SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: SEPTEMBER 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ______ to ______
Commission file number: 0-30629
SPEARHEAD LIMITED, INC.
(Name of small business issuer in its charter)
FLORIDA 65-0729332
------- ----------
(State of incorporation) (IRS employer Ident. No.)
21218 Saint Andrews Boulevard, #509
Boca Raton, FL 33433
561 912-9977
------------
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registrant: (1) has 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 number of shares outstanding of each of the issuer's classes of equity as of
October 31, 2004: 40,058,071 shares of Common Stock, $.001 par value.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
SPEARHEAD LIMITED, INC.
TABLE OF CONTENTS
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements.
1. Condensed Consolidated Balance Sheet
as of SEPTEMBER 30, 2004. 3
2. Condensed Consolidated Statements of Operations
for the nine months ended September 30, 2004 and 2003
and the three months ended September 30, 2004 and 2003. 4
3. Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2004 and 2003. 5
4. Notes to Condensed Consolidated Financial Statements 6 - 12
Item 2. Management's discussion and analysis or plan of operation 13 - 17
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION 19
Item 1. Changes In Securities And Use Of Proceeds
Item 2. Exhibits
2
SPEARHEAD LIMITED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(Unaudited)
Current assets:
Cash and cash equivalent $ 158,948
Accounts receivable - trade 3,035,010
Work-in -process 69,229
Prepaid expenses 168,171
-----------
Total current assets 3,431,358
-----------
Property and equipment net 208,583
Goodwill 2,743,091
-----------
Total assets $ 6,383,032
===========
Current liabilities
Accounts payable and accrued expenses $ 2,500,223
Accounts payable - stockholders 239,235
Loans payable - stockholders 960,000
Income taxes payable 1,708
-----------
Total current liabilities 3,701,166
-----------
Shareholders' equity
Capital stock, $.001 par value; 200,000,000 shares
authorized; 40,040,424 issued and outstanding 40,040
Additional paid-in capital 3,093,373
Capital stock not issued 519,000
Accumulated deficit (1,045,727)
Accumulated other comprehensive income 75,180
-----------
Total shareholders' equity 2,681,866
-----------
Total liabilities and shareholders' equity $ 6,383,032
===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SPEARHEAD LIMITED, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ----------- ------------ -----------
Net sales $ 8,988,318 -- $ 3,915,014 --
Cost of sales 7,629,685 -- 3,335,878 --
------------ ----------- ------------ -----------
Gross margin 1,358,633 -- 579,136 --
Selling, operating
and administrative
expenses 2,161,035 240,000 906,406 80,000
Loss from
discontinued
operations -- (123,452) -- (34,350)
------------ ----------- ------------ -----------
Income before
income taxes (802,402) (116,548) (327,270) (45,650)
Provision for
income taxes 152 -- 340 --
------------ ----------- ------------ -----------
Net loss $ (802,554) $ (116,548) $ (327,610) $ (45,650)
============ =========== ============ ===========
Net loss per common
share:
Continuing
operations $ (0.020) $ (0.060) $ (0.008) $ (0.020)
Discontinued
Operations -- 0.031 -- 0.009
------------ ----------- ------------ -----------
Net loss per common
Share basic and
diluted, restated $ (0.020) $ (0.029) $ (0.008) $ (0.012)
============ =========== ============ ===========
Weighted average
Number Of
common shares 38,435,538 3,985,000 40,040,424 3,985,000
============ =========== ============ ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SPEARHEAD LIMITED, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
2004 2003
----------- ---------
Cash flow from operating activities:
Net loss $ (802,554) $(116,548)
----------- ---------
Adjustments to reconcile net loss to
net cash used by operations
Depreciation and amortization 34,735 --
Foreign exchange gain 88,664 --
Changes, net of acquisition:
Accounts receivable (484,575) --
Prepaid expenses (70,699) --
Accounts payable and accrued expenses 122,880 --
Net changes -- (50,372)
----------- ---------
Total adjustments (308,995) (50,372)
----------- ---------
Net cash used by operations (1,111,549) (166,920)
----------- ---------
Cash flows from investing activities:
Acquisition of subsidiaries (816,500) --
Purchase of equipment (17,157) (16,604)
----------- ---------
Cash flows from investing activities (833,657) (16,604)
----------- ---------
Cash flows from financing activities:
Borrowings (repayment) on line of credit (3,857) 215,000
Sale of common stock from private placements 810,520 --
Borrowings from stockholders 960,000 --
----------- ---------
Cash flows from financing activities 1,766,663 215,000
----------- ---------
Net increase (decrease) in cash (178,543) (31,476)
Cash at beginning of period 337,491 6,071
----------- ---------
Cash at end of period $ 158,948 $ 37,547
=========== =========
Cash paid for interest $ -- $ 4,692
=========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SPEARHEAD LIMITED, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Spearhead Limited, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Regulation S-B. In the opinion of
management, all adjustments consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine months and three month period ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. For further information, refer to the financial statements and footnotes
for the year ended December 31, 2003 found in the Company's Form 10-KSB.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
On October 31, 2003, the stockholders of 3323455 Canada Inc. ("3323"), a
Canadian company, exchanged all of their issued and outstanding shares for
shares of Total First Aid, Inc. The exchange was accounted for as a
recapitalization of the Company, wherein the shareholders of 3323 retained
the majority of the outstanding stock of Total First Aid, Inc. after the
merger. At the time of the acquisition, both companies were substantially
inactive. Collectively, 3323 and Total First Aid, Inc. are know as the
"Company". Additionally on October 31, 2003, the Company acquired Kischi
Konsulting Inc., 2906694 Canada Inc., and 3054276 Canada Inc, all Canadian
companies, which was accounted for as a purchase and became wholly-owned
subsidiaries of the Company. The consolidated Statements of Operations and
Cash Flows present the operations of the Company, and the acquired
subsidiaries from date of acquisition. The operations of Total First Aid,
Inc. that were sold during the year 2003 have been reflected in discontinued
operations. Certain expenses, totaling $749,090, incurred by 3323 as part of
the acquisition and reorganization have been included as recapitalization
costs and reflected in the Statement of Stockholders' Equity. During the
year ended December 31, 2003, First Aid Direct, Inc. changed its name to
Total First Aid Inc. All amounts included in the consolidated financial
statements are reflected in US dollars, except where it is indicated as
Canadian dollars (CDN).
Effective March 31, 2004 3054276 Canada Inc. ("3054") and 2906694 Canada
Inc. ("Centos") were "wound up" into Spearhead Management f/k/n as 3323455
Canada Inc ("3332") pursuant to and in compliance with Canadian Tax
regulations. As a result of this action the corporate existence of 3054276
Canada Inc, ("3054") and 2906694 Canada Inc. ("Centos") ceased. On April 1,
2004, 3323455 Canada Inc. changed its name to Spearhead Management Canada
Inc.
6
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
(Spearhead Limited, Inc. and Spearhead Management Canada Inc.) and its
subsidiaries, Kischi Konsulting Inc., Progestic International Inc. and FSG
Consulting Inc. All significant inter-company accounts and transactions have
been eliminated in consolidation.
(c) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States (GAAP) requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying disclosures. Although
these estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ from
actual results.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
(e) Goodwill
Goodwill represents the excess of cost over fair value of net assets
acquired through September 30, 2004. The Company had previously adopted SFAS
142 effective January 1, 2002. With the adoption of SFAS 142, goodwill is
not subject to amortization. Rather, goodwill is subject to at least an
annual assessment for impairment by applying a fair-value based test. The
Company performed an additional fair-value based impairment test as of
December 31, 2003, and no impairment charge was deemed necessary.
(f) Revenue Recognition
The Company recognizes revenue at the time the services are rendered and
reasonable assurance exists as to the measurement of the consideration
derived from the rendering of the services.
(g) Stock-based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, ("Accounting For Stock Issued to Employees") ("APB No. 25"), and related
interpretations, in accounting for its employee stock based compensation
rather than the alternative fair value accounting allowed by SFAS No. 123,
("Accounting for Stock-based Compensation"). 25 provides that the
compensation expense relative to the Company's employee stock options is
measured based on the intrinsic value of the stock option. SFAS No. 123
requires companies that continue to follow APB No. 25 to provide a pro-forma
disclosure of the impact of applying the fair value method of SFAS No.123.
7
(h) Foreign Currency Translation
The accounts of the Company's foreign subsidiary are translated into U.S.
dollars. For a subsidiary where the functional currency is other than the
U.S. dollar, balance sheet accounts are translated at the exchange rate in
effect at the end of the year. Income and expense accounts are translated at
the average exchange rates in effect during the year. Resulting translation
adjustments are reflected as a separate component of stockholders' equity
("other comprehensive income (loss)"). Realized foreign currency transaction
gains and losses are included in operations.
(i) Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure" ("SFAS 148"), amends
SFAS 123, "Accounting for Stock-Based Compensation." In response to a
growing number of companies announcing plans to record expenses for the fair
value of stock options, SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent and more
frequent disclosures in financial statements about the effects of
stock-based compensation. The Statement also improves the timeliness of
those disclosures by requiring that this information be included in interim
as well as annual financial statements. In the past, companies were required
to make pro forma disclosures only in annual financial statements. The
transition guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002.
(3) DISPOSITIONS AND ACQUISITIONS
Sale of Discontinued Operations
-------------------------------
Effective as of the close of business on September 30, 2003, the Company
f/k/a First Aid Direct, Inc. completed the sale of substantially all of its
assets to VDC First Aid and Safety Supply, LLC, a related party. The assets
disposed of were those related to First Aid Direct's wholesale first aid and
safety supply business. VDC First Aid and Safety Supply is an affiliate of
Van Dyne-Crotty, Inc., who, along with its affiliates, were principal
shareholders of First Aid Direct. The sale of assets was made pursuant to
the terms and conditions of an Asset Purchase Agreement entered into on
August 29, 2003. Following the closing, First Aid Direct continued to
distribute its Total First Aid and Roehampton Supply product lines. First
Aid Direct changed its name to Total First Aid, Inc. on September 30, 2003.
The purchase price for the assets disposed of is $1,215,000 and was paid at
closing. Approximately $215,000 of the purchase price was used to retire the
Company's indebtedness to Key Bank. The Company was also entitled to receive
its accounts receivable ($259,150) collected by VDC First Aid and Safety
Supply during the 120-day period following the closing. At closing, a
$250,000 deposit against those accounts receivable was paid to the Company.
The Company has recorded a gain on the sale of this product line of
approximately $672,000. The purchase price for the assets was supported by a
8
valuation and fairness opinion received from an unaffiliated financial
consulting firm.
On October 26, 2003 the Company transferred approximately $103,000 of fixed
assets to VanDyne Crotty in exchange for VanDyne Crotty assuming the
existing facility lease, which would have obligated the Company in the
amount of $675,000, over the remaining lease term (four years and four
months). The transaction resulted in a loss of $103,000 to the Company.
On December 19, 2003, the Company disposed of the assets comprising the
Roehampton Supply Product line and the Total First Aid product line to
Roehampton Aid Corp. Roehampton Aid Corp. assumed all of the liabilities of
Total First Aid relating to the assets assigned. The Company has recorded a
loss on the disposition of these assets of approximately $265,000.
The Company reported a net gain on these transactions of approximately
$304,000, before income taxes, in discontinued operations on their statement
of operations for the year ended December 31, 2003.
Acquisition of Subsidiaries
---------------------------
On October 31, 2003, the Company consummated the acquisition of 3323455
Canada Inc. ("3323"). Simultaneous with the acquisition, 3323 acquired
Kischi Konsulting Inc. ("Kischi"), 3054276 Canada Inc. ("3054") and 2906694
Canada Inc. ("Centos"). The acquisition of 3323 was effected through a
securities exchange agreement in which the Company issued 26,692,285 shares
of its common stock for all of the issued and outstanding shares of 3323.
This acquisition has been accounted for as a recapitalization of the
Company. Kischi, 3054 and Centos were acquired for 4,000,000 shares
($440,000) of the Company's common stock, and cash in the amount of
$1,115,682. The cash portion of the acquisition of Kischi and the other
companies was derived from a private placement of units of securities of the
Company, as well as cash on hand. The purchase price for the acquisitions
resulted from arms-length bargaining among the parties, and there was no
prior affiliation or relationship among management of the Company and the
acquired companies. The Company has accounted for this acquisition as a
purchase. The goodwill recognized at acquisition represents the actual stock
issued and cash paid in excess of the fair market value of all the net
assets acquired in the transaction.
On June 3, 2004, Spearhead Limited, Inc. (the "Company") acquired all of the
issued and outstanding capital stock of Progestic International Inc.
("Progestic") and FSG Consultants Inc. ("FSG"). Each of the acquired
companies is a Canadian corporation engaged in providing information
technology-related consulting services. Progestic and FSG are each operated
as a wholly owned subsidiary of the Company.
PROGESTIC INTERNATIONAL INC.
The Company acquired all of the issued and outstanding capital stock of
Progestic for a purchase price consisting of cash in the amount of
CDN$500,000 and the issuance of 863,824 shares of the Company's common
stock. The consideration was paid to the former shareholders of Progestic,
9
pro-rata to their ownership interests in Progestic. The source of the funds
used by the Company to pay the cash portion of the purchase price was a
combination of the sale of equity securities and loans from shareholders and
an officer. Progestic, incorporated in 1983, generated revenues of
$5,981,475 and sustained net losses of $(263,675), for its most recently
completed fiscal year ended September 30, 2003. Progestic provides
consulting services to Canadian government and private sector clients
primarily in the areas of: problem solving to management designed to
increase effectiveness and productivity, information technology and audit
and audit-related services.
In connection with the acquisition of Progestic, the Company entered into a
consulting agreement with Jean LaBelle, the former principal shareholder of
Progestic, and his controlled corporation. The agreement is for an initial
term of two years and is subject to a one-year renewal terms at the election
of the parties. Mr. LaBelle's corporation will receive a consulting fee in
the amount of $7,500 per month during the term of the agreement, and has
been granted three-year options to purchase 150,000 shares of the Company's
common stock, exercisable at $.85 per share. Five additional executives of
Progestic who will continue in the employ of Progestic were granted options
to purchase an aggregate of 450,000 shares of the Company's common stock
upon the same terms and conditions as those granted to Mr. Labelle. The
options may not be exercised prior to March 3, 2005. The shares issued as
part of the purchase consideration, as well as the shares issuable upon
exercise of the options, have been accorded "piggy-back" registration rights
in connection with future registration statements that may be filed by the
Company.
FSG CONSULTANTS INC.
The Company acquired all of the issued and outstanding capital stock of FSG
for a purchase price consisting of cash in the amount of CDN$350,000 and the
issuance of 558,235 shares of the Company's common stock. The consideration
was paid to the former shareholders of FSG, pro-rata to their ownership
interests in FSG. The source of the funds used by the Company to pay the
cash portion of the purchase price was a combination of the sale of equity
securities and loans from shareholders and an officer.
FSG, incorporated in 1993, generated revenues of $3,764,378 and sustained
net losses of $(1,476), for its most recently completed fiscal year ended
March 31, 2004. FSG provides consulting services to government and private
sector clients primarily in the areas of knowledge management, business and
technology solutions, tracking solutions, Government 0n-line (eGovernment),
records and document information management systems.
In connection with the acquisition of FSG, the Company entered into a
consulting agreement with Gilles Caron, the former principal shareholder of
FSG. The agreement is for an initial term of two years and is subject to a
one-year renewal terms at the election of the parties. Mr. Caron's
corporation will receive a consulting fee in the amount of $7,500 per month
during the term of the agreement, and has been granted three-year options to
purchase 150,000 shares of the Company's common stock, exercisable at $.85
per share. In connection with the acquisition of FSG, the Company granted
three-year options to purchase an aggregate of 250,000 shares of the
10
Company's common stock, exercisable at $.85 per share to FSG's former
principal shareholder and three additional executive officers of FSG who
will continue to render their services to FSG. The options may not be
exercised prior to March 3, 2005. The shares issued as part of the purchase
consideration, as well as the shares issuable upon exercise of the options,
have been accorded "piggy-back" registration rights in connection with
future registration statements that may be filed by the Company.
(4) RELATED PARTY TRANSACTIONS
Consulting Agreements
---------------------
Effective November 1, 2003 the Company entered into a consulting agreement
with the C.E.O. for two years at a rate of $240,000 per annum, with a one
year renewal option. The Company also entered into consulting agreements
with an officer and director for two twelve month periods at a rate of
$150,000 annum, with a twelve month renewal option, and a director for two
twelve (12) month periods providing for consulting services at a rate of
$90,000 per annum, with a twelve month renewal option. In addition, the
Company has entered into three individual consulting agreements with
shareholders of the Company who provide consulting services to Kishi
Konsulting Inc. The agreements provide for total compensation of $440,000
(CDN) for a twelve month period, with an option of an additional twelve
months.
During the nine months ended September 30, 2003, 31% or $772,120 of revenue
was derived from sales to a former shareholder.
On June 3, 2004 the Company borrowed $860,000 from Corporations controlled
by shareholders. $560,000 from 373 Corp., controlled by a shareholder and
senior executive officer of the Company. $150,000 from 3689697 Corp.,
controlled by a shareholder and $150,000 from 3113019 Corp., also owned by a
shareholder. The Company agrees to repay the loans on September 3, 2004 with
interest at a fixed rate of ten (10%) until maturity and at an annual rate
of 20% after maturity until paid in full, compounded monthly and not in
advance. Interest on overdue interest shall accrue and be payable at the
interest rate. In addition, the lenders acquired 286,667 warrants to
purchase Company stock at $0.85 per share, said warrants issued September 3,
2004 and expire September 2, 2007. The Company shall be entitled to prepay
any amount outstanding under this loan at any time, without notice, penalty
or bonus. The loan shall be governed by and interpreted and enforced in
accordance with the laws of the Province of Quebec and the laws of Canada.
Both Progestic and FSG have pledged their accounts receivables as a
guarantee to Spearhead Limited, Inc. for the repayment of the loans. On July
3, 2004 the Company borrowed an additional $100,000 from 373 Corp.,
controlled by a shareholder and senior executive officer of the Company. The
Company agreed to repay the loans on September 3, 2004 with interest at a
fixed rate of ten (10%) until maturity and at an annual rate of 20% after
maturity until paid in full, compounded monthly and not in advance. Interest
on overdue interest shall accrue and be payable at the interest rate.
$112,000 of interest has been included in the operating expenses of the
business for the period ended September 30, 2004.
11
(5) STOCK OPTIONS
Had compensation cost for the Company's stock options been determined based
on the fair value at the grant dates for awards consistent with the method
of SFAS 123, the Company's pro forma net loss and pro forma net loss per
share would have been as indicated below:
Nine Months Ended Three Months Ended
SEPTEMBER 30, 2004 SEPTEMBER 30, 2004
------------------ ------------------
Net loss to common shareholders -
As reported $ (802,554) $ (327,611)
============ ===========
Pro forma $ (836,023) $ (361,79)
============ ===========
Basic and diluted loss per share -
As reported $ (.020) $ (.008)
============ ===========
Pro forma $ (.022) $ (.009)
============ ===========
For purposes of the preceding pro forma disclosures, the weighted average
fair value of each option has been estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2004: no dividend yield; volatility of 126.7;
risk-free interest rate of 4% and an expected term of five years.
12
FORWARD-LOOKING STATEMENTS
Portions of this report, including disclosure under "Management's Discussion
and Analysis or Plan of Operation," contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), Section 21E of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), and the Private Securities Litigation
Reform Act of 1995, as amended. These forward-looking statements are subject
to risks and uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the
results, performance or achievements expressed or implied by the
forward-looking statements. You should not unduly rely on these statements.
Forward-looking statements involve assumptions and describe our plans,
strategies, and expectations. You can generally identify a forward-looking
statement by words such as may, will, should, expect, anticipate, estimate,
believe, intend, contemplate or project. With respect to any forward-looking
statement that includes a statement of its underlying assumptions or bases,
we caution that, while we believe such assumptions or bases to be reasonable
and have formed them in good faith, assumed facts or bases almost always
vary from actual results, and the differences between assumed facts or bases
and actual results can be material depending on the circumstances. When, in
any forward-looking statement, we or our management express an expectation
or belief as to future results, that expectation or belief is expressed in
good faith and is believed to have a reasonable basis, but there can be no
assurance that the stated expectation or belief will result or be achieved
or accomplished. All subsequent written and oral forward-looking statements
attributable to us, or anyone acting on our behalf, are expressly qualified
in their entirety by the cautionary statements. We do not undertake any
obligations to publicly release any revisions to any forward-looking
statements to reflect events or circumstances after the date of this report
or to reflect unanticipated events that may occur.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Spearhead Limited, Inc. (the "Company") is a holding company which is
principally engaged, through its subsidiaries (the "Operating Companies") in
the information technology industry. Prior to September 30, 2003, the
Company was engaged in the wholesale distribution of first aid and safety
supplies. On September 30, 2003 the Company divested itself of the first aid
supply business in order to redirect its assets in a business which
management believed would offer the opportunity for higher growth. Following
a review of the available opportunities, the Company determined to pursue
acquisition opportunities in the information technology industry and on
October 31, 2003 acquired Kischi Konsulting Inc. ("Kischi"), 3054276 Canada
Inc. ("3054") and 2906694 Canada Inc. ("Centos"). Subsequently, on June 3,
2004, the Company acquired Progestic International Inc. ("Progestic") and
FSG Consulting, Inc. ("FSG"). The Company anticipates further acquisitions
in the information technology industry.
RESULTS OF OPERATIONS
Inasmuch as the operations of all of the operating companies were acquired
subsequent to September 30, 2003, comparisons between the three and nine
month periods ended September 30, 2004 and 2003 are not meaningful. All of
the first aid supply distribution business has been accounted for as
discontinued operations. The acquisitions of Kischi, 3054 and Centos have
been accounted for from the date of acquisition (October 31, 2003), and thus
are reflected through the entire nine month period ended September 30, 2004
(the "Current Nine Months"). The operations of Progestic and FSG are
reflected for the entire three month period ended September 30, 2004 (the
"Current Three Months") but only four months of the Current Nine Months.
Revenues. We had consulting revenues of $8,988,318 for the nine months ended
SEPTEMBER 30, 2004 and $3,915,014 for the three months ended SEPTEMBER 30,
2004. Revenues represent nine months of operations for Kischi and four
months for Progestic and FSG.
Cost of Sales. The direct expenses consist primarily of the costs paid to
the consultants performing the services and were $7,629,685 and $3,335,878
for the nine and three months ended SEPTEMBER 30, 2004 respectively.
13
Gross Profit. Gross profit amounted to $1,358,633 or 15% of gross revenues
for the nine months ended SEPTEMBER 30, 2004 and $579,136 or 14.8% of gross
revenues for the three months ended SEPTEMBER 30, 2004.
Selling, General and Administrative Expense. Net income reflects the net
operating results (including selling, general and administrative
expense("SG&A")) of the Operating Companies less the holding company
expenses of the Company, including the costs of legal, accounting and other
costs of regulatory compliance as a public company and non-capitalized
expenses of the Company's acquisition strategy. During the Current Nine
Months, the Operating Companies' SG&A amounted to $1,257,819 with the
holding company expenses reflecting $903,216 in the period. The Company is
taking steps to reduce the SG&A expense of the Operating Companies by
consolidating them into a single operating entity operating under
consolidated premises. This consolidation should also positively impact cost
of sales by more efficiently deploying salaried consultants on the contracts
of the previously separate entities.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
LIQUIDITY AND CAPITAL RESOURCES
Our primary ongoing sources of cash for operational purposes are net cash
flows from operating activities. The Company is presently working on
establishing a credit facility for its Canadian subsidiaries, and to
reimburse the parent company for the funds advanced to subsidiaries. These
funds were to replace existing credit lines at time of acquisition. The
Company's working capital is $ (269,808) and its' current ratio is down
from 1.10 as of December 31, 2003 to 0.93 as of September 30, 2004. The
decrease in working capital can be directly traced to the borrowings to
finance the acquisitions of Progestic International and FSG Consulting.
With respect to our planned acquisition strategy, management believes that it
will be able to provide the necessary cash needed for subsequent acquisitions
from private placements.
PLAN OF OPERATION
Our mission is to provide world class, quality and client focused management
consulting services to enable our clients to improve business performance
through the efficient and effective use of Information Technology. To this
end our services cover the full spectrum of Information technology
professional consulting services to the public and private sector. We offer
a comprehensive variety of services such as strategic IT business planning
and architecture, marketing support, systems development and maintenance,
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project management, project administration, technology trend analysis,
upgrading and integration services, procurement facilitation, benchmarking
and performance measurement systems, outsourcing management, network
planning and management, business intelligence systems, training and human
resource management. We take pride in providing these services across any of
today's technological platforms and in delivering performance and value to
its customers.
OVERVIEW
We offer a wide range of consulting and outsourcing services designed to
enhance clients' business performance through the efficient and effective
use of information technology ("IT"). Our client base, which resides
predominantly in Canada, includes many Canadian federal government
departments and crown corporations, with a smaller percentage of business
being conducted with private entities working with the Canadian federal
government.
Consulting Services
Our Canadian subsidiaries have been providing IT consulting services since
1983. We generate revenues predominantly from fees for consulting services
relating to the design, development, implementation, enhancement, support
and maintenance of integrated systems that are custom-designed for our
clients. Depending upon a client's needs, our service capabilities include:
o Strategic IT business planning and architecture.
o Custom-designed systems development, integration, enhancement,
support and maintenance.
o Custom Web applications development and maintenance.
o IT security, including information security, document management
security, security networks and user management.
o IT business continuity (contingency planning and disaster
recovery).
o Records and document warehousing, information and knowledge
management.
o Procurement facilitation.
o Training and human resource management.
o Problem solving to management designed to increase effectiveness
and productivity.
o Information technology and audit and audit-related services.
o Government 0n-line (eGovernment), records and document
information management systems.
Consultants
We maintain a database of over 2,500 consultants who are called upon to
provide services on an as needed basis, depending upon the requirements of
any particular consulting assignment. Our database of consultants provides
us with access to a diverse set of backgrounds, skill sets, experience and
knowledge. In order to compete with larger consulting firms for significant
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government contracts, we often submits bid proposals as a participant in a
joint venture formed with one or more other consulting firms who,
collectively, are able to service all of the requirements of any particular
project. Often, but not in all instances, we serve as the lead consultant in
these joint venture projects.
Sales and Marketing
We employ a full-time sales force which generates new business from:
o Government contracts awarded based through bid procurements.
o Referrals and word of mouth.
o Targeted marketing.
o New assignments from existing clients.
o Government standing offers.
o Direct telephone solicitations by our in-house sales force.
Competition
There is intense competition in the IT consulting market. We compete of
consulting firms that are significantly larger, better capitalized and
possessing greater fiscal and physical resources than we do. We believe that
we will continue to effectively compete in this industry as follows:
o Our management has extensive experience in the government bidding
process including the preparation of "requests for proposals" for
government projects.
o We have been "pre-cleared" (site security clearance to the level
of "secret") to participate in certain government bidding
processes and to service government standing offers.
o We have over the years worked diligently to develop and maintain
a reputation for reliability, quality product and professional
workmanship.
CONSOLIDATION OF LEGAL ENTITIES
The three companies who have been the subject of the first round of
acquisitions are all independent legal entities with different fiscal year
ends. It is the Company's intention to wind up the acquired companies into
the Canadian parent company Spearhead Management Canada Limited (SMCL) as at
December 31, 2004 and therefore merge all operations into one legal entity.
Notwithstanding the various financial advantages of running all operations
within this Company, significant tax savings will be achieved as SMCL owns
significant tax losses that will be used to shelter earnings of the newly
merged entities.
CONSOLIDATION OF OPERATIONS
FINANCIAL INFORMATION SYSTEMS
The acquired companies used three different financial information systems to
compile financial results of operations and to manage contracts. Effective
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October 1, 2004, a standardized financial reporting system for operations
and contract management was implemented. The standardization of the system
now provides management with comparable information on a timely basis and
consolidations of financial results are fully automated.
LOCATION OF OPERATIONS
The three companies initially operated from three different facilities.
Negotiations have been completed and the Canadian subsidiaries are currently
relocating all operations to a newly renovated facility and are moving
towards the full integration of operations. Leases on existing premises have
either be terminated at no cost to the Company or sublet to independent
third parties.
SAVINGS
The consolidation of operations under one roof and the wind up of the three
legal entities into Spearhead Management Canada Limited will translate into
significant savings over time as common services are merged into more
efficient units and resources are used to their full capacity. The savings
realized will be quickly evident in the costs incurred to run the financial
and administrative services of the three companies while other savings in
the marketing, operations and delivery units will be experienced later on.
ITEM 3. CONTROLS AND PROCEDURES.
Disclosure controls and procedures [as defined in Rule 13(a)-15(e) of the
Securities Exchange Act of 1934 (the "Exchange Act")] are designed to ensure
that information required to be disclosed in the reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in applicable laws, rules and regulations.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in
the reports filed under the Exchange Act is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. Given the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Further, the design of a control system must reflect the fact that there are
resource constraints, and that benefits of controls must be considered
relative to their costs. The design of any system of controls is also based
in part on certain assumptions regarding the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the
17
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based upon and as of the
date of that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
the Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls or in other factors
that could have significantly affected those controls subsequent to the date
of the Company's most recent evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During the three months ended SEPTEMBER 30, 2004:
(a) The Company sold 17,647 shares of common stock and warrants to purchase
17,647 shares of common stock to an accredited investor for an aggregate
purchase price of $15,000; each warrant entitles the holder to purchase one
share of common stock for $1.00 per share during the 3 year period from the
date of sale;
In the foregoing transaction, the investor (a) had access to business and
financial information about us, (b) was an accredited investor within the
meaning of Rule 501(a) of Regulation D and had such experience in business
and financial matters so that it was able to evaluate the risks and merits
of an investment in us, (c) acknowledged that the securities were not
registered under the Securities Act of 1933 and could not be transferred
except in compliance with applicable securities laws, and (d) received
securities bearing a legend describing the restrictions referred to in
clause (c) above. No placement agent or broker dealer participated in the
transaction and no commissions or similar compensation was paid. The
transactions were exempt from the registration requirements of the
Securities Act of 1933 by reason of Section 4(2) thereof and the rules and
regulations thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS
(a) Exhibits.
The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:
31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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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.
Date: November 11, 2004
SPEARHEAD LIMITED, INC.
By: /s/ Michel Marengere
--------------------
Michel Marengere
Chief Executive Officer
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EXHIBIT INDEX
31.1 CEO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 CFO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 CEO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 CFO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.