10-K 1 t300236.txt THINKPATH INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 001-14813 THINKPATH INC. ------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ONTARIO, CANADA 52-209027 ----------------------------------- ----------------- (JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 55 UNIVERSITY AVENUE, SUITE 400, TORONTO, ONTARIO, CANADA M5J 2H7 --------------------------------------------- ------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (416) 364-8800 ---------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, NO PAR VALUE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ____ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. YES X NO ___ THE ISSUER'S REVENUES FOR THE MOST RECENT FISCAL YEAR WERE $25,064,074. THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING STOCK HELD BY NON-AFFILIATES BASED UPON THE LAST SALE PRICE ON APRIL 11, 2003 WAS APPROXIMATELY $1,023,126. AS OF APRIL 11, 2003 THERE WERE 143,551,288 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE,ISSUED AND OUTSTANDING. DOCUMENTS INCORPORATED BY REFERENCE: NONE. THINKPATH INC. 2002 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Item 1. Description of Business............................................. Item 2. Description of Property ............................................ Item 3. Legal Proceedings.................. ................................ Item 4. Submission of Matters to a Vote of Security Holders................. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters........................................................... Item 6. Selected Financial Data ............................................ Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......... Item 8. Financial Statements....................................... F-1 - F-38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............................................. PART III Item 10. Directors and Executive Officers of the Registrant; Compliance with Section 16(a) ............................................... Item 11. Executive Compensation........................................ ..... Item 12. Security Ownership of Certain Beneficial Owners and Management...... Item 13. Certain Relationships and Related Transactions...................... Item 14. Controls and Procedures............................................. Item 15. Exhibits, List and Reports on Form 8-K.............................. Signatures................................................................... SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained herein including, without limitation, those concerning (i) Thinkpath Inc.'s ("Thinkpath") strategy, (ii) Thinkpath's expansion plans, and (iii) Thinkpath's capital expenditures, contained forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) concerning Thinkpath's operations, economic performance and financial condition. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Thinkpath undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. EXCHANGE RATE DATA Thinkpath maintains its books of account in Canadian dollars, but has provided the financial data in this Form 10-K in United States dollars and on the basis of generally accepted accounting principles as applied in the United States, and Thinkpath's audit has been conducted in accordance with generally accepted auditing standards in the United States. All references to dollar amounts in this Form 10-K, unless otherwise indicated, are to United States dollars. The following table sets forth, for the periods indicated, certain exchange rates based on the noon buying rate in New York City for cable transfers in Canadian dollars. Such rates are the number of United States dollars per one Canadian dollar and are the inverse of rates quoted by the Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average exchange rate is based on the average of the exchange rates on the last day of each month during such periods. On April 11, 2003, the exchange rate was Cdn$0.6880 per US$1.00.
Year ended December 31, 1997 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- ---- Rate at end of period $0.6991 $0.6532 $0.6929 $0.6676 $0.62870 $0.63440 Average rate during period 0.7223 0.6745 0.6730 0.6739 0.64612 0.63724 High 0.6945 0.7061 0.6929 0.6983 0.67140 0.66560 Low 0.7749 0.6376 0.6582 0.6397 0.62270 0.61750
PART I ITEM 1. DESCRIPTION OF BUSINESS Unless otherwise indicated, all reference to "Thinkpath", "us", "our" and "we" refer to Thinkpath Inc. and its wholly-owned subsidiaries: Systemsearch Consulting Services Inc., an Ontario corporation, International Career Specialists Ltd., an Ontario corporation, Thinkpath Inc. (formerly Cad Cam, Inc.), an Ohio corporation, Thinkpath Technical Services Inc. (formerly Cad Cam Technical Services Inc.), an Ohio corporation, Thinkpath Michigan Inc. (formerly Cad Cam Michigan Inc.), a Michigan corporation, Thinkpath Training Inc. (formerly ObjectArts Inc.), an Ontario corporation, Thinkpath Training US Inc. (formerly ObjectArts US Inc.), a New York corporation, MicroTech Professionals Inc., a Massachusetts corporation, and TidalBeach Inc., an Ontario corporation. OVERVIEW Thinkpath provides technological solutions and services in engineering knowledge management including design, drafting, technical publishing, e-learning and staffing. Our customers include Department of Defense ("DOD") 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, CIBC and EDS Canada. We were incorporated under the laws of the Province of Ontario, Canada in 1994. Our principal executive offices are located at 55 University Avenue, Suite 400, Toronto, Ontario, Canada, M5J 2H7, telephone number (416) 364-8800 and our website is www.thinkpath.com. TECHNICAL PUBLISHING We provide technical publishing programs for complete integration into engineering and design departments of government, military contractors, aerospace and automotive customers. Our software performs technical documentation through desktop publishing, technical illustration and web animation and produces printed materials, e-publications for CD rom and web, and SGML/XML tagged electronic manuals. Our technology can also capture existing publications and convert the data to assemble electronic publications specific to a customer's requirements. We maintain a complete staff of technical publication personnel consisting of highly skilled engineers and drafters. As a result, we can draw heavily upon our engineering resources to handle every step of the documentation process, including researching, writing, editing, illustration, printing and distribution. We have also made a substantial investment into high-end engineering software tools in order to fully use existing engineering data in developing new material. We believe this gives us an advantage over competitors because it reduces the time needed not only to generate illustrations, but also the amount of customer support time required in developing new documentation. We provide technical translation services in over 30 different languages ranging from Spanish to Mandarin Chinese. Our translators come from diverse technical and cultural backgrounds, which results in an accurate translation within the customer's industrial discipline. In addition, our typesetters work with cutting-edge software specific to each language conversion. We can guide a company's entire ISO documentation process, from developing requirements to delivering detailed publications that meet all ISO9001 regulations. Our technical publication library includes hundreds of documents written to meet a variety of military, industrial, and individual corporate specifications. We practice the MIL-SPEC (Military Specifications guidelines) rules for graphics, the ATA(American Transportation Association) rules for content, as well as the AICC*(Aviation Industry Computer Based Training Committee) rules for format and interchangeability. We also produce CE (Communaute Europeenne) compliant documentation for CE and compliant machinery. -1- DESIGN ENGINEERING Our engineering and design services cover every facet of a project from concept to SLA prototyping to a complete turnkey package that delivers a finished, operating system. Our engineers handle the drafting, the detailing and the parametric modeling. We have experienced engineers on staff as well as a pool of skilled consultants whom we can call on to provide internal design services. RECRUITMENT We offer full-service recruitment services, including permanent placement, contract placement, and executive search in the IT and engineering fields. We have particular expertise in recruiting for Web-based and e-commerce applications, Customer Relationship Management (CRM) technologies, technical documentation and technical training. We can and do find candidates from the entire spectrum of responsibility levels -- from newly graduated junior technicians to senior technical executives. Our careful evaluation process tests candidates on their technical proficiency, soft skills, fit with company culture, and attitude towards finding a new position. We guarantee that all potential hires are interviewed and reference checked and that no resume is ever forwarded to a customer without the candidate's prior permission and knowledge. TRAINING We provide technical and e-learning training in Catia, ProEngineer and Unigraphics products. Our focus going forward will be on the engineering services group and the training derived from those services. Some of engineering products we train on include: - Archibus; - AutoCAD; - AutoCAD LT; - AutoDesk Mechanical Desktop; - CADPLUS; - Computer Aided Facilities Management (CAFM); - MicroStation; - SDRC; - Solid Edge; - Solid Works; - ProENGINEER; and - Unigraphics. We have developed and delivered custom engineering courses on engines, presses, weaponry and various equipment and machinery to General Electric, J&L, Caterpillar, Kellogg, DOW Brands, Heidelberg, and many others. In addition, we have developed e-learning programs that teach engineering design software usage, machine operation, aircraft jet engine repairs, CIM programs that register students and monitor their progress and accomplishments, pretests, in-process testing and final exams. CUSTOMERS Our customers are large and high-growth corporations from a wide variety of industries across North America, including Fortune 500 companies as well as other high-profile companies. We believe that our customer base provides credibility when pursuing other customers. -2- The following is a partial listing of our customers: Hill-Rom Company Lockheed Martin General Dynamics General Electric General Motors Bank of Montreal Cummins Engine FUJITSU Group ESI Fiscal Ford Motor Co. COMPETITION The information technology staffing industry is highly competitive, fragmented and characterized by low barriers to entry. We compete for potential customers with other providers of information technology staffing services, systems integrators, internet-based recruitment management systems, computer consultants, employment listing services and temporary personnel agencies. Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and human resources, greater name recognition and a larger base of information technology professionals and customers than we do, all of which may provide these competitors with a competitive advantage. In addition, many of these competitors, including numerous smaller privately held companies, may be able to respond more quickly to customer requirements and to devote greater resources to the marketing of services than we are. Because there are relatively low barriers to entry, we expect that competition will increase in the future. The engineering services, technical publishing and e-learning industry are also very competitive but have much higher barriers to entry due to high capital costs for tools and equipment and the specialized skills and knowledge required. Increased competition could result in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, prospects, financial condition and results of operations. Further, we cannot assure you that we will be able to compete successfully against current or future competitors or that the competitive pressures we face will not have a material adverse effect on our business, prospects, financial condition and results of operations. We believe that the principal factors relevant to competition in the information technology, staffing and engineering services industry are the recruitment and retention of highly qualified information technology and engineering professionals, rapid and accurate response to customer requirements and, to a lesser extent, price. BUSINESS STRATEGY We plan to exploit our track record in engineering services by offering a unique blend of design engineering, technical publishing and customized e-learning courseware. In early 2002, we began to focus our marketing efforts on the defense, aerospace and automotive industries and it is here that we expect our opportunity to generate significant growth in 2003 is most likely. By combining design engineering and technical publishing we believe we have become experts experienced in content management and thus are positioned to deliver high margin customized e-learning products. Engineering services offer higher margins and growth as well as more predictability and stability than the IT services arena does. Although our focus will be on growing the engineering services division, we plan to maintain our current level of activity in IT services without investing further capital. Our business objective is to increase our gross revenue and improve our gross margins by replacing fixed priced projects with time and materials based contracts. We intend to increase our market share through the addition of engineering sales staff and through the marketing and promotion support services of outside consultants. The primary components of our strategy to achieve this objective are as follows: - Expand our DOD contractor customer base; - Grow our aerospace and automotive customer base; and - Further penetrate existing customer base, including Fortune 500 companies. We have established an extensive technology strategy and infrastructure that we believe provides us with a competitive advantage over less technologically advanced competitors. The primary components of this strategy and infrastructure are described below. -3- BACK OFFICE INFRASTRUCTURE We have invested heavily in the creation and support of an integrated technological infrastructure that links all offices and employees and promotes uniformity in certain functions. Our accounting program provides for real-time financial reporting across dispersed branch offices. Our intranet and recruitment management software application, Njoyn, provides each of our employees with access to the tools and information that help them to be successful and productive. This infrastructure allows us to integrate our acquisitions more easily and cost-effectively than would otherwise be possible. MARKETING AND PROMOTION Our marketing and brand strategy is to position us as experts of content in engineering knowledge management. As a provider of engineering services, we will emphasize our flexible service options, the depth of our expertise, and the global delivery capabilities of our North American offices. We believe this positioning will be achieved through a variety of means, including: - Strong and easy-to-access sales and marketing support at the branch level; - Investment in awareness and branding campaigns; and, - Exploration and establishment of various business partnerships and alliances. COLLATERAL AND SALES SUPPORT A major marketing and promotion program is underway to update our collateral material and Web sites to more accurately reflect our renewed focus on engineering services. TARGET MARKETS Our target customers are Department of Defense contractors, and aerospace and automotive corporations located primarily in the South Eastern states and Great Lake regions of North America. EMPLOYEES AND CONSULTANTS EMPLOYEES Our staff as of April 11, 2003, consists of 46 full-time employees, including 30 sales personnel and 16 administrative and technical employees. Our staff at December 31, 2002 consisted of 46 full-time employees, including 32 sales personnel and 16 administrative and technical employees. Our staff at December 31, 2001 consisted of 98 full-time employees, including 46 sales personnel and 52 administrative and technical employees. We are not party to any collective bargaining agreements covering any of our employees, have never experienced any material labor disruption and are unaware of any current efforts or plans to organize our employees. CONSULTANTS We enter into consulting agreements with information technology and engineering professionals at hourly rates based on each individual's technical skills and experience. As of April 11, 2003, approximately 205 professionals were performing services for our customers. At December 31, 2002 there were 225 professionals placed by us, performing services for our customers. At December 31, 2001 there were 309 professionals placed by us, performing services for our customers. RECENT EVENTS On January 24, 2003, we held a Special Meeting of Shareholders at which a resolution amending our Articles of Incorporation to increase our authorized capital stock from 100,000,000 to 800,000,000 was approved. On January 28, 2003, we registered an aggregate of 12,427,535 shares of common stock, no par value per share, issued to Declan A. French, our Chief Executive Officer, pursuant to an amendment to his employment agreement. -4- On February 7, 2003, we entered into a consulting agreement with Rainery Barba who shall perform legal and advisory services for a period of one year. In consideration for such services we registered 4,000,000 shares of our common stock, no par value per share. On February 7, 2003, we entered into a consulting agreement with Dailyfinancial.com Inc. which shall perform corporate consulting services in connection with mergers and acquisitions, corporate finance and other financial services. In consideration for such services we issued 4,200,000 shares of our common stock, no par value per share. Subsequent to December 31, 2002, we closed an additional $1,100,000 in convertible debentures and warrants. The funds were used for various debt settlements and critical payables. The debentures will become due twelve months from the date of issuance. The investors will have the right to acquire up to $1,100,000 worth of our common stock at the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of 7 years from the original purchase date at a purchase price of $.0175 per share. We are required to pay interest to the debenture holder on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. The proceeds received were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital was credited by the value of the warrants in the amount of $517,448. The value of the beneficial conversion feature was determined to be $623,313. As of April 11, 2003, the beneficial conversion was recalculated as the conversion price from time of issuance had declined. An amount of $6,517,670 will be reflected in the first quarter. As of April 11, 2003, we have issued 43,958,652 shares of our common stock to the convertible debenture holders upon the conversion of $285,400 of debentures and accrued interest. -5- ITEM 2. DESCRIPTION OF PROPERTY We maintain our headquarters in 6,462 square foot offices located at 55 University Avenue, Suite 400 in Toronto, Ontario, Canada. We have leased such facility for a term of ten years terminating in December 2007. We pay annual base rent of $290,000. We lease additional offices at the following locations: Location Square Feet Lease Expiration Current Rent Per Annum -------- ------------- ------------------- ------------------ Cincinnati, Ohio 3,820 05/31/05 $53,289 Columbus, Ohio 1,600 01/31/05 $27,000 Dayton, Ohio 6,421 12/31/05 $89,894 Detroit, Michigan 15,328 08/31/05 $168,025 Toronto, Ontario 6,462 12/31/10 $223,826 The lease commitments do not include two operating leases for premises that we currently sub lease to the purchasers of the Canadian and United States training divisions. If the purchasers were to default on payment or abandon the premises, we would be liable for annual payments of $282,096 expiring August 31, 2006 and $150,534 expiring September 30, 2010. The lease commitments also do not include two operating leases for premises located in the United States that were closed in the fourth quarter of 2002. We have not made any payments on these leases since the premises were abandoned. We do not intend to make any further payments on these leases and the lessors have not tried to enforce payment. However, we may be liable for a lease balance of $44,597 which expires November 30, 2004 and $103,686 which expires September 30, 2005. ITEM 3. 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. AT&T Corp. instituted an action against us in the United States District Court for the Southern District of New York, No. 02 CV 3132, alleging that we breached an agreement to pay AT&T certain monies in exchange for Internet and web hosting services purportedly performed by AT&T. AT&T is seeking $153,669.36 in damages, plus interest and reasonable attorneys' fees. We have answered the complaint and vigorously dispute AT&T Corp.'s allegations. Discovery has not yet begun, and we are endeavoring to resolve this matter without further litigation. Should settlement discussions fail, we intend to defend this action vigorously. We are not party to any other material litigation, pending or otherwise. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On October 16, 2002, we held our Annual Meeting of Shareholders at which the shareholders were invited to consider and vote upon proposals to: (i) elect the members of our board of directors for the ensuing year; (ii) ratify the appointment of Schwartz, Levitsky, Feldman, llp, as our independent chartered accountants for the ensuing year; (iii) ratify the adoption of our 2002 Stock Option Plan; (iv) vote upon the proposal to amend our Articles of Incorporation to increase the authorized number of the shares of our common stock from 30,000,000 to 100,000,000; and, (v) transact such other business as may properly come before the Meeting and any continuations and adjournments thereof. -6- (i) The following directors were elected to our board of directors and received the votes indicated: For Against Withheld Declan A. French 24,416,848 - 756,001 Kelly Hankinson 24,856,972 - 315,877 John Dunne 24,957,017 - 215,832 Arthur S. 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: Declan A. French has served as our Chairman of our board of directors and Chief Executive Officer since our 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 its Board of Directors from June 2000 until February 14, 2003 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. Ms. Hankinson resigned from the Board of Directors on February 14, 2003. 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 on 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 practices 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 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 in1999 and a Chartered Accountant in 1978. Ms. Evans received a Bachelors Degree in Science from McGill University in 1972. Ms. Evans served on the Board of Directors from October 16, 2002 until her resignation on February 14, 2003. (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: 25,177,514 Against: 199,262 Withheld: 138,975 Non-votes: 0 (iii) The adoption of our Stock Option Plan was approved by the votes indicated: For: 11,161,695 Against: 1,554,095 Withheld: 12,681,461 Non-votes: 0 -7- The 2002 Stock Option Plan 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 us 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 the 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 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 our outstanding shares (based upon voting power); or (v) as a result of or in connection with a contested election of directors, the persons who were directors 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 the we shall pay to each optionee an certain amount of cash per share; (3) make such adjustments to options then outstanding as our Compensation Committee deems appropriate to reflect such Corporate Change (provided, however, that our Compensation Committee 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. -8- 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 the shares of our common stock from 30,000,000 to 100,000,000 For: 24,473,632 Against: 1,052,269 Withheld: 43,850 Non-votes: 0 -9- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock began trading on the Nasdaq SmallCap Market on June 8, 1999, when we completed our initial public offering. Our common stock is listed on the Over-the-Counter Bulletin Board (OTC:BB) under the symbol "THTH-F". As of April 11, 2003, we had 143,551,288 shares of common stock outstanding. The following table sets forth the high and low sale prices for our common stock as reported on the OTC:BB. Fiscal 2001 High Low ----------- ---- --- First Quarter $1.688 $0.563 Second Quarter $0.57 $0.30 Third Quarter $0.63 $0.25 Fourth Quarter $0.37 $0.13 Fiscal 2002 First Quarter $0.24 $0.14 Second Quarter $0.24 $0.10 Third Quarter $0.14 $0.08 Fourth Quarter $0.09 $0.04 Fiscal 2003 First Quarter $0.05 $0.007 Second Quarter (through to April 11, 2003) 0.0095 0.0071 As of April 11, 2003, we had 100 holders of record and approximately 1,756 beneficial shareholders. On April 11, 2003, the last sale price of our common stock as reported on the OTC:BB was $0.0071. DIVIDEND POLICY We have never paid or declared dividends on our common stock. The payment of cash dividends, if any, in the future is within the discretion of our Board of Directors and will depend upon our earnings, capital requirements, financial condition and other relevant factors. We intend to retain future earnings for use in our business. -10- ITEM 6. SELECTED FINANCIAL DATA
Selected Income Statement Data For the years ended, 2002 2001 2000 ---- ---- ---- Revenue 25,064,674 33,183,661 35,736,076 Operating loss from continuing operations (3,465,954) (6,710,650) (7,354,288) Net loss from continuing operations (8,004,164) (8,559,402) (7,040,644) Loss from discontinued operations (142,488) (1,124,040) (1,357,673) Preferred stock dividends 100,387 728,740 3,646,595 Net loss (8,247,039) (10,412,182) (12,044,912) ============= =============== =============== Weighted average number of common stock outstanding basic and fully diluted 29,000,252 14,943,306 5,296,442 ============= =============== ============== Loss from continuing operations per weighted average common stock before preferred dividends basic and fully diluted (0.28) (0.57) (1.33) ============= =============== =============== Loss from continuing operations per weighted average common stock after preferred dividends basic and fully diluted (0.28) (0.62) (2.02) ============= =============== =============== Selected Balance Sheet Data 2002 2000 2001 ---- ---- ---- Current Assets 2,974,524 6,801,561 8,646,035 Current Liabilities 6,692,642 10,155,923 11,733,166 Working Capital (3,718,118) (3,354,362) (3,087,131) Total Assets 8,787,531 17,174,978 25,685,940 Long-term debt and notes payable, net of current portion 771,459 2,922,432 2,401,980 Stockholders' equity 1,323,430 3,246,946 10,799,006
-11- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the selected historical financial data, financial statements and notes thereto and our other historical financial information contained elsewhere in this Annual Report on Form 10-K. The statements contained in this Annual Report on Form 10-K that are not historical are forward looking statements within the meaning of Section 27A of the Securities Act of and Section 21E of the Exchange Act, including statements regarding our expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include our statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward-looking statements included herein are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statement. It is important to note that our actual results could differ materially from those in such forward-looking statements. 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 DOD 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, and Hill-Rom Company. 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. -12- At December 31, 2002, all of our investments in non-related companies totaling $45,669 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 8, 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 from March 8, 2002. 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. 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 -13- 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 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. During the fourth quarter, the IT recruitment unit experienced further decline, indicating impairment. The fair value of the unit was estimated using the expected present value of future cash flows. At December 31, 2002, a further goodwill impairment loss of $87,489 was recognized. The Technical Publications and Engineering unit was tested for impairment in the fourth quarter, as operating profits, cash flows and forecasts were lower than expected. At December 31, 2002, a goodwill impairment loss of $1,234,962 was recognized. 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 year ended December 31, 2001, our net loss would decrease by $454,908 from a loss of $8,559,402 to a loss of $8,104,494 and our net loss per share would decrease by $0.03 from a net loss per share of $0.57 to a net loss per share of $0.54. Had the standard been in effect for the year ended December 31, 2000, our net loss would decrease by $319,879 from a loss of $7,040,644 to a loss of $6,720,765 and our net loss per share would decrease by $0.06 from a net loss per share of $1.32 to a net loss per share of $1.26. 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. -14- The Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001 Revenue For the year ended December 31, 2002, we derived 50% of our revenue in the United States compared to 56% for the year ended December 31, 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 engineering and IT documentation sales in the United States. For the year ended December 31, 2002, our primary source of revenue was IT recruitment, representing 51% of total revenue which is consistent with the year ended December 31, 2001. Recruitment revenue for the year ended December 31, 2002 decreased by $3,970,000 or 24% to $12,830,000 compared to $16,800,000 for the year ended December 31, 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 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 year ended December 31, 2002, 43% of our revenue came from engineering services including technical publications, engineering design and e-learning compared to 39% for the year ended December 31, 2001. Revenue from engineering services for the year ended December 31, 2002 decreased by $2,220,000 or 17% to $10,740,000 compared to $12,960,000 for the year ended December 31, 2001`. The decrease in engineering sales is a result of the reduction of the sales force for this division. 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. -15- For the year ended December 31, 2002, information technology documentation services represented approximately 6% of our revenue compared to 10% for the year ended December 31, 2001. Revenue from information technology documentation services for the year ended December 31, 2002 decreased by $1,930,000 or 56% to $1,490,000 compared to $3,420,000 for the year ended December 31, 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 reduced terminated the staff in this division and transferred the existing contracts to another office. The staff terminations in this division represent approximately $400,000 in annual savings. 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. 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 IT recruitment services for the year ended December 31, 2002 declined to 14% from 25% for the year ended December 31, 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 67% of the total revenue for the recruitment division and 34% of the company's total revenues for the year ended December 31, 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 direct costs of technical publications and engineering services include wages, benefits, software training and project expenses. The average gross profit for the engineering division was 32% for the year ended December 31, 2002 compared to 30% for the year ended December 31, 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 information technology division for the year ended December 31, 2002 was 25% compared to 38% for the year ended December 31, 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 Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000 Revenue For the year ended December 31, 2001, we derived 56% of our revenue in the United States compared to 70% for the year ended December 31, 2000. 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 engineering and IT documentation sales in the United States. -16- For the year ended December 31, 2001, our primary source of revenue was recruitment, representing 51% of total revenue compared to 37% for the year ended December 31, 2000. Recruitment revenue for the year ended December 31, 2001 increased $3,460,000 or 26% to $16,800,000 compared to $13,340,000 for the year ended December 31, 2000. The increase in revenue from recruitment is a result of the added revenues associated with certain preferred vendor agreements we secured in 2001. We are now a preferred vendor to AT&T, CIBC, EDS Canada Inc., Fidelity, and the Management Board Secretariat of the Ontario Government. For the year ended December 31, 2001, 39% of our revenue came from engineering services including technical publications, engineering design and e-learning compared to 45% for the year ended December 31, 2000. Revenue from engineering services for the year ended December 31, 2001 decreased $3,210,000 or 20% to $12,960,000 compared to $16,170,000 for the year ended December 31, 2000. Although the majority of our revenue came from IT Recruitment in 2001, our focus was on strengthening the engineering services division. In particular, we focused on expanding into the defense, aerospace and automotive industries and leveraging off existing engineering customers to secure new higher margin technical publication and e-learning business. During the year 2001, we terminated seven employees of this division, representing $390,000 in annual expenses. In addition, we closed our Atlanta office, representing $80,000 in annual rent expense. Revenues from the Atlanta office were $1,345,000 for 2001 and $1,800,000 for 2000. We successfully transitioned the sales contracts to more effective engineering offices, and therefore do not anticipate a material decline in revenue as a result of closure. For the year ended December 31, 2001, information technology documentation services represented approximately 10% of our revenue compared to 17% for the year ended December 31, 2000. Revenue from information technology documentation services for the year ended December 31, 2001 decreased $2,800,000 or 45% to $3,420,000 compared to $6,220,000 for the year ended December 31, 2000. The substantial decrease in revenue from information technology documentation services was primarily due to the general economic slowdown. 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 overheads for this division to support the current levels of revenue. During 2001, we restructured salaries and eliminated eight employees representing annual expenses of $425,000. Gross Profit Gross profit for information technology recruitment services for the year ended December 31, 2001 declined to 25% from 51% for the year ended December 31, 2000. The decline in gross profit is a result of becoming a preferred vendor for information technology contract recruitment services and the resulting lower margins. In addition, revenue from permanent placements had declined significantly from 2000, and contributed to the decline in gross profit. As we do not attribute any direct costs to permanent placement services, the gross profit on such services is 100% of revenue. The average gross profit for the engineering division was 30% for the year ended December 31, 2001 which is consistent with the year ended December 31, 2000 The average gross profit for the IT documentation division for the year ended December 31, 2001 was 38% compared to 44% for the year ended December 31, 2000. The decline in gross profit for 2001 is a result of the decrease in higher margin permanent placements and increase in lower margin contract placements of documentation specialists. -17- Results of Operations The Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001 Revenue. Revenue for the year ended December 31, 2002 decreased by $8,120,000 or 24%, to $25,060,000, as compared to $33,180,000 for the year ended December 31, 2001. The decrease is primarily attributable to the decline in revenues from each division including 24% for IT recruitment, 17% for technical publications and engineering, and 56% for IT documentation. Cost of Sales. The cost of sales for the year ended December 31, 2002 decreased by $4,330,000, or 18%, to $19,460,000, as compared to $23,790,000 for the year ended December 31, 2001. The cost of sales as a percentage of revenue increased to 78% compared to 72% for the year ended December 31, 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 year ended December 31, 2002 decreased by $3,800,000, or 40%, to $5,600,000 compared to $9,400,000 for the year ended December 31, 2001. This decrease was attributable to the overall decrease in revenue and the increase in cost of sales during the year ended December 31, 2002. As a percentage of revenue, gross profit decreased from 28% for the year ended December 31, 2001 to 22% for the year ended December 31, 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 year ended December 31, 2002 decreased by $7,040,000, or 44%, to $9,070,000 compared to $16,110,000 for the year ended December 31, 2001. Administrative expenses decreased by $790,000 or 15% to $4,530,000 for the year ended December 31, 2002 compared to $5,320,000 for the year ended December 31, 2001. General administrative expenses including salaries and rent have decreased significantly over last year as a result of restructuring and general cost cutting. Included in administrative expenses are the costs of $980,000 of shares of our common stock issued to various consultants for corporate and debt restructuring services rendered during 2002. Selling expenses for the year ended December 31, 2002 decreased by $2,040,000, or 41%, to $2,980,000 from $5,020,000 for the year ended December 31, 2001. This decrease is attributable to the considerable downsizing in sales staff and the decrease in commissions, as a result of the reduction in sales. In addition, in 2002 we eliminated certain advertising and promotional expenses. For the year ended December 31, 2002, financing expenses increased 79% to $1,200,000 from $670,000 for the year ended December 31, 2001. This increase is attributable to the expensing of approximately $770,000 for cash, shares and warrants 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 year ended December 31, 2002, depreciation and amortization expenses decreased by $700,000, or 35%, to $1,290,000 from $1,990,000 for the year ended December 31, 2001. This decrease is primarily attributable to our adoption of Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Under these statements, we are no longer required to amortize goodwill. Amortization of goodwill for the year ended December 31, 2001 amounted to $450,000. During 2002, we assessed the financial impact SFAS No. 141 and No. 142 will have on our consolidated Financial Statements and recorded a goodwill impairment of $1,380,259 as required based on our evaluation of carrying value and projected cash flows. In accordance with SFAS 121, we recorded a write down of goodwill of $3,001,291 in 2001. For the year ended December 31, 2002, there were no restructuring charges related to the termination of personnel and the closure of non-productive branch offices. For the year ended December 31, 2001, our restructuring charges were $120,000 related to the closure of our London training office and termination of personnel. -18- 0perating Loss from Continuing Operations. For the year ended December 31, 2002, losses from continuing operations decreased by $3,240,000 or 48% to a loss of $3,470,000 as compared to a loss of $6,710,000 for the year ended December 31, 2001. This decrease is largely attributable to the recognition of debt forgiveness of approximately $2,310,000 related to discounts received on the repayment of our line of credit with Bank One for a net discount of $935,000; repayment of long-term debt to the Business Development Bank of Canada for a net discount of $300,000; and, debt forgiveness of on the restructuring of our notes payable totaling $1,075,000. Loss on investments. During the year ended December 31, 2002, we wrote down our investment in Conexys by $667,510. During the year ended December 31, 2001, we wrote down our investments in Tillyard Management, SCM Dialtone, and Lifelogix of $130,242, $75,000 and $121,947 respectively. Interest Charges. For the year ended December 31, 2002, interest charges increased by $3,070,000, or 341%, to $3,970,000 from $900,000 for the year ended December 31, 2001. This increase is largely attributable to the interest expense on the beneficial conversion feature of on the convertible debentures issued in December 2002, in the amount of $2,900,000. Loss from Continuing Operations before Income Tax. Loss from continuing operations before income tax for the year ended December 31, 2002 increased by $60,000 or 1% to a loss of $8,000,000 as compared to a loss of $7,940,000 for the year ended December 31, 2001. Income Taxes. Income tax expense for the year ended December 31, 2002 decreased by $616,000 or 99% to $4,000 compared to an expense of $620,000 for the year ended December 31, 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 year ended December 31, 2002 decreased by $560,000, or 6%, to a loss of $8,000,000 compared to a loss of $8,560,000 for the year ended December 31, 2001. Income (Loss) from Discontinued Operations. Operations of the technology and training divisions for the years ended December 31, 2002 and 2001 have been reported as discontinued. Effective March 8, 2002, we sold our technology division, Njoyn Software Incorporated to Cognicase Inc., a Canadian company. 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, including the employees of TidalBeach Inc. We will not have future revenues from either the Njoyn or Secondwave products. Technology revenue for the year ended December 31, 2002 was $59,000 and $555,000 in 2001. The operating loss from the technology division for the year ended December 31, 2002 was $164,000 and $732,000 in 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 $400,229 has been reflected in the 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. Effective May 1, 2002, we signed an agreement with triOS Training Centres Limited, an Ontario company, for the purchase of certain assets of the Toronto training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, triOS assumed the Toronto training staff and is subletting the classroom facilities. On November 1, 2002, we entered into a series of agreements with Thinkpath Training LLC, a New York company, for the sale of certain assets of the 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 assumed the New York training staff, some assets and is subletting the classroom facilities. -19- As a result of these two transactions, we will not have future revenues from either training division. Training revenue for the year ended December 31, 2002 was $1,347,000, and $3,187,000 in 2001. The operating loss from the training division for the year ended December 31, 2002 was $362,000 and $391,000 in 2001. Net Loss Before Preferred Stock Dividends. Net loss before preferred stock dividends for the year ended December 31, 2002 decreased by $1,530,000 or 16% to a net loss of $8,150,000 compared to a net loss of $9,680,000 for the year ended December 31, 2001. Net Loss Applicable to Common Stock. Net loss applicable to common stock decreased by $2,160,000 or 21% to $8,250,000 for the year ended December 31, 2002 compared to $10,410,000 for the year ended December 31, 2001. During 2002 we issued preferred stock dividends of $100,000 and $730,000 in 2001. THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000 Revenue. Revenue for the year ended December 31, 2001 decreased by $2,560,000 or 7%, to $33,180,000, as compared to $35,740,000 for the year ended December 31, 2000. The decrease is primarily attributable to the decline in revenues from our technical publications and engineering and information technology documentation divisions of 20% and 45% respectively. Cost of Sales. The cost of sales for the year ended December 31, 2001 increased by $2,490,000, or 10%, to $23,790,000, as compared to $21,300,000 for the year ended December 31, 2000. As a percentage of revenue, the cost of sales was 72% compared to 60% for the year ended December 31, 2000. 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 year ended December 31, 2001 decreased by $5,030,000, or 35%, to $9,400,000 compared to $14,430,000 for the year ended December 31, 2000. This decrease was attributable to the overall decrease in revenue and the increase in cost of sales during the year ended December 31, 2001. As a percentage of revenue, gross profit decreased from 40% for the year ended December 31, 2000 to 28% for the year ended December 31, 2001. This decrease in gross profit is a direct result of the increase in direct costs associated with IT recruitment sales. Expenses. Expenses for the year ended December 31, 2001 decreased by $5,940,000 or 27% to $16,110,000 compared to $22,050,000 for the year ended December 31, 2000. Administrative expenses decreased by $710,000 or 12% to $5,320,000 compared to $6,030,000 for the year ended December 31, 2000. This decrease is related to the reduction of administrative salaries and overhead as a result of restructuring and general cost reduction. Selling expenses for the year ended December 31, 2001 decreased by $1,330,000 or 21% to $5,020,000 from $6,350,000 for the year ended December 31, 2000. This decrease is attributable to the decrease in sales personnel and commissions corresponding with the decline in revenue. Financing expenses for the year ended December 31, 2001 decreased by $3,920,000 or 85% to $670,000 compared to $4,590,000 for the year ended December 31, 2000. The charges in 2000 related to the costs of acquisitions and the repricing of options and warrants in connection with financing and acquisitions. For the year ended December 31, 2001, depreciation and amortization expense increased by $60,000 or 3% to $1,980,000 from $1,920,000 for the year ended December 31, 2000. This increase is primarily attributable to the increase in capital assets and the acquisition of other assets. -20- In accordance with SFAS 121, a goodwill impairment of $3,001,391 was recorded in 2001 and an impairment of $3,113,268 recorded in 2000. For the year ended December 31, 2001, restructuring charges related to the termination of personnel and the closure of non-productive branch offices increased $70,000 or 140% to $120,000 compared to $50,000 for the year ended December 31, 2000. Operating Loss from Continuing Operations. For the year ended December 31, 2001, operating losses decreased by $640,000 or 9% to an operating loss of $6,710,000 as compared to an operating loss of $7,350,000 for the year ended December 31, 2000. This decrease is primarily attributable to the significant reduction in financing expenses related to acquisitions and financing activities during the year ended December 31, 2001 compared to 2000. Loss on investments. For the year ended December 31, 2001, we lost $330,000 on investments, compared to zero for the year ended December 31, 2000. During the year 2001, we wrote down our investments in Tillyard Management, SCM Dialtone, and Lifelogix of $130,242, $75,000 and $121,947 respectively. Interest Charges. For the year ended December 31, 2001, interest charges increased by $350,000 or 38% to $900,000 from $650,000 for the year ended December 31, 2000. The increase in interest charges is primarily attributable to higher interest and penalties being charged by Bank One on the overdraft facility which ranged between $400,000 and $750,000 during the period August until December. The interest charges also represent interest paid and accrued for on the notes payable. Loss from Continuing Operations before Income Tax. Loss from continuing operations before income tax for the year ended December 31, 2001 decreased by $70,000 or 1% to a loss of $7,940,000 as compared to a loss of $8,010,000 for the year ended December 31, 2000. Income Taxes. Income tax expense for the year ended December 31, 2001 increased $1,590,000 to $620,000 compared to a tax recovery in 2000 of $970,000 related to deferred tax asset. The increase in income taxes in 2001 is a result of the write down of the deferred income tax asset. Loss from Continuing Operations. Loss from continuing operations for the year ended December 31, 2001 increased by $1,520,000, or 22%, to a loss of $8,560,000 compared to a loss of $7,040,000 for the year ended December 31, 2000. Loss from Discontinued Operations. Operations of the technology and training divisions for the years ended December 31, 2001 and 2000 have been reported as discontinued. Technology revenue for the year ended December 31, 2001 was $600,000 and $827,000 in 2000. The operating loss from the technology division for the year ended December 31, 2001 was $732,000 and $448,000 in 2000. Training revenue for the year ended December 31, 2001 was $3,187,000 and $7,197,000 in 2000. The operating loss from the training division for the year ended December 31, 2001 was $391,000 and $910,000 in 2000. Net Loss Before Preferred Stock Dividends. Net loss before preferred stock dividends for the year ended December 31, 2001 increased by $1,280,000 or 15% to a net loss of $9,680,000 compared to a net loss of $8,400,000 for the year ended December 31, 2000. Net Loss Applicable to Common Stock. Net loss applicable to common stock decreased by $1,630,000 or 14% to $10,410,000 for the year ended December 31, 2001 compared to $12,040,000 for the year ended December 31, 2000. During 2001 we issued preferred stock dividends of $730,000 and $3,650,000 in 2001. -21- LIQUIDITY AND CAPITAL RESOURCES We have incurred substantial operating losses during the last two fiscal years. Due to these factors, we had taken additional cost cutting steps during the year 2002 to reduce our expenses. Specifically, we sold certain non-performing divisions and assets of such divisions and reduced our staff by approximately 50 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 $1,350,000 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 contracted 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 accrued liabilities. We believe the sale of Njoyn and the corresponding reduction in technology expenses will improve our cash flow, as the operations had recurring losses since inception. As a result of the sale of this division, we expect our annual revenues to decrease by approximately $200,000. 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. As a result of the closure of this office, we expect our annual revenues to decrease by approximately $700,000. In May 2002, we entered into a series of agreements with triOS Training Centres Limited, an Ontario company, for the sale 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. Effective November 1, 2002, we entered into a series of agreements with Thinkpath Training LLC, a New York company, for the sale of certain assets of our New York training division 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. We expect the reduction of our staff during 2002 will save approximately $2,000,000 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 during 2002 were a revolving line of credit with Bank One and proceeds from the sale of equity securities. Our primary capital requirements included debt service, capital expenditures and working capital needs. On December 5, 2002, Bank One's security and indebtedness were purchased by Morrison Financial Services Limited. Bank One accepted a $1,100,000 discount on the payoff of its debt. On July 1, 2002 we had entered into a Forbearance and Modification Agreement with Bank One which was subsequently amended on August 1, 2002, August 15, 2002, September 1, 2002, September 16, 2002, September 30, 2002, October 15, 2002, November 15, 2002, and November 30, 2002. Under the terms of the agreement, the Bank was entitled to forbearance fees and payment of related legal fees and expenses. The Bank charged us approximately $250,000 in forbearance fees and $18,000 in legal fees. -22- Morrison Financial Services Limited charged us a 15% fee or $165,000 for the discount negotiation with Bank One. The discount amount of $1,100,000 was recognized as debt forgiveness and the fee of $165,000 was netted against this amount for total debt forgiveness of $935,000. Our facility with Morrison Financial Services Limited is a receivable discount facility whereby we are able to borrow up to 75% of qualifying receivables at 30% interest per annum. At December 31, 2002, the balance on the receivable discount facility was approximately $2,340,000 and exceeded our borrowing capacity based on qualifying receivables. Subsequent to December 31, 2002, we used proceeds from the sale of equity to pay down the facility. We are currently within margin of our receivable discount facility with Morrison Financial Services Limited based on 75% of qualifying accounts receivable. On December 5 2002, we closed a 12% Senior Secured Convertible Debt financing arrangement with a syndicate of investors for debentures of up to $3,000,000. The first debenture of $800,000 was purchased together with 45,714,285 warrants on closing. The debenture will become due twelve months from the date of issuance. The investors will have the right to acquire up to $800,000 worth of our common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until December 5, 2009 at a purchase price of $.0175 per share. We are required to pay interest to the debenture holder on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On December 18, 2002, we closed an additional debenture of $100,000 with Tazbaz Holdings Limited together with 5,625,000 warrants. The debenture will become due twelve months from the date of issuance. Tazbaz Holdings Limited will have the right to acquire up to $100,000 worth of our common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until December 18, 2009 at a purchase price of $.0175 per share. We are required to pay interest to Tazbaz Holdings Limited on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. The proceeds of $900,000 received by us were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the warrants in the amount of $707,050. The value of the beneficial conversion feature was determined to be $2,898,328 which has been credited to paid in capital and charged to earnings as interest expense in 2002. Subsequent to the year end, the beneficial conversion has been recalculated as the conversion price has declined from $.0175. An amount of $14,794,613 will be reflected in the first quarter as an additional interest expense and additional paid in capital. At December 31, 2002, we had cash of $114,000 and a working capital deficiency of $3,720,000. At December 31, 2002, we had a cash flow deficiency from operations of $330,000. At December 31, 2001, we had cash of $480,000 and a working capital deficiency of $3,360,000. At December 31, 2001, we had a cash flow deficiency from operations of $200,000. At December 31, 2000, we had negative cash or cash equivalents and a working capital deficiency of $3,080,000. At December 31, 2000, we had a cash flow deficiency from operations of $3,500,000, due primarily to expenditures on research and development of Njoyn, and restructuring costs associated with the closure of non-performing branch offices. -23- At December 31, 2002, we had cash flow from investing activities of $1,140,000 attributable primarily to the proceeds on the disposal of Njoyn of $1,250,000, which was offset by the purchase of capital assets of approximately $190,000. At December 31, 2001, we had a cash flow deficit from investing activities of $380,000 attributable primarily to the purchase of capital assets of $370,000. At December 31, 2000, we had a cash flow deficit from investing activities of $3,720,000 attributable to the acquisition of MicroTech Professionals Inc. At December 31, 2002, we had a cash flow deficit from financing activities of $1,050,000 attributable primarily to a reduction in bank indebtedness of $3,790,000 which was offset by an increase in debt of $260,000 related to the Terry Lyons loan received in May 2002 and $2,340,000 related to the Morrision Financial receivable discount facility and proceeds of $900,000 from the sale of convertible debentures. At December 31, 2001, we had cash flow from financing activities of $790,000 attributable primarily to proceeds from the issuance of common stock of $400,000, the issuance of preferred stock of $1,200,000 and the repayment of notes of $198,000 and long-term debt of $500,000. At December 31, 2000, we had cash flow from financing activities of $6,020,000, attributable primarily to share capital issue of $5,530,000 an increase in long-term debt of $1,110,000 and a increase in bank indebtedness of $630,000. At December 31, 2002, we had a loan balance of $31,403 with the Business Development Bank of Canada. The loan was assigned to us when we combined with TidalBeach Inc. in November 2000. The loan is secured by a general security agreement with monthly payments of $950.00 and interest at 12.5% per annum. On December 5, 2002, Morrison Financial Services Limited purchased additional debt belonging to the Business Development Bank of Canada of approximately $440,000 in consideration of $100,000. Morrison Financial Services charged us a 15% fee or $45,000 for the discount negotiation with the Business Development Bank of Canada. The discount amount of $341,467 was recognized as debt forgiveness and the fee of $45,000 was netted against this amount for total debt forgiveness of $296,467. In May 2002, we secured a loan of $259,356 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. This loan is subordinated to Morrison Financial Services Limited and no principal payments have been made. At December 31, 2002, we had approximately $174,191 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 engineering division. At December 31, 2002, we had a note payable of $224,000 owed to Roger Walters, the sole shareholder of CadCam Inc. On August 1, 2002, we further 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. 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 price of the shares at the time of conversion of Mr. Walter's debt on August 1, 2002 was 0.0942, representing approximately $340,800 in debt forgiveness. In accordance with FAS 15, the gain was measured by the excess of the carrying amount of the note payable settled less accrued interest, finance charges or other debt obligations. On December 5, 2002, the shares were issued to Roger Walters and we debited liabilities payable in capital stock and credited capital stock in the amount of $247,858 and debt forgiveness in the amount of $187,142. In addition, 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. Pursuant to this agreement, we issued Mr. Walters 1,631,185 shares of our common stock in December 2002. The loan is subordinated to Morrison Financial Services Limited and the 12% Senior Secured Convertible Debenture holders. We have not made any principal payments to Mr. Walters since December 2002 and we are currently in default of the loan agreement. In the event that we default on payment, the principal balance will bear interest at 12% per annum until payment is made. -24- At December 31, 2002, we had a note payable of $670,957 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 $1,740,536 to $600,000 in consideration of the issuance of 4,000,000 shares of our common stock. In addition a prior debt conversion of $225,000 that was to be paid in capital was forgiven. 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 $10,000 per month will begin November 1, 2002 bearing 5% interest until October 1, 2007. 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. The price of the shares at the time of conversion was 0.0942, representing approximately $763,763 in debt forgiveness. In accordance with FAS 15, the gain was measured by the excess of the carrying amount of the note payable settled less accrued interest, benefits and car lease payments as per the settlement agreement. On December 5, 2002, the shares were issued to Denise Dunne and we debited liabilities payable in capital stock and credited capital stock in the amount of $475,787 and debt forgiveness in the amount of $889,749. The loan is secured under a general security agreement but is subordinated to Morrison Financial Services Limited and the 12% Senior Secured Convertible Debenture holders. We have not made any principal payments to Ms. Dunne-Fushi since December 2002 and are currently in default of the loan agreement. In the event of default, Ms. Dunne-Fushi has the option of enforcing the security she holds. 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 April 2002, the FASB issued SFAS No. 145, which, among other factors, 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. The new standard is effective for companies with fiscal years beginning after May 15, 2002. However, the company has elected to adopt the standard as the debt restructuring gain in the current period, as permitted by SFAS No. 145. -25- 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. In January 2003, the FASB issued SFAS No. 148, Accounting for Stock -Based Compensation - Transition and Disclosures. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in the financial statements about the effects of stock-based compensation. The transitional guidance and annual disclosure provisions of this Statement is effective for the December 31, 2002 financial statements. The interim reporting disclosure requirements will be effective for our March 31, 2003 10-Q. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation elaborates on the existing disclosure requirement for most guarantees including loan guarantees, and clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of the Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities," which addresses consolidation by business enterprises of variable interest entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The objective of Interpretation No. 46 is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We do not have any variable interest entities, and, accordingly, adoption is not expected to have a material effect our financial position, results of operations or cash flows. -26- Year 2000 Compliance We have developed and implemented a Year 2000 compliance program to address internal systems, suppliers, processes and procedures, as well as the internally developed Njoyn solution. All phases and actions of this program were successfully completed as planned. Remediation measures, where required, were successfully implemented and tested. The total cost of the compliance program was not material. Although we believe that we have taken the appropriate steps to assess, implement and test Year 2000 compliance, it is not possible to ascertain whether the efforts of customers, suppliers or other third parties, will have a material adverse effect on our business, results of operations and financial condition. Fluctuations in Quarterly Results Our quarterly operating results have in the past and, may in the future, fluctuate significantly, depending on factors such as the demand for our services; our ability to attract and retain employees, information technology and engineering professionals, and customers; the timing and significance of new services and products introduced by us and our competitors; the level of services provided and prices charged by us and our competitors; unexpected changes in operating expenses; and general economic factors. Our operating expenses are based on anticipated revenue levels in the short term, are relatively fixed, and are incurred throughout the quarter. Accordingly, there may be significant variations in our quarterly operating results. Management of Growth Our business has grown rapidly in the last five years. The growth of our business and expansion of our customer base and service offerings has placed a significant strain on management and operations. Our expansion by acquisition resulted in substantial growth in the number of our employees, the scope of our operating and financial systems and the geographic area of our operations, resulting in increased responsibility for management personnel. Our future operating results will depend on the ability of management to continue to implement and improve our operational and financial control systems, and to expand, train and manage our employee base. In addition, our failure to generate or raise sufficient capital to fund continued growth may result in the delay or abandonment of some or all future expansion plans or expenditures or and the continued reduction in the scope of some or all of our present operations, which could materially adversely effect our business, results of operations and financial condition. -27- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. -28- ITEM 8. FINANCIAL STATEMENTS -29- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have had no changes in or disagreements with our accountants. -30- PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT Our officers and directors, and further information concerning each of them, are as follows as at the date of this Annual Report on Form 10-K: Name Age Position ---- --- -------- Declan A. French 56 Chairman of the Board of Directors and Chief Executive Officer Tony French 30 Executive Vice President Kelly Hankinson 33 Chief Financial Officer John Dunne 63 Director Arthur S. Marcus 36 Director Lloyd MacLean 50 Director Katherine Evans 50 Director Each director is elected for a period of one year at our annual meeting of shareholders and serves until the next such meeting and until his or her successor is duly elected and qualified. Directors may be re-elected annually without limitation. Officers are appointed by, and serve at the discretion of, our Board of Directors. Our Bylaws provide that the authorized number of directors shall be as set by our Board of Directors, but shall not be less than one. We have paid our directors fees for service on the Board of Directors by the issuance of options under our 1998 Stock Option Plan, 2000 Stock Option Plan and 2001 Stock Option Plan. Set forth below is a biographical description of each of our officers and directors based on information supplied by each of them: Declan A. French has served as our Chairman of our board of directors and Chief Executive Officer since our 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. Tony French has served as our Executive Vice President since September 1999. In his capacity of Executive Vice President, Mr. French is responsible for overseeing our recruitment services division. Prior to becoming Executive Vice President, Mr. French served as our Vice President of Sales, since our inception in 1994. Mr. French is the son of Declan A. French, our Chairman of the Board of Directors and Chief Executive Officer. Kelly Hankinson has served as our Chief Financial Officer since May 2000, as a member of its Board of Directors from June 2000 until February 14, 2003 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. Ms. Hankinson resigned from the Board of Directors on February 14, 2003. 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 on 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 practices 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. 31 Lloyd MacLean joined our Board of Directors on February 14, 2003. Mr. MacLean served as our Chief Financial Officer and a Director from September 1997 until May 2000, at which time he departed to pursue other business opportunities. Mr. MacLean is the sole officer and director of Globe Capital Corporation. From 1996 to 1997, Mr. MacLean was Vice-President and Chief Financial Officer of ING Direct Bank of Canada. From 1994 until 1996, he was Vice-President and Chief Financial Officer of North American Trust, Inc., where he also served as a Vice President from 1990 until 1994. Mr. MacLean has an MBA from Harvard University and is a member of the Canadian Institute of Chartered Accountants. Katherine Seto Evans 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 in1999 and a Chartered Accountant in 1978. Ms. Evans received a Bachelors Degree in Science from McGill University in 1972. Ms. Evans served on the Board of Directors from October 16, 2002 until her resignation on February 14, 2003. Committees of the Board of Directors In July 1998, our Board of Directors formalized the creation of a Compensation Committee, which is currently comprised of John Dunne, Arthur S. Marcus and Lloyd MacLean. The Compensation Committee has: (i) full power and authority to interpret the provisions of, and supervise the administration of, our 1998 Stock Option Plan, 2000 Stock Option Plan, 2001 Stock Option Plan, and 2002 Stock Option Plan as well as any stock option plans adopted in the future; and (ii) the authority to review all compensation matters relating to us. The Compensation Committee has not yet formulated compensation policies for senior management and executive officers. However, it is anticipated that the Compensation Committee will develop a company-wide program covering all employees and that the goals of this program will be to attract, maintain, and motivate our employees. It is further anticipated that one of the aspects of the program will be to link an employee's compensation to his or her performance, and that the grant of stock options or other awards related to the price of the shares of our common stock will be used in order to make an employee's compensation consistent with shareholders' gains. It is expected that salaries will be set competitively relative to the information technology and engineering services and consulting industry and that individual experience and performance will be considered in setting such salaries. In July 1998, our Board of Directors also formalized the creation of an Audit Committee, which currently consists of Lloyd MacLean and John Dunne. The Audit Committee is charged with reviewing the following matters and advising and consulting with our entire Board of Directors with respect to: (i) the preparation of our annual financial statements in collaboration with our chartered accountants; (ii) annual review of our financial statements and annual reports; and (iii) all contracts between us and our officers, directors and other of our affiliates. The Audit Committee, like most independent committees of public companies, does not have explicit authority to veto any actions of our entire Board of Directors relating to the foregoing or other matters; however, our senior management, recognizing their own fiduciary duty to us and our shareholders, is committed not to take any action contrary to the recommendation of the Audit Committee in any matter within the scope of its review. We have established an Executive committee, comprised of certain of our executive officers and key employees, which allows for the exchange of information on industry trends and promotes "best practices" among our business units. Currently, the Executive Committee consists of Declan A. French, Tony French, Kelly Hankinson, and Robert Trick. 32 During the year ended December 31, 2002, our Board of Directors met five times on the following dates: March 7, 2002, April 15, 2002, May 17, 2002, August 28, 2002 and October 16, 2002, at which all of the directors were present; and acted by written consent in lieu of a meeting five times on the following dates: February 6, 2002, June 28, 2002, November 21, 2002, November 25, 2002 and December 11, 2002. During the year ended December 31, 2002, the Compensation Committee met on August 28, 2002, the Audit Committee met on April 15, 2002 and the Executive Committee met monthly. Indemnification of Officers and Directors Our Bylaws provide that we shall indemnify, to the fullest extent permitted by Canadian law, our directors and officers (and former officers and directors). Such indemnification includes all costs and expenses and charges reasonably incurred in connection with the defense of any civil, criminal or administrative action or proceeding to which such person is made a party by reason of being or having been our officer or director if such person was substantially successful on the merits in his or her defense of the action and he or she acted honestly and in good faith with a view to our best interests, and if a criminal or administrative action that is enforced by a monetary penalty, such person had reasonable grounds to believe his or her conduct was lawful. Insofar as indemnification for liabilities arising under the Securities Act may be permitted, our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses, incurred or paid by one of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person, we will, unless our counsel opines that the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act and we will be governed by the final adjudication of such issue. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information regarding compensation paid by us during each of the last three fiscal years to our Chief Executive Officer and to each of our executive officers who earned in excess of $100,000 during the year ended December 31, 2002: The following table sets forth certain information regarding compensation paid by us during each of the last three fiscal years to our Chief Executive Officer and to each of our executive officers who earned in excess of $100,000 during the year ended December 31, 2002: Summary Compensation Table
Name and Restricted Principal Annual Stock Other Position Year Salary Bonus Awards Options/SARs Compensation -------- ---- ------ ----- ------ ------------ ------------- Declan A. French 2002 150,000 100,000(1) -0- -0- -0- Chief Executive Officer 2001 150,000 100,000(1) -0- -0- -0- and Chairman of the Board 2000 100,000 750,000(1) -0- 29,000 -0- Laurie Bradley 2002 150,000(2) -0- -0- -0- -0- President 2001 150,000(2) -0- -0- -0- -0- 2000 -0- -0- -0- -0- -0- Tony French, 2002 100,000 -0- -0- -0- -0- Executive Vice President 2001 94,500 -0- -0- -0- 25,000(3) 2000 94,500 -0- -0- 75,000 47,000(3) Kelly Hankinson 2002 100,000 -0- -0- -0- -0- Chief Financial Officer, 2001 100,000 -0- -0- -0- -0- 2000 75,000 -0- -0- 100,000 -0- (1) This reflects the dollar value of 588,235 shares of common stock issued to Mr. French in lieu of cash bonuses for the fiscal year 2001 and 1,200,000 shares for the fiscal years of 1999 and 2000 pursuant to his employment agreement. (2) This reflects salary paid pursuant to Ms. Bradley's employment agreement which was terminated in January 2003. (3) This reflects commissions paid pursuant to Mr. French's employment agreement.
33 Employment Agreements We have entered into an employment agreement with Declan A. French whereby he will serve as Chairman of the Board and Chief Executive Officer for a period of two years commencing on November 28, 2001. Mr. French shall be paid a base salary of $150,000 and a bonus to be determined by our EBITDA (earnings before interest, taxes, depreciation and amortization) as a percentage of annual gross revenue with a minimum guaranteed bonus of $100,000. The bonus will be paid in cash or shares at our discretion. In April 2002, we issued 588,235 shares of our common stock to Mr. French as payment in full for the bonus due for the fiscal year 2001. In February 2001, we issued 1,200,000 shares of our common stock as payment in full for the bonuses due to Mr. French for the fiscal ears of 1999 and 2000 pursuant to the terms of his previous employment agreement. In January 2003, we issued an aggregate of 12,427,535 shares of our common stock to Mr. French for extinguishment of certain indebtedness of the company to Mr. French pursuant to the amendment to his employment agreement dated January 27, 2003. Mr. French continues to serve as Chairman and Chief Executive Officer. Declan French is the father of Tony French. In February 1998, in connection with the acquisition of Systemsearch Consulting Services Inc., we entered into a three-year employment agreement with John R. Wilson whereby he served as President of Systemsearch Consulting Services Inc. at annual salary of $120,000 plus commissions. The agreement was effective as of January 2, 1997. Pursuant to the agreement, Mr. Wilson had control of the day-to-day management of Systemsearch Consulting Services Inc. Mr. Wilson's contract was not renewed, though he continued to be employed on a month-to-month basis at an annual salary of $67,000 plus commissions. On April 8, 2002, this office was closed and certain assets of Systemsearch Consulting Services Inc. were sold to Mr. Wilson in consideration of his assumption of the lease and certain liabilities. Existing contracts were transferred to head office and all sales and administrative staff were terminated. Mr. Wilson was terminated in April 2002. In September 1999, in connection with the acquisition of Cad Cam, Inc., Roger W. Walters was elected to the Board of Directors. On March 14, 2001, Mr. Walters resigned from the Board of Directors effective March 30, 2001. On January 1, 2000, in connection with the acquisition of ObjectArts Inc., we entered into an employment agreement with Marilyn Sinclair whereby she was to serve as Vice President and as President of ObjectArts Inc. The employment agreement was for a term of three years commencing on January 1, 2000 with an annual salary of $82,000. The agreement was terminated on March 9, 2001, the effective date of Ms. Sinclair's resignation from us. Ms. Sinclair resigned from the Board of Directors effective April 4, 2001. On April 1, 2000, in connection with the acquisition of MicroTech Professionals, Inc., we entered into an employment agreement with Denise Dunne-Fushi pursuant to which she served as Vice-President and as President of MicroTech Professionals, Inc. The employment agreement was for a term of one year commencing on April 25, 2000, with an annual salary of $125,000 and a bonus of $25,000. The agreement was terminated on July 29, 2002. On November 15, 2000, in connection with the business combination with TidalBeach Inc., we entered into an employment agreement with Michael Reid pursuant to which Mr. Reid will serve as Chief Information Officer and as the President of TidalBeach Inc. The employment agreement is for a term of two years commencing on November 15, 2000, with an annual salary of $120,000. Pursuant to the Share Purchase Agreement governing the sale of our subsidiary, Njoyn Software Incorporated to Cognicase Inc., Mr. Reid was contracted as a consultant to Cognicase until October 4, 2002, after which his contract with us was terminated. On January 29, 2001, we entered into an employment agreement with Laurie Bradley whereby she served as President. Ms. Bradley was paid an annual salary of $150,000 and a bonus based on performance. The employment agreement was for an indeterminate period of time. Ms. Bradley's agreement was terminated in January 2003. 34 On March 1, 2001, we entered into an employment agreement with Tony French whereby he will serve as Executive Vice President. Mr. French shall be paid an annual salary of $100,000 and a performance bonus. The employment agreement is for an indeterminate period of time. In the event Mr. French is terminated for any reason, including but not limited to, the acquisition of Thinkpath, Mr. French shall be entitled to a severance payment equal to one year's salary. Tony French is the son of Declan A. French. On March 1, 2001, we entered into an employment agreement with Kelly Hankinson whereby she will serve as Chief Financial Officer. Ms. Hankinson shall be paid an annual salary of $100,000. The employment agreement is for an indeterminate period of time. In the event Ms. Hankinson is terminated for any reason, including but not limited to, the acquisition of Thinkpath, Ms. Hankinson shall be entitled to a severance payment equal to one year's salary. No other officer or director has an employment contract with us. Compensation of Directors Effective August 28, 2002, each non-employee member of the Company's Board of Directors shall receive the following annual compensation in consideration for services rendered as a director: (i) 5 year option to purchase up to 50,000 shares of our common stock exercisable at a price equal to fair market value of our common stock as of the date of grant; (ii) a cash amount of $4,000 per annum, paid on a quarterly basis; and, (iii) reimbursement of reasonable and ordinary expenses in connection with such member's attendance at Board or committee meetings. To date, we have not made any such payments to our outside directors. Directors who receive a salary from the company shall not be entitled to receive any additional compensation for their services as a member of the Company's Board of Directors. Board of Directors and shareholders have adopted the 1998 Stock Option Plan, 2000 Stock Option Plan, and 2001 Stock Option Plan and 2002 Stock Option Plan, pursuant to which options have been or may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide their skills and expertise to us. Options, Warrants or Rights Issued to Directors and/or Officers On August 19, 1999, Declan A. French was issued an option to purchase 100,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered us in his capacity as Chairman of the Board and Chief Executive Officer. The option is immediately exercisable and expires on August 19, 2004. On August 19, 1999, Tony French was issued an option to purchase 50,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as an employee. The option is immediately exercisable and expires on August 19, 2004. On August 19, 1999, John R. Wilson was issued an option to purchase 20,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as President of Systemsearch Consulting Services Inc. The option is immediately exercisable and expires on August 19, 2004. 35 On August 19, 1999, Kelly Hankinson was issued an option to purchase 25,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered us in her capacity as Vice President, Finance and Administration and Group Controller. The option is immediately exercisable and expires on August 19, 2004. On August 19, 1999, Arthur S. Marcus was issued an option to purchase 2,500 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services legal services rendered to us. The option expires on August 19, 2004. On January 1, 2000, Roger W. Walters was issued an option to purchase 25,000 shares of our common stock at an exercise price of $3.25 per share. The option was issued in connection with our acquisition of Cad Cam, Inc. The option was immediately exercisable and expired on December 31, 2000. The option was never exercised by Mr. Walters. On March 22, 2000, Declan A. French was issued an option to purchase 4,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as Chairman of the Board and Chief Executive Officer. The option shall vest at a rate of 1,333 shares of common stock per year and shall be fully vested on March 22, 2003. The option expires on March 22, 2005. On March 22, 2000, Thomas E. Shoup, our former President and Chief Operating Officer, was issued an option to purchase 4,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in connection with the our acquisition of Cad Cam, Inc. and in consideration services rendered to us in his capacity as President and Chief Operating Officer. The option was to vest at a rate of 1,333 shares of common stock per year and was to be fully vested on March 22, 2003. The option was to expire on March 22, 2005. Such option terminated on December 22, 2000, the effective date of Mr. Shoup's resignation as an officer. On March 22, 2000, Tony French was issued an option to purchase 4,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as Executive Vice President. The option shall vest at a rate of 1,333 shares of common stock per year and shall be fully vested on March 22, 2003. The option expires on March 22, 2005. On March 22, 2000, Kelly Hankinson was issued an option to purchase 3,500 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered us in her capacity as Vice President, Finance and Administration and Group Controller. The option shall vest at a rate of 1,167 shares of common stock per year and shall be fully vested on March 22, 2003. The option expires on March 22, 2005. On March 22, 2000, Roger W. Walters was issued an option to purchase 4,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as Executive Vice President of US Operations and as a Director. The option shall vest at a rate of 1,333 shares of common stock per year and shall be fully vested on March 22, 2003. The option expires on March 22, 2005. On March 22, 2000, John R. Wilson was issued an option to purchase 4,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as President of Systemsearch Consulting Services Inc. The option shall vest at a rate of 1,333 shares of common stock per year and shall be fully vested on March 22, 2003. The option expires on March 22, 2005. On March 22, 2000, John A. Irwin was issued an option to purchase 4,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as President of International Career Specialists Ltd. The option shall vest at a rate of 1,333 shares of common stock per year and shall be fully vested on March 22, 2003. The option expires on March 22, 2005. On March 22, 2000, William J. Neil, a former director, was issued an option to purchase 10,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as a director. The option shall vest at a rate of 3,333 shares of common stock per year and shall be fully vested on March 22, 2003. The option expires on March 22, 2005. 36 On March 22, 2000, John Dunne was issued an option to purchase 10,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as director. The option shall vest at a rate of 3,333 shares of common stock per year and shall be fully vested on March 22, 2003. The option expires on March 22, 2005. On March 22, 2000, James Reddy, a former director, was issued an option to purchase 10,000 shares of our common stock at an exercise price of $3.19 per share. The option was issued in consideration for services rendered to us in his capacity as Director. The option shall vest at a rate of 3,333 shares of common stock per year and shall be fully vested on March 22, 2003. The option expires on March 22, 2005. On March 31, 2000, Roger W. Walters was issued an option to purchase 25,000 shares of our common stock at an exercise price of $2.75 per share. The option was issued in connection with our acquisition of Cad Cam, Inc. The option was immediately exercisable and expired on December 31, 2000. Such option was never exercised by Mr. Walters. On May 9, 2000, Marilyn Sinclair, a former officer and director, was issued an option to purchase 4,000 shares of our common stock at an exercise price of $3.25 per share. The option was issued in consideration for services rendered to us in her capacity as Vice President and President, Object Arts Inc. The option shall vest at a rate of 1,333 shares of common stock per year and shall be fully vested on May 9, 2003. The option expires on May 9, 2005 On June 30, 2000, Roger W. Walters was issued an option to purchase 25,000 shares of our common stock at an exercise price of $3.00 per share. The option was issued in connection with our acquisition of Cad Cam, Inc. The option was immediately exercisable and expired on December 31, 2000. This option was never exercised by Mr. Walters. On September 30, 2000, Roger W. Walters was issued an option to purchase 25,000 shares of our common stock at an exercise price of $2.12 per share. The option was issued in connection with our acquisition of Cad Cam, Inc. The option was immediately exercisable and expired on December 31, 2000. This option was never exercised by Mr. Walters. On December 26, 2000, Declan A. French was issued an option to purchase 25,000 shares of our common stock at an exercise price of $0.70 per share. Such option expires on December 26, 2005. The option was issued in consideration for services rendered to us in his capacity as Chairman of the Board. The option shall vest at a rate of 8,333 shares of common stock per year and shall be fully vested on December 26, 2003. The option expires on December 26, 2005 On December 26, 2000, Kelly Hankinson was issued an option to purchase 100,000 shares of our common stock at an exercise price of $0.70 per share. The option was issued in consideration for services rendered to us in her capacity as director. Such option expires on December 26, 2005. On December 26, 2000, John Dunne was issued an option to purchase 25,000 shares of our common stock at an exercise price of $0.70 per share. Such option expires on December 26, 2005. The option was issued in consideration for services rendered to us in his capacity as director. The option shall vest at a rate of 8,333 shares of common stock per year and shall be fully vested on December 26, 2003. The option expires on December 26, 2005 On December 26, 2000, Arthur S. Marcus was issued an option to purchase 25,000 shares of our common stock at an exercise price of $0.70 per share. Such option expires on December 26, 2005. The option was issued in consideration for services rendered to us in his capacity as director. The option shall vest at a rate of 8,333 shares of common stock per year and shall be fully vested on December 26, 2003. The option expires on December 26, 2005. On December 26, 2000, Ronan McGrath was issued an option to purchase 25,000 shares of our common stock at an exercise price of $0.70 per share. Such option expires on December 26, 2005. The option was issued in consideration for services rendered to us in his capacity as director. The option shall vest at a rate of 8,333 shares of common stock per year and shall be fully vested on December 26, 2003. The option expires on December 26, 2005. 37 On December 26, 2000, Mike Reid was issued an option to purchase 100,000 shares of our common stock at an exercise price of $0.70 per share. Such option expires on December 26, 2005. On December 26, 2000, Joel Schoenfeld was issued an option to purchase 25,000 shares of our common stock at an exercise price of $0.70 per share. Such option expires on December 26, 2005. The option was issued in consideration for services rendered to us in his capacity as director. The option shall vest at a rate of 8,333 shares of common stock per year and shall be fully vested on December 26, 2003. The option expires on December 26, 2005. On March 14, 2001, we repriced 100,000 options belonging to Roger W. Walters to $1.00 per share in consideration of debt forgiveness of $75,000 and restructuring of debt totaling $250,000 on the notes payable to Mr. Walters in connection with the Company's purchase of Cad Cam, Inc. The options shall be exercisable during the period April 1, 2001 to April 4, 2004. No options were issued to any our officers or directors during 2002. Consulting Agreements In May 1998, we entered into a consulting agreement with Robert M. Rubin, one of our former directors, pursuant to which Mr. Rubin is required To assist us in structuring and negotiating acquisitions, strategic partnerships and other expansion opportunities. In exchange for such services, Mr. Rubin has been granted an option to purchase 200,000 shares of our common stock at a purchase price of $2.10 per share. Mr. Rubin has agreed not to sell, transfer, assign, hypothecate or otherwise dispose of the shares of our common stock issuable upon exercise of the options for a period of two years after exercise without our consent. As of the date of this annual report, we have issued 64,778 shares of our common stock upon Mr. Rubin's exercise of the option. On September 13, 2000, we entered into an engagement agreement with Burlington Capital Markets Inc. (Burlington) to assist us in further acquisitions. The agreement with Burlington provided for the issuance of 250,000 shares of our common stock at a cash purchase price of $.01 per share upon signing of the agreement. We further agreed to issue 250,000 shares at a cash price of $0.10 per share upon the successful completion of our first acquisition initiated through Burlington. We also agreed to issue warrants to purchase an aggregate of 400,000 shares of our common stock according to the following schedule: (1) 100,000 shares at an exercise price of $5.00 per share, exercisable at any time after October 13, 2000; (ii) 100,000 shares at an exercise price of $7.00 per share, exercisable at any time after November 13, 2000; (iii) 100,000 shares at an exercise price of $9.00 per share, exercisable at any time after December 13, 2000, and (iv) 100,000 shares at an exercise price of $11.00 per share, exercisable at any time after February 13, 2001. Such warrants were exercisable in whole or in part five years from the respective vesting date and contained a cashless exercise provision and registration rights. Compensation was to be paid to Burlington at monthly fee of $10,000 for the term of the agreement with a minimum notice period for termination of six months. Through Burlington, we began to pursue the acquisition of Aquila Holdings Limited and a letter of intent was signed on October 4, 2000. We subsequently agreed with Aquila to postpone the transaction. The agreement with Burlington was subsequently terminated and no warrants were issued. In the aggregate, Burlington received 425,000 shares of our common stock and $10,000 pursuant to the agreement. The additional 175,000 shares constituted compensation to Burlington as settlement on the termination of the agreement for their entitlement to the monthly fees and the arrival at a letter of intent for the acquisition of Aquila. The difference between the fair market value of the shares and the purchase price of $.01 represents the value agreed with Burlington for its acquisition services. The total of 425,000 common shares has been reflected as issued for an aggregate cost of $717,250 based on the stock price at the date of the performance was complete. This amount has been expensed in the year ended December 31, 2000 and is included in financing expenses. 38 On December 14, 2000, we entered into a consulting agreement with Tsunami Trading Corp. d/b/a Tsunami Financial Communications and International Consulting Group, pursuant to which Tsunami and International Consulting Group are to provide financial consulting services to us with respect to financing, and mergers and acquisitions and related matters. In consideration for the services to be rendered, we: (a) issued 160,000 shares of our common stock to the consultants as an advance fee, (b) agreed to pay a fee of 10% of the consideration received by us upon the successful completion of any transaction contemplated by the consulting agreement; and (c) agreed to issue warrants to purchase our common stock in an amount equal to 2% of the equity sold and/or issued by us in any transactions contemplated by the consulting agreement. As a result of an oral agreement between us and Del Mar Consulting Group entered into in December 2000, on January 24, 2001, we executed a written agreement pursuant to which Del Mar Consulting Group shall provide investors' communications and public relations services. Pursuant to the agreement, we issued a non-refundable retainer of 400,000 shares common stock to Del Mar and are required to pay $4,000 per month for on-going consulting services. In addition, we issued Del Mar warrants to purchase 400,000 shares of our common stock at $1.00 per share and 100,000 shares at $2.00 per share which collectively expire January 24, 2005 and 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 acquisition costs and financing expenses for December 31, 2000. The value of the warrants of $216,348 has been included in paid in capital in January 2001 and the expense is being 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 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. On August 22, 2001, we issued 93,883 shares of our common stock in lieu of fees, for investor communications and public relations services rendered. On January 30, 2001, we issued an additional 20,000 shares of our common stock to International Consulting Group for financial consulting services rendered pursuant to the December 14, 2000 consulting agreement between Tsunami Trading Corp. d/b/a Tsunami Financial Communications, International Consulting Group and us. On April 1, 2001, we entered into an agreement with Dailyfinancial.com, Inc., a New York corporation, pursuant to which Dailyfinancial will provide services with respect to investor communications and public relations. Dailyfinancial acts a liaison between us and our shareholders, brokers, broker-dealers and other investment professionals. In lieu of fees, we issued Dailyfinancial 90,000 shares of our common stock for services to be rendered for the period between April 1, 2001 to September 30, 2001. On October 3, 2001 we issued an additional 75,000 shares of our common stock in lieu of fees for services rendered for the period October 1, 2001 to December 31, 2001. On January 9, 2002, we entered into an agreement with Ogilvie Rothchild Inc., an Ontario company, to perform public relations and marketing services. In consideration of these services, we paid Ogilvie Rotchild a retainer of $16,000 and issued 500,000 shares of our common stock. The agreement can be cancelled by either party at any time. On January 15, 2002, we entered into an agreement with David J. Wodar, a consultant operating in Ontario, to assist with investor communications and the development of marketing plans and strategies. In consideration of these services, Mr. Wodar was paid a monthly fee of $6,500 and was issued 480,000 shares of our common stock. The agreement expired on January 15, 2003. On April 4, 2002, we retained Johnston & Associates, LLC, a Washington company, to provide strategic governmental relations counseling and marketing representation before the United Stated Department of Defense, the United States Congress and targeted companies in connection with marketing our engineering services related to specific government contracts. Johnston & Associates will be compensated at a rate of $10,000 per month for twelve months beginning April 2002 and ending March 31, 2003. This agreement was terminated in August 2002. 39 On June 24, 2002, we 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 we issued 2,250,000 and 1,000,000 shares of its common stock to Messrs. Young and Georgiou, respectively. Pursuant to the agreement we registered such shares of common stock under an S-8 registration statement. The shares were valued at the date of issue based upon the trading price. On October 1, 2002, we entered into consulting agreements with Peter Benz, Michael Rudolph, Karim Souki, Howard Schraub, George Furla, and Owen Naccarato to perform consulting services with respect to corporate and debt restructuring. In consideration for such services we issued warrants to purchase 10,600,000 shares of our common stock at an exercise price of $0.025 per share. On February 7, 2003, we entered into a consulting agreement with Rainery Barba who shall perform legal and advisory services for a period of one year. In consideration for such services we issued and registered 4,000,000 shares of our common stock, no par value per share. On February 7, 2003, we entered into a consulting agreement with Dailyfinancial.com Inc., which shall perform corporate consulting services in connection with mergers and acquisitions, corporate finance and other financial services. In consideration for such services we issued 4,200,000 shares of our common stock, no par value per share. Stock Option Plans The 1998 Stock Option Plan The 1998 Stock Option Plan is administered by our Compensation Committee or our Board of Directors, which determines 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. As of the date of this prospectus, we have issued options to purchase 435,000 shares of our common stock underlying the 1998 Stock Option Plan to certain of our directors, employees and consultants. The 1998 Stock Option Plan is effective for a period for ten years, expiring in 2008. Options to acquire 435,000 shares of our common stock may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide us with their skills and expertise. The 1998 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 1998 Stock Option Plan may be exercisable for up to ten years, generally require a minimum two year vesting period, and shall be at an exercise price all as determined by our Board of Directors provided that, pursuant to the terms of the underwriting agreement between us and our underwriters, 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. Upon a change in control of Thinkpath, the acceleration date of any options that were granted but not otherwise exercisable accelerates to the date of the change in control. Change in control includes (i) the sale of substantially all of our assets and merger or consolidation with another company, or (ii) a majority of the members of our Board of Directors changes other than by election by the shareholders pursuant to Board of Directors solicitation or by vacancies filled by the Board of Directors caused by death or resignation of such person. 40 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 ninety 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 1998 Stock Option Plan, subject to applicable securities regulation. The 1998 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 1998 Stock Option Plan may not be increased without the consent of our shareholders. The 2000 Stock Option Plan The 2000 Stock Option Plan is administered by our Compensation Committee or our Board of Directors, which determines 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. As of the date of this prospectus, we have issued options to purchase 435,000 shares of our common stock underlying the 2000 Stock Option Plan to certain of our directors, employees and consultants. The 2000 Stock Option Plan is effective for a period for ten years, expiring in 2010. Options to acquire 435,000 shares of our common stock may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide us with their skills and expertise. The 2000 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 2000 Stock Option Plan may be exercisable for up to ten years, generally require a minimum two year vesting period, and shall be at an exercise price all as determined by our Board of Directors provided that, pursuant to the terms of the underwriting agreement between us and our underwriters, 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. Upon a change in control of Thinkpath, the acceleration date of any options that were granted but not otherwise exercisable accelerates to the date of the change in control. Change in control includes (i) the sale of substantially all of our assets and merger or consolidation with another company, or (ii) a majority of the members of our Board of Directors changes other than by election by the shareholders pursuant to Board of Directors solicitation or by vacancies filled by the Board of Directors caused by death or resignation of such person. 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 ninety (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 2000 Stock Option Plan, subject to applicable securities regulation. The 2000 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 2000 Stock Option Plan may not be increased without the consent of our shareholders. The 2001 Stock Option Plan The 2001 Stock Option Plan is administered by our Compensation Committee or our Board of Directors, which determines 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. As of the date of this prospectus, we have issued options to purchase 1,000,000 shares of our common stock underlying the 2001 Stock Option Plan to certain of our directors, employees and consultants. 41 The 2001 Stock Option Plan is effective for a period for ten years, expiring in 2011. Options to acquire 1,000,000 shares of our common stock may be granted to officers, directors, consultants, key employees, advisors and similar parties who provide us with their skills and expertise. The 2001 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 2001 Stock Option Plan may be exercisable for up to ten years, generally require a minimum two year vesting period, and shall be at an exercise price all as determined by our Board of Directors provided that, pursuant to the terms of the underwriting agreement between us and our underwriters, 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. Upon a change in control of Thinkpath, the acceleration date of any options that were granted but not otherwise exercisable accelerates to the date of the change in control. Change in control includes (i) the sale of substantially all of our assets and merger or consolidation with another company, or (ii) a majority of the members of our Board of Directors changes other than by election by the shareholders pursuant to Board of Directors solicitation or by vacancies filled by the Board of Directors caused by death or resignation of such person. 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 ninety 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 2001 Stock Option Plan, subject to applicable securities regulation. The 2001 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 2001 Stock Option Plan may not be increased without the consent of our shareholders. The 2002 Stock Option Plan The 2002 Stock Option Plan is administered by our Compensation Committee or our Board of Directors, which determines 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. As of the date of this prospectus, we have not issued any options to purchase shares of our common stock underlying the 2002 Stock Option Plan to certain of our directors, employees and consultants. 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 us 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 two year vesting period, and shall be at an exercise price all as determined by our Board of Directors provided that, pursuant to the terms of the underwriting agreement between us and our underwriters, 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. Upon a change in control of Thinkpath, the acceleration date of any options that were granted but not otherwise exercisable accelerates to the date of the change in control. Change in control includes (i) the sale of substantially all of our assets and merger or consolidation with another company, or (ii) a majority of the members of our Board of Directors changes other than by election by the shareholders pursuant to Board of Directors solicitation or by vacancies filled by the Board of Directors caused by death or resignation of such person. 42 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 ninety 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. 43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of April 11, 2003, the names and ownership of our common stock beneficially owned, directly or indirectly, by: (i) each person who is a director or executive officer of Thinkpath; (ii) all directors and executive officers of Thinkpath as a group; and (iii) all holders of 5% or more of the outstanding shares of the common stock of Thinkpath: Name and Address of Amount and Nature of Percentage of Shares Beneficial Owner (1) Beneficial Ownership (2) Outstanding Declan A. French 15,338,229 (3) 10.7% Tony French 70,133 (4) * Kelly Hankinson 180,167 (5) * John Dunne 41,424 (6) * Lloyd MacLean -- * Arthur S. Marcus 30,500 (7) * Stonestreet Capital 13,869,903 (8) 9.7% Alpha Capital 8,866,230 (9) 6.2% Tazbaz Holdings Limited 13,477,260 (10) 9.3% All Directors and Officers as a Group (6 persons) (3 - 7) 15,660,453 10.9% * Less than 1%. (1) Except as set forth above, the address of each individual is 55 University Avenue, Suite 400, Toronto, Ontario M5J 2H7. (2) Based upon information furnished to us by the directors and executive officers or obtained from our stock transfer books. We have been informed that these persons hold the sole voting and dispositive power with respect to the common stock except as noted herein. For purposes of computing "beneficial ownership" and the percentage of outstanding common stock held by each person or group of persons named above as of April 11, 2003, or 143,551,288 shares, any security which such person or group of persons has the right to acquire within 60 days after such date is deemed to be outstanding for the purpose of computing beneficial ownership and the percentage ownership of such person or persons, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (3) Includes 101,333 shares of common stock issuable upon the exercise of options granted to Declan A. French that are currently exercisable or exercisable within the next 60 days. Also includes 1,647,103 shares of common stock issued to Declan A. French as a bonus pursuant to his employment agreement and 12,427,535 shares of common stock issued to Declan A. French pursuant to an amendment of his employment agreement dated January 27, 2003. (4) Includes 126,167 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within the next 60 days. (5) Includes 1,333 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within the next 60 days. (6) Includes 1,333 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within the next 60 days. (7) Includes 27,500 shares of common stock issuable upon the exercise of options that are currently exercisable or exercisable within the next 60 days. Excludes 347,902 shares of common stock issued in the name of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, our United States legal counsel, of which Mr. Marcus is a partner. 44 (8) Includes 13,869,903 shares of common stock issued upon conversion of Series C 7% Preferred stock. Pursuant to the Series C 7% Preferred Share Agreement, as amended, such shareholder may not beneficially own more than 9.9% of our common stock at any time. Does not include shares of common stock issuable upon the conversion of $34,900 principal amount convertible debentures. (9) Includes 4,963,418 shares of common stock issued upon conversion of Series C 7% Preferred stock. Pursuant to the Series C 7% Preferred Share Agreement, as amended, such shareholder may not beneficially own more than 9.9% of our common stock at any time. Includes 3,902,812 shares of common stock issuable upon the conversion of $20,000 principal amount convertible debentures. Does not include shares of common stock issuable upon the conversion of $355,000 principal amount convertible debentures. (10) Includes 10,000,000 shares of common stock issuable upon the exercise of warrants and 2,577,260 shares of common stock issuable upon the conversion of $10,000 principal amount convertible debentures. Does not include shares of common stock issuable upon the conversion of $55,000 principal amount convertible debentures.
Number of securities to be Weighted-average exercise Number of securities issued upon exercise of price of outstanding remaining available outstanding options, options, warrants and for future issuance warrants and rights rights under equity compensation plans Equity compensation plans 1,110,492 1.80 6,876,000 approved by security holders Equity compensation plans not approved by security holders -- -- -- Total 1,110,492 1.80 6,876,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS In April 1998, we acquired all the issued and outstanding capital stock of Systemsearch Consulting Services Inc. and Systems PS Inc. from John R. Wilson for aggregate consideration of $98,000 and 174,551 shares of our common stock. The acquisition was effective as of January 2, 1997. Systems PS Inc. is currently inactive but holds certain assets utilized by Systemsearch Consulting Services Inc. in its operations. Mr. Wilson was not affiliated with us prior to the acquisition. On May 19, 1998, we completed the acquisition of all the issued and outstanding capital stock of International Career Specialists Ltd. for $326,000 in cash and 130,914 shares of our common stock to John A. Irwin, a former officer of Thinkpath. In connection with the acquisition, International Career Specialists Ltd. made a distribution to Mr. Irwin of certain of its assets that were not necessary for the operation of the business. The transaction was effective as of January 1, 1998. Mr. Irwin was not affiliated with us prior to the acquisition. In October 1997, in consideration for certain business consulting services, including identifying, structuring and effecting the acquisitions of Systemsearch Consulting Services Inc. and International Career Specialists Ltd., we issued 113,459 shares of our common stock to Globe Capital Corporation, which is controlled by Lloyd MacLean, our former Chief Financial Officer and a former director. 45 In May 1998, we entered into a consulting agreement with Robert M. Rubin, one of our former directors, pursuant to which Mr. Rubin will assist us in structuring and negotiating acquisitions, strategic partnerships and other expansion opportunities. In exchange for such services, Mr. Rubin received an option to purchase 200,000 shares of our common stock at a purchase price of $2.10 per share. Mr. Rubin has agreed not to sell, transfer, assign, hypothecate or otherwise dispose of the shares of our common stock issuable upon exercise of the option for a period of 2 years after exercise without our consent. As of the date of this annual report, we have issued 64,778 shares of common stock upon Mr. Rubin's exercise of the option. In November 1998, we purchased certain assets of Southport Consulting, Inc. from Michael Carrazza, one of our former directors, for an aggregate of $300,000 in cash and 40,000 shares of our common stock. In February 2001, Mr. Carrazza instituted an action against us in the Supreme Court of the State of New York Michael 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 two hundred and fifty thousand dollars ($250,000.00) in damages. Specifically, Mr. Carrazza claimed that we failed to deliver cash or stock to Mr. Carrazza under an asset purchase agreement pursuant to which Thinkpath acquired certain assets of Southport Consulting Co. We filed a counterclaim against Mr. Carrazza, seeking $162,000.00 in damages, plus punitive damages and attorneys' fees, on the ground that Mr. Carrazza, as then president and sole shareholder of Southport Consulting Co., fraudulently induced Thinkpath into executing the asset purchase agreement by misrepresenting the value of the assets being purchased. After the commencement of discovery, Mr. Carrazza filed a motion for summary judgment, which was granted in his favor in the sum of $264,602. On October 21, 2002, we entered into a settlement agreement with Michael Carrazza, 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. In September 1999, we completed the acquisition of all the issued and outstanding capital stock of Cad Cam, Inc. for $2,000,000 in cash, $2,500,000 pursuant to a promissory note and the issuance of $1,500,000 worth of shares of our common stock to Roger W. Walters, Cad Cam, Inc.'s former president. As part of the transaction, Mr. Walters was elected to serve on our Board of Directors. The share purchase agreement was executed on January 1, 1999 and the transaction was effective as of September 16, 1999. Mr. Rogers was not affiliated with us prior to the acquisition. On January 1, 2000, the share purchase agreement by and among Cad Cam, Inc., Roger W. Walters, and us, was amended. Pursuant to the amendment, the parties agreed that $1,000,000 of the $2,000,000 cash payment to be made to Mr. Walters was to be paid in 4 equal quarterly payments of $250,000 commencing on January 1, 2000. In consideration for accepting the cash payment in installments, we issued Mr. Walters options to purchase an aggregate of 100,000 shares of common stock at an exercise prices ranging from $2.12 to $3.25 per share, which options expired on December 31, 2000. On March 14, 2001, we repriced such options belonging to Roger W. Walters to an exercise price of $1.00 per share in consideration of debt forgiveness of $75,000 and restructuring of debt totaling $250,000 on the notes payable to Mr. Walters in connection with our purchase of Cad Cam, Inc. In addition, the term of such option was extended to April 4, 2004. In September 2001, the note payable to Rogers Walters was further amended whereby the principal was reduced from $1,200,000 to $750,000 in consideration of capital stock of $450,000 or 1,756,655 shares. In addition, all principal payments were postponed until January 1, 2003, at which time, we were to pay $12,500 per month plus interest at 4.5% until December 31, 2006. The balance of $150,000 was to be due on December 31, 2006. On August 1, 2002, we further 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. This loan is non-interest bearing. In addition, 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. Pursuant to this agreement, we issued Mr. Walters 1,631,185 shares of our common stock in December 2002. 46 The price of the shares at the time of conversion of Mr. Walter's debt on August 1, 2002 was 0.0942, representing approximately $340,800 in debt forgiveness. In accordance with FAS 15, the gain was measured by the excess of the carrying amount of the note payable settled less accrued interest, finance charges or other debt obligations. On December 5, 2002, the shares were issued to Roger Walters and we debited liabilities payable in capital stock and credited capital stock in the amount of $247,858 and debt forgiveness in the amount of $187,142. The loan is subordinated to Morrison Financial Services Limited and the 12% Senior Secured Convertible Debenture holders. We have not made any principal payments to Mr. Walters since December 2002 and we are currently in default of the loan agreement. In the event that we default on payment, the principal balance will bear interest at 12% per annum until payment is made. On January 1, 2000, we completed the acquisition of all of the issued and outstanding capital stock of Object Arts Inc., an Ontario corporation, in consideration of: (i) the issuance of $900,000 of our common stock to Working Ventures Custodian Fund in exchange for the retirement of outstanding subordinated debt; (ii) the issuance to Working Ventures Custodian Fund an amount of our common stock equal to the legal fees and professional fees incurred and paid by Working Ventures Custodian Fund in connection with our acquisition of Object Arts Inc.; and (iii) the issuance of $1,100,000 of our common stock to the existing shareholders of Object Arts Inc. As part of the transaction, we entered into employment agreement with Marilyn Sinclair, a former officer of Object Arts Inc. Such employment agreement was for a term of 3 years commencing on January 1, 2000, the effective date of the acquisition, with an annual salary of $82,000. Ms. Sinclair was not affiliated with us prior to the acquisition. On March 9, 2001 Ms. Sinclair resigned as an officer of Thinkpath. On April 9, 2001, Ms. Sinclair resigned from our Board of Directors. On April 1, 2000, we completed the acquisition of all of the issued and outstanding capital stock of Micro Tech Professionals, Inc., a Massachusetts corporation, in consideration of an aggregate of up to $4,500,000 in a combination of cash, notes payable and shares of our common stock, subject to specific performance criteria to be met. On April 25, 2000, we paid to Denise Dunne-Fushi, the sole shareholder of Micro Tech Professionals, Inc., $2,500,000 of the aggregate of $4,500,000, which was paid in accordance with the following schedule: (i) $1,250,000 in cash; (ii) the issuance of a $750,000 principal amount unsecured promissory note; and (iii) the issuance of 133,333 shares of our common stock. As part of the transaction, we entered into an employment agreement with Denise Dunne-Fushi, the former President of Micro Tech Professionals, Inc. Such employment agreement was for a term of 1 year commencing on April 25, 2000, with an annual salary of $125,000 and a bonus of $25,000. Mrs. Dunne-Fushi was not affiliated with us prior to the acquisition. On August 1, 2002, we restructured our note payable to Denise Dunne-Fushi, reducing the principal from $1,740,536 to $600,000 in consideration of the issuance of 4,000,000 shares of our common stock. In addition a prior debt conversion of $225,000 that was to be paid in capital was forgiven. 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 $10,000 per month will begin November 1, 2002 bearing 5% interest until October 1, 2007. In addition, we agreed to cover the monthly expense associated with Ms. Dunne-Fushi's family health benefits until May 2004 and vehicle lease until August 2004. In accordance with FAS 15, the gain was measured by the excess of the carrying amount of the note payable settled less accrued interest, benefits and car lease payments as per the settlement agreement. On December 5, 2002, the shares were issued to Denise Dunne and we debited liabilities payable in capital stock and credited capital stock in the amount of $376,800 and debt forgiveness in the amount of $889,749. 47 The loan is secured under a general security agreement but is subordinated to Morrison Financial Services Limited and the 12% Senior Secured Convertible Debenture holders. We have not made any principal payments to Ms. Dunne-Fushi since December 2002 and are currently in default of the loan agreement. In the event of default, Ms. Dunne-Fushi has the option of enforcing the security she holds. On November 15, 2000, we consummated a business combination with TidalBeach Inc., an Ontario-based Web development company. In consideration for the business combination, we issued 250,000 shares of our common stock to the two shareholders of TidalBeach Inc. As part of the transaction, we entered into an employment agreement with Michael Reid, the former President of TidalBeach Inc. Such employment agreement is for a term of 2 years commencing on November 15, 2000 with an annual salary of $123,000. Effective December 26, 2000, shares and options were issued to the following: Declan A. French, Tony French, Michael Reid, Kelly Hankinson, and Globe Capital Corporation. These issuances were made pursuant to contracts and/or as bonuses with regards to the various acquisitions throughout the course of the fiscal year 2000. The amounts issued were as follows: 1,200,000 shares to Declan A. French; 50,000 shares to Tony French; 100,000 options priced at $0.70 to Michael Reid; and 50,000 shares and 100,000 options priced at $0.70 to Kelly Hankinson; and 500,000 shares to Globe Capital Corporation. During the fiscal year ended December 31, 2000, we paid to Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, our United States legal counsel, approximately $100,000 and issued 30,632 shares of common stock in consideration for legal services rendered. Arthur S. Marcus, one of our directors, is a partner of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP. During the fiscal year ended December 31, 2001, we paid to Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, our United States legal counsel, approximately $180,000 and issued 158,635 shares of common stock in consideration for legal services rendered. Arthur S. Marcus, one of our directors, is a partner of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP. We agreed that in the event that our stock traded below $0.10 for ten consecutive trading days or more, we would be obliged to issue shares for the differential or approximately 158,635 shares. During the fiscal year ended December 31, 2002, we paid to Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP, our United States legal counsel, approximately $113,000 and issued 158,635 shares of common stock in consideration for legal services rendered. Arthur S. Marcus, one of our directors, is a partner of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP. The 158,635 shares issued were pursuant to an agreement regarding prior share issuances that in the event that our stock traded below $0.10 for ten consecutive trading days or more, we would issue shares for the differential. During the fiscal year ended December 31, 2002, we issued 100,336 shares of common stock to Katherine Seto Evans, a former director, in consideration for financial and accounting advisory services rendered. 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 for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, Thinkpath Training LLC assumed the New York training staff, some assets and is subletting the classroom facilities. The owner of Thinkpath Training LLC, is the daughter of Declan French, our Chief Executive Officer. As a result of this transaction, included in the Accounts Receivable at December 31, 2002, is an amount of approximately $13,351 due to us by Thinkpath Training LLC. 48 While we were private, we lacked sufficient independent directors to ratify many of the foregoing transactions. However, we believe that the foregoing transactions were on terms no less favorable to us than could have been obtained from unaffiliated third parties. Management believes that all transactions consummated since we became public and all future transactions between us and our officers, directors or 5% shareholders, and their respective affiliates have been and will be on terms no less favorable than could be obtained from unaffiliated third parties. In the event that we enter into future affiliated transactions, independent directors who do not have an interest in the transactions and who have access, at our expense, to our counsel or independent legal counsel, will approve such transactions. 49 ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of Form 10-K filed for the year ended December 31, 2002 (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to us (including our wholly owned subsidiaries) required to be included in our reports filed or submitted under the Exchange Act. (b) Changes in Internal Controls. Since the Evaluation Date, there have not been any significant changes in our internal controls or in other factors that could significantly affect such controls. 50 ITEM 15. EXHIBITS, LIST AND REPORTS ON FORM 8-K (a) Financial Statements. See pages F-1 through to F-38. (b) Reports on Form 8-K. On October 1, 1999, Thinkpath filed a report on Form 8-K to disclose the acquisition of Cad Cam, Inc. On November 15, 1999, Thinkpath filed a report on Form 8-K to disclose the execution of an agreement and plan of merger by and among Thinkpath, IT Acquisition Corp. and Trans Global Services, Inc. Such merger was never completed. On March 21, 2002, Thinkpath filed a report on Form 8-K to disclose the disposition of its subsidiary, Njoyn Software Incorporated. (c) Exhibits. 1.1 Form of Underwriting Agreement(1) 3.1 Bylaws of Thinkpath Inc.(1) 3.2 Articles of Incorporation dated February 11, 1994(1) 3.3 Articles of Amendment dated February 15, 1996(1) 3.4 Articles of Amendment dated April 15, 1998(1) 3.5 Articles of Amendment dated August 6, 1998(1) 3.6 Articles of Amendment dated January 19, 1999(1) 4.2 Form of Underwriters' Warrant(1) 4.3 Specimen Common Share Certificate(1) 10.1 Form of Financial Consulting Agreement(1) 10.2 1998 Stock Option Plan(1) 10.3(a) Lease of Thinkpath Inc.'s headquarters in Toronto, Ontario(1) 10.3(b) Lease of Thinkpath Inc.'s office in New York, New York(1) 10.3(c) Lease of Thinkpath Inc.'s office in Etobicoke, Ontario(1) 10.3(d) Lease of Thinkpath Inc.'s office in Scarborough, Ontario(1) 10.3(e) Lease of Thinkpath Inc.'s office in Ottawa, Ontario(1) 10.4 Employment Agreement between Thinkpath Inc. and Declan French dated August 1998(1) 10.5 Employment Agreement between Thinkpath Inc. and John A. Irwin dated May 18, 1998(1) 10.6 Employment Agreement between Thinkpath Inc. and John R. Wilson dated February 8, 1998(1) 10.7 Employment Agreement between Thinkpath Inc. and Roger Walters dated September 16, 1999(2) 10.8 Form of consulting agreement for Thinkpath Inc.'s independent contractors(1) 10.9 Form of services agreement for Thinkpath Inc.'s customers(1) 10.10 Agreement for the acquisition of the capital stock of International Career Specialists Ltd.(1) 10.11 Agreement for the acquisition of the capital stock of Systemsearch Consulting Services Inc. and Systems PS Inc.(1) 10.12 Agreement for the acquisition of the capital stock of Cad Cam, Inc.(2) 10.13 License Agreement between Thinkpath Inc. and International Officer Centers Corp. dated August 1, 1998(2) 10.13 License Agreement between Thinkpath Inc. and International Officer Centers Corp. dated August 1, 1998(1) 10.14 Consulting Agreement between Thinkpath Inc. and Robert M. Rubin(1) 10.15 Form of Employment Agreement with Confidentiality Provision(1) 10.16 Asset Purchase Agreement between Thinkpath Inc. and Southport Consulting Company(1) 10.17 2000 Stock Option Plan(3) 10.18 Share Purchase Agreement between Thinkpath Inc. and MicroTech Professionals, Inc. dated April 25, 2000(4) 10.19 Non-Binding Letter of Intent between Thinkpath Inc. and Aquila Holdings Limited dated October 4, 2000(4) 10.20 Share Purchase Agreement between Thinkpath Inc. and TidalBeach Inc. dated October 31, 2000(5) 10.21 Consulting Agreement between Thinkpath Inc., and Tsunami Trading Corp. d/b/a Tsunami Financial Communications and International Consulting Group, Inc. dated December 14, 2000(5) 51 10.23 Share Purchase Agreement by and among Cognicase Inc. and Thinkpath Inc. dated March 1, 2002 (7) 10.24 Employment Agreement between Thinkpath Inc. and Declan French dated November 28, 2001 (8) 10.25 Employment Agreement between Thinkpath Inc. and Laurie Bradley dated January 29, 2001 (8) 10.26 Employment Agreement between Thinkpath Inc. and Tony French dated March 1, 2001 (8) 10.27 Employment Agreement dated between Thinkpath Inc. and Kelly Hankinson dated March 1, 2001 (8) 10.28 Agreement between Thinkpath Inc. and entrenet(2) Capital Advisors, LLC dated November 5, 2001. 10.29 Agreement between Thinkpath Inc. and Olgivie Rothchild Inc. dated January 9, 2002 (8) 10.30 Agreement between Thinkpath Inc. and Dave Wodar dated January 15, 2002 (8) 10.31 Consulting Agreement between Thinkpath Inc. and Mark Young dated June 24, 2002. (9) 10.32 Consulting Agreement between Thinkpath Inc. and George Georgiou dated June 24, 2002 (9) 10.33 Consulting Agreement between Thinkpath Inc. and Peter Benz dated October 1, 2002. (10) 10.34 Consulting Agreement between Thinkpath Inc. and George Furla dated October 1, 2002. (10) 10.35 Consulting Agreement between Thinkpath Inc. and Owen Naccarato dated October 1, 2002. (10) 10.36 Consulting Agreement between Thinkpath Inc. and Michael Rudolph dated October 1, 2002. (10) 10.37 Consulting Agreement between Thinkpath Inc. and Karim Souki dated October 1, 2002. (10) 10.38 Consulting Agreement between Thinkpath Inc. and Howard Schraub dated October 1, 2002. (10) 10.39 Agreement between Thinkpath Inc. and Declan French dated January 27, 2003. (11) 10.40 Agreement between Thinkpath Inc. and Rainery Barba dated February 12, 2003. (12) 23 Consent of Schwartz, Levitsky, Feldman LLP, Independent Auditors (8) 99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ------ (1) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form SB-2 filed on May 26, 1999. (2) Incorporated by reference to Thinkpath Inc.'s report on Form 8-K filed on October 1, 1999. (3) Incorporated by reference to Thinkpath Inc.'s Proxy Statement on Form Def-14A filed on May 22, 2000. (4) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form SB-2 filed on April 25, 2000. (5) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form SB-2 filed on January 12, 2001. (6) Incorporated by reference to Thinkpath Inc.'s Proxy Statement on Form Def-14A filed on May 21, 2001. (7) Incorporated by reference to Thinkpath Inc.'s report on Form 8-K filed on March 21, 2002. (8) Incorporated by reference to Thinkpath Inc., report on Form 10-KSB filed on April April 15, 2002 (9) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form S-8 filed on June 28, 2002 (10) Incorporated by reference to Thinkpath Inc.'s Registration Statement on Form S-8 filed on December 11, 2002 (11) Incorporated by reference to Thinkpath Inc., Registration Statement on Form S-8 filed on January 28, 2003. 52 (12) Incorporated by reference to Thinkpath Inc., Registration Statement on Form S-8 filed on February 14, 2003. (13) Included herewith. 53 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. By: /s/ DECLAN A. FRENCH ------------------------------------- Declan A. French Chairman and Chief Executive Officer Dated: April 15, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ DECLAN A. FRENCH --------------------------- Declan A. French (Principal Executive Officer) Chairman and Chief Executive Officer April 15, 2003 /S/ KELLY HANKINSON -------------------------- Kelly Hankinson (Principal Accounting Officer) Chief Financial Officer April 15, 2003 /S/ JOHN DUNNE -------------------------- John Dunne Director April 15, 2003 /S/ ARTHUR S. MARCUS --------------------------- Arthur S. Marcus Director April 15, 2003 /S/ LLOYD MACLEAN --------------------------- Lloyd MacLean Director April 15, 2003 54 Certification I, Declan A. French, Chief Executive Officer of Thinkpath Inc., certify that: 1. I have reviewed this annual report on Form 10-K 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 the registrant's board of directors: 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: April 15, 2003 /S/ DECLAN FRENCH ------------------------- Declan A. French Chief Executive Officer 55 Certification I, Kelly L. Hankinson, Chief Financial Officer of Thinkpath Inc., certify that: 1. I have reviewed this annual report on Form 10-K 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 the registrant's board of directors: 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: April 15, 2003 /S/ KELLY HANKINSON --------------------------- Kelly L. Hankinson Chief Financial Officer 56 THINKPATH INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002, 2001 AND 2000 TOGETHER WITH AUDITOR'S REPORT (AMOUNTS EXPRESSED IN US DOLLARS) REPORT OF INDEPENDENT AUDITORS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF THINKPATH INC. We have audited the accompanying consolidated balance sheets of Thinkpath Inc. (formerly Thinkpath.com Inc.), (incorporated in Ontario) as of December 31, 2002, 2001 and 2000 and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the years ended December 31, 2002, 2001 and 2000. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Thinkpath Inc. (formerly Thinkpath.com Inc.) as of December 31, 2002, 2001 and 2000 and the consolidated results of its operations and its cash flows for each of the years ended December 31, 2002, 2001 and 2000 in conformity with generally accepted accounting principles in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2(a) to the consolidated financial statements, the Company has suffered recurring losses from operations and has recurring negative working capital that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Should the company be unable to continue as a going concern, certain assets and liabilities will have to be adjusted to their liquidated values. As discussed in Note 8 to the consolidated financial statements, effective January 1, 2002, Thinkpath Inc., changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets". Since the accompanying consolidated financial statements have not been prepared and audited in accordance with generally accepted accounting principles and standards in Canada, they may not satisfy the reporting requirements of Canadian statutes and regulations. Schwartz Levitsky Feldman LLP Chartered Accountants Toronto, Ontario April 11, 2003 F-1 THINKPATH INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002, 2001 AND 2000 (AMOUNTS EXPRESSED IN US DOLLARS)
2002 2001 2000 --------- --------- --------- $ $ $ ASSETS CURRENT ASSETS Cash 114,018 482,233 - Accounts recei 2,663,823 5,502,113 7,857,999 Inventory - 40,057 93,670 Income taxes receivable - 431,817 358,436 Prepaid expenses 196,683 345,341 335,930 ---------- ---------- ---------- 2,974,524 6,801,561 8,646,035 PROPERTY AND EQUIPMENT 1,915,379 2,859,340 3,596,759 ---------- ---------- ---------- GOODWILL 3,748,732 5,128,991 8,585,290 INVESTMENT IN NON-RELATED COMPANIES 45,669 1,013,926 1,318,091 LONG-TERM RECEIVABLE 53,924 83,450 83,450 OTHER ASSETS 49,303 1,287,710 1,812,889 DEFERRED INCOME TAXES - - 1,643,426 --------- --------- ---------- 8,787,531 17,174,978 25,685,940 ========= ========== ==========
The accompanying notes are an integral part of these consolidated financial statements F-2 THINKPATH INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002, 2001 AND 2000 (AMOUNTS EXPRESSED IN US DOLLARS)
2002 2001 2000 ---- ---- ---- $ $ $ LIABILITIES CURRENT LIABILITIES Bank indebtedness 209,776 5,039,171 5,061,410 Receivable Discount Facility 2,340,579 -- -- Accounts payable 3,197,286 4,073,444 3,822,984 Deferred revenue 163,609 365,023 219,308 Current portion of long-term debt 380,188 528,285 946,131 Current portion of notes payable 208,254 150,000 1,683,333 12% Convertible Debenture 192,950 -- -- ----------- ----------- ----------- 6,692,642 10,155,923 11,733,166 DEFERRED INCOME TAXES -- 150,380 -- LONG-TERM DEBT 84,756 582,432 760,313 NOTES PAYABLE 686,703 2,340,000 1,641,667 LIABILITIES PAYABLE IN CAPITAL STOCK -- 699,297 751,788 ----------- ----------- ----------- 7,464,101 13,928,032 14,886,934 =========== =========== =========== COMMITMENTS AND CONTINGENCIES (NOTE 25) STOCKHOLDERS' EQUITY CAPITAL STOCK 33,367,034 26,571,481 23,759,415 DEFICIT (30,966,083) (22,719,044) (12,306,862) ACCUMULATED OTHER COMPREHENSIVE LOSS (1,077,521) (605,491) (653,547) ----------- ----------- ----------- 1,323,430 3,246,946 10,799,006 ----------- ----------- ----------- 8,787,531 17,174,978 25,685,940 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements F-3 THINKPATH INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (AMOUNTS EXPRESSED IN US DOLLARS)
2002 2001 2000 ----------- ----------- ----------- $ $ $ REVENUE 25,064,674 33,183,661 35,736,076 COST OF SERVICES 19,462,597 23,785,136 21,301,361 ----------- ----------- ----------- GROSS PROFIT 5,602,077 9,398,525 14,434,715 ----------- ----------- ----------- OTHER INCOME - - 259,532 ----------- ----------- ----------- 5,602,077 9,398,525 14,694,247 ----------- ----------- ----------- EXPENSES Administrative 4,526,991 5,316,417 6,026,883 Selling 2,980,666 5,021,123 6,349,777 Financing 1,197,240 669,358 4,585,493 Depreciation and amortization 1,291,233 1,984,020 1,922,549 Write down goodwill 1,380,259 3,001,391 3,113,268 Restructuring costs - 116,866 50,565 Debt Forgiveness (2,308,358) - - ----------- ----------- ----------- 9,068,031 16,109,175 22,048,535 OPERATING LOSS FROM CONTINUING OPERATIONS (3,465,954) (6,710,650) (7,354,288) Gain (Loss) on Investment (565,201) (329,162) - ----------- ----------- ----------- LOSS FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES (4,031,155) (7,039,812) (7,354,288) Interest Charges 3,969,268 895,849 653,128 ----------- ----------- ----------- LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (8,000,423) (7,935,661) (8,007,416) Income Taxes (recovery) 3,741 623,741 (966,772) ----------- ----------- ----------- LOSS FROM CONTINUING OPERATIONS (8,004,164) (8,559,402) (7,040,644) LOSS FROM DISCONTINUED OPERATIONS (INCLUDING GAIN ON DISPOSAL OF $497,579) (142,488) (1,124,040) (1,357,673) ----------- ----------- ----------- NET LOSS BEFORE PREFERRED STOCK DIVIDENDS (8,146,652) (9,683,442) (8,398,317) PREFERRED STOCK DIVIDENDS 100,387 728,740 3,646,595 NET LOSS APPLICABLE TO COMMON STOCK (8,247,039) (10,412,182) (12,044,912) =========== =========== ========== WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING BASIC AND FULLY DILUTED 29,000,252 14,943,306 5,296,442 =========== =========== ========= LOSS FROM CONTINUING OPERATIONS PER WEIGHTED AVERAGE COMMON STOCK BEFORE PREFERRED DIVIDENDS BASIC AND FULLY DILUTED (0.28) (0.57) (1.33) =========== =========== ========= LOSS FROM CONTINUING OPERATIONS PER WEIGHTED AVERAGE COMMON STOCK AFTER PREFERRED DIVIDENDS BASIC AND FULLY DILUTED (0.28) (0.62) (2.02) =========== =========== =========
The accompanying notes are an integral part of these consolidated financial statements F-4 THINKPATH INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECMEBER 31, 2002, 2001 AND 2000 (AMOUNTS EXPRESSED IN US DOLLARS)
ACCUMULATED COMMON STOCK PREFERRED STOCK CAPITAL OTHER NUMBER OF NUMBER OF SHARES STOCK COMPREHENSIVE COMPREHENSIVE SHARES A B C AMOUNTS DEFICIT LOSS LOSS ----------- ------- ------- ----- ---------- ----------- ----------- ----------- Balance as of December 31, 1999 3,865,902 15,000 - - 7,870,874 (261,950) (22,141) Cumulative effect adjustment - - - - 1,091,606 (1,091,606) Net loss for the year before preferred stock dividends - - - - - (8,398,317) (8,398,317) ----------- Other comprehensive income (loss), net of tax: Foreign currency translation - - - - - - (707,954) Adjustment to market value - - - - - - 76,548 ----------- Other comprehensive income (631,406) (631,406) ----------- Comprehensive loss (9,029,723) =========== Issuance of common stock 2,821,782 - - - 5,394,766 - Issuance of preferred stock - 7,500 1,500 - 2,287,980 - Conversion of preferred stock to common stock 1,694,343 21,450) (750) - - - Dividend on preferred stock from beneficial conversion benefit - - - - 2,495,201 (2,554,989) Common stock and warrants issued in consideration of services and investments 3,533,111 - - - 4,618,988 ----------- ------ -------- ------ ---------- ----------- ---------- Balance as of December 31, 2000 11,915,138 1,050 750 - 23,759,415 (12,306,862) (653,547) =========== ====== ======== ====== ========== =========== =========== Net loss for the year before (9,683,442) (9,683,442) preferred stock dividends - - - - - ----------- Other comprehensive income (loss), net of tax: Foreign currency translation - - - - - - 209,506 Adjustment to market value - - - - - - (161,450) ----------- Other comprehensive income 48,056 48,056 ----------- Comprehensive loss (9,635,386) =========== Issuance of common stock for cash 525,000 - - - 400,000 - Issuance of preferred stock - - - ,230 1,230,000 - Reduction in common stock payable 596,667 - - - 709,005 - Dividend on preferred stock - - - - 414,848 (444,647) Conversion of preferred stock to common stock 3,864,634 (1,050) (750) (285) - - Beneficial conversion on Issuance of preferred stock - - - - 284,093 (284,093) Options exercised 22,122 - - - 1 - Debt settled through the issuance of common stock 93,883 - - - 44,125 - Common stock and warrants issued in consideration of services 714,267 - - - 519,994 - Allowance for deferred taxes Recoverable on issue expenses - - - - (790,000) ----------- ------ -------- ------ ---------- ----------- --------- Balance as of December 31, 2001 17,731,711 - - 945 26,571,481 (22,719,044) (605,491) =========== ====== ======== ====== ========== =========== ========== Net loss for the year before preferred stock dividends - - - - - (8,146,652) (8,146,652) ---------- Other comprehensive income (loss), net of tax: Foreign currency translation - - - - - - (171,283) Adjustment to market value - - - - - - (300,747) ----------- Other comprehensive income (472,030) (472,030) ----------- Comprehensive loss (7,674,622) =========== Reduction in common stock payable 8,387,840 - - - 1,098,955 - Dividend on preferred stock - - - - 67,530 (67,530) Conversion of preferred stock to common stock 23,278,448 - - (945) - - Beneficial conversion on Issuance of preferred stock - - - - 32,857 (32,857) Debt settled through the issuance of common stock 2,982,018 - - - 434,348 - Common stock and warrants issued in consideration of services 13,878,026 - - - 1,556,485 - Warrants issued for cash - - - - 707,050 - Beneficial conversion on issuance of convertible debt - - - - 2,898,328 (1,077,521) ----------- ------ -------- ------ ---------- ----------- Balance as of December 31, 2002 66,258,043 - - - 33,367,034 (30,966,083) (1,077,197) =========== ====== ======== ====== ========== =========== ========== The accompanying notes are an integral part of these consolidated financial statements.
F-5 THINKPATH INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (AMOUNTS EXPRESSED IN US DOLLARS)
2002 2001 2000 ----------- ---------- ---------- $ $ $ Cash flows from operating activities Net loss before preferred stock dividends (8,146,652) (9,683,442) (8,398,317) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Amortization 1,291,233 2,469,638 2,119,396 Loss on disposition 149,251 -- -- Amortization of beneficial conversion (included in interest) 2,898,328 -- -- Write down of long-term investment 667,511 344,279 67,000 Write down of goodwill 1,380,259 3,001,391 3,113,268 Decrease (increase) in accounts receivable 2,914,575 2,045,046 (142,862) Decrease (increase) in prepaid expenses 159,093 (21,660) 99,092 Increase (decrease) in accounts payable (837,634) 416,109 (451,729) Decrease (increase) in deferred income taxes (150,380) 993,806 (1,742,898) Decrease (increase) in inventory 38,784 53,144 (43,666) Increase (decrease) in deferred revenue (99,942) 147,077 219,308 Increase in income taxes payable (receivable) 428,885 2,459 (470,459) Common stock and warrants issued for services 1,556,485 519,994 3,050,288 Accounts payable settled with common stock 434,348 -- -- Liabilities payable in common stock -- (88,152) -- Long-term investment received for services -- (206,072) (932,927) Gain on disposal of subsidiary (497,579) -- -- Expenses on debt-forgiveness (210,000) -- -- Forgiveness of long-term debt (2,308,358) (190,629) -- ----------- ---------- ---------- Total adjustments 7,814,859 9,486,430 4,883,811 ----------- ---------- ---------- Net cash used in operating activities (331,793) (197,012) (3,514,506) ----------- ---------- ---------- Cash flows from investing activities Purchase of capital assets (194,866) (368,260) (1,108,814) Disposal (purchase) of other assets 16,156 (15,353) (1,229,266) Proceeds on sale of fixed assets 72,892 -- -- Increase in long-term receivable -- -- (83,450) Cash payment for subsidiaries -- -- (1,300,000) Proceeds on disposal of subsidiary 1,247,894 -- -- ----------- ---------- ---------- Net cash provided from (used in) investing activities 1,142,076 (383,613) (3,721,530) ----------- ---------- ---------- Cash flows from financing activities Repayment of notes payable (119,027) (197,437) (1,053,174) Repayment of long-term debt (643,896) (505,651) (187,281) Dividend payable -- (12,560) -- Cash received (paid) on long-term debt 2,599,929 -- 1,106,536 Proceeds from issuance of common stock -- 400,000 3,237,866 Proceeds from issuance of preferred stock -- 1,125,000 2,287,980 Proceeds from issuance of debentures and warrants 900,000 -- -- Increase (decrease in bank indebtedness) (3,786,107) (22,239) 626,211 ----------- ---------- ---------- Net cash provided by financing activities (1,049,101) 787,113 6,018,138 ----------- ---------- ---------- Effect of foreign currency exchange rate changes (129,397) 275,745 (686,690) ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (368,215) 482,233 (1,904,588) Cash and cash equivalents Beginning of period 482,233 -- 1,904,588 ----------- ---------- ---------- End of period 114,018 482,233 -- =========== ========== ========== SUPPLEMENTAL CASH ITEMS: Interest paid 1,052,108 340,000 776,637 =========== ========== ========== Income taxes paid (recovered) 19,237 38,000 435,089 =========== ========== ========== SUPPLEMENTAL NON-CASH ITEMS: Preferred stock dividend 100,387 728,740 2,554,989 Common shares issued for liabilities 1,556,485 44,125 742,200 Reduction in notes payable 1,197,942 -- -- =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements F-6 THINKPATH INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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 December 31, 2002, the Company had a working capital deficiency of $3,718,118, a deficit of $30,966,083 and has suffered recurring losses from operations. With insufficient working capital from operations, the Company's primary sources of cash are a receivable discount facility with Morrison Financial Services Limited and proceeds from the sale of equity securities. At December 31, 2002, the balance on the receivable discount facility was approximately $2,340,000. Morrison Financial Services purchased the company's security and indebtedness held by its prior lender, Bank One, on December 5, 2002. Bank One accepted a $1,100,000 discount on the payoff of its debt which is included in debt forgiveness in the statement of operations. On December 20, 2002, Morrison Financial Services also purchased the security and indebtedness of the Business Development Bank of Canada, with whom the company had a number of working capital loans. The Business Development Bank of Canada agreed to a discount of $330,000 on payoff. At December 31, 2002 the company's position on the receivable discount facility with Morrison Financial exceeded its borrowing capacity based on qualifying receivables. Subsequent to December 31, 2002, the company used proceeds from the sale of equity to pay down the facility. The company is currently within margin of its receivable discount facility with Morrison Financial Services Limited based on 75% of qualifying accounts receivable. On December 5 2002, the company closed a 12% Senior Secured Convertible Debt financing arrangement with a syndicate of investors for debentures of up to $3,000,000. The first debenture of $800,000 was purchased together with warrants on closing. On December 18, 2002, the company closed an additional debenture of $100,000. The funds were directed to Bank One to pay down the company's discounted loan balances. Subsequent to December 31, 2002, the company closed an additional $1,100,000 in debentures. The funds were used for various debt settlements and critical payables. As at April 15, 2003, management's plans to mitigate and alleviate these adverse conditions and events include: a) Commitment from investors for additional convertible debentures of up to $400,000 to be used for working capital. 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 payments to certain vendors and interest payments on debt. b) Ongoing restructuring of debt obligations and settlement of outstanding claims. c) Focus on growth in the engineering division, including design services and technical publications and expansion of the engineering service offerings to Ontario, Canada to replace existing lower margin information staffing services. 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 receivable discounting facility with Morrison Financial Services Limited, 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, and the closing of new financing, all of which are subject to substantial uncertainties. Cash flows from operations for the next twelve months will be dependent, among other factors, 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 close alternate financing, could have a material adverse effect on the company's liquidity position and capital resources. F-7 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Going Concern These 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 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 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 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 wholly-owned 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.), provides engineering, design, technical publications and staffing, services to enhance the resource performance of clients. In addition, the company owns the following companies which are currently inactive: Systemsearch Consulting Services Inc., International Career Specialists Ltd., Microtech Professionals Inc., E-Wink Inc. (80%), Thinkpath Training Inc. (formerly ObjectArts Inc.), Thinkpath Training US Inc. (formerly ObjectArts US Inc.) and TidalBeach Inc. In 2002, the company sold Njoyn Software Incorporated, a wholly-owned subsidiary. d) Basis of consolidated financial statement presentation The 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 from and 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. 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) Property and Equipment 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 property and equipment 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. F-8 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 14 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) Prior to the sale of the training division (Note 19), the company provided advanced training and certification in a variety of technologies and revenue was recognized on delivery. 5) Prior to the sale of the technology division (Note 19), the company licensed software in the form of a Human Capital Management System called Njoyn. The revenue associated with providing this software consisted 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 was based on the company's determination of the fair value of the elements if they had been sold separately. The customers had the right to choose a provider to host the software which was unrelated to the company. The set-up fee and customization revenue was recognized upon delivery of access to the software with customization completed in accordance with milestones determined by the contract. Revenue was 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 required significant customization, without clearly defined milestones, and an inability to estimate costs, revenue was reflected on a completed contract basis. Substantial completion was determined based on customer acceptance of the software. 6) Prior to the sale of the technology division (Note 19), the company also signed contracts for the customization or development of SecondWave, a web development software in accordance with specifications of its clients. The project plan defined milestones to be accomplished and the costs associated. These amounts were billed as they were accomplished and revenue was recognized as the milestones were reached. The work in progress for costs incurred beyond the last accomplished milestone was reflected at the period end. The contracts did not include any post-contract customer support. Additional customer support services were provided at standard daily rates, as services are required. F-9 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. Thinkpath completed SFAS No. 142 transitional impairment test during the third quarter of 2002 and concluded that there was no impairment of recorded goodwill, as the fair value of its reporting units exceeded their carrying amount as of January 1, 2002. Therefore, the second part of the transitional test was not required to be performed. The Company has assessed the financial impact SFAS No. 141 and No. 142 will have on its Consolidated Financial Statements and has recorded a goodwill impairment of $1,380,259 as required by SFAS No. 141 and SFAS 142. 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, 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. F-10 r) Accounting for Stock-Based Compensation In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was issued. It introduced 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. s) Computer software costs The company accounts for the cost of developing computer software, through its wholly owned subsidiary Njoyn Software Incorporated. The company records these costs as research and development expenses until the technological feasibility of the product has been established at which time the costs are deferred. At the end of each year the company compares the unamortized costs represented by deferred developments costs in Other Assets to the net realizable value of the product to determine if a reduction in carrying value is warranted. The software developed for own use which may be sold as a separate product is the Njoyn software and during development, the company decided to market the software and therefore for 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. On March 8, 2002, Thinkpath sold all of its shares in Njoyn Software Incorporated. t) Investments in Non-Related Companies The company records its investments in companies in which it holds a 20% or more interest and in which the company can exercise significant influence over the investee's operating and financial policies on the equity basis. The company records its investment in companies in which it holds less than 20% interest or in which the company has a 20% or greater interest but the company is unable to exercise significant influence at fair market value. Changes in fair market value are adjusted in comprehensive income, unless the impairments are of a permanent nature, in which case the adjustments are recorded in earnings. u) Recent Pronouncements In April 2002, the FASB issued SFAS No. 145, which, among other factors, 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. The new standard is effective for companies with fiscal years beginning after May 15, 2002. However, the company has elected to adopt the standard as to the debt restructuring gain in the current period, as permitted by SFAS No. 145. 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)". The company 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. In January 2003, the FASB issued SFAS No. 148, Accounting for Stock -Based Compensation - Transition and Disclosures. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement also amends the disclosure requirements of SFAS No. 123 to require more prominent and frequent disclosures in the financial statements about the effects of stock-based compensation. The transitional guidance and annual disclosure provisions of this Statement is effective for the December 31, 2002 financial statements. The interim reporting disclosure requirements will be effective for the Company's March 31, 2003 10-Q. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Interpretation"). This Interpretation elaborates on the existing disclosure requirement for most guarantees including loan guarantees, and clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of the Interpretation apply on a prospective basis to guarantees issued or modified after December 31, 2002. F-11 In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities," which addresses consolidation by business enterprises of variable interest entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A variable interest entity often holds financial assets, including loans or receivables, real estate or other property. A variable interest entity may be essentially passive or it may engage in research and development or other activities on behalf of another company. The objective of Interpretation No. 46 is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not have any variable interest entities, and, accordingly, adoption is not expected to have a material effect on the Company. v) Advertising Costs Advertising costs are expensed as incurred. 3. ACQUISITIONS (i) 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. The assets and liabilities of this company were sold in 2002 and the balance of the goodwill written off at December 31, 2002. (ii) 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. and this company is currently inactive. F-12 (iii) 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 ========= The assets of this company were written off in 2000. (iv) 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. 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 =========== (v) 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 24(a) for supplemental information. The terms of payment were subsequently restructured. 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. and the company is currently inactive. (vi) 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 through an interactive Website. The full purchase price of $2,433,700 has been allocated to goodwill. The company's software Njoyn and Secondwave would have been used for the development of the Website. The costs to develop the Website were to be funded through a private placement. E-Wink was not successful in raising capital through a private placement and therefore the operations were abandoned. On December 31, 2000,the company has written off the goodwill related to its investment in E-Wink, Inc. This company was inactive at year-end. F-13 4. POOLING OF INTEREST Effective January 1, 2000. Thinkpath Inc. entered into a merger and acquisition agreement with a technical training provider, Thinkpath Training Inc. (formerly ObjectArts Inc.) and its subsidiary Thinkpath Training US Inc. (formerly ObjectArts (US) Inc.). Thinkpath Training 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. The assets of both of these companies were disposed of in 2002. 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 24(b) for supplemental information concerning TidalBeach Inc. The assets of TidalBeach Inc. were disposed of in 2002. 5. ACCOUNTS RECEIVABLE
2002 2001 2000 $ $ $ Accounts receivable 2,900,616 6,079,676 8,316,832 Less: Allowance for doubtful accounts (236,793) (577,563) (458,833) --------- --------- --------- 2,663,823 5,502,113 7,857,999 ========= ========= ========= 2002 2001 2000 $ $ $ Allowance for doubtful accounts Balance, beginning of year 577,563 458,833 632,962 Provision (292,764) 68,620 (147,475) Recoveries (48,006) -- (26,654) --------- --------- --------- Balance, end of year 236,793 577,563 458,833 ========= ========= =========
6. PROPERTY AND EQUIPMENT
2002 2001 2000 ----------------------------------- ---------- --------- ACCUMULATED COST AMORTIZATION NET NET NET $ $ $ $ Furniture and equipment 728,289 473,171 255,118 344,693 440,732 Computer equipment and software 5,824,959 4,231,022 1,593,937 2,322,887 2,938,431 Leasehold improvements 201,117 134,793 66,324 191,760 217,596 --------- --------- --------- --------- --------- 6,754,365 4,838,986 1,915,379 2,859,340 3,596,759 ========= ========= ========= ========= ========= Assets under capital lease 707,167 380,802 326,365 474,485 536,694 ========= ========= ========= ========= =========
Amortization of property and equipment for the year ended December 31, 2002 amounted to $974,142 including amortization of assets under capital lease of $110,763. Amortization for the year ended December 31, 2001 amounted to $1,594,709 and $1,067,029 for the year ended December 31, 2000. Amortization includes amortization of assets under capital lease of $146,217 for the year ended December 31, 2001 and $136,487 for the year ended December 31, 2000. F-14 7. INVESTMENT IN NON-RELATED COMPANIES Investment in non-related companies are represented by the following:
2002 2001 2000 Conexys $ 1 $667,511 $667,511 Digital Cement 45,668 346,415 507,865 Lifelogix -- -- 142,715 -------- ---------- ---------- Total $ 45,669 $1,013,926 $1,318,091 ======== ========== ==========
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. Effective February 26, 2003, the common shares of Conexys were temporarily suspended from trading on the Bermuda Stock Exchange as it does not have adequate sources of funding for its immediate operating requirements and is currently investigating various options to retain and maximize shareholder value including the restructuring of its debt and refinancing of the company. At December 31, 2002, the company wrote down its investment by $667,510 to a carrying value of $1. The writedown was considered a permanent decline in value and as such was recorded as a charge to operations. 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 was adjusted to $346,415 with a charge of $161,450 to comprehensive income. During 2002, the fair value was adjusted to $45,668 with a charge of $300,747 to comprehensive income. 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 the ability to exercise significant influence over LifeLogix as the majority ownership of the investee is concentrated among a small group of shareholders who operate Lifelogix without regard to the views of the company and the company has been unable to obtain quarterly information. This investment was written off in 2001. iv) Tillyard Management During the year ended December 31, 2001, the company acquired an interest of $130,242 in Tillyard Management Inc., a property management company, in consideration of a real estate management software system developed by Thinkpath Inc. This investment has been accounted for using the cost method. Tillyard was formed to utilize and market the real estate management software. The value of the investment was established based upon the capitalization for the investee and our share of that capitalization. As sufficient funding and interest was not forthcoming, the operations of Tillyard were abandoned and the Company wrote down its investment at December 31, 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: F-15
2002 2001 2000 -------------------------------------- ---------- ---------- ACCUMULATED IMPAIRMENT COST AMORTIZATION LOSSES NET NET NET $ $ $ $ $ $ IT Recruitment 448,634 303,337 145,297 -- 145,297 388,818 (Systemsearch Consulting Services) Technical Publications & Engineering 5,518,858 535,164 1,234,962 3,748,732 4,983,694 8,196,472 (CadCam Inc.) ---------- ---------- --------- ---------- --------- --------- 5,967,492 838,501 1,380,259 3,748,732 5,128,991 8,585,290 ========== ========== ========== ========== ========= =========
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. This statement requires the Company to evaluate the carrying value of goodwill and intangible assets based on assumptions and estimates of fair value and future cash flow information. These assumptions reflect management's best estimates and 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 the Company's earnings. During the third quarter of 2002, the company completed its transitional goodwill impairment test as of January 1, 2002 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. During the fourth quarter, the IT recruitment unit experienced further decline, indicating impairment. The fair value of the unit was estimated using the expected present value of future cash flows. At December 31, 2002, a further goodwill impairment loss of $87,489 was recognized. The Technical Publications and Engineering unit was tested for impairment in the fourth quarter, as operating profits, cash flows and forecasts were lower than expected. At December 31, 2002, a goodwill impairment loss of $1,234,962 was recognized. 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. 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 years ended December 31, 2001 and 2000 2001 2000 ---- ---- Reported loss from continuing operations (8,559,402) (7,040,644) Adjustments: Amortization of goodwill 454,908 319,879 ---------- ---------- Adjusted loss from continuing operations (8,104,494) (6,720,765) ========== ========== Reported loss from continuing operations, before preferred dividends, basic and fully diluted loss per common share (0.57) (1.33) Impact of amortization of goodwill 0.03 0.06 ---------- ---------- Adjusted loss from continuing operations, before preferred dividends, basic and fully diluted loss per common share (0.54) (1.27) ========== ========== Reported loss from continuing operations after preferred dividends (9,288,142) (10,687,239) Adjustments: Amortization of goodwill 454,908 319,879 ---------- ---------- Adjusted loss from continuing operations after preferred dividends (8,833,234) (10,367,360) ========== =========== Reported loss from continuing operations, after preferred dividends, basic and fully diluted loss per common share (0.62) (2.02) Impact of amortization of goodwill 0.03 0.06 ---------- ---------- Adjusted loss from continuing operations, after preferred dividends, basic and fully diluted loss per common share (0.59) (1.96) ========== ========== Amortization for the year ended December 31, 2001 was $454,908 and $319,879 for 2000. Effective July 1, 2001, the Company changed its amortization period from 30 to 15 years on a prospective basis. The goodwill amortization and any impairment writedown reported in 2001 and 2000, all relate to continuing operations. In accordance with the requirements of SFAS 121 and SFAS 142, the impairment of goodwill has resulted in the writedown of the following amounts; F-16 2002 2001 2000 -------- --------- --------- Systemsearch Consulting Services 145,297 238,673 -- CadCam Inc. 1,234,962 -- -- MicroTech Professionals Inc. -- 2,762,718 -- International Career Specialists -- -- 679,568 E-Wink Inc. -- -- 2,433,700 --------- ---------- ---------- 1,380,259 3,001,391 3,113,268 ========= ========== ========== Systemsearch Consulting Services Inc., MicroTech Professionals Inc., International Career Specialists and E-Wink Inc. are inactive companies. 9. OTHER ASSETS
2002 2001 2000 $ $ $ Deferred development cost -- 993,765 1,153,445 Deferred financing costs -- -- 9,945 Deferred contracts -- 250,000 540,000 Cash surrender value of life insurance 49,303 43,945 109,499 --------- --------- --------- 49,303 1,287,710 1,812,889 ========= ========= =========
Amortization of other assets for the year ended December 31, 2002 amounted to $317,886. Amortization for the year ended December 31, 2001 amounted to $510,038 and $732,488 for the year ended December 31, 2000. 10. BANK INDEBTEDNESS i) December 31, 2002 On December 5, 2002, Bank One's security and indebtedness were purchased by Morrison Financial Services Limited. Bank One accepted a $1,100,000 discount on the payoff of its debt. On July 1, 2002 the company entered into a Forbearance and Modification Agreement with Bank One which was subsequently amended on August 1, 2002, August 15, 2002, September 1, 2002, September 16, 2002, September 30, 2002, October 15, 2002, November 15, 2002, and November 30, 2002. Under the terms of the agreement, the Bank was entitled to forbearance fees and payment of related legal fees and expenses. The Bank charged the company approximately $250,000 in forbearance fees and $18,000 in legal fees. Morrison Financial Services Limited charged the company a 15% fee or $165,000 for the discount negotiation with Bank One. The discount amount of $1,100,000 was recognized by the company as debt forgiveness and the fee of $165,000 was netted against this amount for total debt forgiveness of $935,000. 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 did not have an authorized overdraft facility with Bank One, however the bank 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 the company's credit line facility, Bank One restricted the company's repayment of certain subordinated loans and notes payable which affected payments to the Business Development Bank of Canada, Roger Walters and Denise Dunne-Fushi. iii) December 31, 2000 The company had a line of credit with Bank One to a maximum of $7,000,000, which bore interest at Canadian prime plus 1.5% per annum and was secured by a general assignment of book debts, a general security agreement and guarantees and postponements of claims by various affiliated companies. The company's average interest rate on short-term borrowings was 9%. F-17 11. CONVERTIBLE DEBENTURE Pursuant to a share purchase agreement dated December 5, 2002, the Company entered into an agreement (the "12% Senior Secured Convertible Debenture Agreement"), with a syndicate of investors for debentures of up to $3,000,000. The first debenture of $800,000 was purchased together with 45,714,285 warrants on closing. The debenture will become due twelve months from the date of issuance. The investors will have the right to acquire up to $800,000 worth of the Company's common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until December 5, 2009 at a purchase price of $.0175 per share. The Company is required to pay interest to the debenture holder on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. On December 18, 2002, the Company entered into a share purchase agreement with Tazbaz Holdings Limited for the issuance and sale by the Company of a $100,000 principal amount Convertible Debenture and 5,625,000 warrants to purchase shares of the Company's common stock. The debenture will become due twelve months from the date of issuance. Tazbaz Holdings Limited will have the right to acquire up to $100,000 worth of our common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount until December 18, 2009 at a purchase price of $.0175 per share. The Company is required to pay interest to Tazbaz Holdings Limited on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. The proceeds of $900,000 received by the company were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the warrants in the amount of $707,050. The value of the beneficial conversion feature was determined to be $2,898,328 which has been credited to paid in capital and charged to earnings as interest expense in 2002. Subsequent to the year end, the beneficial conversion has been recalculated as the conversion price has declined from $.0175. An amount of $14,794,613 will be reflected in the first quarter as an additional interest expense and additional paid in capital. 12. LONG-TERM DEBT i) December 31, 2002 At December 31, 2002, the Company had a loan balance of $31,403 with the Business Development Bank of Canada. The loan was assigned to the Company when it combined with TidalBeach Inc. in November 2000. The loan is secured by a general security agreement with monthly payments of $950.00 and bears interest at 12.5%. On December 5, 2002, Morrison Financial Services Limited purchased additional debt belonging to the Business Development Bank of Canada of approximately $440,000 in consideration of $100,000. Morrison Financial Services Limited charged the company a 15% fee or $45,000 for the discount negotiation with the Business Development Bank of Canada. The discount amount of $341,467 was recognized by the company as debt forgiveness and the fee of $45,000 was netted against this amount for total debt forgiveness of $296,467. In May 2002, the company secured a loan of $259,356 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. This loan is subordinated to Morrison Financial Services Limited and no principal payments have been made. 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. iii) December 31, 2000 At December 31, 2000, the Company had $545,000 in subordinated debt outstanding to the Business Development Bank of Canada. At December 31, 2000 and thereafter, the Company was not in compliance with the covenant contained in the loan agreements. At December 31, 2000, the loan amounts were reclassified as current. F-18
2002 2001 2000 $ $ $ a) Included therein: A loan with Business Development Bank of Canada ("BDC") secured by a general security agreement at the bank's floating base rate plus a variance of 6% per year on the principal outstanding. At December 31, 2002, the bank's floating base rate was 6.5%. 31,403 419,079 544,656 A loan with T. Lyons payable in monthly payments of $21,613 which were to begin November 30, 2002 and bearing interest at 30% per annum. This loan is subordinated to Morrison Financial Services Limited and no principal payments have been made. 259,356 -- -- A loan with Bank One payable in 19 remaining monthly payments of $13,889 plus interest based on prime. Currently the interest is 6%. This loan was paid in full on March 31, 2002 -- 263,889 430,000 Various capital leases with various payment terms and interest rates 174,191 427,749 731,788 ---------- ---------- ---------- 464,944 1,110,717 1,706,444 Less: current portion 380,188 528,285 946,131 ---------- ---------- ---------- $ 84,756 $ 582,432 760,313 ========== ========== ==========
b) Future principal payments obligations as at December 31, 2002, were as follows: 2003 380,188 2004 84,756 2005 -- 2006 -- 2007 -- ---------- 464,944 ========== c) Interest expense related to long-term debt was $138,240 for the year ended December 31, 2002. Interest expense with respect to the long-term debt amounted to $99,651 for December 31, 2001 ($278,574 in 2000). 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 was 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. 13. NOTES PAYABLE a) 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. Also as part of the restructuring, 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. F-19 The company has accounted for its modification in the terms of its notes payable as troubled debt restructuring. Accordingly, the company has recognized a gain on the restructuring of the old debt based upon the difference between the total carrying value of the original debt (with any accrued interest) and the total future cash flows of the restructured debt. The gain on the restructured debt, included in expenses in the consolidated statement of operations is as follows: Old debt Principal balance $675,000 Accrued interest -- -------- Carrying value 675,000 Common stock issued (2,631,185 shares at $0.0942) (247,858) Principal balance of new debt (240,000) Interest (payable through maturity) -- -------- Gain on restrutured debt $187,142 ======== All future cash payments under the modified terms will be accounted for as reductions of note payable and no interst expense will be recognized for any period between the closing date and the maturity date. The loan is subordinated to Morrison Financial Services Limited and the 12% Senior Secured Convertible Debenture holders. The company has not made any principal payments to Mr. Walters since December 2002 and is currently in default of the loan agreement. In the event that the company defaults on payment, the principal balance will bear interest at 12% per annum until payment is made. b) 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 4,000,000 shares of its common stock. In addition a prior debt conversion of $225,000 that was to be paid in capital was forgiven. 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 until May 2004 and vehicle lease until August 2004. The company has accounted for its modification in the terms of its notes payable as troubled debt restructuring. Accordingly, the company has recognized a gain on the restructuring of the old debt based upon the difference between the total carrying value of the original debt (with any accrued interest) and the total future cash flows of the restructured debt. The gain on the restructured debt, included in expenses in the consolidated statement of operations is as follows: Old debt Principal balance $1,740,536 Accrued interest -- Capital stock payable 225,000 ---------- Carrying value 1,965,536 Common stock issued (4,000,000 shares at $0.0942) (376,800) Principal balance of new debt (600,000) Interest, insurance and vehicle lease costs (98,987) --------- Gain on restrutured debt $ 889,749 ========= All future cash payments under the modified terms will be accounted for as reductions of note payable and no interst expense will be recognized for any period between the closing date and the maturity date. The loan is secured under a general security agreement but is subordinated to Morrison Financial Services Limited and the 12% Senior Secured Convertible Debenture holders. The company has not made any principal payments to Ms. Dunne-Fushi since December 2002 and is currently in default of the loan agreement. In the event of default, Ms. Dunne-Fushi has the option of enforcing the security she holds. 2002 2001 2000 $ $ $ Note Payable to Roger Walters 224,000 750,000 1,325,000 Note Payable to Denise Dunne 670,957 1,740,000 2,000,000 -------- ---------- ---------- 894,957 2,490,000 3,325,000 Less: current portion 208,254 150,000 1,683,333 ------- ---------- ---------- $686,703 $2,340,000 $1,641,667 ======== ========== ========== c) Capital repayments as at December 31, 2002 2003 208,254 2004 193,911 2005 182,250 2006 176,250 2007 134,292 ---------- $ 894,957 ========== 14. 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 F-20 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 the OTC:BB under the trading symbol "THTH-F". 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 ========= ========= 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. The shares were valued at the date of issue based upon the trading price. 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, Thinkpath Inc. entered into an agreement with Burlington Capital Markets Inc. to aid the company in further acquisitions. The agreement with Burlington Capital Markets Inc. (Burlington) provided for the issuance of 250,000 shares of our common stock at a cash purchase price of $.01 per share upon signing of the agreement. We further agreed to issue 250,000 at a cash price of $.01 per share upon the successful completion of the Company's first acquisition initiated through Burlington. We further agreed to issue warrants to purchase an aggregate of 400,000 shares of our common stock according to the following schedule: (i) 100,000 shares at an exercise price of $5.00 per share, exercisable at any time after October 13, 2000; (ii) 100,000 shares at an exercise price of $7.00 per share, exercisable at any time after November 13, 2000; (iii) 100,000 shares at an exercise price of $9.00 per share, exercisable at any time after December 13, 2000, and (iv) 100,000 shares at an exercise price of $11.00 per share, exercisable at any time after February 13, 2001. Such warrants were exercisable in whole or in part 5 years from the respective vesting date and contained a cashless exercise provision and registration rights. Compensation was to be paid to Burlington at a monthly fee of $10,000 for the term of the agreement with a minimum notice period for termination of six months. Through Burlington, the company began to pursue the acquisition of Aquila Holdings Limited and a letter of intent was signed on October 4, 2000. The company and Aquila subsequently agreed to postpone the transaction. The agreement with Burlington was subsequently terminated and no warrants were issued. In the aggregate, Burlington received 425,000 shares of our common F-21 stock and $10,000 pursuant to the agreement. The additional 175,000 shares constituted compensation to Burlington Capital Markets Inc. as a settlement on the termination of the agreement for their entitlement to the monthly fees and the arrival at a letter of intent for the acquisition of Aquila.The difference between the fair market value of the shares and the purchase price of $.01 represents the value agreed between the Company and Burlington for its acquisition services. The total of 425,000 common shares has been reflected as issued for an aggregate cost of $717,250 based on the stock price at the date of the performance was complete. This amount has been expensed in the year ended December 31, 2000 and is included in 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 14(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. The shares were valued at the date of issue based upon the trading price. 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 3,221,126 shares of its common 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. The shares were valued at the date of issue based upon the trading price. On October 1, 2002, the company entered into consulting agreements with a group of seven consultants with expertise in restructuring, financing, legal and management services for one-year terms to assist the company with its restructuring and refinancing efforts. In consideration for such services the Company issued warrants to purchase 10,600,000 shares of our common stock at an exercise price of $0.025 per share. 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 amended its Articles of Incorporation to increase its authorized common stock from 30,000,000 to 100,000,000. During the year ended December 31, 2002, the Company issued 588,235 shares of its common stock as payment of an executive bonus in the amount of $100,000, 8,387,840 shares to reduce common stock payable of $1,098,955, and 2,393,783 shares in settlement of various accounts payable and liabilities in the amount of $334,348. During the year ended December 31, 2002, the company issued both shares of its common stock and warrants as payment for a variety of services: 1,230,000 shares in consideration of investor relations and marketing services in the amount of $79,000; 1,651,495 shares and warrants in consideration of finance services in the amount of $719,664; 546,531 shares in consideration of restructuring services in the amount of $45,321; 3,250,000 shares pursuant to the June 24, 2002 consulting agreements with Mr. Young and Mr. Georgiou in the amount of $520,000; and 7,200,000 shares on the exercise of warrants pursuant to the October 1, 2002 consulting agreements in the amount of $192,500. The shares were valued at the date of issue based upon the trading price. F-22 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 year ended December 31, 2002, the company issued 4,387,840 shares of its common stock to reduce a note payable of $909,297 to Roger Walters related to the purchase of CadCam Inc. During the year ended December 31, 2002, the company issued 4,000,000 shares of its common stock to reduce a note payable of $1,140,536 to Denise Dunne related to the purchase of MicroTech Professionals Inc. 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 were 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 was 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 were 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. had 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 was less than $2.00. Thinkpath Inc. held 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 were 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 were 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 were reduced by any issue expenses. The preferred stock were 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, 2002, there were no Series A or B Convertible Preferred Stock outstanding. 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 had a stated value of $1,000 per share. The shares of Series C Preferred Stock were 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 were manditorily converted or redeemed by the Company, under certain conditions. The Company was 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 was 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 were 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 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 F-23 interest per annum on the stated value per share plus any accrued but unpaid dividends, when as and if declared. The Company had the option to pay such dividends in shares of the Company's common stock to be paid (based on an assumed value of $1,000 per share) in full shares only, with a cash payment equal to any fractional shares. The number of shares of the Company's common stock into which the Series C Preferred stock was convertible into that number of shares of common stock equal to (i) the sum of (A) the stated value per share and (B) at the holder's election, accrued and unpaid dividends on such share, divided by (ii) the Conversion Price". The "Conversion Price" was the lesser of (x) 87.5% of the average of the 5 lowest daily volume weighted average prices of the Company's common stock during the period of 60 consecutive trading days immediately prior the date of the conversion notice; or (y) 90% of the average of the daily volume weighted average prices during the period of the 5 trading days prior to the applicable closing date ($.4798 with respect to the 1,105 shares of Series C 7% Preferred Stock issued and outstanding). The Conversion Price was subject to certain floor and time limitations. At any time prior to October 24, 2001, the Company could, 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 year ended December 31, 2002, the Company issued 23,278,448 shares of its common Stock on the conversion of 945 Series C preferred stock. The Company paid dividends of $100,387 on the conversions. As of December 31, 2002, there were no Series C preferred stock outstanding. 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. 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. F-24 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. 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 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. As of December 31, 2002, all 723,436 warrants issued in connection with the purchase of the Series C Preferred Stock remain outstanding and none have been exercised. On May 24, 2002, the company entered into an agreement with Tazbaz Holdings Limited, pursuant to which Tazbaz securitized an overdraft position of the company with Bank One in the amount of $650,000 until the Bank's repayment on December 5, 2002. Pursuant to this agreement the company issued 10,000,000 warrants; 6,000,000 of which are exercisable at any time and in any amount until November 15, 2009 at a purchase price of $.08 per share, and 4,000,000 of which are exercisable at any time and in any amount until November 15, 2009 at a purchase price of $.04 per share. On October 1, 2002, the company entered into consulting agreements with a group of seven consultants with expertise in restructuring, financing, legal and management services for one-year terms to assist the company with its restructuring and refinancing efforts. In consideration for such services the company issued 10,600,000 warrants which are exercisable at any time and in any amount until September 30, 2003 at a purchase price of $.025 per share. As of December 31, 2002, 7,200,000 warrants had been exercised with net proceeds of $192,500. On December 5, 2002, the company issued 45,714,285 warrants to holders of the 12% Senior Secured Convertible Debentures which are exercisable at any time and in any amount until December 5, 2009 at a purchase price of $.0175 per share. Pursuant to the December 18, 2002 convertible debenture, the company issued 5,625,000 warrants to Tazbaz Holdings Limited, which are exercisable at any time and in any amount until December 18, 2009 also at a purchase price of $0.175 per share. f) Stock Options F-25 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 remain 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. 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. 15. FINANCING EXPENSES Financing expenses represent the following; a) Acquisition costs incurred which are not related to a successfully completed acquisition and the costs incurred on the merger with entities treated as a pooling of interest. b) Financing expenses include consulting services for financing and the cost of options and warrants. F-26 16. RESTRUCTURING COSTS i) December 31, 2002 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 The accrual was relieved throughout fiscal 2002 as severance payments were completed. Details of the restructuring costs and reserve balance is as follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance non/cash December 31,2001 Costs December 31, 2002 Severance packages London-Training Cash 66,518 -- (66,518) -- Lease cancellations London-Training Cash 12,600 -- (12,600) -- ------- ------- ------- ------- Commitments 79,118 -- (79,118) -- ======= ======= ======= =======
ii) December 31, 2001 At the end of December 31, 2000 the Company had a restructuring reserve balance of $571,339 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, have been terminated during March 2001 and April 2001. During the three months ended September 2001, the lease cancellation costs for London have been reduced by $30,700 and the severance costs for London have been reduced by $56,000. These amounts represent settlements reached with the landlord and one of the three employees with long term contracts. The employee agreed to a reduction in the term of the contract which resulted in a reduction of the liability of $56,000. In February 2001, the company started to close down one of its research and development (R&D) Operations located in Toronto. The company continued to terminate employees until April 2001. The premises are subject to a long-term lease and will be utilized for corporate needs in the future. Restructuring costs include rent for the current period for the Toronto R&D space. The company moved its operations into this space at the end of October 2001. The remaining accrual will be relieved throughout fiscal 2001, as leases expire and severance payments, some of which are paid on a monthly basis, are completed. Details of the restructuring costs and reserve balance is as follows;
Description Cash/ Reserve balance Restructuring Activity Reserve balance non/cash December 31, 2000 Costs December 31, 2001 Severance packages London-Training Cash 435,173 50,696 (419,351) 66,518 Toronto-R&D Cash 17,640 (25,348) 7,708 -- Lease cancellations London-Training Cash 118,526 27,159 (133,085) 12,600 Toronto-R&D Cash 439,714 (439,714) -- ------- ------- ------- ------- Commitments 571,339 492,221 (984,442) 79,118 ======= ======= ======= =======
iii) December 31, 2000 During the fourth quarter of fiscal 2000, the Company recorded a restructuring charge of $685,103 as a result of certain of the Company's actions to better align its cost structure with expected revenue growth rates. The restructuring activities (shown below in tabular format) relate 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. Additional restructuring costs will be incurred upon the termination of the balance of the employees at the London location after December 31, 2000. The premises were vacated in April 2001. Operations continued until April 2001 with a very low volume of work as the bulk of training was shifted to the Toronto site. F-27 The remaining accrual will be relieved throughout fiscal 2001, as leases expire and severance payments, some of which are paid on a monthly basis, are completed. Detail of the restructuring charge and reserve balance is as follows;
Description Cash/non-cash Restructuring Activity Reserve balance Charge December 31, 2000 Elimination of Job Responsibilities Severance packages Cash 546,587 93,774 452,813 Lease cancellations Cash 138,516 19,990 118,526 ------- ------ ------- Commitments 685,103 113,764 571,339 ======= ======= =======
17. 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:
2002 2001 2000 $ $ $ Accounting amortization in excess of tax amortization 9,875 9,875 (190,000) Losses available to offset future income taxes 3,113,829 2,909,873 1,465,157 Share issue costs 429,785 532,405 790,957 Adjustment cash to accrual method (148,461) (496,879) (413,688) Investment tax credit -- -- 201,000 --------- --------- -------- 3,405,028 2,955,274 1,853,426 Less: Valuation allowance 3,405,028 3,105,654 210,000 --------- --------- -------- -- (150,380) 1,643,426 ========= ========= ========
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:
2002 2001 2000 $ $ $ Amount calculated at Federal and Provincial statutory rates (1,231,955) (3,533,461) (2,750,577) ---------- ---------- --------- Increase (decrease) resulting from: Permanent differences 2,017,678 1,629,464 1,454,784 Timing differences -- (141,868) (103,879) Valuation allowance 299,374 2,895,654 210,000 --------- ---------- --------- 1,085,097 4,383,250 1,560,905 --------- ---------- --------- Current income taxes (30,403) 849,789 (1,189,672) ========= ========== =========
F-28 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 $1,025,000 over the next two 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 or a capital loss totaling $750,000 in the future as a deferred tax asset as at December 31, 2002. As at the completion of the December 31, 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. 18. OTHER COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) for the year ended December 31, 2002:
Before Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------ ---------- ------ Foreign currency translation adjustments (171,283) -- (171,283) Adjustment to market value (300,747) -- (300,747) --------- ------- --------- Other comprehensive income (loss) (472,030) -- (472,030) ========= ======== ========= 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 ========= ======== =========
Comprehensive income (loss) for the year ended December 31, 2000:
Before Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------ ---------- ------ Foreign currency translation adjustments (707,954) -- (707,954) Adjustment to market value 109,348 (32,800) 76,548 --------- -------- -------- Other comprehensive loss (598,606) (32,800) (631,406) ========= ======== ==========
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. 19. DISCONTINUED OPERATIONS Effective March 8, 2002, the Company sold its technology division, Njoyn Software Incorporated to Cognicase Inc., a Canadian company. Net proceeds after broker fees were $1,350,000 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, including the employees of TidalBeach Inc. 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 year ended December 31, 2002 was $59,000, $555,000 in 2001 and $827,000 in 2000. The operating loss from the technology division for the year ended December 31, 2002 was $164,000, $732,000 in 2001 and $448,000 in 2000. 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 $400,229 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. F-29 Effective May 1, 2002, the Company signed an agreement with triOS Training Centres Limited, an Ontario company, for the purchase of certain assets of the Toronto training division, Thinkpath Training for a nominal amount of cash and the assumption of all prepaid training liabilities. As part of the transaction, triOS assumed the Toronto training staff and is subletting the classroom facilities. 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 the 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 assumed the New York training staff, some assets and is subletting the classroom facilities. As a result of these two transactions, the company will not have future revenues from its training division, and therefore the operations have been reported as discontinued. Training revenue for the year ended December 31, 2002 was $1,347,000, $3,163,000 in 2001 and $7,197,000 in 2000. The operating loss from the training division for the year ended December 31, 2002 was $362,000, $391,000 in 2001 and $910,000 in 2000. The following table presents the revenues, loss from operations and other components attributable to the discontinued operations of Njoyn Software Incorporated, TidalBeach Inc., Thinkpath Training Inc. and Thinkpath Training US Inc.: 2002 2001 2000 ---- ---- ---- Revenues 1,406,490 3,742,550 8,589,704 Loss from operations before income taxes (613,405) (898,001) (1,580,573) Provision for Income taxes (recovery) 26,662 226,048 (222,900) Gain on disposal of Njoyn Software 400,229 -- -- Gain on disposal of Training Canada 97,350 -- -- --------- ---------- --------- Loss from discontinued operations (142,488) (1,124,049) (1,357,673) ========= ========== ========== 20. SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Thinkpath Inc. acquired all the capital stock of MicroTech Professionals Inc. on April 25, 2000, for $4,660,000. The acquisition was funded as follows: Fair Value of Assets acquired $ 1,769,478 Liabilities assumed (1,073,527) Goodwill 3,009,198 Other assets acquired 850,000 Fixed assets acquired 104,851 Liabilities payable in common stock (625,000) Cash paid for Capital Stock (1,300,000) Note Payable (2,125,000) Common Stock Issued (610,000) ------------ -- ------------ During the year ended December 31, 2000, the company reflected preferred dividends through the issuance of common shares and the beneficial conversion feature on its preferred shares in the amount of $3,586,807. The balance of the preferred dividends of $59,788 have been included in liabilities payable in common stock at December 31, 2000. A subordinated loan payable to Working Ventures in the amount of $837,151 was converted into 196,800 common shares. During the year ended December 31, 2000 the company acquired the shares of E-Wink in exchange for 300,000 common shares with a value of $975,000 and warrants valued at $1,458,700. During the year ended December 31, 2000, the company settled liabilities payable in common stock through the issuance of common shares with a value of $742,200. During the year ended December 31, 2002, the company issued common shares and warrants for the following; Services rendered $1,556,485 Liabilities payable in common stock 1,197,942 Accounts payable 434,348 ---------- $3,188,775 =========== F-30 21. SEGMENTED INFORMATION a) Sales by Geographic Area 2002 2001 2000 ---------- ---------- ---------- $ $ $ Canada 12,438,653 14,549,495 10,710,553 United States of America 12,626,021 18,634,166 25,025,523 ---------- ---------- ---------- 25,064,674 33,183,661 35,736,076 ========== ========== ========== b) Net Loss by Geographic Area 2002 2001 2000 ----------- ----------- ----------- $ $ $ Canada (6,515,673) (4,378,397) (7,248,889) United States of America (1,630,979) (5,305,045) (1,149,428) ----------- ----------- ----------- (8,146,652) (9,683,442) (8,398,317) =========== =========== =========== c) Identifiable Assets by Geographic Area 2002 2001 2000 ---------- ---------- ---------- $ $ $ Canada 2,644,647 4,995,715 8,979,711 United States of America 6,142,884 12,179,263 16,706,229 ---------- ---------- ---------- 8,787,531 17,174,978 25,685,940 ========== ========== ========== d) Revenue and Gross Profit by Operating Segment 2002 2001 2000 ----------- ----------- ----------- $ $ $ Revenue IT Recruitment 12,829,932 16,804,152 13,341,141 Tech Pubs and Engineering 10,743,287 12,957,139 16,171,216 IT Documentation 1,491,455 3,422,370 6,223,719 Training -- -- -- Technology -- -- -- ---------- ---------- ---------- 25,064,674 33,183,661 35,736,076 ========== ========== ========== Gross Profit IT Recruitment 1,748,806 4,165,374 6,855,307 Tech Pubs and Engineering 3,478,754 3,927,516 4,858,759 IT Documentation 374,517 1,305,635 2,720,649 Training -- -- -- Technology -- -- -- --------- ---------- ---------- 5,602,077 9,398,525 14,434,715 ========= ========== ========== e) Revenues from Major Customers The consolidated entity had the following revenues from major customers: For the year ended December 31, 2002, one customer had sales of $8,548,284 representing approximately 34% of total revenues. In December 2002, the company's contract with this customer was terminated. For the year ended December 31, 2001, one customer had sales of $6,800,000 which representing approximately 18% of total revenues. For the year ended December 31, 2000, no single customer consisted of more than 10% of the revenues. F-31 f) Purchases from Major Suppliers There were no significant purchases from major suppliers. 22. 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.
2002 2001 2000 $ $ $ Numerator Net loss from continuing operations (8,004,164) (8,559,402) (7,040,644) Preferred stock dividends (100,387) (728,740) (3,646,595) ----------- ----------- ----------- Loss available to common stockholders (8,140,551) (9,288,142) (10,687,239) ----------- ----------- ----------- Loss from discontinued operations (142,488) (1,124,040) (1,357,673) ----------- ----------- ----------- Net loss (8,247,039) (10,412,182) (12,044,912) =========== =========== =========== Denominator Weighted Average common stock outstanding 29,000,252 14,943,306 5,296,442 =========== =========== =========== Basic and fully diluted loss per common share from continuing operations (.28) (.57) (1.32) =========== =========== =========== Basic and fully diluted loss per common share after preferred stock dividends (.28) (.62) (2.02) =========== =========== =========== Basic and fully diluted loss per common share from discontinued operations (.005) (.08) (0.26) =========== =========== =========== 2002 2001 2000 Average common stock outstanding 29,000,252 14,943,306 5,296,442 Average common stock issuable -- -- -- ---------- ---------- ---------- Average common stock outstanding assuming dilution 29,000,252 14,943,306 5,296,442 ========== ========== =========
The outstanding options and warrants as detailed in note 14 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. As indicated in Note 27, the company has issued 43,958,652 shares of its common stock upon to the convertible debenture holders upon the conversion of $285,400 of debentures and accrued interest. The aggregate per share amount of gain on restructured debt is $0.08. F-32 23. STOCK OPTION PLANS
OPTIONS WEIGHTED AVERAGE EXERCISE PRICE Options outstanding at January 1, 2000 472,625 2.21 Options granted to key employees and directors 969,500 2.22 Options exercised during the year (18,508) 2.10 Options forfeited during the year (4,000) 3.19 Options expired during the year - --------- 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 forfeited during the period (114,500) 3.22 --------- Options outstanding at December 31, 2002 1,110,492 ========= Options exercisable December 31, 2000 714,117 1.95 Options exercisable December 31, 2001 1,059,659 1.75 Options exercisable December 31, 2002 1,065,992 Options available for future grant December 31, 2000 -- Options available for future grant December 31, 2001 261,500 Options available for future grant December 31, 2002 6,614,500
During the year ended December 31, 2002, 114,500 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 March 31, 2003. b) Range of Exercise Prices at December 31, 2002
Outstanding Weighted Options Options Weighted Options Average Outstanding exercisable Average Remaining Average Exercise Life Exercise Price Price $2.10 - $3.25 565,492 1.61 years $2.81 520,992 $2.79 $1 and under 545,000 2.06 years $0.75 545,000 $0.75
c) Pro-forma net income At December 31, 2002, the company has four stock-based employee compensation plans, which are described more fully in Note 14(f). The company accounts for those plans under the recognition and measurement principles of APB Opinion No.25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FASB Statement No. 123 Accounting for Stock-Based Compensation, to stock-based employee compensation. F-33
2002 2001 2000 ----------- ----------- ---------- Net loss, as reported (8,146,652) (9,683,442) (8,398,317) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (292,733) (445,120) (541,273) ----------- ----------- ----------- Pro forma net loss (8,439,385) (10,128,562) (8,939,590) =========== =========== =========== Net loss, after preferred share dividends (8,247,039) (10,412,182) (12,044,912) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (292,733) (445,120) (541,273) ----------- ----------- ---------- Pro forma net loss after preferred share dividends (8,539,772) (10,857,302) (12,586,185) =========== =========== ============ Earnings per share: Basic and fully diluted loss per share, as reported (0.28) (0.65) (1.59) =========== =========== ============ pro forma loss per share (0.29) (0.68) (1.70) =========== =========== ============ loss per share, after preferred dividends (0.28) (0.70) (2.27) =========== =========== ============ pro forma loss per share, after preferred dividends (0.29) (0.73) (2.38) =========== =========== ============
F-34 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 2000 GRANTS ----------- ----------- Risk free interest rates 4.76% 6.05% Volatility factors 100% 100% Weighted average expected life 4.90 years 3.81 years Weighted average fair value per share .74 2.40 Expected dividends -- -- There were no option grants in the year ended December 31, 2002. 24. 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)
F-35 25. COMMITMENTS AND 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 December 31, 2002 for the next five years are as follows: 2003 $562,034 2004 564,731 2005 455,649 2006 223,826 2007 223,826 Thereafter 671,478 --------- $2,701,544 ========== The lease commitments do not include two operating leases for premises that the company is currently sub leasing to the purchasers of the Canadian and United States training divisions. If the purchasers were to default on payment or abandon the premises, the company would be liable for annual payments of $282,096 expiring August 31, 2006 and $150,534 expiring September 30, 2010. The lease commitments do not include two operating leases for premises located in the United States that were closed in the fourth quarter of 2002. The company has not made any payments on these leases since the premises were abandoned. The company does not intend to make any further payments on these leases and the lessors have not tried to enforce payment. The company may be liable for a lease balance of $44,597 which expires November 30, 2004 and $103,686 which expires September 30, 2005. 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. c) On May 22, 2002, the company received a payment of $100,000 from Chubb Insurance for a business interruption claim filed, relating to losses suffered on its New York training division as a result of the terrorist attacks of September 11, 2001. The payment was advanced as a loan, without interest, repayable only in the event that the net recovery is greater than the filed claim. The company does not expect the net recovery, if any, to be greater than the claim amount. 26. RELATED PARTY TRANSACTIONS 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 the 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 assumed the New York training staff, some assets and is subletting the classroom facilities. The owner of Thinkpath Training LLC, is the daughter of the Company's Chief Executive Officer. As a result of this transaction, included in the Accounts Receivable at December 31, 2002, is an amount of approximately $13,351 due to the Company by Thinkpath Training LLC. 27. SUBSEQUENT EVENTS On January 24, 2003, the company held a Special Meeting of Shareholders at which a resolution was passed amending the company's Articles of Incorporation to increase its authorized capital stock from 100,000,000 to 800,000,000. On January 28, 2003, the company registered an aggregate of 12,427,535 shares of common stock, no par value per share, issued to Declan A. French, the company's Chief Executive Officer, pursuant to an amendment to his employment agreement. On February 7, 2003, the company entered into a consulting agreement with Rainery Barba who shall perform legal and advisory services for a period of one year. In consideration for such services the company registered an aggregate of 4,000,000 shares of common stock, no par value per share. F-36 On February 7, 2003, the company entered into a consulting agreement with Dailyfinancial.com Inc. who shall perform corporate consulting services in connection with mergers and acquisitions, corporate finance and other financial services. In consideration for such services the company issued 4,200,000 shares of common stock, no par value per share. Subsequent to December 31, 2002, the company closed an additional $1,100,000 in convertible debentures. The funds were used for various debt settlements and critical payables. The debentures will become due twelve months from the date of issuance. The investors will have the right to acquire up to $1,100,000 worth of the Company's common stock at a price the lesser of $.0175 or 50% of the average of the three lowest prices on three separate trading days during the sixty-day trading period prior to conversion. The warrants are exercisable at any time and in any amount for a period of 7 years from the original purchase date at a purchase price of $.0175 per share. The Company is required to pay interest to the debenture holder on the aggregate unconverted and outstanding principal amount of the debenture at the rate of 12% per annum, payable on each conversion date and maturity date in cash or shares of common stock. The proceeds received by the company were allocated between the warrants and the debenture without warrants on a pro rata basis. Paid in capital has been credited by the value of the warrants in the amount of $517,448. The value of the beneficial conversion feature was determined to be $623,313. As of April 11, 2003, the beneficial conversion was recalculated as the conversion price from time of issuance had declined. An amount of $6,517,670 will be reflected in the first quarter. As of April 11, 2003, the company has issued 43,958,652 shares of its common stock upon to the convertible debenture holders upon the conversion of $285,400 of debentures and accrued interest. 28. 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. 29. COMPARATIVE FIGURES Certain figures in the December 31, 2001 and 2000 financial statements have been reclassified to conform with the basis of presentation used at December 31, 2002. F-37