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, 1999
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 issuer's
classes of common equity, as of the latest practicable date:
10,299,020 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, 1999 and December 31, 1998 3
Unaudited Consolidated Statements of Operations
Three Months Ended March 31, 1999 and 1998 4
Unaudited Consolidated Statement of Stockholders'
Equity Three Months Ended March 31, 1999 5
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. Other Information 14
Signatures 14
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 31,1999 December 31, 1998
Assets
Current assets:
Cash and cash equivalents $ 3,038 $ 4,157
Accounts receivable, trade, net 56,617 47,017
Prepaid expenses and other current assets 1,295 954
Prepaid income taxes 771 1,217
______________________________
Total current assets 61,721 53,345
Property and equipment, net 4,728 4,566
Intangibles, net 69,325 66,388
Deferred financing costs 1,681 1,757
Other assets 871 890
______________________________
Total assets $ 138,326 $ 126,946
______________________________
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,688 $ 2,190
Accrued expenses 3,319 2,969
Accrued payroll 15,667 13,492
Long-term debt, current portion 155 150
Capital lease obligations, current portion 409 416
Other liabilities 4,187 1,989
______________________________
Total current liabilities 26,425 21,206
Long-term debt, less current portion 67,081 60,959
Capital lease obligations, less current portion 665 755
Deferred rent 1,267 1,251
Deferred income taxes 204 204
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, 10,419,220 shares and 10,299,020
shares issued and outstanding, respectively, at
March 31, 1999; 10,419,220 shares and 10,362,020
shares issued and outstanding, respectively, at
December 31, 1998 1 1
Treasury stock at cost (558) (290)
Additional paid-in capital 15,779 15,779
Notes receivable (155) (172)
Retained earnings 7,618 7,244
Accumulated other comprehensive (loss) income (1) 9
______________________________
Total stockholders' equity 42,684 42,571
______________________________
Total liabilities and stockholders' equity $ 138,326 $ 126,946
______________________________
See accompanying notes
3
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Dollars In Thousands)
Three months ended March 31,
1999 1998
Revenues: $ 92,653 $ 57,718
Operating expenses:
Direct costs 69,730 43,120
General and administrative 16,978 10,877
Termination of employment contract 2,329 -
Depreciation and amortization 1,016 489
__________________________
90,053 54,486
Operating income 2,600 3,232
Other (income) expenses:
Interest expense 1,459 983
Interest income (27) (32)
__________________________
1,432 951
Income before income tax expense and
extraordinary item 1,168 2,281
Income tax expense 519 1,011
__________________________
Income before extraordinary item 649 1,270
Extraordinary item--Loss on early retirement of
debt (net of income tax benefit of $1,241) - (1,457)
__________________________
Net income (loss) 649 (187)
Preferred dividend requirements (275) (37)
__________________________
Net income (loss) available for common
stockholders $ 374 $ (224)
__________________________
Basic earnings (loss) per common share:
Income before extraordinary item $ .04 $ .14
Extraordinary item - (.16)
__________________________
Net income (loss) $ .04 $ (.02)
__________________________
Diluted earnings (loss) per common share
Income before extraordinary item $ .04 $ .12
Extraordinary item - $ (.14)
__________________________
Net income (loss) $ .04 $ (.02)
__________________________
See accompanying notes
4
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 1999
(Unaudited)
(Dollars in thousands)
Series F Convertible
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
Balance - December 31, 1998 1,000 $ 20,000 10,419,220 $ 1 (57,200) $(290)
Repayment of notes receivable - - - - - -
Preferred stock dividends - - - - - -
Purchase of treasury stock - - - - (63,000) (268)
Translation adjustment - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
__________________________________________________________________________________________
Balance - March 31,1999 1,000 $ 20,000 10,419,220 $ 1 (120,200) $(558)
__________________________________________________________________________________________
5
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity, Continued
Three Months Ended March 31, 1999
(Unaudited)
(Dollars in thousands)
Accumulated
Additional Other Total
Paid-in Notes Retained Comprehensive Stockholders'
Capital Receivable Earnings (Loss) Equity
Balance - December 31, 1998 $ 15,779 $ (172) $ 7,244 $ 9 $ 42,571
Repayment of notes receivalbe - 17 - - 17
Preferred stock dividends - - (275) - (275)
Purchase of treasury stock - - - - (268)
Translation adjustment - - - (10) (10)
Net income - - 649 - 649
Comprehensive income - - - - 639
______________________________________________________________________________________________
Balance - March 31, 1999 $15,779 $ (155) $ 7,618 $ (1) $ 42,684
______________________________________________________________________________________________
6
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three months ended March 31,
1999 1998
Operating activities
Net Income $ 649 $ (187)
Adjustments to reconcile net income (loss) to
net cash (used in) operating activities:
Loss on early extinguishment of debt - 1,457
Depreciation and amortization 1,016 489
Amortization of deferred financing costs 86 166
Deferred income taxes - 96
Changes in assets and liabilities net of effect
of acquisitions:
Accounts receivable (9,600) (6,869)
Prepaid expenses and other assets (323) (493)
Accounts payable and accrued expenses 864 1,133
Accrued payroll 2,175 (336)
Prepaid income taxes/Income taxes payable 446 (143)
___________________________
Net cash (used in) operating activities (4,687) (4,687)
___________________________
Investing activities
Expenditures for property and equipment (430) (275)
Repayment from notes receivable 17 62
Repayment from related party - 638
Cash paid for acquisitions, net of cash acquired (1,486) (11,722)
___________________________
Net cash (used in) investing activities (1,899) (11,297)
___________________________
Financing activities
Sale of preferred stock, net - 18,668
Net change in revolving credit line - (13,404)
Proceeds from long-term debt 6,200 34,000
Repayment of long-term debt (73) (20,532)
Payment of capital lease obligations (97) (50)
Payments of loan acquisition fees (10) (1,529)
Proceeds from exercise of options and warants - 491
Purchase of treasury stock (268) -
Cash dividends paid (275) -
___________________________
Net cash provided by financing activities 5,477 17,644
___________________________
Effect of exchange rate changes on cash and
cash equivalents (10) 28
Increase (decrease) in cash and cash
equivalents (1,119) 1,688
Cash and cash equivalents at beginning of
period 4,157 2,472
___________________________
Cash and cash equivalents at end of period $ 3,038 $ 4,160
___________________________
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest $ 1,373 $ 724
Income taxes $ 44 $ 1,270
7
HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(1) BASIS OF PRESENTATION
Headway Corporate Resources, Inc. and its wholly owned subsidiaries
provide strategic staffing solutions and personnel on a worldwide
basis. Its operations include information technology staffing,
temporary staffing, human resources administration, permanent
placement and executive search. Headquartered in New York, the
Company has 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 (collectively referred to as the "Company").
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, 1999 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all
of the informaton 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 Form 10-K
for the year ended December 31, 1998.
Certain reclassifications of 1998 balances have been made to conform
to the 1999 presentation.
(2) INTANGIBLES
During the quarter ended March 31, 1999, additional purchase price
of $3,684,000 was recorded as goodwill upon the determination that
the earnouts had been met on certain acquisitions made in 1998 and
1997.
(3) TERMINATION OF EMPLOYMENT CONTRACT
In March 1999, the Company incurred costs of $2,319,000 associated
with the termination of an employment contract.
8
(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, 1999 and
1998:
1999 1998
Numerator:
Income before extraordinary item $ 649,000 $ 1,270,000
Extraordinary item - (1,457,000)
Preferred dividend requirements (275,000) (37,000)
___________________________
Numerator for basic earnings per share - net
income (loss) available for common shareholders 374,000 (224,000)
Effect of dilutive securities:
Preferred dividend requirements 275,000 37,000
___________________________
Numerator for diluted earnings per share - net
income (loss) available for common stockholders
after assumed conversions $ 649,000 $ (187,000)
___________________________
Denominator:
Denominator for basic earnings per share -
weighted average shares 10,354,981 8,983,825
Effect of dilutive securities:
Stock options and warrants 640,950 1,907,934
Convertible preferred stock 3,584,299 68,927
___________________________
Dilutive potential common stock 4,225,249 1,976,861
Denominator for diluted earnings per share -
adjusted weighted - average shares and
assumed conversions 14,580,230 10,960,686
___________________________
Basic earnings (loss) per share $ .04 $ (.02)
___________________________
Diluted earnings (loss) per share $ .04 $ (.02)
___________________________
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, 1999 Services Services Total
Revenues $ 83,960,000 $ 8,693,000 $ 92,653,000
Segment profit 1,065,000 1,484,000 2,549,000
Segment assets 123,954,000 13,662,000 137,616,000
Executive
Staffing Search
Three months ended March 31, 1998 Servics Services Total
Revenues $ 51,138,000 $ 6,580,000 $ 57,718,000
Segment income before
extraordinary item 720,000 1,040,000 1,760,000
Extraordinary loss (1,457,000) - (1,457,000)
Segment profit (loss) (737,000) 1,040,000 303,000
Segment assets 75,342,000 9,367,000 84,709,000
Three months ended March 31,
Reconciliation to net income 1999 1998
Total profit for reportable
segments $ 2,549,000 $ 303,000
Unallocated amounts:
Interest expense (87,000) (163,000)
Corporate overhead (859,000) (744,000)
Termination of employment
contract (2,329,000) -
Income tax benefit 1,375,000 417,000
_________ _______
Net income (loss) $ 649,000 $ (187,000)
_________ _______
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Overview
The Company's financial performance was very strong for the first
quarter of 1999. This can be attributed to the results of the
acquisitions completed during 1998, 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. For the three months
ended March 31, 1999, the Company achieved record revenues and
operating profit. All of the acquisitions that the Company has made
over the past twenty four months have been integrated into the
Headway organization and are performing at or better than
expectations. The Company expects to continue to grow both
internally and through acquisitions.
Consolidated
Revenues increased $34,935,000 or 61% to $92,653,000 for the three
months ended March 31, 1999, from $57,718,000 for the same period in
1998. This increase is attributable to the staffing acquisitions
completed in the latter part of 1998, as well as strong internal
growth. For the first three months of 1999, the Company experienced
a 27% internal growth rate.
The executive search subsidiary, Whitney Partners, LLC (Whitney),
contributed $8,693,000 to consolidated revenues in the first quarter
of 1999, an increase of $2,113,000 from $6,580,000 for the same
period in 1998. This increase is due to the strong recovery of the
financial markets in the first quarter of 1999, and the related
increase in the hiring activities of Whitney's clients, as well as
the contribution that Carlyle Group, Ltd. (Carlyle) has made since
its acquisition in July 1998.
The staffing subsidiary, Headway Corporate Staffing Services, Inc.
(HCSS) contributed revenues of $83,960,000 to consolidated revenues
in the first quarter of 1999, an increase of $32,822,000 from
$51,138,000 for first quarter of 1998. This increase is primarily a
result of the acquisitions completed during the latter part of 1998,
as well as strong internal growth.
Total operating expenses increased $35,567,000 to $90,053,000 for
the three months ended March 31, 1999, from $54,486,000 for the same
period in 1998. Of the increase, $26,610,000 relates to the direct
costs that are the wages, taxes and benefits of work site employees
of the staffing companies. Direct costs increased as a percentage
of revenues to 75.3% in 1999 from 74.7% in 1998. The increase is a
result of the Company's changing business mix. Specifically, the
executive search business that has no direct costs is becoming a
smaller percentage of the Company's revenues. Direct costs for HCSS
declined as a percentage of HCSS revenue to 83.1% for the three
months ended March 31, 1999, from 84.3% for the same period in 1998.
This improvement is primarily a result of the acquisitions completed
in 1998 of several information technology companies that have higher
gross margin percentages than the traditional temporary staffing
companies. General and administrative expenses decreased as a
percentage of revenues from 18.8% in first quarter 1998 to 18.3% in
first quarter 1999.
Included in operating expenses for the first quarter of 1999 is a
special charge of $2,329,000 paid in connection with the termination
of an employment agreement. The balance of the increase is
primarily due to operating expenses of the acquired staffing
companies completed in the latter part of 1998.
11
Whitney's operating expenses increased $1,440,000 to $6,060,000 in
the first quarter of 1999, from $4,620,000 for the same period last
year. This increase is primarily a result of higher compensation
expense directly related to the increase in revenue, as well as the
operating expenses of Carlyle that was acquired in July 1998.
Operating income decreased 20% or $632,000 to $2,600,000 for the
three months ended March 31, 1999, compared to $3,232,000 for the
three months ended March 31, 1998. The decline is directly related
to the $2,329,000 termination payment. Excluding this payment,
operating income increased 53% to $4,929,000 for the three months
ended March 31, 1999, compared to the same period in 1998.
Income before extraordinary item declined $621,000 to $649,000 for
the three months ended March 31, 1999, compared to $1,270,000 for
the same period in 1998. This decrease is a result of the
termination payment, which had an impact of $1,351,000, net of tax.
Excluding this charge, income before extraordinary item increased
57% to $2,000,000 for the three months ended March 31, 1999,
compared to the same period in 1998. For first quarter 1998, the
Company had a net loss of $187,000, after an extraordinary loss
after tax of $1,457,000 for the early retirement of debt.
Liquidity and Capital Resources
Cash used in operations during the three months ended March 31, 1999
and 1998 was $4,687,000. The cash used in 1999 was primarily
attributable to the increase in accounts receivable as a result of
the Company's growth in revenue, partially offset by an increase in
accrued payroll. This is a trend that is likely to continue as the
Company continues to grow the staffing business.
For the three months ended March 31, 1999, the Company used
$1,899,000 in investing activities almost exclusively for earnout
payments for acquisitions completed during 1997 and 1998, compared
to cash used in investing activities of $11,297,000 for the same
period in 1998. The cash used for investing activities in 1998
related to acquisitions completed during that period.
Total net cash received from financing activities was $5,477,000 for
the three months ended March 31, 1999, compared to net cash provided
by financing activities of $17,644,000 for the same period in 1998.
The cash generated in 1999 was a result of additional borrowings
under the Company's senior credit facility.
In March 1999, the Company announced its plans to step up purchases
under its stock repurchase program. The program was implemented in
October 1998 when the Company's Board of Directors authorized
purchases of up to 1.0 million shares. During the first quarter of
1999, the Company used $268,000 to repurchase 63,000 shares. The
Company expects that it will continue to purchase shares under the
program as long as the current stock price weakness continues.
The Company's working capital improved to $35,296,000 at March 31,
1999, from $32,139,000 at December 31, 1998. 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.
In addition, at March 31, 1999, the Company had approximately $33
million available under its senior credit facility.
12
Year 2000 Compliance
The Company's internal computer information system is Year 2000
compliant, since its database does not store dates as plain text.
The dates are converted into an internal date format that does not
rely on the year to determine the century. Any new software
purchases will conform to the same type of internal date storage
specifications, which should eliminate any internal Year 2000
issues.
The Company's Year 2000 issues and any potential business
interruptions, costs, damages or losses related thereto are
primarily dependent upon the Year 2000 compliance of third parties.
The Company's suppliers that provide mission-critical services are
primarily large companies, such as local and long distance telephone
service providers, banks, and utility companies. The Company has no
reason to believe that these suppliers will not be Year 2000
compliant. However, the Company is in the process of reviewing its
third party relationships in order to assess and address Year 2000
issues with respect to these third parties.
The costs associated with Year 2000 compliance have been nominal and
the Company believes that the remaining costs will be minimal and
will not have a material adverse effect on its financial condition
or results of operations.
The Company is in the process of developing a contingency plan to be
able to react to any Year 2000 problems should they arise.
13
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-K.
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 10, 1999 By: /s/ Barry S. Roseman,
President and Chief Operating Officer
14