<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
IT STAFFING LTD.
FORM 20-F
(MARK ONE)
[] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
_________________
IT STAFFING LTD.
(Exact Name of Registrant as specified in its charter)
Canada
(Jurisdiction of incorporation or organization)
55 University Avenue
Toronto, Ontario, Canada M5J2H7
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
<PAGE>
Securities registered or to be registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of Class Name of Exchange
- -------------- ----------------
<S> <C>
Common Stock, no par value Nasdaq SmallCap Market
</TABLE>
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
Common Stock, no par value
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
1,677,875 shares of Common Stock
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.
[X] Yes [ ] No
Indicate by check mark which financial statement item the registrant has elected
to follow:
[X] Item 17 [ ] Item 18
2
<PAGE>
EXCHANGE RATE DATA
IT Staffing Ltd. (the "Company") maintains its books of account in
Canadian dollars, but has provided the financial data in this 20-F in United
States dollars with its audit conducted in accordance with generally accepted
auditing standards in the United States of America. All references to dollar
amounts in this 20-F are in United States dollars.
The following table sets forth, for the periods indicated, certain
exchange rates based on the noon buying rate in New York City for cable
transfers in Canadian dollars. Such rates are the number of United States
dollars per one Canadian dollar and are the inverse of rates quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average
exchange rate is based on the average of the exchange rates on the last day of
each month during such periods. On May 31, 1999, the exchange rate was US$1.00
per Cdn$1.48.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 1995 1996 1997 1998
- ----------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RATE AT END OF PERIOD $0.7143 $0.7353 0.7299 $0.6991 $0.6532
AVERAGE RATE DURING PERIOD 0.7299 0.7299 0.7353 0.7223 0.6745
HIGH 0.7092 0.7009 0.7212 0.6945 0.7061
LOW 0.7642 0.7533 0.7526 0.7493 0.6376
</TABLE>
<PAGE>
PART 1
ITEM 1 - DESCRIPTION OF BUSINESS GENERAL
The Company is a provider of IT staffing services, primarily in
Toronto, Ontario, Canada, supplying qualified IT professionals to its customers
as independent contractors for short and long term assignments and for permanent
placement within such enterprises. The Company's customers include financial
service companies, software and other technology companies, Canadian
governmental entities and large multinational companies, including Merrill Lynch
Canada Company, Inc., Bank of Montreal, Bell Sygma Inc., Revlon Canada Inc., IBM
Corporation and American Express Company. The Company has recently expanded its
operations into the United States and intends to develop a network of offices to
provide IT staffing services throughout North America.
The Company has focused on the recruiting of quality IT professionals.
The Company utilizes established testing methods to ensure that its IT
professionals are properly qualified. The Company also reviews a candidates'
technical backgrounds and conducts preliminary interviews prior to referring
candidates to its customers. By attracting the most qualified IT professionals,
the Company believes that it will be able to attract high quality customers who
require the services of such professionals.
Since inception, the Company has pursued a strategy of developing and
utilizing technology that it believes will provide it a competitive advantage.
As a result, the Company believes that one of its primary competitive strengths
is its utilization of technology. The Company maintains a database of over
35,000 IT professionals and advertises on the Internet to attract both
candidates and customers. The Company uses HR Workbench, software developed by
the Company in conjunction with Great Lakes Research and Development ("Great
Lakes"), an unaffiliated entity, to locate the IT professionals in the Company's
database with the technical skills and job interests that best satisfy the
requirements of the position that the Company is attempting to staff. The
database allows all of the Company's recruiters immediate access to active
candidates. Candidates can register themselves directly into the database
through the Internet or be entered into the system by the Company's recruiters.
The Company and Great Lakes have developed, and are in the process of
testing, an additional software product called AppTracker, which the Company,
through a joint venture with Great Lakes, intends to market to human resource
departments during the year ending December 31, 1999. The software is designed
to aid human resources departments in performing numerous recruitment tasks,
such as scheduling interviews and evaluating candidates. Statistics about the
recruitment process, including the costs and expenses, are tabulated in various
databases. The Company believes that it will have an advantage in marketing its
staffing services to companies using AppTracker because of the Company's
familiarity with the software and the ease of electronic data interchange
("EDI") with the Company.
The Company was incorporated under the laws of the Province of Ontario,
Canada in 1994.
4
<PAGE>
INDUSTRY BACKGROUND
The staffing industry has experienced significant growth in recent
years in response to the increased popularity of outsourcing of many staffing
requirements. This growth has been driven by employers who have sought to
convert personnel costs from fixed to variable in nature by reducing their
permanent staff and supplementing their workforce with contract employees for
specific projects, peak work loads and other needs. The use of flexible staffing
services has allowed employers to improve productivity, outsource specialized
skills and avoid the negative effects of layoffs. This trend has accelerated
with the pace of technological change and greater global competitive pressures.
Regulations governing employee benefits, insurance and retirement plans, as well
as the high cost of hiring, laying off and terminating permanent employees, have
prompted many employers to take advantage of the flexibility offered through
contract staffing arrangements. According to the Staffing Industry Report, a
leading industry publication, revenue for the year ended December 31, 1997 for
IT staffing services in the United States is estimated to have been $14.8
billion, a 27% increase over such revenues for the year ended December 31, 1996.
According to an 1998 IDC Canada survey, an independent Canadian industry
publication, the Canadian Information Technology services industry grew by more
than 11% in 1997, reaching CDN$11.5 billion in revenues, an increase of 11.5%
over such revenues for the year ended December 31, 1996, and is expected to grow
at a compounded annual rate of 12.1% through 2001.
The high technology industry as a whole continues to experience
substantial growth as constant innovations, such as open and distributed
computing, client/server technology, the Internet, relational databases and
object-oriented programming, shortens product lifecycles and accelerates the
demand for computer-related products. These trends, combined with the intense
competition faced by high technology companies, have put considerable pressure
on such companies to shorten the time-to-market of their products. The
development of these next generation products often requires highly specialized
technical talent which may not be available internally. This need for IT
professionals is particularly critical during the period prior to the release of
new software or hardware products. As a result, these high technology companies
are frequently utilizing supplemental sources of IT professionals with expertise
in current technologies.
As new technologies are developed and introduced, businesses are
attempting to integrate and implement these technologies into their already
complex IT systems. As these systems are being deployed on an enterprise-wide
basis and on multiple hardware and software platforms, the process of systems
design and implementation has become more complex. As a result, businesses are
forced to find qualified IT professionals to design, develop, deploy and
maintain their systems. Frequently, however, qualified IT professionals do not
exist internally or it may be impractical to redeploy and retrain internal
personnel. Consequently, these businesses are increasingly seeking to augment
their staffs with IT professionals skilled in the management and operation of
such systems.
The Company believes that the growth of the Internet is likely to
contribute to the demand for IT professionals. North American companies are
increasingly establishing or maintaining a presence on the Internet. Although
many companies outsource to Web-site maintenance companies,
5
<PAGE>
others retain direct control of their Web-sites and may utilize contract workers
to establish and maintain such sites.
Despite increased demand for IT professionals, there is a shortage of
IT professionals proficient in the most current computer languages and
applications. According to the Information Technology Association of America,
recent studies indicate that the United States has a shortage of approximately
346,000 IT professionals. According to a study performed by the KPMG/CATA
Alliance, Canada has a shortage of between 20,000 and 30,000 IT professionals.
The studies also suggests that the shortfall is growing. Due to the high demand
for their services, many IT professionals have a variety of opportunities in the
job market and an increasing number are attracted to the benefits of working on
a contract basis. Such benefits include more flexible work schedules and the
opportunity to work with emerging and challenging technologies in a variety of
industries.
The Company believes that to address their increasing demand for
contract and permanent IT professionals, both research and development
departments of technology companies and IT departments of large corporations are
turning to IT staffing companies to augment their existing operations.
Technology-dependent companies are increasingly utilizing outside consultants
to: (i) meet critical production deadlines; (ii) focus on their core business
and avoid devoting valuable time to the recruiting and hiring processes; (iii)
access specialized technical skills; (iv) better match staffing levels to
current needs; and (v) reduce the costs of recruiting, training and terminating
employees.
BUSINESS STRATEGY
The Company's business objectives are to increase its share of the IT
staffing services market in Canada and the United States, as well as to
establish a network of offices throughout such countries which, when linked by
means of the Internet, will allow the Company to provide its customers with an
array of IT staffing services. The primary components of the Company's strategy
to achieve such objectives are as follows:
LEVERAGE CLIENT BASE TO ATTRACT AND RETAIN HIGHLY QUALIFIED IT PROFESSIONALS
A key element of the Company's success has been its ability to attract
and retain highly qualified IT professionals. The Company believes that the
primary reason that it can attract such professionals is due to its high quality
customer base, which allows the Company the opportunity to identify and deliver
high quality assignments involving leading-edge technologies. Additionally, the
Company believes that it has developed a reputation among IT professionals for
efficient and high quality placements by focusing on an IT professional's
particular field of technical specialization and providing access for IT
professionals to cash compensation levels comparable to, or higher than, that of
similarly skilled, full-time employees.
As the Company's high quality clients have allowed it to attract a
large number of qualified IT professionals, the Company's database of IT
professionals, in turn, has allowed the Company to
6
<PAGE>
increase its number of clients. The Company believes that this cyclical
phenomenon in the recruiting business creates the opportunity for significant
growth as the Company expands and implements the other facets of its business
plan.
FOCUS ON NICHE MARKETS
The Company believes that its expertise in the IT industry provides it
a competitive advantage over recruiting firms that do not utilize IT specialists
in their recruiting. The Staffing Report On-Line, an on-line magazine for the
employment and temporary service industry, views the IT staffing business as
distinctly different from traditional staffing businesses. The Company's
recruiters follow IT industry trends, are usually knowledgeable in the IT area
and have access to the Company's databases of IT professionals, all of which
enables them to provide their customers with candidates who will satisfy a
particular client's requirements.
Although the Company recruits professionals in all aspects of the IT
business, the Company places added emphasis on certain areas, such as Enterprise
Resource Planning ("ERP") software products produced by Oracle Corporation, SAP
AG, Peoplesoft, Inc. and the BAAN Company. The Company is often discussed in
Web-sites for Oracle product users and believes it can develop a reputation as
one of the premier sources of IT professionals with skills and experience
relating to Oracle Corporation and other ERP products. The Company has also
developed an excellent reputation for recruiting IT professionals who
specialize in network management. The Company believes that developing niche
specialties will enhance the reputation of the Company as a whole and create
opportunities for the Company to establish relationships with new customers
who then may utilize the Company to locate IT professionals with other skills.
EXPAND INTO NEW REGIONAL MARKETS
As opportunities arise, the Company intends to expand into certain
markets by means of acquisition, but believes that most expansion will come from
the establishment of new offices. The Company intends to establish such offices
by hiring experienced recruiters familiar with the local markets and providing
them access to the Company's existing group of IT professionals and customers by
means of the Internet. By hiring local recruiters the Company believes that it
will be able to attract local clients and IT professionals who may not have been
previously familiar with the Company. The Company believes that such recruiters
will find the Company to be an attractive place to work because of the Company's
existing relationships with multinational and other large corporate clients, the
Company's good reputation among IT professionals, the Company's quality
information technology system and the Company's incentive based compensation
package which will generally combine base salary, bonuses, commissions and
incentive stock options.
Where the Company deems it more cost effective, or a particular
acquisition candidate will provide the Company with a competitive advantage, the
Company may enter a new regional market by acquiring an existing IT staffing
company. The Company intends to focus on small acquisition targets who will be
able to benefit from the Company's strong IT and operating systems.
7
<PAGE>
CONTINUE TO UTILIZE THE INTERNET AND INFORMATION TECHNOLOGY
The Company believes that its use of technology provides it a
competitive advantage over many of its competitors. The Company utilizes its HR
Workbench software to operate its database and allow recruiters to use a query
based system that matches the skill set and employment preferences of the IT
professionals with the needs of the customer. This system also tracks other
information, such as average salaries of a particular position, which enables
the Company to provide valuable advice to its clients in selecting the proper IT
professional. The Company's IT professional database and recruiting software is
available to its employees in other cities through its fully secure intranet
system. For example, a recruiter in a new office in Austin, Texas could have
complete access to the Company's information technology in Toronto, Ontario. The
Company believes that this will enable it to open new offices that are quickly
ready to provide services to customers without incurring significant IT start-up
costs. In smaller markets, the Company intends to utilize its IT system to
create lightly staffed "virtual offices" that rely on the Toronto, Ontario
office for all administrative and many operating functions.
The Company utilizes the Internet to promote its services and to
provide IT professionals with a complete listing of available employment
opportunities. IT professionals can e-mail their resumes to the Company's
recruiters and, by completing an on-line form, enter themselves into the
Company's database. Currently, the Company is upgrading its Web site so that it
will more effectively promote the Company's services to potential customers.
The Company, in conjunction with Great Lakes, is developing software
that will enable human resources departments to perform numerous recruitment
tasks, such as scheduling interviews and evaluating candidates. Statistics
related to the recruitment process, including the costs and expenses, are
tabulated in various databases. The Company believes that it will have an
advantage in marketing its recruitment services to companies that are using
AppTracker because of the Company's familiarity with the software and the ease
of EDI with the Company.
DEVELOP AND PROMOTE A MANAGED SERVICES PRACTICE
The Company intends to form a team of consultants who will aid the
Company's customers in determining their IT staffing needs. The Company believes
that this will provide it with a competitive advantage when compared with
traditional recruiting firms. Furthermore, the Company believes that Managed
Services could provide it with an additional source of revenue, which could be
particulary important if companies utilize AppTracker and Internet sources to
reduce their reliance on recruiting firms.
CAPITALIZE ON YEAR 2000 AND OTHER OPPORTUNITIES
Due to a once-common programming standard that represents years using
two-digits, many computer systems and software products, unless upgraded, will
not function properly as the year 2000 approaches. The problem will result in
the inability of computer systems to properly recognize
8
<PAGE>
date-sensitive data and will result in the production of erroneous information
or system failure.
The Company believes that many companies will turn to contract workers
to review their computer systems and make necessary changes to avoid Year 2000
problems. For example, the Company assembled a group of specialists to remedy
the potential Year 2000 problems at the Canadian offices of a large financial
services firm. Contract workers are ideal for this task because it is likely to
be a time consuming and complicated, yet temporary, project. Although the
increase in revenues from Year 2000 related projects will be temporary, the
Company intends to use the Year 2000 as an opportunity to develop additional
customer relationships and to expand the scope of its contract work on a
project-by-project basis. The Company intends to assemble teams of Year 2000
specialists and aggressively market their services to the Company's customers.
The Company believes that there will be opportunities for projects like
Year 2000 projects as the Dow Jones Industrial Average, which is often recorded
in data fields designed to read four digits, approaches 10,000, and when the
European Union adopts a single currency. Computer systems will require
modifications to be able to properly record these data changes, and companies
may rely on contract workers and consulting teams to implement these changes.
The Company intends to capitalize on the need for a quick response to such
provisions by assembling teams of specialists to address such problems which the
Company intends to use as an opportunity to establish additional customer
relationships.
As the state of the economy fluctuates, so too do expenditures on new
IT systems. This is particularly true of the financial services industry, where
there is a higher amount of discretionary spending for IT systems. The Company
has guarded against being adversely affected by a curb in spending from the
financial services sector by diversifying its client base to include
manufacturing, distributing and telecommunications firms, and software
companies.
Currently there is a high demand for IT people to tackle the Year 2000
and European Currency conversion projects. There has been some speculation that
demand for IT workers will decline dramatically after these projects have been
completed. More accurately, however, the level of demand will not change
significantly. New projects that are currently on hold in order to focus finite
resources on the pressing Year 2000 issue, will come alive and will keep
requirements for IT workers at a consistently high level.
The Company has been focusing its infrastructure development and
marketing initiatives on niche market areas, such as ERP and network management.
The Company believes that by doing so it has positioned itself in the lowest
possible risk sector for market fluctuations.
The niche IT specialists mentioned above will be in strong demand for
new system initiatives currently on hold while resources are focused on the more
critical Year 2000 issue.
9
<PAGE>
CONTRACT SERVICES
The Company's contract services revenue is derived from time and
materials contracts in which the Company supplies a contract worker to perform
under the supervision of the client. The Company's contract services generally
consist of providing contract workers to customers for short and long term
assignments. These assignments generally last from three to twelve months, but
can sometimes last much longer. The assignments may be for specified projects or
general IT consulting work. Although the Company currently bills the clients
only on a time and materials basis at an agreed upon hourly rate, in the future
it may assemble teams that will perform projects for an agreed upon fixed price
for the project. The Company pays the contract worker an agreed upon rate,
pursuant to the Company's standard consulting services agreement. The contract
worker generally receives between 75% and 80% of the amount paid by the customer
to the Company, however such payment is usually not based on any formula and may
vary for different engagements. This agreement, which is terminable by the
Company at any time, obligates the contract worker to provide notice prior to
leaving the position, contains a confidentiality clause, and prohibits the
worker from going to work directly for the customer for a period of six months
from the date that the worker no longer works for such customer without the
consent of the Company. At December 31, 1998, approximately 180 contract workers
placed by the Company were performing services for the Company's customers.
The Company intends to increase the amount of project services work it
is doing by assembling teams specializing in particular projects, such as Year
2000 problem resolution. In the future, the Company may hire project leaders
as salaried employees to lead teams of consultants on certain projects. The
Company believes that this will enable the Company to earn higher margins on
its project work. Furthermore, such teams would enable the Company to market
itself as a full-service provider of IT staffing services with a wide array
of services that can be tailored to meet a customer's particular needs.
PERMANENT STAFFING PLACEMENT SERVICES
The Company's permanent placement services generally consist of the
placement of an IT professional in a position for the Company's customers. The
Company identifies and provides candidates to its customers who its recruiters
believe, based on the Company's data, have the technical skills and job interest
to best satisfy the requirements of the position. The Company recognizes revenue
when the IT professional commences employment. However, the Company is required
to find a replacement free of charge if the employee does not remain in the
position for at least 90 days. This placement fee is usually structured as a
percentage of the IT professional's first-year annual compensation. This
percentage ranges from 20% to 30%, although the Company expects to reduce the
fee to 15% for customers utilizing the Company's Internet technology because
those placements will require less time and input from the Company's recruiters.
Salaries for the IT professionals that the Company places generally range from
$45,000 to $125,000.
The Company performs permanent placement services pursuant to three
invoicing policies.
10
<PAGE>
Contingency services are engagements in which the Company is only paid if it is
successful in placing a candidate in a position. Contingency exclusive services
are similar to contingency engagements, however, the Company is the only firm
engaged to fill the position. Retained search services are similar to
contingency exclusive services, except that the Company receives a
non-refundable portion of the fee prior to performing any services, with the
remainder paid if the position is filled.
SALES AND MARKETING
The Company's primary target markets are software, telecommunications
and other technology companies, financial service companies and multinational
and other large corporations. The Company maintains a database of human resource
administrators and IT department heads at these firms and utilizes its sales
forces to build relationships with these individuals by stressing the quality of
IT professionals that the Company recruits. As the Company expands into new
regional markets it intends to hire local sales people who are familiar with
local customers. Because many of the Company's customers maintain offices in
more than one city, the Company believes that it will have an advantage in
establishing relationships with these additional offices as the Company expands
into new regional markets.
The Company markets its services via the Internet. The Company is in
the process of upgrading its Web-site, which previously has been used primarily
as a tool to advertise job opportunities to IT professionals and to promote its
services to its customers. The Company also utilizes traditional advertising
outlets and trade shows to promote its services to potential customers.
CUSTOMERS
The Company provides staffing services to customers in a wide array of
industries. Software development, telecommunications, and other technology
companies utilize the Company's services to locate programmers in the
development of new products. The Company also provides services to financial
services companies, such as Bank of Montreal and Merrill Lynch Canada Inc.,
which are extremely reliant on their IT systems. Large consulting firms, such as
Deloitte & Touche Tohmatsu, are also beginning to utilize the Company to meet
their need for IT professionals.
The Company's customers include the Canadian units of Fortune 1000
companies, such as American Express Company, Revlon Canada Inc. and IBM
Corporation. The Company believes that it will be able to provide services to
other multinational and large companies and expand services provided to these
existing customers by expanding into new regional markets. These multinational
and other large companies have indicated to the Company that they desire to use
fewer suppliers to meet their needs and the Company believes that it will be
able to utilize relationships in one market to establish relationships with such
companies in other markets. Additionally, the Company believes that its high
profile customer base provides it credibility when pursuing other customers. The
following is a list of certain of the larger companies who utilize the Company's
services.
11
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL SERVICES SOFTWARE, TECHNOLOGY AND TELECOMMUNICATIONS
- ------------------ -------------------------------------------
<S> <C>
Bank of Montreal Bell Sygma Inc.
Merrill Lynch Canada Inc. Bell Canada
CIBC Wood Gundy Securities Inc. SHL Systemhouse Co.
First American Title Insurance Company Star Data Systems, Inc.
Harris Trust and Savings Bank IBM Corporation
GOVERNMENT AND EDUCATIONAL OTHER
- -------------------------- -----
Revenue Canada American Express Company
Environment Canada Imperial Oil Limited
University of Toronto Deloitte & Touche Tohmatsu
National Grocers Co. Ltd.
SolCorp
Revlon Canada Inc.
</TABLE>
As is common in the staffing industry, the Company does not have
long term written contracts with most of its customers. The Company, however,
generally enters into a standard form agreement with its customers that
indicates which parties are responsible for taxes and other expenses, and
provides that all intellectual property and other proprietary information will
remain confidential and the property of the customer. Some customers, such as
the Canadian government, Dow Jones and CIBC Wood Gundy Securities Inc., require
the Company to use another form of agreement which is similar in all material
respects to the Company's standard form. With certain clients, most
significantly, Bank of Montreal, the Company enters into an agreement allocating
other responsibilities, such as the supervision of the IT professionals it
recruits. Other customers, such as Bell Sygma Inc., enter into annual contracts
with the Company pursuant to which the Company will supply contract workers
during the year as required by the customer at fees to be negotiated.
STRATEGIC ALLIANCES
The Company has entered into a strategic alliance with Great Lakes
which has resulted in the development of HR Workbench and AppTracker. The
Company has also established relationships with other job search resources on
the Internet to promote the Company's services. For example, the job listing
page of the Toronto Star newspaper's Web-site displays the Company's name and
has a hyperlink to the Company's Web-site.
The Company intends to utilize strategic alliances to promote its
staffing services. The Company may enter into arrangements with consulting firms
to staff major IT projects. Alternatively, the Company may enter into
arrangements with software companies whereby the Company's contract workers will
be trained to perform customer support services. Lastly, the Company may enter
into agreements with other staffing companies in geographic regions in which the
Company does not intend to expand. Such arrangements will allow the Company to
provide its existing large corporate clients with services in areas where the
Company is not familiar with the local market. Currently, the Company is not a
party to any agreements to enter into arrangements
12
<PAGE>
such as these, and there can be no assurance that the Company will find entities
with which to enter into strategic alliances on terms acceptable to the Company,
or at all.
RECRUITING
The Company believes that its technology and experienced recruiting
staff of 52 individuals enables it to recruit qualified IT professionals whose
skills match the needs of its customers. Many of the Company's recruiters have
strong IT backgrounds and are required by the Company to take a two week
training course when hired by the Company. The Company maintains a database of
over 35,000 IT professionals. The Company's recruiters maintain ongoing
relationships with certain IT professionals and are aware of their particular
skills and employment status. Using the Company's database and its recruiters'
knowledge of available IT professionals, the Company is often able to quickly
locate a number of suitable candidates for a position, which is particularly
important for positions in which the Company does not have an exclusive
engagement. The database also contains reference and employment history
information which accelerates the screening process.
The Company tests the computer skills of all of its IT professionals
utilizing TeckChek software. This software provides recruiters with a consistent
rating system and a reliable method of evaluating candidates, which aids
recruiters in matching candidates with positions requiring their skill set. This
software also allows the Company to provide evidence to its customers that
potential employees have sufficient technical skills. Additionally, the Company
screens candidates by telephone and in-person interviews and by reference
checks.
If the Company is unable to locate suitable candidates for a position
by means of its databases, the Company may utilize advertisements in newspapers
and trade magazines. The Company often prepares and places advertisements on
behalf of its clients. The Company has been approved by the Canadian Newspaper
Association as an advertising agency, which allows the Company to earn a
commission on any advertisements it places. Additionally, the Company posts job
openings on its Web-site and invites IT professionals to submit their resumes to
the Company by e-mail.
The Company intends to recruit IT professionals from other countries,
such as Singapore and India, where there are a number of IT professionals and
the job opportunities are inferior to those in North America. United States and
Canadian immigration laws contain preferences for immigrants who can fill
skilled labor positions for which there is a shortage of native applicants.
The Company believes that turbulent economic and political
situations in other parts of the world, as well as the general lack of
opportunities for top IT professionals in countries such as Russia and India,
make Canada and the United States an appealing choice for immigration.
According to a recent KPMG/CATA Alliance High Tech Labor Survey, there is a
shortage of IT workers in Canada. Bringing in foreign workers helps to
alleviate this shortage. The Canadian government, in recognition of this
fact, has relaxed entrance requirements for IT professionals, allowing such
workers to enter the country more quickly than ever before.
13
<PAGE>
The Company is dedicated to maximizing the value of overseas
recruitment through a variety of methods. The first is through the extensive use
of the Internet and its Internet-based products, WorkBench and AppTracker. By
using a combination of its Web site and e-mail, it is able to communicate with
IT professionals around the globe, making them aware of the opportunities it has
available, and discussing immigration options.
Internally, the Company has started to build a knowledge base around
the particular issues of bringing IT workers to Canada. The Company has also
been building a library of information about the legal technicalities
surrounding work visas and immigration for Canadian workers migrating to the
United States. To complement this knowledge that the Company is building
internally, it has also developed strategic relationships with legal counsel
specializing in immigration and visa issues.
Another strategy the Company is employing in the area of foreign
recruitment is the establishment of lightly staffed virtual offices in different
parts of the world. Recruiters with country-specific contacts and knowledge are
given access to the Company's database and job postings. They then carry this
information into the field where they screen and select foreign candidates who
they feel would be appropriate for the opportunities that the Company has
available. The Company then takes these pre-screened candidates and continues
with the evaluation process.
INFORMATION TECHNOLOGY AND THE INTERNET
The Company has established an extensive IT system which it believes
provides it with a competitive advantage over less technologically advanced
competitors. The primary components of the Company's IT system and its use of
technology are described below.
THE HR WORKBENCH SOFTWARE AND PROPRIETARY DATABASES
The HR Workbench software is an Internet-based software application
that is used by the Company in the administration and tracking of internal
processes relating to the recruitment and placement of IT professionals. This
software was developed by the Company in conjunction with Great Lakes, and
they will share in all intellectual property rights to the software equally.
The HR Workbench software is a query based software program that allows the
Company's recruiters to locate the IT professional in the Company's database
with the technical skills and job interests that best satisfy the
requirements of the position that the Company is attempting to staff. This
system also tracks other information, such as average salaries of a
particular position, which enables the Company to provide valuable advice to
its clients in selecting the proper IT professional. The software also
incorporates the Company's database of over 35,000 IT professionals. The
Company continually updates its database and occasionally accesses other
databases of IT professionals that are available for sale or over the
Internet. HR Workbench allows information entered into the database by a
Company employee, or directly by an IT professional by means of the Internet,
to be shared by all of the Company's recruiters and salespeople.
14
<PAGE>
UTILIZATION OF THE INTERNET
The Company utilizes the Internet to promote its services and to enable
customers and IT professionals to utilize its services. The descriptions of the
employment opportunities are segregated among permanent and contract positions,
describe the necessary skills required by IT professional candidates, and
provides a phone number and e-mail address for the Company's recruiter who works
with the relevant client. Alternatively, IT professionals can e-mail their
resumes to the Company or can enter themselves into the Company's database by
means of the Internet. The Company also utilizes the Internet to connect its
offices to its Toronto, Ontario office. This results in substantial savings in
software and hardware costs in the maintenance of the Company's IT system and
allows for the creation of lightly staffed regional virtual offices.
THE APPTRACKER SOFTWARE
The Company and Great Lakes have developed a software package called
AppTracker. The software is designed to aid a human resources department in
performing numerous recruitment tasks, such as scheduling interviews and
evaluating candidates. The software has a feature that allows a human resources
department to have a description of any job openings sent automatically to
selected e-mail addresses, such as those of recruiting firms or previous
applicants. Statistics about the recruitment process, including the costs and
expenses, are tabulated in various databases. Additionally, the software allows
the human resource department to compile their own database of prospective
employees and contract workers.
Traditionally, recruiters acquire new candidates using as many sources
as possible. Normally the number of sources would be limited to the recruiting
office's ability to handle the logistics of communicating job specifications to
those sources and handling the incoming responses. Therefore, their ability to
hire quality IT candidates is directly related to the size of the group of
candidates they can attract and the speed with which they can assimilate,
contact, interview, evaluate, file for future use and/or hire those candidates.
AppTracker, the process through which recruiters post or communicate
job specifications to applicant sources, is fully automated. Once the hiring
manager and the recruiter have constructed the job specification using
AppTracker, they use the AppTracker Broadcast facility to communicate this job
specification to all designated sources. With a click of the mouse the recruiter
defines and chooses the broadcast strategy. The information can be
communicated/posted simultaneously and automatically to appropriate employment
agencies, web news groups, web job posting sites, archived candidates, internal
candidates (as per policy) and personal referral sources.
AppTracker consolidates and automates the communication process for all
sources. Each unique information source is provided with a Web-interface. All
out-going and in-coming communications/applications are managed using this
Web-interface. No specialized client software is required. All transactions are
initiated through a Web-browser. Recruiters, hiring managers and applicants now
use a common medium for communication. This type of common-interface
15
<PAGE>
messaging reduces significantly the reliance on hard-copy mail, phone
communication and fax transmission. Additionally, a Web-site address is provided
for all candidates that are informed of the job requirements by means of trade
journals or newspapers. This further centralizes the incoming applicant
response.
The joint venture between the Company and Great Lakes is primarily
designed to market AppTracker to human resources departments commencing during
the year ending December 31, 1999, but also governs ownership of HR Workbench
and any future software developed by the Company. The AppTracker development
program was launched as a result of the positive response observed during its
first test-marketing session. A working prototype was demonstrated at the annual
Human Resources Professional Association Conference in Toronto, Ontario in
February 1998. The Company performed more than 40 one-on-one demo sessions with
companies, currently, the product is being test marketed by the human resources
departments of two of the Company's customers. The first customer for the
AppTracker is the Toronto Stock Exchange, which is viewed as a Canadian leader
in the development and deployment of application software. The Company believes
that it will be able to provide assistance in the marketing of the software as a
result of its existing relationships with management in the human resources and
IT departments of its customers, although there can be no assurance thereof. The
Company's joint venture allocates costs and responsibilities in marketing
Apptracker. The Company has spent approximately $235,000 on research and
development related to the HR Workbench and the Apptracker software. The joint
venture agreement provides that all costs of development and marketing will be
shared equally between the Company and Great Lakes as will all profits and
losses. The initial contribution of the Company was the macro design, marketing
and all recruitment needs of Great Lakes. Great Lakes' initial contribution was
the establishment of a team of programmers to design and implement HR Workbench
and AppTracker.
Although there can be no assurance thereof, the Company believes that
it will have an advantage in marketing its recruitment services to companies
using AppTracker because of its familiarity with the software and the ease of
EDI with the Company. There is a possibility, however, that utilization of the
software will reduce reliance of certain customers on recruiting firms,
including the Company. Notwithstanding the foregoing, the Company does not
anticipate any material reduction in such reliance as a result of the
utilization of this software due to the difficulty of hiring IT professionals.
Furthermore, the Company intends to offer lower commission rates to customers
using AppTracker software to make it less likely that they will reduce the level
of utilization of the services of recruiting firms. The Company believes that
the use of AppTracker and its familiarity with the software will enable it to
aid customers in finding suitable, professionals in a more timely and cost
efficient manner, allowing for the decrease in prices arged by the Company.
EXPANSION AND ACQUISITIONS
The Company believes that it can leverage its database of IT
professionals, reputation, and IT system to achieve revenue growth by
establishing new offices in other regional markets. Such offices may be
established by opening new offices and staffing them with local recruiters and
sales
16
<PAGE>
people or by acquiring complimentary or competitive companies.
The Company primarily intends to focus its expansion in large United
States cities, such as Atlanta, Chicago, San Francisco and Austin. The Company
is selecting locations that have other offices of its existing customers, such
as Chicago, the headquarters of Harris Bank & Trust, or areas with numerous
technology companies, such as Austin. In addition to attracting local IT
professionals, the Company intends to attempt to recruit Canadian and other
foreign IT professionals for these positions in the United States. Due to the
strength of the U.S. dollar against the Canadian dollar and other currencies,
the Company believes that foreign IT professionals will find the economic
opportunities in the United States attractive. The Company is currently
endeavoring to expand its operations in the northeastern United States. The
Company believes that recruiters in other markets will find the Company to be an
attractive place to work because of its existing relationships with
multinational and other large corporate clients, the Company's good reputation
among IT professionals, quality information technology system and the Company's
incentive based compensation package, which will generally combine base salary,
bonuses, commissions and incentive stock options.
The Company has also expanded in Ontario, Canada in order to obtain
additional business from large Canadian customers. For example, the Company has
opened an office in Ottawa in order to expand its relationship with Bell Canada.
The Company believes that other large customers with offices or affiliated
offices in Ottawa will consider using the Company's services in that city,
providing the Company's sales force an advantage in building relationships when
compared with other companies opening new offices.
The Company may seek to establish offices in smaller markets that
contain desirable customers. The Company believes that it can do so in a cost
effective manner because of the strength of its IT system. A single
recruiter/sales person can operate a "virtual office" by utilizing the Toronto,
Ontario office's database and other operational systems by means of the
Company's Intranet. For example, the Company has opened a "virtual office" in
Indian Wells, California to provide services to U.S. Filters and Armtech
Incorporated.
Based on the experience of the Company's principals who, prior to
forming the Company, have been involved in the opening of several offices
throughout Ontario and most recent experience with the opening of its New York
office, the Company expects newly opened offices to become productive within 6
to 12 months of opening. The delay in productivity can be attributed to the
following factors:
- Recruiting, hiring, training and orientation of new staff with
recruitment/sales methodologies and practices, as well as
technology (databases, software, Internet, e-mail, etc.);
- Recruiting and developing a base of qualified IT professionals
(advertising, open houses, career fairs);
17
<PAGE>
- Attracting and building client relations; and
- Getting on preferred supplier lists.
Although there can be no assurance that such expectations will be
satisfied, the Company's expectations in terms of productivity for new offices
by the 12th month of operations are: 30 contractors and between $30,000 to
$50,000 in permanent placement sales per month with annual revenues of
approximately $450,000.
The opening of new offices with the addition of qualified employees and
entrance into new regional markets results in increased operating expenses
including:
- Salaries and payroll costs;
- Infrastructure (office equipment, office space, office
supplies, telephone, insurance) including an elaborate
technological infrastructure;
- Advertising (print and career fairs);
- Marketing and public relations; and
- Travel and business development costs.
There are also the related head office expenses associated with opening
new offices, including:
- Time spent by management and technical personnel on training
(recruitment sales, HR Workbench, databases, e-mail, Internet,
job postings to user groups); and
- Time spent by management and support personnel on implementing
and maintaining reporting procedures (financial and
administration).
The Company may also expand by acquiring complementary or competitive
companies, including existing IT staffing companies, which will provide an
immediate increase to the Company's customer base and in some circumstances,
provide a more cost effective method of expansion than opening a new office. The
Company intends to target companies who have a strong customer base or group of
IT professionals, but do not utilize an advanced internal IT system. The Company
believes that providing an acquired company access to the Company's IT system
will allow the acquired company to provide better service without substantially
increasing costs, which may also lead to increased revenue. Although, due to
consolidation in the industry, there is competition for the acquisition of
companies in the IT staffing industry, the Company intends to avoid competing
for acquisition candidates by focusing on smaller companies.
18
<PAGE>
The Company may also utilize acquisitions or hiring of new employees to
achieve growth in its existing markets. The Company utilized the acquisitions of
Systems and ICS in the metropolitan Toronto, Ontario area to acquire access to
experienced recruiters with an existing customer base.
With regard to customer services, the Company plans to implement a
decentralized management plan. The Company believes that allowing existing
management of an acquired company to remain an important part of its operations
will be beneficial in retaining customers, recruiters and IT professionals.
Similarly, local recruiters and sales people hired to staff new offices will
have the flexibility to continue relationships with customers and IT
professionals. The Company's Intranet will provide all offices full access to
the Company's databases and operating software, promoting uniformity in certain
functions. The Company intends to hold monthly meetings of its Operations
Committee, which will consist of the heads of each regional office and
subsidiary, to exchange information on industry trends and promote "best
practices" among the offices. With regard to financial controls, the Company
plans to have a fully integrated system which will allow control of cash flows
and accounting and payroll functions from the Toronto, Ontario office.
COMPETITION
The IT staffing industry is highly competitive and fragmented and is
characterized by low barriers to entry. The Company competes for potential
clients with other providers of IT staffing services, systems integrators,
providers of outsourcing services, computer consultants, employment listing
services and temporary personnel agencies. Many of the Company's current and
potential competitors have longer operating histories, significantly greater
financial, marketing and human resources, greater name recognition and a larger
base of IT professionals and clients than the Company which may provide such
competitors with a competitive advantage when compared to the Company. In
addition, many of these competitors, including numerous smaller privately held
companies, may be able to respond more quickly to customer requirements and to
devote greater resources to the marketing of services than the Company. Because
there are relatively low barriers to entry, the Company expects that competition
will increase in the future. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could
materially and adversely affect the Company's business, prospects, financial
condition and results of operations. Further, there can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its business, prospects, financial condition and
results of operations. The Company believes that the principal factors relevant
to competition in the IT staffing services industry are the recruitment and
retention of highly qualified IT professionals, rapid and accurate
response to client requirements and, to a lesser extent, price. The Company
believes that it competes favorably with respect to these factors.
The Company believes that its competitive advantage is not only in
their use of technology, but also in the accessibility of this technology to all
of the Company's employees. The building and maintenance of the Company's
database of over 35,000 has been a combined effort of employees in
19
<PAGE>
Toronto, New York and Ottawa. The Company also has Internet access and
membership to over 25 local, national and international databases for IT
professionals.
EMPLOYEES AND CONSULTANTS
EMPLOYEES
The Company's corporate staff at December 31, 1998 consisted of 88
full-time employees, including 52 recruiters, 19 account managers/salespeople
and 17 administrative employees. The Company is not a party to any collective
bargaining agreements covering any of its employees, has never experienced any
material labor disruption and is unaware of any current efforts or plans to
organize its employees. The Company considers its relationships with its
employees to be good.
CONSULTANTS
The Company enters into consulting agreements with the IT professionals
at hourly rates negotiated with each IT professional based on such individuals
technical and other skills. The agreements provide that the IT professional is
responsible for taxes and all other expenses and that the IT professional is not
an employee of the Company for tax or other legal purposes. At December 31,
1998, approximately 180 contract workers placed by the Company were performing
services for the Company's customers.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company maintains its headquarters in a 8,076 square foot office
located at 55 University Avenue in Toronto, Ontario. The Company has leased such
facility for a term of ten years terminating in November 2007. The Company pays
annual rent of $30,307, which will increase to $36,080 commencing in December
2002. The Company leases additional offices at the following locations:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET LEASE EXPIRATION CURRENT RENT PER ANNUM
- -------- ----------- ---------------- ----------------------
<S> <C> <C> <C>
Etobicoke, Ontario............ 1,610 4/13/03 $22,300
New York, New York............ 1,214 10/31/01 $47,353
Tampa, Florida................ 188 2/28/99(1) $ 4,355
Scarborough, Ontario.......... 6,000 5/31/01 $39,000
Ottawa, Ontario............... 1,291 9/30/03 $14,739
</TABLE>
- --------
(1) The Company has renewed the lease on a month to month basis.
20
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4 - CONTROL OF REGISTRANT
The Company is not directly or indirectly owned or controlled by another
corporation or by any foreign government.
PRINCIPAL SHAREHOLDERS
The following table sets forth as of May 31, 1999, the names and beneficial
ownership of the Company's Common Stock beneficially owned, directly or
indirectly, by (i) each person who is a director or executive officer of the
Company, (ii) all directors and executive officers of the Company as a group,
and (iii) all holders of 5% or more of the outstanding shares of Common Stock of
the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER(1) OWNED BENEFICIALLY OWNED
- ------------------- ----- ------------------
<S> <C> <C>
Declan French(2)........................................ 1,021,126 60.9%
John R. Wilson.......................................... 130,914 7.8%
John A. Irwin........................................... 130,914 7.8%
Lloyd Maclean (3)....................................... 113,459 6.8%
Robert M. Rubin (4)..................................... 200,000 10.7%
William J. Neill........................................ 19,637 1.2%
John Dunne (5).......................................... 13,091(5) *
Blair Taylor (6)........................................ 19,637(6) 1.2%
James Reddy............................................. 19,637 1.2%
All executive officers and directors as a group
(five persons)....................................... 1,668,415 88.8%
</TABLE>
- -----------
* Less than 1.0%
(1) Unless otherwise indicated, the address of the referenced individual is
c/o IT Staffing Ltd., 55 University Avenue, Suite 505, Toronto, Ontario
M5J 2H7.
(2) Includes 510,563 Common Shares owned by Christine French, the wife of
Declan French.
(3) Such Common Shares are owned by Globe Capital Corporation, an Ontario
corporation that is wholly owned by Lloyd MacLean.
(4) Consists of currently exercisable options to acquire 200,000 Common
Shares at an exercise price of $2.10 per share for a period of seven
years.
21
<PAGE>
(5) Consists of 13,091 Common Shares owned by Mr. Dunne's spouse.
(6) Includes 9,818 Common Shares owned by Mr. Taylor's spouse.
ITEM 5 - NATURE OF TRADING MARKET
Since the initial public offering of the Company's Common Stock on June
2, 1999, the Common Stock has been traded on the Nasdaq SmallCap Market
("Nasdaq") under the symbol ITSTF, and on the Boston Stock Exchange under the
symbol ITI. Prior to June 1999, there was no market for the Company's shares.
There is no non-United States trading market for such securities and there is no
limitation on non-Canadians owning shares of the Company's Common Stock.
The following is the high and low sales prices reported for the
Company's shares as reported on Nasdaq during the quarter since such trading
commenced on June 2, 1999:
<TABLE>
<CAPTION>
Quarter High Low
- ---------------------------- ----- -----
<S> <C> <C>
June 2, 1999 - June 25, 1999 5.125 4.313
</TABLE>
As of June 25, 1999, there were 2 shareholders of record and
approximately 800 beneficial owners.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS
There are no governmental laws, decrees or regulations in Canada
relating to restrictions on the export or import of capital, or affecting the
remittance of interest, dividends or other payments to non-resident holders of
the Company's Common Stock. See Item 7 "Taxation".
Except as provided in the Investment Canada Act (the "Act"), there are
no limitations specific to the rights of non-Canadians to hold or vote the
Common Stock of the Company under the laws of Canada or the Province of Ontario
or in the charter documents of the Company.
The Investment Canada Act requires a non-Canadian making an investment
which would result in the acquisition of control of a Canadian business, the
gross value of the assets of which exceed certain threshold levels or the
business activity of which is related to Canada's cultural heritage or national
identity, to either notify, or file an application for review with, Investment
Canada, the federal agency created by the Investment Canada Act.
The notification procedure involves a brief statement of information
about the investment on a prescribed form which is required to be filed with
Investment Canada by the investor at any time up to 30 days following
implementation of the investment. It is intended that investments requiring only
notification will proceed without government intervention unless the investment
is in a specific type of business activity related to Canada's cultural heritage
and national identity.
22
<PAGE>
If an investment is reviewable under the Act, an application for review
in the form prescribed is normally required to be filed with Investment Canada
prior to the investment taking place and the investment may not be implemented
until the review has been completed and the Minister responsible for Investment
Canada is satisfied that the investments is likely to be of net benefit to
Canada. If the Minister is not satisfied that the investment is likely to be of
net benefit to Canada, the non-Canadian must not implement the investment or, if
the investment has been implemented, must divest himself of control of the
business that is the subject of the investment.
ITEM 7. TAXATION
Management considers that the following general summary fairly
describes the principal Canadian federal income tax consequences applicable to a
holder of Common Stock of the Company who is a resident of the United States and
who is not a resident of Canada and who does not use or hold, and is not deemed
to use or hold, his Common Stock in connection with carrying on a business in
Canada (a "non-resident shareholder").
This summary is based upon the current provisions of the Income Tax Act
(Canada) (the ITA), the regulations thereunder (the "Regulations") and the
current publicly announced administrative and assessing policies of Revenue
Canada, Taxation. This description is not exhaustive of all possible Canadian
federal income tax consequences and, does not take into account or anticipate
any changes in law, whether by legislative, governmental or judicial action, nor
does it take into account provincial or foreign tax considerations which may
differ significantly from those discussed herein.
DIVIDENDS
Dividends paid on Common Stock of the Company to a non-resident holder
will be subject to withholding tax. The Canada-US Income Tax Convention (1980)
as amended by the protocol signed on March 17, 1995 (the "Treaty"), provides
that the normal, 25% withholding tax rate is reduced to 5% on dividends paid on
shares of a corporation resident in Canada (such as the Company) to residents of
the United States, and also provides for a further reduction of the 25% rate to
5% where the beneficial owner of the dividends is a corporation which is a
resident of the United States which owns at least 10% of the voting shares of
the corporation paying the dividend. However, the Company does not anticipate
paying dividends in the near future. See Item 5, "Nature of Trading Market."
CAPITAL GAINS
A non-resident of Canada is not subject to tax under the ITA in respect
of a capital gain realized upon the disposition of a share of a public
corporation unless the share represents "taxable Canadian property" to the
holder thereof. The Company's Common Stock is listed on a prescribed
23
<PAGE>
exchange and therefore will be taxable Canadian property to a non-resident
holder if, at any time during the period of five years immediately preceding the
disposition, the non-resident holder, non-arms length persons, or the
non-resident together with all such persons owned not less than 25% of the
issued shares of any class of the capital stock of the Company.
In the case of a non-resident holder to whom shares of the Company
represent taxable Canadian property and who is resident in the United States, no
Canadian taxes will be payable on a capital gain realized on such shares by
reason of the Treaty unless the value of such shares is derived from real
property or natural resources situated in Canada. However, in such case, certain
transitional relief under the Treaty may be available. In certain circumstances,
the Treaty allows Canada to tax former residents on gains from the disposition
of taxable Canadian property where such property was owned at the time of their
departure from Canada or was received in substitution therefor in a transaction
that is tax-free under Canadian law.
ITEM 8. SELECTED FINANCIAL DATA
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
more detailed consolidated financial statements and notes thereto appearing
elsewhere in this Form 20-F. The Company maintains its books and records in
Canadian Dollars, but has reconciled such financial data to United States
dollars (see "Exchange Rate Data") and has prepared its consolidated financial
statements contained in this Form 20-F in accordance with generally accepted
auditing standards in the United States. See "Report of Independent Auditors"
and "Consolidated Financial Statements." All information should be read in
conjunction with the consolidated financial statements of the Company and the
notes contained elsewhere in this Form 20-F.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
<S> <C> <C> <C>
Statement Of Operations Data:
Revenue.............................. $764 $4,705 $12,503
Gross Profit......................... 505 1,816 4,908
Operating Expenses................... 469 1,622 4,442
Income From Operations............... 36 194 467
Net Income........................... 30 138 351
Earnings Per Share................... .03 .11 .21
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working Capital...................... $ 4 $ (10) $ (161)
Total Assets......................... 362 1,274 4,849
Long-Term Debt....................... 24 37 628
Total Liabilities.................... 434 838 3,063
Shareholders' Equity................. 363 436 1,786
</TABLE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS.
The statements contained in this Form 20-F that are not historical are
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including statements regarding the
Company's expectations, intentions, beliefs or strategies regarding the future.
Forward looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward looking statements included in this Form-20F are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward looking statements.
GENERAL
The Company is a provider of IT staffing services, primarily in
Toronto, Ontario, Canada, supplying qualified IT professionals to its customers
as independent contractors for short and long term assignments and for permanent
placement within such enterprises. The Company's customers include financial
service companies, software and other technology companies, Canadian
governmental entities and large multinational companies, including Merrill Lynch
Canada Inc., Bank of Montreal, Bell Sygma Inc., Revlon of Canada, Inc., IBM
Corporation and American Express Company. The Company has recently expanded its
operations into the United States and intends to develop a network of offices to
provide IT staffing services throughout North America.
For the year ended December 31, 1997 and the year ended December 31,
1998, the Company derived 96% and 95%, respectively, of its revenue in Canada
and the remainder in the United States. The Company's books and records are
recorded in Canadian dollars. For purposes of financial statement presentation,
the Company converts balance sheet data to U.S. dollars using the exchange rate
in effect at the balance sheet date. Income and expense accounts are translated
using an average
25
<PAGE>
exchange rate prevailing during the relevant reporting period. There can be no
assurance that the Company would have been able to exchange currency on the
rates used in these calculations. The Company does not engage in exchange rate
hedging transactions. A material change in exchange rates between U.S. and
Canadian dollars could have a material effect on the reported results of the
Company.
The Company's services are generally classified as either contract
services or permanent placement services. In the case of contract services, the
Company provides its customers with independent contractors or "contract
workers" who usually work under the supervision of the customer's management.
Generally, the Company enters into a time-and-materials contract with its
customer whereby the customer pays the Company an agreed upon hourly rate for
the contract worker. The Company pays the contract worker pursuant to a separate
consulting agreement. The contract worker generally receives between 75% and 80%
of the amount paid by the customer to the Company; however, such payment is
usually not based on any formula and may vary for different engagements. The
Company has been seeking to gain "preferred supplier status" with its larger
customers to secure a larger percentage of those customers' business. While such
status is likely to result in increased revenue and gross profit, it is likely
to reduce gross margin percentage because the Company is likely to accept a
lower hourly rate from its customers and there can be no assurance that it will
be able to reduce the hourly rate paid to its consultants.
Revenue from contract services is recognized as services are provided.
Similarly, expenses for contract services, which usually consist solely of
consulting fees paid to contract workers, are recognized as services are
provided. For the year ended December 31, 1997 and the year ended December 31,
1998, the gross margin on contract services revenue was approximately 23% and
26%, respectively. Contract services accounted for 79% of revenue and 46% of
gross profit for the year ended December 31, 1997 and approximately 82% of
revenue and 55% of gross profit for the year ended December 31, 1998.
In the future, the Company may perform contract services for customers
on a project by project basis whereby the Company will be engaged to complete a
particular, specified project. The Company may hire full time employees to
supervise these projects. These projects may be billed on a time-and-materials
basis or the Company may charge a fixed price for the project. If the Company
charges a fixed price for a project, it will be required to estimate the total
costs involved in the project and formulate a bid that contains an adequate
profit margin. If the Company is unable to accurately predict the costs of such
a project, or the costs of the project change due to unanticipated
circumstances, which may be circumstances that are beyond the control of the
Company, the Company may earn lower profit margins or suffer a loss on a given
project. Currently, the Company is not providing any IT professionals pursuant
to fixed price contracts.
In the case of permanent placement services, the Company identifies and
provides candidates to fill a permanent position for its customer. The Company
recognizes revenue when the IT professional commences employment. The Company
performs permanent placement services pursuant to three invoicing policies.
Contingency services are engagements in which the Company
26
<PAGE>
is only paid if it is successful in placing a candidate in a position.
Contingency exclusive services are similar to contingency services; however, the
Company is the only firm engaged to fill the position. Retained search services
are similar to contingency exclusive services, except that the Company receives
a non-refundable portion of the fee prior to performing any services, with the
remainder paid if the position is filled. Contingency, contingency exclusive and
retained search services accounted for approximately 71%, 18% and 11%,
respectively, of the Company's permanent placement services for the year ended
December 31, 1997 and 80%, 15% and 5% for the year ended December 31, 1998.
The Company calculates gross profit by subtracting the fees paid to
contractors from net revenue. The Company does not attribute any direct costs to
permanent placement services; therefore the gross profit margin on such services
is 100% of revenue. As a result, the addition of permanent placement revenue to
contract services revenue has a significant effect on the gross profit margin of
the Company as a whole. Permanent placement services accounted for 21% of
revenue and 54% of gross profit for the year ended December 31, 1997 and 18% of
revenue and 45% of gross profit for the year ended December 31, 1998.
The Company anticipates expanding into new regional markets by
establishing new offices or by acquiring or investing in complementary or
competitive companies. The Company has not yet identified any acquisition
candidates and has no agreements, plans, or arrangements with respect to such
acquisitions or investments. The Company expects the cost of opening and funding
a new office to range from $200,000 to $500,000, depending on the size of the
office and the costs of doing business in the city in which the office is to be
located. Such costs will primarily consist of leasing office space, purchasing
or leasing office equipment and computer hardware and other related expenses
incurred prior to the commencement of operations in new locations. Such costs
also include operating expenses, such as payroll and advertising, prior to such
time that the new office is able to generate significant cash flow from
operations. The opening of new offices in new regional markets results in
increased operating expenses including, but not limited to, salaries, equipment,
insurance, marketing and public relations. Senior management also devotes
resources to training and management support. Based on the experience of the
Company's principals, the Company expects newly opened offices to become
productive within 6 to 12 months of opening. Although there can be no assurance
that such expectations will be satisfied, the Company's expectations in terms of
productivity for new offices by the 12th month of operations are: 30 contractors
and between $30,000 to $50,000 in permanent placement sales per month with
annual revenues of approximately $450,000. The Company is likely to utilize
acquisitions as an attempt to avoid or limit these costs, but the Company will
incur other costs as a result of any acquisitions, including funding the
purchase price and expenses related to the integration of operations and
training of new employees. With regard to previous acquisitions, integration
costs were expensed in the period that they were incurred an the Company expects
to continue to do so with future acquisitions. The Company intends its
acquisition targets to be small companies who can benefit from the Company's
advanced IT and other operating systems. There can be no assurance that
integrating the Company's operations with those of acquired companies will
result in improvements in such companies' operations or increased revenue from
such operations.
In April 1998, the Company completed the acquisition of all the issued
and outstanding
27
<PAGE>
shares of SCI and SPSI for aggregate consideration of $100,007 and 174,551
Common Shares. In addition, the Company issued 113,459 Common Shares to Globe
Capital Corporation for services in connection with the acquisition. SPSI is
inactive but holds certain assets utilized by Systems in its operations. The
acquisition was effective as of January 2, 1997. Declan French, the President
and Chairman of the Board of the Company, participated in the management of
Systems during 1997 and the Company and Systems shared data and operating
information during the year ended December 31, 1997. Accordingly, the Company's
Consolidated Financial Statements incorporate the operations of Systems since
January 1, 1997.
On May 19, 1998, the Company completed the acquisition of all the
issued and outstanding shares of capital stock of ICS for $303,555 in cash and
130,914 Common Shares to John A. Irwin, who was not affiliated with the Company
prior to this acquisition. In connection with the acquisition, ICS made a
distribution to Mr. Irwin of certain ICS assets that were not necessary for the
operation of the business. The transaction was effective as of January 1, 1998.
Declan French and other officers of the Company participated in the management
of ICS during the year ended December 31, 1998. Accordingly, the Company's
Consolidated Financial Statements incorporate the operation of ICS since January
1, 1998.
In November 1998, the Company completed the acquisition of certain
assets of Southport from Mr. Michael Carrazza for $50,000 in cash and 40,000
shares of Common Stock. The 40,000 shares were not issued until June 2, 1999.
Each acquisition was accounted for using the purchase method of
accounting, which requires that the purchase price be allocated to the assets of
the acquired entity based on fair market value. In connection with the
acquisitions of Systems, ICS and certain assets of Southport the Company
recorded $434,657, $851,763 and $100,000, respectively, in goodwill, which is
being amortized over thirty years in accordance with generally accepted
accounting principles as applied in the United States.
RESULTS OF OPERATIONS
The following table presents certain financial data of the Company as a
percentage of the Company's revenue based on information derived from the
Company's financial statements.
<TABLE>
<CAPTION>
YEAR ENDED,
DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Sales......................................... 100% 100% 100%
Contractor Costs.............................. 34% 61% 61%
Gross profit.................................. 66% 39% 39%
Operating Expenses............................ 61% 34% 39%
Income from operations........................ 5% 4% 4%
Net income.................................... 4% 3% 3%
</TABLE>
28
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
REVENUE. Revenue for year ended December 31, 1998 increased by $7.8
million, or 166%, to $12.5 million, as compared to $4.7 million for the year
ended December 31, 1997. The increase is primarily attributable to the
acquisition effective January 1, 1998 of ICS, which had sales of $4.38 million
for the year ended December 31, 1998. Also contributing to the increase was an
increase of $530,000 in the sales of Systems as a result of improvements in
operations since it was acquired by the Company effective January 2, 1997, and
growth in the contract sales in the Toronto office. Revenue from contract
services and permanent placement services accounted for 82% and 18%,
respectively, of revenue for the year ended December 31, 1998 as compared to 79%
and 21%, respectively, for the year ended December 31, 1997.
CONTRACTOR COSTS. Contractor costs for the year ended December 31, 1998
increased by $4.7 million, or 163%, to $4.9 million, as compared to $1.8 million
for the year ended December 31, 1997. This increase was due to the increased
volume of contract services. As a percentage of revenue from contract services,
contractor costs decreased from 77% to 74% as a result of a higher margin mix of
contractors placed.
GROSS PROFIT. Gross profit for the year ended December 31, 1998
increased by $3.1 million, or 170%, to $4.9 million, as compared to $1.8 million
for the year ended December 31, 1997. This increase was attributable to the
aforementioned increase in revenue during the year ended December 31, 1998. As a
percentage of revenue, gross profit increased to 39.2% for the year ended
December 31, 1998 as compared to 38.6% for the year ended December 31, 1997.
This increase was due to the slight decrease in the percentage of revenue which
was derived from contract services.
OPERATING EXPENSES. Operating expenses for the year ended December 31,
1998 increased by $2.2 million, or 173%, to $4.4 million, as compared to $1.6
million for the year ended December 31, 1997. This increase was primarily
attributable to increases of $1,861,553 in selling expenses and $980,934 in
administrative expenses at ICS during the year ended December 31, 1998.
Administrative expenses at the IT Staffing Division also increased as the
Company expanded its infrastructure to support operations from multiple
locations and operated additional offices. As a percentage of revenue, operating
costs increased to 38.6% for the year ended December 31, 1998 from 34% for the
year ended December 31, 1997 due to an increase in the number of locations and
volume of transactions.
ACCOUNTS RECEIVABLE. The Company had accounts receivable of $2,184,783
for the year ended December 31, 1998 as compared to $791,427 for the year ended
December 31, 19997. Accounts receivable represented 17.5% of revenues for the
year ended December 31, 1998 as compared to 16.8% in the year ended December 31,
1997.
NET INCOME. Net income for the year ended December 31, 1998 increased
by $212,782, or 154% to $351,190, as compared to $138,408 for the year ended
December 31, 1997 due to, among other things, the reasons enumerated above.
29
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Revenue for the year ended December 31, 1997 increased by $3.9
million, or 510%, to $4.7 million, as compared to $764,000 for the year ended
December 31, 1996. The increase is primarily attributable to the acquisition of
Systems, which had revenue for the year ended December 31, 1997 of $2.0 million,
effective January 2, 1997, and an increase of $1.7 million of revenue during
such period from contract services at the IT Staffing Division as a result of
internal growth. Revenue from contract services and permanent placement services
accounted for 79% and 21%, respectively, of revenue for the year ended December
31, 1997 as compared to 39% and 61%, respectively, for the year ended December
31, 1996.
CONTRACTOR COSTS. Contractor costs for the year ended December 31, 1997
increased by $2.6 million, or 1000%, to $2.9 million, as compared to $260,000
for the year ended December 31, 1997. This increase was attributable to the
increased volume of contract services. As a percentage of revenue from contract
services, contractor costs decreased to 78% for the year ended December 31, 1997
from 88% for the year ended December 31, 1996 primarily as a result of an
increase in average hourly billing rates for the Company's contract services.
GROSS PROFIT. Gross profit for the year ended December 31, 1997
increased by $1.3 million, or 256%, to $1.8 million, as compared to $505,000 for
the year ended December 31, 1996. This increase was attributable to the
aforementioned increase in revenue. As a percentage of revenue, gross profit
decreased to 38% for the year ended December 31, 1997 as compared to 66% for the
year ended December 31, 1996. This decrease was due to the increase in the
percentage of revenue which was derived from contract services.
OPERATING EXPENSES. Operating expenses for the year ended December 31,
1997 increased $1.2 million, or 234%, to $1.6 million, as compared to $470,000
for the year ended December 31, 1997. This increase was primarily attributable
to the acquisition of Systems, which incurred operating expenses of $515,000
during the year ended December 31, 1997, and an increase of $442,000 in selling
expenses at the IT Staffing division due to increased volume of sales.
Administrative expenses at the IT Staffing Division also increased as the
Company expanded infrastructure to support operations from multiple locations.
As a percentage of revenue, operating costs decreased to 34% for the year ended
December 31, 1997 from 61% for the year ended December 31, 1996 as a result of
increased revenue since many administrative costs are relatively fixed and do
not vary with revenue.
ACCOUNTS RECEIVABLE. The Company had accounts receivable of $761,570
for the year ended December 31, 1997, as compared to $211,928 for the year ended
December 31, 1996. Accounts receivable represented 16.2% of revenues for the
year ended December 31, 1997, as compared to 27.7% for the year ended December
31, 1996. The decrease as a percentage of revenues stems from the fact that a
large portion of 1996 revenues were in the last part of the year and were not
yet paid at December 31, 1996.
30
<PAGE>
NET INCOME. Net income for the year ended December 31, 1997 increased
by $108,000, or 360%, to $138,000 for the year ended December 31, 1997 as
compared to $30,000 for the year ended December 31, 1996 as a result of, among
other things, the reasons enumerated above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are cash flow from operations and
a credit line with the Toronto-Dominion Bank ("TDB").
At December 31, 1998, the Company had cash of $0 and working capital of
$(161,000). During the year ended December 31, 1998, the Company had a cash flow
from operations of $45,938, due primarily to an increase in accounts receivable
of $1,393,356, which was offset by net income of $212,782 and an increase in
accounts payable of $1,058,432. The increase in accounts receivable is primarily
due to the increase in revenue for the year ended December 31, 1998 as compared
to the year ended December 31, 1997. At December 31, 1997, the Company had cash
and cash equivalents of $10,000, and a working capital deficiency of $10,000.
For the year ended December 31, 1997, the Company had a cash flow deficiency
from operations of $70,000, due primarily to an increase in accounts receivable
of $577,000, which was partially offset by increase in accounts payable of
$317,000 and net income of $138,000.
For the year ended December 31, 1998, the Company had cash flow from
financing activities of $1,708,362, attributable primarily to proceeds from the
issuances of Common Shares. For the year ended December 31, 1997, the Company
had cash flow from financing activities of $250,000 attributable primarily to
the increase in Notes payable and bank indebtedness. During the year ended
December 31, 1998, the Company received $1,075,253.
The Company's arrangement with TDB, which was revised in October 1998,
allows for an operating line, payable on demand, of up to $650,000. Outstanding
balances bear interest at 1.75% over TDB's prime rate. The line is secured by
substantially all of the Company's assets, an assignment of life insurance on
the life of Declan French to the extent of $200,000, and is personally
guaranteed by Declan French and his wife to the extent of $130,000. The loan is
subject to certain financial covenants including a minimum net worth of
$562,065. At December 31, 1998, there was $701,234 outstanding on this line.
As of December 31, 1998, the Company had a total of $679,221 due to
BDC pursuant to four separate loans. The loans bear interest at the BDC's prime
rate plus 4% to 5% and are being repaid in monthly installments which currently
aggregate $17,813.69. In addition to interest, the Company granted BDC an option
to acquire 22,125 Common Shares for an aggregate exercise price of $1.00 and to
pay BDC a royalty equal to .063% of gross sales until August 2003. The Company
is restricted from paying dividends until these loans have been repaid to BDC.
On December 1, 1998 the Company obtained an additional loan of $196,800 from
BDC. The loan bears interest at 11% and is to be repayable in 60 equal payments
commencing on April 23, 1999. In addition, the Company shall pay BDC additional
interest in the form of a royalty on sales equal to .0184% of the
31
<PAGE>
Company's gross sales consolidated beginning in the month following the initial
disbursement of the loan or on January 23, 1999, whichever comes later.
During the year ended December 31, 1998, the Company had a cash flow
deficit from investing activities of $1,763,545, primarily attributable to the
aforementioned acquisition of ICS. During the year ended December 31, 1997, the
Company had a cash flow deficit from investing activities of $184,000, primarily
attributable to the aforementioned acquisition of Systems.
During the fourth quarter of 1997, the Company experienced a financial
loss of $7,000. This loss was a function of two issues relating to operations.
In October 1997, the Company had begun operations in a New York office and
incurred approximately $67,000 of expenses relating to the start-up. While this
type of expense is a re-occurring item with each office opening, the costs will
vary depending upon the size and location of each new office. The second issue
relates to significant management time, commitment and effort invested in the
development of HR Workbench and AppTracker software programs. These are key
strategic initiatives for the Internet oriented nature of the Company's
operations.
The Company has entered into employment and consulting agreements with
certain of its key employees. These agreements provide for significant salaries
and/or bonuses based on the Company and/or certain of its divisions' financial
performance. These agreements could affect the Company's liquidity.
The Company believes that cash flow from operations, together with the
proceeds from the offering on June 2, 1999, will be sufficient to satisfy the
Company's working capital needs for at least the next 18 months.
YEAR 2000 PREPARATION
Many computer systems and software products worldwide and throughout
all industries will not function properly, unless upgraded, as the year 2000
approaches, due to a once common programming standard that represents years
using two-digits. This is the "Year 2000 problem" that has received considerable
media coverage. The Company believes that it is Year 2000 compliant with respect
to its internal systems, including its HR Workbench software. AppTracker is also
designed to be Year 2000 compliant.
SEASONALITY
The Company also experiences a minor decrease in contract billings in
the second half of December as workers take their holidays; there also tends to
be a sluggish start to new billings in January due to lack of hiring momentum
from managers newly returned from holidays. Beyond these two instances, the
Company does not experience much seasonal fluctuation in its level of business.
32
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
MANAGEMENT
The directors and executive officers of the Company are as follows.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Declan French.............................. 54 Chairman of the Board of Directors, President and
Chief Executive Officer
John R. Wilson............................. 45 President-Systems
John A. Irwin.............................. 46 President-ICS
Lloyd MacLean.............................. 46 Chief Financial Officer and Director
William J. Neill........................... 37 Director
John Dunne................................. 59 Director
Blair Taylor............................... 46 Director
James Reddy................................ 59 Director
Robert M. Rubin............................ 58 Director
Michael Carrazza........................... 33 Director
</TABLE>
Set forth below is a biographical description of each director and
executive officer of the Company based on information supplied by each of them.
DECLAN FRENCH has served as the Company's Chairman of the Board of
Directors, President and Chief Executive Officer since the inception of the
Company in February 1994. Prior to founding the Company, Mr. French was
President and Chief Executive Officer of TEC Partners Ltd., an IT recruiting
firm in Toronto, Ontario. Mr. French has a diploma in Psychology and
Philosophy from the University of St. Thomas in Rome, Italy.
JOHN R. WILSON has served as President of Systems since 1982 and was
its sole shareholder prior to its sale to the Company in April 1998. Mr. Wilson
is a member of the Company's Operations Committee.
JOHN A. IRWIN has served as President of ICS since 1980 and was its
sole shareholder prior to its sale to the Company in May 1998. Mr. Irwin has a
degree in Computer Programming from Cambridge College of Arts and Technology.
Mr. Irwin is a member of the Company's Operations Committee.
LLOYD MACLEAN has served as the Company's Chief Financial Officer since
September 1997 and as a Director since June 1998. Mr. MacLean is the sole
officer and director of Globe Capital Corporation. From 1996 to 1997, Mr.
MacLean was Vice President and Chief Financial Officer of ING Direct Bank of
Canada. From 1994 until 1996, he was Vice President and Chief Financial Officer
of North American Trust, Inc., where he also served as a Vice President from
1990 until 1994. Mr. MacLean has an MBA from Harvard University and is a member
of the Canadian Institute
33
<PAGE>
of Chartered Accountants.
WILLIAM J. NEILL has served as a Director since the offering on June 2,
1999. Mr. Neill is currently a senior executive at Sun Media Corp. From October
1997 to October 1998 he served as Publisher and Chief Executive Officer of the
Financial Post. From 1996 until 1997, Mr. Neill was Publisher of the Ottawa Sun.
From 1993 until 1996, he was a Vice President of the Financial Post. Mr. Neill
has an MBA from Queens University in Kingston, Ontario.
BLAIR TAYLOR has served as a Director since the offering on June 2,
1999. Since July 1997, Mr. Taylor has served as Director of Finance and
Operations for Phoenix Research and Trading Corporation. From 1993 to 1997, he
was a managing director of CIBC Wood Gundy Securities, Inc. Mr. Taylor has a
degree in computer science from the University of Waterloo and is a member of
the Canadian Institute of Chartered Accountants.
JOHN DUNNE has served as a Director since the offering on June 2, 1999.
Mr. Dunne has been Chairman and Chief Executive Officer of the Great Atlantic &
Pacific Company of Canada, Ltd ("Great Atlantic") since August 1997, where he
also served as President and Chief Operating Officer from September 1996 until
August 1997. From November 1995 until September 1996, Mr. Dunne was Chairman and
Chief Executive Officer of Food Basics Ltd. Prior to that, he had served as Vice
Chairman and Chief Merchandising Officer of Great Atlantic.
JAMES REDDY has served as a Director since the offering on June 2,
1999. Mr. Reddy has served as Chief Financial Officer of Gemstar Communications,
Inc. since July 1998. From July 1997 to July 1998, Mr. Reddy was an independent
management consultant. He is a member of the Canadian Institute of Chartered
Accountants. From 1989 to 1997, he was employed by DFI Securities, Inc., most
recently as Chief Financial Officer.
ROBERT M. RUBIN has served as a Director since the offering on June 2,
1999. Mr. Rubin has served as Chairman of the Board of Directors of Diplomat
Direct Marketing Corporation since 1994. From October 1990 to the present, Mr.
Rubin has served as the Chairman of the Board of Directors and Chief Executive
Officer of American United Global Inc., a telecommunications and software
company ("AUGI"). Mr. Rubin was formerly a Director and Vice Chairman of the
Board of Directors, and is a minority stockholder of American Complex Care,
Incorporated ("ACCI"). In April 1995, the principal operating subsidiaries of
ACCI petitioned in the Circuit Court of Broward County, Florida for an
assignment for the benefit of creditors. Mr. Rubin is also a Director of Help At
Home, Inc., Western Power and Equipment Corporation, IDF International Inc.,
Response USA, Inc. and Med-Emerg International, Inc., each of which are public
companies. Mr. Rubin was Chairman of the Board of Directors, Chief Executive
Officer and remains a Director and a principal stockholder of ERD Waste Corp.,
which filed for bankruptcy protection in 1997. Mr. Rubin was the founder,
President, Chief Executive Officer and a Director of Superior Care, Inc. ("SCI")
from its inception in 1976 until May 1986 and continued as a Director of SCI
(now known as Olsten Corporation ("Olsten")) until the latter part of 1987.
Olsten, a New York Stock Exchange listed company, is engaged in providing home
care and institutional staffing services and health care management services.
34
<PAGE>
MICHAEL CARRAZZA has served as a Director since the offering on June 2,
1999. From September 1991 to November 1998 Mr. Carrazza was the Managing
Director and sole shareholder of Southport Consulting Corp. Southport provided
IT workers to clients, in the New York area, primarily in the financial sector.
He is currently the Managing Director of Craven Street Capital Partners, a
privately owned equity investment and management company which specializes in
acquisitions. Since 1997, Mr. Carrazza has held a Senior Corporate Finance
advisory position and has been the assistant to the Chief Financial Officer of
Mitchell Madison Group, a global management consultant. From 1995 to 1997, he
served as Vice-President of South Street Capital Group, a company specializing
in turnarounds for middle market public and private companies. From 1989 to
1995, Mr. Carrazza was an associate and an advisor to Goldman, Sachs & Co. where
he was involved in automating operations within the Investment Banking, Finance
and Treasury Divisions. Mr. Carrazza is a Certified Management Consultant and a
member of the Turnaround Management Association. Mr. Carrazza has a B.S. in
Electrical Engineering from the Pennsylvania State University and an MBA from
the Stern School of Business at New York University.
COMMITTEES OF THE BOARD
In July 1998, the Board of Directors formalized the creation of a
Compensation Committee, which is comprised of Blair Taylor, William J. Neill and
Declan French. The Compensation Committee has (i) full power and authority to
interpret the provisions of, and supervise the administration of, the Plan and
(ii) the authority to review all compensation matters relating to the Company.
The Compensation Committee has not yet met and has not yet formulated
compensation policies for senior management and executive officers. However, it
is anticipated that the Compensation Committee will develop a Company-wide
program covering all employees and that the goals of such program will be to
attract, maintain and motivate the Company's employees. It is further
anticipated that one of the aspects of the program will be to link an employee's
compensation to his or her performance, by granting stock options, or other
awards to employees who reach certain objectives. It is expected that salaries
will be set competitively relative to the IT staffing industry and that
individual experience and performance will be considered in setting salaries.
In July 1998, the Board of Directors also formalized the creation of an
Audit Committee, which is comprised of Lloyd MacLean, James Reddy, and John
Dunne. The Audit Committee is charged with reviewing the following matters and
advising and consulting with the entire Board of Directors with respect thereto:
(i) the preparation of the Company's annual financial statements in
collaboration with the Company's chartered accountants; (ii) annual review of
the financial statements and annual report of the Company; and (iii) all
contracts between the Company and the officers, directors and other affiliates
thereof. The Audit Committee, like most independent committees of public
companies, does not have explicit authority to veto any actions of the entire
Board of Directors relating to the foregoing or other matters; however, the
Company's senior management, recognizing their own fiduciary duty to the Company
and its shareholders, is committed not to take any action contrary to the
recommendation of the Audit Committee in any matter within the scope of its
review.
35
<PAGE>
OPERATIONS COMMITTEE
The Company has established an Operations Committee in order for the
Company's officers to exchange information on industry trends and promote "best
practices" among the officers. The head of each regional office and subsidiary
will serve on the Operations Committee. Currently, the Operations Committee
consists of Declan French, Lloyd MacLean, John A. Irwin and John R. Wilson.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Bylaws of the Company provide that the Company shall indemnify to
the fullest extent permitted by Canadian law directors and officers (and former
officers and directors) of the Company. Such indemnification includes all costs
and expenses and charges reasonably incurred in connection with the defense of
any civil, criminal or administrative action or proceeding to which such person
is made a party by reason of being or having been an officer or director of the
Company if such person was substantially successful on the merits in his or her
defense of the action and he or she acted honestly and in good faith with a view
to the best interests of the Company, and if a criminal or administrative action
that is enforced by a monetary penalty, such person had reasonable grounds to
believe his or her conduct was lawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Company and the Underwriters pursuant to the
foregoing provisions, or otherwise, the Company has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses,
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person or by the underwriters in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth compensation paid by
the Company and its subsidiaries for the last three fiscal year for services in
all capacities for its CEO and any other officer who received a total annual
salary and bonus from the Company which exceeded $100,000.
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation for services
rendered in all capacities to the Company, for the fiscal years ended December
31, 1998, December 31, 1997 and December 31, 1996 paid to the Company's Chief
Executive Officer, and the two other most highly compensated executive officers
(the "Named Executive Officers") at the end of the above fiscal years whose
total annual salary plus bonus exceeded $100,000 per annum.
36
<PAGE>
<TABLE>
<CAPTION>
YEAR/ OTHER
ENDED ANNUAL COM-
NAME AND PRINCIPAL POSITION DECEMBER COMPENSATION BONUS PENSATION
- --------------------------- -------- ------------ ----- ---------
<S> <C> <C> <C> <C>
Declan French..................................... 1998 $98,000 - $8,342
Chairman of the Board of Directors 1997 104,275 - 8,342
President and Chief Executive Officer 1996 108,350 - 8,668
John A. Irwin..................................... 1998 130,580 - 35,888
President-ICS 1997 195,000 8,342
1996 - - -
- -
John R. Wilson.................................... 1998 90,000 - 77,282
President-System 1997 83,420 - 20,855
1996 80,659 - 10,113
</TABLE>
EMPLOYMENT CONTRACTS
The Company has entered into an employment agreement with Declan French
whereby he will serve as the Company's Chairman of the Board of Directors,
President and Chief Executive Officer for a period of five years commencing on
June 2, 1999. Mr. French shall be paid a base salary of $97,900 (CDN$150,000)
and a bonus based on a percentage of the Company's net income.
On May 19, 1998, in connection with the acquisition of ICS, the Company
entered into an employment agreement for John A. Irwin whereby he will serve as
President of ICS. The employment agreement is for a term of three years
commencing on January 1, 1998, the effective date of the acquisition of ICS. Mr.
Irwin receives a salary of $130,580 (CDN$200,000) plus a quarterly bonus of 2%
of all permanent placement service revenue and 2% of the gross profit all
contract services revenue.
In February 1998, in connection with the acquisition of Systems, the
Company entered into a three year employment agreement with John R. Wilson
whereby he will serve as President of Systems at a salary of $90,000
(CDN$137,195) per year. The agreement was effective as of January 2, 1997. Mr.
Wilson receives a commission of 10% of the permanent placement revenue of
Systems. Additionally, he receives $0.65 for every hour of contract services
provided by IT professionals placed by Systems, provided that the gross margin
on such hour exceeds $6.50. Pursuant to the agreement, Mr. Wilson will have
control of the day-to-day management of Systems.
CONSULTING AGREEMENTS
In November 1998, in connection with the acquisition of certain assets
of Southport, the Company entered into a consulting agreement with Michael
Carrazza, the owner of Southport. Southport was engaged in the business of
providing IT workers to corporations in the New York, tri-state region. The
consulting agreement is for a term of two years and provides for an annual
salary of $125,000.
In May 1998, the Company entered into a consulting agreement with
Robert M. Rubin, a director of the Company, pursuant to which Mr. Rubin will
aid the Company in structuring and negotiating acquisitions, strategic
partnerships and other expansion opportunities. In exchange for such
services, Mr. Rubin has been granted an option to purchase 200,000 Common
Shares at a purchase price of $2.10 per share and a consulting fee of $80,000
per year. The consulting agreement
37
<PAGE>
is for a term of five years. Mr. Rubin has agreed not to sell, transfer, assign,
hypothecate or otherwise dispose of the Common Shares issuable upon exercise of
the options for a period of two years after exercise without the consent of the
Company.
COMPENSATION OF DIRECTORS
There are no standard arrangements for the payment of any fees to
directors of the Company for acting in such capacity. Directors are reimbursed
for expenses for attending meetings.
The Company has adopted a 1998 Stock Option Plan (the "Plan")
pursuant to which options will be granted to officers, directors, consultants,
key employees, advisors and similar parties who provide their skills and
expertise to the Company.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
The Plan will be administered by the Compensation Committee or the
Board of Directors, which will determine among other things, those individuals
who shall receive options, the time period during which the options may be
partially or fully exercised, the number of Common Shares issuable upon the
exercise of the options and the option exercise price.
The Plan is effective for a period for ten years, expiring in 2008.
Options to acquire an aggregate of 435,000 Common Shares may be granted to
officers, directors, consultants, key employees, advisors and similar parties
who provide their skills and expertise to the Company. The Plan is designed to
enable management to attract and retain qualified and competent directors,
employees, consultants and independent contractors. Options granted under the
Plan may be exercisable for up to ten years, generally require a minimum two
year vesting period and shall be at an exercise price all as determined by the
Board of directors provided that pursuant to the terms of the Underwriting
Agreement between the Company and the underwriters, the exercise price of any
options may not be less than the fair market value of the Common Shares on the
date of the grant. Options are non-transferable, and are exercisable only by the
participant (or by his or her respective guardian or legal representative)
during his or her lifetime or by his or her legal representatives following
death.
If a participant ceases affiliation with the Company by reason of
death, permanent disability or retirement at or after age 65, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other types of termination allow the participant 90 days to
exercise the option, except for termination for cause which results in immediate
termination of the option.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the Company become available again for
issuance under the Plan, subject to applicable securities regulation.
The Plan may be terminated or amended at any time by the Board of
Directors, except that the number of Common Shares reserved for issuance upon
the exercise of options granted under the Plan may not be increased without the
consent of the shareholders of the Company. As of December 31, 1998, no options
have been granted under the Plan.
38
<PAGE>
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
In April 1998, the Company acquired all the issued and outstanding
capital stock of SCI and SPSI from John R. Wilson for aggregate consideration of
$100,007 and 174,551 Common Shares. The acquisition was effective as of January
2, 1997. SPSI is inactive but holds certain assets utilized by Systems in its
operations. Mr. Wilson was not affiliated with the Company prior to the
acquisition.
On May 19, 1998, the Company completed the acquisition of all the
issued and outstanding capital stock of ICS for $303,955 in cash and 130,914
shares of Common Shares to John A. Irwin. In connection with the acquisition,
ICS made a distribution to Mr. Irwin of certain ICS assets that were not
necessary for the operation of the business. The transaction was effective as of
January 1, 1998. Mr. Irwin was not affiliated with the Company prior to the
acquisition.
The Company, through ICS, leases its Scarborough, Ontario office
facility from 1242541 Ontario Ltd., a corporation owned by John A. Irwin,
President of ICS, and certain other ICS employees. The three year lease, which
expires in May 2001, requires annual rental payments of $39,000, which the
Company believes is as least as favorable as could be obtained from a
non-affiliated third party.
In October 1997, in consideration for business consulting services,
including identifying, structuring and effecting the acquisitions of Systems and
ICS, the Company issued 113,459 Common Shares to Globe Capital Corporation,
which is controlled by Lloyd MacLean, the Company's Chief Financial Officer and
a Director.
In May 1998, the Company entered into a consulting agreement with
Robert M. Rubin, a director of the Company, pursuant to which Mr. Rubin will aid
the Company in structuring and negotiating acquisitions, strategic partnerships
and other expansion opportunities. In exchange for such services, Mr. Rubin
received an option to purchase 200,000 Common Shares at a purchase price of
$2.10 per share and a consulting fee of $80,000 per year. The consulting
agreement is for a term of five years. Mr. Rubin has agreed not to sell,
transfer, assign, hypothecate or otherwise dispose of the Common Shares issuable
upon exercise of the options for a period of two years after exercise without
the consent of the Company.
In November 1998, the Company purchased certain assets of Southport
from Michael Carrazza for $50,000 in cash and 40,000 Common Shares. Mr. Carrazza
has been a director since the offering on June 2, 1999. In connection with the
acquisition, Mr. Carrazza entered into a consulting agreement with the Company
for a period of two years. Mr. Carrazza shall be paid $250,000 in consideration
for his consulting services. Certain payments under such consulting agreement
are secured by a lien, secured in priority on the accounts receivable of the
Company.
While the Company was a private company, the Company lacked
sufficient independent directors to ratify the foregoing transactions. However,
management believes that the foregoing transactions were on terms no less
favorable to the Company than could have been obtained from unaffiliated third
parties. All future transactions between the Company and its officers, directors
or 5% shareholders, and their respective affiliates, will be on terms no less
favorable than could be obtained from unaffiliated third parties. In the event
that the Company enters into future affiliated transactions they will be
approved by the Company's independent directors who do not have an interest in
the transactions and who have access, at the Company's expense, to the Company's
counsel or independent legal counsel.
39
<PAGE>
PART II.
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
Not applicable.
40
<PAGE>
PART IV.
ITEM 17. FINANCIAL STATEMENTS
See Pages F-1 to F -22
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
(a). See the Exhibit to the Financial Statements on Page F-1.
(b). Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1(a) Form of Underwriting Agreement+
3(a) Bylaws of the Company+
(b) Articles of Incorporation dated February 11, 1994+
(c) Articles of Incorporation dated February 15, 1996+
(d) Articles of Incorporation dated April 15, 1998+
(e) Articles of Incorporation dated August 6, 1998+
(f) Articles of Incorporation dated January 19, 1999+
4(a) Form of Underwriters' Warrant+
(b) Specimen of Common Share Certificate+
5(a) Opinion of McMillan Binch+
10(a) Form of Financial Consulting Agreement+
(b) 1998 Stock Option Plan+
(c) Lease of the Company's Headquarters in Toronto, Ontario+
(d) Lease of the Company's office in New York, New York+
(e) Lease of the Company's office in Etobicoke, Ontario+
(f) Lease of the Company's office in Scarborough, Ontario+
(g) Lease of the Company's Office in Ottawa, Ontario+
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
(h) Employment Agreement between the Company and Delcan French dated
August 1998+
(i) Employment Agreement between the Company and John A. Irwin dated
May 19, 1998+
(j) Employment Agreement between the Company and John R. Wilson dated
February 8, 1998+
(k) Form of Consulting Agreement for the Company's Independent
Contractors+
(l) Form of Services Agreement for the Company's Customers+
(m) Agreement for the Acquisition of Capital Stock of International
Career Specialists Ltd.+
(n) Agreement for the Acquisition of Capital Stock of Systemsearch
Consulting Services, Inc. and Systems, PS, Inc.+
(o) License Agreement between the Company and Great Lakes Research
and Development, Ltd. dated August 1, 1998+
(p) Joint Venture Agreement between the Company and Great Lakes
Research and Development, Ltd. dated October 30, 1998+
(q) Consulting Agreement between the Company and Robert M. Rubin+
(r) Form of Employment Agreement with Confidentiality Provision+
(s) Asset Purchase Agreement between the Company and Southport
Consulting Company+
(t) Consulting Agreement between the Company and Michael Carrazza+
</TABLE>
+ Documents previously filed with the Company's Registration Statement and Post
Effective Amendment thereto.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this annual report to
be signed on its behalf by the undersigned, hereunder duly authorized.
For and on Behalf of
IT STAFFING LTD.
By: /s/ DECLAN FRENCH
-----------------------------------
Declan French
Chairman of the Board, President and
Chief Executive Officer
Date: June 30, 1999
43
<PAGE>
IT STAFFING LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997
TOGETHER WITH AUDITORS' REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 to F-22
</TABLE>
<PAGE>
SCHWARTZ LEVITSKY FELDMAN LLP
CHARTERED ACCOUNTANTS
TORONTO, MONTREAL, OTTAWA
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
IT Staffing Ltd.
We have audited the accompanying consolidated balance sheets of IT
Staffing Ltd. (incorporated in Canada) as of December 31, 1998 and 1997
and the related consolidated statements of income, cash flows and changes
in stockholders' equity for the years ended December 31, 1998 and 1997.
These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of IT Staffing Ltd. as of December 31, 1998 and 1997 and the
consolidated results of its operations and its cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles in the United States of America.
Toronto, Ontario
June 25, 1999 Chartered Accountants
1167 Caledonia Road
Toronto, Ontario M6A 2X1
Tel: 416-785-5353
Fax: 416-785-5663
F-2
<PAGE>
IT STAFFING LTD.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash -- 9,860
Accounts receivable (note 2) 2,184,783 761,570
Prepaid expenses 87,941 19,997
--------- ---------
2,272,724 791,427
CAPITAL ASSETS (note 3) 526,562 47,955
GOODWILL (note 4) 1,332,603 434,833
INVESTMENT IN NON-RELATED COMPANY (note 5) 130,438 --
DEFERRED CHARGES (note 6) 586,450 --
--------- ---------
4,848,777 1,274,215
--------- ---------
--------- ---------
</TABLE>
F-3
<PAGE>
IT STAFFING LTD.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 7) 734,034 196,248
Accounts payable 1,386,659 388,250
Income taxes payable 95,212 40,786
Note payable -- 104,858
Current portion of long-term debt (note 8) 218,251 21,191
Advances from stockholders -- 49,749
--------- ---------
2,434,156 801,082
LONG-TERM DEBT (note 8) 628,428 37,278
--------- ---------
3,062,584 838,360
--------- ---------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 9) 1,448,368 328,327
CUMULATIVE TRANSLATION ADJUSTMENT (139,026) (18,133)
RETAINED EARNINGS 476,851 125,661
--------- ---------
1,786,193 435,855
--------- ---------
4,848,777 1,274,215
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
IT STAFFING LTD.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
REVENUE
Contract services 10,273,956 3,729,703
Permanent placements 2,228,604 974,638
---------- ---------
12,502,560 4,704,341
COST OF CONTRACT SERVICES 7,594,533 2,888,540
---------- ---------
GROSS PROFIT 4,908,027 1,815,801
---------- ---------
EXPENSES
Selling 2,984,604 1,123,051
Administrative 1,354,561 373,627
Financial 102,351 125,594
---------- ---------
4,441,516 1,622,272
---------- ---------
INCOME BEFORE INCOME TAXES 466,511 193,529
Income taxes (note 10) 115,321 55,121
---------- ---------
NET INCOME 351,190 138,408
---------- ---------
---------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic 1,684,542 1,209,135
---------- ---------
---------- ---------
Fully diluted 1,906,667 1,309,135
---------- ---------
---------- ---------
EARNINGS PER WEIGHTED AVERAGE COMMON SHARE
Basic 0.21 0.11
---------- ---------
---------- ---------
Fully diluted 0.18 0.11
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
IT STAFFING LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
Common
Stock Cumulative
Number of Retained Translation
Shares Amounts Earnings Adjustments
---------- ------- -------- -----------
$ $ $
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 1,021,125 4 (12,747) 59
Common shares issued 288,010 328,323 -- --
Foreign currency translation -- -- -- (18,192)
Net income for the year -- -- 138,408 --
--------- --------- ------- --------
Balance as of December 31, 1997 1,309,135 328,327 125,661 (18,133)
Common shares issued 408,740 1,120,041 -- --
Foreign currency translation -- -- -- (120,893)
Net income for the year -- -- 351,190 --
--------- --------- ------- --------
Balance as of December 31, 1998 1,717,875 1,448,368 476,851 (139,026)
--------- --------- ------- --------
--------- --------- ------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
IT STAFFING LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Cash flows from operating activities:
Net income 351,190 138,408
----------- ---------
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Amortization 140,735 16,968
Amortization of goodwill 44,191 15,258
Increase in accounts receivable (1,524,174) (577,114)
Increase in prepaid expenses (83,531) (15,645)
Increase in accounts payable 1,058,432 317,281
Decrease in income taxes payable 59,095 34,365
----------- ---------
Total adjustments (305,252) (208,887)
----------- ---------
Net cash provided by (used in) operating activities 45,938 (70,479)
----------- ---------
Cash flows from investing activities:
Purchases of capital assets (638,867) (44,739)
Incorporation costs -- 733
Acquisition of goodwill (989,825) (140,028)
Acquisition of shares in non-related company (134,853) --
----------- ---------
Net cash used in investing activities (1,763,545) (184,034)
----------- ---------
Cash flows from financing activity:
Increase (decrease) in notes payable (101,140) 108,350
Increase in long-term debt 818,942 23,837
Proceeds from issuance of capital stock 1,075,253 --
Increase (decrease) in advances from shareholders (47,985) 21,716
Increase in deferred charges (606,300) --
Increase in bank indebtedness 569,592 96,601
----------- ---------
1,708,362 750,504
----------- ---------
Effect of foreign currency exchange rate changes (615) 8,126
----------- ---------
Net increase (decrease) in cash and cash equivalents (9,860) 4,117
Cash and cash equivalents
- Beginning of year 9,860 5,743
----------- ---------
- End of year -- 9,860
----------- ---------
----------- ---------
Interest paid 113,102 6,491
----------- ---------
----------- ---------
Income taxes paid -- --
----------- ---------
----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation
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. All significant
inter-company accounts have been eliminated.
Systemsearch Consulting Services Inc. was acquired on January 2, 1997
for $391,313. This amount was paid by the issuance of common shares and
a cash payment of $97,828. The purchase has been reflected as follows:
<TABLE>
<S> <C>
Consideration $391,313
Assumption of net liabilities 57,321
--------
Goodwill $448,634
--------
--------
</TABLE>
International Career Specialists Ltd. was acquired on January 1, 1998
for $652,188. This amount was paid by the issuance of common shares and
a cash payment of $326,094. The purchase was reflected as follows:
<TABLE>
<S> <C>
Consideration $652,188
Assumption of net liabilities 198,409
--------
Goodwill $850,597
--------
--------
</TABLE>
The assets of Southport Consulting Company, a New Jersey corporation
were acquired by IT Staffing Ltd. in a transaction effective October
31, 1998. The consideration for the acquisition was as follows:
<TABLE>
<S> <C>
Cash $ 50,000
Shares 200,000
--------
$250,000
--------
--------
</TABLE>
F-8
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
a) Principles of Consolidation (cont'd)
40,000 shares were issued.
The assets acquired are valued as follows:
<TABLE>
<S> <C>
Software $130,000
Office furniture and equipment 20,000
Goodwill 100,000
--------
$250,000
--------
--------
</TABLE>
b) Principal Business Activity
IT Staffing is an information technology staffing company, which along
with its subsidiaries System Search Consulting Services Inc. and
International Career Specialists Ltd., specialize in placing
information technology personnel on both a contract and permanent basis
System Search Consultants Inc. was purchased by IT Staffing Ltd. in a
transaction effective January 2, 1997. The acquisition was accounted
for using the purchase method.
International Career Specialists Ltd. was purchased by IT Staffing Ltd.
in a transaction effective January 1, 1998. The acquisition was
accounted for using the purchase method.
c) Cash and Cash Equivalents (Bank Indebtedness)
Cash and cash equivalents (bank indebtedness) include cash on hand,
amounts due from and to banks, and any other highly liquid investments
purchased with a maturity of three months or less. The carrying amount
approximates fair value because of the short maturity of those
instruments.
d) Other Financial Instruments
The carrying amount of the company's other financial instruments
approximate fair value because of the short maturity of these
instruments or the current nature of interest rates borne by these
instruments.
e) Long-term Financial Instruments
The fair value of each of the company's long-term financial assets and
debt instruments is based on the amount of future cash flows associated
with each instrument discounted using an estimate of what the company's
current borrowing rate for similar instruments of comparable maturity
would be.
F-9
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
f) Capital Assets
Property and equipment are recorded at cost and are depreciated on the
declining balance basis over their estimated useful lives.
g) Revenue
Revenue from contract placements is recognized as services are
performed. Revenue from permanent placements are recognized upon
commencement of employment.
h) Goodwill
Goodwill representing the cost in excess of the fair value of net
assets acquired related to the acquisitions of System Search Consulting
Services Inc., International Career Specialists Ltd., and the assets of
Southport Consulting Company is being amortized on a straight-line
basis over a thirty year period. The Company calculates the
recoverability of goodwill on a quarterly basis by reference to
estimated undiscounted future cash flows.
i) Foreign Currency Translation
The translation of the consolidated financial statements from Canadian
dollars ("CDN $") into United States dollars is performed for the
convenience of the reader. Balance sheet accounts are translated using
closing exchange rates in effect at the balance sheet date and income
and expense accounts are translated using an average exchange rate
prevailing during each reporting period. No representation is made that
the Canadian dollar amounts could have been, or could be, converted
into United States dollars at the rates on the respective dates or at
any other rates. Adjustments resulting from the translation are
included in the cumulative translation adjustments in stockholders'
equity.
i) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principals in the United States of
America requires management to make estimates and assumptions that
affect certain reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-10
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
j) Comprehensive Income
In 1998, the company adopted the provisions of SFAS No. 130 "Reporting
Comprehensive Income". This standard requires companies to disclose
comprehensive income in their financial statements. In additional to
items included in net income, comprehensive income includes items
currently charged or credited directly to stockholders' equity, such as
the changes in unrealized appreciation (depreciation) of securities and
foreign currency translation adjustments.
2. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Accounts receivable 2,217,392 796,523
Less: Allowance for doubtful accounts 32,609 34,953
--------- -------
2,184,783 761,570
--------- -------
--------- -------
</TABLE>
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998 1997
------------------------------------ -------
Accumulated
Cost Amortization Net Net
------- ------------ -------- ------
$ $ $ $
<S> <C> <C> <C> <C>
Furniture and equipment 227,284 52,151 175,133 24,565
Computer equipment 268,924 57,381 211,543 16,399
Computer software 136,510 74,777 61,733 6,991
Leasehold improvements 5,263 526 4,737 --
Software database 10,551 1,583 8,968 --
Website development 3,147 472 2,675 --
HR Work bench development 46,652 -- 46,652 --
Apptracker development 15,121 -- 15,121 --
------- ------- ------- ------
713,452 186,890 526,562 47,955
------- ------- ------- ------
------- ------- ------- ------
Assets under capital lease 301,291 40,539 260,753 --
------- ------- ------- ------
------- ------- ------- ------
</TABLE>
Amortization for the year amounted to $140,735 ($16,968 in 1997).
F-11
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
4. GOODWILL
Goodwill is the excess of cost over the value of assets acquired over
liabilities assumed.
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Cost 1,389,123 450,091
Accumulated amortization 56,520 15,258
--------- -------
Net 1,332,603 434,833
--------- -------
--------- -------
AMORTIZATION FOR THE YEAR 44,191 15,258
--------- -------
--------- -------
</TABLE>
5. INVESTMENT IN NON-RELATED COMPANY
In September 1998, IT Staffing Ltd. was issued 95,000 common shares of Fax
Forward Inc. in lieu of $130,438 receivable owing to them. The investment is
accounted for using the cost method. Fax Forward Inc. has issued an offering
memorization as at March 15, 1999 in order to raise $15,000,000 through the
Issuance of 3,750,000 units. Each unit consists of 1 common share and
one-quarter of one share purchase warrants. At date hereof this offering has
not yet closed.
6. DEFERRED CHARGES
Deferred charges are related to the initial public offering as described in
note 15. These costs will be charged against the proceeds of the new share
issuance in 1999.
F-12
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
7. BANK INDEBTEDNESS AND LINE OF CREDIT
The companies have available a line of credit to a maximum of $1,500,000,
which bears interest at Canadian prime plus 2.1% per annum and is secured by
a general assignment of book debts, a general security agreement and
guarantees and postponements of claims by various affiliated companies.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
a. Included therein:
A BDC loan secured by a general security agreement, payable in 59
equal monthly payments of $3,261 starting April 23, 1999, plus
interest of the BDC base rate plus 2% per annum. Currently the
interest rate is 11%. In addition IT Staffing Ltd. shall pay interest
monthly by way of royalty of 0.018% per annum of IT Staffing Ltd.'s
projected annual gross sales 195,656 --
A Business Development Bank of Canada ("BDC") loan, secured by a
general security agreement, payable in 44 equal monthly payments of
$4,348 from October 23, 1998, plus interest of the BDC base rate plus
4% per annum. Current the interest rate is 12.75%. In addition IT
Staffing Ltd. shall pay interest monthly by way of a royalty of
0.0426% per annum of IT Staffing Ltd.'s projected annual
gross sales 243,496 --
A BDC loan, secured by a general security agreement, payable in 47
monthly payments of $3,261 plus interest of the BDC base rate plus 4%
per annum. Currently, the interest rate is 12.75%. In addition IT
Staffing Ltd. shall pay interest monthly by way of royalty of 0.0198%
per annum of its projected gross annual sales 182.613 --
A BDC loan secured by a general security agreement, payable in 22
remaining monthly payments of $653 plus interest of the BDC
operational interest rate prime plus 5%, per annum.
Currently, the interest rate if 13.75% 20,218 --
</TABLE>
F-13
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
8. LONG-TERM DEBT (cont'd)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
A BDC loan secured by a general security agreement payable in 23
remaining monthly payments of $653 plus interest of the BDC base rate
plus 3% per annum. Currently, the interest rate is 11.75% 15,000 23,749
A National Bank of Canada non-revolving, demand loan currently with
no outstanding balance. Payments were made on a monthly basis in the
amount of $608 for 24 months, at a rate equal to the National Bank of
Canada Canadian prime rate plus 2% per annum -- 5,746
Various capital leases with various payment terms and interest rates 189,696 --
------- -------
846,679 58,469
Less: Current portion 218,251 21,191
------- -------
628,428 37,278
------- -------
------- -------
</TABLE>
b) Future principal payments obligations are as follows:
<TABLE>
<S> <C>
1999 $218,251
2000 203,944
2001 160,262
2002 146,158
2003 107,840
Thereafter 10,224
--------
$846,679
--------
--------
</TABLE>
c) Interest expense with respect to the long-term debt amounted to $60,317
($6,491 in 1997).
d) Pursuant to the BDC loan agreement, BDC has the option to acquire
22,125 shares for an aggregate consideration of $1. The fair market
value of these shares at the time of issuance was $62,393 ($2.82
share). The imputed discount on these options is being amortized over
the term of the loan as interest.
F-14
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
9. CAPITAL STOCK
Authorized
An unlimited number of common shares
<TABLE>
<CAPTION>
Issued Shares $
------ ------ -
<S> <C> <C>
December 31, 1998 1,717,875 1,448,368
December 31, 1997 1,309,135 328,327
</TABLE>
On January 2, 1997, 288,010 shares were issued in conjunction with
the acquisition of System Search Consulting Services Inc. with a
carrying value of $328,323.
On January 1, 1998, 130,914 shares were issued in conjunction with
the acquisition of International Career Specialists Ltd. with a
carrying value of $349,528.
A private placement of 196,370 shares was completed in March 1998 yielding
proceeds of $423,639.
A second private placement of 85,094 shares was completed in April 1998
yielding proceeds of $216,814.
The company redeemed 43,637 shares for $69,940 in April 1998.
The company has outstanding stock options issued in conjunction with its
long-term financing agreements for 22,125 shares (see note 8d) and
additional options issued to a consultant of the company for 200,000 shares
exercisable at $2.10/share.
Subsequent to June 30, 1998, the company granted options to purchase 50,000
shares to a vice president. The options are exercisable at the issue price
of common shares in the proposed initial public offering.
On October 31, 1998, the company issued 40,000 shares in the acquisition of
the assets of Southport Inc. The cost of these shares was $200,000.
The company has initiated a stock option plan for officers, directors,
consultants, key employees and advisors. Under the plan, options to acquire
an aggregate of 435,000 common shares may be granted at the discretion of
the board of directors. The shares will require a two year vesting period
and will be exercisable for up to 10 years. The option exercise price will
be determined by the board of directors and may not be less than the fair
market value of the common shares on the date of the granting of an option.
To date, no options have been granted under this plan.
F-15
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
9. CAPITAL STOCK (cont'd)
On August 6, 1998, the company split its stock. The result of the split
converted the outstanding shares from 1,281,667 to 1,667,875 shares. The
number of shares indicated above have been retroactively restated in all
periods to reflect the stock split on august 6, 1998.
The fully diluted shares outstanding after the effect of the stock split is
1,900,000 shares.
Weighted average number of shares outstanding is calculated on a fully
diluted basis after giving effect to the stock split.
10. INCOME TAXES
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Income taxes consist of:
Amount calculated at Federal and Provincial statutory rates 115,471 70,702
------- --------
Increase (decrease) resulting from:
Permanent differences 10,407 2,714
Timing differences (1,471) (29)
Other differences (9,086) (18,266)
------- --------
(150) (15,581)
------- --------
Current income taxes 115,321 55,121
------- --------
------- --------
</TABLE>
F-16
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
11. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
Reporting Comprehensive Income and its components in the financial
statements. However, it does not affect net income or stockholders' equity.
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Net income 351,190 138,408
Other comprehensive loss (120,893) (18,192)
-------- --------
Comprehensive income 230,297 120,216
-------- --------
-------- --------
</TABLE>
The components of accumulated other comprehensive income (loss) are as
follows:
<TABLE>
<S> <C>
Accumulated other comprehensive income, December 31, 1996 $ 59
Foreign currency translation adjustments for the year ended
December 31, 1997 (18,192)
---------
Accumulated other comprehensive losses, December 31, 1997 (18,133)
Foreign currency translation adjustments for the year ended
December 31, 1998 (120,893)
---------
Accumulated other comprehensive losses December 31, 1998 $(139,026)
---------
---------
</TABLE>
The foreign currency translation adjustments are not currently adjusted for
income taxes since the company is situated in Canada and the adjustments
relate to the translation of the financial statements from Canadian dollars
into United States dollars done only for the convenience of the reader.
12. TRANSACTIONS WITH RELATED COMPANIES
Prior to IT Staffing Ltd. purchasing shares of International Career
Specialists Ltd. on January 1, 1998, the company rented premises from
International Career Specialists Ltd. The land and building were disposed of
as part of the purchase price.
F-17
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
13. LEASE COMMITMENTS
a) Minimum payments under operating leases for premises occupied by the
company and its subsidiaries in Toronto and New York, exclusive of most
operating costs and realty taxes, for the fiscal year end of December
31 for the next five years are as follows:
<TABLE>
<S> <C>
1999 $173,064
2000 173,141
2001 169,195
2002 43,295
2003 40,786
Thereafter 13,838
--------
$613,319
--------
--------
</TABLE>
14. SALES INFORMATION
a) Sales by Geographic Area
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Canada 11,877,432 4,503,642
United States of America 625,128 200,699
---------- ---------
12,502,560 4,704,341
---------- ---------
---------- ---------
</TABLE>
b) Net Income by Geographic Area
The company's accounting records do not readily provide information on
net income by geographic area. Management is of the opinion that the
proportion of net income based principally on sales, presented below,
would fairly present the results of operations by geographic area.
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Canada 333,630 131,822
United States of America 17,560 6,586
------- -------
351,190 138,408
------- -------
------- -------
</TABLE>
F-18
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
14. SALES INFORMATION (cont'd)
c) Identifiable Assets by Geographic Area
All identifiable assets were located in Canada for 1998.
d) Revenues from Major Customers
The consolidated entity had the following revenues from major
customers:
1998
----
No single customer consisted of more than 10% of the revenues.
1997
----
<TABLE>
<S> <C> <C>
Bank of Montreal $674,426 14%
SHL Systemhouse 511,951 11%
</TABLE>
e) Purchases from Major Suppliers
There were no significant purchases from major suppliers.
15. SUBSEQUENT EVENTS
On June 3, 1999 the company successfully completed as initial public
offering on NASDAQ. The company issued 1,100,000 shares for gross proceeds
of $5,500,000.
16. COMPARATIVE FIGURES
Certain figures in the 1997 financial statements have been reclassified to
conform with the basis of presentation used in 1998.
F-19
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
17. STOCK OPTION PLAN
In July 1998, the directors of the company adopted and the stockholders
approved the adoption of the company's 1998 Stock Option Plan.
The plan will be administrated by the Compensation Committee or the Board of
Directors, which will determine among other things, those individuals who
shall receive options, the time period during which the options may be
partially of fully exercised, the number of common shares issuable upon the
exercise of the options and the option exercise price.
The plan is effective for a period for ten years, expiring in 2008. Options
to acquire 435,000 common shares may be granted to officers, directors,
consultants, key employees, advisors and similar parties who provide their
skills and expertise to the company. The plan is designed to enable
management to attract and retain qualified and competent directors,
employees, consultants and independent contractors, Options granted under
the plan may be exercisable for up to ten years, generally require a minimum
two year vesting period, and shall be at an exercise price all as determined
by the Board of Directors provided that, pursuant to the terms of the
Underwriting Agreement between the company and Underwriters, the exercise
price of any options may not be less than the fair market value of the
common shares on the date of the grant. Options are non-transferable, and
are exercisable only by the participant (or by this or her guardian of legal
representative) during his or her lifetime or by his or her legal
representatives following death.
If a participant ceases, affiliation with the company by reason of death,
permanent disability or retirement at or after age 65, the option remains
exercisable for one year from such occurrence but not beyond the option's
expiration date. Other types of termination allow the participant 90 days to
exercise the option, except for termination for cause which results in
immediate termination of the option.
The company has agreed with the representative not to grant any options
under the plan at less than 100% of the fair market value of the common
shares at the date of the grant of the option.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the company become available again for issuance
under the plan, subject to applicable securities regulation.
The plan may be terminated or amended at any time by the Board of Directors,
except that the number of common shares reserved for issuance upon the
exercise of options granted under the plan may not be increased without the
consent of the shareholders of the company.
F-20
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
18. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect a company's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the company,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
F-21
<PAGE>
IT STAFFING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
ADMINISTRATIVE
Office and salaries and benefits 418,662 96,132
Rent 227,810 66,261
Management salaries and fees 321,231 --
Telephone 105,427 40,011
Office and general 65,131 60,898
Taxes and licenses 12,047 15,066
Insurance 16,940 8,751
Repairs and maintenance 2,387 3,486
Equipment rental -- 50,796
Amortization of goodwill 44,191 15,258
Amortization 140,735 16,968
--------- ---------
1,354,561 373,627
--------- ---------
--------- ---------
SELLING
Commissions 2,691,854 954,915
Advertising and promotion 233,397 144,455
Automobile and travel 59,353 23,681
--------- ---------
2,984,604 1,123,051
--------- ---------
--------- ---------
FINANCIAL
Bad debts 6,292 36,117
Interest and bank charges 83,718 42,153
Professional fees 12,341 47,324
--------- -------
102,351 125,594
--------- -------
--------- -------
</TABLE>
F-22
