Exhibit 99.1
Form 10-K 2001, Amendment No. 1
Headway Corporate Resources, Inc.
File No. 1-16025
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934: For the fiscal year ended December 31, 2001
[ ] 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 1-16025
HEADWAY CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2134871
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
317 Madison Avenue New York, NY 10017
(Address of Principal Executive Offices and Zip Code)
Registrant's Telephone Number: (212) 672-6501
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.0001 American Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
Common Stock, Par Value $0.0001
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant based of the last sale price on March 28, 2002,
is $0.30. The number of shares outstanding of each of the registrant's classes
of common stock as of March 31, 2002, was 10,914,627.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement of Headway for the 2002 annual
meeting of stockholders are incorporated by reference in Part III of this
report.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that
are subject to certain risks, uncertainties or assumptions and may be affected
by certain other factors, including but not limited to the specific factors
discussed in Part II, Item 5 under "Market for Registrant's Common Equity and
Related Stockholder Matters", "Liquidity and Capital Resources", and "Factors
Which May Impact Future Results and Financial Condition". In some cases, you can
identify forward-looking statements by terminology such as "may," "should,"
"could," "expects," "plans," "projected," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continues," or the negative of these
terms or other comparable terminology. In addition, except for historical facts,
all information provided in Part II, Item 7A, under "Quantitative and
Qualitative Disclosures About Market Risk" should be considered forward-looking
statements. Should one or more of these risks, uncertainties or other factors
materialize, or should underlying assumptions prove incorrect, actual results,
performance or achievements of Headway may vary materially from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Forward-looking statements are based on beliefs and assumptions of
Headway's management and on information currently available to such management.
Forward-looking statements speak only as of the date they are made, and Headway
undertakes no obligation to update publicly any of them in light of new
information or future events. Undue reliance should not be placed on such
forward-looking statements, which are based on current expectations.
Forward-looking statements are not guarantees of performance.
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TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Business 4
2. Properties 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 9
Part II
5. Market for Registrant's Common Equity and Related Stockholder 9
Matters
6. Selected Financial Data 12
7. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk 19
8. Financial Statements and Supplementary Data 19
9. Changes in and Disagreements with Accountants 19
on Accounting and Financial Disclosure
Part III
10. Directors and Executive Officers of the Registrant 20
11. Executive Compensation 20
12. Security Ownership of Certain Beneficial Owners and Management 20
13. Certain Relationships and Related Transactions 20
Part IV
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 20
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PART I
Item 1. Business
General
Headway Corporate Resources, Inc. ("Headway") is a leading provider of
staffing and executive search services to businesses in a variety of industries,
including, financial services, media, entertainment, biotechnology and
information technology. Headway established its human resource business through
20 acquisitions of staffing and professional services companies from 1996
through 1999. Headquartered in New York City, we operate domestically from
regional and local offices in, California, Connecticut, Florida, Illinois,
Massachusetts, New York, New Jersey, North Carolina, Virginia and Texas, and
overseas in the United Kingdom, Japan, Hong Kong, Singapore and Australia.
Headway's goal is to build a national human resource business focused on
providing staffing and executive search services to the industries identified
above. Headway's strategy for achieving this goal is to emphasize programs that
generate internal growth and market penetration in the industries and
geographical areas we service.
On April 17, 2002, the Company entered into an amendment to the Senior
Credit Facility and obtained a waiver of the financial ratio defaults. The
amendment provides for an increase in the margin for base rate loans, partial
pay down of the loan balance with the Company's cash balance over $8 million or
if the accounts receivable balance falls below certain thresholds, modified
financial covenants, and an extended maturity date. The amended Senior Credit
Facility, which was set to expire on April 18, 2002, has been extended to an
expiration date of June 30, 2003, with all outstanding amounts then due. Even
though the Company has obtained amendments and waivers, the Company will need to
negotiate a further extension of these agreements or complete a re-financing
prior to the expiration date of the Senior Credit Facility in June 2003.
Market Overview
In 2001, the temporary employment service industry experienced a
significant slow down in demand in response to the unfavorable conditions in the
overall economy. Many companies initiated layoffs of both temporary and
permanent workers, and implemented hiring freezes during 2001.
In the recent years prior to 2001, the temporary employment service
industry experienced significant growth in response to the changing work
environment in the United States. Employers have developed increasingly
stringent criteria for permanent employees, while moving toward project-oriented
temporary and contract hiring. These changes were the result of increasing
automation that resulted in shorter technological cycles, and global competitive
pressures. Many employers responded to these challenges by turning to temporary
and contract personnel to keep personnel costs variable, achieve maximum
flexibility, outsource highly specialized skills, and avoid the negative effects
of layoffs. Rapidly changing regulations concerning employee benefits, health
insurance, retirement plans, and the highly competitive business climate also
prompted many employers to take advantage of the flexibility offered through
temporary and human resource staffing. Additionally, Internal Revenue Service
and Department of Labor regulations concerning the classification of employees
and independent contractors significantly increased demand by prompting many
independent contractors to affiliate with employers like Headway.
By using temporary and contract workers, many companies significantly
increased flexibility to respond to the difficult economic conditions and were
able to reduce their cost structures, while minimizing the negative effects of
layoffs. As a result, Headway believes that as the economy recovers, employers
will once again look to use temporary and contract workers as a way to keep
their personnel costs variable and maintain maximum flexibility, and that this
will fuel future growth in the industry.
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Growth Strategy
We intend to focus on internal growth as the key element of our growth
strategy. We will concentrate on existing market locations, customer segments,
and skill areas that value high levels of service to improve growth. Further, we
will endeavor to increase penetration of existing markets, expand existing
specialties into new and contiguous geographic markets to the ones we service,
and identify new service areas that compliment our current services that we
believe will be attractive to the industries we serve. Finally, we will continue
our practice of enhancing the knowledge and skills of our consultants and
employees to strengthen our existing relationships with clients and enhance our
reputation for providing highly skilled personnel.
Services
The human resource management services offered by Headway include
o temporary staffing and value added services
o IT/professional staff services
o executive search and permanent placement services, and
o human resource administration services.
Temporary Staffing and Value Added Services. Headway provides employees to
clients for periods ranging from one day to several months to satisfy a specific
job skill need arising from absenteeism, special projects, fluctuations in the
client's volume of business inherent in the business cycle, technology and
business system changes, and other causes. The job skills required by clients
and offered by Headway range from entry-level clerks and secretaries to master
administrative assistants.
Under vendor-on-premise programs, Headway assumes administrative
responsibility for coordinating some or all staffing services at a client's
location or organization, including recruiting activities, skills testing and
training. Headway also provides payroll services to its clients for its
permanent employees, thereby mitigating the administrative burden of employment.
By using Headway's services, clients can make changes in workforce quickly
without the administrative burden and cost of hiring and firing.
IT/Professional Staff Services. Rapid changes in technology and competitive
pressures in the financial services industry create demand by employers for
computer programmers and technicians, desktop publishing operators, network
administrators, and computer graphic specialists to help implement the systems
required to meet these challenges. Headway offers to its clients IT/professional
staff services in which persons with these special skills are placed on a
temporary, contract, or permanent basis.
Executive Search and Permanent Placement. Headway, through its Whitney
subsidiary, is one of the leading executive search firms in the financial
services industry. Beginning in 1998, Headway has expanded its industry focus to
include management consulting, e-commerce, media, entertainment, information
technology and telecommunication businesses. Headway uses a complete
consultative approach with its clients, including, market analysis, product
recommendations, and staffing new and existing business divisions of its
clients. Headway conducts executive searches in a broad range of product areas
in the financial services industry, including, investment banking, capital
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markets, leveraged finance, research, emerging markets, investment management,
financial administration, and risk management. Executive search services are
provided in major financial markets, including, New York, Chicago, Boston,
London, Tokyo, Hong Kong, Singapore and Australia.
Headway also provides permanent placement services to its clients for
office/clerical positions and IT/professional personnel. Clients use Headway's
temporary staffing services as a means for locating and evaluating new personnel
with a view to permanent employment. Clients are able to evaluate the abilities
and productivity of workers during temporary employment through Headway and make
informed decisions on whether to retain the workers on a permanent basis, all
without the administrative burden associated with adding the workers to their
workforce from the outset.
Human Resource Administration Services. Many of Headway's clients use
long-term contingent workers on a regular basis to satisfy recurring needs for
highly skilled workers in the areas of accounting, finance, business
administration, marketing, computer programming, computer graphics, and other
areas requiring a high level of business or technical expertise. The use of
contingent workers on a regular basis can create a number of problems for
clients. The possibility always exists that these workers will accept employment
elsewhere that prevents them from being available to the client when needed.
Furthermore, there is always a risk contingent workers will be viewed by federal
and state taxing authorities as employees rather than contingent workers for
income tax withholding and benefits purposes. To mitigate these potential
problems, Headway offers a service where it assumes the position of employer for
the independent contractors. As an employer, Headway manages the scheduling of
these people to make them available to service the needs of the clients, and
implements income tax withholding and other employee benefit programs to ensure
compliance with the legal requirements of employment under applicable federal
and state laws.
Operating Strategy
In 2001, Headway continued its program to diversify its specialization
outside of financial services to include media, entertainment, biotechnology and
information technology and continued to expand its service offerings to include
accounting and finance, legal and mortgage underwriters. Headway has a strong
presence in the financial services industry. Headway will continue to focus on
this industry, because Headway believes there is a substantial untapped market
for its services in this industry and because its core strengths of industry
experience and human resources expertise enable it to develop unique,
value-added staffing solutions for the financial services industry. Headway will
work to maintain its relationships with existing clients in the financial
services industry, expand service offerings in existing locations and cross-sell
services to existing clients. It will also look to complete small but strategic
acquisitions. Although Headway expects to focus on this industry, it expects
that it will continue to have a diversified client base, with no more than 50%
of its annual revenues being derived from financial services clients.
Headway employs a decentralized, Hub-Spoke management model. Local regional
managers manage Headway's operations in each market, including any satellite
offices in that market. Headway believes it has a strong market presence in each
of its major markets largely due to the commitment, ability, and creativity of
its regional managers who drive each local business. Headway fosters this
entrepreneurial environment by giving its regional managers the authority to
respond quickly and creatively to client needs. Regional managers are
responsible for achieving operational and financial objectives, including
revenues and earnings growth, and have authority over hiring, recruiting,
compensation, pricing, and sales management. Headway believes that
accountability and authority, combined with the support of Headway's corporate
level support services, enables its regional managers to compete successfully in
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the local marketplace. Headway also believes this entrepreneurial environment
allows Headway to attract talented managers and successfully serve its clients'
needs.
Headway emphasizes recruiting, training, and retaining experienced sales
consultants and providing highly qualified temporary employees. Headway trains
its sales consultants to operate as partners with their clients in evaluating
and meeting the client's staffing requirements. Headway promotes and monitors
quality of service in a number of ways. It seeks highly qualified temporary
employees through referrals from existing temporary employees and conducts
in-depth interviews by Headway personnel experienced in the temporary employees'
field. Headway performs skill evaluations and offers programs to its temporary
employees to improve their skills. Headway contacts clients within hours of the
beginning of a project to receive a preliminary determination of satisfaction,
and obtains client satisfaction reports upon the completion of projects. Headway
seeks to understand and proactively assess clients' needs, respond promptly to
clients' requests, and continually monitor job performance and client
satisfaction. Headway believes that its commitment to providing quality service
has enabled it to establish and maintain long-term relationships with clients.
Headway's services are marketed through its network of Hubs whose managers
and placement coordinators make regular personal sales visits to clients and
prospective clients. Headway emphasizes long-term personal relationships with
clients who are developed through regular assessment of client requirements and
constant monitoring of temporary staff performance. New clients are obtained
through sales calls, consultation meetings with target companies, and client
referrals. Headway's management and regional managers participate in national
and regional trade associations, local chambers of commerce, and other civic
associations. Headway monitors sales, marketing, and recruiting functions to
identify opportunities to deliver high value-added quality services. Headway
believes that its client's select service providers principally on the basis of
quality of service, range of services offered, specialized expertise, and
ability to service multiple locations, and Headway is striving to satisfy these
criteria in its marketing efforts.
Human Resources
As of December 31, 2001, Headway had approximately 435 full-time employees.
In the fourth quarter of 2001, Headway employed approximately 7,900 temporary
employees in a typical week. None of Headway's employees, including its
temporary employees, is represented by a collective bargaining agreement.
Headway believes its employee relations to be strong. Hourly wages for Headway's
temporary employees are determined according to local market conditions. Headway
pays mandated costs of employment, including the employer's share of social
security taxes, federal and state unemployment taxes, unemployment compensation
insurance, general payroll expenses and workers' compensation insurance. Headway
offers access to various insurance programs and other benefits, such as
vacations, holidays and 401(k) programs to qualified temporary employees and
professionals.
Competition
The staffing industry is intensely competitive and fragmented and has
limited barriers to entry. Headway competes for employees and clients in
national, regional, and local markets with full-service and specialized
temporary staffing service businesses. A significant number of Headway's
competitors have greater marketing, financial, and other resources and more
established operations than Headway. Price competition in the staffing industry
is intense and pricing pressures from competitors and customers are increasing.
Many of Headway's clients have relationships with more than one staffing service
company. However, in recent years, an increasing number of companies have
7
consolidated their staffing services purchases and entered into exclusive
contracts with a single temporary staffing company or small number of temporary
staffing companies. If current or potential clients enter into exclusive
contracts with competitors of Headway, it will be difficult or impossible for
Headway to obtain business from such clients. Headway expects that the level of
competition will remain high in the future, which could limit Headway's ability
to maintain or increase its market share or maintain or increase gross margins.
However, Headway believes that its strategy of becoming a dominant provider in
each of its markets will allow it to remain competitive in this environment.
Regulation
Generally, Headway's operations are not subject to state or local licensing
requirements or other regulations specifically governing the provision of
commercial and professional staffing services. There can be no assurance,
however, that states in which Headway operates or may operate in the future will
not adopt such licensing or other regulations affecting Headway.
The laws of various states require Headway to maintain workers'
compensation and unemployment insurance coverage for its temporary employees.
Headway maintains state mandated workers' compensation and unemployment
insurance coverage. The extent and type of health insurance benefits that
employers are required to provide employees has been the subject of intense
scrutiny and debate in recent years at both the national and state levels.
Proposals have been made to mandate that employers provide health insurance
benefits to staffing employees. In addition, some states could impose sales
taxes, or raise sales tax rates, on staffing services. Further increases in such
premiums or rates, or the introduction of new regulatory provisions, could
substantially raise the costs associated with hiring and employing staffing
employees.
Intellectual Property
Headway maintains a number of trademarks, trade names, service marks and
other intangible rights. Headway believes that it has all rights to trademarks
and trade names necessary for the conduct of its business and is not currently
aware of any infringing uses or other conditions that would materially and
adversely affect its use of proprietary rights.
Item 2. Properties
Headway's corporate headquarters are located at 317 Madison Avenue, New
York, NY 10017. Headway believes that space at its corporate headquarters will
be adequate for its needs.
Headway leases space for all of its Hub-Centers and does not own any real
property. Headway believes that its facilities are adequate for its needs and
does not anticipate inordinate difficulty in replacing such facilities or
opening additional facilities, if needed.
Item 3. Legal Proceedings
In the ordinary course of its business, Headway is periodically threatened
with or named as a defendant in various lawsuits, including discrimination,
harassment, and other similar claims. Headway maintains insurance in such
amounts and with such coverage and deductibles as management believes are
reasonable.
In February 1999, a lawsuit was filed in the Superior Court of California
alleging breach of contract, interference with prospective business relations,
8
misappropriation of trade secrets and unfair competition. In February 2002, the
lawsuit was settled. The settlement did not have a material effect on the
financial position, results of operations or cash flows of the Company.
In May 2000, a lawsuit was filed in the Judicial District Court of Dallas
County, Texas alleging breach of contract, fraud, negligence, negligent
retention and supervision, civil conspiracy and harmful access by computer.
Plaintiffs have alleged damages in the amount of $10 million. Headway believes
the claims are unfounded and intends to defend itself vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders in the fourth quarter
of 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Price Information
Since August 3, 2000, Headway's common stock has traded on the American
Stock Exchange under the symbol "HEA." Previously, quotations for Headway's
common stock were reported on the Nasdaq National Market.
The following table sets forth the high and low closing sale prices for the
common stock as reported on the American Stock Exchange and Nasdaq National
Market for 2000 and the American Stock Exchange for all of 2001.
Calendar Quarter Ended High ($) Low ($)
March 31, 2000 5.060 3.380
June 30, 2000 3.750 2.940
September 30, 2000 3.380 2.190
December 31, 2000 3.130 1.130
March 31, 2001 2.400 1.375
June 30, 2001 1.850 0.950
September 30, 2001 1.100 0.400
December 31, 2001 0.700 0.300
Since its inception, no dividends have been paid on Headway's common stock.
Headway intends to retain any earnings for use in its business activities, so it
is not expected that any dividends on the common stock will be declared and paid
in the foreseeable future. As of March 31, 2002, Headway had approximately 242
stockholders of record.
Recent Sales of Unregistered Securities
As of June 30, 2001, Headway failed to comply with certain financial ratio
covenants in an existing senior credit facility and outstanding senior
subordinated notes. As a result, the agent for the lenders under the senior
credit facility issued a notice of payment blockage to prevent Headway from
paying interest on the senior subordinated notes. In June 2001, the board of
directors determined not to declare a dividend on Headway's outstanding Series F
Convertible Preferred Stock (the "Series F Stock") believing that it was not in
9
the interest of Headway to declare a dividend until the covenant defaults under
the senior credit facility and senior subordinated notes were resolved. Holders
of the senior subordinated notes are also the holders of the Series F Stock.
In August 2001, Headway amended the senior credit facility and obtained a
waiver of the financial ratio defaults. This amendment increased the margin for
base rate loans and the letter of credit fee, added a default interest rate
payable upon the occurrence of an event of default, required a partial pay down
of the loan balance with Headway's cash balance over $8 million, terminated the
obligation of the senior lenders to make further advances under the facility,
modified certain financial covenants, and required Headway to negotiate an
extended payment schedule for approximately $2.3 million of earn out payments
due for prior acquisitions. Concurrently, Headway amended the terms of the
senior subordinated notes and exchanged all 1,000 shares of outstanding Series F
Stock for an equal number of shares of Series G Convertible Preferred Stock (the
"Series G Stock"). As a negotiated element of the transaction, Headway also
issued to the holders of the Series G Stock warrants to purchase an aggregate of
1,000,000 shares of common stock at an exercise price of $1.10 per share that
expire on the later of September 7, 2006 and the date on which all principal,
premiums and interest on the Subordinated Notes has been paid in full and all of
the Preferred Stock has been redeemed or converted (the "First Series G
Warrants"); warrants to purchase an additional 1,150,000 shares at an exercise
price of $0.01 per share (the "Second Series G Warrants") and warrants to
purchase an additional 850,000 shares at an exercise price of $3.05 per shares
(the "Third Series G Warrants, and, together with the First Series G Warrants
and the Second Series G Warrants, the "Series G Warrants"), exercisable from
January 2, 2002, through the later of January 2, 2007 and the date on which all
principal, premiums and interest on the Subordinated Notes has been paid in full
and all of the Preferred Stock has been redeemed or converted.
Under the amendments to the senior subordinated notes Headway obtained
waivers of the financial covenant and interest payment defaults, agreed to an
increase in the note interest rate to 20 percent retroactive to July 1, 2001, if
all interest accrued at April 1, 2002, is not paid in full as of that date,
modified certain financial covenants, and agreed to negotiate for the payment of
alternative consideration if all accrued payment obligations at April 1, 2002,
are not paid as of that date, which shall include a decrease in the exercise
price of all warrants issued to the holders of Series G Stock to $0.01 per
share. None of the foregoing interest or dividend payments were made.
On April 17, 2002, Headway further amended the senior credit facility and
obtained a waiver of the financial ratio defaults, as well as an extension of
the maturity date to June 30, 2003. This amendment further increased the margin
for base rate loans and the letter of credit fee, required a partial pay down of
the loan balance with Headway's cash balance over $8 million or if the accounts
receivable balance falls below certain thresholds, modified certain financial
covenants, and required Headway to issue warrants to the Senior Lenders to
purchase an aggregate of 2,455,522 shares of common stock at an exercise price
of $0.25 per share.
Concurrently, but effective as of March 31, 2002, Headway amended the terms
of the senior subordinated notes. As a negotiated element of the transaction,
the exercise prices of the First Series G Warrants and the Third Series G
Warrants was changed to $0.25 per share. Under the amendments to the senior
subordinated notes Headway obtained waivers of the financial covenant and
interest payment defaults, modified certain financial covenants, as well as
continued deferral of interest and dividend payments through the Recap Amendment
Termination Date (as defined in Note 8). As part of this transaction, the
holders of the senior subordinated notes agreed to the elimination of the
requirement to pay 5.0% of additional interest on the senior subordinated notes,
which was to take effect retroactively, as of July 1, 2001, in the event that
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all accrued and unpaid interest on the senior subordinated notes and accrued and
unpaid dividends on the Preferred Stock were not paid in full in cash by April
1, 2002.
The Series G Stock issued to the former holders of the Series F Stock was
convertible to common stock of Headway at a conversion price of $5.58 per share;
provided, that the conversion price would decrease to $2.75 per share if all
accrued interest on the senior subordinated notes and accrued dividends on the
Series G Stock are not paid in full as of January 2, 2002, and would decrease
further to $1.00 per share if such interest and dividends are not paid in full
as of April 1, 2002. The Series G Stock is senior to the common stock with
respect to payment of dividends and distributions in liquidation. Holders of the
Series G Stock are entitled to receive dividends payable quarterly equal to 7.5%
of the liquidation preference value of the Series G Stock, which is $20,000 per
share or a total of $20.0 million; provided, that the dividend rate was
increased to nine percent as all accrued dividends on the Series G Stock were
not paid in full on January 2, 2002, and were increased further to 10 percent as
all such dividends were not paid in full as of April 1, 2002. None of the
foregoing interest or dividend payments were made, and, accordingly, the
conversion price for the Series G Stock is now $1.00 per share. No dividends or
distributions may be made with respect to the common stock unless all dividend
payments on the Series G Stock are current. Holders of Headway's Series G Stock
have the right to elect one member of the board of directors, elect one-third of
the board of directors so long as a default in dividend payments exists and is
continuing, and approve certain corporate transactions and activities,
including, acquisitions in excess of specified limits, sales of substantial
assets or subsidiaries, implementing additional debt facilities in excess of
specified limits, sales of Headway securities in certain circumstances, amending
Headway's charter documents, effecting or permitting a sale of Headway, issuing
stock options and similar incentive arrangements involving Headway's securities,
and other matters. The existence of these rights could inhibit the ability of
Headway to effect or participate in transactions acceptable to Headway but not
the holders of the Series G Stock, or the ability of stockholders to participate
in a transaction in which they might otherwise receive a premium for their
shares over the then-current market price.
The foregoing transactions were effected in reliance on the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933 for
transactions by an issuer not involving a public offering. No underwriter was
involved in the transaction, and no commissions were paid to any person.
However, Headway agreed to pay to the lenders under the senior credit facility a
waiver and amendment fee in the aggregate amount of $618,750, of which $368,750
was paid in August 2001, and the balance of $250,000 was due April 1, 2002. Such
balance was paid on April 17, 2002 as part of the amendment to the senior credit
facility completed on that date. In connection with the amendment to the senior
credit facility completed on April 17, 2002, Headway also agreed to pay the
lenders a deferred restructuring fee of approximately $2.2 million, which is
payable on the maturity date and may be reduced or waived if certain conditions
are met. An additional restructuring fee of $368, 434 was paid to the lenders on
April 17, 2002. In connection the Second Limited Waiver, Headway agreed to pay
to the holders of the senior subordinated notes and the preferred stock a
restructuring fee of approximately $175,000, which is payable on or about the
Recap Amendment Termination Date (as defined in Note 8).
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Item 6. Selected Financial Data
The selected consolidated financial data set forth below as of and for the
years ended December 31, 2001, 2000, 1999, 1998, and 1997, were derived from
audited consolidated financial statements of Headway.
Statement of Operations Data
In Thousands, Except Per Share Data
For Year Ended December 31
--------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Revenues $ 142,842 $ 291,303 $ 360,742 $ 371,115 $ 323,037
Direct costs 104,396 224,993 274,360 272,872 253,354
Selling, general and administrative expenses 29,588 48,638 63,349 74,690 62,587
Termination of employment contract - - 2,329 - -
Depreciation and amortization 1,453 2,952 4,411 5,337 5,787
------------------------------------------------------------
Total operating expenses 31,041 51,590 70,089 80,027 68,374
Operating income from continuing operations 7,405 14,720 16,293 18,216 1,309
Other (income) expenses:
Interest expenses 2,662 4,515 6,331 8,049 10,879
Interest income (104) (152) (122) (105) (113)
(Gain) on sale of investment (4,272) (901) - - -
Other (income) expenses, net (750) - - - -
------------------------------------------------------------
(2,464) 3,462 6,209 7,944 10,766
------------------------------------------------------------
Income (loss) from continuing operations
before income tax expense (benefit) 9,869 11,258 10,084 10,272 (9,457)
Income tax expense (benefit) 4,064 4,639 4,299 4,388 (3,778)
------------------------------------------------------------
Income (loss) from continuing operations 5,805 6,619 5,785 5,884 (5,679)
(Loss) from discontinued operations (2,999) - - - -
------------------------------------------------------------
Net income (loss) before extraordinary item 2,806 6,619 5,785 5,884 (5,679)
Extraordinary (loss) - (1,557) - - -
------------------------------------------------------------
Net income (loss) 2,806 5,062 5,785 5,884 (5,679)
------------------------------------------------------------
Preferred dividend requirements (137) (866) (1,100) (1,414) (1,500)
------------------------------------------------------------
Net income (loss) available
for common stockholders $ 2,669 $ 4,196 $ 4,685 $ 4,470 $ (7,179)
============================================================
Basic earnings (loss) per common share:
Continuing operations $ 0.79 $ 0.58 $ 0.46 $ 0.42 $ (0.67)
Discontinued operations (0.42) - - - -
Extraordinary item - (0.15) - - -
------------------------------------------------------------
Net income (loss) $ 0.37 $ 0.43 $ 0.46 $ 0.42 $ (0.67)
============================================================
Diluted earnings (loss) per common share:
Continuing operations $ 0.58 $ 0.47 $ 0.40 $ 0.41 $ (0.67)
Discontinued operations (0.30) - - - -
Extraordinary item - (0.11) - - -
------------------------------------------------------------
Net income (loss) $ 0.28 $ 0.36 $ 0.40 $ 0.41 $ (0.67)
============================================================
Average shares outstanding
Basic 7,223,462 9,853,354 10,287,978 10,590,461 10,729,627
Diluted 10,012,198 14,157,012 14,328,754 14,248,902 10,729,627
12
Balance Sheet Data
In Thousands
As of December 31
-----------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Working capital $ 450 $ 32,139 $ 30,566 $ 27,457 $ 34,813
Total assets 67,336 126,946 148,419 154,186 149,164
Long term debt, excluding
current portion 19,059 60,959 72,750 69,700 82,000
Stockholders' equity 16,452 42,571 48,001 32,739 26,429
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Headway is a leading provider of staffing and executive search services to
businesses in a variety of industries, including, financial services,
e-commerce, media, entertainment, information technology and telecommunication.
Headway established its human resource business through 20 acquisitions of
staffing and professional services companies from 1996 through 1999. Headway's
goal is to continue to build a national staffing business focused on providing
these services with an emphasis in the financial services industry as well as
other identified industries. Headway's strategy for achieving this goal is to
emphasize programs that generate internal growth.
In 2001, Headway focused its efforts on reducing costs in response to the
weakened economy. This included a reduction of headcount and operating expenses
as well as the consolidation of certain business lines. We also began the
national rollout of our newly developed operating software, Staffserv. In May
2001, Headway opened a new clerical staffing office in Torrance, California.
In March 1999, Headway bought out the employment agreement of the vice
chairman and executive vice president of Headway Corporate Staffing Services, a
wholly owned subsidiary. In connection with this termination, Headway incurred a
non-recurring pre-tax charge of $2.3 million or $1.4 million after tax in the
first quarter of 1999.
In June 1999, Headway acquired substantially all of the assets of the
Resource Management division of Nine Rivers Technology Corporation, with offices
in Florida, Texas and North Carolina. The acquired offices were folded into
existing Headway locations in North Carolina, Florida and Texas. The acquired
division of Nine Rivers is engaged in the business of offering temporary
information technology staffing services.
In November 1999, Headway acquired all of the outstanding capital stock of
Tyzack Holding Limited, the oldest established executive search firm in the UK
with offices in London and Leeds. While Tyzack performs executive search for
financial services companies, it also provides search services in other
industries such as; e-commerce, media and entertainment, consumer goods,
information technology and telecommunications.
Critical Accounting Policies
Revenue Recognition
Information technology staffing, temporary staffing and human resource
staffing revenue is recognized when the temporary personnel perform the related
services. Permanent placement revenue is recognized when the placement is
13
employed. Provisions are made for estimated losses in realization (principally
due to applicants not remaining in employment for the guaranteed period, usually
90 days) and for bad debts. These provisions are reviewed periodically and have
always been found to be adequate based on the Company's experience in this
regard.
Executive search services are primarily engaged on a retainer basis. Income
from retainer contracts which provide for periodic billings over periods of up
to one year, is recognized as earned based on the terms of the contract.
Goodwill
Goodwill is amortized utilizing the straight-line method over a period of
20 to 30 years. The Company periodically evaluates the carrying value and the
periods of amortization of goodwill based on the current and expected future
non-discounted income from operations of the entities giving rise to the
goodwill to determine whether events and circumstances warrant revised estimates
of carrying value or useful lives. No such write-downs have been made.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
effective for all combinations initiated after June 30, 2001, and No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statement. Other
intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS 142 is expected to result in a decrease in
amortization expense of approximately $4,000,000 ($0.37 per share) pre-tax per
year. During 2002, the Company will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1, 2002.
Based on steps the Company has taken to prepare for the adoption of Statement
142, it is likely that between $35 and $45 million of the goodwill related to
the acquisitions completed by the Company will be impaired using the impairment
test required by Statement 142. The impairment that is required to be recognized
when adopting Statement 142 will be reflected as the cumulative effect of a
change in accounting principle in the first quarter of 2002. The Company plans
to complete the measurement of the impairment loss in 2002.
Results of Operations
Years Ended December 31, 2001 and 2000
Revenue decreased $48.1 million to $323.0 million for the year ended
December 31, 2001, from $371.1 million for the year ended December 31, 2000. The
decrease in revenue for 2001 is attributable to the slowing of the economy in
2001 and the resulting decline in demand for staffing services. In addition, the
tragic events of September 11, 2001 had a profound impact on two of the
Company's primary markets: the financial services industry and the New York
metropolitan area.
Whitney, the executive search segment contributed $26.1 million to
consolidated revenues in 2001, a decrease of $11.5 million from $37.7 million in
2000. This decrease is attributable to the economic slowdown in 2001. Whitney
primarily serves the financial services industry, which was significantly
impacted by the events of September 11th. Many of Whitney's clients experienced
significant layoffs and implemented hiring freezes during 2001.
14
The staffing subsidiary, Headway Corporate Staffing Services, Inc. (HCSS)
contributed revenues of $296.9 million, a decrease of $36.6 million from $333.5
million in 2000. The decline in revenues was a result of negative impact of the
unfavorable economic conditions on the demand for information technology and
clerical staffing services.
Total operating expenses decreased $31.2 million to $321.7 million for 2001
from $352.9 million for 2000. The decrease is the result of a $19.5 million
decrease in direct costs, a $12.1 million decrease in selling, general and
administrative expenses, offset by a $0.5 million increase in depreciation and
amortization. Direct costs increased as a percentage of revenues to 78.4% in
2001 from 73.5% in 2000. This increase in direct costs as a percentage of
revenues is a result of a change in Headway's business mix in 2001, as well as
pricing pressure that we experienced in some of our markets. Specifically, the
executive search business that has no direct costs experienced more significant
declines than the staffing business, therefore reducing its percentage of our
total revenues. The decrease in selling, general and administrative expenses is
primarily attributed to the lower commission expenses associated with the
reduction in revenues, as well as staff reductions and other cost-cutting
initiatives implemented this year in response to the unfavorable economic
conditions.
Whitney's selling, general and administrative expenses decreased $5.0
million to $23.4 million for the year ended December 31, 2001 as compared to
$28.4 million for the same period last year. The decrease relates primarily to
the reduced commissions related to the lower executive search revenues.
HCSS' selling, general and administrative expenses decreased $5.9 million
to $37.0 million for the year ended December 31, 2001 as compared to $42.9
million for the same period last year. The decrease in selling, general and
administrative expenses is primarily attributable to the lower commission
expense associated with the decline in revenues, as well as staff reductions and
other cost-cutting initiatives that were implemented in 2001.
Interest expense increased $2.9 million to $10.9 million for the year ended
December 31, 2001 as compared to $8.0 million for the same period last year. The
increase in interest expense related to increased amortization of deferred
financing costs relating to the amendment completed in August 2001, an increase
in the applicable margin for base rate loans under the Amended Senior Credit
Facility, the default penalty on the Senior Credit Facility during the fourth
quarter of 2001, and expense relating to the Company's interest rate swap.
The Company had a net loss of $5.7 million for the year ended December 31,
2001 compared to net income of $5.9 million for the year ended December 31,
2000.
Years Ended December 31, 2000 and 1999
Revenue increased $10.4 million to $371.1 million for the year ended
December 31, 2000, from $360.7 million for the year ended December 31, 1999. The
increase in revenue for 2000 is attributable to a full year of results from the
executive search acquisition completed in the latter part of 1999. The
relatively modest growth in revenue is misleading and will continue to be a less
significant measurement criterion as Headway focuses its growth strategy on
higher margin business and reduces the emphasis on high revenue low margin human
resource staffing business. This is evident in the decrease in direct costs as a
percentage of revenues to 73.5% for the year ended December 31, 2000 from 76.1%
for the same period in 1999. During 2000, Headway experienced strong performance
in the executive search and permanent placement business offset by a continued
decline in the information technology staffing business.
15
Whitney, the executive search segment contributed $37.7 million to
consolidated revenues in 2000, an increase of $11.7 million from $26.0 million
in 1999. This increase is due to the continued strong demand for new hires in
the financial services industry and the full year results from the Tyzack
acquisition made in November 1999.
The staffing subsidiary, Headway Corporate Staffing Services, Inc. (HCSS)
contributed revenues of $333.4 million, a decrease of $1.3 million from $334.7
million in 1999. Revenues were slightly behind 1999, as Headway focused on
reducing it's lower margin human resource staffing business, as well as the very
low supply of information technology staffing candidates, which has resulted in
slightly lower revenue for information technology staffing.
Total operating expenses (excluding the $2.3 million termination payment in
1999) increased $10.8 million to $352.9 million for 2000 from $342.1 million for
1999. The increase is the result of a $11.4 million increase in selling, general
and administrative expenses, a $900,000 increase in depreciation and
amortization, offset slightly by a $1.5 million decrease in direct costs. Direct
costs decreased as a percentage of revenues to 73.5% in 2000 from 76.1% in 1999.
This decrease in direct costs as a percentage of revenues is a result of
Headway's changing business mix. Specifically, the executive search business
that has no direct cost is becoming a larger percentage of our total revenues
and the human resource staffing business, which traditionally has a high direct
cost, has decreased. The increase in selling, general and administrative
expenses is primarily attributed to the higher commission expenses associated
with a larger portion of revenues being generated from executive search and
permanent placements.
Whitney's operating expenses increased $9.5 million to $28.4 million for
the year ended December 31, 2000 as compared to $18.9 million for the same
period last year. The increase relates primarily to the increased commissions
related to the higher executive search revenues as well as a full year of
operating expenses of Tyzack.
HCSS operating expenses increased $900,000 to $42.9 million for the year
ended December 31, 2000 as compared to $42.0 million for the same period last
year. The increase in selling, general and administrative expenses is primarily
attributable to the higher commission expense associated with higher revenues
generated from permanent placements.
Net income increased $99,000 to $5.9 million for the year ended December
31, 2000 compared to $5.8 million for the year ended December 31, 1999.
Liquidity and Capital Resources
As of December 31, 2001, $72.0 million in aggregate principal amount was
outstanding under the Senior Credit Facility, $10.0 million in aggregate
principle amount was outstanding under the Senior Subordinated Notes due 2006
and $20.0 million in face amount of Series G Convertible Preferred Stock of the
Company (the "Preferred Stock") was outstanding. The Company failed to comply
with certain financial ratios during the fourth quarter of 2001, creating an
event of default under the Senior Credit Facility, the Indenture for the Senior
Subordinated Notes and the Certificate of Designations for the Preferred Stock.
On April 17, 2002, the Company entered into an amendment to the Senior Credit
Facility and obtained a waiver of the financial ratio defaults. The amendment
provides for an increase in the margin for base rate loans, partial pay down of
the loan balance with the Company's cash balance over $8 million or if the
accounts receivable balance falls below certain thresholds, modified financial
covenants, and an extended maturity date. The amended Senior Credit Facility,
16
which was set to expire on April 18, 2002, has been extended to an expiration
date of June 30, 2003, with all outstanding amounts then due. Even though the
Company has obtained amendments and waivers, the Company will need to negotiate
a further extension of these agreements or complete a re-financing prior to the
expiration date of the Senior Credit Facility in June 2003.
On April 17, 2002, but effective as of March 31, 2002, the Company also
entered into an amendment of the Indenture for the Senior Subordinated Notes and
the Second Limited Waiver with the Senior Subordinated Notes Holders and the
Preferred Stockholders, which provided for a waiver of the events of default on
the Senior Subordinated Notes and a waiver of the Preferred Stock events of
default through the Recap Amendment Termination Date (See Note 8 (i) to the
Financial Statements). The Second Limited Waiver also waived the payment of (but
not the accrual of) interest and dividends through the Recap Amendment
Termination Date, modified certain financial covenants, waived the increase in
the interest rate on the Senior Subordinated Notes and decreased the exercise
price on the First Series G Warrants and the Third Series G Warrants.
In connection with the transactions described above, discussions regarding
the employment arrangements that will likely be required to induce the
management team to commit to remain with the Company and to align their
compensation incentives with the interests of the shareholders and creditors of
the Company, have been held among representatives of the Company's Board of
Directors, senior management as well as representatives of the senior debt
holders and certain of the holders of the senior subordinated debt and the
Preferred Stock. While no definitive agreement has been reached, it is expected
that such employment arrangements would include base salaries and bonuses
consistent with current levels, retention bonuses, and customary non-competition
and non-solicitation provisions. In addition, it is expected that the Company
would establish a new "Management Incentive Plan" ("MIP"). Under the MIP, the
management group would receive, as incentive compensation, amounts based on the
total realized by the Company in one or more liquidity transactions such as
sales of assets, merger or sale of the entire company, or refinancing of the
Company's indebtedness: 10% between $40 and $75 million; 20% between $75 and
$107.5 million; and, 30% above $107.5 million. No assurance can be given that
the Company and the executives will enter into such arrangements.
Net cash provided by operating activities was $4.5 million in 2001. This is
primarily due to a net loss of $5.7 million, depreciation and amortization
expenses of $7.2 million and a $14.6 million decrease in accounts receivable and
other assets. This was partially offset by an $8.8 million decrease in accrued
payroll and a $3.4 million decrease in income taxes payable. In 2000 cash
provided by operating activities of $15.3 million was primarily due to net
income of $5.9 million and depreciation and amortization expenses of $5.9
million, a $2.2 million increase in accounts payable and accrued expenses and a
$3.1 million increase in accrued payroll, partially offset by a $1.4 million
decrease in income taxes payable.
Total cash used in investing activities of $7.1 million in 2001 and $9.5
million in 2000 was primarily the result of the earn-outs paid related to the
acquisitions completed during 1999, 1998 and 1997, and to a lesser extent
purchases of property and equipment.
Total cash provided by financing activities was $9.6 million compared to
total cash used in financing activities of $6.0 million for 2000. Cash generated
by financing activities in 2001 related to additional borrowings made on
Headway's revolving credit facility, partially offset by payments of loan
acquisition fees, dividends and capital lease obligations. Cash used in
financing activities in 2000 related to payments made on Headway's revolving
credit facility, payments of other loans and dividend payments.
17
In September 1998, Headway announced that its Board of Directors had
authorized a stock repurchase program of up to 1.0 million shares. In 2000,
Headway spent $20,000 to repurchase approximately 5,000 shares. Such shares were
retired in 2001.
On January 22, 2002, the Securities and Exchange Commission issued FR-61,
Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations. The release sets forth certain views of the
Securities and Exchange Commission regarding disclosure that should be
considered by registrants. Headway's contractual obligations and commercial
commitments are summarized below, and are fully disclosed in the Notes to
Consolidated Financial Statements. The following table includes aggregate
information about Headway's contractual obligations as of December 31, 2001 and
the periods in which payments are due:
Contractual Obligations Payments Due by Period
----------------------
(in thousands)
- ------------------------------------------------------------------------------
Total Less 1-3 years 4 - 5 After 5
than 1 years years
year
- ------------------------------------------------------------------------------
Loans Payable $82,000 $ - $82,000 $ - $ -
- ------------------------------------------------------------------------------
Capital Lease Obligations 362 246 116 - -
- ------------------------------------------------------------------------------
Operating Leases 10,400 2,880 3,899 2,336 1,285
- ------------------------------------------------------------------------------
Unconditional Purchase
Obligations None
- ------------------------------------------------------------------------------
Other Long Term 1,287 1,287 - - -
Obligations (1)
- ------------------------------------------------------------------------------
Total Contractual Cash
Obligations $94,049 $4,413 $86,015 $ 2,336 $ 1,285
- ------------------------------------------------------------------------------
The following table includes aggregate information about Headway's
commercial commitments as of December 31, 2001. Commercial commitments are items
that Headway could be obligated to pay in the future. They are not required to
be included in the consolidated balance sheet.
Other Commercial Total Amount of Commitment Expiration Per Period
Commitments Amounts (in thousands)
Committed
- --------------------------------------------------------------------------------
Less than 1 - 3 4 - 5 Over 5
1 year years years years
- --------------------------------------------------------------------------------
Lines of Credit None
- --------------------------------------------------------------------------------
Standby Letters of Credit $1,750 $1,750 $ - $ - $ -
- --------------------------------------------------------------------------------
Guarantees None
- --------------------------------------------------------------------------------
Standby Repurchase None
Obligations
- --------------------------------------------------------------------------------
Other Commercial None
Commitments
- --------------------------------------------------------------------------------
Total Commercial $ 1,750 $1,750 $ - $ - $ -
Commitments
- --------------------------------------------------------------------------------
(1) Represents earnout amounts payable to the former owners of businesses
previously acquired by Headway.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
effective for all combinations initiated after June 30, 2001, and No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), effective for fiscal years
18
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statement. Other
intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS 142 is expected to result in a decrease in
amortization expense of approximately $4,000,000 ($0.37 per share) pre-tax per
year. During 2002, the Company will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1, 2002.
Based on steps the Company has taken to prepare for the adoption of Statement
142, it is likely that between $35 and $45 million of the goodwill related to
the acquisitions completed by the Company will be impaired using the impairment
test required by Statement 142. The impairment that is required to be recognized
when adopting Statement 142 will be reflected as the cumulative effect of a
change in accounting principle in the first quarter of 2002. The Company plans
to complete the measurement of the impairment loss in 2002.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144") which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of", and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations for a Disposal of a Segment of a Business". The Company is
required to adopt SFAS 144 in the first quarter of 2002. The Company does not
expect the adoption of this statement to have a material effect on its financial
position and results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Headway is exposed to changes in interest rates primarily from its
long-term debt arrangements. Under its current policies, Headway uses interest
rate derivative instruments to manage exposure to interest rate changes. As of
December 31, 2001, Headway had one interest rate exchange agreement converting
$30.0 million of variable rate borrowings under the senior credit agreement to a
fixed rate of 6.868% per annum plus the applicable margin, expiring in 2002.
Headway is exposed to credit loss in the event of non-performance by the
counter-party, a large financial institution. However, Headway does not
anticipate nonperformance by the counter-party.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data of Headway
appear at the end of this report beginning with the Index to Consolidated
Financial Statements on page 21.
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
There were no changes in or disagreements with Headway's independent
auditors during the preceding two calendar years.
19
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by "Item 10. Directors and Executive Officers of the
Registrant," is incorporated by reference to the proposed caption "Directors and
Executive Officers" in the definitive proxy statement of Headway for the 2002
annual meeting of stockholders.
Item 11. Executive Compensation
Information required by "Item 11. Executive Compensation," is incorporated
by reference to the proposed caption "Executive Compensation" in the definitive
proxy statement of Headway for the 2002 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by "Item 12. Security Ownership of Certain Beneficial
Owners and Management," is incorporated by reference to the proposed caption
"Security Ownership of Management and Principal Stockholders" in the definitive
proxy statement of Headway for the 2002 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions
Information required by "Item 13. Certain Relationships and Related
Transactions," is incorporated by reference to the proposed caption "Certain
Relationships and Related Transactions" in the definitive proxy statement of
Headway for the 2002 annual meeting of stockholders.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements and Financial Statement Schedules
The information required by this subsection of this item is presented in
the index to the financial statements on page 21.
Reports on Form 8-K
No reports on Form 8-K were filed by Headway during the last calendar
quarter of 2001.
20
Exhibits
Copies of the following documents are included as exhibits to this report
pursuant to Item 601 of Regulation S-K.
Exhibit No. Title of Document Location
3.1 Certificate of Incorporation (1) Ex. No. 1
3.2 By-Laws (1) Ex. No. 2
3.3 By-Law Amendments (2) Ex. No. 5
4.1 Series F Preferred Stock Designation (2) Ex. No. 4
for an aggregate of 850,000 shares
4.6 Securities Purchase Agreement dated March 19, 1998 (2) Ex. No. 6
4.7 Registration Rights Agreement dated March 19, 1998 (2) Ex. No. 7
4.8 Indenture dated March 19, 1998 (2) Ex. No. 8
4.9 Fourth Supplemental Indenture, dated as of August 24, Ex. No. 4.1
2001 (3)
4.10 Limited Waiver and Amendment dated as of August 24, Ex. No. 4.3
2001 (3)
4.11 Form of Senior Subordinated Note (2) Ex. No. 9
4.12 Guaranty Agreement dated March 19, 1998 (2) Ex. No. 10
4.13 Credit Agreement dated March 19, 1998, including Ex. No. 11
Exhibit A - Commitment Percentage, and
Exhibit F - Form of Revolving Note (2)
4.14 Seventh Amendment and Limited Waiver to Credit Ex. No. 4.2
Agreement dated as of August 24, 2001, to the Credit
Agreement dated as of March 19, 1998 (3)
4.15 Guaranty Agreement dated March 19, 1998 (2) Ex. No. 12
4.16 Security Agreement dated March 19, 1998 (2) Ex. No. 13
4.17 Pledge Agreement dated March 19, 1998 (2) Ex. No. 14
4.18 LC Account Agreement dated March 19, 1998 (2) Ex. No. 15
21
4.19 Intellectual Property Security Agreement dated Ex. No. 16
March 19, 1998 (2)
21.1 Subsidiaries of Headway (4) Ex. No. 16
(1) These exhibits are included in Headway's annual report on Form 10-KSB, for
the fiscal year ended December 31, 1996, and filed with the Securities and
Exchange Commission on March 27, 1997, and are incorporated herein by this
reference. The reference under the column "Location" is to the exhibit number in
the report on Form 10-KSB.
(2) These exhibits are included in Headway's current report on Form 8-K, dated
March 19, 1998, and filed with the Commission on April 3, 1998, and are
incorporated herein by this reference. The reference under the column "Location"
is to the exhibit number in the report on Form 8-K.
(3) These exhibits are included in Headway's quarterly report on Form 10-Q, for
the quarter ended September 30, 2001, and filed with the Securities and Exchange
Commission on November 14, 2001, and are incorporated herein by this reference.
The reference under the column "Location" is to the exhibit number in the report
on Form 10-Q.
(4) This exhibit is included in Headway's annual report on Form 10-K for the
fiscal year ended December 31, 2000, and filed with the Securities and Exchange
Commission on March 30, 2001, and is incorporated herein by this reference. The
reference under the column "Location" is to the exhibit number in the report on
Form 10-K.
22
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Headway Corporate Resources, Inc.
Date: April 17, 2002 By: /s/ Barry S. Roseman
Barry S. Roseman, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: April 17, 2002 /s/ Gary S. Goldstein
Gary S. Goldstein, Principal Executive Officer
and Director
Dated: April 17, 2002 /s/ Barry S. Roseman
Barry S. Roseman, President and Director
Dated: April 17, 2002 /s/ Philicia G. Levinson
Philicia G. Levinson, Senior Vice President
and Chief Financial Officer
Dated: April 17, 2002 /s/ G. Chris Andersen
G. Chris Andersen, Director
Dated: April 17, 2002 /s/ E. Garrett Bewkes, III
E. Garrett Bewkes, III, Director
Dated: April 17, 2002 /s/ Ehud D. Laska
Ehud D. Laska, Director
Dated: April 17, 2002 /s/ Richard B. Salomon
Richard B. Salomon, Director
23
Form 10-K Item 14(a)(1) and (2)
Headway Corporate Resources, Inc. and Subsidiaries
List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Headway Corporate Resources,
Inc. and Subsidiaries are included in Item 8:
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.................F-3
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999...........................................F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2001, 2000 and 1999.......................F-5
Consolidated Statements of Cash Flows for the years ended
December 2001, 2000 and 1999...............................................F-8
Notes to Consolidated Financial Statements...................................F-9
The following consolidated financial statement schedule of Headway Corporate
Resources, Inc. and Subsidiaries is included in Item 14(a)(2):
Schedule II - Valuation and Qualifying Accounts.............................F-30
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders
Headway Corporate Resources, Inc.
We have audited the accompanying consolidated balance sheets of Headway
Corporate Resources, Inc. and Subsidiaries (the "Company") as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall 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 Headway
Corporate Resources, Inc. and Subsidiaries at December 31, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New York, New York
March 1, 2002, except for the second paragraph of Note 1,
and the fifth paragraph of Note 8, as to which the date
is April 17, 2002
F-2
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands)
December 31
2001 2000
-------------------
Assets
Current assets:
Cash and cash equivalents $ 8,641 $ 1,549
Accounts receivable, trade, net of allowance for
doubtful accounts of $1,430 (2001) and $1,156 (2000) 37,713 53,714
Prepaid expenses and other current assets 2,181 1,151
Deferred financing costs, current 979 -
Prepaid and refundable income taxes 4,279 900
-------------------
Total current assets 53,793 57,314
Property and equipment, net 5,691 6,016
Intangibles, net of accumulated amortization of
$14,865 (2001) and $10,825 (2000) 87,313 88,374
Deferred financing costs 509 1,308
Other assets 1,858 1,174
-------------------
Total assets $149,164 $154,186
===================
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 1,302 $ 3,576
Accrued expenses 7,848 4,853
Accrued payroll 8,319 17,248
Capital lease obligations, current portion 224 377
Earnouts payable 1,287 3,803
-------------------
Total current liabilities 18,980 29,857
Capital lease obligations, less current portion 111 291
Long-term debt 82,000 69,700
Deferred rent 1,073 1,143
Deferred income taxes 307 456
Other liabilities 264 -
Commitments and contingencies
Preferred stock--$.0001 par value, 5,000,000 shares
authorized:
Series F, convertible preferred stock--$.0001 par
value, 1,000 shares authorized, 0 and 1,000 shares
issued and outstanding (aggregate liquidation value
$20,000) as of December 31, 2001 and 2000, respectively - 20,000
Series G, convertible preferred stock--$.0001 par value,
1,000 shares authorized, 1,000 and 0 shares issued and
outstanding (aggregate liquidation value $20,000)
as of December 31, 2001 and 2000, respectively 20,000 -
Stockholders' equity:
Common stock--$.0001 par value, 20,000,000 shares
authorized, 10,914,627 shares issued and
outstanding at December 31, 2001 and 11,589,727 1 1
shares issued and outstanding at December 31, 2000
Additional paid-in capital 18,268 20,379
Treasury stock, at cost - (3,211)
Notes receivable (71) (84)
Deferred compensation (382) (497)
Retained earnings 9,220 16,399
Other comprehensive (loss) (607) (248)
-------------------
Total stockholders' equity 26,429 32,739
-------------------
Total liabilities and stockholders' equity $149,164 $154,186
===================
See accompanying notes.
F-3
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars in Thousands, except per share data)
Year ended December 31
2001 2000 1999
--------------------------------
Revenues $323,037 $371,115 $360,742
Operating expenses:
Direct costs 253,354 272,872 274,360
Selling, general and administrative 62,587 74,690 63,349
Termination of employment contract - - 2,329
Depreciation and amortization 5,787 5,337 4,411
--------------------------------
321,728 352,899 344,449
--------------------------------
Operating income 1,309 18,216 16,293
Other (income) expenses:
Interest expense 10,879 8,049 6,331
Interest income (113) (105) (122)
--------------------------------
10,766 7,944 6,209
--------------------------------
(Loss) income before income tax (benefit)
expense (9,457) 10,272 10,084
Income tax (benefit) expense (3,778) 4,388 4,299
--------------------------------
Net (loss) income (5,679) 5,884 5,785
Preferred dividend requirements (1,500) (1,414) (1,100)
--------------------------------
Net (loss) income available for common
stockholders $ (7,179) $ 4,470 $ 4,685
================================
Basic (loss) earnings per common share: $ (.67) $ .42 $ .46
================================
Diluted (loss) earnings per common share $ (.67) $ .41 $ .40
================================
See accompanying notes.
F-4
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands, except share data)
Series F
Convertible Additional
Preferred Stock Common Stock Paid-in
--------------- ------------------- ---------
Shares Amount Shares Amount Capital
---------------------------------------------
Balance at December 31, 1998 1,000 $20,000 10,419,220 $ 1 $ 15,779
Repayment of notes receivable - - - -
Issuance of stock for acquisitions - - 425,110 - 1,969
Exercise of options - - 403,231 - 1,597
Issuance of common stock to an officer for
services - - 125,000 - 475
Amortization of stock-based compensation - - - - -
Preferred stock dividends - - - - -
Treasury stock - - - - -
Comprehensive income:
Translation adjustment - - - - -
Net income - - - - -
Comprehensive income - - - -
---------------------------------------------
Balance at December 31, 1999 1,000 20,000 11,372,561 1 19,820
Repayment of notes receivable - - - - -
Issuance of stock for acquisitions - - 157,166 - 416
Issuance of common stock to an
employee for services - - 60,000 - 143
Amortization of stock-based compensation - - - - -
Preferred stock dividends - - - - -
Treasury stock - - - - -
Comprehensive income:
Translation adjustment - - - - -
Net income - - - - -
Comprehensive income - - - - -
---------------------------------------------
Balance at December 31, 2000 1,000 20,000 11,589,727 1 20,379
Retirement of treasury stock - - (675,100) - (3,211)
Repayment of notes receivable - - - - -
Amortization of stock-based compensation - - - - -
Preferred stock dividends - - - - -
Issuance of warrants - - - - 1,100
Transfer to temporary equity (1,000) (20,000) - - -
Comprehensive (loss):
Translation adjustment - - - - -
Cumulative effect of change in accounting - - - - -
for derivative financial instrument,
net of applicable income tax of $187
Change in fair value of derivative, net of - - - - -
applicable income tax of $12
Net (loss) - - - - -
Comprehensive (loss) - - - - -
---------------------------------------------
Balance at December 31, 2001 - $ - 10,914,627 $ 1 $ 18,268
=============================================
See accompanying notes.
F-5
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands, except share data)
Treasury Stock
------------------- Notes Deferred
Shares Amount Receivable Compensation
--------------------------------------------
Balance at December 31, 1998 (57,200) $ (290) $ (172) $ -
Repayment of notes receivable - - 46 -
Issuance of stock for acquisitions - - - -
Exercise of options - - - -
Issuance of common stock to an officer for
services - - - (475)
Amortization of stock-based compensation - - - 35
Preferred stock dividends - - - -
Treasury stock (612,900) (2,901) - -
Comprehensive income:
Translation adjustment - - - -
Net income - - - -
Comprehensive income - - - -
---------------------------------------------
Balance at December 31, 1999 (670,100) (3,191) (126) (440)
Repayment of notes receivable - - 42 -
Issuance of stock for acquisitions - - - -
Issuance of common stock to an
employee for services - - - (143)
Amortization of stock-based compensation - - - 86
Preferred stock dividends - - - -
Treasury stock (5,000) (20) - -
Comprehensive income:
Translation adjustment - - - -
Net income - - - -
Comprehensive income - - - -
---------------------------------------------
Balance at December 31, 2000 (675,100) (3,211) (84) (497)
Retirement of treasury stock 675,100 3,211 - -
Repayment of notes receivable - - 13 -
Amortization of stock-based compensation - - - 115
Preferred stock dividends - - - -
Issuance of warrants - - - -
Transfer to temporary equity - - - -
Comprehensive (loss):
Translation adjustment - - - -
Cumulative effect of change in accounting
for derivative financial instrument,
net of applicable income tax of $187 - - - -
Change in fair value of derivative,
net of applicable income tax of $12 - - - -
Net (loss) - - - -
Comprehensive (loss) - - - -
---------------------------------------------
Balance at December 31, 2001 - $ - $ (71) $ (382)
=============================================
See accompanying notes.
F-6
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
(Dollars in Thousands)
Other Total
Retained Comprehensive Stockholders'
Earnings Income (Loss) Equity
-----------------------------------
Balance at December 31, 1998 $ 7,244 $ 9 $ 42,571
Repayment of notes receivable - - 46
Issuance of stock for acquisitions - - 1,969
Exercise of options - - 1,597
Issuance of common stock to an
officer for services - - -
Amortization of stock-based
compensation - - 35
Preferred stock dividends (1,100) - (1,100)
Treasury stock - - (2,901)
Comprehensive income:
Translation adjustment - (1) (1)
Net income 5,785 - 5,785
------------
Comprehensive income - - 5,784
-----------------------------------
Balance at December 31, 1999 11,929 8 48,001
Repayment of notes receivable - - 42
Issuance of stock for acquisitions - - 416
Issuance of common stock to an
employee for services - - -
Amortization of stock-based
compensation - - 86
Preferred stock dividends (1,414) - (1,414)
Treasury stock - - (20)
Comprehensive income:
Translation adjustment - (256) (256)
Net income 5,884 - 5,884
------------
Comprehensive income - - 5,628
-----------------------------------
Balance at December 31, 2000 16,399 (248) 52,739
Retirement of treasury stock - - -
Repayment of notes receivable - - 13
Amortization of stock-based compensation - - 115
Preferred stock dividends (1,500) - (1,500)
Issuance of warrants - - 1,100
Transfer to temporary equity - - (20,000)
Comprehensive (loss):
Translation adjustment - (95) (95)
Cumulative effect of change in accounting
for derivative financial instrument,
net of applicable income tax of $187 - (248) (248)
Change in fair value of derivative,
net of applicable income tax of $12 - (16) (16)
Net (loss) (5,679) - (5,679)
------------
Comprehensive (loss) - - (6,038)
-----------------------------------
Balance at December 31, 2001 $ 9,220 $ (607) $ 26,429
===================================
See accompanying notes.
F-7
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year ended December 31
2001 2000 1999
--------------------------
Operating activities
Net (loss) income $(5,679) $ 5,884 $ 5,785
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization, including 7,218 5,864 4,798
deferred financing costs
Amortization of deferred compensation 115 86 35
Provision for bad debt 611 297 504
Deferred income taxes (149) 403 513
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable 15,229 (732) (4,584)
Prepaid expenses and other current assets 33 (181) (36)
Other assets (667) (199) (98)
Accounts payable and accrued expenses 43 2,224 (425)
Accrued payroll (8,838) 3,102 749
Income taxes payable (3,358) (1,378) 500
Deferred rent (70) (103) (5)
--------------------------
Net cash provided by operating activities 4,488 15,267 7,736
--------------------------
Investing activities
Expenditures for property and equipment (1,442) (1,750) (1,919)
Repayment from notes receivable 13 42 46
Cash paid for acquisitions (5,638) (7,787)(17,164)
--------------------------
Net cash used in investing activities (7,067) (9,495)(19,037)
Financing activities
Net change in revolving credit line 12,300 (3,050) 11,950
Repayment of long-term debt - (152) (157)
Payment of capital lease obligations (333) (426) (213)
Payments of loan acquisition fees (1,610) (289) (176)
Payment of other loans - (1,020) -
Proceeds from exercise of options - - 1,597
Purchase of treasury stock - (20) (2,901)
Cash dividends paid (750) (1,039) (1,100)
--------------------------
Net cash provided by (used in) financing
activities 9,607 (5,996) 9,000
Effect of exchange rate changes on cash and
cash equivalents 64 (94) 11
--------------------------
Increase (decrease) in cash and cash equivalents 7,092 (318) (2,290)
Cash and cash equivalents at beginning of year 1,549 1,867 4,157
--------------------------
Cash and cash equivalents at end of year $ 8,641 $ 1,549 $ 1,867
==========================
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 8,074 $ 8,511 $ 5,901
==========================
Income taxes $ 844 $ 5,388 $ 3,176
==========================
Supplemental disclosure of noncash investing and financing activities
In 1999, the Company issued common stock valued at $475,000 for services. In
2000 and 1999 the Company issued 157,166 and 425,110 shares of its common stock
valued at $416,000 and $1,969,000 respectively, for acquisitions.
In 2001, the Company did not purchase any property and equipment under capital
leases. In 2000 and 1999, the Company purchased property and equipment under
capital leases amounting to approximately $136,000 and $198,000, respectively.
See accompanying notes.
F-8
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2001
1. Organization and Basis of Presentation
Headway Corporate Resources, Inc. and its wholly owned subsidiaries (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, the United Kingdom, Japan, Hong Kong, Singapore
and Australia.
The Company's financial statements have been presented on the basis that it is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As more fully described in Note 8,
the Company was in default on its Senior Credit Facility, Senior Subordinated
Notes and Series G Convertible Preferred Stock as of December 31, 2001. On April
17, 2002, the Senior Credit Facility was amended, including an extension of the
expiration date of the Senior Credit Facility to June 30, 2003, and waivers for
the events of default on the Senior Subordinated Notes and Series G Convertible
Preferred Stock were obtained.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Headway Corporate
Resources, Inc. and its subsidiaries after elimination of intercompany accounts
and transactions.
Revenue Recognition
Information technology staffing, temporary staffing and human resource staffing
revenue is recognized when the temporary personnel perform the related services.
Permanent placement revenue is recognized when the placement is employed.
Provisions are made for estimated losses in realization (principally due to
applicants not remaining in employment for the guaranteed period, usually 90
days).
Executive search services are primarily engaged on a retainer basis. Income from
retainer contracts which provide for periodic billings over periods of up to one
year, is recognized as earned based on the terms of the contract.
Cash Equivalents
Cash equivalents are comprised of certain highly liquid investments with a
maturity of three months or less when purchased.
F-9
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed utilizing
the straight-line method over the estimated useful lives of the assets which
range from three to seven years. Leasehold improvements are amortized utilizing
the straight-line method over the lesser of the useful life of the leasehold or
the term of the lease.
Deferred Rent
The Company leases premises under leases which provide for periodic increases
over the lease term. Pursuant to Statement of Financial Accounting Standards No.
13, "Accounting for Leases," the Company records rent expense on a straight-line
basis. The effect of these differences is recorded as deferred rent.
Deferred Taxes
The Company provides for deferred taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred taxes utilizing the liability method.
Foreign Currency Translation
Balance sheet accounts of the Company's United Kingdom, Asian and Australian
subsidiaries are translated using year-end exchange rates. Statement of
operations accounts are translated at monthly average exchange rates. The
resulting translation adjustment is reported as other comprehensive income
(loss) in stockholders' equity. Foreign exchange gains and losses for all the
years presented were not significant.
Goodwill
Goodwill is amortized utilizing the straight-line method over periods of 20 to
30 years. The Company periodically evaluates the carrying value and the periods
of amortization of goodwill based on the current and expected future
un-discounted cash flow from operations of the entities giving rise to the
goodwill to determine whether events and circumstances warrant revised estimates
of carrying value or useful lives. No such write-downs have been made.
Deferred Financing Costs
Deferred financing costs are amortized utilizing the straight-line method over
the term of the related debt.
F-10
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of
credit risk include cash and cash equivalents and accounts receivable arising
from its normal business activities. The Company places its cash and cash
equivalents with high credit quality financial institutions.
The Company believes that its credit risk regarding accounts receivable is
limited due to the large number of entities comprising the Company's customer
base. In addition, the Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk of its customers,
establishes an allowance for uncollectible accounts, where appropriate and, as a
consequence, believes that its accounts receivable credit risk exposure is
limited.
Fair Value of Financial Instruments
The carrying amount of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximates fair value. It is
not practicable to estimate the fair value of the borrowings under the Senior
Credit Facility and Senior Subordinated Notes and the Series G Preferred Stock.
(See Note 8).
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Segment Information
The Company reports segment information in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("Statement 131"). Statement 131 establishes
standards for the way companies report information about operating segments in
annual financial statements. Statement 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers (see Note 16).
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
F-11
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
interpretations because the Company believes the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized on the date of grant.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations",
effective for all combinations initiated after June 30, 2001, and No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statement. Other
intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS 142 is expected to result in a decrease in
amortization expense of approximately $4,000,000 ($0.37 per share) pre-tax per
year. During 2002, the Company will perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1, 2002.
Based on steps the Company has taken to prepare for the adoption of Statement
142, it is likely that between $35 and $45 million of the goodwill related to
the acquisitions completed by the Company will be impaired using the impairment
test required by Statement 142. An impairment that is required to be recognized
when adopting Statement 142 will be reflected as the cumulative effect of a
change in accounting principle in the first quarter of 2002. The Company plans
to complete the measurement of the impairment loss in 2002.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144") which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of", and
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations for a Disposal of a Segment of a Business". The Company is
required to adopt SFAS 144 in the first quarter of 2002. The Company does not
expect the adoption of this statement to have a material effect on its financial
position and results of operations.
F-12
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property and Equipment
Property and equipment consists of the following:
December 31
2001 2000
--------------------------
Leasehold improvements $1,720,000 $1,667,000
Furniture and fixtures 1,884,000 1,844,000
Office and computer equipment 8,141,000 6,890,000
--------------------------
11,745,000 10,401,000
Less accumulated depreciation and
amortization 6,054,000 4,385,000
--------------------------
$5,691,000 $6,016,000
==========================
4. Related Party Transactions
In August 2000, the Company issued 60,000 shares of common stock to an employee
for services. These shares vest in August 2003. Such shares were valued at
$143,000, the then current market value. Deferred compensation is being
amortized on a straight-line basis through August 2003.
In July 1999, the Company granted 125,000 shares of common stock to the
Company's Chairman. These shares vest at the earlier of i) the Company's common
stock price reaching a certain level, as defined, or ii) on July 1, 2006. Such
shares were valued at $475,000 and the related deferred compensation is being
amortized on a straight-line basis through July 1, 2006.
During the years ended December 31, 2001, 2000 and 1999, the Company incurred
fees of approximately $61,000, $204,000 and $304,000, respectively, for legal
services to an entity, whose partner is a member of the Company's Board of
Directors.
5. Acquisitions
In connection with acquisitions the Company made in 1997 and 1998, in addition
to the purchase price paid at closing, the Company was obligated to pay
additional cash and common stock earnout consideration to the sellers based on
future earnings. In 2001, 2000 and 1999, additional consideration of
approximately $3,200,000, $7,847,000 and $12,363,000 was recorded, respectively.
As consideration for a portion of the earnouts recorded in 2000 and 1999, the
Company issued 80,710 and 80,710 shares of the Company's common stock, valued at
$333,333 and $333,333, respectively.
In June 1999, the Company acquired substantially all of the assets of a division
of a North Carolina corporation and, in November 1999, the Company acquired all
F-13
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
of the outstanding stock of a United Kingdom executive placement and management
advisory company. The purchase price for these acquisitions of approximately
$8,707,000, including earn-outs, net of adjustments, recorded in 2001 and 2000
of $(234,000) and $215,000, and exceeded the fair value of the net assets
acquired resulting in goodwill of approximately $8,317,000. A portion of the
purchase price for the United Kingdom acquisition consisted of 344,400 shares of
the Company's common stock valued at $1,691,000, which were issued at the time
of the acquisition. In December 2000, the Company issued an additional 76,456
shares valued at $83,000 to the former shareholders of the United Kingdom
company acquired, as additional earnout consideration.
The aforementioned acquisitions have been accounted for as purchases and have
been included in the Company's operations from the dates of the respective
purchases. Any additional purchase price based on future earnings related to the
aforementioned acquisitions will be recorded as additional goodwill upon the
determination that the earnouts have been met. The amortization of goodwill for
the years ended December 31, 2001, 2000 and 1999 was approximately $4,013,000,
$3,917,000 and $3,280,000, respectively.
The pro forma unaudited consolidated results of operations for the year ended
December 31, 1999, assuming consummation of the aforementioned transactions as
of the beginning of 1999 is as follows (in thousands, except for per share
data):
Total revenue $ 370,038
Net income 6,493
Net income available for common stockholders 5,393
Earnings per share:
Basic $0.52
===============
Diluted $0.45
===============
6. Termination of Employment Contract
In March 1999, the Company incurred costs of $2,329,000 associated with the
termination of an employment contract.
7. 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.
The Company accounted for the accounting change as a cumulative effect of a
change in an accounting principle. The adoption of Statement 133 resulted in a
F-14
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 income.
The Company uses interest rate swap contracts for hedging purposes. The Company
had entered into interest rate swap agreements that effectively converted 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 debt was designated as
the hedged item to an interest rate swap agreement at December 31, 2001. At
December 31, 2001, the fair value of the interest rate swap contract amounted to
approximately $463,000. The Company is exposed to credit loss in the event of
non-performance by the counter party, a large financial institution. However,
the Company does not anticipate non-performance by the counter party. 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 year ended December 31, 2001, the Company recognized a
change in fair value of the derivative of $16,000 related to the change in fair
value of the interest rate swap contract net of applicable income taxes of
$12,000 as a component of other comprehensive income.
8. Long-Term Debt and Credit Facilities
In March 1998, the Company completed a financing totaling $105,000,000
consisting of a $75,000,000 senior credit facility ("the Senior Credit
Facility"), $10,000,000 of senior subordinated notes (the "Senior Subordinated
Notes"), and $20,000,000 of Series F Convertible Preferred Stock (see Note 9).
In August 2000, the credit facility was amended and the amount that could be
borrowed was reduced to $85,000,000. In August 2001, the Company further amended
the Senior Credit Facility and obtained a waiver regarding compliance with
certain financial ratios, which the Company had failed as of June 30, 2001,
reducing the amount that could be borrowed from $85,000,000 to $72,000,000. The
amended credit facility required, among other things, that the Company negotiate
an extended payment schedule in connection with an earnout payment related to a
prior acquisition, by October 31, 2001. The Company did not complete this
negotiation in the required time frame and was, therefore, in default of its
Senior Credit Facility. The negotiation with the shareholders of the prior
acquisition has since been completed. In addition, the Company failed to comply
with certain financial ratios during the fourth quarter of 2001, creating an
event of default under the Senior Credit Facility, the Indenture for the Senior
Subordinated Notes and the Certificate of Designations for the Preferred Stock
as of December 31, 2001.
As of December 31, 2001, $72,000,000 in aggregate principal amount was
outstanding under the Senior Credit Facility, which was to mature on April 18,
F-15
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2002 (see below). Substantially all assets of the Company have been pledged as
collateral for the senior credit facility.
As of December 31, 2001, $10,000,000 in aggregate principal amount was
outstanding under the Senior Subordinated Notes and $20,000,000 in face amount
of Series G Convertible Preferred Stock of the Company (the "Preferred Stock")
was outstanding. The senior subordinated notes are payable in March 2006 and
bear interest at 12% per annum until March 2001, increasing to 14% per annum
thereafter. In January 2001, the terms of the senior subordinated notes were
amended, including increasing the effective interest rate to 13% until March
2001 and 15% thereafter. In August 2001, the Company entered into a Limited
Waiver and Amendment with the Senior Subordinated Notes Holders and the
Preferred Stockholders, which provided the following:
(a.i) A waiver of the events of default on the Senior Subordinated Notes
from April 1, 2001 through the "Bank Maturity Date", defined as the
earliest of (1) April 18, 2002, (2) the termination or expiration of
the amendment to the Senior Credit Facility dated August 23, 2001, (3)
the date on which all indebtedness under the Senior Credit Facility is
repaid or refinanced, or (4) the acceleration of any indebtedness
under the Senior Credit Facility. Since the Company was in default as
of December 31, 2001, the waiver was nullified.
(a.ii) A waiver of the payment of interest (but not the accrual of interest)
under the Senior Subordinated Notes from April 1, 2001 through the
Bank Maturity Date.
(a.iii) A waiver of the Preferred Stock events of default and a waiver of the
payment of dividends (but not the accrual of dividends) on the
Preferred Stock from April 1, 2001 through the Bank Maturity Date.
(a.iv) If all interest accrued on and prior to April 1, 2002 is not paid in
full in cash by such date, then the interest rate on the Senior
Subordinated Notes will be increased to 20% per annum commencing on
July 1, 2001. Such increase has since been waived.
(a.v) If all dividends on the Preferred Stock accrued on or before January
2, 2002 are not paid in full in cash by such date then the annual
dividend rate will be increased to 9% commencing at such time and
further increased to 10% by April 1, 2002 if payment is not made. Such
dividends were not paid before April 1, 2002.
(a.vi) If all interest on the Senior Subordinated Notes and dividends on the
Preferred Stock accrued on and prior to (a) January 2, 2002 have not
been paid in full in cash by such date, then the conversion price of
the Preferred Stock shall be reduced to $2.75 per share at such time
and prior to (b) April 1, 2002 have not been paid in full in cash by
such date, then the conversion price of the Preferred Stock shall be
further reduced at such time to $1.00 per share. The ability of the
holders of the Preferred Stock to fully convert their shares is
contingent upon an increase in the Company's authorized number of
shares of Common Stock, which requires common stockholders' approval
("Common Stockholders Approval"). Such interest and dividends were not
paid before April 1, 2002, and accordingly the conversion price for
the Series G Stock is now $1.00 per share.
F-16
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(a.vii) The issuance of (1) warrants in the aggregate, immediately exercisable
into 1,000,000 shares of the Company's common stock at an exercise
price of $1.10 per share (the "First Series G Warrants") and (2)
warrants in the aggregate exercisable into 1,150,000 (the "Second
Series G Warrants") and 850,000 (the "Third Series G Warrants") shares
of the Company's common stock at exercise prices of $.01 and $3.05 per
share, respectively (collectively, the "Series G Warrants"). The
Second Series G Warrants and the Third Series G Warrants became
exercisable on January 2, 2002 because the Company did not make
certain payments and meet certain other obligations. The issuance of
the Series G Warrants resulted in estimated deferred financing costs
based on the fair value of the warrants of $1,100,000, which is being
amortized through April 2002.
(a.viii) Required maintenance of a certain amount of EBITDA, as defined, and
maximum amounts of capital expenditures. Such EBITDA requirement was
not met as of December 31, 2001.
(a.ix) In the event that as of April 1, 2002, (i) all payments accrued on and
prior to such date have not been paid in full in cash by such date and
(ii) the Common Stockholders Approval has not been obtained, the
Preferred Stockholders and Senior Subordinated Note holders would
receive alternative consideration to be negotiated with the Company,
provided unless otherwise agreed, such compensation would include a
decrease of the exercise price of all Series G Warrants to $.01 per
share (see below). Such payments have not been made and Common
Stockholders Approval has not been obtained.
(a.x) The exchange of the Series F Preferred Stock into an equal number of
shares of a newly created Series G Convertible Preferred Stock. Such
exchange took place as of September 7, 2001. The Series G Preferred
Stock has the same features as the Series F Preferred Stock, other
than the reduction in the conversion price under the conditions
described above.
On April 17, 2002, the Senior Credit Facility and Senior Subordinated Notes were
amended and the Company entered into the Second Limited Waiver with the Senior
Subordinated Notes Holders and the Preferred Stockholders, which provided the
following:
(i) An extension of the Senior Credit Facility maturity date to June 30,
2003.
(ii) A waiver of the events of default on the Senior Subordinated Notes
from March 31, 2002 through the "Recap Amendment Termination Date",
defined as the earliest of (1) June 30, 2003 or such earlier on date
on which the Senior Indebtedness may mature; (2) the date on which all
amounts due under the Senior Credit Facility shall have been paid in
full in cash; (3) the date on which the Senior Credit Facility is
amended or modified in a manner that (A) increases the Base Rate, the
Default Rate, the Applicable Margin or any other interest rate on the
Senior Indebtedness (B) decreases the PIK Amount (C) increases the
amount of fees or other payments due to the Agent or any Lender under
the Senior Credit Facility (other than increases made in connection
with events of default under the Senior Credit Facility that do not
F-17
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
exceed, in the aggregate, 0.50% of the outstanding Senior
Indebtedness), or (D) in consideration of which, the Agent (as defined
in the Senior Credit Facility) or any Lender under the Senior Credit
Facility is issued any additional equity interest in the Company; and
(iv) the acceleration of any indebtedness under the Senior Credit
Facility or the exercise of any rights or remedies by any of the
Lenders under the Senior Credit Facility.
(iii) A waiver of the payment of interest (but not the accrual of interest)
under the Senior Subordinated Notes from March 31, 2002 through the
Recap Amendment Termination Date.
(iv) A waiver of the Preferred Stock events of default and a waiver of the
payment of dividends (but not the accrual of dividends) on the
Preferred Stock from March 31, 2002 through the Recap Amendment
Termination Date.
(v) A waiver of the increase in interest rate on the Senior Subordinated
Notes from 15% to 20% retroactive to July 1, 2001.
(vi) An adjustment to the exercise price of the First Series G Warrants and
the Third Series G Warrants to $0.25 per share.
(vii) Required maintenance of certain amounts of EBITDA, as defined, and
maximum amounts of capital expenditures, as defined.
(viii) That the Company take all actions necessary to obtain Common
Stockholder Approval at a stockholder meeting to be held no later than
July 15, 2002, subject to extension under certain circumstances.
(ix) That the Company issue warrants to purchase 2,455,522 shares of common
stock at $0.25 per share to the lenders in connection with the
amendment of its Senior Credit Facility.
As of December 31, 2001, the unpaid aggregate dividend for the second, third and
fourth quarters of 2001 was $1,125,000 and the unpaid interest on the Senior
Subordinated Notes was $1,125,000, and are included in accrued expenses.
In connection with an acquisition made in July 1997, the Company entered into a
$451,000 note payable to the seller. This note was payable in six equal
semi-annual installments commencing in January 1998 with interest at 6% per
annum. The note was repaid during 2000.
9. Stockholders' Equity
In March 1998, the Company authorized and issued 1,000 shares of Series F
Convertible Preferred Stock for $20,000,000. The Series F Convertible Preferred
Stock is non-voting, accrues dividends at the rate of 5.5% (increased to 7.5% in
March 2000) per annum and was convertible into common stock at an initial
conversion price of $5.58 per share (the market value of the Company's common
stock at closing). On September 7, 2001, the Series F Convertible Preferred
Stock were exchanged into an equal number of the newly created Series G
Convertible Preferred Stock. Expenses in connection with the issuance of the
preferred stock amounted to $1,367,000 and were accounted for as share issuance
expenses.
F-18
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During July 2001, guidance was issued in Emerging Issue Task Force Topic No.
D-98, "Classification and Measurement of Redeemable Securities", which requires
preferred securities that are redeemable for cash or other assets to be
classified outside of permanent equity if they are redeemable (1) at a fixed or
determinable price on a fixed or determinable date; (2) at the option of the
holder; or (3) upon the occurrence of an event that is not solely within the
control of the issuer. The Company adopted this announcement during the quarter
ended September 30, 2001. The Series F and Series G Convertible Preferred Stock
requires redemption for cash upon the occurrence of a change of control, as
defined. The change of control event which triggers redemption at the option of
the holder is not deemed solely within the control of the Company. Accordingly,
the Company has classified the Series G Convertible Preferred Stock outside of
permanent stockholders' equity on the December 31, 2001 balance sheet. The
change in classification has been applied retroactively and the December 31,
2000 balance sheet was restated with respect to the Series F Convertible
Preferred Stock.
In May 1996, the Company loaned a total of $507,000 to ten employees of the
Company at an interest rate of 8% per annum, payable quarterly over a term of
five years. The funds were used by the employees to purchase a total of 2,170
shares of the Company's Series A Convertible Preferred Stock, (which was
subsequently converted into common stock), from the then current Series A
Convertible Preferred Stock stockholder. The loans outstanding ($71,000 at
December 31, 2001) are collateralized by common stock.
In September 1998, the Company authorized a stock repurchase program of up to
1,000,000 shares of the Company's common stock. The Company did not make any
purchases under this program in 2001. In 2000 and 1999, the Company repurchased
5,000 and 612,900 shares of the Company's common stock for approximately $20,000
and $2,901,000, respectively.
At December 31, 2001, approximately 9,825,000 shares of common stock have been
reserved for future issuance as follows:
Convertible Preferred Stock 3,584,000
Series G Warrants 3,000,000
Stock Incentive Plan (see Note 10) 3,241,000
-----------
9,825,000
===========
At December 31, 2001, the Series G Warrants are fully vested and have exercise
prices of $0.01 to $0.25 per share. The First Series G Warrants expire on the
F-19
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
later of September 7, 2006 and the date on which all principal, premiums and
interest on the Subordinated Notes has been paid in full and all of the
Preferred Stock has been redeemed or converted. The Second Series G Warrants and
the Third Series G Warrants expire on the later of January 2, 2007 and the date
on which all principal, premiums and interest on the Subordinated Notes has been
paid in full and all of the Preferred Stock has been redeemed or converted.
During 2001, no warrants were exercised and approximately 270,000 warrants
expired. During 2000, no warrants were exercised and approximately 102,000
warrants that were issued upon the conversion of Series D convertible preferred
stock were cancelled.
10. (Loss) Earnings Per Share
The following table sets forth the computation of basic and diluted (loss)
earnings per share for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
-----------------------------------------
Numerator:
Net (loss) income $(5,679,000) $5,884,000 $5,785,000
Preferred stock dividend
requirements (1,500,000) (1,414,000) (1,100,000)
-----------------------------------------
Numerator for basic (loss)
earnings per share - net (loss)
income available for common
stockholders (7,179,000) 4,470,000 4,685,000
Effect of dilutive securities:
Preferred dividend requirements - 1,414,000 1,100,000
-----------------------------------------
Numerator for diluted (loss)
earnings per share - net (loss)
income available for common stock-
holders after assumed conversions $(7,179,000) $5,884,000 $5,785,000
=========================================
F-20
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Denominator:
Denominator for basic (loss)
earnings per 10,729,627 10,590,461 10,287,978
share - weighted average shares
Effect of dilutive securities:
Stock options, warrants and
restricted shares - 74,142 456,477
Convertible preferred stock - 3,584,299 3,584,299
-----------------------------------------
Dilutive potential common stock - 3,658,441 4,040,776
-----------------------------------------
Denominator for diluted (loss)
earnings per share - adjusted
weighted-average shares and assumed
conversions 10,729,627 14,248,902 14,328,754
=========================================
Basic (loss) earnings per share $ (.67) $ .42 $ .46
=========================================
Diluted (loss) earnings per share $ (.67) $ .41 $ .40
=========================================
The calculation of diluted (loss) earnings per share excludes potential common
shares. During the year ended December 31, 2001, Series F and Series G preferred
stock, restricted common stock, warrants and stock options were outstanding that
would be dilutive (aggregating 3,865,934 shares), but were excluded because to
include them would be antidilutive.
11. Income Taxes
Pre-tax (loss) income from foreign operations was $(1,053,000), $1,718,000, and
$(225,000) for the years ended December 31, 2001, 2000 and 1999, respectively.
Income tax expense from continuing operations consists of the following:
Year ended December 31
2001 2000 1999
-------------------------------------------
Current:
Domestic $(3,745,000) $3,368,000 $3,771,000
Foreign 116,000 443,000 15,000
-------------------------------------------
(3,629,000) 3,811,000 3,786,000
-------------------------------------------
Deferred expense:
Domestic 50,000 577,000 513,000
Foreign (199,000) - -
-------------------------------------------
Total deferred expense (149,000) 577,000 513,000
-------------------------------------------
$(3,778,000) $4,388,000 $4,299,000
===========================================
F-21
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The components of deferred tax assets and liabilities are as follows:
December 31
2001 2000
-----------------------------
Deferred tax assets:
Deferred rent $ 462,000 $ 486,000
Allowances for doubtful accounts 559,000 438,000
NOL Carryforwards 932,000 -
Other 47,000 34,000
-----------------------------
2,000,000 958,000
Deferred tax liabilities:
Depreciation (216,000) (123,000)
Intangibles (2,091,000) (1,228,000)
Cash to accrual adjustments - (63,000)
Other - -
-----------------------------
(2,307,000) (1,414,000)
-----------------------------
$ (307,000) $ (456,000)
=============================
A reconciliation of the statutory Federal income tax rate to the effective rates
is as follows:
Year ended December 31
2001 2000 1999
------------------------------
Statutory rate (34)% 34% 34%
State and local income taxes
(net of federal tax benefit) (7) 7 7
Other 1 2 2
------------------------------
Effective tax rate (40)% 43% 43%
==============================
The Company has federal and state net operating losses in the current year of
approximately $10,500,000, which will be carried back for federal tax purposes
and carried forward for state tax purposes.
F-22
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Stock Incentive Plan
Pursuant to the Company's Stock Incentive Plan (the "Plan"), up to 3,771,567
options to purchase common stock were reserved for grant. The Plan provides for
the granting of stock options, stock appreciation rights and stock awards. Stock
options intended to be incentive stock options will be granted at prices equal
to at least market price on the date of the grant. A summary of the activity in
the Plan is as follows:
Number of Weighted Average
Shares Exercise Price
--------------------------------
Outstanding at December 31, 1998 1,968,129 $ 4.16
Granted 560,000 4.76
Canceled (139,667) 4.14
Exercised (403,231) 3.47
--------------
Outstanding at December 31, 1999 1,985,231 4.47
Granted 282,500 3.34
Canceled (345,000) 4.59
--------------
Outstanding at December 31, 2000 1,922,731 4.27
Granted 20,000 0.60
Canceled (95,950) 5.23
--------------
Outstanding at December 31, 2001 1,846,781 4.19
==============
Exercisable at December 31, 1999 1,111,620 3.98
==============
Exercisable at December 31, 2000 1,276,896 4.13
==============
Exercisable at December 31, 2001 1,460,948 4.20
==============
Options granted vest equally over three years or cliff vest at the end of a
three-year term and are exercisable for a period not to exceed ten years from
the date of grant. Information regarding options outstanding under the Plan at
December 31, 2001 is as follows:
Weighted-
Weighted- Average Weighted-
Exercise Number of Average Remaining Number of Average
Price Options Exercise Contractual Options Exercise
Range Outstanding Price Life Exercisable Price
- ------------------------------------------------------------------------------
$ 0.60 20,000 $ 0.60 9.7 years 20,000 $0.60
2.38 - 3.50 558,000 2.81 4.4 years 496,333 2.84
3.62 - 5.38 1,112,231 4.37 6.6 years 788,064 4.36
5.50 - 8.00 72,500 6.30 6.7 years 72,500 6.30
9.88 84,050 9.88 6.6 years 84,050 9.88
--------- ---------
1,846,781 1,460,948
========= =========
F-23
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock-Based Compensation
Pro forma information regarding net (loss) income and (loss) earnings per share
is required by SFAS 123 and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted-average assumptions:
Year ended December 31
2001 2000 1999
------------------------------------
Assumptions
Risk-free rate 4.61% 6.72% 5.83%
Dividend yield 0% 0% 0%
Volatility factor of the
expected market price of
the Company's common stock .47 .70 .68
Average life 5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The Company's
pro forma information is as follows:
Year ended December 31
2001 2000 1999
-------------------------------------------
Pro forma net (loss) income
available for common $(7,462,000) $4,039,000 $5,243,000
stockholders
Pro forma earnings per share:
Basic (.70) .38 .40
Diluted (.70) .38 .36
The weighted average fair value of options granted during the years ended
December 31, 2001, 2000 and 1999 was $0.28, $2.12 and $2.93 respectively. The
weighted average remaining contractual life of options exercisable at December
31, 2001 is 5.43 years.
F-24
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Commitments and Contingencies
The Company leases office space under operating leases which have various
expiration dates through October 2009. The leases provide for additional rent
based on increases in operating costs and real estate taxes. The Company also
leases equipment under capital leases expiring at various times through January
2004.
Future minimum lease payments at December 31, 2001 under capital leases and
noncancelable operating leases (shown net of $563,000 of sublease income per
annum through 2009) with remaining terms of one year or more are as follows:
Capital Operating
Leases Leases
--------------------------------
2002 246,000 2,880,000
2003 111,000 2,218,000
2004 5,000 1,681,000
2005 - 1,211,000
2006 - 1,125,000
Thereafter - 1,285,000
--------------------------------
Total minimum lease payments 362,000 $10,400,000
================
Less amounts representing interest 27,000
----------------
Present value of net minimum
lease payments 335,000
Less current portion 224,000
----------------
Long-term portion $ 111,000
================
Included in property and equipment at December 31, 2001 and 2000 are equipment
recorded under capital leases with a cost of $1,170,000 and $1,635,000,
respectively, and accumulated depreciation and amortization of $693,000 and
$692,000, respectively. Amortization of equipment recorded under capital leases
is included with depreciation expense.
Rent expense, including escalation charges, and net of sublease income of
$563,000, $514,000 and $498,000 for the years ended December 31, 2001, 2000 and
1999 were $3,070,000, $2,976,000 and $2,634,000, respectively.
The Company has letters of credit outstanding aggregating $1,750,000 in
connection with various guarantees relating to its workers compensation
insurance policy, office leases and capital leases. The amount was reduced to
$1,687,000 in January 2002.
In February 1999, a lawsuit was filed in the Superior Court of California
alleging breach of contract, interference with prospective business relations,
F-25
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
misappropriation of trade secrets and unfair competition. In February 2002, the
lawsuit was settled. The settlement did not have a material effect on the
financial position, results of operations or cash flows of the Company.
In May 2000, a lawsuit was filed in the Judicial District Court of Dallas
County, Texas alleging breach of contract, fraud, negligence, negligent
retention and supervision, civil conspiracy and harmful access by computer.
Plaintiffs have alleged damages in the amount of $10 million. Headway believes
the claims are unfounded and intends to defend itself vigorously.
The Company is party to litigation arising out of the normal course of its
business. In the opinion of management, all matters are without merit or are of
such kind or involve such amounts, as would not have a material adverse effect
on the financial position, results of operations or cash flows of the Company.
15. Retirement Plan
The Company has a 401(k) plan covering substantially all its domestic employees.
The plan does not require a matching contribution by the Company.
16. Segment Information
Major Customers
For the year ended December 31, 2001, one staffing services customer accounted
for 12% of the Company's revenues. For the year ended December 31, 2000, no
customer accounted for more than 10% of the Company's revenues. For the year
ended December 31, 1999, one staffing services customer accounted for 11% of
revenues.
Geographic Information
For the years ended December 31, 2001, 2000 and 1999, the Company derived
substantially all of its revenues from businesses located in the United States,
and no other country accounted for more than 10% of the Company's revenues.
F-26
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 or loss from
operations before unallocated corporate overhead. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies (see Note 2).
Year ended December 31, 2001
Executive
Staffing Search
Services Services Total
-------------------------------------
(Dollars in Thousands)
Revenues $296,921 $26,116 $323,037
Depreciation and amortization 4,979 808 5,787
Interest expense 9,203 443 9,646
Interest income (41) - (41)
Segment (loss) income before
income tax (benefit) expense (7,824) 1,496 (6,328)
Income tax (benefit) expense (3,244) 688 (2,556)
Segment (loss) profit (4,580) 808 (3,772)
Segment assets 120,419 19,579 139,998
Expenditures for long lived assets 1,157 285 1,442
Year ended December 31, 2000
Executive
Staffing Search
Services Services Total
-------------------------------------
(Dollars in Thousands)
Revenues $333,465 $37,650 $371,115
Depreciation and amortization 4,479 858 5,337
Interest expense 6,818 253 7,071
Interest income (98) - (98)
Segment income before income tax
expense 6,141 8,127 14,268
Income tax expense 2,641 3,413 6,054
Segment profit 3,500 4,714 8,214
Segment assets 128,478 23,356 151,834
Expenditures for long lived assets 1,435 315 1,750
F-27
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Segment Information (continued)
Year ended December 31, 1999
Executive
Staffing Search
Services Services Total
-------------------------------------
(Dollars in Thousands)
Revenues $334,743 $25,999 $360,742
Depreciation and amortization 3,930 481 4,411
Termination of employment contract 2,329 - 2,329
Interest expense 5,801 8 5,809
Interest income (89) (18) (107)
Segment income before income tax
expense 6,371 6,616 12,987
Income tax expense 2,785 2,748 5,533
Segment profit 3,586 3,868 7,454
Segment assets 127,518 19,392 146,910
Expenditures for long lived assets 1,538 381 1,919
Year ended December 31
2001 2000 1999
-------------------------------------
(Dollars in Thousands)
Reconciliation to net income
Total (loss) profi for
reportable segments $(3,772) $ 8,214 $ 7,454
Unallocated amounts:
Interest expense (1,233) (978) (522)
Interest income 72 7 15
Corporate overhead (1,968) (3,025) (2,396)
Income tax benefit 1,222 1,666 1,234
-------------------------------------
Net (loss) income $(5,679) $5,884 $ 5,785
=====================================
December 31
2001 2000 1999
-------------------------------------
(Dollars in Thousands)
Reconciliation to total assets
Total assets for reportable
segments $139,998 $151,834 $146,910
Other assets 9,166 2,352 1,509
-------------------------------------
Total assets $149,164 $154,186 $148,419
=====================================
F-28
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results for the years ended December
31, 2001 and 2000.
2001 Quarter Ended
------------------------------------------------------
March June September December
------------------------------------------------------
(Dollars in Thousands, except per share data)
Revenues $89,713 $ 83,181 $76,140 $74,003
Operating Income (Loss) 5,755 370 (557) (4,259)
Net Income (Loss) 1,984 (906) (2,017) (4,740)
Net Income (Loss) available
for common stockholders:
-Basic $ .15 $ (.12) $ (.22) $ (.48)
===== ======= ======= =======
-Diluted $ .14 $ (.12) $ (.22) $ (.48)
===== ======= ======= =======
2000 Quarter Ended
------------------------------------------------------
March June September December
------------------------------------------------------
(Dollars in Thousands, except per share data)
Revenues $96,315 $96,655 $91,678 $86,467
Operating Income 4,998 5,187 3,674 4,357
Net Income 1,819 1,802 870 1,393
Net Income available for
common stockholders:
-Basic $ .14 $ .14 $ .05 $ .10
===== ===== ===== =====
-Diluted $ .13 $ .13 $ .05 $ .10
===== ===== ===== =====
F-29
Schedule II - Valuation And Qualifying Accounts
Headway Corporate Resources, Inc. and Subsidiaries
December 31, 2001
- ------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------
Additions
---------------------
Balance at Charged to Charged Balance
Beginning to Costs and to Other Deductions(a) at End
Description of Period Expense Accounts of Period
- -------------------------------------------------------------------------------------------------
Year Ended December 31, 2001:
Deducted from asset account
Allowance for doubtful $1,156,000 $611,000 $ - $337,000 $1,430,000
accounts
Year Ended December 31, 2000:
Deducted from asset account
Allowance for doubtful
accounts $ 958,000 $297,000 $ - $99,000 $1,156,000
Year Ended December 31, 1999:
Deducted from asset account
Allowance for doubtful
accounts $ 593,000 $504,000 $ - $139,000 $958,000
(a) Uncollectible accounts written off.
F-30