UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
---------------
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: MAY 31, 2005
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 001-15503
--------------------------
WORKSTREAM INC.
(Exact name of Registrant as specified in its charter)
CANADA N/A
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
495 MARCH ROAD, SUITE 300
OTTAWA, ONTARIO K2K 3G1
(Address of principal executive offices) (zip code)
(613) 270-0619
(Registrant's telephone number, including area code)
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -------------------
COMMON SHARES, NO PAR VALUE BOSTON STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON SHARES, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes |X| No |_|
The aggregate market value of the outstanding voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
price at which the common equity was last sold as of the last business day of
the registrant's most recently completed second fiscal quarter, was
$110,835,000. Common shares held by each executive officer and director and by
each person who owned 10% or more of the outstanding common shares as of such
date have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The total number of common shares, no par value per share, outstanding on
August 10, 2005 was 49,194,178, excluding 108,304 escrow shares.
DOCUMENTS INCORPORATED BY REFERENCE
Information required by Part III of this annual report is incorporated by
reference to the registrant's definitive proxy statement relating to its 2005
annual meeting of shareholders, which will be filed within 120 days of the close
of the registrant's fiscal year end.
WORKSTREAM INC.
FORM 10-K
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business....................................................................5
2. Properties.................................................................15
3. Legal Proceedings..........................................................16
4. Submission of Matters to a Vote of Security Holders....................... 16
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities .................................... 17
6. Selected Financial Data................................................... 25
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................26
7A.Quantitative and Qualitative Disclosures About Market Risk.................44
8. Financial Statements and Supplementary Data ...............................45
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................................75
9A.Control and Procedures.....................................................75
9B.Other Information..........................................................76
PART III
10. Directors and Executive Officers of the Registrant........................77
11. Executive Compensation....................................................77
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.......................................................77
13. Certain Relationships and Related Transactions............................77
14. Principal Accountant Fees and Services....................................77
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........78
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "ANTICIPATES," "BELIEVES,"
"EXPECTS," "INTENDS," "FUTURE," AND WORDS OF SIMILAR IMPORT WHICH EXPRESS
MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS REGARDING OUR FUTURE
PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE HAVE NO OBLIGATION TO
UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS AND FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE SET FORTH UNDER "RISK FACTORS" WHICH BEGINS ON PAGE 39
ON THIS FORM 10-K AND OTHER FACTORS AND UNCERTAINTIES CONTAINED ELSEWHERE IN
THIS FORM 10-K AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
PART I
ITEM 1. BUSINESS
OVERVIEW
We were incorporated on May 24, 1996 under the Canada Business Corporation
Act under the name CareerBridge Corporation. In February 1999, we changed our
name to E-Cruiter.com Inc. and in November 2001 we changed our name to
Workstream Inc. (the "Company"). In 1997, we began operating an online regional
job board, on which applicants posted their resumes and employers posted
available positions, focused on the high-technology industry. In February 1999,
we changed our business focus from the job board business to providing on-line
recruitment services. Beginning in 2001, we began to expand our focus to provide
a full range of services and web-based software for Human Capital Management
("HCM"). HCM is the process by which companies recruit, train, evaluate,
motivate and retain their employees. Today, we offer software and services that
address the needs of companies to more effectively manage their human capital
management function. Workstream has two distinct business units: Enterprise
Workforce Services and Career Networks. The Enterprise Workforce Services
segment offers a complete suite of HCM software solutions, which addresses
recruitment, benefits, performance, compensation and rewards. We offer each
application on an individual basis, and we offer the comprehensive package
through TalentCenter, which is a web-based portal that aggregates and integrates
all of the applications. We also offer enterprise workforce management
application tools for succession planning and organizational planning and
charting. The Career Networks segment offers recruitment research, applicant
sourcing and exchange and career transition services. We believe that our
"one-stop-shopping" approach for our clients' HCM needs is more efficient and
effective than traditional methods of human resource management.
COMPANY SEGMENTS
The Company has two distinct operating segments, which are the Enterprise
Workforce Services and Career Networks segments. Enterprise Workforce Services
consists of revenue generated from HCM software and related professional
services. In addition, Enterprise Workforce Services generates revenue from the
sale of various products through the rewards module of the HCM software. Career
Networks primarily consists of revenue from recruitment research, applicant
sourcing and exchange and career transition services. During fiscal 2005 after
the most recent acquisitions, management changed the segments in order for them
to more accurately reflect how management evaluates the business. Prior to the
change, career transition services was considered a separate reportable segment
(Career Transition Services), and recruitment research and applicant sourcing
and exchange were included in the Enterprise Workforce Services segment.
Financial information about our segments and geographic areas can be found
in note 14 to our consolidated financial statements.
INDUSTRY BACKGROUND
Our target market includes any organization needing to manage their human
capital function in a more effective and cost efficient manner. This includes
providing solutions for recruiting, training, evaluating, motivating and
retaining their employees, evaluating performance and compensation,
administering benefits, and planning the outplacement of their employees. Our
market includes companies seeking to fulfill those functions through information
technology skills and expertise. We believe that several factors require
companies to hire additional personnel and place an emphasis on fulfilling the
human capital function and, therefore, increase demand for our services
including increased employee turnover and the shortage of knowledge workers in
North America.
We believe that many organizations are seeking to overhaul their human
resources information systems to take advantage of both new technologies and new
human capital management concepts, and we anticipate that spending in human
capital management will continue to shift away from the client-server human
resources services to web-based and hosted services because of their lower cost
and ease of implementation.
5
We believe that our suite of workforce management solutions directly
addresses the major challenges facing employers mainly, time, quality and cost
of hiring and retaining employees.
STRATEGY
Our objective is to become the leading supplier of comprehensive adaptive
workforce solutions in North America. Our Career Network services can be used by
any size organization, however, our Enterprise Workforce Solutions are presently
configured for larger organizations. We believe that our products can address
the needs of the entire human capital market and manage the entire employee
lifecycle. We are able to provide enterprise workforce management solutions and
services to companies of any size. We believe that our solutions help companies
cost-effectively maximize workforce productivity, engagement, and satisfaction
by applying business discipline to key people processes. Our solutions include:
o automating and monitoring the recruitment process and the provision
of links to external service providers, such as companies that
specialize in skill testing or personality profiling;
o talent acquisition services ranging from job posting outreach to job
boards;
o hosting a corporate career site;
o talent utilization services with job posting to internal company
intranets;
o evaluation of talent performance;
o management of talent compensation;
o talent succession planning;
o talent reward and retention services; and
o talent separation services that encompass pre-termination planning,
individual coaching, opportunity research and job marketing campaign
development.
We believe we have developed a strategy that will achieve revenue growth
in most economic conditions, and we are focused on achieving profitability
through a combination of organic revenue growth, cost management and strategic
acquisitions. Key elements of our strategy for business development are as
follows:
o Enhancing and widening our service portfolio. We continue to
integrate our different services within our technology platform and
continue to expand our services to provide a more complete workforce
management process through further product development and strategic
acquisitions. We believe that this will give us the ability to grow
revenues with each client, acquire new clients with different
requirements, and further develop revenue stability in almost any
market condition.
o Building a wider indirect sales channel for distribution of our
products and services. We will continue to pursue reseller
agreements for all of our services with human capital solution
providers and recruiting companies.
o Expanding direct sales with vertical focus. We will continue to
emphasize our direct sales efforts into targeted vertical
industries, especially those with good current economic outlooks
including financial services, retail, healthcare, pharmaceuticals
and biotech, food services and some manufacturing sectors.
6
o Maintaining technological leadership. We plan to remain at the
forefront of web-based human capital solutions by developing and
hosting or licensing the latest available technologies taking
advantage of the internet and offering our clients a comprehensive
human capital management service in a hosted environment.
o Pursuing strategic acquisitions. From time-to-time, we will evaluate
acquisition and investment opportunities in complementary
businesses, products and/or technologies. Our objective is to
increase our revenue growth, add new services or new technologies
for our existing client base and penetrate new markets.
We believe that our services allow organizations of every size to
significantly improve their recruiting, hiring, evaluation, compensation,
retention and outplacement cycles. Our systems automate those human capital
management functions and most are accessible with any standard web browser and
require no additional software or hardware deployment by clients.
PRINCIPAL SERVICES AND OPERATIONS
ENTERPRISE WORKFORCE SERVICES
Our Enterprise Workforce Services segment offers a complete suite of HCM
software solutions and related professional services. Our products address
recruitment, benefits, performance, compensation, and rewards. During fiscal
2005, we launched TalentCenter, which is an integrated, open portal solution
that aggregates applications, content and services that companies use to manage
all phases of the employee lifecycle - from recruitment to retirement. During
fiscal 2005, we changed our segments to more accurately reflect how management
evaluates its business. Subsequent to the change, recruitment research and
applicant sourcing and exchange moved to the Career Networks segment. In fiscal
2005, approximately 67% of our revenue was generated by our Enterprise Workforce
Services.
TalentCenter
The Workstream TalentCenter provides a unified view of all of our
offerings. It is a role-based talent management portal that provides single
sign-on authentication to all licensed applications and services. This
streamlined approach facilitates rapid user adoption of our applications and
services. Due to the fact that TalentCenter is a hosted solution, we manage all
of the integration and service complexities at our data center. Through a
standard web browser, companies have access to our on-demand applications and
can turn on those they need, when they need them. TalentCenter provides
companies the flexibility to start small and grow over time or deploy the entire
solution at once.
Recruitment
Workstream Recruitment helps companies automate and manage the entire
recruitment process including job requisition, job profile creation, job
posting, applicant attraction, screening and tracking, interview scheduling,
offer letter generation and making the hire. Workstream Recruitment also
provides companies with an extended network and industry database to help source
key hires. The end result is a thoroughly researched and filtered list of
qualified prospective candidates. Recruitment applications include the
following:
o Candidate Management, for automating and streamlining the recruiting
process used to attract, manage, screen and qualify candidates.
o Career Site, a custom-designed internal and external career website
hosted and maintained by Workstream at our secure data center, used
for attracting, routing and tracking job candidates.
o Compliance, reporting tools for preparing EEOC compliance reporting
information and evaluating the staffing process.
o Document Builder, for automating and streamlining the creation
process and management of candidate-facing letters, such as offer
letters.
7
Benefits
Workstream Benefits is an integrated benefits solution that supports both
benefits communication and transactions. Featuring flexible, out-of-the-box
functionality, Workstream Benefits can be implemented quickly to help companies
automate and streamline the entire benefits enrollment, communication and
administration process. Benefit applications included:
o Benefits Enrollment and Administration is an out-of-the-box
application that automates the benefits enrollment and
administration process. It supports customers' full enrollment
cycle, including open, new hire and life event processing.
o Benefits Communicator helps organizations personalize and
communicate benefit information as well as human resources policies
and procedures via the web to their employees, in turn reducing the
amount of inquiries into customers' human resources staff supporting
this process.
o Health Pages is a one-stop source for the information employees need
to make educated health care choices during benefits enrollment and
year-round. Health Pages gives employees 24/7 access to personalized
information on providers and plans specific to customers' benefits
programs and the tools they need to make well-informed decisions.
All information comes from our continuously-maintained database of
more than 500,000 physicians, 6,000 hospitals and 400 health plans.
o Total Rewards Statements gives employees one place to view, model
and manage all of their corporate-sponsored compensation, financial
and health benefits. Employees are able to grasp the full value of
their wealth-related benefits programs, and the contributions
employers make on their behalf.
Performance
Workstream Performance enables organizations to translate business
strategy into a fully aligned set of operational goals, provide real-time
visibility and reporting on goal status, assess employee performance and gather
employee feedback across the organization. These products supply the tools and
information required to manage organizational performance effectively,
including: goal setting, alignment, cascading and linkage; self, peer,
multi-rater and 360 degree performance assessments; on-demand tracking and
reporting of performance against established metrics; and the collaboration and
evaluation capabilities necessary to assess results. The solution is also
integrated with Workstream Compensation to help support organization's
pay-for-performance programs. Performance applications include:
o Achievement, for aligning individual performance with top-level
business goals, automating the process of managing, monitoring and
assessing individual employee performance and integrating
performance data into the compensation planning process.
o Development, for assessing, developing and mentoring specific
competencies and behaviors with self-assessments, 180 degree, 360
degree and multi-rater assessments.
o Employee Surveys, for gathering employee feedback across the entire
organization, analyzing and communicating the results.
Compensation
Workstream Compensation is a comprehensive set of products that enable
end-to-end management of all types of enterprise compensation, including salary,
merit increases, variable pay and stock awards. As many organizations are
beginning to introduce more complex, formula-driven variable pay plans, we
feature an advanced variable pay product that provides the flexibility to use
formula-based compensation plans and managerial discretion to reward the
company's high achievers. All compensation planning products are designed to
provide managers and compensation professionals with the information and online
decision support tools necessary to help them make more informed, policy-based
pay decisions. The compensation planning products can be implemented separately
or together, allowing organizations to achieve the goal of realizing a
pay-for-performance philosophy at their own pace. Compensation applications
include:
o Focal Planning, for annual salary, basic variable pay and stock
evaluation across the enterprise during a pre-determined planning
window.
8
o Anniversary Planning, for evaluating individual employees on their
'effective' hiring dates throughout the year.
o Advanced Variable Pay, for formulaic variable pay plans that are
administered throughout the year.
o Total Rewards Statements, a Web-based product for employees to
access, view, model and manage all of their corporate-sponsored
financial benefits.
Rewards
Workstream Rewards programs enable organizations to increase employee
productivity, improve employee satisfaction and drive engagement. These
solutions deliver convenience and productivity benefits to the entire workforce
and help organizations identify and reward accomplishments and behaviors that
drive desired operational results. This product line delivers several offerings
using an enterprise class solution. Rewards applications include:
o Discount Programs, for enhancing employee satisfaction and
productivity. This web-based incentive and employee discount
platform offers employees savings on computers, movies,
entertainment, travel, insurance and professional services from over
200 brand name providers.
o Incentive Programs, for motivating performance and driving results
across the organization. This web-based incentive solution
calculates and distributes non-cash awards to employees for
achieving specific results based upon predefined metrics
strategically aligned with company goals.
o Recognition Programs, for rewarding years of service or other
corporate milestones and outstanding performance achievement. This
online recognition program rewards employees for attaining corporate
milestones using online certificates with a selection from a
non-cash awards catalog. The program also provides a company-wide
online recognition tool for participants and managers to issue
on-the-spot recognition certificates and awards when exceptional
performance occurs or goals are achieved.
Workstream Workforce Planning and Analytics
Workstream's Workforce Planning and Analytics product line supports a
broad range of strategic and administrative workforce planning processes
including succession planning and leadership development, competency management
and organizational charting. Applications include:
o Workforce and Succession planning supports critical human resource
planning processes, including succession planning, leadership
development, development planning and competency management.
o Organizational Charting uses information a company already has on
hand to deliver information-rich corporate directories and
organizational charts across a company's intranet.
o Advance Workforce Reporting serves line-managers, human resource
administrators, employees and executives and presents information in
formats that are useful to each function role. Advanced Workforce
Reporting complements Workstream's standard reports with
personalized reports created by Workstream to meet an organization's
specific needs.
CAREER NETWORKS
Our Career Networks segment consists of our career transition services,
recruitment research and applicant sourcing and exchange. Career Networks
accounted for approximately 33% of total revenue for fiscal 2005.
Career Transition Services
Workstream's career transition services provide a package of outplacement
products and services which are provided through our wholly-owned subsidiary
Paula Allen Holdings, Inc., which we acquired in July 2001 and does business
under the name of Allen and Associates.
Our career transition services establish a comprehensive guide for
displaced employees. We focus on creating professional career marketing
materials that displaced employees need in order to immediately begin their new
job campaign. This package includes a professionally written resume, broadcast
letter, custom cover letter, and references. This assistance is provided to
approximately 10,000 job seekers each year in the areas of information
technology, engineering, finance and marketing.
9
We market our career transition services to individuals seeking employment
or other career opportunities in the marketplace. Career transition services are
marketed to individuals predominantly by advertising on the internet as well as
in local newspapers throughout North America. Individuals are charged on average
between $850 to $3,500 for our resume development, career consulting and market
research services.
Recruitment Research
We currently provide recruitment research services through our subsidiary
OMNIpartners, which we acquired in July 2001. Our recruitment research services
are based on the outsourcing of the sourcing and screening work associated with
recruiting. Our services are based on research provided to our clients on an
hourly fee basis, and clients are billed once the project is completed. We
believe this outsourcing formula allows clients to lower costs and gain access
to specialized expertise that provides objectivity and ongoing value to the
hiring process. OMNIpartners' research employees look for potential employees,
interview and qualify them, and deliver all the information to the clients'
human resource departments. The OMNIresearch Report, delivered after completion
of the recruitment assignment, details information about each individual
uncovered during the search. OMNIresearch Reports may include information about
candidates' work histories, technical abilities, educational backgrounds, people
skills, decision-making abilities, availability and salary expectations. The
client can offer to hire any or all of the individuals presented, at any time,
for no additional charge.
Applicant Sourcing and Exchange
6FigureJobs.com, which we acquired in October 2001, is an applicant
sourcing and exchange where job seeking candidates and recruiting companies can
interact. We believe that 6FigureJobs customizes this experience to satisfy the
needs of the upper-echelon management candidate and the companies looking to
hire them. The site provides content appropriate for senior executives,
directors and other managers, as well as containing job postings that meet their
qualifications. We employ screening to create this exclusive community of job
seekers. On the candidate side, each job seeker is reviewed before his or her
resume is allowed to reside in the site's candidate database. On the recruiting
side, all job openings must have a minimum aggregate compensation of $100,000.
We generate revenue through 6FigureJobs on a subscription basis from employers
and recruiters that access our database of job seekers and use our tools to
post, track and manage job openings. We also generate revenue by charging
companies that advertise on our 6FigureJobs website, which includes charging
certain advertisers a fee based on a percentage of their sales generated through
the advertisement on our website.
ACQUISITIONS
As part of our overall strategy, we have pursued our objective of offering
an entire suite of HCM applications through the acquisition of other companies
offering services similar or complementary to ours. Through the acquisition of
those companies, we have added the necessary technology and expanded our
services enabling us to grow our revenue and to position ourselves for future
profitability by consolidating operations and improving efficiencies. We
completed four acquisitions during the twelve months ended May 31, 2005 ("fiscal
2005"), three acquisitions during the twelve months ended May 31, 2004 ("fiscal
2004"), and three acquisitions during the twelve months ended May 31, 2003
("fiscal 2003") that met our criteria.
FISCAL 2005 ACQUISITIONS
Peoplebonus.com LLC
On June 21, 2004, we acquired certain assets of Peoplebonus.com LLC
("Peoplebonus"), a Delaware limited liability company. As consideration for the
sale, the Company issued to the shareholders of Peoplebonus 180,506 common
shares (72,202 common shares valued at $200,000 and 108,304 common shares held
in escrow), made a cash payment of $25,000, which is held in escrow, and assumed
a promissory note for $100,000. In addition, the Company made a cash payment of
$105,000 to Peoplebonus. Peoplebonus' products and services are designed to
streamline the way a company processes and handles resumes. Peoplebonus'
artificial intelligence data mining software can search for key words and
phrases from within a resume and score the resume based on learned search
criteria. We recorded approximately $427,000 in intangible assets as part of the
acquisition.
10
Bravanta, Inc.
On July 27, 2004, we acquired 100% of the outstanding shares of Bravanta,
Inc. ("Bravanta"), a Delaware corporation. As consideration for the sale, the
Company issued to the shareholders of Bravanta 2,427,125 common shares. In
January 2005, 244,939 additional common shares were issued to the former
management of Bravanta upon receipt by the Company of completed and satisfactory
accredited investor questionnaires and other related documentation. The total
aggregate value of the shares was $7,107,693. In addition, the Company made cash
payments of $2,051,120 to meet certain of Bravanta's obligations prior to the
finalization of the purchase agreement. Bravanta is a provider of enterprise
incentive and recognition programs. We recorded approximately $2.2 million in
intangible assets and $7.3 million in goodwill as part of the acquisition.
HRSoft, LLC
On October 6, 2004, we acquired certain assets of HRSoft, LLC ("HRSoft"),
a Delaware limited liability company. As consideration for the sale, the Company
assumed $766,913 in bank debts and vendor obligations. In addition, the Company
made cash payments of $100,000 to meet certain of HRSoft's obligations prior to
the finalization of the asset purchase agreement. We also agreed to reimburse
the owners of HRSoft for the estimated individual tax liabilities arising from
the transaction. This amount totaled $110,000. Finally, the Company issued a
promissory note for $325,000 to the owners of HRSoft, under which the portion to
be repaid to the Company is contingent on future revenue levels. HRSoft develops
and markets strategic talent management software solutions for succession
planning and leadership development, performance management, competency
management, career and development planning, organizational charting, modeling
and hierarchy management. We recorded approximately $1.8 million in intangible
assets as part of the acquisition.
ProAct Technologies Corporation
On December 30, 2004, we acquired certain assets of ProAct Technologies
Corporation ("ProAct"), a Delaware corporation. As consideration for the sale,
we made a cash payment of $5,500,000 and issued a promissory note for
$1,530,000, which accrued interest at an annual rate of 6% with principal and
interest due on June 1, 2005. In addition, the Company issued to the
shareholders of ProAct 913,551 common shares valued at $2,822,873, of which
253,764 shares are being held in escrow as the exclusive source against which
the Company can assert potential indemnification claims. ProAct is a provider of
software and hosted web-based tools for employee benefits management. We
recorded approximately $6.8 million in intangible assets and $3.3 million in
goodwill as part of the acquisition.
FISCAL 2004 ACQUISITIONS
Perform, Inc.
On September 11, 2003, the Company acquired certain assets of Perform,
Inc. ("Perform"), a Delaware corporation, in connection with Perform's voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. As
consideration for the sale, we issued to the shareholders of Perform 189,873
common shares valued at $300,000 and cash of $450,000. In addition, the Company
advanced $72,000 to Perform to fund its operations prior to the finalization of
the asset purchase agreement. Perform designs, develops and markets Human
Resource Information Systems and Performance Management Information Systems for
mid-size and Global 2000 companies, enabling them to automate and have an
effective performance management process of goal setting, employee appraisal and
feedback. We recorded approximately $700,000 in intangible assets as part of the
acquisition.
Peopleview, Inc.
On March 27, 2004 as amended and effective for accounting purposes on May
27, 2004, the Company acquired certain assets of Peopleview, Inc.
("Peopleview"), a Nevada corporation. As consideration for the sale, the Company
issued to the shareholders of Peopleview 246,900 common shares valued at
$688,851 and warrants to purchase 50,000 common shares at $3.00 per share, which
were valued at $46,500. In addition, the Company made a cash payment of
$250,000. Peopleview designs, develops and markets software that helps companies
evaluate employee skills, competency and performance. In addition, Peopleview
offers software that enables companies to survey their employees regarding the
company's environment and assess compliance with the Sarbanes-Oxley Act. We
recorded approximately $900,000 in intangible assets as part of the acquisition.
11
Kadiri, Inc.
On May 28, 2004, we acquired via merger 100% of the outstanding shares of
Kadiri Inc. ("Kadiri"), a California based company. As consideration for the
sale, we issued to the shareholders of Kadiri 4,450,000 common shares valued at
$12,415,500. During fiscal 2005, an additional 1,042,891 shares valued at
$2,532,111 were issued as additional contingent consideration after certain
revenue and cash generation targets of the acquired entity were achieved. Kadiri
is a provider of Enterprise Compensation Management solutions which enable
companies to plan and manage compensation, performance evaluation and monitor
the granting of rewards. We recorded approximately $3.6 million in intangible
assets and $14 million in goodwill as part of the acquisition.
FISCAL 2003 ACQUISITIONS
Icarian, Inc.
On June 28, 2002, we acquired via merger 100% of the outstanding shares of
Icarian Inc. ("Icarian"), a California based company. As consideration for the
sale, we issued to the shareholders of Icarian 2,800,000 common shares valued at
approximately $9.9 million. Icarian is a provider of web-enabled solutions and
professional services. Icarian's Recruitment Management Suite is web-native
software, offered on an Application Service Provider ("ASP") basis, with a user
interface that provides functionality for management of the hiring process.
Icarian's Connectivity, Interactive Job Site and Reporting modules offer human
resource professionals capabilities to integrate with human resource management
systems, to manage candidates' applications and job campaigns, and to produce
reporting for both compliance and cost reporting for a corporation's employee
acquisition process. We recorded approximately $8.4 million in intangible assets
and $5.4 million in goodwill as part of the acquisition.
PureCarbon, Inc.
On July 1, 2002, we acquired certain assets and liabilities of PureCarbon,
Inc. ("PureCarbon"), a California based company. As consideration for the sale,
we issued to the shareholders of PureCarbon 263,158 common shares valued at
$1,000,000. PureCarbon's internet software (JobPlanet) is designed to integrate
easily with behind-the-scenes human resources and recruiting technology.
JobPlanet is built on a technology platform that enables clients to build and
implement an employment web site that mirrors the client's corporate brand
image. We recorded approximately $800,000 in intangible assets as part of the
acquisition.
Xylo, Inc.
On September 13, 2002, we acquired via merger 100% of the outstanding
shares of Xylo, Inc. ("Xylo"), a Washington based provider of web-based Employee
Retention Management ("ERM") solutions focused on providing customized retention
solutions to Fortune 500 companies. As consideration for the purchase, we issued
to the shareholders of Xylo 702,469 common shares valued at $1,700,000. Xylo's
work/life customizable software offers employee programs in one
externally-hosted platform, giving clients control over content and
applications. We recorded approximately $1.3 million in intangible assets and
$700,000 in goodwill as part of the acquisition.
Some of these acquisitions were also made in consideration of additional
common shares that were held in escrow to be released upon achievement of
certain profit and/or revenue targets. As of May 31, 2005, 108,304 common shares
related to the Peoplebonus acquisition remain in escrow.
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FOREIGN OPERATIONS
We have operations in Canada and the United States, and, therefore, are
subject to the risks typical of an international business, including, but not
limited to, differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility.
Our operations center is located in Ottawa, Canada and maintains our
servers, which support all of our locations and the software that is accessed by
our clients in an Application Service Provider ("ASP") environment. Financial
information about geographic areas and segments can be found in note 14 to our
consolidated financial statements.
REVENUE SOURCES
The Enterprise Workforce Services segment derives revenue from various
sources including the following: licensing of software; software subscriptions,
which includes maintenance and hosting fees; professional services related to
software implementation, customization and training; and sale of products and
tickets through the Company's employee discount and rewards software module.
Clients enter into contracts which specifically address the products and
services acquired, periods covered, and the billings terms. Typically, contracts
which include a software subscription component have a period of at least one
year. Clients are billed in advance according to the terms of the contract. In
the case of annual or multiple year contracts, we bill our clients in advance
monthly, quarterly or annually over the period in which the service is provided
as deemed necessary when negotiating the contract. Any unearned revenue is
disclosed in the balance sheet as deferred revenue and is recognized when the
service is provided. Professional services are billed either on a time and
material basis or on a fixed fee basis. Time and material engagements are billed
monthly as the professional services hours are incurred. Fixed fee engagements
are billed according to the terms of the contract, and revenue is recognized on
a percentage of completion basis. Revenue from the sale of products and tickets
through the discount and rewards software module is billed and recognized when
the goods are shipped and title has transferred.
The Career Networks segment derives revenue from recruitment research,
applicant sourcing and exchange and career transition services. For recruitment
research services and applicant sourcing and exchange, customers are billed and
revenue is recognized as services are provided. For career transition services,
clients are billed 50% when the assignment starts and the remaining 50% when the
assignment is completed, which is generally in approximately ten days. Revenue
is recognized when the services have been completed.
RESEARCH AND DEVELOPMENT
Since fiscal 2002, the Company changed its primary approach to research
and development relating to software. Rather than relying solely on developing
software internally, the Company began a strategy of obtaining new technology
through the acquisition of companies that had already developed the technology
and proven its success in the marketplace. The Company does incur internal
research and development expenses, but much smaller balances than had this
strategy not been adopted. Research and development expense was approximately
$2,147,000, $453,000, and $1,086,000 in fiscal 2005, fiscal 2004, and fiscal
2003, respectively. During fiscal 2005, additional costs were incurred
subsequent to the various acquisitions to merge the technologies developed by
the individual entities prior to the acquisitions. In fiscal 2005 and 2004, all
research and development expense was incurred in the Enterprise Workforce
Services segment.
INTELLECTUAL PROPERTY
We rely upon a combination of copyright, trade secret and trademark laws
and non-disclosure and other contractual arrangements to protect our proprietary
rights. Many of the copyrights and trademarks we hold were obtained in
connection with the acquisitions we made since 2002. Currently, we have eight
registered trademarks in Canada and eight in the United States. With the
acquisition of Kadiri, we now have four registered trademarks in the European
Union and two in Mexico. Our trademarks include Workstream, E-Cruiter, E-Cruiter
Enterprise, E-Cruiting, Careerbridge, 6FigureJobs.com, RezLogic, Kadiri, Kadiri
TotalComp, and Decisis. In addition, we have two service marks for OMNIpartners
and OMNIresearch. We also have copyrights on some of our training manuals and
internally developed software programs.
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In 1999, we changed our name from "Careerbridge" to "E-Cruiter". In 2001,
we changed our name to "Workstream". We have registered the Workstream trademark
in the U.S. and Canada, and such registrations expire in May 2014 and in May
2019, respectively. The U.S. trademark renews ten years at a time and the
Canadian trademark renews fifteen years at a time.
The following registered trademarks, are registered and will expire as
follows: E-Cruiter - December 2013, E-Cruiter Enterprise - December 2013,
E-Cruiting - January 2014. These trademarks are renewable for fifteen years at a
time. Our 6FigureJobs.com and RezLogic trademark registrations expire in
September 2010 and March 2010, respectively, and are renewable for ten years at
a time.
Our Kadiri trademarks are registered and expire as follows: United States:
Kadiri, Decisis, and Kadiri TotalComp - January 2011. These trademarks are
renewable for ten years at a time. Canada: Kadiri - September 2018, and Kadiri
TotalComp - June 2019. These trademarks are renewable for fifteen years at a
time. European Union: Decisis - October 2006, Kadiri - December 2010, and Kadiri
TotalComp - June 2011. These trademarks are renewable for ten years at a time.
Mexico: Kadiri and Kadiri TotalComp - July 2011. These trademarks are renewable
for ten years at a time.
In connection with our acquisition of Kadiri, we acquired one U.S. patent
issued July 31, 2001 for Automated Process Guidance System and Method Using
Knowledge Management System by Kadiri Inc. In addition, we have three pending
patent applications: (1) a Canadian patent application for Method for Traversing
a Flowchart by Kadiri Inc, (2) a European patent application for Method for
Traversing a Flowchart by Kadiri Inc, and (3) a U.S. patent application for
Automated Process Guidance System and Method by Kadiri Inc.
We believe that the proprietary rights created by these trademarks,
service marks and patents are important to our business. The measures we have
taken to protect our proprietary rights, however, may not be adequate to deter
misappropriation of proprietary information or protect us if misappropriation
occurs. Policing unauthorized use of our technologies and other intellectual
property is difficult, particularly because of the global nature of the
internet. We may not be able to detect unauthorized use of our proprietary
information and take appropriate steps to enforce our intellectual property
rights.
We are not aware of any patent infringement charge or any violation of
other proprietary rights claim by any third party relating to us or our
products. However, the computer technology market is characterized by frequent
and substantial intellectual property litigation.
SALES AND MARKETING
We market our services in both the United States and Canada. We utilize
the internet, trade shows, seminars and newspapers to market our services. The
Enterprise Workforce Services segment's sales cycle is approximately six to nine
months depending on the size of the potential client. Career Networks sales
cycle is relatively short and of higher volume. The Enterprise Workforce
Services segment has a sales team of approximately 15 (internal and external)
located throughout the United States with one individual in Canada. The Career
Networks segment has a sales team of approximately 30 located in five locations
throughout the United States. In addition, we have approximately ten marketing
personnel located throughout the United States and Canada. Both Career Networks
and Enterprise Workforce Services sales teams sell only within their segment.
COMPETITION
The market for HCM services is highly fragmented and competitive with
hundreds of companies offering products or services that compete with one or
more of the services that we offer. Our Career Networks segment competes within
the United States and Canada with internet recruitment services companies,
outplacement services companies and human resource service providers. We compete
for a portion of employer's recruiting budgets with many types of competitors
such as offline recruiting firms, offline advertising, resume processing
companies and web-based recruitment companies. While we do not believe that any
of our competitors offer the full suite of services that we provide, there are a
number of companies that have products or services that compete with one or more
of the services we provide. For instance, companies that compete with our
recruiting systems services include Taleo Corporation, BrassRing, Webhire and
Kenexa. Companies such as Monster Worldwide, Execunet and Netshare have products
or services that compete with our applicant sourcing and exchange services. We
also compete with vendors of enterprise resource planning software, such as
Oracle, SAP and Performaworks. In the area of outplacement services, we compete
with companies such as McKenzie Scott and WSA Corp. Companies such as LifeCare,
Next Jump and SparkFly compete with our employee portal. Oracle, SAP, Workscape
and Authoria are our main competitors for our benefit product and Siebel,
Kronos, Callidus, Softscape and Authoria compete with our compensation product
line.
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We believe that the primary competitive factors affecting our market
include product functionality, product performance, quality service support and
implementation and the cost of delivery. We believe that our principal
competitive advantages include:
o our complete suite of HCM applications;
o our unique combination of services;
o our technology;
o our network of offices and personnel throughout North America;
o our performance and reliability as an application service provider;
o our service reputation; and
o our experienced staff.
Although we believe we compete favorably with respect to such factors,
there can be no assurance that we can maintain our position against current and
potential competitors. A number of our competitors have longer operating
histories and greater financial, technology and marketing resources, as well as
better name recognition than we do.
EMPLOYEES
As of May 31, 2005, we had 195 full-time employees, consisting of 55 in
sales and marketing, 37 in research and development, 25 in professional
services, 65 in maintaining daily operating functions, and 13 in finance/human
resources. Our employees are not represented by a collective bargaining
organization, and we have never experienced any work stoppage. We consider our
relations with our employees to be good.
ITEM 2. PROPERTIES
Our corporate headquarters and principal research and development,
customer support, network operations and human resource administration are
located in approximately 17,100 square feet of leased office space in Ottawa,
Ontario, Canada. Our lease for this facility expires in September 2010.
In addition, we lease approximately 20,700 square feet of office space in
Maitland, Florida, which serves as the headquarters of our subsidiary, Paula
Allen Holdings. In addition, our finance department resides in this space. Our
lease for this premise expires in April 2009.
We also assumed several other leases as part of the acquisitions which
occurred over the last 15 months. We lease approximately 7,100 square feet of
office space in Burlingame, California that was assumed as part of the Kadiri
acquisition and expires in April 2006. We lease approximately 15,700 square feet
of office space in White Plains, New York that was assumed as part of the ProAct
acquisition and expires in September 2007. We lease approximately 9,400 square
feet of office space in Fairfield, Iowa that was assumed as part of the HRSoft
acquisition and expires in February 2008.
We also lease space for sales offices in another four locations, primarily
under one to three year leases, usually with renewal options. We believe that
our facilities are adequate for our current needs.
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ITEM 3. LEGAL PROCEEDINGS
In November 2004, Profiles Worldwide, a division of Conren Investors
Group, filed a lawsuit against 6FigureJobs.com alleging failure to perform and
breach of contract and demands specific performance and damages in the amount of
$825,000. The litigation is currently in the discovery phase and a trial date
has been scheduled for February 2006. We believe that the lawsuit to be without
merit and intend to contest it vigorously.
In July 2005, a direct competitor filed a complaint against the Company in
U.S. District Court in the District of Massachusetts. The plaintiff asserts that
Workstream interfered with the contractual relationship between them and a
former member of its executive management team. We are in the process of
reviewing this complaint with legal counsel and are of the view that such
possible effect cannot be reasonably estimated at this time.
On or about August 10, 2005, a class action lawsuit was filed against us,
our Chief Executive Officer and our former Chief Financial Officer in the United
States District Court for the Southern District of New York. The action, brought
on behalf of a purported class of purchasers of our common shares during the
period from January 14, 2005 to and including April 14, 2005, alleges, among
other things that we provided the market misleading guidance as to our
anticipated revenues for the quarter ended February 28, 2005, and failed to
correct this guidance on a timely basis. The action claims violations of Section
10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated thereunder,
as well as Section 20(a) of the Exchange Act, and seeks compensatory damages in
an unspecified amount as well as the award of reasonable costs and expenses,
including counsel and expert fees and costs. We are in the process of reviewing
the complaint and, following consultation with our legal counsel, we will
respond accordingly.
We are currently involved in lawsuits with three ex-employees who joined
the Company subsequent to two of our acquisitions and left shortly thereafter.
These individuals claim that they are entitled to severance benefits under the
terms of their employment agreements with the acquired entities. In total, these
three individuals seek approximately $287,000 in severance.
We are subject to other legal proceedings and claims which arise in the
ordinary course of our business. We do not believe that the resolution of such
actions will materially affect our business, results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET PRICE OF COMMON SHARES
Our common shares are listed on the NASDAQ Small Cap Market under the
symbol "WSTM" and on the Boston Stock Exchange under the symbol "ERM." The
principal United States market for our common shares is the NASDAQ Small Cap
Market. The following table sets forth, for the periods indicated, the high and
low sales prices of our common shares as reported on the NASDAQ Small Cap
Market. As of August 9, 2005, there were approximately 265 holders of record of
our common shares.
PRICE OF COMMON SHARES
Period High Low
- ------ ---- ---
June 1, 2003 - August 31, 2003 $2.17 $0.89
September 1, 2003 - November 30, 2003 $1.95 $1.37
December 1, 2003 - February 29, 2004 $2.68 $1.42
March 1, 2004 - May 31, 2004 $3.33 $2.22
June 1, 2004 - August 31, 2004 $3.09 $2.26
September 1, 2004 - November 30, 2004 $3.44 $2.56
December 1, 2004 - February 29, 2005 $4.75 $2.60
March 1, 2005 - May 31, 2005 $5.35 $1.68
DIVIDEND POLICY
We have not paid any cash dividends on our common shares and do not
anticipate paying cash dividends in the foreseeable future. We intend to retain
future earnings for use in our business.
There is no law or government decree or regulation in Canada that
restricts the export or import of capital, or that affects the remittance of
dividends, interest or other payments to a non-resident holder of common shares,
other than withholding tax requirements. See "Taxation."
There is no limitation imposed by Canadian law or by our articles or other
charter documents on the right of a non-resident of Canada to hold or vote our
common shares, other than as provided in the Investment Canada Act, as amended,
referred to as the Investment Act.
The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a "Canadian" as defined in the
Investment Act, referred to as a non-Canadian, unless, after review, the
minister responsible for the Investment Act is satisfied that the investment is
likely to be of net benefit to Canada. If an investment by a non-Canadian is not
a reviewable investment, it nevertheless requires the filing of a short notice
which may be given at any time up to 30 days after the implementation of the
investment.
An investment in our common shares by a non-Canadian that is a WTO
investor (defined below) would be reviewable under the Investment Act if it were
an investment to acquire direct control, through a purchase of our assets or
voting interests, and the gross book value of our assets equaled or exceeded
$237 million, the threshold established for 2004, as indicated in our financial
statements for our fiscal year immediately preceding the implementation of the
investment. In subsequent years, such threshold amount may be increased or
decreased in accordance with the provisions of the Investment Act. A WTO
investor is an investment by an individual or other entity that is a national
of, or has the right of permanent residence in, a member of the World Trade
Organization, current members of which include the European Community, Germany,
Japan, Mexico, the United Kingdom and the United States, or a WTO
investor-controlled entity, as defined in the Investment Act.
17
An investment in our common shares by a non-Canadian, other than a WTO
investor, would be subject to review under the Investment Act if it were an
investment to acquire our direct control and the value of the assets were $5.0
million or more, as indicated on our financial statements for our fiscal year
immediately preceding the implementation of the investment.
A non-Canadian, whether a WTO investor or otherwise, would acquire control
in us for the purposes of the Investment Act if he, she or it acquired a
majority of our common shares or acquired all or substantially all of the assets
used in conjunction with our business. The acquisition of less than a majority,
but one-third or more of our common shares, would be presumed to be an
acquisition of control in us unless it could be established that we were not
controlled in fact by the acquirer through the ownership of common shares.
The Investment Act would not apply to certain transactions in relation to
our common shares including:
(a) an acquisition of our common shares by any person if the acquisition
were made in the ordinary course of that person's business as a
trader or dealer in securities;
(b) an acquisition of control in us in connection with the realization
of security granted for a loan or other financial assistance and not
for any purpose related to the provisions of the Investment Act; and
(c) an acquisition of control in us by reason of an amalgamation,
merger, consolidation or corporate reorganization following which
the ultimate direct or indirect control in fact in us through the
ownership of voting interests, remains unchanged.
PURCHASES OF EQUITY SECURITIES
We did not repurchase any common shares or other equity securities during
fiscal 2005.
TAXATION
MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material Canadian federal income tax
considerations generally applicable to a person who acquires our common shares
and who, for purposes of the Income Tax Act (Canada) and the Canada-United
States Income Tax Convention, 1980, as applicable, and at all relevant times, is
a U.S. holder. Readers are cautioned that this is not a complete technical
analysis or listing of all potential tax effects that may be relevant to holders
of our common shares. In particular, this discussion does not deal with the tax
consequences applicable to all categories of investors, some of which may be
subject to special rules, and does not address the tax consequences under
Canadian provincial or territorial tax laws, or tax laws of jurisdictions
outside of Canada. Accordingly, you should consult your own advisor regarding
the particular tax consequences to you of an investment in our common shares.
This summary is based on the advice of our Canadian counsel, Perley-Robertson,
Hill & McDougall.
For purposes of the Income Tax Act (Canada) and the Canada-United States
Income Tax Convention, 1980, a U.S. holder is a person that:
o Through the period during which the person owns our common shares is
not resident in Canada and is a resident of the United States;
o Holds our common shares as capital assets, that is generally as
investments;
o Deals at arm's length with us within the meaning of the Income Tax
Act (Canada);
18
o Does not have a permanent establishment or fixed base in Canada, as
defined by the Canada-United States Income Tax Convention, 1980; and
o Does not own and is not treated as owning, 10% or more of our
outstanding voting shares.
Special rules, which we do not address in this discussion, may apply to a
U.S. holder that is (a) an insurer that carries on an insurance business in
Canada and elsewhere, or (b) a financial institution subject to special
provisions of the Income Tax Act (Canada) applicable to income gain or loss
arising from mark-to-market property.
This discussion is based on the current provisions of the Canada-United
States Income Tax Convention, 1980, the Income Tax Act (Canada) and their
regulations, all specific proposals to amend the Income Tax Act (Canada) and
regulations, all specific proposals to amend the Income Tax Act (Canada) and
regulations announced by the Minster of Finance (Canada) before the date of this
annual report and counsel's understanding of the current published
administrative practices of Canada Customs and Revenue Agency. This discussion
is not exhaustive of all potential Canadian tax consequences to a U.S. holder
and does not take into account or anticipate any other changes in law, whether
by judicial, governmental or legislative decision or action, nor does it take
into account the tax legislation or considerations of any province, territory or
foreign jurisdiction.
TAXATION OF DIVIDENDS
Dividends paid or credited or deemed to be paid or credited on common
shares owned by a U.S. holder will be subject to Canadian withholding tax under
the Income Tax Act (Canada) at a rate of 25% on the gross amount of the
dividends. The rate of withholding tax generally is reduced under the
Canada-United States Income Tax Convention, 1980 to 15% where the U.S. holder is
the beneficial owner of the dividends. Under the Canada-United States Income Tax
Convention, 1980, dividends paid to religious, scientific, charitable and
similar tax exempt organizations and pension organizations that are resident and
exempt from tax in the United States and that have complied with the
administrative procedures specified in the Tax Convention are exempt from this
Canadian withholding tax.
TAXATION OF CAPITAL GAINS
Gain realized by a U.S. holder on a sale, disposition or deemed
disposition of our common shares generally will not be subject to tax under the
Income Tax Act (Canada) unless the common shares constitute taxable Canadian
property within the meaning of the Income Tax Act (Canada) at the time of the
sale, disposition or deemed disposition. Our common shares generally will not be
taxable Canadian property provided that: (a) they are listed on a prescribed
stock exchange, and (b) at no time during the five-year period immediately
preceding the sale, disposition or deemed disposition, did the U.S. holder,
persons with whom the U.S. holder did not deal at arm's length, or the U.S.
Holder acting together with those persons, own or have an interest in or a right
to acquire 25% or more of the issued shares of any class or series of our
shares. A deemed disposition of common shares will occur on the death of a U.S.
holder.
If our common shares are taxable Canadian property to a U.S. holder, any
capital gain realized on a disposition or deemed disposition of those shares
will generally be exempt from tax under the Income Tax Act (Canada) by the
Canada-United States Income Tax Convention, 1980, so long as the value of our
common shares at the time of the sale, disposition or deemed disposition is not
derived principally from real property situated in Canada, as defined by the
Canada-United States Income Tax Convention, 1980. We have advised that currently
our common shares do not derive their value principally from real property
situated in Canada; however, the determination as to whether Canadian tax would
be applicable on a sale, disposition or deemed disposition of common shares must
be made at the time of that sale, disposition or deemed disposition.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
Subject to the limitations described below, the following discussion
describes the material United States federal income tax consequences to a U.S.
Holder (as defined below) that is a beneficial owner of the common shares of
Workstream Inc. and that holds them as capital assets. For purposes of this
summary, a "U.S. Holder" is a beneficial owner of common shares who or that is
for United States federal income tax purposes (i) a citizen or resident of the
United States, (ii) a corporation (or other entity treated as a corporation for
United States federal tax purposes) created or organized in the United States or
under the laws of the United States or of any state or the District of Columbia,
(iii) an estate, the income of which is includible in gross income for United
States federal income tax purposes regardless of its source, or (iv) a trust, if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust.
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This summary is for general information purposes only. It does not purport
to be a comprehensive description of all of the tax considerations that may be
relevant to owning the common shares. AS THIS IS A GENERAL SUMMARY, OWNERS OF
COMMON SHARES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
U.S. FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS TO NON-U.S. TAX
CONSEQUENCES, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF COMMON SHARES
APPLICABLE TO THEIR PARTICULAR TAX SITUATIONS.
This discussion is based on current provisions of the U.S. Internal
Revenue Code of 1986, as amended, current and proposed U.S. Treasury regulations
promulgated thereunder, and administrative and judicial decisions, as of the
date hereof, all of which are subject to change, possibly on a retroactive
basis. This discussion does not address all aspects of United States federal
income taxation that may be relevant to any particular holder based on such
holder's individual circumstances. In particular, this discussion does not
address the potential application of the alternative minimum tax or the United
States federal income tax consequences to holders that are subject to special
treatment, including:
o broker-dealers, including dealers in securities or currencies;
o insurance companies, regulated investment companies or real estate
investment trusts;
o taxpayers that have elected mark-to-market accounting;
o tax-exempt organizations;
o financial institutions or "financial services entities";
o taxpayers who hold common shares as part of a straddle, "hedge" or
"conversion transaction" with other investments;
o holders owning directly, indirectly or by attribution at least 10%
of our voting power;
o non-resident aliens of the United States;
o taxpayers whose functional currency is not the U.S. dollar; and
o taxpayers who acquire common shares as compensation.
This discussion does not address any aspect of United States federal gift
or estate tax, or state, local or non-United States laws. Additionally, the
discussion does not consider the tax treatment of partnerships or persons who
hold common shares through a partnership or other pass-through entity. Certain
material aspects of United States federal income tax relevant to a beneficial
owner other than a U.S. Holder (a "Non-U.S. Holder") also are discussed below.
20
EACH HOLDER OF COMMON SHARES IS ADVISED TO CONSULT SUCH PERSON'S OWN TAX
ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF
PURCHASING, HOLDING OR DISPOSING OF COMMON SHARES.
TAXATION OF DIVIDENDS PAID ON COMMON SHARES
We have never paid cash dividends, and we currently do not intend to pay
cash dividends in the foreseeable future. In the event that we do pay a
dividend, and subject to the discussion of the passive foreign investment
company, or PFIC, rules below, a U.S. Holder will be required to include in
gross income as ordinary income the amount of any distribution paid on our
common shares, including any Canadian taxes withheld from the amount paid, on
the date the distribution is received to the extent the distribution is paid out
of our current or accumulated earnings and profits, as determined for United
States federal income tax purposes. In the case of noncorporate U.S. Holders,
dividends may qualify for favorable tax treatment. Distributions in excess of
such earnings and profits will be applied against and will reduce the U.S.
Holder's basis in the common shares and, to the extent in excess of such basis,
will be treated as a gain from the sale or exchange of the common shares.
Distributions of current or accumulated earnings and profits paid in a
currency other than the U.S. dollar to a U.S. Holder will be includible in the
income of a U.S. Holder in a U.S. dollar amount calculated by reference to the
exchange rate on the date the distribution is received. A U.S. Holder that
receives a distribution in a currency other than the U.S. dollar and converts
the non-U.S. currency into U.S. dollars subsequent to its receipt will have
foreign exchange gain or loss based on any appreciation or depreciation in the
value of the non-U.S. currency against the U.S. dollar, which will generally be
U.S. source ordinary income or loss.
U.S. Holders will have the option of claiming the amount of any Canadian
income taxes withheld at source either as a deduction from gross income or as a
dollar-for-dollar credit against their United States federal income tax
liability. Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of any Canadian
income taxes withheld, but such individuals may still claim a credit against
their United States federal income tax liability. The amount of foreign income
taxes which may be claimed as a credit in any year is subject to complex
limitations and restrictions, which must be determined on an individual basis by
each shareholder. The total amount of allowable foreign tax credits in any year
cannot exceed the pre-credit U.S. tax liability for the year attributable to
foreign source taxable income.
A U.S. Holder will be denied a foreign tax credit with respect to Canadian
income tax withheld from dividends received on our common shares:
o if such U.S. Holder has not held the common shares for at least 16
days of the 30-day period beginning on the date which is 15 days
before the ex-dividend date; or
o to the extent such U.S. Holder is under an obligation to make
related payments on substantially similar or related property.
Any days during which a U.S. Holder has substantially diminished its risk
of loss on the common shares are not counted toward meeting the 15 day holding
period required by the statute. In addition, distributions of current or
accumulated earnings and profits will be foreign source passive income for
United States foreign tax credit purposes and will not qualify for the dividends
received deduction otherwise available to corporations.
TAXATION OF THE DISPOSITION OF COMMON SHARES
Subject to the discussion of the PFIC rules below, upon the sale, exchange
or other disposition of our common shares, a U.S. Holder will generally
recognize capital gain or loss in an amount equal to the difference between the
amount realized on the disposition and such U.S. Holder's tax basis in the
common shares (tax basis is usually the U.S. dollar cost of such common shares).
If the common shares are publicly traded, a disposition of common shares will be
considered to occur on the "trade date," regardless of the U.S. Holder's method
of accounting. A U.S. Holder that uses the cash method of accounting calculates
the U.S. dollar value of the proceeds received on the sale as of the date that
the sale settles. However, a U.S. Holder that uses the accrual method of
accounting is required to calculate the value of the proceeds of the sale as of
the "trade date" and may therefore realize foreign currency gain or loss, unless
such U.S. Holder has elected to use the settlement date to determine its
proceeds of sale for purposes of calculating such foreign currency gain or loss.
Capital gain from the sale, exchange or other disposition of the common shares
held more than one year is long-term capital gain. Gain or loss recognized by a
U.S. Holder on a sale, exchange or other disposition of common shares generally
will be treated as United States source income or loss for United States foreign
tax credit purposes. The deductibility of a capital loss recognized on the sale,
exchange or other disposition of common shares is subject to limitations. In
addition, a U.S. Holder that receives non-U.S. currency upon disposition of our
common shares and converts the non-U.S. currency into U.S. dollars subsequent to
its receipt will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the non-U.S. currency against the U.S. dollar,
which will generally be United States source ordinary income or loss.
21
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
We will be a passive foreign investment company, or PFIC, for United
States federal income tax purposes, if 75% or more of our gross income in a
taxable year, including the pro rata share of the gross income of any company,
U.S. or foreign, in which we are considered to own 25% or more of the shares by
value, is passive income. Alternatively, we will be considered to be a PFIC if
50% or more of our assets in a taxable year, averaged over the year and
ordinarily determined based on fair market value and including the pro rata
share of the assets of any company in which we are considered to own 25% or more
of the shares by value, are held for the production of, or produce, passive
income. Passive income includes amounts derived by reason of the temporary
investment of funds raised in our public offerings.
If we were a PFIC, and a U.S. Holder did not make a qualifying election
either to (i) treat us as a "qualified electing fund" (a "QEF") (as described
below), or (ii) mark our common shares to market (as discussed below), excess
distributions by us to a U.S. Holder would be taxed under special rules. "Excess
distributions" are amounts received by a U.S. Holder with respect to shares in a
PFIC in any taxable year that exceed 125% of the average distributions received
by such U.S. Holder from the PFIC in the shorter of either the three previous
years or such U.S. Holder's holding period for such shares before the present
taxable year. Excess distributions must be allocated ratably to each day that a
U.S. Holder has held shares in a PFIC. A U.S. Holder must include amounts
allocated to the current taxable year in its gross income as ordinary income for
that year. Further, a U.S. Holder must pay tax on amounts allocated to each
prior PFIC taxable year at the highest rate in effect for that year on ordinary
income and the tax is subject to an interest charge at the rate applicable to
deficiencies for income tax. The entire amount of gain that is realized by a
U.S. Holder upon the sale or other disposition of our common shares will also be
treated as an excess distribution and will be subject to tax as described above.
A. U.S. Holder's tax basis in our common shares that were acquired from a
decedent who was a U.S. Holder would not receive a step-up to fair market value
as of the date of the decedent's death but would instead be equal to the
decedent's basis, if lower. If we were a PFIC, a U.S. Holder of our common
shares will be subject to the PFIC rules as if such holder owned its pro-rata
share of any of our direct or indirect subsidiaries which are themselves PFICs.
Accordingly, a U.S. Holder of our common shares will be subject to tax under the
PFIC rules with respect to distributions to us by, and dispositions by us of
stock of, any direct or indirect PFIC stock held by us, as if such holder
received directly its pro-rata share of either the distribution or proceeds from
such disposition.
The special PFIC rules described above will not apply to a U.S. Holder if
the U.S. Holder makes an election to treat us as a "qualified electing fund" in
the first taxable year in which the U.S. Holder owns common shares and if we
comply with certain reporting requirements. Instead, a shareholder of a QEF is
required for each taxable year to include in income a pro rata share of the
ordinary earnings of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the QEF as long-term capital gain, subject
to a separate election to defer payment of taxes, which deferral is subject to
an interest charge. The QEF election is made on a shareholder-by-shareholder
basis and can be revoked only with the consent of the U.S. Internal Revenue
Service, ("IRS"). A shareholder makes a QEF election by attaching a completed
IRS Form 8621, including the PFIC annual information statement, to a timely
filed United States federal income tax return and by filing such form with the
IRS Service Center in Philadelphia, Pennsylvania. Even if a QEF election is not
made, a shareholder in a PFIC who is a U.S. person must file a completed IRS
Form 8621 every year. We have agreed to supply U.S. Holders with the information
needed to report income and gain pursuant to a QEF election in the event we are
classified as a PFIC.
A U.S. Holder of PFIC stock which is publicly traded could elect to mark
the stock to market annually, recognizing as ordinary income or loss each year
an amount equal to the difference as of the close of the taxable year between
the fair market value of the PFIC stock and the U.S. Holder's adjusted tax basis
in the PFIC stock. Losses would be allowed only to the extent of net
mark-to-market gain previously included by the U.S. Holder under the election
for prior taxable years. If the mark-to-market election were made, then the
rules set forth above would not apply for periods covered by the election.
22
We believe that we were not a PFIC for the fiscal years ending May 2005
and May 2004, and we believe that we will not be a PFIC for the fiscal year
ending May 2006. The tests for determining PFIC status, however, are applied
annually, and it is difficult to make accurate predictions of future income and
assets, which are relevant to this determination. Accordingly, there can be no
assurance that we will not become a PFIC. U.S. Holders who hold common shares
during a period when we are a PFIC will be subject to the foregoing rules, even
if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who
made a QEF election. U.S. Holders are strongly urged to consult their tax
advisors about the PFIC rules, including the consequences to them of making a
mark-to-market or QEF election with respect to common shares in the event that
we qualify as a PFIC.
TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON SHARES
Except as described in "U.S. Information Reporting and Backup Withholding"
below, a Non-U.S. Holder who is a beneficial owner of our common shares will not
be subject to United States federal income or withholding tax on the payment of
dividends on, and the proceeds from the disposition of, our common shares,
unless:
o Such item is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States and, in the case
of a resident of a country which has a treaty with the United
States, such item is attributable to a permanent establishment or,
in the case of an individual, a fixed place of business, in the
United States;
o The Non-U.S. Holder is an individual who holds the common shares as
capital assets and is present in the United States for 183 days or
more in the taxable year of the disposition and does not qualify for
an exemption; or
o The Non-U.S. Holder is subject to tax pursuant to the provisions of
United States tax law applicable to U.S. expatriates.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Holders generally are subject to information reporting requirements
with respect to dividends paid in the United States on common shares. In
addition, U.S. Holders are subject to U.S. backup withholding at a rate of up to
28% on dividends paid in the United States on common shares unless the U.S.
Holder provides an IRS Form W-9 or otherwise establishes an exemption. U.S.
Holders are subject to information reporting and backup withholding at a rate of
up to 28% on proceeds paid from the sale, exchange, redemption or other
disposition of common shares unless the U.S. Holder provides an IRS Form W-9 or
otherwise establishes an exemption.
Non-U.S. Holders generally are not subject to information reporting or
backup withholding with respect to dividends paid on, or proceeds upon the sale,
exchange, redemption or other disposition of, common shares, provided that such
Non-U.S. Holder provides a taxpayer identification number, certifies to its
foreign status, or otherwise establishes an exemption.
The amount of any backup withholding will be allowed as a credit against
such U.S. Holder's or Non-U.S. Holder's United States federal income tax
liability and may entitle such holder to a refund, provided that the required
information is furnished to the IRS.
RECENT SALES OF UNREGISTERED SECURITIES
In April 2005, 250,000 common shares valued at $1,172,500 were released
from escrow to the former shareholders of Kadiri as certain revenue and cash
generation targets were achieved. The issuance of the shares in the private
placement was exempt from registration under Rule 506 of the Securities Act of
1933.
23
In April 2005, 93,333 common shares were issued to a placement agent as
commission relating to the December 2004 private placement. The issuance of the
shares in the private placement was exempt from registration under Rule 506 of
the Securities Act of 1933.
24
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Form 10-K.
FISCAL YEAR ENDED MAY 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Statement of Operations Data
Revenue, net $ 26,819 $ 17,167 $ 17,837 $ 14,752 $ 1,992
Cost of revenues 7,014 1,587 3,040 2,858 1,483
Selling and marketing 7,211 4,362 6,058 6,649 2,416
General and administrative 17,838 9,799 9,582 6,724 984
Research and development 2,147 453 1,086 750 2,164
Amortization and depreciation 8,535 5,602 6,097 1,796 501
Impairment write-down of goodwill -- -- 2,133 2,810 --
-------- -------- -------- -------- --------
Operating loss (15,926) (4,636) (10,159) (6,835) (5,556)
Other (expense) income, net (45) (2,635) (1,146) (155) 452
-------- -------- -------- -------- --------
Loss before income taxes (15,971) (7,271) (11,305) (6,990) (5,104)
Recovery of deferred income tax
848 1,789 1,586 29 --
Current income tax (expense) recovery
(36) (55) 42 -- --
-------- -------- -------- -------- --------
Net loss for the year $(15,159) $ (5,537) $ (9,677) $ (6,961) $ (5,104)
======== ======== ======== ======== ========
Basic and diluted net loss per share $ (0.35) $ (0.22) $ (0.52) $ (0.52) $ (0.66)
======== ======== ======== ======== ========
Weighted average number of
common stock outstanding 43,462 25,036 18,608 13,281 7,710
======== ======== ======== ======== ========
MAY 31,
(IN THOUSANDS)
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Balance Sheet Data
Working capital (deficit) $ 6,720 $ (351) $ (3,412) $ (1,677) $ 3,200
Total assets 75,657 48,882 30,618 23,276 5,389
Long term obligations 192 1,259 5,312 1,557 213
Total liabilities 12,718 11,143 11,594 8,519 1,347
Stockholders' equity 62,939 37,739 19,024 14,757 4,042
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS CONTAINING THE WORDS "ANTICIPATES," "BELIEVES," "
EXPECTS," "INTENDS," "FUTURE," AND WORDS OF SIMILAR IMPORT WHICH EXPRESS
MANAGEMENT'S BELIEF, EXPECTATIONS OR INTENTIONS REGARDING OUR FUTURE
PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE HAVE NO OBLIGATION TO
UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS AND FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING,
WITHOUT LIMITATION, THOSE SET FORTH BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS REPORT AND IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
OVERVIEW
We are a provider of services and web-based software for Human Capital
Management ("HCM"). HCM is the process by which companies recruit, train,
evaluate, motivate and retain their employees. We offer software and services
that address the needs of companies to more effectively manage their human
capital management function. We believe that our "one-stop-shopping" approach
for our clients' HCM needs is more efficient and effective than traditional
methods of human resource management.
We have two distinct operating segments, which are the Enterprise
Workforce Services and Career Networks segments. The Enterprise Workforce
Services segment primarily consists of HCM software and professional services.
Specifically, our Enterprise Workforce Services segment offers a complete suite
of HCM software solutions, which address recruitment, benefits, performance,
compensation and rewards. The Career Networks segment consists of career
transition services, recruitment research and applicant sourcing and exchange.
Our business changed significantly beginning in fiscal 2002. During fiscal
2002, we completed the acquisitions of Paula Allen Holdings, OMNIpartners,
6FigureJobs.com, RezLogic, ResumeXpress and Tech Engine. During fiscal 2003, we
completed the acquisitions of Icarian, PureCarbon and Xylo. During fiscal 2004,
we completed the acquisitions of Perform, Peopleview and Kadiri. During fiscal
2005, we completed the acquisitions of Peoplebonus, Bravanta, HRSoft and ProAct.
These acquisitions have enabled us to expand and enhance our HCM software,
increase our service offerings and increase our revenue streams. Subsequent to
the acquisitions, we have concentrated on integrating the acquired entities,
expanding the reach of the existing business and identifying other potential
acquisition targets. When we complete an acquisition, we combine the business of
the acquired entity into the Company's existing operations. We expect that this
will significantly reduce the administrative and other expenses associated with
the business prior to the acquisition. The acquired business is not maintained
as a standalone business operation. Therefore, we do not separately account for
the acquired business, including its profitability. Rather, it is included in
one of our two distinct business segments and is evaluated as part of the entire
segment. Furthermore, we do not assess the impact of individual acquisitions on
earning trends.
26
To monitor our results of operations and financial condition, we review
key financial information including net revenues, gross profit, earnings per
share, and cash flow from operations. As acquired entities are integrated and
our business evolves, we continue to seek methods to more efficiently monitor
and manage our business performance. We review key operating metrics such as
revenue per average number of employee, days of sales outstanding(1), liquidity
ratio(2), and debt to equity ratio(3).
(1) Days of sales outstanding represents both the age, in terms of days, of a
company's accounts receivable and the average time it takes to turn the
receivables into cash. It is calculated by dividing accounts receivables
by daily revenue. Daily revenue is calculated by dividing revenue for the
year by the number of days in the year.
(2) Liquidity ratio represents the number of times that current assets can
cover current liabilities, and it is calculated by dividing current assets
by current liabilities.
(3) Debt to equity ratio represents the level of debt in relation to
shareholders' equity measuring a company's financial leverage. The ratio
is calculated by dividing total liabilities by shareholders' equity.
CRITICAL ACCOUNTING POLICIES
Our most critical accounting policies relate to the assessment of goodwill
impairment, the valuation of acquired intangible assets, the assessment of
intangible asset impairment and the valuation of deferred tax assets and related
allowances. Management makes estimates and assumptions that affect the value of
assets and the reported amounts of revenues. Changes in assumptions used would
impact our financial position and results.
Goodwill is assessed for impairment on an annual basis or more frequently
if circumstances warrant. We assess goodwill related to reporting units for
impairment and write down the carrying amount of goodwill as required. We
estimate the fair value of each business unit by preparing a discounted cash
flow model, using a 15% discount rate. The model is prepared by projecting
results for five years making different assumptions for each reporting unit. For
the calculation done at the end of fiscal 2005, we estimated that individual
reporting unit revenue growth rates would range from 2% to 25%, that gross
profit would increase slightly, and that operating expenses would increase but
would decrease as a percentage of revenues. An impairment charge is recorded if
the implied fair value of goodwill of a reporting unit is less than the book
value of goodwill for that unit. Changes in the discount rate used, or in other
assumptions in the model, would result in wide fluctuations in the value of
goodwill that is supported. Any such changes may result in additional impairment
write-downs.
We value acquired intangible assets, which includes acquired technologies,
customer base and intellectual property, based on the estimated fair value of
the assets at the time of the acquisition. The estimated fair value is primarily
based on projected cash flows associated with the assets and the customer
attrition rates. Different assumptions were used in estimating the intangible
assets acquired in each business acquisition. If the future cash flows or the
customer attrition rates differ significantly from our estimates, we may be
required to record an impairment of intangible assets. Changes in circumstances
impacting other assumptions used to value intangible assets could also lead to
future impairments.
We apply significant judgment in recording deferred tax assets, which
primarily are the result of loss carry forwards of companies that we acquired
and loss carry forwards internally generated. In addition, we make certain
assumptions about if and when these deferred tax assets will be utilized. These
determinations require estimates of future profits to be forecasted. Actual
results may differ from amounts estimated.
27
FISCAL 2005 COMPARED TO FISCAL 2004
GENERAL
Workstream made the following business acquisitions during fiscal 2005:
Peoplebonus on June 21, 2004; Bravanta on July 27, 2004; HRSoft on October 6,
2004; and ProAct on December 30, 2004. In addition, Workstream acquired Kadiri
on May 28, 2004, which was three days prior to fiscal 2004 year end. Absorbing
each of these entities' activities subsequent to the acquisition date was the
primary reason for many of the variances discussed in the following paragraphs.
For this reason, Kadiri, Peoplebonus, Bravanta, HRSoft and ProAct are referred
to as the "acquired entities". The acquired entities are all included in the
Enterprise Workforce Services segment.
REVENUES
Consolidated revenues were $26,818,587 for fiscal 2005 compared to
$17,166,880 for fiscal 2004, an increase of $9,651,707 or 56%. Revenues from
acquired entities represented $11,802,803 for fiscal 2005. Revenues from all
other companies ("existing companies") was $15,015,784 for fiscal 2005 compared
to $17,166,880 for fiscal 2004, a decrease of $2,151,096 or 13%. This decrease
was primarily due to a decrease in career transition services revenue of
$1,650,209. During fiscal 2005, we changed our strategy with regards to career
transition services whereby we significantly decreased our salesforce and
focused on higher revenue customers. This resulted in a decrease in revenues but
an increase in revenue per customer.
Enterprise Workforce Solutions revenues for fiscal 2005 were $17,886,559
compared to $7,181,564 for fiscal 2004, an increase of $10,704,995 or 149%.
$11,802,803 of revenues for fiscal 2005 were contributed by the acquired
entities. These increases were partially offset by a decrease in revenues from
our technologies which are older, more mature products and the customer base has
been reduced. During fiscal 2005, Enterprise Workforce Solutions revenue
consisted of software revenue of $10,686,643, professional services revenue of
$1,753,764 and awards and ticket revenue of $5,446,152.
Career Networks revenues for fiscal 2005 were $8,932,028 compared to
$9,985,316 for fiscal 2004, a decrease of $1,053,288 or 11%. This decrease was
due to a decrease in career transition services revenue of $1,650,209 as
discussed previously, which was partially offset by an increase in applicant
sourcing and exchange services revenue of $504,456. Applicant sourcing and
exchange services revenue increased due to a strong executive job market,
particularly in financial positions.
During fiscal 2005, the total revenue per average number of employees
increased to $136,135 compared to $93,298 for fiscal 2004. We believe that the
increase is primarily due to the acquisitions within the Enterprise Workforce
Services segment which generate higher revenue per employee rates.
Our Enterprise Workforce Services revenue per average number of clients
increased primarily due to the higher revenue generating clients associated with
some of the acquired companies, specifically Kadiri, Bravanta and ProAct.
Within Career Networks, the monthly average number of job postings in our
applicant sourcing and exchange business remained fairly constant between fiscal
2005 and fiscal 2004 with an increase of less than 1%. During fiscal 2005,
management shifted its focus to clients that provide higher revenue per posting.
The monthly average number of clients in our career transition services business
decreased 35% during fiscal 2005 compared to fiscal 2004. This decrease is
consistent with the decrease in career transition services revenue for fiscal
2005 due to the closure of several offices in an effort to consolidate the
workforce into fewer locations and focus on higher earnings with this smaller
workforce. Our revenue per career transition services client increased 13%
during fiscal 2005 compared to fiscal 2004.
28
COST OF REVENUES
Cost of revenues for fiscal 2005 was $7,013,980 compared to $1,586,989 for
fiscal 2004, an increase of $5,426,991 or 342%. Gross profits were $19,804,607
for fiscal 2005 or 74% of revenues compared to $15,579,891 or 91% of revenues
for fiscal 2004. Costs of revenues of the acquired entities was $5,860,618
during fiscal 2005. The decrease in gross profit as a percent of revenues is due
to the lower gross profit margins generated by the acquired companies. The gross
profit margins of these companies is lower because the software products require
more implementation and customization services, which traditionally had lower
margins. In addition, the awards revenue generated subsequent to the Bravanta
acquisition had lower margins. Finally, several of the acquired companies
entered into fixed fee contracts prior to the acquisition, and the costs
associated with these contracts were higher than anticipated.
Enterprise Workforce Services cost of revenues accounted for $6,074,570 of
the total cost of revenues for fiscal 2005 and $403,760 for fiscal 2004, an
increase of $5,670,810. Cost of revenues in the Enterprise Workforce Services
segment during fiscal 2005 increased $5,860,618 as a result of costs incurred in
connection with the acquired entities. Enterprise Workforce Services gross
profit was $11,811,989 or 66% of Enterprise Workforce Services revenues for
fiscal 2005 compared to $6,777,804 or 94% of Enterprise Workforce Services
revenue for fiscal 2004. The decrease in the Enterprise Workforce Services gross
profit as a percent of revenues directly corresponds to the increase in
professional services revenue and awards revenue as discussed previously.
Career Networks cost of revenues accounted for $939,410 of the total cost
of revenues for fiscal 2005 and $1,183,229 for fiscal 2004, a decrease of
$243,819 or 21%. Career Networks gross profit was $7,992,618 or 90% of revenues
for fiscal 2005 compared to $8,802,087 or 88% of revenue for fiscal 2004. The
gross profit margin increased slightly due to general efficiencies gained
relating to career transition services.
SELLING AND MARKETING EXPENSE
Selling and marketing expenses were $7,210,996 for fiscal 2005 compared to
$4,362,292 for fiscal 2004, an increase of $2,848,704 or 65%. This increase is
primarily attributable to selling and marketing expenses of $2,277,236 incurred
by the acquired companies during fiscal 2005. Selling and marketing expenses for
existing companies was $4,933,760 in fiscal 2005 compared to $4,362,292 for
fiscal 2004, an increase of $571,468 or 13%. The increase in sales and marketing
expense is primarily due to an increase of $2,179,153 in employee costs. The
employee costs in the salesforce and marketing department in the Enterprise
Workforce Services segment increased by approximately $2.6 million as a result
of the various acquisitions. This increase is partially offset by a decrease in
the salesforce in the Career Networks segment as we refocused efforts on
increasing revenue per salesperson as opposed to gross revenue. Selling and
marketing expenses also increased in the Enterprise Workforce Services segment
due to our hosting of a user conference and attending more industry conferences
during fiscal 2005.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses were $17,837,777 for fiscal 2005
compared to $9,798,440 for fiscal 2004, an increase of $8,039,337 or 82%. The
acquired companies accounted for $8,741,418 of general and administrative
expenses during fiscal 2005. General and administrative expenses for existing
companies accounted for $9,096,359 during fiscal 2005 compared to $9,798,440
during fiscal 2004, a decrease of $702,081 or 7%. The decrease in general and
administrative expense for existing companies is primarily due to less expense
being allocated to these entities as certain allocations are based on revenue,
which was spread over several additional entities in fiscal 2005. The increase
in general and administrative expense is due to the following: employee costs
increased $4,244,140; travel and entertainment increased $567,774; professional
fees increased $1,084,641 and bad debt expense increased $526,392. The employee
costs increased during fiscal 2005 primarily due to the additional employees
being added from the various acquisitions. Typically, employee costs will
increase for a period of time after an acquisition until the appropriate
downsizing occurs. The majority of the downsizing benefit is anticipated to
occur with the employee costs included in general and administrative expenses.
Travel expense increased in fiscal 2005 primarily due to travel required before
and after the acquisitions. Professional fees increased primarily due to the
legal fees, including those associated with a dispute with the former
shareholders of 6FigureJobs.com, and due to the increased audit costs associated
with Sarbanes-Oxley. Bad debt expense increased due to the decrease in the aging
of certain accounts receivable, primarily relating to projects started by an
acquired entity prior to the acquisition.
29
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs were $2,147,251 for fiscal 2005 compared to
$453,247 for fiscal 2004, an increase of $1,694,004 or 374%. $1,826,041 of the
research and development costs incurred in fiscal 2005 was attributable to the
acquired companies. Research and development costs for existing companies during
fiscal 2005 was $321,210 compared to $453,247 for fiscal 2004, a decrease of
$132,037 or 29%. The increase in research and development expense is primarily
due to an increase of $1,077,017 in employee costs and an increase of $395,540
in professional fees. During fiscal 2005 subsequent to the acquisitions, we
incurred costs necessary to continue updating the acquired softwares and to
standardize the various software applications now owned by the Company. In the
second half of fiscal 2005, we began outsourcing some of this work to overseas
vendors, which resulted in the increase in professional fees.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense was $8,534,715 for fiscal 2005
compared to $5,601,910 for fiscal 2004, an increase of $2,932,805 or 52%. The
acquired companies incurred $3,679,856 of depreciation and amortization expense
in fiscal 2005. Amortization and depreciation expense for existing companies
during fiscal 2005 was $4,854,859 compared to $5,601,910 during fiscal 2004, a
decrease of $747,051 or 13%. The decrease in the existing companies' expense was
due to certain capital and intangible assets becoming fully depreciated and
amortized. Amortization and depreciation expense for the Enterprise Workforce
Services segment was $8,126,808 for fiscal 2005 compared to $4,451,332 for
fiscal 2004, an increase $3,675,476 or 83%. All of the companies acquired in
fiscal 2004 and 2005 are included in the Enterprise Workforce Services. Each
acquisition resulted in acquired intangible assets, which are being amortized
over three to five years. The increase in the fiscal 2005 amortization and
depreciation expense is due to the increase in amortizable intangible assets. In
fiscal 2005, the Career Networks segment amortization and depreciation expense
was $407,907 compared to $1,150,578 in fiscal 2004, a decrease of $742,671 or
65%. The decrease is due to the intangible assets with a three-year life
(customer base and acquired technology) included in the Career Networks segment
becoming fully amortized during fiscal 2005.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $189,851 for fiscal 2005 compared to $11,959
for fiscal 2004, an increase of $177,892. The increase in interest and other
income during fiscal 2005 was due to higher interest-earning cash, short-term
investment and restricted cash balances compared to fiscal 2004. The increase in
the interest-earning deposits is primarily due to the funds raised during the
equity financing in fiscal 2005.
INTEREST AND OTHER EXPENSE
Interest and other expense was $234,451 for fiscal 2005 compared to
$2,647,265 for fiscal 2004, a decrease of $2,412,814. The decrease in interest
and other expense was due to the cessation of the amortization of the discount
related to 8% senior subordinated convertible notes that were paid in full in
fiscal 2004.
GOODWILL
Goodwill was $42,283,442 at May 31, 2005 compared to $28,598,706 at May
31, 2004, an increase of $13,687,736 or 48%. $7,332,488 of the increase relates
to the Bravanta acquisition completed during first quarter 2005, and $3,284,531
of the increase relates to the ProAct acquisition completed during third quarter
2005. $2,532,111 of the increase represents additional consideration issued to
the former shareholders of Kadiri after certain revenue and cash generation
targets were achieved by the acquired entity. $234,305 of the increase
represents the additional consideration issued to the former shareholders of
6FigureJobs.com. This additional consideration was determined by an arbitrator
who resolved a dispute between the Company and the former shareholders of
6FigureJobs.com. The amount represents 20% of the fair market value of the
shares held in escrow since the acquisition as potential contingent
consideration. The remaining $301,301 increase in goodwill represents various
purchase price adjustments made within one year of the acquisition date.
30
FISCAL 2004 COMPARED TO FISCAL 2003
GENERAL
Workstream made the following business acquisitions during fiscal 2004:
Perform on September 11, 2003; Peopleview on March 17, 2004; and Kadiri on May
28, 2004. Absorbing each of these entities' activities subsequent to the
acquisition date was a contributing reason for several of the variances
discussed in the following paragraphs. For this reason, Perform, Peopleview and
Kadiri are referred to as the "acquired entities". The acquired entities are all
included in the Enterprise Workforce Services segment.
REVENUES
Consolidated revenues were $17,166,880 for fiscal 2004 compared to
$17,836,990 for fiscal 2003, a decrease of $670,110 or 4%. Fiscal 2004 revenues
from companies we acquired during fiscal 2004 represented $714,795 for the year
ended May 31, 2004. Revenues other than from companies we acquired in fiscal
2004 declined 8% to $16,452,085 from $17,836,990 in fiscal 2003 mainly due to a
decrease in Career Network revenues ($951,416 lower) caused by our closure of
seven office locations in fiscal 2004 and the timing of our closure of four
office locations in fiscal 2003, as well as lower sales as a result of a change
in marketing strategy initiated during the last six months of fiscal 2003.
Career Networks revenues for fiscal 2004 were $9,985,316 compared to
$10,936,732 for fiscal 2003, a decrease of $951,416 or 9%. The major reason for
the decline in Career Networks revenues was due to our closure of seven office
locations during fiscal 2004 and the timing of the closure of four office
locations during fiscal 2003, as well as lower sales as a result of a change in
marketing strategy.
Enterprise Workforce Services revenues for fiscal 2004 were $7,181,564
compared to $6,900,258 for fiscal 2003, an increase of $281,306 or 4%. $714,795
of revenues for fiscal 2004 was contributed by the acquisitions made in fiscal
2004. This increase as a result of acquisitions was partially offset by a
decline in sales due to the transition of Icarian clients from our Icarian
software to our E-cruiter software, which is less expensive for the client but
results in a greater profit as a percentage of sales for Workstream.
COST OF REVENUES
Cost of revenues for fiscal 2004 were $1,586,989 compared to $3,040,132
for fiscal 2003, a decrease of $1,453,143 or 48%. Gross profits were $15,579,891
or 91% of revenues compared to $14,796,858 or 83% of revenues for fiscal 2003.
The improvement in gross profit as a percent of revenues is due to efforts to
eliminate redundant operations and costs and to pursue more profitable business
by shifting to more profitable products and changing marketing strategies
resulting in sales with higher gross margins.
Career Networks cost of revenues accounted for $1,183,229 of the total
cost of revenues for fiscal 2004 and $1,890,731 for fiscal 2003, a decrease of
$707,502 or 37%. Career Networks gross profit was $8,802,087 or 88% of revenues
for fiscal 2004 compared to $9,046,001 or 83% of revenues for fiscal 2003. Cost
of revenues for the Career Networks segment decreased primarily as a result of
reduction of staffing in an effort to improve productivity through automation.
Enterprise Workforce Services cost of revenues accounted for $403,760 of
the total cost of revenue for fiscal 2004 and $1,149,401 for fiscal 2003, a
decrease of $745,641 or 65%. Enterprise Workforce Services gross profit was
$6,777,804 or 94% of revenues for fiscal 2004 compared to $5,750,857 or 83% of
revenues for fiscal 2003. Cost of revenues in the Enterprise Workforce Services
segment decreased primarily as a result of the elimination of redundant
operations.
31
SELLING AND MARKETING
Selling and marketing expenses were $4,362,292 for fiscal 2004 compared to
$6,057,788 for fiscal 2003, a decline of $1,695,496 or 28%. This decrease is due
to a decrease in advertising expenses of $805,512 primarily due to shifting of
advertising from newspapers and print media to the internet in the Career
Networks segment. In addition, there was a decrease in sales and marketing
employee costs of $850,494 due to the consolidation of operations resulting in
the hiring of fewer sales and marketing personnel as well as the transitioning
of sales and marketing positions to our headquarters in Ottawa, Canada where we
have replaced positions at lower salaries. Finally, travel and entertainment
decreased $169,015.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $9,798,440 for fiscal 2004
compared to $9,581,554 for fiscal 2003, an increase of $216,886 or 2%. The
acquisitions made in fiscal 2004 contributed $131,129 of this increase mainly
for employee costs, rent and communication expense. General and administrative
expenses for existing operations increased $85,757 due principally to an
increase of $1,053,288 in employee costs due to an increase in personnel at our
headquarters in Ottawa, Canada, in corporate support functions, a $591,172
increase in professional fees as a result of agreements entered this year for
consulting services, and an increase of $107,510 in travel and entertainment.
These increases were partially offset by a decrease in expenses due to the
consolidation of operations in areas such as rent expense (a decrease of
$686,775), communication expense (a decrease of $185,699), computing expense (a
decrease of $185,736). In addition, expenses decreased due to a reduction of
$237,525, net of recoveries, as a result of better collection efforts, as well
as due to credits related to the recovery and settlement of claims with vendors
that arose prior to the Icarian acquisition ($131,966), and the reversal of
pre-acquisition accounts payable balances of Icarian determined not to be
outstanding ($202,877).
RESEARCH AND DEVELOPMENT
Research and development costs were $453,247 for fiscal 2004 and
$1,086,295 for fiscal 2003, a decrease of $633,048 or 58%. $201,168 of the
research and development costs incurred in fiscal 2004 was attributable to the
operations that we acquired in fiscal 2004. The overall decline in research and
development costs is primarily due to our strategy to acquire new technology
through acquisitions. We believe that we can acquire new technology at a lower
cost in the long-term and more efficiently than developing new software
platforms with internal resources. We implemented this strategy in fiscal 2002.
Since fiscal 2002, most of our research and development efforts have been
incurred in the Enterprise Workforce Services segment.
AMORTIZATION AND DEPRECIATION EXPENSE
Amortization and depreciation expense was $5,601,910 for fiscal 2004
compared to $6,097,141 for fiscal 2003, a decrease of $495,231 or 8%. The
decrease is due to a decrease of $1,096,934 in depreciation expense due to lower
computer equipment and leasehold improvement expense as a result of the disposal
of certain assets in connection with the termination of a lease of real property
formerly leased to Icarian and other assets becoming fully amortized. The
decrease in depreciation is partially offset by an increase of $601,704 in
amortization of intangibles as a result of the timing of the acquisitions
completed in fiscal 2004 and fiscal 2003. During fiscal 2004, through the
acquisitions of Perform, Peopleview and Kadiri we acquired capital assets of
$624,838 and intangible assets of $5,105,311. The amortization of these acquired
assets is based on the estimated useful lives of the assets as described in the
notes accompanying our consolidated financial statements.
INTEREST INCOME AND OTHER INCOME
Interest and other income was $11,959 for fiscal 2004 compared to $47,245
for fiscal 2003, a decrease of $35,286 or 75%. The decline was due to lower
average short-term investment and restricted cash balances throughout fiscal
2004.
32
INTEREST EXPENSE AND OTHER EXPENSE
Interest and other expense was $2,647,265 for fiscal 2004 compared to
$1,193,045 for fiscal 2003, an increase of $1,454,220 or 122%. The primary
reason for the increase in interest and other expense was due to a non-recurring
increase of $1,733,455 incurred as a result of the non-cash charge for
amortization of the discount related to the conversion of $2,700,000 of our 8%
senior subordinated convertible notes and the accretion of the notes to their
full face value during fiscal 2004. This increase was partially offset by a
decrease of $279,235 in interest expense due to the timing of the conversion of
the 8% senior subordinated convertible notes and the payment of a certain
shareholder note.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2005, we maintained $15,187,301, in cash and cash equivalents,
restricted cash and short-term investments and working capital of $6,719,502.
The receipt of approximately $25 million from the issuance of stock during
fiscal 2005 provided capital used in the acquisitions and, in part, to subsidize
the current operating deficit. During fiscal 2005, we acquired Bravanta,
Peoplebonus, HRSoft and ProAct. In conjunction with these acquisitions, we made
total cash payments of approximately $8.8 million and incurred costs associated
with these acquisitions of $468,000. In addition, cash used in operations was
$8,940,058.
At May 31, 2005, $3,063,368 of short-term investments was restricted from
use as they collateralize various borrowing and lease arrangements. Deposits
totaling $2,855,614 were restricted as security for an outstanding term loan, a
line of credit and three letters of guarantee provided to landlords for facility
leases. As the outstanding term loan and line of credit balances change, the
restricted cash balance guaranteeing them will change accordingly. In addition,
when we make lease payments, the restricted cash guaranteeing the leases will
periodically decrease according to the terms of the lease agreements. The
remaining $207,754 of restricted cash represents reserve deposits on our
merchant accounts relating to our customers' credit card activity. These
deposits serve as guarantees to the merchant banks for chargebacks that may be
issued to our clients that request a cancellation of our services and that
previously paid for our services with a credit card.
For fiscal 2005, cash used in operations totaled $8,940,058, consisting
primarily of the net loss for the year of $15,158,975, cash used for working
capital of $2,269,182, and the non-cash recovery of deferred income taxes of
$847,920 offset by non-cash expenses such as amortization and depreciation of
$8,494,615 and provision for bad debts of $577,362.
Net cash used for investing activities during fiscal 2005 was $9,207,543.
Investing outflows consisted mainly of cash paid for business acquisitions of
$8,838,592 and $339,499 in capital expenditures.
Net cash provided by financing activities was $25,609,638 for fiscal 2005.
In July 2004, we received $9,999,988 in exchange for 4,444,439 shares of our
common stock sold in a private placement. In December 2004, we received
$14,994,001 in exchange for 4,996,667 shares of our common stock and 2,498,333
warrants to purchase our common stock at $3.50 per share. In addition, we
received $1,433,313 in cash from institutional investors as a result of their
exercising of warrants to purchase our common stock and $950,390 in cash as a
result of the exercising of stock options. The net activity of our line of
credit was $186,289. Financing outflows consisted primarily of the repayments of
long-term obligations of $1,050,292 and costs related to the registration and
issuance of the common stock of $904,051.
We have had operating losses since our inception. During fiscal 2005, we
continued to have operating losses as a result of non-cash charges such as
amortization and depreciation, and an increase in operating expenses subsequent
to our acquisitions. However, management believes that our operations will
generate operating cash flow in the future as a result of increased revenue from
the sales of the now complete suite of HCM software applications, a
rationalizing of operating expenses after the elimination of redundant costs in
the businesses we have acquired, and a general increase in efficiencies.
We believe that our financial strength was improved during the fiscal 2005
as a result of the funds we raised through the sale of $25 million of our common
shares. We believe that our liquidity ratio, which improved from 1.0 as of May
31, 2004 to 1.5 as of May 31, 2005, and our debt to equity ratio, which
decreased from .30 as of May 31, 2004 to .20 as of May 31, 2005, reflect our
increased financial strength.
33
Management believes that the anticipated improvement in operating cash
flows together with our current cash reserves will be sufficient to meet our
working capital and capital expenditure requirements through at least May 31,
2006.
CONTRACTUAL OBLIGATIONS
At May 31, 2005 maturities of debt outstanding, capital leases, operating
leases and contractual obligations are as follows:
Year Ended May 31,
2006 2007 2008 2009 2010 Total
---------- ---------- ---------- ---------- ---------- ----------
Debt $1,738,966 $ 102,518 $ 51,810 $ 37,930 $- $1,931,224
Capital leases 24,011 -- -- -- -- 24,011
Operating leases 1,151,095 1,080,551 852,527 582,051 317,599 3,983,823
---------- ---------- ---------- ---------- ---------- ----------
Total $2,914,072 $1,183,069 $ 904,337 $ 619,981 $ 317,599 $5,939,058
========== ========== ========== ========== ========== ==========
ACQUISITIONS
As part of our overall strategy, we have pursued growth through the
acquisition of other companies offering services similar or complementary to
ours. Through the acquisition of those companies we have expanded our service
offerings enabling us to grow our revenue and to position ourselves for future
profitability by consolidating operations and improving efficiencies.
On May 28, 2004, we acquired via merger 100% of the outstanding shares of
Kadiri Inc., a California based company. As consideration for the sale, we
issued to the shareholders of Kadiri 4,450,000 common shares valued at
$12,415,500. During fiscal 2005, an additional 1,042,891 shares valued at
$2,532,111 were issued as additional contingent consideration after certain
revenue and cash generation targets of the acquired entity were achieved. Kadiri
is a provider of Enterprise Compensation Management solutions which enable
companies to plan and manage compensation, performance evaluation and monitor
the granting of rewards. We recorded approximately $3.6 million in intangible
assets and $14 million in goodwill as part of the acquisition.
On June 21, 2004, we acquired certain assets of Peoplebonus.com LLC, a
Delaware limited liability company. As consideration for the sale, the Company
issued to the shareholders of Peoplebonus 180,506 common shares (72,202 common
shares valued at $200,000 and 108,304 common shares held in escrow), made a cash
payment of $25,000, which is held in escrow, and assumed a promissory note for
$100,000. In addition, the Company made a cash payment of $105,000 to
Peoplebonus. Peoplebonus' products and services are designed to streamline the
way a company processes and handles resumes. Peoplebonus' artificial
intelligence data mining software can search for key words and phrases from
within a resume and score the resume based on learned search criteria. We
recorded approximately $427,000 in intangible assets as part of the acquisition.
On July 27, 2004, we acquired 100% of the outstanding shares of Bravanta,
Inc., a Delaware corporation. As consideration for the sale, the Company issued
to the shareholders of Bravanta 2,427,125 common shares. In January 2005,
244,939 additional common shares were issued to the former management of
Bravanta upon receipt by the Company of completed and satisfactory accredited
investor questionnaires and other related documentation. The total aggregate
value of the shares was $7,107,693. In addition, the Company made cash payments
of $2,051,120 to meet certain of Bravanta's obligations prior to the
finalization of the purchase agreement. Bravanta is a provider of enterprise
incentive and recognition programs. We recorded approximately $2.2 million in
intangible assets and $7.3 million in goodwill as part of the acquisition.
34
On October 6, 2004, we acquired certain assets of HRSoft, LLC, a Delaware
limited liability company. As consideration for the sale, the Company assumed
$766,913 in bank debts and vendor obligations. In addition, the Company made
cash payments of $100,000 to meet certain of HRSoft's obligations prior to the
finalization of the asset purchase agreement. We also agreed to reimburse the
owners of HRSoft for the estimated individual tax liabilities arising from the
transaction. This amount totaled $110,000. Finally, the Company issued a
promissory note for $325,000 to the owners of HRSoft, under which the portion to
be repaid to the Company is contingent on future revenue levels. HRSoft develops
and markets strategic talent management software solutions for succession
planning and leadership development, performance management, competency
management, career and development planning, organizational charting, modeling
and hierarchy management. We recorded approximately $1.8 million in intangible
assets as part of the acquisition.
On December 30, 2004, we acquired certain assets of ProAct Technologies
Corporation, a Delaware corporation. As consideration for the sale, we made a
cash payment of $5,500,000 and issued a promissory note for $1,530,000, which
accrued interest at an annual rate of 6% with principal and interest due on June
1, 2005. In addition, the Company issued to the shareholders of ProAct 913,551
common shares valued at $2,700,000, of which 253,764 shares are being held in
escrow as the exclusive source against which the Company can assert potential
indemnification claims. The actual number of common shares issued at closing was
determined based on the average of the closing price of the Company's common
shares for the 20 business days prior to the closing date. Under accounting
principles generally accepted in the United States, the common shares were
valued at $2,822,873. ProAct is a provider of software and hosted web-based
tools for employee benefits management. We recorded approximately $6.8 million
in intangible assets and $3.3 million in goodwill as part of the acquisition.
In the past we have generally acquired companies and businesses through
the issuance of our common shares. We anticipate that we will continue to
finance future acquisitions in whole or in part by issuing our common shares.
However, to the extent that we use cash to fund acquisitions, the amount of
funds available to satisfy our working capital needs will be reduced.
We believe that these acquisitions have been important to our evolution
from a recruitment application service provider into an HCM business process
aggregator. We believe that these additions will continue to broaden our revenue
base and diversify our product offerings.
RISK FACTORS
You should carefully consider the following risk factors that pertain to
our Company. The realization of these risks could result in a material adverse
effect on our results of operations, financial condition, cash flows, business
or the market for our common shares. We cannot assure you that we will
successfully address any of these risks or address them on a continuing basis.
Keep these risk factors in mind when reading "forward-looking" statements
elsewhere in this Form 10-K. (See "Cautionary Statement Concerning
Forward-Looking Statements" in Item 7)
We may not become profitable.
Since our inception, we have incurred losses which have been substantial
in relation to our operations. As of May 31, 2005, we had an accumulated deficit
of $52,658,318. We reported a net loss of $15,158,975 for the year ended May 31,
2005 ("fiscal 2005") and a net loss of $5,536,899 for the year ended May 31,
2004 ("fiscal 2004"). Revenues for fiscal 2005 and 2004 were $26,818,587 and
$17,166,880, respectively. Our ability to reduce our losses will be adversely
affected if we continue to acquire companies reporting losses, if revenue grows
slower than we anticipate or if operating expenses exceed our expectations. Even
if we do achieve profitability, we may not sustain or increase profitability on
a quarterly or annual basis. Failure to achieve or maintain profitability would
materially adversely affect the market price of our common shares. We expect our
operating expenses to continue to grow as we expand our operations.
35
We may encounter difficulties with acquisitions, which could harm our business.
During fiscal 2005, fiscal 2004 and fiscal 2003, we made several
acquisitions of other companies and businesses, as part of our efforts to expand
our operations, and we may continue to make acquisitions of complementary
companies, products and businesses. The risks we may encounter in acquisitions
include:
o difficulty and expense of assimilating the operations and personnel
of acquired businesses;
o difficulty integrating the acquired technologies or products with
our current products and technologies;
o potential exposure to product liability or intellectual property
liability associated with the sale of the acquired company's
products;
o diversion of management time and attention and other resources;
o loss of key employees and customers as a result of changes in
management;
o difficulty and expense of managing an increased number of employees
over large geographic distances;
o our due diligence processes may fail to identify significant issues
with product quality, product architecture, and legal and financial
contingencies, among other things;
o potential exposure to unknown liabilities of acquired companies;
o the incurrence of amortization expenses;
o possible future goodwill impairment if the financial results and
subsequent forecasted financial results are lower than those
estimated at the time of the acquisition; and
o possible dilution to our shareholders.
In the past, we have acquired financially distressed businesses which had
lost customers prior to our acquisition due in part to their financial
instability. While we are generally successful in retaining the remaining
customers of these businesses after we acquire them, we may be unable to recover
customers already lost by these financially distressed businesses. We have also
frequently used our common shares to pay the purchase price for acquisitions.
Our common shares may not remain at a price at which they can be used for
acquisitions without further diluting our existing shareholders, and potential
acquisition candidates may not view our stock attractively. We may not be
successful in overcoming these risks or any other problems encountered in
connection with any acquisitions. These difficulties may increase our expenses,
and our ability to achieve profitability may be adversely affected.
Michael Mullarkey, our Chairman, Chief Executive Officer and President, may have
interests that are different than other shareholders and may influence certain
actions.
As of May 31, 2005, Michael Mullarkey, our Chairman, Chief Executive
Officer and President, beneficially owned approximately 8% of our outstanding
common shares. Mr. Mullarkey's interests as a major shareholder may conflict
with his fiduciary duties as an officer and director. Mr. Mullarkey's interests
may influence how Mr. Mullarkey votes on certain matters that require
shareholder approval. Mr. Mullarkey may influence the outcome of various actions
that require shareholder approval including the election of our directors,
delaying or preventing a transaction in which shareholders might receive a
premium over the prevailing market price for their shares and preventing changes
in control or management.
36
The current economic downturn and future economic downturns may adversely affect
the demand for our services.
Historically, the general level of economic activity has significantly
affected the demand for employment and recruitment services. We believe that we
are currently experiencing the effects of the current economic downturn and, as
a result, the demand for our employment and recruitment services has decreased.
If the general level of economic activity continues to slow, our clients may not
require additional personnel and may delay or cancel plans that involve
recruiting new personnel using our services and technology. Consequently, the
time from initial contact with a potential client to the time of sale could
increase and the demand for our services could decline, resulting in a loss of
revenue harming our business, operating results and financial condition. In
addition, it is expected that in times of economic growth, demand for our
outplacement business may decline.
We may not be able to grow our client base and revenue because of competition we
face.
Our future success will depend to a large extent on our ability to grow
and maintain our client base and revenue. This requires that we offer services
that are superior to the services being offered by the competition that we face
and that we price our services competitively. The market for human capital
management, or HCM, services is highly fragmented and competitive, with
thousands of companies offering products or services that compete with one or
more of the services that we offer. We compete for a portion of employers'
recruiting budgets with many types of competitors, as employers typically
utilize a variety of sources for recruiting, including:
o traditional offline recruiting firms;
o traditional offline advertising, such as print media;
o resume processing companies;
o Web-based recruitment companies;
o Internet job posting companies; and
o client-server-based software services.
In addition, many employers are developing or may develop their own
software to satisfy their recruitment needs. We also compete with traditional
offline and web-based outplacement service companies and human resource, or HR,
service providers. While we do not believe that any of our competitors offer the
full suite of services that we provide, there are a number of companies that
have products or services that compete with one or more of the services we
provide. For instance, companies that compete with our Recruitment Systems
services include Taleo Corporation (formerly RecruitSoft), Webhire and Kenexa.
Companies such as Monster Worldwide, Execunet and Netshare have products or
services that compete with our applicant sourcing and exchange services. We also
compete with vendors of enterprise resource planning software, such as
PeopleSoft, Oracle, SAP and Performaworks. In the area of career transition
services, we compete with companies such as McKenzie Scott and WSA Corp.
Finally, companies such as LifeCare, Next Jump and SparkFly compete with our
employee portal services.
We expect competition to increase and intensify in the future, with
increased price competition developing for our services. A number of our current
and potential competitors have longer operating histories and greater financial,
technical and marketing resources and name recognition than we do, which could
give them a competitive advantage. Our competitors may develop products or
services that are equal or superior to ours or that achieve greater market
acceptance than ours. It is also possible that new competitors may emerge and
rapidly acquire significant market share. As a result, we may not be able to
expand or maintain our market share and our ability to penetrate new markets may
be adversely affected.
37
If we experience client attrition, our operating results will be adversely
affected.
Our Enterprise Workforce Services clients generally enter into
subscription agreements covering various periods, typically for one year or
less. We have no assurance that these clients will maintain a long-term
relationship with us. If these clients fail to renew their subscriptions with
us, our business, revenues, operating results and financial condition will be
adversely affected. Since we have only been offering our services for a limited
period of time, we do not know what rate of client attrition to expect. To the
extent we experience significant client attrition, we must attract additional
clients to maintain revenue.
We may not be able to strengthen and maintain awareness of our brand name.
We believe that our success will depend to a large extent on our ability
to successfully develop, strengthen and maintain the recognition and reputation
of our Workstream brand name. In order to strengthen and maintain our Workstream
brand recognition and reputation, we invest and will need to continue to invest
substantial resources in our marketing efforts and maintain high standards for
actual and perceived quality, usefulness, reliability, security and ease of use
of our services. If we fail to successfully promote and maintain our Workstream
brand name, particularly after incurring significant expenses in promoting our
Workstream brand name, or encounter legal obstacles which prevent our continued
use of our Workstream brand name, our business, operating results and financial
condition could be materially adversely affected and the market price of our
common shares could decline. Moreover, even if we continue to provide quality
service to our clients, factors outside of our control, including actions by
organizations that are mistaken for us and factors generally affecting our
industry, could affect our Workstream brand and the perceived quality of our
services.
Our failure to enter into strategic relationships with third parties may harm
our business.
If we are unable to enter into or maintain certain strategic
relationships, our business will suffer. These relationships generally include
those with job posting boards and other on-line recruitment services such as
Monster.com and Yahoo!hotjobs pursuant to which our clients can post their job
openings on such boards. These relationships allow us to expand the services
that we provide our clients without our having to spend significant capital
resources developing or acquiring such services. Because many of these third
parties compete with each other, the existence of a relationship with any
particular third party may limit or preclude us from entering into a
relationship with that third party's competitors. In addition, some of the third
parties with which we seek to enter into relationships may view us as a
competitor and refuse to do business with us. Any loss of an existing
relationship or failure to establish new relationships may adversely affect our
ability to improve our services, offer an attractive service in the new markets
that we enter, or expand the distribution of our services.
Because we have international operations, we may face special economic and
regulatory challenges that we may not be able to meet.
Beginning in 2002, we completed several acquisitions of businesses in the
United States and began marketing our services outside of Canada. We expect to
continue to expand our U.S. and Canadian operations through acquisitions and to
spend significant financial and managerial resources to do so. We have limited
experience in international operations and may not be able to compete
successfully in international markets. Our international operations are subject
to certain risks, including:
o changes in regulatory requirements, tariffs and trade barriers;
o changes in diplomatic and trade relationships;
o potentially adverse tax consequences;
o the impact of recessions in economies outside of Canada;
o the burden of complying with a variety of foreign laws and
regulations, and any unexpected changes therein;
o political or economic constraints on international trade or
instability; and
38
o fluctuations in currency exchange rates.
We may lose business if we are unable to successfully develop and introduce new
products, services and features.
If we are unable to develop and introduce new products, services, or
enhancements to, or new features for, existing products or services, in a timely
and successful manner, we may lose sales opportunities. The market for our
services is characterized by rapid and significant technological advancements,
the introduction of new products and services, changes in client demands and
evolving industry standards. The adoption of new technologies or new industry
standards may render our products obsolete and unmarketable. The process of
developing new services or technologies is complex and requires significant
continuing efforts. We may experience difficulties or funding shortages that
could delay or prevent the successful development, introduction and sale of
enhancements or new products and services. Moreover, new products, services or
features which we introduce may not adequately address the needs of the
marketplace or achieve significant market acceptance.
Our business could suffer if financing is not available when required or is not
available on acceptable terms.
Our future capital requirements depend on a number of factors, including
our ability to generate positive cash flow, cash required by future
acquisitions, anticipated capital expenditures, the development of new services
or technologies and our projected operations. We believe that we have sufficient
credit facilities, cash flow from operations and cash reserves, which, together
with further cost reductions, will permit us to meet our working capital
requirements and capital expenditure requirements through at least May 31, 2006.
However, it is possible that we may need to raise additional funds sooner than
expected in order to fund expansion, develop new, and enhance existing, services
or acquire complementary businesses or technologies or if our revenues are less
or our expenses are greater than we expect. Our ability to obtain financing
depends on a number of factors, including our ability to generate positive cash
flow from operations, the amount of our cash reserves, the amount and terms of
our existing debt arrangements, the availability of sufficient collateral and
the prospects of our business. If financing is not available when required or is
not available on acceptable terms, we may not be able to:
o keep up with technological advances;
o pursue acquisition opportunities;
o develop product enhancements;
o make capital expenditures;
o respond to business opportunities;
o address competitive pressures or adverse industry developments; or
o withstand economic or business downturns.
Future financings may be on terms adverse to your interests.
In the past we have issued and, in the future we may issue equity to raise
additional funds. In July 2004, we issued 4,444,439 common shares at $2.25 per
common share for a total of $9,999,988. In December 2004, we issued 4,996,667
common shares at $3.00 per share and warrants to purchase 2,498,333 common
shares at $3.50 per share resulting in aggregate proceeds of $14,994,001.If we
issue additional securities, our existing shareholders may be further diluted
and holders of those new securities may have dividend, liquidation, voting and
other rights senior to those of the holders of our common shares.
39
The power of our board of directors to designate and issue shares of stock could
have an adverse effect on holders of our common shares.
We are authorized to issue an unlimited number of common shares, which may
be issued by our board of directors for such consideration as they may consider
sufficient without seeking shareholder approval. The issuance of additional
common shares in the future will reduce the proportionate ownership and voting
power of current shareholders. Our Articles of Incorporation also authorize us
to issue an unlimited number of Class A Preferred Shares, the rights and
preferences of which may be designated by our board of directors without
shareholder approval. The designation and issuance of Class A Preferred Shares
in the future could create additional securities that would have dividend,
liquidation and voting preferences prior in right to the outstanding common
shares. These provisions could also impede a change of control.
If we are characterized as a passive foreign investment company, our U.S.
shareholders may suffer adverse tax consequences.
We believe that we were not a passive foreign investment company for U.S.
federal income tax purposes for fiscal years 2003, 2004 and 2005. Generally, we
may be characterized as a passive foreign investment company for U.S. federal
income tax purposes if for any taxable year 75% of our gross income is passive
income, or at least 50% of our assets are held for the production of, or
produce, passive income. This characterization could result in adverse U.S. tax
consequences to our shareholders. These consequences may include having gains
realized on the sale of our common shares treated as ordinary income, rather
than capital gain income, and having potentially punitive interest charges apply
to the proceeds of share sales. U.S. shareholders should consult with their own
U.S. tax advisors with respect to the U.S. tax consequences of investing in our
common shares.
Our business could be adversely affected if we are unable to protect our
proprietary technologies.
Our success depends to a significant degree upon the protection of our
proprietary technologies and brand names. The unauthorized reproduction or other
misappropriation of our proprietary technologies could provide third parties
with access to our technologies without payment. If this were to occur, our
proprietary technologies would lose value and our business, operating results
and financial condition could be materially adversely affected. We rely upon a
combination of copyright, trade secret and trademark laws and non-disclosure and
other contractual arrangements to protect our proprietary rights. The measures
we have taken to protect our proprietary rights, however, may not be adequate to
deter misappropriation of proprietary information or protect us if
misappropriation occurs. Policing unauthorized use of our technologies and other
intellectual property is difficult, particularly because of the global nature of
the internet. We may not be able to detect unauthorized use of our proprietary
information and take appropriate steps to enforce our intellectual property
rights. If we resort to legal proceedings to enforce our intellectual property
rights, the proceedings could be burdensome and expensive and could involve a
high degree of risk.
Third parties could claim that we infringe upon their proprietary technologies.
Our products, services, content and brand names may be found to infringe
valid copyrights, trademarks or other intellectual property rights held by third
parties. In the event of a successful infringement claim against us and our
failure or inability to modify our technologies or services, develop
non-infringing technology or license the infringed or similar technology, we may
not be able to offer our services. Any claims of infringement, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management attention, require us to enter into costly royalty or licensing
arrangements, modify our technologies or services or prevent us from using
important technologies or services, any of which could harm our business,
operating results and financial condition.
We may become subject to burdensome government regulation which could increase
our costs of doing business, restrict our activities and/or subject us to
liability.
Uncertainty and new regulations relating to the internet could increase
our costs of doing business, prevent us from providing our services, slow the
growth of the internet or subject us to liability, any of which could adversely
affect our business, operating results and prospects. In addition to new laws
and regulations being adopted, existing laws may be applied to the internet.
There are currently few laws and regulations directly governing access to, or
commerce on, the internet. However, due to the increasing popularity and use of
the internet, the legal and regulatory environment that pertains to the internet
is uncertain and continues to change. New and existing laws may cover issues
which include:
40
o user privacy;
o pricing controls;
o consumer protection;
o libel and defamation;
o copyright and trademark protection;
o characteristics and quality of services;
o sales and other taxes; and
o other claims based on the nature and control of Internet materials.
The Canadian Federal Government enacted privacy legislation which requires
us to appoint an individual responsible for the administration of personal
information, to implement policies and practices to protect personal
information, to provide access to information and to deal with complaints. We
must obtain individual consents for each collection, use or retention of
personal information. We implemented procedures to comply with this new privacy
legislation. The privacy legislation increases our cost of doing business due to
the administrative burden of these laws, restricts our activities in light of
the consent requirement and potentially subjects us to monetary liability for
breach of these laws.
Computer viruses or software errors may disrupt our operations, subject us to a
risk of loss and/or expose us to liability.
Computer viruses may cause our systems to incur delays or other service
interruptions. In addition, the inadvertent transmission of computer viruses or
software errors in new services or products not detected until after their
release could expose us to a material risk of loss or litigation and possible
liability. Moreover, if a computer virus affecting our system is highly
publicized or if errors are detected in our software after it is released, our
reputation and brand name could be materially damaged and we could lose clients.
We may experience reduced revenue, loss of clients and harm to our reputation
and brand name in the event of system failures.
We may experience reduced revenue, loss of clients and harm to our
reputation and brand name in the event of unexpected network interruptions
caused by system failures. Our servers and software must be able to accommodate
a high volume of traffic. If we are unable to add additional software and
hardware to accommodate increased demand, we could experience unanticipated
system disruptions and slower response times. Our systems are vulnerable to
damage or interruption from earthquakes, floods, fires, power loss,
telecommunication failures, terrorist attacks, computer viruses and similar
events. Some of our systems are not fully redundant, and our disaster recovery
planning is not sufficient for all eventualities. We have experienced delays in
providing our customers access to their data in the past, and we believe these
system interruptions will continue to occur from time to time in the future. Any
catastrophic failure at our network operations center could prevent us from
serving our clients for a number of days, or possibly weeks, and any failure of
our internet service provider may adversely affect our network's performance.
Most of our system interruptions are due to heavy internet traffic and minor
equipment failures which generally result in our customers being unable to
access their data for a few seconds or several minutes. Our clients may become
dissatisfied by any system failure that interrupts our ability to provide our
services to them or results in slower response times. Our subscription
agreements generally provide that our customers will be able to access their
data during certain guaranteed times. If we fail to meet the service levels
specified under our subscription agreements as a result of repeated outages, the
customer can terminate its agreement with us. Our business interruption
insurance may not adequately compensate us for any losses that may occur due to
any failures in our system or interruptions in our services.
41
Breaches of our network security could be costly.
If unauthorized persons penetrate our network security, they could
misappropriate proprietary information or cause interruptions in our services.
We may be required to spend capital and resources to protect against or to
alleviate these problems. In addition, because we host data for our clients, we
may be liable to any of those clients that experience losses due to our security
failures. As a result, security breaches could have a material adverse effect on
our business and the market price of our common shares may decline.
Our business may be adversely affected if internet service providers fail to
provide satisfactory service to our clients to enable them to use our services
and access job seeker candidates on-line.
Failure of internet service providers or on-line service providers to
provide access to the internet to our clients and job seekers would prevent them
from accessing our web board, which would cause our business to suffer. Many of
the internet service providers, on-line service providers and other web site
operators on which we depend have experienced significant service slowdowns,
malfunctions, outages and capacity limitations. If users experience difficulties
using our services due to the fault of third parties, our reputation and brand
name could be harmed.
Failure of the internet infrastructure to support current and future user
activity may adversely affect our business.
We cannot assure you that the Internet infrastructure will continue to
effectively support the demands placed on it as the internet continues to
experience increased numbers of users, greater frequency of use and increased
bandwidth requirements of users. In the past, the internet has experienced a
variety of outages and other delays. The internet is also subject to actions of
terrorists or hackers who may attempt to disrupt specific web sites or Internet
traffic generally. Any future outages or delays could affect the willingness of
employers to use our on-line recruitment offerings and of job seekers to post
their resumes on the internet. If any of these events occur, our business,
operating results and financial condition could be materially adversely
affected.
We may not expand and upgrade our systems and hardware in a timely manner in
order to accommodate growth in our business, which could adversely affect our
business.
We must expand and upgrade our systems and network hardware in order to
accommodate growth in our business. We may not plan any such expansion and
upgrades in a timely manner to satisfy actual growth in our business. If we do
not expand and upgrade our systems and network hardware in a timely manner to
accommodate any growth in our business, our business, financial condition and
operating results could be adversely affected.
Our common shares have traded at prices below $1.00 and could be subject to
delisting by NASDAQ.
Our common stock currently trades on the NASDAQ Small Cap Market and the
Boston Stock Exchange. Under the NASDAQ requirements, a stock can be delisted
and not allowed to trade on the NASDAQ if the closing bid price of the stock
over a 30 consecutive trading-day period is less than $1.00. The Boston Stock
Exchange, however, does not maintain a similar minimum price requirement. During
the fourth quarter of fiscal 2003, our common stock failed to meet the NASDAQ
minimum bid price requirement because the closing bid price for 30 consecutive
trading days was below $1.00. In July 2003, NASDAQ gave us notice that we
regained compliance with the minimum bid price rule because the closing bid
price of our common shares had been $1.00 or more for at least 10 consecutive
trading days. No assurance can be given that the closing bid price of our common
shares will continue to satisfy the NASDAQ minimum bid price requirements and
thus continue to trade on the NASDAQ Small Cap Market. Although our common
shares may remain listed on the Boston Stock Exchange, if our common shares are
delisted from the NASDAQ Small Cap Market, there may be a limited market for our
shares, trading our stock may become more difficult and our share price could
decrease even further. If our common shares are not listed on a national
securities exchange or NASDAQ, potential investors may be prohibited from or be
less likely to purchase our common shares, limiting the trading market for our
stock even further.
42
We may become subject to the SEC's penny stock rules, which may decrease the
liquidity of our common shares and negatively impact the ability of purchasers
of our common shares to sell our common shares in the secondary market.
SEC regulations generally define a penny stock as an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. We are
not currently subject to the penny stock rules because our common shares qualify
for two separate exceptions to the SEC's penny stock rules. The first exception
from the penny stock rules for which we qualify is an exception for companies
that have an equity security that is quoted on the NASDAQ Stock Market. Since
our common shares are traded on the NASDAQ Small Cap Market, we are not subject
to the penny stock rules. The second exception from the penny stock rules for
which we qualify is an exception for companies that have an average revenue of
at least $6,000,000 for the last three years. Our revenue for fiscal 2005,
fiscal 2004, and fiscal 2003 was $26,818,587, $17,166,880, and $17,836,990,
respectively, resulting in an average revenue of $20,607,486. If our common
shares are delisted or removed from the NASDAQ Small Cap Market and if we fail
to meet the average revenue exception to the penny stock rules, our common
shares may become subject to the penny stock rules, which impose additional
sales practice requirements on broker-dealers who sell our common shares. For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchaser of such securities and have received
the purchaser's written agreement to the transaction prior to purchase. In
addition, unless an exception is available, the regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated with it. If
our common shares were considered penny stock, the ability of broker-dealers to
sell our common shares and the ability of our shareholders to sell their
securities in the secondary market would be limited. As a result, the market
liquidity for our common shares would be severely and adversely affected. We
cannot assure you that trading in our securities will not be subject to these or
other regulations in the future which would negatively affect the market for our
common shares.
The price of our common shares historically has been volatile, which may make it
more difficult for you to resell our common shares when you want at prices you
find attractive.
The market price of our common shares has been highly volatile in the
past, and may continue to be volatile in the future. For example, since June 1,
2002, the closing sale price of our common shares on the NASDAQ Small Cap Market
has fluctuated between $0.81 and $5.35 per share. The following factors may
significantly affect the market price of our common shares:
o quarterly variations in our results of operations;
o announcement of new products, product enhancements, joint ventures
and other alliances by our competitors or us;
o technological innovations by our competitors or us;
o general market conditions or market conditions specific to
particular industries; and
o the operating and stock price performance of other companies that
investors may deem comparable to us.
In addition, the stock market in general, and the market prices for
internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the price of
our common shares, regardless of our operating performance. (See Risk Factor
"Our common shares have traded at prices below $1.00 and could be subject to
delisting by NASDAQ.")
The use of performance-based payment provisions in our acquisitions may result
in costly legal proceedings.
We often require that a portion of the total purchase price in our
acquisitions be contingent upon the acquired company's achievement of certain
performance-based milestones. We believe that the use of contingent
performance-based payment provisions more closely matches the price we pay with
the value we receive. However, the use of these provisions has resulted and may
continue to result in disputes over whether the performance-based milestones
have been achieved. Resolving these disputes could result in costly legal
proceedings and divert management attention.
43
We depend on our key employees to manage our business effectively, and if we are
unable to retain our key employees, our business may be adversely affected.
Our success depends on the efforts, abilities and expertise of our senior
management and other key employees, including in particular, Michael Mullarkey,
our President and Chief Executive Officer, and Stephen Lerch, our Executive Vice
President, Chief Operation and Financial Officer . There can be no assurance
that we will be able to retain our key employees. If any of our key employees
leave before suitable replacements are found, there could be an adverse effect
on our business. There can be no assurance that suitable replacements could be
hired without incurring substantial additional costs, or at all.
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are primarily exposed to market risks associated with fluctuations in
interest rates and foreign currency exchange rates.
INTEREST RATE RISKS
Our exposure to interest rate fluctuations relates primarily to our
short-term investment portfolio and our bank loans. We invest our surplus cash
in an investment trust established by a Canadian chartered bank, and in a
certificate of deposit in a bank in the United States. The investment trust
holds various short-term, low-risk instruments, and can be withdrawn without
penalty at any time. The interest income from these investments is subject to
interest rate fluctuations which we believe will not have a material impact on
our financial position.
We have established a CDN $3,000,000 line of credit with a Canadian bank
which bears interest at the bank's prime rate plus 1%. We have drawn CDN
$2,920,367 on this facility as of May 31, 2005. We can draw an additional CDN
$79,633 before additional collateral would be required. We also have a term loan
with the bank in the amount of CDN $76,659 as of May 31, 2005. The term loan
bears interest at the bank's prime rate plus 2%. Additionally, we have two
letters of credit issued in May 2002 as collateral on leased facilities in the
amounts of $95,568 and CDN $400,000. We pay an annual fee of 1.2% on these
letters of credit.
The majority of our interest rates are variable, and, therefore, we have
exposure to risks associated with interest rate fluctuations. However,
management believes that the exposure is limited as the majority of the exposure
is related to the CDN $3,000,000 line of credit, which is fully collateralized
with our restricted cash and therefore can be liquidated immediately if faced
with a rising interest rate environment.
The impact on net interest income of a 100 basis point adverse change in
interest rates for the fiscal year ended May 31, 2005 would have been less than
$25,000.
FOREIGN CURRENCY RISK
We have monetary assets and liabilities denominated in Canadian dollars.
As a result, fluctuations in the exchange rate of the Canadian dollar against
the U.S. dollar will impact our reported net asset position and net income or
loss. A 10% change in foreign exchange rates would result in a change in our
reported net asset position of approximately $60,000, and a change in the
reported net loss for the year ended May 31, 2005 of approximately $40,000.
44
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Workstream Inc.
We have completed an integrated audit of Workstream Inc.'s 2005 consolidated
financial statements and of its internal control over financial reporting as of
May 31, 2005 and audits of its 2004 and 2003 consolidated financial statements
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive loss, shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Workstream Inc. and its subsidiaries (the "Company") at May 31, 2005 and 2004
and the results of their operations and their cash flows for each of the three
years in the period ended May 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Report of Management on Internal Control over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of May
31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of May 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
45
As described in Management's Report on Internal Control over Financial
Reporting, management has excluded ProAct Technologies, Inc., Bravanta, Inc., HR
Soft, Inc., and PeopleBonus, Inc. (collectively referred to as "the acquired
businesses") from its assessment of internal control over financial reporting as
of May 31, 2005 because they were acquired by Company during the current fiscal
year and it was not possible for management to conduct an assessment of the
related internal control over financial reporting in the period between the
consummation date of the acquisitions and the date of management's assessment.
We have also excluded the acquired business from our audit of internal control
over financial reporting. The acquired businesses represented total assets and
net loss of $22.4 million and $5.3 million, respectively, of the Company's
related consolidated financial statement amounts as of and for the year ended
May 31, 2005.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PRICEWATERHOUSECOOPERS LLP
Ottawa, Ontario
August 15, 2005
46
WORKSTREAM INC.
CONSOLIDATED BALANCE SHEETS
May 31, 2005 May 31, 2004
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,811,611 $ 4,338,466
Restricted cash 3,063,368 2,760,259
Short-term investments 312,322 301,194
Accounts receivable, net 3,388,501 1,379,610
Prepaid expenses and other assets 669,692 753,379
------------- -------------
Total current assets 19,245,494 9,532,908
Property and equipment, net 1,224,332 1,429,143
Other assets 89,570 79,073
Acquired intangible assets, net 12,814,525 9,242,617
Goodwill 42,283,442 28,598,706
------------- -------------
TOTAL ASSETS $ 75,657,363 $ 48,882,447
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,520,038 $ 1,332,036
Accrued liabilities 1,658,155 2,969,248
Line of credit 2,326,612 1,972,218
Accrued compensation 916,101 1,241,441
Current portion of long-term obligations 1,738,966 303,240
Deferred revenue 3,366,120 2,065,604
------------- -------------
Total current liabilities 12,525,992 9,883,787
Deferred income tax liability -- 839,265
Long-term obligations 192,258 420,213
------------- -------------
Total liabilities 12,718,250 11,143,265
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Common stock, no par value: 49,182,772 and 33,574,883
shares issued and outstanding, respectively 109,019,358 72,705,603
Additional paid-in capital 7,506,376 3,605,224
Accumulated other comprehensive loss (928,303) (1,072,302)
Accumulated deficit (52,658,318) (37,499,343)
------------- -------------
Total stockholders' equity 62,939,113 37,739,182
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 75,657,363 $ 48,882,447
============= =============
See accompanying notes to these consolidated financial statements.
47
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended May 31,
2005 2004 2003
------------ ------------ ------------
Revenues, net $ 26,818,587 $ 17,166,880 $ 17,836,990
Cost of revenues (exclusive of depreciation
expense as shown below) 7,013,980 1,586,989 3,040,132
------------ ------------ ------------
Gross profit 19,804,607 15,579,891 14,796,858
------------ ------------ ------------
Operating expenses:
Selling and marketing 7,210,996 4,362,292 6,057,788
General and administrative 17,837,777 9,798,440 9,581,554
Research and development 2,147,251 453,247 1,086,295
Amortization and depreciation 8,534,715 5,601,910 6,097,141
Impairment write-down of goodwill -- -- 2,133,242
------------ ------------ ------------
Total operating expenses 35,730,739 20,215,889 24,956,020
------------ ------------ ------------
Operating loss (15,926,132) (4,635,998) (10,159,162)
------------ ------------ ------------
Interest and other income 189,851 11,959 47,245
Interest and other expense (234,451) (2,647,265) (1,193,045)
------------ ------------ ------------
Other income (expense), net (44,600) (2,635,306) (1,145,800)
------------ ------------ ------------
Loss before income tax (15,970,732) (7,271,304) (11,304,962)
Recovery of deferred income taxes 847,920 1,789,235 1,586,232
Current income tax (expense) recovery (36,163) (54,830) 42,128
------------ ------------ ------------
NET LOSS $(15,158,975) $ (5,536,899) $ (9,676,602)
============ ============ ============
Weighted average number of
common shares outstanding 43,461,514 25,036,056 18,607,725
============ ============ ============
Basic and diluted net loss per share $ (0.35) $ (0.22) $ (0.52)
============ ============ ============
See accompanying notes to these consolidated financial statements.
48
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Total
--------------------------- Paid-In Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Loss Equity
----------- ------------- ----------- ------------ ----------- ------------
Balance at June 1, 2002 14,851,905 $ 33,135,734 $ 4,792,887 $(22,285,842) $ (885,961) $ 14,756,818
Issuance of shares for acquisitions 3,765,627 12,618,640 -- -- -- 12,618,640
Issuance of shares through
exercise of stock options 46,173 53,535 -- -- -- 53,535
Issuance of shares through
exercise of stock warrants 35,674 35,674 (35,674) -- -- --
Finance costs associated with the
Issuance of convertible notes -- -- (123,697) -- -- (123,697)
Issuance of shares for exit costs 275,000 253,000 -- -- -- 253,000
Conversion of convertible note 210,525 200,000 -- -- -- 200,000
Issuance of shares held in escrow 500,000 750,000 -- -- -- 750,000
Issuance of shares and warrants 266,666 112,000 88,000 -- -- 200,000
Net loss for the year -- -- -- (9,676,602) -- (9,676,602)
Cumulative translation adjustment -- -- -- -- (7,355) (7,355)
----------- ------------- ----------- ------------ ----------- ------------
Balance at May 31, 2003 19,951,570 47,158,583 4,721,516 (31,962,444) (893,316) 19,024,339
Issuance of shares and warrants,
net of issue costs 5,454,168 6,055,639 823,584 -- -- 6,879,223
Issuance of shares and
warrants for acquisitions 4,836,773 13,404,351 46,500 -- -- 13,450,851
Issuance of shares and warrants
for services 332,000 542,590 73,500 -- -- 616,090
Issuance of shares through
exercise of stock options 136,665 139,997 -- -- -- 139,997
Issuance of shares through
exercise of warrants 465,697 1,174,343 (475,798) -- -- 698,545
Conversion of convertible note 2,424,999 4,284,078 (1,584,078) -- -- 2,700,000
Share repurchases (26,989) (53,978) -- -- -- (53,978)
Net loss for the year -- -- -- (5,536,899) -- (5,536,899)
Cumulative translation adjustment -- -- -- -- (178,986) (178,986)
----------- ------------- ----------- ------------ ----------- ------------
Balance at May 31, 2004 33,574,883 72,705,603 3,605,224 (37,499,343) (1,072,302) 37,739,182
Issuance of shares and warrants,
net of issue costs 9,684,439 19,519,485 4,820,653 -- -- 24,340,138
Issuance of shares for acquisitions 4,700,708 13,491,066 -- -- -- 13,491,066
Issuance of shares through
exercise of stock options 331,260 950,390 -- -- -- 950,390
Issuance of shares through
exercise of warrants 891,482 2,352,814 (919,501) -- -- 1,433,313
Net loss for the year -- -- -- (15,158,975) -- (15,158,975)
Cumulative translation adjustment -- -- -- -- 143,999 143,999
----------- ------------- ----------- ------------ ----------- ------------
Balance at May 31, 2005 49,182,772 $ 109,019,358 $ 7,506,376 $(52,658,318) $ (928,303) $ 62,939,113
=========== ============= =========== ============ =========== ============
See accompanying notes to these consolidated financial statements.
49
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended May 31,
2005 2004 2003
------------ ----------- -----------
Cash provided by (used in) operating activities:
Net loss for the year $(15,158,975) $(5,536,899) $(9,676,602)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Amortization and depreciation 8,494,615 5,572,366 6,080,763
Non-cash interest on convertible notes and notes payable 53,746 2,318,444 720,486
Provision for bad debt 577,362 55,966 186,581
Impairment write-down of goodwill -- -- 2,133,242
Recovery of deferred income taxes (847,920) (1,758,049) (1,586,232)
Gain (loss) on sale of capital assets -- (460) 97,993
Non-cash payment to consultants 210,296 542,590 --
Non-cash settlement of employee compensation -- 100,000 --
Change in operating components of working capital,
net of acquisitions:
Accounts receivable (430,955) 361,894 932,902
Prepaid expenses 451,737 (177,284) 117,277
Other assets 211,408 121,230 20,940
Accounts payable and accrued liabilities (2,828,592) (1,386,478) (1,525,348)
Deferred revenue 327,220 (140,100) (335,191)
------------ ----------- -----------
Net cash (used in) provided by operating activities (8,940,058) 73,220 (2,833,189)
------------ ----------- -----------
Cash provided by (used in) investing activities:
Purchase of property and equipment (339,499) (228,408) (56,708)
Cash (paid for) / acquired in business combinations (8,838,592) (416,385) 1,914,884
Proceeds from sale of property and equipment 5,700 6,310 14,950
(Increase)/decrease in restricted cash (196,811) (1,485,665) 761,170
Sale (purchase) of short-term investments 98,659 (242,780) 239,595
------------ ----------- -----------
Net cash (used in) provided by investing activities (9,270,543) (2,366,928) 2,873,891
------------ ----------- -----------
Cash provided by (used in) financing activities:
Proceeds from issuance of common stock and warrants 24,993,989 8,248,545 200,000
Costs related to the registration and issuance of common stock (904,051) (670,775) --
Costs related to issuance of convertible promissory notes -- -- (123,697)
Repayment of long-term obligations (1,050,292) (2,452,023) (712,721)
Proceeds from exercise of options and warrants 2,383,703 39,997 53,534
Shareholder loan proceeds -- -- 500,000
Line of credit, net activity 186,289 1,488,180 (841,248)
Repayment related to lease settlement -- (120,000) (100,000)
------------ ----------- -----------
Net cash provided by (used in) financing activities 25,609,638 6,533,924 (1,024,132)
------------ ----------- -----------
Effect of exchange rate changes on cash and cash equivalents 74,108 (156,923) (59,053)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 7,473,145 4,083,293 (1,042,483)
Cash and cash equivalents, beginning of year 4,338,466 255,173 1,297,656
------------ ----------- -----------
Cash and cash equivalents, end of year $ 11,811,611 $ 4,338,466 $ 255,173
============ =========== ===========
50
WORKSTREAM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended May 31,
2005 2004 2003
---------- ---------- --------
Supplemental disclosure of cash flow information:
Interest paid $ 141,690 $ 367,893 $340,605
Taxes paid $ 50,736 $ 633 --
Issuance of common shares as contingent consideration $2,532,111 -- --
Conversion of notes to common shares -- $2,700,000 $200,000
Non-cash lease settlement -- -- $631,654
See accompanying notes to these audited financial statements.
51
Note 1. Description of Company and Significant Accounting Policies
Description of the Company
Workstream Inc. ("Workstream" or the "Company"), is a provider of services and
software for Human Capital Management ("HCM"). HCM is the process by which
companies recruit, train, evaluate, motivate and retain their employees.
Workstream offers software and services that address the needs of companies to
more effectively manage their human capital management function. Workstream has
two distinct reporting units: Enterprise Workforce Services and Career Networks.
The Enterprise Workforce Services segment offers a complete suite of HCM
software solutions, which includes recruitment, benefits administration and
enrollment, performance management, succession planning, compensation management
and employee awards and discounts programs. The Career Networks segment offers
recruitment research, resume management and outplacement services. In addition,
Career Networks provides services through a web-site where job-seeking senior
executives can search job databases and post their resumes, and companies and
recruiters can post position openings and search for qualified senior executive
candidates. Workstream conducts its business in the United States and Canada.
Principles of Consolidation
The consolidated financial statements include the accounts of Workstream and its
wholly-owned subsidiaries. The earnings of the subsidiaries are included from
the date of acquisition. All intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions affecting the amounts reported in the consolidated
financial statements and the accompanying notes. Changes in these estimates and
assumptions may have a material impact on the financial statements and
accompanying notes.
Significant estimates and assumptions made by management include the assessment
of goodwill impairment. When assessing goodwill for possible impairment,
significant estimates include future cash flow projections, future revenue
growth rates and the appropriate discount rate. It is reasonably possible that
those estimates may change in the near-term, significantly affecting future
assessments of goodwill impairment. Other significant estimates include the
determination of the provision for doubtful accounts receivable, valuing and
estimating useful lives of intangible assets, valuing assets and liabilities
acquired through business acquisitions, determining the percentage of completion
of implementation services for certain revenue contracts and estimating tax
valuation allowances.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Cash Equivalents and Short-Term Investments
Cash equivalents and short-term investments are stated at cost plus accrued
interest, which approximates fair value. Cash equivalents are defined as highly
liquid investments with terms to maturity at acquisition of three months or
less. Short-term investments are defined as highly liquid investments with terms
to maturity of one year or less. All cash equivalents and short-term investments
are classified as available for sale.
Restricted Cash
Restricted cash consists of short-term investment balances used to collateralize
the outstanding line of credit and term loan balances as well as certain lease
agreements, and customer credit card activity. The line of credit, term loan,
facility leases and customer credit card activity form part of current
operations, and, accordingly, the restricted cash is classified as a current
asset.
52
Property and Equipment
Property and equipment are recorded at cost. Depreciation is based on the
estimated useful life of the asset and is recorded as follows:
Furniture and fixtures.............. 5 years straight line
Office equipment.................... 5 years straight line
Computers and software.............. 3 years straight line
Leasehold improvements.............. Shorter of lease term or useful life
The carrying values are reviewed for impairment whenever events or changes in
events indicate that the carrying amounts of such assets may not be recoverable.
The determination of whether any impairment exists includes a comparison of
estimated undiscounted future cash flows anticipated to be generated during the
remaining life of the asset to the net carrying value of the asset. The amount
of any impairment recognized is the difference between the carrying value and
the fair value.
Leasehold Inducements
Leasehold inducements are amortized over the term of the leases as a reduction
in rent expense.
Goodwill and Acquired Intangible Assets
Management assesses goodwill related to reporting units for impairment at least
annually and writes down the carrying amount of goodwill as required. The
Company estimates the fair value of each reporting unit by preparing a
discounted cash flow model. An impairment charge is recorded if the implied fair
value of goodwill of a reporting unit is less than the book value of goodwill
for that unit.
Intangible assets with a finite useful life recorded as a result of acquisition
transactions are amortized over their estimated useful lives as follows:
Acquired technologies............... 3 years straight line
Customer base....................... 3 years straight line
Intellectual property............... 5 years straight line
The Company evaluates its intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not
be recoverable. To determine recoverability, the Company compares the carrying
value of the assets to the estimated future undiscounted cash flows. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on temporary
differences between the financial statement and tax basis of assets and
liabilities and net operating loss and credit carryforwards using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect of deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
Investment Tax Credits
Investment tax credits, which are earned as a result of qualifying Canadian
research and development expenditures, are recognized when the expenditures are
made and their realization is reasonably assured.
53
Revenue Recognition
The Company derives revenue from various sources including the following:
licensing of software; software subscriptions, which includes maintenance and
hosting fees; professional services related to software implementation,
customization and training; sale of products and tickets through the Company's
employee discount and rewards software module; career transition services;
recruitment research services; and, applicant sourcing and exchange services.
In general, the Company recognizes revenue when all of the revenue recognition
criteria are met, which is typically when:
o Evidence of an arrangement exists
o Services have been provided or goods have been delivered
o The price is fixed and determinable
o Collection is reasonably assured.
The Company sells various HCM software applications. Software revenue is
generated through a variety of contractual arrangements.
License revenues consist of fees earned from the granting of licenses to use the
software products. The Company recognizes revenue from the sale of software
licenses in accordance with American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 97-2, Software Revenue Recognition,
and SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions, when all of the following conditions are met: a
signed contract exists; the software has been shipped or electronically
delivered; the license fee is fixed or determinable; and the Company believes
that the collection of the fees is reasonably assured. License revenue is
recorded upon delivery with an appropriate deferral for maintenance services, if
applicable, provided all of the other relevant conditions have been met. The
total fee from the arrangement is allocated based on Vendor Specific Objective
Evidence ("VSOE") of fair value of each of the undelivered elements. Maintenance
agreements are typically priced based on a percentage of the product license fee
and have a one-year term, renewable annually. VSOE of fair value for maintenance
is established based on the stated renewal rates. Services provided to customers
under maintenance agreements include technical product support and unspecified
product upgrades. VSOE of fair value for the professional service element is
based on the standard hourly rates the Company charges for services when such
services are sold separately.
Subscription revenues primarily consist of the following: fees for maintenance
services; fees for hosting services; and, amortization of one-time set up fees.
Maintenance and hosting fees are billed in advance on a monthly, quarterly or
annual basis. Quarterly and annual payments are deferred and recognized monthly
over the service period on a straight-line basis. Set up fees are deferred and
recognized monthly on a straight-line basis over the contractual lives, which
approximates the expected lives of the customer relationships.
Professional services revenue is generated from implementation and customization
of software, technical support not included in the maintenance, training and
consulting. The majority of professional services revenue is billed based on an
hourly rate and recognized on a monthly basis as services are provided. For
certain contracts which involve significant implementation or other services
which are essential to the functionality of the software and which are
reasonably estimable, the license and implementation services revenue is
recognized using contract accounting, as prescribed by SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. Revenue
is recognized over the period of each implementation using the
percentage-of-completion method. Labor hours incurred are used as the measure of
progress towards completion, and management believes its estimates to completion
are reasonably dependable. A provision for estimated losses on engagements is
made in the period in which the losses become probable and can be reasonably
estimated.
54
One of the software applications offered by the Company allows customer
companies to offer rewards and benefits (discounted goods and tickets) in an
effort to promote their employee retention. The Company generates subscription
revenues from the customer company. In addition, the Company generates revenue
from the sale of products and tickets to the customers' employees through a
website. The Company recognizes revenue when all of the revenue recognition
criteria are met, which is typically when the goods are shipped and title has
transferred.
For outplacement services, the Company bills the client 50% when the assignment
starts and the remaining 50% when the assignment is completed. The Company
recognizes revenue when all of the revenue recognition criteria are met, which
is typically when services have been completed.
For resume management services and recruitment services, the Company bills its
clients for job postings and matching of resumes per descriptions that the
client provides, and for quantity-based job posting packages. The Company
recognizes revenue when all of the revenue recognition criteria are met, which
is typically when the services have been completed.
Stock-Based Compensation
The Company accounts for compensation expense for its stock-based employee
compensation plan using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25") and complies with the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based . Under APB
25, compensation expense is measured at the grant date based on the intrinsic
value of the award and is recognized on a straight-line basis over the service
period, which is usually the option-vesting period.
Pro forma information regarding the results of operations is determined as if
the Company had accounted for its employee stock options using the fair-value
method. The fair value of options granted was estimated at the date of grant
using the Black Scholes option pricing model with the following assumptions:
2005 2004 2003
------- ------- -------
Weighted-average risk free interest rates 3.68% 2.99% 2.94%
Expected dividend yield 0% 0% 0%
Weighted-average expected volatility 72% 90% 115%
Expected life (in years) 3.5 3.5 3.5
Because the determination of the fair value of all options is based on the
assumptions described in the preceding paragraph and because additional option
grants are expected to be made in future periods, this pro forma information is
not likely to be representative of the pro forma effects on reported net income
or loss for future periods.
55
The following reflects the impact on results of operations if the Company had
recorded additional compensation expense relating to the employee stock options:
2005 2004 2003
------------ ------------ ------------
Net loss, as reported $(15,158,975) $ (5,536,899) $ (9,676,602)
Estimated incremental share based
compensation expense (896,621) (508,059) (798,700)
------------ ------------ ------------
Net loss, pro forma $(16,055,596) $ (6,044,958) $(10,475,302)
============ ============ ============
Weighted average common shares
outstanding during the year 43,461,514 25,036,056 18,607,725
============ ============ ============
Basic and diluted loss per share:
As reported $ (0.35) $ (0.22) $ (0.52)
============ ============ ============
Proforma $ (0.37) $ (0.24) $ (0.56)
============ ============ ============
Research and Development Costs
Research and development costs associated with computer software products to be
sold, leased, or otherwise marketed are expensed as incurred until technological
feasibility has been established. Technological feasibility is established upon
completion of a working model; thereafter, all software production costs are
capitalized and subsequently reported at the lower of unamortized cost or net
realizable value. Capitalized costs are amortized based on current and future
revenue for each product, with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the product. To date,
the time period between the establishment of technological feasibility and
completion of software development has been short, and as a result, no
significant development costs have been incurred during that period.
Accordingly, the Company has not capitalized any research and development costs
to date associated with computer software products to be sold, leased, or
otherwise marketed.
Research and development costs primarily include salaries and related costs,
costs associated with using outside vendors and miscellaneous administrative
expenses.
Foreign Currency Translation
The parent company is located in Canada, and the functional currency of the
parent company is the Canadian dollar. The Company's subsidiaries use their
local currency, which is the U.S. dollar, as their functional currency.
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are recorded as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are included
in net loss for the period and have not been material during fiscal 2005, 2004
and 2003. All assets and liabilities denominated in a foreign currency are
translated into U.S. dollars at the exchange rate on the balance sheet date.
Revenues and expenses are translated at the average exchange rate during the
period. Equity transactions are translated using historical exchange rates.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, restricted cash, short-term
investments and accounts receivable. At times, the Company's deposit may exceed
federally insured limits. Management believes that the use of credit quality
financial institutions minimizes the risk of loss associated with these
deposits. Collateral is not required for accounts receivables.
56
Interest Rate Risk
The Company's restricted cash short-term investments earn interest at fixed
rates. The Company's line of credit and term loan accrue interest at a variable
rate based on the bank's prime rate. Fluctuations in the prime rate could impact
the Company's financial results. Management believes that the exposure to
interest rate fluctuations is limited as line of credit and the term loan are
fully collateralized with restricted cash and can be liquidated if faced with
rising interest rates.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, short-term investments, restricted cash, accounts receivable,
accounts payable, and accrued expenses, approximate their fair values due to
their short maturities. Based on borrowing rates currently available to the
Company for similar terms, the carrying value of the line of credit, capital
lease obligations and long-term obligations approximate fair value.
Business Combinations and Valuation of Intangible Assets
The Company accounts for business combinations in accordance with SFAS No. 141,
Business Combinations ("SFAS 141"). SFAS 141 requires business combinations to
be accounted for using the purchase method of accounting and includes specific
criteria for recording intangible assets separate from goodwill. Results of
operations of acquired businesses are included in the financial statements of
the Company from the date of acquisition. Net assets of the acquired company are
recorded at their fair value at the date of acquisition. As required by SFAS No.
142, Goodwill and Other Intangible Assets ("SFAS 142"), the Company does not
amortize goodwill but instead tests goodwill for impairment periodically and if
necessary, would record any impairment in accordance with SFAS 142. Identifiable
intangibles, such as the acquired customer base, are amortized over their
expected economic lives.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Accounting for
Share-Based Payments ("SFAS 123R"). SFAS 123R requires that the compensation
cost relating to share-based payment transactions be recognized in financial
statements with the cost measured based on the estimated fair value of the
equity or liability instruments issued. SFAS 123R states that its effective date
is for interim periods beginning after June 15, 2005, but the SEC has deferred
the effective date to annual periods beginning after June 15, 2005. Accordingly,
the Company will adopt the new requirements beginning in fiscal 2007. SFAS 123R
covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SFAS 123R replaces SFAS 123,
Share-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Company is currently assessing the impact of
adoption.
57
Note 2. Asset and Business Acquisitions
The following summarizes the purchase price allocations for asset and business
acquisitions made during the year ended May 31, 2005:
Peoplebonus Bravanta HRSoft ProAct Total
----------- ----------- ----------- ----------- ------------
Share consideration $ 200,000 $ 7,107,693 $ -- $ 2,822,873 $ 10,130,566
Cash consideration 105,000 2,051,120 100,000 5,500,000 7,756,120
Payoff of bank loans -- -- 550,000 -- 550,000
Payoff of vendor payables -- -- 216,913 -- 216,913
Note payable 95,798 -- -- 1,530,000 1,625,798
Cash advance -- -- 325,000 -- 325,000
Escrow funds 25,000 -- -- -- 25,000
Acquisition costs 18,499 155,000 150,000 144,529 468,028
--------- ----------- ----------- ----------- ------------
Total purchase price $ 444,297 $ 9,313,813 $ 1,341,913 $ 9,997,402 $ 21,097,425
========= =========== =========== =========== ============
Current assets $ 8,450 $ 661,866 $ 326,561 $ 1,443,098 $ 2,439,975
Tangible long-term assets 9,080 86,310 49,548 298,858 443,796
Other assets -- 35,005 57,103 56,686 148,794
Current liabilities (644) (892,232) (644,942) (1,836,771) (3,374,589)
Other liabilities -- (61,624) (267,823) -- (329,447)
Deferred income tax asset -- 861,000 -- -- 861,000
Intangible assets:
Customer base -- 837,000 852,098 1,717,000 3,406,098
Intellectual property -- 645,000 -- 5,034,000 5,679,000
Acquired technology 427,411 670,000 969,368 -- 2,066,779
Deferred income tax liability -- (861,000) -- -- (861,000)
Goodwill -- 7,332,488 -- 3,284,531 10,617,019
--------- ----------- ----------- ----------- ------------
Total net assets $ 444,297 $ 9,313,813 $ 1,341,913 $ 9,997,402 $ 21,097,425
========= =========== =========== =========== ============
Peoplebonus.com LLC
On June 21, 2004, the Company acquired certain assets of Peoplebonus.com LLC
("Peoplebonus"), a Delaware limited liability company. As partial consideration
for the purchase, the Company issued 72,202 shares of common stock valued at
$200,000. An additional 108,304 shares are being held in escrow as potential
contingent consideration dependent upon the acquired company meeting certain
revenue targets subsequent to the acquisition. Peoplebonus' products and
services were designed to streamline the way a company processes and handles
resumes. Peoplebonus' artificial intelligence data mining software can search
for key words and phrases from within a resume and score the resume based on
learned search criteria. The primary reason for the Peoplebonus acquisition was
the expansion and enhancement of the HCM solutions offered by the Company.
The consolidated financial statements presented herein include the results of
operations of Peoplebonus from June 22, 2004.
Management prepared a valuation of the net tangible and intangible assets
acquired.
58
Bravanta, Inc.
On July 27, 2004, the Company acquired 100% of the outstanding stock of
Bravanta, Inc. ("Bravanta"), a Delaware corporation. As partial consideration
for the purchase, the Company issued Bravanta 2,672,064 shares of common stock
valued at $7,107,693. Bravanta is a provider of enterprise incentive and
recognition programs. The primary reason for the Bravanta acquisition was to
enable the Company to expand its customer base, expand rewards and incentives
products and services, and increase recurring revenues.
The consolidated financial statements presented herein include the results of
operations of Bravanta from July 28, 2004.
Management obtained an independent valuation of intangible assets acquired and
prepared a valuation of net tangible assets acquired. The excess of the purchase
price over the value of the net tangible and identifiable intangible assets
acquired has been allocated to goodwill.
HRSoft, LLC
On October 6, 2004, the Company acquired certain assets of HRSoft, LLC
("HRSoft"), a Delaware limited liability company. HRSoft developed and marketed
strategic talent management software solutions for succession planning and
leadership development, performance management, competency management, career
and development planning, organizational charting, modeling and hierarchy
management. The primary reason for the HRSoft acquisition was to enable the
Company to expand its customer base, expand its products and services, and
increase recurring revenues.
The consolidated financial statements presented herein include the results of
operations of HRSoft from October 7, 2004.
Management prepared a valuation of the net tangible and intangible assets
acquired and liabilities assumed.
ProAct Technologies Corporation
On December 30, 2004, the Company acquired certain assets of ProAct Technologies
Corporation ("ProAct"), a Delaware corporation. As partial consideration for the
purchase, the Company issued 913,551 shares of common stock valued at
$2,822,873, of which 253,764 shares are being held in escrow as source against
which the Company can assert potential indemnification claims. ProAct was a
provider of software and hosted web-based tools for employee benefits
management. The primary reason for the ProAct acquisition was to enable the
Company to expand its customer base, expand employee benefits management
products and services, and increase recurring revenue.
The consolidated financial statements presented herein include the results of
operations of ProAct from December 31, 2004.
Management obtained an independent valuation of the identifiable intangible
assets acquired. Management estimated the fair value of all other assets. The
excess of the purchase price over the value of the net tangible and identifiable
intangible assets acquired has been allocated to goodwill.
59
The following summarizes the final purchase price allocations for asset and
business acquisitions made during the year ended May 31, 2004:
Perform Peopleview Kadiri Total
--------- ----------- ------------ ------------
Share consideration $ 300,000 $ 688,851 $ 14,947,611 $ 15,936,462
Cash consideration 522,000 250,000 -- 772,000
Warrants -- 46,500 -- 46,500
Acquisition costs 47,000 40,000 620,257 707,257
--------- ----------- ------------ ------------
Total purchase price $ 869,000 $ 1,025,351 $ 15,567,868 $ 17,462,219
========= =========== ============ ============
Current assets $ 4,919 $ 194,432 $ 1,143,383 $ 1,342,734
Tangible long-term assets 232,362 8,700 383,777 624,839
Other assets -- -- 877 877
Current liabilities (2,950) (39,000) (2,610,301) (2,652,251)
Other liabilities -- -- (895,639) (895,639)
Deferred income tax asset -- -- 1,434,800 1,434,800
Intangible assets:
Customer base -- -- 653,000 653,000
Intellectual property -- -- 220,000
220,000
Acquired technology 634,669 861,219 2,714,000 4,209,888
Deferred income tax liability -- -- (1,434,800) (1,434,800)
Goodwill -- -- 13,958,771 13,958,771
--------- ----------- ------------ ------------
Total net assets $ 869,000 $ 1,025,351 $ 15,567,868 $ 17,462,219
========= =========== ============ ============
Perform, Inc.
On September 11, 2003, the Company acquired certain assets of Perform, Inc.
("Perform"), a Delaware corporation, in connection with Perform's voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code. As
partial consideration for the purchase, the Company issued Perform 189,873
shares of common stock valued at $300,000. Perform designed, developed and
marketed human resource information systems and performance management
information systems for mid-size and global 2000 companies. The primary reason
for the Perform acquisition was the expansion and enhancement of the HCM
solutions offered by the Company.
The consolidated financial statements presented herein include the results of
operations of Perform from September 12, 2003.
Management prepared a valuation of the net tangible and intangible assets
acquired.
Peopleview, Inc.
On March 17, 2004 and as amended and effective for accounting purposes on May
27, 2004, the Company acquired certain assets of Peopleview, Inc.
("Peopleview"), a Nevada corporation. As partial consideration for the purchase,
the Company issued Peopleview 246,900 shares of common stock valued at $688,851
and warrants to purchase 50,000 shares of common stock at $3.00 per share, which
were valued at $46,500. The warrants expire in March 2006. Peopleview designed,
developed and marketed software that assists companies in evaluating employee
skills and competency and employee's performance. In addition, Peopleview
offered software that enables companies to survey their employees regarding the
company's environment and to assess Sarbanes-Oxley corporate compliance. The
primary reason for the Peopleview acquisition was the expansion and enhancement
of the HCM solutions offered by the Company.
60
The consolidated financial statements presented herein include the results of
operations of Peopleview from March 18, 2004.
Management prepared a valuation of the net tangible and intangible assets
acquired.
Kadiri, Inc.
On May 28, 2004, the Company acquired 100% of the outstanding stock of Kadiri,
Inc. ("Kadiri"), a California based company. As consideration for the purchase,
the Company originally issued to the shareholders of Kadiri 4,450,000 shares of
common stock valued at $12,415,500. During fiscal 2005, an additional 1,042,891
common shares valued at $2,532,111 were issued as additional contingent
consideration after certain revenue and cash generation targets of the acquired
entity were achieved. Of these amounts, 92,891 common shares valued at $230,000
were issued to the former shareholders of Trimbus, Inc., a company acquired by
Kadiri prior to the Company's acquisition of Kadiri. Kadiri is a provider of
enterprise compensation management solutions which enable companies to plan and
manage compensation, performance evaluation and granting of rewards. The primary
reason for the Kadiri acquisition was the expansion and enhancement of the HCM
solutions offered by the Company.
The consolidated financial statements presented herein include the results of
operations of Kadiri from May 29, 2004.
Management obtained an independent valuation of intangible assets acquired and
prepared a valuation of net tangible assets acquired. The excess of the purchase
price over the value of the net tangible and identifiable intangible assets
acquired has been allocated to goodwill.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information gives effect to the
material acquisitions (Kadiri, Bravanta and ProAct) made subsequent to May 31,
2003 as if the transactions occurred as of June 1, 2003.
Years ended May 31,
2005 2004
------------ ------------
Revenues, net $ 32,032,854 $ 38,883,937
Cost of revenues 9,923,887 14,719,203
------------ ------------
Gross profit 22,108,967 24,164,734
Operating expenses 42,330,428 45,557,724
------------ ------------
Operating loss (20,221,461) (21,392,990)
Other income (expenses), net (305,856) (2,837,043)
------------ ------------
Loss before income tax (20,527,317) (24,230,033)
Recovery of deferred income taxes 847,920 1,789,235
Current income tax (expense) recovery (36,164) (54,830)
------------ ------------
NET LOSS $(19,715,561) $(22,495,628)
============ ============
Basic and diluted net loss per share $ (0.44) $ (0.53)
============ ============
61
Note 3. Restricted Cash
Certain short-term investments were pledged as collateral as follows at May 31:
2005 2004
---------- ----------
$2,326,612 $1,972,218
Line of credit (note 8)
Term loan (note 9) 61,073 85,561
Letters of credit for facility leases (note 10) 467,929 492,694
Credit card reserves 207,754 209,786
---------- ----------
$3,063,368 $2,760,259
========== ==========
Note 4. Allowance for Doubtful Accounts
The following presents the detail of the changes in the allowance for doubtful
accounts for the years ended May 31:
2005 2004
--------- --------
Balance at beginning of the year $ 21,509 $ 55,828
Charged to costs and expenses 577,362 55,966
Write-offs and effect of exchange rate changes (103,469) (90,285)
--------- --------
Balance at end of the year $ 495,402 $ 21,509
========= ========
The Company assesses the adequacy of the allowance for doubtful accounts balance
based on historical experience. Any adjustments to this account is reflected in
the statement of operations as a general and administrative expense.
Note 5. Property and Equipment
Property and equipment consist of the following at May 31:
2005 2004
----------- -----------
Furniture, equipment
and leasehold improvements $ 1,701,644 $ 1,393,844
Office equipment 313,237 293,814
Computers and software 4,753,030 4,049,582
----------- -----------
6,767,911 5,737,240
Less accumulated depreciation (5,543,579) (4,308,097)
----------- -----------
Net capital assets $ 1,224,332 $ 1,429,143
=========== ===========
Depreciation expense for property and equipment was $1,007,737, $677,933 and
$1,774,868 for the years ended May 31, 2005, 2004 and 2003, respectively.
62
Note 6. Acquired Intangible Assets
Acquired intangible assets consist of the following at May 31:
2005 2004
--------------------------- ----------------------------
Accumulated Accumulated
Cost Amortization Cost Amortization
------------ ------------ ------------ -------------
Customer base $ 7,561,712 $ 4,360,465 $ 4,186,182 $ 2,930,512
Acquired technologies 21,592,299 12,804,243 14,513,943 6,950,270
Intellectual property 1,322,760 497,538 677,760 254,486
------------ ----------- ------------ ------------
30,476,771 $17,662,246 19,377,885 $ 10,135,268
=========== ============ ============
Less accumulated amortization (17,662,246) (10,135,268)
------------ ------------
Net acquired intangible assets $ 12,814,525 $ 9,242,617
============ ============
Amortization expense for intangible assets was $7,526,978, $4,919,260, and
$4,322,272 for the years ended May 31, 2005, 2004 and 2003, respectively. The
estimated amortization expense related to intangible assets in existence as of
May 31, 2005 is as follows:
Fiscal 2006: $ 5,777,983
Fiscal 2007: 5,074,886
Fiscal 2008: 1,767,156
Fiscal 2009: 173,000
Fiscal 2010: 21,500
-----------
$12,814,525
============
Note 7. Goodwill
The following represents the detail of the changes in the goodwill account for
the years ended May 31, 2005 and 2004:
Enterprise
Workforce Career
Services Networks Total
----------- ---------- -----------
Goodwill at May 31, 2003 $ 9,570,100 $7,813,337 $17,383,437
Acquisitions during the year 11,125,760 -- 11,125,760
Purchase price allocation adjustments made
within one year of acquisition date 89,509 -- 89,509
----------- ---------- -----------
Goodwill at May 31, 2004 20,785,369 7,813,337 28,598,706
Acquisitions during the year 10,617,019 -- 10,617,019
Contingent consideration 2,532,111 234,305 2,766,416
Purchase price allocation adjustments made
within one year of acquisition date 301,301 -- 301,301
----------- ---------- -----------
Goodwill at May 31, 2005 $34,235,800 $8,047,642 $42,283,442
=========== ========== ===========
63
Note 8. Line of Credit
At May 31, 2005 and 2004, the Company had an aggregate of $2,326,612 and
$1,972,218, respectively, outstanding on a line of credit from a Canadian bank.
The line of credit bears annual interest at the bank's prime rate plus 1%. The
Company is permitted to draw up to CDN (Canadian dollars) $3,000,000 against
this facility based on compensating balances on deposit with the bank (note 3).
At May 31, 2005, the Company had drawn CDN $2,920,367, which allowed for an
additional CDN $79,633 available to be drawn on this line.
Note 9. Long-Term Obligations
Long-term obligations consist of the following at May 31:
2005 2004
---------- --------
Note payable $1,530,000 $ --
Settlement agreement payable 123,500 --
Leasehold inducements 193,359 234,733
Term loan 61,073 85,561
Capital lease obligations 23,292 85,533
Shareholder loans -- 317,626
---------- --------
1,931,224 723,453
Less: current portion 1,738,966 303,240
---------- --------
$ 192,258 $420,213
========== ========
The note payable represents a portion of the total consideration for the
acquisition of ProAct. The note accrued interest at an annual rate of 6% with
principal and interest due on June 1, 2005 and was collateralized by the assets
acquired by the Company from ProAct. On June 8, 2005, the Company paid the
principal balance of $1,434,408 and accrued interest of $36,816. The $95,592
difference between the stated balance of the note payable of $1,530,000 and the
amount paid of $1,434,408 represents a working capital adjustment as prescribed
for in the original acquisition agreement. To date, the Company and ProAct have
not agreed to the final working capital adjustment amount.
The settlement agreement payable represents a settlement reached by HRSoft with
one of its vendors relating to services provided prior to the asset acquisition
of HRSoft by the Company. The Company assumed the liability as part of the
acquisition agreement. The settlement agreement provides for monthly payments of
$8,500 through August 2006 with a final payment of $4,500 in September 2006.
The term loan represents a five year term loan with a Canadian bank maturing in
May 2007 with monthly principal payments of CDN $3,333 that bears annual
interest at the bank's prime rate plus 2%. Cash balances have been provided as
collateral against this loan (note 3).
As of May 31, 2004, the shareholder loans consisted of a term loan assumed as
part of the acquisition of Paula Allen Holdings which was non-interest bearing
and was repayable in quarterly installments of $52,500. The Company recorded the
present value of these shareholder notes at the time of the acquisition
utilizing a 15% discount rate. The Company paid the loans in full and expensed
the remaining unamortized interest during fiscal 2005.
As of May 31, 2005, the maturities for long-term obligations are as follows:
Fiscal 2006: $1,738,966
Fiscal 2007: 102,518
Fiscal 2008: 51,810
Fiscal 2009: 37,930
----------
$1,931,224
==========
64
Note 10. Commitments and Contingencies
Lease Commitments
A summary of the future minimum lease payments under the Company's
non-cancelable leases as of May 31, 2005 is as follows:
Capital Leases Operating Leases
-------------- ----------------
Facilities Equipment Total
------- ---------- --------- ----------
Year ended May 31:
2006 $24,011 $1,079,101 $ 71,994 $1,175,106
2007 -- 1,022,472 58,079 1,080,551
2008 -- 806,837 45,690 852,527
2009 -- 582,051 -- 582,051
2010 -- 317,599 -- 317,599
------- ---------- -------- ----------
Total minimum lease payments 24,011 $3,808,060 $175,763 $4,007,834
========== ======== ==========
Less amount representing interest 719
-------
Total principal payments 23,292
Less current maturities 23,292
-------
$ --
=======
Rent expense totaled $1,582,667, $1,369,801, and $1,988,955 for the years ended
May 31, 2005, 2004 and 2003, respectively, under operating leases.
Letters of Credit
At May 31, 2005, the Company had provided three letters of credit totaling
$467,929 as security for office leases in Florida, California and Ontario, which
were collateralized by short-term investments that are maintained at the
granting financial institution (note 3).
Contingencies
In July 2005, a direct competitor filed a complaint against the Company in U.S.
District Court in the District of Massachusetts. The plaintiff asserts that
Workstream interfered with the contractual relationship between it and a former
member of its executive management team. Management is reviewing this complaint
with legal counsel and is of the view that such possible effect cannot be
reasonably estimated at this time.
In January 2005, the Company settled a dispute through arbitration with the
former shareholders of 6FigureJobs.com, Inc., a company acquired in October
2001. The dispute involved whether the acquired entity reached certain revenue
and profit targets which would require the issuance of additional contingent
consideration to the former shareholders. According to the arbitrator's
decision, damages and other fees totaling $376,523 were assessed against the
Company.
On or about August 10, 2005, a class action lawsuit was filed against the
Company, its Chief Executive Officer and its former Chief Financial Officer in
the United States District Court for the Southern District of New York. The
action, brought on behalf of a purported class of purchasers of the Company's
common shares during the period from January 14, 2005 to and including April 14,
2005, alleges, among other things that management provided the market misleading
guidance as to anticipated revenues for the quarter ended February 28, 2005, and
failed to correct this guidance on a timely basis. The action claims violations
of Section 10(b) of the Securities and Exchange Act and Rule 10b-5 promulgated
thereunder, as well as Section 20(a) of the Exchange Act, and seeks compensatory
damages in an unspecified amount as well as the award of reasonable costs and
expenses, including counsel and expert fees and costs. Management is in the
process of reviewing the complaint and, following consultation with legal
counsel, will respond accordingly. The Company does not believe that the
resolution of such actions will materially affect the Company's business,
results of operations or financial condition.
65
The Company is subject to other legal proceedings and claims which arise in the
ordinary course of business. The Company does not believe that the resolution of
such actions will materially affect the Company's business, results of
operations or financial condition.
Note 11. Income Taxes
The Company operates in several tax jurisdictions. Its income is subject to
varying rates of tax, and losses incurred in one jurisdiction cannot be used to
offset income taxes payable in another.
The loss before income taxes consisted of the following (rounded):
Years ended May 31,
2005 2004 2003
----------- ---------- -----------
Canadian domestic loss $ 568,000 $ 230,000 $ 1,174,000
United States loss 15,403,000 7,041,000 10,131,000
----------- ---------- -----------
Loss before income taxes $15,971,000 $7,271,000 $11,305,000
=========== ========== ===========
The provision (recovery) for income taxes consists of the following (rounded):
Years ended May 31,
2005 2004 2003
--------- ----------- -----------
Canadian domestic:
Current income taxes $ -- $ (49,000) $ (46,000)
Deferred income taxes -- -- --
United States:
Current income taxes 36,000 104,000 4,000
Deferred income taxes (848,000) (1,789,000) (1,586,000)
--------- ----------- -----------
Recovery of income taxes $(812,000) $(1,734,000) $(1,628,000)
========= =========== ===========
66
A reconciliation of the combined Canadian federal and provincial income tax rate
with the Company's effective income tax rate is as follows (rounded):
Years ended May 31,
2005 2004 2003
----------- ----------- -----------
Combined Canadian federal and provincial tax rate 36.12% 36.80% 37.80%
Income tax recovery based on combined Canadian and
federal and provincial rate $ 5,768,000 $ 2,676,000 $ 4,273,000
Effect of foreign tax rate differences 579,000 240,000 223,000
Change in enacted tax rates (147,000) (210,000) (410,000)
Non-deductible amounts 173,000 (852,000) (362,000)
Write-down of non deductible goodwill -- -- (853,000)
Change in valuation allowance (5,638,000) 175,000 (2,783,000)
Effect of changes in carryforward amounts (547,000) (298,000) 911,000
Effect of foreign exchange rate differences 661,000 123,000 627,000
Other (37,000) (120,000) 2,000
----------- ----------- -----------
Recovery of income taxes $ 812,000 $ 1,734,000 $ 1,628,000
=========== =========== ===========
The components of the Company's net deferred income taxes are as follows
(rounded):
Years ended May 31,
2005 2004 2003
------------ ------------ ------------
Deferred income tax assets:
Scientific Research and Experimental Development
("SR&ED") expenses $ 613,000 $ 561,000 $ 291,000
Loss carryforwards 23,313,000 18,002,000 14,213,000
Asset basis differences 2,421,000 2,541,000 2,354,000
Share issue costs 467,000 267,000 314,000
Investment tax credits 849,000 105,000 195,000
Other 413,000 386,000 36,000
------------ ------------ ------------
28,076,000 21,862,000 17,403,000
Less: valuation allowance (27,039,000) (19,656,000) (16,632,000)
------------ ------------ ------------
1,037,000 2,206,000 771,000
Deferred income tax liabilities:
Intangible assets (1,037,000) (3,045,000) (3,379,000)
------------ ------------ ------------
Net deferred income tax liabilities $ -- $ (839,000) $ (2,608,000)
============ ============ ============
67
The Company has incurred net losses since inception. At May 31, 2005, the
Company had approximately $43,205,000 in net operating loss carryforwards for
U.S. federal income tax purposes that expire in various amounts through 2025,
and approximately CDN $20,892,000 (US $16,644,000) in net operating loss
carryforwards for Canadian federal and provincial income tax purposes that
expire in various years through 2012. Management has determined that it is more
likely than not that a component of deferred tax assets relating to United
States operations will be realized, therefore deferred tax assets relating to
those operations have been recognized. A valuation allowance has been provided
for the balance of net tax assets. The change in the valuation allowance for the
year ended May 31, 2005 and 2004 was an increase of $7,383,000 and $3,024,000,
respectively, resulting primarily from net operating losses generated during the
periods.
Note 12. Stockholders' Equity
The authorized share capital consists of an unlimited number of no par value
common shares, an unlimited number of Class A Preferred Shares, no par value per
share (the "Class A Preferred Shares"), and an unlimited number of Series A
Convertible Preferred Shares, no par value per share (the "Series A Shares").
There were 49,182,772 and 33,574,883 common shares outstanding as of May 31,
2005 and 2004, respectively. There were no Class A Preferred Shares or Series A
Shares outstanding as of May 31, 2005 and 2004.
In July 2004, the Company issued an aggregate of 4,444,439 common shares at
$2.25 per common share in a private placement resulting in aggregate proceeds of
$9,999,988.
In July 2004, 100,000 common shares valued at $250,000 were issued as a retainer
under the terms of a one-year business advisory agreement. The expense is being
recognized over the life of the agreement.
In December 2004, the Company issued an aggregate of 4,996,667 shares of common
stock at $3.00 per common share and warrants to purchase 2,498,333 shares of
common stock at an exercise price of $3.50 per share in a private placement
resulting in aggregate proceeds of $14,994,001. The fair value of the warrants
was estimated using the Black-Scholes pricing model and was determined to be
$4,262,052. The assumptions used were as follows: risk free interest rate of
3.36%, expected dividend yield of 0%, expected volatility of 85%, and expected
life of 4 years. In connection with the issuance of the common stock, the
Company paid commissions to a placement agent in the amount of $700,000. In
April 2005, 93,333 shares of common stock and warrants to purchase 326,667
shares common stock at an exercise price of $3.50 per share were issued to the
same placement agent as additional commission.
Stock-Based Compensation Plan
The Company has granted stock options to employees, directors and consultants
under the 2002 Amended and Restated Stock Option Plan (the "Plan"), which was
most recently amended in October 2004. Under the Plan, as amended, the Company
authorizes the issuance of up to 4,000,000 shares of common stock upon the
exercise of stock options. In addition, the Plan reserves 1,000,000 shares of
common stock for issuance of restricted share grants. The Plan is administered
by the Audit Committee of the Board of Directors. Under the terms of the Plan,
the exercise price of the options shall not be lower than the fair market value
of the common stock on the date of the grant. Options to purchase shares of
common stock generally vest ratably over a period of three years and expire five
years from the date of grant.
68
Stock option activity and related information is summarized as follows:
Weighted Weighted
Number Average Average
of Options Exercise Price Fair Value
--------------- ---------------- --------------
Balance outstanding - May 31, 2002 1,881,295 $2.64
Granted 463,500 1.34 $1.02
Exercised (46,173) 1.37
Forfeited (509,570) 2.77
--------------
Balance outstanding - May 31, 2003 1,789,052 2.33
Granted 593,000 1.82 1.14
Exercised (136,665) 1.02
Forfeited (403,884) 2.43
--------------
Balance outstanding - May 31, 2004 1,841,503 2.24
Granted 1,755,770 2.81 1.49
Exercised (331,260) 2.87
Forfeited (1,011,928) 2.93
--------------
Balance outstanding - May 31, 2005 2,254,085 $2.29
===============
Information about options outstanding at May 31, 2005 is as follows:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Life Exercise Exercise
Exercise Price Shares (Years) Price Shares Price
- ----------------------- ------------- ------------------ ---------------- ------------- -----------------
Less than $.99 161,073 3.00 $.98 52,406 $.97
$1.00-$1.99 459,784 3.03 $1.29 195,000 $1.01
$2.00-$2.99 1,220,950 3.62 $2.35 287,667 $2.22
$3.00-$3.99 224,528 4.30 $3.29 17,000 $3.29
$4.00 and over 187,750 4.81 $4.23 -- --
------------ -------
Total 2,254,085 552,073
============ =======
69
Warrants
Outstanding warrants to purchase shares of common stock as of May 31, 2005 are
as follows:
Exercise Price Expiration Shares
- ----------------------- ------------------- ------------
$1.50 May 2007 133,333
$1.60 December 2008 162,500
$2.00 April 2007 400,000
$3.00 March 2006 50,000
$3.50 December 2008 2,825,000
------------
3,570,833
============
Earnings per Share
For all the years presented, diluted net loss per share equals basic net loss
per share due to the antidilutive effect of employee stock options, warrants and
escrowed shares. The following outstanding instruments could potentially dilute
basic earnings per share in the future:
May 31, 2005
------------
Stock options 2,254,085
Escrowed shares 108,304
Warrants 3,570,833
---------
Potential increase in number of shares from dilutive instruments 5,933,222
=========
Note 13. Comprehensive Loss
Components of comprehensive loss were as follows:
Year ended May 31,
2005 2004 2003
------------ ----------- -----------
Net loss for the year $(15,158,975) $(5,536,899) $(9,676,602)
Other comprehensive loss:
Foreign currency translation adjustments
(net of tax of $0) 143,999 (178,986) (7,355)
------------ ----------- -----------
Comprehensive loss for the year $(15,014,976) $(5,715,885) $(9,683,957)
============ =========== ===========
70
Note 14. Segmented and Geographic Information
The Company has two reportable segments: Career Networks and Enterprise
Workforce Services. Career Networks primarily consists of revenue from
outplacement services, recruitment services and resume management services.
Enterprise Workforce Services consists of revenue generated from HCM software
and related professional services. In addition, Enterprise Workforce Services
generates revenue from the sale of various products through the rewards module
of the HCM software.
The Company evaluates performance in each segment based on profit or loss from
operations. There are no intersegment sales. Corporate operating expenses are
allocated to the segments primarily based on revenue.
The Company's segments are distinct business units that offer different products
and services. Each is managed separately and each has a different client base
that requires a different approach to the sales and marketing process. In
addition, Career Networks is an established business unit whereas Enterprise
Workforce Services is a developing business unit, which requires significantly
more investment in time and resources.
During fiscal 2005, the Company changed its reportable segments. In previous
years, outplacement services was considered a separate reportable segment
(Career Transition Services), and recruitment services and resume management
services were included in the Enterprise Workforce Services segment. During
fiscal 2005 subsequent to various acquisitions, the change was made to more
accurately reflect how management evaluates the business. The fiscal 2004
segment information has been reclassified to conform to the current year
presentation.
The following is a summary of the Company's operations by business segment and
by geographic region for the years ended May 31, 2005 and 2004:
Business Segment
Enterprise
Workforce Career
Services Networks Total
------------ ------------ ------------
Year ended May 31, 2005
Revenue $ 17,886,559 $ 8,932,028 $ 26,818,587
Expenses 32,713,958 10,030,761 42,744,719
------------ ------------ ------------
Business segment loss $(14,827,399) $ (1,098,733) (15,926,132)
============ ============
Other income/(expenses) and
impact of income taxes 767,157
------------
Net loss $(15,158,975)
============
Enterprise
Workforce Career
Services Networks Total
----------- ----------- -----------
As at May 31, 2005
Business segment assets $ 4,714,196 $ 737,873 $ 5,452,069
Intangible assets 12,721,282 93,243 12,814,525
Goodwill 29,825,840 12,457,602 42,283,442
----------- ----------- -----------
$47,261,318 $13,288,718 60,550,036
=========== ===========
Assets not allocated to business segments 15,107,327
-----------
Total assets $75,657,363
===========
71
Enterprise
Workforce Career
Services Networks Total
------------ ------------ ------------
Year ended May 31, 2004
Revenue $ 7,181,564 $ 9,985,316 $ 17,166,880
Expenses 10,245,149 11,557,729 21,802,878
------------ ------------ ------------
Business segment loss $ (3,063,585) $ (1,572,413) (4,635,998)
============ ============
Other income/(expenses) and
impact of income taxes (900,901)
------------
Net loss $ (5,536,899)
============
Enterprise
Workforce Career
Services Networks Total
----------- ----------- -----------
As at May 31, 2004
Business segment assets $ 3,203,269 $ 696,343 $ 3,899,612
Intangible assets 8,860,471 382,146 9,242,617
Goodwill 16,375,409 12,223,297 28,598,706
----------- ----------- -----------
$28,439,149 $13,301,786 41,740,935
=========== ===========
Assets not allocated to business segments 7,141,512
-----------
Total assets $48,882,447
===========
72
Geographic
Canada United States Total
---------- ------------- ------------
Year ended May 31, 2005
Revenue $ 2,184,951 $ 24,633,636 $ 26,818,587
Expenses 2,675,726 40,068,993 42,744,719
----------- ------------ ------------
Geographical loss $ (490,775) $(15,435,357) (15,926,132)
========== ============
Other income/(expenses) and
impact of income taxes 767,157
------------
Net loss $(15,158,975)
============
Canada United States Total
---------- ------------- ------------
As at May 31, 2005
Long-lived assets $641,040 $55,770,829 $56,411,869
========== ============
Other assets 19,245,494
-----------
Total assets $75,657,363
===========
Canada United States Total
----------- ------------- ------------
Year ended May 31, 2004
Revenue $1,980,517 $ 15,186,363 $ 17,166,880
Expenses 1,908,646 19,894,232 21,802,878
---------- ------------ ------------
Geographical loss $ 71,871 $ (4,707,869) (4,635,998)
========== ============
Other income/(expenses) and
impact of income taxes (900,901)
------------
Net loss $ (5,536,899)
============
Canada United States Total
----------- ------------- ------------
As at May 31, 2004
Long-lived assets $706,902 $38,642,637 $39,349,539
======== ===========
Other assets 9,532,908
-----------
Total assets $48,882,447
===========
Note 15. Retirement Plans
The Company has four 401(k) plans that cover all eligible employees. The Company
is not required to contribute to the plan and has made no contributions to date.
73
Note 16. Quarterly Results (Unaudited)
The following table summarizes selected quarterly data of the Company for the
years ended May 31, 2005 and 2004:
Quarter Ended
---------------------------------------------------------------
August 31, November 30, February 28, May 31,
2004 2004 2005 2005
------------ ------------ ------------ ------------
Revenues, net $ 5,719,129 $ 7,147,824 $ 6,874,735 $ 7,076,899
Gross profit 4,647,302 4,953,326 4,962,384 5,241,595
Net loss for the period $ (2,508,326) $ (2,849,376) $ (3,554,351) $ (6,246,922)
Weighted average number of
common shares outstanding
during the period 37,140,857 41,385,822 46,498,415 48,824,747
============ ============ ============ ============
Basic and diluted net loss
per common share $ (0.07) $ (0.07) $ (0.08) $ (0.13)
============ ============ ============ ============
Quarter Ended
---------------------------------------------------------------
August 31, November 30, February 29, May 31,
2003 2003 2004 2004
------------ ------------ ------------ ------------
Revenues, net $ 4,178,514 $ 4,261,771 $ 4,169,074 $ 4,557,521
Gross profit 3,735,164 3,872,364 3,812,584 4,159,779
Net loss for the period $ (1,749,559) $ (1,082,877) $ (1,796,317) $ (908,146)
Weighted average number of
common shares outstanding
during the period 21,777,379 22,407,020 26,912,938 29,038,713
============ ============ ============ ============
Basic and diluted net loss
per common share $ (0.08) $ (0.05) $ (0.07) $ (0.03)
============ ============ ============ ============
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of fiscal 2005, our management, with the participation of our
Chief Executive Officer and Chief Financial Officer, carried out an evaluation
of the effectiveness of our disclosure controls and procedures. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There were no changes during the fourth
quarter of fiscal 2005 that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Report of Management on Financial Statements
The Company's management is responsible for preparing the accompanying
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America ("GAAP"). In preparing these
consolidated financial statements, management selects appropriate accounting
policies and uses its judgment and best estimates to report events and
transactions as they occur. Management has determined such amounts on a
reasonable basis in order to ensure that the financial statements are presented
fairly, in all material respects. Financial data included throughout this annual
report is prepared on a basis consistent with that of the consolidated financial
statements.
PricewaterhouseCoopers LLP, the independent registered public accounting firm
appointed by the the Board of Directors and ratified by the stockholders, have
been engaged to conduct an integrated audit of the consolidated financial
statements and internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States), and
have expressed their opinions thereon. The Board of Directors is responsible for
ensuring that management fulfills its responsibility for financial reporting and
internal control over financial reporting, and is ultimately responsible for
reviewing and approving the consolidated financial statements. The Board carries
out this responsibility principally through its Audit Committee which is
comprised of outside Directors. The Committee meets at least four times annually
to review audited and unaudited financial information prior to its public
release. The Committee also considers, for review by the Board of Directors and
approval by the stockholders, the engagement or reappointment of the external
auditors. PricewaterhouseCoopers LLP has full and free access to the Audit
Committee.
Management acknowledges its responsibility to provide financial information that
is representative of the Company's operations, is consistent and reliable, and
is relevant for the informed evaluation of the Company's activities.
Report of Management on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting is a set of processes designed by, or under the
supervision of, the Company's CEO and CFO, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles in the United States of America and includes those
policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and dispositions of
our assets:
o Provide reasonable assurance our transactions are recorded as
necessary to permit preparation of our financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statement.
Under the supervision and with the participation of the Company's management,
including the Company's CEO and CFO, the Company conducted an assessment of the
effectiveness of its internal control over financial reporting based on criteria
established in "Internal Control-Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission, also known as COSO.
Based on this assessment, management concluded that the Company's internal
control over financial reporting was effective as of May 31, 2005 based on those
criteria.
75
ProAct Technologies, Inc., Bravanta, Inc., HR Soft, Inc., and PeopleBonus, Inc.
(collectively referred to as "the acquired businesses") have been excluded from
management's assessment of internal controls as of May 31, 2005, because they
were acquired by the Company during the current fiscal year and it was not
possible for management to conduct an assessment of the related internal
control over financial reporting in the period between the consummation date of
the acquisitions and the date of management's assessment. The acquired
businesses represented total assets and net loss of $22.4 million and $5.3
million, respectively, of the Company's related consolidated financial statement
amounts as of and for the year ended May 31, 2005.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of May 31, 2005 has been audited by
PricewaterhouseCoopers LLP, the Company's independent registered public
accounting firm as stated in their report which is included on page45 of this
annual report on Form 10-K for the year ended May 31, 2005.
/s/ Michael Mullarkey /s/ Stephen E. Lerch
Michael Mullarkey Stephen E. Lerch
Chairman and Chief Executive Officer Executive Vice President, Chief
Operating Officer and Chief
Financial Officer
August 15, 2005
Attestation Report of the Registered Public Accounting Firm
Refer to the Report of Independent Registered Public Accounting Firm on page 45.
ITEM 9B. OTHER INFORMATION
None.
76
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be incorporated by reference
from our definitive proxy statement for our 2005 annual meeting of shareholders,
which will be filed within 120 days after the end of the fiscal year covered by
this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be incorporated by reference
from our definitive proxy statement for our 2005 annual meeting of shareholders,
which will be filed within 120 days after the end of the fiscal year covered by
this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item will be incorporated by reference
from our definitive proxy statement for our 2005 annual meeting of shareholders,
which will be filed within 120 days after the end of the fiscal year covered by
this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be incorporated by reference
from our definitive proxy statement for our 2005 annual meeting of shareholders,
which will be filed within 120 days after the end of the fiscal year covered by
this report.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The information required by this item will be incorporated by reference
from our definitive proxy statement for our 2005 annual meeting of shareholders,
which will be filed within 120 days after the end of the fiscal year covered by
this report.
77
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
1. Financial Statements for the Year Ended May 31, 2005. (See Page 47)
2. Financial Statement Schedule. (None)
3. Exhibits.
The following is a list of exhibits filed as part of this annual report on Form
10-K.
Exhibit
Number Description
3.1 Articles of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form F-1 (File No.
333-87537)).
3.2 Articles of Amendment, dated July 26, 2001 (incorporated by
reference to Exhibit 1.2 of Form 20-F of Workstream Inc. for the
fiscal year ended May 31, 2001).
3.3 Articles of Amendment, dated November 6, 2001 (incorporated by
reference to Exhibit 1.3 of Form 20-F of Workstream Inc. for the
fiscal year ended May 31, 2001).
3.4 Articles of Amendment, dated November 7, 2002 (incorporated by
reference to Exhibit 4.4 to the Registration Statement on Form F-3
(File No. 333-101502).
3.5 By-law No. 1 and No. 2 (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form F-1 (File No. 333-87537)).
3.6 By-law No. 3 (incorporated by reference to Exhibit 1.5 of Form 20-F
of Workstream Inc. for the fiscal year ended May 31, 2001).
4.1 Form of common share certificate (incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form F-1 (File No.
333-87537)).
4.2 Warrant Agreement dated as of March 22, 2001 between Workstream Inc.
(formerly E-Cruiter.com Inc.) and BlueStone Capital Corp.
(incorporated by reference to Exhibit 4.11 of Form 20-F of
Workstream Inc. for the fiscal year ended May 31, 2001).
4.3 Form of Underwriter's Warrant Agreement (incorporated by reference
to Exhibit 1.1 to the Registration Statement on Form F-1 (File No.
333-87537)).
4.4 Form of 8% Senior Subordinated Convertible Note (incorporated by
reference to Exhibit 4.5 to the annual report on Form 10-K for the
year ended May 31, 2002).
4.5 Form of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.7 to the annual report on Form 10-K for the year ended May
31, 2002).
4.6 Amended and Restated Registration Rights Agreement dated May 14,
2002 by and among Workstream Inc., Sands Brothers Venture Capital
III LLC, Sands Brothers Venture Capital IV LLC and Sands Brothers &
Co., Ltd. (incorporated by reference to Exhibit 4.7 to the annual
report on Form 10-K for the year ended May 31, 2002).
4.7 Common Stock Purchase Warrant dated May 30, 2003 between Michael
Weiss and Workstream Inc. (incorporated by reference to Exhibit 4.7
to the annual report on Form 10-K for the year ended May 31, 2003).
78
4.8 Form of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.8 to the annual report on Form 10-K for the year ended May
31, 2003).
4.9 Note and Warrant Amendment Agreement dated January 12, 2004, by and
among Workstream Inc., Sands Brothers Venture Capital III LLC, Sands
Brothers Venture Capital IV LLC and Sands Brothers & Co., LTD.
(incorporated by reference to Exhibit 4.1 to the quarterly report on
Form 10-Q for the quarter ended February 29, 2004).
4.10 Note and Warrant Amendment Agreement dated January 12, 2004, by and
among Workstream Inc., Crestview Capital Fund, L.P., Crestview
Capital Fund II, L.P. and Crestview Capital Offshore Fund, Inc.
(incorporated by reference to Exhibit 4.2 to the quarterly report on
Form 10-Q for the quarter ended February 29, 2004).
4.11 Warrant to Acquire Common Shares from Workstream Inc. to Standard
Securities Capital Corporation dated December 9, 2003 (incorporated
by reference to Exhibit 4.3 to the quarterly report on Form 10-Q for
the quarter ended February 29, 2004).
4.12 Warrant to Acquire Common Shares from Workstream Inc. to Nathan Low
dated December 11, 2003 (incorporated by reference to Exhibit 4.4 to
the quarterly report on Form 10-Q for the quarter ended February 29,
2004).
4.13 Warrant to Acquire Common Shares from Workstream Inc. to Nathan Low
dated December 31, 2003 (incorporated by reference to Exhibit 4.5 to
the quarterly report on Form 10-Q for the quarter ended February 29,
2004).
4.14 Form of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 4.6 to the quarterly report on Form 10-Q for the quarter
ended February 29, 2004).
4.15 Registration Rights Agreement dated as of December 9, 2003, by and
among Workstream Inc., Standard Securities Capital Corporation and
certain purchasers (incorporated by reference to Exhibit 4.7 to the
quarterly report on Form 10-Q for the quarter ended February 29,
2004).
4.16 Registration Rights Agreement dated as of December 11, 2003, by and
among Workstream Inc., Nathan Low and Smithfield Fiduciary LLC
(incorporated by reference to Exhibit 4.8 to the quarterly report on
Form 10-Q for the quarter ended February 29, 2004).
4.17 Registration Rights Agreement dated as of December 31, 2003 by and
among Workstream Inc. and certain purchase (incorporated by
reference to Exhibit 4.9 to the quarterly report on Form 10-Q for
the quarter ended February 29, 2004).
4.18 Registration Rights Agreement dated December 15, 2004 among
Workstream, Rubicon Master Fund, Union Spring Fund Ltd., Sunrise
Equity Partners, LP, Sunrise Foundation Trust and Nathan A. Low
(incorporated by reference to Exhibit 4.1 to the current report on
Form 8-K filed December 21, 2004).
4.19 Form of Warrant issued on December 15, 2004 (incorporated by
reference to Exhibit 4.2 to the current report on Form 8-K filed
December 21, 2004).
10.1** Workstream Inc. 2002 Amended and Restated Stock Option Plan, as
amended as of November 7, 2002 (incorporated by reference to Exhibit
10.1 to the quarterly report on Form 10-Q for the quarter ended
November 30, 2002).
79
10.2 Lease Agreement between Workstream Inc. (formerly E-Cruiter.com
Inc.) and RT Twenty-Second Pension Properties Limited, dated March
21, 2000 (incorporated by reference to Exhibit 2.1 to the annual
report on Form 20-F for the period ended May 31, 2000).
10.3 Service Agreement between Positionwatch Limited and Workstream Inc.
(formerly E-Cruiter.com Inc.), dated February 23, 1999 (incorporated
by reference to Exhibit 10.6 to the Registration Statement on Form
F-1 (File No. 333-87537)).
10.4 Security Agreement dated April 18, 2002 between Workstream Inc. and
Sands Brothers Venture Capital III LLC, as Security Agent for the
holders of the Senior Secured Convertible Notes (incorporated by
reference to Exhibit 10.19 to the annual report on Form 10-K for the
year ended May 31, 2002).
10.5 Guarantee Agreement dated as of April 18, 2002 by Workstream USA,
Inc. in favor of the holders of 8% Senior Subordinated Secured
Convertible Notes (incorporated by reference to Exhibit 10.20 to the
annual report on Form 10-K for the year ended May 31, 2002).
10.6 Joinder Agreement dated May 14, 2002 by and among Workstream Inc.,
Workstream USA, Inc., Sands Brothers Venture Capital IV LLC, Sands
Brothers Venture Capital III LLC, Crestview Capital Fund, L.P.,
Crestview Capital Fund II, L.P. and Crestview Capital Offshore Fund,
Inc. (incorporated by reference to Exhibit 10.21 to the annual
report on Form 10-K for the year ended May 31, 2002).
10.7** Employment Agreement dated as of January 27, 2003 between Michael
Mullarkey and Workstream Inc. (incorporated by reference to Exhibit
10.11 to the annual report on Form 10-K for the year ended May 31,
2003).
10.8** Employment Agreement dated as of April 4, 2005 between Workstream,
Inc. and Stephen Lerch (incorporated by reference to Exhibit 10.1 to
the current report on Form 8-K filed April 7, 2005).
10.9** Settlement Agreement dated as of May 9, 2003 between Paul Haggard
and Workstream Inc. (incorporated by reference to Exhibit 10.13 to
the annual report on Form 10-K for the year ended May 31, 2003).
10.10 Merger Agreement dated August 30, 2002, among Workstream Inc.,
Workstream Acquisition II, Inc. and Xylo, Inc. (incorporated by
reference to Exhibit 2.1 to the report on Form 8-K filed September
4, 2002).
10.11 Term Note dated January 31, 2003 by Workstream Inc., Workstream USA,
Inc., 6FigureJobs.com, Inc., Icarian, Inc., RezLogic, Inc.,
OMNIpartners, Inc. and Xylo, Inc. in favor of Michael Mullarkey
(incorporated by reference to Exhibit 10.1 to the quarterly report
on Form 10-Q for the quarter ended February 28, 2003).
10.12 Security Agreement dated January 31, 2003 by and among Michael
Mullarkey, Workstream Inc., Workstream USA, Inc., 6FigureJobs.com,
Inc., Icarian, Inc., RezLogic, Inc., OMNIpartners, Inc., and Xylo,
Inc. (incorporated by reference to Exhibit 10.2 to the quarterly
report on Form 10-Q for the quarter ended February 28, 2003).
10.13 General Security Agreement dated January 31, 2003 between Workstream
Inc. and Michael Mullarkey (incorporated by reference to Exhibit
10.3 to the quarterly report on Form 10-Q for the quarter ended
February 28, 2003).
10.14 Securities Purchase Agreement dated as of May 30, 2003 by and among
Workstream Inc. and William J. Ritger (incorporated by reference to
Exhibit 10.18 to the annual report on Form 10-K for the year ended
May 31, 2003).
10.15 Securities Purchase Agreement dated as of May 30, 2003 by and among
Workstream Inc. and Michael Weiss (incorporated by reference to
Exhibit 10.19 to the annual report on Form 10-K for the year ended
May 31, 2003).
10.16 Form of Securities Purchase Agreement (incorporated by reference to
Exhibit 10.20 to the annual report on Form 10-K for the year ended
May 31, 2003).
10.17 Agreement and Plan of Merger dated May 24, 2004, as amended, by and
between Kadiri, Inc., Workstream Inc. and Workstream Acquisition
III, Inc. (incorporated by reference to Exhibits 2.1 and 2.2 to the
report on Form 8-K filed June 14, 2004).
80
10.18 Asset Purchase Agreement dated as of July 14, 2003 by and between
Perform, Inc. and Workstream Inc. (incorporated by reference to
Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter
ended November 30, 2003).
10.19 Asset Purchase Agreement dated as of March 27, 2004, as amended, by
and between Workstream USA, Inc., Workstream Inc. and Peopleview,
Inc. *
10.20 Form of Subscription Agreement (incorporated by reference to Exhibit
10.1 to the quarterly report on Form 10-Q for the quarter ended
February 29, 2004).
10.21 Form of Securities Purchase Agreement (incorporated by reference to
Exhibit 10.2 to the quarterly report on Form 10-Q for the quarter
ended February 29, 2004).
10.22 Agency Agreement dated December 9, 2003 between Standard Securities
Capital Corporation and Workstream Inc.(incorporated by reference to
Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter
ended February 29, 2004).
10.23 Securities Purchase Agreement dated as of December 11, 2003 by and
between Workstream Inc. and Sunrise Securities Corporation
(incorporated by reference to Exhibit 10.4 to the quarterly report
on Form 10-Q for the quarter ended February 29, 2004).
10.24 Securities Purchase Agreement dated as of December 31, 2003 by and
between Workstream Inc. and Sunrise Securities Corporation
(incorporated by reference to Exhibit 10.5 to the quarterly report
on Form 10-Q for the quarter ended February 29, 2004).
10.25 Institutional Public Relations Retainer Agreement dated December 1,
2003 between Sunrise Financial Group, Inc. and Workstream Inc.
(incorporated by reference to Exhibit 10.6 to the quarterly report
on Form 10-Q for the quarter ended February 29, 2004).
10.26 Business Advisory Agreement dated as of December 3, 2003, by and
between Workstream Inc. and Legend Merchant Group, Inc.
(incorporated by reference to Exhibit 10.7 to the quarterly report
on Form 10-Q for the quarter ended February 29, 2004).
10.27 Securities Purchase Agreement dated December 15, 2004 among
Workstream, Rubicon Master Fund, Union Spring Fund Ltd., Sunrise
Equity Partners, LP, Sunrise Foundation Trust and Nathan A. Low
(incorporated by reference to Exhibit 10.1 to the current report on
Form 8-K filed December 21, 2004).
10.28 Agreement and Plan of Merger dated June 29, 2004 among Workstream,
Workstream Acquisition IV, Inc. and Bravanta, Inc. (incorporated by
reference to Exhibit 2.1 to the current report on Form 8-K filed
August 11, 2004).
10.29 Asset Purchase Agreement dated December 20, 2004 among Workstream,
Workstream USA, Inc. and ProAct Technologies Corporation
(incorporated by reference to Exhibit 10.1 to the current report on
Form 8-K filed January 6, 2005).
10.30 Amendment to Asset Purchase Agreement dated December 30, 2004 among
Workstream, Workstream USA, Inc. and ProAct Technologies Corporation
(incorporated by reference to Exhibit 10.2 to the current report on
Form 8-K filed January 6, 2005).
10.31 Registration Rights Agreement dated December 30, 2004 between
Workstream and ProAct Technologies Corporation (incorporated by
reference to Exhibit 10.3 to the current report on Form 8-K filed
January 6, 2005).
81
10.32 Promissory Note dated December 30, 2004 issued to ProAct
Technologies Corporation (incorporated by reference to Exhibit 10.4
to the current report on Form 8-K filed January 6, 2005).
10.33 Asset Purchase Agreement dated August 31, 2004 among Workstream,
Workstream USA, Inc. and Peoplebonus.com, Inc. (incorporated by
reference to Exhibit 10.1 to the quarterly report on Form 10-Q for
the quarter ended August 31, 2004).
21.1 List of Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers LLP.*
31.1 Certifications pursuant to Rule 13a-14(a)/15d-14(a).*
32.1 Certifications pursuant to 18 U.S.C. Section 1350.* -
- ----------
* Filed herewith.
** Constitutes a management contract for compensatory plan or arrangement.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WORKSTREAM INC.
By: /s/ Michael Mullarkey
-------------------------------------
Michael Mullarkey,
Chairman of the Board and Chief
Executive Officer
Dated: August 15, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Michael Mullarkey Chairman of the Board of August 15, 2005
- -------------------------- Directors and Chief Executive
Michael Mullarkey Officer (Principal Executive Officer)
/s/ Stephen Lerch Executive Vice President August 15, 2005
- -------------------------- Chief Financial Officer/Chief Operating Officer
Stephen Lerch (Principal Financial and Accounting Officer)
/s/ Arthur Halloran Director August 15, 2005
- --------------------------
Arthur Halloran
/s/ Matthew Ebbs Director August 15, 2005
- --------------------------
Matthew Ebbs
/s/ Michael A. Gerrior Director August 15, 2005
- --------------------------
Michael A. Gerrior
/s/ Thomas Danis Director August 15, 2005
- --------------------------
Thomas Danis
/s/ Cholo Manso Director August 15, 2005
- --------------------------
Cholo Manso
/s/ Steve Singh Director August 15, 2005
- --------------------------
Steve Singh
83