UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended February 28, 2002 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file number 001-15503
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WORKSTREAM INC.
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(Exact Name of Registrant as Specified in Its Charter)
Canada N/A
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(IRS Employer Identification No.) (State or Other Jurisdiction of
Incorporation or Organization)
495 March Road, Suite 300, Ottawa, Ontario K2K 3G1
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(Address of Principal Executive Offices) (Zip Code)
(613) 236-2263
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The total number of common shares, without par value, outstanding as of February
28, 2002 was 14,364,138*. The Registrant has no other class of common stock
outstanding.
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* Excluding 2,120,655 common shares held in escrow under acquisition agreements.
WORKSTREAM INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
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Part I. Financial Information
Item 1. Unaudited Financial Statements
Unaudited Consolidated Balance Sheet as of
February 28, 2002 and May 31, 2001........................................ 2
Unaudited Consolidated Statements of Operations for
each of the Three and Nine Months Ended February
28, 2002 and 2001......................................................... 3
Unaudited Consolidated Statements of Cash Flows
for each of the Nine Months Ended February
28, 2002 and 2001......................................................... 4
Unaudited Consolidated Statements of Comprehensive Loss
for each of the Three and Nine Months Ended February
28, 2002 and 2001......................................................... 5
Notes to Unaudited Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................24
Part II. Other Information
Item 5. Exhibits and Reports on Form 8-K ..................................................25
1
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
WORKSTREAM INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
(UNITED STATES DOLLARS)
(UNAUDITED) (AUDITED)
28-FEB-02 31-MAY-01
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 781,811 $ 65,483
Short-term investments 1,318,036 3,518,962
Accounts receivable, net of allowance for doubtful accounts of 1,273,946 319,405
$151,661 (May 31, 2001 - $13,142)
Prepaid expenses 122,561 268,719
Deferred tax asset 193,255 -
Other receivables 174,173 161,520
--------------- ---------------
3,863,782 4,334,089
PROPERTY, PLANT AND EQUIPMENT 1,630,715 1,036,641
DEFERRED COSTS - 17,993
OTHER ASSETS 138,454 -
ACQUIRED INTANGIBLE ASSETS 6,051,792 -
GOODWILL 11,607,875 -
--------------- ---------------
$ 23,292,618 $ 5,388,723
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,093,190 $ 318,889
Accrued liabilities 1,140,995 350,578
Line of credit 1,142,892 -
Accrued compensation 775,930 204,049
Current portion of long-term obligations 73,045 52,462
Current portion of related party obligations 1,234,964 -
Deferred income tax liability 635,133 -
Deferred revenue 1,014,670 224,291
--------------- ---------------
7,110,819 1,150,269
DEFERRED INCOME TAX LIABILITY 1,341,308 -
LONG TERM RELATED PARTY OBLIGATIONS 653,638 -
LONG TERM OBLIGATIONS 244,990 196,397
--------------- ---------------
9,350,755 1,346,666
--------------- ---------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK
Issued and outstanding - 14,364,138 common shares
(May 31, 2001 - 7,712,262) 31,720,391 18,913,625
Additional paid in capital 643,489 577,364
Accumulated other comprehensive income (loss) (152,428) 38,995
Accumulated deficit (18,269,589) (15,487,927)
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13,941,863 4,042,057
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$ 23,292,618 $ 5,388,723
=============== ===============
The accompanying notes are an integral part of these unaudited financial
statements.
2
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNITED STATES DOLLARS)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUE $ 4,332,903 $ 485,272 $ 10,574,025 $ 1,559,166
COST OF REVENUES 795,664 304,127 2,225,608 1,007,547
------------ ------------ ------------ ------------
GROSS PROFIT 3,537,239 181,145 8,348,417 551,619
------------ ------------ ------------ ------------
EXPENSES
Selling and marketing 1,838,230 681,549 4,719,953 1,923,160
General and administrative 2,007,577 218,324 4,593,156 847,449
Research and development 87,241 574,243 622,150 1,696,933
Amortization and depreciation 696,339 189,739 1,400,095 411,205
------------ ------------ ------------ ------------
4,629,387 1,663,855 11,335,354 4,878,747
------------ ------------ ------------ ------------
OPERATING LOSS (1,092,148) (1,482,710) (2,986,937) (4,327,128)
OTHER INCOME AND EXPENSES
Interest and other income 11,068 105,997 112,055 434,562
Interest and other expense (19,912) (12,996) (86,665) (30,573)
------------ ------------ ------------ ------------
(8,844) 93,001 25,390 403,989
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX (1,100,992) (1,389,709) (2,961,547) (3,923,139)
Recovery of Deferred Income
Taxes 3,252 - 179,880 -
------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD $ (1,097,740) $ (1,389,709) $ (2,781,667) $ (3,923,139)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING DURING THE
PERIOD 14,178,438 7,712,262 12,263,281 7,709,618
============ ============ ============ ============
BASIC AND DILUTED NET LOSS PER
SHARE $ (0.08) $ (0.18) $ (0.23) $ (0.51)
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited financial
statements.
3
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNITED STATES DOLLARS)
NINE MONTHS NINE MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
2002 2001
------------ ------------
CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Net loss for the period $(2,781,667) $(3,923,139)
Items not involving cash -
Amortization and depreciation 1,400,095 411,205
Amortization of lease inducement (12,172) -
Non-cash loss on investments 18,999 -
Non-cash adjustment to deferred tax asset and
liabilities 179,880 -
Non-cash compensation expense included in results 150,000 -
Change in operating components of working capital 397,191 (177,525)
----------- -----------
(647,674) (3,689,459)
----------- -----------
INVESTING ACTIVITIES
Pre-acquisition advances to related parties (1,258,747) -
Acquisition of property, plant and equipment (68,935) (802,749)
Business acquisitions (net of acquired cash of $569,566) (565,525) -
Acquisition of intangible assets (54,091) -
Sale of short term investments 2,932,074 4,402,043
----------- -----------
984,776 3,599,294
----------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of options 19,266 15,923
Shareholder loan proceeds 750,000 -
Shareholder loan repayment (248,100) -
Repayment of bank debt (943,362) (150,657)
Proceeds from bank financing 1,042,892 267,711
Long term debt repayments (50,045) (27,306)
----------- -----------
570,651 105,671
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EFFECT OF EXCHANGE RATE CHANGES (191,425) (130,200)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE
PERIOD 716,328 (114,694)
CASH AND CASH EQUIVALENTS,
BEGINNING OF THE PERIOD 65,483 165,050
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF THE PERIOD $ 781,811 $ 50,356
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Working capital acquired by issuance of shares (388,280)
Property, plant and equipment acquired by issuance of
shares 1,060,629
Debt acquired through acquisitions 2,161,700
Goodwill acquired through acquisitions 11,607,875
Intangible assets acquired through acquisitions 6,808,810
The accompanying notes are an integral part of these unaudited financial
statements.
4
WORKSTREAM INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNITED STATES DOLLARS)
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, 2002 FEBRUARY 28, 2001 FEBRUARY 28, 2002 FEBRUARY 28, 2001
NET INCOME (LOSS) $ (1,097,740) $ (1,389,709) $ (2,781,667) $ ( 3,923,139)
OTHER COMPREHENSIVE INCOME
(LOSS) - - - -
CUMULATIVE TRANSLATION
ADJUSTMENT (13,927) - (191,425) -
------------------- -------------------- ------------------- -------------------
COMPREHENSIVE LOSS $ (1,111,667) $ ( 1,389,709) $ ( 2,973,092) $ ( 3,923,139)
=================== ==================== =================== ===================
The accompanying notes are an integral part of these unaudited financial
statements.
5
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF OPERATIONS
Workstream Inc. ("Workstream" or "the Company"), formerly
known as E-Cruiter.com, is a provider of Web-enabled tools and professional
services for human capital management (HCM). The Company offers a diversified
suite of high-tech and high-touch services aimed at addressing the full life
cycle of the employer-employee relationship. Workstream's HCM technology
backbone enables companies to streamline the management of enterprise human
processes, including recruitment, assessment, deployment and career transitions.
NOTE 2: BASIS OF PRESENTATION
The consolidated interim unaudited financial statements
included herein have been prepared by Workstream, without audit, in accordance
with United States generally accepted accounting principles. 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 February 28, 2002, the Company's subsidiaries are Paula Allen
Holdings, Inc. ("AAA"), OMNIpartners, Inc. ("OMNI"), RezLogic, Inc.
("RezLogic"), and 6FigureJobs.com, Inc. ("6Figures") (collectively, the
"Acquired Companies").
These unaudited financial statements should be read in
conjunction with the Company's most recent annual financial statements for the
year ended May 31, 2001. These interim unaudited financial statements are
prepared following accounting policies consistent with the Company's financial
statements for the year ended May 31, 2001, with the exception of a change in
reporting currency, which is explained in Note 3, and a change to United States
generally accepted accounting principles. The Company has also adopted
accounting policies in the period for revenue recognition relating to the
revenue streams of the Acquired Companies. In management's opinion, all
adjustments necessary for a fair presentation are reflected in the interim
periods presented. All adjustments are of a normal, recurring nature.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue recognition
Workstream 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.
Using these criteria, revenue for Applicant Tracking Software
("ATS") subscriptions are recognized ratably over the term of the contract,
revenue from internet posting services are recognized ratably over the period of
posting and other professional services are recognized when services are
delivered to the customer. The incremental direct costs of obtaining ATS
subscription contracts are deferred and recognized in earnings in the same
pattern as revenue is recognized.
Revenue from recruitment research is recognized when an
assignment has been completed and delivered to the customer. No provision is
made in the accounts for assignments in process.
Revenue from outplacement services is recognized as services
are provided. The Company provides for refunds at the time the revenue is
recognized based on prior experience.
Revenue from computer integration services is recognized as
the services are performed.
(b) Goodwill and acquired intangible assets
Effective June 1, 2001, the Company adopted the new Financial
Accounting Standards Board statement 141 on business combinations and statement
142 on goodwill and other intangible assets. Under these rules, goodwill and
6
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
other intangible assets with indefinite lives are not amortized, but subject to
periodic impairment testing. Management will assess goodwill for impairment at
least annually, and write down the carrying amount of goodwill as required.
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 5 years straight line
Intellectual property 5 years straight line
(c) Reporting Currency
Effective June 1, 2001, the Company meets the definition of a
domestic filer, as defined by the United States Securities and Exchange
Commission Division of Corporation and Finance, and as a result, the Company
adopted the US dollar as its reporting currency. Prior to this change, the
Canadian dollar had been used as the Company's reporting currency. As a result
of the change in reporting currency, the financial statements for all periods
prior to June 1, 2001 have been translated from Canadian dollars to US dollars.
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.
NOTE 4: ACQUISITION TRANSACTIONS
Paula Allen Holdings, Inc. ("AAA")
On July 27, 2001, the Company acquired 100% of AAA, a company
that provides career transitioning and outplacement services, as well as
computer system integration services, through offices located across North
America. The Company pursued this acquisition as a means to facilitate an
expansion into the United States, facilitated by AAA's established network of
offices and the expansion strategy AAA already had in place. Furthermore, this
acquisition extends Workstream's service offerings beyond a technology-enabled
hiring management system to a broader suite of human capital technology and
services.
The definitive agreement, which was signed April 3, 2001
established the consideration for the acquisition as 4,000,000 common shares. At
that date, the shares of Workstream had a closing market price of $1.375,
resulting in a total value for the transaction of $5.5 million.
Under this agreement an additional 1,000,000 shares of
contingent consideration may be issued if the Company achieves specific revenue
and profit targets. Of the 1,000,000 shares, up to 500,000 shares may be issued
for the eight-month period ended December 31, 2001 and up to 500,000 shares may
be issued for the twelve-month period ending December 31, 2002. On April 4,
2002, the Board of Directors approved the release of the first 500,000 shares
from escrow following achievement of specific revenue and profit targets for the
period ended December 31, 2001. The release has been recorded in these unaudited
financial statements as at January 1, 2002, with goodwill and capital stock
being increased by $687,500, representing the value of the released 500,000
shares at $1.375 per share, and the number of outstanding shares increased by
500,000. The escrow shares were distributed to the former owners of AAA, which
Michael Mullarkey, the Company's chief executive officer, was a majority owner.
Mr. Mullarkey received 437,500 shares of the total escrow shares distributed.
Any remaining contingent consideration issued will be added to the goodwill
resulting from the acquisition.
These unaudited financial statements include the results of
operations of AAA from July 28, 2001.
7
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
Management obtained an independent valuation of the net
tangible and intangible assets acquired. The excess of the purchase price over
the appraised value of the net tangible and identifiable intangible assets
acquired was allocated to goodwill.
The purchase price has been allocated as follows:
Purchase price.............................................. $ 6,187,500
Cash contributed prior to acquisition....................... 300,000
Acquisition costs........................................... 279,864
--------------
6,767,364
--------------
Current assets.............................................. 550,228
Tangible long term assets................................... 106,945
Current liabilities assumed................................. (1,080,912)
Long term liabilities assumed............................... (948,465)
Intangible assets:
Database and related software...................... 127,500
Customer base...................................... 1,020,000
Future income tax liability........................ (350,500)
Intellectual property.............................. 510,000
--------------
Total identifiable assets................................... (65,204)
--------------
Goodwill ................................................... $ 6,832,568
==============
The goodwill resulting from the transaction has been allocated
to the career transition services business unit.
OMNIpartners, Inc. ("OMNI")
On July 27, 2001, the Company acquired 100% of the outstanding
shares of OMNI, a Florida-based recruitment research firm providing recruitment
research at an hourly rate as a lower cost alternative to traditional recruiting
services. Management pursued this acquisition to increase the Company's
penetration into the U.S. market and to further broaden the Company's suite of
human capital technology and services.
The Company issued 500,000 common shares upon closing. The
definitive agreement was signed on May 18, 2001 when the closing share price was
$2.00 per share, giving the acquisition a value of $1.0 million. Subsequent to
July 27, 2001 the Company repurchased 100,000 shares at $2.00 per share from the
former owner of OMNI. The purchase price for these shares is paid in four equal
quarterly installments of $50,000 each, beginning December 31, 2001.
Under this agreement an additional 1,000,000 shares of
contingent consideration may be issued if OMNI achieves certain profit and
revenue targets for the twelve months ending June 30, 2002. Any contingent
consideration issued will be added to the goodwill resulting from the
acquisition.
The unaudited consolidated financial statements presented
herein include the results of operations of OMNI from July 28, 2001.
Management prepared a valuation of the net tangible and
intangible assets acquired. The excess of the purchase price over the appraised
value of the net tangible and identifiable intangible assets acquired was
allocated to goodwill.
8
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
The purchase price has been allocated as follows:
Total purchase price........................................ $ 1,000,000
Cash contributed prior to acquisition....................... 1,026,000
Acquisition costs........................................... 157,101
--------------
$ 2,183,101
==============
Current assets.............................................. 932,064
Tangible long term assets................................... 725,990
Current liabilities assumed................................. (766,712)
Long term liabilities assumed............................... (545,705)
Intangible assets:
Contracts in process............................... 76,500
Acquired technology................................ 85,000
Future income tax asset............................ 312,500
Trademarks, domain names........................... 51,000
--------------
Total identifiable assets................................... 870,637
--------------
Goodwill ................................................... $ 1,312,464
==============
The goodwill resulting from the transaction has been allocated
to the enterprise recruiting services business unit.
RezLogic, Inc.
The Company acquired RezLogic on August 3, 2001. RezLogic
provides recruitment process automation, offering web-based solutions for
employers, staffing agencies, executive recruiters, contract placement firms and
independent recruiters. Once integrated into the E-Cruiter HCM technology
platform, RezLogic's technology will extend the functionality through the
addition of key innovations, including automated email input, MS-Word document
processing, virus protection, streamlined resume capture and integrated
graphical reports including Equal Employment Opportunity.
For this acquisition, Workstream issued 445,545 common shares.
The shares of Workstream were trading at $4.04 when the agreement was signed on
June 29, 2001, resulting in an acquisition valuation of $1.80 million.
The unaudited consolidated financial statements presented
herein include the results of operations of RezLogic from August 3, 2001.
Management prepared a valuation of the net tangible and
intangible assets acquired. The excess of the purchase price over the appraised
value of the net tangible and identifiable intangible assets acquired was
allocated to goodwill.
9
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
The purchase price has been allocated as follows:
Purchase price.............................................. $ 1,800,000
Acquisition costs........................................... 410,000
--------------
2,210,000
--------------
Current assets.............................................. 495,295
Tangible long term assets................................... 75,661
Current liabilities assumed................................. (44,159)
Intangible assets:
Future income tax liability........................ (465,500)
Acquired technology................................ 765,000
Intellectual property.............................. 170,000
In-process research and development................ 51,000
Customer database.................................. 85,000
Contracts in process............................... 59,500
--------------
Total identifiable assets................................... 1,191,797
--------------
Goodwill $ 1,018,203
==============
The goodwill resulting from the transaction has been allocated
to the enterprise recruiting services business unit.
Under this agreement an additional 297,030 shares of
contingent consideration may be issued, pending the achievement of certain
revenue and profit targets for the twelve months ending June 30, 2002. Any
contingent consideration issued will be added to the goodwill resulting from the
acquisition.
6FigureJobs.com, Inc.
The Company acquired 6Figures on October 16, 2001. 6Figures
provides a variety of career management, recruitment advertising, resume
database, and targeted research services to senior-level executives, employers
and executive recruiters.
For this acquisition, Workstream issued 1,294,498 common
shares. The shares of Workstream were trading at an average price of $3.09 in
the 10 days preceding the signature of the agreement, which was September 20,
2001, resulting in an acquisition valuation of $4.0 million.
The unaudited consolidated financial statements presented
herein include the results of operations of 6Figures from October 16, 2001.
Management prepared a valuation of the net tangible and
intangible assets acquired. The excess of the purchase price over the appraised
value of the net tangible and identifiable intangible assets acquired was
allocated to goodwill.
10
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
The purchase price has been allocated as follows:
Purchase price.............................................. $ 4,000,000
Acquisition costs........................................... 438,517
--------------
4,438,517
--------------
Current assets.............................................. 878,410
Tangible long term assets................................... 155,953
Current liabilities assumed................................. (1,208,077)
Intangible assets:
Acquired technology................................ 671,500
Intellectual property.............................. 170,000
Trademarks and domain names........................ 34,000
Customer database.................................. 2,975,000
Future income tax liability........................ (1,585,500)
---------------
Total identifiable assets................................... 2,091,286
--------------
Goodwill $ 2,347,231
==============
The goodwill resulting from the transaction has been allocated
to the Recruiting Services business unit.
An additional 323,625 shares of contingent consideration may
be issued, pending the achievement of certain revenue and profit targets for the
twelve month period ending September 30, 2002. Any contingent consideration
issued will be added to the goodwill resulting from the acquisition.
ResumeXpress
In July 2001, the Company entered into a definitive agreement
to acquire the technology and assets of Gonyea Career Marketing Inc., known as
ResumeXpress. As consideration for the sale, Workstream paid ResumeXpress a cash
amount of $60,000. The acquisition was completed in August 2001. 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.
Tech Engine
In September 2001, the Company entered into a definitive
agreement to acquire the technology and assets of Tech Engine, Inc. in exchange
for the assumption of a promissory note in the amount of $186,638 plus
acquisition costs. Tech Engine's software enables Workstream to rapidly develop
career sites and job boards. The Company recorded intangible assets of $85,000
and goodwill of $97,409 on the purchase. The goodwill has been allocated to the
Enterprise Recruiting Services division.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives
effect to the acquisitions made by Workstream as if the transactions occurred at
the beginning of each of the nine month periods ended February 28, 2002 and
February 28, 2001.
11
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
9 MONTHS ENDED 9 MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
2002 2001
------------ ------------
Revenues $ 14,335,899 $ 14,138,805
Cost of revenues 2,708,470 3,552,132
------------ ------------
Gross profit 11,627,429 10,586,673
Expenses 15,347,682 18,332,741
------------ ------------
Operating loss (3,720,253) (7,746,068)
Interest and other income (expense) 191,097 366,309
------------ ------------
Net loss (3,529,156) (7,379,759)
============ ============
Weighted average number of common 12,263,281 12,263,281
shares ============ ============
Pro forma earnings per share $ (0.25) $ (0.53)
============ ============
NOTE 5: GOODWILL AND ACQUIRED INTANGIBLE ASSETS
(a) Goodwill
The following table summarizes the non-depreciable goodwill
acquired during the nine month period. No impairment losses were recorded during
the nine month period.
NINE MONTHS ENDED
FEBRUARY 28, 2002
---------------------
Goodwill acquired in acquisition of AAA $ 6,832,568
Goodwill acquired in acquisition of OMNI 1,312,464
Goodwill acquired in acquisition of RezLogic 1,018,203
Goodwill acquired in acquisition of TechEngine 97,409
Goodwill acquired in acquisition of 6Figures 2,347,231
---------------------
Balance at February 28, 2002 $ 11,607,875
=====================
(b) Acquired Intangibles
The following table summarizes the depreciable intangible
assets acquired during the nine month period.
Customer base $ 4,080,000
Acquired technologies 1,793,810
Intellectual property 935,000
----------------
6,808,810
Accumulated amortization for 9 months ended (749,654)
-----------------
Net acquired intangible assets $ 6,059,156
================
12
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
NOTE 6: LINES OF CREDIT AND RESTRICTED CASH AND SHORT TERM INVESTMENTS
At February 28, 2002, the Company had $1,142,892 outstanding
on two lines of credit from SunTrust Bank and Harris Bank. Certain assets of the
Company, including short term investments, property and receivables, are pledged
as collateral for these facilities.
February 28, 2002 May 31, 2001
----------------------- -----------
Line of credit - SunTrust $ 992,892 $ -
Line of credit - Harris Bank 150,000 -
----------------------- -----------
Total line of credit $1,142,892 $ -
======================= ===========
The Company's short term investments have been provided as
collateral for the SunTrust line of credit. It bears interest at the rate of
return on these short term investments plus 1.5%. During the period, the line of
credit had an effective interest rate of 3.87%. The Company is permitted to draw
up to $1,000,000 against this facility.
The operating line of credit with Harris Bank is authorized
for up to $150,000. The interest rate on this line of credit is subject to
change from time to time based on changes in the lender's prime rate. During the
period, the line of credit had an effective interest rate of 4.75%.
During the quarter ended February 28, 2002, the Company
established a line of credit with the Bank of Montreal at an effective rate of
4.75%. The Company is permitted to draw up to $1,000,000 against this facility
based on compensating balances on deposit with the bank. The Company was able to
draw $350,000 as of February 28, 2002. The Company has not drawn on this line to
date.
At February 28, 2002, a total of $1,375,570 of cash and short
term deposits were pledged as collateral for these facilities and the Company's
leases and therefore restricted from the Company's use, to the following
institutions:
SunTrust Bank $ 992,892
SunTrust Bank - credit card department 103,414
Royal Bank (facilities lease) 168,539
Royal Bank (furniture lease) 110,725
-----------
$ 1,375,570
===========
13
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
NOTE 7: LONG TERM OBLIGATIONS
Long term obligations consists of the following:
February 28, 2002 May 31, 2001
-------------------- -------------
Small business loan $ - 5,148
Capital leases 176,893 84,486
Lease inducement 141,142 159,225
-------------------- -------------
318,035 248,859
==================== =============
Less current portion 73,045 52,462
-------------------- -------------
$ 244,990 $ 196,397
==================== =============
Capital lease obligations relate to office equipment,
computers and software, and bear interest at rates that range from 7.5% to 20%
per annum. These leases mature at various times through December 2005.
NOTE 8: RELATED PARTY OBLIGATIONS
Related party obligations consist of the following:
February 28, 2002
------------------
Notes payable $ 146,038
Shareholder loans 1,742,564
------------------
1,888,602
Less current portion 1,234,964
------------------
$ 653,638
==================
The note payable to a related party is non-interest bearing,
and is repayable in monthly installments of $10,200 beginning in October 2001
and ending in April 2003.
During the quarter ended February 28, 2002, the Company
received $750,000 in working capital loans from the Company's chief executive
officer. These are repayable upon demand and earn interest at the United States
prime rate.
The balance of the shareholder loans consists of a term loan
assumed as part of the acquisition of AAA which is non-interest bearing and is
repayable in quarterly installments of $52,500 beginning in April 2001 and
ending in January 2005, and a non-interest bearing note payable to the former
owner of OMNIpartners resulting from the repurchase of 100,000 of the Company's
common shares, payable in four quarterly installments starting December 31, 2001
and ending September 30, 2002.
NOTE 9: COMMON SHARES
The authorized share capital consists of an unlimited number
of no par value common shares. The Company has 14,364,138 shares that are
outstanding, including the 500,000 shares released from escrow on April 4, 2002
related to the AAA acquisition. An additional 2,120,655 shares are being held in
escrow as a result of the terms of acquisitions. These shares may be released
from escrow if certain profit and/or revenue targets are achieved. The periods
covered by the escrow agreements extend until December 31, 2002.
NOTE 10: SEGMENTED AND GEOGRAPHIC INFORMATION
Prior to the acquisitions, the Company had one operating
segment: Enterprise recruiting services. As a result of the acquisitions,
Workstream now has two distinct operating segments: Enterprise recruiting
services and Career transition services. Operations are conducted in Canada and
the United States. The following is a summary of the Company's operations by
14
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
business segment and by geographic region for the three and nine month periods
ended February 28, 2002.
ENTERPRISE CAREER TRANSITION
RECRUITING SERVICES SERVICES TOTAL
------------------ -------------------- ------------------
BUSINESS UNIT
THREE MONTHS ENDED
FEBRUARY 28, 2002
Revenue $ 2,015,764 $ 2,317,139 $ 4,332,903
Expenses 2,394,643 2,333,960 4,728,603
-------------------- ---------------- ------------------
Business unit income (loss) (378,879) (16,821) (395,700)
==================== ================
Corporate overhead, other revenues (702,040)
-------------------
and expenses
Net loss $ (1,097,740)
===================
NINE MONTHS ENDED
FEBRUARY 28, 2002
Revenue $ 4,707,826 $ 5,866,199 $ 10,574,025
Expenses 6,637,161 5,413,375 12,050,536
-------------------- ---------------- ------------------
Business unit income (loss) (1,929,335) 452,824 (1,476,511)
==================== ================
Corporate overhead, other revenues
and expenses (1,305,156)
-------------------
Net loss $ (2,781,667)
===================
Business unit assets $ 1,972,350 $ 8,683,736 $ 10,656,086
Goodwill 4,775,307 6,832,568 11,607,875
-------------------- ---------------- ------------------
6,747,657 15,516,304 22,263,961
==================== ================
Assets not allocated to business units 1,028,657
------------------
Total assets $ 23,292,618
==================
15
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
GEOGRAPHY
THREE MONTHS ENDED FEBRUARY 28, 2002
CANADA USA TOTAL
---------------- ---------------- ----------------
Revenue $ 667,137 $ 3,665,766 $ 4,332,903
Expenses 865,117 3,863,486 4,728,603
---------------- ---------------- ----------------
Geographical income (loss) (197,980) (197,720) (395,700)
================= ================
Other revenues and expenses (702,040)
----------------
Net loss $ (1,097,740)
================
NINE MONTHS ENDED
FEBRUARY 28, 2002
Revenue $ 1,993,755 $ 8,580,270 $ 10,574,025
Expenses 2,587,410 9,463,126 12,050,536
----------------- ---------------- ----------------
Geographical income (loss) $ (593,655) $ (882,856) $ (1,476,511)
================= ================
Corporate overhead, other revenues and
expenses ----------------
(1,305,156)
Net loss $ (2,781,667)
================
Geographic unit assets excluding goodwill $ 1,972,350 $ 9,712,393 $ 11,684,743
Goodwill - 11,607,875 11,607,875
----------------- ----------------- ----------------
$ 1,972,350 $ 21,320,268 $ 23,292,618
Assets not allocated to specific -
geographic units
---------------
Total assets $ 23,292,618
================
NOTE 11: RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations (SFAS 143), which is effective for fiscal years beginning after June
15, 2002. This standard establishes accounting standards for the recognition and
measurement of legal obligations associated with the retirement of tangible
long-lived assets. The Company has not yet assessed the impact of the adoption
of this new standard on its financial statements.
In October 2001, the FASB issued Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This standard
replaces FAS 121, but retains its fundamental provisions with respect to the
recognition and measurement of the impairment of long-lived assets to be held
and used, and the measurement of long-lived assets to be disposed of by sale.
This standard is effective for fiscal years beginning after June 15, 2002. The
Company is in the process of evaluating the impact this standard will have on
the financial statements.
NOTE 12: EARNINGS PER SHARE
For all the periods presented, diluted net loss per share
equals basic net loss per share due to the antidilutive effect of employee stock
options, warrants and escrowed shares. The following outstanding instruments
could potentially dilute basic earnings per share in the future:
16
WORKSTREAM INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - - (Continued)
THREE MONTHS ENDED
FEBRUARY 28, 2002
Stock options 2,213,978
Escrowed shares 2,120,655
Underwriter warrants 490,000
-------------
Potential increase in
number of shares from
dilutive instruments 4,824,633
=============
The weighted average price of the options exercisable at February 28, 2002, was
$3.12.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements discussed in Item 2 (Management's
Discussion and Analysis of Financial Condition and Results of Operations) and
Item 3 (Quantitative and Qualitative Disclosures About Market Risk) and
elsewhere in this Form 10-Q constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements concerning Management's expectations, strategic
objectives, business prospects, anticipated economic performance and financial
condition and other similar matters involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of results to differ materially from any future
results, performance or achievements discussed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: inability to offer services that are superior and
cost effective when compared to the services being offered by the Company's
competitors; we have no assurance that a client will remain a long term client
as we generally enter into subscription agreements with the Company's Ecruiter
Enterprise clients for terms of one year or less; inability to further identify,
develop and achieve success for new products, services and technologies;
increased competition and its effect on pricing, spending, third-party
relationships and revenues; as well as the inability to enter into successful
strategic relationships and various other matters, many of which are beyond the
Company's control and other factors as are described in Item 3 D (Key
Information-Risk Factors) of the Company's Form 20-F for the fiscal year ended
May 31, 2001. The words "estimate," "project," "intend," "believe," "plan" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements speak only as of the date of the document in which
they are made. The Company disclaims any obligation or undertaking to provide
any updates or revisions to any forward-looking statement to reflect any change
in the Company's expectations or any change in events, conditions or
circumstances on which the forward-looking statement is based.
The following discussion and analysis should be read in
conjunction with the unaudited consolidated financial statements of the Company
and accompanying notes for the 3 and 9 month periods ended February 28, 2002.
All figures are in United States dollars, except as otherwise noted.
Management has prepared unaudited pro forma financial
information which can be found in Note 4 of the unaudited financial statements.
Management's discussion and analysis refers to this information. All pro forma
financial information gives effect to the acquisitions made by the Company as if
the transactions had occurred at the beginning of the nine month periods ended
February 28, 2002 and February 28, 2001.
OVERVIEW
Workstream Inc (the "Company") is a leading provider of human
capital management (HCM) services. The Company offers a combination of high-tech
and high-touch services, giving customers the ability to manage their complete
recruiting and outplacement needs on a single Workstream platform.
The past nine months have resulted in significant changes in
the business. During the first six months of this fiscal year the Company
completed the acquisition of Paula Allen Associates, OMNIpartners,
6FiguresJobs.com, Rezlogic, ResumeXpress and Tech-Engine (the "Acquired
Companies"). These acquisitions dramatically increased the service offerings and
revenue streams for the Company. During the third quarter the Company has
focussed on integrating the acquired entities and expanding the reach of the
existing business.
18
The Company's recruiting research revenues have declined on a
pro forma basis for the nine months ended February 28, 2002 due primarily to the
overall economic slowdown, while career transition and enterprise sales revenues
have increased by more than 40% for the same period. The decline in recruiting
research revenues has required the Company to reduce certain cost to achieve
profitability in the recruiting segment.
Following completion of the acquisitions, the Company has been
working to expand its market reach, most notably through the addition of 9
offices of Paula Allen Associates. It has also been reducing costs by
consolidating operations, resulting in staff reductions of redundant positions
and related overhead and significantly reducing research and development
expenditures.
REVENUES
Consolidated Revenues were $4,332,903 for the three months
ended February 28, 2002 compared to $485,272 for the same period last year. The
significant growth in revenues is attributed to the Acquired Companies. These
acquisitions contributed $3,864,977 for the quarter ended February 28, 2002.
Career transition service revenues for the three months ended
were $2,317,139 and were the largest contributor to total revenue this quarter.
All of the revenue in this segment is attributable to the acquisition of Paula
Allen Holdings, acquired in July of this fiscal year. The revenue in this
segment decreased slightly compared to the prior quarter due to a slow down
during the holiday season which is traditionally a slow period in the Career
Transition industry. December revenues were $563,680 compared with January and
February that generated revenues of $875,556 and $877,903, respectively.
Management believes that January and February revenues are more reflective of
revenues going forward.
Enterprise recruiting service revenues for the three months
ended February 28, 2002, were $2,015,764 compared to $485,272 for the same
period last year. The increase in revenues was primarily due to the acquisition
of Rezlogic Inc., OMNIpartners and 6Figures.com Inc. in fiscal year 2002.
Consolidated Revenues for the nine months ended February 28,
2002 were $10,574,025 compared to $1,559,166 for the same period last year. The
significant increase in revenues were due to the above mentioned acquisitions
completed this fiscal year.
Pro-forma Revenues for the nine months ended February were
$14,335,899 compared to $14,138,805 for the same period last year. Pro-forma
revenues include the revenues of all acquisitions for the full reporting
periods, instead of from their acquisition date.
Management believes that these acquisitions will have a
significant impact on future revenues by allowing the Company to deliver a full
range of recruiting and outplacement products and services through its 21
offices across North America. The Company expects the growth trend shown in its
pro forma results to continue as the Company continues to expand its network of
offices.
COST OF REVENUES
Cost of Revenues for the three months ended February 28, 2002
were $795,664 compared to $304,127 for the same period last year. While the
total cost of revenues has increased significantly due to the recent
acquisitions, as a percentage of revenue these costs have declined from
approximately 63% for the three months ended February 28, 2001 to 18% for the
same period this year. Career transition cost of revenues accounted for $323,066
and Recruiting services was $472,598 of the total cost for the quarter.
For the nine months ended February 28, 2002, cost of revenues
doubled, from $1,007,547 for the nine months ended February 28, 2001 to
$2,225,608. As a percentage of total revenues, cost of revenues dropped from 65%
19
in the prior year to 21% in the current period, reflecting the impact of recent
acquisitions. On a pro forma basis, cost of revenues decreased from $3,552,132
for the nine months ended February 28, 2001 to $2,708,470 for the nine months
ended February 28, 2002. Since the consummation of the acquisitions, management
has proceeded with the consolidation of certain cost centers and the elimination
of redundant operations. This has resulted in a decrease compared to the pro
forma cost of revenues for the nine months ended February 28, 2001.
Cost of Revenues includes the cost of network operations,
client support and charges related to third-party services. The decline as a
percentage of revenue is due to the recent acquisitions' lower cost of delivery
of products and services and the Company's ability to consolidate technology.
GROSS PROFITS
Consolidated gross profits were $3,537,239 for the three
months ended February 28, 2002 or 82% of revenues compared to $181,145 or 37%
for the same period last year. The significant increase in Gross Profits is due
to the above mentioned acquisitions. Management believes that these margins
should be maintained, since the newly-acquired service lines involve a
significantly lower cost of delivery.
Career transition services gross profit was $1,994,073 or 86%
of Career transition services revenues and Enterprise recruiting gross profit
represented $1,543,166 or approximately 77% of Enterprise recruiting service
revenues for the three months ended February 28, 2002.
Consolidated gross profits were $8,348,417 or 79% of revenues
for nine months ended February 28, 2002 compared to $551,619 or 35% of revenues
for the same period last year. The significant improvement in the gross profit
percentage is due to the lower cost of revenues contributed by the recently
acquired service lines.
Pro-forma gross profits were $11,627,429 or 81% of revenues
for nine months ended February 28, 2002 compared to $10,586,673 or 75% of
revenues for the same period last year.
OPERATING EXPENSES
Total Operating Expenses were $4,629,387 for the three months
ended February 28, 2002, compared to $1,663,855 for the same period last year.
The recent acquisitions accounted for $3,965,149 in total operating expense.
Operating expenses for non-acquired operations were $664,238 for the three
months ended February 28, 2002, representing an approximately 60% decline
compared to the same period last year. The primary reason for the decline in
operating expenses for the operations that existed prior to the recent
acquisitions is the consolidation of operating functions and technology.
Total operating expenses were $11,335,354 for the nine months
ended February 28, 2002 compared to $4,878,747 for the same period last year. On
a pro-forma basis, operating expenses were $15,347,682 for nine months ended
February 28, 2002 compared to $18,332,741 for the same period last year.
SELLING AND MARKETING
Selling and marketing expenses were $1,838,230 for the
quarter ended February 28, 2002 compared to $681,549 for the same period last
year. This increase is attributed to the above mentioned acquisitions.
Commission expense is approximately 10% of the total selling and marketing
expense and is expected to increase at the same rate as revenues grow.
For the nine months ended February 28, 2002, selling and
marketing expenses were $4,719,953, compared to $1,923,160 for the nine months
ended February 28, 2001. On a pro forma basis, selling and marketing expenses
were $6,157,464 for the nine months ended February 28, 2002, compared to
20
$7,699,751 for the nine months ended February 28, 2001. Management expects
selling and marketing costs to continue to increase as the Company continues to
expand its sales force and invest in developing and strengthening the new
Workstream brand.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,007,577 for the
three months ended February 28, 2002, compared to $218,324 for the same period
last year, an increase of $1,789,253, reflecting increased cost related to the
Acquired Companies, which management believes will be partially offset in the
future by continued consolidation of some administrative functions.
General and administrative expenses for the nine months ended
February 28, 2002 were $4,593,156, compared to $847,449 for the nine months
ended February 28, 2001. On a pro forma basis, general and administrative
expenses decreased from $10,632,990 for the nine months ended February 28, 2001
to $8,493,879 for the nine months ended February 28, 2002. The decrease is due
to the elimination of redundant functions across the acquired organizations
since consummation of the acquisitions.
RESEARCH AND DEVELOPMENT
Research and development costs were $87,241 for the three
months ended February 28, 2002 compared to $574,243 for the same period last
year. The decline is primarily due to the completion of various projects under
development in prior periods and the Company's strategy to acquire technology
through acquisition. The Company feels that it can acquire new technology at
less cost and more efficiently than developing new software platforms with
internal resources. All of the Company's research and development efforts are
incurred in the Enterprise Recruiting division.
For the nine months ended February 28, 2002, research and
development expenses were $622,150, compared to $1,696,933 for the nine months
ended February 28, 2001. The decrease is due primarily to a reduction in the
number of third party consultants and employees in this area. As the Company
integrated acquired technologies into existing platforms and completed
in-process projects, headcount was reduced. On a pro forma basis, research and
development expenses were $803,782 for the nine months ended February 28, 2002,
compared to $1,938,997 for the nine months ended February 28, 2001.
DEPRECIATION/AMORTIZATION EXPENSE
Depreciation and amortization expenses were $696,339 for the
three months ended February 28, 2002, compared to $189,739 for the same period
last year, with the amortization of acquired intangible assets representing
$401,002 of the increase over the prior year and the balance related to
depreciation of tangible assets obtained by the acquisitions. For the nine
months ended February 28, 2002, depreciation and amortization expense were
$1,400,095, compared to $411,205 for the same period in the prior year. On a pro
forma basis, depreciation and amortization expense was $1,927,515 for the nine
months ended February 28, 2002 and $1,915,768 for the nine months ended February
28, 2001.
INTEREST INCOME
Interest income was $11,068 for the three months ended
February 28, 2002, compared to $105,997 for the same period last year. The
significant decline was due to the decline in short-term investments, and the
increase in long term debt. A total of $2,155,617 in debt was added to the
Company's balance sheet as a result of the acquisitions. Short-term investments
as of February 28, 2001, were $4,504,620 which represented the remaining capital
raised from the Company's public offering in December 1999.
21
Interest expense was $ 19,912 for the three months ended
February 28, 2002, compared to $12,996 for the same period last year. The
increased interest expense was due to increases in both short and long-term
obligations.
GOODWILL
Goodwill was increased by $687,500 during the quarter due to the release to the
former owners of Paula Allen Holdings Inc., of 500,000 shares valued at $1.375
per share from escrow as the Company achieved the specific revenue and profit
targets set by the Paula Allen Holdings acquisition agreement for the period
ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At February 28, 2002, the Company had $2,099,847 in cash, cash
equivalents, and short term investments. The Company has made significant
investment in acquiring new service lines which has reduced available cash and
increased long term debt. Furthermore, capital requirements have exceeded cash
flows from operations in the quarter. At February 28, 2002, $1,375,570 of these
cash and short term investment balances were restricted from use because they
were collateral for debt, leases and a letter of guarantee. These restricted
cash balances will be reduced quarterly by lease and rent payments and any
repayments on lines of credit.
In addition, several merchant banks have required the Company
to place reserve deposits on the Company's merchant accounts due to the high
volume of credit card usage by the Company's clients. As of February 28, 2002,
approximately $103,414 were held by such banks. These deposits will be reviewed
quarterly and may be returned to the Company based on activity surrounding
credits issued .
For the nine months ended February 28, 2002, cash used in
operations totaled $647,674, consisting primarily of the net loss for the period
of $2,781,667, offset by non-cash expenses such as depreciation, amortization,
and non-cash compensation. The change in working capital for the nine months
ended February 28, 2002, was $397,191, primarily due to the increase in current
liabilities offset by the increase in accounts receivable from Acquired
Companies.
Net cash provided by investing activities during the nine
month period ended February 28, 2002, was $984,776. The disposal of certain
short term investments provided cash inflows of $2,932,074. A significant
portion of these proceeds were used to pursue the Company's acquisition
strategy. In the nine months ended February 28, 2002, the Company expended a
total of $1,824,272 on acquisitions, including a total of $1,258,747 that had
been advanced to Acquired Companies before the close of the transactions. An
additional $68,935 was expended for capital assets as the Company improved its
network infrastructure and integrating the technology platforms of the Acquired
Companies to improve internal communications and efficiencies.
Net cash generated by financing activities was $570,651 for
the nine months ended February 28, 2002. Financing outflows consisted primarily
of the repayment of bank debt of $943,362 and the repayment of a loan to a
shareholder of an acquired company of $248,100. The Company's chief executive
officer has provided the Company with $400,000 in short term loans to offset the
negative cash flow created by the new credit card deposit requirements. In
addition, the Company's chief executive officer provided $350,000 to establish a
new line of credit with the Bank of Montreal. The Company has also drawn an
additional $1,042,892 on existing bank facilities for the nine months ended
February 28, 2002.
The Company has had operating losses since inception and has
negative cash flow from operations for the nine months ended February 28, 2002.
However, the elimination of redundancies in the Acquired Companies, the
consolidation of ongoing operations and reductions in research and development
efforts previously discussed, has reduced the monthly negative cash flows over
the quarter ended February 28, 2002, such that cash flow from operations for
both January and February of 2002 has improved. Management believes that these
22
changes, along with further consolidation of cost centers and elimination of
redundancies will result in cash flows from operations which, together with
current cash reserves and credit facilities, will be sufficient to meet the
Company's working capital and capital expenditure requirements for the
foreseeable future.
The Company is currently reviewing alternative financing,
which may include the consolidation and/or restructure of current lines of
credit and other debt obligations.
ACQUISITIONS
The Company constantly endeavors to increase its share of, and
strengthen its position in, the HCM market. A key component of the Company's
business strategy is to continue to acquire companies offering services similar
or complementary to ours. The HCM market has experienced significant
consolidation in the last several months as companies attempt to expand their
service offerings and broaden their revenue bases to achieve rapid growth and
profitability. Implementing the Company's business strategy and identifying the
consolidation trend in relatively early stages, the Company has actively pursued
acquisition opportunities and completed acquisitions of several attractive
companies.
In April 2001, the Company entered into a definitive agreement
to acquire 100% of the outstanding shares of Paula Allen Holdings and its
subsidiaries, doing business as Allen and Associates ("AAA"). As initial
consideration for the sale, the Company issued to the shareholders of AAA
4,000,000 of its common shares valued at approximately $5.5 million. The
acquisition of AAA was completed in July 2001. In addition to the initial
consideration, 1,000,000 common shares were initially held in escrow, to be
released upon the achievement of certain profit and revenue targets of the
combined companies. The escrow agreement expires on December 31, 2002, at which
time any shares remaining in escrow will be cancelled. On April 4, 2002, after
the Company had achieved the revenue and profit targets set for the period ended
December 31, 2001, the Company's Board of Directors approved the release of the
first 500,000 shares from escrow. AAA had 11 offices across the U.S. at the time
of execution of the agreement, and established 9 additional offices by September
2001. Headquartered in Orlando, Florida, AAA is focused on career transition,
job placing services and recruiting within the information technology,
engineering, finance and marketing areas. AAA's online candidate recruitment and
placement technology enables employers to search for candidates for employment
in real time, reducing time to hire. AAA is also engaged in management
consulting. AAA's management consulting practice focuses on emerging
technologies and extending HCM strategy. Leveraging the Internet and advanced
technology, AAA's service integrates platforms, systems and software, including
human resources management systems delivering innovative business processes that
encourage corporate growth. For the year ended December 31, 2000, AAA had
revenues of approximately $6.9 million and net losses of approximately $216,000.
In May 2001, the Company entered into a definitive agreement
to acquire 100% of the shares of OMNIpartners, Inc. and its affiliates. As
initial consideration for the sale, the Company issued to the shareholders of
OMNIpartners 500,000 common shares valued at approximately $1 million.
Subsequent to July 27, 2001 the Company purchased 100,000 shares at $2.00 from
the former owner of OMNIpartners and is making equal quarterly payments of
$50,000 beginning December 31, 2001. In addition to the initial consideration,
1,000,000 common shares are being held in escrow, to be released upon the
achievement of certain profit and revenue targets of OMNIpartners. The escrow
agreement expires on June 30, 2002, at which time any shares remaining in escrow
will be cancelled. Management believes that these profits and revenue targets
will not be achieved. The acquisition of OMNIpartners was completed in July
2001. 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. For its fiscal
year ended December 31, 2000, OMNIpartners had revenues of approximately $7.8
million and net income of approximately $121,000.
23
In June 2001, the Company entered into a definitive agreement
to acquire 100% of the shares of RezLogic, Inc., referred to as RezLogic, a
company based in Colorado Springs, Colorado. As initial consideration for the
sale, the Company issued to the shareholders of RezLogic 445,545 common shares
valued at approximately $1.8 million. In addition to the initial consideration,
297,030 common shares are being held in escrow, to be released upon the
achievement of certain profit and revenue targets of RezLogic. The escrow
agreement expires on June 30, 2002, at which time any shares remaining in escrow
will be cancelled. Management believes that these profit and revenue targets
will not be achieved. The acquisition of RezLogic was completed in August 2001.
RezLogic is a leader in recruiting process automation offering Web-based
recruiting process automation solutions for employers, staffing agencies,
executive recruiters, contract placement firms and independent recruiters. The
Company expects that the acquisition of RezLogic will provide the Company with
an established U.S. sales channel for the applicant tracking systems, or ATS
platform, and enable the Company to integrate additional functionality into
existing platforms, such as equal employment opportunity, or EEO tracking. For
the year ended December 31, 2000, RezLogic had revenues of approximately
$734,000 and net loss of approximately $244,000. The Company believes that this
reporting capability is essential to achieve a significant penetration of the
U.S. market.
In July 2001, the Company entered into a definitive agreement
to acquire the technology and assets of Gonyea Career Marketing Inc., known as
ResumeXpress. As consideration for the sale, the Company paid ResumeXpress a
cash amount of $60,000. The acquisition was completed in August 2001.
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.
In September 2001, the Company entered into a definitive
agreement to acquire 100% of the shares of 6FigureJobs.com, Inc. As initial
consideration for the sale, the Company issued to the shareholders of
6FigureJobs 1,294,498 common shares valued at approximately $4 million. In
addition to the initial consideration, 323,625 common shares are being held in
escrow, to be released upon the achievement of certain profit and revenue
targets of 6FigureJobs.com. The escrow agreement expires on September 30, 2002,
at which time any shares remaining in escrow will be cancelled. The acquisition
was completed in October 2001. 6FigureJobs.com is a leader in executive search
and recruitment services. 6FigureJobs.com provides career management,
recruitment advertising, resume database and targeted research services for
senior-level executives, employers and executive recruiters. The Company
believes that this acquisition expands and enhances its existing executive
career transition services which became available to the Company to offer as a
result of its previous acquisitions, and provides applicant tracking clients
with a premier advertising destination. For the year ended December 31, 2000,
6FigureJobs.com had revenues of approximately $1.8 million and net losses of
approximately $1.6 million.
In September 2001, the Company entered into a definitive
agreement to acquire the technology and assets of Tech Engine, Inc. in exchange
for the assumption of a promissory note in the amount of $186,638. Tech Engine's
software enables Workstream to rapidly develop career sites and job boards.
The Company believes that these acquisitions are important to
its evolution from a recruitment application service provider into an HCM
business process aggregator. These additions have broadened the Company's
revenue base, diversified its product offering, and added over 200 employees to
the Company's work force and 20 revenue generating locations across North
America.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is primarily exposed to market risks associated
with fluctuations in interest rates and foreign currency exchange rates.
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INTEREST RATE RISKS
The Company's exposure to interest rate fluctuations relates
primarily to its short-term investment portfolio and its bank credit. The
Company invests its 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 the Company's
management believes will not have a material impact on the Company's financial
position.
The Company has a revolving line of credit with SunTrust Bank,
which bears interest at a rate of 3.87%, the rate of return on the short terms
investment provided as collateral plus 1.5%, until October 2002. As of February
28, 2002, $992,892 had been drawn on the line of credit. The Company also has a
revolving line of credit with Harris Bank, which bears interest at the rate of
4.75%. As of February 28, 2002, $150,000 had been drawn on the line of credit.
The Company has recently established a $350,000 line of credit with the Bank of
Montreal which bears interest at 4.75%. No draw down has been made as of
February 28, 2002. The majority of the Company's interest rates are fixed,
therefor the Company has limited exposure to risks associated with interest rate
fluctuations.
The impact on net interest income of a 100 basis point adverse
change in interest rates for the fiscal year ended May 31, 2001 would have been
less than $15,000.
FOREIGN CURRENCY RISK
The Company has monetary assets and liabilities balances
denominated in Canadian Dollars. As a result, fluctuations in the exchange rate
of the Canadian dollar against the U.S. dollar will impact the Company's
reported net asset position. A 10% adverse change in foreign exchange rates
would result in a decrease in the Company's reported net asset position of
approximately $75,000.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits: None
B. Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on January 11,
2002, reporting its results of operations for the second quarter of the
Company's 2002 fiscal year.
The Company filed a Current Report on Form 8-K on February 7,
2002, with respect to the release of an updated list of new corporate customers
for the Company's E-Cruiter ATS product and announced the release of RezKeeper
4.4, a newly enhanced version of the Company's award-winning applicant tracking
solution for independent recruiters and agencies.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Workstream Inc.
(Registrant)
DATE: April 12, 2002 By: /s/ Michael Mullarkey
-------------------------------------------------
Michael Mullarkey,
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
DATE: April 12, 2002 By:/s/ Paul Haggard
-------------------------------------------------
Paul Haggard,
Chief Financial Officer and Secretary
(Principal Financial Officer)
26