FORM 20-F
(Mark One)
[X] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER []
TALWARE NETWORX INC.
(Exact name of Registrant as specified in its charter)
ONTARIO, CANADA
(Jurisdiction of incorporation or organization)
123 Commerce Valley Drive East, Suite 301, Thornhill,
Ontario, Canada L3T 7W8 (Address of Principal executive offices)
Securities registered or to be registered pursuant to Section
12(b) of the Act.
Title of each class Names of each exchange on which registered
None Not Applicable
Securities registered or to be registered pursuant to Section
12(g) of the Act.
Common Shares
(Title of Class)
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the
Registration statement.
As of September 30, 2003, the Registrant had 33,036,466 common shares issued and
outstanding and as of December 31, 2002, the Registrant had 25,198,583 common
shares issued and outstanding (the "Common Shares").
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |_| No [X]
Indicate by check mark which financial statement item the Registrant has elected
to follow.
Item 17 [ ] Item 18 [X]
ALL MONETARY REFERENCES THROUGHOUT THIS REGISTRATION STATEMENT ARE EXPRESSED IN
UNITED STATES DOLLARS ("$"), EXCEPT WHERE INDICATED AS CANADIAN DOLLARS
("CDN$"). ALL FINANCIAL INFORMATION PRESENTED IN THIS REGISTRATION STATEMENT,
EXCEPT WHERE OTHERWISE INDICATED, HAS BEEN PREPARED IN ACCORDANCE WITH
ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES ("U.S. GAAP").
WHEN USED IN THIS REGISTRATION STATEMENT, THE WORDS "BELIEVES," "ANTICIPATES,"
"EXPECTS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. IN
ADDITION TO QUARTERLY FLUCTUATIONS, OUR OPERATING RESULTS ARE AFFECTED BY A WIDE
VARIETY OF OTHER FACTORS THAT COULD MATERIALLY AND ADVERSELY AFFECT ACTUAL
RESULTS, INCLUDING: GENERAL ECONOMIC CONDITIONS; DEPENDENCE ON SIGNIFICANT
CUSTOMERS AND SUPPLIERS; REVENUES FROM DEVELOPMENT CONTRACTS; RAPID CHANGES IN
TECHNOLOGY; COMPETITION; ABILITY TO MANAGE GROWTH AND INTEGRATE ACQUISITIONS;
ACTIONS BY GOVERNMENTAL AUTHORITIES; AND FOREIGN CURRENCY AND EXCHANGE RATE
FLUCTUATIONS. AS A RESULT OF THESE AND OTHER FACTORS, WE MAY EXPERIENCE MATERIAL
FLUCTUATIONS IN FUTURE OPERATING RESULTS ON A QUARTERLY OR ANNUAL BASIS, WHICH
COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION,
OPERATING RESULTS AND STOCK PRICE. FURTHERMORE, THIS DOCUMENT AND OTHER
DOCUMENTS FILED BY US WITH THE SEC CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS
WITH RESPECT TO OUR BUSINESS, INCLUDING PROSPECTIVE FINANCING ARRANGEMENTS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE MENTIONED ABOVE, WHICH MAY CAUSE ACTUAL RESULTS TO DIFFER
SIGNIFICANTLY FROM THESE FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION
TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS, WHICH MAY BE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT
THE OCCURRENCE OF UNANTICIPATED EVENTS. AN INVESTMENT IN OUR COMPANY INVOLVES
VARIOUS RISKS, INCLUDING THOSE MENTIONED ABOVE AND THOSE, WHICH ARE DETAILED
FROM TIME TO TIME IN OUR SEC FILINGS.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
Alan Rootenberg, President, Chief Executive Officer and Director
123 Commerce Valley Drive East, Suite 301
Thornhill, Ontario, Canada L3T 7W8
Functions: Mr. Rootenberg functions as the principal person in charge of all
major business decisions for us.
Stephan Bielawski, Chief Operating Officer and Director
123 Commerce Valley Drive East, Suite 301
Thornhill, Ontario, Canada L3T 7W8
Functions: Mr. Bielawski's functions include decision making for our day-to-day
operations and he is responsible for our marketing and sales functions.
Yuri Tarasov, Vice President - Technology Services
123 Commerce Valley Drive East, Suite 301
Thornhill, Ontario, Canada L3T 7W8
Functions: Mr. Tarasov's functions include supervising the development,
maintenance, updating and implementation of our product suite and supervision of
our customer service operation.
HoJin Song, Executive Vice President
123 Commerce Valley Drive East, Suite 301
Thornhill, Ontario, Canada L3T 7W8
Functions: Mr. Song's functions include business development and client services
in international markets.
John Angaritis, Director
47 Lunau Lane
Thornhill, Ontario, Canada L3T 5N1
Functions: Mr. Angaritis serves on our board of directors and has standard
functions of a board member.
Norman Grafstein, Director
55 Bevshire Circle
Thornhill, Ontario, Canada L4J 5C5
Functions: Mr. Grafstein serves on our board of directors and has standard
functions of a board member.
Alpha Pang, Director
15 Wertheim Court, Suite 501
Richmond Hill, Ontario Canada L4B 3H7
Functions: Mr. Pang serves on our board of directors and has standard functions
of a board member.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not Applicable
ITEM 3. KEY INFORMATION.
A. Selected Financial Data
Our selected consolidated financial data presented below under the captions
"Interim Consolidated Statement of Operations" for the nine months ended
September 30, 2003 with comparative figures for nine months ended September 30,
2002, "Interim Consolidated Statement of Deficit" for the nine months ended
September 30, 2003 with comparative figures for nine months ended September 30,
2002, "Interim Consolidated Statement of Cash Flows" for the nine months ended
September 30, 2003 with comparative figures for nine months ended September 30,
2002, and "Interim Consolidated Balance Sheet" for us at September 30, 2003 with
comparative figures as at December 31, 2002. These figures are unaudited. These
interim consolidated financial statements have been prepared by management,
using the same accounting policies and the methods for their application as the
most recent consolidated financial statements. Disclosures in these interim
consolidated financial statements may not conform in all respects to the
requirements of Canadian generally accepted accounting principles for annual
financial statements. These interim consolidated financial statements should be
read in conjunction with our most recent audited consolidated financial
statements, being for the year ended December 31, 2002.
TALWARE NETWORX INC.
INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
WITH COMPARATIVE FIGURES FOR NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
September 30 September 30 September 30 September 30
2003 2003 2002 2002
(9 months) (3 months) (9 months) (3 months)
$ $ $ $
---------- ---------- ---------- ----------
REVENUES 18,550 18,550 -- --
---------- ---------- ---------- ----------
EXPENSES
Selling, general and administrative 968,925 375,630 666,918 299,438
---------- ---------- ---------- ----------
OPERATING LOSS BEFORE OTHER INCOME (EXPENSES)
AND THE UNDERNOTED ITEMS (950,375) (357,080) (666,918) (299,438)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSES)
Amortization expense, deferred development costs 426,885 142,295 126,790 94,993
Amortization expense, property and equipment 6,882 2,294 6,951 3,010
Interest expense 4,507 1,479 849 533
Loss on disposition of shares of Career Match, Inc. -- -- 5,974 --
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE THE
UNDERNOTED ITEMS (1,388,649) (503,148) (807,482) (397,974)
---------- ---------- ---------- ----------
EQUITY IN NET LOSS OF CAREER MATCH, INC. -- -- 76,428 --
NON-CONTROLLING INTEREST -- -- (561) (66)
---------- ---------- ---------- ----------
NET LOSS (1,388,649) (503,148) (883,349) (397,908)
========== ========== ========== ==========
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES (NOTE 5) 29,794,149 31,166,066 19,277,730 22,203,133
BASIC LOSS PER SHARE (0.047) (0.016) (0.046) (0.018)
---------- ---------- ---------- ----------
All amounts are in Canadian Dollars. The exchange rates of the Canadian dollar
in United States Dollars are as follows: (a) latest practicable date: March 5,
2004: $1.3217 (closing price); (b) high and low monthly rates during the
previous 6 months: September 2003 - high $1.3693, low $1.3594; October 2003 -
high $1.3281, low $1.3191; November 2003 - high $1.317, low $1.3082; December
2003 - high $1.3178, low $1.3077; January 2004 - high $1.3013, low $1.2913;
February 2004 - high $1.3352, low $1.3241; (c) the average rates for the period
that financial statements are presented: 2001 - $1.5484; 2002 - $1.5704;
September 30, 2003 - $1.4287 (the average daily closing value was taken from
January 1, 2003 through September 30, 2003.
The following table sets forth our selected audited financial information for
each of the last three financial years ended December 31.
2002 2001 2000
---------------------------------------- --------------- ---------------- -----------------
Revenues from Continuing Operations Nil Nil 47,822
Revenues from Discontinued Operations Nil 394,552 757,019
Loss from Continuing Operations (1,553,560) (496,120) (693,978)
Loss from Discontinued Operations nil (338,228) (200,841)
Net Loss (1,553,560) (834,348) (894,819)
Net Loss per Share (0.076) (0.055) (0.071)
Total Assets 918,371 1,341,083 781,854
Long Term Debt Nil Nil Nil
Cash Dividends Declared Nil Nil Nil
B. Capitalization and Indebtedness
The following table sets forth our capitalization as of September 30, 2003
adjusted to reflect private placements which closed on October 16, 2003 and
January 21, 2004
Long-term debt $ --
Common Stock (45,597,335 shares) 5,078,038
Contributed Surplus 6,301
Deficit (4,657,498)
Total stockholders' equity 426,841
Total capitalization 426,841
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. RISK FACTORS
Any evaluation of us should take into account, among other things, the following
factors, which could have a material adverse effect on our business, financial
condition and results of operations.
IF THERE IS A CHANGE IN INTERNET STRATEGY AND SUCH COMMUNICATION FAILS, OUR
BUSINESS WILL BE NEGATIVELY IMPACTED
We believe that the Internet reflects a paradigm shift in the way business is
done and the way business will be done in the future. There can be no assurance
that our strategy will become profitable or that the Internet medium will
continue to serve as a viable mode of delivery for recruitment and services. In
addition, there can be no assurance that the Internet usage will continue to
experience the growth it has experienced in the past. If communication through
the Internet fails to gain widespread acceptance or develops more slowly than
expected, our business and financial condition may be negatively impacted. There
are no assurances that we will ever be profitable or that we will receive
continued financial support from our shareholders and from external financing or
that such financial support and financing will be on terms acceptable to us.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND THE UNAUTHORIZED USE OF SUCH TECHNOLOGY
MAY BE COSTLY TO US AND NEGATIVELY EFFECT OUR OPERATIONS
With respect to our technology development initiatives, we plan to rely on a
combination of copyright, confidentiality procedures and contractual provisions
to protect our intellectual proprietary rights. Despite our efforts to protect
our intellectual proprietary rights, unauthorized parties may attempt to copy
aspects of our technology or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our technology may be difficult, time
consuming and costly. There is no assurance that our means of protecting our
intellectual proprietary rights will be adequate or that our competitors will
not independently develop similar technology, the effect of either of which may
materially negatively affect business, results of operations and financial
condition.
RISK OF THIRD PARTY CLAIMS FOR INFRINGEMENT COULD BE COSTLY TO US AND EFFECT OUR
PROFITABILITY
We are not aware that our technology infringes the proprietary rights of any
third parties. There can be no assurance, however, that third parties will not
claim such infringement by us or our licensees with respect to current or future
technology initiatives. Any such claims, with or without merit, could be time
consuming, result in costly litigation, cause product implementation delays or
require us to enter into royalty or licensing agreements which, if required, may
not be available on terms acceptable to us. Any of the foregoing could have a
materially negative effect on our business, results of operations, or financial
condition.
OUR CONTINUED GROWTH CAN CAUSE A STRAIN ON OUR OPERATIONS
We are currently experiencing growth that could strain our managerial,
financial, administrative, and operational resources. To effectively manage our
growth, we may be required to improve our internal operational processes and
controls, expand our technological and financial systems, eliminate or
consolidate redundant capabilities, and maintain the consistency and quality of
our services.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH OUR EXISTING COMPETITORS
There can be no assurance that we will be able to compete effectively with
existing competitors such as Monster.com, Careerbuilder.com, or Hotjobs.com or
any of the other existing potential competitors. Also, we can provide no
assurance as to whether we will have a sufficient number of customers to become
a threat to our competitors.
THERE IS NO GUARANTEE THAT THE RELIANCE ON OUR NEW SOFTWARE DUE TO THE
DISCONTINUANCE OF OUR TRADITIONAL RECRUITING OPERATIONS WILL RESULT IN BETTER
FINANCIAL RESULTS FOR US
Prior to the discontinuance of our traditional recruiting operations, revenues
from the traditional recruiting operations had been declining steadily. There is
no guarantee that our reliance on new software applications will lead to better
financial results for us.
WE HAVE HAD NET LOSSES AND MAY NOT HAVE PROFITS IN THE FUTURE
Our net loss for the nine months ending on September 30, 2003 according to
United States Generally Accepted Accounting Principles ("US GAAP") was $961,764.
Our net loss in accordance with the US GAAP for the nine months ending on
September 30, 2002 was $777,308. It is possible that we may not have any profits
in the near future or ever. We have had a history of deficits. We had a deficit
of $1,715,289 on December 31, 2001 and deficit of $3,268,849 on December 31,
2002.
INFLATION, FOREIGN CURRENCY FLUCTUATIONS AND CURRENCY DERIVATE CONTRACTS
We intend to continue to sell the majority of our services in U.S. dollars while
incurring costs in varying proportions in Canadian dollars, U.S. dollars and
other currencies. Thus, our operations are susceptible to fluctuations in
currency exchange rates. If the Canadian dollar rises relative to the U.S.
dollar, our reported operating expenses, as stated in U.S. dollars, would rise
without a corresponding increase in revenues. This could have a material and
adverse effect on our net income.
THE LOSS OF OUR KEY PERSONNEL COULD NEGATIVELY EFFECT OUR OPERATIONS
Our success is dependent in large part on certain key management and technical
personnel, specifically, Alan Rootenberg and Stephan Bielawski. The loss of one
or both of these key personnel could negatively affect our business. We believe
that our future success depends significantly upon our ability to attract,
retain and motivate highly skilled technical, sales and management employees and
consultants. There can be no assurance that we will be successful in these
efforts due to the high level of competition in the industry generally. Our
business and operating results may be materially and adversely affected if we
are unsuccessful in these efforts.
ITEM 4. INFORMATION ON THE COMPANY.
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated as Harvard Capital Corp. on March 12, 1998 pursuant to the
provisions of the Business Corporations Act (Alberta, Canada). We amended our
articles of incorporation by Certificate of Amendment dated July 6, 1998 to
remove the private company restrictions. Our name was changed to Nework Corp.
pursuant to a Certificate of Amendment dated December 6, 1999 and to Talware
Networx Inc. pursuant to a Certificate of Amendment dated June 22, 2001.
We became a reporting issuer in the Province of Alberta, Canada on July 28,
1998, pursuant to the issuance of a final receipt for a prospectus by the
Alberta Securities Commission. On November 12, 1999, we filed an offer to
purchase ("Offer") and a take-over bid circular ("Circular") pursuant to the
Securities Act (Ontario) in connection with the acquisition of the shares of New
Media Recruiting Services Inc. ("NMRS") and Financial Career & Strategic
Services Inc. ("FCSS"). We became a reporting issuer in British Columbia, Canada
on November 26, 1999, pursuant to the amalgamation of the Alberta Stock Exchange
and the Vancouver Stock Exchange to form the Canadian Venture Exchange ("CDNX").
Our head office is 123 Commerce Valley Drive East, Suite 301, Thornhill,
Ontario, Canada, L3T 7W8. Our registered office is 2300 Western Gas Tower,
530-8th Avenue S.W., Calgary, Alberta, Canada T2P 3S8. The registered office of
NMRS and FCSS, our subsidiaries, is 123 Commerce Valley Drive East, Suite 301,
Thornhill, Ontario, Canada, L3T 7W8. The registered office of the Nework
Corporation, our subsidiary, is 201 North DuPont Parkway, New Castle, Delaware
19720, USA. Our website is www.talware.com.
B. BUSINESS OVERVIEW
GENERAL
DISCONTINUED OPERATIONS
In late fiscal 2001, we moved our corporate headquarters from our midtown
Toronto location to our current premises in Thornhill, Ontario, Canada. We
decided at that time to discontinue our traditional recruiting operations for
two reasons. First, we determined that it was necessary to eliminate any
perceived conflict of interest that may arise as a result of operating a
traditional recruiting firm while at the same time operating a database network
for professional recruiters and candidates. Second, the revenues generated from
our traditional recruiting business had been declining and we decided to reduce
our corporate burden and focus on our human capital management and recruitment
applications.
On December 16, 2001 (the measurement date and date of disposal), we ceased
operating our executive placement and recruiting service division.
(a) Results of operations of discontinued division
2001 2000 1999
$ $ $
(revised, see Note 4)
Fee revenue 394,552 757,019 1,187,580
Direct costs 436,420 550,270 630,055
Gross profit (loss) (41,868) 206,749 557,525
Selling, general and
administrative expenses 279,778 397,301 422,197
Amortization expense 2,902 7,566 5,479
Interest expense -- 2,723 5,450
Development costs -- -- 140,398
Loss on write-off of
leasehold improvements (13,670) -- --
Loss on write-down
of other property
and equipment -- -- (21,241)
Loss before
income taxes recovered (338,228) (200,841) (37,240)
Income taxes recovered -- -- (14,671)
LOSS FROM
DISCONTINUED OPERATIONS (338,228) (200,841) (22,569)
ON GOING OPERATIONS
We have developed a suite of software application modules that assist
organizations in managing their workforce, retaining their existing employee
talent and identifying and recruiting new talent. The application modules
comprise:
TALFINDER Enables organizations to create their own private branded job
boards or career sites
TALMATCH Enhances or replaces the career section of an organization's
website
TALMANAGER Enables organizations to identify the experience and skills of
their employees
TALMARKETER Enables organizations to communicate with employees, job
applicants and candidates through customized, personalized email
messages.
TALXCHANGE Enables professional third party recruiters to share their
candidate pool with other professional recruiters.
All modules use our profiling and matching engine which allows employees, job
applicants and candidates to detail their employment history, experience and
skills using our library of profile templates that we have created for
approximately 60 industries. Organizations looking for talent use the same
profile templates to create a job profile, and the application then matches the
most appropriate candidates to the talent seekers' requirements. A distinct
advantage of our application software is its language neutrality. Profiles can
be created in a user's native language and read in another language.
The application modules can be used as stand alone applications or can be
networked with other modules to create an integrated system. Our modules are
marketed to all organizations that need to streamline their talent recruitment,
employee retention and applicant/employee communication efforts. Our business
plan is to create networks within vertical markets or industries, which link the
various components of the human capital supply chain and to provide employers
and recruiters with a single point of entry into the supply chain. As an
example, an organization looking for talent creates a job profile using our
engine. It can then potentially identify candidates within its own employee
base, from the applicant pool on its own corporate website, from candidates
within an independent job board and from a pool of candidates represented by
professional third party recruiters. These networks could extend beyond national
borders, providing access to candidates internationally.
Our pricing model is predicated on generating ongoing subscription or royalty
revenues for the majority of our revenue. This model applies to all the
application modules. Non-recurring revenues will accrue from:
(a) Master license fees received on the sale of a country specific master
license. This is in addition to on-going royalty revenues earned from master
licensees.
(b) Customization and implementation fees.
EVOLUTION OF OUR APPLICATION MODULES
Traditional recruitment of employees has always used resumes as the basis for
identifying skills, experience, education, and training. A fundamental problem
with using resumes comes down to a simple reality--every person describes his or
her experience and skills differently. In addition, resumes tell employers what
the candidate wants the employers to know. Employers should ensure that
candidates provide the information that the employers need to know. To eliminate
this fundamental problem, we developed a unique and powerful profiling (from
industry specific templates) and matching engine, which is at the heart of all
our application modules. Candidates use these templates to indicate their skills
and experience, creating a detailed profile in minutes. Employers use the same
templates to identify the skills and experience they require from candidates and
the application then:
o Identify qualified candidates
o Compare and rank these candidates
o Present a candidate shortlist
This allows job candidates and job opportunities to be finely targeted, defined,
and matched with precision. It eliminates general searches which return jobs or
candidates with vaguely related skill sets.
All application modules are developed to match employers and candidates on a
local, national, and international basis. These web-based application modules
have the following features:
o Industry-wide standards for describing jobs and defining candidate
skills
o Ability to precisely match candidates and jobs
o Language neutrality allowing for matching to be done on a global
basis
The underlying philosophy behind the application is universality--to create
larger pools of candidates and job opportunities and a common worldwide standard
of job specifications and talent qualifications, while providing a platform to
match up the variables.
With standardized profiles, it becomes efficient for candidates to expose their
qualifications to the greatest possible number of employers, and for employees
to expose job opportunities to the largest possible number of candidates. An
automated matching system--accepting or restricting matches by company, city,
salary, or other combinations--can be tailored to the preferences of both
individuals and employers allowing for the precise matching of candidates with
job opportunities and selection from the largest possible pool.
COMPETITION
While a number of applications exist which compete with our application modules,
we are not aware of any application that has the detailed templates that cover
as many industries and positions within each industry that we have. We believe
that no other application has reached our advanced state of product development.
While there are moderate barriers to entry for competing firms, achieving a
critical mass of users acts as a barrier to entry. Furthermore, once a network
of the various components of the human capital supply chain within a vertical
market has been established, the cost to switch to a competing or new
application is compounded by the inconvenience factor. We are relying on these
facts to secure an early dominant position in our marketplace and to always
operate from this position of strength as the leading provider in key industries
and vertical markets.
OUR BUSINESS MODEL
Our business model is to create networks within vertical markets or industries,
which link the various components of the human capital supply chain and to
provide employers and recruiters with a single point of entry into this supply
chain. Where possible, these networks are created in some form of partnership or
alliance with media companies that specialize in a particular vertical market or
industry. The promotional power of the media companies, combined with the
natural ability of our technology to create networks, creates a powerful
combination. A component of the human capital supply chain is a network of
professional third party recruiters that represent the passive candidate pool.
This network, which uses the TalXchange module as its underlying technology,
allows professional recruiters to expose their candidates to corporations on a
completely anonymous basis.
Once a network has been established, i.e. creating a job board network for a
specific industry that includes employers, candidates, industry associations,
media companies and educational institutions, a user base is created to which we
can market our full suite of application modules. An employer using one of our
job boards can then use the TalMatch module to enhance the career section of
their website, which can be linked to the job board. That employer can use the
TalManager module to identify candidates within the ranks of their existing
employees. They can gain access to a network of professional recruiters through
the Quality Talent Portal and can maintain ongoing communications with
applicants and employees by using the TalMarketer module.
We offer most of our suite of application modules on an application service
provider model. In certain instances where customer security policies require
that the customer host the application, this service is available to such
customers.
The Company's business model also includes creating private or closed networks
for an organization or group of related organizations. These private networks
are created using our application modules as their base.
Revenue Generation
Our pricing model is predicated on generating ongoing subscription or royalty
revenues for the majority of our revenue. This model applies to all the
application modules. Non-recurring revenues will accrue from:
(i) master license fees received on the sale of a country specific master
license. This is in addition to on-going royalty revenues earned from master
licensees.
(ii) customization and implementation fees.
An example of the way revenues are earned is as follows:
We enter into a licensing agreement with a media company in terms of which the
media company is granted a license to use our technology to operate a job board
for a vertical market or industry (within a defined geographic region). The
media company, also known as an Operator, is responsible for all marketing and
operating costs related to the job board and for creating a network of industry
associations and educational institutions that are linked to the job board. The
Operator charges employers that use the job board to find talent within their
industry either an annual subscription fee, or a single use fee or some
combination thereof.
We receive an initial implementation fee from the Operator and receive a
percentage of the gross revenues generated by the Operator from operation of the
job board, as a license fee or royalty.
In certain instances, we, together with an industry partner, are the operator of
the job board. In such cases, the net revenues from operating the job board
accrue to us and our partner.
We market our TalMatch, TalManager and TalMarketer modules directly to employers
within such vertical market. Users of these modules are charged for a monthly
fee for the use of each module.
We generate revenues from operation of the TalXchange module by charging
professional recruiters a percentage of the fee they earn from using the
exchange to place a candidate with an employer. They create anonymous profiles
for a select number of candidates that they present. These candidates can then
be found by employers using the exchange.
The potential revenue streams available to the Company are from:
o additional vertical market penetration (we have created profile
templates for sixty vertical markets or industries),
o subscription revenues generated from TalMatch, TalManager and
TalMarketer sales to employers,
o customization fees, implementation and subscription fees earned as a
result of the creation of private networks,
o fees earned from professional recruiters.
MARKET FOCUS
Our initial focus has been on those industries or vertical markets experiencing
above average talent shortages, and on those industries that are inherently
global in nature to exploit the language neutrality inherent in the application
modules. As a result, we have pursued and secured licensees in the defense
contracting, homeland security, mining and hospitality and food service
industries. We are currently focused on the healthcare industry, have secured a
number of healthcare licensees for our TalMatch module and are pursuing a media
licensee to create job boards for the industry using our TalFinder module.
RESULTS FROM OPERATIONS
Revenues on a go forward basis are expected to be generated from:
o Implementation fees
o License fees received from job board network operators in vertical
markets or industries
o Where we are the licensee for a vertical market or industry, user
fees received from employers.
o Subscription revenues generated from TalMatch, TalManager and
TalMarketer sales to employers.
In May 2003, we began to generate revenues.
C. Organizational Structure
We have three wholly-owned subsidiaries, NMRS, FCSS and Nework Corporation. NMRS
was incorporated under the Business Corporations Act (Ontario) on November 4,
1992 as 1006828 Ontario Limited. By Certificate of Amendment dated December 1,
1998, NMRS amended its articles to change its name to New Media Recruiting
Services Inc. FCSS was incorporated under the Canada Business Corporations Act
on January 28, 1998. By Certificate of Incorporation dated September 20, 1999,
Nework Corporation was incorporated under the General Corporate Laws of Delaware
in the United States of America (the "US") under the name eWork Corporation.
Effective December 26, 1999, by Certificate of Amendment, eWork Corporation
changed its name to Nework Corporation. Nework Corporation has one 99.26% owned
subsidiary, Talware Technologies, Inc. ("Talware"), incorporated under the
General Corporate Law of Delaware in the US on April 3, 2000. Talware has a
50.5% interest in The Defense Talent Network ("DTN"), incorporated under the
General Corporate Law of Delaware in the US on February 14, 2003. Talware has a
minority interest in Career Match Inc., incorporated under the laws of South
Korea.
D. Property, Plants and Equipment
Our head office is located at 123 Commerce Valley Drive East, Suite 301,
Thornhill, Ontario., Canada L3T 7W8 and has the customary office products and
equipment. The current annual rent under this lease is CAD48,000.00. The lease
space consists of approximately 1500 square feet.
Our Defense Talent Network division operates from the home office of the CEO of
that operation, David Germand. Mr. Germand lives at 4903 Commonwealth Road,
Palmetto, Florida 34221.
GLOSSARY
CERTAIN WORDS AND TERMS USED THROUGHOUT THE BUSINESS SECTION ARE DEFINED BELOW:
"HUMAN CAPITAL MANAGEMENT" means identifying, categorizing and accessing the
specific skills, experience and attributes of employees, job applicants and job
seekers.
"MODULE" means a component of a total system which can be used either on its own
or integrated with other modules to create a more functional and feature-rich
application.
"VERTICAL MARKET" means a segment of the economy that provides a specific
function or service, i.e., the retail sector, or the hospitality sector.
"LANGUAGE NEUTRAL" means the ability to create a profile in one language and
have that profile readable in another language.
"SUBSCRIPTION REVENUES" means ongoing monthly, quarterly or annual revenues.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The following discussion and analysis is based on and should be read in
conjunction with our consolidated financial statements and the related notes to
the consolidated financial statements, contained in Item 18, "Financial
Statements".
A. Operating Results
PERIOD SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
The following discussion of the results of operations and financial condition
for the periods ended September 30, 2003 and September 30, 2002 should be read
in conjunction with our consolidated unaudited financial statements .
Revenues
The revenues recorded by us during the third quarter of 2003 were generated from
implementation fees and from ongoing monthly service fees. These revenues
totaled $18,550 during the third quarter of 2003 compared to -0- during the
third quarter of 2002.
Expenses
Our expenses are reflected in the Statement of Operations as Selling, General
and Administrative (SG&A). To meet the criteria under Canadian generally
accepted accounting principles, costs related to the development of our suite of
software application modules were capitalized as deferred development costs
during fiscal 2001 and from January 1, 2002 to May 31, 2002 when our master
licensee launched CareerMatch, powered by our application, in South Korea. After
May 31, 2002, further development costs were expensed.
SG&A expenses for the nine months ended September 30, 2003 were $968,925 and are
stated at $666,918 for the comparable period in 2002. The increase in SG&A
expenses reflects the changes in the accounting treatment of development costs
as indicated above and reflects the addition of key senior management during
2002, specifically Mr. Bielawski who joined as Chief Operating Officer in May
2002. In the ordinary course of business, Mr. Rootenberg, our President, has
been paid a monthly draw against cash advances he made to us. With the advent of
a revenue stream, salary and benefits owing to Mr. Rootenberg for 2003 and for
part of 2002 have been accrued as an advance from shareholder and expensed to
our income statement. Additional expenditures were also incurred in further
enhancing our database of profile templates which are key differentiators of our
application and in modifying our core applications to accommodate changes
required by some key founding sponsors of the job board networks developed by
us. Additional expenditures were also incurred to create the personalized job
boards for the partners in the various job board networks.
Application Development
While we improve the functionality of our suite of products on an ongoing basis,
we do not anticipate any significant additional expenditure on application
development. Where customization is required for a licensee or user application,
we charge an implementation or customization fee to cover the cost of such
customization. We intend to maintain our fixed development costs as low as
possible and use contract or contingent staff when required.
RELATED PARTY TRANSACTIONS
During 2003, there were no material related party transactions.
PERIOD DECEMBER 31, 2002 AND DECEMBER 31, 2001
The following discussion of the results of operations and financial condition
for the years ended December 31, 2002 and December 31, 2001 should be read in
conjunction with our consolidated audited financial statements and accompanying
notes.
OVERVIEW
The consolidated results include the operations from us and our wholly-owned
subsidiaries. As of December 31, 2002, we had seven employees.
REVENUES
Revenues from continuing operations for the year 2002 were nil which reflects
the change in focus of our operations. Revenues from discontinued operations of
$394,552 in 2001 reflect the placement fees earned from our discontinued
traditional recruitment operations.
OPERATING LOSS
Our loss from continuing operations was $1,553,560 compared to a loss of
$496,120 for 2001. This increase in the loss was due to the amortization of
deferred development costs of $332,021 in 2002 as compared with nil in 2001, the
addition of additional management during the year and development expenses
incurred after June 1, 2002 which were expensed.
DEVELOPMENT COSTS
During fiscal 2001, software development costs were deferred and charged to
Deferred development costs. Software development costs incurred from January 1,
2002 to May 31, 2002 were charged to Deferred development costs. On June 1, 2002
when we installed a commercial application of its software in Korea, the
amortization of Deferred development costs commenced, using the straight line
method over two years. Development costs incurred after June 1, 2002 were
expensed and are included in Expenses - Selling, General & Administrative.
NET EARNINGS
The net loss for the year 2002 was $1,553,560 compared to a net loss of $834,348
for fiscal 2001. The increase in the loss was due to the amortization of
Deferred development costs which commenced in 2002, expensing software
development costs incurred after June 1, 2002, and the addition of additional
management during 2002. The Fiscal 2001 loss included a dilution gain of
$130,388 which was nil in Fiscal 2002.
WORKING CAPITAL
We had a working capital deficiency of $520,336 as at December 31, 2001 which
included $65,551 due to a related party who is also our major shareholder. This
compares to a working capital deficiency of $377,303 as at December 31, 2001
that included $307,821 due to the same shareholder.
B. LIQUIDITY AND CAPITAL RESOURCES
During October 2003, we received subscriptions for 5,418,012 common shares for
proceeds of $433,441 through a private placement.
In October 2003, we issued, by way of private placement, an 8% Convertible
Debenture in the principal amount of $150,000. The proceeds from the debenture
were received in October 2003.
During the year ended December 31, 2002, we issued 8,995,540 common shares for
proceeds of $899,554 through private placements, of which $45,000 represented
the settlement of accounts payable existing as at the date of settlement.
Subsequent to the year end, we issued a further 3,225,000 common shares for
proceeds of $322,500 through private placement.
All funds raised are to finance our operations.
We have no long term debt other than a few operating leases.
C. Research and Development, Patents and Licenses
Costs related to the development of our suite of software application modules
were capitalized as deferred development costs until May 31, 2002 when our
master licensee launched CareerMatch, powered by our application in South Korea.
After May 31, 2002, further development costs were expensed. Development costs
for the year ended December 31, 2000 were -0-, for the year ended December 31,
2001 were $1,048,063 and for the period January 1, 2002 to May 31, 2002 were
$90,296.
D. Trend Information
MARKET TRENDS
Internet based recruiting is experiencing growth, largely as a result of the
advent and acceptance of the Internet as a means to conduct commerce. This
growth has been triggered by the impact of information technology, increased
flexibility in the structure of business, including decentralization and more
reliance on outsourcing, increased worker mobility, the impact of the Internet
on e-commerce, and the increased significance of networks, both online and
offline. The initial use of Internet based recruiting was primarily centered on
the large, general purpose job boards that are used to identify potential
employees. These job boards developed as an alternate to print based classified
and recruitment advertising. Their impact was also felt in the professional
recruitment sector. The acceptance of Internet based recruiting has led to
corporations enhancing the recruitment power of their corporate websites by
using new technologies to attract applicants to and register applicants on,
their corporate sites.
The recent downturn in the global economy has significantly impacted the
traditional recruiting industry as a whole. As such, prior to the discontinuance
of our traditional recruiting operations, revenues from the traditional
recruiting operations had been declining steadily. We believe that our future
lies in exploiting the software applications we have developed and make better
use of our financial and human resources by focusing our efforts on human
capital management and retention applications.
To date, we have been successful in receiving continued financial support both
from existing shareholders, insiders and external sources. During the year ended
December 31, 2002, we raised $899,554 through private placements. Subsequent to
the year-end, we raised $322,500 through private placements.
E. Off-Balance Sheet Arrangements
NONE.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management.
Our directors and executive officers are as follows:
NAME AGE POSITION
Alan Rootenberg 52 President, Chief Executive Officer and
Chairman of the Board of Directors
Stephan Bielawski 52 Chief Operating Officer and Director
Yuri Tarasov 31 Vice President - Technology Services
HoJin Song 34 Executive Vice President
John Angaritis(1) 50 Director
Norman Grafstein(1)(2) 53 Director
Alpha Pang(2) 46 Director
(1) member of the audit committee.
(2) member of the compensation committee.
The business experience of each of our directors and executive officers is as
follows:
ALAN ROOTENBERG has been our President, Chief Executive officer and director
since 1999. He has been the President of NMRS since 1993 and President of FCSS
since 1997. From 1996 to 1997, Mr. Rootenberg was the President of Intromatch
Inc., a database company. From 1994 to 1996, he was Vice President of DCST Inc.,
a database technology company. From 1986 to 1994, he was Chief Financial Officer
of Padulo Integrated Inc., an independent advertising agency located in Toronto,
Canada.
STEPHAN BIELAWSKI has been our Chief Operating Officer and director since May
2002. During 2001 he served as Vice President of Business Development at Sand
Technology Inc., a software developer. Prior to that Mr. Bielawski was Vice
President of Business Development and President and the Chief Executive Officer
from December 1998 to October 2000 at Hotline Communications Ltd., a private
Internet software company. From January 1994 to August 1998, Mr. Bielawski was
Managing Director for Canada, at Systems Union Incorporated, a global software
developer.
YURI TARASOV is our Vice President for Technology Services. He has worked for us
since 2001. He graduated from the Space Engineering University in St. Petersburg
with a Master's Degree in Computer Science. From 1996 to 2000, he worked as
Chief Technology Officer for Conline Ltd, an Internet Service Provider. From
2000 to 2001, he held the title of Vice President of Technology at Net 4 Inc., a
software development company.
HOJIN SONG is our Executive Vice President. He joined us in 2000. He is
responsible for Asian Market Development for us. He has been involved in the
recruiting industry since 1995. From 1995 to 1998, he was a partner and a senior
consultant with People and Future Co., Ltd., a leading South Korean executive
search company. From 1999 to 2000 he was a senior consultant with Solution Inc.
a member of Stanton Chase International. In that role, HoJin was responsible for
the organization's overseas recruiting activities, developed one of the first
online recruiting sites for the Korean market and analyzed the existing North
American online recruiting models.
JOHN ANGARITIS has been our director since 2002. He has also been a consultant
from October 2001 to present to a number of companies in the technology field.
From January 1997 to September 2001, he held number of positions with Coretec
Inc. (including President of the Company), a major North American printed
circuit board company servicing the electronics industry. Mr. Angaritis is
brother-in-law of Alan Rootenberg.
NORMAN GRAFSTEIN has been our director since 2002. From 2002 to present Mr.
Grafstein has been Vice President of PanFinancial, a financial services company.
From 1996 to present Mr. Grafstein has been President of Odessey Group, which
provides strategic and marketing counsel to companies in their early stage.
ALPHA PANG has been our director since 2002. From 1991 to Present Mr. Pang has
been a Manager of Shingfat Realty Inc., a real estate company. From 1995 to the
Present, he has also been a Partner and Director of Knix Computer Inc., a
wholesaler of computer parts across Canada. From 2001 to Present, Mr. Pang has
been a Director of Harbour Capital Management Group (1999) Inc., which provides
business consultation and syndication of investment funds for start up
companies. From 1995 to 2000, Mr. Pang was a Director and Partner in Top Grandy
Ltd., an import and export business.
Other than as indicated above, there is no family relationship between any of
our directors and executive officers. There are no arrangements or
understandings between any director and executive officer and any other person
pursuant to which any director and executive officer was selected.
B. Compensation
EXECUTIVE COMPENSATION
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
NAME YEAR SALARY BONUS CAR ALLOWANCE STOCK OPTIONS TOTAL
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
ALAN ROOTENBERG 2003 $82,500 $5,257 $87,757
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
2002 $120,000 $4,800 $124,800
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
STEPHAN BIELAWSKI 2003 $112,000 $112,000
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
2002 $91,792 320,000 $91,792
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
YURI TARASOV 2003 $62,762 $10,000 $72,762
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
2002 $60,625 200,000 $60,625
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
HONJIN SONG 2003 $45,168 $10,000 $55,168
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
2002 $45,337 $22,500 $67,837
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
- --------------------- -------- ------------ ---------- ------------------ ----------------- -----------
OPTIONS
GRANT OPTION EXPIRY JAN 01/03 TRANS.
DATE HOLDER PRICE DATE BALANCE DATE
1998 Plan EXPIRED OPTIONS
March, 1998 John Wiseman-Director 0.10 August 19,2003 Aug 19 2003
March, 1998 Daniel Wiseman-Emp/Consult 0.10 August 19,2003 Aug 19 2004
Apr/01 Lee Kea-Adv Bd 0.10 April 12, 2003 April 12 2003
May 9, 2002 Trevor Burns-Adv Bd 0.10 May 9, 2007 May 9 2003
TOTAL EXPIRED OPTIONS
GRANT OPTION
DATE HOLDER GRANTED EXERCISED EXPIRED CANCELLED
1998 Plan EXPIRED OPTIONS
March, 1998 John Wiseman-Director 200,000
March, 1998 Daniel Wiseman-Emp/Consult 200,000
Apr/01 Lee Kea-Adv Bd 125,000
May 9, 2002 Trevor Burns-Adv Bd 120,000
---------
TOTAL EXPIRED OPTIONS 645,000
=========
CURRENT OPTIONS
May 9, 2002 Alan Rootenberg-Director 0.15 May 9, 2007 120,000
July 3, 2002 Steve Bielawski-Director 0.15 July 3, 2007 120,000
July 3, 2002 John Angaritis-Director 0.15 July 3, 2007 120,000
July 3, 2002 Norm Grafstein-Director 0.15 July 3, 2007 120,000
July 3, 2002 Alpha Pang-Director 0.15 July 3, 2007 120,000
January 7, 2004 Gerry Goldberg-Consultant 0.15 January 6 2009 120,000
May 9, 2002 Chris Simmons-Employee 0.15 May 9, 2007 100,000
July 8, 2002 Steve Bielawski-Employee 0.15 May 21, 2006 200,000
July 8, 2002 Steve Bielawski**-Employee 0.15 May 21, 2006 600,000
November 19, 2002 Yuri Tarasov-Employee 0.15 May 21, 2006 400,000
November 1, 2003 Joe Braccia-Employee 0.15 October 31 2008 35,000
November 1, 2003 Dorothy Charbanneau-Employee 0.15 October 31 2008 25,000
July 8, 2002 Stern Growth Mgmt-Consultant 0.15 July 8, 2007 150,000
August 13, 2002 Stern Growth Mgmt-Consultant 0.15 August 13, 2007 150,000
January 7, 2004 Gerry Goldberg-Consultant 0.10 January 6 2009 500,000
November 1, 2003 Jeff Lebow-Consultant 0.15 October 31 2008 35,000
John Cerenzia see below November 2008 450,000
November 19, 2002 Judson Woods 0.15 November 19, 2004 100,000
July 12, 2002 Anne-Louise Tindall see below June 3, 2006 450,000
----------
TOTAL OPTIONS OUTSTANDING 3,915,000
==========
Anne-Louise Tindall 0.15 333,333
0.25 116,667
----------
450,000
==========
John Cerenzia 0.10 150,000
0.15 150,000
0.15 150,000
----------
450,000
==========
C. Board Practices
Under the Company Act (Ontario), a majority of our Board of Directors must be
resident Canadians and at least one member of our Board of Directors must
ordinarily be resident in the Province of Ontario. All directors hold office
until the next meeting of our shareholders and until their successors are
elected and qualified. Officers are appointed to serve, at the discretion of the
Board of Directors, until their successors are appointed. Our Board of Directors
met six (6) times in 2003.
MANDATE AND RESPONSIBILITIES OF THE BOARD
The fundamental objective of our board of directors is to ensure that it
operates in a fashion that maximizes shareholder value over the long term. The
board's duties and responsibilities are all carried out in a manner consistent
with that fundamental objective.
The principal duty and responsibility of our board is to oversee our management
and operations, with the day-to-day management of our business and affairs
delegated by our board to our Chief Executive Officer and other executive
officers.
Our board's responsibilities include overseeing the conduct of our business,
providing leadership and direction to our management, and setting policies.
Strategic direction for us is developed through the board's annual planning
process. Through this process, the board adopts the operating plan for the
coming year, and monitors management's progress relative to that plan through a
regular reporting and review process.
Notwithstanding the suggested guidelines, no formal position descriptions for
our board and Chief Executive Officer have been developed.
COMPOSITION AND SIZE OF THE BOARD
Our board of directors consists of five (5) members. Alan Rootenberg is our
Chairman of the Board of Directors. The other board members are Stephan
Biewalski, John Angaritis (Mr. Rootenberg's brother-in-law), Norman Grafstein
and Alpha Pang.
COMMITTEES OF THE BOARD
Our board has two standing committees: audit and compensation. The committees
are comprised of one or two directors as noted above. Each committee also has
available to it as a resource such members of management as may from time to
time be determined to be appropriate.
The AUDIT COMMITTEE assesses, influences, and helps set the tone for quality
financial reporting and sound internal controls. The audit committee meets
quarterly to review and approve financial results of the quarter. The committee
reviews the annual audit and meets with our independent accountants to review
the adequacy and effectiveness of our internal controls and financial management
practices, and recommends our financial statements to the board for approval. In
2000, the board adopted a charter for the audit committee, which sets out its
mandate. John Angaritis (Mr. Rootenberg's brother-in-law) and Norman Grafstein
are the members of our audit committee.
The COMPENSATION COMMITTEE reviews and recommends compensation policies and
programs for our executives. The committee makes recommendations to the board,
which gives final approval on these policies and programs. Norman Grafstein and
Alpha Pang are members of our compensation committee.
The guidelines contemplate that committees of our board should generally be
composed of outside directors, a majority of whom are unrelated directors. We
comply with the requirements of the Ontario Company Act in that the majority of
our audit committee is comprised of directors who are not our officers or
employees.
DECISIONS REQUIRING PRIOR BOARD APPROVAL AND EXPECTATIONS OF MANAGEMENT
The board has delegated to our CEO, Mr. Rootenberg, and senior management
responsibility for the day-to-day management of our business. Matters of policy
and issues outside the normal course of business are brought before the board
for its review and approval, along with all matters dictated by statute and
legislation as requiring board review and approval. The CEO, Mr. Rootenberg, and
senior management review our progress in relation to the current operating plan
at in-person board meetings, which are held four times a year. The board meets
on a regular basis with and without management present. Financial, operational
and strategic issues facing us are reviewed, monitored and approved at our board
meetings.
DIRECTOR'S COMPENSATION
Non-management directors are compensated via allotments of incentive stock
options. See the table under "Compensation of Directors" for further
information. The board believes that its compensation plan realistically
reflects the responsibilities and risk involved in being an effective director.
MEMBER FEEDBACK AND CONCERN
Under the direction of our CEO, Mr. Rootenberg, there are member relations
program in place, which involves providing information with respect to reported
financial results and other announcements by us to a broad spectrum of investors
and interested parties. Member concerns of a significant nature are directed to
Messrs. Rootenberg and Bielawski for information and resolution, and management
reports to the board on these matters and other major members and investor
matters.
D. Employees
As of September 30, 2003, we had a total of seven (7) employees and consultants,
of which five were full-time employees, one part-time consultant and one
part-time controller. None of our employees are represented by a labor union or
collective bargaining agreement.
E. Share Ownership
The share ownership of our directors and executive officers as of February 18,
2004 is as follows:
APPROX. NO. OF VOTING SHARES AND
PERCENTAGE OF VOTING SHARES
PRINCIPAL OCCUPATION OR EMPLOYMENT AND, IF NOT BENEFICIALLY OWNED, DIRECTLY OF
NAME, COUNTRY OF ORDINARY AN ELECTED DIRECTOR, OCCUPATION DURING THE INDIRECTLY, OR CONTROLLED OR
RESIDENCE AND POSITION WITH COMPANY PAST FIVE YEARS DIRECTED (1)
- ------------------------------------ ------------------------------------------------ ----------------------------------
Alan Rootenberg President, Chief Executive Officer and 4,717,012 shares - 12.10%;
Canada Director since 1999. President of NMRS since 120,000 options
President, Chief Executive Officer 1993. President of FCSS since 1997. From 1996
and Chairman of the Board of to 1997, Mr. Rootenberg was the President of
Directors Intromatch Inc., a database company. From 1994
to June 1996, he was Vice President of DCST
Inc., a database technology company. From 1986
to 1994, he was a co-founder and the Chief
Financial Officer of Padulo Integrated Inc.,
an independent advertising agency located in
Toronto.
Stephan Bielawski Chief Operating Officer and Director since 920,000 options
Canada 2002. Mr. Bielawski joined Talware Networx
Chief Operating Officer and inc. in May 2002 as Chief Operating Officer.
Director During 2001 he served as Vice President
Business Development at Sand Technology Inc.,
a software developer.
Prior to that, Mr. Bielawski held roles at
Hotline Communications Ltd., a private
internet software company, from December 1,
1998 to October 2000. The roles held were
Vice-President Business Development and
President and CEO.
From January 1994 to August 31, 1998, Mr.
Bielawski was Managing Director, Canada for
Systems Union Incorporated, Systems Union
(SU), a global software vendor.
Yuri Tarasov Vice President of Technology Services. He 400,000 options
Canada joined us in 2001. He graduated from the
Vice President Technology Services Space Engineering University in St. Petersburg
with a Master's Degree in Computer Science.
From 1996 to 2000, he worked as Chief
Technology Officer for Conline Ltd, an
Internet Service Provider. From 2000 to
2001, he held the title of Vice President
of Technology at Net 4 Inc., a software
development company.
HoJin Song Executive Vice President. He joined us in
Canada 2000. He is in charge of Asian Market
Executive Vice President Development for us. He has been involved in
the recruiting industry since 1995. From
1995 to 1998, he was a partner and a senior
consultant with People and Future Co.,
Ltd., a leading South Korean executive
search company. From 1999 to 2000 he was a
senior consultant with Solution Inc. a
member of Stanton Chase International. In
that role, HoJin was responsible for the
organization's overseas recruiting
activities, developed one of the first
online recruiting sites for the Korean
market and analyzed the existing North
American online recruiting models.
APPROX. NO. OF VOTING SHARES AND
PERCENTAGE OF VOTING SHARES
PRINCIPAL OCCUPATION OR EMPLOYMENT AND, IF NOT BENEFICIALLY OWNED, DIRECTLY OF
NAME, COUNTRY OF ORDINARY AN ELECTED DIRECTOR, OCCUPATION DURING THE INDIRECTLY, OR CONTROLLED OR
RESIDENCE AND POSITION WITH COMPANY PAST FIVE YEARS DIRECTED (1)
- ------------------------------------ ------------------------------------------------ ----------------------------------
John Angaritis(1) Director since 2002. From October 2001 to the 120,000 options
Canada present, Mr. Angaritis has served as a
Director consultant to a number of companies in the
technology field. From 1997 to September 2001
he held a number of positions, including
President, with Coretec Inc. a major North
American printed circuit board company
servicing the electronics industry.
Norman Grafstein Director since 2002. From 2002 to the present 641,785 shares(3) - 1.64%;
Canada Mr. Grafstein was Vice President of 120,000 options
Director PanFinancial, a financial services company.
From 1996 to the present Mr. Grafstein was
president of the Odessey Group which
provides strategic and marketing counsel to
early stage companies.
Alpha Pang Director since 2002. From 1991 to the 120,000 options
Canada present, Mr. Pang was manager of Shingfat
Director Realty Inc., a real estate company. From 1995
to the present, he was also a partner and
director of Knix Computer Inc., a wholesaler
of personal computer parts across Canada.
From 2001 to the present, Mr. Pang was a
director of Harbour Capital Management Group
(1999) Inc., which provides business
consultation and syndication of investment
funds for start up companies. From 1995 to
2000 Mr Pang was a director and partner in
Top Grandy Ltd., an import and export business.
(1) Based on 38,954,478 shares issued and outstanding as of February 18, 2004.
(2) Percentage based on a fully diluted basis of 38,954,478 shares and
8,500,000 options
MR. GRAFSTEIN OWNS SUCH SHARES THROUGH 754274 ONTARIO LIMITED, AN ONTARIO
CORPORATION CONTROLLED BY HIM.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
A. Major Shareholders
Shareholders of the Company who are beneficial owners of 5% or more of our
outstanding common shares as of February 18, 2004 are as follows:
NAME NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY OWNED OWNERSHIP
Alan Rootenberg 4,717,012 12.10%
B. Related Party Transactions
Mr. Rootenberg, our President, is also a 5% or greater shareholder. In the
ordinary course of business, he has been paid a monthly draw against cash
advances he made to us. With the advent of a revenue stream, salary and benefits
owing to him for 2003 and for part of 2002 have been accrued as an advance from
shareholder and expensed to our income statement. We have also done this for Mr.
Bielawski, our Chief Operating Officer.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION.
A. Financial Statements
See Item 19.a. Financial Statements
B. Significant Changes
Private placement
During September 2003, we sold 2,500,000 common shares at a price of $0.08 per
share for gross proceeds of $200,000. The offering was made in a private
placement transaction primarily in Canada and was not registered in the U.S. As
part of the offering, we issued 1 warrant for each share sold at a price of
$0.11.
During January 2004, we sold 7,142,857 common shares at price of $0.07 per share
for gross proceeds of $500,000. As part of the offering, we issued 1 warrant for
each share sold at a price of $0.11.
ITEM 9. THE OFFER AND LISTING.
A. Offer and Listing Details
The following table sets forth the high and low closing prices of our common
shares on the TSX Venture Exchange for the periods indicated:
LAST 5 FINANCIAL YEARS HIGH LOW
1999 $0.700 $0.030
2000 $1.350 $0.500
2001 $0.900 $0.090
2002 $0.210 $0.060
2003 $0.130 $0.050
LAST 2 FULL FINANCIAL YEARS
2002
1ST QUARTER $0.170 $0.060
2ND QUARTER $0.210 $0.060
3RD QUARTER $0.170 $0.080
4TH QUARTER $0.160 $0.080
2003
1ST QUARTER $0.120 $0.060
2ND QUARTER $0.090 $0.060
3RD QUARTER $0.090 $0.060
4TH QUARTER $0.130 $0.050
MOST RECENT SIX MONTHS
FEBRUARY 2004 $0.130 $0.090
JANUARY 2004 $0.140 $0.090
DECEMBER 2003 $0.130 $0.080
NOVEMBER 2003 $0.090 $0.060
OCTOBER 2003 $0.085 $0.050
SEPTEMBER 2003 $0.090 $0.065
B. Plan of Distribution
Not applicable.
C. Markets
Our common shares are traded under the symbol "JOB" on the TSX Venture Exchange
since December 6, 1999.
D. Selling Shareholders
List of shares issued Names, Addresses Number of shares subscribed any position
or material relationship with the company
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION.
A. Share Capital
Not applicable.
B. Memorandum and Articles
We were incorporated as Harvard Capital Corp. on March 12, 1998 pursuant to the
provisions of the Business Corporations Act (Alberta, Canada) and has registry
number 207754441. We amended our articles of incorporation by Certificate of
Amendment dated July 6, 1998 to remove the private company restrictions. Our
name was changed to Nework Corp. pursuant to a Certificate of Amendment dated
December 6, 1999 and to Talware Networx Inc. pursuant to a Certificate of
Amendment dated June 22, 2001. Our Memorandum of Incorporation sets our
authorized capital at an unlimited amount of common shares. Neither the
Memorandum nor our articles of nor By-law number 1specifies or limits our
objects and purposes.
The following is a summary of certain provisions of our Memorandum and Articles
of Incorporation and By-law number 1.
DIRECTOR'S POWER TO VOTE ON MATTERS IN WHICH THE DIRECTOR IS MATERIALLY
INTERESTED
Our By-law number 1, requires any director who is directly or indirectly
interested in an existing or proposed contract or transaction with us, or who
holds any office or possesses any property whereby a duty or interest might be
created that is in conflict with his or her duty as a director, to declare his
or her interest in writing to the Corporation, or request to have entered in the
minutes of meetings of Directors, the nature and extent of the Director's or
Officer's interest in material contract or proposed material contract id
contract is one that in the ordinary course of the Corporation's business would
not require approval by the Board or the Shareholders. The disclosure must be
made immediately after the Director or the Officer becomes aware of the contract
or the proposed contract.
DIRECTORS' POWER TO VOTE ON COMPENSATION TO THEMSELVES
A Director who is required to disclose an interest in a material contract or
proposed material contract may not vote on any resolution to approve the
contract unless the contract is for (a) an arrangement by way of security for
money lent to or obligations undertaken by the Director, or by a body corporate
in which the Director has an interest, for the benefit of the Corporation or an
affiliate; (b) a contract relating primarily to the Director's remuneration as a
Director, officer, employee or agent of an affiliate; (c) a contract for
indemnity or insurance under the ABCA (Business Corporation Act (Alberta)); or
(d) a contract with an affiliate.
BORROWING POWERS
By-law number 1, provides that the Board may, without authorization of the
Shareholders:
o borrow money on the credit of the Corporation;
o issue, reissue, sell or pledge debt obligations of the Corporation;
o subject to section 42 of the ABCA, give a guarantee on behalf of the
Corporation to secure performance of an obligation of any person;
and
o mortgage, hypothecate, pledge or otherwise create a security
interest in all or any property of the Corporation, owned or
subsequently acquired, to secure any obligation of the Corporation.
RETIREMENT OF DIRECTORS UNDER AN AGE LIMIT REQUIREMENT
By-law number 1 does not require that our directors retire pursuant to an age
limit.
NUMBER OF SHARES REQUIRED FOR A DIRECTOR'S QUALIFICATION
There is no requirement that a director hold any of our shares.
RIGHTS, PREFERENCES AND RESTRICTIONS ATTACHING TO SHARES
The holders of our common shares are entitled to dividends, if and when declared
by our Board of Directors. The holders of our common shares are entitled to
receive notice of, and attend and vote at, all meetings of our shareholders.
Each common share carries the right to one vote and all the shares rank equally
as to voting. There are no conversion rights, special liquidation rights,
pre-emptive rights, subscription rights, redemption rights or retraction rights
attached to our common shares. In the event of our liquidation, dissolution or
winding up, the holders of our common shares shall be entitled to receive, on a
prorated basis, all of the assets remaining after we have paid our liabilities.
We may, by resolution of our Board of Directors and in compliance with the Act,
purchase any of our shares at the price and upon the terms specified in the
resolution. Holders of our common shares are not liable for further capital
calls by us.
CHANGES TO RIGHTS OF SHAREHOLDERS
We may create, define and attach special rights and restrictions to any shares,
or vary or abrogate any special rights and restrictions attached to any shares
by a special resolution of the shareholders, consisting of not less than 75% of
the votes cast by shareholders present, or represented by proxy, at a general
meeting for which not less than 21 days' notice specifying the intent to vote on
a special resolution have been given to our shareholders, and filing a certified
copy of it with the Registrar of Companies for British Columbia; PROVIDED,
HOWEVER, that no right attached to any issued shares of any class may be
prejudiced unless either all holders of that class consent in writing or a
consenting resolution is passed by 75 percent of the holders of that class. The
quorum for a class meeting shall be one-third of the voting shares of that
class. A resolution to create, vary or abrogate any special right of conversion
or exchange attaching to our shares may not be submitted to a general meeting,
or a class meeting, unless the executive director (appointed under the Business
Corporation Act (Alberta)) has first consented to such a resolution.
GENERAL MEETING
We must hold a general meeting of shareholders at least once every calendar year
at a time determined by the Board of Directors, but not later than 15 months
after the preceding annual general meeting. The Board of Directors may call a
special meeting at any time. Subject to the Articles, meetings of shareholders
may be held at the place and at a the time Board determines.
Notice of the time and place of a meeting of shareholders must be sent not less
than 21 days and not more than 50 days before the meeting to:
(a) each shareholder entitled to vote at the meeting; (b) each director; and (c)
the auditor of the Corporation.
Notice of a meeting of Shareholders called for the purpose of transacting any
business other than consideration of the financial statements and auditor's
report, fixing the number of Directors for the following year, election of
directors and reappointment of the incumbent auditor must state the nature of
the business to be transacted in sufficient detail to permit a Shareholder to
form a reasoned judgment on that business and must state the text of any special
resolution to be submitted to the meeting.
LIMITATIONS ON THE RIGHTS TO OWN SECURITIES
By-law number 1 does not provide for any limitations on the rights to own
securities.
CHANGE IN CONTROL PROVISIONS
By-law number 1 does not contain any provisions that would have the effect of
delaying, deferring or preventing a merger, acquisition or corporate
restructuring involving us or any of our subsidiaries.
DISCLOSURE OF SHAREHOLDER OWNERSHIP
By-law number 1 does not stipulate any ownership threshold above which
shareholder ownership must be disclosed.
CHANGES IN CAPITAL
There are no provisions in the Memorandum or Articles of Association governing
changes in our capital that are more stringent than those contained in the Act.
C. Material Contracts
In January 2001, we entered into a technology services agreement with Microforum
to build its recruiting industry network application, called the TalXchange
Network. The TalXchange Network, is a web-based global network of professional
recruiters and search consultants. On June 22, 2001, a beta version of the
TalXchange(TM) Network was released to our Master Licensee in South Korea, under
the name Career Match, Inc. Responding to local market conditions, the South
Korean Master Licensee changed its focus from the TalXchange Network to using
the TalFinder module to create a general purpose on-line recruiting application
in South Korea. This application was launched in June 2002 as
www.careermatch.co.kr.
In February 2003, we signed a license agreement with Hollinger Canadian
Newspapers L.P. to use the TalFinder application to create a network of online
job boards for the mining industry under the brand name of the Northern Miner,
the premier publication for the North American mining industry.
Also in February 2003, we signed an agreement with NewTech Executive Search, a
Florida based company that specializes in providing recruitment services to the
defense contracting industry in the United States, to create the Defense Talent
Network using the TalFinder application. Headquartered in Palmetto, Florida, the
Defense Talent Network creates a talent supply chain that enables defense
contractors to source qualified candidates from diverse talent pools. The
Defense Talent Network has signed agreements with the AOC and with PennWell
corporation, a US based media publisher to join the Defense Talent Network as
founding sponsors. The AOC is a nonprofit international professional association
engaged in the science and practice of Electronic Warfare ("EW"), Information
Operations ("IO"), and related disciplines. PennWell corporation's publications
include Military and Aerospace Electronics, a magazine that focuses exclusively
on design and engineering issues that influence the military and aerospace
electronics industry and Homeland Security Solutions which serves the Homeland
Security industry.
In March 2003, we signed a license agreement with Kostuch Publications Ltd.,
headquartered in Toronto, Canada, to use the TalFinder application to create a
network of online job boards for the North American hospitality and foodservice
industries. Amongst their other media properties, Kostuch Publications publishes
the Hotelier and Foodservice & Hospitality magazines.
D. Exchange Controls
There are currently no limitations imposed by Canadian laws, decrees or
regulations that restrict the import or export of capital, including foreign
exchange controls, or that affect the remittance of dividends, and interest or
other payments to non-resident holders of our securities.
E. Taxation
U.S. FEDERAL TAX CONSIDERATIONS
The following summary describes certain of the material U.S. federal income tax
consequences to U.S. Holders (as defined below) arising from the purchase,
ownership and disposition of Common Shares. This summary is based on the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final,
temporary and proposed U.S. Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof, and all of which are subject to change, possibly with retroactive
effect. This summary has no binding effect or official status of any kind; we
cannot assure holders that the conclusions reached below would be sustained by a
court if challenged by the Internal Revenue Service.
This summary does not deal with all aspects of U.S. federal income taxation that
may be relevant to particular U.S. Holders in light of their particular
circumstances, or to U.S. Holders subject to special rules, including, without
limitation, certain retirement plans, insurance companies, U.S. Holders of
securities held as part of a "straddle," "synthetic security," "hedge,"
"conversion transaction" or other integrated investment, persons that enter into
"constructive sales" involving Common Shares or substantially identical property
with other investments, U.S. Holders whose functional currency is not the United
States dollar, certain expatriates or former long-term residents of the United
States, financial institutions, broker-dealers, tax-exempt organizations and
U.S. Holders who own (directly, indirectly or through attribution) 10% or more
of the Company's outstanding voting stock. The following discussion does not
address the effect of any applicable state, local or foreign tax laws. This
summary does not consider the tax treatment of persons who own Common Shares
through a partnership or other pass-through entity, and deals only with Common
Shares held as "capital assets" as defined in Section 1221 of the Code.
This discussion is addressed only to "U.S. Holders." A U.S. Holder is a holder
of Common Shares that is a U.S. citizen, an individual resident in the United
States for U.S. federal income tax purposes, a domestic corporation or other
domestic entity taxable as a corporation, an estate the income of which is
includible in its gross income for U.S. federal income tax purposes without
regard to its source, or a trust if either: (i) a U.S. court is able to exercise
primary supervision over the administration of the trust and one or more U.S.
persons have the authority to control all the substantial decisions of the trust
or (ii) the trust has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
U.S. HOLDERS OF COMMON SHARES ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS
WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS
THE TAX CONSEQUENCES IN OTHER JURISDICTIONS, OF THE PURCHASE, OWNERSHIP AND SALE
OF COMMON SHARES APPLICABLE IN THEIR PARTICULAR TAX SITUATIONS.
SALE OR EXCHANGE OF COMMON SHARES
A U.S. Holder's sale, exchange or other taxable disposition of Common Shares
generally will result in the recognition of capital gain or loss by such U.S.
Holder in an amount equal to the difference between the amount realized and the
U.S. Holder's tax basis in the Common Shares sold. If a U.S. Holder's holding
period on the date of the sale, exchange or other taxable disposition is more
than one year, such gain or loss will be long-term capital gain or loss. In
general, a non-corporate U.S. Holder's capital gains will be taxed at a maximum
rate of 20% for property held more than one year, and the maximum rate is
reduced to 18% for property acquired after December 31, 2000 and held for more
than five years. Capital gains of U.S. Holders who are corporations are subject
to a maximum federal income tax rate of 35% regardless of their holding period.
If the U.S. Holder's holding period on the date of the sale, exchange or other
taxable disposition was one year or less, such gain or loss will be short-term
capital gain (generally subject to the same effective federal income tax rates
as ordinary income) or loss. See "Certain Canadian Federal Income Tax
Considerations-Taxation of Capital Gains on Sale of Common Shares" for a
discussion of taxation by Canada of capital gains realized on the sale, exchange
or other taxable disposition of Common Shares. In general, any capital gain
recognized by a U.S. Holder upon the sale, exchange or other taxable disposition
of Common Shares will be treated as U.S. source income for U.S. foreign tax
credit purposes. Losses will generally be allocated against U.S. source income.
Capital losses realized upon the sale, exchange or other taxable disposition of
Common Shares generally are deductible only against capital gains and not
against ordinary income, except that in the case of noncorporate taxpayers, a
capital loss is deductible only to the extent of capital gains plus ordinary
income of up to $3,000.
A U.S. Holder's tax basis in his, her or its Common Shares generally will be the
purchase price paid by the U.S. Holder. The holding period of each Common Share
owned by a U.S. Holder will commence on the day following the date of the U.S.
Holder's purchase of the Common Share and will include the day on which the U.S.
Holder sells the Common Share.
In the case of a cash basis U.S. Holder who receives Canadian dollars in
connection with the taxable disposition of Common Shares, the amount realized
will be based on the spot rate as determined on the settlement date of such
disposition. A U.S. Holder who receives payment in Canadian dollars and converts
Canadian dollars to U.S. dollars at a conversion rate other than the rate in
effect on the settlement date may have a foreign currency exchange gain or loss
that would be treated as ordinary income or loss.
An accrual basis U.S. Holder may elect the same treatment required of a cash
basis U.S. Holder with respect to a taxable disposition of Common Shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service.
In the event that an accrual basis U.S. Holder does not elect to be treated as a
cash basis taxpayer, such U.S. Holder may have a foreign currency gain or loss
for U.S. federal income tax purposes because of the differences between the U.S.
dollar value of the currency received prevailing on the trade date and the
settlement date. Any such currency gain or loss will be treated as ordinary
income or loss and would be in addition to gain or loss, if any, recognized by
such U.S. Holder on the taxable disposition of such Common Shares.
TREATMENT OF DIVIDEND DISTRIBUTIONS
For U.S. federal income tax purposes, the gross amount of any distribution made
with respect to, or in some cases a partial purchase or redemption of, Common
Shares (including the amount of any Canadian taxes withheld therefrom) will be
included in a U.S. Holder's income as ordinary dividend income to the extent
that the dividends are paid out of current or accumulated earnings and profits
of the Company, as determined based on U.S. tax principles. Dividend
distributions in excess of the Company's current and accumulated earnings and
profits will be treated first as a non-taxable return of the U.S. Holder's tax
basis in his, her or its Common Shares to the extent thereof and then as a gain
from the sale of Common Shares. For U.S. federal income tax purposes, the amount
of any distribution paid in Canadian dollars received by a U.S. Holder will
equal the U.S. dollar value of the sum of the Canadian dollar payments made
(including the amount of any Canadian taxes withheld therefrom), determined at
the "spot rate" on the date the dividend distribution is includible in such U.S.
Holder's income, regardless of whether the payment is in fact converted into
Dollars. Any gain or loss resulting from currency exchange fluctuations during
the period from the date a dividend is included in income to the date such
payment is converted into U.S. dollars generally will be treated as ordinary
income or loss.
For purposes of this discussion, the "spot rate" generally means a rate that
reflects a fair market rate of exchange available to the public for currency
under a "spot contract" in a free market and involving representative amounts. A
"spot contract" is a contract to buy or sell a currency on or before two
business days following the date of the execution of the contract. If such a
spot rate cannot be demonstrated, the Internal Revenue Service has the authority
to determine the spot rate.
Dividend income derived with respect to the Common Shares will constitute
"portfolio income" for purposes of the limitation on the use of passive activity
losses and, therefore, generally may not be offset by passive activity losses,
and will constitute as "investment income" for purposes of the limitation on the
deduction of investment interest expense. Such dividends will not be eligible
for the dividends received deduction generally allowed to a U.S. corporation
under Section 243 of the Code.
Dividends paid to a U.S. Holder with respect to Common Shares will be treated as
foreign source dividend income for U.S. foreign tax credit limitation purposes.
Subject to certain conditions and limitations, any Canadian withholding tax
imposed on such dividends generally will be eligible for credit against such
U.S. Holder's U.S. federal income tax liability or, at the U.S. Holder's
election, may be claimed as a deduction against income in determining such tax
liability. The limitations on claiming a foreign tax credit include computation
rules under which foreign tax credits allowable with respect to specific classes
of income cannot exceed the U.S. federal income taxes otherwise payable with
respect to each such class of income. Dividends with respect to the Common
Shares generally will be classified as "passive income," or in the case of
certain U.S. Holders, "financial services income," for purposes of computing the
foreign tax credit limitation. Foreign income taxes exceeding the credit
limitation for the year of payment or accrual may be carried back for two
taxable years and forward for five taxable years in order to reduce U.S. federal
income taxes, subject to the credit limitation applicable in each of such years.
Other restrictions on the foreign tax credit include a prohibition on the use of
the credit to reduce liability for the U.S. individual and corporation
alternative minimum taxes by more than 90%. In addition, a U.S. Holder generally
will not be entitled to claim a credit for Canadian tax withheld unless the U.S.
Holder has held the Common Shares for at least 16 days within the 30 day period
beginning 15 days before the applicable ex-dividend date. The calculation of
allowable foreign tax credits and, in the case of a U.S. Holder that elects to
deduct foreign taxes, the availability of deductions for foreign taxes paid
involve the application of rules that depend on a U.S. Holder's particular
circumstances. Accordingly, U.S. Holders should consult their own tax advisors
regarding their eligibility for foreign tax credits or deductions.
PASSIVE FOREIGN INVESTMENT COMPANIES
In general, for U.S. federal income tax purposes, we will be considered a
passive foreign investment company ("PFIC") for any taxable year in which either
(1) 75% or more of our gross income is passive income, or (2) at least 50% of
the average value of all of our assets for the taxable year produce or are held
for the production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. federal income tax purposes, highly complex
rules would apply to U.S. Holders owning Common Shares.
Based on the Company's current and projected income, assets and activities, it
does not believe that the Company is currently a PFIC nor does it expect to
become a PFIC in the foreseeable future. However, because the determination of
whether the Company is a PFIC is determined as of the end of each taxable year
and is dependent on a number of factors, including the value of the Company's
assets (based generally on the market price of our Common Shares) and the amount
and type of its gross income, there can be no assurances that the Company will
not become a PFIC for any future taxable year.
If the Company is determined to be a PFIC for U.S. federal income tax purposes
for any year during a U.S. Holder's holding period of the Common Shares and the
U.S. Holder does not make a QEF Election of a Mark-to-Market election, both as
described below, any gain recognized by a U.S. Holder upon the sale of Common
Shares, or upon the receipt of certain distributions, would be treated as
ordinary income. Such income generally would be allocated ratably over a U.S.
Holder's holding period with respect to the Common Shares. The amount allocated
to prior years, with certain exceptions, will be subject to tax at the highest
tax rate in effect for those years and an interest charge would be imposed on
the amount of deferred tax on the income allocated to the prior taxable years.
Although the Company generally will be treated as a PFIC as to any U.S. Holder
if it is a PFIC for any year during a U.S. Holder's holding period, if the
Company ceases to satisfy the requirements for PFIC classification, the U.S.
Holder may avoid PFIC classification for subsequent years if the U.S. Holder
elects to recognize gain based on the unrealized appreciation in the Common
Shares through the close of the tax year in which the Company ceases to be a
PFIC. Additionally, if the Company is a PFIC, a U.S. Holder who acquires Common
Shares from a decedent would be denied the normally available step-up in tax
basis for the Common Shares to fair market value at the date of death and
instead would have a tax basis equal to the decedent's tax basis.
For any tax year in which the Company is determined to be a PFIC, U.S. Holders
may elect to treat their Common Shares as an interest in a qualified electing
fund ("QEF Election"), in which case the U.S. Holders would be required to
include in income currently their proportionate share of the Company's earnings
and profits in years in which the Company is a PFIC regardless of whether
distributions of such earnings and profits are actually distributed to such U.S.
Holders. Any gain subsequently recognized upon the sale of their Common Shares
by such U.S. Holders generally would be taxed as capital gain and a denial of
the basis step-up at death would not apply.
As an alternative to a QEF Election, a U.S. Holder generally may be able to
avoid the imposition of the special tax and interest charge described above by
electing to mark to market the Common Shares ("Mark-to-Market Election")
recognizing as ordinary income or loss for each taxable year, subject to certain
limitations, the difference as of the close of the taxable year between the fair
market value of the U.S. Holder's Common Shares and the adjusted tax basis of
such Common Shares. Losses would be allowed only to the extent of the net
mark-to-market gain previously included by the U.S. Holder under the election in
prior taxable years. If a Mark-to-Market Election with respect to Common Shares
is in effect on the date of a U.S. Holder's death, the normally available
step-up in tax basis to fair market value will not be available. Rather, the tax
basis of such Common Shares in the hands of a U.S. Holder who acquired them from
a decedent will be the lesser of the decedent's tax basis or the fair market
value of the ordinary shares.
RULES RELATING TO A PFIC ARE VERY COMPLEX. U.S. HOLDERS ARE ENCOURAGED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF PFIC RULES TO THEIR
INVESTMENTS IN THE COMMON SHARES.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Any dividends paid on the Common Shares to U.S. Holders may be subject to U.S.
information reporting requirements and the U.S. backup withholding tax. The
backup withholding rate is 30% through 2003, 29% for 2004-2005 and 28% for
2006-2010. For payments made after 2010, the backup withholding rate will be
increased to 31%. In addition, the proceeds of a U.S. Holder's sale of Common
Shares may be subject to information reporting and the U.S. backup withholding
tax. Payment made with respect to the Common Shares to a U.S. Holder must be
reported to the Internal Revenue Service, unless the U.S. Holder is an exempt
recipient or establishes an exemption. Backup withholding will not apply if the
holder (i) is a corporation or other exempt recipient or (ii) the holder
provides a U.S. taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with any applicable
backup withholding requirements. Any amounts withheld under the U.S. backup
withholding tax rules will be allowed as a refund or a credit against the U.S.
Holder's U.S. federal income tax, provided the required information is furnished
to the Internal Revenue Service.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material Canadian Federal income tax
considerations relevant to an investment in the Common Shares by a holder who,
for income tax purposes, is resident in the United States and not in Canada,
holds the Common Shares as capital property, deals at arm's length with the
Company, does not use or hold the Common Shares in carrying on a business
through a permanent establishment or in connection with a fixed base in Canada
and, in the case of an individual investor, is also a United States citizen. The
tax consequences of an investment in the Common Shares by an investor who is not
as described above may be expected to differ from the tax consequences discussed
herein.
This discussion is based upon the provisions of the Income Tax Act (Canada) (the
"Tax Act"), regulations under the Tax Act, specific proposals to amend the Tax
Act publicly announced prior to the date hereof, the Canada-United States Income
Tax Convention (1980), as amended (the "Convention"), and administrative
practices published by Revenue Canada, all of which are subject to change. Any
such change, which may or may not be retroactive, could alter the tax
consequences to a holder as otherwise described herein. The discussion does not
take in account the tax laws of the various provinces or territories of Canada.
TAXATION OF DISTRIBUTIONS FROM THE COMPANY
Dividends paid or credited on the Common Shares to U.S. residents will be
subject to a Canadian withholding tax. Under the Convention, the rate of
withholding tax generally applicable is 15% of the gross amount of the
dividends, including stock dividends and payments deemed to be dividends upon
the repurchase of Common Shares by the Company, as described below. The rate of
withholding tax is reduced if the beneficial owner of the dividend is a company
that owns at least 10% of the voting stock of the Company at the time the
dividend is paid. In this case, the rate is 5% of the gross amount of the
dividends.
If the Company purchases Common Shares, a holder will be deemed to have received
a dividend to the extent that the amount paid on the repurchase exceeds the
paid-up capital, as defined in the Tax Act, of the Common Shares acquired. The
portion, if any, of the acquisition proceeds that are deemed to be a dividend
will be subject to Canadian withholding tax on dividends, as described above.
Further, the holder will be deemed to have disposed of the Common Shares for the
amount paid by the Company for the Common Shares less the amount deemed to have
been received as a dividend. If this results in a capital gain to a holder, the
tax consequences will be as described below.
TAXATION OF CAPITAL GAINS ON SALE OF COMMON SHARES
Under the Tax Act, a holder will not be subject to Canadian tax on any capital
gain realized on an actual or deemed disposition of a Common Share, including a
deemed disposition at death, provided that he did not hold the Common Share as
capital property used in carrying on a business in Canada, or that neither he
nor persons with whom he did not deal at arm's length alone or together owned
25% or more of the issued shares of any class of the Company at any time in the
five years immediately preceding the disposition.
A holder who otherwise would be liable for Canadian tax in respect of a capital
gain realized on an actual or deemed disposition of a Common Share will be
relieved under the Convention from such liability unless:
A. the Common Share formed part of the business property of a permanent
establishment in Canada that the Holder had within the twelve-month period
preceding the disposition; or
B. the holder
1. was resident in Canada for 120 months during any 20-year period preceding the
disposition, and
2. was resident in Canada at any time during the 10 years immediately preceding
the disposition, and
3. owned the Common Share when he ceased to be a resident of Canada.
F. Dividends and Paying Agents
Not applicable.
G. Statements by Experts
Not applicable.
H. Documents on Display
As a foreign private issuer, the Company is exempt from the rules under the
Securities and Exchange Act of 1934, as amended, prescribing the furnishing and
content of proxy statements to shareholders. Because the Company is a foreign
private issuer, its directors and officers are also exempt from the short swing
profit recovery and disclosure regime of Section 16 of the Exchange Act.
I. Subsidiary Information
The Company's software application modules assist organizations in
recruiting new employees and retaining their talented and existing employees.
The company has four wholly-owned subsidiaries (i) New Media Recruiting Services
Inc. ("NMRS"), (ii) Financial Career and Strategic Services Inc. ("FCSS"), (iii)
Nework Corporation, and (iv) the Defense Talent Network. NMRS was incorporated
under the Business Corporations Act (Ontario) on November 4, 1992 as 1006828
Ontario Limited. By Certificate of Amendment dated December 1, 1998, NMRS
amended its article to change its name to New Media Recruiting Services Inc.
FCSS was incorporated under the Canada Business Corporations Act on January 28,
1998. By Certificate of Incorporation dated September 20, 1999, Nework
Corporation was incorporated under the General Corporate Law of Delaware in the
United States of America under the name eWork Corporation. It changed its name
to Nework Corporation. Nework Corporation has one 99.26% owned subsidiary,
Talware Technologies, Inc. ("Talware") , incorporated under the General
Corporate Law of Delaware in the US on April 3, 2000. Talware has a 50.5%
interest in the Defense Talent Network ("DTN"), incorporated under the General
Corporate Law of Delaware in the United States of America on February 14, 2003.
Talware has a minority interest in Career Match Inc., incorporated under the
laws of Republic of South Korea.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK
At December 31, 2002, we were not party to any currency derivative contracts.
INTEREST RATE RISK
NOT APPLICABLE.
CREDIT RISK
NOT APPLICABLE.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SERVICES
Convertible Debenture
On October 20, 2003, we entered into a convertible debenture agreement for
$150,000 with A&F Capital Corporation with the due date of October 20, 2006. The
holder of the debenture has the right, at its option with a 20 day notice to us,
to convert the entire debenture (in increments of $1,000). The price for
conversion shall be $0.06 per Unit if converted prior to the second anniversary
of the issuance of the debenture and a price of $0.07 per Unit if converted
subsequent to the second anniversary and prior to October 20, 2006. Each Unit
shall consist of one common share of the company and one share purchase warrant.
Each Warrant entitles the holder to purchase an additional common share at a
purchase price of $0.10 exercisable on or before the period ending two years
following the date of issuance.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this registration statement, we performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. The evaluation was performed with the participation of
our key corporate senior management and under the supervision of our President,
Chief Executive Officer and Director, Alan Rootenberg. Our management concluded
that our disclosure controls and procedures were effective in alerting them to
material information, on a timely basis, required to be included in our periodic
filings with the U.S. Securities and Exchange Commission. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the evaluation.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our audit committee has one financial expert, John Angaritis, who is Alan
Rootenberg's brother-in-law.
ITEM 16B. CODE OF ETHICS
WE NEED TO DISCLOSE WHETHER WE HAVE ADOPTED A CODE OF ETHICS FOR OUR PRINCIPAL
OFFICERS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
In 2002, we paid $46,159 for tax related (audit, interim financial statement
preparations, tax/accounting, other) services. In 2003, we paid $33,248 for tax
related (audit, interim financial statements, tax/accounting, other) services.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not Applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS.
Not Applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
The Financial Statements are attached as part of Item 19, "Exhibits".
ITEM 19. EXHIBITS.
a. INDEX TO FINANCIAL STATEMENTS
Auditors' Report
Consolidated Statement of Operations for the Years Ended December 31, 2002 and
2001; Consolidated Balance Sheets at December 31, 2001 and 2002; Consolidated
Statement of Deficit for the years ended December 31, 2002 and 2001;
Consolidated Statement of Cash Flows for the years ended December 31, 2002 and
2001; Notes to Consolidated Financial Statements
UNAUDITED REPORTS
Interim Consolidated Statement of Operations
Interim Consolidated Statement of Deficit
Interim Consolidated Statement of Cash Flows
Interim Consolidated Balance Sheet
b. OTHER EXHIBITS
The following exhibits are filed as part of this registration statement:
Certificate of Incorporation and all amendments thereto 3.1
Articles of Incorporation and all amendments thereto 3.1
By-Law Number 1 3.1
Consulting Services Agreement, dated November 21, 2000, between
Microforum and the Company 10.1
Licensing Agreement dated June 22, 2001, between Career Match,
Inc. and the Company 10.2
Licensing Agreement dated February 2003, between Hollinger
Canadian Newspapers L.P.and the Company 10.3
Licensing Agreement dated February 2003, between NewTech
Executive Search and the Company 10.4
Licensing Agreement dated April 2003, between Kostuch
Publications Ltd.,and the Company 10.5
Convertible Debenture Dated October, 2003, between the
Company and A&F Capital Corporation 10.6
Certification by Principal Executive Officer and Principal
Financial Officer pursuant to 18 USC ss. 1350, pursuant to ss.
302 of the Sarbanes-Oxley ACT of 2002 31.1
Certification by Principal Executive Officer and Principal
Financial Officer pursuant to 18 USC ss. 1350, pursuant to ss.
906 of the Sarbanes-Oxley ACT of 2002 32.1
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this Registration Statement on its behalf.
TALWARE NETWORX INC.
By: /S/ Alan Rootenberg
-------------------------------
ALAN ROOTENBERG
President, Chief Executive Officer, Principal Financial
Officer and Chairman of the Board of Directors
Date: April 22, 2004
TALWARE NETWORX INC.
DECEMBER 31, 2002
CONTENTS
- --------------------------------------------------------------------------------
Page
AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated statement of operations 2
Consolidated balance sheet 3
Consolidated statement of deficit 4
Consolidated statement of cash flows 5
Notes to consolidated financial statements 6 - 25
Suite 302, 1 Concorde Gate
Toronto, Ontario, M3C 3N6 Canada
Tel: 416-449-2249 Fax: 449-4133
[email address illegible]
[LOGO]
AUDITORS' REPORT
TO THE SHAREHOLDERS OF TALWARE NETWORX INC.:
We have audited the consolidated balance sheet of Talware Networx Inc. as at
December 31, 2002 and 2001, and the consolidated statement of operations,
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the management of the Corporation. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Talware Networx Inc. as at December
31, 2002 and 2001, and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.
Toronto, Canada "BENNETT GOLD"
April 8, 2003 Chartered Accountants
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Corporation's ability to continue as a going concern, such as those
described in Note 1 to these consolidated financial statements. Our report to
the shareholders dated April 8, 2003, is expressed in accordance with Canadian
reporting standards which do not permit a reference to such events and
conditions in the auditors' report when these are adequately disclosed in the
financial statements.
Toronto, Canada "BENNETT GOLD"
April 8, 2003 Chartered Accountants
[WebTrust logo]
1.
TALWARE NETWORX INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
$ $
- --------------------------------------------------------------------------------
REVENUES -- --
EXPENSES
Selling, general and administrative 1,128,642 491,330
----------- -----------
OPERATING LOSS BEFORE OTHER INCOME (EXPENSES)
AND THE UNDERNOTED ITEMS 1,128,642 491,330
----------- -----------
OTHER INCOME (EXPENSES)
Amortization expense, deferred development costs (332,021) --
Amortization expense, property and equipment (9,268) (4,239)
Interest expense (2,913) (2,659)
Interest income 1,125 5,173
Dilution gain (Note 9) -- 130,388
Loss on disposition of shares of Career Match, Inc. (5,974) --
----------- -----------
(349,051) 128,663
----------- -----------
LOSS FROM CONTINUING OPERATIONS BEFORE THE
UNDERNOTED ITEMS (1,477,693) (362,667)
EQUITY IN NET LOSS OF CAREER MATCH, INC (76,428) (135,657)
NON-CONTROLLING INTEREST 561 2,204
----------- -----------
LOSS FROM CONTINUING OPERATIONS (1,553,560) (496,120)
LOSS FROM DISCONTINUED OPERATIONS (NOTE 11) -- (338,228)
----------- -----------
NET LOSS (1,553,560) (834,348)
=========== ===========
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES 20,557,198 15,057,801
=========== ===========
BASIC LOSS PER SHARE
From continuing operations $ (0.076) $ (0.033)
From discontinued operations -- (0.022)
----------- -----------
$ (0.076) $ (0.055)
=========== ===========
See accompanying notes
2.
TALWARE NETWORX INC.
(INCORPORATED UNDER THE LAWS OF ALBERTA)
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
$ $
- --------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents 33,868 137,883
Accounts receivable -- 27,000
Prepaid expenses and other assets 31,547 697
---------- ----------
65,415 165,580
INVESTMENT IN CAREER MATCH, INC. (NOTE 4) 1 88,377
PROPERTY AND EQUIPMENT (NOTE 5) 35,579 28,269
DEFERRED DEVELOPMENT COSTS, NET OF ACCUMULATED
AMORTIZATION OF $332,021 (2001: $NIL) 806,338 1,048,063
TRADEMARK APPLICATION COSTS 6,245 6,245
PATENT APPLICATION COSTS 4,793 4,549
---------- ----------
918,371 1,341,083
========== ==========
LIABILITIES
CURRENT
Accounts payable and accrued liabilities (Note 6) 520,160 235,062
Advances from a shareholder, without interest 65,591 307,821
---------- ----------
585,751 542,883
NON-CONTROLLING INTEREST 1 562
---------- ----------
585,752 543,445
---------- ----------
SHAREHOLDERS' EQUITY
Capital stock (Note 8) 3,315,167 2,506,626
Contributed surplus 6,301 6,301
Equity component of convertible debenture (Note 7) 280,000 --
Deficit (3,268,849) (1,715,289)
---------- ----------
332,619 797,638
---------- ----------
918,371 1,341,083
========== ==========
ON BEHALF OF THE BOARD: "Alan Rootenberg" Director
-------------------
"Steven Bielawski" Director
-------------------
See accompanying notes
3.
37
TALWARE NETWORX INC.
CONSOLIDATED STATEMENT OF DEFICIT
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
$ $
- --------------------------------------------------------------------------------
DEFICIT, BEGINNING OF YEAR (1,715,289) (880,941)
Net loss (1,553,560) (834,348)
---------- ----------
DEFICIT, END OF YEAR (3,268,849) (1,715,289)
========== ==========
TALWARE NETWORX INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
$ $
- --------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Loss from continuing operations (1,553,560) (496,120)
Items not affecting cash
Non-cash items included in selling, general and
administrative expenses 5,974 --
Amortization, property and equipment 9,268 4,239
Amortization, deferred development costs 332,021 --
Loss on write-off of leasehold improvements -- 13,379
Dilution gain -- (130,388)
Equity in net loss of Career Match, Inc. 76,428 135,657
Loss on disposition of shares of Career Match, Inc. 5,974 --
Non-controlling interest (561) (2,204)
---------- ----------
(1,124,456) (475,437)
---------- ----------
Changes in non-cash components of working capital
Taxes recoverable -- 29,217
Prepaid expenses and other assets (30,850) 2,866
Accounts payable and accrued liabilities 330,098 292,633
---------- ----------
299,248 324,716
---------- ----------
CASH USED IN CONTINUING OPERATIONS (825,208) (150,721)
---------- ----------
FINANCING ACTIVITIES
Advances from a shareholder 37,770 116,727
Issuance of capital stock 854,545 1,156,110
Costs associated with raising capital (91,005) (130,547)
Common shares issued by a subsidiary -- 132,734
---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 801,310 1,275,024
---------- ----------
INVESTING ACTIVITIES
Investment in Career Match, Inc. -- (86,688)
Purchase of property and equipment (16,578) (10,220)
Development costs capitalized (90,296) (1,048,063)
Trademark application costs capitalized (244) (6,245)
Patent application costs capitalized -- (4,549)
---------- ----------
CASH USED IN INVESTING ACTIVITIES (107,118) (1,155,765)
---------- ----------
NET CASH OUTFLOWS FROM CONTINUING OPERATIONS (131,018) (31,462)
Net cash inflows (outflows) from discontinued
operations (Note 11(b)) 27,000 (310,071)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (104,018) (341,533)
Cash and cash equivalents, beginning of year 137,883 479,416
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR 33,865 137,883
========== ==========
2
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
Talware Networx Inc. (hereinafter referred to as "TNI" or the "Corporation")
provides human capital recruitment and retention solutions. The Corporation's
suite of software products allows users to source and manage human capital
resources on a local, national and global basis. They include solutions for
private label job boards, skill and experience identification, applicant
marketing and employee communication.
1. FUTURE OPERATIONS
These consolidated financial statements have been prepared on a going
concern basis, which assumes the Corporation will continue in operation in
the foreseeable future and be able to realize its assets and satisfy its
liabilities in the normal course of business. Certain conditions and events
exist that cast doubt on the Corporation's ability to continue as a going
concern.
The Corporation has incurred significant losses from both continuing and
discontinued operations and has used significant amounts of cash in
developing its suite of software products over the past three years.
Continued operations depend upon the Corporation's ability to obtain
additional financing and/or generate positive cash flows from operations.
Should the Corporation be unable to generate positive cash flows from
operations or secure additional financing in the foreseeable future, the
application of the going concern principle for financial statement
reporting purposes may no longer be appropriate. These financial statements
do not include any adjustments, related to the valuation or classification
of assets or the amounts or classification of liabilities, which would
otherwise be necessary should the Corporation be unable to continue as a
going concern.
2. BASIS OF CONSOLIDATION AND PRESENTATION
These consolidated financial statements include the accounts of TNI and its
subsidiaries. All intercompany transactions and balances have been
eliminated.
3. SIGNIFICANT ACCOUNTING POLICIES
(a) Use of estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities (if
any) at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting periods. Actual results
may vary from the current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reported in
operations in the periods in which such adjustments become known.
3
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
3. Significant accounting policies (continued)
(b) Property and equipment
Property and equipment are stated at cost. Amortization is provided for
using the declining balance basis at the following annual rates:
Furniture and equipment - 20%
Computer hardware and
and systems software - 30%
(c) Deferred development costs
Research costs are expensed as incurred. Software development costs are
deferred when such costs meet the criteria under Canadian generally
accepted accounting principles for capitalization and amortization
which, in the case of the Corporation, occurred on January 1, 2001.
Prior to January 1, 2001, costs related to development activities were
charged to operations in the period in which they were incurred because
the capitalization criteria had not been met.
On June 1, 2002, when the Corporation first installed and launched a
successful commercial application of its software in Korea, the
amortization of deferred development costs commenced and will continue
using the straight-line method over a 2-year period.
(d) Trademark application costs
Trademark application costs represent such costs that are directly
attributable to the preparation and submission thereof. Upon formal
receipt of the trademarks, accumulated costs will be amortized using
the straight-line method over the economic life of the trademarks. No
trademarks have been received to date.
(e) Patent application costs
Patent application costs represent such costs that are directly
attributable to the preparation and submission thereof, related to
certain processes or products. Upon formal receipt of the patents,
accumulated costs will be amortized using the straight-line method over
the economic life of the patents. No patents have been received to
date.
(f) Foreign currency translation
The accounts of TNI expressed in foreign currencies and the accounts of
foreign subsidiaries, which are operationally and financially
integrated, are translated into Canadian dollars as follows: revenue
and expenses at exchange rates effective on the transaction dates,
monetary assets and monetary liabilities at exchange rates in effect at
the year-end, and non-monetary assets and non-monetary liabilities at
exchange rates effective on the transaction dates. Foreign exchange
gains and losses are included in operations.
4
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
3. Significant accounting policies (continued)
(g) Income taxes
The Corporation and its subsidiaries follow the liability method of
accounting for income taxes. Under the liability method, the amount of
future income tax assets and liabilities reflect the future tax
consequences attributable to temporary differences between the
financial statement carrying amount of existing assets and liabilities
and their respective tax bases. Future tax assets and liabilities are
measured using enacted or substantially enacted tax rates and laws
expected to apply when the temporary differences are expected to
reverse. A valuation allowance is recorded against any future tax
assets if, in the judgment of management, it is more unlikely than not
the future tax assets would be realized. The income tax provision, if
any, represents the aggregate of the current income taxes plus the
variance in the amounts of the future tax assets and liabilities
between the beginning and the end of the year.
(h) Investment tax credits
Investment tax credits are recognized when qualifying expenditures are
made and there is reasonable assurance that credits will be realized.
Investment tax credits earned with respect to current expenditures for
qualified research activities are included in the consolidated
statement of operations as a reduction of related expenses in the year
incurred. Investment tax credits attributable to current expenditures
for qualified development activities are reflected as a reduction of
development costs capitalized in the year such expenditures are
incurred.
(i) Stock-based compensation
The Corporation has stock-based compensation plans which are described
in note 8(e)(iv). No compensation expense is recognized for these plans
when stock or stock options are issued to employees, directors or
consultants. Consideration received on the exercise of stock options or
issuance of stock is credited to share capital. For consideration paid
to an employee for the repurchase of stock options, the excess
consideration paid over the carrying amount of the stock option
cancelled, if any, is charged to deficit.
(j) Revenue recognition
Commencing in 2003, the Corporation will earn revenues from license
fees, royalties and other fees. Revenues therefrom will be recognized,
provided collection thereof is reasonably assured, as follows:
i) License fees
The Corporation will earn license fees from the granting of licenses to
businesses located outside North America for the use of certain or all
of its software applications (hereinafter referred to as the "Service")
in specified territories.
5
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
3. Significant accounting policies (continued)
(j) Revenue recognition (continued)
i) License Fees (continued)
Such territorial license fees will be recognized according to the terms
of the license agreement. Perpetual territorial licenses will be
recognized upon delivery and licensee acceptance of the licensed
application. Revenues from territorial licenses subject to a term will
be recognized over the term of the agreement, which would normally
commence after delivery to the licensee, and the licensee's acceptance,
of the licensed application. If a territorial license agreement
includes multiple elements, license fee revenues would be recognized on
delivery, provided the application delivered does not include
significant customization or modification of the base application and
the payment terms for licenses are not subject to acceptance criteria.
If an acceptance period is stipulated, revenues would be recognized
upon the earlier of customer acceptance or the expiration of the
acceptance period.
ii) Royalties and other fees
The Corporation will earn royalties and other fees from the use of the
Service in two ways, from:
a) end-users involved in the personnel placement business; and
b) the territorial licenses referred to in paragraph (i) above.
Royalties and other fees earned will be recognized as they accrue in
accordance with the terms of the agreements.
4. INVESTMENT IN CAREER MATCH, INC.
2002 2001
$ $
-------------------------
Investment in shares, at cost 244,123 288,030
Equity in net loss of Career Match, Inc.
since acquisition (244,122) (199,653)
-------------------------
1 88,377
=========================
A subsidiary of the Corporation has an investment in TNI's Korean-based
licensee, Career Match, Inc. ("CMI"). In June 2002, CMI commenced its
commercial operations, having completed the adaptation for the Korean
market place of TNI's TalXchange software product.
6
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
4. Investment in Career Match, Inc. (continued)
Prior to 2001, this subsidiary, Talware Technologies Inc. ("Technologies"),
purchased 328,000 common shares of CMI for cash consideration of $288,030.
As at December 31, 2001, Technologies had a 27.2% interest in CMI. Under
Canadian generally accepted accounting principles ("Canadian GAAP"), the
Corporation considered its investment in CMI as being an investment in a
corporation subject to significant influence, on the basis that it owned
more than 20% of the issued and outstanding common shares of CMI.
Consequently, TNI used the equity method to account for the investment in
CMI.
In 2002, Technologies transferred 50,000 common shares of CMI to a
Korean-based shareholder of CMI for no consideration. Furthermore, CMI
raised additional equity capital from others. Consequently, in 2002,
Technologies' interest in CMI declined from 27.2% as at December 31, 2001
to 16.2% as at December 31, 2002.
Under Canadian GAAP, when an investor ceases to be able to exercise
significant influence over the operations of an investee enterprise, its
investment therein must be accounted for using the cost method, with cost
representing the carrying value of the investment when its interest in the
investee declined below 20%. As at that time, TNI's carrying value of its
investment in CMI was $1. Therefore, no further write-down of the value in
the investment in CMI was required.
5. PROPERTY AND EQUIPMENT
---------------------------------------
Accumulated
Cost Amortization Net Book Value
2002 2001
$ $ $ $
------ ------ ------ ------
Furniture and equipment 28,437 13,441 14,996 15,590
Computer hardware and
systems software 32,740 12,157 20,583 12,679
------ ------ ------ ------
61,177 25,598 35,579 28,269
====== ====== ====== ======
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2002 2001
$ $
------------------------------
Employees/Contractors 113,445 35,543
Consultants 99,555 40,614
Professional fees 148,956 86,494
Other trade creditors 158,202 72,407
------------------------------
520,158 235,058
==============================
7
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
7. EQUITY COMPONENT OF CONVERTIBLE DEBENTURE
On December 31, 2002, the Corporation issued an unsecured, interest-free,
5-year convertible debenture having a principal amount of $280,000. This
debenture is convertible into common shares of the Corporation at various
conversion prices over the 5-year term of the debenture. The conversion
prices are: $0.12 per share during 2003 and 2004 (8,333.33 shares per $1,000
of principal amount of debenture), $0.13 per share during 2005 (7,692.31
shares per $1,000 of principal), $0.15 per share during 2006 (6,666.67
shares per $1,000 of principal) and $0.16 per share during 2007 (6,250
shares per $1,000 of principal). The Corporation issued the debenture to a
major shareholder to settle an amount of $280,000 payable thereto.
The debenture is being accounted for in accordance with its substance. The
entire amount of the principal of the convertible debenture is presented in
these consolidated financial statements as a component of shareholders'
equity, on the basis that the debenture was issued to a major shareholder
who intends on exercising his conversion rights. The issuance of the
convertible debenture has not been reflected in the consolidated statement
of cash flows, on the basis that this settlement of a debt payable to the
major shareholder represents a non-cash transaction.
8
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
8. CAPITAL STOCK
Authorized:
Unlimited number of Common, voting shares.
7,000,000 Preferred Shares-Series 1; non-voting; entitled to receive
dividends upon declaration by the directors of the Corporation; entitled
to the return of the stated capital upon dissolution, liquidation, or
winding-up; convertible at the option of the holder, into Common Shares
on a one-for-one basis, and for such financial year up to and including
the year ending December 31, 2003, using a formula in which the number
of such shares that may be converted after any one fiscal year ("vested
shares") represents the proportion of Normalized Net Earnings (as
defined by the Board of Directors for the purpose of these conversions)
divided by $2,000,000 multiplied by the number of such shares originally
held after deducting any such shares previously converted; ranking
equally with the Preferred Shares of every other series and ranking in
preference over any other shares junior to Preferred Shares of the
Corporation, notwithstanding the rights, privileges, restrictions and
conditions attached to any other class of shares of the Corporation;
with the provision that any such shares which are not convertible to
Common Shares, as defined by the conversion formula, shall be cancelled
upon confirmation by the auditors of the Corporation of the Normalized
Net Earnings to December 31, 2003; and with the provision that the
Corporation shall not, without the consent of a majority of the holders
of Preferred Shares-Series 1, issue rights or warrants to all holders of
its Common Shares, entitling them to subscribe for or purchase common
shares (or securities exchangeable for, or convertible into, Common
Shares) at a price per Common Share (or in the case of a security
exchangeable for or convertible into Common Shares, having an exchange
or conversion price per Common Share) which is less than 95% of the
Current Price per common share on the record date established in
connection with the issuance of rights or warrants.
3,000,000 Preferred Shares-Series 2; non-voting; issuable pursuant to the
terms of, and in accordance with, the Corporation's Independent Search
Consultant and Employee Performance Stock Option Plan; ranking equally
with Series 1 shares in respect to dividends and dissolution,
liquidation or winding up; redeemable at the Conversion Price as defined
in the Performance Stock Plan; convertible to Common Shares as to 25% of
the number of Preferred Shares-Series 2 issued to such holder from time
to time on March 31 of each year following the date of issue of such
shares.
2002 2001
Issued: $ $
---------- ----------
25,198,583 Common Shares (2001: 16,203,133 shares) 3,927,526 3,027,981
Costs associated with raising capital (612,359) (521,355)
---------- ----------
3,315,167 2,506,626
========== ==========
9
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
8. Capital stock (continued)
Changes in the number of shares issued for the years ended December 31, 2002
and 2001 are summarized as follows:
Preferred Common Shares
Shares-Series 1
Number $ Number $
--------------------------------------------------
BALANCES, JANUARY 1, 2001 7,000,000 1 12,995,000 1,121,871
Special Warrants exercised -- -- 937,500 750,000
Shares returned to treasury (7,000,000) (1) -- --
Public offering -- -- 1,437,300 1,006,110
Private placement -- -- 833,333 150,000
--------------------------------------------------
BALANCES, DECEMBER 31, 2001 -- -- 16,203,133 3,027,981
Private placements 8,995,450 899,545
--------------------------------------------------
BALANCES, DECEMBER 31, 2002 -- -- 25,198,583 3,927,526
==================================================
(a) Private placements, 2002
On April 15, 2002, the Corporation completed the closing of the first
portion of a $600,000 private placement of equity and issued 2,800,000
units at a price of $0.10 per unit for aggregate consideration of
$280,000. Each unit consisted of one Common Share and one Warrant which
is convertible for a period of one year into one common share at a cost
of $0.15.
On June 6, 2002, the Corporation completed the closing of the second
and final portion of the $600,000 private placement and issued a
further 3,200,000 units for aggregate consideration of $320,000, of
which $275,000 was received in cash and $45,000 represented the
settlement of accounts payable existing as at the date of settlement.
Each unit consisted of one Common Share and one Warrant which is
convertible for a period of one year into one common share at a cost of
$0.15.
On October 4, 2002, the Corporation completed the closing of the first
portion of an additional $750,000 private placement of equity and
issued 1,955,450 units at a price of $0.10 per unit for aggregate
consideration of $195,545. Each unit consisted of one Common Share and
one common share purchase warrant which is convertible for a period of
two years into one common share at a cost of $0.15.
On December 17, 2002, the Corporation completed the closing of the
second portion of the $750,000 private placement and issued a further
1,040,000 units at a price of $0.10 per unit for aggregate
consideration of $104,000. Each unit consisted of one Common Share and
one common share purchase warrant which is convertible for a period of
two years into one common share at a cost of $0.15.
10
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
8. Capital stock (continued)
(a) Private placements, 2002 (continued)
The stated capital value of the common shares issued on June 6, 2002,
as settlement of certain accounts payable existing at that date, has
not been reflected in the statement of cash flows on the basis that the
settlement of such accounts payable represents a non-cash transaction.
Further closings of the $750,000 private placement occurred after
December 31, 2002 and are reported as subsequent events in Note 15.
(b) Issuance of shares in 2001
On March 30, 2001, the Corporation completed the closing of its public
offering and issued 1,437,300 units for $1,006,110 cash. Each unit
consisted of one Common Share and one Warrant expiring March 30, 2003.
On November 30, 2001, the Corporation completed the closing of a
private placement and issued 833,333 units for $150,000 cash. Each unit
consisted of one Common Share and one Warrant, which expired November
30, 2002.
(c) Issuance of Special Warrants in 2001
Following an October 2000 private placement of common shares wherein
937,500 special warrants were issued, on January 16, 2001 these
warrants were deemed to have been exercised in exchange for Common
Shares and Warrants, on a one-for-one basis.
(d) Cancellation and return to Treasury of Preferred Shares-Series 1 in
2001
On February 21, 2001, the Corporation cancelled and returned to
Treasury 7,000,000 Preferred Shares-Series 1. All holders of the shares
consented to the cancellation and return of such shares to treasury.
The stated value attributed to these shares, being $1 in the aggregate,
has been transferred to contributed surplus. The decrease in the stated
value of Preferred Shares-Series 1 and the corresponding increase in
the value of contributed surplus have not been reflected in the
consolidated statement of cash flows, on basis that the changes in the
accounts result from a non-cash transaction.
11
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
8. Capital stock (continued)
(e) Commitments to issue shares
i) Warrants
As at December 31, 2002, the Corporation has issued and
outstanding warrants, as follows:
Exercise Expiry
Number of -------------------------------
Warrants Price Date
---------- ----- -----------------
1,437,300 0.85 March 30, 2003
2,800,000 0.15 April 15, 2003
3,200,000 0.15 June 6, 2003
1,955,450 0.15 October 2, 2004
1,040,000 0.15 December 20, 2004
10,432,750
ii) The Corporation entered into a one-year, renewable agreement,
effective July 1, 2002, with consultants engaged to assist
management with global business development opportunities.
Pursuant to the terms of the agreement, the consultants received
a fee of $75,000 in 2002 and will receive, subject to regulatory
approval, 250,000 common shares of the Corporation during each of
the first and second quarters of 2003.
iii) On October 12, 2002, the Corporation entered into a marketing
agreement with consultants to complement the Corporation's sales
efforts in developing Global Human Capital Supply Chain Networks
in certain vertical industries; and in particular the health care
sector. Under the terms of the agreement, the Corporation will
issue to these consultants, subject to regulatory approval, up to
two million common shares on the achievement of significant
financial and business development milestones. Commissions on net
revenues generated will also be payable.
12
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
8. Capital stock (continued)
(e) Commitments to issue shares (continued)
iv) The Corporation has two stock option plans.
Under the 1998 Stock Option Plan, 10% of the outstanding capital
of the Corporation is available for option grants, less any
options exercised. This plan has no specific requirements as to
the option period, the time during which options vest and the
method of vesting. Generally, the options issued under this plan
are five years in duration and vest immediately or, in a number of
limited cases, are based on the achievement of certain
performance-related targets based on revenue generation. At
December 31, 2002, there were 1,975,000 options issued under this
plan and a further 544,858 options available for issue.
Under the 2002 Stock Option Plan, 2,180,313 options have been
approved by the Corporation's shareholders for issue under the
plan. Options are generally issued for five-year terms and vest as
to 33% in each of the six-month periods following the granting
thereof. In certain limited cases, vesting also is based on the
achievement of certain performance-related targets based on
revenue generation. At December 31, 2002, 1,970,000 options were
issued under this plan leaving 210,313 available for future issue.
Changes in options during the years ended December 31, 2002 and
2001 are summarized as follows:
2002 2001
Number Weighted Average Number Weighted Average
Exercise Price Exercise Price
-----------------------------------------------------------------
OPTIONS OUTSTANDING, JANUARY 1 678,000 $0.20 1,098,000 $0.41
Options granted 3,867,000 0.28 125,000 0.15
Options forfeited (600,000) (0.24) (545,000) (0.62)
-----------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31 3,945,000 $0.27 678,000 $0.20
=================================================================
Exercisable 1,375,000 $0.14 678,000 $0.20
Not exercisable- service/time based 670,000 0.15 -- --
Not exercisable- performance related 1,900,000 0.41 -- --
-----------------------------------------------------------------
3,945,000 $0.27 678,000 $0.20
=================================================================
13
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
8. Capital stock (continued)
(e) Commitments to issue shares (continued)
As at December 31, 2002, options outstanding are summarized as follows:
Exercise Number Weighted Average Number
Price Contractual Life (months) Exercisable
----------------------------------------------------------------------
$0.10 400,000 8 400,000
$0.15 1,845,000 46 975,000
$0.20 150,000* 41 --
$0.30 350,000* 41 --
$0.40 350,000* 41 --
$0.50 350,000* 41 --
$0.60 500,000* 41 --
----------- ------------
3,945,000 1,375,000
=========== ============
* These options, and 200,000 of the options at $0.15, have
been issued to certain individuals and vest solely to the
extent that certain cumulative net revenue targets are met
over the life of the options (gross revenue targets in the
case of one individual who holds 600,000 of the 1,900,000
options). The options awarded to one individual were partially
approved by the Toronto Venture Exchange and 500,000 options
remain to be approved by the shareholders of the Corporation.
The fair values of the Corporation's options granted in 2002 and 2001
were estimated using the Black-Scholes model with weighted average
assumptions of 50 months expected terms (2001: 24 months), volatility
of 31% (2001: 83%), interest rate of 2.77% (2001: 5.25%) and an
expected dividend yield of nil in both 2002 and 2001. Had the
compensation cost for the employee stock option plan been determined
based upon the fair values at the date of the award, the Corporation's
net loss and basic loss per share for 2002 would have been increased by
$106,359 and $0.005, respectively (2001: $59,950 and $0.004 per share,
respectively).
14
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
9. DILUTION GAIN
On November 5, 2001, Talware Technologies Inc. issued 41,667 Common Shares
from treasury in exchange for aggregate cash consideration of $83,318USD,
representing $132,734CAD.
As a result of this transaction, TNI's ownership of Technologies has been
reduced from 99.26% to 98.85%. TNI realized a gain on dilution of its
ownership of Technologies in the amount of $130,388. The dilution gain
results from the issuance of shares by Technologies at a price per share in
excess of TNI's carrying value per share of its investment in Technologies.
The dilution gain does not represent a taxable event. Therefore, no income
taxes are attributable thereto.
10. INCOME TAXES
(a) Reconciliation of statutory tax provision to the effective tax
provision on continuing operations
The provision for income taxes on continuing operations reflects an
effective tax rate that differs from statutory tax rates for the
following reasons:
2002 2001
--------- ---------
Combined statutory Canadian federal and Ontario
income tax rate 40.5% 42.1%
========= =========
Provision for current income taxes recovered
on continuing operations using the statutory rate $(584,369) $(152,683)
--------- ---------
Permanent differences between accounting
income and taxable income 6,511 (73,871)
Temporary differences 53,180 (446,867)
Costs associated with the issuance of equity
instruments, not deducted in the computation
of accounting income (55,544) (50,076)
Additional tax benefit attributable to losses
carried forward by U.S. subsidiaries (1,823) (6,101)
Current year tax losses being carried
forward to reduce future years' taxable income 582,045 729,598
--------- ---------
584,369 152,683
--------- ---------
PROVISION FOR CURRENT INCOME TAXES RECOVERED
ON CONTINUING OPERATIONS $ -- $ --
========= =========
15
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
10. Income taxes (continued)
(b) Non-capital (operating) losses being carried forward
As at December 31, 2002, the Corporation and its subsidiaries have
accumulated non-capital (operating) losses totaling $4,300,000, which
are available to reduce taxable income in future years. The tax
benefits pertaining to these losses have not been recognized in these
consolidated financial statements. The amounts of the losses
attributable to TNI and its Canadian subsidiaries (the "Canadian
group") and to its U.S. subsidiaries (the "U.S. group"), and the years
in which the losses expire, are as follows:
$ $
---------------- ------------
(Canadian group) (U.S. group)
2006 88,000 -
2007 1,014,000 87,000
2008 715,000 1,020,000
2009 1,293,000 83,000
--------- ---------
3,110,000 1,190,000
========= =========
(c) Investment tax credits being carried forward
As at December 31, 2002, TNI is entitled to investment tax credits
totaling approximately $35,000, which are available to reduce Canadian
income taxes payable in future years. The tax benefits pertaining to
these losses have not been recognized in these consolidated financial
statements. These investment tax credits expire, as follows:
$
-------
2011 17,000
2012 18,000
-------
35,000
=======
(d) Pool of unclaimed SR&ED expenditures being carried forward
As at December 31, 2002, TNI has accumulated unclaimed Scientific
Research and Experimental Development ("SR&ED") expenditures totaling
$173,000, which are available for indefinite carry forward and would be
used to reduce Canadian taxable income in future years.
16
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
10. Income taxes (continued)
(e) Net future tax liability recognized
As at December 31, 2002, the tax effects of the temporary differences
and tax reductions that would otherwise give rise to future tax assets
and future tax liabilities are, as follows:
$
-----------
Future tax assets
Non-capital (operating) losses being carried-forward 1,767,106
Deferred finance charge deductions 112,281
Pool of unclaimed SR&ED expenditures 69,934
Investment in Career Match, Inc. 52,120
Investment tax credits recoverable 34,535
-----------
2,035,976
-----------
Less: valuation allowance (1,647,354)
-----------
388,622
-----------
Future tax liabilities
Deferred development costs (388,503)
Property and equipment (119)
-----------
(388,622)
-----------
NET FUTURE TAX LIABILITY AS AT DECEMBER 31, 2002 --
===========
17
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
11. DISCONTINUED OPERATIONS
On December 16, 2001 (the measurement date and date of disposal), the
Corporation ceased operating its executive placement and recruiting service
division. In 2002, there were no ongoing activities related to operations
discontinued and no further revenues or costs were incurred. All assets and
liabilities from discontinued operations were settled in 2002 and no
amounts remain outstanding at December 31, 2002.
(a) Results of operations of discontinued division
2001
$
--------
Fee revenue 394,552
Direct costs 436,420
--------
Gross profit (loss) (41,868)
Selling, general and administrative expenses (279,778)
Amortization expense (2,902)
Loss on write-off of leasehold improvements (13,670)
--------
LOSS FROM DISCONTINUED OPERATIONS (338,228)
========
(b) Cash outflows from discontinued division
2001
$
--------
Loss from discontinued operations (338,228)
Amortization of capital assets 2,902
Loss on write-off of leasehold improvements 13,670
Decrease (increase) in accounts receivable 52,886
Decrease (increase) in prepaid expenses
and sundry assets 186
Increase (decrease) in accounts payable
and accrued liabilities (41,487)
CASH OUTFLOWS FROM DISCONTINUED OPERATIONS (310,071)
========
In 2002, accounts receivable in the amount of $27,000 were collected.
This amount is reflected in the statement of cash flows as a net cash
inflow from discontinued operations in 2002.
18
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
11. Discontinued operations (continued)
(c) Assets related to discontinued division
Assets related to discontinued operations, presented in the
consolidated balance sheets, are as follows:
2001
$
------
CURRENT ASSETS
Accounts receivable 27,000
12. FULLY DILUTED LOSS PER SHARE
Fully-diluted loss per share figures have not been presented as the effect
of the exercise of the warrants and options would be anti-dilutive.
13. CONCENTRATION OF CREDIT RISK
Cash and cash equivalents
Cash is on deposit with a major Canadian chartered bank. The cash
equivalents represent money market mutual fund units managed by a
subsidiary of a major Canadian chartered bank. Management does not believe
the company is subject to any significant credit risk, in this respect.
14. SUBSEQUENT EVENTS
On January 17, 2003, the Corporation completed the closing of the third
portion of the $750,000 private placement and issued 2,500,000 units at a
price of $0.10 per unit for aggregate consideration of $250,000. Each unit
consisted of one Common Share and one common share purchase warrant which
is convertible for a period of two years into one common share at a cost of
$0.15.
On March 14, 2003, the Corporation completed the closing of the fourth
portion of the $750,000 private placement and issued 725,000 units at a
price of $0.10 per unit for aggregate consideration of $72,500. Each unit
consisted of one Common Share and one common share purchase warrant which
is convertible for a period of two years into one common share at a cost of
$0.15.
19
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
15. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN GAAP AND UNITED STATES GAAP
These consolidated financial statements are prepared using Canadian GAAP,
which differs in some respects from U.S. GAAP. There are no material
differences between Canadian GAAP and U.S. GAAP that affect the statement
of cash flows. The significant reporting differences between Canadian and
U.S. GAAP that effect these consolidated financial statements are, as
follows:
(a) Deferred development costs
Commencing in 2001, the Corporation began to defer costs associated
with software development on the basis that such costs met the
criteria under Canadian GAAP for capitalization and amortization.
Under Canadian GAAP, deferred development costs amount to $806,338,
net of accumulated amortization of $332,021. Amortization expense for
the year totals $332,021.
Under U.S. GAAP, all development costs should be charged to operations
in the year incurred.
(b) Stock-based compensation
Under Canadian GAAP, the Corporation is not required to recognize
stock-based compensation based on the fair value of the related equity
instruments at the grant date. The fair value of the unrecognized
stock-based compensation is disclosed in note 8(e).
Under U.S. GAAP, the Corporation should use fair value accounting or
the intrinsic value method of accounting to measure compensation cost
for its stock options awarded to employees at grant date.
The effects of the significant differences between Canadian GAAP and U.S.
GAAP are reflected in the balance sheet and statement of operations below.
No significant differences exist between net loss determined in accordance
with U.S. GAAP and comprehensive income.
20
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
15. Significant differences between Canadian GAAP and United States GAAP
(continued)
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
-----------------------------------------------------------------------------
2002 2001
$ $
----------------------------
NET LOSS IN ACCORDANCE WITH CANADIAN GAAP (1,553,560) (834,348)
Adjustments to reconcile to U.S. GAAP:
Eliminate development costs capitalized (90,296) (1,048,063)
Eliminate amortization expense, deferred
development costs 332,021 --
Record fair value of stock-based compensation (106,359) (59,950)
----------------------------
NET LOSS IN ACCORDANCE WITH U.S. GAAP (1,418,194) (1,942,361)
============================
BASIC LOSS PER SHARE
From continuing operations (0.069) (0.107)
From discontinued operations -- (0.022)
----------------------------
(0.069) (0.129)
============================
21
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
15. Significant differences between Canadian GAAP and United States GAAP
(continued)
CONSOLIDATED BALANCE SHEET - DECEMBER 31, 2002 AND 2001
----------------------------------------------------------------------
2002 2001
$ $
---------------------------
ASSETS
Current 65,415 165,580
Investment in Career Match, Inc. 1 88,377
Property and equipment 35,579 28,269
Trademark application costs 6,245 6,245
Patent application costs 4,793 4,549
---------------------------
112,033 293,020
===========================
LIABILITIES
Current 585,751 542,883
Non-controlling interest 1 562
---------------------------
585,752 543,445
---------------------------
SHAREHOLDERS' DEFICIENCY
Capital stock 3,536,996 2,622,096
Contributed surplus 6,301 6,301
Equity portion of convertible debenture 280,000 --
Deficit (4,297,016) (2,878,822)
---------------------------
(473,719) (250,425)
---------------------------
112,033 293,020
===========================
16. COMPARATIVE FIGURES
Certain comparative figures have been reclassified, where applicable, to
conform to the current year's presentation.
22
Exhibits
INDEX TO FINANCIAL STATEMENTS
INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
WITH COMPARATIVE FIGURES FOR NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
September 30 September 30 September 30 September 30
2003 2003 2002 2002
(9 months) (3 months) (9 months) (3 months)
$ $ $ $
---------- ---------- ---------- ----------
REVENUES 18,550 18,550 -- --
---------- ---------- ---------- ----------
EXPENSES
Selling, general and administrative 968,925 375,630 666,918 299,438
---------- ---------- ---------- ----------
OPERATING LOSS BEFORE OTHER INCOME (EXPENSES)
AND THE UNDERNOTED ITEMS (950,375) (357,080) (666,918) (299,438)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSES)
Amortization expense, deferred development costs 426,885 142,295 126,790 94,993
Amortization expense, property and equipment 6,882 2,294 6,951 3,010
Interest expense 4,507 1,479 849 533
Loss on disposition of shares of Career Match, Inc. -- -- 5,974 --
---------- ---------- ---------- ----------
LOSS FROM CONTINUING OPERATIONS BEFORE THE
UNDERNOTED ITEMS (1,388,649) (503,148) (807,482) (397,974)
---------- ---------- ---------- ----------
EQUITY IN NET LOSS OF CAREER MATCH, INC. -- -- 76,428 --
NON-CONTROLLING INTEREST -- -- (561) (66)
---------- ---------- ---------- ----------
NET LOSS (1,388,649) (503,148) (883,349) (397,908)
========== ========== ========== ==========
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES (NOTE 5) 29,794,149 31,166,066 19,277,730 22,203,133
BASIC LOSS PER SHARE (0.047) (0.016) (0.046) (0.018)
---------- ---------- ---------- ----------
23
TALWARE NETWORX INC.
INTERIM CONSOLIDATED STATEMENT OF DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 2003
WITH COMPARATIVE FIGURES FOR NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
========================================================================================================
September 30 September 30 September 30 September 30
2003 2003 2002 2002
(9 months) (3 months) (9 months) (3 months)
$ $ $ $
- --------------------------------------------------------------------------------------------------------
DEFICIT BEGINNING OF PERIOD (3,268,849) (4,154,350) (1,715,289) (1,715,289)
Net Loss (1,388,649) (503,148) (883,349) (397,908)
------------- ------------- ------------- -------------
DEFICIT END OF PERIOD (4,657,498) (4,657,498) (2,598,638) (2,113,197)
------------- ------------- ------------- -------------
24
TALWARE NETWORX INC.
INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
WITH COMPARATIVE FIGURES FOR NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
September 30 September 30 September 30 September 30
2003 2003 2002 2002
(9 months) (3 months) (9 months) (3 months)
$ $ $ $
---------- ---------- ---------- ----------
Cash provided by (used in)
Loss from continuing operations (1,388,649) (503,148) (883,349) (397,908)
---------- ---------- ---------- ----------
Items not affecting cash
Non-cash items included in selling, general and
administrative expenses -- -- 5,974 --
Amortization, deferred development costs 426,885 142,295 126,790 94,993
Amortization, property and equipment 6,882 2,294 6,951 3,010
Equity in net loss of Career Match, Inc. -- -- 76,428 --
Loss on disposition of shares of Career Match, Inc. -- -- 5,974 --
Non-controlling interest -- -- (561) (66)
---------- ---------- ---------- ----------
(954,882) (358,559) (661,793) (299,971)
---------- ---------- ---------- ----------
Changes in non-cash components of working capital
Accounts receivable (11,880) (3,701) -- --
Sundry taxes recoverable -- -- (11,993) (9,749)
Prepaid expenses and other assets 21,309 2,777 (27,689) (21,502)
Accounts payable and accrued liabilities 254,403 95,253 156,596 146,614
---------- ---------- ---------- ----------
263,832 94,329 116,914 115,363
---------- ---------- ---------- ----------
Cash provided by (used) in continuing operations (691,050) (264,230) (544,879) (184,608)
---------- ---------- ---------- ----------
Financing activities
Advances from (repayment to) a shareholder 93,093 36,557 1,284 1,284
Issuance of capital stock 550,455 227,955 555,000 --
Costs associated with issuing stock (1,025) -- (58,829) --
---------- ---------- ---------- ----------
Cash provided by financing activities 642,523 264,512 497,455 1,284
---------- ---------- ---------- ----------
Investing activities
Purchase of property and equipment -- -- (16,578) (1,773)
Development costs capitalized -- -- (93,045) 3,571
Trademark application costs capitalized -- -- (244) --
---------- ---------- ---------- ----------
Cash used in investing activities -- -- (109,867) 1,798
---------- ---------- ---------- ----------
Net cash outflows from continuing operations (48,527) 282 (157,291) (181,526)
Net cash inflows (outflows) from discontinued operations 27,000 --
Net increase (decrease) in cash and cash equivalents (48,527) 282 (130,291) (181,526)
---------- ---------- ---------- ----------
Cash and cash equivalents, beginning of period 33,868 (14,941) 137,883 189,118
---------- ---------- ---------- ----------
Bank indebtedness, end of period (14,659) (14,659) 7,592 7,592
---------- ---------- ---------- ----------
25
TALWARE NETWORX INC.
(INCORPORATED UNDER THE LAWS OF ALBERTA)
INTERIM CONSOLIDATED BALANCE SHEET
AS AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(UNAUDITED)
September 30 December 31
2003 2002
$ $
---------- ----------
ASSETS
CURRENT
Cash and cash equivalents -- 33,868
Accounts receivable 11,880 --
Prepaid expenses and other assets 10,238 31,547
---------- ----------
22,118 65,415
Investment in Career Match, Inc. 1 1
Property and equipment 28,697 35,579
Deferred development costs, net of accumulated amortization
of -$379,453 (2002: -$806,338) 379,453 806,338
Trademark application costs 6,245 6,245
Patent application costs 4,793 4,793
---------- ----------
441,307 918,371
========== ==========
LIABILITIES
CURRENT
Bank indebtedness 14,659 --
Accounts payable and accrued liabilities 774,563 520,160
Advances from a shareholder, without interest 158,684 65,591
---------- ----------
947,906 585,751
Non-controlling interest 1 1
---------- ----------
947,907 585,752
---------- ----------
SHAREHOLDERS' EQUITY
Capital stock (Note 5) 4,144,597 3,315,167
Contributed surplus 6,301 6,301
Equity component of convertible debenture (Note 4) -- 280,000
Deficit (4,657,498) (3,268,849)
---------- ----------
(506,600) 332,619
---------- ----------
441,307 918,371
---------- ----------
26
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
1. NATURE OF THE BUSINESS
Talware Networx Inc. (hereinafter referred to as "TNI" or the "Corporation")
provides human capital recruitment and retention solutions. The Corporation's
suite of software products allows users to source and manage human capital
resources on a local, national and global basis. They include solutions for
private label job boards, skill and experience identification, applicant
marketing and employee communication.
2. FUTURE OPERATIONS
These interim consolidated financial statements have been prepared on a going
concern basis, which assumes the Corporation will continue in operation in the
foreseeable future and be able to realize its assets and satisfy its liabilities
in the normal course of business. Certain conditions and events exist that cast
doubt on the Corporation's ability to continue as a going concern.
The Corporation has incurred significant losses from both continuing and
discontinued operations and has used significant amounts of cash in developing
its suite of software products over the past three years.
Continued operations depend upon the Corporation's ability to obtain additional
financing and/or generate positive cash flows from operations.
Should the Corporation be unable to generate positive cash flows from operations
or secure additional financing in the foreseeable future, the application of the
going concern principle for financial statement reporting purposes may no longer
be appropriate. These interim consolidated financial statements do not include
any adjustments, related to the valuation or classification of assets or the
amounts or classification of liabilities, which would otherwise be necessary
should the Corporation be unable to continue as a going concern.
3. SIGNIFICANT ACCOUNTING POLICIES
3. These interim consolidated financial statements have been prepared by
management, using the same accounting policies and the methods for their
application as the most recent consolidated financial statements. Disclosures in
these interim consolidated financial statements may not conform in all respects
to the requirements of Canadian generally accepted accounting principles for
annual financial statements. These interim consolidated financial statements
should be read in conjunction with the most recent audited consolidated
financial statements of the Corporation, being for the year ended December 31,
2002.
4. EQUITY COMPONENT OF CONVERTIBLE DEBENTURE
On December 31, 2002, as reported in its audited consolidated financial
statements as at that date, the Corporation issued an unsecured, interest-free,
5-year convertible debenture having a principal amount of $280,000. This
debenture was convertible into common shares of the Corporation at various
conversion prices over the 5-year term of the debenture. On May 12, 2003, the
debenture was converted at $0.12 per share. Accordingly, the conversion has not
been shown as a financing activity on the Interim Consolidated Statement of Cash
Flows.
27
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
5. CAPITAL STOCK
September 30, December 31,
2003 2002
-----------------------------
Issued
33,036,466 Common Shares (December 31, 2002: 25,198,583 shares) $4,757,981 $3,927,526
Costs associated with raising capital (613,384) (612,359)
-----------------------------
$4,144,597 $3,315,167
=============================
Changes in the number of shares issued during the nine months ended September
30, 2003 and the year ended December 31, 2002 are summarized as follows:
Number $
BALANCES, JANUARY 1, 2002 16,203,133 3,027,981
Private placements 8,995,450 899,545
BALANCES, DECEMBER 31, 2002 25,198,583 3,927,526
Private placements 3,225,000 322,500
Conversion of debenture 2,333,333 280,000
Private placement 2,279,550 227,955
BALANCES, SEPTEMBER 30, 2003 33,036,466 4,757,981
(a) Private placements, 2003
On January 17, 2003, the Corporation completed the closing of the third
portion of the $750,000 private placement and issued 2,500,000 units at a
price of $0.10 per unit for aggregate consideration of $250,000. Each unit
consisted of one Common Share and one common share purchase warrant, which
is convertible for a period of two years into one common share at a cost of
$0.15.
On March 14, 2003, the Corporation completed the closing of the fourth
portion of the $750,000 private placement and issued 725,000 units at a
price of $0.10 per unit for aggregate consideration of $72,500. Each unit
consisted of one Common Share and one common share purchase warrant, which
is convertible for a period of two years into one common share at a cost of
$0.15.
On August 13, 2003, the Corporation completed the closing of the final
portion of the $750,000 private placement, which was over subscribed to
total $850,000, and issued 2,279,550 units at a price of $0.10 per unit for
aggregate consideration of $227,955. Each unit consisted of one Common
Share and one common share purchase warrant, which is convertible for a
period of two years into one common share at a cost of $0.15.
Further closings of an additional private placement occurred after
September 30, 2003 as described in Note 7 (Subsequent events).
28
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
5. Capital stock (continued)
(b) Commitments to issue shares
i) Warrants
As at September 30, 2003, the Corporation has issued and outstanding
warrants, as follows:
Number of Warrants Exercise Price Expiry Date
1,955,450 0.15 October 2, 2004
1,040,000 0.15 December 20, 2004
2,500,000 0.15 January 17, 2005
725,000 0.15 March 14, 2005
2,279,550 0.15 August 13, 2005
8,500,000
ii) The Corporation entered into a one-year, renewable agreement,
effective July 1, 2002, with consultants engaged to assist management
with global business development opportunities. Pursuant to the terms
of the agreement, the consultants received a fee of $75,000 in 2002
and will receive, subject to regulatory approval, 250,000 common
shares of the Corporation during each of the first and second quarters
of 2003.
iii) On October 12, 2002, the Corporation entered into a marketing
agreement with consultants to complement the Corporation's sales
efforts in developing Global Human Capital Supply Chain Networks in
certain vertical industries; and in particular the health care sector.
Under the terms of the agreement, the Corporation will issue to these
consultants, subject to regulatory approval, up to two million common
shares on the achievement of significant financial and business
development milestones. Commissions on net revenues generated will
also be payable.
(b) Commitments to issue shares (continued)
iv) Option plans
Under a 1998 Stock Option Plan, 10% of the outstanding capital of the
Corporation is available for option grants, less any options
exercised. This plan had no specific requirements as to the option
period, the time during which options vest and the method of vesting.
Generally, the options issued under this plan were five years in
duration and vested immediately or, in a number of limited cases, were
based on the achievement of certain performance-related targets based
on revenue generation. At September 30, 2003, there were 1,975,000
options issued under this plan and a further 544,858 options available
for issue.
Under a 2002 Stock Option Plan, 2,180,313 options were approved by the
corporation's shareholders for issue under the plan. Options were
generally issued for five-year terms and vested as to 33% in each of
the six-month periods following the granting thereof. In certain
limited cases, vesting also was based on the achievement of certain
performance-related targets based on revenue generation. At June 30,
2003, 1,970,000 options were issued under this plan leaving 210,313
available for future issue.
At the corporation's Annual General Meeting held July 16, 2003, the
shareholders voted to amend the Plans to combine the two Plans into
one plan and to increase the number of shares of the Corporation for
which options may be granted under the resulting plan. Consequently,
the former plans were consolidated into one plan called the "Talware
Networx Inc. Stock Option Plan" (the "New Plan"). The number of shares
issuable, pursuant to options granted and to be granted under the New
Plan, was increased to a total of 6,150,000 common shares. All options
that were previously granted remained outstanding on the terms
ascribed thereto and subject to the terms of the New Plan.
During the nine months ended September 30, 2003, 900,000 options
outstanding were converted from performance based options, to options
exercisable at 15 cents.
140,000 options were issued to employees and consultants of the
corporation during the quarter ended September 30, 2003
As at September 30, 2003, there were 4,085,000 options outstanding
under the New Plan.
29
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
5. Capital stock (continued)
(b) Commitments to issue shares (continued)
iv) Option plans (continued)
Changes to the option plans are summarized as follows:
2002
----------------------------
Weighted Average
Number Exercise Price
- -------------------------------------------------------------------------------
OPTIONS OUTSTANDING JANUARY 1 678,000 $ 0.20
Options granted 3,867,000 $ 0.28
Options forfeited (600,000) $ 0.24
- -------------------------------------------------------------------------------
OPTIONS OUTSTANDING, DECEMBER 31 3,945,000 $ 0.27
- -------------------------------------------------------------------------------
2003
------------------------
OPTIONS OUTSTANDING JANUARY 1 3,945,000 $ 0.27
OPTIONS GRANTED 140,000 $ 0.15
OPTIONS FORFEITED -- --
- -------------------------------------------------------------------------------
OPTIONS OUTSTANDING, SEPTEMBER 30 4,085,000 $ 0.20
- -------------------------------------------------------------------------------
Exercisable 1,945,000 $ 0.14
Not exercisable - service/time based 1,140,000 $ 0.15
Not exercisable - performance related 1,000,000 $ 0.375
- -------------------------------------------------------------------------------
OPTIONS OUTSTANDING, SEPTEMBER 30 4,085,000 $ 0.20
===============================================================================
6. FULLY DILUTED LOSS PER SHARE
Fully-diluted loss per share figures have not been presented as the effect of
the exercise of warrants and options would be anti-dilutive.
7. SUBSEQUENT EVENTS
Subsequent to September 30, 2003, the Corporation continued its $430,000 private
placement of securities at a price of $0.08 per unit. Each unit consists of one
Common Share and one common share purchase warrant, which is convertible for a
period of two years into one common share at a cost of $0.10. To September 30,
2003, subscriptions totaling $406,716 were received. Of this amount, $146,480
was received in cash from A. Rootenberg, a major shareholder, which amount has
been recorded as an advance from shareholder pending the issuance of shares. The
remaining funds of $260,236 have been recorded as a current liability pending
the issuance of the shares.
Also subsequent to September 30, 2003, the Corporation entered into a private
placement of a convertible debenture for an aggregate principal of $150,000. The
debenture bears interest at 8% per annum and will mature in three years. The
debenture is convertible into units of Talware at $0,06 during the first two
years of its term and $0.07 during the third year of its term. Each unit
consists of one Common Share and one common share purchase warrant, which is
convertible for a period of two years into one common share at a cost of $0.10.
Any common shares issued upon conversion of the debenture or exercise of the
warrants will be subject to resale restrictions until February 21, 2004.
30
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
8. RELATED PARTY TRANSACTIONS
The President of the company is also a major shareholder. In the ordinary course
of business, he has been paid a monthly draw against cash advances the President
made to the company. With the advent of a revenue stream, salary and benefits
owing to the President for 2003 and for part of 2002 has been accrued as an
advance from shareholder and expensed to the income statement.
9. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN GAAP AND UNITED STATES GAAP
These interim consolidated financial statements are prepared using Canadian
GAAP, which differs in some respects from U.S. GAAP. There are no material
differences between Canadian GAAP and U.S. GAAP that affect the statement of
cash flows. The significant reporting differences between Canadian and U.S. GAAP
that effect these interim consolidated financial statements are, as follows:
(a) Deferred development costs
Commencing in 2001, the Corporation began to defer costs associated with
software development on the basis that such costs met the criteria under
Canadian GAAP for capitalization and amortization. Under Canadian GAAP,
deferred development costs amount to $379,453, net of accumulated
amortization of $758,905. Amortization expense for the nine months ended
September 30, 2003 totals $426,885.
Under U.S. GAAP, all development costs should be charged to operations in
the year incurred.
(b) Stock-based compensation
Under Canadian GAAP, the Corporation is not required to recognize
stock-based compensation based on the fair value of the related equity
instruments at the grant date.
Under U.S. GAAP, the Corporation should use fair value accounting or the
intrinsic value method of accounting to measure compensation cost for its
stock options awarded to employees at grant date.
31
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
9. Significant differences between Canadian GAAP and United States GAAP
(continued)
The effects of the significant differences between Canadian GAAP and U.S. GAAP
are reflected in the interim consolidated balance sheet and statement of
operations below. No significant differences exist between net loss determined
in accordance with U.S. GAAP and comprehensive income.
INTERIM CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
SEPTEMBER 30 September 30
2003 2002
(9 MONTHS) (9 months)
$ $
---------- ----------
Net loss in accordance with Canadian GAAP (1,388,649) (807,482)
---------- ----------
Adjustments to reconcile to U.S. GAAP
Eliminate development costs capitalized 96,616
Eliminate amortization expense, deferred
development costs (426,885) (126,790)
---------- ----------
Net loss in accordance with U.S. GAAP (961,764) (777,308)
========== ==========
Basic loss per share (0.032) (0.040)
========== ==========
32
TALWARE NETWORX INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003
9. Significant differences between Canadian GAAP and United States GAAP
(continued)
INTERIM CONSOLIDATED BALANCE SHEET - SEPTEMBER 30, 2003
WITH COMPARATIVE FIGURES AS AT DECEMBER 31, 2002
SEPTEMBER 30 December 31
2003 2002
$ $
---------- ----------
ASSETS
Current 22,118 65,415
Investment in Career Match, Inc. 1 1
Property and equipment 28,697 35,579
Trademark application costs 6,245 6,245
Patent application costs 4,793 4,793
---------- ----------
61,854 112,033
========== ==========
LIABILITIES
Current 947,906 585,751
Non-controlling interest 1 1
---------- ----------
947,907 585,752
---------- ----------
SHAREHOLDERS' DEFICIENCY
Capital stock 4,144,597 3,315,167
Contributed surplus 6,301 6,301
Equity component of convertible debenture (Note 3) -- 280,000
Deficit (5,036,951) (4,075,187)
---------- ----------
(886,053) (473,719)
---------- ----------
61,854 112,033
========== ==========
33
SCHEDULE "B" - SUPPLEMENTAL INFORMATION
Details Regarding Selling General and Administrative Expenses ("SG&A")
Compensation expense $211,490
Technical consulting costs $ 51,546
Public company expense $ 17,728
All other $ 94,866
--------
$375,630
34