. The Career Transition
Services segment consists of outplacement services.
Our business changed significantly beginning in fiscal 2002. During the
first six months of fiscal 2002, we completed the acquisition of Paula Allen
Holdings, OMNIpartners, 6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine.
During the first six months of fiscal 2003 we completed the acquisition of
Icarian, PureCarbon and Xylo. During fiscal 2004, we completed the acquisitions
of Perform, Peopleview and Kadiri. Subsequent to the acquisitions, we have
concentrated on integrating the acquired entities and expanding the reach of the
existing business. These acquisitions have enabled us to increase our service
offerings and revenue streams.
30
Due to the substantive change these acquisitions have made to our
business, this management's discussion and analysis includes comparisons of pro
forma results of operations for fiscal 2004 and fiscal 2003. These pro forma
results assume that the significant acquisitions (Kadiri) had been completed as
at June 1, 2002 and therefore compare revenues and expenses of us and all our
subsidiaries for both fiscal years.
To monitor our results of operations and financial condition, 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 outstanding1, liquidity ratio2, and debt to equity ratio3. In
addition, we review the number of clients and revenue per client in both the
Enterprise Workforce Services and Career Transition Services segments, and the
number of listings in our Applicant Sourcing and Exchange business. As our
business is impacted by the job market, we also review economic indicators such
as the unemployment rate.
CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies relate to the assessment of goodwill
impairment, impairments in intangible assets and the valuation of deferred tax
assets. Management applies judgment to value these assets. Changes in
assumptions used would impact our financial results.
Goodwill is assessed for impairment on an annual basis or more frequently
if circumstances warrant. We assess goodwill related to reporting units for
impairment, and write down the carrying amount of goodwill as required. We
estimate the fair value of each business 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. We
assumed that the economy would continue to improve in fiscal 2005, that
individual business unit revenue growth rates would range from 10% to 146%, that
gross profit would generally be higher than current trends, and that operating
expense would be reduced. 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.
- ----------
1 Days of 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.
31
We value intangible assets, such as a customer base acquired in an
acquisition, based on estimated future income applying historical customer
retention rates. If the customer base acquired discontinues using our service
earlier than historical experience, we may be required to record an impairment
of intangible assets. Changes in circumstances impacting other assumptions used
to value intangible assets could also lead to future impairments.
We apply significant judgment in recording net deferred tax assets, which
result from the loss carry forwards of companies that we acquire. The recording
of deferred tax assets requires estimates of future profits from the acquired
company to be forecast. Actual results may differ from amounts estimated.
The table below sets forth pro forma results and the percentage difference
between fiscal year 2004 and fiscal year 2003, assuming that the Kadiri
acquisition was acquired at the beginning of fiscal 2003.
Workstream Inc.
Unaudited Pro Forma Statement of Operations
(United States dollars)
Proforma Proforma
FY 2004 FY 2003 Variance % change
-------------------------------------------------------
Revenue $ 20,825,775 $ 23,135,712 $(2,309,937) -10.0%
Cost of Revenue 4,023,809 4,561,146 (537,337) -11.8%
-------------------------------------------
Gross Profit 16,801,966 18,574,566 (1,772,600) -9.5%
Selling and marketing 8,560,200 9,295,905 (735,705) -7.9%
General and administrative 11,879,945 11,676,515 203,430 1.7%
Research and development 3,168,834 3,088,811 80,023 2.6%
Amortization and depreciation 7,030,569 7,683,223 (652,654) -8.5%
Impairment write-down of goodwill 0 2,133,242 (2,133,242) -100.0%
-------------------------------------------
30,639,548 33,877,696 (3,238,148) -9.6%
-------------------------------------------
OPERATING LOSS (13,837,582) (15,303,130) 1,465,548 -9.6%
Interest and other income 84,243 2,662,378 (2,578,135) -96.8%
Interest and other expense (2,648,848) (2,381,359) (267,489) 11.2%
-------------------------------------------
(2,564,605) 281,019 (2,845,624) -1012.6%
Recovery of deferred income taxes 1,789,235 1,586,232 203,003 12.8%
Current income tax (expense) recovery (54,830) 42,128 (96,958) -230.2%
-------------------------------------------
NET LOSS FOR THE YEAR $(14,667,782) $(13,393,751) $(1,274,031) -9.5%
===========================================
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
DURING THE YEAR 29,449,581 23,057,725
============================
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.50) $ (0.58)
============================
32
Our revenues have declined on a pro forma basis for fiscal 2004 due
primarily to a reduction in revenue for Kadiri as a result of deferral of
revenue due to the timing of the sales completed and additional work needed to
complete the project. Additionally, pro forma revenues declined as a result of
the closure of the Career Transition Services' offices in the first six months
of fiscal 2003, the closure of seven offices in fiscal 2004 and a change in
marketing strategy. In addition, pro forma revenue declined in recruiting
research and some sectors of recruiting software 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.
Following completion of the fiscal 2002, fiscal 2003 and fiscal 2004
acquisitions, we focused on integrating the acquired entities and expanding the
reach of the existing businesses. We have also made efforts to reduce costs by
consolidating operations, resulting in staff reductions of redundant positions
and related overhead and reducing research and development expenditures. Certain
actions taken to reduce costs, 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 sales, we
believe that it is more profitable because it is easier to manage and less
costly than advertising in newspapers. In fiscal 2004, operating expenses of
non-acquired operations declined $5,506,366 including an advertising expense
decline of $794,616 and a decline of $2,268,515 related to the closure of
offices. We believe that the impact of a full year of reduction in costs will
continue to impact results in the near term for existing operations.
FISCAL 2004 COMPARED TO FISCAL 2003
REVENUES
Consolidated revenues were $17,166,880 for fiscal 2004 compared to
$17,836,990 for fiscal 2003, a decrease of $670,110 or 4%. Fiscal 2004 revenues
from companies we acquired during fiscal 2004 represented $714,795 for the year
ended May 31, 2004. Revenues other than from companies we acquired in fiscal
2004 declined 8% to $16,452,085 from $17,836,990 in fiscal 2003 mainly due to a
decrease in Career Transition Service revenues ($682,867 lower) caused by our
closure of seven office locations in fiscal 2004 and the timing of our closure
of four office locations in fiscal 2003, as well as lower sales as a result of a
change in marketing strategy initiated during the last six months of fiscal
2003. Enterprise Workforce Services revenues (other than those resulting from
acquisitions) decreased in fiscal 2004 by $702,038 from fiscal 2003 mainly due
to a decline in sales in recruitment research and some sectors of recruitment
software which we believe was due in part to the weak job market and the
transition of our clients from our higher priced Icarian product to our less
expensive E-cruiter software. The E-cruiter software is less costly for us to
maintain than the Icarian software and therefore generates higher gross profits
as a percentage of sales for us.
33
Career Transition Services revenues for fiscal 2004 were $6,376,829
compared to $7,059,696 for fiscal 2003, a decrease of $682,867 or 10%. The major
reason for the decline in Career Transition Services revenues was due to our
closure of seven office locations during fiscal 2004 and the timing of the
closure of four office locations during fiscal 2003, as well as lower sales as a
result of a change in marketing strategy.
Enterprise Workforce Services revenues for fiscal 2004 were $10,790,051
compared to $10,777,294 for fiscal 2003, an increase of $12,757 or .1%. $714,795
of revenues for fiscal 2004 was contributed by the acquisitions made in fiscal
2004. This increase as a result of acquisitions was partially offset by a
decline in sales in recruiting research and some sectors of recruiting software
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
less expensive for the client but results in a greater profit as a percentage of
sales for Workstream.
Pro forma revenues for fiscal 2004 were $20,825,775 compared to
$23,135,712 for fiscal 2003, a decrease of $2,309,937 or 10%. The decline in pro
forma revenues is primarily due to a reduction of $1,639,827 in revenue for
Kadiri due to the deferral of revenue as a result of the timing of the sales
completed and additional work needed to complete the project. Additionally, pro
forma revenues declined $682,867 as a result of the timing of the closure of the
Career Transition Services' offices during fiscal 2003 and fiscal 2004 and a
change in marketing strategy initiated during the last six months of fiscal
2003.
During fiscal 2004, the amount of sales per employee decreased to $86,266
compared to $105,544 per employee for fiscal 2003 due to the addition of
Kadiri's employees to such calculation without recognizing any revenue for
Kadiri during fiscal 2004 since the acquisition took place on the last business
day of our fiscal year. Sales per employee excluding Kadiri employees were
$100,982, a decrease of $4,562 sales per employee. We believe that the decrease
is due mainly to the timing of the closure of the offices in the Career
Transition Services segment and lower revenues in the Enterprise Workforce
Services segment.
By the end of fiscal 2004, the total number of clients for our software
services, consisting of our Recruitment Systems, Performance Management and
Employee Portal were at the same level since May 31, 2003. At the end of fiscal
2004, the total number of clients for our Career Transition Services decreased
by 5% since May 31, 2003 as a result of the timing our closure of offices mostly
done during the first six months of fiscal 2004. The number of job postings in
our Applicant Sourcing and Exchange business remained at approximately the same
level throughout fiscal 2004.
By the end of fiscal 2004, our revenue per client for our software
services, consisting of our Recruitment Systems, Performance Management and
Employee Portal Services increased 13% since May 31, 2003. We believe that the
increase in revenue per client is primarily attributable to the higher revenue
generating clients we obtained through the businesses we acquired during fiscal
2004. Our revenue per client for our Career Transition Services increased
approximately 5% from May 31, 2003 as a result of our efforts to improve our
level of service by having better qualified staff involved in the delivery of
the services and by automating the production process. These revenue per client
figures are calculated by dividing monthly revenue by the number of clients
serviced during the month.
34
We believe that our business is impacted by the job market. The
unemployment rate as of May 31, 2004 was 5.6%, improving from a 6.1% for May 31,
2003 but still significantly higher than the pre-recession rate of 3.9% for
December 2000. When businesses reduce the number of employees being hired, as
evidenced by a higher unemployment rate, we believe that the demand for our
services decreases mainly in the areas of our recruitment software and
recruitment services.
COST OF REVENUES
Cost of revenues for fiscal 2004 were $1,586,989 compared to $3,040,132
for fiscal 2003, a decrease of $1,453,143 or 48%. Cost of revenues includes the
cost of network operations, client support and charges related to third-party
services. Career Transition Services cost of revenues accounted for $728,178 and
Enterprise Workforce Services cost of revenues accounted for $858,811 of the
total cost of revenues for fiscal 2004. Cost of revenues in the Enterprise
Workforce Services segment decreased $1,072,903 from fiscal 2003 as a result of
the elimination of redundant operations. Cost of revenues for the Career
Transition Services segment decreased $380,240 from fiscal 2003 as a result of
reduction of staffing in an effort to improve productivity through automation.
On a pro forma basis, cost of revenues decreased from $4,561,146 for
fiscal 2003 to $4,023,809 for fiscal 2004, a decrease of $537,337 or 12% mainly
due to Workstream's elimination of redundant operations and improved
productivity. The decrease was partially offset by a $915,806 increase in the
cost of revenues of Kadiri's operations as a result of hosting costs not
incurred in the prior year, an increase in technical and customer support costs
incurred to support a larger customer base, and higher implementation costs due
to outsourcing of those services.
GROSS PROFITS
Consolidated gross profits were $15,579,891 for fiscal 2004 or 91% of
revenues compared to $14,796,858 or 83% of revenues for fiscal 2003.
Career Transition Services gross profit was $5,648,650 or 89% of Career
Transition Service revenues compared to $5,951,277 or 84% of Career Transition
Services revenues for fiscal 2003. Enterprise Workforce Services gross profit
was $9,931,241 or 92% of Enterprise Workforce Services for fiscal 2004 compared
to $8,845,581 or approximately 82% of Enterprise Workforce Services revenues for
fiscal 2003. 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 to more profitable products and changing
marketing strategies resulting in sales with higher gross margins.
35
Pro forma gross profits were $16,801,966 or 81% of revenues for fiscal
2004 compared to $18,574,566 or 81% of revenues for fiscal 2003. Pro forma gross
profits remained at the same level as a result of Workstream's efforts to
eliminate redundant operations and costs and the pursuit of more profitable
business, offset by Kadiri's increased costs of revenues due to added hosting
costs, a shift to higher costs incurred through the outsourcing of
implementation and higher technical and customer support costs.
OPERATING EXPENSES
Total operating expenses were $20,215,889 for fiscal 2004 compared to
$24,956,020 for fiscal 2003, a decrease of $4,740,131 or 19%. Acquisitions
completed in fiscal 2004 accounted for $766,235 in total operating expenses.
Operating expenses for non-acquired operations were $19,449,654 for fiscal 2004,
representing an approximate 22% decline compared to fiscal 2003. The primary
reason for the decline in operating expenses for the operations that existed
prior to the fiscal 2004 acquisitions is the consolidation of operating
functions and the impairment of goodwill recorded in fiscal 2003. Goodwill
impairment for non-acquired operations declined $2,133,242 from fiscal 2003 to
fiscal 2004. Non-acquired operating expenses excluding goodwill declined
$3,373,124, $806,512 of which was from moving our advertising from newspapers to
the internet, $834,216 of which was from reducing our internal research and
development expenses and the balance mainly as a result of consolidating
operations. We believe that operating expenses generally continue to increase in
the first three to twelve months after we complete an acquisition but that
operating expenses will decrease after that as a result of the consolidation of
operations. Any future acquisition will increase operating expenses from the
date of acquisition, in which case we believe that pro forma results would
provide a more comparable analysis.
On a pro forma basis, operating expenses were $30,639,548 for fiscal 2004
compared to $33,877,696 for fiscal 2003, a decrease of $3,238,148 or 10%. The
decline in pro forma operating expense is due mainly to the elimination of
redundant costs in the operations excluding Kadiri, and the impairment of
goodwill recorded in fiscal 2003. Kadiri's operating expenses increased
$1,501,983 due to mainly to an increase of $959,791 in selling and marketing
expenses and an increase of $713,071 in research and development.
SELLING AND MARKETING
Selling and marketing expenses were $4,362,292 for fiscal 2004 compared to
$6,057,788 for fiscal 2003, a decline of $1,695,496 or 28%. This decrease is
attributed mainly to a reduction of $806,512 in advertising expense for existing
operations, a reduction of $850,494 in sales and marketing employee costs for
existing operations due to the consolidation of operations resulting in the
hiring of fewer sales and marketing personnel as well as the transitioning of
sales and marketing positions to our headquarters in Ottawa, Canada where we
have replaced positions at lower salaries, and a reduction of $169,015 in sales
and marketing travel and entertainment. Advertising expense was reduced by
$665,280 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 Workforce Services segment by $141,232 due to a
reduction of online advertising mainly for our Applicant Sourcing and Exchange
business.
36
On a pro forma basis, selling and marketing expenses were $8,560,200 for
fiscal 2004 compared to $9,295,905 for fiscal 2003, a decrease of $735,705 or
8%. The decline in selling and marketing expenses was mainly due to reductions
in operations other than Kadiri, in advertising, employee and travel and
entertainment as explained above. This decline was partially offset by an
increase of $959,791 in the Kadiri operations as a result of an increase in
marketing expense in efforts to create market awareness and the promotion of new
product.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $9,798,440 for fiscal 2004
compared to $9,581,554 for fiscal 2003, an increase of $216,886 or 2%. The
acquisitions made in fiscal 2004, contributed $131,129 of this increase mainly
for employee costs, rent and communication expense. General and administrative
expenses for existing operations increased $85,757 due principally to an
increase of $1,053,288 in employee costs due to an increase in personnel at our
headquarters in Ottawa, Canada, in corporate support functions, a $591,172
increase in professional fees as a result of agreements entered this year for
consulting services, and an increase of $107,510 in travel and entertainment.
These increases were partially offset by a decrease in expenses due to the
consolidation of operations in areas such as rent expense (a decrease of
$686,775), communication expense (a decrease of $185,699), computing expense (a
decrease of $185,736). In addition, expenses decreased due to a reduction of
$237,525, net of recoveries, as a result of better collection efforts, as well
as due to credits related to the recovery and settlement of claims with vendors
that arose prior to the Icarian acquisition ($131,966), and the reversal of
pre-acquisition accounts payable balances of Icarian determined not to be
outstanding ($202,877). 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.
On a pro forma basis, general and administrative expenses increased from
$11,676,515 for fiscal 2003 to $11,879,945 for fiscal 2004, an increase of
$203,430 or 2%. The increase is mainly due to additional expense of $131,129
incurred as a result of the acquisitions of Peopleview and Perform in the form
of employee costs, rent and communication and an increase of $85,757 for
existing operations as explained above.
RESEARCH AND DEVELOPMENT
Research and development costs were $453,247 for fiscal 2004 and
$1,086,295 for fiscal 2003, a decrease of $633,048 or 58%. $201,168 of the
research and development costs incurred in fiscal 2004 was attributable to the
operations that we acquired in fiscal 2004. The overall decline in research and
development costs is primarily due to our strategy to acquire new technology
through acquisitions. We believe that we can acquire new technology at a lower
cost in the long-term and more efficiently than developing new software
platforms with internal resources. We implemented this strategy in fiscal 2002.
Since fiscal 2002 most of our research and development efforts have been
incurred in the Enterprise Workforce Services segment.
37
On a pro forma basis, research and development expenses were $3,168,834
for fiscal 2004 compared to $3,088,811 for fiscal 2003, an increase of $80,023
or 3% . This increase is mainly due to an increase of $713,071 in the Kadiri
operations as a result of higher staffing and consulting costs due to release of
new product in 2004. The increase was offset by lower research and development
expense in operations other than Kadiri due to our strategy to acquire new
technology through acquisitions.
AMORTIZATION AND DEPRECIATION EXPENSE
Amortization and depreciation expense was $5,601,910 for fiscal 2004
compared to $6,097,141 for fiscal 2003, a decrease of $495,231 or 8%. The
decrease is due to a decrease of $1,096,934 in depreciation expense 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. The decrease in depreciation is partially offset by an increase of
$601,704 in amortization of intangibles as a result of the timing of the
acquisitions completed in fiscal 2004 and fiscal 2003. Amortization and
depreciation expense for the Enterprise Workforce Services Segment increased
$506,415 mainly as a result of the increase in amortization due to the timing of
the acquisitions completed in fiscal 2004 and fiscal 2003 partially offset by
the disposal and full amortization of the assets as discussed above. In fiscal
2004, the Career Transition Services segment's amortization and depreciation
expense increased by $11,182. During fiscal 2004, through the acquisitions of
Perform, Peopleview and Kadiri we acquired capital assets of $624,838 and
intangible assets of $5,105,311. The amortization of these acquired assets is
based on the estimated useful lives of the assets as described in note 3 of our
consolidated financial statements.
On a pro forma basis, amortization and depreciation expense was $7,030,569
for fiscal 2004 compared to $7,683,223 for fiscal 2003, a decrease of $652,654
or 9%. The decline in amortization and depreciation expense on a pro forma basis
was due primarily to lower computer equipment and leasehold improvement expense
related to the disposal of assets and assets becoming fully amortized, partially
offset by additional amortization of intangibles as a result of the timing of
the acquisitions completed in fiscal 2004 and fiscal 2003.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $11,959 for fiscal 2004 compared to $47,245
for fiscal 2003, a decrease of $35,286 or 75%. The decline was due to lower
average short term investment and restricted cash balances throughout fiscal
2004.
INTEREST EXPENSE AND OTHER EXPENSE
Interest and other expense was $2,647,265 for fiscal 2004 compared to
$1,193,045 for fiscal 2003, an increase of $1,454,220 or 122%. The primary
reason for the increase in interest and other expense was due to a non recurring
increase of $1,733,455 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 of 2004. This increase was partially
offset by a decrease of $279,235 in interest expense due to the timing of the
conversion of the 8% Senior Subordinated Convertible Notes and the payment of a
certain shareholder note.
38
GOODWILL
Goodwill was $28,598,706 as of May 31, 2004 compared to $17,383,437 as of
May 31, 2003, an increase of $11,215,269 or 65%. $11,125,760 of the increase
relates to the Kadiri acquisition completed during fiscal 2004, and $89,509 of
the increase was due as a result of additional liabilities for a tax assessment
and a claim with a vendor 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.
Management recorded during fiscal 2004 and fiscal 2003, goodwill
impairment charges totaling nil and $2,133,242, respectively, related to the
Icarian, Rezlogic and Tech Engine acquisitions.
FISCAL 2003 COMPARED TO FISCAL 2002
REVENUES
Consolidated revenues were $17,836,990 for fiscal 2003 compared to
$14,751,620 for fiscal 2002, an increase of $3,085,370 or 21%. Fiscal 2003
revenues from companies we acquired during fiscal 2003 represented $4,831,432
for the year ended May 31, 2003. Revenues other than from companies we acquired
in fiscal 2003 declined 12% to $13,005,558 from $14,751,620 in fiscal 2002
mainly due to lower Career Transition Service revenues (15% lower from fiscal
2002) caused by our consolidation of office locations and lower Enterprise
Workforce Services revenues (8% lower from fiscal 2002). We believe that
Enterprise Workforce Services revenues (other than those resulting from
acquisitions) decreased in fiscal 2003 as a result of the continued softness in
the economy which we believe has led to fewer companies hiring additional staff.
Career Transition Services revenues for fiscal 2003 were $7,059,696
compared to $8,301,246 for fiscal 2002. The major reason for the decline in
Career Transition Services revenues was due to the closure of two office
locations in the fourth quarter of fiscal 2002 and four office locations in the
first six months of fiscal 2003. These closures are a result of our plan to
consolidate sales locations and develop larger centers in fewer locations in
order to leverage management costs and improve internal controls.
Enterprise Workforce Services revenues for fiscal 2003 were $10,777,294
compared to $6,450,374 for fiscal 2002. The increase in revenues was primarily
due to the acquisition of Icarian, PureCarbon, and Xylo in fiscal 2003. This
increase was partially offset by a decline in sales in recruiting research and
some sectors of recruiting software which we believe is due to the weak economy.
We believe that the acquisitions we made in fiscal 2002 and fiscal 2003
allow us to deliver a broader range of recruiting and outplacement products and
services through our 11 offices across North America. Management believes that
the acquisitions will have a significant impact on future revenues.
39
During fiscal 2003, the amount of sales per employee increased to $105,544
compared to $64,985 per employee for fiscal 2002. We believe that this increase
reflects the integration of the businesses acquired, our efforts to improve
efficiencies and the elimination of redundant positions.
By the end of fiscal 2003, the total number of clients for our software
services, consisting of our Recruitment Systems Services and our Employee Portal
Services, had increased by 14% since June 2002. We believe that the increase in
the total number of clients is primarily attributable to the additional clients
we obtained through the businesses we acquired during fiscal 2003. At the end of
fiscal 2003, the total number of clients for our Career Transition Services
decreased by 30% since June 2002 as a result of the closing of offices and
change in marketing strategy. The number of job postings in our Applicant
Sourcing and Exchange business remained at approximately the same level
throughout fiscal 2003.
By the end of fiscal 2003, our revenue per client for our software
services, consisting of our Recruitment Systems Services and our Employee Portal
Services, had increased by 152% since June 2002. We believe that the increase in
revenue per client is primarily attributable to the higher revenue generating
clients we obtained through the businesses we acquired during fiscal 2003. Our
revenue per client for our Career Transition Services remained at approximately
the same level throughout fiscal 2003. These revenue per client figures are
calculated by dividing monthly revenue by the number of clients serviced during
the month.
We believe that our business is impacted by the job market. The
unemployment rate as of May 31, 2003 was 6.1%, a level not seen since July 1994,
and significantly higher than the pre-recession rate of 3.9% for December 2000.
When businesses reduce the number of employees being hired, as evidenced by a
higher unemployment rate, we believe that the demand for our services decreases
mainly in the areas of our recruitment software and recruitment research
services.
COST OF REVENUES
Cost of revenues for fiscal 2003 were $3,040,132 compared to $2,858,294
for fiscal 2002, an increase of $181,838 or 6%. Cost of revenues includes the
cost of network operations, client support and charges related to third-party
services. Career Transition Services cost of revenues accounted for $1,108,418
and Enterprise Workforce Services cost of revenues accounted for $1,931,714 of
the total cost of revenues for fiscal 2003. Cost of revenues in the Enterprise
Workforce Services segment increased $197,319 from fiscal 2002. The acquisitions
done in fiscal 2003 contributed $803,336 to this increase which was partially
offset by reduced costs as a result of an effort to eliminate redundant
operations. Cost of revenues for the Career Transition Services segment
decreased $15,421 from fiscal 2002.
GROSS PROFITS
Consolidated gross profits were $14,796,858 for fiscal 2003 or 83% of
revenues compared to $11,893,326 or 81% for fiscal 2002.
40
Career Transition Services gross profit was $5,951,277 or 84% of Career
Transition Services revenues for fiscal 2003 compared to $7,177,347 or 86% of
Career Transition Service revenues for fiscal 2002. In the Career Transition
Services segment, although cost of revenues has been reduced, the timing of the
reduction of costs in relation to the loss of revenue in the closed offices has
resulted in a slight decrease in its gross profit margin. Enterprise Workforce
Services gross profit was $8,845,581 or approximately 82% of Enterprise
Workforce Services revenues for fiscal 2003 compared to $4,715,979 or 73% of
Enterprise Workforce Service revenues for fiscal 2002. As mentioned above, the
reduction in redundant costs in the Enterprise Workforce Services segment has
improved gross profit margins compared to the prior year.
OPERATING EXPENSES
Total operating expenses were $24,956,020 for fiscal 2003 compared to
$18,728,105 for fiscal 2002, an increase of $6,227,915 or 33%. Acquisitions
completed in fiscal 2003 accounted for $9,565,079 in total operating expenses.
Operating expenses for non-acquired operations were $15,390,941 for fiscal 2003,
representing an approximate 18% decline compared to fiscal 2002. The primary
reason for the decline in operating expenses for the operations that existed
prior to the fiscal 2003 acquisitions is the consolidation of operating
functions and the impairment of goodwill recorded in fiscal 2002. Goodwill
impairment for non-acquired operations declined $2,574,912 from fiscal 2002 to
fiscal 2003. Non-acquired operating expenses declined $762,248, $458,450 of
which was from moving our advertising from newspapers to the internet and the
balance mainly as a result of consolidating operations. We believe that
operating expenses generally continue to increase in the first three to twelve
months after we complete an acquisition but that operating expenses will
decrease after that as a result of the consolidation of operations. Any future
acquisition will increase operating expenses from the date of acquisition, in
which case we believe that pro forma results would provide a more comparable
analysis.
SELLING AND MARKETING
Selling and marketing expenses were $6,057,788 for fiscal 2003 compared to
$6,649,057 for fiscal 2002, a decline of $591,269 or 9%. This decrease is
attributed mainly to a reduction in advertising expense ($458,450) and a
reduction in employee costs for existing operations ($472,552) partially offset
by an increase in employee costs as a result of the acquisitions made in fiscal
2003 ($428,877). Advertising expense was reduced by $322,748 in the Career
Transition Services segment by shifting advertising from newspapers and print
media to the Internet. In addition, advertising expense was reduced in the
Enterprise Workforce Services segment by $135,702 by implementing a more direct
sales approach compared to an indirect approach used by prior management of the
acquired operations and initially continued after the acquisitions.
41
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $9,581,554 for fiscal 2003
compared to $6,724,211 for fiscal 2002, an increase of $2,857,343 or 42%, due
principally to increased employee costs ($277,600), space occupancy ($271,367),
equipment leasing costs ($297,528), computing and communication expense
($304,779), bad debt expense ($57,206), postage ($22,705), and professional fees
($26,703) related to the companies we acquired during fiscal 2003, as well as
director fees for serving on our board ($114,750), higher audit and accounting
fees ($179,370), and the impact of a full year of costs from the acquisitions
made in fiscal 2002.
RESEARCH AND DEVELOPMENT
Research and development costs were $1,086,295 for fiscal 2003 compared to
$749,392 for fiscal 2002, an increase of $336,903 or 45% mainly as a result of
$678,309 of research and development costs, most of which was in the form of
employee expenses incurred by Icarian, PureCarbon and Xylo during the first six
to twelve months after we acquired them. As the acquired companies are
integrated into our operations, we expect to reduce their research and
development costs by reducing or eliminating those positions or activities
dedicated to research and development. During fiscal 2003, research and
development costs of our existing operations declined by $341,406 or 46%, as a
result of our strategy to acquire technology through acquisitions. We believe
that we can acquire new technology at a lower cost in the long-term and more
efficiently than developing new software platforms with internal resources. We
implemented this strategy in fiscal 2002. Since fiscal 2002 most of our research
and development efforts have been incurred in the Enterprise Workforce Services
segment.
AMORTIZATION AND DEPRECIATION EXPENSE
Amortization and depreciation expense was $6,097,141 for fiscal 2003
compared to $1,795,445 for fiscal 2002, an increase of $4,301,696 or 240%. The
majority of the increase ($4,322,272) is due to the amortization of acquired
intangible assets arising from acquisitions. Amortization and depreciation
expense for the Enterprise Workforce Services Segment increased $4,280,922
mainly as a result of the Icarian ($3,059,958), PureCarbon ($398,019) and Xylo
($517,865) acquisitions. In fiscal 2003, the Career Transition Services
segment's amortization and depreciation expense increased by $20,774. During
fiscal 2003, through the acquisitions of Icarian, PureCarbon and Xylo, we
acquired capital assets of $11,780,298 and intangible assets of $10,533,542. The
amortization of these acquired assets is based on the estimated useful lives of
the assets as described in note 3 of our consolidated financial statements.
42
INTEREST INCOME AND OTHER INCOME
Interest and other income was $47,245 for fiscal 2003 compared to $146,061
for fiscal 2002, a decrease of $98,816 or 68%. The decline was due to the
reduction in short-term investments. Short-term investments as of May 31, 2003
were $38,419 compared to $345,206 at May 31, 2002.
INTEREST EXPENSE AND OTHER EXPENSE
Interest and other expense was $1,193,045 for fiscal 2003 compared to
$300,983 for fiscal 2002, an increase of $892,062 or 296%. The primary reason
for the increase in interest and other expense was due to interest expense
incurred as a result of the issuance of $2.9 million aggregate principal amount
of 8% Senior Subordinated Convertible Notes in April and May 2002. Future period
interest expense related to those Notes will increase significantly as the Notes
accrete to their current face value of $2.7 million over the remaining period to
maturity.
GOODWILL
Goodwill was $17,383,437 as of May 31, 2003 compared to $12,738,172 as of
May 31, 2002, an increase of $4,645,265 or 36%. The increase in goodwill relates
to the acquisitions completed during fiscal 2003 and includes additions during
the year for 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 remaining in escrow were to be released to the former
owners of Paula Allen Holdings upon Workstream achieving certain consolidated
revenue and profit targets for the year ending December 31, 2002 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
things, the consolidated revenue targets being achieved, the unexpected effects
that September 11, 2001 had on Workstream's business and ambiguities contained
in the acquisition agreement regarding the inclusion of additional operating
expenses incurred from subsequent acquisitions for purposes of computing 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, officer,
director or employee of Workstream. As an officer, director and shareholder of
Paula Allen Holdings, Mr. Mullarkey participated on behalf of Paula Allen
Holdings in the negotiation and structuring of our acquisition of Paula Allen
Holdings.
Management recorded during fiscal 2003 and fiscal 2002, goodwill
impairment charges totaling $2,133,242 related to the Icarian, Rezlogic and Tech
Engine acquisitions, and $2,810,000 related to the Paula Allen Holdings and
OMNIpartners acquisitions, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2004, we had $7,399,919 in cash and cash equivalents,
restricted cash and short-term investments and a working capital deficit of
$350,879. Throughout fiscal 2004, we have made a significant investment in
acquiring new service lines, specifically the Kadiri acquisition, which has
reduced working capital. During fiscal 2004, as a result of acquiring Kadiri,
Peopleview and Perform, we assumed current liabilities which exceeded acquired
current assets by $923,874, as of the respective dates of acquisition.
43
At May 31, 2004, $2,760,259 of short-term investment balances were
restricted from use because they were collateral for various borrowing or
leasing arrangements. Merchant banks have required us to place reserve deposits
on our merchant accounts due to the high volume of credit card usage by our
clients. These reserve deposits serve as guarantees to the Merchant banks for
chargebacks that may be issued to our clients that request a cancellation of our
services and that previously paid for our services with a credit card. As of May
31, 2004, approximately $199,786 was held as guarantees by such banks. These
deposits are reviewed quarterly and may be returned to us or increased based on
the activity surrounding chargebacks and credit card usage. We expect the level
of chargebacks and credit card usage to remain consistent with levels
experienced in the past. Therefore, we believe that our reserve deposits will
not change significantly and will not impact our liquidity in a material way.
Additional deposits of $2,560,473 are restricted by three banks as security for
an outstanding term loan, a line of credit and letters of guarantee provided to
three landlords for facility leases. Since these restricted cash balances are
held as guarantees of the borrowings and leases mentioned above, as any of the
borrowings or the leases change, the restricted cash balance guaranteeing them
will change accordingly. The line of credit will increase or decrease according
to our working capital needs, and therefore the restricted cash guaranteeing the
line of credit will change accordingly. We expect to reduce the principal amount
of the term loan on a monthly basis according to the loan agreement, and as we
do so, the restricted cash balance guaranteeing the loan will decrease. We also
expect that as we make lease payments, the restricted cash guaranteeing the
leases will decrease on an annual basis according to the lease agreements.
For fiscal 2004, cash provided by operations totaled $73,220, consisting
primarily of non-cash expenses such as amortization ($5,572,366), non-cash
interest ($2,318,444), non-cash payment to consultants ($542,590), and non-cash
settlement of Mr. Mullarkey compensation ($100,000) offset mainly by the net
loss for the year of $5,536,899, the non-cash recovery of deferred income taxes
of $1,758,049 and cash used for working capital of $1,164,772. Our acquisitions
made from July 2001 until May 2004, have reduced our working capital. Prior to
the acquisitions, the majority of these companies experienced losses generating
working capital deficits. As we have integrated them and consolidated costs, we
expect to generate operating cash flow, therefore reducing our working capital
deficit. However, any future acquisitions that result in our acquiring working
capital deficiencies will contribute to increasing our working capital deficit.
Net cash used for investing activities during fiscal 2004 was $2,366,928.
Investing outflows consisted mainly of an increase in our restricted cash of
$1,485,665 as a result of increased drawings under our line of credit, cash paid
for acquisitions, net of cash acquired, of $416,385, purchase of short term
investments of $242,780 and acquisition of capital assets of $228,408.
Net cash provided by financing activities was $6,533,924 for fiscal 2004.
During fiscal 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. In addition, we received $698,545 in cash
from institutional investors as a result of their exercise of warrants to
purchase our common stock. As a result of drawing on our credit line, we
received proceeds of $2,666,784. Financing outflows consisted primarily of the
repayments of shareholder notes of $2,332,273, repayments of the line of credit
of $1,178,604, costs related to the registration and issuance of the common
stock of $670,775, capital lease payments of $87,430, and payment of $120,000
related to a lease settlement.
44
We have had operating losses since our inception, and during fiscal 2004
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 fiscal 2004, the consolidation of ongoing operations, and
improved efficiencies in the delivery of our services
During the third quarter of 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 2004, we entered
into an agreement with the holders of our convertible notes whereby they 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 15: Convertible Notes). In addition, during the third
quarter of 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).
In January 2003, Mr. Mullarkey had 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 was
automatically extended each month after June 1, 2004 for an additional month,
which resulted 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 representing his deferred compensation as of March 31, 2004 as well
as interest of $56,841.84 accrued through that date. 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.
Subsequent to the end of fiscal 2004, the Company raised $10 million in a
private placement with William Blair & Company and its affiliates and Crestview
Capital. As consideration of the private placement, the Company issued 4,444,439
of its common shares (See note 24).
45
We believe that our financial strength was improved at the end of this
fiscal 2004 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 1.0X as of May 31, 2004, and our
debt to equity ratio, which improved from .61 as of May 31, 2003 to .30 as of
May 31, 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. Our Days of Sales Outstanding for May
31, 2004 was 28.9, however, this figure is distorted by the inclusion of
Kadiri's accounts receivable at the end of May 2004, while not reflecting any
revenue for Kadiri in Workstream's financial statements during fiscal 2004 due
to the fact that the Kadiri acquisition took place on the last business day of
our fiscal year. Excluding the Kadiri acquisition, our Days of Sales Outstanding
was 15.2 as of May 31, 2004 compared to 21.6 as of May 31, 2003.
Management believes the proceeds from the sale of $6.6 million and $10
million of our common shares in December 2003 and July 2004, respectively, the
closure of offices and reduction of costs made in fiscal 2002, fiscal 2003 and
fiscal 2004, along with further consolidation of cost centers and elimination of
redundant costs will result in continued improvement of our 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 May 31, 2005.
At May 31, 2004 maturities of debt outstanding, capital leases, operating
leases and contractual obligations are as follows:
Year Ended May 31,
2005 2006 2007 2008 2009 Total
-------------------------------------------------------------------
Debt $ 199,704 $176,592 $ 26,892 $ -- $ -- $ 403,188
Capital leases 66,805 27,194 -- -- -- 93,999
Operating leases 1,404,242 605,453 506,411 550,200 394,386 3,460,692
-------------------------------------------------------------------
Total $1,670,751 $809,239 $533,303 $550,200 $394,386 $3,957,879
====================================================================
ACQUISITIONS
As part of our overall strategy, we have pursued growth through the
acquisition of other companies offering services similar or complementary to
ours. Through the acquisition of those companies we have expanded our service
offerings enabling us to grow our revenue and to position ourselves for future
profitability by consolidating operations and improving efficiencies.
46
On May 28, 2004, we acquired via merger 100% of the outstanding shares of
Kadiri Inc. ("Kadiri"), a California based company. As consideration for the
sale, we issued to the shareholders of Kadiri 4,450,000 of our common shares
valued at approximately $12.4 million. Kadiri is a provider of Enterprise
Compensation Management solutions which enable companies to plan and manage
compensation, performance evaluation and monitor the granting of rewards. Kadiri
had revenues of approximately $3.8 million and it recorded a net loss of
approximately $7.2 million for the twelve months ended December 31, 2003. We
recorded approximately $3.6 million in intangible assets and $11.1 million in
goodwill from the acquisition. Pursuant to the acquisition agreement with
Kadiri, an additional 950,000 of our common shares may be released from escrow,
if certain revenue and cash generation targets are met during each fiscal
quarter through November 30, 2005 or for any indemnification claims for breaches
of representation and warranties. The release from escrow of any additional
common shares will result in additional goodwill being recorded.
On March 17, 2004 and as amended and effective for accounting purposes on
May 27, 2004, the Company acquired certain assets of Peopleview, Inc.
("Peopleview"), a Nevada corporation. As consideration for the sale, the Company
issued Peopleview 246,900 of its common shares valued at $688,851 and cash in an
amount equal to $250,000. 50,000 of the common shares were held in escrow
subject to certain representations being met. Subsequent to May 31, 2004, the
representations were met and the escrow shares were released. We recorded
approximately $0.9 million in intangible assets related to the acquisition.
Peopleview designs, develops and markets software that help companies evaluate
employee skills, competency and performance. In addition, Peopleview offers
software that enables companies to survey their employees regarding the
company's environment and assess Sarbanes-Oxley Corporate compliance.
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. We recorded
approximately $0.7 million in intangible assets related to the acquisition.
Perform designs, develops and markets Human Resource Information Systems and
Performance Management Information Systems for mid-size and Global 2000
companies.
In the past we have generally acquired companies and businesses through
the issuance of our common shares. We anticipate that we will continue to
finance future acquisitions in whole or in part by issuing our common shares.
However, to the extent that we use cash to fund acquisitions, the amount of
funds available to satisfy our working capital needs will be reduced.
We believe that these acquisitions have been important to our evolution
from a recruitment application service provider into an HCM business process
aggregator. We believe that these additions will continue to broaden our revenue
base and diversify our product offerings.
47
RISK FACTORS
You should carefully consider the following risk factors that pertain to
our Company. The realization of these risks could result in a material adverse
effect on our results of operations, financial condition, cash flows, business
or the market for our common shares. We cannot assure you that we will
successfully address any of these risks or address them on a continuing basis.
Keep these risk factors in mind when reading "forward-looking" statements
elsewhere in this Form 10-K. (See "Cautionary Statement Concerning
Forward-Looking Statements" in Item 7)
WE MAY NOT BECOME PROFITABLE.
Since our inception, we have incurred losses which have been substantial
in relation to our operations. As of May 31, 2004, we had an accumulated deficit
of $37,499,343. We reported a net loss of $5,536,899 for the year ended May 31,
2004 ("fiscal 2004") and a net loss of $9,676,602 for the year ended May 31,
2003 ("fiscal 2003"). Revenues for fiscal 2004 were $17,166,880. We acquired
twelve companies during fiscal 2004, fiscal 2003 and for the year ended May 31,
2002 ("fiscal 2002"), seven of which reported in the aggregate net losses of
approximately $42.4 million in their immediately preceding fiscal years. Our
ability to reduce our losses will be adversely affected if we continue to
acquire companies reporting losses, if revenue grows slower than we anticipate
or if operating expenses exceed our expectations. Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis. Failure to achieve or maintain profitability would materially
adversely affect the market price of our common shares. We expect our operating
expenses to continue to grow as we expand our operations.
WE MAY ENCOUNTER DIFFICULTIES WITH ACQUISITIONS, WHICH COULD HARM OUR BUSINESS.
During fiscal 2004, fiscal 2003 and fiscal 2002, we made several
acquisitions of other companies and businesses, as part of our efforts to expand
our operations and we may continue to make acquisitions of complementary
companies, products and businesses. The risks we may encounter in acquisitions
include:
o difficulty and expense of assimilating the operations and personnel of
acquired businesses;
o difficulty integrating the acquired technologies or products with our
current products and technologies;
o potential exposure to product liability or intellectual property liability
associated with the sale of the acquired company's products;
o diversion of management time and attention and other resources;
o loss of key employees and customers as a result of changes in management;
48
o difficulty and expense of managing an increased number of employees over
large geographic distances;
o our due diligence processes may fail to identify significant issues with
product quality, product architecture, and legal and financial
contingencies, among other things;
o potential exposure to unknown liabilities of acquired companies;
o the incurrence of amortization expenses;
o possible future goodwill impairment if the financial results and
subsequent forecasted financial results are lower than those estimated at
the time of the acquisition; and
o possible dilution to our shareholders.
In the past, we have acquired financially distressed businesses which had
lost customers prior to our acquisition of them due in part to their financial
instability. While we are generally successful in retaining the remaining
customers of these businesses after we acquire them, we may be unable to recover
customers already lost by these financially distressed businesses. We have also
frequently used our common shares to pay the purchase price for acquisitions.
Our common shares may not remain at a price at which they can be used for
acquisitions without further diluting our existing shareholders, and potential
acquisition candidates may not view our stock attractively. We may not be
successful in overcoming these risks or any other problems encountered in
connection with any acquisitions. These difficulties may increase our expenses,
and our ability to achieve profitability may be adversely affected.
MICHAEL MULLARKEY, OUR CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT, MAY HAVE
INTERESTS THAT ARE DIFFERENT THAN OTHER SHAREHOLDERS AND MAY INFLUENCE CERTAIN
ACTIONS.
As of May 31, 2004, Michael Mullarkey, our Chairman, Chief Executive
Officer and President, was our largest shareholder, beneficially owning
approximately 12% of our outstanding common shares. Mr. Mullarkey's interests as
our largest shareholder may conflict with his fiduciary duties as an officer and
director. Mr. Mullarkey's interests as our largest shareholder may influence how
Mr. Mullarkey votes on certain matters that require shareholder approval. As our
largest shareholder, Mr. Mullarkey may influence the outcome of various actions
that require shareholder approval including the election of our directors,
delaying or preventing a transaction in which shareholders might receive a
premium over the prevailing market price for their shares and preventing changes
in control or management.
THE CURRENT ECONOMIC DOWNTURN AND FUTURE ECONOMIC DOWNTURNS MAY ADVERSELY AFFECT
THE DEMAND FOR OUR SERVICES.
Historically, the general level of economic activity has significantly
affected the demand for employment and recruitment services. We believe that we
are currently experiencing the effects of the current economic downturn and as a
result the demand for our employment and recruitment services has decreased. If
the general level of economic activity continues to slow, our clients may not
require additional personnel and may delay or cancel plans that involve
recruiting new personnel using our services and technology. Consequently, the
time from initial contact with a potential client to the time of sale could
increase and the demand for our services could decline, resulting in a loss of
revenue harming our business, operating results and financial condition. In
addition, it is expected that in times of economic growth, demand for our
outplacement business may decline.
49
WE MAY NOT BE ABLE TO GROW OUR CLIENT BASE AND REVENUE BECAUSE OF COMPETITION WE
FACE.
Our future success will depend to a large extent on our ability to grow
and maintain our client base and revenue. This requires that we offer services
that are superior to the services being offered by the competition that we face
and that we price our services competitively. The market for human capital
management, or HCM, services is highly fragmented and competitive, with
thousands of companies offering products or services that compete with one or
more of the services that we offer. We compete for a portion of employers'
recruiting budgets with many types of competitors, as employers typically
utilize a variety of sources for recruiting, including:
o traditional offline recruiting firms;
o traditional offline advertising, such as print media;
o resume processing companies;
o Web-based recruitment companies;
o Internet job posting companies; and
o client-server-based software services.
In addition, many employers are developing or may develop their own
software to satisfy their recruitment needs. We also compete with traditional
offline and Web-based outplacement service companies and human resource, or HR,
service providers. While we do not believe that any of our competitors offer the
full suite of services that we provide, there are a number of companies that
have products or services that compete with one or more of the services we
provide. For instance, companies that compete with our Recruitment Systems
services include Taleo Corporation (formerly RecruitSoft), Webhire and Kenexa.
Companies such as Monster Worldwide, Execunet and Netshare have products or
services that compete with our Applicant Sourcing and Exchange services. We also
compete with vendors of enterprise resource planning software, such as
PeopleSoft, Oracle, SAP and Performaworks. In the area of outplacement services,
we compete with companies such as McKenzie Scott and WSA Corp. Finally,
companies such as LifeCare, Next Jump and SparkFly compete with our Employee
Portal Services.
We expect competition to increase and intensify in the future, with
increased price competition developing for our services. A number of our current
and potential competitors have longer operating histories and greater financial,
technical and marketing resources and name recognition than we do, which could
give them a competitive advantage. Our competitors may develop products or
services that are equal or superior to ours or that achieve greater market
acceptance than ours. It is also possible that new competitors may emerge and
rapidly acquire significant market share. As a result, we may not be able to
expand or maintain our market share and our ability to penetrate new markets may
be adversely affected.
50
IF WE EXPERIENCE CLIENT ATTRITION, OUR OPERATING RESULTS WILL BE ADVERSELY
AFFECTED.
Our Recruitment Systems, Applicant Sourcing and Exchange, Performance
Management and Employee Portal Services clients generally enter into
subscription agreements for terms of one year or less. These clients represented
42% and 40% of our revenue for fiscal 2004 and fiscal 2003, respectively. We
have no assurance that these clients will maintain a long-term relationship with
us. If these clients fail to renew their subscriptions with us, our business,
revenues, operating results and financial condition will be adversely affected.
Since we have only been offering our services for a limited period of time, we
do not know what rate of client attrition to expect. To the extent we experience
significant client attrition, we must attract additional clients to maintain
revenue.
WE MAY NOT BE ABLE TO STRENGTHEN AND MAINTAIN AWARENESS OF OUR BRAND NAME.
We believe that our success will depend to a large extent on our ability
to successfully develop, strengthen and maintain the recognition and reputation
of our Workstream brand name. In order to strengthen and maintain our Workstream
brand recognition and reputation, we invest and will need to continue to invest
substantial resources in our marketing efforts and maintain high standards for
actual and perceived quality, usefulness, reliability, security and ease of use
of our services. If we fail to successfully promote and maintain our Workstream
brand name, particularly after incurring significant expenses in promoting our
Workstream brand name, or encounter legal obstacles which prevent our continued
use of our Workstream brand name, our business, operating results and financial
condition could be materially adversely affected and the market price of our
common shares could decline. Moreover, even if we continue to provide quality
service to our clients, factors outside of our control, including actions by
organizations that are mistaken for us and factors generally affecting our
industry, could affect our Workstream brand and the perceived quality of our
services.
OUR FAILURE TO ENTER INTO STRATEGIC RELATIONSHIPS WITH THIRD PARTIES MAY HARM
OUR BUSINESS.
If we are unable to enter into or maintain certain strategic
relationships, our business will suffer. These relationships generally include
those with job posting boards and other on-line recruitment services such as
Monster.com and Yahoo!hotjobs pursuant to which our clients can post their job
openings on such boards. These relationships allow us to expand the services
that we provide our clients without our having to spend significant capital
resources developing or acquiring such services. Because many of these third
parties compete with each other, the existence of a relationship with any
particular third party may limit or preclude us from entering into a
relationship with that third party's competitors. In addition, some of the third
parties with which we seek to enter into relationships may view us as a
competitor and refuse to do business with us. Any loss of an existing
relationship or failure to establish new relationships may adversely affect our
ability to improve our services, offer an attractive service in the new markets
that we enter, or expand the distribution of our services.
51
WE MAY NOT BE ABLE TO CONTINUE TO EXPAND OUR BUSINESS IN THE UNITED STATES
MARKET.
Until the fiscal year ended May 31, 2001, we marketed our services
primarily in Canada. Since that time, we completed several acquisitions of
businesses in the United States. Through these acquisitions we endeavored to
enhance our business by penetrating the United States market. During fiscal
2002, 2003 and 2004, 83%, 87% and 88% of our revenues, respectively, were
generated in the United States. Our success and ability to grow our business
will depend to a significant degree on our ability to market our services
successfully in the United States. We expect to continue to expand our
operations through acquisitions of U.S.-based companies. If we are unable to
maintain or expand our U.S. operations, we may suffer increasing losses and the
loss of our investment, in whole or in part, in our acquisitions. This could
materially adversely affect our business, operating results and financial
condition.
BECAUSE WE HAVE INTERNATIONAL OPERATIONS, WE MAY FACE SPECIAL ECONOMIC AND
REGULATORY CHALLENGES THAT WE MAY NOT BE ABLE TO MEET.
Beginning in fiscal 2002, we completed several acquisitions of businesses
in the United States and began marketing our services outside of Canada. We
expect to continue to expand our U.S. and Canadian operations through
acquisitions and to spend significant financial and managerial resources to do
so. We have limited experience in international operations and may not be able
to compete successfully in international markets. Our international operations
are subject to certain risks, including:
o changes in regulatory requirements, tariffs and trade barriers;
o changes in diplomatic and trade relationships;
o potentially adverse tax consequences;
o the impact of recessions in economies outside of Canada;
o the burden of complying with a variety of foreign laws and regulations,
and any unexpected changes therein;
o political or economic constraints on international trade or instability;
and
o fluctuations in currency exchange rates.
WE MAY LOSE BUSINESS IF WE ARE UNABLE TO SUCCESSFULLY DEVELOP AND INTRODUCE NEW
PRODUCTS, SERVICES AND FEATURES.
If we are unable to develop and introduce new products, services, or
enhancements to, or new features for, existing products or services, in a timely
and successful manner, we may lose sales opportunities. The market for our
services is characterized by rapid and significant technological advancements,
the introduction of new products and services, changes in client demands and
evolving industry standards. The adoption of new technologies or new industry
standards may render our products obsolete and unmarketable. The process of
developing new services or technologies is complex and requires significant
continuing efforts. We may experience difficulties or funding shortages that
could delay or prevent the successful development, introduction and sale of
enhancements or new products and services. Moreover, new products, services or
features which we introduce may not adequately address the needs of the
marketplace or achieve significant market acceptance.
52
OUR BUSINESS COULD SUFFER IF FINANCING IS NOT AVAILABLE WHEN REQUIRED OR IS NOT
AVAILABLE ON ACCEPTABLE TERMS.
Our future capital requirements depend on a number of factors, including
our ability to generate positive cash flow, cash required by future
acquisitions, anticipated capital expenditures, the development of new services
or technologies and our projected operations. We believe that we have sufficient
credit facilities, cash flow from operations and cash reserves, which, together
with further cost reductions, will permit us to meet our working capital
requirements and capital expenditure requirements through at least May 31, 2005.
However, it is possible that we may need to raise additional funds sooner than
expected in order to fund expansion, develop new, and enhance existing, services
or acquire complementary businesses or technologies or if our revenues are less
or our expenses are greater than we expect. Our ability to obtain financing
depends on a number of factors, including our ability to generate positive cash
flow from operations, the amount of our cash reserves, the amount and terms of
our existing debt arrangements, the availability of sufficient collateral and
the prospects of our business. If financing is not available when required or is
not available on acceptable terms, we may not be able to:
o keep up with technological advances;
o pursue acquisition opportunities;
o develop product enhancements;
o make capital expenditures;
o respond to business opportunities;
o address competitive pressures or adverse industry developments; or
o withstand economic or business downturns.
FUTURE FINANCINGS MAY BE ON TERMS ADVERSE TO YOUR INTERESTS.
In the past we have issued and, in the future we may issue, equity or
convertible debt securities to raise additional funds. From May 31, 2003 to May
31, 2004 we have issued common shares and securities that are convertible into
common shares amounting to a total of 14,970,706 common shares, including
2,424,999 common shares that were issued upon conversion of our 8% Senior
Subordinated Convertible Notes that were originally sold in April and May 2002,
resulting in a 70% increase in the number of outstanding common shares (assuming
the conversion of the convertible securities). If we issue additional
securities, our existing shareholders may be further diluted and holders of
those new securities may have dividend, liquidation, voting and other rights
senior to those of the holders of our common shares.
53
THE POWER OF OUR BOARD OF DIRECTORS TO DESIGNATE AND ISSUE SHARES OF STOCK COULD
HAVE AN ADVERSE EFFECT ON HOLDERS OF OUR COMMON SHARES.
We are authorized to issue an unlimited number of common shares, which may
be issued by our board of directors for such consideration as they may consider
sufficient without seeking shareholder approval. The issuance of additional
common shares in the future will reduce the proportionate ownership and voting
power of current shareholders. Our Articles of Incorporation also authorize us
to issue an unlimited number of Class A Preferred Shares, the rights and
preferences of which may be designated by our board of directors without
shareholder approval. The designation and issuance of Class A Preferred Shares
in the future could create additional securities that would have dividend,
liquidation and voting preferences prior in right to the outstanding common
shares. These provisions could also impede a change of control.
IF WE ARE CHARACTERIZED AS A PASSIVE FOREIGN INVESTMENT COMPANY, OUR U.S.
SHAREHOLDERS MAY SUFFER ADVERSE TAX CONSEQUENCES.
We believe that we were not a passive foreign investment company for U.S.
federal income tax purposes for fiscal years 2002, 2003 and 2004. Generally, we
may be characterized as a passive foreign investment company for U.S. federal
income tax purposes if for any taxable year 75% of our gross income is passive
income, or at least 50% of our assets are held for the production of, or
produce, passive income. This characterization could result in adverse U.S. tax
consequences to our shareholders. These consequences may include having gains
realized on the sale of our common shares treated as ordinary income, rather
than capital gain income, and having potentially punitive interest charges apply
to the proceeds of share sales. U.S. shareholders should consult with their own
U.S. tax advisors with respect to the U.S. tax consequences of investing in our
common shares.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
PROPRIETARY TECHNOLOGIES.
Our success depends to a significant degree upon the protection of our
proprietary technologies and brand names. The unauthorized reproduction or other
misappropriation of our proprietary technologies could provide third parties
with access to our technologies without payment. If this were to occur, our
proprietary technologies would lose value and our business, operating results
and financial condition could be materially adversely affected. We rely upon a
combination of copyright, trade secret and trademark laws and non-disclosure and
other contractual arrangements to protect our proprietary rights. The measures
we have taken to protect our proprietary rights, however, may not be adequate to
deter misappropriation of proprietary information or protect us if
misappropriation occurs. Policing unauthorized use of our technologies and other
intellectual property is difficult, particularly because of the global nature of
the Internet. We may not be able to detect unauthorized use of our proprietary
information and take appropriate steps to enforce our intellectual property
rights. If we resort to legal proceedings to enforce our intellectual property
rights, the proceedings could be burdensome and expensive and could involve a
high degree of risk.
THIRD PARTIES COULD CLAIM THAT WE INFRINGE UPON THEIR PROPRIETARY TECHNOLOGIES.
Our products, services, content and brand names may be found to infringe
valid copyrights, trademarks or other intellectual property rights held by third
parties. In the event of a successful infringement claim against us and our
failure or inability to modify our technologies or services, develop
non-infringing technology or license the infringed or similar technology, we may
not be able to offer our services. Any claims of infringement, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management attention, require us to enter into costly royalty or licensing
arrangements, modify our technologies or services or prevent us from using
important technologies or services, any of which could harm our business,
operating results and financial condition.
54
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION WHICH COULD INCREASE
OUR COSTS OF DOING BUSINESS, RESTRICT OUR ACTIVITIES AND/OR SUBJECT US TO
LIABILITY.
Uncertainty and new regulations relating to the Internet could increase
our costs of doing business, prevent us from providing our services, slow the
growth of the Internet or subject us to liability, any of which could adversely
affect our business, operating results and prospects. In addition to new laws
and regulations being adopted, existing laws may be applied to the Internet.
There are currently few laws and regulations directly governing access to, or
commerce on, the Internet. However, due to the increasing popularity and use of
the Internet, the legal and regulatory environment that pertains to the Internet
is uncertain and continues to change. New and existing laws may cover issues
which include:
o user privacy;
o pricing controls;
o consumer protection;
o libel and defamation;
o copyright and trademark protection;
o characteristics and quality of services;
o sales and other taxes; and
o other claims based on the nature and control of Internet materials.
Recently, the Canadian Federal Government enacted privacy legislation
which requires us to appoint an individual responsible for the administration of
personal information, to implement policies and practices to protect personal
information, to provide access to information and to deal with complaints. We
must obtain individual consents for each collection, use or retention of
personal information. We recently implemented procedures to comply with this new
privacy legislation. The privacy legislation increases our cost of doing
business due to the administrative burden of these laws, restricts our
activities in light of the consent requirement and potentially subjects us to
monetary liability for breach of these laws.
55
COMPUTER VIRUSES OR SOFTWARE ERRORS MAY DISRUPT OUR OPERATIONS, SUBJECT US TO A
RISK OF LOSS AND/OR EXPOSE US TO LIABILITY.
Computer viruses may cause our systems to incur delays or other service
interruptions. In addition, the inadvertent transmission of computer viruses or
software errors in new services or products not detected until after their
release could expose us to a material risk of loss or litigation and possible
liability. Moreover, if a computer virus affecting our system is highly
publicized or if errors are detected in our software after it is released, our
reputation and brand name could be materially damaged and we could lose clients.
WE MAY EXPERIENCE REDUCED REVENUE, LOSS OF CLIENTS AND HARM TO OUR REPUTATION
AND BRAND NAME IN THE EVENT OF SYSTEM FAILURES.
We may experience reduced revenue, loss of clients and harm to our
reputation and brand name in the event of unexpected network interruptions
caused by system failures. Our servers and software must be able to accommodate
a high volume of traffic. If we are unable to add additional software and
hardware to accommodate increased demand, we could experience unanticipated
system disruptions and slower response times. Our systems are vulnerable to
damage or interruption from earthquakes, floods, fires, power loss,
telecommunication failures, terrorist attacks, computer viruses and similar
events. Some of our systems are not fully redundant, and our disaster recovery
planning is not sufficient for all eventualities. We have experienced delays in
providing our customers access to their data in the past, and we believe these
system interruptions will continue to occur from time to time in the future. Any
catastrophic failure at our network operations center could prevent us from
serving our clients for a number of days, or possibly weeks, and any failure of
our Internet service provider may adversely affect our network's performance.
Most of our system interruptions are due to heavy Internet traffic and minor
equipment failures which generally result in our customers being unable to
access their data for a few seconds or several minutes. However, in September
2003, our Internet service provider suffered a failure which resulted in our
customers being unable to access our network and their data for a period of 25
hours. Our clients may become dissatisfied by any system failure that interrupts
our ability to provide our services to them or results in slower response times.
Our subscription agreements generally provide that our customers will be able to
access their data during certain guaranteed times. If we fail to meet the
service levels specified under our subscription agreements as a result of
repeated outages, the customer can terminate its agreement with us. Our business
interruption insurance may not adequately compensate us for any losses that may
occur due to any failures in our system or interruptions in our services.
BREACHES OF OUR NETWORK SECURITY COULD BE COSTLY.
If unauthorized persons penetrate our network security, they could
misappropriate proprietary information or cause interruptions in our services.
We may be required to spend capital and resources to protect against or to
alleviate these problems. In addition, because we host data for our clients, we
may be liable to any of those clients that experience losses due to our security
failures. As a result, security breaches could have a material adverse effect on
our business and the market price of our common shares may decline.
56
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF INTERNET SERVICE PROVIDERS FAIL TO
PROVIDE SATISFACTORY SERVICE TO OUR CLIENTS TO ENABLE THEM TO USE OUR SERVICES
AND ACCESS JOB SEEKER CANDIDATES ON-LINE.
Failure of Internet service providers or on-line service providers to
provide access to the Internet to our clients and job seekers would prevent them
from accessing our Web board, which would cause our business to suffer. Many of
the Internet service providers, on-line service providers and other Web site
operators on which we depend have experienced significant service slowdowns,
malfunctions, outages and capacity limitations. If users experience difficulties
using our services due to the fault of third parties, our reputation and brand
name could be harmed.
FAILURE OF THE INTERNET INFRASTRUCTURE TO SUPPORT CURRENT AND FUTURE USER
ACTIVITY MAY ADVERSELY AFFECT OUR BUSINESS.
We cannot assure you that the Internet infrastructure will continue to
effectively support the demands placed on it as the Internet continues to
experience increased numbers of users, greater frequency of use and increased
bandwidth requirements of users. In the past, the Internet has experienced a
variety of outages and other delays. The Internet is also subject to actions of
terrorists or hackers who may attempt to disrupt specific web sites or Internet
traffic generally. Any future outages or delays could affect the willingness of
employers to use our on-line recruitment offerings and of job seekers to post
their resumes on the Internet. If any of these events occur, our business,
operating results and financial condition could be materially adversely
affected.
WE MAY NOT EXPAND AND UPGRADE OUR SYSTEMS AND HARDWARE IN A TIMELY MANNER IN
ORDER TO ACCOMMODATE GROWTH IN OUR BUSINESS, WHICH COULD ADVERSELY AFFECT OUR
BUSINESS.
We must expand and upgrade our systems and network hardware in order to
accommodate growth in our business. We may not plan any such expansion and
upgrades in a timely manner to satisfy actual growth in our business. If we do
not expand and upgrade our systems and network hardware in a timely manner to
accommodate any growth in our business, our business, financial condition and
operating results could be adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR SHAREHOLDERS COULD DEPRESS THE MARKET
PRICE FOR OUR COMMON SHARES.
We have filed a registration statement with the Securities and Exchange
Commission seeking to register the resale by certain holders of 10,211,625 of
our common shares which are either outstanding or are issuable upon the exercise
of warrants. If the registration statement is declared effective by the
Securities and Exchange Commission an additional 10,211,625 common shares out of
a total of 43,057,784 common shares outstanding (assuming that all of the
warrants covered by the registration statement are exercised) which would not
otherwise be immediately resaleable may be resold in the public market without
restriction at any time. We cannot predict the effect, if any, that the resale
of these additional securities or the availability of these additional
securities for resale will have on the market prices of our common shares
prevailing from time to time, but it could depress the market price for our
common shares.
57
OUR COMMON SHARES HAVE TRADED AT PRICES BELOW $1.00 AND COULD BE SUBJECT TO
DELISTING BY NASDAQ.
Our common stock currently trades on the NASDAQ Small Cap Market and the
Boston Stock Exchange. Under the NASDAQ requirements, a stock can be delisted
and not allowed to trade on the NASDAQ if the closing bid price of the stock
over a 30 consecutive trading-day period is less than $1.00. The Boston Stock
Exchange, however, does not maintain a similar minimum price requirement. During
the fourth quarter of fiscal 2003, our common stock failed to meet the NASDAQ
minimum bid price requirement because the closing bid price for 30 consecutive
trading days was below $1.00. On May 20, 2003, NASDAQ gave us notice of this
fact and gave us six months to cure this problem or our common stock would be
delisted. On July 8, 2003, NASDAQ gave us notice that we regained compliance
with the minimum bid price rule because the closing bid price of our common
shares had been $1.00 or more for at least 10 consecutive trading days. No
assurance can be given that the closing bid price of our common shares will
continue to satisfy the NASDAQ minimum bid price requirements and thus continue
to trade on the NASDAQ Small Cap Market. Although our common shares may remain
listed on the Boston Stock Exchange, if our common shares are delisted from the
NASDAQ Small Cap Market, there may be a limited market for our shares, trading
our stock may become more difficult and our share price could decrease even
further. If our common shares are not listed on a national securities exchange
or NASDAQ, potential investors may be prohibited from or be less likely to
purchase our common shares, limiting the trading market for our stock even
further.
WE MAY BECOME SUBJECT TO THE SEC'S PENNY STOCK RULES, WHICH MAY DECREASE THE
LIQUIDITY OF OUR COMMON SHARES AND NEGATIVELY IMPACT THE ABILITY OF PURCHASERS
OF OUR COMMON SHARES TO SELL OUR COMMON SHARES IN THE SECONDARY MARKET.
SEC regulations generally define a penny stock as an equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
We are not currently subject to the penny stock rules because our common shares
qualify for two separate exceptions to the SEC's penny stock rules. The first
exception from the penny stock rules for which we qualify is an exception for
companies that have an equity security that is quoted on the NASDAQ Stock
Market. Since our common shares are traded on the NASDAQ Small Cap Market, we
are not subject to the penny stock rules. The second exception from the penny
stock rules for which we qualify is an exception for companies that have an
average revenue of at least $6,000,000 for the last three years. Our revenue for
fiscal 2004, fiscal 2003, and fiscal 2002 was $17,166,880, $17,836,990, and
$14,751,620, respectively, resulting in an average revenue of $16,585,163. If
our common shares are delisted or removed from the NASDAQ Small Cap Market and
if we fail to meet the average revenue exception to the penny stock rules, our
common shares may become subject to the penny stock rules, which impose
additional sales practice requirements on broker-dealers who sell our common
shares. For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchaser of such securities and have
received the purchaser's written agreement to the transaction prior to purchase.
In addition, unless an exception is available, the regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated with it. If
our common shares were considered penny stock, the ability of broker-dealers to
sell our common shares and the ability of our shareholders to sell their
securities in the secondary market would be limited. As a result, the market
liquidity for our common shares would be severely and adversely affected. We
cannot assure you that trading in our securities will not be subject to these or
other regulations in the future which would negatively affect the market for our
common shares.
58
THE PRICE OF OUR COMMON SHARES HISTORICALLY HAS BEEN VOLATILE, WHICH MAY MAKE IT
MORE DIFFICULT FOR YOU TO RESELL OUR COMMON SHARES WHEN YOU WANT AT PRICES YOU
FIND ATTRACTIVE.
The market price of our common shares has been highly volatile in the
past, and may continue to be volatile in the future. For example, since June 1,
2002, the closing sale price of our common shares on the NASDAQ Small Cap Market
has fluctuated between $0.81 and $3.99 per share. The following factors may
significantly affect the market price of our common shares:
o quarterly variations in our results of operations;
o announcement of new products, product enhancements, joint ventures and
other alliances by our competitors or us;
o technological innovations by our competitors or us;
o general market conditions or market conditions specific to particular
industries; and
o the operating and stock price performance of other companies that
investors may deem comparable to us.
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the price of
our common shares, regardless of our operating performance. (See Risk Factor
"Our common shares have traded at prices below $1.00 and could be subject to
delisting by NASDAQ.")
THE USE OF PERFORMANCE-BASED PAYMENT PROVISIONS IN OUR ACQUISITIONS MAY RESULT
IN COSTLY LEGAL PROCEEDINGS.
We often require that a portion of the total purchase price in our
acquisitions be contingent upon the acquired company's achievement of certain
performance-based milestones. We believe that the use of contingent
performance-based payment provisions more closely matches the price we pay with
the value we receive. However, the use of these provisions has resulted and may
continue to result in disputes over whether the performance-based milestones
have been achieved. Resolving these disputes could result in costly legal
proceedings and divert management attention. We are currently in a lawsuit with
the former shareholders of 6FigureJobs.com, Inc., a company we acquired in
October 2001. Under the terms of the purchase agreement pursuant to which we
acquired 6FigureJobs.com, 323,625 common shares were held in escrow to be
released to the former shareholders of 6FigureJobs.com provided that certain
revenue and profit targets were achieved. The Company determined that the
revenue and profit targets were not achieved, but the representative of the
former 6FigureJobs.com shareholders disputed that determination and filed a
lawsuit against the Company with regard to the escrowed shares. Although the
Company continues to believe that such revenue and profit targets were not met,
we can not be certain that we will prevail in this dispute and that the escrowed
common shares will not be released. This suit has cost us approximately $134,000
to date.
59
WE DEPEND ON OUR KEY EMPLOYEES TO MANAGE OUR BUSINESS EFFECTIVELY, AND IF WE ARE
UNABLE TO RETAIN OUR KEY EMPLOYEES, OUR BUSINESS MAY BE ADVERSELY AFFECTED.
Our success depends on the efforts, abilities and expertise of our senior
management and other key employees, including in particular, Michael Mullarkey,
our President and Chief Executive Officer, and David Polansky, our Chief
Financial Officer. There can be no assurance that we will be able to retain our
key employees. In 2003, Andrew Hinchliff, our Senior Vice President North
American Sales, Arthur Halloran, our President and Chief Operating Officer, and
Paul Haggard, our Chief Financial Officer, resigned from their respective
positions with us. Mr. Halloran, however, continues to serve as a member of our
board of directors. While we have hired new or appointed existing employees to
fulfill the duties previously performed by Messrs. Hinchliff, Halloran and
Haggard, if any of our key employees leave before suitable replacements are
found, there could be an adverse effect on our business. There can be no
assurance that suitable replacements could be hired without incurring
substantial additional costs, or at all.
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are primarily exposed to market risks associated with fluctuations in
interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
Our exposure to interest rate fluctuations relates primarily to our
short-term investment portfolio and our bank loans. We invest our surplus cash
in an investment trust established by a Canadian chartered bank, and in a
Certificate of Deposit in a bank in the United States. The investment trust
holds various short-term, low-risk instruments, and can be withdrawn without
penalty at any time. The interest income from these investments is subject to
interest rate fluctuations which we believe 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 $2,688,924 on this facility as of May 31, 2004. We can draw an additional
CDN $311,076 before additional collateral would be required. We also have a term
loan with the bank in the amount of CDN $116,665 as of May 31, 2004. The term
loan bears interest at the bank's prime rate plus 2%. Additionally, we have a
letter of credit issued in May 2002 as collateral on leased facilities in the
amount of CDN $400,000 that will renew annually. 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 collateralized
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 fiscal year ended May 31, 2004 would have been less than
$46,000.
60
FOREIGN CURRENCY RISK
We have monetary assets and liabilities 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 $259,000.
61
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT STATEMENT OF RESPONSIBILITY
Workstream's management is responsible for the preparation and
presentation of the consolidated financial statements and all the information in
this annual report on Form 10-K. The consolidated financial statements were
prepared by management in accordance with generally accepted accounting
principles in the United States. Where alternative accounting methods exist,
management has selected those it considered to be most appropriate in the
circumstances. Financial statements include certain amounts based on estimates
and judgments. Management has determined such amounts on a reasonable basis with
the objective of ensuring that the consolidated financial statements are
presented fairly, in all material respects. Financial information presented
elsewhere in this annual report has been prepared by management to ensure
consistency with that in the financial statements. The consolidated financial
statements have been reviewed and approved by the Company's Audit Committee.
Management is responsible for the development and maintenance of systems
of internal accounting and administrative controls of high quality, consistent
with reasonable cost. Such systems are designed to provide reasonable assurance
that the financial information is accurate, relevant and reliable and that the
Company's assets are appropriately accounted for and adequately safeguarded.
The Company's Audit Committee is appointed by its Board of Directors
annually and consists solely of outside directors. The committee meets
periodically with management, as well as with the independent auditors, to
satisfy itself that each is properly discharging its responsibilities, to review
the consolidated financial statements and the independent auditors' report, and
to discuss significant financial reporting issues and auditing matters. The
Audit Committee reports its findings to the Board of Directors for consideration
when approving the consolidated financial statements for issuance to the
shareholders.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, the independent auditors, in accordance with the
standards of the Public Company Accounting Oversight Board (United States) on
behalf of the shareholders. The Auditors' Report outlines the nature of the
examination and their opinion on the consolidated financial statements of the
Company. The independent auditors have full and unrestricted access to the Audit
Committee.
(Signed) Michael Mullarkey, CEO (Signed) David Polansky, CFO
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF WORKSTREAM INC.
We have audited the consolidated balance sheets of Workstream Inc. as at
May 31, 2004 and 2003, and the consolidated statements of operations,
comprehensive loss, shareholders' equity and cash flows for each of the three
years in the period ending May 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at May 31, 2004
and 2003, and the results of its operations and its cash flows for each of the
three years in the period ending May 31, 2004, in accordance with generally
accepted accounting principles in the United States.
PricewaterhouseCoopers LLP
Chartered Accountants
Ottawa, Canada
July 23, 2004
63
WORKSTREAM, INC.
CONSOLIDATED BALANCE SHEETS
(UNITED STATES DOLLARS)
MAY 31, 2004 MAY 31, 2003
----------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,338,466 $ 255,173
Restricted cash 2,760,259 1,307,439
Short-term investments 301,194 38,419
Accounts receivable, net of allowance for doubtful 1,379,610 933,889
accounts of $21,509 (May 31, 2003 - $55,828)
Prepaid expenses 606,370 133,551
Other assets 147,009 201,877
----------------------------
9,532,908 2,870,348
CAPITAL ASSETS 1,429,143 1,138,276
OTHER ASSETS 79,073 143,500
ACQUIRED INTANGIBLE ASSETS 9,242,617 9,082,926
GOODWILL 28,598,706 17,383,437
----------------------------
$ 48,882,447 $ 30,618,487
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,332,036 $ 1,909,896
Accrued liabilities 2,969,248 1,093,133
Accrued exit costs -- 117,702
Line of credit 1,972,218 593,452
Accrued compensation 1,241,441 443,144
Current portion of capital lease obligations 54,003 97,882
Current portion of leasehold inducements 49,533 --
Current portion of convertible notes -- 449,071
Current portion of long-term obligations 29,335 31,662
Current portion of related party obligations 170,369 178,623
Deferred revenue 2,065,604 1,367,362
----------------------------
9,883,787 6,281,927
DEFERRED INCOME TAX LIABILITY 839,265 2,607,981
CAPITAL LEASE OBLIGATIONS 31,530 73,316
LEASEHOLD INDUCEMENTS 185,200 142,274
LONG-TERM OBLIGATIONS 56,226 85,243
RELATED PARTY OBLIGATIONS 147,257 2,403,407
----------------------------
11,143,265 11,594,148
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued and outstanding, no par value - 33,574,883
common shares (May 31, 2003 - 19,951,570) 72,705,603 47,158,583
Additional paid-in capital 3,605,224 4,721,516
Accumulated other comprehensive loss (1,072,302) (893,316)
Accumulated deficit (37,499,343) (31,962,444)
----------------------------
37,739,182 19,024,339
----------------------------
$ 48,882,447 $ 30,618,487
============================
The accompanying notes are an integral part of
these consolidated financial statements.
64
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNITED STATES DOLLARS)
YEARS ENDED MAY 31,
2004 2003 2002
--------------------------------------------
REVENUE $ 17,166,880 $ 17,836,990 $ 14,751,620
COST OF REVENUES 1,586,989 3,040,132 2,858,294
--------------------------------------------
GROSS PROFIT 15,579,891 14,796,858 11,893,326
--------------------------------------------
EXPENSES
Selling and marketing 4,362,292 6,057,788 6,649,057
General and administrative 9,798,440 9,581,554 6,724,211
Research and development 453,247 1,086,295 749,392
Amortization and depreciation 5,601,910 6,097,141 1,795,445
Impairment write-down of goodwill -- 2,133,242 2,810,000
--------------------------------------------
20,215,889 24,956,020 18,728,105
--------------------------------------------
OPERATING LOSS (4,635,998) (10,159,162) (6,834,779)
--------------------------------------------
OTHER INCOME AND (EXPENSES)
Interest and other income 11,959 47,245 146,061
Interest and other expense (2,647,265) (1,193,045) (300,983)
---------------------------------------
(2,635,306) (1,145,800) (154,922)
--------------------------------------------
LOSS BEFORE INCOME TAX (7,271,304) (11,304,962) (6,989,701)
Recovery of deferred income taxes 1,789,235 1,586,232 28,396
Current income tax (expense) recovery (54,830) 42,128 --
--------------------------------------------
NET LOSS FOR THE YEAR $ (5,536,899) $ (9,676,602) $ (6,961,305)
============================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
DURING THE YEAR 25,036,056 18,607,725 13,281,374
============================================
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.22) $ (0.52) $ (0.52)
============================================
The accompanying notes are an integral part of
these consolidated financial statements.
65
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNITED STATES DOLLARS)
YEARS ENDED MAY 31,
2004 2003 2002
-----------------------------------------
Net loss for the year $(5,536,899) $(9,676,602) $(6,961,305)
Other comprehensive loss:
Cumulative translation adjustment (net of tax of $nil) (178,986) (7,355) (346,043)
-----------------------------------------
Comprehensive loss for the year $(5,715,885) $(9,683,957) $(7,307,348)
=========================================
The accompanying notes are an integral part of
these consolidated financial statements.
66
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNITED STATES DOLLARS)
Accumulated
Common Stock Additional Other Total
-------------------------- Paid-In Accumulated Comprehensive Shareholders'
Shares Amount Capital Deficit Loss Equity
----------------------------------------------------------------------------------------
Balance at May 31, 2001 7,712,262 17,789,892 2,116,620 (15,324,537) (539,918) 4,042,057
Issuance of shares for acquisitions 7,220,810 15,500,533 -- -- -- 15,500,533
Share repurchases (100,000) (200,000) -- -- -- (200,000)
Issuance of shares through
exercise of stock options 11,833 19,269 -- -- -- 19,269
Issuance of shares for services 7,000 26,040 -- -- -- 26,040
Issuance of options to employees -- -- 162,500 -- -- 162,500
Beneficial conversion feature
related to convertible notes,
net of issue costs -- -- 1,584,078 -- -- 1,584,078
Detachable warrants issued with
convertible notes, net of
issue costs 929,689 -- -- 929,689
Net loss for the year -- -- -- (6,961,305) -- (6,961,305)
Cumulative translation adjustment -- -- -- -- (346,043) (346,043)
----------------------------------------------------------------------------------------
Balance at May 31, 2002 14,851,905 33,135,734 4,792,887 (22,285,842) (885,961) 14,756,818
Issuance of shares for acquisitions 3,765,627 12,618,640 -- -- -- 12,618,640
Issuance of shares through
exercise of stock options 46,173 53,535 -- -- -- 53,535
Issuance of shares through
exercise of stock warrants 35,674 35,674 (35,674) -- -- 0
Finance costs associated with the
issuance of convertible notes (123,697) -- -- (123,697)
Issuance of shares for exit costs 275,000 253,000 -- -- -- 253,000
Conversion of convertible note 210,525 200,000 -- -- -- 200,000
Issuance of shares held in escrow 500,000 750,000 -- -- -- 750,000
Issuance of shares and warrants 266,666 112,000 88,000 -- -- 200,000
Net loss for the year -- -- -- (9,676,602) -- (9,676,602)
Cumulative translation adjustment -- -- -- -- (7,355) (7,355)
----------------------------------------------------------------------------------------
Balance at May 31, 2003 19,951,570 $ 47,158,583 $ 4,721,516 $(31,962,444) $ (893,316) $ 19,024,339
Issuance of shares and warrants,
net of issue costs 5,454,168 6,055,639 823,584 -- -- 6,879,223
Issuance of shares and
warrants for acquisitions 4,836,773 13,404,351 46,500 -- -- 13,450,851
Issuance of shares and warrants
for services 332,000 542,590 73,500 -- -- 616,090
Issuance of shares through
exercise of stock options 136,665 139,997 -- -- -- 139,997
Issuance of shares through
exercise of warrants 465,697 1,174,343 (475,798) -- -- 698,545
Conversion of convertible note 2,424,999 4,284,078 (1,584,078) -- -- 2,700,000
Share repurchases (26,989) (53,978) -- -- -- (53,978)
Net loss for the year -- -- -- (5,536,899) -- (5,536,899)
Cumulative translation adjustment -- -- -- -- (178,986) (178,986)
----------------------------------------------------------------------------------------
Balance at May 31, 2004 33,574,883 $ 72,705,603 $ 3,605,224 $(37,499,343) $(1,072,302) $ 37,739,182
========================================================================================
The accompanying notes are an integral part of
these consolidated financial statements.
67
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNITED STATES DOLLARS)
YEARS ENDED MAY 31,
2004 2003 2002
-----------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net loss for the year $(5,536,899) $(9,676,602) $(6,961,305)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation 5,572,366 6,080,763 1,766,995
Non-cash interest on convertible notes and notes payable 2,318,444 720,486 33,364
Shares issued to service providers -- -- 26,040
Impairment write-down of goodwill -- 2,133,242 2,810,000
Write-off of deferred charges -- -- 17,993
Recovery of deferred income taxes (1,758,049) (1,586,232) (109,000)
Non-cash compensation expense -- -- 312,500
Gain on sale of capital assets (460) 97,993 --
Non-cash payment to consultants 542,590
Non-cash settlement of employee compensation 100,000 -- --
Net change in operating components of working capital
excluding acquisitions (1,164,,772) (602,839) 263,371
-----------------------------------------
73,220 (2,833,189) (1,840,042)
-----------------------------------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Acquisition of capital assets (228,408) (56,708) (204,297)
Cash acquired in /(paid for) business acquisitions
(net of acquired cash of $355,637-May 31, 2004) (416,385) 1,914,884 (1,824,272)
Sale of capital assets 6,310 14,950 --
Acquisition of intangible assets -- -- (68,810)
(Increase)/decrease in restricted cash (1,485,665) 761,170 (1,957,090)
Sale (purchase) of short-term investments (242,780) 239,595 3,173,756
-----------------------------------------
(2,366,928) 2,873,891 (880,713)
-----------------------------------------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Proceeds from share and warrants issuance 8,248,545 200,000 --
Cost related to the registration and issuance of common stock (670,775)
Costs related to issuance of convertible promissory notes -- (123,697) (288,000)
Proceeds from issuance of convertible notes -- -- 2,900,000
Capital lease payments (87,430) (297,282) --
Proceeds from exercise of options 39,997 53,534 19,269
Shareholder loan proceeds -- 500,000 750,000
Shareholder loan repayment (2,332,273) (391,600) (428,092)
Repayment of bank debt (1,178,604) (1,323,335) (1,693,712)
Proceeds from bank financing 2,666,784 482,087 3,058,434
Repayment related to lease settlement (120,000) (100,000) --
Long-term debt repayments (32,320) (23,839) (61,156)
-----------------------------------------
6,533,924 (1,024,132) 4,256,743
-----------------------------------------
EFFECT OF EXCHANGE RATE CHANGES (156,923) (59,053) (303,815)
-----------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS FOR THE YEAR 4,083,293 (1,042,483) 1,232,173
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE YEAR 255,173 1,297,656 65,483
-----------------------------------------
CASH AND CASH EQUIVALENTS, END OF
THE YEAR $ 4,338,466 $ 255,173 $ 1,297,656
=========================================
The accompanying notes are an integral part of
these consolidated statements.
68
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNITED STATES DOLLARS)
YEARS ENDED MAY 31,
2004 2003 2002
-------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 367,893 $340,605 $97,796
Conversion of notes to common shares $2,700,000 $200,000 --
Taxes paid $ 633 -- --
Non cash lease settlement $ -- $631,654 --
The accompanying notes are an integral part of
these consolidated statements.
69
WORKSTREAM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Workstream Inc. ("Workstream" or the "Company"), formerly E-Cruiter.com,
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 and
managing employee's job performance, managing corporate compliance and offering
benefits that promote employee retention. Workstream also provide 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 financial statements included herein have been prepared
by Workstream in accordance with United States generally accepted accounting
principles. All amounts presented in these financials statements are presented
in United States dollars unless otherwise noted. Prior to September 1, 2001, the
Company prepared its financial statements in accordance with Canadian generally
accepted accounting principles and presented its financial statements in
Canadian dollars. The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. The earnings of the subsidiaries
are included from the date of acquisition. At May 31, 2004, the Company's
subsidiaries are Workstream USA Inc., 3451615 Canada Inc., Paula Allen Holdings,
Inc., OMNIpartners, Inc. RezLogic, Inc., 6FigureJobs.com, Inc., Icarian Inc.,
Xylo, Inc, and Kadiri, Inc.
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.
70
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.
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
Capital 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.
The carrying values are reviewed for impairment whenever events or changes in
events indicate that the carrying amounts of such assets may not be recoverable.
The determination of any impairment includes a comparison of estimated
undiscounted future cash flows anticipated to be generated during the remaining
life of the asset to the net carrying value of the asset. The amount of any
impairment recognized is the difference between the carrying value and the fair
value.
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.
71
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 104.
The Company's Enterprise Workforce Services revenue consists of
Recruitment Systems Services, Recruitment Services, Applicant Sourcing and
Exchange Services, Performance Management Services and Employee Portal Services.
The Company makes sales to Recruitment Systems Services and Performance
Management Systems 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 Services, the Company bills its clients based on a per-hour fee and
recognizes the revenue once the project is completed. For Applicant Sourcing and
Exchange Services and Employee Portal 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.
72
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 fiscal 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:
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 US 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 US 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.
73
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: RESTRICTED CASH AND SHORT-TERM INVESTMENTS
The following is a summary of the Company's restricted cash and short-term
investments as at May 31, 2004 and May 31, 2003:
MAY 31,
2004 2003
-----------------------------
Restricted cash .......................... $2,760,259 $1,307,439
Short-term investments ................... $ 301,194 $ 38,419
Excess funds are used to purchase units of an investment trust established
by a Canadian chartered bank, as well as bonds issued by Canadian corporations.
The investment trust holds various short-term, low-risk instruments that accrue
interest daily, and monies held in trust can be withdrawn without penalty at any
time.
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.
74
NOTE 5: ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEARS ENDED MAY 31,
2004 2003
--------------------------
Balance at beginning of year $ 55,828 $ 98,188
Charged to costs and expenses 55,966 186,581
Write-offs (90,285) (228,941)
--------------------------
Balance at end of year $ 21,509 $ 55,828
==========================
NOTE 6: 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.
The purchase price has been allocated as follows:
Share consideration $ 300,000
Cash consideration 522,000
Acquisition costs 69,423
---------
Total purchase costs $ 891,423
=========
Current assets $ 4,919
Tangible long-term assets 232,362
Current liabilities (2,950)
Intangible assets:
Acquired technology 657,092
---------
Total net identifiable assets $ 891,423
=========
75
Acquisition of Peopleview, Inc.
On March 17, 2004 and as amended and effective for accounting purposes on
May 27, 2004, the Company acquired certain assets of Peopleview, Inc.
("Peopleview"), a Nevada corporation. As consideration for the sale, the Company
issued Peopleview 246,900 common shares valued at $688,851 and cash in an amount
equal to $250,000. Peopleview designs, develops and markets software that helps
companies evaluate employee skills and competency and employee's performance. In
addition, Peopleview offers software that enables companies to survey their
employees regarding the company's environment and assess Sarbanes-Oxley
Corporate compliance.
Management prepared a valuation of the net tangible and intangible assets
acquired.
The purchase price has been allocated as follows:
Share consideration $ 688,851
Cash consideration 250,000
Warrants 46,500
Acquisition costs 40,000
-----------
Total purchase costs $ 1,025,351
===========
Current assets $ 194,432
Tangible long-term assets 8,700
Current liabilities (39,000)
Intangible assets:
Acquired technology 861,219
-----------
Total net identifiable assets $ 1,025,351
===========
Acquisition of Kadiri
On May 28, 2004, the Company acquired 100% of the outstanding stock of
Kadiri, Inc., a California based company. As consideration for the purchase, the
Company issued to the shareholders of Kadiri 4,450,000 common shares valued at
approximately $12.4 million. Kadiri is a provider of Enterprise Compensation
Management solutions which enable companies to plan and manage compensation,
performance evaluation and granting of rewards.
Management obtained an independent valuation of intangible assets acquired
and prepared a valuation of net tangible assets acquired. The excess of the
purchase price over the value of the net tangible and identifiable intangible
assets acquired has been allocated to goodwill.
The goodwill resulting from the transaction has been allocated to the
Enterprise Workforce Services business segment.
76
The purchase price has been allocated as follows:
Share consideration $ 12,415,500
Acquisition costs 705,000
------------
Total purchase costs $ 13,120,500
============
Current assets $ 1,382,715
Tangible long-term assets 383,777
Other assets 877
Current liabilities (2,463,990)
Long-term liabilities assumed (895,639)
Deferred tax asset 1,434,800
Intangible assets:
Customer base 653,000
Intellectual property 220,000
Acquired technology 2,714,000
Deferred income tax liability (1,434,800)
Goodwill 11,125,760
------------
Total net identifiable assets $ 13,120,500
============
Contingent consideration
As of May 31, 2004, a total of 1,323,625 common shares were held in escrow
relating to acquisitions as further described below. This total consists of
323,625 common shares relating to the Company's acquisition of 6FigureJobs.com,
50,000 common shares relating to the Company's acquisition of Peopleview, and
950,000 common shares relating to the Company's acquisition of Kadiri.
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 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, but the representative of
the former 6FigureJobs.com shareholders disputed that determination and filed a
lawsuit against the Company with regard to the escrowed shares. Management
continues to believe that the targets were not met and that the shares currently
held in escrow will be cancelled.
Pursuant to the purchase agreement with Peopleview, 50,000 of the common
shares were held in escrow to be released to the former shareholders of
Peopleview, if certain representations were met. Subsequent to May 31, 2004, the
representations were met and the shares were released from escrow.
77
Pursuant to the purchase agreement with Kadiri, 950,000 additional common
shares are to be released from escrow if certain revenue and cash generation
targets are achieved during each fiscal quarter through November 30, 2005 or for
any indemnification claims for breaches of representation and warranties.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to
the significant acquisitions made by Workstream as if the transactions occurred
at the beginning of the year ended May 31, 2003.
Workstream Inc.
Unaudited Pro Forma Statement of Operations
(United States dollars)
Proforma Proforma
FY 2004 FY 2003
----------------------------
Revenue $ 20,825,775 $ 23,135,712
Cost of Revenue 4,023,809 4,561,146
----------------------------
Gross Profit 16,801,966 18,574,566
Selling and marketing 8,560,200 9,295,905
General and administrative 11,879,945 11,676,515
Research and development 3,168,834 3,088,811
Amortization and depreciation 7,030,569 7,683,223
Impairment write-down of goodwill 0 2,133,242
----------------------------
30,639,548 33,877,696
----------------------------
OPERATING LOSS (13,837,582) (15,303,130)
Interest and other income 84,243 2,662,378
Interest and other expense (2,648,848) (2,381,359)
----------------------------
(2,564,605) 281,019
Recovery of deferred income taxes 1,789,235 1,586,232
Current income tax (expense) recovery (54,830) 42,128
----------------------------
NET LOSS FOR THE YEAR $(14,667,782) $(13,393,751)
============================
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
DURING THE YEAR 29,449,581 23,057,725
============================
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (0.50) $ (0.58)
============================
78
NOTE 7: CAPITAL ASSETS
Property and equipment consists of the following:
May 31, 2004 May 31, 2003
-------------------------- -------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
-------------------------- -------------------------
Furniture, equipment
and leaseholds $ 1,393,844 $ 695,967 $1,388,873 $ 710,603
Office equipment 293,814 226,992 241,659 194,597
Computers and software 4,049,582 3,385,138 3,461,678 3,048,734
-------------------------- -------------------------
5,737,240 4,308,097 5,092,210 3,953,934
-------------------------- -------------------------
Less accumulated amortization (4,308,097) (3,953,934)
----------- ----------
Net capital assets $ 1,429,143 $1,138,276
=========== ==========
As of May 31, 2004 capital assets include net assets under capital lease
of $13,938 (2003 - $27,410) net of accumulated amortization of $121,161 (2003 -
$216,664).
79
NOTE 8: ACQUIRED INTANGIBLE ASSETS
Depreciable intangible assets consists of the following:
MAY 31,
2004 2003
---------------------------
Customer base $ 4,186,182 $ 3,559,543
Acquired technologies 14,513,943 10,281,632
Trademarks, domain names and intellectual property 677,760 457,760
---------------------------
Total cost 19,377,885 14,298,935
---------------------------
Accumulated amortization:
Customer base (2,930,512) (1,760,860)
Acquired technologies (6,950,270) (3,292,215)
Trademarks, domain names and intellectual property (254,486) (162,934)
---------------------------
Total accumulated amortization (10,135,268) (5,216,009)
---------------------------
Net acquired intangible assets $ 9,242,617 $ 9,082,926
===========================
Amortization of intangible assets was $4,919,260, $4,322,272, and $905,210
for fiscal 2004, fiscal 2003, and fiscal 2002, respectively. The estimated
amortization expense related to intangible assets in existence as of May 31,
2004, over the next fiscal years is as follows:
Fiscal 2005: $5,535,404
2006: $2,165,128
2007: $1,453,945
2008: $ 44,140
2009: $ 44,000
NOTE 9: GOODWILL
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
-----------------------------------------
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
-----------------------------------------
Acquisitions during the year 11,125,760 -- 11,125,760
Purchase price allocation
adjustments made within
one year of acquisition date 89,509 -- 89,509
Impairment during the year -- -- --
-----------------------------------------
Goodwill at May 31, 2004 $ 20,785,369 $7,813,337 $ 28,598,706
-----------------------------------------
80
In fiscal 2003, the Company recognized an impairment charge for its
Enterprise Workforce Services segment related principally to reduced revenue
forecasts as a result of lower revenue projections for the Icarian business
acquired in June 2002.
NOTE 10: LINES OF CREDIT
At May 31, 2004, the Company had an aggregate of $1,972,218 outstanding on
a line of credit from the Bank of Montreal ("BMO").
MAY 31,
2004 2003
------------------------
Line of credit - Bank of Montreal 1,972,218 593,452
========================
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 $2,688,924 as of May 31, 2004.
The Company has provided collateral of CDN $3,000,000, leaving CDN $311,076
available to be drawn on this line.
As of May 31, 2004, and May 31, 2003, a total of $2,760,259 and
$1,307,439, respectively, of 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 facility leases, as well as for Workstream's
credit card with the Bank of Montreal and therefore were restricted from the
Company's use:
MAY 31,
2004 2003
-----------------------
Bank of America - credit card reserve $ 199,786 $ 399,786
Silicon Valley Bank - letter of credit for facility lease
77,594 --
Bank of Montreal - Term loan, line of credit and letters
of credit for facility leases, and BMO credit card 2,482,879 907,653
-----------------------
$2,760,259 $1,307,439
=======================
NOTE 11: LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
MAY 31,
2004 2003
------------------
Term loan $85,561 $116,905
Less: current portion 29,335 31,662
------------------
$56,226 $ 85,243
==================
81
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 10.
As of May 31, 2004 the maturities for long-term obligations are as
follows:
Year ended May 31,
2005 29,335
2006 29,335
2007 26,891
--------
$ 85,561
========
NOTE 12: RELATED PARTY OBLIGATIONS
Related party obligations consist of the following:
MAY 31,
2004 2003
-----------------------
Note payable $ -- $ 33,838
Deferred compensation -- 797,880
Shareholder loans 317,626 1,750,312
-----------------------
317,626 2,582,030
Less: current portion 170,369 178,623
-----------------------
$ 147,257 $2,403,407
=======================
As of May 31, 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 was automatically extended each
month after June 1, 2004 for an additional month, which resulted 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. In April 2004, the
Company and Mr. Mullarkey agreed to terminate his deferred compensation
agreement and the Company paid in full the outstanding deferred compensation of
$783,867 and any accrued interest incurred through March 31, 2004.
82
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. The Company did not draw against this
facility. In April, 2004, the Company and Mr. Mullarkey agreed to terminate Mr.
Mullarkey's commitment to provide the credit facility.
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.
As of May 31, 2004 the related party obligations maturities are as
follows:
Year ended May 31,
2005 $170,369
2006 147,257
--------
$317,626
========
NOTE 13: CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist of the following:
MAY 31,
2004 2003
-------------------
Capital leases $85,533 $171,198
Less: current portion 54,003 97,882
-------------------
$31,530 $ 73,316
===================
Capital lease obligations relate to office equipment, computers and
software and bear interest at rates that range from 7.5% to 15.1% per annum.
These leases mature at various times through October 2005.
83
NOTE 14: COMMITMENTS AND CONTINGENCIES
The Company has obligations under non-cancelable capital leases and
operating leases for office equipment, computer software and hardware, and
facilities. The leases expire at various dates through fiscal 2009 and, in many
cases, provide for renewal options. Most of the leases require the payment of
related executory costs, which include payment of taxes, maintenance and
insurance.
A summary of the future minimum lease payments under the Company's
non-cancelable leases as of May 31, 2004 is as follows:
Capital Operating
Leases Leases
--------------------------
Year ended May 31:
2005 $ 66,805 $1,175,343
2006 27,194 605,453
2007 0 506,411
2008 -- 550,200
2009 -- 394,386
Thereafter -- --
--------------------------
Total minimum lease payments 94,000 $3,231,793
==========
Less amount representing interest (8,467)
--------
Total minimum lease payments 85,533
Less current maturities (54,003)
--------
$ 31,530
========
Rent expense totaled $1,369,801, $1,988,955, and $1,495,726 for the years
ended May 31, 2004, 2003 and 2002, respectively, under operating leases. The
Company has provided the landlords of the corporate headquarters location in
Ottawa and of the Maitland location with letters of credit in the amount of
$198,034 and $119,460, respectively (See note 10).
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.
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 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 sought compensation for
unpaid rents, maintenance charges and other charges as well as an undetermined
amount for attorneys' fees. As of May 31, 2004, the lawsuit was settled
requiring OMNIpartners to pay $250,000 to 11263 Mississippi, LLC and 14617
Vanowen LLC. The Company has accrued for the full amount as of May 31, 2004.
84
OMNIpartners also filed a lawsuit against U.S. Vehicle and its principals
alleging a breach of its sublease agreement with OMNIpartners. This action was
filed on April 18, 2002 in the Clark County District Court in Nevada. In this
action, OMNIpartners seeks approximately $115,000 for unpaid rents, maintenance
charges and other charges as well as an undetermined amount for attorneys' fees.
We are currently in a lawsuit with the former shareholders of
6FigureJobs.com, Inc., a company we acquired in October 2001. Under the terms of
the purchase agreement pursuant to which we acquired 6FigureJobs.com, 323,625
common shares were held in escrow to be issued to the former shareholders of
6FigureJobs.com provided that certain revenue and profit targets were achieved.
The Company determined that the revenue and profit targets were not achieved,
but the representative of the former 6FigureJobs.com shareholders disputed that
determination and filed a lawsuit against the Company with regard to the
escrowed shares.
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 15: CONVERTIBLE NOTES
MAY 31,
2004 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
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.
85
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 May 31, 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.
86
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.
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 16: INCOME TAXES
The Company operates in several tax jurisdictions. Its income is subject
to varying rates of tax, and losses incurred in one jurisdiction cannot be used
to offset income taxes payable in another.
The loss before income taxes consisted of the following rounded:
YEARS ENDED MAY 31,
2004 2003 2002
-----------------------------------------
Canadian domestic loss $ 230,000 $ 1,174,000 $ 1,577,000
United States loss 7,071,000 10,131,000 5,413,000
----------- ------------ -----------
Loss before income taxes $ 7,271,000 $ 11,305,000 $ 6,990,000
=========== ============ ===========
The provision (recovery) for income taxes consists of the following
rounded:
YEARS ENDED MAY 31,
2004 2003 2002
-----------------------------------------
Canadian domestic:
Current income taxes $ (49,000) $ (46,000) $ --
Deferred income taxes -- -- --
United States:
Current income taxes 104,000 4,000 81,000
Deferred income taxes (1,789,000) (1,586,000) (109,000)
----------- ------------ -----------
Provision for (recovery of)
income taxes $(1,734,000) $ (1,628,000) $ (28,000)
=========== ============ ===========
87
A reconciliation of the combined Canadian federal and provincial income
tax rate with the Company's effective income tax rate is as follows rounded:
YEAR ENDED MAY 31,
2004 2003 2002
-------------------------------------------
Combined Canadian federal and
provincial tax rate 36.80% 37.80% 40.50%
Income tax recovery based on
combined Canadian federal and
provincial rate $ 2,676,000 $ 4,273,000 $ 2,831,000
Effect of foreign tax rate differences 240,000 223,000 (12,000)
Deductible amounts charged to equity 247,000 47,000 563,000
Change in enacted tax rates (210,000) (410,000) (870,000)
Non-deductible amounts (852,000) (362,000) (125,000)
Write-down of non deductible goodwill -- (853,000) (1,138,000)
Change in valuation allowance (3,024,000) (9,463,000) (1,298,000)
Utilization of losses -- -- (252,000)
Reversal of basis difference relating to
acquired intangibles -- -- 361,000
Convertible Note accretion --
Effect of changes in carryforward amounts (298,000) 911,000 --
Deferred tax assets arising from acquisitions 2,952,000 6,633,000 --
Effect of foreign exchange rate differences 123,000 627,000 --
Other (120,000) 2,000 (32,000)
-------------------------------------------
Recovery of income taxes $ 1,734,000 $ 1,628,000 $ 28,000
===========================================
88
The components of the Company's net deferred income taxes are as follows
rounded:
YEAR ENDED MAY 31,
2004 2003 2002
-------------------------------------------
Deferred income tax assets:
Scientific Research and Experimental Development
("SR&ED") expenses
Development ("SR&ED") expenses $ 561,000 $ 291,000 $ 341,000
Loss carryforwards 18,002,000 14,213,000 6,435,000
Asset basis differences 2,541,000 2,354,000 535,000
Share issue costs 267,000 314,000 362,000
Investment tax credits 105,000 195,000 186,000
Other 386,000 36,000 139,000
-------------------------------------------
21,862,000 17,403,000 7,998,000
Less: valuation allowance (19,656,000) (16,632,000) (7,169,000)
-------------------------------------------
2,206,000 771,000 829,000
Deferred income tax liabilities:
Intangible assets (3,045,000) (3,379,000) (1,142,000)
-------------------------------------------
Net deferred income tax liabilities $ (839,000) $ (2,608,000) $ (313,000)
===========================================
The Company has incurred net losses since inception. At May 31, 2004, the
Company had approximately $29,300,000 in net operating loss carryforwards for
U.S. federal income tax purposes that expire in various amounts through 2024,
and approximately CDN $23,000,000 (US $17,000,000) in net operating loss
carryforwards for Canadian federal and provincial income tax purposes that
expire in various years through 2011. Management has determined that it is more
likely than not that a component of deferred tax assets relating to United
States operations will be realized, therefore deferred tax assets relating to
those operations have been recognized. A valuation allowance has been provided
for the balance of net tax assets. The change in the valuation allowance for the
year ended May 31, 2004 and 2003 was an increase of $3,024,000, and $9,463,000,
respectively, resulting primarily from net operating losses generated during the
periods.
NOTE 17: FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including accounts
receivable, accounts payable, and other accrued charges, the carrying amounts
approximate the fair value to settlement. Cash equivalents, short-term
investments, bank line of credit, capital lease obligations and long-term
obligations are carried at cost which management believes approximates their
fair value due to their short-term to maturity and the relative stability of
fixed interest rates. The terms of the Company's related party obligations are
set out in note 12.
Interest rate and Foreign Exchange Risk
The Company has short-term investments and deposits that earn interest at
fixed rates ranging from 1.75% to 2.25%.
As explained in note 10, the Company has a line of credit with the Bank of
Montreal that bears interest based on the bank's prime rate plus 1%.
Fluctuations in the Bank's prime rate or exchange rates would result in an
impact on financial results. The Company also has letters of credit with a
Canadian bank based on a fixed rate of 1.2% and fluctuations in exchange rates
would have a financial impact.
89
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.
NOTE 18: SHARE CAPITAL
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
Series A Convertible Preferred Shares, no par value per share (the "Series A
Shares"). There were 33,574,883 common shares outstanding as of May 31, 2004
(May 31, 2003 - 19,951,570). As of May 31, 2004, an additional 1,323,625 shares
were being held in escrow as a result of the terms of acquisitions. (See note 6)
These shares are to be released from escrow if certain revenue, profit, and/or
cash generation targets are achieved or for any indemnification claims for
breaches of representation and warranties. Management believes that the profit
and/or revenue targets of the 6FigureJobs.com have not been met, and believes
that the escrow shares related to the 6FigureJobs.com acquisition will be
cancelled. The periods covered by the escrow agreements extend until November
30, 2005. As at May 31, 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.
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.
90
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 have been used to repay in full of the
amounts outstanding under the Company's Convertible Notes, to pay the expenses
incurred in connection with the issuance and will be used 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
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.
91
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.
In March 2004 and as amended and effective for accounting purposes in May
2004, the Company acquired certain assets of Peopleview, Inc., a Nevada
corporation. As consideration for the sale, the Company issued Peopleview, Inc.
196,900 of its common shares and 50,000 common shares held in escrow for an
aggregate value of $688,851, cash of $250,000 and a warrant to purchase 50,000
of the Company's common shares at an exercise price of $3.00 per share.
In May 2004, the Company acquired 100% of the outstanding stock of Kadiri,
Inc., a California based company. As consideration for the sale, the Company
issued to the shareholders of Kadiri 4,450,000 common shares valued at
approximately $12.5 million, and 950,000 common shares held in escrow.
During the fourth quarter 2004, 465,697 common shares were issued through
exercise of warrants previously issued to investors for an aggregate cash amount
of $698,545.
In May 2004, an employee exercised previously issued options that resulted
in the issuance of 3,332 common shares for a cash amount of $6,664.
NOTE 19: STOCK BASED COMPENSATION PLANS
The Company has an employee and directors stock option plan (the "1997
Plan"). Under the terms of the 1997 Plan, the options to purchase common shares
generally vest ratably over a period of three years and expire five years from
the date of grant. The 1997 Plan provides that the number of options and the
option exercise price are to be fixed by the Board of Directors, but the
exercise price may not be lower than the fair value of the underlying common
shares on the date of grant. The Board of Directors has the right to accelerate
the vesting date for any options granted. In the event of a third-party offer to
acquire control of the Company that is accepted by a majority of the
shareholders, any options that are not exercisable at that time become fully
exercisable.
92
On October 29, 1999, the shareholders approved the 1999 Employees Stock
Option Plan (the "1999 Plan") to replace the 1997 Plan. The 1999 Plan is similar
to the 1997 Plan but includes provisions for directors and employees who reside
in the United States.
On October 5, 2000, the shareholders approved the 2000 Amended and
Restated Employee and Directors Stock Option Plan (the "2000 Plan") to replace
the 1999 Plan. The 2000 Plan is similar to the 1999 Plan but increased the
number of shares available for issuance under the 1999 Plan from 250,000 to
1,150,000.
On July 26, 2001, the shareholders approved the 2001 Amended and Restated
Employee and Directors Stock Option Plan (the "2001 Plan") to replace the 2000
Plan. The 2001 Plan is similar to the 2000 Plan but definitions of `affiliate'
and `consultant' have been added and the definition of `participant' has been
amended to mean a current or former full-time employee, consultant or director
of the Company or an affiliate. The number of shares available was also
increased from 1,150,000 to 2,500,000.
On November 7, 2002, the shareholders approved the 2002 Amended and
Restated Employee and Directors Stock Option Plan (the "2002 Plan") to replace
the 2001 Plan. The number of shares available was increased from 2,500,000 to
3,000,000.
Pro forma information regarding net loss is required by SFAS No. 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method. The fair value of options granted is
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
YEAR ENDED MAY 31,
2004 2003 2002
--------------------------
Risk free interest rates 2.99% 2.94% 3.12%
Expected dividend yield 0% 0% 0%
Expected volatility 90% 115% 50%
Expected lives (in years) 3.5 3.5 3.5
The following reflects the impact on earnings as if the Company had
recorded additional compensation expense:
93
Stock option activity and related information is summarized as follows:
Weighted
Number Average
Options Exercise Price
--------------------------
Balance outstanding - May 31, 2001 1,327,036 2.85
Granted 1,189,700 2.57
Exercised (11,833) 1.63
Forfeited (623,608) 2.97
---------
Balance outstanding - May 31, 2002 1,881,295 2.64
Granted 463,500 1.34
Exercised (46,173) 1.37
Forfeited (509,570) 2.77
---------
Balance outstanding - May 31, 2003 1,789,052 2.33
Granted 593,000 1.82
Exercised (136,665) 1.02
Forfeited (403,884) 2.43
---------
Balance outstanding - May 31, 2004 1,841,503 2.24
=========
The weighted average exercise price of options granted during the year is
as follows:
FOR THE YEAR ENDED MAY 31,
2004 2003 2002
-------------- -------------- --------------
Options issued with exercise
price at market price 593,000 $1.82 463,500 $1.34 479,700 $2.47
Options issued with exercise
price above market price -- -- -- -- 210,000 $3.11
Options issued with exercise
below market price -- -- -- -- 500,000 $2.45
The weighted average fair value of options granted during the year is as
follows:
FOR THE YEAR ENDED MAY 31,
2004 2003 2002
-------------- -------------- --------------
Options issued with exercise
price at market price 593,000 $1.14 463,500 $1.02 479,700 $0.99
Options issued with exercise
price above market price -- -- -- -- 210,000 $1.10
Options issued with exercise
below market price -- -- -- -- 500,000 $1.22
94
Information about options outstanding at May 31, 2004 is as follows:
Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Life Exercise Exercise
Exercise Price Shares (Years) Price Shares Price
- ----------------------- ------------------------------- ------------------
xxx
$1.00-1.99 585,334 3.35 $1.03 312,165 $1.03
$2.00-2.99 962,000 3.31 $2.37 539,140 $2.47
$3.00 and over 294,169 1.01 $4.25 292,968 $4.25
NOTE 20: SUPPLEMENTARY INFORMATION TO THE CASH
The following table provides supplementary information for users of the
financial statements to reconcile to the net change in operating components of
working capital as disclosed in the cash flow statement. The table is derived by
evaluating the change in each category, excluding any change resulting from
acquisitions.
NET CHANGE IN OPERATING COMPONENTS OF WORKING CAPITAL EXCLUDING ACQUISITIONS:
YEARS ENDED MAY 31,
2004 2003 2002
------------------------------------
Accounts receivable $ 417,860 $ 1,119,483 $ (42,935)
Prepaid expenses (177,284) 117,277 223,522
Other assets 121,230 20,940 (76,273)
Accounts payable and accrued liabilities (1,273,406) (1,172,995) (272,414)
Accrued compensation (113,072) (352,353) 498,124
Deferred revenue (140,100) (335,191) (66,653)
-------------------------------------
$(1,164,772) $ (602,839) $ 263,371
=====================================
95
The tables below reconcile the changes in each line item showing the
amounts excluded from acquisitions:
Fiscal 2004
Change in Change
working due to
Capital acquisitions Net change
-----------------------------------------
Accounts receivable $ (435,861) $ 853,721 $ 417,860
Prepaid expenses (472,368) 295,084 (177,284)
Other assets 120,353 877 121,230
Accounts payable and accrued
liabilities 1,292,519 (2,565,925) (1,273,406)
Accrued compensation 697,437 (810,509) (113,072)
Deferred revenue 750,178 (890,278) (140,100)
-----------------------------------------
1,952,258 $(3,117,030) $(1,164,772)
=========================================
Change in working capital includes change in balance, reclasses, non working
capital items and effect of exchange rate
Fiscal 2003
Change in Change
working due to
capital acquisitions Net change
-----------------------------------------
Accounts receivable $ 500,405 $ 619,078 $ 1,119,483
Prepaid expenses 13,315 103,962 117,277
Other assets (147,541) 168,481 20,940
Accounts payable and accrued
liabilities 1,774,737 (2,947,732) (1,172,995)
Accrued compensation 325,701 (678,054) (352,353)
Deferred revenue 311,601 (646,792) (335,191)
-----------------------------------------
$ 1,300,585 $(3,381,057) $ (602,839)
=========================================
Change in working capital includes change in balance, reclasses, non working
capital items and effect of exchange rate
Fiscal 2002
Change in Change
working due to
capital acquisitions Net change
---------------------------------------
Accounts receivable $(1,454,005) $ 1,411,070 $ (42,935)
Prepaid expenses 39,530 183,992 223,522
Other assets (76,273) -- (76,273)
Accounts payable and accrued
liabilities 1,135,449 (1,407,863) (272,414)
Accrued compensation 691,166 (193,042) 498,124
Deferred revenue 814,595 (881,248) (66,653)
-----------------------------------------
$ 1,150,462 $ (887,091) $ 263,371
=========================================
Change in working capital includes change in balance, reclasses, non working
capital items and effect of exchange rate
96
NOTE 21: SEGMENTED AND GEOGRAPHIC INFORMATION
Workstream has two distinct operating segments: Enterprise Workforce
Services and Career Transition Services. Operations are conducted in Canada and
the United States. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the corporation's chief decision maker in deciding how to allocate
resources and assess performance. The Company's chief decision maker is the
Chief Executive Officer. The following is a summary of the Company's operations
by business segment and by geographic region for the years ended May 31, 2004,
May 31, 2003 and May 31, 2002:
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
-----------------------------------------
BUSINESS SEGMENT
YEAR ENDED MAY 31, 2004
Revenue $10,790,051 $ 6,376,828 $ 17,166,879
Expenses 12,755,664 7,384,811 20,140,475
-----------------------------------------
Business segment loss $(1,965,613) $(1,007,983) (2,973,596)
=========================
Corporate overhead, other revenues
And expenses (2,563,304)
------------
Net loss $ (5,536,899)
============
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
-----------------------------------------
AS AT MAY 31, 2004
Business segment assets $ 7,883,911 $ 322,278 $ 8,206,189
Intangible assets 9,069,568 173,049 9,242,617
Goodwill 20,785,368 7,813,338 28,598,706
-----------------------------------------
$37,738,847 $ 8,308,665 46,047,512
=========================
Assets not allocated to business
segments 2,834,935
------------
Total assets $ 48,882,447
============
97
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
-----------------------------------------
BUSINESS SEGMENT
YEAR ENDED MAY 31,2003
Revenue $10,777,294 $ 7,059,696 $ 17,836,990
Expenses 15,301,033 7,610,637 22,911,670
-----------------------------------------
Business segment loss $(4,523,739) $ (550,941) (5,074,680)
=========================
Corporate overhead, other revenues
And expenses (4,601,922)
------------
Net loss $ (9,676,602)
============
AS AT MAY 31, 2003
Tangible assets $ 3,354,100 $ 107,428 $ 3,461,528
Intangible assets 8,576,138 506,788 9,082,926
Goodwill 9,570,099 7,813,338 17,383,437
-----------------------------------------
$21,500,337 $ 8,427,554 29,927,891
=========================
Assets not allocated to business
Segments 690,596
------------
Total assets $ 30,618,487
============
ENTERPRISE CAREER
WORKFORCE TRANSITION
SERVICES SERVICES TOTAL
-----------------------------------------
YEAR ENDED MAY 31, 2002
Revenue $ 6,450,374 $ 8,301,246 $ 14,751,620
Expenses 10,123,277 10,290,488 20,413,765
-----------------------------------------
Business segment loss $(3,672,903) $(1,989,242) (5,662,145)
=========================
Corporate overhead, other revenues
and expenses (1,299,160)
------------
Net loss $ (6,961,305)
============
AS AT MAY 31, 2002
Tangible assets $ 6,032,404 $ 550,538 $ 6,582,942
Intangible assets 1,834,599 767,415 2,602,014
Goodwill 5,674,838 7,063,337 12,738,175
-----------------------------------------
$13,541,841 $ 8,381,290 21,923,131
=========================
Assets not allocated to business
Segments 1,352,466
------------
Total assets $ 23,275,597
============
98
CANADA USA TOTAL
-----------------------------------------
GEOGRAPHY
YEAR ENDED MAY 31, 2004
Revenue $ 2,071,617 $15,095,262 $ 17,166,879
Expenses 2,249,744 19,553,133 21,802,877
-----------------------------------------
Geographical loss $ (178,127) $(4,457,871) (4,635,998)
=========================
Other revenues and expenses ~~ ~~ (900,901)
------------
Net loss ~~ ~~ $ (5,536,899)
============
CANADA USA TOTAL
-----------------------------------------
AS AT MAY 31, 2004
Geographic segment assets $ 5,310,040 $43,572,407 $ 48,882,447
=========================================
-----------------------------------------
CANADA USA TOTAL
-----------------------------------------
GEOGRAPHY
YEAR ENDED MAY 31, 2003
Revenue $ 2,338,404 $15,498,586 $ 17,836,990
Expenses 4,574,968 23,421,183 27,996,151
-----------------------------------------
Geographical loss $(2,236,564) $(7,922,597) (10,159,161)
=========================
Other revenues and expenses ~~ ~~ 482,559
------------
Net loss ~~ ~~ $ (9,676,602)
============
AS AT MAY 31, 2003
Geographic segment assets $ 2,572,495 $28,045,992 $ 30,618,487
=========================================
99
YEAR ENDED MAY 31, 2002
Revenue $ 2,527,412 $12,224,208 $ 14,751,620
Expenses 4,182,544 17,826,295 22,008,839
-----------------------------------------
Geographical loss $(1,655,132) $(5,602,087) (7,257,219)
=========================
Other revenues and expenses ~~ ~~ 295,914
------------
Net loss ~~ ~~ $ (6,961,305)
============
AS AT MAY 31, 2002
Geographic segment assets $ 4,469,560 $18,806,037 $ 23,275,597
=========================================
NOTE 22: RECENT ACCOUNTING PRONOUNCEMENTS
None.
NOTE 23: EARNINGS PER SHARE
For all the periods presented, diluted net loss per share equals basic net
loss per share due to the anti-dilutive effect of employee stock options,
warrants and escrowed shares.
Weighted average number of shares outstanding is computed as follows:
Shares outstanding at May 31, 2001 7,712,262
Weighted average number of shares issued for acquisitions 5,601,472
Weighted average number of shares issued for employee options 3,947
Weighted average number of shares issued for services rendered 5,063
Weighted average number of shares cancelled (41,370)
Weighted average number of shares outstanding for the year
----------
ended May 31, 2002 13,281,374
==========
Shares outstanding at May 31, 2002 14,851,905
Weighted average number of shares issued for acquisitions 3,534,622
Weighted average number of shares issued for employee options 32,011
Weighted average number of shares issued for exercise of warrants 29,810
Weighted average number of shares issued for exit costs 91,164
Weighted average number of shares issued for conversion
of convertible note 67,483
Weighted average number of shares issued to investors 730
Weighted average number of shares outstanding for the year
----------
ended May 31, 2003 18,607,725
==========
Shares outstanding at May 31, 2003 19,951,570
Weighted average number of shares issued for acquisitions 218,104
Weighted average number of shares issued for employee options 50,728
Weighted average number of shares issued for exercise of warrants 63,975
Weighted average number of shares issued for conversion
of convertible note 1,424,590
Weighted average number of shares issued for services rendered 301,391
Weighted average number of shares cancelled (20,205)
Weighted average number of shares issued to investors 3,045,903
Weighted average number of shares outstanding for the year
----------
ended May 31, 2004 25,036,056
==========
100
The following outstanding instruments could potentially dilute basic
earnings per share in the future:
MAY 31, 2004
------------
Stock options 1,841,503
Escrowed shares 1,323,625
Warrants issued to investors 167,637
Warrants issued with convertible notes 712,179
Warrants issued to private placement agents 412,500
Warrants issued to consultant 100,000
Warrants issued through acquisition 50,000
Underwriter warrants 440,000
---------
Potential increase in number of shares from dilutive instruments 5,047,444
=========
NOTE 24: SUBSEQUENT EVENTS
In June 2004, the Company acquired certain assets of Peoplebonus, Inc., a
California corporation. As consideration for the sale, the Company issued
Peoplebonus, Inc. 180,506 of its common shares valued at $485,561, paid cash in
the amount of $25,000 and assumed a promissory note for $100,000. 108,304 of the
common shares are held in escrow to be released if certain revenue and cash
generation targets are met or for any indemnification claims for breaches of
representations and warranties.
In July 2004, the Company acquired 100% of the stock of Bravanta, a
California corporation. As consideration for the sale, the Company issued the
shareholders of Bravanta, Inc., approximately 2,270,000 shares in Workstream
common stock valued at approximately $5.6 million, with an additional 400,000
shares in common stock to be held in escrow and released upon certain revenue
goals and representations being met by Bravanta.
101
In July 2004, the Company raised $10 million in a private placement with
William Blair & Company and its affiliates and Crestview Capital. As
consideration of the private placement, the Company issued 4,444,439 of its
common shares.
In July 2004, the Company settled a commitment with the prior shareholders
of Trimbus, a company previously purchased by Kadiri. As consideration of the
settlement of the commitment, the Company issued 92,891 of its common shares
valued at $228,512
NOTE 25: QUARTERLY RESULTS (UNAUDITED)
Quarterly Financial Information (Unaudited):
(United States Dollars)
The following tables summarize selected quarterly data of Workstream Inc. for
the years ended May 31, 2004 and 2003:
Quarter Ended
-----------------------------------------------------------
August 31, November 30, February 28, May 31,
2003 2003 2004 2004
-----------------------------------------------------------
Revenue $ 4,178,514 $ 4,261,771 $ 4,169,074 $ 4,557,521
Gross Profit $ 3,735,164 $ 3,872,364 $ 3,812,584 $ 4,159,779
Net loss for the period $ (1,749,559) $ (1,082,877) $ (1,796,317) $ (908,146)
Weighted average number of
common shares outstanding
during the period 21,777,379 22,407,020 26,912,938 29,038,713
============================================================
Basic and diluted net loss
per common share $ (0.08) $ (0.05) $ (0.07) $ (0.03)
============================================================
Quarter Ended
-----------------------------------------------------------
August 31, November 30, February 28, May 31,
2002 2002 2003 2003
-----------------------------------------------------------
Revenue $ 4,645,714 $ 4,975,429 $ 4,142,244 $ 4,073,603
Gross Profit $ 3,766,717 $ 3,956,704 $ 3,453,291 $ 3,620,146
Net loss for the period $ (2,216,789) $ (2,056,059) $ (1,889,496) $ (3,514,258)
Weighted average number of
common shares outstanding
during the period 16,983,809 18,582,012 19,174,247 19,687,834
============================================================
Basic and diluted net loss
per common share $ (0.13) $ (0.11) $ (0.10) $ (0.18)
============================================================
102
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of fiscal 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 fourth
quarter of fiscal 2004 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
103
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be included in an amendment to this Form 10-K, which
will be filed within 120 days after the end of the fiscal year covered by this
report.
ITEM 11. EXECUTIVE COMPENSATION
This information will be included in an amendment to this Form 10-K, which
will be filed within 120 days after the end of the fiscal year covered by this
report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
This information will be included in an amendment to this Form 10-K, which
will be filed within 120 days after the end of the fiscal year covered by this
report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be included in an amendment to this Form 10-K, which
will be filed within 120 days after the end of the fiscal year covered by this
report.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
This information will be included in an amendment to this Form 10-K, which
will be filed within 120 days after the end of the fiscal year covered by this
report.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements. (See Page x)
2. Financial Statement Schedule. (None)
3. Exhibits. (See (c) below)
104
(b) Reports on Form 8-K
We filed the following reports on Form 8-K during the last quarter of the period
covered by this report
(1) Current Report on Form 8-K with respect to Items 5 & 7 filed on
March 8, 2004;
(2) Current Report on Form 8-K with respect to Items 12 & 7 filed on
April 14, 2004;
(3) Current Report on Form 8-K with respect to Items 5 & 7 filed on
April 15, 2004; and
(4) Current Report on Form 8-K with respect to Items 5 & 7 filed on May
25, 2004.
(c) Exhibits.
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in
parentheses.
Exhibit
Number DESCRIPTION
3.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form F-1 (File No.
333-87537)).
3.2 Articles of Amendment, dated July 26, 2001 (incorporated by reference
to Exhibit 1.2 of Form 20-F of Workstream Inc. for the fiscal year
ended May 31, 2001).
3.3 Articles of Amendment, dated November 6, 2001 (incorporated by
reference to Exhibit 1.3 of Form 20-F of Workstream Inc. for the
fiscal year ended May 31, 2001).
3.4 Articles of Amendment, dated November 7, 2002 (incorporated by
reference to Exhibit 4.4 to the Registration Statement on Form F-3
(File No. 333-101502).
3.5 By-law No. 1 and No. 2 (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form F-1 (File No. 333-87537)).
3.6 By-law No. 3 (incorporated by reference to Exhibit 1.5 of Form 20-F of
Workstream Inc. for the fiscal year ended May 31, 2001).
4.1 Form of common share certificate (incorporated by reference to Exhibit
4.1 to the Registration Statement on Form F-1 (File No. 333-87537)).
4.2 Warrant Agreement dated as of March 22, 2001 between Workstream Inc.
(formerly E-Cruiter.com Inc.) and BlueStone Capital Corp.
(incorporated by reference to Exhibit 4.11 of Form 20-F of Workstream
Inc. for the fiscal year ended May 31, 2001).
105
4.3 Form of Underwriter's Warrant Agreement (incorporated by reference to
Exhibit 1.1 to the Registration Statement on Form F-1 (File No.
333-87537)).
4.4 Form of 8% Senior Subordinated Convertible Note (incorporated by
reference to Exhibit 4.5 to the annual report on Form 10-K for the
year ended May 31, 2002).
4.5 Form of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.7 to the annual report on Form 10-K for the year ended May
31, 2002).
4.6 Amended and Restated Registration Rights Agreement dated May 14, 2002
by and among Workstream Inc., Sands Brothers Venture Capital III LLC,
Sands Brothers Venture Capital IV LLC and Sands Brothers & Co., Ltd.
(incorporated by reference to Exhibit 4.7 to the annual report on Form
10-K for the year ended May 31, 2002).
4.7 Common Stock Purchase Warrant dated May 30, 2003 between Michael Weiss
and Workstream Inc. (incorporated by reference to Exhibit 4.7 to the
annual report on Form 10-K for the year ended May 31, 2003).
4.8 Form of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.8 to the annual report on Form 10-K for the year ended May
31, 2003).
4.9 Note and Warrant Amendment Agreement dated January 12, 2004, by and
among Workstream Inc., Sands Brothers Venture Capital III LLC, Sands
Brothers Venture Capital IV LLC and Sands Brothers & Co., LTD.
(incorporated by reference to Exhibit 4.1 to the quarterly report on
Form 10-Q for the quarter ended February 29, 2004).
4.10 Note and Warrant Amendment Agreement dated 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. (incorporated
by reference to Exhibit 4.2 to the quarterly report on Form 10-Q for
the quarter ended February 29, 2004).
4.11 Warrant to Acquire Common Shares from Workstream Inc. to Standard
Securities Capital Corporation dated December 9, 2003 (incorporated by
reference to Exhibit 4.3 to the quarterly report on Form 10-Q for the
quarter ended February 29, 2004).
4.12 Warrant to Acquire Common Shares from Workstream Inc. to Nathan Low
dated December 11, 2003 (incorporated by reference to Exhibit 4.4 to
the quarterly report on Form 10-Q for the quarter ended February 29,
2004).
106
4.13 Warrant to Acquire Common Shares from Workstream Inc. to Nathan Low
dated December 31, 2003 (incorporated by reference to Exhibit 4.5 to
the quarterly report on Form 10-Q for the quarter ended February 29,
2004).
4.14 Form of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.6 to the quarterly report on Form 10-Q for the quarter ended
February 29, 2004).
4.15 Registration Rights Agreement dated as of December 9, 2003, by and
among Workstream Inc., Standard Securities Capital Corporation and
certain purchasers (incorporated by reference to Exhibit 4.7 to the
quarterly report on Form 10-Q for the quarter ended February 29,
2004).
4.16 Registration Rights Agreement dated as of December 11, 2003, by and
among Workstream Inc., Nathan Low and Smithfield Fiduciary LLC
(incorporated by reference to Exhibit 4.8 to the quarterly report on
Form 10-Q for the quarter ended February 29, 2004).
4.17 Registration Rights Agreement dated as of December 31, 2003 by and
among Workstream Inc. and certain purchase (incorporated by reference
to Exhibit 4.9 to the quarterly report on Form 10-Q for the quarter
ended February 29, 2004).
10.1** Workstream Inc. 2002 Amended and Restated Stock Option Plan, as
amended as of November 7, 2002 (incorporated by reference to Exhibit
10.1 to the quarterly report on Form 10-Q for the quarter ended
November 30, 2002).
10.2 Lease Agreement between Workstream Inc. (formerly E-Cruiter.com Inc.)
and RT Twenty-Second Pension Properties Limited, dated March 21, 2000
(incorporated by reference to Exhibit 2.1 to the annual report on Form
20-F for the period ended May 31, 2000).
10.3 Service Agreement between Positionwatch Limited and Workstream Inc.
(formerly E-Cruiter.com Inc.), dated February 23, 1999 (incorporated
by reference to Exhibit 10.6 to the Registration Statement on Form F-1
(File No. 333-87537)).
10.4 Security Agreement dated April 18, 2002 between Workstream Inc. and
Sands Brothers Venture Capital III LLC, as Security Agent for the
holders of the Senior Secured Convertible Notes (incorporated by
reference to Exhibit 10.19 to the annual report on Form 10-K for the
year ended May 31, 2002).
107
10.5 Guarantee Agreement dated as of April 18, 2002 by Workstream USA, Inc.
in favor of the holders of 8% Senior Subordinated Secured Convertible
Notes (incorporated by reference to Exhibit 10.20 to the annual report
on Form 10-K for the year ended May 31, 2002).
10.6 Joinder Agreement dated May 14, 2002 by and among Workstream Inc.,
Workstream USA, Inc., Sands Brothers Venture Capital IV LLC, Sands
Brothers Venture Capital III LLC, Crestview Capital Fund, L.P.,
Crestview Capital Fund II, L.P. and Crestview Capital Offshore Fund,
Inc. (incorporated by reference to Exhibit 10.21 to the annual report
on Form 10-K for the year ended May 31, 2002).
10.7** Employment Agreement dated as of January 27, 2003 between Michael
Mullarkey and Workstream Inc. (incorporated by reference to Exhibit
10.11 to the annual report on Form 10-K for the year ended May 31,
2003).
10.8** Employment Agreement dated as of May 12, 2003 between David Polansky
and Workstream Inc. (incorporated by reference to Exhibit 10.12 to the
annual report on Form 10-K for the year ended May 31, 2003).
10.9** Settlement Agreement dated as of May 9, 2003 between Paul Haggard and
Workstream Inc. (incorporated by reference to Exhibit 10.13 to the
annual report on Form 10-K for the year ended May 31, 2003).
10.10 Merger Agreement dated August 30, 2002, among Workstream Inc.,
Workstream Acquisition II, Inc. and Xylo, Inc. (incorporated by
reference to Exhibit 2.1 to the report on Form 8-K filed September 4,
2002).
10.11 Term Note dated January 31, 2003 by Workstream Inc., Workstream USA,
Inc., 6FigureJobs.com, Inc., Icarian, Inc., RezLogic, Inc.,
OMNIpartners, Inc. and Xylo, Inc. in favor of Michael Mullarkey
(incorporated by reference to Exhibit 10.1 to the quarterly report on
Form 10-Q for the quarter ended February 28, 2003).
10.12 Security Agreement dated January 31, 2003 by and among Michael
Mullarkey, Workstream Inc., Workstream USA, Inc., 6FigureJobs.com,
Inc., Icarian, Inc., RezLogic, Inc., OMNIpartners, Inc., and Xylo,
Inc. (incorporated by reference to Exhibit 10.2 to the quarterly
report on Form 10-Q for the quarter ended February 28, 2003).
10.13 General Security Agreement dated January 31, 2003 between Workstream
Inc. and Michael Mullarkey (incorporated by reference to Exhibit 10.3
to the quarterly report on Form 10-Q for the quarter ended February
28, 2003).
10.14 Securities Purchase Agreement dated as of May 30, 2003 by and among
Workstream Inc. and William J. Ritger (incorporated by reference to
Exhibit 10.18 to the annual report on Form 10-K for the year ended May
31, 2003).
108
10.15 Securities Purchase Agreement dated as of May 30, 2003 by and among
Workstream Inc. and Michael Weiss (incorporated by reference to
Exhibit 10.19 to the annual report on Form 10-K for the year ended May
31, 2003).
10.16 Form of Securities Purchase Agreement (incorporated by reference to
Exhibit 10.20 to the annual report on Form 10-K for the year ended May
31, 2003).
10.17 Agreement and Plan of Merger dated May 24, 2004, as amended, by and
between Kadiri, Inc., Workstream Inc. and Workstream Acquisition III,
Inc. (incorporated by reference to Exhibits 2.1 and 2.2 to the report
on Form 8-K filed June 14, 2004).
10.18 Asset Purchase Agreement dated as of July 14, 2003 by and between
Perform, Inc. and Workstream Inc. (incorporated by reference to
Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter
ended November 30, 2003).
10.19 Asset Purchase Agreement dated as of March 27, 2004, as amended, by
and between Workstream USA, Inc., Workstream Inc. and Peopleview, Inc.
*
10.20 Form of Subscription Agreement (incorporated by reference to Exhibit
10.1 to the quarterly report on Form 10-Q for the quarter ended
February 29, 2004).
10.21 Form of Securities Purchase Agreement (incorporated by reference to
Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter
ended February 29, 2004).
10.22 Agency Agreement dated December 9, 2003 between Standard Securities
Capital Corporation and Workstream Inc.(incorporated by reference to
Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter
ended February 29, 2004).
10.23 Securities Purchase Agreement dated as of December 11, 2003 by and
between Workstream Inc. and Sunrise Securities Corporation
(incorporated by reference to Exhibit 10.4 to the quarterly report on
Form 10-Q for the quarter ended February 29, 2004).
10.24 Securities Purchase Agreement dated as of December 31, 2003 by and
between Workstream Inc. and Sunrise Securities Corporation
(incorporated by reference to Exhibit 10.5 to the quarterly report on
Form 10-Q for the quarter ended February 29, 2004).
10.25 Institutional Public Relations Retainer Agreement dated December 1,
2003 between Sunrise Financial Group, Inc. and Workstream Inc.
(incorporated by reference to Exhibit 10.6 to the quarterly report on
Form 10-Q for the quarter ended February 29, 2004).
109
10.26 Business Advisory Agreement dated as of December 3, 2003, by and
between Workstream Inc. and Legend Merchant Group, Inc. (incorporated
by reference to Exhibit 10.7 to the quarterly report on Form 10-Q for
the quarter ended February 29, 2004).
21.1 List of Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers LLP.*
31.1 Certifications pursuant to Rule 13a-14(a)/15d-14(a).*
32.1 Certifications pursuant to 18 U.S.C. Section 1350.*
- ----------
* Filed herewith.
** Constitutes a management contract for compensatory plan or arrangement.
110
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Michael Mullarkey
-------------------------------------
Michael Mullarkey,
Chairman of the Board and Chief
Executive Officer
Dated: August 13, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Michael Mullarkey Chairman of the Board of August 13, 2004
- ---------------------------- Directors and Chief Executive
Michael Mullarkey Officer (Principal
Executive Officer)
/s/ David Polansky Chief Financial Officer and August 13, 2004
- ---------------------------- Secretary (Principal Financial
David Polansky and Accounting Officer)
/s/ Arthur Halloran Director August 13, 2004
- ----------------------------
Arthur Halloran
/s/ Matthew Ebbs Director August 13, 2004
- ----------------------------
Matthew Ebbs
/s/ Michael A. Gerrior Director August 13, 2004
- ----------------------------
Michael A. Gerrior
/s/ Thomas Danis Director August 13, 2004
- ----------------------------
Thomas Danis
/s/ Cholo Manso Director August 13, 2004
- ----------------------------
Cholo Manso
111