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, 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 No. 0-23170
HEADWAY CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2134871
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
850 Third Avenue, New York, New York 10022
(Address of principal executive offices)
(212) 508-3560
(Registrant's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the 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 issuerOs
classes of common equity, as of the latest practicable date:
9,762,578 shares of common stock.
FORM 10-Q
HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. Financial Information
Financial Statements
Unaudited Consolidated Balance Sheets-
March 31, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997 4
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information 11
Signatures 11
Headway Corporate Resources, Inc.
Consolidated Balance Sheets
(Unaudited)
(Dollars In Thousands)
March 31, 1998 December 31, 1997
Assets
Current assets:
Cash and cash equivalents $ 4,160 $ 2,472
Accounts receivable, trade, net 35,326 27,332
Due from related party - 638
Prepaid expenses and other current assets 1,608 368
Total current assets 41,094 30,810
Property and equipment, net 2,762 2,181
Intangibles, net 38,896 28,079
Deferred financing costs 1,486 2,821
Other assets 3,081 3,445
Total assets $ 87,319 $ 67,336
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 5,638 $ 4,605
Accrued payroll 7,968 8,097
Long-term debt, current portion and line
of credit 146 15,259
Capital lease obligations, current portion 190 199
Other liabilities 2,200 2,200
Total current liabilities 16,142 30,360
Long-term debt, less current portion 34,236 19,059
Capital lease obligations, less current portion 327 318
Deferred rent 1,147 1,147
Stockholders' equity
Preferred stock--$.0001 par value, 5,000,000
shares authorized:
Series B, convertible preferred stock-$.0001 par
value, 6,858 shares authorized, none and 572 issued
and outstanding in 1998 and 1997 respectively - 200
Series D, convertible preferred stock-$.0001 par
value, 44 shares authorized, none and 4 issued
and outstanding in 1998 and 1997 respectively - 200
Series E, convertible preferred stock-$.0001 par
value, 575,000 shares authorized, none issued
and outstanding - -
Series F, convertible preferred stock-$.0001 par
value, 1,000 shares authorized, issued and
outstanding [aggregate liquidation value $20,000] 20,000 -
Common stock-$.0001 par value, 20,000,000 shares
authorized, 9,138,236 and 8,907,110 issued and
outstanding in 1998 and 1997 respectively 1 1
Additional paid-in capital 12,796 13,247
Cumulative translation adjustments 69 41
Notes receivable (223) (285)
Retained earnings 2,824 3,048
Total stockholders' equity 35,467 16,452
Total liabilities and stockholdersO equity $ 87,319 $ 67,336
See accompanying notes
Headway Corporate Resources, Inc.
Consolidated Statements of Operations
(Unaudited)
(Dollars In Thousands)
Three months ended March 31,
1998 1997
Revenues: $ 57,718 $ 22,077
Operating expenses:
Direct costs 43,120 14,433
General and administrative 10,877 5,609
Depreciation and amortization 489 225
54,486 20,267
Operating income from continuing operations 3,232 1,810
Other expenses (income):
Interest expense 983 430
Interest income (32) (8)
Gain on sale of investment - (1,219)
951 (797)
Income from continuing operations before income
tax expense and extraordinary item 2,281 2,607
Income tax expense 1,011 1,053
Income from continuing operations before
extraordinary item 1,270 1,554
Gain from discontinued operations - 5
Income before extraordinary item 1,270 1,559
Extraordinary item--Loss on early retirement of
debt (net of income tax benefit of $1,241) (1,457) -
Net income (loss) (187) 1,559
Preferred dividend requirements (37) (52)
Net income (loss) available for common stockholders $ (224) $ 1,507
Basic earnings (loss) per common share:
Continuing operations $ .14 $ .22
Extraordinary item (.16) --
Net income (loss) $ (.02) $ .22
Diluted earnings (loss) per common share
Continuing operations $ .12 $ .16
Extraordinary item (.14) --
Net income (loss) $ (.02) $ .16
See accompanying notes
Headway Corporate Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three months ended March 31,
1998 1997
Operating activities
Net Income $ (187) $ 1,559
Adjustments to reconcile net income (loss) to net
cash (used in) operating activities:
Loss on early retirement of debt 1,457 -
Depreciation and amortization 489 269
Amortization of deferred financing costs 166 136
Deferred income taxes 96 (16)
Gain on sale of investment - (1,219)
Changes in assets and liabilities net of
effect of acquisitions:
Accounts receivable (6,869) (420)
Prepaid expenses and other current assets (493) (842)
Accounts payable and accrued expenses 1,133 (651)
Accrued payroll (336) (1,325)
Income taxes payable (143) 464
Net cash (used in) operating activities (4,687) (2,045)
Investing activities
Expenditures for property and equipment (275) (258)
Repayment from employees 62 36
Repayment from related party 638 -
Proceeds from sale of investment - 1,642
Cash paid for acquisitions, net of cash acquired (11,722) (4,169)
Net cash (used in) investing activities (11,297) (2,749)
Financing activities
Issuance of preferred stock 18,668 -
Net change in revolving credit line (13,404) 1,529
Proceeds from long-term debt 34,000 4,000
Repayment of long-term debt (20,532) (250)
Payment of capital lease obligations (50) (18)
Payments of loan acquisition fees (1,529) (332)
Proceeds from exercise of options and warants 491 -
Net cash provided by financing activities 17,644 4,929
Effect of exchange rate changes on
cash and cash equivalents 28 (23)
Increase (decrease) in cash and cash equivalents 1,688 112
Cash and cash equivalents at beginning of period 2,472 1,008
Cash and cash equivalents at end of period $ 4,160 $ 1,120
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 724 $ 293
Income taxes $ 1,270 $ 304
HEADWAY CORPORATE RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(1) BASIS OF PRESENTATION
These financial statements are presented on a
consolidated basis and include the results of operations of the
parent corporation, Headway Corporate Resources, Inc., and its
wholly-owned subsidiaries (i) Headway Corporate Staffing Services,
Inc. and its wholly-owned subsidiaries (OHCSSIO) and (ii) Whitney
Partners LLC and its United Kingdom and Asian subsidiaries (OWPIO),
(collectively referred to as the OCompanyO).
In the opinion of management, the accompanying unaudited
financial statements included in this Form 10-Q reflect all
adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the results of operations for the periods
presented. The results of operations for the periods presented are
not necessarily indicative of the results to be expected for the
full year.
For further information, refer to the financial
statements and footnotes included in the CompanyOs Form 10-KSB for
the year ended December 31, 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Comprehensive Income - As of January 1, 1998, the Company
adopted Statement 130, Reporting Comprehensive Income. Statement
130 establishes new rules for the reporting and display of
comprehensive income and its components, however, the adoption of
this Statement had no impact on the CompanyOs net income or
shareholdersO equity. Statement 130 requires foreign currency
translation adjustments, which prior to adoption were reported
separately in shareholdersO equity, to be included in other
comprehensive income. During the first quarter of 1998 and 1997,
total comprehensive income (loss) amounted to $(159,000) and
$1,536,000.
Reclassifications - Certain reclassifications of 1997
balances have been made to conform to the 1998 presentation.
(3) ACQUISITIONS
In March 1998, the Company acquired directly and through
its subsidiaries three businesses in three separate transactions.
The Company acquired substantially all of the assets of Cheney
Associates and Cheney Consulting Group of New Haven, Connecticut,
for approximately $3,772,000 paid at closing, plus an earnout for
certain periods through the end of 2000 equal to a percentage of the
earnings, as defined, for those periods before interest, taxes and
amortization attributable to the assets acquired. The Company also
acquired substantially all of the assets of the Southern Virginia
offices of Select Staffing Services, Inc. for approximately
$2,993,000 paid at closing, plus an earnout for certain periods
through the end of March 2001, equal to a percentage of the
earnings, as defined, for those periods before interest, taxes and
amortization attributable to the assets acquired. The Company
acquired all of the outstanding capital stock of Shore Resources,
Incorporated, of Los Angeles, California, for approximately
$5,051,000 paid at closing, plus an earnout for certain periods
through the end of March 2001, equal to a percentage of the
earnings, as defined, for those periods before interest, taxes and
amortization attributable to the assets acquired. The purchase
price for these acquisitions exceeded the fair value of assets
acquired resulting in goodwill of approximately $11,700,000.
The aforementioned acquisitions were accounted for under
the purchase method of accounting and their results of operations
have been included in the accompanying financial statements from
their respective dates of acquisition. Any additional purchase
price based on future earnings related to the aforementioned
acquisitions will be recorded as goodwill upon the determination
that the earnouts have been met.
The pro forma unaudited consolidated results of operations
assuming consummation of the above mentioned transactions, and the
acquisitions in 1997, as of the beginning of the respective periods,
are as follows:
Three months ended March 31,
1998 1997
Total revenue $ 65,217,000 $ 39,646,000
Net income (loss) (114,000) 1,903,000
Net income (loss) available
for common stockholders (151,000) 1,851,000
Earnings per share:
Basic $ (.02) $ .29
Diluted $ (.02) $ .19
(4) DEBT AND EQUITY TRANSACTIONS
In March 1998, the Company completed debt and equity
financing totaling $105,000,000. The financing includes a
$75,000,000 senior credit facility, $10,000,000 of senior
subordinated notes, and $20,000,000 of Series F Convertible
Preferred Stock. The Company retired its credit facility with ING
(U.S.) Capital Corporation for $37,998,000 from the proceeds of the
new financing.
The senior credit facility is payable within five years
with mandatory reductions of $5,000,000 in March 2001 and
$10,000,000 in March 2002. This revolving credit facility bears
interest at varying rates based on LIBOR (7.22% per annum at March
31, 1998). The Company incurred expenses in connection with the
issuance of the senior credit facility of $827,000 which have been
deferred and are being amortized over the five year life of the
debt. As of March 31, 1998, $24,000,000 was drawn on this facility.
Substantially all assets of the Company have been pledged as
collateral for this credit agreement. The credit agreement requires
the Company to meet certain financial ratios, as defined.
The senior subordinated notes are payable in March 2006
and bear interest at a fixed rate of 12% per annum until March 2001,
increasing to 14% per annum thereafter. The Company incurred
expenses in connection with the issuance of the senior subordinated
notes of $666,000 which have been deferred and are being amortized
over the eight year life of the debt.
The Series F Convertible Preferred Stock accrues dividends
at the rate of 5.5% per annum and are convertible to common stock at
a conversion price to be determined based on the market price of the
common stock over the next two years. The Company incurred expenses
in connection with the issuance of the preferred stock of $1,332,000
which has been accounted for as a reduction in additional paid-in
capital.
During the quarter ended March 31, 1998 the Company issued
116,586 common shares upon the exercise of options and warrants
resulting in proceeds of $491,000. In addition, the remaining
$200,000 of Series B Convertible Preferred Stock and remaining
$200,000 of Series D Convertible Preferred Stock were converted into
55,885 and 58,655 of common shares, respectively.
(5) EARNINGS PER SHARE
The following table sets forth the computation of basic
and diluted earnings per share for the three months ended March 31,
1998 and 1997:
1998 1997
Numerator:
Income from continuing operations
before extraordinary item $ 1,270,000 $1,559,000
Extraordinary item (1,457,000) -
Preferred dividend requirements (37,000) (52,000)
Numerator for basic earnings per share - net
income (loss) available for common shareholders (224,000) 1,507,000
Effect of dilutive securities:
Preferred dividend requirements 37,000 52,000
Numerator for diluted earnings per share - net
income (loss) available for common stockholders
after assumed conversions $ (187,000) $1,559,000
Denominator:
Denominator for basic earnings per share -
weighted average shares 8,983,825 6,952,008
Effect of dilutive securities:
Stock options and warrants 1,907,934 1,006,538
Convertible preferred stock 68,927 1,851,742
Dilutive potential common stock 1,976,861 2,858,280
Denominator for diluted earnings per share -
adjusted weighted-average shares
and assumed conversions 10,960,686 9,810,288
Basic earnings (loss) per share $ (.02) $ .22
Diluted earnings (loss) per share $ (.02) $ .16
MANAGEMENTOS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview
The Company's financial performance for the first quarter
of 1998 was very strong. This can be attributed to the addition of
the temporary staffing companies acquired in 1997, strong internal
growth as a result of the continued demand for contingent workers
and solid performance in the executive search division. The Company
expects this trend to continue as long as there is no drastic change
in the economy or the financial services industry. The Company
expects to continue to grow both through internal growth and
acquisitions.
In March 1998, the Company completed the acquisition of three
staffing companies which did not contribute significantly to the
Company's results in the first quarter. In addition, the Company
closed on $105,000,000 of new financing consisting of a combination
of debt and equity.
Consolidated
Revenues increased $35,641,000 to $57,718,000 for the three
months ended March 31, 1998, from $22,077,000 for the same period in
1997. The increase is attributable to the temporary staffing
acquisitions completed in the later part of 1997 as well as internal
growth from existing business. Executive search revenue of
$6,580,000 was significantly better than the same period last year
of $4,693,000. The increase in executive search revenue is a result
of the strong demand for senior level talent in the financial
services industry.
Operating expenses increased $34,219,000 to $54,486,000 for the
three months ended March 31, 1998, from $20,267,000 for the same
period in 1997. Of the increase, $28,687,000 is the direct cost of
revenues relating to wages, taxes and benefits of worksite
employees. The balance of the increase is primarily associated with
the acquisition of the temporary staffing companies which were
completed after the first quarter of 1997.
Operating income from continuing operations increased
$1,422,000 to $3,232,000 for the three months ended March 31, 1998,
compared to $1,810,000 for the three months ended March 31, 1997.
The increase is directly related to the growth in revenue.
Operating income from continuing operations decreased as a
percentage of revenues in the first quarter of 1998 as the executive
search division has become a smaller portion of total revenue.
Historically, revenue from executive search generates a higher
operating margin percentage than temporary staffing.
In March 1998, the Company had an extraordinary expense of
$1,457,000 after tax in connection with the early retirement of debt
as a result of the new financing.
Diluted earnings per share were $0.12 before extraordinary
items and ($0.02) after the extraordinary item for the first quarter
of 1998 compared to $0.16 for the first quarter of 1997. Included
in the results for the first quarter of 1997 was an after tax gain
of approximately $805,000 or $.08 per share on investments.
Liquidity and Capital Resources
Cash used in operations during the three months ended March 31,
1998 was $4,687,000, compared to cash used in operations of
$2,045,000 during the same period in 1997. The cash used in the
current quarter was primarily attributable to the increase in
accounts receivable as a result of the Company's growth in revenue.
This is a trend that is likely to continue as the Company continues
to grow the staffing business.
In March 1998, the Company completed a new financing consisting
of a $75,000,000 senior credit facility and $30,000,000 of junior
capital. The junior capital included $20,000,000 of convertible
preferred stock and $10,000,000 of senior subordinated debt. The
Company used a portion of the new financing to pay down existing
debt obligations and a portion to finance the three acquisitions
which the Company completed in March. The balance of the financing
will be used for future acquisitions and for general working
capital. Primarily as a result of the financing, the Company's
working capital improved dramatically to $24,952,000 at March 31,
1998, from $450,000 at December 31, 1997. Management expects that
the Company's working capital position will be sufficient to meet
all of the working capital needs for the remainder of the year.
For the three months ended March 31, 1998, the Company used
$11,297,000 in investing activities almost exclusively for the
acquisitions completed in March, compared to cash used in investing
activities of $2,749,000 for the same period in 1997. The cash used
for investing activities in 1997 also related to staffing
acquisitions offset partially by proceeds from the sale of
investments.
Total net cash received from financing activities was
$17,644,000 for the first quarter of 1998, compared to net cash used
in financing activities of $4,929,000 for the same period in 1997.
The cash generated in 1998 related to the financing completed in
March.
PART II. OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS: Attached only to the electronic filing by the Company with
the Securities and Exchange Commission is the Financial Data
Schedule, Exhibit Reference Number 27, in accordance with Item
601(c) of Regulation S-B.
REPORTS ON FORM 8-K: On April 3, 1998, the Company filed a
report on Form 8-K dated March 19, 1998 reporting under Item 2 the
completed debt and equity financing totaling $105,000,000 and the
acquisition of three businesses:
(1) Cheney Associates and Cheney Consulting Group
(2) Three offices of Select Staffing Services, Inc.
(3) Shore Resources, Incorporated.
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 12, 1998 By:/s/ Barry S. Roseman
President and Chief Operating Officer
Duly Authorized and Principal Financial Officer)