UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ____________ TO ________________
COMMISSION FILE NUMBER __________
THINKPATH INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
ONTARIO 52-209027
- -------------------------- --------------------
(STATE OR OTHERJURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
55 UNIVERSITY AVENUE, SUITE 505
TORONTO, ONTARIO, CANADA M5J 2H7
---------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(416) 364-8800
--------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH
SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2)
HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES |X| NO |_|
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES BASED
UPON THE LAST SALE PRICE ON NOVEMBER 16, 2001 WAS APPROXIMATELY $2,894,111.
AS OF NOVEMBER 19, 2001 THERE WERE 15,536,601 SHARES
OF COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
YES X NO _____
THINKPATH INC.
SEPTEMBER 30, 2001 QUARTERLY REPORT ON FORM 10-QSB
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page Number
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000...............................................4,5
Interim Consolidated Statements of Income for the three months and
nine months ended September 30, 2001 and 2000.........................6
Interim Consolidated Statements of Stockholders' Equity for the nine months
ended September 30, 2001..............................................7
Interim Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000. .........................................8
Notes to Interim Consolidated Financial Statements.............................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ...................................................21
Item 2. Changes in Securities and Use of Proceeds ...........................21
Item 3. Defaults Upon Senior Securities .....................................23
Item 4. Submission of Matters to a Vote of Security Holders .................23
Item 5. Other Information ...................................................26
Item 6. Exhibits and Reports on Form 8-K ....................................26
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements, which are other than statements of historical facts. These
statements are subject to uncertainties and risks including, but not limited to,
product and service demand and acceptance, changes in technology, economic
conditions, the impact of competition and pricing, government regulation, and
other risks defined in this document and in statements filed from time to time
with the Securities and Exchange Commission. All such forward-looking statements
are expressly qualified by these cautionary statements and any other cautionary
statements that may accompany the forward-looking statements. In addition,
Thinkpath Inc. disclaims any obligations to update any forward-looking
statements to reflect events or circumstances after the date hereof.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THINKPATH INC.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2001
(UNAUDITED)
(AMOUNTS EXPRESSED IN US DOLLARS)
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
2001 2000
---- ----
$ $
ASSETS
CURRENT ASSETS
Accounts receivable 6,276,010 7,857,999
Inventory 51,807 93,670
Income taxes receivable 270,099 358,436
Prepaid expenses 409,443 335,930
---------- ---------
7,007,359 8,646,035
CAPITAL ASSETS 3,160,604 3,596,759
GOODWILL 8,272,467 8,585,290
INVESTMENT IN NON-RELATED COMPANIES 1,372,323 1,318,091
LONG-TERM RECEIVABLE 273,530 83,450
OTHER ASSETS 1,248,866 1,812,889
DEFERRED INCOME TAXES 236,103 1,643,426
---------- ---------
21,571,252 25,685,940
========== ==========
-4-
THINKPATH INC.
INTERIM CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
2001 2000
---- ----
$ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 4,980,282 5,061,410
Accounts payable 3,273,601 3,822,984
Deferred revenue 154,241 219,308
Current portion of long-term debt 446,723 946,131
Current portion of notes payable -- 1,683,333
---------- ----------
8,854,847 11,733,166
LONG-TERM DEBT 791,365 760,313
NOTES PAYABLE 2,407,659 1,641,667
LIABILITIES PAYABLE IN CAPITAL STOCK 773,033 751,788
---------- ----------
12,826,904 14,886,934
---------- ----------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (Note 6) 26,342,456 23,759,415
DEFICIT (16,723,231) (12,306,862)
ACCUMULATED OTHER COMPREHENSIVE LOSS (874,877) (653,547)
---------- ----------
8,744,348 10,799,006
---------- ----------
21,571,252 25,685,940
=========== ==========
The accompanying notes are an integral part of these interim
consolidated financial statements.
-5-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
3 MONTHS ENDED 3 MONTHS ENDED 9 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
$ $ $ $
REVENUE 8,510,306 9,935,619 29,228,191 32,629,218
COST OF SERVICES 6,261,463 6,224,758 19,738,364 19,771,530
----------- ----------- ----------- -----------
GROSS PROFIT 2,248,843 3,710,861 9,489,827 12,857,688
----------- ----------- ----------- -----------
EXPENSES
Administrative 1,388,776 1,787,416 4,298,309 5,362,952
Selling 1,313,069 1,785,978 4,576,715 5,605,362
Financing expenses 41,178 -- 614,703 --
Depreciation and amortization 589,231 337,986 1,712,937 1,108,242
Restructuring costs (314) -- 582,612 --
----------- ----------- ----------- -----------
3,331,940 3,911,380 11,785,276 12,076,556
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (1,083,097) (200,519) (2,295,449) 781,132
Gain (loss) on investments (130,242) 94,728 (130,242) 94,728
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INTEREST CHARGES (1,213,339) (105,791) (2,425,691) 875,860
Interest Charges 119,992 137,041 612,978 562,247
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,333,331) (242,832) (3,038,669) 313,613
Income taxes (recovery) 295,509 51,414 699,501 (31,406)
----------- ----------- ----------- -----------
NET INCOME (LOSS) (1,628,840) (294,246) (3,738,170) 345,019
PREFERRED STOCK DIVIDEND REQUIREMENTS 13,468 350,579 724,989 350,579
----------- ----------- ----------- -----------
EARNINGS APPLICABLE TO COMMON STOCK (1,642,308) (644,825) (4,463,159) (5,560)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON STOCK
OUTSTANDING BASIC AND FULLY DILUTED 15,093,564 5,109,111 14,277,356 4,525,622
=========== =========== =========== ===========
INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON STOCK BEFORE PREFERRED
DIVIDENDS BASIC AND FULLY DILUTED (0.11) (0.06) (0.26) 0.08
=========== =========== =========== ===========
INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON STOCK AFTER PREFERRED DIVIDENDS
BASIC AND FULLY DILUTED (0.11) (0.12) (0.31) (0.01)
=========== =========== =========== ===========
The accompanying notes are an integral part of these interim
consolidated financial statements.
-6-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK CAPITAL OTHER
NUMBER OF PREFERRED STOCK NUMBER OF STOCK RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES SHARES AMOUNTS EARNINGS INCOME (LOSS) INCOME (LOSS)
A B C
Balance as at December 31, 2000 11,915,138 1,050 750 - 23,759,415 (12,306,862) (653,547)
Net loss for the period - - - - - (490,296) (490,296)
-------------
Other comprehensive loss, net of tax:
Foreign currency translation - - - - - - (589,297)
Adjustment to market value - - - - - - (1,735)
-------------
Other comprehensive loss (591,032) (591,032)
-------------
Comprehensive loss (1,081,328)
=============
Issuance of common stock for cash
525,000 - - - 400,000 -
Common stock and warrants
issued in consideration of
services 30,632 - - - 246,980 -
Dividend on preferred stock - - - - 226,500 (226,500)
Conversion of preferred stock to
common stock 1,875,839 (1,050) (750) - - -
-------------- --------- -------- -------- ------------ ------------- ------------
Balance as of March 31, 2001 14,346,609 - - - 24,632,895 (13,023,658) (1,244,579)
Net loss for the period - - - - - (1,619,034) (1,619,034)
-------------
Other comprehensive income (loss), net of tax:
Foreign currency translation - - - - - - 345,732
Adjustment to market value - - - - - - 944
-------------
Other comprehensive income 346,676 346,676
-------------
Comprehensive loss (1,272,358)
=============
Issuance of preferred stock - - - 1,230 1,230,000 -
Common stock and warrants issued,
in consideration of
services 150,000 - - - 107,702 -
Dividend on preferred stock - - - - 141,140 (154,138)
Conversion of preferred stock to
common stock 266,774 - - (120) - -
Beneficial conversion on
Issuance of preferred stock - - - - 284,093 (284,093)
Allowance for deferred taxes recoverable
On issue expenses (790,000)
-------------- --------- -------- -------- ------------ ------------- ------------
Balance as of June 30, 2001 14,763,383 - - 1,110 25,605,830 (15,080,923) (897,903)
Net loss for the period - - - - - (1,628,840) (1,628,840)
-------------
Other comprehensive income (loss), net of tax:
Foreign currency translation - - - - - - 23,026
Adjustment to market value - - - - - - --
-------------
Other comprehensive income 23,026 23,026
-------------
Comprehensive loss (1,605,814)
=============
Issuance of preferred stock - - - - - -
Options exercised 22,122 - - - 1 -
Common stock and warrants issued,
in consideration of
services 150,000 - - - 67,500 -
Reduction in common stock payable 316,667 - - - 625,000 -
Dividend on preferred stock - - - - - (13,468)
Conversion of preferred stock to
common stock - - - - - -
Beneficial conversion on
Issuance of preferred stock - - - - - -
Debt settled through the issuance
of common stock 93,883 - - - 44,125 -
-------------- --------- -------- -------- ------------ ------------- ------------
Balance as of September 30, 2001 15,346,055 - - 1,110 26,342,456 (16,723,231) (874,877)
============= ========= ======== ======== ============ ============= ===========
The accompanying notes are an integral part of these interim
consolidated financial statements.
-7-
THINKPATH INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
2001 2000
---- ----
$ $
Cash flows from operating activities
Net income (loss) (3,738,170) 345,019
---------- ----------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Gain on short-term investments -- (94,728)
Share of equity loss in subsidiary -- 246,236
Amortization 1,712,937 1,198,242
Decrease (increase) in accounts receivable 1,604,197 (2,715,629)
Decrease (increase) in prepaid expenses (80,776) 243,513
Increase (decrease) in accounts payable (186,017) (604,401)
Increase in income taxes payable (receivable) 84,494 (184,444)
Decrease (increase) in short term investments 130,242 (14,933)
Decrease (increase) in deferred income taxes 611,439 (384,455)
Decrease (increase) in inventory 41,351 (200,612)
Increase (decrease) in deferred revenue (63,899) 57,760
Forgiveness of long-term debt (190,629) --
Common stock and warrants issued for services 428,299 --
Long-term investment received for services (206,072) (230,111)
---------- ----------
Total adjustments 3,885,566 (2,683,562)
---------- ----------
Net cash used in operating activities 147,396 (2,338,543)
---------- ----------
Cash flows from investing activities
Purchase of capital assets (183,803) (941,472)
Disposal (purchase) of other assets (295,476) 223,835
Increase in long-term receivable (188,026) --
Deferred development costs -- (2,535,492)
Cash payment for subsidiaries -- (1,648,557)
---------- ----------
Net cash used in investing activities (667,305) (4,901,686)
---------- ----------
Cash flows from financing activities
Repayment of notes payable (211,127) 1,048,151
Repayment of long-term debt (861,292) 87,538
Cash received on due from related party -- 49,440
Cash received (paid) on long-term debt 225,000 (273,826)
Proceeds from issuance of common stock 400,000 2,333,716
Proceeds from issuance of preferred stock 1,230,000 1,999,980
Increase (decrease) in bank indebtedness (61,505) 843,107
---------- ----------
Net cash provided by financing activities 721,076 6,088,106
---------- ----------
Effect of foreign currency exchange rate changes (201,167) 31,739
---------- ----------
Net increase (decrease) in cash and cash equivalents -- (1,120,384)
Cash and cash equivalents
-Beginning of period -- 1,904,588
---------- ----------
-End of period -- 784,204
---------- ==========
SUPPLEMENTAL CASH ITEMS:
Interest paid 612,978 562,247
========== ==========
Income taxes paid 99,501 117,190
========== ==========
SUPPLEMENTAL NON-CASH ITEM:
Preferred stock dividend 711,521 --
Common shares issued for liabilities 669,125 --
Reduction in notes payable 650,600 --
Deferred taxes 790,000 --
========== ==========
The accompanying notes are an integral part of these interim
consolidated financial statements.
-8-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. MANAGEMENT'S INTENTIONS
As at September 30, 2001, certain principal conditions and events are prevalent
that indicate that there could be substantial doubt about the company's ability
to continue as a going concern for a reasonable period of time. These conditions
and events include a significant current operating loss, working capital
deficiencies, negative cash flow from operations and violation of certain loan
covenants. Management's plans to mitigate and alleviate these adverse conditions
and events include:
A. Restructuring of operations relating to the closure of non-profitable
offices, termination of redundant staff and the institution of other
cost cutting measures, which continued throughout 2001.
B. Ongoing negotiations to restructure bank loan agreements with the
company's principal and subordinated bankers and long-term note
holders.
C. Ongoing efforts to procure cash through a private placement of debt,
equity and warrant securities, and an equity line of $8,000,000.
D. Settlement of an outstanding insurance claim related to the loss of
assets and business for two offices impacted by the terrorist events
of September 11, 2001.
E. The successful win of substantial contracts to provide defense related
services to US government military suppliers commencing October 2001.
F. Ongoing discussions with parties interested in acquiring certain
divisions of the company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) PRINCIPAL BUSINESS ACTIVITIES
Thinkpath Inc. is an information technology and engineering services
company which, along with its subsidiaries Systemsearch Consulting
Services Inc., Cad Cam Inc., Cad Cam of Michigan Inc., Cad Cam
Integrated Manufacturing Services Inc. and Cad Cam Technical Services
Inc., Thinkpath Training Inc. (formerly ObjectArts Inc.), MicroTech
Professionals Inc., Njoyn Software Inc., and TidalBeach Development
Inc., provides outsourcing, recruiting, training and technology
services to enhance the resource performance of clients.
B) BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated interim financial statements have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in consolidated
interim financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading.
In the opinion of the Company, all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation have
been included in the consolidated interim financial statements. The
consolidated interim financial statements are based in part on
estimates and have not been audited by independent accountants.
Independent accountants will audit the annual consolidated financial
statements.
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 for
acquisitions accounted for using the purchase method. For subsidiaries
accounted for by the pooling of interest method their earnings have
been included for all periods reported. All significant inter-company
accounts and transactions have been eliminated.
C) NET INCOME (LOSS) AND FULLY DILUTED NET INCOME (LOSS) PER
WEIGHTED AVERAGE COMMON STOCK
Net income (Loss) per common stock is computed by dividing net income
(loss) for the year by the weighted average number of common stock
outstanding during the year.
Fully diluted net income (loss) per common stock is computed by dividing
net income for the year by the weighted average number of common stock
outstanding during the year, assuming that all convertible preferred
stock, stock options and warrants were converted or exercised. Stock
conversions stock options and warrants, which are anti-dilutive, are not
included in the calculation of fully diluted net income (loss) per
weighted average common stock.
D) REVENUE RECOGNITION
1) The company provides the services of engineering and information
technology staff on a project basis. The services provided are
defined by guidelines to be accomplished by milestone and revenue is
recognized upon the accomplishment of the relevant milestone. As
services are rendered, the costs incurred are reflected as Work in
Progress. Revenue is recognized upon the persuasive evidence of an
agreement, delivery has occurred, the fee is fixed or determinable
and collection is probable.
-9-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
2) The company provides the services of information technology
consultants on a contract basis and revenue is recognized as
services are performed.
3) The company places engineering and information technology
professionals on a permanent basis and revenue is recognized upon
candidates' acceptance of employment. If the company receives
non-refundable upfront fees for "retained searches", the revenue is
recognized upon candidates' acceptance of employment.
4) The company provides advanced training and certification in a
variety of technologies and revenue is recognized on delivery.
5) The company licenses software in the form of a Human Capital
Management System called Njoyn. The revenue associated with
providing this software is allocated to an initial set up fee,
customization and training as agreed and an ongoing monthly per user
fee. The allocation of revenue to the various elements is based on
the company's determination of the fair value of the elements if
they had been sold separately. The set-up fee and customization
revenue is recognized upon delivery of access to the software with
customization completed in accordance with milestones determined by
the contract. Revenue for the training is recorded as the services
are rendered and the ongoing monthly fee is recorded each calendar
month. There is no additional fee for hosting.
The company signs contracts for the customization or development of
SecondWave in accordance with specifications of its clients. The
project plan defines milestones to be accomplished and the costs
associated. These amounts are billed as they are accomplished and
revenue is recognized as the milestones are reached. The work in
progress for costs incurred beyond the last accomplished milestone
is reflected at the period end. To date these amounts have not been
material and have not been set up at the period ends. The contracts
do not include any post-contract customer support. Additional
customer support services are provided at standard daily rates, as
services are required.
3. INVESTMENT IN NON-RELATED COMPANIES
Investment in non-related companies are represented by the following:
Conexys $667,511
Digital Cement 507,865
Lifelogix 121,947
Tillyard Management --
SCM Dialtone 75,000
----------
Total $1,372,323
==========
At September 30, 2001, the Company wrote down the investment in Tillyard
Management of $130,242.
-10-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
4. LONG-TERM DEBT
At September 30, 2001, the Company had $4,980,000 outstanding with
Bank One. The revolving line of credit provided for a maximum
borrowing amount of $4,640,000 at variable interest rates based on
eligible accounts receivable. At September 30, 2001, the Company had
an overdraft of $340,000. The Company does not have an authorized
overdraft facility with Bank One, however the bank has allowed an
overdraft of up to $500,000 on a regular basis for approximately ten
weeks. The revolving line of credit agreement requires the Company to
meet various restrictive covenants, including a senior debt to EBITDA
ratio, debt service coverage ratio, debt to tangible net worth ratio
and certain other covenants. At September 30, 2001 and thereafter, the
Company was not in compliance with the covenants contained in the
revolving line of credit agreement. Bank One has indicated its
intention to enter into a forbearance agreement with the Company in
which the bank would refrain from exercising any rights or remedies
based on existing or continuing defaults, including accelerating the
maturity of the loans under the credit facility.
As a result of the default on the loan covenants governing the
Company's credit line facility, Bank One is restricting the Company's
repayment of certain subordinated loans and notes payable. The parties
affected by this restriction, include the Business Development Bank of
Canada, Roger Walters and Denise Dunne.
At September 30, 2001, the Company had $426,000 in subordinated debt
outstanding to the Business Development Bank of Canada. The loan
agreements require the Company to meet a certain working capital
ratio. At September 30, 2001 and thereafter, the Company was not in
compliance with the covenant contained in the loan agreements. The
Business Development Bank of Canada has agreed to postpone principal
repayment of its subordinated loans until March 2002. At this time,
they will re-evaluate the Company's financial position and possibly
extend the postponement until June 2002. The company has not made any
principal payments to the Business Development Bank of Canada since
June 2001, but is current in its interest obligations.
5. NOTES PAYABLE
In September 2001, the Company restructured its note payable to Roger
Walters, the vendor of Cad Cam Inc. The principal was reduced from
$1,200,000 to $750,000 in consideration of capital stock payable of
$450,000. In addition, all principal payments were postponed until
January 1, 2003 at which time, the Company will pay $12,500 per month
plus interest at 4.5% until December 31, 2006. The balance of $150,000
will be due on December 31, 2006. The Company is currently making
interest payments of $7,500 per month until December 31, 2002.
In September 2001, the Company restructured its note payable to
Denise Dunne, the vendor of MicroTech Professionals Inc. The
principal was reduced from $1,965,000 to $1,740,000 in
consideration of capital stock payable of $225,000. In
addition, all principal payments were postponed until January 1,
2003, at which time, the Company will pay $20,000 per month plus
interest at 5% until December 31, 2006. The balance of $781,287
will be due on January 1, 2007. The Company is currently making
interest payments of $14,397 per month until December 30, 2002.
6. CAPITAL STOCK
a) Authorized
30,000,000 Common stock, no par value
1,000,000 Preferred stock, issuable in series,
rights to be determined by the Board of Directors
b) Issued
During the three months ended September 30, 2001, the Company issued
150,000 shares of its common stock in consideration of investment banking
services, 316,667 shares to reduce common stock payable of $625,000, and
93,883 shares in settlement of accounts payable.
-11-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
c) Preferred Stock
During the three months ended September 30, 2001, there were no preferred
shares issued or common stock issued on the conversion of preferred
shares.
d) Warrants
During the three months ended September 30, 2001, the company issued
22,122 shares to the Business Development Bank of Canada on the exercise
of warrants at $1.00.
7. RESTRUCTURING COSTS
At the end of June, 2001, the Company had a restructuring reserve balance of
$310,472 as a result of certain of the Company's actions to better align its
cost structure with expected revenue growth rates. The restructuring
activities related to the closure of one training location in London, Ontario
resulting in costs to sever 3 employees with long-term contracts until
December 2002 and the lease commitment for the premises in London, Ontario.
These long-term contracts do not require the employees to provide services
until the date of involuntary termination. Other employees at the London
location, without contracts, have been terminated during March 2001 and April
2001. During the three months ended September 2001, the lease cancellation
costs for London have been reduced by $30,700 and the severance costs for
London have been reduced by $56,000. These amounts represent settlements
reached with the landlord and one of the three employees with long term
contracts. The employee agreed to a reduction in the term of the contract
which resulted in a reduction of the liability of $56,000.
In February 2001, the company started to close down one of its research and
development (R&D) Operations located in Toronto. The company continued to
terminate employees until April 2001. The premises are subject to a long-term
lease and will be utilized for corporate needs in the future. Restructuring
costs include rent for the current period for the Toronto R&D space. The
company moved its operations into this space at the end of October 2001.
The remaining accrual will be relieved throughout fiscal 2001, as leases
expire and severance payments, some of which are paid on a monthly basis, are
completed. Details of the restructuring costs and reserve balance is as
follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance
non/cash June 30, 2001 Costs September 30, 2001
Severance packages
London-Training Cash 230,661 (13,614) 127,474 89,573
Toronto-R&D Cash 17,640 -- 17,640 --
Lease cancellations
London-Training Cash 62,171 (30,700) -- 31,471
Toronto-R&D Cash 44,000 29,610 14,390
------- ------- ------- -------
Commitments 310,472 (314) 174,724 135,434
======= ======= ======= =======
-12-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
8. OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended September 30, 2001:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments 23,026 - 23,026
Adjustment to market value - - -
--------- ------- ---------
Other comprehensive income (loss) 23,026 - 23,026
========= ======== =========
Comprehensive income (loss) for the three months ended June 30, 2001:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments 345,732 - 345,732
Adjustment to market value 1,349 (405) 944
--------- ------- --------
Other comprehensive income (loss) 347,081 (405) 346,676
========= ======== ========
Comprehensive income (loss) for the three months ended March 31, 2001:
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
------ ---------- ------
Foreign currency translation adjustments (589,297) - (589,297)
Adjustment to market value (2,479) 744 (1,735)
-------- -------- ---------
Other comprehensive loss (591,776) 744 (591,032)
========= ======== =========
The foreign currency translation adjustments are not currently adjusted for
income taxes since the company is situated in Canada and the adjustments
relate to the translation of the financial statements from Canadian dollars
into United States dollars done only for the convenience of the reader.
9. SEGMENTED INFORMATION
a) Sales by Geographic Area
Three Months Three Months Nine Months Nine Months
Ended September 30, Ended September 30, Ended September 30, Ended September 30,
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
$ $ $ $
Canada 4,197,975 3,474,351 12,848,946 11,376,309
United States of America 4,312,331 6,461,268 16,379,245 21,252,909
---------- ---------- ---------- ----------
8,510,306 9,935,619 29,228,191 32,629,218
========== ========== ========== ==========
b) Net Income (Loss) by Geographic Area
Three Months Three Months Nine Months Nine Months
Ended September 30, Ended September 30, Ended September 30, Ended September 30,
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
$ $ $ $
Canada (818,003) (852,212) (2,724,992) (1,088,821)
United States of America (810,837) 557,966 (1,013,178) 1,433,840
------- ------- ----------- ----------
(1,628,840) (294,246) (3,738,170) 345,109
========== ======= =========== ==========
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
9. SEGMENTED INFORMATION (CONT'D)
c) Identifiable Assets by Geographic Area
September 30, December 31,
2001 2000
---- ----
$ $
Canada 7,672,461 8,979,711
United States of America 13,898,791 16,706,229
---------- ----------
21,571,252 25,685,940
========== ==========
d) Revenue and Gross Profit by Operating Segment
Three Months Three Months Nine Months Nine Months
Ended September 30, Ended September 30, Ended September 30, Ended September 30,
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
$ $ $ $
Revenue
IT Recruitment 4,208,683 2,686,464 12,979,101 11,010,371
Tech Pubs and Engineering 3,001,612 3,584,227 10,200,817 12,726,438
IT Documentation 629,771 1,493,107 2,848,940 3,231,153
Training 514,194 1,987,371 2,564,541 5,107,895
Technology 156,046 184,450 634,792 553,361
---------- ---------- ---------- ----------
8,510,306 9,935,619 29,228,191 32,629,218
========== ========== ========== ==========
Gross Profit
IT Recruitment 919,223 1,184,394 3,511,180 4,800,529
Tech Pubs and Engineering 797,608 991,056 2,814,622 3,757,529
IT Documentation 156,646 680,934 1,158,589 1,490,026
Training 227,841 703,228 1,402,506 2,353,508
Technology 147,525 151,249 602,930 456,096
---------- ---------- ---------- ----------
2,248,843 3,710,861 9,489,827 12,857,688
========== ========== ========== ==========
e) Revenues from Major Customers
The consolidated entity had the following revenues from major Customers:
No single customer consisted of more than 10% of the revenues.
f) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
10. CONTINGENCIES
a) The assignee of Southport Consulting Co. ("Southport") is seeking damages
in the sum of $250,000 in connection with Thinkpath's acquisition of
Southport, which was funded by shares of the company. The assignee
contends that the shares received do not satisfy the purchase price, and
Thinkpath has counterclaimed the assignee for fraud. No provision has been
recorded in the company's accounts for possible losses. Should any
expenditure be incurred by the company for the resolution of this lawsuit,
it will be charged to the operations of the year in which such
expenditures are incurred. A motion for summary judgment was filed by the
plaintiff and, as of the date hereof, no decision has been made by the
court.
b) Two former employees are alleging wrongful dismissal for the termination
of their employment. No provision has been recorded in the accounts for
possible losses. Should any expenditure be incurred by the company for the
resolution of these lawsuits, they will be charged to the operations of
the year in which such expenditures are incurred.
c) The Company is party to various lawsuits arising from the normal course of
business and its restructuring activities. In management's opinion, the
litigation will not materially affect the company's financial position,
results of operations or cash flows. No material provision has been
recorded in the accounts for possible losses or gains. Should any
expenditure be incurred by the Company for the resolution of these
lawsuits, they will be charged to the operations of the year in which such
expenditures are incurred.
-13-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
11. SUBSEQUENT EVENTS
As of September 30, 2001, certain of the Company's offices, including its
head office occupied approximately 30,000 square feet in Toronto, Ontario,
Canada. The term of the lease was seven years at an annual expense of
approximately $800,000. Effective November 1, 2001, the Company entered
into a revised lease agreement with its landlord, reducing the square
footage to 15,000 and reducing the annual expense by approximately
$400,000.
As a result of the tragic events of September 11, 2001, the Company lost
its office in the World Trade Center. The three staff members of this
office survived and are continuing business in temporary office space. This
office represents approximately $2,000,000 in annual information technology
recruitment revenue. The Company does not anticipate a material decline in
revenue from this office. The Company lost approximately $75,000 of fixed
assets, including furniture, computer hardware and office equipment. The
Company is in the process of filing a statement of loss with its insurance
company.
The Company's training office located at 195 Broadway was also impacted by
the events of September 11, 2001. As a result of destruction to the
building and supporting utility companies, the office was closed for four
weeks. This office represents approximately $3,000,000 in annual technical
training revenue. Many of the company's top clients have relocated to other
cities and have indicated their postponement of employee training until
Spring 2002. The estimated loss of revenue from this office is between
$200,000 and $250,000 per month. In addition, many of the office's computer
assets are malfunctioning as a result of debris and smoke. The Company is
in the process of filing a statement of loss with its insurance company. As
a result of the decline in revenue, the Company, laid of four of twelve
employees from this office in October, 2001.
On November 1, 2001, the Company entered into an agreement with Hyperion
Partners Corp., an Atlanta investment banking company, to assist in
arranging a private placement of debt, equity and warrant securities. Upon
successful completion of a transaction, Hyperion Partners Corp. will be
entitled to a cash fee of 7% of the aggregate private placement and 100,000
warrants per million raised at an exercise price of 110% of the closing bid
price of the common stock on the date prior to the closing of the
placement. The agreement expires on January 1, 2002.
On November 1, 2001, the Company agreed to amend its agreement with the
holders of the Series C preferred shares, and removed the provision
prohibiting the investors from executing short sales of the Company's
common stock for as long as they continue to hold the Series C preferred
shares. The amendment was made in consideration of the investor's waiver of
certain penalties and fees for delinquent registration of the Series C
preferred shares.
On November 1, 2001, the Company entered into an agreement with Transactive
Partners. Ltd., a Chicago company, to render representation and transaction
advisory services to the Company in connection with possible Business
Combinations. Upon successful completion of a transaction, Transactive
Partners. Ltd., would be entitled to a fee ranging between $50,000 or 5%,
whichever is greater, of the gross proceeds depending on the nature of the
transaction. The agreement expires May 1, 2002.
On November 5, 2001, the Company entered into an agreement with entrenet2
Capital Advisors, LLC, a California company, on a best efforts basis, to
assist in achieving capital financing, debt financing, and merger or
acquisition transactions. Upon successful completion of a transaction,
entrenet2 would be entitled to a fee ranging between 1.5% to 4% of the
gross proceeds depending on the nature of the transaction. The agreement
expires November 4, 2002.
On November 5, 2001, the Company entered into an agreement with Creative
Funding Group, LLC, a New York company, to assist in arranging a banking
agreement. Upon successful completion of a transaction, Creative Funding
Group will be entitled to receive a fee of 1.7% of the total credit
facility. The agreement may be cancelled by either party upon thirty days
written notice.
On November 16, 2001, the Company entered into an agreement with
Stonestreet Capital and Alpha Capital for an equity line of $8,000,000.
-14-
THINKPATH INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
13. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets." Under the new rules,
goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed annually for impairment. Separable intangible assets that are
not deemed to have an indefinite life will continue to be amortized over
their useful lives. The amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, the
Company will apply the new accounting rules beginning January 1, 2002.
The Company is currently assessing the financial impact SFAS No. 141 and
No. 142 will have on its Consolidated Financial Statements. Any
transitional impairment loss will be recognized as the cumulative effect of
a change in accounting principle in the Company's statement of earnings.
As of September 30, 2001, the Company has $8,270,000 unamortized goodwill.
Amortization expense related to goodwill was $215,000 for the three months
ended September 30, 2001 and $500,000 for the nine months ended September
30, 2001.
Effective July 1, 2001, the Company changed its amortization period from 30
to 15 years on a prospective basis.
14. COMPARATIVE FIGURES
The financial statements as at September 30, 2000 have been restated to
conform with the basis of presentation.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto and the other historical
financial information of Thinkpath Inc. contained elsewhere in this Form 10-QSB.
The statements contained in this Form 10-QSB that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, including
statements regarding Thinkpath Inc.'s expectations, intentions, beliefs or
strategies regarding the future. Forward-looking statements include Thinkpath
Inc.'s statements regarding liquidity, anticipated cash needs and availability
and anticipated expense levels. All forward-looking statements included in this
Form 10-QSB are based on information available to Thinkpath Inc. on the date
hereof, and Thinkpath Inc. assumes no obligation to update any such
forward-looking statement. It is important to note that Thinkpath Inc.'s actual
results could differ materially from those in such forward-looking statements.
All dollar amounts stated throughout this Form-10QSB are in United States
dollars unless otherwise indicated. Unless otherwise indicated, all reference to
"Thinkpath," "us," "our," and "we," refer to Thinkpath Inc. and its
subsidiaries.
Overview
We are a global provider of information technology and engineering,
project outsourcing, recruitment, technical training and consulting and
ASP-based skills management technology. Our customers include financial service
companies, software and other technology companies, Canadian and American
governmental entities and large multinational companies, including Bank of
Montreal, General Electric, Bell Canada, Goldman Sachs, Chapters, Lucent
Technologies, Cummins Engine, General Motors, CIBC, Xerox Corporation, American
Express and Universal Industrial Corp.
During the three months ended September 30, 2001 we recorded $175,000
for costs associated with our decision to restructure operations in the first
and second quarters of 2001. In making this decision, we reviewed a number of
factors including profitability, declining economic conditions and expected
future cash flows. Based on the results of our review, we decided to close our
training office located in London, Ontario, and our research and development
(R&D) operation located in Toronto, Ontario. As of September 30, 2001, we had
laid off approximately 36 people representing unproductive sales, sales support
and administrative personnel. During the three months ended September 2001, the
lease cancellation costs for the London office were reduced by $30,700 and the
severance costs for London were reduced by $56,000. These amounts represent
settlements reached with the landlord and one of the three employees with a
long-term employment agreement. The employee agreed to a reduction in the term
of the agreement, resulting in a reduction of the liability of $56,000.
As of September 30, 2001, certain of our offices, including our R&D
and corporate office occupied approximately 30,000 square feet in Toronto,
Ontario, Canada. The term of the lease was seven years at an annual expense of
approximately $800,000. Effective November 1, 2001, we entered into a revised
lease agreement with our landlord, reducing the square footage to 15,000 and
reducing the annual expense by approximately $400,000.
Subsequent to September 30, 2001, we engaged in additional
restructuring including the closure of our Atlanta office and the termination of
21 people representing unproductive sales, sales support and administrative
personnel. We are planning on recording an additional $135,000 of restructuring
costs in the fourth quarter for severances related to the restructuring plan. We
are continuing to execute the plan and expect the plan to be completed by the
end of the fiscal year 2001.
We do not expect to see a decrease in sales due to the closure of our
Atlanta office, as the existing contracts managed by this office have been
transferred to more effective offices. The Atlanta office generated
approximately $420,000 and $1,250,000 respectively in revenue for the three and
nine months ended September 2001 and $470,000 and $1,400,000 respectively for
the three and nine months ended September 30, 2000.
The books and records of our Canadian operations are recorded in
Canadian dollars. For purposes of financial statement presentation, we convert
balance sheet data to United States dollars using the exchange rate in effect at
the balance sheet date. Income and expense accounts are translated using an
average exchange rate prevailing during the relevant reporting period. There can
be no assurance that we would have been able to exchange currency on the rates
used in these calculations. We do not engage in exchange rate-hedging
transactions. A material change in exchange rates between United States and
Canadian dollars could have a material effect on our reported results.
The Three and Nine Months Ended September 30, 2001 Compared to the Three and
Nine Months ended September 30, 2000
-16-
For the three months ended September 30, 2001, we derived 51% of our
revenue in the United States, compared to 65% for the three months ended
September 30, 2000. For the nine months ended September 30, 2001, we derived 56%
of our revenue in the United States compared to 65% for the nine months ended
September 30, 2000. The decrease in the total revenue derived from the United
States is a result of the increase in IT Recruitment sales in Canada and the
decrease in Technical Training and IT Documentation sales in the United States.
For the three months ended September 30, 2001, our primary source of
revenue was recruitment, representing 49% of total revenue compared to 27% for
the three months ended September 30, 2000. For the nine months ended September
30, 2001, our primary source of revenue was recruitment, representing 44% of
total revenue compared to 34% for the nine months ended September 30, 2000.
Recruitment revenue for the three months ended September 30, 2001 increased
$1,500,000 or 56% to $4,200,000 compared to $2,700,000 for the three months
ended September 31, 2000. Recruitment revenue for the nine months ended
September 31, 2001 increased $1,970,000 or 18% to $12,980,000 compared to
$11,010,000 for the nine months ended September 31, 2000. The increase in
revenue from recruitment is a result of the added revenues associated with
certain preferred vendor agreements we won in the last quarter of 2000 and early
2001. We are now a preferred vendor to AT&T, CIBC, Bank of Montreal, Fidelity,
and the Management Board Secretariat of the Ontario Government.
We perform permanent, contract and executive searches for IT and
engineering professionals. Most searches are performed on a contingency basis
with fees due upon candidate acceptance of permanent employment or on a
time-and-materials basis for contracts. Retained searches are also offered, and
are paid by a non-refundable portion of one fee prior to performing any
services, with the balance due upon candidates' acceptance. The revenue for
retained searches is recognized upon candidates' acceptance of employment.
Selected recruitment clients include DMR, Bank of Montreal, Goldman
Sachs, and Sprint Canada. In the case of contract services, we provide our
customers with independent contractors or "contract workers" who usually work
under the supervision of the client's management. Generally, we enter into a
time-and-materials contract with our customer whereby the client pays us an
agreed upon hourly rate for the contract worker. We pay the contract worker
pursuant to a separate consulting agreement. The contract worker generally
receives between 75% and 80% of the amount paid to us by the customer; however,
such payment is usually not based on any formula and may vary for different
engagements. We seek to gain "preferred supplier status" with our larger clients
to secure a larger percentage of those clients' businesses. While such status is
likely to result in increased revenue and gross profit, it is likely to reduce
gross margin percentage because we are likely to accept a lower hourly rate from
our customers and there can be no assurance that we will be able to reduce the
hourly rate paid to our consultants. In the case of permanent placement
services, we identify and provide candidates to fill permanent positions for our
clients.
For the three months ended September 30, 2001, 35% of our revenue came
from technical publications and engineering outsourcing services compared to 36%
for the three months ended September 30, 2000. For the nine months ended
September 30, 2001, 35% of our revenue came from technical publications and
engineering outsourcing services compared to 39% for the nine months ended
September 30, 2000. Revenue from technical publications and engineering
outsourcing services for the three months ended September 30, 2001 decreased
$580,000 or 16% to $3,000,000 compared to $3,580,000 for the three months ended
September 30, 2000. Revenue from technical publications and engineering
outsourcing services for the nine months ended September 30, 2001 decreased
$2,530,000 or 20% to $10,200,000 compared to $12,730,000 for the nine months
ended September 30, 2000.
The decline in revenue from technical publications and engineering
outsourcing services is a result of the postponement of start dates of several
major contracts with established clients until September and October of 2001.
Many of these contracts were awarded in the first quarter of 2001, but were
postponed as a result of the economic slowdown. After the events of September
11, 2001, these contracts, which consist primarily of defense work for military
suppliers to the American government, commenced immediately. The combined
revenue from these contracts over the next twelve months is anticipated to be
between $6,000,000 and $10,000,000 and will re-establish technical publications
and engineering outsourcing services as our primary source of revenue in 2002.
Subsequent to September 30, 2001, we terminated seven personnel from this
division, representing $390,000 in annual expenses. In addition, we closed our
Atlanta office, representing $60,000 in annual rent expense. Revenues from the
Atlanta office were $1,800,000 for 2000 and $1,200,000 for the nine months
ending September 30, 2001. We have successfully transitioned the sales contracts
to our other technical publications and engineering offices, and do not
anticipate a decline in revenue as a result.
-17-
Our technical publications and engineering outsourcing services include
the complete planning, staffing, development, implementation and testing of a
project. Outsourcing can also involve enterprise-level planning and project
anticipation. Our specialized outsourcing services include: technical
publications and engineering documentation, Web development and engineering
services. We outsource our technical publications and engineering services on
both a time and materials and project basis. For project work, the services
provided are defined by guidelines to be accomplished by milestone and revenue
is recognized upon the accomplishment of the relevant milestone. As services are
rendered, the costs incurred are reflected as Work in Progress. Revenue is
recognized upon the persuasive evidence of an agreement, delivery has occurred,
the fee is fixed or determinable and collection is probable. Clients we provide
outsourcing to include General Dynamics, General Electric, FedEx, Boeing,
Caterpillar, Cummins Engines and Intel.
For the three months ended September 30, 2001, information technology
documentation services represented approximately 7% of our revenue compared to
15% for the three months ended September 30, 2000. For the nine months ended
September 30, 2001, information technology documentation services represented
approximately 10% of our revenue compared to 10% for the nine months ended
September 30, 2000. Revenue from information technology documentation services
for the three months ended September 30, 2001 decreased $870,000 or 58% to
$630,000 compared to $1,500,000 for the three months ended September 30, 2000.
Revenue from information technology documentation services for the nine months
ended September 30, 2001 decreased $380,000 or 12% to $2,850,000 compared to
$3,230,000 for the nine months ended September 30, 2000.
The substantial decrease in revenue from information technology
documentation services was primarily due to the general economic slowdown. While
no one customer represents more than 10% of the company's total revenue, this
particular division offers a very specialized service, and relied on several key
clients in a local market. Many of these clients have either cancelled projects
or have put a number of their projects on hold. In response to these conditions,
we have recently expanded the marketing of our documentation services to other
regions and to existing recruitment and engineering services clients. In
addition, we have reduced our operating overheads for this division to support
the current levels of revenue. Subsequent to September 30, 2001, we restructured
salaries and eliminated two personnel representing annual expenses of $160,000.
We provide outsourced information technology documentation services in
two ways: complete project management or the provision of skilled project
resources to supplement a client's internal capabilities. Revenue is recognized
on the same basis as technical publications and engineering outsourcing
services. Selected information technology documentation services clients include
Fidelity Investments, SMD Tech Aid Corporation, CDI Corporation, and the
Gillette Company.
For the three months ended September 30, 2001, technical training
represented approximately 6% of our revenue compared to 20% for the three months
ended September 30, 2000. For the nine months ended September 30, 2001,
technical training represented approximately 9% of our revenue compared to 16%
for the nine months ended September 30, 2000. Revenue from technical training
for the three months ended September 30, 2001 decreased $1,480,000 or 75% to
$510,000 compared to $1,990,000 for the three months ended September 30, 2000.
Revenue from technical training for the nine months ended September 30, 2001
decreased $2,550,000 or 50% to $2,560,000 compared to $5,110,000 for the nine
months ended September 30, 2000.
The decline in revenue from technical training is the result of several
factors: the significant restructuring of this division, including the
termination of 8 sales personnel; a general decline in the industry resulting in
the cancellation or postponement of technical training contracts, and; the
events of September 11, 2001 which resulted in the temporary closure of our New
York technical training office and the loss of approximately $300,000 in revenue
for the period. In response to these conditions, we have reduced our operating
overheads for this division to support the current levels of revenue. We do not
intend to invest additional capital into this division to increase revenue to
historical levels. Subsequent to September 30, 2001, we terminated an additional
four personnel, representing $230,000 in annual expenses. Provided we maintain
the current levels of revenue, this division will be cash flow neutral.
Our training services include advanced training and certification in
Microsoft, Java and Linux technologies, as well as Microsoft applications such
as Outlook and Access. Training services include training requirements analysis,
skills assessment, instructor-led classroom training for small groups (10 - 16
students), mentoring, e-learning, and self-paced learning materials. We offer
both public and private classes. Selected training clients include Microsoft,
Chase Manhattan Bank, Goldman Sachs, City of New York and Consumers Gas. Revenue
is recognized on delivery of services.
-18-
For the three months ended September 30, 2001, technology sales
represented 3% of total revenue compared to 2% for the three months ended
September 30, 2000. For the nine months ended September 30, 2001, technology
sales represented 2% of total revenue compared to 1% for the nine months ended
September 30, 2000. Technology revenue for the three months ended September 30,
2001 decreased $28,000 or 15% to $156,000 compared to $184,000 for the three
months ended September 31, 2000. Technology revenue for the nine months ended
September 31, 2001 increased $81,000 or 15% to $634,000 compared to $553,000 for
the nine months ended September 31, 2000. The slight increase in technology
sales represents the gradual addition of users of our software application,
Njoyn.
We have developed proprietary software applications in two areas: human
capital management and Web development. Njoyn is our human capital management
system. Njoyn is a Web-based application that automates and manages the entire
hiring process. The revenue associated with providing this software is allocated
to an initial set up fee, customization and training as agreed and an ongoing
monthly per user fee. The allocation of revenue to the various elements is based
on our determination of the fair value of the elements as if they had been sold
separately. The set-up fee and customization revenue is recognized upon delivery
of access to the software with customization completed in accordance with
milestones determined by the contract. Revenue for the training is recorded as
the services are rendered and the ongoing monthly fee is recorded each calendar
month. There is no additional fee charged to clients for hosting.
SecondWave is our Web development software. SecondWave allows companies
to create, manage and automate their own dynamic, adaptive Web sites. The
software learns from each visitor's behavior and targets his or her needs and
interests with customized content and communications. We sign contracts for the
customization or development of SecondWave in accordance with specifications of
our clients. The project plan defines milestones to be accomplished and the
costs associated. These amounts are billed as they are accomplished and revenue
is recognized as the milestones are reached. The work in progress for costs
incurred beyond the last accomplished milestone is reflected at the period end.
To date these amounts have not been material and have not been set up at the
period ends. The contracts do not include any post-contract customer support.
Additional customer support services are provided at standard daily rates, as
services are required. Selected technology clients include Microsoft, CIBC,
Investors Group, and Digital Cement.
Gross profit is calculated by subtracting all direct costs from net
revenue. The direct costs of contract recruitment include contractor fees and
benefits, resulting in an average gross profit of 22% for the three months ended
September 30, 2001 compared to 44% for the three months ended September 30,
2000. Gross profit for information technology recruitment services for the nine
months ended September 30, 2001 declined to 27% from 44% for the nine months
ended September 30, 2000. The decline in gross profit is a downside of becoming
a preferred vendor for information technology contract recruitment services. In
order to beat the competition, it is often necessary to lower billing rates and
markups to be successful in the bid process. We do not attribute any direct
costs to permanent placement services, therefore the gross profit on such
services is 100% of revenue. Revenue from permanent placements has declined from
last year, and has therefore contributed to the decline in gross profit.
The direct costs of technical publications and engineering services
include wages, benefits, software training and project expenses. The average
gross profit for this division was 27% for the three months ended September 30,
2001 compared to 28% for the three months ended September 30, 2000. The average
gross profit for this division was 28% for the nine months ended September 30,
2001 compared to 30% for the nine months ended September 30, 2000. The slight
decline in gross profit for technical publications and engineering services, is
also a result of the increase in lower margin billings to clients with preferred
vendor agreements.
The direct costs of information technology documentation services
include wages, benefits, and project expenses. The average gross profit for
information technology documentation was 25% for the three months ended
September 31, 2001 compared to 46% for the three months ended September 30,
2000. The average gross profit for the nine months ended September 30, 2001 was
41% compared to 46% for the nine months ended September 30, 2000. The sharp
decline in gross profit for the current period is a result of the decrease in
higher margin permanent placements and increase in lower margin contract
placements of documentation specialists.
The direct costs of training include trainer salaries, benefits and
travel as well as courseware. The average gross profit on training was 44% for
the three months ended September 30, 2001 compared to 35% for the three months
ended September 30, 2000. The average gross profit was 55% for the nine months
ended September 30, 2001 compared to 46% for the nine months ended September 30,
2000. The increase in gross profit is a result of significant restructuring and
cost controls implemented within this division late last year and throughout the
first quarter of this year. Travel expenditures have been reduced significantly
and trainer salaries, which are fixed, have decreased as a result of layoffs and
higher utilization.
-19-
The direct costs of our technology services are minimal and include
hosting fees and software expenses. The average gross profit on technology was
95% for the three months ended September 30, 2001 compared to 82% for the three
months ended September 30, 2000. The average gross profit for the nine months
ended September 30, 2001 was 95% compared to 82% for the nine months ended
September 30, 2000. The increase in gross profit is the result of less expensive
hosting arrangement that was secured this year.
Results of Operations
The Three and Nine Months Ended September 30, 2001 Compared to the Three and
Nine Months ended September 30, 2000
Revenue. Revenue for the three months ended September 30, 2001
decreased by $1,430,000 or 15%, to $8,510,000, as compared to $9,940,000 for the
three months ended September 30, 2000. The decrease is primarily attributable to
the significant decline in revenues from our technical publications and
engineering, information technology documentation and training divisions of 16%,
58% and 65% respectively.
Revenue for the nine months ended September 30, 2001 decreased by
$3,400,000 or 10%, to $29,230,000, as compared to $32,630,000 for the nine
months ended September 30, 2000. The decrease is primarily attributable to the
decline in revenues from our technical publications and engineering, information
technology documentation and training divisions of 20%, 12% and 50%
respectively.
Cost of Sales. The cost of sales for the three months ended September
30, 2001 increased by $40,000, or 0.1%, to $6,260,000, as compared to $6,220,000
for the three months ended September 30, 2000. This increase is a result of the
changed revenue mix, particularly the increase in revenues from lower margin
services such as IT recruitment and the decrease in revenues from higher margin
services such as training. As a percentage of revenue, the cost of sales was 74%
compared to 63% for the three months ended September 30, 2000.
The cost of sales for the nine months ended September 30, 2001
increased by $30,000, or 0.2%, to $19,770,000, as compared to $19,740,000 for
the nine months ended September 30, 2000. This increase, despite the decline in
sales, was a direct result of the increase in lower margin contract sales. As a
percentage of revenue, the cost of sales was 68% compared to 61% for the nine
months ended September 30, 2000.
Gross Profit. Gross profit for the three months ended September 30,
2001 decreased by $1,460,000, or 40%, to $2,250,000, compared to $3,710,000 for
the three months ended September 30, 2000. This decrease was attributable to the
overall decrease in revenue combined with the significant increase in cost of
sales. As a percentage of revenue, gross profit decreased from 37% for the three
months ended September 30, 2000 to 26% for the three months ended September 30,
2001.
Gross profit for the nine months ended September 30, 2001 decreased
by $3,370,000, or 26%, to $9,490,000 compared to $12,860,000 for the nine months
ended September 30, 2000. This decrease was attributable to the overall decrease
in revenue and the increase in cost of sales during the nine months ended
September 30, 2001. As a percentage of revenue, gross profit decreased from 39%
for the nine months ended September 30, 2000 to 32% for the nine months ended
September 30, 2001.
Expenses. Expenses for the three months ended September 30, 2001
decreased by $580,000 or 15% to $3,330,000 compared to $3,910,000 for the three
months ended September 30, 2000. This decrease is primarily attributable to the
decrease in administrative and selling expenses, and more specifically, the
reduction of salaries and overheads as a result of the significant restructuring
undertaken this year. Administrative expenses decreased $400,000 or 22% to
$1,390,000 compared to $1,790,000 for the three months ended September 30, 2000.
Selling expenses for the three months ended September 30, 2001 decreased by
$480,000 or 27% to $1,310,000 from $1,790,000 for the three months ended
September 30, 2000. This decrease is attributable to the reduction of salaries
as a result of terminations and the reduction of commissions as a result of the
aforementioned decrease in revenue. For the three months ended September 30,
2001, financing expenses increased $40,000 from zero for the three months ended
September 30, 2000 and relate to the repricing of options held by Del Mar
Consulting, the company's investors relations firm. For the three months ended
September 30, 2001, depreciation and amortization expenses increased $250,000 or
74% to $590,000 from $340,000 for the three months ended September 30, 2000.
This increase is primarily attributable to the increase in capital assets and
the acquisition of other assets.
-20-
Expenses for the nine months ended September 30, 2001 decreased by
$290,000 or 2% to $11,790,000 compared to $12,080,000 for the nine months ended
September 30, 2000. Administrative expenses decreased $1,060,000 or 20% to
$4,300,000 compared to $5,360,000 for the nine months ended September 30, 2000.
This decrease is related to the reduction of administrative salaries and
overheads as a result of restructuring. Selling expenses for the nine months
ended September 30, 2001 decreased by $1,030,000 or 18% to $4,580,000 from
$5,610,000 for the nine months ended September 30, 2000. This decrease is
attributable to the decrease in sales salaries and commissions. Financing
expenses for the nine months ended September 30, 2001 were $610,000 compared to
zero for the nine months ended September 30, 2000 and relate to the costs of
repricing options held by Del Mar Consulting and the issuance of warrants to the
Series C placement agent. For the nine months ended September 30, 2001,
depreciation and amortization expenses increased $600,000 or 54% to $1,710,000
from $1,110,000 for the nine months ended September 30, 2000. This increase is
primarily attributable to the increase in capital assets and the acquisition of
other assets. For the nine months ended September 30, 2001, restructuring
charges related to the termination of personnel and the closure of
non-productive branch offices were $580,000 compared to $0 for the nine months
ended September 30, 2000.
Operating Income (Loss). For the three months ended September 30, 2001,
operating income decreased by $880,000 to an operating loss of $1,080,000 as
compared to an operating loss of $200,000 for the three months ended September
30, 2000. This decrease is primarily attributable to the reduction in gross
profit and the increase in depreciation and amortization expense.
For the nine months ended September 30, 2001, operating income
decreased by $3,080,000 to an operating loss of $2,300,000 as compared to an
operating income of $780,000 for the nine months ended September 30, 2000. This
decrease is primarily attributable to the reduction in gross profit, increase in
financing, depreciation and amortization, and restructuring expenses.
Gain (loss) on investments. For the three months and nine months ended
September 30, 2001, we lost $130,242 on investments, compared to a gain of
$94,728 for the three and nine months ended September 30, 2000. At September 30,
2001, we wrote down our investment in Tillyard Management of $130,242.
Income (Loss) Before Interest Charges. Income before interest charges
for the three months ended September 30, 2001 decreased by $1,100,000 to a loss
of $1,210,000 compared to a loss of $110,000 for the three months ended
September 30, 2000. Income before interest charges for the nine months ended
September 30, 2001 decreased by $3,310,000 to a loss of $2,430,000 compared to
income of $880,000 for the nine months ended September 30, 2000.
Interest Charges. For the three months ended September 30, 2001,
interest charges decreased by $20,000 or 15% to $120,000 from $140,000 for the
three months ended September 30, 2000, primarily due to a reduction of long-term
debt. For the nine months ended September 30, 2001, interest charges increased
by $50,000 or 9% to $610,000 from $560,000 for the nine months ended September
30, 2000. The reduction of long-term debt was offset by the increase in our
borrowing base, higher bank interest rates as a result of being in
non-compliance with our covenants, and interest charged on an overdraft
position.
Income (Loss) Before Income Tax. Income before income tax for the three
months ended September 30, 2001 decreased by $1,090,000, to a loss of $1,330,000
compared to a loss of $240,000 for the three months ended September 30, 2000.
The sharp decrease in income before income tax is a result of the increase in
financing, depreciation and amortization expense and restructuring expenses,
combined with the decrease in revenue and gross profit.
Income before income tax for the nine months ended September 30, 2001
decreased by $3,350,000, to a loss of $3,040,000 as compared to income before
income tax of $310,000 for the nine months ended September 30, 2000. The sharp
decrease in income before income tax is a result of the increase in financing,
depreciation and amortization expense and restructuring expenses, combined with
the decrease in revenue and gross profit.
Income Taxes. Income tax expense for the three months ended September
30, 2001 increased $250,000 or 500% to $300,000 compared to $50,000 for the
three months ended September 30, 2000. Income tax expense for the nine months
ended September 30, 2001 increased $730,000 or 2433% to $700,000 compared to a
tax recovery of $30,000 for the nine months ended September 30, 2000. The
increase in income taxes is a result of the write down of the deferred income
tax asset.
Net Income (Loss). Net income for the three months ended September 30,
2001 decreased by $1,330,000 to a net loss of $1,630,000 compared to a net loss
of $300,000 for the three months ended September 30, 2000. Net income for the
nine months ended September 30, 2001 decreased by $4,090,000 to a net loss of
$3,740,000 compared to net income of $350,000 for the nine months ended
September 30, 2001.
Liquidity and Capital Resources
Our primary sources of cash are our revolving line of credit with Bank
One and proceeds from the sale of equity securities. Our primary capital
requirements include debt service, capital expenditures and working capital
needs.
At September 30, 2001, we had negative cash or cash equivalents and a
working capital deficiency of $1,850,000. At September 30, 2001, we had cash
flow from operations of $150,000, resulting from the accelerated collection of
accounts receivable and the postponement of payment of accounts payable. At
September 30, 2000, we had negative cash or cash equivalents and working capital
of $1,140,000. At September 30, 2000, we had a cash flow deficiency from
operations of $2,340,000, due primarily to a significant increase in accounts
receivable, decrease in accounts payable and increase in inventory.
-21-
At September 30, 2001, we had cash flow from financing activities of
$720,000 attributable primarily to proceeds from the issuance of common stock of
$400,000, the issuance of preferred stock of $1,230,000 and the repayment of
notes of $210,000 and long-term debt of $860,000 which was offset by the
increase in long-term debt of $225,000. At September 30, 2000, we had cash flow
from financing activities of $6,090,000, attributable primarily to proceeds from
the issuance of common stock of $2,330,000, the issuance of preferred stock of
$2,000,000 and an increase in bank indebtedness of $840,000.
At September 30, 2001, we had a cash flow deficit from investing
activities of $670,000 attributable primarily to the purchase of capital assets
of $180,000, other assets of $300,000 and increase in long-term receivables of
$190,000. At September 30, 2000, we had a cash flow deficit from investing
activities of $4,900,000 attributable primarily to the purchase of capital
assets of $940,000, deferred development costs of $2,540,000 and cash payments
for subsidiaries of $1,650,000.
At September 30, 2001, we had $4,980,000 outstanding with Bank One. The
revolving line of credit provided for a maximum borrowing amount of $4,640,000
at variable interest rates based on eligible accounts receivable. At September
30, 2001, we had an overdraft of $340,000. We do not have an authorized
overdraft facility with Bank One, however the bank has allowed an overdraft of
up to $500,000 on a regular basis for approximately ten weeks. The revolving
line of credit agreement requires us to meet various restrictive covenants,
including a senior debt to EBITDA ratio, debt service coverage ratio, debt to
tangible net worth ratio and certain other covenants. At September 30, 2001 and
thereafter, we were not in compliance with the covenants contained in the
revolving line of credit agreement. Bank One has indicated its intention to
enter into a forbearance agreement with us in which the bank would refrain from
exercising any rights or remedies based on existing or continuing defaults,
including accelerating the maturity of the loans under the credit facility.
Any agreement reached with the bank could result in new terms which are
less favourable than current terms under the existing agreement, and could
involve a reduction in availability of funds, an increase in interest rates and
shorter maturities, among other things. If we are not successful in securing a
forbearance agreement or waivers of the bank's rights and remedies as a result
of the defaults, we will need to seek new financing arrangements from other
lenders. Such alternative financing arrangements may be unavailable to us or
available on terms substantially less favourable to us than our existing line of
credit facility. If we are unable to either procure a waiver from the bank or
acceptable alternative financing, such failures could have a material adverse
effect on our financial condition and results of operations. No assurance can be
given that we will be able to obtain a waiver from the bank on the default of
loan covenants or refinance our existing obligations.
As a result of the default on the loan covenants governing our credit
line facility, Bank One is restricting our repayment of certain subordinated
loans and notes payable. The parties affected by this restriction, include the
Business Development Bank of Canada, Roger Walters and Denise Dunne.
At September 30, 2001, we had $426,000 in subordinated debt
outstanding to the Business Development Bank of Canada. The loan agreements
require us to meet a certain working capital ratio. At September 30, 2001 and
thereafter, we were not in compliance with the covenant contained in the loan
agreements. The Business Development Bank of Canada has agreed to postpone
principal of its subordinated loans until March 2002. At this time, they will
re-evaluate our financial position and possibly extend the postponement until
June 2002. We have not made any principal payments to the Business Development
Bank of Canada since June 2001, but we are current in our interest obligations.
In September 2001, we restructured our note payable to Roger Walters,
the vendor of Cad Cam Inc. The principal was reduced from $1,200,000 to $750,000
in consideration of capital stock payable of $450,000. In addition, all
principal payments were postponed until January 1, 2003, at which time, we will
pay $12,500 per month plus interest at 4.5% until December 31, 2006. The balance
of $150,000 will be due on December 31, 2006. We are currently making interest
payments of $7,500 per month until December 31, 2002.
In September 2001, we restructured our note payable to Denise Dunne,
the vendor of MicroTech Professionals Inc. The principal was reduced from
$1,965,000 to $1,740,000 in consideration of capital stock payable of $225,000.
In addition, all principal payments were postponed until January 1, 2003, at
which time, we will pay $20,000 per month plus interest at 5% until December 31,
2006. The balance of $781,287 will be due on January 1, 2007. We are currently
making interest payments of $14,397 per month until December 30, 2002.
As a result of the tragic events of September 11, 2001, we lost our IT
recruitment office in the World Trade Center. The three staff members of this
office survived and are continuing business in temporary office space. This
office represents approximately $2,000,000 in annual information technology
recruitment revenue. We do not anticipate a material decline in revenue from
this office. We lost approximately $75,000 of fixed assets, including furniture,
computer hardware and office equipment. We are in the process of filing a
statement of loss with our insurance company. We are in the process of
renovating our training office in New York to accommodate the three staff
members.
-22-
Our training office located at 195 Broadway was also impacted by the
events of September 11, 2001. As a result of destruction to the building and
supporting utility companies, the office was closed for four weeks. This office
represents approximately $3,000,000 in annual technical training revenue. Many
of our top clients have since relocated to other cities and have indicated their
postponement of employee training until Spring 2002. The estimated loss of
revenue from this office is between $200,000 and $250,000 per month. In
addition, many of the office's computer assets are malfunctioning as a result of
debris and smoke. We are in the process of filing a statement of loss with our
insurance company. As a result of the decline in revenue, we laid of four of
twelve employees from this office in October, 2001. At this time we do not know
what the total loss of revenue will be for our training operations in New York,
or the final amount of our insurance claim.
In June 2001, we filed a registration statement, which included the
registration of the Series C preferred shares held by Stonestreet Capital and
Alpha Capital. Once the registration statement is effective, we will be able to
drawn down on $375,000. These funds will be used to pay down the current
overdraft position with Bank One. In addition, on November 16, 2001, we entered
into an agreement with Stonestreet Capital and Alpha Capital for an equity line
of $8,000,000. The line will be available upon effectiveness of the registration
statement and the funds will be used to pay down any additional overdraft with
Bank One, as well as working capital.
On November 1, 2001, we also entered into an agreement with Hyperion
Partners Corp., an Atlanta investment banking company, to assist in arranging a
private placement of debt, equity and warrant securities. Upon successful
completion of a transaction, Hyperion Partners Corp. will be entitled to a cash
fee of 7% of the aggregate private placement and 100,000 warrants per million
raised at an exercise price of 110% of the closing bid price of the common stock
on the date prior to the closing of the placement. The agreement expires on
January 1, 2002.
If we are not successful in securing a forbearance agreement or
waivers of Bank One's rights and remedies as a result of the defaults, we will
need to seek new financing arrangements from other lenders. As a result, on
November 5, 2001, we entered into an agreement with Creative Funding Group, LLC,
a New York company, to assist in arranging a banking or alternative financing
agreement. Upon successful completion of a transaction, Creative Funding Group
will be entitled to receive a fee of 1.7% of the total credit facility. The
agreement may be cancelled by either party upon thirty days written notice.
In June 2001, we retained Banc One Capital Markets to represent us in
certain investment banking opportunities. This venture was not successful and
the agreement was terminated in September. We are still currently exploring
investment banking opportunities, including joint ventures, strategic
partnerships, and the potential sale of our training and technology divisions.
The majority of our restructuring to date has been concentrated in these
divisions. Although they are now both at a cash flow neutral position, they
would require substantial capital to be invested in order for them to expand
their customer base and maintain revenue growth. Our current cash flows do not
permit us to make such an investment. As a result, we are seeking either an
investment into or the divestiture of these divisions. In the event that we do
not achieve either, we will maintain the current operations at their current
cash flow neutral levels. If we are successful in divesting these divisions, our
revenue will be reduced by approximately $4,500,000, with little impact on our
profitability. Net cash proceeds from the sale of either division would be
applied toward the partial repayment of the credit line facility with Bank One.
On November 1, 2001, we entered into an agreement with Transactive
Partners. Ltd., a Chicago company, to render representation and transaction
advisory services to us in connection with possible business combinations. Upon
successful completion of a transaction, Transactive Partners. Ltd., would be
entitled to a fee ranging between $50,000 or 5%, whichever is greater, of the
gross proceeds depending on the nature of the transaction. The agreement expires
May 1, 2002.
On November 5, 2001, we entered into an agreement with entrenet2
Capital Advisors, LLC, a California company, on a best efforts basis, to assist
in achieving capital financing, debt financing, and merger or acquisition
transactions. Upon successful completion of a transaction, entrenet2 would be
entitled to a fee ranging between 1.5% to 4% of the gross proceeds depending on
the nature of the transaction. The agreement expires November 4, 2002.
We believe, despite our recent losses and negative working capital that
we have developed a business plan that if successfully implemented could
substantially improve our operational results and financial condition. However,
we can give no assurances that our current cash flows from operations, if any,
borrowings available under our line of credit, and proceeds from the sale of
securities and an equity line, will be adequate to fund our expected operating
and capital needs for the next twelve months. The adequacy of our cash resources
over the next twelve months is primarily dependent on our operating results and
our ability to procure a waiver from the bank, alternate financing, settlement
of our insurance claim, or draw down on our equity line, all of which are
subject to substantial uncertainties. Cash flow from operations for the next
twelve months will be dependent, among other things, upon the effect of the
current economic slowdown on our sales, the impact of the restructuring plan and
management's ability to implement our business plan. The failure to return to
profitability and optimize operating cash flow in the short term, and to
successfully procure a waiver from the bank or alternate financing, could have a
material adverse effect on our liquidity position and capital resources.
-23-
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets." Under the new
rules, goodwill and indefinite lived intangible assets are no longer amortized
but are reviewed annually for impairment. Separable intangible assets that are
not deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, we will apply the new
accounting rules beginning January 1, 2002.
Effective July 1, 2001, we changed our amortization policy from thirty to
fifteen years. We are currently assessing the financial impact SFAS No. 141 and
No. 142 will have on our Consolidated Financial Statements. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in our statement of earnings.
As of September 30, 2001, we have $8,270,000 unamortized goodwill.
Amortization expense related to goodwill was $215,000 for the three months ended
September 30, 2001 and $500,000 for the nine months ended September 30, 2001.
Effective July 1, 2001, we have changed our amortization period from 30
to 15 years on a prospective basis.
Recent Events
On November 1, 2001, we agreed to amend our agreement with the holders
of the Series C preferred shares, and removed the provision prohibiting the
investors from executing short sales of our common stock for as long as they
continue to hold the Series C preferred shares. The amendment was made in
consideration of the investor's waiver of certain penalties and fees for
delinquent registration of the Series C preferred shares.
-24-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to the following pending legal proceedings:
Michael Carrazza, as assignee of Southport Consulting Co., instituted
an action against us in the Supreme Court of the State of New York, County of
New York, Index No. 600553/01, alleging breach of contract and unjust
enrichment. Mr. Carrazza is seeking $250,000 in damages. Specifically, Mr.
Carrazza claims that we failed to deliver cash or stock to Mr. Carrazza under
the asset purchase agreement pursuant to which we acquired the assets of
Southport Consulting Co. We have filed a counterclaim against Mr. Carrazza,
seeking $162,000.00 in damages, plus punitive damages and attorneys' fees, on
the ground that Mr. Carrazza, as then president and sole shareholder of
Southport Consulting Co., fraudulently induced us into executing the asset
purchase agreement by misrepresenting the value of the assets being purchased. A
motion for summary judgment was filed by Mr. Carrazza and, as of the date
hereof, no decision has been made by the court.
Norbert Mika, a former employee of Thinkpath Training Inc. (formerly
ObjectArts Inc.), instituted an action against us in the Ontario Superior Court
of Justice, City of Kitchener, Regional Municipality of Waterloo, Ontario, Court
File No.C-745/01, alleging wrongful dismissal. Specifically, Mr. Mika claims
that we terminated him without cause and he is seeking $195,000 in damages, plus
punitive damages and attorneys' fees. We have filed a statement of defense, and
as of the date hereof, discovery has commenced, and we intend to defend
ourselves and prosecute our claim vigorously.
Glenn Cressman, a former employee of Thinkpath Training Inc. (formerly
ObjectArts Inc.), instituted an action against us in the Ontario Superior Court
of Justice, City of London, Ontario, Court File No. 37208, alleging wrongful
dismissal. Specifically, Mr. Cressman claimed that we terminated him without
cause and he was seeking $100,000 in damages, plus punitive damages and
attorneys' fees. On November 8, 2001, we settled with Mr. Cressman for $10,000
including attorneys' fees.
John James Silver, a former employee, commenced an action against us in
the Supreme Court of the State of New York, County of New York, Index No.
1113642/01, alleging breach of contract, quantum meruit, and account stated. Mr.
Silver is seeking $81,147 in damages. Specifically, Mr. Silver alleges that we
have breached an employment agreement with him, claiming that we owe him damages
representing unpaid salary, vacation time, a car allowance, severance pay and
stock options. Mr. Silver also claims that we owe him damages for allegedly
having defaulted on payment for certain services that he performed. We are in
the process of answering Mr. Silver's complaint, which was recently filed, and
will defend this action vigorously.
We are not party to any other litigation, pending or otherwise.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
-25-
ITEM 3. DEFAULTS IN SENIOR SECURITIES
We are in breach of the loan covenants governing our credit line
facility with Bank One. As a result, the bank has enforced a restriction on
principal repayment of all subordinated loans and notes payable. The parties
affected by this restriction include the Business Development Bank of Canada,
Roger Walters and Denise Dunne to whom we owe approximately $450,000,
$1,200,000, and $1,900,000 respectively.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Incorporated by reference to our Registration Statement on Form
SB-2, as amended and filed on October 16, 2001.
(b) Reports on Form 8-K.
We did not file any reports on Form 8-K during the three-month period
ended September 30, 2001.
-26-
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.
THINKPATH INC.
Dated: November 19, 2001 By: /s/ Declan French By: /s/ Kelly Hankinson
--------------------- -----------------------
Declan French Kelly L. Hankinson
Chief Executive Officer Chief Financial Officer
and President
-27-