-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IZ+oTwtEA/ldzLElS40W2e5Z1j0jF4IXVqpEIdhRY2H8sj+9Je+ZXVa/HDhXOOo1 x0RpYjcT/SLjcZesuU5tKA== 0001125282-02-003575.txt : 20021119 0001125282-02-003575.hdr.sgml : 20021119 20021119170509 ACCESSION NUMBER: 0001125282-02-003575 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: THINKPATH INC CENTRAL INDEX KEY: 0001070630 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 52209027 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14813 FILM NUMBER: 02833565 BUSINESS ADDRESS: STREET 1: 55 UNIVERSITY AVE STE 505 STREET 2: TORONTO, ONTARIO, CANADA CITY: M5J 2H7 BUSINESS PHONE: 4163648800 MAIL ADDRESS: STREET 1: 55 UNIVERSITY AVE STE 505 STREET 2: TORONTO, ONTARIO, CANADA CITY: MCJ 2H7 FORMER COMPANY: FORMER CONFORMED NAME: IT STAFFING LTD DATE OF NAME CHANGE: 19980917 FORMER COMPANY: FORMER CONFORMED NAME: THINKPATH COM INC DATE OF NAME CHANGE: 20000414 10-Q 1 b321496_10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ____________ TO ________________ COMMISSION FILE NUMBER __________ THINKPATH INC. (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) ONTARIO 52-209027 ------------------------- -------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 55 UNIVERSITY AVENUE, SUITE 400 TORONTO, ONTARIO, CANADA M5J 2H7 --------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (416) 364-8800 -------------- (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_| AS OF NOVEMBER 19, 2002 THERE WERE 51,709,067 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING. THINKPATH INC. SEPTEMBER 30, 2002 QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Page Number Item 1. Financial Statements Interim Consolidated Balance Sheets as of September 30, 2002, December 31, 2001...................... .............................. Interim Consolidated Statements of Income for the three and nine months ended September 30, 2002 and 2001 .......................................... Interim Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2002....................................... Interim Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001........................................... Notes to Interim Consolidated Financial Statements............................. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. Item 3. Quantitative and Qualitative Disclosures about Market Risk............ PART II - OTHER INFORMATION Item 1. Legal Proceedings .................................................... Item 2. Changes in Securities and Use of Proceeds ............................ Item 3. Defaults Upon Senior Securities ...................................... Item 4. Submission of Matters to a Vote of Security Holders .................. Item 5. Other Information .................................................... Item 6. Exhibits and Reports on Form 8-K ..................................... ITEM 1. FINANCIAL STATEMENTS THINKPATH INC. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (UNAUDITED) (AMOUNTS EXPRESSED IN US DOLLARS) THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 (AMOUNTS EXPRESSED IN US DOLLARS)
September 30, December 31, 2002 2001 ----------- ---------- $ $ ASSETS CURRENT ASSETS Cash 33,082 482,233 Accounts receivable 4,323,194 5,502,113 Inventory 34,126 40,057 Income taxes receivable 162,100 431,817 Prepaid expenses 326,750 345,341 ---------- ---------- 4,879,252 6,801,561 CAPITAL ASSETS 2,384,164 2,859,340 GOODWILL 5,071,183 5,128,991 INVESTMENT IN NON-RELATED COMPANIES 763,306 1,013,926 LONG-TERM RECEIVABLE 83,450 83,450 OTHER ASSETS 102,688 1,287,710 ---------- ---------- 13,284,043 17,174,978 ========== ==========
THINKPATH INC. INTERIM CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 (AMOUNTS EXPRESSED IN US DOLLARS)
September 30, December 31, 2002 2001 ----------- ----------- $ $ LIABILITIES CURRENT LIABILITIES Bank indebtedness 4,977,686 5,039,171 Accounts payable 3,193,688 4,073,444 Deferred revenue 221,846 365,023 Current portion of long-term debt 807,049 528,285 Current portion of notes payable 168,000 150,000 ----------- ----------- 9,368,269 10,155,923 DEFERRED INCOME TAXES 150,380 150,380 LONG-TERM DEBT 181,202 582,432 NOTES PAYABLE 668,000 2,340,000 LIABILITIES PAYABLE IN CAPITAL STOCK 1,800,536 699,297 ----------- ----------- 12,168,387 13,928,032 ----------- ----------- STOCKHOLDERS' EQUITY CAPITAL STOCK 28,114,210 26,571,481 DEFICIT (25,924,786) (22,719,044) ACCUMULATED OTHER COMPREHENSIVE LOSS (1,073,768) (605,491) ----------- ----------- 1,115,656 3,246,946 ----------- ----------- 13,284,043 17,174,978 =========== ===========
The accompanying notes are an integral part of these interim consolidated financial statements. THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30 (AMOUNTS EXPRESSED IN US DOLLARS)
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED SEPT 30, 2002 SEPT 30, 2001 SEPT 30, 2002 SEPT 30, 2001 ----------- ----------- ----------- ----------- $ $ $ $ REVENUE 6,703,034 8,354,260 21,485,763 28,593,398 COST OF SERVICES 5,284,868 6,252,942 16,405,302 19,706,502 ----------- ----------- ----------- ----------- GROSS PROFIT 1,418,166 2,101,318 5,080,461 8,886,896 ----------- ----------- ----------- ----------- EXPENSES Administrative 1,565,698 1,430,517 3,591,830 4,226,173 Selling 788,626 1,289,867 2,755,788 4,486,245 Financing Expenses 469,741 41,178 469,741 614,703 Depreciation and amortization 286,085 501,416 891,670 1,452,634 Write down goodwill 57,808 -- 57,808 -- Restructuring costs -- (30,454) -- 403,165 ----------- ----------- ----------- ----------- 3,167,958 3,232,524 7,766,837 11,182,920 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS (1,749,792) (1,131,206) (2,686,376) (2,296,024) Gain (Loss) on Investment -- (130,242) -- (130,242) ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES (1,749,792) (1,261,448) (2,686,376) (2,426,266) Interest Charges 354,138 109,599 822,609 584,092 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (2,103,930) (1,371,047) (3,508,985) (3,010,358) Income taxes 20,155 295,509 (5,145) 699,501 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS (2,124,085) (1,666,556) (3,503,840) (3,709,859) INCOME (LOSS) FROM DISCONTINUED OPERATIONS (INCLUDING GAIN ON DISPOSAL OF $497,579) (16,881) 37,716 356,099 (28,311) ----------- ----------- ----------- ----------- NET INCOME (LOSS) (2,140,966) (1,628,840) (3,147,741) (3,738,170) PREFERRED STOCK DIVIDEND REQUIREMENTS 2,828 13,468 58,001 724,989 EARNINGS APPLICABLE TO COMMON STOCK (2,143,794) (1,642,308) (3,205,742) (4,463,159) =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING BASIC AND FULLY DILUTED 28,704,219 15,093,564 23,717,204 14,277,356 =========== =========== =========== =========== INCOME (LOSS) PER WEIGHTED AVERAGE COMMON STOCK BEFORE PREFERRED DIVIDENDS BASIC AND FULLY DILUTED (0.08) (0.11) (0.13) (0.26) =========== =========== =========== =========== INCOME (LOSS) PER WEIGHTED AVERAGE COMMON STOCK AFTER PREFERRED DIVIDENDS BASIC AND FULLY DILUTED (0.08) (0.11) (0.14) (0.31) =========== =========== =========== ===========
The accompanying notes are an integral part of these interim consolidated financial statements. THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND THE YEAR ENDED DECMEBER 31, 2001 (AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED COMMON STOCK PREFERRED STOCK CAPITAL OTHER NUMBER OF NUMBER OF SHARES STOCK RETAINED COMPREHENSIVE COMPREHENSIVE SHARES A B C AMOUNTS EARNINGS INCOME (LOSS) INCOME (LOSS) ----------- ------- ------- ---- ---------- ----------- -------------- ------------- Balance as of December 31, 2001 17,731,711 -- -- 945 26,571,481 (22,719,044) (605,491) Net loss for the period -- -- -- -- -- (499,470) (499,470) ----------- Other comprehensive income (loss), net of tax: (277,058) Foreign currency translation -- -- -- -- -- -- -- Adjustment to market value -- -- -- -- -- -- ----------- (277,058) (277,058) Other comprehensive income ----------- (776,528) Comprehensive loss =========== Reduction in common stock payable 1,756,655 -- -- -- 474,297 -- Dividend on preferred stock -- -- -- -- 21,617 (21,617) Conversion of preferred stock to common stock 541,593 -- -- (65) -- -- Beneficial conversion on Issuance of preferred stock -- -- -- -- 2,063 (2,063) Debt settled through the issuance of common stock 1,253,752 -- -- -- 226,956 -- ---------- ------- ------- ---- ---------- ----------- ----------- Balance as of March 31, 2002 21,283,711 -- -- 880 27,296,414 (23,242,194) (882,549) ========== ======= ======= ==== ========== =========== =========== Net loss for the period -- -- -- -- -- (507,305) (507,305) ----------- Other comprehensive income (loss), 61,005 net of tax: -- Foreign currency translation -- -- -- -- -- -- ----------- Adjustment to market value -- -- -- -- -- -- 61,005 61,005 ----------- Other comprehensive income (446,300) =========== Comprehensive loss Common stock and warrants issued in consideration of services 3,681,818 -- -- -- 578,910 -- Dividend on preferred stock -- -- -- -- 7,842 (7,842) Conversion of preferred stock to common stock 3,253,534 -- -- (280) -- -- Beneficial conversion on Issuance of preferred stock -- -- -- -- 23,651 (23,651) Debt settled through the issuance of common stock -- -- -- ---------- ------- ------- ---- ---------- ----------- ----------- Balance as of June 30, 2002 28,219,063 -- -- 600 27,906,817 (23,780,992) (821,544) ========== ======= ======= ==== ========== =========== =========== Net loss for the period -- -- -- -- -- (2,140,966) (2,140,966) ----------- Other comprehensive income (loss), net of tax: (1,604) Foreign currency translation -- -- -- -- -- -- (250,620) Adjustment to market value -- -- -- -- -- -- ----------- (252,224) (252,224) Other comprehensive income -- -- -- -- -- -- ----------- (2,393,190) Comprehensive loss -- -- -- -- -- -- =========== Common stock and warrants issued in consideration of services -- -- -- -- -- -- Dividend on preferred stock -- -- -- -- 2,828 (2,828) Conversion of preferred stock to common stock -- -- -- -- -- -- Beneficial conversion on Issuance of preferred stock -- -- -- -- -- -- Debt settled through the issuance of common stock 1,728,266 -- -- -- 207,392 -- ---------- ------- ------- ---- ---------- ----------- ----------- Balance as of September 30, 2002 29,947,329 -- -- 600 28,117,037 (25,924,786) (1,073,768) ========== ======= ======= ==== ========== =========== ===========
The accompanying notes are an integral part of these interim consolidated financial statements. THINKPATH INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30 (AMOUNTS EXPRESSED IN US DOLLARS)
2002 2001 ---- ---- $ $ Cash flows from operating activities Net income (loss) (3,147,741) (3,738,170) ---------- ---------- Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Amortization 987,964 1,712,937 Write down of long-term investment 250,620 -- Write down of goodwill 57,808 -- Decrease (increase) in accounts receivable 1,326,509 1,604,197 Decrease (increase) in prepaid expenses 29,062 (80,776) Increase (decrease) in accounts payable (864,409) (186,017) Decrease (increase) in deferred income taxes -- 611,439 Decrease (increase) in inventory 6,000 41,351 Decrease (increase) in short-term investments -- 130,242 Increase (decrease) in deferred revenue (144,225) (63,899) Increase in income taxes payable (receivable) 269,699 84,494 Common stock and warrants issued for services 578,909 428,299 Long-term investment received for services -- (206,072) Gain on disposal of subsidiary (497,579) -- Forgiveness of long-term debt -- (190,629) ---------- ---------- Total adjustments 2,000,358 3,885,566 ---------- ---------- Net cash used in operating activities (1,147,383) 147,396 ---------- ---------- Cash flows from investing activities Purchase of capital assets (253,520) (183,803) Disposal (purchase) of other assets 16,156 (295,476) Increase in long-term receivable -- (188,026) Proceeds on disposal of subsidiary 1,320,786 -- ---------- ---------- Net cash used in investing activities 1,083,422 (667,305) ---------- ---------- Cash flows from financing activities Repayment of notes payable (79,000) (211,127) Repayment of long-term debt (479,532) (861,292) Cash received (paid) on long-term debt 259,350 225,000 Proceeds from issuance of common stock -- 400,000 Proceeds from issuance of preferred stock -- 1,230,000 Increase (decrease) in bank indebtedness (118,197) (61,505) ---------- ---------- Net cash provided by financing activities (417,379) 721,076 ---------- ---------- Effect of foreign currency exchange rate changes 32,189 (201,167) ---------- ---------- (449,151) -- Net increase (decrease) in cash and cash equivalents Cash and cash equivalents -Beginning of period 482,233 -- ---------- ---------- -End of period 33,082 -- ========== ========== SUPPLEMENTAL CASH ITEMS: Interest paid 837,303 612,978 ========== ========== Income taxes paid (recovered) (5,145) 99,501 ========== ========== SUPPLEMENTAL NON-CASH ITEM: Preferred stock dividend 58,001 711,521 Common shares issued for liabilities 1,487,554 669,125 Reduction in notes payable 1,575,536 650,600 Deferred taxes -- 790,000 ========== ==========
The accompanying notes are an integral part of these interim consolidated financial statements. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) 1. MANAGEMENT'S INTENTIONS Certain principal conditions and events are prevalent which indicate that there could be substantial doubt about the company's ability to continue as a going concern for a reasonable period of time. These conditions and events include significant operating losses, working capital deficiencies, and violation of certain loan covenants. At September 30, 2002, the Company had a working capital deficiency of $4,489,017, a deficit of $25,924,786 and has suffered recurring losses from operations. With insufficient working capital from operations, the Company's primary sources of cash have been a revolving line of credit with Bank One and proceeds from the sale of equity securities. At September 30, 2002, the revolving line of credit was $4,980,000 including an overdraft of approximately $650,000. Eligible receivables allowed for a maximum borrowing of $4,330,000. The revolving line of credit agreement requires the Company to meet various restrictive covenants, including a senior debt to EBITDA ratio, debt service coverage ratio, debt to tangible net worth ratio and certain other covenants. At September 30, 2002 and thereafter, the company did not comply with the covenants contained in the revolving line of credit agreement. On July 1, 2002 and as amended on August 1, 2002, August 15, 2002, September 1, 2002, September 16, 2002, September 30, 2002, and October 15, 2002, the company entered into a Forbearance and Modification Agreement with its senior lender, Bank One whereby the Bank agreed to forebear from exercising its rights and remedies against the company as a result of its violation of certain loan covenants, until the period ending November 30, 2002. In the event that the company defaults under the agreement including the failure to make payment when due, the Bank is entitled to exercise any and all of its security rights including foreclosing on collateral. On August 13, 2002, the company received a commitment from Morrison Financial Services Limited for a syndicated financing arrangement that will provide the funding necessary to purchase Bank One's debt and security. The partners in the syndicate are Maple Partners America Inc., Morrison Financial Services Limited and MFI Export Finance Inc. Bank One has agreed to extend the expiration of the Forbearance and Modification Agreement until November 30, 2002 to allow the syndicate to complete the financing arrangement. In addition, Bank One has agreed to accept a $700,000 discount on the payoff of its indebtedness. The Business Development Bank of Canada has also agreed to sell its debt and security to the syndicated group with a discount on the payoff of $300,000. On October 15, 2002, the company signed a term sheet with Bristol Investment Fund, Ltd. and a syndicate of other investors to issue Senior Secured Convertible Debentures of up to $3,000,000 in multiple tranches. The first tranche of $800,000 will be issued upon signing of a definitive investment agreement and concurrently with the closing of the financing arrangement with Morrison Financial. The funds will be directed to Bank One and certain of the company's other creditors. As at November 19, 2002, management's plans to mitigate and alleviate these adverse conditions and events include: A. Commitment from a new lender to purchase Bank One and the Business Development Bank of Canada's debt and security. B. Commitment from investors for a convertible debenture of up to $3,000,000. C. Ongoing restructuring of debt obligations and settlement of outstanding claims. D. Ongoing restructuring of operations relating to the closure of non-profitable offices, termination of redundant staff and the institution of other cost cutting measures. See Note 14. Although there can be no assurances, it is anticipated that continued cash flow improvements will be sufficient to cover current operating costs and will permit partial payments to vendors and interest payments on all debt. E. Settlement of an outstanding insurance claim related to the loss of assets and business for two offices impacted by the terrorist events of September 11, 2001. F. Focus on growth in the engineering division, including design services, technical publications and e-learning. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) Despite its negative working capital and deficit, the company believes that its management has developed a business plan that if successfully implemented could substantially improve the company's operational results and financial condition. However, the company can give no assurances that its current cash flows from operations, if any, borrowings available under its revolving line of credit, and proceeds from the sale of securities, will be adequate to fund its expected operating and capital needs for the next twelve months. The adequacy of cash resources over the next twelve months is primarily dependent on its operating results, the bank's continued forbearance, the closing of new financing, and settlement of its insurance claim, all of which are subject to substantial uncertainties. Cash flows from operations for the next twelve months will be dependent, among other things, upon the effect of the current economic slowdown on sales, the impact of the restructuring plan and management's ability to implement its business plan. The failure to return to profitability and optimize operating cash flows in the short term, and to successfully procure forbearance from the bank and close alternate financing, could have a material adverse effect on the company's liquidity position and capital resources. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Going Concern These interim consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities and commitments in the normal course of business. The application of the going concern concept is dependent on the Company's ability to generate sufficient working capital from operations and external investors. These interim consolidated financial statements do not give effect to any adjustments should the Company be unable to continue as a going concern and, therefore, be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts differing from those reflected in the interim consolidated financial statements. Management plans to obtain sufficient working capital from operations and external financing to meet the Company's liabilities and commitments as they become payable over the next twelve months. There can be no assurance that management's plans will be successful. Failure to obtain sufficient working capital from operations and external financing will cause the Company to curtail operations. These interim consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. b) Change of Name The company changed its name from IT Staffing Ltd. to Thinkpath.com Inc. on February 24, 2000. On June 6, 2001, the company changed its name from Thinkpath.com Inc. to Thinkpath Inc. c) Principal Business Activities Thinkpath Inc. is an information technology and engineering services company which, along with its subsidiaries Thinkpath US Inc. (formerly Cad Cam Inc.), Thinkpath Michigan Inc. (formerly Cad Cam of Michigan Inc.), Thinkpath Technical Services Inc. (formerly Cad Cam Technical Services Inc.), Thinkpath Training US Inc.(formerly ObjectArts US Inc.), MicroTech Professionals Inc., and TidalBeach Development Inc., provides engineering, staffing, training and technology services to enhance the resource performance of clients. d) Basis of interim consolidated financial statement presentation The interim consolidated financial statements include the accounts of the company and its controlled subsidiaries. The earnings of the subsidiaries are included from the date of acquisition for acquisitions accounted for using the purchase method. For subsidiaries accounted for by the pooling of interest method their earnings have been included for all periods reported. All significant inter-company accounts and transactions have been eliminated. e) Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts to banks, and any other highly liquid investments purchased with a maturity of three months or less. The carrying amount approximates fair value because of the short maturity of those instruments. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) f) Other Financial Instruments The carrying amount of the company's other financial instruments approximate fair value because of the short maturity of these instruments or the current nature of interest rates borne by these instruments. g) Long-Term Financial Instruments The fair value of each of the company's long-term financial assets and debt instruments is based on the amount of future cash flows associated with each instrument discounted using an estimate of what the company's current borrowing rate for similar instruments of comparable maturity would be. h) Capital Assets Property and equipment are recorded at cost and are amortized over the estimated useful lives of the assets principally using the declining balance method. The company's policy is to record leases, which transfer substantially all benefits and risks incidental to ownership of property, as acquisition of assets and to record the occurrences of corresponding obligations as long-term liabilities. Obligations under capital leases are reduced by rental payments net of imputed interest. i) Net Income (Loss) and Fully Diluted Net Income (Loss) Per Weighted Average Common Stock Net income (Loss) per common stock is computed by dividing net income (loss) for the year by the weighted average number of common stock outstanding during the year. Fully diluted net income (loss) per common stock is computed by dividing net income for the year by the weighted average number of common stock outstanding during the year, assuming that all convertible preferred stock, stock options and warrants as described in note 13 were converted or exercised. Stock conversions stock options and warrants which are anti-dilutive are not included in the calculation of fully diluted net income (loss) per weighted average common stock. j) Inventory Inventory is valued at the lower of cost and the net realizable value. k) Revenue 1) The company provides the services of engineering and information technology staff on a project basis. The services provided are defined by guidelines to be accomplished by milestone and revenue is recognized upon the accomplishment of the relevant milestone. As services are rendered, the costs incurred are reflected as Work in Progress. Revenue is recognized upon the persuasive evidence of an agreement, delivery has occurred, the fee is fixed or determinable and collection reasonably assured. 2) The company provides the services of information technology consultants on a contract basis and revenue is recognized as services are performed. 3) The company places engineering and information technology professionals on a permanent basis and revenue is recognized upon candidates' acceptance of employment. If the company receives non-refundable upfront fees for "retained searches", the revenue is recognized upon candidates' acceptance of employment. 4) The company provides advanced training and certification in a variety of technologies and revenue is recognized on delivery. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) 5) The company licenses software in the form of a Human Capital Management System called Njoyn. The revenue associated with providing this software consists of an initial set up fee, customization and training as agreed and an ongoing monthly per user fee. The allocation of revenue to the various elements is based on the company's determination of the fair value of the elements if they had been sold separately. The set-up fee and customization revenue is recognized upon delivery of access to the software with customization completed in accordance with milestones determined by the contract. Revenue is recognized on a percentage of completion basis for contracts with significant amounts of customization and clearly defined milestones agreed to by the customer and an enforceable right to invoice and collect on a partial completion basis. For contracts which require significant customization, without clearly defined milestones, and an inability to estimate costs, revenue is reflected on a completed contract basis. On March 1, 2002 the Company sold its subsidiary, Njoyn Software Incorporated to Cognicase Inc, a Canadian company. The net proceeds after broker fees were $1,350,000 of which $800,000 was received in cash and $550,000 was received in unrestricted common shares. The shares were sold on March 11, 2002 for value of $524,673.19. As part of the transaction, Cognicase assumed the entire staff in the technology division. As a result, the company has had no further Njoyn revenue. 6) The company also signs contracts for the customization or development of SecondWave, a web development software in accordance with specifications of its clients. The project plan defines milestones to be accomplished and the costs associated. These amounts are billed as they are accomplished and revenue is recognized as the milestones are reached. The work in progress for costs incurred beyond the last accomplished milestone is reflected at the period end. To date these amounts have not been material and have not been set up at the period ends. The contracts do not include any post-contract customer support. Additional customer support services are provided at standard daily rates, as services are required. After the sale of Njoyn and the assumption of the technology division, the company has had no further SecondWave revenue. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC's view in applying generally accepted accounting principles to selected revenue recognition issues. The effects, if any, of applying this guidance must be adopted by SEC registrants no later than December 31, 2000 and must be reported as a cumulative effect adjustment as of January 1, 2000, resulting from a change in accounting principle. Restatement of previously reported results of the earlier quarters of fiscal 2000, if necessary, is also required. The adoption of SAB 101 did not have a material effect on the Company's consolidated financial statements. l) Goodwill Goodwill representing the cost in excess of the fair value of net assets acquired is being amortized on a straight-line basis over a thirty-year period. The company calculates the recoverability of goodwill on a quarterly basis by reference to estimated undiscounted future cash flows. Effective July 1, 2001, the Company changed its amortization period from 30 to 15 years on a prospective basis. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company began applying the new accounting rules effective January 1, 2002. The Company has assessed the financial impact SFAS No. 141 and No. 142 will have on its Consolidated Financial Statements and has determined that there is no transitional impairment loss. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) m) Income Taxes The company accounts for income tax under the provision of Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statement or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. Deferred tax assets may be reduced, if deemed necessary based on a judgmental assessment of available evidence, by a valuation allowance for the amount of any tax benefits which are more likely, based on current circumstances, not expected to be realized. n) Foreign Currency Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Translation adjustments resulting from this process are charged or credited to other comprehensive income. Revenue and expenses are translated at average rates of exchange prevailing during the year. Gains and losses on foreign currency transactions are included in financial expenses. o) Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are reviewed periodically and as adjustments become necessary, they are reported in earnings in the period in which they become known. p) Long-Lived Assets On January 1, 1996, the company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires that long-lived assets be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management used its best estimate of the undiscounted cash flows to evaluate the carrying amount and have reflected the impairment. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company adopted SFAS 144, effective January 1, 2002. The adoption of SFAS 144 did not have a material impact on the Company's results of operations or financial condition. q) Comprehensive Income In 1999, the company adopted the provisions of SFAS No. 130 "Reporting Comprehensive Income". This standard requires companies to disclose comprehensive income in their financial statements. In addition to items included in net income, comprehensive income includes items currently charged or credited directly to stockholders' equity, such as the changes in unrealized appreciation (depreciation) of securities and foreign currency translation adjustments. r) Accounting for Stock-Based Compensation In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was issued. It introduces the use of a fair value-based method of accounting for stock-based compensation. It encourages, but does not require, companies to recognize stock-based compensation expenses to employees based on the new fair value accounting rules. Companies that choose not to adopt the new rules will continue to apply the existing accounting rules continued in Accounting Principles Board Option No. 25, Accounting for stock issued to employees. However, SFAS No. 123 requires companies that choose not to adopt the new fair value accounting rules to disclose pro forma net income and earnings per share under the new method. SFAS No. 123 is effective for financial statements for fiscal years beginning after December 31, 1995. The company has adopted the disclosure provisions of SFAS No. 123. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) s) Computer software costs The company accounts for the cost of developing computer software for internal use, which may be sold as a separate product, as a research and development expense until the technological feasibility of the product has been established. At the end of each year the company compares the unamortized capital costs represented by Deferred development costs in Other Assets to the net realizable value of the product to determine if a reduction in carrying value is warranted. Included in the software developed for own use which may be sold as a separate product is the Njoyn and Secondwave software and therefore for these products, the costs incurred after technological feasibility was reached has been treated as Deferred Development costs and the amount evaluated on an annual basis to determine if a reduction in carrying value is warranted. t) Investments in Non-Related Companies The company records its investment in companies in which it holds less than 20% interest at fair market value. Changes in fair market value are adjusted in comprehensive income. u) Recent Pronouncements In April 2002, the FASB issued SFAS No. 145, which, among other things, changed the presentation of gains and losses on the extinguishments of debt. Any gain or loss on extinguishments of debt that does not meet the criteria in APB Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", shall be included in operating earnings and not presented separately as an extraordinary item. We will adopt SFAS No. 145 at the beginning of fiscal year 2003. We do not expect the provisions of SFAS No. 145 to have any impact on our financial position, results of operations or cash flows. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No.146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred in a Restructuring)". We will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. v) Advertising Costs Advertising costs are expensed as incurred. For the three months ended September 30, 2002, advertising expense was $94,232 compared to $105,593 for the three months ended September 30, 2001. For the nine months ended September 30, 2002, advertising expense was $243,235 compared to $353,995 for the nine months ended September 30, 2001. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) 3. ACQUISITIONS Systemsearch Consulting Services Inc. was acquired on January 2, 1997 for $391,313. This amount was paid by the issuance of common stock and a cash payment of $97,828. The purchase has been reflected as follows: Consideration $ 391,313 Assumption of net liabilities 57,321 --------- Goodwill $ 448,634 ========= On December 31, 2001, the Company had written off a portion of the goodwill related to its investment in Systemsearch Consulting Services Inc. International Career Specialists Ltd. was acquired on January 1, 1998 for $652,188. This amount was paid by the issuance of common stock and a cash payment of $326,094. The purchase was reflected as follows: Consideration $ 652,188 Assumption of net liabilities 198,409 --------- Goodwill $ 850,597 ========= On December 31, 2000, the Company had written off the goodwill related to its investment in International Career Specialists Ltd. The assets of Southport Consulting Company, a New Jersey corporation, were acquired by Thinkpath Inc. in a transaction effective October 31, 1998. The consideration for the acquisition was as follows: Cash $ 50,000 Shares 200,000 --------- $ 250,000 ========= The assets acquired are valued as follows: Software $ 130,000 Office furniture and equipment 20,000 Other assets 100,000 --------- $ 250,000 ========= Cad Cam Inc. and its subsidiaries Cad Cam of Michigan Inc., Cad Cam Technical Services Inc., and Cad Cam Integrated Systems Inc. was acquired during 1999 for $6,000,000. This amount was paid as follows: $2,000,000 paid in cash and $500,000 in common stock on the date of closing. The balance consists of three notes payable totaling $2,500,000 and $1,000,000 in the form of common stock to be issued with the final note payable. The documents were executed at the end of September 1999 and the operations consolidated with the company from October 1, 1999. The terms of the note payable were subsequently restructured.(Note 12) THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) The assets acquired are valued as follows: Current assets $ 2,468,029 Fixed assets 2,267,539 Other assets 817,004 Liabilities assumed (5,071,430) Consideration (6,000,000) ----------- Goodwill $ 5,518,858 =========== MicroTech Professionals Inc., was acquired effective April 1, 2000 for $4,500,000.The amount was to be paid in two installments, based on certain revenue requirements to be met by MicroTech Professionals Inc. The requirements have been met. First Installment: 133,333 common stock issued on closing, $1,250,000 cash paid on closing, $750,000 by a three year promissory note bearing interest at 1/2% above prime paid semi-annually issued on closing. Second Installment: $625,000 in common stock, $875,000 cash, $500,000 by a three-year promissory note bearing interest at 1/2% above prime paid semi-annually. The acquisition was accounted for by the purchase method and the operations have been included in the consolidated operations from April 1, 2000. Refer to note 21(a) for supplemental information. The terms of payment were subsequently restructured. (Note 12) The net acquired assets are valued as follows: Current assets $ 1,769,478 Other assets 850,000 Fixed assets 104,851 Liabilities assumed (1,073,527) Consideration including acquisition costs (4,660,000) ----------- Goodwill $ 3,009,198 =========== On December 31, 2001, the Company had written off the goodwill related to its investment in MicroTech Professionals Inc. On March 6, 2000, Thinkpath Inc. completed the acquisition of 80% of E-Wink, Inc., a Delaware corporation, in consideration of: i) 300,000 shares of our common stock valued at $975,000; and ii) warrants to purchase an aggregate of 500,000 shares of our common stock at a price of $3.25 per share for a period of five years valued at $1,458,700. E-Wink was formed to match providers of venture capital, bridge loans and private placement capital with members of the brokerage community. The full purchase price of $2,433,700 has been allocated to goodwill. On December 31, 2000,the company has written off the goodwill related to its investment in E-Wink, Inc. 4. POOLING OF INTEREST Effective January 1, 2000. Thinkpath Inc. entered into a merger and acquisition agreement with a technical training provider, ObjectArts Inc. and its subsidiary ObjectArts (US) Inc. ObjectArts (US) Inc., was merged with IT Staffing New York Ltd., an inactive subsidiary of Thinkpath Inc. In exchange for all of the outstanding shares of ObjectArts Inc., the company issued 527,260 common stock. The merger was accounted for as a pooling of interests and the results of ObjectArts Inc. and ObjectArts (US) Inc. have been included for all periods presented. On November 15, 2000, Thinkpath Inc. combined with TidalBeach Inc., a software developer, and in exchange for all of the outstanding shares of TidalBeach Inc., issued 250,000 common stock. The combination has been accounted for as a pooling of interests and the results of TidalBeach Inc. have been included for all periods presented. Refer to note 20(b) for supplemental information concerning TidalBeach Inc. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) 5. ACCOUNTS RECEIVABLE September 30, December 31, 2002 2001 $ $ Accounts receivable 4,593,586 6,079,676 Less: Allowance for doubtful accounts (270,392) (577,563) --------- --------- 4,323,194 5,502,113 ========= ========= 6. CAPITAL ASSETS
September 30, December 31, 2002 2001 ----------------------------------- ----------- Accumulated COST AMORTIZATION NET NET $ $ $ $ Furniture and equipment 778,489 478,985 299,504 344,693 Computer equipment and software 6,409,180 4,455,277 1,953,903 2,322,887 Leasehold improvements 475,963 345,206 130,757 191,760 --------- --------- --------- --------- 7,663,632 5,279,468 2,384,164 2,859,340 ========= ========= ========= ========= Assets under capital lease 735,890 378,114 357,776 474,485 ========= ========= ========= =========
Amortization of capital assets for the three months ended September 30, 2002 was $141,935 including amortization of assets under capital lease of $28,182. Amortization of capital assets for the nine months ended September 30, 2002 amounted to $482,464 including amortization of assets under capital lease of $88,147. Amortization for the year ended December 31, 2001 amounted to $1,594,709 including amortization of assets under capital lease of $146,217. 6. INVESTMENT IN NON-RELATED COMPANIES Investment in non-related companies are represented by the following: September 30, December 31, 2002 2001 Conexys $667,511 $667,511 Digital Cement 95,795 346,415 ---------- ---------- Total $763,306 $1,013,926 ========== ========== i) Conexys During the year ended December 31, 1999, $383,146 of the Conexys investment was included as a short-term investment as the company had intended to sell these shares on the open market. During fiscal 2000, the company acquired additional shares of Conexys at a cost of approximately $284,365 in consideration of services rendered and reclassified the total investment as available for sale. Since the shares of Conexys trade on the Bermuda Stock Exchange, the fair value was determined based on the stock price. ii) Digital Cement During fiscal 2000, the company acquired 1,125,000 shares of Digital Cement, representing approximately 4% of that company's shares in consideration of the co-licensing of SecondWave, software developed by TidalBeach Inc., a wholly-owned subsidiary of Thinkpath Inc. The value of these shares was determined to be approximately $507,865 based on a offer to a third party to purchase shares in the company at a price of $0.50 per share. During 2001, the fair value adjusted to $346,415 with a charge of $161,450 to comprehensive income. During the three months ended September 30, 2002, the fair value adjusted to $95,795 with a charge of $250,620 to comprehensive income. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) iii) Lifelogix During 2000, the company acquired a twenty percent interest in LifeLogix in consideration of the source code for Secondwave, the software which supports LifeLogix's human stress and emotions management systems. The value of these shares is approximately $142,715. This investment has been accounted for on the cost basis as the company does not have significant influence over LifeLogix. This investment was written off in 2001. 8. GOODWILL Goodwill is the excess of cost over the value of assets acquired over liabilities assumed in the purchase of the subsidiaries detailed in Note 3. Goodwill has been allocated to reporting units as follows:
September 30, December 31, 2002 2001 --------------------------------------------------- ------------ Accumulated Impairment COST AMORTIZATION Losses NET NET $ $ $ $ $ IT Recruitment 448,634 303,337 57,808 87,489 145,297 (Systemsearch Consulting Services) Technical Publications & Engineering 5,518,858 535,164 -- 4,983,694 4,983,694 (CadCam Inc.) ---------- ---------- ---------- ---------- ---------- 5,967,492 838,501 57,808 5,071,183 5,128,991 ========== ========== ========== ========== ==========
Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. This statement requires the Company to evaluate the carrying value of our goodwill and intangible assets based on assumptions and estimates of fair value and future cash flow information. These assumptions and estimates may differ from actual results. If different assumptions and estimates are used, carrying values could be adversely impacted, resulting in writedowns that could adversely affect the Company's earnings. During the third quarter of 2002, the company completed its transitional goodwill impairment test as of December 31, 2001 and determined that no adjustment to the carrying value of goodwill was needed. The IT recruitment unit was tested for impairment in the third quarter, after the annual forecasting process. Due to a decrease in margins and the loss of key sales personnel, operating profits and cash flows were lower than expected in the first nine months of 2002. Based on that trend, the earnings forecast for the next two years was revised. At September 30, 2002, a goodwill impairment loss of $57,808 was recognized in the IT recruitment reporting unit. The fair value of that reporting unit was estimated using the expected present value of future cash flows. On an ongoing basis, absent any impairment indicators, the company expects to perform a goodwill impairment test as of the end of the third quarter of every year. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) The following table presents the impact of adopting SFAS No. 142 on net loss and net loss per share had the standard been in effect for the three and nine months ended September 30, 2001.
Three Months Nine Months Ended Ended September 30, 2001 September 30, 2001 ------------------ ------------------- Net loss as reported (1,628,840) (3,738,170) Adjustments -- -- Amortization of goodwill, net of tax 214,905 494,974 ------------ ------------ Adjusted net loss (1,413,935) (3,243,196) ============ ============ As reported basic and diluted net loss per share (0.11) (0.26) Impact of amortization of goodwill, net of tax 0.02 0.03 ------------ ------------ Adjusted basic net loss per share (0.09) (0.23) ============ ============
9. OTHER ASSETS
September 30, December 31, 2002 2001 $ $ Deferred development cost -- 993,765 Deferred financing costs -- -- Deferred contract(net of accumulated amortization of $195,275) 54,725 250,000 Cash surrender value of life insurance 47,963 43,945 --------- --------- 102,688 1,287,710 ========== ==========
Amortization for the three and nine months ended September 30, 2002 amounted to $153,895 and $418,951 respectively. Amortization for the year ended December 31, 2001 amounted to $510,038. 10. BANK INDEBTEDNESS i) September 30, 2002 At September 30, 2002, the balance of the revolving line of credit was $4,980,000 including an overdraft of approximately $650,000. The revolving line of credit provided for a maximum borrowing amount of $4,330,000 at variable interest rates based on eligible accounts receivable. The revolving line of credit agreement requires the Company to meet various restrictive covenants, including a senior debt to EBITDA ratio, debt service coverage ratio, debt to tangible net worth ratio and certain other covenants. At September 30, 2002 and thereafter, the Company was not in compliance with the covenants contained in the revolving line of credit agreement. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) On July 1, 2002 and as amended on August 1, 2002, August 15, 2002, September 1, 2002, September 16, 2002, September 30, 2002, October 15, 2002, and November 15, 2002, the company entered into a Forbearance and Modification Agreement with its senior lender, Bank One whereby the Bank agreed to forebear from exercising its rights and remedies against the company as a result of its violation of certain loan covenants, until the period ending November 30, 2002. Under the terms of the agreement, the Bank is entitled to forbearance fees and payment of related legal fees and expenses. As of November 19, 2002, the Bank has charged the company $204,000 in forbearance fees and $18,000 in legal fees. The interest rate on the revolving line facility was increased to prime plus 3%. The company has continued to borrow from the revolving line facility subject to eligible accounts receivables as monitored weekly by the Bank. In the event that the company defaults under the agreement including the failure to make payment when due, the Bank is entitled to exercise any and all of its security rights including foreclosing on collateral. Bank One has agreed to extend the expiration of the Forbearance and Modification Agreement until November 30, 2002 to allow the company's new lender complete the financing arrangement required to purchase Bank One's debt and security. In addition, Bank One has agreed to accept a $700,000 discount on the payoff of its indebtedness. ii) December 31, 2001 At December 31, 2001, the Company had $4,870,000 outstanding with Bank One. The revolving line of credit provided for a maximum borrowing amount of $4,760,000 at variable interest rates based on eligible accounts receivable. At December 31, 2001, the Company had an overdraft of $110,000. The Company does not have an authorized overdraft facility with Bank One, however the bank has allowed an overdraft of up to $500,000 on a regular basis for approximately ten weeks. At December 31, 2001 and thereafter, the Company was not in compliance with the covenants contained in the revolving line of credit agreement. As a result of the default on the loan covenants governing our credit line facility, Bank One restricted our repayment of certain subordinated loans and notes payable which affected payments to the Business Development Bank of Canada, Roger Walters and Denise Dunne-Fushi. 11. LONG-TERM DEBT i) September 30, 2002 At September 30, 2002, the Company had $400,652 in subordinated debt outstanding to the Business Development Bank of Canada. The loan agreements require the Company to meet a certain working capital ratio. At September 30, 2002 and thereafter, the Company was not in compliance with the covenant contained in the loan agreements. On September 27, 2002, the company received a notice of default demanding repayment of the loans in full and the BDC's intention to enforce its security if repayment was not made within 10 days. On October 7, 2002, the BDC agreed to extend the stay of the demand period and on November 4, 2002 accepted a proposal from Morrison Financial to purchase its debt and security at a 75% discount. The purchase will close concurrently with the syndicated financing arrangement with Morrison Financial, the repayment of Bank One and the first tranche of the senior convertible debenture. In May 2002, the company secured a loan of $259,375 from an individual, Terry Lyons which was secured by the company's IRS refund. The company paid a placement fee of 10% to Mr. Lyons. Although the company received its IRS refund in July 2002, Mr. Lyons agreed to an extension of the loan until October 31, 2003. The loan is payable in twelve monthly payments of $21,613 beginning November 30, 2002 and bears interest at 30% per annum. ii) December 31, 2001 At December 31, 2001, the Company had $419,079 in subordinated debt outstanding to the Business Development Bank of Canada. At December 31, 2001 and thereafter, the Company was not in compliance with the covenant contained in the loan agreements. The Business Development Bank of Canada agreed to postpone principal repayment of its subordinated loans until March 2002. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS)
September 30, December 31, 2002 2001 $ $ a) Included therein: Several loans with Business Development Bank of Canada ("BDC") secured by a general security agreement at various interest rates and royalties. 400,652 419,079 A loan with T. Lyons payable in 12 monthly payments of $21,613 beginning November 30, 2002 259,350 -- and bearing interest at 30% per annum. A loan with Bank One that was payable in 19 remaining monthly payments of $13,889 with interest at 6% at December 31, 2001. In March 2002, this loan was paid in full. -- 263,889 Various capital leases with various payment terms and interest rates 328,249 427,749 ---------- ---------- 988,251 1,110,717 Less: current portion 807,049 528,285 ---------- ---------- $ 181,202 $ 582,432 ========== ==========
b) Future principal payments obligations as at September 30, 2002, were as follows: 2002 $ 454,979 2003 397,386 2004 127,332 2005 8,554 2006 -- ---------- 988,251 ========== c) Interest expense with respect to the long-term debt for the three months ended September 30, 2002 amounted to $52,835. Interest expense related to long-term debt was $142,236 for the nine months ended September 30, 2002 and $99,651 for the year ended December 31, 2001. d) Pursuant to the BDC loan agreement, BDC had the option to acquire 22,122 common stock for an aggregate consideration of $1. The fair market value of these options at the time of issuance was $62,393 ($2.82 per option). The imputed discount on these options has been amortized over the term of the loan as interest and was fully amortized prior to January 1, 1999. The options were exercised in July 2001. 12. NOTES PAYABLE On August 1, 2002, the company restructured its note payable to Roger Walters, reducing the principal from $675,000 to $240,000 in consideration of the issuance of 1,000,000 shares of its common stock. The company agreed to issue and register the shares upon obtaining shareholder approval of an amendment to its Articles of Incorporation increasing its authorized capital stock. Principal payments of $4,000 will be made monthly and started September 1, 2002 until August 1, 2007. This loan is non-interest bearing. The company agreed to price protection on the 1,756,655 shares that were issued to Mr. Walters in January 2002. In the event that the bid price is less than $.27 per share when Mr. Walters seeks to sell his shares in an open market transaction, the Company will be obligated to issue additional shares of unregistered common stock with a value equal to the difference between $.27 per share and the closing bid price to a floor of $.14 per share. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) On August 1, 2002, the company restructured its note payable to Denise Dunne-Fushi, reducing the principal from $1,740,536 to $600,000 in consideration of the issuance of 3,000,000 shares of its common stock. The company agreed to issue and register the shares upon obtaining shareholder approval of an amendment to its Articles of Incorporation increasing its authorized capital stock. Principal payments of $10,000 per month will begin November 1, 2002 bearing 5% interest until October 1, 2007. In addition, the company agreed to cover the monthly expense associated with Ms. Dunne-Fushi's family health benefits and vehicle lease for a period of four years.
September 30, December 31, 2002 2001 $ $ Note Payable to Roger Walters 236,000 750,000 Note Payable to Denise Dunne 600,000 1,740,000 ---------- ---------- 836,000 2,490,000 Less: current portion 168,000 150,000 ---------- ---------- $ 668,000 $2,340,000 ========== ==========
c) Capital repayments as at September 30, 2002 2002 32,000 2003 168,000 2004 168,000 2005 168,000 2006 168,000 2007 132,000 ---------- $ 836,000 ========== 13. CAPITAL STOCK a) Authorized 100,000,000 Common stock, no par value (30,000,000 at December 31, 2001) 1,000,000 Preferred stock, issuable in series, rights to be determined by the Board of Directors b) Issued On June 8, 1999, the company was successful in its Initial Public Offering. 1,100,000 common stock were issued at an issuance price of $5.00 per share. Net proceeds received, after all costs, was $3,442,683. The company trades on Nasdaq under the trading symbol "THTH". As part of the Initial Public Offering, the underwriters exercised the over- allotment, resulting in 107,000 common stock being issued for net proceeds of $465,000. Deferred costs of $1,351,365, which were incurred as part of the completion of the Initial Public Offering, have been applied against the proceeds raised by the offering, and are included in the net proceeds. On June 30, 1999, 163,767 common stock were issued in conjunction with the acquisition of Cad Cam Inc., with a carrying value of $500,000. During 2000, the company effected two acquisitions accounted for as pooling of interest and therefore the capital stock of the company outstanding at January 1, 1999 and December 31, 1999 have been restated to reflect the aggregate capital stock and shareholder equity amounts as follows: # $ Original Balance as of December 31, 1998 1,717,875 1,448,368 Issuance of Shares for pooling of interest 777,260 344,576 --------- --------- Revised Balance as of December 31, 1998 2,495,135 1,792,944 ========= ========= THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) As part of the acquisition of ObjectArts Inc., the company issued 196,800 common shares for a total consideration of $837,151 on the conversion of debt to common shares. On April 25, 2000, 133,333 common stock were issued for the purchase of MicroTech Professionals Inc., for a total consideration of $500,000. During 2000, 300,000 common stock were issued as partial consideration for the purchase of shares of E-Wink Inc. for a value of $975,000. On August 22, 2000, 1,063,851 shares of common stock and 560,627 warrants were issued in a private placement for net proceeds of $2,333,715 (gross proceeds of $2,681,600). During 2000, 3,533,111 common stock were issued for services rendered totaling $3,160,288. An amount of $110,000 has been included in the acquisition of MicroTech and the balance of $3,050,288 has been included in financing expenses as of December 31, 2000. During 2000, 1,694,343 common stock were issued on the conversion of Preferred Stock. The company has issued 1,800,000 common shares of the company in consideration of services rendered related to the acquisition of various subsidiaries. These shares are included in common stock issued in consideration of services in the amount of $1,125,000 and have been included in Acquisition costs and financing expenses for December 31, 2000. On September 13, 2000, the Company. entered into an agreement with Burlington Capital Markets Inc. to aid the company in further acquisitions. A total of 425,000 common shares has been reflected as issued for an aggregate cost of $717,250. This amount has been expensed in the year ended December 31, 2000 and is included in Acquisition costs and financing expenses. During January 2001, the Company agreed to issue 250,000 warrants to acquire shares of the company at $1.50 and to re-price a total of 330,693 options to an exercise price of $1.00. In consideration of the foregoing, a total of 275,000 shares were issued for an amount of $275,000 in cash. The terms of the warrants are indicated in note 13(e). The value of the repricing of the warrants and the new warrants issued have been treated as the part of the allocation of the proceeds on the issuance of the common stock. On June 6, 2001, the Company amended its Articles of Incorporation to increase its authorized common stock from 15,000,000 to 30,000,000. During the year December 31, 2001, the Company issued 400,000 shares of its common stock in consideration of $203,000 in cash. During the year ended December 31, 2001, the Company issued 30,632 shares of its common stock in consideration of legal services, 300,000 shares of its common stock in consideration of investment banking services, 596,667 shares to reduce common stock payable of $709,005, and 93,883 shares in settlement of accounts payable. During the three months ended March 31, 2002, the Company issued 588,235 shares of its common stock as payment of an executive bonus, 1,756,655 shares to reduce common stock payable of $474,297, and 665,517 shares in settlement of accounts payable. During the three months ended June 30, 2002, the Company issued 250,000 shares of its common stock in consideration of public relations services, and 181,818 shares of its common stock in consideration of marketing and communications services. On May 24, 2002, the company entered into a loan agreement with Tazbaz Holdings Inc., an Ontario Corporation. Pursuant to the agreement, Tazbaz securitized an overdraft position of the company with Bank One in the amount of $650,000 in consideration of an aggregate of 5,000,000 shares of its common stock to be issued upon an amendment to the company's Articles of Incorporation permitting an increase in the company's authorized capital stock. On June 24, 2002, the company entered into consulting agreements with each of Mark Young and George Georgiou pursuant to which Messrs. Young and Georgiou shall perform consulting services with respect to corporate and debt restructuring. In consideration for such services the company issued 2,250,000 and 1,000,000 shares of its common stock to Messrs. Young and Georgiou, respectively. Pursuant to the agreement the company registered such shares of common stock under an S-8 registration statement. During the three months ended September 30, 2002, the Company issued 158,635 shares of its common stock in consideration of legal services and 1,569,631 shares in settlement of accrued liabilities. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) On October 16, 2002, the Company amended its Articles of Incorporation to increase its authorized common stock from 30,000,000 to 100,000,000. c) Liabilities payable in common stock During the year ended December 31, 2001, the company issued 316,667 shares to reduce a note payable of $625,000 to Denise Dunne related to the purchase of MicroTech Professionals Inc. The company also issued 280,000 shares in relation to a settlement with an Njoyn employee. The balance at December 31, 2001, represents $474,297 to Roger Walters in settlement of a note payable, and $225,000 to Denise Dunne also in settlement of a note payable. During the three months ended March 31, 2002, the company issued 1,756,655 shares to reduce a note payable of $474,297 to Roger Walters related to the purchase of CadCam Inc. The balance at June 30, 2002 represents $225,000 to Denise Dunne in settlement of a note payable. During the three months ended September 30, 2002, the company converted $435,000 of its note payable to Roger Walters for consideration of 1,000,000 shares and $1,140,536 of its note payable to Denise Dunne for consideration of 3,000,000 shares. The shares were issued in October 2002. The balance at September 30, 2002 represents $435,000 to Roger Walters and $1,365,536 to Denise Dunne. d) Preferred Stock On December 30, 1999, 15,000 shares of series A, 8% cumulative, convertible, preferred stock, no par value were issued in a private placement for gross proceeds of $1,500,000. The preferred stock are convertible into common stock at the option of the holders under certain conditions, at any time after the effective date of the registration statement. The conversion price will be based on the trading price at December 30, 1999 or 80% of the average of the ten trading days immediately preceding the conversion of the respective shares of Series A, preferred stock. The stockholders of the Series A, 8% cumulative, convertible stock are entitled to receive preferential cumulative quarterly dividends in cash or shares at a rate of 8% simple interest per annum on the stated value per share. The intrinsic value of the conversion price at date of issue was reflected as a dividend of $138,000. At any time after the effective date of the registration statement, Thinkpath Inc. has the option to redeem any or all of the shares of Series A, 8% cumulative, convertible, preferred stock by paying to the holders a sum of money equal to 135% of the stated value of the aggregate of the shares being redeemed if the conversion price is less than $2.00. Thinkpath Inc. holds the option to cause the investors in the December 30, 1999 placement offering to purchase an additional $500,000 worth of Series A, 8% cumulative, convertible, preferred stock upon the same terms as described above. This right was exercised in July, 2000. On April 16, 2000, 2,500 shares of Series A, 8% cumulative, convertible, preferred stock, no par value were issued in a private placement for gross proceeds of $250,000. The proceeds have been reduced by any issue expenses. On April 16, 2000, 1,500 shares of Series B, 8% cumulative, convertible, preferred stock, no par value were issued in a private placement for gross proceeds of $1,500,000. The proceeds have been reduced by any issue expenses. On July 7, 2000, 5000 shares of series A, 8% cumulative, convertible, preferred stock, no par value were issued in a private placement for gross proceeds of $500,000. The proceeds have been reduced by any issue expenses. The preferred stock are convertible into common stock at the option of the holders under certain conditions, at any time after the effective date of the registration statement. As of December 31, 2000, 1,050 Series A preferred stock and 750 Series B preferred stock were not yet converted into common stock. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) Pursuant to a share purchase agreement dated April 18, 2001, the Company issued 1,105 shares of Series C 7% Cumulative Convertible Preferred Stock (Series C Preferred Stock). Each share of Series C Preferred Stock has a stated value of $1,000 per share. The shares of Series C Preferred Stock are convertible into shares of the Company's common stock at the option of the holders, at any time after issuance until such shares of Series C Preferred Stock are manditorily converted or redeemed by the Company, under certain conditions. The Company is required to register 200% of the shares of common stock issuable upon the conversion of the 1,105 shares of Series C Preferred Stock. In addition, upon the effective date of such registration statement, the Company is obligated to issue to the holders of Series C Preferred Stock an aggregate of 500 shares of Series C Preferred Stock in consideration for $500,000, under certain conditions. The holders of the shares of Series C Preferred Stock are entitled to receive preferential dividends in cash, on a quarterly basis commencing on June 30, 2001, out of any of the Company's funds legally available at the time of declaration of dividends before any other dividend distribution will be paid or declared and set apart for payment on any shares of the Company's common stock, or other class of stock presently authorized, at the rate of 7% simple interest per annum on the stated value per share plus any accrued but unpaid dividends, when as and if declared. The Company has the option to pay such dividends in shares of the Company's common stock to be paid (based on an assumed value of $1,000 per share) in full shares only, with a cash payment equal to any fractional shares. The number of shares of the Company's common stock into which the Series C Preferred stock shall be convertible into that number of shares of common stock equal to (i) the sum of (A) the stated value per share and (B) at the holder's election, accrued and unpaid dividends on such share, divided by (ii) the Conversion Price". The "Conversion Price" shall be the lesser of (x) 87.5% of the average of the 5 lowest daily volume weighted average prices of the Company's common stock during the period of 60 consecutive trading days immediately prior the date of the conversion notice; or (y) 90% of the average of the daily volume weighted average prices during the period of the 5 trading days prior to the applicable closing date ($.4798 with respect to the 1,105 shares of Series C 7% Preferred Stock issued and outstanding). The Conversion Price is subject to certain floor and time limitations. At any time prior to October 24, 2001, the Company may, in its sole discretion, redeem in whole or in part, the then issued and outstanding shares of Series C Preferred Stock at a price equal to $1,150 per share, plus all accrued and unpaid dividends, and after October 24, 2001 at a price equal to $1,200 per share, plus all accrued and unpaid dividends. During the year ended December 31, 2001, the Company issued 3,864,634 common stock on the conversion of 1,050 Series A preferred stock, 750 Series B preferred stock and 285 Series C preferred stock. The Company paid dividends of $723,607 on the conversions. During the three months ended March 31, 2002, the Company issued 541,593 common stock on the conversion of 65 Series C preferred stock. The Company paid dividends of $21,617 on the conversions. During the three months ended June 30, 2002, the Company issued 3,253,534 shares of its common stock on the conversion of 280 Series C preferred stock. The Company paid dividends of $84,506 on the conversions. During the three months ended June 30, 2002, the company received four conversion notices for an aggregate of 435 shares of Series C Preferred Stock requiring the issuance of approximately 5,421,386 shares of its common stock. The company is unable to honor these conversions until it files an amendment to its Articles of Incorporation increasing its authorized capital stock, which amendment is subject to shareholder approval. The company has reflected the dividend on each of these conversions for a total of $51,687. On June 25, 2002, the company received letters from two of the holders of the Series C Preferred Stock demanding payment of an aggregate of $253,250 in liquidated damages as a result of a default of certain registration rights. The company believes that it has reached an oral agreement whereby such holders would forgo any liquidated damages. The proceeds received on the issue of Class C preferred shares have been allocated between the value of detachable warrants issued and the preferred shares outstanding on the basis of their relative fair values. Paid in capital has been credited by the value of the warrants and retained earnings charged for the amount of preferred dividends effectively paid. The conversion benefit existing at the time of issue of the preferred Class C shares has been computed and this amount has been credited to paid in capital for the Class C preferred shares and charged to retained earnings as dividends on the Class C preferred shares. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) e) Warrants On December 30, 1999, 475,000 warrants were issued in conjunction with the private placement of the Series A, preferred stock. They are exercisable at any time and in any amount until December 30, 2004 at a purchase price of $3.24 per share. These warrants have been valued at $1,091,606 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.33%. This amount has been treated as a cumulative effect adjustment to retained earnings. For purposes of earnings per share, this amount has been included with preferred share dividend in the 2000 financial statements. In connection with the Initial Public Offering, the underwriters received 110,000 warrants. They are exercisable at a purchase price of $8.25 per share until June 1, 2004. On April 16, 2000, we issued 50,000 warrants in connection with a private placement of Series A stock and 300,000 warrants on the issue of Class B preferred shares. The warrants were issued with a strike price of $3.71 and expire April 16, 2005. These warrants have been valued at $939,981 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.18%. This amount has been treated as a preferred share dividend in the 2000 financial statements. In connection with the private placement of Series B preferred stock 225,000 warrants were issued. They are exercisable at a purchase price of $3.58. These warrants have been valued at $533,537 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.13%. This amount has been treated as a preferred share dividend in the 2000 financial statements. In 2000, in connection with the purchase of the investment in E-Wink 500,000 warrants were issued. They are exercisable at a purchase price of $3.25 and expire March 6, 2005. These warrants have been valued at $1,458,700 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.50%. This amount has been treated as part of the cost of the E-Wink investment. In 2000, in connection with the private placement of August 22, 2000, 560,627 warrants were issued. They are exercisable at a purchase price of $2.46 and expire August 22, 2005. These warrants have been valued at $1,295,049 based on the Black Scholes model utilizing a volatility rate of 100% and a risk-less interest rate of 6.13%. This amount has been treated as an allocation of the proceeds on the common stock issuance. On January 26, 2001, the Company: (i) repriced warrants to purchase up to 100,000 shares of its common stock, which warrant was issued to a certain investor in our April 2000 private placement offering of Series B 8% Cumulative Preferred Stock, so that such warrant is exercisable at any time until April 16, 2005 at a new purchase price of $1.00 per share; (b) repriced warrants to purchase an aggregate of up to 280,693 shares of its common stock, which warrants were issued to the placement agent, certain financial advisors, and the placement agent's counsel in our August 2000 private placement offering of units, so that such warrants are exercisable at any time until August 22, 2005 at a new purchase price of $1.00 per share; and (c) issued warrants to purchase up to 250,000 shares of its common stock exercisable at any time and in any amount until January 26, 2006 at a purchase price of $1.50 per share. In February 2001, 150,000 of such warrants were exercised by KSH Investment Group, the placement agent in the Company's August 2000 private placement offering. The exercise prices of the revised and newly issued warrants are equal to, or in excess of, the market price of our common stock on the date of such revision or issuance. Following verbal agreements in December 2000, on January 24, 2001, the company signed an agreement with The Del Mar Consulting Group, a California corporation, to represent it in investors' communications and public relations with existing shareholders, brokers, dealers and other investment professionals. The company issued a non-refundable retainer of 400,000 shares to Del Mar and are required to pay $4,000 per month for on-going consulting services. In addition, Del Mar has a warrant to purchase 400,000 shares of common stock at $1.00 per share and 100,000 shares at $2.00 which expires January 24, 2005 and which are exercisable commencing August 1, 2001. As the agreement to issue the non- refundable retainer was reached in December 2000, the 400,000 shares with a value of $268,000 has been included in the shares issued for services rendered and has been included in financing expenses for December 31, 2000. The commitment to issue the non-refundable deposit was effected in December 2000. The value of the warrants of $216,348 has been included in paid in capital in January 2001 and the expense was reflected over the six month period ending August 1, 2001. In April 2001, the warrants were cancelled and new warrants were issued which are exercisable at $0.55. 200,000 of the warrants are exercisable commencing April 2001 and the balance are exercisable commencing August 1, 2001. The value of the change in the warrants of $29,702 has been included in the paid in capital in April 2001 and the additional expense was amortized in the period ending August 1, 2001. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) During the year ended December 31, 2001, the Company issued 723,436 warrants to the Series C Preferred Stock investors of which 663,484 have a strike price of $0.54 and expire on April 18, 2005. The balance of 59,952 have a strike price of $0.63 and expire on June 8, 2005. During the year ended December 31, 2001, the company issued 22,122 shares to the Business Development Bank of Canada on the exercise of warrants at $1.00. During the three months ended June 30, 2002, the company issued 200,000 warrants. The warrants were issued to Johnston & Associates, LLC, a Washington company, to provide strategic governmental relations counseling and marketing representation before the Department of Defense, Congress and targeted companies in connection with marketing the services of the Company's engineering operations related to specific government contracts. The warrants were issued at the fair market value on the date of grant and will vest at 50% per year. In addition, Johnston & Associates will be compensated at a rate of $10,000 per month for twelve months from April 2002 until March 31, 2003. f) Stock Options The company had outstanding stock options issued in conjunction with its long-term financing agreements for 22,122 common stock which were exercised in July 2001, the cost of which has been expensed prior to January 1, 1999, and additional options issued to a previous employee of the company for 200,000 shares exercisable at $2.10, of which 18,508 were exercised during 2000. The balance of 181,492 are outstanding. During 1999, 250,500 options to purchase shares of the company were issued to related parties. The options are exercisable at $3.19. In connection with the acquisition of Cad Cam Inc. 100,000 options to purchase shares of the company were delivered in quarterly installments of 25,000 options each, starting January 1, 2000. The exercise amounts ranged from $2.12 to $3.25. The exercise price was amended to $1.00 and these options will be exercisable between April 4, 2001 to 2004. The cost of re-pricing of these options totaling $100,000 has been recorded in Acquisition costs and financing expenses for the year ended December 31, 2000. In July 1999, the directors of the company adopted and the stockholders approved the adoption of the company's 1998 Stock Option Plan. In May 2000, the directors approved the adoption of the 2000 Stock Option Plan. In June 2001, the directors approved the adoption of the 2001 Stock Option Plan. Each of the plans provides for the issuance of 435,000 options. In October 2002, the directors of the company adopted and the stockholders approved the adoption of the company's 2002 Stock Option Plan which provides for the issuance of 6,500,000 options. The plans are administrated by the Compensation Committee or the Board of Directors, which determine among other things, those individuals who shall receive options, the time period during which the options may be partially or fully exercised, the number of common stock to be issued upon the exercise of the options and the option exercise price. The plans are effective for a period of ten years and options may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide their skills and expertise to the company. Options granted under the plans generally require a three-year vesting period, and shall be at an exercise price that may not be less than the fair market value of the common stock on the date of the grant. Options are non-transferable and if a participant ceases affiliation with the company by reason of death, permanent disability or retirement at or after age 65, the option remains exercisable for one year from such occurrence but not beyond the option's expiration date. Other types of termination allow the participant 90 days to exercise the option, except for termination for cause, which results in immediate termination of the option. Any unexercised options that expire or that terminate upon an employee's ceasing to be employed by the company become available again for issuance under the plans, subject to applicable securities regulation. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) The plans may be terminated or amended at any time by the Board of Directors, except that the number of common stock reserved for issuance upon the exercise of options granted under the plans may not be increased without the consent of the stockholders of the company. Included in the options granted in 2000 were 260,000 options issued to related parties in December 2000. The options are exercisable at $0.70 and expire December 2005. 14. RESTRUCTURING COSTS At the end of December 31, 2001 the Company had a restructuring reserve balance of $79,118 as a result of certain of the Company's actions to better align its cost structure with expected revenue growth rates. The restructuring activities related to the closure of one training location in London, Ontario resulting in costs to sever 3 employees with long-term contracts until December 2002 and the lease commitment for the premises in London Ontario. These long-term contracts do not require the employees to provide services until the date of involuntary termination. Other employees at the London location, without contracts, were terminated during March 2001 and April 2001. In addition, in February 2001, the company began to close down one of its research and development (R&D) offices in Toronto. The company continued to terminate employees until April 2001. The remaining accrual will be relieved throughout fiscal 2002 as severance payments are completed. Details of the restructuring costs and reserve balance is as follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance non/cash March 31, 2002 Costs September 30, 2002 Severance packages London-Training Cash 37,646 -- (37,646) -- Toronto-R&D Cash -- -- -- -- Lease cancellations London-Training Cash -- -- -- -- Toronto-R&D Cash -- -- -- -- ------- ------- ------- ------- Commitments 37,646 -- (37,646) -- ======= ======= ======= =======
15. DEFERRED INCOME TAXES AND INCOME TAXES a) Deferred Income Taxes The components of the future tax liability classified by source of temporary differences that gave rise to the benefit are as follows: September 30, 2002 $ Accounting amortization in excess of tax amortization 9,875 Losses available to offset future income taxes 3,910,483 Share issue costs 532,405 Adjustment cash to accrual method (496,879) Investment tax credit -- --------- 3,955,884 Less: Valuation allowance 4,106,264 --------- (150,380) ========= THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) As part of the acquisitions of Cad Cam Inc. and MicroTech Professionals Inc., there was a change of control which resulted in the subsidiaries being required to change from the cash method to the accrual method of accounting for income tax purposes. b) Current Income Taxes Current income taxes consist of: September 30, 2002 $ Amount calculated at Federal and Provincial statutory rates (1,269,260) ---------- Increase (decrease) resulting from: Permanent differences 288,805 Valuation allowance 975,310 ---------- 1,264,115 ---------- Current income taxes (5,145) ========== Issue expenses totaling approximately $1,300,000 may be claimed at the rate of 20% per year until 2005. To the extent that these expenses create a loss, the loss is available to be carried forward for seven years from the year the loss is incurred. As the US subsidiaries have been acquired by a non-US entity, the taxable income will be increased by approximately $1,900,000 over the next three years as the company is required to change its taxation method from the cash basis to the accrual basis. The company has not reflected the benefit of utilizing non-capital losses totaling approximately $10,000,000 in the future as a deferred tax asset as at September 30, 2002. As at the completion of the September 30, 2002 financial statements, management believed it was more likely than not that the results of future operations would not generate sufficient taxable income to realize the deferred tax assets. 16. OTHER COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) for the three months ended September 30, 2002:
Before Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------ ---------- ------ Foreign currency translation adjustments (1,604) -- (1,604) Adjustment to market value (250,620) -- (250,620) --------- ------- --------- Other comprehensive income (loss) (252,224) -- (252,224) ========= ======== =========
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) Comprehensive income (loss) for the three months ended June 30, 2002:
Before Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------ ---------- ------ Foreign currency translation adjustments 61,005 -- 61,005 Adjustment to market value -- -- -- --------- ------- --------- Other comprehensive income (loss) 61,005 -- 61,005 ========= ======== =========
Comprehensive income (loss) for the three months ended March 31, 2002:
Before Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------ ---------- ------ Foreign currency translation adjustments (277,058) -- (277,058) Adjustment to market value -- -- -- --------- ------- --------- Other comprehensive income (loss) (277,058) -- (277,058) ========= ======== =========
Comprehensive income (loss) for the year ended December 31, 2001:
Before Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------ ---------- ------ Foreign currency translation adjustments 209,506 - 209,506 Adjustment to market value (230,643) 69,193 (161,450) --------- ------- --------- Other comprehensive income (loss) (21,137) 69,193 48,056 ========= ======== =========
The foreign currency translation adjustments are not currently adjusted for income taxes since the company is situated in Canada and the adjustments relate to the translation of the financial statements from Canadian dollars into United States dollars done only for the convenience of the reader. 17. DISCONTINUED OPERATIONS Effective March 1, 2002, the Company sold its technology division, Njoyn Software Incorporated to Cognicase Inc., a Canadian company. Net proceeds after broker fees were $1,320,000 of which the company received $800,000 in cash and $550,000 worth of unrestricted common shares on closing. The shares were sold on March 11, 2002 for value of $524,673. As part of the transaction, Cognicase assumed all of the staff in the Company's technology division. The company will not have future revenues from either its Njoyn or Secondwave products and therefore the technology operations have been reported as discontinued. Technology revenue for the nine months ended September 30, 2002 was $40,000 compared to $630,000 for the nine months ended September 30, 2001. The operating loss from the technology division for the three months ended September 30, 2002 was $17,000 compared to income of $37,000 for the nine months ended September 30, 2001. The operating loss from the technology division for the nine months ended September 30, 2002 was $140,000 compared to a loss of $30,000 for the nine months ended September 30, 2001. On disposal, Njoyn had approximately $950,000 in assets consisting primarily of deferred development charges and approximately $30,000 in liabilities consisting primarily of capital lease obligations. The gain on disposal of $497,579 has been reflected in the Income (loss) from discontinued operations. No income taxes have been reflected on this disposition as the sale of the shares gives rise to a capital loss, the benefit of which, is more likely than not to be realized. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) 18. SEGMENTED INFORMATION a) Sales by Geographic Area
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 ------------------ ------------------ ------------------ ------------------ $ $ $ $ Canada 3,557,058 4,041,929 10,283,684 12,214,153 United States of America 3,145,976 4,312,331 11,202,079 16,379,245 ---------- ---------- ---------- ---------- 6,703,034 8,354,260 21,485,763 28,593,398 ========== ========== ========== ==========
b) Net Income (Loss) by Geographic Area
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 ------------------ ------------------ ------------------ ------------------ $ $ $ $ Canada (1,384,584) (818,003) (1,948,450) (2,724,992) United States of America (756,382) (810,837) (1,199,291) (1,013,178) ---------- ---------- ---------- ---------- (2,140,966) (1,628,840) (3,147,741) (3,738,170) ========== ========== ========== ==========
c) Identifiable Assets by Geographic Area Nine Months Ended Year Ended September 30, 2002 December 31, 2001 -------------------- -------------------- $ $ Canada 5,036,291 4,995,715 United States of America 8,247,752 12,179,263 ---------- ---------- 13,284,043 17,174,978 ========== ==========
d) Revenue and Gross Profit by Operating Segment
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 ------------------ ------------------ ------------------ ------------------ $ $ $ $ Revenue IT Recruitment 3,587,881 4,208,683 10,471,735 12,979,100 Tech Pubs and Engineering 2,497,900 3,001,612 8,607,860 10,200,817 IT Documentation 340,719 629,771 1,246,580 2,848,940 Training 276,534 514,194 1,159,588 2,564,541 ---------- ---------- ---------- ---------- 6,703,034 8,354,260 21,485,763 28,593,398 ========== ========== ========== ========== Gross Profit IT Recruitment 420,404 919,223 1,476,289 3,511,179 Tech Pubs and Engineering 766,382 797,608 2,702,811 2,814,622 IT Documentation 77,586 156,646 313,622 1,158,589 Training 153,794 227,841 587,739 1,402,506 ---------- ---------- ---------- ---------- 1,418,166 2,101,318 5,080,461 8,886,896 ========== ========== ========== ==========
e) Revenues from Major Customers The consolidated entity had the following revenues from major customers: For the three months ended September 30, 2002 one customer had sales of $2,550,000, representing approximately 38% of total revenues. For the nine months ended September 30, 2002, one customer had sales of $6,890,000, representing approximately 32% of total revenues. For the year ended December 31, 2001, one customer had sales of $6,800,000 which representing approximately 18% of total revenues. f) Purchases from Major Suppliers There were no significant purchases from major suppliers. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) 19. EARNINGS PER SHARE The company has adopted Statement No. 128, Earnings Per Share, which requires presentation, in the consolidated statement of income, of both basic and diluted earnings per share.
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001 ------------------ ------------------ ------------------ ------------------ Average common stock outstanding 28,704,219 15,093,564 23,717,204 14,277,356 Average common stock issuable -- -- -- -- ---------- ---------- ---------- ---------- Average common stock outstanding assuming dilution 28,704,219 15,093,564 23,717,204 14,277,356 ========== ========== ========== ==========
The outstanding options and warrants were not included in the computation of the fully diluted earnings per common share as the effect would be anti-dilutive. The earnings per share calculation (basic and fully diluted) does not include any common stock for common stock payable as the effect would be anti-dilutive. 20. STOCK OPTION PLANS a) Options outstanding
OPTIONS WEIGHTED AVERAGE EXERCISE PRICE Options outstanding at December 31, 2000 1,419,617 2.21 Options granted to key employees and directors 35,000 .68 Options granted to consultant 50,000 .70 Options exercised during the year (22,125) .01 Options forfeited during the year (257,500) 3.21 Options expired during the year - --------- Options outstanding at December 31, 2001 1,224,992 ========= Options granted to key employees and directors - Options granted to consultant - Options exercised during the period - Options forfeited during the period (27,500) 3.22 Options expired during the period - --------- Options outstanding at March 31, 2002 1,197,492 ========= Options granted to key employees and directors - Options granted to consultant - Options exercised during the period - Options forfeited during the period (45,000) 3.22 Options expired during the period - --------- Options outstanding at June 30, 2002 1,152,492 ========= Options granted to key employees and directors - Options granted to consultant - Options exercised during the period - Options forfeited during the period (24,500) 3.22 Options expired during the period - --------- Options outstanding at September 30, 2002 1,127,992 =========
THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) Options exercisable December 31, 2000 714,117 1.95 Options exercisable December 31, 2001 1,059,659 1.75 Options available for future grant December 31, 1999 184,500 Options available for future grant December 31, 2000 -- Options available for future grant December 31, 2001 261,500
During the three months ended September 30, 2002, 24,500 options exercisable at between $3.19 and $3.25 have been forfeited by employees following their termination and the expiry of their option periods to November 14, 2002. During the three months ended June 30, 2002, 45,000 options exercisable at between $3.19 and $3.25 have been forfeited by employees following their termination and the expiry of their option periods to August 16, 2002. During the three months ended March 31, 2002, 27,500 options exercisable at between $3.19 and $3.25 have been forfeited by employees following their termination and the expiry of their option periods to April 16, 2002. b) Range of Exercise Prices at December 31, 2001
Outstanding Weighted Options Options Weighted Options Average Outstanding exercisable Average Remaining Average Exercise Life Exercise Price Price $2.10 - $3.25 679,992 2.73 years $2.88 514,659 $2.80 $1 and under 545,000 3.06 years $0.75 545,000 $0.75
c) Pro-forma net income The company applies Accounting Principles Board Opinion No. 25, "Accounting of Stock Issued to Employees" and related interpretation in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for such plans. Had compensation cost been determined, based on the fair value at the grant dates for options granted during 2001, 2000 and 1999, consistent with the method of SFAS No.123, "Accounting for Stock-Based Compensation," the Company's pro forma net earnings and pro forma earnings per share for the years ended December 31, 2001 and 2000 would have been as follows: 2001 AS 2001 REPORTED PRO FORMA -------- --------- Net loss (9,683,442) (10,128,562) Net loss after preferred share dividends (10,412,182) (10,857,302) Basic and fully diluted Loss per share (0.65) (0.68) loss per share after preferred dividends (0.70) (0.73) d) Black Scholes Assumptions The fair value of each option grant used for purposes of estimating the pro forma amounts summarized above is estimated on the date of grant using the Black-Scholes option price model with the weighted average assumptions shown in the following table: 2001 GRANTS ----------- Risk free interest rates 4.76% Volatility factors 100% Weighted average expected life 4.90 years Weighted average fair value per share .74 Expected dividends -- THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) 21. SUPPLEMENTAL INFORMATION a) MicroTech Professionals Inc. acquisition The following represents that results of operations as though MicroTech had been acquired as of January 1, 2000 and as of January 1, 1999. December 31, 2000 December 31, 1999 Revenue 45,788,302 32,173,548 Net income (8,483,765) 402,430 Earnings per share (2.17) .08 Earnings per share - fully diluted (2.17) .07 b) TidalBeach Inc. pooling of interests The results of operations include the following amounts for the period prior to the combination of TidalBeach Inc. on November 15, 2000 Revenue $ 657,715 Net income $ 158,039 There are no inter-company transactions and no adjustments have been required to adopt the same accounting practices or combine the net income of the combining companies Reconciliation of revenue and net income (loss) previously reported
December 31, 1999 Previously ObjectArts TidalBeach Restated Reported Revenue 19,822,861 6,599,496 610,078 27,032,435 Net income(loss) 228,720 (251,128) 17,085 (5,323)
22. CONTINGENCIES a) Lease Commitments Minimum payments under operating leases for premises occupied by the company and its subsidiaries offices, located throughout Ontario, Canada and the United States, exclusive of most operating costs and realty taxes, as at September 30, 2002 for the next five years are as follows: 2002 $ 204,418 2003 306,328 2004 273,270 2005 272,820 2006 270,570 Thereafter 1,082,280 --------- $2,409,686 ========== b) The Company is party to various lawsuits arising from the normal course of business and its restructuring activities. No material provision has been recorded in the accounts for possible losses or gains. Should any expenditure be incurred by the Company for the resolution of these lawsuits, they will be charged to the operations of the year in which such expenditures are incurred. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) 23. SUBSEQUENT EVENTS On July 1, 2002 and as amended on August 1, 2002, August 15, 2002, September 1, 2002, September 16, 2002, September 30, 2002, October 15, 2002, and November 15, 2002, the company entered into a Forbearance and Modification Agreement with its senior lender, Bank One whereby the Bank agreed to forebear from exercising its rights and remedies against the company as a result of its violation of certain loan covenants, until the period ending November 30, 2002. In the event that the company defaults under the agreement including the failure to make payment when due, the Bank is entitled to exercise any and all of its security rights including foreclosing on collateral. On August 13, 2002, the company received a commitment from Morrison Financial Services Limited for a syndicated financing arrangement that will provide the funding necessary to purchase Bank One's debt and security. The partners in the syndicate are Maple Partners America Inc., Morrison Financial Services Limited and MFI Export Finance Inc. Bank One has agreed to extend the expiration of the Forbearance and Modification Agreement until November 30, 2002 to allow the syndicate to complete the financing arrangement. In addition, Bank One has agreed to accept a $700,000 discount on the payoff of its indebtedness. The Business Development Bank of Canada has also agreed to sell its debt and security to the syndicated group with a discount on the payoff of $300,000. On October 4, 2002, the company's securities were delisted from The Nasdaq SmallCap Market, for failure to comply with the minimum bid price or net tangible assets requirements for continued listing, as set forth in Nasdaq's Marketplace Rule 4310(c)(4). The company also failed to meet the initial inclusion requirements under Nasdaq's Marketplace Rule 4310(c)(2)(A) including minimum stockholders' equity of $5 million, market capitalization of $50 million or net income of $750,000 (excluding extraordinary or non-recurring items) in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. On October 16, 2002, the company held its Annual General Meeting and Special Meeting of Shareholders where the following resolutions were passed: the election of the Board of Directors including Declan French, Kelly Hankinson, John Dunne, Arthur Marcus and Katherine Seto Evans; the appointment of Schwartz Levitsky Feldman LLP as the company's independent auditors for the ensuing year; the adoption of the company's 2002 Stock Option Plan; and, the amendment of the company's Articles of Incorporation to increase its authorized capital stock from 30,000,000 to 100,000,000. On October 15, 2002, the company signed a term sheet with Bristol Investment Fund, Ltd. and a syndicate of other investors to issue Senior Secured Convertible Debentures of up to $3,000,000 in multiple tranches. The first tranche of $800,000 will be issued upon signing of a definitive investment agreement and concurrently with the closing of the financing arrangement with Morrison Financial. The funds will be directed to Bank One and certain of the company's other creditors. On October 21, 2002, the company entered into a settlement agreement with Michael Carrazza, a former director, in the sum of $330,000 to be paid $50,000 on October 31, 2002 and $17,500 per month thereafter until paid in full, bearing interest at 9% per annum. This settlement was pursuant to a motion for summary judgment filed by Carrazza, which was granted in his favor in the sum of $264,602. In November 1998, the Company completed the acquisition of certain assets of Southport Consulting Co. from Carrazza, for an aggregate of $250,000 in cash and shares of the company's common stock. Carrazza instituted an action against the company in the Supreme Court of the State of New York, County of New York, Index No. 600553/01, alleging breach of contract and unjust enrichment and seeking at least $250,000 in damages. Specifically, Mr. Carrazza claimed that the company failed to deliver cash or stock to Mr. Carrazza under an asset purchase agreement, and that he was entitled to recovery of his attorneys' fees. The company filed a counterclaim against Mr. Carrazza, seeking $162,000 in damages, plus punitive damages and attorneys' fees, on the ground that Mr. Carrazza, as then president and sole stockholder of Southport Consulting Co., fraudulently induced the company into executing the asset purchase agreement by misrepresenting the value of the assets being purchased. On November 1, 2002, the company entered into a series of agreements with Thinkpath Training LLC, a New York company, for the purchase of certain assets of our New York training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC will assume the New York training staff, some assets and sublet the classroom facilities. THINKPATH INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 (AMOUNTS EXPRESSED IN US DOLLARS) 24. FINANCIAL INSTRUMENTS a) Credit Risk Management The company is exposed to credit risk on the accounts receivable from its customers. In order to reduce its credit risk, the company has adopted credit policies which include the analysis of the financial position of its customers and the regular review of their credit limits. In some cases, the company requires bank letters of credit or subscribes to credit insurance. b) Concentration of Credit Risk The company does not believe it is subject to any significant concentration of credit risk. Cash and short-term investments are in place with major financial institutions, North American Government, and major corporations. c) Interest Risk The long-term debt bears interest rates that approximate the interest rates of similar loans. Consequently, the long-term debt risk exposure is minimal. d) Fair Value of Financial Instruments The carrying value of the accounts receivable, bank indebtedness, and accounts payable on acquisition of subsidiary company approximates the fair value because of the short-term maturities on these items. The carrying amount of the long-term assets approximates the fair value of these assets. The fair value of the company's long-term debt is estimated on the quoted market prices for the same or similar debt instruments. The fair value of the long-term debt approximates the carrying value. 24. COMPARATIVE FIGURES Certain figures in the September 30, 2001 financial statements have been reclassified to conform with the basis of presentation used in September 30, 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and notes thereto and the other historical financial information of Thinkpath Inc. contained elsewhere in this Form 10-Q. The statements contained in this Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended including statements regarding Thinkpath Inc.'s expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include Thinkpath Inc.'s statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements included in this Form 10-Q are based on information available to Thinkpath Inc. on the date hereof, and Thinkpath Inc. assumes no obligation to update any such forward-looking statement. It is important to note that Thinkpath Inc.'s actual results could differ materially from those in such forward-looking statements. All dollar amounts stated throughout this Form 10-Q are in United States dollars unless otherwise indicated. Unless otherwise indicated, all reference to "Thinkpath," "us," "our," and "we," refer to Thinkpath Inc. and its subsidiaries. OVERVIEW We are a global provider of technological solutions and services in engineering knowledge management including design, drafting, technical publishing, e-learning and staffing. Our customers include Department of Defense contractors, aerospace, automotive and financial services companies, Canadian and American governmental entities and large multinational companies, including Lockheed Martin, General Dynamics, General Electric, General Motors, Ford Motors, Goldman Sachs, CIBC and EDS Canada Inc. CRITICAL ACCOUNTING POLICIES On December 12, 2001, the Securities and Exchange Commission issued FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, which encourages additional disclosure with respect to a company's critical accounting policies, the judgments and uncertainties that affect a company's application of those policies, and the likelihood that materially different amounts would be reported under different conditions and using different assumptions. Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. Certain of our accounting policies and estimates have a more significant impact on our financial statements than others, due to the magnitude of the underlying financial statement elements. Consolidation Our determination of the appropriate accounting method with respect to our investments in subsidiaries is based on the amount of control we have, combined with our ownership level, in the underlying entity. Our consolidated financial statements include the accounts of our parent company and our wholly-owned subsidiaries. All of our investments are accounted for on the cost method. If we had the ability to exercise significant influence over operating and financial policies of a company, but did not control such company, we would account for these investments on the equity method. Accounting for an investment as either consolidated or by the equity method would have no impact on our net income (loss) or stockholders' equity in any accounting period, but would impact individual income statement and balance sheet items, as consolidation would effectively "gross up" our income statement and balance sheet. However, if control aspects of an investment accounted for by the cost method were different, it could result in us being required to account for an investment by consolidation or the equity method. Under the cost method, the investor only records its share of the investee's earnings to the extent that it receives dividends from the investee; when the dividends received exceed the investee's earnings subsequent to the date of the investor's investment, the investor records a reduction in the basis of its investment. Under the cost method, the investor does not record its share of losses of the investee. Conversely, under either consolidation or equity method accounting, the investor effectively records its share of the investee's net income or loss, to the extent of its investment or its guarantees of the investee's debt. At September 30, 2002, all of our investments in non-related companies totaling $763,306 were accounted for using the cost method. Accounting for an investment under either the equity or cost method has no impact on evaluation of impairment of the underlying investment; under either method, impairment losses are recognized upon evidence of permanent losses of value. Revenue Recognition We recognize revenue in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, which has four basic criteria that must be met before revenue is recognized: - - Existence of persuasive evidence that an arrangement exists; - - Delivery has occurred or services have been rendered; - - The seller's price to the buyer is fixed and determinable; and, - - Collectibility is reasonably assured. Our various revenue recognition policies are consistent with these criteria. We have developed proprietary technology in two areas: human capital management and Web development. Njoyn is a Web-based human capital management system that automates and manages the hiring process. The revenue associated with providing this software is allocated to an initial set-up fee, customization and training fees as agreed with the customer and an ongoing monthly per user fee. The allocation of revenue to the various elements is based on our determination of the fair value of the elements as if they had been sold separately. The set-up fee and customization revenue is recognized upon delivery of access to the software with customization completed in accordance with milestones determined by the contract. Revenue for the training is recorded as the services are rendered and the ongoing monthly fee is recorded each calendar month. There is no additional fee charged to customers for hosting. Effective March 1, 2002, we sold our technology division, Njoyn Software Incorporated to Cognicase Inc, a Canadian company. As part of the transaction, Cognicase assumed all of the (eight employees) staff in our technology division and is contracting the services of our Chief Information Officer for a period of six months. There was no revenue from Njoyn for the three months ended September 30, 2002 and it represented less than 1% for the three months ended September 30, 2001. Revenue from Njoyn represented less than 1% of total revenue for the nine months ended September 30, 2002, and 2001. As a result of the sale to Cognicase, we will not have future revenues from Njoyn and the operations have been reported as discontinued. Our other proprietary technology, SecondWave, is a Web development product that allows companies to create, manage and automate their own dynamic, adaptive Web sites. The software learns from each visitor's behavior and targets his or her needs and interests with customized content and communications. We enter into contracts for the customization or development of SecondWave in accordance with the specifications of our customers. The project plan defines milestones to be accomplished and the costs associated with this project. These amounts are billed as they are accomplished and revenue is recognized as the milestones are reached. The work in progress for costs incurred beyond the last accomplished milestone is reflected at the period end. To date these amounts have not been material and have not been set up at the period ends. The contracts do not include any post-contract customer support. Additional customer support services are provided at standard daily rates, as services are required. There was no revenue from SecondWave for the three months ended September 30, 2002. Revenue from SecondWave represented less than 2% of total revenue for the three months ended September 30, 2001. Revenue from SecondWave represented less than 1% of total revenue for the nine months ended September 30, 2002 and 2% for the nine months ended September 30,2001. As part of the sale of Njoyn, Cognicase Inc. assumed all of our technology staff. As a result, we do not anticipate future revenues from SecondWave Inc. and the operations have been reported as discontinued. Carrying Value Goodwill and Intangible Assets Prior to January 1, 2002, our goodwill and intangible assets were accounted for in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement required us to evaluate the carrying value of our goodwill and intangible assets upon the presence of indicators of impairment. Impairment losses were recorded when estimates of undiscounted future cash flows were less than the value of the underlying asset. The determination of future cash flows or fair value was based upon assumptions and estimates of forecasted financial information that may differ from actual results. If different assumptions and estimates were used, carrying values could be adversely impacted, resulting in write downs that would adversely affect our earnings. In addition, we amortized our goodwill balances on a straight-line basis over 30 years. The evaluation of the useful life of goodwill required our judgment, and had we chosen a shorter time period over which to amortize goodwill, amortization expense would have increased, adversely impacting our operations. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. This statement requires us to evaluate the carrying value of our goodwill and intangible assets based on assumptions and estimates of fair value and future cash flow information. These assumptions and estimates may differ from actual results. If different assumptions and estimates are used, carrying values could be adversely impacted, resulting in write downs that could adversely affect our earnings. During the third quarter of 2002, we completed our transitional goodwill impairment test as of December 31, 2001 and determined that no adjustment to the carrying value of goodwill was needed. The IT recruitment unit was tested for impairment in the third quarter, after the annual forecasting process. Due to a decrease in margins and the loss of key sales personnel, operating profits and cash flows were lower than expected in the first nine months of 2002. Based on that trend, the earnings forecast for the next two years was revised. At September 30, 2002, we recognized a goodwill impairment loss of $57,808 in the IT recruitment unit. The fair value of that reporting unit was estimated using the expected present value of future cash flows. On an ongoing basis, absent any impairment indicators, we expect to perform a goodwill impairment test as of the end of the third quarter during the fourth quarter of each year. Had the standard been in effect for the three months ended September 30, 2001, our net loss would decrease by $215,000 from a loss of $1,630,000 to a loss of $1,415,000 and our net loss per share would decrease by $0.02 from a net loss per share of $0.11 to a net loss per share of $0.09. Had the standard been in effect for the nine months ended September 30, 2002, our net loss would decrease by $500,000 from a loss of $3,740,000 to a loss of $3,240,000 and our net loss per share would decrease by $0.03 to a net loss per share of $0.26 to a net loss per share of $0.23. The books and records of our Canadian operations are recorded in Canadian dollars. For purposes of financial statement presentation, we convert balance sheet data to United States dollars using the exchange rate in effect at the balance sheet date. Income and expense accounts are translated using an average exchange rate prevailing during the relevant reporting period. There can be no assurance that we would have been able to exchange currency on the rates used in these calculations. We do not engage in exchange rate-hedging transactions. A material change in exchange rates between United States and Canadian dollars could have a material effect on our reported results. THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001 Revenue For the three months ended September 30, 2002, we derived 47% of our revenue in the United States compared to 52% for the three months ended September 30, 2001. The decrease in the total revenue derived in the United States is a result of the increase in IT Recruitment sales in Canada and the decrease in Technical Training and IT Documentation sales in the United States. For the three months ended September 30, 2002, our primary source of revenue was recruitment, representing 54% of total revenue compared to 50% for the three months ended September 30, 2002. Recruitment revenue for the three months ended September 30, 2002 decreased by $620,000 or 15% to $3,590,000 compared to $4,210,000 for the three months ended September 30, 2001. The decrease in recruitment revenue is a result of cutbacks and reduced hiring in the telecommunications, network and financial services industries. In April 2002, we closed one of our IT recruitment offices, Systemsearch Consulting Services Inc., and transferred the existing contracts to our Toronto head office. As a result of the closing, eight of our employees were terminated. The prior owner of Systemsearch, John Wilson, was also terminated. Mr. Wilson is subletting the space from us in consideration of certain assets including furniture and equipment. We perform permanent, contract and executive searches for IT and engineering professionals. Most searches are performed on a contingency basis with fees due upon candidate acceptance of permanent employment or on a time-and-materials basis for contracts. Retained searches are also offered, and are paid by a non-refundable portion of one fee prior to performing any services, with the balance due upon candidates' acceptance. The revenue for retained searches is recognized upon a candidate's acceptance of employment. Selected recruitment customers include Fujitsu, Bank of Montreal, EDS Canada Inc., Goldman Sachs, and Sprint Canada. In the case of contract services, we provide our customers with independent contractors or "contract workers" who usually work under the supervision of the customer's management. Generally, we enter into a time-and-materials contract with our customer whereby the customer pays us an agreed upon hourly rate for the contract worker. We pay the contract worker pursuant to a separate consulting agreement. The contract worker generally receives between 75% and 80% of the amount paid to us by the customer; however, such payment is usually not based on any formula and may vary for different engagements. We seek to gain "preferred supplier status" with our larger customers to secure a larger percentage of those customers' businesses. While such status is likely to result in increased revenue and gross profit, it is likely to reduce gross margin percentage because we are likely to accept a lower hourly rate from our customers and there can be no assurance that we will be able to reduce the hourly rate paid to our consultants. In the case of permanent placement services, we identify and provide candidates to fill permanent positions for our customers. For the three months ended September 30, 2002, 37% of our revenue came from engineering services including technical publications, engineering design and e-learning compared to 36% for the three months ended September 30, 2001. Revenue from engineering services for the three months ended September 30, 2002 decreased by $500,000 or 17% to $2,500,000 compared to $3,000,000 for the three months ended September 30, 2001. Although the majority of our revenue continues to be derived from IT Recruitment, our focus is on growing the engineering services division. In particular, we are focused on expanding into the defense, aerospace and automotive industries and leveraging off existing engineering customers to secure new technical publication and e-learning business. The decrease in engineering sales is a result of the postponement and cancellation of several large contracts, combined with a general decline in sales activity as a result of a reduced sales force. Our engineering services include the complete planning, staffing, development, design, implementation and testing of a project. It can also involve enterprise-level planning and project anticipation. Our specialized engineering services include: technical publications, design, e-learning and Web development. We outsource our technical publications and engineering services on both a time and materials and project basis. For project work, the services provided are defined by guidelines to be accomplished by milestone and revenue is recognized upon the accomplishment of the relevant milestone. As services are rendered, the costs incurred are reflected as Work in Progress. Revenue is recognized upon the persuasive evidence of an agreement, delivery of the service, and when the fee is fixed or determinable and collection is probable. Customers we provide engineering services to include General Dynamics, General Electric, General Motors, Lockheed Martin, Boeing, Caterpillar and Cummins Engines. For the three months ended September 30, 2002, information technology documentation services represented approximately 5% of our revenue compared to 8% for the three months ended September 30, 2001. Revenue from information technology documentation services for the three months ended September 30, 2002 decreased by $290,000 or 46% to $340,000 compared to $630,000 for the three months ended September 30, 2001. The substantial decrease in revenue from information technology documentation services is primarily due to the loss of sales personnel and the general economic slowdown in this industry. This division offers a very specialized service, and relied on several key customers in a very localized market. Many of these customers have either cancelled projects or have put a number of their projects on hold. In response to these conditions, we have recently expanded the marketing of our documentation services to other regions and to existing recruitment and engineering services customers. In addition, we have reduced our operating expenses for this division to support the current levels of revenue. We provide outsourced information technology documentation services in two ways: complete project management and the provision of skilled project resources to supplement a customer's internal capabilities. Revenue is recognized on the same basis as technical publications and engineering outsourcing services. Selected information technology documentation services customers include Fidelity Investments, SMD Tech Aid Corporation, CDI Corporation, and the Gillette Company. For the three months ended September 30, 2002, technical training represented approximately 4% of our revenue compared to 6% for the three months ended September 30, 2001. Revenue from technical training for the three months ended September 30, 2002 decreased by $230,000 or 45% to $280,000 compared to $510,000 for the three months ended September 30, 2001. In May 2002, we entered into a series of agreements with triOS Training Centres Limited, an Ontario company, for the purchase of certain assets of our Toronto training division, Thinkpath Training. As part of the transaction, triOS assumed the Toronto training staff (six employees) and is subletting our classroom facilities. As a result of the sale of this office, our annual revenue will decline by approximately $1,000,000. There was no revenue from this office for the three months ended September 30, 2002. Revenue from this office represented approximately 3% for the three months ended September 30, 2001. Subsequent to September 30, 2002, we entered into a series of agreements with Thinkpath Training LLC, a New York company, for the purchase of certain assets of our New York training division, Thinkpath Training US, for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC will assume the New York training staff, some assets and sublet the classroom facilities. As a result of the sale of this office, our annual revenue will decline by approximately $1,000,000. Revenue from this office for the three months ended September 30, 2002 was $270,000 or 4% of total revenue. Revenue from this office for the three months ended September 30, 2001 was $310,000 or 4% of total revenue. Our training services include advanced training and certification in Microsoft, Java and Linux technologies, as well as Microsoft applications such as Outlook and Access. Training services include training requirements analysis, skills assessment, instructor-led classroom training for small groups (10 - 16 students), mentoring, e-learning, and self-paced learning materials. We offer both public and private classes. Selected training customers include Microsoft, Chase Manhattan Bank, Goldman Sachs, City of New York and Consumers Gas. Revenue is recognized on delivery of services. Gross Profit Gross profit is calculated by subtracting all direct costs from net revenue. The direct costs of contract recruitment include contractor fees and benefits. Gross profit for information technology recruitment services for the three months ended September 30, 2002 declined to 12% from 22% for the three months ended September 30, 2001. The decline in gross profit is a result of our focus on contract sales and our preferred vendor status with large clients for information technology contract recruitment services. It is often necessary to lower billing rates and markups to be successful in the bid process. One client, with an average gross profit margin of 12%, represents 71% of the total revenue for the recruitment division and 38% of the company's total revenues for the three months ended September 30, 2002. Revenue from permanent placements has declined considerably from last year, which has also contributed to the decline in gross profit. We do not attribute any direct costs to permanent placement services, therefore the gross profit on such services is 100% of revenue. The direct costs of technical publications and engineering services include wages, benefits, software training and project expenses. The average gross profit for this division was 31% for the three months ended September 30, 2002 compared to 27% for the three months ended September 30, 2001. The increase in gross profit for technical publications and engineering services is a result of the increase in higher margin contracts in technical publications and e-learning compared to the traditional engineering services. In addition, we are engaging in more time-and-materials based contracts versus fixed cost which prevents against project and costs overruns. The direct costs of information technology documentation services include contractor wages, benefits, and project expenses. The average gross profit for the three months ended September 30, 2002 was 23% compared to 25% for the three months ended September 30, 2001. The decline in gross profit in the current period is a result of the decrease in higher margin permanent placements and increase in lower margin contract placements of documentation specialists. The direct costs of training include courseware and trainer salaries, benefits and travel. The average gross profit was 56% for the three months ended September 30, 2002 compared to 44% for the three months ended September 30, 2001. The increase in gross profit is a result of tighter expense controls on trainer travel costs and the lower utilization of contract trainers. THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 Revenue For the nine months ended September 30, 2002, we derived 52% of our revenue in the United States compared to 57% for the nine months ended September 30, 2001. The decrease in the total revenue derived from the United States is a result of the increase in IT Recruitment sales in Canada and the decrease in Technical Training and IT Documentation sales in the United States. For the nine months ended September 30, 2002, our primary source of revenue was recruitment, representing 49% of total revenue compared to 45% for the nine months ended September 30, 2001. Recruitment revenue for the nine months ended September 30, 2002 decreased by $2,510,000 or 19% to $10,470,000 compared to $12,980,000 for the nine months ended September 30, 2001. The decrease in recruitment revenue is a result of cutbacks and reduced hiring in the telecommunications, network and financial services industries. For the nine months ended September 30, 2002, 40% of our revenue came from engineering services including technical publications, engineering design and e-learning compared to 36% for the nine months ended September 30, 2001. Revenue from engineering services for the nine months ended September 30, 2002 decreased by $1,590,000 or 16% to $8,610,000 compared to $10,200,000 for the nine months ended September 30, 2001. The decrease in engineering sales is a result of the postponement and cancellation of several large contracts as well as reduced sales activity in response to the reduction of the sales force for this division. For the nine months ended September 30, 2002, information technology documentation services represented approximately 6% of our revenue compared to 10% for the nine months ended September 30, 2001. Revenue from information technology documentation services for the nine months ended September 30, 2002 decreased by $1,600,000 or 56% to $1,250,000 compared to $2,850,000 for the nine months ended September 30, 2001. The substantial decrease in revenue from information technology documentation services is primarily due to the loss of sales personnel and the general economic slowdown in this industry. This division offers a very specialized service, and relied on several key customers in a very localized market. Many of these customers have either cancelled projects or have put a number of their projects on hold. In response to these conditions, we have recently expanded the marketing of our documentation services to other regions and to existing recruitment and engineering services customers. In addition, we have reduced our operating expenses for this division to support the current levels of revenue. For the nine months ended September 30, 2002, technical training represented approximately 5% of our revenue compared to 9% for the nine months ended September 30, 2001. Revenue from technical training for the nine months ended September 30, 2002 decreased by $1,410,000 or 55% to $1,160,000 compared to $2,570,000 for the nine months ended September 30, 2001. As a result of the sale of certain assets of the Toronto office of the technical training division in May 2002, revenue from this office for the nine months ended September 30, 2002 was only $180,000 or 1% of total revenue compared to $900,000 or 3% of total revenue for the nine months ended September 30, 2001. Subsequent to September 30, 2002, certain assets of the New York office of the technical training division were sold. Revenue from this office for the nine months ended September 30, 2002 was $980,000 or 5% of total revenue compared to $1,640,000 or 6% of total revenue for the nine months ended September 30, 2001. Gross Profit Gross profit for information technology recruitment services for the nine months ended September 30, 2002 declined to 14% from 27% for the nine months ended September 30, 2001. The decline in gross profit is a result of our focus on contract sales and our preferred vendor status with large clients for information technology contract recruitment services. It is often necessary to lower billing rates and markups to be successful in the bid process. One client, with an average gross profit margin of 12% represented 66% of the total revenue for the recruitment division and 32% of the company's total revenues for the nine months ended September 30, 2002. Revenue from permanent placements has declined considerably from last year, which has also contributed to the decline in gross profit in this division. The average gross profit for the engineering division was 31% for the nine months ended September 30, 2002 compared to 28% for the nine months ended September 30, 2001. The increase in gross profit for technical publications and engineering services is a result of the increase in higher margin contracts in technical publications and e-learning compared to the traditional engineering services. In addition, we are engaging in more time-and-materials based contracts versus fixed cost which prevents against project and costs overruns. The average gross profit for the information technology division for the nine months ended September 30, 2002 was 25% compared to 41% for the nine months ended September 30, 2001. The decline in gross profit in the current period is a result of the decrease in higher margin permanent placements and increase in lower margin contract placements of documentation specialists. The average gross profit for the technical training division was 51% for the nine months ended September 30, 2002 compared to 55% for the nine months ended September 30, 2001. The increase in gross profit is a result of tighter expense controls over trainer travel costs and the decreased utilization of contract trainers. RESULTS OF OPERATIONS The following table presents our statements of operations reflected as a percentage of our total revenue.
STATEMENTS OF OPERATIONS--PERCENTAGES (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- ----------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- REVENUE 100 % 100 % 100 % 100 % - ------- ---- ---- ---- ---- COST OF SALES 79 % 75 % 76 % 69 % ---- ---- ---- ---- GROSS PROFIT 21 % 25 % 24 % 31 % ---- ---- ---- ---- EXPENSES Administrative 23 % 17 % 17 % 15 % Selling 12 % 15 % 13 % 16 % Financing Expenses 7 % -- % 2 % 2 % Depreciation and amortization 4 % 6 % 4 % 5 % Write down of goodwill 1 % -- % -- % -- % Restructuring -- % -- % -- % 1 % ---- ---- ---- ---- Income (loss) from continuing operations (26)% (14)% (13)% (8)% Gain (loss) on Investment -- % (1)% -- % -- % Income (loss) from continuing operations before interest charges (26)% (15)% (13)% (8)% Interest charges 5 % 1 % 3 % 3 % ---- ---- ---- ---- Income (loss) from continuing operations (31)% (16)% (16)% (11)% Income taxes 1 % 4 % -- % 2 % ---- ---- ---- ---- Income (loss) from continuing operations (32)% (20)% (16)% (13)% Income (loss) from discontinued operations -- % 1 % 1 % -- % Net Income (loss) (32)% (19)% (15)% (13)% ---- ---- ---- ----
THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001 Revenue. Revenue for the three months ended September 30, 2002 decreased by $1,650,000 or 20%, to $6,700,000, as compared to $8,350,000 for the three months ended September 30, 2001. The decrease is primarily attributable to the decline in revenues from each division including 15% for IT recruitment, 17% for technical publications and engineering, 46% for IT documentation and 45% for technical training. Cost of Sales. The cost of sales for the three months ended September 30, 2002 decreased by $960,000, or 15%, to $5,290,000, as compared to $6,250,000 for the three months ended September 30, 2001. The cost of sales as a percentage of revenue increased to 79% compared to 75% for the three months ended September 30, 2001. The increase in cost as a percentage of sales corresponds with the increase in lower margin IT recruitment sales. Gross Profit. Gross profit for the three months ended September 30, 2002 decreased by $680,000, or 32%, to $1,420,000 compared to $2,100,000 for the three months ended September 30, 2001. This decrease was attributable to the overall decrease in revenue and the increase in cost of sales during the three months ended September 30, 2002. As a percentage of revenue, gross profit decreased from 25% for the three months ended September 30, 2001 to 21% for the three months ended September 30, 2002. This decrease in gross profit is a direct result of the increase in direct costs associated with IT recruitment sales. Expenses. Expenses for the three months ended September 30, 2002 decreased by only $60,000, or 2%, to $3,230,000 compared to $3,170,000 for the three months ended September 30, 2001. Administrative expenses increased by $140,000 or 9% to $1,570,000 compared to $1,430,000 for the three months ended September 30, 2001. General administrative expenses including salaries and rent have decreased significantly over last year as a result of restructuring and general cost cutting. The increase is attributable to the expensing of approximately $500,000 for 3,250,000 shares of our common stock issued to Young and Georgiou for corporate and debt restructuring services rendered during the period. Selling expenses for the three months ended September 30, 2002 decreased by $500,000, or 39%, to $790,000 from $1,290,000 for the three months ended September 30, 2001. This decrease is attributable to the decrease in sales salaries and commissions, as a result of the reduction in sales and the elimination of certain advertising and promotional expenses. For the three months ended September 30, 2002, financing expenses increased 1075% to $470,000 from $40,000 for the three months ended September 30, 2001. This increase is attributable to the expensing of approximately $150,000 in fees to various financial brokers including Morrison Financial. In addition, we expensed approximately $320,000 for shares issued to Tazbaz Holdings in consideration of a loan agreement whereby Tazbaz securitized our overdraft position with Bank One in the amount of $650,000. For the three months ended September 30, 2002, depreciation and amortization expenses decreased by $210,000, or 42%, to $290,000 from $500,000 for the three months ended September 30, 2001. This decrease is primarily attributable to our adoption of Statements of Financial Accounting Standards No. 141, Business Combinations, No. 142, Goodwill and Other Intangible Assets and No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under these statements, goodwill will no longer be amortized. Amortization of goodwill for the three months ended September 30, 2001 amounted to $215,000. In accordance with the requirements of SFAS 144, at September 30, 2002 we recorded an impairment of goodwill of $57,808 based on our evaluation of carrying value and projected cash flows. In accordance with SFAS 121, there was no write down for the same period last year. For the three months ended September 30, 2002, there were no restructuring charges related to the termination of personnel and the closure of non-productive branch offices. For the three months ended September 30, 2001, we reduced our restructuring charges by $30,000 as a result of an over accrual in the prior period related to the closure of our London training office and termination of personnel. Income (Loss) from Continuing Operations. For the three months ended September 30, 2002, losses from continuing operations increased by $620,000 or 55% to a loss of $1,750,000 as compared to a loss of $1,130,000 for the three months ended September 30, 2001. The increase is largely attributable to the decline in gross profit as a result of the concentration of IT recruitment sales, and the expensing of financing costs of approximately $470,000 and shares issued to consultants for restructuring services of approximately $500,000. Interest Charges. For the three months ended September 30, 2002, interest charges increased by $240,000, or 218%, to $350,000 from $110,000 for the three months ended September 30, 2001. This increase is largely attributable to the default interest rate and forbearance fees charged by Bank One under the Forbearance Agreement entered into on July 1, 2002. Income (Loss) from Continuing Operations before Income Tax. Loss from continuing operations before income tax for the three months ended September 30, 2002 increased by $730,000 or 53% to a loss of $2,100,000 as compared to a loss of $1,370,000 for the three months ended September 30, 2001. Income Taxes. Income tax expense for the three months ended September 30, 2002 decreased by $280,000 or 93% to $20,000 compared to an expense of $300,000 for the three months ended September 30, 2001. The expense in 2001 was a write down of the deferred income tax asset. Income (Loss) from Continuing Operations. Loss from continuing operations for the three months ended September 30, 2002 increased by $450,000, or 27%, to a loss of $2,120,000 compared to a loss of $1,670,000 for the three months ended September 30, 2001. Income (Loss) from Discontinued Operations. Operations of the technology division for the three months ended September 30, 2002 have been reported as discontinued and include no revenue, cost of sales of $2,000, depreciation expense of $10,000 and interest expense of $5,000. The net loss for the three months ended September 30, 2002 was $17,000. Operations of the technology division for the three months ended September 30, 2001 have been reported as discontinued and include revenues of $160,000, cost of sales of $9,000, a credit in administrative expenses of $40,000, selling expenses of $20,000, depreciation expense of $90,000, restructuring costs of $30,000 and interest expense of $10,000. Net income for the three months ended September 30, 2001 was $40,000. Net Loss. Net loss for the three months ended September 30, 2002 decreased by $510,000 to a net loss of $2,140,000 compared to a net loss of $1,630,000 for the three months ended September 30, 2001. THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001 Revenue. Revenue for the nine months ended September 30, 2002 decreased by $7,100,000, or 25%, to $21,490,000, as compared to $28,590,000 for the nine months ended September 30, 2001. The decrease is primarily attributable to the decline in revenues from each division including 19% for IT recruitment, 16% for technical publications and engineering, 56% for IT documentation and 55% for technical training. Cost of Sales. The cost of sales for the nine months ended September 30, 2002 decreased by $3,300,000, or 17%, to $16,410,000, as compared to $19,710,000 for the nine months ended September 30, 2001. The cost of sales as a percentage of revenue increased to 76% compared to 69% for the nine months ended September 30, 2001. The increase in cost as a percentage of sales corresponds with the increase in lower margin IT recruitment sales. Gross Profit. Gross profit for the nine months ended September 30, 2002 decreased by $3,810,000, or 43%, to $5,080,000 compared to $8,890,000 for the nine months ended September 30, 2001. This decrease was attributable to the overall decrease in revenue and the increase in cost of sales during the nine months ended September 30, 2002. As a percentage of revenue, gross profit decreased from 31% for the nine months ended September 30, 2001 to 24% for the nine months ended September 30, 2002. This decrease in gross profit is a direct result of the increase in direct costs associated with IT recruitment sales. Expenses. Expenses for the nine months ended September 30, 2002 decreased by only $3,410,000 or 31%, to $7,770,000 compared to $11,180,000 for the nine months ended September 30, 2001. Administrative expenses decreased by $640,000 or 15% to $3,590,000 compared to $4,230,000 for the nine months ended September 30, 2001 This decrease is related to the significant reduction in administrative salaries and overhead as a result of restructuring and general cost cutting. Selling expenses for the nine months ended September 30, 2002 decreased by $1,730,000, or 39%, to $2,760,000 from $4,490,000 for the nine months ended September 30, 2001. This decrease is attributable to the decrease in sales salaries and commissions, as a result of the reduction in sales and the elimination of certain advertising and promotional expenses. For the nine months ended September 30, 2002, financing expenses decreased $150,000, or 24% to $470,000 from $620,000 for the nine months ended September 30, 2001. For the nine months ended September 30, 2002, depreciation and amortization expenses decreased by $560,000, or 39%, to $890,000 from $1,450,000 for the nine months ended September 30, 2001. This decrease is primarily attributable to our adoption of Statements of Financial Accounting Standards No. 141, Business Combinations, No. 142, Goodwill and Other Intangible Assets and No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Under these statements, goodwill will no longer be amortized. Amortization of goodwill for the nine months ended September 30, 2001 amounted to $500,000. In accordance with the requirements of SFAS 144, at September 30, 2002 we recorded an impairment of goodwill of $57,808 based on our evaluation of carrying value and projected cash flows. In accordance with SFAS 121, there was no write down for the same period last year. For the nine months ended September 30, 2002, there were no restructuring charges related to the termination of personnel and the closure of non-productive branch offices. For the nine months ended September 30, 2001, we recorded restructuring charges of $400,000 related to the closure of our London training office and termination of personnel. Income (Loss) from Continuing Operations. For the nine months ended September 30, 2002, losses from continuing operations increased by $390,000 or 17% to a loss of $2,690,000 as compared to a loss of $2,300,000 for the nine months ended September 30, 2001. The increase is largely attributable to the decline in gross profit as a result of the concentration of IT recruitment sales, and the expensing of financing costs of approximately $470,000 and shares issued to consultants for restructuring services of approximately $500,000. Interest Charges. For the nine months ended September 30, 2002, interest charges increased by $240,000 or 41% to $820,000 from $580,000 for the nine months ended September 30, 2001. This increase is largely attributable to the default interest rate and forbearance fees charged by Bank One under the Forbearance Agreement which was entered into on July 1, 2002. Income (Loss) from Continuing Operations before Income Tax. Loss from continuing operations before income tax for the nine months ended September 30, 2002 increased by $500,000 or 17%, to a loss of $3,510,000 as compared to a loss of $3,010,000 for the nine months ended September 30, 2001. Income Taxes. Income tax expense for the nine months ended September 30, 2002 decreased by $705,000 to a recovery of $5,000 compared to an expense of $700,000 for the nine months ended September 30, 2001. The expense in 2001 was a write down of the deferred income tax asset. Income (Loss) from Continuing Operations. Loss from continuing operations for the nine months ended September 30, 2002 decreased by $210,000, or 6%, to a loss of $3,500,000 compared to a loss of $3,710,000 for the nine months ended September 30, 2001. Income (Loss) from Discontinued Operations. Operations of the technology division for the nine months ended September 30, 2002 have been reported as discontinued and include revenue of $42,000, cost of sales of $23,000, administrative expenses of $43,000, selling expenses of $6,000, depreciation expense of $96,000 and interest expense of $15,000. The net loss for the nine months ended September 30, 2002 was $140,000. The gain on disposal of $500,000 has been reflected in the Income (loss) from discontinued operations. Operations of the technology division for the nine months ended September 30, 2001 have been reported as discontinued and include revenues of $635,000, cost of sales of $32,000 administrative expenses of $72,000, selling expenses of $90,000, depreciation expense of $260,000, restructuring costs of $180,000 and interest expense of $29,000. The net loss for the nine months ended September 30, 2001 was $28,000. Net Loss. Net loss for the nine months ended September 30, 2002 decreased by $590,000 or 16%, to a net loss of $3,150,000 compared to a net loss of $3,740,000 for the nine months ended September 30, 2001. Liquidity and Capital Resources We have incurred substantial losses during the last 21 months. Due to these factors, we had taken additional cost cutting steps in the first nine months of 2002 to reduce our expenses. Specifically, we sold certain non-performing divisions and assets of such divisions and reduced our staff by approximately 35 employees. In March 2002, we sold our technology division, Njoyn Software Incorporated to Cognicase Inc., a Canadian company. Our net proceeds after broker fees were $1,320,000 of which we received $800,000 in cash and $550,000 worth of unrestricted common shares on closing. The shares were sold on March 11, 2002 for value of $ 524,673. As part of the transaction, Cognicase assumed all of the staff in our technology division (eight employees) and is contracting the services of our CIO for a period of six months. The proceeds were used to pay down bank indebtedness with Bank One of $500,000 and a term loan with Bank One for $260,000. We also used the proceeds to pay past due rent, professional fees and contractor fees. We believe the sale of Njoyn and the corresponding reduction in technology expenses will have a significant impact on our cash flow for the balance of 2002, as the operations had recurring losses since inception. In April 2002, we closed one of our IT recruitment offices, Systemsearch Consulting Services Inc., and transferred the existing contracts to our Toronto head office. As a result of the closing, eight of our employees were terminated. The prior owner of Systemsearch, John Wilson, was also terminated. Mr. Wilson is subletting the space from us in consideration of certain assets including furniture and equipment. In May 2002, we entered into a series of agreements with triOS Training Centres Limited, an Ontario company, for the purchase of certain assets of our Toronto training division, Thinkpath Training. As part of the transaction, triOS assumed the Toronto training staff (six employees) and is subletting our classroom facilities. As a result of the sale of this office, our annual revenue will decline by approximately $1,000,000. Revenue from this office represented less than 1% of the total revenue for the nine months ended September 30, 2002 and approximately 3% for the nine months ended September 30, 2001. Subsequent to September 30, 2002, we entered into a series of agreements with Thinkpath Training LLC, a New York company, for the purchase of certain assets of our New York training division, Thinkpath Training US, for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC will assume the New York training staff, some assets and sublet the classroom facilities. As a result of the sale of this office, our annual revenue will decline by approximately $1,000,000. Revenue from this office represented 5% of the total revenue for the nine months ended September 30, 2002 and approximately 6% for the nine months ended September 30, 2001. We expect the reduction of our staff during the nine months ended September 30, 2002 will save approximately $1,600,000 on an annualized basis. Despite the steps that we have taken, to the extent we experience a shortfall in required revenue or are unable to bill and collect our receivables and unbilled work-in-progress in a timely manner, it could have a material adverse impact on our ability to continue as a going-concern and meet our intended business objectives. Also, a continued slowdown in the economy or the postponement of large engineering contracts could adversely affect our working capital and/or operating cash flow. With insufficient working capital from operations, our primary sources of cash have been a revolving line of credit with Bank One and proceeds from the sale of equity securities. Our primary capital requirements include debt service, capital expenditures and working capital needs. At September 30, 2002, we had negative cash or cash equivalents and a working capital deficiency of $4,490,000. At September 30, 2002, we had a cash flow deficiency from operations of $1,150,000 due primarily to the decrease in accounts payable of $870,000 and the decrease in deferred revenue of $140,000 which was partially offset by the decrease in accounts receivable of $1,330,000 and the gain on the disposal of Njoyn of $500,000. At September 30, 2001, we had negative cash or cash equivalents and a working capital deficiency of $1,850,000. At September 30, 2001, we had a cash flow from operations of $150,000. At September 30, 2002, we had cash flow from investing activities of $1,080,000 attributable primarily to the proceeds on the disposal of Njoyn of $1,320,000, which was offset by the purchase of capital assets of approximately $250,000 and the disposal of other assets of $10,000. At September 30, 2001, we had a cash flow deficit from investing activities of $670,000 attributable to the purchase of capital assets of $180,000, purchase of other assets of $300,000 and increase in long-term receivable of $190,000. At September 30, 2002, we had a cash flow deficit from financing activities of $420,000 attributable primarily to long-term debt repayment of $480,000, the repayment of Roger Walters' note payable of $80,000 and a decrease in bank indebtedness of $120,000 which was offset by an increase in debt of $260,000 related to the Terry Lyons loan received in May 2002. At September 30, 2001, we had cash flow from financing activities of $720,000 attributable primarily to proceeds from the issuance of common stock of $400,000, proceeds from the issuance of preferred stock of $1,230,000, and an increase in long-term debt of $220,000. Cash was used in the repayment of notes payable of $210,000, long-term debt of $860,000 and bank indebtedness of $60,000. At September 30, 2002, the balance of our revolving line of credit with Bank One was $4,980,000 including an overdraft of approximately $650,000. Eligible receivables allowed for a maximum borrowing amount of $4,330,000. The revolving line of credit agreement requires us to meet various restrictive covenants, including a senior debt to EBITDA ratio, debt service coverage ratio, debt to tangible net worth ratio and certain other covenants. At September 30, 2002 and thereafter, we were not in compliance with the covenants contained in the revolving line of credit agreement. On July 1, 2002 and as amended on August 1, 2002, August 15, 2002, September 1, 2002, September 16, 2002, September 30, 2002, October 15, 2002, and November 15, 2002, we entered into a Forbearance and Modification Agreement with our senior lender, Bank One whereby the Bank agreed to forebear from exercising its rights and remedies against us as a result of its violation of certain loan covenants, until the period ending November 30, 2002. Under the terms of the agreement, the Bank is entitled to forbearance fees and payment of related legal fees and expenses. As of November 19, 2002, the Bank has charged us $204,000 in forbearance fees and $18,000 in legal fees. The interest rate on the revolving line facility was increased to prime plus 3%. We have continued to borrow from the revolving line facility subject to eligible accounts receivables as monitored weekly by the Bank. In the event that we default under the agreement including the failure to make payment when due, the Bank is entitled to exercise any and all of its security rights including foreclosing on collateral. Bank One has agreed to extend the expiration of the Forbearance and Modification Agreement until November 30, 2002 to allow our new lender to complete the financing arrangement required to purchase Bank One's debt and security. In addition, Bank One has agreed to accept a $700,000 discount on the payoff of its indebtedness. On August 13, 2002, we received a commitment from Morrison Financial Services Limited for a syndicated financing arrangement that will provide the funding necessary to purchase Bank One's debt and security. The partners in the syndicate are Maple Partners America Inc., Morrison Financial Services Limited and MFI Export Finance Inc. Bank One has agreed to extend the expiration of the Forbearance and Modification Agreement until November 30, 2002 to allow the syndicate to complete the financing arrangement. At September 30, 2002, we had $400,652 in subordinated debt outstanding to the Business Development Bank of Canada. The loan agreements require us to meet a certain working capital ratio. At September 30, 2002 and thereafter, we were not in compliance with the covenant contained in the loan agreements. On September 27, 2002, we received a notice of default demanding repayment of the loans in full and the BDC's intention to enforce its security if repayment was not made within 10 days. On October 7, 2002, the BDC agreed to extend the stay of the demand period and on November 4, 2002 accepted a proposal from Morrison Financial to purchase its debt and security at a 75% discount. The purchase will close concurrently with the syndicated financing arrangement with Morrison Financial, the repayment of Bank One and the first tranche of the senior convertible debenture. In May 2002, we secured a loan of $259,375 from an individual, Terry Lyons which was secured by our IRS refund. We paid a placement fee of 10% to Mr. Lyons. Although we received our IRS refund in July 2002, Mr. Lyons agreed to an extension of the loan until October 31, 2003. The loan is payable in twelve monthly payments of $21,613 beginning November 30, 2002 and bears interest at 30% per annum. At September 30, 2002, we had approximately $328,249 outstanding on various capital leases with various payment terms and interest rates. The average balance on the terms of leases are 12 months and cover primarily the hardware and various software applications required to support our training and engineering divisions. At September 30, 2002, we had a note payable of $236,000 owed to Roger Walters, the sole shareholder of CadCam Inc. On August 1, 2002, we restructured our note payable to Roger Walters, reducing the principal from $675,000 to $240,000 in consideration of the issuance of 1,000,000 shares of our common stock. We agreed to issue and register the shares upon obtaining shareholder approval of an amendment to our Articles of Incorporation increasing our authorized capital stock. Principal payments of $4,000 will be made monthly and started September 1, 2002 until August 1, 2007. We agreed to price protection on the 1,756,655 shares that were issued to Mr. Walters in January 2002. In the event that the bid price is less than $.27 per share when Mr. Walters seeks to sell his shares in an open market transaction, we will be obligated to issue additional shares of unregistered common stock with a value equal to the difference between $.27 per share and the closing bid price to a floor of $.14 per share. At September 30, 2002, we had a note payable of $600,000 owed to Denise Dunne-Fushi, the vendor of MicroTech Professionals Inc. On August 1, 2002, we restructured our note payable to Denise Dunne-Fushi, reducing the principal from $1,740,000 to $600,000 in consideration of the issuance of 3,000,000 shares of our common stock. We agreed to issue and register the shares upon obtaining shareholder approval of an amendment to its Articles of Incorporation increasing our authorized capital stock. Principal payments of $10,000 per month will begin November 1, 2002 until October 1, 2007 and bear interest of 5% per annum. In addition, we agreed to cover the monthly expense associated with Ms. Dunne-Fushi's family health benefits and vehicle lease for a period of four years. As a result of the terrorist attacks of September 11, 2001, we lost our IT recruitment office in the World Trade Center and our training office located at 195 Broadway was inaccessible for approximately four weeks. The recruitment office represents approximately $2,000,000 in annual information technology recruitment revenue. We have experienced a significant decline in revenue from this office from $1,800,000 per annum to $500,000 per annum. We lost approximately $75,000 of fixed assets, including furniture, computer hardware and office equipment. We have filed an interim statement of loss with our insurance company and to date have received insurance payments of $75,000 with respect to the claims submitted for this office. Our training office in New York represents approximately $1,000,000 in annual technical training revenue. Many of our primary customers have since relocated to other cities and have indicated their postponement of employee training until the later part of 2002. The estimated loss of revenue from this office is now between $100,000 and $200,000 per month. In addition, many of the office's computer assets were malfunctioning as a result of debris and smoke. As a result of the decline in revenue, we terminated four of twelve employees from this office in October 2001 and an additional two employees in March 2002. At this time we do not know what the total loss of revenue will be for our training operations in New York, or the final amount of our insurance claim. We have filed an interim statement of loss with our insurance company and to date have received approximately $250,000 for business interruption which have been treated as an extraordinary item on the income statement. We have filed additional business interruption claims, which have not yet been settled. In accordance with EITF 01-10 "Accounting for the Impact of the Terrorist Attacks of September 11, 2001," we have determined our losses directly resulting from the September 11th events amount to approximately $25,000 net of insurance recoveries. On November 1, 2002, we entered into a series of agreements with Thinkpath Training LLC, a New York company, for the purchase of certain assets of this office for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC will assume the New York training staff, some assets and sublet the classroom facilities. Although we believe that our current working capital and cash flows from restructured operations will be adequate to meet our anticipated cash requirements going forward, we have accrued liabilities and potential settlements of outstanding claims that may require additional funds. We will have to raise these funds through equity or debt financing. There can be no assurance that additional financing will be available at all or that if available, such financing will be obtainable on terms favorable to us and would not be dilutive. Despite our recurring losses and negative working capital, we believe that we have developed a business plan that, if successfully implemented, could substantially improve our operational results and financial condition. However, we can give no assurances that our current cash flows from operations, if any, borrowings available under our line of credit, and proceeds from the sale of securities, will be adequate to fund our expected operating and capital needs for the next twelve months. The adequacy of our cash resources over the next twelve months is primarily dependent on our operating results and our ability to secure alternate financing, and settlement of our insurance claim, all of which are subject to substantial uncertainties. Cash flow from operations for the next twelve months will be dependent, among other things, upon the effect of the current economic slowdown on our sales, the impact of the restructuring plan and management's ability to implement our business plan. The failure to return to profitability and optimize operating cash flow in the short term, and to successfully secure alternate financing, could have a material adverse effect on our liquidity position and capital resources which may force us to curtail our operations. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Effective January 1, 2002, we adopted SFAS No. 142. This statement requires us to evaluate the carrying value of our goodwill and intangible assets based on assumptions and estimates of fair value and future cash flow information. These assumptions and estimates may differ from actual results. If different assumptions and estimates are used, carrying values could be adversely impacted, resulting in write downs that could adversely affect our earnings. In April 2002, the FASB issued SFAS No. 145, which, among other things, changed the presentation of gains and losses on the extinguishments of debt. Any gain or loss on extinguishments of debt that does not meet the criteria in APB Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", shall be included in operating earnings and not presented separately as an extraordinary item. We will adopt SFAS No. 145 at the beginning of fiscal year 2003. We do not expect the provisions of SFAS No. 145 to have any impact on our financial position, results of operations or cash flows. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No.146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue, or EITF, No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit on Activity (including Certain Costs Incurred in a Restructuring)". We will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. Recent Events On July 1, 2002 and as amended on August 1, 2002, August 15, 2002, September 1, 2002, September 16, 2002, September 30, 2002, October 15, 2002, and November 15, 2002, we entered into a Forbearance and Modification Agreement with our senior lender, Bank One whereby the Bank agreed to forebear from exercising its rights and remedies against us as a result of our violation of certain loan covenants, until the period ending November 30, 2002. In the event that we default under the agreement including the failure to make payment when due, the Bank is entitled to exercise any and all of its security rights including foreclosing on collateral. On August 13, 2002, we received a commitment from Morrison Financial Services Limited for a syndicated financing arrangement that will provide the funding necessary to purchase Bank One's debt and security. The partners in the syndicate are Maple Partners America Inc., Morrison Financial Services Limited and MFI Export Finance Inc. Bank One has agreed to extend the expiration of the Forbearance and Modification Agreement until November 30, 2002 to allow the syndicate to complete the financing arrangement. In addition, Bank One has agreed to accept a $700,000 discount on the payoff of its indebtedness. The Business Development Bank of Canada has also agreed to sell its debt and security to the syndicated group with a discount on the payoff of $300,000. On October 4, 2002, our securities were delisted from The Nasdaq SmallCap Market, for failure to comply with the minimum bid price or net tangible assets requirements for continued listing, as set forth in Nasdaq's Marketplace Rule 4310(c)(4). We also failed to meet the initial inclusion requirements under Nasdaq's Marketplace Rule 4310(c)(2)(A) including minimum stockholders' equity of $5 million, market capitalization of $50 million or net income of $750,000 (excluding extraordinary or non-recurring items) in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. On October 16, 2002, we held our Annual General Meeting and Special Meeting of Shareholders where the following resolutions were passed: the election of the Board of Directors including Declan French, Kelly Hankinson, John Dunne, Arthur Marcus and Katherine Seto Evans; the appointment of Schwartz Levitsky Feldman LLP as our independent auditors for the ensuing year; the adoption of our 2002 Stock Option Plan; and, the amendment of our Articles of Incorporation to increase our authorized capital stock from 30,000,000 to 100,000,000. On October 15, 2002, we signed a term sheet with Bristol Investment Fund, Ltd. and a syndicate of other investors to issue Senior Secured Convertible Debentures of up to $3,000,000 in multiple tranches. The first tranche of $800,000 will be issued upon signing of a definitive investment agreement and concurrently with the closing of the financing arrangement with Morrison Financial. The funds will be directed to Bank One and certain of our other creditors. On October 21, 2002, we entered into a settlement agreement with Michael Carrazza, a former director, in the sum of $330,000 to be paid $50,000 on October 31, 2002 and $17,500 per month thereafter until paid in full, bearing interest at 9% per annum. This settlement was pursuant to a motion for summary judgment filed by Carrazza, which was granted in his favor in the sum of $264,602. In November 1998, we completed the acquisition of certain assets of Southport Consulting Co. from Carrazza, for an aggregate of $250,000 in cash and shares of our common stock. Carrazza instituted an action against us in the Supreme Court of the State of New York, County of New York, Index No. 600553/01, alleging breach of contract and unjust enrichment and seeking at least $250,000 in damages. Specifically, Mr. Carrazza claimed that we failed to deliver cash or stock to Mr. Carrazza under an asset purchase agreement, and that he was entitled to recovery of his attorneys' fees. We filed a counterclaim against Mr. Carrazza, seeking $162,000 in damages, plus punitive damages and attorneys' fees, on the ground that Mr. Carrazza, as then president and sole stockholder of Southport Consulting Co., fraudulently induced us into executing the asset purchase agreement by misrepresenting the value of the assets being purchased. On November 1, 2002, we entered into a series of agreements with Thinkpath Training LLC, a New York company, for the purchase of certain assets of our New York training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC will assume the New York training staff, some assets and sublet the classroom facilities. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have evaluated the Company's disclosure controls and procedures (as such term is defined in Rule 13a-14 (c) under the Exchange Act) as of a date within 90 days of the date of filing of this Form 10-Q. Based upon such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports it files under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation described above. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are party to the following pending legal proceedings: Christopher Killarney, a former employee, filed a statement of claim against us on June 14, 2002, with the Superior Court of Justice of Ontario, Canada, Court File No. 02-CV-229385CMS, alleging wrongful dismissal and breach of contract. Mr. Killarney is seeking between approximately $120,000 and $650,000 in damages. We intend to defend this claim vigorously. We are not party to any other material litigation, pending or otherwise. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS IN SENIOR SECURITIES We are in breach of the loan covenants governing our credit line facility with Bank One; including a senior debt to EBITDA ratio, debt service coverage ratio, debt to tangible net worth ratio and certain other covenants. At September 30, 2002, we had $4,900,000 outstanding with Bank One. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On October 16, 2002, we held an Annual General Meeting and Special Meeting of Shareholders at which the shareholders: (i) elected the Board of Directors for the ensuing year; (ii) ratified the appointment of Schwartz, Levitsky, Feldman, llp, as our independent chartered accountants for the ensuing year; (iii) ratified the adoption of our 2002 Stock Option Plan; and, (iv) amended our Articles of Incorporation to increase the authorized number of shares of our common stock from 30,000,000 to 100,000,000 shares. (i) The following directors were elected to the Board of Directors and received the votes indicated: For Withheld Declan French 24,416,848 756,001 Kelly Hankinson 24,856,972 315,877 John Dunne 24,957,017 215,832 Arthur Marcus 24,961,092 211,757 Katherine Seto Evans 24,955,687 217,162 Set forth below is a biographical description of each of our directors elected at our Annual General Meeting and Special Meeting of Shareholders held on October 16, 2002: Declan A. French has served as our Chairman of the Board of Directors and Chief Executive Officer since its inception in February 1994. Prior to founding Thinkpath, Mr. French was President and Chief Executive Officer of TEC Partners Ltd., an information technology recruiting firm in Toronto, Canada. Mr. French has a diploma in Psychology and Philosophy from the University of St. Thomas in Rome, Italy. Kelly Hankinson has served as our Chief Financial Officer since May 2000, as a member of our Board of Directors since June 2000 and as Secretary and Treasurer since March 2001. Ms. Hankinson served as our Vice President, Finance and Administration and Group Controller from February 1994 to May 2000. Ms. Hankinson has a Masters Degree and a Bachelors Degree from York University. John Dunne has served on our Board of Directors since June 1998. Mr. Dunne has served as Chairman and Chief Executive Officer of the Great Atlantic & Pacific Company of Canada, Ltd. since August 1997, where he also served as President and Chief Operating Officer from September 1996 until August 1997. From November 1995 until September 1996, Mr. Dunne was Chairman and Chief Executive Officer of Food Basics Ltd. Arthur S. Marcus has served our Board of Directors since April 2000. Mr. Marcus is a partner at the New York law firm of Gersten, Savage, Kaplowitz, Wolf and Marcus, LLP, our United States securities counsel. Mr. Marcus joined Gersten, Savage & Kaplowitz, LLP in 1991 and became a partner in 1996. Mr. Marcus specializes in the practice of United States Securities Law and has been involved in approximately 50 initial public offerings and numerous mergers and acquisitions. Mr. Marcus received a Juris Doctorate from Benjamin N. Cardozo School of Law in 1989. Katherine Seto Evans, director nominee, is an independent consultant with extensive and diversified experience in financial management, human resource leadership and organizational administration. From 1974 to 2001, Ms. Evans was a partner at Schwartz, Levitsky, Feldman, llp, our independent auditors. From 2001 to present, Ms. Evans has been an independent consultant to various companies. During this period she has consulted with us and has assisted us with various financial and accounting projects. Ms. Evans became a Certified Public Accountant in 1999 and a Chartered Accountant in 1978. Ms. Evans received a Bachelors Degree in Science from McGill University in 1972. (ii) The appointment of Schwartz, Levitsky Feldman, llp, to serve as our independent chartered accountants for the ensuing year was approved by the votes indicated: For Against Withheld 25,177,514 199,262 138,975 (iii) The adoption of our 2002 Stock Option Plan was approved by the votes indicated: For Against Abstain Withheld 11,161,695 1,554,095 107,500 12,681,461 The 2002 Stock Option Plan will be administered by our Compensation Committee, which will determine among other things, those individuals who shall receive options, the time period during which the options may be partially or fully exercised, the number of shares of our common stock issuable upon the exercise of the options and the option exercise price The 2002 Stock Option Plan is effective for a period for ten years, expiring in 2012. Options to acquire 6,500,000 shares of our common stock may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide the Company with their skills and expertise. The 2002 Stock Option Plan is designed to enable management to attract and retain qualified and competent directors, employees, consultants and independent contractors. Options granted under the 2002 Stock Option Plan may be exercisable for up to ten years, generally require a minimum three-year vesting period, and shall be at an exercise price all as determined by our Compensation Committee provided that, the exercise price of any options may not be less than the fair market value of the shares of our common stock on the date of the grant. Options are non-transferable, and are exercisable only by the participant (or by his or her guardian or legal representative) during his or her lifetime or by his or her legal representatives following death. If: (i) we are not the surviving entity in any merger, consolidation or other reorganization (or survives only as a subsidiary of an entity); (ii) we sell, lease or exchange all or substantially all of our assets to any other person or entity; (iii) we are to be dissolved and liquidated; (iv) any person or entity, including a "group" as contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, acquires or gains ownership or control (including, without limitation, power to vote) of more than 50% of the outstanding shares of our voting stock (based upon voting power); or (v) as a result of or in connection with a contested election of directors, the persons who were directors with us before such election shall cease to constitute a majority of the Board of Directors (each such event is referred to herein as a "Corporate Change"); no later than (a) ten days after the approval by our shareholders of such merger, consolidation, reorganization, sale, lease or exchange of assets or dissolution or such election of directors or (b) 30 days after a change of control of the type described in clause (iv), our Compensation Committee, acting in its sole discretion without the consent or approval of any optionee, shall act to effect 1 or more of the following alternatives, which may vary among individual optionees and which may vary among options held by any individual optionee: (1) accelerate the time at which options then outstanding may be exercised so that such options may be exercised in full for a limited period of time on or before a specified date (before or after such Corporate Change) fixed by our Compensation Committee, after which specified date all unexercised options and all rights of optionees thereunder shall terminate; (2) require the mandatory surrender to us by selected optionees of some or all of the outstanding Options held by such optionees (irrespective of whether such options are then exercisable under the provisions of the 2002 Stock Option Plan) as of a date before or after such Corporate Change, specified by our Compensation Committee, in which event our Compensation Committee shall thereupon cancel such options and we shall pay to each optionee an certain amount of cash per share; (3) make such adjustments to options then outstanding our Compensation Committee deems appropriate to reflect such Corporate Change (provided, however, that they may determine in its sole discretion that no adjustment is necessary to options then outstanding); or (4) provide that the number and class of shares covered by an option theretofore granted shall be adjusted so that such option shall thereafter cover the number and class of shares or other securities or property (including, without limitation, cash) to which the optionee would have been entitled pursuant to the terms of the agreement of merger, consolidation or sale of assets and dissolution if, immediately prior to such merger, consolidation or sale of assets, and dissolution, the optionee had been the holder of record of the number of shares of common stock then covered by such option. If a participant ceases affiliation with us by reason of death, permanent disability or retirement at or after age 65, the option remains exercisable for one year from such occurrence but not beyond the option's expiration date. Other types of termination allow the participant 90 days to exercise the option, except for termination for cause, which results in immediate termination of the option. Any unexercised options that expire or that terminate upon an employee's ceasing to be employed by us become available again for issuance under the 2002 Stock Option Plan, subject to applicable securities regulation. The 2002 Stock Option Plan may be terminated or amended at any time by our Board of Directors, except that the number of shares of our common stock reserved for issuance upon the exercise of options granted under the 2002 Stock Option Plan may not be increased without the consent of our shareholders. (iv) The amendment of our Articles of Incorporation to increase the authorized number of shares of our common stock from 30,000,000 to 100,000,000 shares. For Against Withheld 24,473,632 1,052,269 43,850 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 99.1 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 - Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K. On March 21, 2002, Thinkpath filed a report on Form 8-K to disclose the disposition of its subsidiary, Njoyn Software Incorporated. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THINKPATH INC. Dated: November 19, 2002 By: /s/ Declan French By: /s/ Kelly Hankinson --------------------- ----------------------- Declan French Kelly L. Hankinson Chief Executive Officer Chief Financial Officer I, Declan French, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Thinkpath Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ Declan French ----------------------- Declan French Chief Executive Officer I, Kelly Hankinson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Thinkpath Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 19, 2002 /s/ Kelly Hankinson ----------------------- Kelly Hankinson Chief Financial Officer EX-99.1 3 b321496_ex99-1.txt CERTIFICATION DECLAN FRENCH EXHIBIT 99.1 CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer of Thinkpath Inc. (the "Company") hereby certifies that to the best of my knowledge: (a) The Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 (the "Report"), to which this certification is attached as an exhibit, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Declan French - ----------------------- Declan French Chief Executive Officer November 19, 2002 - ----------------------- EX-99.2 4 b321496_ex99-2.txt CERTIFICATION KELLY HANKINSON EXHIBIT 99.2 CERTIFICATION Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Financial Officer of Thinkpath Inc. (the "Company") hereby certifies that to the best of my knowledge: (a) The Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 (the "Report"), to which this certification is attached as an exhibit, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kelly Hankinson - ----------------------- Kelly Hankinson Chief Financial Officer November 19, 2002 - ----------------------- -----END PRIVACY-ENHANCED MESSAGE-----