U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-16025
HEADWAY CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2134871
(State of other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)
317 Madison Avenue, New York, New York 10017
(Address of principal executive offices)
(212) 672-6501
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the preceding 12 months (or for such shorter period that
the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or
15(d) of the Exchange Act subsequent to the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
11,589,727 shares of common stock.
FORM 10-Q
HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. Financial Information
Financial Statements
Consolidated Balance Sheets
March 31, 2001 (Unaudited) and December 31, 2000 3
Unaudited Consolidated Statements of Operations
Three Months Ended March 31, 2001 and 2000 4
Unaudited Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2001 5
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. Other Information 13
Signatures 13
FORWARD-LOOKING STATEMENT NOTICE
When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27a of the Securities Act of 1933 and Section 21e of the
Securities Exchange Act of 1934 regarding events, conditions, and financial
trends that may affect the Company's future plans of operations, business
strategy, operating results, and financial position. Persons reviewing this
report are cautioned that any forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that
actual results may differ materially from those included within the forward-
looking statements as a result of various factors. Such factors are
discussed under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and also include general
economic factors and conditions that may directly or indirectly impact the
Company's financial condition or results of operations.
2
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(Dollars In Thousands)
March 31, December 31,
2001 2000
--------- ----------
Assets
Current assets:
Cash and cash equivalents $ 1,016 $ 1,549
Accounts receivable, trade, net 56,389 53,714
Prepaid expenses and other current assets 1,195 1,151
Prepaid income taxes - 900
--------- ----------
Total current assets 58,600 57,314
Property and equipment, net 6,003 6,016
Intangibles, net 89,632 88,374
Deferred financing costs 1,204 1,308
Other assets 1,171 1,174
--------- ----------
Total assets $ 156,610 $ 154,186
========= ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,219 $ 3,576
Accrued expenses 4,365 4,853
Accrued payroll 11,967 17,248
Capital lease obligations, current portion 353 377
Income taxes payable 1,496 -
Earnouts payable 4,700 3,803
--------- ----------
Total current liabilities 25,100 29,857
Capital lease obligations, less current portion 209 291
Long-term debt, less current portion 75,500 69,700
Deferred rent 1,134 1,143
Deferred income taxes 456 456
Other liabilities 430 -
Stockholders' equity
Preferred stock---$.0001 par value, 5,000,000
shares authorized:
Series F, convertible preferred stock---$.0001 par
value, 1,000 shares authorized, issued and
outstanding (aggregate liquidation value $20,000) 20,000 20,000
Common stock---$.0001 par value, 20,000,000 shares
authorized, 11,589,727 shares issued and
outstanding 1 1
Additional paid-in capital 20,379 20,379
Treasury stock, at cost (3,211) (3,211)
Notes receivable (78) (84)
Deferred compensation (468) (497)
Retained earnings 18,008 16,399
Other comprehensive (loss) (850) (248)
--------- ----------
Total stockholders' equity 53,781 52,739
-------- ----------
Total liabilities and stockholders' equity $ 156,610 $ 154,186
========= ==========
See accompanying notes.
3
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Dollars In Thousands, except per share data)
Three months ended March 31,
2001 2000
---------- ----------
Revenues: $ 89,713 $ 96,315
Operating expenses:
Direct costs 63,891 69,896
Selling, general and administrative 18,681 20,141
Depreciation and amortization 1,386 1,280
---------- ----------
83,958 91,317
Operating income 5,755 4,998
Other (income) expenses:
Interest expense 2,075 1,848
Interest income (14) (23)
---------- ----------
2,061 1,825
Income before income tax expense 3,694 3,173
Income tax expense 1,710 1,354
---------- ----------
Net income 1,984 1,819
Preferred dividend requirements (375) (289)
---------- ----------
Net income available for common stockholders $ 1,609 $ 1,530
========== ==========
Basic earnings per common share $ .15 $ .14
========== ==========
Diluted earnings per common share $ .14 $ .13
========== ==========
See accompanying notes.
4
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2001
(Unaudited)
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------
Series F Convertible Additional
Preferred Stock Common Stock Paid-in Treasury Stock
Shares Amount Shares Amount Capital Shares Amount
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 1,000 $ 20,000 11,589,727 $ 1 $ 20,379 (675,100) $ (3,211)
Repayment of notes receivable - - - - - - -
Amortization of stock-based
compensation - - - - - - -
Preferred stock dividends - - - - - - -
Translation adjustment - - - - - - -
Cumulative effect of change in
accounting for derivative
financial instrument, net of
applicable income taxes of
$187,000 - - - - - - -
Change in fair value
of derivative, net
of applicable income
taxes of $137,000 - - - - - - -
Net income - - - - - - -
Comprehensive income - - - - - - -
- ------------------------- ----- --------- ---------- ------ ---------- -------- ----------
Balance at March 31, 2001 1,000 $ 20,000 11,589,727 $ 1 $ 20,379 (675,100) $ (3,211)
- ------------------------- ----- --------- ---------- ------ ---------- --------- ----------
5
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity, Continued
Three Months Ended March 31, 2001
(Unaudited)
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------
Accumulated
Other Total
Notes Deferred Retained Comprehensive Stockholders'
Receivable Compensation Earnings (loss) Equity
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 2000 $ (84) $ (497) $16,399 $ (248) $ 52,739
Repayment of notes receivable 6 - - - 6
Amortization of stock-based
compensation - 29 - - 29
Preferred stock dividends - - (375) - (375)
Translation adjustment - - - (172) (172)
Cumulative effect of
change in accounting
for derivative
financial instrument,
net of applicable income
taxes of $187,000 - - - (248) (248)
Change in fair value
of derivative, net of
applicable income
taxes of $137,000 - - - (182) (182)
Net income - - 1,984 - 1,984
-----
Comprehensive income - - - - 1,382
- ------------------------- ---------- ------- ------- ------ ---------
Balance at March 31, 2001 $ (78) $ (468) $18,008 $ (850) $ 53,781
- ------------------------- ---------- ------- ------- ------ ---------
See accompany notes.
6
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
2001 2000
-------------------------
Operating activities
Net Income $ 1,984 $ 1,819
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 1,386 1,280
Amortization of deferred financing costs 203 88
Provision for bad debt 110 117
Amortization of deferred compensation 29 15
Changes in assets and liabilities:
Accounts receivable (2,966) (10,883)
Prepaid expenses and other assets (62) (391)
Accounts payable and accrued expenses (1,974) (1,983)
Accrued payroll (5,080) 539
Income taxes payable 2,427 2,090
Deferred rent (9) (25)
------- ---------
Net cash (used in) operating activities (3,952) (7,334)
------- ---------
Investing activities
Expenditures for property and equipment (390) (463)
Repayment from notes receivable 6 24
Cash paid for acquisitions (1,360) (1,600)
------- ---------
Net cash (used in) investing activities (1,744) (2,039)
------- ---------
Financing activities
Proceeds from long-term debt 5,800 10,450
Repayment of long-term debt - (84)
Payment of capital lease obligations (106) (112)
Payments of other loans - (1,020)
Purchase of treasury stock - (20)
Cash dividends paid (375) (289)
------- --------
Net cash provided by financing activities 5,319 8,925
------- --------
Effect of exchange rate changes on cash and
cash equivalents (156) 14
(Decrease) in cash and cash equivalents (533) (434)
Cash and cash equivalents at beginning of period 1,549 1,867
------- ---------
Cash and cash equivalents at end of period $ 1,016 $ 1,433
======== ==========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 2,336 $ 1,645
======== ==========
Income taxes $ 12 $ 142
======== ==========
7
HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(1) BASIS OF PRESENTATION
Headway Corporate Resources, Inc. and its wholly owned subsidiaries
(collectively referred to as the "Company") provide strategic staffing
solutions and personnel worldwide. Its operations include information
technology staffing, temporary staffing, human resource staffing, permanent
placement and executive search. Headquartered in New York, the Company has
temporary staffing offices in California, Connecticut, Florida, New Jersey,
North Carolina, Virginia, and Texas and executive search offices in New York,
Illinois, Massachusetts, the United Kingdom, Japan, Hong Kong and Singapore.
These consolidated financial statements include the accounts of Headway
Corporate Resources, Inc. and its subsidiaries.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2000.
(2) DERIVATIVE FINANCIAL INSTRUMENTS
As of January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (Statement 133) which was issued in June, 1998 and its amendments
Statement 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133 and 138,
Accounting for Derivative Instruments and Certain Hedging Activities issued
in June 1999 and June 2000, respectively (collectively referred to as
Statement 133).
The Company accounted for the accounting change as a cumulative effect of an
accounting principle. The adoption of Statement 133, resulted in a
cumulative effect of an accounting change of $248,000, net of an applicable
income tax benefit of $187,000, which was recognized as a charge to other
comprehensive loss.
The Company uses interest rate swap contracts for hedging purposes. The
Company had entered into interest rate swap agreements that effectively
convert a portion of its floating-rate debt to a fixed-rate basis through
April 18, 2002, thus reducing the impact of interest-rate changes on future
interest expense. Approximately $30,000,000 of the Company's outstanding
long-term debt was designated as the hedged item to an interest rate swap
agreement at March 31, 2001. For interest rate swaps, the net amounts paid
or received and net amounts accrued through the end of the accounting period
were included in interest expense. Unrealized gains or losses on interest
rate swap contracts were not recognized in income. During the three months
ended March 31, 2001, the Company recognized a net loss of $182,000 related
to the change in fair value of the interest rate swap contract net of
applicable income taxes of $137,000 as a component of other comprehensive
loss.
8
(3) INTANGIBLES
During the quarter ended March 31, 2001, additional purchase price of
$2,257,000 was recorded as goodwill upon the determination that the earnouts
had been met on certain acquisitions made in 1997, 1998 and 1999.
(4) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended March 31, 2001 and 2000:
2001 2000
----------- -----------
Numerator:
Net income $ 1,984,000 $ 1,819,000
Preferred dividend requirements (375,000) (289,000)
----------- -----------
Numerator for basic earnings per share-net
income available for common stockholders 1,609,000 1,530,000
Effect of dilutive securities:
Preferred dividend requirements 375,000 289,000
----------- -----------
Numerator for diluted earnings per share-net
income available for common stockholders after
assumed conversions $ 1,984,000 $ 1,819,000
=========== ===========
Denominator:
Denominator for basic earnings per share -
weighted average shares 10,729,627 10,572,571
Effect of dilutive securities:
Stock options, warrants and restricted
common stock - 202,420
Convertible preferred stock 3,584,229 3,584,299
----------- ------------
Dilutive potential common stock 3,584,229 3,786,719
Denominator for diluted earnings per share-
adjusted weighted-average shares and
assumed conversions 14,313,856 14,359,290
=========== ============
Basic earnings per share $ .15 $ .14
=========== ============
Diluted earnings per share $ .14 $ .13
=========== ============
9
(5) BUSINESS SEGMENTS
The Company classifies its business into two fundamental areas, staffing and
executive search. Staffing consists of the placement and payrolling of
temporary and permanent office, clerical and information technology
professional personnel. Executive search focuses on placing middle to upper
level management positions. The Company evaluates performance based on the
segments' profit from operations before unallocated corporate overhead.
Executive
Staffing Search
Three months ended March 31, 2001 Services Services Total
- -----------------------------------------------------------------------------------
Revenues $ 75,793,000 $ 13,920,000 $ 89,713,000
Segment (loss) profit (565,000) 2,970,000 2,405,000
Executive
Staffing Search
Three months ended March 31, 2000 Services Services Total
- -----------------------------------------------------------------------------------
Revenues $ 84,927,000 $ 11,388,000 $ 96,315,000
Segment profit 469,000 1,850,000 2,319,000
Three months ended March 31,
Reconciliation to net income 2001 2000
- -----------------------------------------------------------------------
Total profit for reportable segments $ 2,405,000 $ 2,319,000
Unallocated amounts:
Interest expense (273,000) (168,000)
Corporate overhead (517,000) (706,000)
Income tax benefit 369,000 374,000
--------- ---------
Net income $ 1,984,000 $ 1,819,000
=========== ===========
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview
The results for the first quarter were mixed. The executive search segment
exhibited strong growth due to the continued demand for high level personnel
in the financial services industry offsetting disappointing results in our IT
and general staffing areas. The performance in the staffing industry
generally follows the performance in the overall economy which has been soft
for the past 4-6 months. The Company believes that the performance for the
balance of the year will continue to be impacted by the performance in the
general economy. The performance in executive search for the balance of the
year will depend in part on the financial services industry.
Consolidated
Revenues decreased $6,602,000 or 6.9% to $89,713,000 for the three months
ended March 31, 2001, from $96,315,000 for the same period in 2000. The
decrease was attributable to an overall decline in the demand for the
Company's staffing services as a direct result of weakness in the economy.
The decline also relates to a reduction in the Company's human resource
administration business as part of the Company's strategy to de-emphasize the
low margin capital intensive business initiated in 2000. These reductions
were offset in part by the strong results in the Company's executive search
segment.
The executive search subsidiary, Whitney Partners, LLC (Whitney) contributed
$13,920,000 to consolidated revenues in the first quarter of 2001, an
increase of $2,532,000 from $11,388,000 for the same period in 2000. This
increase is attributable to the continued demand for the Company's executive
search services.
The staffing subsidiary, Headway Corporate Staffing Services, Inc. (HCSS)
contributed revenues of $75,793,000 to consolidated revenues in the first
quarter of 2001, a decrease of $9,134,000 from $84,927,000 for first quarter
of 2000. Revenues were behind 2000 as the information technology and
clerical staffing business have been impacted by a slowdown in the overall
economy as well as our planned reduction in the Company's lower margin human
resource administration business.
Total operating expenses decreased $7,359,000 to $83,958,000 for the three
months ended March 31, 2001, from $91,317,000 for the same period in 2000.
Direct costs decreased as a percentage of revenues to 71.2% in 2001 from
72.6% in 2000. The decrease is a result of the Company's business mix.
Specifically, the executive search business that has no direct costs has
grown versus the first quarter of 2000 while the staffing companies have seen
a decrease in revenue. Direct costs for HCSS increased as a percentage of
HCSS revenue to 84.3% for the three months ended March 31, 2001, from 82.3%
for the same period in 2000 primarily as a result of a decline in our
permanent placement business that has no direct cost. Consolidated selling,
general and administrative expenses decreased as a percentage of revenues
from 20.9% in first quarter 2000 to 20.8% in first quarter 2001.
Whitney's operating expenses increased only slightly to $8,110,000 in the
first quarter of 2001 from $8,079,000 for the same period last year as a
lower than average commission rate was applicable to a large portion of the
2001 revenues.
Consolidated operating income increased 15.1% or $757,000 to $5,755,000 for
the three months ended March 31, 2001, compared to $4,998,000 for the three
months ended March 31, 2000 primarily as a result of higher executive search
revenues.
11
Liquidity and Capital Resources
Cash used in operations during the three months ended March 31, 2001 was
$3,952,000. The cash used in 2001 was primarily attributable to an increase
in accounts receivable, a decrease in accounts payable, accrued expenses and
accrued payroll, which was partially offset by an increase in income taxes
payable.
For the three months ended March 31, 2001, the Company used $1,744,000 in
investing activities almost exclusively for earnout payments for acquisitions
completed during 1997 and 1998 and capital expenditures. This compares to
cash used in investing activities of $2,039,000 for the same period in 2000.
The cash used for investing activities in 2000 also related primarily to
earnout payments for acquisitions completed during 1997 and 1998 as well as
capital expenditures.
Total net cash received from financing activities was $5,319,000 for the
three months ended March 31, 2001, compared to net cash provided by financing
activities of $8,925,000 for the same period in 2000. The cash generated in
2001 and 2000 was primarily a result of additional borrowings under the
Company's senior credit facility.
The Company's working capital improved to $33,500,000 at March 31, 2001, from
$27,457,000 at December 31, 2000. Management expects that the Company's
working capital position will be sufficient to meet all of its working
capital needs for the remainder of the year. In addition, at March 31, 2001,
the Company had approximately $19.5 million available under its senior credit
facility.
12
PART II. OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS: None
REPORTS ON FORM 8-K: None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
HEADWAY CORPORATE RESOURCES, INC.
Date: May 14, 2001 By: /s/ Barry S. Roseman, President
and Chief Operating Officer
13