U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-16025
HEADWAY CORPORATE RESOURCES, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2134871
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
317 Madison Avenue, New York, New York 10017
--------------------------------------------
(Address of principal executive offices)
(212) 672-6501
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Exchange Act
subsequent to the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 10,914,627 shares of common
stock.
This amendment is filed to correct a clerical error in transposing the cash
figures on the balance sheet.
FORM 10-Q
HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements 3
Consolidated Balance Sheets
March 31, 2002 (Unaudited) and December 31, 2001 3
Unaudited Consolidated Statements of Operations
Three Months Ended March 31, 2002 and 2001 4
Unaudited Consolidated Statement of Stockholders' Equity
Three Months Ended March 31, 2002 5
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. Other Information 17
Signatures 18
FORWARD-LOOKING STATEMENT NOTICE
When used in this report, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27a of the Securities Act of 1933 and Section 21e of the Securities Exchange Act
of 1934 regarding events, conditions, and financial trends that may affect the
Company's future plans of operations, business strategy, operating results, and
financial position. Persons reviewing this report are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such factors are discussed under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and also include
general economic factors and conditions that may directly or indirectly impact
the Company's financial condition or results of operations.
2
Item 1. Financial Statements
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars In Thousands, except for share data)
March 31, December 31,
2002 2001
-----------------------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 10,289 $ 8,641
Accounts receivable, trade, net 35,939 37,713
Prepaid expenses and other current assets 1,553 2,181
Deferred financing costs, current 385 979
Prepaid and refundable income taxes 2,806 4,279
-----------------------------
Total current assets 50,972 53,793
Property and equipment, net 5,536 5,691
Goodwill 42,366 87,313
Deferred financing costs 485 509
Other assets 1,892 1,858
-----------------------------
Total assets $101,251 $ 149,164
=============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 987 $ 1,302
Accrued expenses 6,575 7,848
Accrued payroll 9,666 8,319
Capital lease obligations, current portion 208 224
Earnouts payable 927 1,287
------------------------------
Total current liabilities 18,363 18,980
Capital lease obligations, less current portion 75 111
Long-term debt 82,000 82,000
Deferred rent 1,014 1,073
Deferred income taxes 307 307
Other liabilities 49 264
Commitments and contingencies
Preferred stock---$.0001 par value, 5,000,000 shares
authorized: 21,622 20,000
Series G, convertible preferred stock--$.0001 par value,
1,000 shares authorized, issued and outstanding (aggregate
liquidation value $21,622)
Stockholders' (deficit) equity
Common stock--$.0001 par value, 20,000,000 shares 1 1
authorized, 10,914,627 shares issued and outstanding
Additional paid-in capital 18,268 18,268
Notes receivable (71) (71)
Deferred compensation (353) (382)
(Accumulated deficit)/retained earnings (39,786) 9,220
Other comprehensive (loss) (238) (607)
------------------------------
Total stockholders' (deficit) equity (22,179) 26,429
------------------------------
Total liabilities and stockholders' (deficit) equity $ 101,251 $ 149,164
==============================
See accompanying notes.
3
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Dollars In Thousands, except per share data)
Three months ended March 31,
2002 2001
------------------------------
Revenues: $ 69,641 $ 89,713
Operating expenses:
Direct costs 56,880 63,891
Selling, general and administrative 13,517 18,681
Depreciation and amortization 469 1,386
------------------------------
70,866 83,958
Operating (loss) income (1,225) 5,755
Other (income) expenses:
Interest expense 3,854 2,075
Interest income (25) (14)
------------------------------
3,829 2,061
(Loss) income before income tax (benefit) expense and (5,054) 3,694
cumulative effect of accounting change
Income tax (benefit) expense (1,545) 1,710
------------------------------
(Loss) income before cumulative effect of accounting (3,509) 1,984
change
Cumulative effect of accounting change (45,000) --
------------------------------
Net (loss) income (48,509) 1,984
Preferred dividend requirements (497) (375)
------------------------------
Net (loss) income available for common stockholders $ (49,006) $ 1,609
==============================
Basic (loss) earnings per share:
Basic (loss) income per common share before
cumulative effect of accounting change $ (0.37) $ 0.15
Cumulative effect of accounting change (4.20) --
------------------------------
Basic (loss) income per common share $ (4.57) $ 0.15
==============================
Diluted (loss) earnings per share:
Diluted (loss) income per common share before
cumulative effect of accounting change $ (0.37) $ 0.14
Cumulative effect of accounting change (4.20) --
------------------------------
Diluted (loss) income per common share $ (4.57) $ 0.14
==============================
See accompanying notes.
4
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Three Months Ended March 31, 2002
(Unaudited)
(Dollars in thousands, except for share data)
------------------------------------------------------------------------------------
Additional
Common Stock Paid-in Notes Deferred
Shares Amount Capital Receivable Compensation
------------------------------------------------------------------------------------
Balance at December 10,914,627 $ 1 $ 18,268 $ (71) $ (382)
31, 2001
Amortization of
stock-based - - - - 29
compensation
Preferred stock - - - - -
dividends
Translation adjustment - - - - -
Change in fair value
of derivative, net
of applicable income - - - - -
taxes of $107,000
Net (loss) - - - - -
Comprehensive (loss) - - - - -
------------------------------------------------------------------------------------
Balance at March 31,
2002 10,914,627 $ 1 $ 18,268 $ (71) $ (353)
------------------------------------------------------------------------------------
5
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit), Continued
Three Months Ended March 31, 2002
(Unaudited)
(Dollars in thousands)
- -----------------------------------------------------------------------------
Retained Accumulated
Earnings Other Total
(Accumulated Comprehensive Stockholders'
Deficit) (loss) Equity (Deficit)
- -----------------------------------------------------------------------------
Balance at December 31, 2001 $ 9,220 $ (607) $ 26,429
Amortization of stock-based
compensation - - 29
Preferred stock dividends (497) - (497)
Translation adjustment - 154 154
Change in fair value of
derivative, net of
applicable income taxes of - 215 215
$107,000
Net (loss) (48,509) - (48,509)
------------
Comprehensive (loss) - - (48,140)
- -----------------------------------------------------------------------------
Balance at March 31, 2002 $ (39,786) $ (238) $ (22,179)
- -----------------------------------------------------------------------------
See accompany notes.
6
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three months ended March 31,
2002 2001
------------------------------
Operating activities
Net (loss) income $ (48,509) $ 1,984
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change 45,000 -
Depreciation and amortization 469 1,386
Amortization of deferred financing costs 1,286 203
Provision for bad debt 60 110
Amortization of deferred compensation 29 29
Changes in assets and liabilities:
Accounts receivable 1,694 (2,966)
Prepaid expenses and other assets 214 (62)
Prepaid and refundable income taxes 1,455 -
Other assets (36) -
Accounts payable and accrued expenses (556) (1,974)
Accrued payroll 1,470 (5,080)
Income taxes payable - 2,427
Deferred rent (59) (9)
------------------------------
Net cash provided by (used in) operating activities 2,517 (3,952)
------------------------------
Investing activities
Expenditures for property and equipment (308) (390)
Repayment from notes receivable - 6
Cash paid for acquisitions (423) (1,360)
------------------------------
Net cash (used in) investing activities (731) (1,744)
------------------------------
Financing activities
Proceeds from long-term debt - 5,800
Payment of capital lease obligations (52) (106)
Payments of loan acquisition fees (268) -
Cash dividends paid - (375)
------------------------------
Net cash (used in) provided by financing activities (320) 5,319
------------------------------
Effect of exchange rate changes on cash and cash 182 (156)
equivalents
Increase (decrease) in cash and cash equivalents 1,648 (533)
Cash and cash equivalents at beginning of period 8,641 1,549
------------------------------
Cash and cash equivalents at end of period $ 10,289 $ 1,016
==============================
7
HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2002
(1) BASIS OF PRESENTATION
Headway Corporate Resources, Inc. and its wholly owned subsidiaries
(collectively referred to as the "Company") provide strategic staffing solutions
and personnel worldwide. Its operations include information technology staffing,
temporary staffing, human resource staffing, permanent placement and executive
search. Headquartered in New York, the Company has temporary staffing offices in
California, Connecticut, Florida, New Jersey, North Carolina, Virginia, and
Texas and executive search offices in New York, Illinois, Massachusetts, the
United Kingdom, Japan, Hong Kong and Australia. These consolidated financial
statements include the accounts of Headway Corporate Resources, Inc. and its
subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three month period ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2001.
(2) GOODWILL
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.
Upon adoption of SFAS 142 in the first quarter of 2002, the Company recorded a
one-time, non-cash charge of $45 million to reduce the carrying value of its
goodwill. Such charge is non-operational in nature and is reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations. In calculating the impairment charge, the fair value of
the impaired reporting units underlying the business segments (see Note 5) were
estimated using a discounted cash flow methodology.
8
A summary of the change in the Company's goodwill during the quarter and total
assets at March 31, 2002, by reporting units is as follows:
Goodwill Total Assets
------------------------------------------------------------ March 31,
January 1, 2002 Adjustments (i) Impairments March 31, 2002 2002
--------------- --------------- ------------- -------------- ------------
Executive Search $ 11,086,000 $ 53,000 $ (8,200,000) $ 2,939,000 $ 7,873,000
Temporary Staffing 42,415,000 - (10,800,000) 31,615,000 82,382,000
Technology Staffing 33,812,000 - (26,000,000) 7,812,000 13,190,000
--------------- --------------- ------------- -------------- ------------
Total $ 87,313,000 $ 53,000 $(45,000,000) $ 42,366,000 $103,445,000
=============== =============== ============= ============== ============
(i)During the three months ended March 31, 2002, additional purchase price of
$60,000 was recorded as goodwill upon the determination that the earnouts had
been met on certain acquisitions made in 1997, 1998 and 1999.
The 2001 results on a historical basis do not reflect the provisions of SFAS
142. Had the Company adopted SFAS 142 on January 1, 2001 and ceased to amortize
goodwill at such date, the historical net income and basic and diluted net
income per common share would have been changed to the adjusted amounts
indicated below:
Three Months Ended March 31, 2001
------------------------------------------------------
Net income per
Net income per diluted common
Net income basic common share share
------------------------------------------------------
As reported--historical basis $1,609,000 $0.15 $0.14
Add: Goodwill amortization 1,003,000 0.09 0.07
Income tax impact (435,000) (0.04) (0.03)
------------------------------------------------------
Adjusted $2,177,000 $0.20 $0.18
======================================================
(3) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses interest rate swap contracts for hedging purposes. The Company
had entered into interest rate swap agreements that effectively convert a
portion of its floating-rate debt to a fixed-rate basis through April 18, 2002,
thus reducing the impact of interest-rate changes on future interest expense.
Approximately $30,000,000 of the Company's outstanding long-term debt was
designated as the hedged item to an interest rate swap agreement at March 31,
2002.
At March 31, 2002, the fair value of the interest rate swap contract amounted to
approximately $87,000. 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 three months ended March 31, 2002, the Company recognized
change in fair value of the derivative of $215,000 related to the change in fair
value of the interest rate swap contract net of applicable income taxes of
$107,000 as a component of other comprehensive income.
(4) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31, 2002 and 2001:
9
2002 2001
------------------------------
Numerator:
Net (loss) income $(48,509,000) $ 1,984,000
Cumulative effect of accounting change 45,000,000 -
Preferred dividend requirements (497,000) (375,000)
------------------------------
Numerator for basic (loss) earnings per share - net
(loss) income available for common stockholders
before cumulative effect of accounting change (4,006,000) 1,609,000
Effect of dilutive securities:
Preferred dividend requirements - 375,000
Numerator for diluted (loss) earnings per share - net ------------------------------
(loss) income available for common stockholders after
assumed conversions before
cumulative effect of accounting change $ (4,006,000) $ 1,984,000
==============================
Denominator:
Denominator for basic (loss) earnings per share -
weighted average shares 10,729,627 10,729,627
Effect of dilutive securities:
Convertible preferred stock - 3,584,229
------------------------------
Dilutive potential common stock - 3,584,229
Denominator for diluted (loss) earnings per share -
adjusted weighted-average shares and assumed
conversions 10,729,627 14,313,856
==============================
Basic (loss) earnings per share before cumulative effect
of accounting change $ (0.37) $ .15
==============================
Diluted (loss) earnings per share before cumulative
effect of accounting change $ (0.37) $ .14
==============================
(5) BUSINESS SEGMENTS
The Company classifies its business into two fundamental areas, staffing and
executive search. Staffing consists of the placement and payrolling of temporary
and permanent office, clerical and information technology professional
personnel. Executive search focuses on placing middle to upper level management
positions. The Company evaluates performance based on the segments' profit from
operations before unallocated corporate overhead.
Executive
Staffing Search
Three months ended March 31, 2002 Services Services Total
- --------------------------------------------------------------------------------
Revenues $65,315,000 $ 4,326,000 $69,641,000
Segment (loss) (1,708,000) (532,000) (2,240,000)
Executive
Staffing Search
Three months ended March 31, 2002 Services Services Total
- --------------------------------------------------------------------------------
Revenues $75,793,000 $13,920,000 $89,713,000
Segment (loss) profit (565,000) 2,970,000 2,405,000
10
Three months ended March 31,
Reconciliation to net (loss) income 2002 2001
- -----------------------------------------------------------------------------
Total (loss) profit for reportable segments $ (2,240,000) $ 2,405,000
Unallocated amounts:
Interest expense (1,382,000) (273,000)
Corporate overhead (541,000) (517,000)
Cumulative effect of accounting change (45,000,000) --
Income tax benefit 654,000 369,000
------------- ------------
Net (loss) income $(48,509,000) $ 1,984,000
============= ============
(6) LONG-TERM DEBT AND CREDIT FACILITIES
In March 1998, Headway obtained $105 million of financing consisting of $85
million in senior debt, $20 million of equity financing and $10 million of
senior subordinated debt. As of March 31, 2002, $72,000,000 in aggregate
principal amount was outstanding under the Senior Credit Facility, which was to
mature on April 18, 2002 (see below). Substantially all assets of the Company
have been pledged as collateral for the senior credit facility.
As of March 31, 2002, $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.
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 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 (4) 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.
11
(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. Such warrants were issued in April 2002.
(7) COMPREHENSIVE INCOME
During the three months ended March 31, 2002 and 2001, total comprehensive
(loss) income amounted to $(48,140,000) and $ 1,382,000, respectively.
(8) 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 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.
12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 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 prior to the first quarter of 2002 was amortized utilizing the
straight-line method over a period of 20 to 30 years. The Company periodically
evaluated 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.
During the first quarter of 2002 the Company adopted Statements of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). 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. Under FAS 142, goodwill
impairment is deemed to exist if the net carrying value of a reporting unit's
goodwill exceeds its estimated fair value. The Company's reporting units are one
level below the operating segments underlying the segments identified in Note
5-Segment Information. Upon adoption of FAS 142 in the first quarter of 2002,
the Company recorded a one-time, non-cash charge of $45 million to reduce the
carrying value of its goodwill. Such charge is non-operational in nature and is
reflected as a cumulative effect of an accounting change in the accompanying
consolidated statement of operations.
Results of Operations
Overview
The results for the first quarter reflect a significant reduction in the demand
for the Company's staffing and executive search services. This trend is a direct
result of the soft economy and is consistent with the performance of the other
staffing and executive search companies in the sector. Many companies have
instituted hiring freezes for both temporary and permanent positions. The
financial services industry has reduced its demand for the Company's executive
search services as a direct result of the poor financial performance across the
financial services industry. The Company believes that the performance for the
balance of the year will continue to be impacted by the performance in the
general economy. The performance in executive search for the balance of the year
will depend in part on the financial services industry. The Company has taken
steps to reduce costs and is constantly looking for growth opportunities.
13
Consolidated
Revenues decreased $20,072,000 or 22.4% to $69,641,000 for the three months
ended March 31, 2002, from $89,713,000 for the same period in 2001. The decrease
was attributable to an overall decline in the demand for the Company's staffing
and executive search services as a direct result of weakness in the economy.
The executive search subsidiary, Whitney Partners, LLC (Whitney) contributed
$4,326,000 to consolidated revenues in the first quarter of 2002, a decrease of
$9,594,000 from $13,920,000 for the same period in 2001. The decrease reflects a
sharp decline in the demand for new hires in the financial services industry.
The staffing subsidiary, Headway Corporate Staffing Services, Inc. (HCSS)
contributed revenues of $65,315,000 to consolidated revenues in the first
quarter of 2002, a decrease of $10,478,000 from $75,793,000 for first quarter of
2001. The decline in revenues was a result of the negative impact of the
unfavorable economic conditions on the demand for information technology and
clerical staffing services.
Total operating expenses decreased $13,092,000 to $70,866,000 for the three
months ended March 31, 2002, from $83,958,000 for the same period in 2001. The
decrease is the result of a $7.0 million decrease in direct costs, a $5.2
million decrease in selling, general and administrative expenses, and a $0.9
million decrease in depreciation and amortization. Direct costs increased as a
percentage of revenues to 81.7% in 2002 from 71.2% in 2001. This increase in
direct costs as a percentage of revenues is a result of a change in Headway's
business mix in 2001. Specifically, the executive search and permanent placement
business that has no direct costs experienced more significant declines than the
staffing business, therefore reducing its percentage of our total revenues.
Selling, general and administrative expenses decreased as a percentage of
revenues from 20.8% in first quarter 2001 to 19.4% in first quarter 2002. 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 in
response to the unfavorable economic conditions. The decrease in depreciation
and amortization is a result of the adoption of Statements of Financial
Accounting Standards 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. Amortization of goodwill recorded for the first
quarter of 2001 was $1.0 million.
Whitney's selling, general and administrative expenses decreased $3.2 million in
the first quarter of 2002 to $4.8 million as compared to $8.0 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 $2.0 million in the
first quarter of 2002 to $8.2 million as compared to $10.2 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 implemented in the latter half of 2001.
Interest expense increased $1.8 million to $3.9 million in the first quarter of
2002 as compared to $2.1 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,
and expense relating to the Company's interest rate swap.
During the first quarter of 2002 the Company adopted SFAS 142. 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. Under SFAS 142, goodwill impairment is deemed to exist if
the net carrying value of a reporting unit's goodwill exceeds its estimated fair
value. The Company's reporting units are one level below the operating segments
underlying the segments identified in Note 5-Segment Information. Upon adoption
of SFAS 142 in the first quarter of 2002, the Company recorded a one-time,
non-cash charge of $45 million to reduce the carrying value of its goodwill.
14
Such charge is non-operational in nature and is reflected as a cumulative effect
of an accounting change in the accompanying consolidated statement of
operations.
Liquidity and Capital Resources
In March 1998, Headway obtained $105 million of financing consisting of $85
million in senior debt, $20 million of equity financing and $10 million of
senior subordinated debt. As of March 31, 2002, $72,000,000 in aggregate
principal amount was outstanding under the Senior Credit Facility, which was to
mature on April 18, 2002 (see below). Substantially all assets of the Company
have been pledged as collateral for the senior credit facility.
As of March 31, 2002, $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.
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 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. Such warrants were issued in April 2002.
Net cash provided by operations during the three months ended March 31, 2002 was
$2,517,000. The cash provided in 2002 was primarily attributable to a decrease
15
in accounts receivable and prepaid and refundable income taxes, and an increase
in accrued payroll. Net cash used in operations during the three months ended
March 31, 2001 was $3,952,000. The cash used in 2001 was primarily attributable
to an increase in accounts receivable, a decrease in accounts payable, accrued
expenses and accrued payroll, which was partially offset by an increase in
income taxes payable.
Net cash used in investing activities for the three months ended March 31, 2002,
of $731,000 was primarily the result of earnout payments for acquisitions
completed during 1997 and 1998 and capital expenditures. This compares to cash
used in investing activities of $1,744,000 for the same period in 2001. The cash
used for investing activities in 2001 also related primarily to earnout payments
for acquisitions completed during 1997 and 1998 as well as capital expenditures.
Net cash used in financing activities during the three months ended March 31,
2002 was $320,000, primarily relating to payments of loan acquisition fees. Net
cash provided by financing activities of $5,319,000 for the three months ended
March 31, 2001 was primarily a result of additional borrowings under the
Company's senior credit facility.
The Company's working capital was $32,609,000 at March 31, 2002, compared to
$34,813,000 at December 31, 2001. Management expects that the Company's working
capital position will be sufficient to meet all of its working capital needs for
the remainder of the year.
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. The following table includes aggregate
information about Headway's contractual obligations as of March 31, 2002 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 283 208 75 - -
- ------------------------------------------------------------------------------
Operating Leases 9,728 2,770 3,662 2,183 1,113
- ------------------------------------------------------------------------------
Unconditional Purchase
Obligations None
- ------------------------------------------------------------------------------
Other Long Term 927 927 - - -
Obligations (1)
- ------------------------------------------------------------------------------
Total Contractual Cash
Obligations $92,938 $3,905 $85,737 $ 2,183 $ 1,113
- ------------------------------------------------------------------------------
The following table includes aggregate information about Headway's commercial
commitments as of March 31, 2002. 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
Commitments Amounts Per Period
Committed (in thousands)
---------------------------------------
Less than 1 - 3 4 - 5 Over 5
1 year years years years
- --------------------------------------------------------------------------------
Lines of Credit None
- --------------------------------------------------------------------------------
Standby Letters of Credit $1,687 $1,687 $ - $ - $ -
- --------------------------------------------------------------------------------
Guarantees None
- --------------------------------------------------------------------------------
Standby Repurchase None
Obligations
- --------------------------------------------------------------------------------
Other Commercial None
Commitments
- --------------------------------------------------------------------------------
Total Commercial $ 1,687 $1,687 $ - $ - $ -
Commitments
- --------------------------------------------------------------------------------
(1) Represents earnout amounts payable to the former owners of businesses
previously acquired by Headway.
16
Item 3. 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
March 31, 2002, 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 April
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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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)
3.2 By-Laws (1)
3.3 By-Law Amendments (2)
4.1 Series F Preferred Stock Designation (2)
4.2 Series G Preferred Stock Designation (3)
4.3 Form of Warrants issued August 23, 2001, exercisable (3)
for an aggregate of 1,000,000 shares
4.4 Form of Warrants issued August 23, 2001, exercisable (3)
for an aggregate of 1,150,000 shares
4.5 Form of Warrants issued August 23, 2001, exercisable (3)
for an aggregate of 850,000 shares
4.6 Securities Purchase Agreement dated March 19, 1998 (2)
4.7 Registration Rights Agreement dated March 19, 1998 (2)
4.8 Amended and Restated Indenture dated Aril 18, 2002 (3)
17
4.9 Registration Rights Agreement dated April 17, 2002 (3)
4.10 Amended and Restated Credit Agreement dated April 17, (3)
2002, With Exhibits
4.11 Voting Agreement dated April 17, 2002 (3)
(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.
(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.
(3) These exhibits are included in Amendment No. 1 to Headway's annual report on
Form 10-K for the fiscal year ended December 31, 2001, and filed with the
Securities and Exchange Commission on April 30, 2002, and are incorporated
herein by this reference.
Reports on Form 8-K: None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
HEADWAY CORPORATE RESOURCES, INC.
Date: May 15, 2002 By: /s/ Barry S. Roseman
President and Chief Operating Officer
By: /s/ Philicia G. Levinson
Senior Vice President and
Chief Financial Officer
18