<DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>mv1-14_q.txt <TEXT> SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended November 30, 2001 or ---------------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ---------------------- --------------------- Commission file number 001-15503 -------------------------------------------------------- WORKSTREAM INC. -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Canada N/A -------------------------------------------------------------------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 495 March Road, Suite 300, Ottawa, Ontario K2K 3G1 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (613) 236 2263 -------------------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) E-Cruiter.com Inc. -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The total number of shares of common stock, par value $.01 per share, outstanding as of January 14, 2002 was 13,943,369. The Registrant has no other class of common stock outstanding. <PAGE> WORKSTREAM INC. AND SUBSIDIARIES TABLE OF CONTENTS <TABLE> <CAPTION> Page No. -------- Part I. Financial Information <S> <C> Item 1. Financial Statements Consolidated Balance Sheets as of November 30, 2001 and May 31, 2001...............................1 Consolidated Statements of Operations for each of the Three and Six Months Ended November 30, 2000 and 2001................................................2 Consolidated Statements of Cash Flows for each of the Six Months Ended November 30, 2001 and 2000......3 Notes to Consolidated Financial Statements............................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................15 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................19 Part II. Other Information Item 5. Other Information..........................................................20 Item 6. Exhibits and Reports on Form 8-K...........................................20 </TABLE> i <PAGE> PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WORKSTREAM INC. CONSOLIDATED BALANCE SHEET (UNITED STATES DOLLARS) <TABLE> <CAPTION> ----------------------------------------------------------------------------------- (UNAUDITED) (AUDITED) 30-NOV-01 31-MAY-01 ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 211,649 $ 65,483 Short term investments 1,313,854 3,518,962 Accounts receivable, net of allowance for doubtful accounts of $87,479 1,303,692 319,405 (May 31, 2001 - $13,142) Prepaid expenses 232,989 268,719 Future tax asset 345,470 - Other receivables 143,501 161,520 ----------------------------------------------- 3,551,155 4,334,089 PROPERTY, PLANT AND EQUIPMENT 1,916,695 1,036,641 DEFERRED COSTS - 17,993 OTHER LONG TERM ASSETS 135,175 - ACQUIRED INTANGIBLE ASSETS 6,459,390 - 10,898,678 GOODWILL - ----------------------------------------------- $ 22,961,093 $ 5,388,723 =============================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,488,853 $ 318,889 Accrued liabilities 711,194 350,578 Line of credit 902,892 - Accrued compensation 737,124 204,049 Current portion of long-term obligations 351,926 52,462 Future income tax liability 659,208 - Deferred revenue 1,060,779 224,291 ----------------------------------------------- 5,911,976 1,150,269 FUTURE INCOME TAX LIABILITY 1,472,730 - LONG TERM OBLIGATIONS 1,029,629 196,397 ----------------------------------------------- 8,414,335 1,346,666 ----------------------------------------------- SHAREHOLDERS' EQUITY CAPITAL STOCK Issued and outstanding - 13,952,305 common shares (May 31, 2001 - 7,712,262) 31,213,625 18,913,625 Additional paid in capital 643,489 577,364 Accumulated other comprehensive income (138,503) 38,995 Accumulated deficit (17,171,853) (15,487,927) ----------------------------------------------- 14,546,758 4,042,057 ----------------------------------------------- $ 22,961,093 $ 5,388,723 =============================================== </TABLE> The accompanying notes are an integral part of these financial statements. 1 <PAGE> WORKSTREAM INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (UNITED STATES DOLLARS) <TABLE> <CAPTION> -------------------------------------------- ------------------ ------------------- -- ------------------ ------------------ THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, 2001 2000 2001 2000 -------------------------------------------- ------------------ ------------------- -- ------------------ ------------------ <S> <C> <C> <C> <C> REVENUE $ 4,391,844 $ 541,512 $ 6,241,122 $ 1,073,894 COST OF REVENUES 846,568 334,257 1,429,944 703,420 ------------------ ------------------- -- ------------------ ------------------ GROSS PROFIT 3,545,276 207,255 4,811,178 370,474 ------------------ ------------------- -- ------------------ ------------------ EXPENSES Selling and marketing 1,870,996 656,654 2,881,723 1,241,611 General and administrative 2,050,783 344,531 2,585,579 629,125 Research and development 189,846 547,767 534,909 1,122,690 Amortization and depreciation 389,678 108,333 703,756 221,466 ------------------ ------------------- -- ------------------ ------------------ 4,501,303 1,657,285 6,705,967 3,214,892 ------------------ ------------------- -- ------------------ ------------------ OPERATING LOSS (956,027) (1,450,030) (1,894,789) (2,844,418) OTHER INCOME AND EXPENSES Provision for income taxes - future 30,090 - 176,628 - Interest and other income 38,522 196,291 100,987 328,565 Interest and other expense (27,152) - (66,753) (17,577) ------------------ ------------------- -- ------------------ ------------------ 41,460 196,291 210,862 310,988 ------------------ ------------------- -- ------------------ ------------------ NET LOSS FOR THE PERIOD (914,567) (1,253,739) (1,683,927) (2,533,430) ------------------ ------------------- -- ------------------ ------------------ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING DURING THE PERIOD 13,297,943 7,710,479 11,418,688 7,708,317 ================== =================== == ================== ================== BASIC AND FULLY DILUTED NET LOSS PER SHARE $ (0.07) $ (0.16) $ (0.15) $ (0.33) ================== =================== == ================== ================== </TABLE> The accompanying notes are an integral part of these financial statements. 2 <PAGE> WORKSTREAM INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW (UNITED STATES DOLLARS) <TABLE> <CAPTION> SIX MONTHS SIX MONTHS ENDED ENDED NOVEMBER 30, NOVEMBER 30, 2001 2000 ------------------------- -------------------------- <S> <C> <C> CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES Net loss for the period $ (1,683,927) $ (2,533,430) Items not involving cash - Amortization and depreciation 703,756 221,466 Amortization of lease inducement (8,200) - Non-cash loss on investments 18,999 - Non-cash adjustment to future income tax asset 42,910 - Non-cash compensation expense included in results 216,125 - Amortization of other long term assets 18,134 19,448 Change in operating components of working capital 276,632 18,974 ------------------------- -------------------------- (415,571) (2,273,542) ------------------------- -------------------------- INVESTING ACTIVITIES Pre-acquisition advances to related parties (1,258,747) - Acquisition of property, plant and equipment (59,753) (379,796) Business acquisitions (net of acquired cash of $569,566) (565,525) - Acquisition of intangible assets (38,789) - Sale of short term investments 2,936,256 2,715,560 ------------------------- -------------------------- 1,013,442 2,335,764 ------------------------- -------------------------- FINANCING ACTIVITIES Proceeds from exercise of options - 16,450 Shareholder loan repayment (47,147) - Repayment of bank debt (723,111) (143,698) Proceeds from bank financing 541,391 110,803 Capital lease repayments (45,340) (20,869) ------------------------- -------------------------- (274,207) (37,313) ========================= ========================== EFFECT OF EXCHANGE RATE CHANGES (177,498) (83,559) ------------------------- -------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD 146,166 (58,650) CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 65,483 165,050 ------------------------- -------------------------- CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 211,649 $106,400 ========================= ========================== SUPPLEMENTAL CASH FLOW INFORMATION Working capital acquired by issuance of shares (388,280) - Property, plant and equipment acquired by issuance of shares 1,060,629 - Debt acquired through acquisitions 2,161,760 - Goodwill acquired through acquisitions 10,898,678 - Intangible assets acquired through acquisitions 6,420,601 - </TABLE> The accompanying notes are an integral part of these financial statements. 3 <PAGE> WORKSTREAM INC. UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDING NOVEMBER 30, 2001 (UNITED STATES DOLLARS) <TABLE> <CAPTION> ACCUMULATED NUMBER OF ADDITIONAL OTHER TOTAL COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS' SHARES SHARES CAPITAL DEF1CIT INCOME EQUITY ------------- ---------------- ----------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> <C> <C> Balance at May 31, 2001 7,712,262 $ 18,913,625 $ 577,364 $ (15,487,927) $ 38,994 $ 4,042,057 Issuance of shares 6,240,043 12,300,000 - - - 12,300,000 Additional paid-in capital - - 66,125 - - 66,125 Cumulative translation adjustment - - - - (177,497) (177,498) Net loss for the period - - - (1,683,927) - (1,683,927) ------------- ---------------- ----------------- --------------- --------------- --------------- Balance at November, 2001 13,952,305 $ 31,213,625 $ 643,489 $ (17,171,853) $ (138,503) $ 14,546,758 ============= ================ ================= =============== =============== ============== FOR THE SIX MONTHS ENDING NOVEMBER 30, 2000 ACCUMULATED NUMBER OF ADDITIONAL OTHER TOTAL COMMON COMMON PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS' SHARES SHARES CAPITAL DEFICIT INCOME EQUITY ------------- ---------------- ----------------- --------------- --------------- --------------- Balance at May 31, 2000 7,701,625 $ 18,897,175 $ 577,364 $ (10,281,231) $ 48,766 $ 9,242,074 Issuance of shares for exercise of options 8,027 16,450 - - - 16,450 Cumulative translation adjustment - - - - (83,559) (83,559) Net loss for the period - - - (2,533,429) - (2,533,429) ------------- ---------------- ----------------- --------------- --------------- --------------- Balance at November, 2000 7,709,652 $ 18,913,625 $ 577,364 $ (12,814,660) $ (34,793) $ 6,641,536 ============= ================ ================= =============== =============== ============== </TABLE> WORKSTREAM INC. UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNITED STATES DOLLARS) <TABLE> <CAPTION> ----------------------------------- ------------------------ ------------------------ ----------------------- -------------------- THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, 2001 NOVEMBER 30, 2000 NOVEMBER 30, 2001 NOVEMBER 30, 2000 ----------------------------------- ------------------------ ------------------------ ----------------------- -------------------- <S> <C> <C> <C> <C> NET INCOME (LOSS) $ (914,567) $ (1,253,739) $ (1,683,927) $ (2,533,430) OTHER COMPREHENSIVE INCOME (LOSS) - - - - CUMULATIVE TRANSLATION ADJUSTMENT 20,635 (282,106) (177,498) (83,559) ------------------------ ------------------------ ----------------------- -------------------- COMPREHENSIVE LOSS $ (893,932) $ (1,535,845) $ (1,861,425) $ (2,616,989) ======================== ======================== ======================= ==================== </TABLE> The accompanying notes are an integral part of these financial statements. 4 <PAGE> WORKSTREAM INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2001 (UNITED STATES DOLLARS) NOTE 1: NATURE OF OPERATIONS Workstream Inc. ("Workstream" or "the Company"), formerly known as E-Cruiter.com, is a provider of Web-enabled tools and professional services for human capital management (HCM). The Company offers a diversified suite of high-tech and high-touch services aimed at addressing the full life cycle of the employer-employee relationship. Workstream's HCM technology backbone enables companies to streamline the management of enterprise human processes, including recruitment, assessment, deployment and career transitions. NOTE 2: BASIS OF PRESENTATION The consolidated interim financial statements included herein have been prepared by Workstream, without audit, in accordance with United States generally accepted accounting principles. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The earnings of the subsidiaries are included from the date of acquisition. At November 30, 2001, the Company's subsidiaries are Paula Allen Holdings, Inc. ("AAA"), OMNIpartners, Inc. ("OMNI"), RezLogic, Inc. ("RezLogic), and 6FigureJobs.com, Inc. ("6Figures"), (collectively the "Acquired Companies"). These financial statements should be read in conjunction with the Company's most recent annual financial statements for the year ended May 31, 2001 which should be consulted for a summary of the significant accounting policies utilized by the Company. These interim financial statements are prepared following accounting policies consistent with the Company's financial statements for the year ended May 31, 2001, with the exception of a change in reporting currency and a change to United States generally accepted accounting principles, which are explained in Note 3. The Company has also adopted accounting policies in the period for revenue recognition relating to the revenue streams of the Acquired Companies. In management's opinion, all adjustments necessary for a fair presentation are reflected in the interim periods presented. All adjustments are of a normal, recurring nature. NOTE 3: SIGNIFICANT ACCOUNTING POLICIES Revenue recognition Workstream recognizes revenue when all of the following criteria are met: persuasive evidence of an agreement exists, the services have been provided, the price is fixed and determinable and collection is reasonably assured. Using these criteria, revenue for Applicant Tracking Software ("ATS") subscriptions are recognized ratably over the term of the contract, revenue from internet posting services are recognized ratably over the period of posting and other professional services are recognized when services are delivered to the customer. The incremental direct costs of obtaining ATS subscription contracts are deferred and recognized in earnings in the same pattern as revenue is recognized. Revenue from recruitment research is recognized when an assignment has been completed and delivered to the customer. No provision is made in the accounts for assignments in process. 5 <PAGE> Revenue from outplacement services is recognized as services are provided. The Company provides for refunds at the time the revenue is recognized based on prior experience. Revenue from computer integration services is recognized as the services are performed. Goodwill and acquired intangible assets Effective June 1, 2001, the Company adopted the new Financial Accounting Standards Board statement 141 on business combinations and statement 142 on goodwill and other intangible assets. Under these rules, goodwill and other intangible assets with indefinite lives are not amortized, but subject to periodic impairment testing. Management will assess goodwill for impairment at least annually, and write down the carrying amount of goodwill as required. Intangible assets with a finite useful life recorded as a result of acquisition transactions are amortized over their estimated useful lives as follows: Acquired technologies 3 years straight line Customer base 5 years straight line Intellectual property 5 years straight line Reporting currency Effective June 1, 2001, the Company adopted the US dollar as its reporting currency. Prior to this change, the Canadian dollar had been used as the Company's reporting currency. As a result, the financial statements for all periods prior to June 1, 2001 have been translated from Canadian dollars to US dollars. Income statement balances were translated at the average rate over the period, while balance sheet accounts were translated at the exchange rate as of the balance sheet date. NOTE 4: ACQUISITION TRANSACTIONS Paula Allen Holdings, Inc. ("AAA") On July 27, 2001, the Company acquired 100% of AAA, a company that provides career transitioning and outplacement services, as well as computer system integration services, through offices located across North America. The Company pursued this acquisition as a means to facilitate an expansion into the United States, facilitated by AAA's established network of offices and the expansion strategy AAA already had in place. Furthermore, this acquisition extends Workstream's service offerings beyond a technology-enabled hiring management system to a broader suite of human capital technology and services. The definitive agreement, which was signed April 3, 2001 established the consideration for the acquisition as 4,000,000 common shares. At that date, the shares of Workstream had a closing market price of $1.375, resulting in a total value for the transaction of $5.5 million. An additional 1,000,000 shares of contingent consideration may be issued if the Company achieves specific revenue and profit targets, up to 500,000 shares may be issued for the eight-month period ended December 31, 2001 and up to 500,000 shares may be issued for the twelve-month period ending December 31, 2002. The amount of any contingent consideration to be issued as a result of attaining these targets as at December 31, 2001 had not yet been determined by management. Any contingent consideration issued will be added to the goodwill resulting from the acquisition. These financial statements include the results of operations of AAA from July 28, 2001. Management obtained an independent valuation of the net tangible and intangible assets acquired. The excess of the purchase price over the appraised value of the net tangible and identifiable intangible assets acquired was allocated to goodwill. 6 <PAGE> The purchase price has been allocated as follows: Purchase price $ 5,500,000 Cash contributed prior to acquisition 300,000 Acquisition costs 270,864 ----------------- Total consideration 6,070,864 Current assets 550,228 Tangible long term assets 106,945 Current liabilities assumed (1,080,912) Long term liabilities assumed (948,465) Intangible assets: Database and related software 127,500 Customer base 1,020,000 Future income tax liability (350,500) Intellectual property 510,000 ----------------- Total identifiable assets (65,204) Goodwill $ 6,136,068 ================= The goodwill resulting from the transaction has been allocated to the Career transition services business unit. OMNIpartners, Inc. ("OMNI") On July 27, 2001, the Company also acquired 100% of the outstanding shares of OMNI, a Florida-based recruitment research firm providing recruitment research at an hourly rate as a lower cost alternative to traditional recruiting services. Management pursued this acquisition to increase the Company's penetration into the U.S. market and to further broaden the Company's suite of human capital technology and services. The Company issued 500,000 common shares upon closing. The definitive agreement was signed on May 18, 2001 when the closing share price was $2.00 per share, giving the acquisition a value of $1.0 million. An additional 1,000,000 shares of contingent consideration may be issued if OMNI achieves certain profit and revenue targets for the twelve months ending June 30, 2002. Any contingent consideration issued will be added to the goodwill resulting from the acquisition. The consolidated financial statements presented herein include the results of operations of OMNI from July 28, 2001. Management prepared a valuation of the net tangible and intangible assets acquired. The excess of the purchase price over the appraised value of the net tangible and identifiable intangible assets acquired was allocated to goodwill. 7 <PAGE> The purchase price has been allocated as follows: Total purchase price $ 1,000,000 Cash contributed prior to acquisition 1,026,000 Acquisition costs 157,101 ------------------ 2,183,101 ------------------ Current assets 932,064 Tangible long term assets 725,990 Current liabilities assumed (766,712) Long term liabilities assumed (533,008) Intangible assets: Contracts in process 76,500 Acquired technology 85,000 Future income tax asset 312,500 Trademarks, domain names 51,000 ------------------ Total identifiable assets 883,334 ------------------ Goodwill $ 1,299,767 ================== The goodwill resulting from the transaction has been allocated to the Enterprise recruiting services business unit. RezLogic, Inc. The Company acquired RezLogic on August 3, 2001. RezLogic provides recruitment process automation, offering web-based solutions for employers, staffing agencies, executive recruiters, contract placement firms and independent recruiters. Once integrated into the E-Cruiter HCM technology platform, RezLogic's technology will extend the functionality of through the addition of key innovations, including automated email input, MS-Word document processing, virus protection, streamlined resume capture and integrated graphical reports including Equal Employment Opportunity. For this acquisition, Workstream issued 445,545 common shares. The shares of Workstream were trading at $4.04 when the agreement was signed on June 29, 2001, resulting in a valuation of $1.80 million. The consolidated financial statements presented herein include the results of operations of RezLogic from August 3, 2001. Management prepared a valuation of the net tangible and intangible assets acquired. The excess of the purchase price over the appraised value of the net tangible and identifiable intangible assets acquired was allocated to goodwill. 8 <PAGE> The purchase price has been allocated as follows: Purchase price $ 1,800,000 Acquisition costs 410,000 --------------- 2,210,000 --------------- Current assets 495,295 Tangible long term assets 75,661 Current liabilities assumed (44,159) Intangible assets: Future income tax liability (465,500) Acquired technology 765,000 Intellectual property 170,000 In-process research and development 51,000 Customer database 85,000 Contracts in process 59,500 --------------- Total identifiable assets 1,191,797 --------------- Goodwill $ 1,018,203 --------------- The goodwill resulting from the transaction has been allocated to the Enterprise recruiting services business unit. An additional 297,030 shares of contingent consideration may be issued, pending the achievement of certain revenue and profit targets for the twelve months ending June 30, 2002. Any contingent consideration issued will be added to the goodwill resulting from the acquisition. 6FigureJobs.com, Inc. The Company acquired 6Figures on October 16, 2001. 6Figures provides a variety of career management, recruitment advertising, resume database, and targeted research services to senior-level executives, employers and executive recruiters. For this acquisition, Workstream issued 1,294,498 common shares. The shares of Workstream were trading at an average price of $3.09 in the 10 days preceding the signature of the agreement, which was September 20, 2001, resulting in a valuation of $4.0 million. The consolidated financial statements presented herein include the results of operations of 6Figures from October 16, 2001. Management prepared a valuation of the net tangible and intangible assets acquired. The excess of the purchase price over the appraised value of the net tangible and identifiable intangible assets acquired was allocated to goodwill. 9 <PAGE> The purchase price has been allocated as follows: Purchase price $ 4,000,000 Acquisition costs 438,517 ------------------- 4,438,517 ------------------- Current assets 878,410 Tangible long term assets 155,953 Current liabilities assumed (1,208,077) Intangible assets: Acquired technology 671,500 Intellectual property 170,000 Trademarks and domain names 34,000 Customer database 2,975,000 Future income tax liability (1,585,500) ------------------- Total identifiable assets 2,091,286 ------------------- Goodwill $ 2,347,231 ------------------- The goodwill resulting from the transaction has been allocated to the Recruiting Services business unit. An additional 323,625 shares of contingent consideration may be issued in the form of shares, pending the achievement of certain revenue and profit targets for the twelve month period ending September 30, 2002. Any contingent consideration issued will be added to the goodwill resulting from the acquisition. ResumExpress In July 2001, the Company entered into a definitive agreement to acquire the technology and assets of Gonyea Career Marketing Inc., known as ResumeXpress. As consideration for the sale, we paid ResumeXpress a cash amount of $60,000. The acquisition was completed in August 2001. ResumeXpress enables job seekers to distribute their resumes to thousands of employers, recruiters and online resume database services across the U.S. and Canada. Resumes are distributed to those parties whose keywords are matched to the keywords found in each job seeker's resume. Using the ResumeXpress Web site, job seekers can post their resumes in a matter of minutes, and their resumes are posted for a six-month period on a personal resume Web page with a unique uniform resource locator, or URL. Tech Engine In September 2001, the Company entered into a definitive agreement to acquire the technology and assets of Tech Engine, Inc. in exchange for the assumption of a promissory note in the amount of $171,000 plus acquisition costs. Tech Engine's software enables Workstream to rapidly develop career sites and job boards. The Company recorded intangible assets of $85,000 and goodwill of $97,409 on the purchase. The goodwill has been allocated to the Enterprise Recruiting Services division. UNAUDITED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information gives effect to the acquisitions made by Workstream as if the transactions occurred at the beginning of each of the six month periods ended November 30, 2001 and November 30, 2000. 10 <PAGE> <TABLE> <CAPTION> 6 MONTHS ENDED NOVEMBER 30, 6 MONTHS ENDED NOVEMBER 30, 2001 2000 ----------------------------- ------------------------------ <S> <C> <C> Revenues $ 10,002,996 $ 9,711,913 Cost of revenues 1,912,806 2,409,261 ----------------------------- ------------------------------ Gross profit 8,090,189 7,302,652 Expenses 10,718,295 12,225,529 ----------------------------- ------------------------------ Operating loss (2,628,105) (4,922,877) Interest and other income (expense) 196,689 270,149 ----------------------------- ------------------------------ Net loss (2,431,416) (4,652,728) ============================= ============================== Weighted average number of common shares 13,952,305 13,952,305 ============================= ============================== Pro forma earnings per share $ (0.17) $ (0.33) ============================= ============================== </TABLE> NOTE 5: GOODWILL AND ACQUIRED INTANGIBLE ASSETS GOODWILL The following table summarizes the non-depreciable goodwill acquired during the six month period. No impairment losses were recovered during the six month period. SIX MONTHS ENDED NOVEMBER 30, 2001 ----------------------------- Goodwill acquired in acquisition of AAA $ 6,136,068 Goodwill acquired in acquisition of OMNI 1,299,767 Goodwill acquired in acquisition of RezLogic 1,018,203 Goodwill acquired in acquisition of TechEngine 97,409 Goodwill acquired in acquisition of 6Figures 2,347,231 ----------------------------- Balance at November 30, 2001 $ 10,898,678 ============================= ACQUIRED INTANGIBLES The following table summarizes the depreciable intangible assets acquired during the six month period. Customer base $ 4,080,000 Acquired technologies 1,793,042 Intellectual property 935,000 ----------------------------- 6,808,042 Amortization expense for the period (348,652) ----------------------------- Net acquired intangible assets $ 6,459,390 ============================= NOTE 6: LINES OF CREDIT At November 30, 2001, the Company had $902,892 outstanding on two lines of credit from Sun Trust Bank and Harris Bank. Certain assets of the Company, including short term investments, property and receivables, are pledged as collateral for these facilities. 11 <PAGE> November 30, 2001 May 31, 2001 ---------------------- ------------------- Line of credit - Sun Trust $ 752,892 $ - Line of credit - Harris Bank 150,000 - ---------------------- ------------------- Total line of credit $ 902,892 $ - ====================== =================== The Company's short term investments have been provided as collateral for the SunTrust line of credit. It bears interest at the rate of return on these short term investments plus 1.5%. During the period, the line of credit had an effective interest rate of 3.87%. The Company is permitted to draw up to $1,000,000 against this facility. The operating line of credit with Harris Bank is authorized for up to $150,000. The interest rate on this line of credit is subject to change from time to time based on changes in the lender's prime rate. During the period, the line of credit had an effective interest rate of 4.75%. NOTE 7: LONG TERM OBLIGATIONS Long term obligations consists of the following: Nov 30, 2001 May 31, 2001 ------------------ ------------------ Note payable - related party $ 156,237 $ - Small business loan - 5,148 Capital leases 181,599 84,486 Lease inducement 147,754 159,225 Shareholder loan 895,965 - ------------------ ------------------ 1,381,555 248,859 Less current portion 351,926 52,462 ------------------ ------------------ $ 1,029,629 $ 196,397 ================== ================== The note payable to a related party is non-interest bearing, and is repayable in monthly installments of $10,200. Capital lease obligations relate to office equipment, computers and software, and bear interest at rates that range from 7.5% to 20% per annum. These leases mature at various times through December 2005. The shareholder loan, which was assumed as part of the acquisition of AAA, is non-interest bearing and is repayable in quarterly installments of $52,500. NOTE 8: COMMON SHARES The Company has 13,925,305 shares that are outstanding. An additional 2,620,655 shares are being held in escrow as a result of the terms of the acquisitions that were consummated in the period. These shares may be released from escrow if certain profit and/or revenue targets are achieved. The periods covered by the escrow agreements extend until December 31, 2002. NOTE 9: SEGMENTED AND GEOGRAPHIC INFORMATION Prior to the acquisitions, the Company had one operating segment: Enterprise recruiting services. As a result of the acquisitions, Workstream now has two distinct operating segments: Enterprise recruiting services and Career transition services. Operations are conducted in Canada and the United States. The following is a summary of the Company's operations by business segment and by geographic region for the three and six month periods ended November 30, 2001. 12 <PAGE> <TABLE> <CAPTION> BUSINESS UNIT THREE MONTHS ENDED ENTERPRISE CAREER TRANSITION TOTAL NOVEMBER 30, 2001 RECRUITING SERVICES SERVICES ---------------------- ---------------------- ---------------------- <S> <C> <C> <C> Revenue $ 1,845,692 $ 2,546,152 $ 4,391,844 Expenses 2,621,165 2,167,728 4,788,893 ---------------------- ---------------------- ---------------------- Business unit income (loss) (775,473) 378,424 (397,049) ====================== ====================== Corporate overhead, other revenues and expenses (517,518) ---------------------- Net loss $ (914,567) ====================== SIX MONTHS ENDED NOVEMBER 30, 2001 Revenue $ 2,692,062 $ 3,549,060 $ 6,241,122 Expenses 4,242,518 3,079,415 7,321,933 ---------------------- ---------------------- ---------------------- Business unit income (loss) (1,550,456) 464,645 (1,080,811) ====================== ====================== Corporate overhead, other revenues and expenses (603,116) ---------------------- Net loss $ (1,683,927) ====================== Business unit assets $ 9,228,879 $ 1,833,536 $ 11,062,415 Goodwill 4,762,610 6,136,068 10,898,678 ---------------------- ---------------------- ---------------------- 13,991,489 7,969,604 21,961,093 ====================== ====================== Assets not allocated to business units 1,000,000 ---------------------- Total assets $ 22,961,093 ====================== GEOGRAPHY THREE MONTHS ENDED CANADA USA TOTAL NOVEMBER 30, 2001 ---------------------- ---------------------- ---------------------- Revenue $ 693,766 $ 3,698,078 $ 4,391,844 Expenses 963,663 3,825,230 4,788,893 ---------------------- ---------------------- ---------------------- Geographical income (loss) (269,897) (127,152) (397,049) ====================== ====================== Other revenues and expenses (517,518) ---------------------- Net loss $ (914,567) ====================== 13 <PAGE> SIX MONTHS ENDED NOVEMBER 30, 2001 Revenue $ 1,326,618 $ 4,914,504 $ 6,241,122 Expenses 1,722,293 5,599,640 7,321,933 ---------------------- ---------------------- ---------------------- Geographical income (loss) $ (395,675) $ (685,136) $ (1,080,811) ====================== ====================== Corporate overhead, other revenues and expenses (603,116) ---------------------- Net loss $ (1,683,927) ====================== Geographic unit assets excluding goodwill $ 1,869,262 $ 9,193,153 $ 11,062,415 Goodwill - 10,898,678 10,898,678 ---------------------- ---------------------- ---------------------- $ 1,869,262 $ 20,091,831 $ 21,961,093 Assets not allocated to specific geographic units 1,000,000 ---------------------- Total assets $ 22,961,093 ====================== </TABLE> NOTE 9: RECENT ACCOUNTING PRONOUNCEMENTS During the six month period, the FASB issued SFAS No. 141 ("SFAS 141"), "Business Combinations". These standards are effective for all business combinations initiated after June 30, 2001, and require that the purchase method of accounting be used for all business combinations initiated after that date. The Company has applied SFAS 141 to all acquisitions in the period. During the six month period, the FASB issued SFAS No. 142 (SFAS 142"), "Goodwill and Other Intangible Assets". These standards are effective for fiscal years beginning after December 15, 2001, but apply immediately to any business combinations consummated after June 30, 2001. Early adoption is permitted for fiscal years beginning after March 15, 2001. SFAS 142 requires that goodwill and intangible assets deemed to have indefinite lives will no longer be amortized, including goodwill recorded in past business combinations, but will be subject to annual impairment tests in accordance with the new guidelines. Other intangible assets will continue to be amortized over their useful lives. The Company has fully adopted SFAS 142 in the period. In June 2001, the FASB approved the issuance of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (SFAS 143), which is effective for fiscal years beginning on or after June 15, 2002. This standard establishes accounting standards for the recognition and measurement of legal obligations associated with the retirement of tangible long-lived assets. The Company has not yet assessed the impact of the adoption of this new standard on its financial statements. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is in the process of evaluating the impact this standard will have on the financial statements. 14 <PAGE> ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain statements discussed in Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations) and Item 3 (Quantitative and Qualitative Disclosures About Market Risk) and elsewhere in this Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concerning Management's expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements discussed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: inability to offer services that are superior and cost effective when compared to the services being offered by our competitors; we have no assurance that a client will remain a long term client as we generally enter into subscription agreements with our Ecruiter Enterprise clients for terms of one year or less; inability to further identify, develop and achieve success for new products, services and technologies; increased competition and its effect on pricing, spending, third-party relationships and revenues; as well as the inability to enter into successful strategic relationships and various other matters, many of which are beyond the Company's control and other factors as are described in Item 3 D (Key Information-Risk Factors) of the Company's Form 20-F for the fiscal year ended May 31, 2001. The words "estimate," "project," "intend," "believe," "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company and accompanying notes for the 3 and 6 month periods ended November 30, 2001. All figures are in United States dollars, except as otherwise noted. OVERVIEW Workstream Inc. is a leading provider of human capital management (HCM) services. The Company offers a combination of high-tech and high-touch services, giving customers the ability to manage their complete recruiting and outplacement needs on a single Workstream platform. During the quarter the Company completed two acquisitions, Tech-Engine Inc. on October 10, 2001 and 6FigureJobs.com Inc. on October 16, 2001. Tech-Engine Inc. provided Workstream with software for Job Board development and 6FigureJobs.com provides online recruiting services to Fortune 500 companies and executive search firms seeking professionals earning $100,000 and higher. REVENUES Consolidated Revenues were $4,391,844 for three months ended November 30, 2001 compared to $541,512 for the same period last year. The significant growth in revenues is attributed to the acquisition of Paula Allen Holdings Inc., Omnipartners Inc. and Rezlogic Inc., that occurred in the previous quarter ending August 31, 2001. These acquisitions contributed $3,451,042 for the quarter ended November 30, 2001. In addition, Workstream acquired 6FigureJobs.com Inc. on October 16, 2001 that also contributed $433,252 (post acquisition date) during the quarter. 15 <PAGE> Career transition service revenues for three months ended were $ 2,546,152 compared to $0 for the same period last year and was the largest contributor to total revenue this quarter compared to the same quarter last year. All of the revenue increase was due to the acquisition of Paula Allen Holding, acquired in July of this year. Enterprise recruiting service revenues for three months ended were $ 1,845,692 compared to $ 541,512 for the same period last year. The increase in revenues was primarily due to the acquisition of Rezlogic Inc., Omnipartners and 6Figures.com Inc. Consolidated Revenues for the six months ended November 30, 2001 were $ 6,241,122 compared to $ 1,073,894 for the same period last year. The significant increase in revenues were due to the above mentioned acquisition completed this year. Pro-forma Revenues for the six months ended November were $ 10,002,996 compared to $ 9,711,913 for the same period last year. Pro-forma revenues include the revenues of all acquisitions for the full reporting periods, instead of from their acquisition date. Management believes that these acquisitions will have a significant impact on future revenues by allowing the Company to deliver a full range of recruiting and outplacement products and services through its 21 offices across North America. We expect the growth trend shown in our pro forma results to continue as we continue to expand our network of offices. COST OF REVENUES Cost of Revenues for the three months ended November 30, 2001 were $846,568 compared to $334,257 for the same period last year. While the total cost of revenues has increased significantly due to the recent acquisitions, as a percentage of revenue these costs have declined from 61.7% for the three months ended November 30, 2000 to 19.3% for the same period this year. Career transition cost of revenues accounted for $ 334,935 of the total cost and Recruiting services was $ 511,633 for the quarter. For the six months ended November 30, 2001, cost of revenues doubled, from $703,420 for the six months ended November 30, 2000 to $1,429,944. As a percentage of total revenues, cost of revenues dropped from 65.5% in the prior year to 22.9% in the current period, reflecting the impact of recent acquisitions. On a pro forma basis, cost of revenues decreased from $2,409,261 for the six months ended November 30, 2000 to $1,192,905 for the six months ended November 30, 2001. Since the consummation of the acquisitions, management has proceeded with the consolidation of certain cost centers and the elimination of redundant operations. This has resulted in a decrease compared to the pro forma cost of revenues on the six months ended November 30, 2000. Cost of Revenues includes the cost of Network operations, client support and charges related to third-party services. The decline as a percentage of revenue is due to the recent acquisitions lower cost of delivery of products and services and the Company's ability to consolidate technology. GROSS PROFITS Consolidated gross profits were $3,545,276 for three months ended November 30, 2001, 80.7% of revenues compared to $207,255 or 38.3% for the same period last year. The significant increase in Gross Profits is due to the above mentioned acquisitions. Management believes margins should be maintained, since the newly-acquired service lines involve a significantly lower cost of delivery. Career transition services gross profit was $ 2,211,217 or 86.8% of Career transition services revenues and Enterprise recruiting gross profit represented $ 1,334,059 or 72.3% of Enterprise recruiting service revenues for three months ended November 30, 2001. Consolidated gross profits were $ 4,811,178 or 77.1% of revenues for six months ended November 30, 2001 compared to $ 370,474 or 34.5% of revenues for the same period last year. The significant improvement in the gross profit percentage is due to the lower cost of revenues contributed by the recently acquired service lines. 16 <PAGE> Pro-forma gross profits were $ 8,090,190 or 80.9% of revenues for six months ended November 30, 2001 compared to $ 7,302,652 or 75.2% of revenues for the same period last year. OPERATING EXPENSES Total Operating Expenses were $4,501,303 for the three months ended November 30, 2001, compared to $1,657,285 for the same period last year. The recent acquisitions accounted for $3,604,004 in total operating expense. Operating expenses for non-acquired operations were $897,299 for three months ended November 30, 2001, representing a 46% decline compared to the same period last time. The primary reason for the decline in operating expenses for the operations that existed prior to the recent acquisition the consolidation of operating functions and technology. Total operating expenses were $ 6,705,967 for six months ended November 30, 2001 compared to $ 3,214,892 for the same period last year. On a pro-forma basis operating expenses were $ 10,718,295 for six months ended November 30, 2001 compared to $12,225,529 for the same period last year. SELLING AND MARKETING Selling and Marketing expenses were $1,870,996 for the quarter ended November 30, 2001 compared to $656,654 for the same period last year. The increase in Sales expense is attributed to the above mentioned acquisitions. Commission expense is approximately 27% of the total Sales and Marketing expense and will increase as revenues grow. Of the total, 50% of the expenses were incurred by the Career transition services division. For the six months ended November 30, 2001, Selling and Marketing expenses were $2,881,723, compared to $1,241,611 for the six months ended November 30, 2000. On a pro forma basis, Selling and Marketing expenses were $ 4,867,767 for the six months ended November 30, 2001, compared to $5,172,890 for the six months ended November 30, 2000. Management expects Selling and Marketing costs to continue to increase as the Company continues to expand its sales force and invest in developing and strengthening the new Workstream brand. GENERAL AND ADMINISTRATIVE General and administrative expenses were $2,050,783 for the three months ended November 30, 2001, compared to $344,531 for the same period last year. The primary reason for the increase is due to the recent acquisitions, approximately $1,514,640. Non-acquisition related G&A expenses increased due primarily to increased support cost for acquired business, which will be partially offset in the future by consolidation of some administrative functions. General and administrative expenses for the six months ended November 30, 2001 were $2,585,579, compared to $629,125 for the six months ended November 30, 2000. On a pro forma basis, general and administrative expenses decreased from $4,533,477 for the six months ended November 30, 2000 to $4,011,492 for the six months ended November 30, 2001. The decrease is due to the elimination of redundant functions since consummation of the acquisitions across the acquired organizations. RESEARCH AND DEVELOPMENT Research and development costs were $189,846 for three months ended November 30, 2001 compared to $547,767 for the same period last year. The decline is primarily due to the acquisition of technology versus internal developed and the completion of various projects under development in prior periods. All of the Company's research and development efforts are incurred in the Enterprise Recruiting division. For the six months ended November 30, 2001, research and development expenses were $534,909, compared to $1,122,690 for the six months ended November 30, 2000. The decrease is due primarily to a reduction in the number of third party consultants and employees in this area. As the Company integrated acquired technologies into existing platforms and completed in-process projects, headcount was reduced. On a pro forma basis, research and development expenses 17 <PAGE> were $604,608 for the six months ended November 30, 2001, compared to $1,293,704 for the six months ended November 30, 2000. DEPRECIATION/AMORTIZATION EXPENSE Depreciation and Amortization expenses were $ 389,678 for the three months ended November 30, 2001, compared to $106,572 for the same period last year, with the amortization of acquired intangible assets representing the major contributor to the increase over the prior year. For the six months ended November 30, 2001, depreciation and amortization expense were $703,756, compared to $221,466 for the same period in the prior year. INTEREST INCOME Net Interest Income was $11,370 for three months ended November 30, 2001, compared to $196,291 for the same period last year. The significant decline was due to the decline in short-term investments, and the increase in long term debt. A total of $2,155,617 in debt was added to the Company's balance sheet as a result of the acquisitions. Short-term investments as of November 30, 2000 were $6,480,340 which represented capital raised from the Company's public offering in December 1999. LIQUIDITY AND CAPITAL RESOURCES At November 30, 2001, the Company had $1,525,503 in cash, cash equivalents, and short term investments. The Company has made significant investment in acquiring new service lines which has reduced available cash and increased long term debt. Furthermore, capital requirements have exceeded cash flows from operations in the quarter. While the above mentioned acquisitions have used cash during the quarter, it is anticipated that these investments will produce positive cash flow over the next 6 months. For the six months ended November 30, 2001, cash used in operations totaled $415,571, consisting primarily of the net loss for the period of $1,683,927, offset by non-cash expenses such as depreciation, amortization, and non-cash compensation. While the acquired companies have used cash in the six months ended November 30, 2001 and as the Company continues to integrate the acquired companies. Management expects that cash flows from operations will be positive over the remainder of the fiscal year. Net cash provided by investing activities was $1,013,442. The disposal of certain short term investments provided cash inflows of $2,936,256. A significant portion of these proceeds were used to pursue the Company's acquisition strategy. In the six months ended November 30, 2001, the Company expended a total of $1,135,091 in the acquisitions. In addition to this, a total of $1,258,747 had been advanced to acquired companies before the close of the transactions. An additional $59,753 was expended for capital assets as the Company improved its network infrastructure and integrated the technology platforms of the acquired companies to improve internal communications and efficiencies. This was offset by cash inflows from acquired companies of $569,566 Net cash used in financing activities was $274,207 for the six months ended November 30, 2001. This consisted primarily of the repayment of bank debt of $723,111, the repayment of capital leases of $45,340, and the repayment of a loan to a shareholder of an acquired company of $47,147. These cash expenditures were offset by additional bank financing of $541,391. The Company has had operating losses since inception and has negative cash flow from operations for the six months ended November 30, 2001. Management believes that the consolidation of cost centers and elimination of redundancies in the acquired companies and the consolidation of ongoing operations and reductions in research and development efforts previously discussed will result in current cash reserves and credit facilities plus cash flows for operations to be sufficient to meet the Company's working capital and capital expenditure requirements through fiscal 2002. ACQUISITIONS We constantly endeavor to increase our share of, and strengthen our position in, the HCM market. A key component of our business strategy is to continue to acquire companies offering services similar or complementary to ours. The HCM market has experienced significant consolidation in the last several months as companies attempt to expand their service offerings and broaden their revenue bases to achieve rapid growth and profitability. Implementing our business 18 <PAGE> strategy and identifying the consolidation trend in relatively early stages, we have actively pursued acquisition opportunities and completed acquisitions of several attractive companies. In April 2001, we entered into a definitive agreement to acquire 100% of the outstanding shares of PAH and its subsidiaries, doing business as Allen and Associates. As initial consideration for the sale, we issued to the shareholders of PAH 4,000,000 of our common shares valued at approximately $5.5 million. In addition to the initial consideration, 1,000,000 common shares are being held in escrow, to be released upon the achievement of certain profit and revenue targets of the combined companies. The escrow agreement expires on December 31, 2002, at which time any shares remaining in escrow will be cancelled. The acquisition of PAH was completed in July 2001. PAH had 11 offices across the U.S. at the time of execution of the agreement, and established 9 additional offices by September 2001. Headquartered in Orlando, Florida, PAH is focused on career transition, job placing services and recruiting within the information technology, engineering, finance and marketing areas. PAH's online candidate recruitment and placement technology enables employers to search for candidates for employment in real time, reducing time to hire. PAH is also engaged in management consulting PAH's management consulting practice focuses on emerging technologies and extending HCM strategy. Leveraging the Internet and advanced technology, PAH's service integrates platforms, systems and software, including human resources management systems delivering innovative business processes that encourage corporate growth. For the year ended December 31, 2000, PAH had revenues of approximately $6.9 million and net losses of approximately $216,000. In May 2001, we entered into a definitive agreement to acquire 100% of the shares of OMNIpartners, Inc. and its affiliates. As initial consideration for the sale, we issued to the shareholders of OMNIpartners 500,000 common shares valued at approximately $1 million. In addition to the initial consideration, 1,000,000 common shares are being held in escrow, to be released upon the achievement of certain profit and revenue targets of the acquired company. The escrow agreement expires on June 30, 2002, at which time any shares remaining in escrow will be cancelled. The acquisition of OMNIpartners was completed in July 2001. OMNIpartners was founded in 1990 and developed the concept of recruitment research at an hourly rate, as a lower-cost recruitment alternative. OMNIpartners offers a range of executive and professional recruitment research services to a wide array of industries including, retail, hotel, restaurant, gaming, food service, telecommunications, insurance, distribution, manufacturing, financial services and information technology. For its fiscal year ended December 31, 2000, OMNIpartners had revenues of approximately $7.8 million and net income of approximately $121,000. In June 2001, we entered into a definitive agreement to acquire 100% of the shares of RezLogic, Inc., referred to as RezLogic, a company based in Colorado Springs, Colorado. As initial consideration for the sale, we issued to the shareholders of RezLogic 445,545 common shares valued at approximately $1.8 million. In addition to the initial consideration, 297,030 common shares are being held in escrow, to be released upon the achievement of certain profit and revenue targets of the acquired company. The escrow agreement expires on June 30, 2002, at which time any shares remaining in escrow will be cancelled. The acquisition of RezLogic was completed in August 2001. RezLogic is a leader in recruiting process automation offering Web-based recruiting process automation solutions for employers, staffing agencies, executive recruiters, contract placement firms and independent recruiters. We expect that the acquisition of RezLogic will provide us with an established U.S. sales channel for the applicant tracking systems, or ATS platform, and enable us to integrate additional functionality into existing platforms, such as equal employment opportunity, or EEO tracking. For the year ended December 31, 2000, RezLogic had revenues of approximately $734,000 and net loss of approximately $244,000. We believe that this reporting capability is essential to achieve a significant penetration of the U.S. market. In July 2001, we entered into a definitive agreement to acquire the technology and assets of Gonyea Career Marketing Inc., known as ResumeXpress. As consideration for the sale, we paid ResumeXpress a cash amount of $60,000. The acquisition was completed in August 2001. ResumeXpress enables job seekers to distribute their resumes to thousands of employers, recruiters and online resume database services across the U.S. and Canada. Resumes are distributed to those parties whose keywords are matched to the keywords found in each job seeker's resume. Using the ResumeXpress Web site, job seekers can post their resumes in a matter of minutes, and their resumes are posted for a six-month period on a personal resume Web page with a unique uniform resource locator, or URL. 19 <PAGE> In September 2001, we entered into a definitive agreement to acquire 100% of the shares of 6FigureJobs.com, Inc. As initial consideration for the sale, we issued to the shareholders of 6FigureJobs 1,294,498 common shares valued at approximately $4 million. In addition to the initial consideration, 323,625 common shares are being held in escrow, to be released upon the achievement of certain profit and revenue targets of the acquired company. The escrow agreement expires on September 30, 2002, at which time any shares remaining in escrow will be cancelled. The acquisition was completed in October 2001. 6FigureJobs.com is a leader in executive search and recruitment services. 6FigureJobs.com provides career management, recruitment advertising, resume database and targeted research services for senior-level executives, employers and executive recruiters. We believe that this acquisition expands and enhances our existing executive career transition services which became available to us to offer as a result of our previous acquisitions, and provides applicant tracking clients with a premier advertising destination. For the year ended December 31, 2000 6FigureJobs.com had revenues of approximately $1.8 million and net losses of approximately $1.6 million. In September 2001, we entered into a definitive agreement to acquire the technology and assets of Tech Engine, Inc. in exchange for the assumption of a promissory note in the amount of $171,000. Tech Engine's software enables Workstream to rapidly develop career sites and job boards. We believe that these acquisitions are important to our evolution from a recruitment application service provider into an HCM business process aggregator. These additions have broadened our revenue base, diversified our product offering, and added over 200 employees to our work force and 20 revenue generating locations across North America. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are primarily exposed to market risks associated with fluctuations in interest rates and foreign currency exchange rates. INTEREST RATE RISKS Our exposure to interest rate fluctuations relates primarily to our short-term investment portfolio and our bank credit. We invest our surplus cash in an investment trust established by a Canadian chartered bank, and in a Certificate of Deposit in a bank in the United States. The investment trust holds various short-term, low-risk instruments, and can be withdrawn without penalty at any time. The interest income from these investments is subject to interest rate fluctuations which our management believes will not have a material impact on our financial position. We have a revolving line of credit with Suntrust bank, which bears interest at a rate of 3.87% until October 2002. As of November 30, 2001, $ 752,892 had been drawn on the line of credit. We also have a revolving line of credit with Harris bank, which bears interest at the rate of 4.75%. As of November 30, 2001, $ 150,000 had been drawn on the line of credit. The impact on net interest income of a 100 basis point adverse change in interest rates for the fiscal year ended May 31, 2001 would have been less than $10,000. FOREIGN CURRENCY RISK We have monetary assets and liabilities balances denominated in Canadian Dollars, including $313,854 of short-term investments. Our cash and cash equivalents are held in Canadian and U.S. dollars. As a result, fluctuations in the exchange rate of the Canadian dollar against the U.S. dollar will impact our reported cash position. Since a portion of our short-term investments are denominated in Canadian dollars, a 10% adverse change in foreign exchange rates would result in a decrease in our reported cash and short-term investments balance of approximately $ 30,000. 20 <PAGE> PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 26, 2001, a special meeting of shareholders was held, and approval by majority of shareholders was given to elect new directors; pass a resolution approving the acquisitions of Paula Allen Holdings, Inc. and The OMNIpartners, Inc.; approve the amended stock option plan; approve the granting of options to two directors; and increase the minimum number of directors. The notice of meeting and management proxy circular for this meeting was filed under a Form 6-K on June 29, 2001. On October 3, 2001 an annual general meeting of shareholders was held and approval was given to approve the financial statements for the year-ended May 31, 2001 together with the auditor's report and the Annual Report to shareholders; elect directors of the Corporation; appoint PricewaterHouseCoopers as auditors; and approve the prior meeting minutes. The notice of meeting and management proxy circular for this meeting was filed under a 6K on August 31, 2001. On November 6, 2001 a special meeting of shareholders was held to approve the amendment of articles of the Corporation to change the name of the Corporation to Workstream Inc. The notice of meeting and management proxy circular was filed under a report on Form 6-K on October 11, 2001. ITEM 5. OTHER INFORMATION Due to a change in the composition of our executive officers in November 2001, we no longer meet the requirements of the definition of a "foreign private issuer" under U.S. securities laws. Except as otherwise disclosed in this quarterly report, no other significant change has occurred since May 31, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits: None B. Reports on Form 8-K: None 21 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Workstream Inc. (Registrant) DATE: January 14, 2002 By: /s/ Michael Mullarkey ----------------------------------------------- Michael Mullarkey, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) DATE: January 14, 2002 By: /s/ Paul Haggard ----------------------------------------------- Paul Haggard, Chief Financial Officer and Secretary (Principal Financial Officer) 22 </TEXT> </DOCUMENT>