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Workstream 10-K 2008 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K/A
(Amendment
No. 1)
ANNUAL
REPORT
PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
(MARK
ONE)
FOR
THE
FISCAL YEAR ENDED: MAY 31, 2008
OR
FOR
THE
TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION
FILE NUMBER: 001-15503
WORKSTREAM
INC.
(Exact
name of Registrant as specified in its charter)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON
SHARES, NO PAR VALUE
(TITLE
OF
CLASS)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x
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 o No x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (check one):
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the outstanding voting and non-voting common equity
held by non-affiliates of the registrant was $20,663,106 as of May 31, 2008,
and
based on the closing sales price of common stock as reported by the NASDAQ
Capital Market on May 31, 2008, which is the last business day of the
registrant’s most recently completed 4th fiscal quarter. This calculation does
not reflect a determination that persons are affiliates for any other
purposes.
The
total
number of common shares, no par value, outstanding on May 31, 2008 was
52,442,818, excluding 108,304 escrow
shares.
EXPLANATORY
NOTE
On
November 14, 2008, Workstream Inc. filed its Annual Report on Form 10-K for
its
fiscal year ended May 31, 2008 (the “2008 Form 10-K”). However, Exhibits 31.1
and 32.1 were inadvertently omitted from such filing. The Company hereby
files
this amendment to include with it as Exhibits 31.1 and 32.1 the certifications
required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. As required,
the Company has included in this filing the 2008 Form 10-K in its entirety,
including all exhibits. None of the information previously disclosed in the
2008
Form 10-K has been modified or amended by this amendment.
WORKSTREAM
INC.
FORM
10-K
TABLE
OF
CONTENTS
2
THIS
REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT PURELY HISTORICAL ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934,
AS AMENDED. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS
CONTAINING THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE,"
AND WORDS OF SIMILAR IMPORT WHICH EXPRESS MANAGEMENT'S BELIEF, EXPECTATIONS
OR
INTENTIONS REGARDING OUR FUTURE PERFORMANCE. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE
HEREOF, AND WE HAVE NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM OUR HISTORICAL OPERATING RESULTS
AND FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT
OF
CERTAIN FACTORS, INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH UNDER "RISK
FACTORS" WHICH BEGINS ON PAGE 18 ON THIS FORM 10-K AND OTHER FACTORS AND
UNCERTAINTIES CONTAINED ELSEWHERE IN THIS FORM 10-K AND IN OUR OTHER FILINGS
WITH THE SECURITIES AND EXCHANGE COMMISSION.
3
PART
I
ITEM
1.
BUSINESS
OVERVIEW
We
were
incorporated on May 24, 1996 under the Canada Business Corporation Act under
the
name CareerBridge Corporation. In February 1999, we changed our name to
E-Cruiter.com Inc., and in November 2001, we changed our name to Workstream
Inc.
(the “Company”). In 1997, we began operating an online regional job board, on
which applicants posted their resumes and employers posted available positions,
focused on the high-technology industry. In February 1999, we changed our
business focus from the job board business to providing on-line recruitment
services. Beginning in 2001, we began to expand our focus further and embarked
on a strategy of product design and development, principally through acquired
intellectual property, that would allow us to provide a full range of services
and web-based software for Human Capital Management (“HCM”). HCM is the process
by which companies recruit, train, compensate, evaluate performance, motivate
and retain their employees. Today, we offer software and service solutions
that
address the needs of companies to more effectively manage their human capital
management function. We believe that our single provider approach for our
clients’ HCM needs is more efficient and effective than traditional methods of
human resource management.
COMPANY
SEGMENTS
Workstream
is a provider of software and services for HCM. Workstream has two distinct
reporting units: Enterprise Workforce Services and Career Networks. The
Enterprise Workforce Services segment offers a suite of HCM software solutions,
which includes performance management, compensation management, development,
recruitment, benefits administration and enrollment, succession planning, and
employee awards and discounts programs. The Career Networks segment offers
recruitment research, resume management and career transition services. In
addition, Career Networks provides services through a web-site where job-seeking
senior executives can search job databases and post their resumes, and companies
and recruiters can post position openings and search for qualified senior
executive candidates. Workstream conducts its business primarily in the United
States of America and Canada.
Workstream
has reduced expenses in an effort to align revenues with expenses. Workstream
has actively engaged an investment bank to value and divest 6Figuresjobs.com.
The move is designed to infuse the Company with cash as well as to reduce the
warrant liability. Per the note agreement made with the Special Warrant Holders
(SWH) (See Note 6 to the financial statements) Workstream is to receive 25%
of
any proceeds from the sale of any assets and the SWH are to receive 75% of
any
proceeds. 6Figuresjobs.com is considered an industry leader in the job board
market and is a part of the Career Networks division. Workstream is continuing
to consider other opportunities to raise capital and align the Company’s
business operations with its strategic focus.
INDUSTRY
BACKGROUND
Our
target market includes any organization that needs to manage their human capital
function in a more effective and cost efficient manner. This includes providing
solutions for recruitment needs, evaluating performance, compensation planning,
development, incenting and retaining employees and benefits administration.
Our
target market includes companies seeking to fulfill those functions through
information technology skills and expertise. We believe that there are several
factors that have contributed to companies now placing a higher premium on
hiring the right personnel, appropriately compensating and rewarding
performance, and making substantial investments in areas such as training and
development, incentives and rewards and overall employee satisfaction. These
factors include increased employee turnover, the shortage of knowledgeable
workers, and compliance pressures on compensation practices, particularly in
North America, all of which increase the demand for our services.
We
believe that many organizations are seeking to overhaul their human resources
information systems to take advantage of both new technologies and new human
capital management concepts, and we anticipate that spending in human capital
management will continue to shift away from the client-server human resources
services to web-based and hosted services because of their lower recurring
cost
and lower cost of implementation.
4
The
Value of Human Capital
Over
the
past two decades, many organizations have implemented software systems that
automate best practices and drive efficiency in most departments, including
enterprise resource planning systems, and customer relationship management
systems. These software applications provide a wide array of benefits that
both
increase revenue growth and eliminate expenses. Based on our experience,
however, we believe that the human resource (HR) departments of many of these
organizations have only implemented HR information systems which track basic
employee information for payroll and benefits purposes, or the organizations
are
increasingly dependent on inefficient use of spreadsheets and other manual
paper-based processes for management of critical areas such as compensation
and
performance management. Although these methods provide some level of automation,
they often do little to increase the effectiveness of managing the human capital
function because, in spite of the volumes of data and business information
that
are generated, the critical knowledge within an organization and therefore
much
of its value, resides with employees. As a result, many companies have begun
to
change their view of human capital, not as an expense to be minimized but as
an
asset whose value should be optimized. Unfortunately, many organizations have
neither systematized best practices for talent management nor have they
implemented software applications to support these processes and provide HR
professionals with critical analytics and metrics.
We
believe that our suite of workforce management solutions directly addresses
the
major challenges facing employers in effectively managing the human capital
function. Our solutions enable companies to employ sophisticated systems in
their talent management processes. The ability to leverage valuable data
generated through these functions allows organizations to identify overall
trends that could improve the efficiency and effectiveness of its processes,
quickly identify problems that could lead to employee turnover and ensure that
the employee workforce is aligned appropriately around the corporate
objectives.
Increased
Use of On-Demand Applications
Based
on
our experience, we believe that organizations have become increasingly
dissatisfied with traditional enterprise software applications, resulting in
the
growing adoption of the on-demand model for enterprise software.
Historically, organizations have purchased perpetual software licenses and
deployed enterprise software applications on-site within their IT environment.
This traditional method of purchasing and deploying enterprise software
applications has left many organizations questioning whether the benefits of
these technologies outweigh the following burdens:
Developments
in technology have enabled software developers to offer enterprise software
applications on an on-demand basis. Leveraging the Internet, multi-tiered
architectures, advances in security and open standards for application
integration, software vendors can offer software applications to their clients
as a service, hosting the software on servers operated by the software vendor.
Clients, using an Internet browser, access the applications, which are designed
to be easily configured and integrated with a client’s existing applications.
The
on-demand model fundamentally changes both the purchasing and deployment of
enterprise software from a client perspective. Rather than making large,
up-front investments in perpetual licenses, clients purchase limited term
subscriptions for on-demand software applications. Further, because only an
Internet browser is required to access on-demand software applications, which
can be easily configured to meet the buyer’s specific needs, organizations
eliminate the expense of ancillary technology and third-party services required
to implement, configure and maintain the enterprise application on-site.
Finally, the finite duration of subscriptions provides a strong incentive to
software vendors to ensure that the software provides the expected benefits
to
the client and that they receive consistent customer service. The on-demand
model also reduces research and development support costs for the software
developer. Because only limited versions of the software exist at any one time,
the on-demand model relieves the burden of maintaining and upgrading historical
versions of the software.
We
believe that talent management applications are particularly well-suited to
the
on-demand model. Talent management applications are generally purchased by
an
organization’s HR department. Because the HR departments of most organizations
have little historical experience making capital expenditures for enterprise
software applications, we believe that the on-demand applications are an
operating expense model that provides these departments the opportunity to
access these software applications on a subscription basis, thus eliminating
a
major impediment to the adoption of talent management software
solutions.
5
STRATEGY
Our
objective is to become a leading supplier of comprehensive, adaptive workforce
solutions in North America. While our Career Network services can be used by
any
size organization, our Enterprise Workforce talent management solutions were
primarily configured for larger organizations. We believe that our products
can
address the needs of most of the human capital market and manage the entire
employee lifecycle and we are able to provide enterprise workforce management
solutions and services to companies of 2,500 employees or more.
We
believe that our solutions help companies cost-effectively maximize workforce
productivity, performance and satisfaction by applying business discipline
to
key people processes. Our solutions are built around a suite of easily
configurable software applications that automate talent management best
practices. We believe that by providing our software applications on an
on-demand basis, we can substantially reduce the costs and risks associated
with
traditional enterprise software application implementations. We also believe
that implementing feature-rich and scalable, or easily configurable on a
real-time basis, talent management solutions that meet organizations’ specific
needs requires a combination of software, services and domain-specific content.
Accordingly, we complement our software applications with consulting services,
outsourcing services and proprietary content. Together, these components form
solutions that enable our clients to improve the quality of their human capital
management processes and increase employee productivity and retention and make
their talent management programs more cost-effective. Our solutions
include:
management
of talent compensation;
evaluation
of talent performance and competencies;
talent
development and training need identification;
talent
succession planning;
talent
reward, non-cash incentives and retention services;
talent
separation services that encompass pre-termination planning, individual
coaching, opportunity research and job marketing campaign
development;
benefits
enrollment and administration and tools for employee
communications;
automating
and monitoring the recruitment process and the provision of links to external
service providers, such as companies that specialize in skill testing or
personality profiling;
talent
acquisition services ranging from job posting outreach to job
boards;
hosting
a
corporate career site; and
talent
utilization services with job posting to internal company
intranets.
We
believe we have developed a strategy that will achieve revenue growth in most
economic conditions, and we are focused on achieving profitability through
a
combination of organic revenue growth, cost management and strategic
acquisitions. Key elements of our strategy for business development are as
follows:
Expanding
direct sales with vertical focus. We will continue to emphasize our direct
sales
efforts into targeted vertical industries, especially those with good current
economic outlooks including healthcare, financial services, retail, education
and government, pharmaceuticals and biotech, food services and some
manufacturing sectors;
6
Building
a wider indirect sales channel for distribution of our products and services.
We
will continue to pursue reseller agreements for all of our services with human
capital solution providers such as Human Resource Outsourcing companies,
Business Processing Outsourcing companies, and Systems Integrators; In addition,
we will continue to pursue OEM channels for our products and
services;
Expand
market opportunities for our products and services. We will continue to identify
and leverage additional growth engines for our products and services as well
as
Education and Government markets. These markets provide new revenue
opportunities for our products and services;
Maintaining
technological leadership. We plan to remain at the forefront of web-based human
capital solutions by developing and hosting or licensing the latest available
technologies taking advantage of the internet and offering our clients a
comprehensive and functionally rich human capital management service in a hosted
environment;
Cross-selling
additional solutions to further penetrate current clients. We
believe that having a “suite” of human capital solutions that address the entire
employee life cycle combined with our strong client relationships provides
us
with a meaningful opportunity to cross-sell additional solutions to our existing
clients and to achieve greater penetration within an organization. We expect
to
continue to create innovative programs designed to provide our sales and account
management personnel with strong incentives to maximize the value for each
of
our clients; and
Pursuing
strategic acquisitions. From time-to-time, we will evaluate acquisition and
investment opportunities in complementary businesses, products and/or
technologies. Our objective is to increase our revenue growth, expand our
customer base, add new services or new technologies for our existing client
base
and penetrate new markets.
We
believe that our services allow organizations to significantly improve their
recruiting, hiring, evaluation, compensation, performance management, retention
and outplacement cycles. Our systems automate those human capital management
functions and most are accessible with any standard web browser and require
no
additional software or hardware deployment by clients.
PRINCIPAL
SERVICES AND OPERATIONS
ENTERPRISE
WORKFORCE SERVICES
Our
Enterprise Workforce Services segment offers a complete suite of HCM software
solutions and related professional services. Our products address recruitment,
benefits, performance, compensation, development and rewards. During fiscal
2005, we introduced TalentCenter, which is an integrated, open portal solution
that aggregates applications, content and services that companies use to manage
all phases of the employee lifecycle - from recruitment to retirement. In fiscal
2008, Enterprise Workforce Services generated approximately 67% of our revenue.
TalentCenter
The
Workstream TalentCenter provides a unified view of all of our offerings. It
is a
role-based talent management portal that provides single sign-on authentication
to all licensed applications and services. This streamlined approach facilitates
rapid user adoption of our applications and services. Due to the fact that
TalentCenter is a hosted solution, we manage virtually all of the integration
and service complexities at a state-of-the-art, world class data center
facility. Through a standard web browser, companies have access to our on-demand
applications and can turn on those they need, when they need them. TalentCenter
provides companies the flexibility to start small and grow over time or deploy
the entire solution at once.
Performance
Workstream
Performance enables organizations to translate business strategy into a fully
aligned set of operational goals, provide real-time visibility and reporting
on
goal status, assess employee performance and gather employee feedback across
the
organization. These products supply the tools and information required to manage
organizational performance effectively, including: goal setting, alignment,
cascading and linkage; self, peer, multi-rater and 360 degree performance
assessments; on-demand tracking and reporting of performance against established
metrics; and the collaboration and evaluation capabilities necessary to assess
results. The solution is also integrated with Workstream Compensation to help
support organization's pay-for-performance programs. Performance
applications include:
7
Compensation
Workstream
Compensation is a comprehensive set of products that enable end-to-end
management of all types of enterprise compensation, including salary, merit
increases, variable pay and stock awards. As many organizations are
beginning to introduce more complex, formula-driven variable pay plans, we
feature an advanced variable pay product that provides the flexibility to use
formula-based compensation plans and managerial discretion to reward the
company's high achievers. All compensation planning products are designed to
provide managers and compensation professionals with the information and online
decision support tools necessary to help them make more informed, policy-based
pay decisions. The compensation planning products can be implemented separately
or together, allowing organizations to achieve the goal of realizing a
pay-for-performance philosophy at their own pace. Compensation
applications include:
Development
Workstream
Development
is
designed to allow organizations to maximize the value of their current workforce
as well as ensuring that there will be strong leadership in the future. A
modular solution, Workstream Development combines individual development
planning (IDP), a competency-based assessment and development process with
integrated succession planning and organizational charting capabilities, all
based on the Workstream Competency Dictionary, which includes over 9,000
technical and 60 behavioral competencies. Development capabilities
include:
8
Recruitment
Workstream
Recruitment helps companies automate and manage the entire recruitment process
including job requisition, job profile creation, job posting, applicant
attraction, screening, and tracking, interview scheduling, offer letter
generation and making the hire. Workstream Recruitment also provides companies
with an extended network and industry database to help source key hires. The
end
result is a thoroughly researched and filtered list of qualified prospective
candidates. Recruitment
applications include the following:
Benefits
Workstream
Benefits is an integrated benefits solution that supports both benefits
communication and transactions. Featuring flexible, out-of-the-box
functionality, Workstream Benefits can be implemented quickly to help companies
automate and streamline the entire benefits enrollment, communication and
administration process. Benefit
capabilities and applications include:
Rewards
Workstream
Rewards programs enable organizations to increase employee productivity, improve
employee satisfaction and drive engagement. These solutions deliver convenience
and productivity benefits to the entire workforce and help organizations
identify and reward accomplishments and behaviors that drive desired operational
results. This product line delivers several offerings using an enterprise class
solution. Rewards applications include:
9
CAREER
NETWORKS
Our
Career Networks segment consists of career transition services, recruitment
research and applicant sourcing. Career Networks accounted for approximately
33%
of total revenue for fiscal 2008.
Career
Transition Services
Workstream’s
career transition services provide a package of outplacement products and
services, which are provided through our wholly-owned subsidiary Paula Allen
Holdings, Inc., which we acquired in July 2001 and does business under the
name
of Allen and Associates.
Our
career transition services provide job search services for displaced employees.
We focus on creating professional career marketing materials that displaced
employees need in order to immediately begin their new job campaign. This
package includes a professionally written résumé, broadcast letter, custom cover
letter and references. This assistance is provided to thousands of job seekers
each year in the areas of information technology, engineering, finance and
marketing.
We
market
our career transition services to individuals seeking employment or other career
opportunities in the marketplace. Career transition services are marketed to
individuals predominantly by advertising on the internet as well as in local
newspapers throughout North America. Individuals are charged on average between
$795 and $3,000 for our resume development, career consulting and market
research services.
Applicant
Sourcing
6FigureJobs.com,
Inc., which we acquired in October 2001, is an online applicant-sourcing portal
where job seeking candidates and companies that are actively hiring and filling
positions can interact. We believe that 6FigureJobs customizes this experience
to satisfy the needs of the upper-echelon management candidate and the companies
looking to hire them. The site provides content appropriate for senior
executives, directors and other managers, as well as containing job postings
that meet their qualifications. The 6FigureJobs job board has evolved into
one
of the premier executive job boards. We employ screening to create this
exclusive community of job seekers. On the candidate side, each job seeker
is
hand reviewed, to ensure they have recent total compensation of $100,000 per
annum, before his or her resume is allowed to reside in the site’s candidate
database. On the recruiting side, all job openings must have a minimum aggregate
compensation of $100,000. We generate revenue through 6FigureJobs on a
subscription basis from employers and recruiters that access our database of
job
seekers and use our tools to post, track and manage job openings. We also
generate revenue by charging companies that advertise on our 6FigureJobs
website, which includes charging certain advertisers a fee based on the number
of leads delivered or on a cost per lead basis.
Workstream
has reduced expenses in an effort to align revenues with expenses. Workstream
has actively engaged an investment bank to value and divest 6Figuresjobs.com.
The move is designed to infuse the Company with cash as well as to reduce the
warrant liability. Per the agreement made with the Special Warrant Holders
(SWH)
Workstream is to receive 25% of any proceeds from the sale of any assets and
the
SWH are to receive 75% of any proceeds. 6Figuresjobs.com is considered an
industry leader in the job board market and is a part of the Career Networks
division. Workstream is continuing to consider other opportunities to raise
capital and align the Company’s business operations with its strategic
focus.
10
Recruitment
Research and Contingent Placement
We
currently provide recruitment research services and contingent recruiting
through our subsidiary OMNIpartners,
which we acquired in July 2001. Our recruitment research services are based
on
the outsourcing of the sourcing and screening work associated with recruiting.
Our services are based on research provided to our clients on an hourly fee
basis, and clients are billed once the project is completed. We believe this
outsourcing formula allows clients to lower costs and gain access to specialized
expertise that provides objectivity and ongoing value to the hiring process.
Recruitment research services’ employees look for potential employees, interview
and qualify them, and deliver all the information to the clients’ human resource
departments. The OMNIresearch Report, delivered after completion of the
recruitment assignment, details information about each individual uncovered
during the search. OMNIresearch Reports may include information about
candidates’ work histories, technical abilities, educational backgrounds, people
skills, decision-making abilities, availability and salary expectations. The
client can offer to hire any or all of the individuals presented, at any time,
for no additional charge. For clients interested in a guaranteed hire, we also
provide search services where fees are based on a percentage of the candidate’s
first year salary.
FOREIGN
OPERATIONS
We
have
operations in Canada and the United States, and, therefore, are subject to
the
risks typical of an international business, including, but not limited to,
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility.
Our
operations group is located in Ottawa, Canada. The Fusepoint datacenter in
Toronto, Canada is where we maintain our servers that support all of our
locations and the software that is accessed by our clients in an Application
Service Provider (“ASP”) environment. We also have certain product development
resources in Victoria, British Columbia.
Financial
information about geographic areas and segments can be found in Note 13 to
our
consolidated financial statements.
REVENUE
SOURCES
The
Enterprise Workforce Services segment derives revenue from various sources
including the following: subscription and hosting fees; licensing of software;
software maintenance fees; professional services related to software
implementation, customization and training; and sale of products and tickets
through the Company’s employee discount and rewards software module. Clients
enter into contracts which specifically address the products and services
acquired, periods covered, and the billings terms. Contracts that include a
software subscription component have a period of at least one year and
typically, average three years. Clients are billed in advance according to
the
terms of the contract. In the case of annual or multiple year contracts, we
bill
our clients in advance monthly, quarterly or annually as deemed necessary when
negotiating the contract. Any billed but unearned revenue is disclosed in the
balance sheet as deferred revenue and is recognized when the service is
provided. Professional services are billed either on a time and material basis
or on a fixed fee basis. Time and material engagements are billed monthly as
the
professional services hours are incurred. Fixed fee engagements are billed
according to the terms of the contract, and revenue is recognized on a
percentage of completion basis. Revenue from the sale of products and tickets
through the discount and rewards software module is billed and recognized when
the goods are shipped and title has transferred.
The
Career Networks and contingent permanent placement segment derives revenue
from
career transition, applicant sourcing and recruitment research services. For
career transition services, clients are billed 50% when the assignment starts
and the remaining 50% when the assignment is completed, which is generally
in
approximately ten days. For recruitment research services and applicant sourcing
and exchange, customers are billed and revenue is recognized as services are
provided. Revenue is recognized when the services have been completed.
11
RESEARCH
AND DEVELOPMENT
From
fiscal 2002 through fiscal 2005, the Company embarked on a research and
development strategy whereby, rather than relying solely on developing software
internally, the Company began to obtain new technology applications and
intellectual property through the acquisition of companies that had already
developed the technology and proven its success in the marketplace. During
late
fiscal 2005 through 2008, the Company incurred significant research and
development costs subsequent to the various acquisitions in order to further
enhance the technologies developed by the individual entities prior to the
acquisitions. This included a more common look and feel to the various
applications user interfaces and reporting, integration between modules. The
increase in costs was primarily due to the addition of internal resources as
well as the use of offshore contractors. In 2008, much of the effort was focused
on specific integration of Workstream TalentCenterV7.0, with particular emphasis
on the compensation, performance management and development solutions. Research
and development expense was approximately $5,725,000 and $4,013,000 in fiscal
2008 and fiscal 2007, respectively. All research and development expense was
incurred in the Enterprise Workforce Services segment. As of April 2008, the
research and development expenses have been reduced.
INTELLECTUAL
PROPERTY
We
rely
upon a combination of copyright, trade secret and trademark laws and
non-disclosure and other contractual arrangements to protect our proprietary
rights. Many of the copyrights and trademarks we hold were obtained in
connection with the acquisitions we have made since 2002. Currently, we have
eight registered trademarks in Canada and eight in the United States. With
the
acquisition of Kadiri, we now have four registered trademarks in the European
Union and two in Mexico. Our trademarks include Workstream, E-Cruiter, E-Cruiter
Enterprise, E-Cruiting, Careerbridge, 6FigureJobs.com, RezLogic, Kadiri, Kadiri
TotalComp, and Decisis. In addition, we have two service marks for OMNIpartners
and OMNIresearch. We also have copyrights on some of our training manuals and
internally developed software programs.
In
1999,
we changed our name from “Careerbridge” to “E-Cruiter”. In 2001, we changed our
name to “Workstream”. We have registered the Workstream trademark in the U.S.
and Canada, and such registrations expire in May 2014 and in May 2019,
respectively. The U.S. trademark renews ten years at a time and the Canadian
trademark renews fifteen years at a time.
The
following registered trademarks, are registered and will expire as follows:
E-Cruiter - December 2013, E-Cruiter Enterprise – December 2013,
E-Cruiting – January 2014. These trademarks are renewable for fifteen
years at a time. Our 6FigureJobs.com and RezLogic trademark registrations
expired and renewals have been applied for and are renewable for ten years
at a
time.
Our
Kadiri trademarks are registered and expire as follows: United States: Kadiri,
Decisis, and Kadiri TotalComp - January 2011. These trademarks are renewable
for
ten years at a time. Canada: Kadiri – September 2018, and Kadiri
TotalComp – June 2019. These trademarks are renewable for fifteen
years at a time. European Kadiri – December 2010, and Kadiri
TotalComp – June 2011. These trademarks are renewable for ten years at a
time. Mexico: Kadiri and Kadiri TotalComp - July 2011. These trademarks are
renewable for ten years at a time.
In
connection with our acquisition of Kadiri, we acquired one U.S. patent issued
July 31, 2001 for Automated Process Guidance System and Method Using Knowledge
Management System by Kadiri Inc. In addition, we have three pending patent
applications: (1) a Canadian patent application for Method for Traversing a
Flowchart by Kadiri Inc, (2) a European patent application for Method for
Traversing a Flowchart by Kadiri Inc, and (3) a U.S. patent application for
Automated Process Guidance System and Method by Kadiri Inc.
We
believe that the proprietary rights created by these trademarks, service marks
and patents are important to our business. The measures we have taken to protect
our proprietary rights, however, may not be adequate to deter misappropriation
of proprietary information or protect us if misappropriation occurs. Policing
unauthorized use of our technologies and other intellectual property is
difficult, particularly because of the global nature of the internet. We may
not
be able to detect unauthorized use of our proprietary information and take
appropriate steps to enforce our intellectual property rights.
12
We
are
not aware of any patent infringement charge or any violation of other
proprietary rights claim by any third party relating to use of our products.
However, the computer technology market is characterized by frequent and
substantial intellectual property litigation.
SALES
AND
MARKETING
We
market
our services in both the United States and Canada. Target clients for our
on-demand software applications range from large global 2000 companies to medium
size organizations. We sell these solutions to both new and existing clients
primarily through our direct sales force, which is comprised of mainly field
sales personnel. Target clients for Career Networks range from headhunters
and
recruitment firms seeking applicant sourcing from the internet job board,
advertisers for our job board website, 6FigureJobs.com, outplacement candidates
looking to either change positions or find a job and companies that wish to
avail themselves of our recruitment research capabilities.
Our
marketing strategy focuses on generating qualified sales leads. The Enterprise
Workforce Services segment’s sales cycle for global 2000 companies is
approximately six to nine months depending on the size of the potential client
and the number of solutions the prospective customer is evaluating. Career
Networks sales cycle is relatively short and of a higher volume nature. The
Enterprise Workforce Services segment has a sales team of approximately 7
(internal and external) located throughout the United States. The Career
Networks segment has a sales team of approximately 40 located in five locations
throughout the United States. In addition, we have approximately three marketing
personnel located throughout the United States and Canada. Both Career Networks
and Enterprise Workforce Services sales teams sell typically within their
segment.
Our
marketing initiatives are generally targeted toward specific vertical industries
or specific solutions. Our marketing programs primarily consist of:
·
participation
in conferences, trade shows and industry events;
·
direct
mail and email campaigns;
·
use
of
webinars;
·
distribution
of white papers, case studies and thought leadership documents; and
·
using
our
website to provide product and company information.
COMPETITION
The
market for HCM services is highly fragmented and competitive with hundreds
of
companies offering products or services that compete with one or more of the
services that we offer. Our Career Networks segment competes within the United
States and Canada with internet recruitment services companies, outplacement
services companies and human resource service providers. We compete for a
portion of employer’s recruiting budgets with many types of competitors such as
offline recruiting firms, offline advertising, resume processing companies
and
web-based recruitment companies. While we do not believe that any of our
competitors offer the full suite of services that we provide, there are a number
of companies that have products or services that compete with one or more of
the
services we provide. For instance, companies that compete with our recruiting
systems services include Taleo Corporation, BrassRing, Webhire and Kenexa.
Companies such as Monster Worldwide, Execunet and Netshare have products or
services that compete with our applicant sourcing and exchange services. We
also
compete with vendors of enterprise resource planning software, such as
Peoplesoft, Oracle and SAP. In the area of outplacement services, we compete
with companies such as ITS Personal Marketing and WSA Corp. Companies such
as
LifeCare, Next Jump and SparkFly compete with our employee portal. Oracle,
SAP,
Workscape and Authoria are our main competitors for our benefit products and
Siebel, Kronos, Callidus, Softscape, Success Factors and Authoria compete with
our compensation and performance product lines.
We
believe that the primary competitive factors affecting our market
include:
13
We
believe that our principal competitive advantages include:
Although
we believe we compete favorably with respect to such factors, there can be
no
assurance that we can maintain our position against current and potential
competitors. A number of our competitors have longer operating histories and
greater financial, technology and marketing resources, as well as better name
recognition than we do.
EMPLOYEES
As
of May
31, 2008, we had 144 full-time employees. Our employees are not represented
by a
collective bargaining organization, and we have never experienced any work
stoppage. We consider our relations with our employees to be good.
AVAILABLE
INFORMATION
Our
internet website address is www.workstreaminc.com. We provide free access to
various reports that we file with or furnish to the United States Securities
and
Exchange Commission through our website, as soon as reasonably practicable
after
they have been filed or furnished. These reports include, but are not limited
to, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports. Our SEC reports can
be
accessed through the investor relations section of our website, or through
www.sec.gov. Information on our website does not constitute part of this 10-K
report or any other report we file or furnish with the SEC.
14
ITEM
1A.
RISK FACTORS
You
should carefully consider the risk factors set forth as follows and elsewhere
in
this Annual Report on Form 10-K that pertain to our Company. The realization
of
such risks could result in a material adverse effect on our results of
operations, financial condition, cash flows, business or the market for our
common shares. We cannot assure you that we will successfully address any of
these risks or address them on a continuing basis.
We
have limited operating funds, and our ability to continue as a going concern
is
dependent upon our ability to obtain additional capital to operate the business.
We
have
experienced net losses which have caused an accumulated deficit of approximately
$132,000,000 as of May 31, 2008. In addition, we have consumed net cash
used in operating activities of approximately $12,500,000 for the year ended
May
31, 2008. We will require additional funds to sustain and expand our current
business, and to continue implementing our business plan. These factors raise
substantial doubt about our ability to continue as a going concern.
Our
independent auditors have expressed substantial doubt about our ability to
continue as a going concern, which may hinder our ability to obtain future
financing.
Our
independent registered public accounting firm has issued its report, which
includes an explanatory paragraph for a going concern uncertainty on our
financial statements as of May 31, 2008. Our ability to continue as a going
concern is heavily dependent upon our ability to obtain additional capital
to
sustain operations. Currently, we have no commitments to obtain additional
capital, and there can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all.
The
Company has a material weakness in its internal accounting
controls.
In
the
2008 Annual Report on Form 10-K, the Company noted that it had identified a
material weakness in its internal accounting controls because of insufficient
staffing in its accounting department. The Company took remedial action to
correct this weakness, but, as of the date of the 2008 audit, the Company’s
Chief Executive Officer and Chief Financial Officer determined that the material
weakness had not been remediated and therefore has continued. The reason for
this decision is that during the Company’s annual audit, a material weakness
arose due to numerous adjustments to the Company’s financial statements that
were not detected by the Company’s accounting staff. See Item 9A. By definition,
a material weakness means that there is a significant deficiency that, by
itself, or in combination with other significant deficiencies, results in more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. Additionally, the
existence of a material weakness precludes management from concluding that
internal control over financial reporting is effective.
We
may not become profitable.
Since
our
inception, we have incurred losses which have been substantial in relation
to
our operations. As of May 31, 2008, we had an accumulated deficit of
approximately $132,000,000. We reported net losses of approximately $52,600,000
and $13,800,000 for the years ended May 31, 2008 and 2007, respectively.
Revenues for fiscal 2008 and 2007 were approximately $27,600,000 and
$29,300,000, respectively. Our ability to reduce our losses will be adversely
affected if we continue to acquire companies reporting losses, if
revenue grows
slower than we anticipate or if operating expenses exceed our expectations.
Even
if we do achieve profitability, we may not sustain or increase profitability
on
a quarterly or annual basis. Failure to achieve or maintain profitability would
materially adversely affect the market price of our common shares. We expect
our
operating expenses to moderate due to the scalability of our business model.
Our
business could suffer if financing is not available when
required or is not available on acceptable terms.
Our
future capital requirements depend on a number of factors, including our ability
to generate positive cash flow, cash required for future anticipated capital
expenditures, the development of new services or technologies and our projected
operational needs. We recentlyundertook cost reductions in an effort to meet
our
working capital requirements and capital expenditure requirements through at
least May 31, 2009. We are not sure whether these cost reductions, together
with
our anticipated generation of cash flow will be sufficient to meet these
requirements.I It is possible that we may need to raise additional funds sooner
than expected in order to fund working capital expansion, develop new, and
enhance existing services, or acquire complementary businesses or technologies
or if our revenues are less or our expenses are greater than we expect. Our
ability to obtain financing depends on a number of factors, including our
ability to generate positive cash flow from operations, the amount of our cash
reserves, the amount and terms of our existing debt arrangements, the
availability of sufficient collateral and the prospects of our business. If
financing is not available when required or is not available on acceptable
terms, it may impair our ability to:
15
Future
financings may be on terms adverse to shareholder interests.
In
the
past we have issued, and in the future we may issue, equity to raise additional
funds. If we issue additional securities, our existing shareholders may be
further diluted and holders of those new securities may have dividend,
liquidation, voting and other rights senior to those of the holders of our
common shares.
Current
economic downturns may adversely affect the demand for our services.
The
general level of current economic activity has significantly affected the demand
for employment and recruitment services in our Career Networks segment, as
well
as, sales of Enterprise software. If the general level of economic activity
continues to be slow, our clients may not require additional personnel and
may
delay or cancel plans that involve recruiting new personnel using our services
and technology. Consequently, the time from initial contact with a potential
client to the time of sale could increase and the demand for our services could
decline, resulting in a loss of revenue harming our business, operating results
and financial condition. In addition, it is expected that in times of economic
growth, demand for our career transition services may decline.
Future
economic downturns may adversely affect the demand for our services.
Historically,
the general level of economic activity has significantly affected the demand
for
employment and recruitment services in our Career Networks segment, as well
as,
sales of Enterprise software. If the general level of economic activity slows,
our clients may not require additional personnel and may delay or cancel plans
that involve recruiting new personnel using our services and technology.
Consequently, the time from initial contact with a potential client to the
time
of sale could increase and the demand for our services could decline, resulting
in a loss of revenue harming our business, operating results and financial
condition. In addition, it is expected that in times of economic growth, demand
for our career transition services may decline.
We
may not be able to grow our client base and revenue because of competition
we
face.
Our
future success will depend to a large extent on our ability to grow and maintain
our client base and revenue. This requires that we offer services that are
superior to the services being offered by the competition that we face and
that
we price our services competitively. The market for human capital management,
or
HCM, services is highly fragmented and competitive, with numerous companies
offering products or services that compete with one or more of the services
that
we offer. We compete for a portion of employers’ human resource budgets with
many types of competitors, as employers typically utilize a variety of sources
for managing their human capital needs, including:
16
client-server-based
software services;
web-based
and hosted service providers with a variety of human capital
solutions;
traditional
offline recruiting firms;
traditional
offline advertising, such as print media;
resume
processing companies;
web-based
recruitment companies; and
Internet
job posting companies.
In
addition, many employers are developing or may develop their own software to
satisfy their recruitment needs. We also compete with traditional offline and
web-based outplacement service companies and human resource, or HR, service
providers. While we do not believe that any of our competitors offer the full
suite of services that we provide, there are a number of companies that have
products or services that compete with one or more of the services we provide.
For instance, companies that compete with our recruiting systems services
include Taleo Corporation, BrassRing, Webhire and Kenexa. Companies such as
Monster Worldwide, Execunet and Netshare have products or services that compete
with our applicant sourcing and exchange services. We also compete with vendors
of enterprise resource planning software, such as Peoplesoft, Oracle and SAP.
In
the area of outplacement services, we compete with companies such as ITS
Personal Marketing and WSA Corp. Companies such as LifeCare, Next Jump and
SparkFly compete with our employee portal. Oracle, SAP, Workscape and Authoria
are our main competitors for our benefit products and Siebel, Kronos, Callidus,
Softscape, Success Factors and Authoria compete with our compensation and
performance product lines.
We
expect
competition to increase and intensify in the future, with increased price
competition developing for our services. A number of our current and potential
competitors have longer operating histories and greater financial, technical
and
marketing resources and name recognition than we do, which could give them
a
competitive advantage. Our competitors may develop products or services that
are
equal or superior to ours or that achieve greater market acceptance than ours.
It is also possible that new competitors may emerge and rapidly acquire
significant market share. As a result, we may not be able to expand or maintain
our market share and our ability to penetrate new markets may be adversely
affected.
If
we experience client attrition, our operating results will
be adversely affected.
Our
Enterprise Workforce Services clients generally enter into subscription
agreements covering various periods for at least one year and typically for
an
average of three years. We have no assurance that these clients will maintain
a
long-term relationship with us. If these clients fail to renew or cancel their
subscriptions with us, our business, revenues, operating results and financial
condition will be adversely affected. To the extent we experience significant
client attrition; we must attract additional clients to maintain
revenue.
We
may not be able to strengthen and maintain awareness of our
brand name.
We
believe that our success will depend to a large extent on our ability to
successfully develop, strengthen and maintain the recognition and reputation
of
our Workstream brand name. In order to strengthen and maintain our Workstream
brand recognition and reputation, we will need to increase our investment in
our
marketing efforts and continue to maintain high standards for actual and
perceived quality, usefulness, reliability, security and ease of use of our
services. If we fail to successfully promote and maintain our Workstream brand
name, particularly after incurring significant expenses in promoting our
Workstream brand name, or encounter legal obstacles which prevent our continued
use of our Workstream brand name, our business, operating results and financial
condition could be materially adversely affected and the market price of our
common shares could decline. Moreover, even if we continue to provide quality
service to our clients, factors outside of our control, including actions by
organizations that are mistaken for us and factors generally affecting our
industry, could affect our Workstream brand and the perceived quality of our
services.
17
Our
failure to enter into strategic relationships with third parties may harm our
business.
If
we are
unable to enter into or maintain certain strategic relationships, our business
will suffer. These relationships generally include those with job posting boards
and other on-line recruitment services such as Monster.com and Yahoo!hotjobs
pursuant to which our clients can post their job openings on such boards. These
relationships allow us to expand the services that we provide our clients
without our having to spend significant capital resources developing or
acquiring such services. Because many of these third parties compete with each
other, the existence of a relationship with any particular third party may
limit
or preclude us from entering into a relationship with that third party’s
competitors. In addition, some of the third parties with which we seek to enter
into relationships may view us as a competitor and refuse to do business with
us. Any loss of an existing relationship or failure to establish new
relationships may adversely affect our ability to improve our services, offer
an
attractive service in the new markets that we enter, or expand the distribution
of our services.
We
may encounter difficulties with acquisitions, which could
harm our
business.
From
fiscal 2003 through fiscal 2006, we made several acquisitions of other companies
and businesses as part of our efforts to expand our operations, and we may
continue to make acquisitions of complementary companies, products and
businesses. While we have no current intention of making acquisitions, the
risks
we may encounter in completing any such acquisitions include:
In
the
past, we have acquired financially distressed businesses which had lost
customers prior to our acquisition due in part to their financial instability.
While we are generally successful in retaining the remaining customers of these
businesses after we acquire them, we may be unable to recover customers already
lost by these financially distressed businesses. We have also frequently used
our common shares to pay the purchase price for acquisitions. Our common shares
may not remain at a price at which they can be used for acquisitions without
further diluting our existing shareholders, and potential acquisition candidates
may not view our stock attractively. We may not be successful in overcoming
these risks or any other problems encountered in connection with any
acquisitions. These difficulties may increase our expenses, and our ability
to
achieve profitability may be adversely affected.
18
Michael
Mullarkey, our Chairman, may have interests that are different than other
shareholders and may influence certain actions.
As
of May
31, 2008, Michael Mullarkey, our Executive Chairman, beneficially owned
approximately 8.52% of our outstanding common shares. As on November 1, 2008,
Mr. Mullarkey beneficially owned approximately 19.91% of our outstanding common
shares. Mr. Mullarkey’s interests as a major shareholder may conflict with his
fiduciary duties as a director. Mr. Mullarkey’s interests may influence how he
votes on certain matters that require shareholder approval. Mr. Mullarkey may
influence the outcome of various actions that require shareholder approval
including the election of our directors, delaying or preventing a transaction
in
which shareholders might receive a premium over the prevailing market price
for
their shares and preventing changes in control or management.
Because
we have international operations, we may face special economic and regulatory
challenges that we may not be able to meet.
We
expect
to continue to expand our U.S. and Canadian operations through both organic
growth and acquisitions and may spend significant financial and managerial
resources to do so. In addition, we intend to expand our talent management
solution offerings on a broader international scale and are presently enhancing
our products with further multi-lingual and multi-currency capabilities. Our
international operations are now and will be subject to certain risks,
including:
We
may lose business if we are unable to successfully develop
and introduce new products, services and features.
If
we are
unable to develop and introduce new products, services, or enhancements to,
or
new features for, existing products or services, in a timely and successful
manner, we may lose sales opportunities. The market for our services is
characterized by rapid and significant technological advancements, the
introduction of new products and services, changes in client demands and
evolving industry standards. The adoption of new technologies or new industry
standards may render our products obsolete and unmarketable. The process of
developing new services or technologies is complex and requires significant
continuing efforts. We may experience difficulties or funding shortages that
could delay or prevent the successful development, introduction and sale of
enhancements or new products and services. Moreover, new products, services
or
features which we introduce may not adequately address the needs of the
marketplace or achieve significant market acceptance.
Currently
our common shares trade at prices below $1.00. If this continues in the future,
our common shares could be subject to delisting by NASDAQ.
Our
common stock currently trades on the NASDAQ Capital Market and the Boston Stock
Exchange. On November 20, 2007, the Company received a letter from The NASDAQ
Stock Market (“NASDAQ”) notifying the Company that for 30 consecutive trading
days prior to the date of the letter, the minimum bid price per share of the
Company's listed securities had been below the minimum bid price per share
of
$1.00 as required for continued inclusion on the NASDAQ Capital Market.
19
On
May
20, 2008, we received a notice from the Nasdaq Stock Market informing the
Company that pursuant to NASDAQ’s previous communication of November 20, 2007,
the Company had not regained compliance with Marketplace Rule 4310(c)(4) related
to the minimum closing bid price of the Company’s common shares by May 19,
2008.
The
notice stated that because the Company met all initial inclusion criteria for
the Capital Market set forth in Marketplace Rule 4310(c) (except for the bid
price) on May 19, 2008, in accordance with Marketplace Rule 4310(c)(8)(D),
the
Company will now be provided an additional 180 calendar day compliance period,
or until November 17, 2008, to regain compliance. To regain compliance anytime
before November 17, 2008, the bid price of the Company’s common shares must
close at $1.00 per share or more for a minimum of ten consecutive business
days.
However, on October 16, 2008, the NASDAQ announced that, effective immediately,
it was suspending the enforcement of the rules requiring a minimum $1.00 closing
bid price. The suspension will remain in effect through January 16, 2009 and,
as
a result, we will now have until February 18, 2009 to regain compliance with
the
$1.00 minimum bud price requirements.
Under
the
NASDAQ’s requirements, a stock can be delisted and not allowed to trade on the
NASDAQ Capital Market if the closing bid price of the stock over a 30
consecutive trading-day period is less than $1.00. The Boston Stock Exchange
does not maintain a similar minimum price requirement. We intend to seek
shareholder approval to authorize a reverse split of our common shares in order
to raise our stock price and gain compliance with the minimum bid price
requirement, However, there is no assurance that our shareholders will approve
the reverse stock split or that such split, if approved, will be sufficient
to
allow us to maintain a bid price of at least $1.00. No assurance can be given
that the closing bid price of our common shares will satisfy the NASDAQ minimum
bid price requirements and thus continue to trade on the NASDAQ Capital Market.
Although our common shares may remain listed on the Boston Stock Exchange,
if
our common shares are delisted from the NASDAQ Capital Market, there may be
a
limited market for our shares, trading our stock may become more difficult
and
our share price could decrease even further. If our common shares are not listed
on a national securities exchange or the NASDAQ Capital Market, potential
investors may be prohibited from or be less likely to purchase our common
shares, limiting the trading market for our stock even further.
We
are currently not in compliance with the NASDAQ’s reporting requirements and may
face delisting if it does not regain compliance.
Currently,
we are not in compliance with the requirements for continued listing set forth
in NASDAQ Marketplace Rule 4310(c)(14) because of our failure to file our annual
report on Form 10-K for the fiscal year ended May 31, 2008 and our quarterly
report on Form 10-Q for the fiscal quarter ended August 31, 2008. We filed
an
appeal of a delisting notice delivered to us by the NASDAQ with the NASDAQ
Listing Qualifications Panel requesting continued listing of our common shares
until the Panel’s review and determination. A hearing before the Panel to
consider the appeal occurred on October 30, 2008. We are awaiting a
determination by the Panel on our matter. The suspension of trading and
delisting remains stayed pending such appeal. Subsequent to our hearing, the
NASDAQ announced that effective as of October 30, 2008, the NASDAQ is providing
a company that is delinquent in its periodic filing obligations with the
opportunity to submit a plan of compliance pursuant to which the staff may
grant
an exception for up to 180 calendar days from the due date of the filing for
the
company to evidence compliance. A company that regains compliance within that
time would not receive a delisting determination. We expect that the Panel’s
determination will take into consideration such pronouncement. If we are unable
to regain compliance with NASDAQ Marketplace Rule 4310(c)(14), our common shares
will likely be delisted from trading on the NASDAQ Capital Market. As described
above, if our common shares are delisted from the NASDAQ Capital Market, there
may be a limited market for our shares, trading our stock may become more
difficult and our share price could decrease even further. If our common shares
are not listed on a national securities exchange or the NASDAQ Capital Market,
potential investors may be prohibited from or be less likely to purchase our
common shares, limiting the trading market for our stock even
further.
20
We
may become subject to the SEC’s penny stock rules, which may decrease the
liquidity of our common shares and negatively impact the ability of purchasers
of our common shares to sell our common shares in the secondary market.
SEC
regulations generally define a penny stock as an equity security that has a
market price of less than $5.00 per share, subject to certain exceptions. We
are
not currently subject to the penny stock rules because our common shares qualify
for two separate exceptions to the SEC’s penny stock rules. The first exception
from the penny stock rules for which we qualify is an exception for companies
that have an equity security that is quoted on the NASDAQ Stock Market. Since
our common shares are traded on the NASDAQ Capital Market, we are not subject
to
the penny stock rules. The second exception from the penny stock rules for
which
we qualify is an exception for companies that have average revenue of at least
$6,000,000 for the last three years. Our revenue for fiscal 2008, fiscal 2007
and fiscal 2006 was approximately $27,600,000, $29,300,000,
and $28,100,000,
respectively, resulting in average revenue of approximately $28,300,000.
If
our
common shares are delisted or removed from the NASDAQ Capital Market and if
we
fail to meet the average revenue exception to the penny stock rules, our common
shares may become subject to the penny stock rules, which impose additional
sales practice requirements on broker-dealers who sell our common shares. For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchaser of such securities and have received
the purchaser’s written agreement to the transaction prior to purchase. In
addition, unless an exception is available, the regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated with it.
If
our common shares were considered penny stock, the ability of broker-dealers
to
sell our common shares and the ability of our shareholders to sell their
securities in the secondary market would be limited. As a result, the market
liquidity for our common shares would be severely and adversely affected. We
cannot assure you that trading in our securities will not be subject to these
or
other regulations in the future which would negatively affect the market for
our
common shares.
The
price of our common shares historically has been volatile, which may make it
more difficult for you to resell our common shares when you want at prices
you
find attractive.
The
market price of our common shares has been highly volatile in the past, and
may
continue to be volatile in the future. For example, since June 1, 2004, the
closing sale price of our common shares on the NASDAQ Capital Market has
fluctuated between $0.15 and $5.35 per share. The following factors may
significantly affect the market price of our common shares:
In
addition, the stock market in general, and the market prices for
internet-related companies in particular, have experienced extreme volatility
that often has been unrelated to the operating performance of such companies.
These broad market and industry fluctuations may adversely affect the price
of
our common shares, regardless of our operating performance. (See Risk Factor
“Our common shares currently trade at prices below $1.00 and could be subject
to
delisting by NASDAQ.”)
The
power of our board of directors to designate and issue shares of stock could
have an adverse effect on holders of our common shares.
Subject
to NASDAQ limitations, we are authorized to issue an unlimited number of common
shares, which may be issued by our board of directors for such consideration
as
they may consider sufficient without seeking shareholder approval. The issuance
of additional common shares in the future will reduce the proportionate
ownership and voting power of current shareholders. Our Articles of
Incorporation also authorize us to issue an unlimited number of Class A
Preferred Shares, the rights and preferences of which may be designated by
our
board of directors without shareholder approval. The designation and issuance
of
Class A Preferred Shares in the future could create additional securities that
would have dividend, liquidation and voting preferences prior in right to the
outstanding common shares. These provisions could also impede a change of
control.
21
If
we are characterized as a passive foreign investment company,
our U.S. shareholders may suffer adverse tax consequences.
We
believe that we were not a passive foreign investment company for U.S. federal
income tax purposes for fiscal years 2007 and 2008. Generally, we may be
characterized as a passive foreign investment company for U.S. federal income
tax purposes if for any taxable year 75% of our gross income is passive income,
or at least 50% of our assets are held for the production of, or produce,
passive income. This characterization could result in adverse U.S. tax
consequences to our shareholders. These consequences may include having gains
realized on the sale of our common shares treated as ordinary income, rather
than capital gain income, and having potentially punitive interest charges
apply
to the proceeds of share sales. U.S. shareholders should consult with their
own
U.S. tax advisors with respect to the U.S. tax consequences of investing in
our
common shares.
Our
business could be adversely affected if we are unable to
protect our proprietary technologies.
Our
success depends to a significant degree upon the protection of our proprietary
technologies and brand names. The unauthorized reproduction or other
misappropriation of our proprietary technologies could provide third parties
with access to our technologies without payment. If this were to occur, our
proprietary technologies would lose value and our business, operating results
and financial condition could be materially adversely affected. We rely upon
a
combination of copyright, trade secret and trademark laws and non-disclosure
and
other contractual arrangements to protect our proprietary rights. The measures
we have taken to protect our proprietary rights, however, may not be adequate
to
deter misappropriation of proprietary information or protect us if
misappropriation occurs. Policing unauthorized use of our technologies and
other
intellectual property is difficult, particularly because of the global nature
of
the internet. We may not be able to detect unauthorized use of our proprietary
information and take appropriate steps to enforce our intellectual property
rights. If we resort to legal proceedings to enforce our intellectual property
rights, the proceedings could be burdensome and expensive and could involve
a
high degree of risk.
Third
parties could claim that we infringe upon their proprietary
technologies.
Our
products, services, content and brand names may be found to infringe valid
copyrights, trademarks or other intellectual property rights held by third
parties. In the event of a successful infringement claim against us and our
failure or inability to modify our technologies or services, develop
non-infringing technology or license the infringed or similar technology, we
may
not be able to offer our services. Any claims of infringement, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management attention, require us to enter into costly royalty or licensing
arrangements, modify our technologies or services or prevent us from using
important technologies or services, any of which could harm our business,
operating results and financial condition.
We
may become subject to burdensome government regulation which could increase
our
costs of doing business, restrict our activities
and/or subject us to liability.
Uncertainty
and new regulations relating to the internet could increase our costs of doing
business, prevent us from providing our services, slow the growth of the
internet or subject us to liability, any of which could adversely affect our
business, operating results and prospects. In addition to new laws and
regulations being adopted, existing laws may be applied to the Internet. There
are currently few laws and regulations directly governing access to, or commerce
on, the Internet. However, due to the increasing popularity and use of the
Internet, the legal and regulatory environment that pertains to the internet
is
uncertain and continues to change. New and existing laws may cover issues which
include:
22
The
Canadian Federal Government enacted privacy legislation which requires us to
appoint an individual responsible for the administration of personal
information, to implement policies and practices to protect personal
information, to provide access to information and to deal with complaints.
We
must obtain individual consents for each collection, use or retention of
personal information. We implemented procedures to comply with this new privacy
legislation. The privacy legislation increases our cost of doing business due
to
the administrative burden of these laws, restricts our activities in light
of
the consent requirement and potentially subjects us to monetary liability for
breach of these laws.
Computer
viruses or software errors may disrupt our operations, subject us to a risk
of
loss and/or expose us to liability.
Computer
viruses may cause our systems to incur delays or other service interruptions.
In
addition, the inadvertent transmission of computer viruses or software errors
in
new services or products not detected until after their release could expose
us
to a material risk of loss or litigation and possible liability. Moreover,
if a
computer virus affecting our system is highly publicized or if errors are
detected in our software after it is released, our reputation and brand name
could be materially damaged and we could lose clients.
We
may experience reduced revenue, loss of clients and harm to
our reputation and brand name in the event of system
failures.
We
may
experience reduced revenue, loss of clients and harm to our reputation and
brand
name in the event of unexpected network interruptions caused by system failures.
Our servers and software must be able to accommodate a high volume of traffic.
If we are unable to add additional software and hardware to accommodate
increased demand, we could experience unanticipated system disruptions and
slower response times. Our systems are vulnerable to damage or interruption
from
earthquakes, floods, fires, power loss, telecommunication failures, terrorist
attacks, computer viruses and similar events. We have centralized all of our
application hosting in a secure, state-of-the-art datacenter facility and we
have invested substantial funds in procuring the necessary equipment. While
this
initiative should enhance our ability to meet performance and security
requirements under our customer service level agreements, there is no assurance
that this will cover all eventualities. We have also established redundant
systems and implemented disaster recovery procedures, they also may not be
sufficient for all situations. We have occasionally experienced delays in
providing our customers access to their data in the past, and we believe these
system interruptions could continue to occur from time to time in the future.
Any catastrophic failure at our network operations center could prevent us
from
serving our clients for a number of days, or possibly weeks, and any failure
of
our internet service provider may adversely affect our network’s performance.
Most of our system interruptions are due to heavy internet traffic and minor
equipment failures which generally result in our customers being unable to
access their data for a few seconds or several minutes. Our clients may become
dissatisfied by any system failure that interrupts our ability to provide our
services to them or results in slower response times. Our subscription
agreements generally provide that our customers will be able to access their
data during certain guaranteed times. If we fail to meet the service levels
specified under our subscription agreements as a result of repeated outages,
the
customer can terminate its agreement with us. Our business interruption
insurance may not adequately compensate us for any losses that may occur due
to
any failures in our system or interruptions in our services.
Breaches
of our network security could be costly.
If
unauthorized persons penetrate our network security, they could misappropriate
proprietary information or cause interruptions in our services. We may be
required to spend capital and resources to protect against or to alleviate
these
problems. In addition, because we host data for our clients, we may be liable
to
any of those clients that experience losses due to our security failures. While
we have implemented measures to strengthen and improve our intrusion protection
system and have achieved independent auditor certification under a SAS 70 Type
I
and II best practices evaluation, this is not an absolute guarantee that
security breakdowns will not occur. As a result, a material security breach
could have a material adverse effect on our business and the market price of
our
common shares may decline.
23
Our
business may be adversely affected if internet service providers fail to provide
satisfactory service to our clients to enable them to use
our services
and access job seeker candidates on-line.
Failure
of internet service providers or on-line service providers to provide access
to
the internet to our clients and job seekers would prevent them from accessing
our web board, which would cause our business to suffer. Many of the internet
service providers, on-line service providers and other web site operators on
which we depend have experienced significant service slowdowns, malfunctions,
outages and capacity limitations. If users experience difficulties using our
services due to the fault of third parties, our reputation and brand name could
be harmed.
Failure
of the internet infrastructure to support current and future user activity
may
adversely affect our business.
We
cannot
assure you that the Internet infrastructure will continue to effectively support
the demands placed on it as the internet continues to experience increased
numbers of users, greater frequency of use and increased bandwidth requirements
of users. In the past, the internet has experienced a variety of outages and
other delays. The internet is also subject to actions of terrorists or hackers
who may attempt to disrupt specific web sites or Internet traffic generally.
Any
future outages or delays could affect the willingness of employers to use our
on-line recruitment offerings and of job seekers to post their resumes on the
internet. If any of these events occur, our business, operating results and
financial condition could be materially adversely affected.
We
may not expand and upgrade our systems and hardware in a timely manner in order
to accommodate growth in our business, which could adversely affect our
business.
We
must
expand and upgrade our systems and network hardware in order to accommodate
growth in our business. While we have recently updated and refreshed our data
center capabilities and upgraded the necessary equipment there is no assurance
that such changes and upgrades will accommodate growth in our business, our
business, financial condition and operating results could be adversely
affected.
We
depend on our key employees to manage our business effectively, and if we are
unable to retain our key employees, our business may be adversely
affected.
Our
success depends on the efforts, abilities and expertise of certain of our Board
members’ senior management and other key employees, including in particular,
Michael Mullarkey, our Chairman and Steve Purello, our President and Chief
Executive Officer. There can be no assurance that we will be able to retain
our
key employees. If any of our key employees leave before suitable replacements
are found, there could be an adverse effect on our business. There can be no
assurance that suitable replacements could be hired without incurring
substantial additional costs, or at all.
ITEM
1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM
2.
PROPERTIES
Our
corporate headquarters are located in approximately 25,020 square feet of leased
office space in Ottawa, Ontario, Canada. This facility houses our network
operation and information technology groups, certain research and development
personnel and customer support. Our lease for 17,945 square feet of this
facility expires in December 2008 with the remaining 7,075 square feet expiring
in October 2010.
In
addition, we lease approximately 20,700 square feet of office space in Maitland,
Florida, which serves as the headquarters of our operating subsidiary,
Workstream USA. Our finance and human resources department, our internal sales
team and lead generation group, and the majority of the employees of the
outplacement and recruitment companies reside in this space. Our lease for
this
premise expires in April 2009.
24
As
part
of the acquisitions over the past several years, we assumed several facility
leases, some of which we extended beyond the assumed term or moved within the
same geographic area. We lease approximately 11,349 square feet of office space
in Pleasanton, California that expires in December 2013. This facility has
the
principal research and development group along with professional services
resources. Finally, we lease 1,500 square feet of office space in Victoria,
British Columbia, Canada that expires in April 2009. This lease was assumed
as
part of the Exxceed acquisition.
ITEM
3.
LEGAL PROCEEDINGS
On
or
about August 10, 2005, a class action lawsuit was filed against the Company,
its
former Chief Executive Officer and its former Chief Financial Officer in the
United States District Court for the Southern District of New York. The action,
instituted on behalf of a purported class of purchasers of the Company’s common
shares during the period from January 14, 2005 to and including April 14, 2005
(the class period), alleges, among other things, that management provided the
market misleading guidance as to anticipated revenues for the quarter ended
February 28, 2005, and failed to correct this guidance on a timely basis. The
action claims violations of Section 10(b) of the Securities Exchange Act of
1934
(the “Exchange Act”) and Rule 10b-5 promulgated thereunder, as well as Section
20(a) of the Exchange Act, and seeks compensatory damages in an unspecified
amount as well as the award of reasonable costs and expenses, including counsel
and expert fees and costs. The Court certified the case as a class action.
The
Company and the individual defendants thereafter filed a motion for judgment
on
the pleadings, based upon a recent ruling of the United States Supreme Court,
seeking to dismiss the amended complaint. Plaintiffs then sought leave to file
a
Second Amended Complaint, and asked the Court for additional time to pursue
discovery. The Court granted the motion for leave to file a Second Amended
Complaint, but deferred the request for additional discovery and ruled that
the
pending motion for judgment on the pleadings would be considered with respect
to
the allegations in the Second Amended Complaint. The motion for judgment on
the
pleadings has been briefed and argued, but has not been ruled upon. In the
event
the case is not disposed of on motion, the Company expects to file a motion
for
summary judgment.
The
Company has directors and officers’ liability insurance, which covers the
liability of the individual defendants in the amount of $10 million. The Company
has reached an agreement with its primary insurance carrier limiting the
Company’s exposure, in the event of a resolution within the Company’s insurance
limits, to $600,000.
The
parties have agreed to settle the claims in consideration of the payment of
$3
million by the Company’s insurance carrier and issuance by the Company of
$600,000 in common shares. The Court held a hearing on June 24, 2008 to consider
the fairness of the settlement after notice of the settlement and the hearing
had been given to the
class. No opposition to approval of the settlement was presented at the hearing.
On August 13, 2008, the Court entered a Final Judgment in the case, which became
final on September 12, 2008.
*
*
*
On
September 27, 2006, Sunrise Equity Partners, L.P. (“Sunrise”) filed a complaint
against the Company and its former Chief Executive Officer in the United States
District Court for the Southern District of New York alleging a violation of
Section 10b-5 of the Securities Exchange Act of 1934 and a claim under New
York
common law for fraudulent and negligent misrepresentations in connection with
Sunrise’s purchase of common shares and warrants in a private placement.
On
April
11, 2007, Nathan A. Low (“Low”) and Sunrise Foundation Trust (“Trust”) filed a
complaint against the Company and its former Chief Executive Officer in the
United States District Court for the Southern District of New York alleging
a
violation of Section 10b-5 of the Securities Exchange Act of 1934 and a claim
under New York common law for fraudulent and negligent misrepresentations in
connection with Low’s and the Trust’s purchase of common shares and warrants in
a private placement. The three plaintiffs invested an aggregate of $4 million
in
the Company in the private placement.
The
case
has been settled for $3.9 million dollars of which $3.3 million is cash and
$600,000 in common shares, pursuant to written agreement, and the litigation
has
been dismissed. The settlement of the claims against defendants was funded
by
proceeds from the Company’s insurance policies.
*
*
*
25
On
June
24, 2008, the Company filed a lawsuit in the Superior Court of the State of
Delaware in and for New Castle County (the “State Court Lawsuit”) against
Empagio Acquisition, LLC (“Empagio”) and SMB Capital Corporation (“SMB”) to
obtain the $5 million termination fee required to be paid by Empagio and SMB
pursuant to Section 7.02 of the Agreement and Plan of Merger dated as of
February 12, 2008 among the Company, Workstream Merger Sub Inc., Empagio and
SMB, which agreement was terminated by the Company on June 13, 2008. On June
25,
2008, Empagio and SMB filed a lawsuit against the Company in the United States
District Court for the District of Delaware (the “Federal Lawsuit”) alleging
entitlement to a $3 million termination fee pursuant to the Agreement and Plan
of Merger. On July 29, 2008, Empagio and SMB filed a notice of voluntary
dismissal of their Federal Lawsuit based on an understanding that Empagio and
SMB would make their claim as part of the Company’s State Court Lawsuit. In
accordance with the voluntary notice of dismissal of the Federal lawsuit,
Empagio and SMB have now asserted their claims in the State Court Lawsuit.
The Company has denied these allegations. The parties are now awaiting the
issuance of a Case Management Order, which will establish deadlines in this
action. Also under new Delaware Rule 16, this matter is subject to
mandatory alternative dispute resolution.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
PART
II
ITEM
5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
PRICE OF COMMON SHARES
Our
common shares are listed on the NASDAQ Capital Market under the symbol “WSTM”
and on the Boston Stock Exchange under the symbol “ERM.” The principal United
States market for our common shares is the NASDAQ Small Cap Market. The
following table sets forth, for the periods indicated, the high and low sales
prices of our common shares as reported on the NASDAQ Capital Market. As of
May
31, 2008, there were approximately 165 holders of record of our common
shares.
26
 DIVIDEND
POLICY
We
have
not paid any cash dividends on our common shares and do not anticipate paying
cash dividends in the foreseeable future. We intend to retain future earnings
for use in our business.
There
is
no law or government decree or regulation in Canada that restricts the export
or
import of capital, or that affects the remittance of dividends, interest or
other payments to a non-resident holder of common shares, other than withholding
tax requirements. See “Taxation.”
There
is
no limitation imposed by Canadian law or by our articles or other charter
documents on the right of a non-resident of Canada to hold or vote our common
shares, other than as provided in the Investment Canada Act, as amended,
referred to as the Investment Act.
The
Investment Act generally prohibits implementation of a reviewable investment
by
an individual, government or agency thereof, corporation, partnership, trust
or
joint venture that is not a "Canadian" as defined in the Investment Act,
referred to as a non-Canadian, unless, after review, the minister responsible
for the Investment Act is satisfied that the investment is likely to be of
net
benefit to Canada. If an investment by a non-Canadian is not a reviewable
investment, it nevertheless requires the filing of a short notice which may
be
given at any time up to 30 days after the implementation of the investment.
An
investment in our common shares by a non-Canadian that is a WTO investor
(defined below) would be reviewable under the Investment Act if it were an
investment to acquire direct control, through a purchase of our assets or voting
interests, and the gross book value of our assets equaled or exceeded $237
million, the threshold established for 2004, as indicated in our financial
statements for our fiscal year immediately preceding the implementation of
the
investment. In subsequent years, such threshold amount may be increased or
decreased in accordance with the provisions of the Investment Act. A WTO
investor is an investment by an individual or other entity that is a national
of, or has the right of permanent residence in, a member of the World Trade
Organization, current members of which include the European Community, Germany,
Japan, Mexico, the United Kingdom and the United States, or a World Trade
Organization (WTO) investor-controlled entity, as defined in the Investment
Act.
27
An
investment in our common shares by a non-Canadian, other than a WTO investor,
would be subject to review under the Investment Act if it were an investment
to
acquire our direct control and the value of the assets were $5.0 million or
more, as indicated on our financial statements for our fiscal year immediately
preceding the implementation of the investment.
A
non-Canadian, whether a WTO investor or otherwise, would acquire control in
us
for the purposes of the Investment Act if he, she or it acquired a majority
of
our common shares or acquired all or substantially all of the assets used in
conjunction with our business. The acquisition of less than a majority, but
one-third or more of our common shares, would be presumed to be an acquisition
of control in us unless it could be established that we were not controlled
in
fact by the acquirer through the ownership of common shares.
The
Investment Act would not apply to certain transactions in relation to our common
shares including:
PURCHASES
OF EQUITY SECURITIES
We
did
not repurchase any common shares or other equity securities during fiscal
2008.
TAXATION
MATERIAL
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The
following is a summary of the material Canadian federal income tax
considerations generally applicable to a person who acquires our common shares
and who, for purposes of the Income Tax Act (Canada) and the Canada-United
States Income Tax Convention, 1980, as applicable, and at all relevant times,
is
a U.S. holder. Readers are cautioned that this is not a complete technical
analysis or listing of all potential tax effects that may be relevant to holders
of our common shares. In particular, this discussion does not deal with the
tax
consequences applicable to all categories of investors, some of which may be
subject to special rules, and does not address the tax consequences under
Canadian provincial or territorial tax laws, or tax laws of jurisdictions
outside of Canada. Accordingly, you should consult your own advisor regarding
the particular tax consequences to you of an investment in our common shares.
This summary is based on the advice of our Canadian counsel, Perley-Robertson,
Hill & McDougall.
For
purposes of the Income Tax Act (Canada) and the Canada-United States Income
Tax
Convention, 1980, a U.S. holder is a person that:
28
Special
rules, which we do not address in this discussion, may apply to a U.S. holder
that is (a) an insurer that carries on an insurance business in Canada and
elsewhere, or (b) a financial institution subject to special provisions of
the
Income Tax Act (Canada) applicable to income gain or loss arising from
mark-to-market property.
This
discussion is based on the current provisions of the Canada-United States Income
Tax Convention, 1980, the Income Tax Act (Canada) and their regulations, all
specific proposals to amend the Income Tax Act (Canada) and regulations, all
specific proposals to amend the Income Tax Act (Canada) and regulations
announced by the Minster of Finance (Canada) before the date of this annual
report and counsel’s understanding of the current published administrative
practices of Canada Customs and Revenue Agency. This discussion is not
exhaustive of all potential Canadian tax consequences to a U.S. holder and
does
not take into account or anticipate any other changes in law, whether by
judicial, governmental or legislative decision or action, nor does it take
into
account the tax legislation or considerations of any province, territory or
foreign jurisdiction.
TAXATION
OF DIVIDENDS
Dividends
paid or credited or deemed to be paid or credited on common shares owned by
a
U.S. holder will be subject to Canadian withholding tax under the Income Tax
Act
(Canada) at a rate of 25% on the gross amount of the dividends. The rate of
withholding tax generally is reduced under the Canada-United States Income
Tax
Convention, 1980 to 15% where the U.S. holder is the beneficial owner of the
dividends. Under the Canada-United States Income Tax Convention, 1980, dividends
paid to religious, scientific, charitable and similar tax exempt organizations
and pension organizations that are resident and exempt from tax in the United
States and that have complied with the administrative procedures specified
in
the Tax Convention are exempt from this Canadian withholding tax.
TAXATION
OF CAPITAL GAINS
Gain
realized by a U.S. holder on a sale, disposition or deemed disposition of our
common shares generally will not be subject to tax under the Income Tax Act
(Canada) unless the common shares constitute taxable Canadian property within
the meaning of the Income Tax Act (Canada) at the time of the sale, disposition
or deemed disposition. Our common shares generally will not be taxable Canadian
property provided that: (a) they are listed on a prescribed stock exchange,
and
(b) at no time during the five-year period immediately preceding the sale,
disposition or deemed disposition, did the U.S. holder, persons with whom the
U.S. holder did not deal at arm’s length, or the U.S. Holder acting together
with those persons, own or have an interest in or a right to acquire 25% or
more
of the issued shares of any class or series of our shares. A deemed disposition
of common shares will occur on the death of a U.S. holder.
If
our
common shares are taxable Canadian property to a U.S. holder, any capital gain
realized on a disposition or deemed disposition of those shares will generally
be exempt from tax under the Income Tax Act (Canada) by the Canada-United States
Income Tax Convention, 1980, so long as the value of our common shares at the
time of the sale, disposition or deemed disposition is not derived principally
from real property situated in Canada, as defined by the Canada-United States
Income Tax Convention, 1980. We have advised that currently our common shares
do
not derive their value principally from real property situated in Canada;
however, the determination as to whether Canadian tax would be applicable on
a
sale, disposition or deemed disposition of common shares must be made at the
time of that sale, disposition or deemed disposition.
UNITED
STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
Subject
to the limitations described below, the following discussion describes the
material United States federal income tax consequences to a U.S. Holder (as
defined below) that is a beneficial owner of the common shares of Workstream
Inc. and that holds them as capital assets. For purposes of this summary, a
“U.S. Holder” is a beneficial owner of common shares who or that is for United
States federal income tax purposes (i) a citizen or resident of the United
States, (ii) a corporation (or other entity treated as a corporation for United
States federal tax purposes) created or organized in the United States or under
the laws of the United States or of any state or the District of Columbia,
(iii)
an estate, the income of which is includible in gross income for United States
federal income tax purposes regardless of its source, or (iv) a trust, if a
court within the United States is able to exercise primary supervision over
the
administration of the trust and one or more U.S. persons have the authority
to
control all substantial decisions of the trust.
29
This
summary is for general information purposes only. It does not purport to be
a
comprehensive description of all of the tax considerations that may be relevant
to owning the common shares. AS THIS IS A GENERAL SUMMARY, OWNERS OF COMMON
SHARES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE U.S.
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES, AS WELL AS TO NON-U.S. TAX
CONSEQUENCES, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF COMMON SHARES
APPLICABLE TO THEIR PARTICULAR TAX SITUATIONS.
This
discussion is based on current provisions of the U.S. Internal Revenue Code
of
1986, as amended, current and proposed U.S. Treasury regulations promulgated
thereunder, and administrative and judicial decisions, as of the date hereof,
all of which are subject to change, possibly on a retroactive basis. This
discussion does not address all aspects of United States federal income taxation
that may be relevant to any particular holder based on such holder’s individual
circumstances. In particular, this discussion does not address the potential
application of the alternative minimum tax or the United States federal income
tax consequences to holders that are subject to special treatment,
including:
This
discussion does not address any aspect of United States federal gift or estate
tax, or state, local or non-United States laws. Additionally, the discussion
does not consider the tax treatment of partnerships or persons who hold common
shares through a partnership or other pass-through entity. Certain material
aspects of United States federal income tax relevant to a beneficial owner
other
than a U.S. Holder (a “Non-U.S. Holder”) also are discussed below.
EACH
HOLDER OF COMMON SHARES IS ADVISED TO CONSULT SUCH PERSON’S OWN TAX ADVISOR WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PERSON OF PURCHASING, HOLDING
OR DISPOSING OF COMMON SHARES.
TAXATION
OF DIVIDENDS PAID ON COMMON SHARES
We
have
never paid cash dividends, and we currently do not intend to pay cash dividends
in the foreseeable future. In the event that we do pay a dividend, and subject
to the discussion of the passive foreign investment company, or PFIC, rules
below, a U.S. Holder will be required to include in gross income as ordinary
income the amount of any distribution paid on our common shares, including
any
Canadian taxes withheld from the amount paid, on the date the distribution
is
received to the extent the distribution is paid out of our current or
accumulated earnings and profits, as determined for United States federal income
tax purposes. In the case of non-corporate U.S. Holders, dividends may qualify
for favorable tax treatment. Distributions in excess of such earnings and
profits will be applied against and will reduce the U.S. Holder’s basis in the
common shares and, to the extent in excess of such basis, will be treated as
a
gain from the sale or exchange of the common shares.
30
Distributions
of current or accumulated earnings and profits paid in a currency other than
the
U.S. dollar to a U.S. Holder will be includible in the income of a U.S. Holder
in a U.S. dollar amount calculated by reference to the exchange rate on the
date
the distribution is received. A U.S. Holder that receives a distribution in
a
currency other than the U.S. dollar and converts the non-U.S. currency into
U.S.
dollars subsequent to its receipt will have foreign exchange gain or loss based
on any appreciation or depreciation in the value of the non-U.S. currency
against the U.S. dollar, which will generally be U.S. source ordinary income
or
loss.
U.S.
Holders will have the option of claiming the amount of any Canadian income
taxes
withheld at source either as a deduction from gross income or as a
dollar-for-dollar credit against their United States federal income tax
liability. Individuals who do not claim itemized deductions, but instead utilize
the standard deduction, may not claim a deduction for the amount of any Canadian
income taxes withheld, but such individuals may still claim a credit against
their United States federal income tax liability. The amount of foreign income
taxes which may be claimed as a credit in any year is subject to complex
limitations and restrictions, which must be determined on an individual basis
by
each shareholder. The total amount of allowable foreign tax credits in any
year
cannot exceed the pre-credit U.S. tax liability for the year attributable to
foreign source taxable income.
A
U.S.
Holder will be denied a foreign tax credit with respect to Canadian income
tax
withheld from dividends received on our common shares:
Any
days
during which a U.S. Holder has substantially diminished its risk of loss on
the
common shares are not counted toward meeting the 15-day holding period required
by the statute. In addition, distributions of current or accumulated earnings
and profits will be foreign source passive income for United States foreign
tax
credit purposes and will not qualify for the dividends received deduction
otherwise available to corporations.
TAXATION
OF THE DISPOSITION OF COMMON SHARES
Subject
to the discussion of the PFIC rules below, upon the sale, exchange or other
disposition of our common shares, a U.S. Holder will generally recognize capital
gain or loss in an amount equal to the difference between the amount realized
on
the disposition and such U.S. Holder’s tax basis in the common shares (tax basis
is usually the U.S. dollar cost of such common shares). If the common shares
are
publicly traded, a disposition of common shares will be considered to occur
on
the “trade date,” regardless of the U.S. Holder’s method of accounting. A U.S.
Holder that uses the cash method of accounting calculates the U.S. dollar value
of the proceeds received on the sale as of the date that the sale settles.
However, a U.S. Holder that uses the accrual method of accounting is required
to
calculate the value of the proceeds of the sale as of the “trade date” and may
therefore realize foreign currency gain or loss, unless such U.S. Holder has
elected to use the settlement date to determine its proceeds of sale for
purposes of calculating such foreign currency gain or loss. Capital gain from
the sale, exchange or other disposition of the common shares held more than
one
year is long-term capital gain. Gain or loss recognized by a U.S. Holder on
a
sale, exchange or other disposition of common shares generally will be treated
as United States source income or loss for United States foreign tax credit
purposes. The deductibility of a capital loss recognized on the sale, exchange
or other disposition of common shares is subject to limitations. In addition,
a
U.S. Holder that receives non-U.S. currency upon disposition of our common
shares and converts the non-U.S. currency into U.S. dollars subsequent to its
receipt will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the non-U.S. currency against the U.S. dollar,
which will generally be United States source ordinary income or
loss.
31
PASSIVE
FOREIGN INVESTMENT COMPANY CONSIDERATIONS
We
will
be a passive foreign investment company, or PFIC, for United States federal
income tax purposes, if 75% or more of our gross income in a taxable year,
including the pro rata share of the gross income of any company, U.S. or
foreign, in which we are considered to own 25% or more of the shares by value,
is passive income. Alternatively, we will be considered to be a PFIC if 50%
or
more of our assets in a taxable year, averaged over the year and ordinarily
determined based on fair market value and including the pro rata share of the
assets of any company in which we are considered to own 25% or more of the
shares by value, are held for the production of, or produce, passive income.
Passive income includes amounts derived by reason of the temporary investment
of
funds raised in our public offerings.
If
we
were a PFIC, and a U.S. Holder did not make a qualifying election either to
(i)
treat us as a “qualified electing fund” (a “QEF”) (as described below), or (ii)
mark our common shares to market (as discussed below), excess distributions
by
us to a U.S. Holder would be taxed under special rules. “Excess distributions”
are amounts received by a U.S. Holder with respect to shares in a PFIC in any
taxable year that exceed 125% of the average distributions received by such
U.S.
Holder from the PFIC in the shorter of either the three previous years or such
U.S. Holder’s holding period for such shares before the present taxable year.
Excess distributions must be allocated ratably to each day that a U.S. Holder
has held shares in a PFIC. A U.S. Holder must include amounts allocated to
the
current taxable year in its gross income as ordinary income for that year.
Further, a U.S. Holder must pay tax on amounts allocated to each prior PFIC
taxable year at the highest rate in effect for that year on ordinary income
and
the tax is subject to an interest charge at the rate applicable to deficiencies
for income tax. The entire amount of gain that is realized by a U.S. Holder
upon
the sale or other disposition of our common shares will also be treated as
an
excess distribution and will be subject to tax as described above. A. U.S.
Holder’s tax basis in our common shares that were acquired from a decedent who
was a U.S. Holder would not receive a step-up to fair market value as of the
date of the decedent’s death but would instead be equal to the decedent’s basis,
if lower. If we were a PFIC, a U.S. Holder of our common shares will be subject
to the PFIC rules as if such holder owned its pro-rata share of any of our
direct or indirect subsidiaries which are themselves PFICs. Accordingly, a
U.S.
Holder of our common shares will be subject to tax under the PFIC rules with
respect to distributions to us by, and dispositions by us of stock of, any
direct or indirect PFIC stock held by us, as if such holder received directly
its pro-rata share of either the distribution or proceeds from such
disposition.
The
special PFIC rules described above will not apply to a U.S. Holder if the U.S.
Holder makes an election to treat us as a “qualified electing fund” in the first
taxable year in which the U.S. Holder owns common shares and if we comply with
certain reporting requirements. Instead, a shareholder of a QEF is required
for
each taxable year to include in income a pro rata share of the ordinary earnings
of the qualified electing fund as ordinary income and a pro rata share of the
net capital gain of the QEF as long-term capital gain, subject to a separate
election to defer payment of taxes, which deferral is subject to an interest
charge. The QEF election is made on a shareholder-by-shareholder basis and
can
be revoked only with the consent of the U.S. Internal Revenue Service, (“IRS”).
A shareholder makes a QEF election by attaching a completed IRS Form 8621,
including the PFIC annual information statement, to a timely filed United States
federal income tax return and by filing such form with the IRS Service Center
in
Philadelphia, Pennsylvania. Even if a QEF election is not made, a shareholder
in
a PFIC who is a U.S. person must file a completed IRS Form 8621 every year.
We
have agreed to supply U.S. Holders with the information needed to report income
and gain pursuant to a QEF election in the event we are classified as a
PFIC.
A
U.S.
Holder of PFIC stock which is publicly traded could elect to mark the stock
to
market annually, recognizing as ordinary income or loss each year an amount
equal to the difference as of the close of the taxable year between the fair
market value of the PFIC stock and the U.S. Holder’s adjusted tax basis in the
PFIC stock. Losses would be allowed only to the extent of net mark-to-market
gain previously included by the U.S. Holder under the election for prior taxable
years. If the mark-to-market election were made, then the rules set forth above
would not apply for periods covered by the election.
We
believe that we were not a PFIC for the fiscal years ending May 2008 and May
2007, and we believe that we will not be a PFIC for the fiscal year ending
May
2009. The tests for determining PFIC status, however, are applied annually,
and
it is difficult to make accurate predictions of future income and assets, which
are relevant to this determination. Accordingly, there can be no assurance
that
we will not become a PFIC. U.S. Holders who hold common shares during a period
when we are a PFIC will be subject to the foregoing rules, even if we cease
to
be a PFIC, subject to certain exceptions for U.S. Holders who made a QEF
election. U.S. Holders are strongly urged to consult their tax advisors about
the PFIC rules, including the consequences to them of making a mark-to-market
or
QEF election with respect to common shares in the event that we qualify as
a
PFIC.
32
TAX
CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON SHARES
Except
as
described in “U.S. Information Reporting and Backup Withholding” below, a
Non-U.S. Holder who is a beneficial owner of our common shares will not be
subject to United States federal income or withholding tax on the payment of
dividends on, and the proceeds from the disposition of, our common shares,
unless:
U.S.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S.
Holders generally are subject to information reporting requirements with respect
to dividends paid in the United States on common shares. In addition, U.S.
Holders are subject to U.S. backup withholding at a rate of up to 28% on
dividends paid in the United States on common shares unless the U.S. Holder
provides an IRS Form W-9 or otherwise establishes an exemption. U.S. Holders
are
subject to information reporting and backup withholding at a rate of up to
28%
on proceeds paid from the sale, exchange, redemption or other disposition of
common shares unless the U.S. Holder provides an IRS Form W-9 or otherwise
establishes an exemption.
Non-U.S.
Holders generally are not subject to information reporting or backup withholding
with respect to dividends paid on, or proceeds upon the sale, exchange,
redemption or other disposition of, common shares, provided that such Non-U.S.
Holder provides a taxpayer identification number, certifies to its foreign
status, or otherwise establishes an exemption.
The
amount of any backup withholding will be allowed as a credit against such U.S.
Holder’s or Non-U.S. Holder’s United States federal income tax liability and may
entitle such holder to a refund, provided that the required information is
furnished to the IRS.
33
ITEM
6.
SELECTED FINANCIAL DATA
The
data
set forth below should be read in conjunction with "Management's Discussion
and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Form
10-K.
FISCAL
YEAR ENDED MAY 31,
(IN
THOUSANDS, EXCEPT PER SHARE DATA)
AS
OF MAY
31,
(IN
THOUSANDS)
ITEM
7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
OVERVIEW
We
are a
provider of services and web-based software applications for Human Capital
Management (“HCM”). HCM is the process by which companies recruit, train,
compensate, evaluate performance, motivate, develop and retain their employees.
We offer software and services that address the needs of companies to more
effectively manage their HCM functions. We believe that our broad array of
HCM
solutions provide a “one-stop-shopping” approach for our clients’ human resource
needs and is more efficient and effective than traditional methods of human
resource management.
34
We
have
two distinct operating segments, which are the Enterprise Workforce Services
and
Career Networks segments. The Enterprise Workforce Services segment primarily
consists of HCM software, professional services and products sold as part of
reward and discount programs. Specifically, our Enterprise Workforce Services
segment offers a complete suite of HCM software solutions, which address
recruitment, benefits, performance management, compensation, development and
rewards. The Career Networks segment consists of career transition, applicant
sourcing and recruitment research services.
Our
business changed beginning in fiscal 2002. During fiscal 2002, we completed
the
acquisitions of Paula Allen Holdings, OMNIpartners, 6FigureJobs.com, RezLogic,
ResumeXpress and Tech Engine. During fiscal 2003, we completed the acquisitions
of Icarian, PureCarbon and Xylo. During fiscal 2004, we completed the
acquisitions of Perform, Peopleview and Kadiri. During fiscal 2005, we completed
the acquisitions of Peoplebonus, Bravanta, HRSoft and ProAct. During fiscal
2006, we acquired Exxceed, Inc. These acquisitions have enabled us to expand
and
enhance our HCM software, increase our service offerings and increase our
revenue streams. Subsequent to the acquisitions, we have concentrated on
integrating the acquired entities and technologies, expanding the reach of
the
existing business and identifying other potential acquisition targets. When
we
complete an acquisition, we combine the business of the acquired entity into
the
Company’s existing operations and expect that this will significantly reduce the
administrative expenses associated with the business prior to the acquisition.
The acquired business is not maintained as a standalone business operation.
Therefore, we do not separately account for the acquired business, including
its
profitability. Rather, it is included in one of our two distinct business
segments and is evaluated as part of the entire segment.
Over
the
past three years, we have expended significant resources on further integration
of the acquired software applications. We have enhanced product functionality,
user interface and reporting capabilities. We have further integrated many
of
the talent management solutions and provide a portal based platform for our
customers who may elect to contract for a single solution or multiple
applications.
In
the
last half of fiscal 2008 we initiated objectives that were a part of a strategy
to align expenses with revenues of the business. Our overall strategic objective
is still to be the premier provider of talent management solutions in the HCM
space. We completed our development of our seamless integration between our
core
applications of Compensation, Performance, and Development. We are capitalizing
on the sales and marketing expenditures and continue to maintain momentum of
selling to new customers and retaining existing customers. We believe that
sound
execution of these initiatives will result in revenue growth and the ability
to
take advantage of the scalable nature of our business model.
To
monitor our results of operations and financial condition, we review key
financial information including net revenues, gross profit, operating
expenditure and cash flow from operations. We have deployed numerous analytical
dashboards across our business to assist in evaluating current performance
against established metrics, budgets and business objectives on an ongoing
basis. We continue to seek methods to more efficiently monitor and manage our
business performance.
CRITICAL
ACCOUNTING POLICIES
Our
most
critical accounting policies relate to revenue recognition, the assessment
of
goodwill impairment, the valuation and determination of useful lives of acquired
intangible assets, the assessment of intangible asset impairment and the
valuation of deferred tax assets and related allowances. Management makes
estimates and assumptions that affect the value of assets and the reported
revenues. Changes in assumptions used would impact our financial position and
results.
Revenue
The
Company derives revenue from various sources including the following:
subscription and hosting fees; licensing of software and related maintenance
fees; professional services related to software implementation, customization
and training; sale of products and tickets through the Company’s employee
discount and rewards software module; career transition services; recruitment
research services; and, applicant sourcing.
In
general, the Company recognizes revenue when all of the revenue recognition
criteria are met, which is typically when:
35
The
Company primarily provides various HCM software applications as an on-demand
application service and also enters into the sale of license agreements. Revenue
is generated through a variety of contractual arrangements.
Subscription
and hosting fees and software maintenance fees are billed in advance on a
monthly, quarterly or annual basis. Amounts that have been invoiced are recorded
in accounts receivable and in deferred revenue or revenue, depending on whether
the revenue recognition criteria have been met. Quarterly and annual payments
are deferred and recognized monthly over the service period on a straight-line
basis. Set up fees are deferred and recognized monthly on a straight-line basis
over the contractual lives of the customer.
Subscription
revenues and hosting fees consist of fees from customers accessing our on-demand
application service. The Company follows the provisions of SEC Staff Accounting
Bulletin No. 104, Revenue
Recognition
and
Emerging Issues Task Force Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables.
For
revenue arrangements with multiple deliverables, the Company allocates the
total
customer arrangement to the separate units of accounting based on their relative
fair values, as determined by the price of the undelivered items when sold
separately. Professional services included in an application services
arrangement with multiple deliverables are accounted for separately when these
services have value to the customer on a standalone basis, and there is
objective and reliable evidence of fair value of each undeliverable item of
the
arrangement. When accounted for separately, revenues are recognized as the
services are rendered.
License
revenues consist of fees earned from the granting of both perpetual and term
licenses to use the software products. The Company recognizes revenue from
the
sale of software licenses in accordance with American Institute of Certified
Public Accountants ("AICPA") Statement of Position ("SOP") No. 97-2,
Software
Revenue Recognition,
and SOP
No. 98-9, Modification
of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions,
when all
of the following conditions are met: a signed contract exists; the software
has
been shipped or electronically delivered; the license fee is fixed or
determinable; and the Company believes that the collection of the fees is
reasonably assured. License revenue is recorded upon delivery with an
appropriate deferral for maintenance services, if applicable, provided all
of
the other relevant conditions have been met. The total fee from the arrangement
is allocated based on Vendor Specific Objective Evidence ("VSOE") of fair value
of each of the undelivered elements. Maintenance agreements are typically priced
based on a percentage of the product license fee and are either multi-year
or
have a one-year term, renewable annually. VSOE of fair value for maintenance
is
established based on the stated renewal rates. Services provided to customers
under maintenance agreements include technical product support and unspecified
product upgrades. VSOE of fair value for the professional service element is
based on the standard hourly rates the Company charges for services when such
services are sold separately.
Source
code revenue is generated by sales in small markets that we do not typically
target. The sales are for versions of specific applications or products that
we
no longer support or sell. As such, future earnings are not affected by these
sales. Source code revenue is recognized when our contractual commitments have
been satisfied.
Professional
services revenue is generated from implementation of software applications
and
from customer training, customization and general consulting. In addition,
revenue is generated from technical support not included in the software
maintenance. The majority of professional services revenue is billed based
on an
hourly rate and recognized on a monthly basis as services are provided. For
certain contracts which involve significant implementation or other services
which are essential to the functionality of the software and which are
reasonably estimable, the license and implementation services revenue is
recognized using contract accounting, as prescribed by SOP 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type
Contracts.
Revenue
is recognized over the period of each implementation using the
percentage-of-completion method. Labor hours incurred is used as the measure
of
progress towards completion, and management believes its estimates to completion
are reasonably dependable. A provision for estimated losses on engagements
is
made in the period in which the losses become probable and can be reasonably
estimated.
One
of
the software applications offered by the Company allows customers to offer
rewards, employee recognition and benefits (discounted goods and tickets) in
an
effort to promote their employee retention. The Company generates subscription
revenues from the customer. In addition, the Company generates revenue from
the
sale of products and tickets to the customers’ employees through a website. The
Company recognizes revenue when all of the revenue recognition criteria are
met,
which is typically when the goods are shipped and title has transferred.
36
For
career transition services, the Company bills the client when the assignment
starts, due to the short turn around on these services revenue is recognized
in
the month that they are billed. The Company recognizes revenue when all of
the
revenue recognition criteria are met, which is typically when services have
been
completed.
For
applicant sourcing services, the Company bills its clients in advance on a
monthly, quarterly and annual basis. The Company recognizes revenue when all
of
the revenue recognition criteria are met, which is typically on a straight-line
basis as services have been completed. Unrecognized revenue is included in
deferred revenue.
For
resume management services and recruitment services, the Company bills its
clients for job postings and matching of resumes per descriptions that the
client provides and for quantity-based job posting packages. The Company
recognizes revenue when all of the revenue recognition criteria are met, which
is typically when the services have been completed.
Goodwill
We
test
goodwill for impairment on an annual basis, as of May 31, or as needed if
circumstances arise that reduce the value of our reporting units below the
carrying value. We compare the fair value of each reporting unit to its carrying
amount (including goodwill) for our impairment evaluation. Our business segments
are considered reporting units for goodwill impairment testing. Goodwill is
considered to be impaired if the carrying value of a reporting unit exceeds
its
fair value. If goodwill is considered to be impaired, the loss that is
recognized is equal to the amount that the carrying value exceeds the fair
value
of that goodwill.
There
are
judgments and estimates built into our fair value analysis, including future
cash flow projections, the discount rate representing innate risk in future
cash
flows, market valuation, strategic operation plans and our interpretation of
current economic indicators. Changes in any of the underlying assumptions will
cause a change in the results, which could lead to the fair value of one or
more
of the reporting units to be worth less than the current carrying amounts.
In
addition to a change in market and economic conditions or our strategic plans,
the possibility exists that our conclusions could change which would result
in a
material negative effect on both our financial position and results of
operations.
In
Fiscal
2008, the Company recorded a $27.6 million goodwill impairment charge. Based
on
the Company’s fourth quarter fiscal 2008 SFAS No. 142 impairment review of its
Enterprise Workforce and Career Networks operating segments net assets and
their
related book value, the Company recorded an impairment of $21.5 million and
$6.1
million, respectively. The analysis was conducted by independent valuation
specialists. The decline in estimated fair values of the operating segments
resulted from an analysis of the current economic conditions, the Company’s
performance to budget and the estimated future cash flows.
Intangible
Assets
We
value
acquired intangible assets, which includes acquired technologies, customer
base
and intellectual property, based on the estimated fair value of the assets
at
the time of the acquisition. The estimated fair value is determined by a third
party valuation expert based on projected cash flows associated with the assets
and the customer attrition rates. Different assumptions were used in estimating
the intangible assets acquired in each business acquisition. If the future
cash
flows or the customer attrition rates differ significantly from our estimates,
we may be required to record an impairment of intangible assets. Changes in
circumstances impacting other assumptions used to value intangible assets could
also lead to future impairments.
Deferred
Taxes
We
apply
significant judgment in recording deferred tax assets, which primarily are
the
result of loss carryforwards of companies that we acquired and loss
carryforwards internally generated. In addition, we make certain assumptions
about if and when these deferred tax assets will be utilized. The utilization
of
the Company’s net operating loss carryforwards may be limited in any given year
under circumstances. Events which may affect the Company’s ability to utilize
these carryforwards include, but are not limited to, future profitability,
cumalitive stock ownership changes of 50% or more over a three-year period,
as
defined by section 382 of the Internal Revenue Code, and the timing of the
utilization of the tax benefit carryforwards. Actual results may differ from
amounts estimated.
37
FISCAL
2008 COMPARED TO FISCAL 2007
RESULTS
OF OPERATIONS
The
following table sets forth certain consolidated statements of operations data
expressed as a percentage of total revenue for the periods indicated.
Period-to-period comparisons of our financial results are not necessarily
meaningful and you should not rely on them as an indication of future
performance.
38
REVENUES
Consolidated
revenues were approximately $27,614,000 for fiscal 2008 compared to
approximately $29,309,000 for fiscal 2007, a decrease of $1,695,000 or 6%.
Enterprise
Workforce Services revenues for fiscal 2008 were approximately $18,477,000
compared to approximately $20,219,000 for fiscal 2007, a decrease of $1,742,000
or 9%. Professional service revenues decreased $1,017,000, reflecting a lower
level of utilization throughout fiscal 2008 driven, primarily, by the timing
of
implementation projects and a reduction in reliance outside consulting services.
Recurring revenues from subscription and maintenance agreements was lower by
$1,732,000 reflecting the impact of the run out of a number of maintenance
contracts on older license agreements and other cancellations in excess of
revenue from new implementations. Revenue from current license sales was higher
by $1,133,000 as a result of sales of more licenses. Rewards and discount
products revenue decreased $101,000 on lower than expected redemption volumes
in
the existing customer base compared to the prior year due to the slowing
economy.
Career
Networks revenues for fiscal 2008 were $9,137,000 compared to $9,090,000 for
fiscal 2007, an increase of $47,000 or .5%. The outplacement business remained
strong, showing an increase of $189,000 through a combination of stronger lead
flow, higher conversion ratios and an increase in revenue per transaction with
the enhanced service offering. The internet job board business slowed as
compared to prior year as a result of the slowing economy and availability
of
high level job opportunities. Recruitment services was lower compared to prior
year, by $74,000, as a substantial portion of our recruiting efforts in the
current year were used to support internal hiring initiatives as opposed to
external revenue generating engagements.
COST
OF
REVENUES AND GROSS PROFIT
Cost
of
revenues for fiscal 2008 were $6,823,000, or 25%, compared to $7,401,000, or
25%, for fiscal 2007 a decrease of $578,000 or 8%. Gross profit for fiscal
2008
was $20,791,000 or 75% of revenues compared to $21,908,000 or 75% of revenues
for fiscal 2007. The decline in costs matched the decline in sales and was
in
line by percentage.
Enterprise
Workforce Services cost of revenues accounted for $6,144,000 of the total cost
of revenue for fiscal 2008 and $6,846,000 for fiscal 2007, a decrease of
$702,000 or 10%. Enterprise Workforce Services gross profit was $12,324,000
or
67% of revenues for fiscal 2008 compared to $13,373,000 or 66% of revenues
for
fiscal 2007. Software margins increased from 87% to 89% year over year primarily
as a result of redundant costs associated with the completion of the migration
of all customers from subcontracted hosting partners to a centralized hosting
array at the Fusepoint datacenter facility in Toronto. The centralization
provided cost efficiencies in the on-demand business and enabled us to provide
further assurance to our customers regarding performance under service level
agreements and other security and privacy requirements. All new customers are
hosted at Fusepoint. Professional services margins decreased from 77% to 71%
primarily as a result of our commitment to maintain satisfied customers. Rewards
and recognition margins increased from 20% a year ago to 25% for fiscal 2008,
continuing the trend in use of gift cards compared to redemption for other
products such as electronic and photographic goods that have larger margins.
This shift in selling more gift cards in the product mix is not expected to
change in the near term and we anticipate further pressure on rewards margins
as
a result. In addition, we are negotiating better discounts from
vendors.
Career
Networks cost of revenues accounted for $679,000 of the total cost of revenues
for fiscal 2008 and $555,000 for fiscal 2007, an increase of $124,000 or 22%.
Career Networks gross profit was $8,467,000 or 93% of revenues for fiscal 2008
compared to $8,535,000 or 94% of revenues for fiscal 2007. The expansion in
the
product set used in career transition services continues to allow for additional
revenue generating items and the target customer group was shifting to more
highly compensated individuals. Both measures, when combined with a higher
conversion ratio on leads provided, continue to have a positive impact on gross
profit.
SELLING
AND MARKETING
Selling
and marketing expenses were $9,894,000 for fiscal 2008 compared to $7,549,000
for fiscal 2007, an increase of $2,345,000 or 31%. The increase was primarily
attributable to a higher level of compensation and related expenses associated
with the increase in sales personnel and training, early in the year, including
an expanded sales management team, a telesales organization and additional
sales
engineering and support resources. There was a 26% reduction in headcount,
resulting in significantly reduced costs after the third quarter. Management
believed that it needed to reduce current costs to align revenues with expenses
and we believe these expenditures will increase in the future, as revenue
increases, to sustain sales momentum. 39
RESEARCH
AND DEVELOPMENT
Research
and development expenses were $5,725,000 for fiscal 2008 compared to $4,013,000
for fiscal 2007, an increase of $1,712,000 or 43%. This increase reflects an
escalation in the use of outside contractors subsequent to new release of Talent
Center 7.0, a significant product release in fiscal 2008. During fiscal 2008,
the Company made a significant investment to update and modify its acquired
technology, standardize and integrate the software applications and build out
the talent center suite platform. The Company used outside consultants and
offshore development contractors to augment its existing development team.
These
resources were reduced after the product releases which will result in savings
in the future.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses were $18,358,000 for fiscal 2008 compared to
$14,959,000 for fiscal 2007, an increase of $3,399,000 or 23%. The
net
increase was primarily due to increases in professional fees, non-cash
compensation associated with stock options, provision for doubtful accounts
and
merger costs. The increase in professional fees was in connection with the
filing of certain SEC documents, professional fees associated with the potential
merger with Empagio and other professional fees due to recruiting costs
associated with new hires. Non-cash compensation associated with stock options
increased as a result of the hiring of new executives. Provision for doubtful
accounts increased as a result of management’s assessment of risk based on
current economic conditions.
AMORTIZATION
AND DEPRECIATION EXPENSE
Amortization
and depreciation expense was $3,602,000 for fiscal 2008 compared to $6,503,000
for fiscal 2007, a decrease of $2,901,000 or 45%. Amortization and depreciation
expense for the Enterprise Workforce Services segment was $3,527,000 in fiscal
2008 compared to $6,414,000 in fiscal 2007, a decrease of $2,887,000 or 45%.
The
decrease was the net effect of a decrease in certain intangible assets with
three and five-year lives becoming fully amortized during fiscal 2007.
Amortization and depreciation expense for the Career Networks segment was
$75,000 in fiscal 2008 compared to $89,000 in fiscal 2007, a decrease of $14,000
or 16%. The decrease was due to certain intangible assets with five-year lives
included in the Career Networks segment becoming fully amortized during fiscal
2008. Amortization expense is expected to decrease significantly from the
$2,153,000 recorded in fiscal 2008 to $428,000 in fiscal 2009 as the intangible
assets acquired in 2003 and 2004 continue to become fully amortized.
IMPAIRMENT
CHARGES
Impairment
of goodwill was $27,547,000 for fiscal 2008 compared to $0 for fiscal 2007,
an
increase of $27,547,000 or 100%. Based on the Company’s impairment tests and
consideration of the current and expected future market conditions, we
determined that goodwill for Enterprise Workforce and Career Networks operating
segments was impaired in accordance with Statement of Financial Accounting
Standards (“SFAS”) 142, Goodwill
and Other Intangible Assets
and the
Company recorded non-cash, pre-tax goodwill impairment charges of $21.4 million
and $6.1 million respectively. The analysis also determined that there was
no
impairment to intangible assets. The analysis was conducted by independent
valuation specialists. The decline in estimated fair values of the operating
segments resulted from an analysis of the current economic conditions, the
Company’s performance to budget and the lower estimated future cash
flows.
INTEREST
AND OTHER EXPENSE
Interest
and other expense was $8,470,000 for fiscal 2008 compared to $3,042,000 for
fiscal 2007 an increase of $5,428,000 or 178%. As required by FASB Statement
No.
150, pursuant to our August 2007 equity financing, we account for changes in
the
fair value of the warrant liability as either interest income or expense based
on the change in the value of the associated warrants for the related period.
For fiscal 2008, the fair value of the warrant liability resulted in interest
expense of $6,318,000.
LIQUIDITY
AND CAPITAL RESOURCES
At
May
31, 2008, we maintained $3,895,000 in cash and cash equivalents, restricted
cash
and short-term investments. Working capital, which represents current assets
less current liabilities, was a negative $2,799,000. 40
At
May
31, 2008, $391,000 of short-term investments was restricted from use in order
to
collateralize two facility lease arrangements. As we make facility lease
payments, the restricted cash guaranteeing the leases will periodically decrease
according to the terms of the lease agreements. The restriction on the cash
ends
in December of 2008.
For
fiscal 2008, cash used in operations totaled $12,495,000, consisting primarily
of the net loss for the year of $52,617,000 and a net increase in working
capital of $829,000 offset by non-cash expenses, including amortization and
depreciation of $3,602,000, non-cash interest expense associated with the
Secured Note arrangement and related warrant interest of $6,318,000, goodwill
impairment of $27,547,000 and non-cash compensation of $1,374,000.
Net
cash
used by investing activities during fiscal 2008 was $456,000. Investing outflows
consisted of the purchase of property and equipment of $587,000.
Net
cash
provided by financing activities was $13,565,000 for fiscal 2008. Proceeds
from
the sale of two series of warrants were $18,658,000, offset by repayment of
$4,721,000 of secured notes payable, done in conjunction with the sale of two
series of, and other long term obligations.
We
have
had operating losses since our inception, and during fiscal 2008, we had an
operating loss of $52,616,000 and cash used in operating activities of
$12,495,000. Cash, cash equivalents and short-term investments on hand at May
31, 2008 totaled $3,895,000. These trends raise concerns about the sufficiency
of the Company’s liquidity levels to be able to support its operations in the
near term. Due to significant reductions in operating expenses and a solid
strategic direction, developed in the fourth quarter of fiscal 2008, management
believes the current liquidity will be sufficient to meet its anticipated
working capital and capital expenditure requirements allowing the Company to
reach its goal for profitability. The loss incurred in fiscal 2008 was the
result of goodwill impairment approximately $27,600,000, costs relating to
the
Empagio merger approximately $1,500,000, higher level of compensation and
related expenses associated with the increase in sales personnel and training
approximately $2,500,000 in the first three quarters of fiscal 2008. Based
on an
analysis of our current contracts, forecasted new business and our current
backlog, management believes the Company will meet its cash flow needs for
fiscal 2009. We recognize that there are no assurances that the Company will
be
successful in meeting its cash flow requirements, however, management is
confident that, if necessary, there are other alternatives available to fund
operations and meet cash requirements during fiscal 2009.
The
significant research and development expenses, incurred in fiscal 2008, have
resulted in a release of our version 7.0 Talent center offering that provides
a
streamlined user interface along with other modifications to its reporting
services, security services and a federated single-sign-on. Research and
development expenses in fiscal 2008 totaled $5,725,000. Subsequent to this
significant investment, management anticipates reductions in research and
development expenditures. In addition, management has identified certain other
expenses, the most significant being employee and related costs, that decreased
in the fourth quarter of fiscal 2008, continuing through fiscal 2009. Legal
and
accounting expenses, which were approximately $760,000 in fiscal 2008 as a
result of the Empagio merger and various SEC filings which required our
predecessor auditors consent are expected to decrease for fiscal 2009. Finally,
management is committed to holding costs down if the projected revenue increases
do not materialize.
While
management believes that the anticipated improvement in operating cash flows
together with our current cash reserves will be sufficient to meet our working
capital and capital expenditure requirements through at least May 31, 2009,
we
are exploring other alternatives to assist in the funding of our business.
Workstream has actively engaged an investment bank to value and divest
6Figuresjobs.com. The move is designed to infuse the Company with cash as well
as to reduce the warrant liability. In accordance with the note agreement (see
Note 16 to the financial statements) made with the Special Warrant Holders
(SWH), from the August 2007 private placement of securities, Workstream is
to
receive 25% of any proceeds from the sale of any assets and the SWH are to
receive 75% of any proceeds. 6Figuresjobs.com, a job board market, part of
the
Career Networks division is available for sale. Workstream is continuing to
consider other opportunities to raise capital and align the Company’s business
operations with its strategic focus. 41
In
August
of 2007 the Company entered into a private placement of securities pursuant
to
which the Company raised $19,000,000 through the sale of Special Warrants
convertible into 15,200,000 common shares at a conversion price of $1.25 per
share and additional warrants to purchase an aggregate of 3,800,000 common
shares at an exercise price of $1.40 per share. On August 29, 2008 the Company
converted the Special Warrants liability into a 2 year note payable due August
29, 2010 at 7% interest per annum. In the event that there is a default 5%
will
be added to the interest rate resulting in a 12% interest rate in the default
period. The Company will also split the proceeds from any dispositions of
Company assets with the warrant holders 25/75. In addition to these conditions,
in the event of default, the Company will reissue the 3,800,000 of additional
warrants at $1.40 at a new exercise price of $.25.
ACQUISITIONS
As
part
of our early strategy, we pursued growth through the acquisition of other
companies offering services similar or complementary to ours. Through the
acquisition of those companies we expanded our service offerings enabling us
to
grow our revenue and to position ourselves for future profitability by
consolidating operations and improving efficiencies. While we are currently
not
actively pursuing an acquisition strategy, we will continue to evaluate
opportunities that may increase revenues for the company and may involve
enhanced or complementary products that assist in a “build or buy” decision or
companies with an attractive customer base that would allow us to penetrate
further with our current product set.
In
the
past we have generally acquired companies and businesses through the issuance
of
our common shares. We anticipate that, to the extent necessary, we would
continue to finance future acquisitions in whole or in part by issuing our
common shares. However, to the extent that we use cash to fund acquisitions,
the
amount of funds available to satisfy our working capital needs will be
reduced.
On
February 12, 2008, Workstream, Workstream Merger Sub Inc., Empagio Acquisition
LLC (“Empagio”) and SMB Capital Corporation entered into an Agreement and Plan
of Merger pursuant to which Empagio would merge with and into Workstream,
subject to the terms and conditions of the Merger Agreement, which was approved
by the Boards of Directors of both the companies. Upon the completion of the
Merger, the equity interests in Empagio would be converted into up to
177,397,332 shares of Workstream Inc. common stock, representing approximately
75% of the Company’s outstanding common stock on a diluted basis following the
Merger. The proposed combination of Workstream and Empagio would have been
accounted for under the purchase method of accounting as a reverse acquisition
with Empagio being treated as having acquired Workstream as of the date of
the
completion of the merger.
On
June
24, 2008, the Company filed a lawsuit against Empagio and SMB Capital
Corporation (“SMB”) to obtain the $5 million termination fee required to be paid
by Empagio and SMB pursuant to Section 7.02 of the Agreement and Plan of Merger
dated as of February 12, 2008 among the Company, Workstream Merger Sub Inc.,
Empagio and SMB, which agreement was terminated by the Company on June 13,
2008.
On June 25, 2008, Empagio and SMB filed a lawsuit against Workstream Inc.
alleging entitlement to a $3 million termination fee pursuant to the Agreement
and Plan of Merger dated as of February 12, 2008 among the Company, Workstream
Merger Sub Inc., Empagio and SMB, which agreement was terminated by the Company
on June 13, 2008. Prior to commencement of the Federal Lawsuit, the Company
initiated a lawsuit against Empagio and SMB. On July 29, 2008, Empagio and
SMB
filed a notice of voluntary dismissal of their Federal Lawsuit based on an
understanding that Empagio and SMB would make their claim as part of the
Company’s State Court Lawsuit. Although Workstream intends to vigorously pursue
the lawsuit, if a judgment is reached against the Company this would have a
significant impact on the Company’s financial position.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurements. Statement
157 defines fair value, establishes a framework for measuring fair value and
expands fair value measurement disclosures. Statement 157 is effective for
fiscal years beginning after November 15, 2007. We are currently evaluating
the impact of the adoption of Statement 157 on our consolidated financial
statements.
In
February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, including
an
amendment of FASB Statement No. 115, which
allows an entity the irrevocable option to elect fair value for the initial
and
subsequent measurement for certain financial assets and liabilities on an
instrument-by-instrument basis. Subsequent measurements for the financial assets
and liabilities an entity elects to record at fair value will be recognized
in
earnings. Statement 159 also establishes additional disclosure requirements.
Statement 159 is effective for fiscal years beginning after November 15,
2007, with early adoption permitted provided that the entity also adopts
Statement 157. We are currently evaluating the impact of the adoption of
Statement 159 on our consolidated financial statements. 42
In
December 2007, the FASB issued Statement No. 141R, Business
Combinations,
which
is intended to improve the relevance, representational faithfulness and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. Statement 141R
applies prospectively to business combinations for which the acquisition date
is
on or after the beginning of the first annual reporting period beginning on
or
after December 15, 2008. Early adoption is not permitted. The statement provides
guidance around how the acquirer recognizes identifiable assets acquired,
liabilities assumed and any non controlling interest in the acquiree,, goodwill
acquired and determines what information to disclose in order to enable users
of
financial statements to evaluate the nature and financial effects of the
business combination. Statement 141R will have an effect on the Company’s future
acquisitions.
In
March
2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities
(“SFAS
161”). The new standard is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial
position, financial performance and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning
after
November 15, 2008, with early application encouraged. The Company is currently
assessing the impact that SFAS 161 may have on its consolidated financial
statements.
ITEM
7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We
are
primarily exposed to market risks associated with fluctuations in interest
rates
and foreign currency exchange rates.
INTEREST
RATE RISKS
Our
exposure to interest rate fluctuations relates primarily to our short-term
investment portfolio. During the year, we invest our surplus cash in short
term
instruments such as overnight repurchase agreements and bank commercial paper
in
a bank in the United States. These short-term, low-risk instruments could be
withdrawn without penalty at any time. The interest income from these
investments is subject to interest rate fluctuations, which we believe will
not
have a material impact on our financial position.
FOREIGN
CURRENCY RISK
We
have
monetary assets and liabilities denominated in Canadian dollars. As a result,
fluctuations in the exchange rate of the Canadian dollar against the U.S. dollar
will impact our reported net asset position and net income or loss. A 10% change
in foreign exchange rates would result in a change in our reported net asset
position of approximately $98,000, and a change in the reported net loss for
the
year ended May 31, 2008 of approximately $381,000. 43
ITEM
8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Workstream Inc.
We
have
audited the consolidated balance sheets of Workstream Inc. and subsidiaries
as
of May 31, 2008 and 2007, and the related consolidated statements of operations,
stockholders’ equity (capital deficiency) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Workstream Inc. and
subsidiaries as of May 31, 2008 and 2007, and the results of their operations
and their cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations and
negative cash flows from operations. This raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do
not
include any adjustments that might result from the outcome of this
uncertainty.
We
were
not engaged to examine management’s assertion about the effectiveness of
Workstream Inc. and subsidiaries’ internal control over financial reporting as
of May 31, 2008 included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting and, accordingly, we do not express
an
opinion thereon.
/s/
McGladrey & Pullen, LLP
Orlando,
Florida
November
14, 2008
44
WORKSTREAM
INC.
CONSOLIDATED
BALANCE SHEETS
See
accompanying notes to these consolidated financial statements. 45
See
accompanying notes to these consolidated financial statements. 46
WORKSTREAM
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
For
the Years ended May 31, 2008 and 2007
See
accompanying notes to these consolidated financial
statements. 47
WORKSTREAM
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
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