SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
___________
FORM 10-Q
___________
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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: 000-50129
-------------------------------------------------
HUDSON HIGHLAND GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3547281
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
622 Third Avenue, New York, New York 10017
(Address of principal executive offices) (Zip code)
(212) 351-7300
(Registrant's telephone number, including area code)
-------------------------------------------------
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 whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes _ No X
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Outstanding on
Class July 31, 2003
----- -------------
Common Stock 8,442,076
HUDSON HIGHLAND GROUP, INC.
INDEX
Page No.
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Statements of Operations - Three Months
and Six Months Ended June 30, 2003 and 2002 3
Consolidated Condensed Balance Sheets - June 30, 2003 and
December 31, 2002 4
Consolidated Condensed Statements of Cash Flows - Six Months
Ended June 30, 2003 and 2002 5
Notes to Consolidated Condensed Financial Statements 6
Report of Independent Certified Public Accountants 17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
Exhibit Index 31
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUDSON HIGHLAND GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Revenue $269,283 $277,787 $528,472 $541,867
Direct costs (Note 5) 165,565 163,838 327,222 318,594
-------- -------- -------- --------
Gross margin 103,718 113,949 201,250 223,273
Selling, general and administrative expenses 120,920 115,143 245,338 234,031
Business reorganization expenses (recoveries) (500) 52,726 7,461 52,726
Merger and integration expenses 3 1,218 978 6,958
-------- -------- -------- --------
Operating loss (16,705) (55,138) (52,527) (70,442)
Other income (expense):
Other, net 1,566 19 (181) (423)
Interest income (expense), net 38 (14) (255) 14
-------- -------- -------- --------
Loss before provision for (benefit of) income taxes and
accounting change (15,101) (55,133) (52,963) (70,851)
Provision for (benefit of) income taxes (11) (1,180) 6,138 (1,893)
-------- -------- -------- --------
Loss before accounting change (15,090) (53,953) (59,101) (68,958)
Cumulative effect of accounting change - - - (293,000)
-------- -------- -------- --------
Net loss $(15,090) $(53,953) $(59,101) $(361,958)
======== ======== ======== ========
Basic and diluted loss per share:
Loss before accounting change $ (1.79) $ (6.46) $ (7.03) $ (8.26)
Net loss $ (1.79) $ (6.46) $ (7.03) $ (43.36)
Weighted average shares outstanding 8,429 8,355 8,406 8,347
See accompanying notes to consolidated condensed financial statements.
-3-
HUDSON HIGHLAND GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, December 31,
2003 2002
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 39,621 $ 25,908
Accounts receivable, net 161,888 161,831
Due from Monster Worldwide, Inc. 11,421 -
Other current assets 25,483 28,177
-------- --------
Total current assets 238,413 215,916
Property and equipment, net 41,984 34,106
Intangibles, net 204,151 201,937
Other assets 16,003 15,145
-------- --------
$500,551 $467,104
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,961 $ 28,305
Accrued expenses and other current liabilities 106,979 84,669
Accrued merger and integration expenses 6,667 8,935
Accrued business reorganization expenses 15,720 25,845
-------- --------
Total current liabilities 168,327 147,754
Other liabilities 2,337 2,776
-------- --------
Total liabilities 170,664 150,530
======== ========
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000 shares authorized; none
issued or outstanding - -
Common stock, $0.001 par value, 100,000 shares authorized; issued and
outstanding: 8,442 and 0 shares, respectively 8 -
Additional paid-in capital 311,704 -
Retained deficit (15,090) -
Accumulated other comprehensive income:
Foreign currency translation adjustments 33,265 24,660
Total divisional equity - 291,914
-------- --------
Total stockholders' equity 329,887 316,574
-------- --------
$500,551 $467,104
======== ========
See accompanying notes to consolidated condensed financial statements.
-4-
HUDSON HIGHLAND GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
--------
2003 2002
---- ----
Cash flows from operating activities:
Net loss $(59,101) $(361,958)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 10,301 10,057
Provision for doubtful accounts 8,113 183
Net loss on disposal of assets 1,784 10,827
Deferred income taxes 6,819 4,695
Cumulative effect of accounting change - 293,000
Changes in assets and liabilities:
Increase in accounts receivable (269) (22,604)
Decrease in due from Monster Worldwide, Inc. 2,109 -
(Increase) decrease in other assets (227) 6,153
Increase (decrease) in accounts payable, accrued expenses and other liabilities 20,397 (30,068)
Decrease in accrued merger and integration expenses (2,140) (11,145)
(Decrease) increase in accrued business reorganization expenses (11,341) 27,638
-------- ---------
Total adjustments 35,546 288,736
-------- ---------
Net cash used in operating activities (23,555) (73,222)
-------- ---------
Cash flows from investing activities:
Capital expenditures (5,362) (11,758)
Payments related to prior years' purchased businesses (330) (5,403)
-------- ---------
Net cash used in investing activities (5,692) (17,161)
-------- ---------
Cash flows from financing activities:
Net payments on short and long-term debt (1,298) (53,720)
Net cash transfers received from Monster Worldwide, Inc., prior to the Distribution 41,317 144,374
-------- ---------
Net cash provided by financing activities 40,019 90,654
-------- ---------
Effect of exchange rate changes on cash and cash equivalents 2,941 2,235
-------- ---------
Net increase in cash and cash equivalents 13,713 2,506
Cash and cash equivalents, beginning of period 25,908 37,672
-------- ---------
Cash and cash equivalents, end of period $ 39,621 $ 40,178
======== =========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 1,974 $ 598
See accompanying notes to consolidated condensed financial statements.
-5-
HUDSON HIGHLAND GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
NOTE 1 - INTERIM CONSOLIDATED CONDENSED QUARTERLY FINANCIAL STATEMENTS
These interim consolidated condensed quarterly financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC") and should be read in conjunction with the combined
audited financial statements and related notes of Hudson Highland Group, Inc.
and subsidiaries (the "Company" or "HH Group") in its Registration Statement on
Form 10 filed with the SEC on March 14, 2003 (the "Form 10"). The consolidated
results for interim periods are not necessarily indicative of results for the
full year or any subsequent period. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of financial position, results of operations and cash
flows at the dates and for the periods presented have been included.
NOTE 2 - REORGANIZATION, BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Reorganization
The accompanying condensed consolidated financial statements include the
operations, assets and liabilities of the Hudson Global Resources ("Hudson") and
Highland Partners ("Highland") formerly business segments of Monster Worldwide,
Inc. ("Monster"), (formerly TMP Worldwide Inc). In October 2002, Monster
announced a plan to distribute to its stockholders the shares of HH Group, a
wholly owned subsidiary of Monster (the "Distribution"). Immediately prior to
the Distribution, Monster transferred the assets and liabilities of its Hudson
and Highland business segments to HH Group. These assets and liabilities are
reflected in HH Group's financial statements at Monster's historical cost. On
March 31, 2003 (the "Distribution Date"), Monster distributed to all of its
stockholders of record one share of HH Group Common Stock for each thirteen and
one-third shares of Monster Common Stock so held. The assets and liabilities of
the Company consist primarily of businesses Monster acquired at various times in
prior years.
Basis of Presentation
The consolidated condensed financial statements have been derived from the
financial statements and accounting records of Monster for all periods through
the Distribution Date, using the historical results of operations and historical
basis of the assets and liabilities of the Company's business. In connection
with the Distribution, the inter-company balances due to Monster were
contributed by Monster to equity; accordingly, such balances are reflected as
divisional equity for periods prior to March 31, 2003 at which time the amount
was reclassified to common stock and additional paid-in capital. Earnings and
losses accumulate in retained earnings (deficit) starting April 1, 2003. The
terms of the distribution agreement with Monster did not require repayment or
distribution of any portion of the divisional equity back to Monster. The
Company's costs and expenses in the accompanying consolidated condensed
financial statements for periods prior to March 31, 2003 include allocations
from Monster for executive, legal, accounting, treasury, real estate,
information technology, certain merger and integration costs and business
reorganization costs and other Monster corporate services and infrastructure
costs because specific identification of the expenses is not practicable. The
total corporate services allocation to the Company from Monster was $5,260 and
$14,405 for the six months ended June 30, 2003 and 2002, respectively, including
$0 and $7,074 for the quarter ended June 30, 2003 and 2002, respectively. There
was no corporate services allocation for the quarter ended June 30, 2003. The
expense allocations were determined on the basis that Monster and the Company
considered to be reasonable reflections of the utilization of services provided
or the benefit received by the Company using ratios that are primarily based on
the Company's revenue, net of direct costs of temporary contractors compared to
Monster as a whole. The financial information included herein prior to March 31,
2003 may not necessarily reflect the financial position and results of
operations of HH Group in the future or what these amounts would have been had
it been a separate, stand-alone entity during the periods presented prior to the
Distribution. However, management believes that if the Company had been a
stand-alone entity during the periods presented, the expenses would not have
been materially different from the allocations presented.
-6-
NOTE 2 - REORGANIZATION, BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
(Continued)
Loss Per Share
To determine the shares outstanding for the Company for the period prior to
the Distribution, Monster's weighted average number of shares is multiplied by
the distribution ratio of one share of HH Group common stock for every thirteen
and one-third shares of Monster common stock. Basic loss per share is computed
by dividing the Company's losses by the weighted average number of shares
outstanding during the period. When the effects are not anti-dilutive, diluted
loss per share is computed by dividing the Company's net losses by the weighted
average number of shares outstanding and the impact of all dilutive potential
common shares, primarily stock options. The dilutive impact of stock options is
determined by applying the "treasury stock" method. For all periods presented,
dilutive earnings per share calculations do not differ from basic earnings per
share because the effects of any potential common stock were anti-dilutive and
therefore not included in the calculation of dilutive earnings per share.
Earnings per share calculations for each quarter include the weighted
average effect for the quarter; therefore, the sum of quarterly earnings per
share amounts may not equal year-to-date earnings per share amounts, which
reflect the weighted average effect on a year-to-date basis.
Business Segments
The Company is one of the world's largest specialized staffing and
executive search firms. The Company provides professional staffing services on a
permanent, contract and temporary basis, as well as executive search and career
management services to clients operating in a wide range of businesses. The
Company focuses on mid-level executives in specialized professional areas and at
the senior executive level.
The Company is organized into two divisions, Hudson Global Resources and
Highland Partners.
Hudson Global Resources. Hudson primarily focuses on providing professional
temporary and contract personnel and business solutions to its clients and
mid-level executive recruitment or placement services. Mid-level executives and
professionals are those who typically earn between $50,000 and $150,000
annually, and possess the set of executive or professional skills and/or profile
required by its clients. In the case of the temporary and contracting business,
Hudson primarily focuses on the placement of professionals or executives in
temporary assignments that can range from one day to more than 12 months.
Hudson's sales strategy focuses on clients operating in particular sectors, such
as health care, financial services, and technology and communications. Hudson
supplies candidates in a variety of specialist fields such as law, accounting,
banking and finance, health care, engineering, technology and science. Hudson
uses both traditional and interactive methods to find and recruit potential
candidates for its clients, employing a suite of products that assess talent and
help predict whether a candidate will be successful in a given role.
Hudson also provides a variety of other services, including career
management, executive assessment and coaching, and human resources consulting.
These service offerings are growing at a higher rate than the recruitment and
placement businesses and the Company's management believes this will help
balance the cyclical nature of its core offerings.
These services allow Hudson to offer clients a comprehensive set of human
capital management services, ranging from temporary workers, to assessment or
coaching of permanent staff, to recruitment or search for permanent workers, to
outplacement. Hudson is also marketed under the name TMP/Hudson Global Resources
and TMP/Hudson Human Resource Consulting in certain markets around the world.
Highland Partners. Highland offers a comprehensive range of executive
search services aimed at finding the senior level executive or professional for
a wide range of clients operating in sectors such as health care, technology,
financial services, retail and consumer, and industrial. Highland also has an
active practice in assisting clients who desire to augment their boards of
directors. Highland concentrates on searches for positions with annual
compensation of $150,000 or more and operates exclusively on a retained basis.
Highland is also marketed as TMP/Highland Partners in certain markets around the
world.
Reclassifications
In the current financial statement presentation, changes have been made
from the Form 10 presentation and new account descriptions are being used.
Certain prior period amounts have been reclassified to conform to the Company's
2003 financial statement presentation; these reclassifications do not change
total revenues, total expenses, net loss, total assets, total liabilities or
stockholders' equity.
-7-
NOTE 3 - STOCK BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance
with APB No. 25. Under APB No. 25, no compensation expense is recognized in
connection with the awarding of stock option grants to employees provided that,
as of the grant date, all terms associated with the award are fixed and the
quoted market price of the stock is equal to or less than the amount an employee
must pay to acquire the stock. Because the Company issues only fixed term stock
option grants at or above the quoted market price on the date of the grant,
there is no related compensation expense recognized in the accompanying
financial statements. The Company adopted the disclosure only provisions of SFAS
123 and SFAS 148, which require certain financial statement disclosures,
including pro forma operating results as if the Company had prepared its
consolidated financial statements in accordance with the fair value based method
of accounting for stock-based compensation.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no restrictions and are fully
transferable and negotiable in a free trading market. Black-Scholes does not
consider the employment, transfer or vesting restrictions that are inherent in
the Company's employee options. Use of an option valuation model, as required by
SFAS 123, includes highly subjective assumptions based on long-term predictions,
including the expected stock price volatility and average life of each option
grant. Because the Company's employee options have characteristics significantly
different from those of freely traded options, and because changes in the
subjective input assumptions can materially affect the Company's estimate of the
fair value of those options, in the Company's opinion the existing valuation
models, including Black-Scholes, are not reliable single measures and may
misstate the fair value of the Company's employee options.
As required under SFAS 123 and SFAS 148, the pro forma effects of
stock-based compensation on the Company's operating results and per share data
have been estimated at the date of grant using the Black-Scholes option-pricing
model based on the following weighted average assumptions:
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Risk fee interest rate 4.0% 4.2%
Volatility 65.0% 73.5%
Expected life (years) 5.0 7.5
Dividends 0.0% 0.0%
For purposes of pro forma disclosures, the options' estimated fair value is
assumed to be amortized to expense over the options' vesting periods. The pro
forma effects of stock-based compensation expense for the quarter and six month
periods ended June 30, 2002 and for the first quarter of 2003, are related
entirely to options in Monster stock granted to employees of Monster prior to
March 31, 2003 who transferred to the Company at the time of the Distribution.
As a result of the Company's inability to recognize current tax benefits on
reported net losses, total stock-based compensation expense is shown without tax
benefits for all periods presented. The pro forma effects of recognizing
compensation expense under the fair value method on the Company's operating
results and per share data are as follows:
Quarter Ended June 30, Six months Ended June 30,
---------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Reported net loss $(15,090) $(53,953) $(59,101) $(361,958)
Add: Total stock-based employee compensation expense determined
under fair value based method for all awards (1,172) (12,169) (1,172) (24,338)
-------- -------- -------- ---------
Pro forma net loss $(16,262) $(66,122) $(60,273) $(386,296)
======== ======== ======== =========
Basic and diluted earnings per share:
As reported net loss $ (1.79) $ (6.46) $ (7.03) $ (43.36)
======== ======== ======== =========
Pro forma net loss $ (1.93) $ (7.91) $ (7.17) $ (46.28)
======== ======== ======== =========
-8-
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, Accounting for
Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 applies
to costs associated with an exit (including restructuring) or disposal activity.
Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS 146, a company records a liability for a cost associated with an exit or
disposal activity when that liability is incurred and can be measured at fair
value. SFAS 146 requires a company to disclose information about its exit and
disposal activities, the related costs and changes in those costs in the notes
to the interim and annual financial statements that include the period in which
an exit activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002. Under SFAS 146, a company may not restate its
previously issued financial statements. Liabilities recognized as a result of
disposal activities prior to the adoption of SFAS 146 continue to be accounted
for under Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3").
The Company's adoption of SFAS 146 on January 1, 2003, did not have a material
impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure ("SFAS 148"), an amendment of SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), which provides
alternatives for companies electing to account for stock-based compensation
using the fair value criteria established by SFAS 123. The Company intends to
account for stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25 ("APB No. 25").
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
the Indebtedness of Others, which addresses the accounting for and disclosure of
guarantees. Interpretation No. 45 requires a guarantor to recognize a liability
for the fair value of a guarantee at inception. The recognition of the liability
is required even if it is not probable that payments will be required under the
guarantee. The disclosure requirements are effective for interim and annual
financial statements ending after December 15, 2002. The initial recognition and
measurement provisions are effective on a prospective basis for guarantees
issued or modified after December 31, 2002. The Company's adoption of
Interpretation No. 45 did not have a material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities. The objective of this interpretation is to
provide guidance on how to identify a variable interest entity ("VIE") and
determine when the assets, liabilities, noncontrolling interests, and results of
operations of a VIE need to be included in a company's consolidated financial
statements. A company that holds variable interests in an entity will need to
consolidate the entity if the company's interest in the VIE is such that the
company will absorb a majority of the VIE's expected losses and/or receive a
majority of the entity's expected residual returns, if they occur.
Interpretation No. 46 also requires additional disclosures by primary
beneficiaries and other significant variable interest holders. The
interpretation became effective upon issuance. The Company's adoption of this
interpretation did not have an effect on its consolidated financial statements.
On May 1, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003. The Company's adoption of SFAS 149 should not have an
effect on its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150"). SFAS 150 changes the accounting for certain financial instruments that,
under previous guidance, could be classified as equity or "mezzanine" equity, by
now requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS 150 affects an entity's classification of the following
freestanding instruments; mandatorily redeemable instruments, financial
instruments to repurchase an entity's own equity instruments and financial
instruments embodying obligations that the issuer must or could choose to settle
by issuing a variable number of its shares or other equity instruments based
solely on (a) a fixed monetary amount known at inception or (b) something other
than changes in its own equity instruments. SFAS 150 is effective for periods
beginning after June 15, 2003. The Company's adoption of this interpretation is
not expected to have an effect on its consolidated financial statements.
-9-
NOTE 5 - REVENUES, DIRECT COSTS AND GROSS MARGIN
Details of the Company's revenues and direct costs, classified by temporary
and permanent placement business, are as follows:
Quarter Ended June 30, 2003 Quarter Ended June 30, 2002
--------------------------- ---------------------------
Temporary Permanent Total Temporary Permanent Total
Revenue $188,467 $80,816 $269,283 $200,173 $77,614 $277,787
Direct costs (1) 155,678 9,887 165,565 161,096 2,742 163,838
-------- ------- -------- -------- ------- --------
Gross margin $ 32,789 $70,929 $103,718 $ 39,077 $74,872 $113,949
======== ======= ======== ======== ======= ========
Six Months Ended June 30, 2003 Six Months Ended June 30, 2002
------------------------------ ------------------------------
Temporary Permanent Total Temporary Permanent Total
Revenue $374,709 $153,763 $528,472 $389,970 $151,897 $541,867
Direct costs (1) 309,322 17,900 327,222 312,488 6,106 318,594
-------- -------- -------- -------- -------- --------
Gross margin $ 65,387 $135,863 $201,250 $ 77,482 $145,791 $223,273
======== ======== ======== ======== ======== ========
(1) Direct costs include the direct staffing costs of salaries, payroll taxes,
employee benefits, travel expenses and insurance costs for the Company's
temporary contractors and reimbursed out-of-pocket expense and other direct
costs. Other than reimbursed out-of-pocket expenses, there are no other
direct costs associated with the search and permanent placement revenues.
The salaries, commissions, payroll taxes and employee benefits related to
recruitment professionals are included in selling, general and
administrative expenses.
NOTE 6 - INTANGIBLE ASSETS, NET
As of June 30, 2003 and December 31, 2002, the Company's intangible assets
consisted of the following:
June 30, 2003 December 31, 2002
------------- -----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Goodwill $201,214 $ - $199,063 $ -
Amortizable intangible assets:
Client lists and other amortizable intangibles 5,058 (2,121) 5,085 (2,211)
-------- ------- -------- -------
Total intangible assets $206,272 $(2,121) $204,148 $(2,211)
======== ======= ======== =======
Intangibles represent acquisition costs in excess of the fair value of net
tangible assets of businesses purchased and consist primarily of the value of
client lists, non-compete agreements, trademarks and goodwill. The Company
amortizes these intangibles, other than goodwill, over periods ranging from two
to thirty years. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets ("SFAS 142"), the Company no longer amortizes goodwill but instead will
evaluate its goodwill annually for impairment, or earlier if indicators of
potential impairment exist. Changes in the Company's strategy and market
conditions could significantly impact these evaluations and require adjustments
to recorded amounts of goodwill and other intangible assets. As a result of the
adoption of SFAS 142 on January 1, 2002, the Company recorded a non-cash
impairment charge of $293,000 to reduce the carrying value of goodwill. The
change in goodwill's gross carrying amount from December 31, 2002 to June 30,
2003 is the result of changes in currency translation on non-U.S. dollar
denominated goodwill. Intangible asset amortization expense for the six months
ended June 30, 2003 and 2002 was $257 and $393, respectively.
NOTE 7 - TAXES
The Company's effective tax rate for the six months ended June 30, 2003 and
2002 differs from the U.S. Federal statutory rate of 35% due to valuation
allowances on deferred tax assets, net operating losses retained or utilized by
Monster, certain non-deductible expenses such as amortization, business
restructuring and spin-off costs, merger costs from pooling of interests
transactions, and variations from the U.S. tax rate in foreign jurisdictions.
The provision for income taxes for the six months ended June 30, 2003 was $6,138
on a pretax loss of $52,963, compared with a benefit of $1,893 on a pretax loss
of $70,851 for the same period of 2002. The tax provision for the six months
ended June 30, 2003 was primarily due to the establishment of a valuation
allowance on certain foreign tax losses which may not be realizable and the
inability of the Company to realize benefits from its current losses in
businesses where the future earnings ability to utilize those losses is not
certain.
-10-
NOTE 8 - BUSINESS COMBINATIONS
Accrued Merger and Integration Expenses
Pursuant to the conclusions stated in EITF 94-3 and EITF Issue No. 95-3,
Recognition of Liabilities in Connection with a Purchase Business Combination,
and in connection with the acquisitions and mergers made in 2001 and 2000, the
Company formulated plans to integrate the operations of such companies. Such
plans involve the closure of certain offices of the acquired and merged
companies and the termination of certain management and employees. The
objectives of the plans are to eliminate redundant facilities and personnel and
to create a single brand in the related markets in which the Company operates.
In connection with plans relating to pooled entities, the Company expensed
$978 and $6,958 in the first six months of 2003 and 2002, respectively, relating
to integration activities included as a component of merger and integration
expenses. Amounts recorded relating to business combinations accounted for as
purchases were charged to goodwill. The $978 expenses for the first six months
were almost entirely related to lease obligations on closed facilities. A
summary of activity of the accrued merger and integration expenses for the six
months ended June 30, 2003 is outlined as follows:
Balance Change in Balance
December 31, 2002 Estimate Utilization June 30, 2003
----------------- -------- ----------- -------------
Assumed lease obligations on closed facilities $7,292 $1,008 $(2,710) $5,590
Consolidation of acquired facilities 1,607 (30) (500) 1,077
Severance, relocation and other employee costs 36 - (36) -
------ ------ ------- ------
Total $8,935 $ 978 $(3,246) $6,667
====== ====== ======= ======
The following table presents a summary of activity relating to the
Company's integration and restructuring plans for acquisitions made in prior
years. Amounts reflected in the "Change in Estimate" column represent
modifications to plans subsequent to finalization and have been expensed in the
current period. Cash payments and associated write-offs relating to the plans
are reflected in the "Utilization" caption of the following table. Details of
the exit plan activity for the six months ended June 30, 2003 are as follows:
Balance Change in Balance
December 31, 2002 Estimate Utilization June 30, 2003
----------------- -------- ----------- -------------
2000 Plans $2,388 $ (6) $ (395) $1,987
2001 Plans 3,291 910 (2,101) 2,100
2002 Plans 3,256 74 (750) 2,580
------ ----- ------- ------
Total $8,935 $ 978 $(3,246) $6,667
====== ===== ======= ======
-11-
NOTE 9 - BUSINESS REORGANIZATION EXPENSES
In the second quarter of 2002, the Company announced a reorganization
initiative to further streamline its operations, lower its cost structure,
integrate businesses previously acquired and improve its return on capital. This
reorganization program includes a workforce reduction, consolidation of excess
facilities, restructuring of certain business functions and other special
charges, primarily for exiting activities that are no longer part of the
Company's strategic plan.
In the fourth quarter of 2002, the Company announced further reorganization
efforts related to its separation from Monster and the streamlining of
operations, which continued through the first six months of 2003. The charge
consisted primarily of workforce reduction, office consolidation costs and
related write-offs, professional fees and other special charges.
A summary of activity of the business reorganization expenses for the six
months ended June 30, 2003 is outlined as follows:
Balance Change in Balance
December 31, 2002 Additions Estimate Utilization June 30, 2003
----------------- --------- -------- ----------- -------------
Workforce reductions $ 8,375 $1,770 $ (155) $ (7,980) $ 2,010
Consolidation of excess facilities 15,048 5,194 (870) (8,130) 11,242
Professional fees and other 2,422 1,723 (201) (1,476) 2,468
------- ------ ------- -------- -------
Total $25,845 $8,687 $(1,226) $(17,586) $15,720
======= ====== ======= ======== =======
The following table presents a summary of plan activity related to business
reorganization costs for the six months ended June 30, 2003. Amounts in the
"Additions" column of the following table represent amounts charged to business
reorganization expense in the Company's statement of operations for the six
months ended June 30, 2003. The expenses were primarily related to consolidation
of facilities, workforce reductions and professional fees related to the
Distribution. Costs under these plans are charged to expense as estimates are
finalized and events become accruable. Amounts reflected in the "Change in
Estimate" column represent modifications to previously accrued amounts that were
initially established under each plan. Cash payments and associated write-offs
relating to the plans are reflected in the "Utilization" caption of the
following table.
Balance Change in Balance
December 31, 2002 Additions Estimate Utilization June 30, 2003
----------------- --------- -------- ----------- -------------
Second Quarter 2002 Plan $14,908 $ 615 $(1,046) $ (8,521) $ 5,956
Fourth Quarter 2002 Plan 10,937 8,072 (180) (9,065) 9,764
------- ------ ------- -------- -------
Total $25,845 $8,687 $(1,226) $(17,586) $15,720
======= ====== ======= ======== =======
NOTE 10 - COMPREHENSIVE INCOME
Quarter Ended June 30, Six months Ended June 30,
---------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss $(15,090) $(53,953) $(59,101) $(361,958)
Other comprehensive income - translation adjustments 5,386 32,295 8,605 29,809
-------- -------- -------- ---------
Total comprehensive loss $( 9,704) $(21,658) $(50,496) $(332,149)
======== ======== ======== =========
-12-
NOTE 11 - RELATED PARTY TRANSACTIONS
In connection with the Distribution, Monster and HH Group entered into the
following agreements:
Distribution Agreement and Employee Benefits Plans
The Company entered into a distribution agreement with Monster effective as
of the Distribution Date, pursuant to which the Company, among other things,
agreed to maintain independent employee benefit plans and programs (other than
equity compensation) that are substantially similar to Monster's existing
employee benefit plans and programs. Following the Distribution, Monster
generally ceased to have any liability to the Company's current and former
employees and their beneficiaries including liability under any of Monster's
benefit plans or programs. Employees of the Company who held vested Monster
options at the Distribution Date retained those options for Monster common
stock, with no further vesting, until the options are exercised or expire, or
until they choose to leave or are terminated by the Company.
Real Estate Agreements
Monster and the Company entered into various lease and sublease
arrangements for the sharing of certain facilities for a transitional period on
commercial terms. In the case of subleases or sub-subleases of property, the
lease terms and conditions generally coincide with the remaining terms and
conditions of the primary lease or sublease, respectively.
Transition Services Agreement
The Company entered into a transition services agreement with Monster
effective as of the Distribution Date. Under the agreement, Monster provides to
the Company, and the Company provides to Monster, certain insurance, tax, legal,
facilities, human resources, information technology and other services that are
required for a limited time (generally for one year following the Distribution
Date, except as otherwise agreed).
Under the transition services agreement, the Company and Monster provide or
arrange to provide services to each other in exchange for fees, which the
Company believes are similar in material respects to what a third-party provider
would charge. Fees for transition services are based on two billing methods,
"agreed billing" and "pass-through billing." Under the agreed billing method,
Monster provides or arranges to provide the Company or the Company provides or
arranges to provide Monster, with services at the specified cost of providing
the services, plus, in the cases of some services, 5% of these costs, in any
case subject to increase by the party providing the relevant service, in the
exercise of its reasonable judgment, after the distribution. Under the
pass-through billing method, the Company and Monster reimburse each other for
all third party expenses, out-of-pocket costs and other expenses incurred in
providing or arranging to provide the relevant service.
The Company and Monster generally invoice each other monthly for the cost
of services provided under the transition services agreement. If either party
fails to pay an invoice by its due date, it is obligated to pay interest to the
invoicing party at the prime rate as reported in The Wall Street Journal.
Tax Separation Agreement
After the Distribution Date, the Company is no longer included in Monster's
consolidated group for United States federal income tax purposes. The Company
and Monster entered into a tax separation agreement to reflect the Company's
separation from Monster with respect to tax matters. The primary purpose of the
agreement is to reflect each party's rights and obligations relating to payments
and refunds of taxes that are attributable to periods beginning before and
including the date of the distribution and any taxes resulting from transactions
effected in connection with the distribution.
The tax separation agreement provides for payments between the two
companies to reflect tax liabilities, which may arise before and after the
distribution. It also covers the handling of audits, settlements, elections,
accounting methods and return filing in cases where both companies have an
interest in the results of these activities.
The Company has agreed to indemnify Monster for any tax liability
attributable to the distribution resulting from any action taken by the Company.
-13-
NOTE 11 - RELATED PARTY TRANSACTIONS (continued)
Loan Agreement and Security Agreement
On the Distribution Date, Monster extended a secured revolving credit
facility of up to $15,000 to the Company (the "Monster Credit Facility"). The
Company closed on a credit facility with a third party on March 31, 2003 and
activated the borrowing capacity under that credit facility in June 2003, as
described in Note 13. Accordingly, the Monster Credit Facility lapsed on the
date that the borrowing capacity under the new credit facility was available to
the Company.
Monster Funding of HH Group Obligations
Monster has agreed to reimburse the Company for $13,530 of cash payments
related to the Company's accrued integration, restructuring and business
reorganization obligations and other expenses during the first year following
the spin-off. The Company received payment of $2,109 during the second quarter
of 2003 and will receive payments of $2,500 from Monster in the first month
subsequent to the end of each quarter, beginning with the second quarter of
2003. Legal obligation for settlement of such liabilities will remain with the
Company.
Other Commercial Arrangements
The Company and Monster have entered into a three-year commercial contract
involving the utilization of Monster.com services for targeting, sourcing,
screening and tracking prospective job candidates around the world. The Company
and Monster may from time to time also negotiate and purchase further services
from the other, pursuant to customary terms and conditions. There is no
contractual commitment that requires the Company to use Monster services in
preference to other service providers.
Non-Cash Transfers
Monster transferred to the Company non-cash assets and liabilities in the
first quarter of 2003 as a result of the Distribution. The approximate transfers
by account were: due from Monster Worldwide, Inc. $13,530, property and
equipment $7,600, intangibles $1,500, accrued expenses and other current
liabilities $2,900, and other liabilities $600.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Risks and Uncertainties
The Company has a history of operating losses and has only operated as an
independent company since the Distribution Date. Prior to the Distribution Date,
the Company's operations were historically financed by Monster as separate
segments of Monster's broader corporate organization rather than as a separate
stand-alone company. Monster assisted the Company by providing financing,
particularly for acquisitions, as well as providing corporate functions such as
identifying and negotiating acquisitions, legal and tax functions. Following the
Distribution, Monster has no obligation to provide assistance to the Company
other than the interim and transitional services, that will be provided by
Monster pursuant to the transition services agreement described in Note 10.
Because the Company's businesses have operated as an independent company only
since the Distribution Date, the Company cannot provide assurance that it will
be able to successfully implement the changes necessary to operate as a
profitable stand-alone business, or to secure additional debt or equity
financing on terms that are acceptable to the Company.
NOTE 13 - CREDIT FACILITY
On March 31, 2003, the Company closed a senior secured credit facility for
$50,000 with Wells Fargo Foothill, Inc. (the "Foothill Credit Facility"). The
Foothill Credit Facility has a term of three years. Outstanding loans will bear
interest equal to the prime rate plus 0.25% or LIBOR plus 2.00%, at the
Company's option. The Foothill Credit Facility is secured by substantially all
of the assets of the Company and extensions of credit will be based on a
percentage of the accounts receivable of the Company. The Company activated the
ability to obtain credit under the Foothill Credit Facility in June 2003 and
expects to use such credit, when required, to support its ongoing working
capital requirements, capital expenditures and other corporate purposes. As of
June 30, 2003 the Company has not borrowed any amounts under this credit
facility.
-14-
NOTE 14 - SEGMENT AND GEOGRAPHIC DATA
The Company operates in two business segments: Hudson and Highland. The
Company conducts operations in the following geographic regions: North America,
the Asia/Pacific Region (primarily Australia), the United Kingdom and
Continental Europe.
Segment information is presented in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
standard is based on a management approach that requires segmentation based upon
the Company's internal organization and disclosure of revenue and operating
income based upon internal accounting methods. The Company's financial reporting
systems present various data for management to run the business, including
internal profit and loss statements prepared on a basis not consistent with
generally accepted accounting principles. Assets are not allocated to segments
for internal reporting purposes.
Information by business segment
- ------------------------------- Quarter Ended June 30, Six Months Ended June 30,
---------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenue
Hudson $252,610 $259,409 $496,575 $505,731
Highland 16,673 18,378 31,897 36,136
-------- -------- -------- --------
$269,283 $277,787 $528,472 $541,867
======== ======== ======== ========
Operating loss
Hudson $ (3,824) $(32,379) $(26,823) $(38,894)
Highland (3,693) (11,347) (11,256) (12,805)
-------- -------- -------- --------
(7,517) (43,726) (38,079) (51,699)
Corporate expenses (9,188) (11,412) (14,448) (18,743)
Interest and other income (expense), net 1,604 5 (436) (409)
-------- -------- -------- --------
Loss before provision for (benefit of)
income taxes and accounting change $(15,101) $(55,133) $(52,963) $(70,851)
======== ======== ======== ========
United United Continental
Information by geographic region States Australia Kingdom Europe Other (a) Total
- -------------------------------- ------ --------- ------- ------ --------- -----
For the Quarter Ended June 30, 2003
Revenue $ 80,768 $ 73,287 $ 69,098 $25,378 $20,752 $269,283
======== ======== ======== ======= ======= ========
Long-lived assets $ 74,945 $ 16,893 $ 67,295 $73,358 $13,644 $246,135
======== ======== ======== ======= ======= ========
For the Quarter Ended June 30, 2002
Revenue $ 90,183 $ 71,845 $ 66,561 $25,413 $23,785 $277,787
======== ======== ======== ======= ======= ========
Long-lived assets $ 81,374 $ 10,685 $ 58,232 $60,262 $18,023 $228,576
======== ======== ======== ======= ======= ========
For the six months ended June 30, 2003
Revenue $166,983 $140,620 $133,992 $49,415 $37,462 $528,472
======== ======== ======== ======= ======= ========
For the six months ended June 30, 2002
Revenue $181,716 $137,074 $133,080 $49,010 $40,987 $541,867
======== ======== ======== ======= ======= ========
(a) Includes the Americas other than the United States and Asia Pacific other
than Australia.
-15-
NOTE 15 - STOCK COMPENSATION PLANS
In April 2003, the Company adopted the Hudson Highland Group, Inc. Long
Term Incentive Plan ("the LTIP") pursuant to which it granted 716,606 stock
options to purchase shares of the Company's common stock to certain key
employees in the second quarter of 2003. These options have an average weighted
exercise price of $13.78 and have vesting periods over the next four years.
Options canceled as of June 30, 2003 totaled 1,500. Options exercisable within
one year from June 30, 2003 totaled 296,803. No options related to the common
stock of Monster were converted at the Distribution into options to purchase the
Company's stock.
The Company also granted 100,000 options to purchase shares of the
Company's common stock under the LTIP to four non-employee members of the Board
of Directors in the second quarter of 2003. These options had an immediate
vesting of 40% of the options granted with the remaining options vesting over
the next three years. All options granted were outstanding as of June 30, 2003.
Options exercisable within one year from June 30, 2003 totaled 60,000.
The Company also granted 65,375 shares of restricted stock under the LTIP
to certain key employees during the second quarter of 2003. Restricted stock
vests over a three-year period from the date of grant. Restricted stock of
21,792 shares will vest within one year. Amortization expense for restricted
stock for the three and six-month periods ended June 30, 2003 was $130.
In April 2003, the Company adopted the Hudson Highland Group, Inc. Employee
Stock Purchase Plan (the "ESPP"), pursuant to which employees who are scheduled
to work 20 hours per week and have been employed for at least 90 days are
eligible to participate in the ESPP. The ESPP allows eligible employees to
purchase shares of the Company's common stock at the lesser of 85% of the fair
market value at the commencement of each plan period or 85% of the fair market
value as of the purchase date. Plan periods for 2003 in the United States are
April 1 to August 31 and September 1 to December 31. This is a non-compensatory
plan and no expenses were recorded for the ESPP.
In the second quarter of 2003, the Company adopted the Hudson Highland
Group, Inc. 401(k) Savings Plan (the "401(k)"). All regular full-time and
part-time employees are eligible to participate in the plan the first of the
month following three months of service. The 401(k) plan allows employees to
contribute up to 15% of their earnings to the 401(k) plan. The Company matches
contributions up to 2% through a contribution of the Company's common stock.
Vesting in the Company's contribution is over a five-year period. Expense for
the three and six month period ended June 30, 2003 for the 401(k) plan was
$1,509.
-16-
Report of Independent Certified Public Accountants
Board of Directors
Hudson Highland Group, Inc.
New York, New York
We have reviewed the consolidated condensed balance sheet of Hudson
Highland Group, Inc. and subsidiaries as of June 30, 2003, the related
consolidated condensed statements of operations for the three-month and
six-month periods ended June 30, 2003 and 2002 and cash flows for the six-month
periods ended June 30, 2003 and 2002 included in the accompanying Securities and
Exchange Commission Form 10-Q for the period ended June 30, 2003. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the combined balance sheet as of
December 31, 2002, and the related combined statements of operations, divisional
equity, and cash flows for the year then ended (not presented herein); and in
our report dated February 12, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying combined balance sheet as of December 31, 2002 is fairly stated
in all material respects in relation to the combined balance sheet from which it
has been derived.
/s/ BDO Seidman, LLP
----------------------------
BDO Seidman, LLP
New York, New York
July 29, 2003
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (in thousands, except per share data)
The following discussion should be read in conjunction with the
consolidated condensed financial statements and the notes thereto, included in
Item 1 of this Form 10-Q. This Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements. Please
see "Special Note Regarding Forward-Looking Statements" for a discussion of the
uncertainties, risks and assumptions associated with these statements
As one of the world's largest professional staffing and executive search
agencies, Hudson Highland Group, Inc. ("the Company" or "HH Group") helps its
clients (employers and professional recruiters) find the right employee, from
mid-level candidates to senior executives. HH Group was formed from the
distribution of the Hudson Global Resources ("Hudson") and Highland Partners
("Highland") divisions of Monster Worldwide, Inc., formerly known as TMP
Worldwide Inc. ("Monster"), and currently operates in 25 countries and employs
approximately 4,000 people globally. For the year ended December 31, 2002, 67%
of the Company's revenues were earned outside of the United States. The
Company's two principal business segments are as follows:
Hudson Global Resources. Hudson primarily focuses on providing professional
temporary and contract personnel and business solutions to its clients and
mid-level executive recruitment or placement services. Mid-level executives and
professionals are those who typically earn between $50,000 and $150,000
annually, and possess the set of executive or professional skills and/or profile
required by its clients. In the case of the temporary and contracting business,
Hudson primarily focuses on the placement of professionals or executives in
temporary assignments that can range from one day to more than 12 months.
Hudson's sales strategy focuses on clients operating in particular sectors, such
as health care, financial services, and technology and communications. Hudson
supplies candidates in a variety of specialist fields such as law, accounting,
banking and finance, health care, engineering, technology and science. Hudson
uses both traditional and interactive methods to find and recruit potential
candidates for its clients, employing a suite of products, which assess talent
and help predict whether a candidate will be successful in a given role.
Hudson also provides a variety of other services, including career
management, executive assessment and coaching, and human resources consulting.
These service offerings are growing rapidly and Company's management believes
will help balance the cyclical nature of its core offerings.
These services allow Hudson to offer clients a comprehensive set of human
capital management services, ranging from temporary workers, to assessment or
coaching of permanent staff, to recruitment or search for permanent workers, to
outplacement. Hudson is also marketed under the name TMP/Hudson Global Resources
and TMP/Hudson Human Resources in certain markets around the world.
Highland Partners. Highland offers a comprehensive range of executive
search services aimed at finding the senior level executive or professional for
a wide range of clients operating in sectors such as health care, technology,
financial services, retail and consumer and industrial. Highland also has an
active practice in assisting clients who desire to augment their boards of
directors. Highland concentrates on searches for positions with annual
compensation of $150,000 or more and operates exclusively on a retained basis.
Highland is also marketed as TMP/Highland Partners in certain markets around the
world.
For the periods presented in this Form 10-Q through March 31, 2003 (the
"Distribution Date"), HH Group operated as part of Monster. Prior to the
Distribution Date, the businesses described in this Form 10-Q were conducted by
Monster through various divisions and subsidiaries. Immediately prior to the
Distribution (as defined below), Monster transferred the assets and liabilities
of its Hudson and Highland business segments to HH Group at Monster's historical
cost. On the Distribution Date, Monster distributed to all of its stockholders
of record one share of HH Group Common Stock for each thirteen and one-third
shares of Monster Common Stock so held (the "Distribution"). Following the
Distribution, HH Group became an independent public company and Monster has no
continuing stock ownership interest in HH Group. Prior to the Distribution, HH
Group entered into several agreements with Monster in connection with, among
other things, employee matters, income taxes, leased real property and
transitional services. See Note 11 of the Notes to Consolidated Condensed
Financial Statements for a description of the agreements.
-18-
The Company's consolidated condensed financial statements prior to the
Distribution reflect the historical financial position, results of operations
and cash flows of the businesses transferred to HH Group from Monster as part of
the Distribution. Additionally, net intercompany balances due to Monster have
been contributed to HH Group and are reflected as divisional equity in the
accompanying consolidated condensed financial statements. The financial
information included herein, however, may not necessarily reflect HH Group's
financial position, results of operations and cash flows in the future or what
its financial position, results of operations and cash flows would have been had
HH Group been a stand-alone company during the periods presented prior to the
Distribution.
The Company's costs and expenses prior to March 31, 2003 in the
accompanying consolidated condensed financial statements include allocations
from Monster for executive, legal, accounting, treasury, real estate,
information technology, merger and integration costs and other Monster corporate
services and infrastructure costs because specific identification of the
expenses is not practicable. The total corporate services allocation to the
Company from Monster was $5,260 and $14,405 for the six months ended June 30,
2003 and 2002, respectively, including $0 and $7,074 for the quarter ended June
30, 2003 and 2002, respectively. The expense allocations were determined on the
basis that Monster and HH Group considered to be reasonable reflections of the
utilization of services provided or the benefit received by HH Group using
ratios that are primarily based on its revenue, net of costs of temporary
contractors compared to Monster as a whole. Interest charges from Monster were
allocated to HH Group only for that portion of third-party debt attributed to HH
Group.
The Company recorded merger, integration and reorganization and
restructuring expense of $8,439 and $59,684 for the six months ended June 30,
2003 and 2002, respectively. The merger and integration charges were recorded in
connection with its pooling of interest transactions and consist of costs to
integrate and/or exit certain aspects of the operations of its pooled entities,
particularly in areas where duplicate functions and facilities existed. During
the first six months of 2003, the Company recorded $978 related to changes in
estimates to plans in merger and integration expense. The expense related to the
reorganization of operations announced in the second quarter of 2002 and the
Distribution was $7,461 in the first six months of 2003.
Prior to the Distribution, HH Group was not a separate taxable entity for
federal, state or local income tax purposes and its operating results are
included in Monster 's tax return. Income taxes were calculated as if HH Group
filed separate tax returns. However, Monster was managing its tax position for
the benefit of its entire portfolio of businesses, and its tax strategies are
not necessarily reflective of the tax strategies that HH Group would have
followed or will follow as a stand-alone company.
Critical Accounting Policies and Items Affecting Comparability
Quality financial reporting relies on consistent application of company
accounting policies that are based on generally accepted accounting principles.
Management considers the accounting policies discussed below to be critical to
understand HH Group's financial statements and often require management judgment
and estimates regarding matters that are inherently uncertain.
Revenue Recognition
Although the Company's revenue recognition policy involves a relatively low
level of uncertainty, it does require judgment on complex matters that is
subject to multiple sources of authoritative guidance.
Hudson. The Company recognizes revenue for services at the time services
are provided and revenue is recorded on a time and materials basis. Revenues
generated when the Company permanently places an individual with a client are
recorded at the time of placement, net of an allowance for estimated fee
reversals.
Highland. Substantially all professional fee revenue is derived from fees
for professional services related to executive recruitment, consulting and
related services performed on a retained basis. Fee revenue is generally
one-third of the estimated first year compensation and reimbursed expenses, plus
a percentage of the fee to cover indirect expenses. Fee revenue is recognized as
earned. The Company generally bills clients in three monthly installments. Fees
earned in excess of the initial contract amount are billed at completion of the
engagement.
-19-
Direct Costs
Direct costs include the direct staffing costs of salaries, payroll taxes,
employee benefits, travel expenses and insurance costs for the Company's
temporary contractors and reimbursed out-of-pocket expense and other direct
costs. Other than reimbursed out-of-pocket expenses, there are no other direct
costs associated with the search and permanent placement revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the salaries,
commissions, payroll taxes and employee benefits related to recruitment
professionals, executive level employees, administrative staff and other
employees of HH Group who are not temporary contractors, and the expenses for
marketing and promotion, occupancy, equipment leasing and maintenance,
utilities, travel expenses, professional fees and depreciation and amortization.
Accounts Receivable
The Company is required to estimate the collectability of its trade
receivables and notes receivable. A considerable amount of judgment is required
in assessing the ultimate realization of these receivables including the current
credit-worthiness of each customer. Changes in required reserves may occur due
to changing circumstances, including changes in the current market environment
or in the particular circumstances of individual customers.
Merger, Integration, Restructuring and Business Reorganization Plans
The Company has recorded significant charges and accruals in connection
with its merger, integration, restructuring and business reorganization plans.
These reserves include estimates pertaining to employee separation costs and the
settlement of contractual obligations resulting from its actions. Although the
Company does not anticipate significant changes, the actual costs may differ
from these estimates.
Contingencies
The Company is subject to proceedings, lawsuits and other claims related to
labor, service and other matters. The Company is required to assess the
likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. The Company makes a determination of the
amount of reserves required, if any, for these contingencies after careful
analysis of each individual issue. The required reserves may change in the
future due to new developments in each matter or changes in approach, such as a
change in settlement strategy in dealing with these matters.
Intangibles
Intangibles represent acquisition costs in excess of the fair value of net
tangible assets of businesses purchased and consist primarily of the value of
client lists, non-compete agreements, trademarks and goodwill. The Company
amortizes these intangibles, other than goodwill, over periods ranging from two
to thirty years. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets ("SFAS 142"), the Company no longer amortizes goodwill but instead will
evaluate its goodwill annually for impairment, or earlier if indicators of
potential impairment exist. Changes in the Company's strategy and market
conditions could significantly impact these evaluations and require adjustments
to recorded amounts of goodwill and other intangible assets. As a result of the
adoption of SFAS 142 on January 1, 2002, the Company recorded a non-cash
impairment charge of $293,000 to reduce the carrying value of goodwill.
-20-
Results of Operations
The following table sets forth the Company's revenue, operating loss, net
loss, temporary contracting revenue, direct costs of temporary contractors and
temporary contractor gross margin for the quarters and six month periods ended
June 30.
Quarter ended June 30, Six Months Ended June 30,
---------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenue $269,283 $277,787 $528,472 $541,867
======== ======== ======== ========
Operating loss $(16,705) $(55,138) $(52,527) $(70,442)
======== ======== ======== ========
Net loss $(15,090) $(53,953) $(59,101) $(361,958)
======== ======== ======== ========
TEMPORARY CONTRACTING DATA (1):
Temporary contracting revenue $188,467 $200,173 $374,709 $389,970
Direct costs of temporary contracting 155,678 161,096 309,322 312,488
-------- -------- -------- --------
Temporary contracting gross margin $ 32,789 $ 39,077 $ 65,387 $ 77,482
======== ======== ======== ========
Gross margin as a percent of revenue 17.4% 19.5% 17.5% 19.9%
(1) Temporary contracting revenues are a component of Hudson revenues.
Temporary contracting gross margin and gross margin as a percent of
revenue are shown to provide additional information on the Company's
ability to manage its cost structure and provide further comparability
relative to HH Group's peers. Temporary contracting gross margin is
derived by deducting the direct costs of temporary contractors from
temporary contracting revenue. The Company's calculation of gross
margin may differ from those of other companies.
Constant Currencies
The Company defines the term "constant currencies" to mean that financial
data for a period are translated into U.S. Dollars using the same foreign
currency exchange rates that were used to translate financial data for the
previously reported period. Changes in revenues, direct costs, gross margin and
selling, general and administrative expenses include the effect of changes in
foreign currency exchange rates. Variance analysis usually describes
period-to-period variances that are calculated using constant currency as a
percentage. The Company's management reviews and analyzes business results in
constant currencies and believes these results better represent the Company's
underlying business trends.
The Company believes that these calculations are a useful measure,
indicating the actual change in operations. Earnings from subsidiaries are
rarely repatriated to the United States, and there are not significant gains or
losses on foreign currency transactions between subsidiaries therefore, changes
in foreign currency exchange rates generally impact only reported earnings and
not the Company's economic condition.
Quarter ended
-------------------------------------------------------------------
June 30, 2003 June 30, 2002
----------------------------------------------- ----------------
Currency Constant
As reported translation currency As reported
Hudson revenue $252,610 $(23,698) $228,912 $259,409
Highland revenue 16,673 (740) 15,933 18,378
-------- -------- -------- --------
Total revenue 269,283 (24,438) 244,845 277,787
-------- -------- -------- --------
Direct costs 165,565 (13,836) 151,729 163,838
-------- -------- -------- --------
Gross margin $103,718 $(10,602) $ 93,116 $113,949
======== ======== ======== ========
Selling, general and
administrative expenses $120,920 $(12,526) $108,394 $115,143
======== ======== ======== ========
21
Six months ended
-------------------------------------------------------------------
June 30, 2003 June 30, 2002
----------------------------------------------- ----------------
Currency Constant
As reported translation currency As reported
Hudson revenue $496,575 $(45,138) $451,437 $505,731
Highland revenue 31,897 (1,649) 30,248 36,136
-------- -------- -------- --------
Total revenue 528,472 (46,787) 481,685 541,867
-------- -------- -------- --------
Direct costs 327,222 (27,237) 299,985 318,594
-------- -------- -------- --------
Gross margin $201,250 $(19,550) $181,700 $223,273
======== ======== ======== ========
Selling, general and
administrative expenses $245,338 $(22,269) $223,069 $234,031
======== ======== ======== ========
Quarter Ended June 30, 2003 Compared to the Quarter Ended June 30, 2002
Total revenues for the three months ended June 30, 2003 were $269,283, a
decrease of $8,504 or 3.1%, as compared to total revenues of $277,787 in the
second quarter of 2002. This decrease was primarily due to the effects of weak
global economic and labor environments, which reduced demand for the Company's
services. On a constant currencies basis total revenues would have decreased
approximately 12% comparing the second quarter 2003 with the second quarter
2002.
Hudson revenues were $252,610 for the three months ended June 30, 2003,
down 2.6% from $259,409 for the same period of 2002, reflecting lower demand for
temporary staffing, particularly in the U.S. information technologies ("IT")
market and lower temporary staffing revenues in Australia, partially offset by
higher revenues in continental Europe. On a constant currencies basis Hudson
revenues would have decreased approximately 12% comparing the second quarter
2003 with the second quarter 2002.
Highland revenues of $16,673 for the three months ended June 30, 2003 were
down 9.3% from $18,378 in the same period of 2002, reflecting the continued
adverse impact that the challenging global economy is having on executive level
search placements. On a constant currencies basis, Highland revenues would have
decreased approximately 13% comparing the second quarter 2003 with the second
quarter 2002.
Direct costs for the three months ended June 30, 2003 were $165,565,
compared to $163,838 for the same period of 2002. On a constant currencies
basis, direct costs would have decreased in the second quarter of 2003 period in
comparison to the prior year by approximately 7%. A portion of the increase in
direct costs was due to the classification of permanent staffing out-of-pocket
expenses in direct costs in 2003.
Gross margin, defined as revenue less direct costs, for the three months
ended June 30, 2003 was $103,718, lower by $10,231 or 9.0% from $113,949
reported in the three months ended June 30, 2002. Gross margin as a percentage
of revenue declined to 38.5% for the second quarter of 2003, from 41.0% in the
second quarter of 2002. The decrease was primarily due to a decline in permanent
staffing revenue, particularly in the U.K. and various countries in continental
Europe; lower revenue in temporary staffing, largely due to lower demand in the
domestic IT staffing market; and an increase in direct costs associated with the
permanent staffing out-of-pocket expenses. On a constant currencies basis the
second quarter 2003 gross margin would have decreased by approximately 18%
compared to the second quarter 2002.
Selling, general and administrative expenses for the three months ended
June 30, 2003 were $120,920 compared with $115,143 for the same period of 2002.
Selling general and administrative expenses were 44.9% and 41.5%, as a
percentage of revenue for the second quarter of 2003 and 2002, respectively. A
higher provision for doubtful accounts by $3,531 and the reclassification of
certain transactions with Monster to selling expenses also negatively impacted
second quarter 2003 results when compared to the same period in 2002. This was
partially offset by continued cost cutting in reaction to the current economic
and labor environment. On a constant currencies basis, the second quarter 2003
selling, general and administrative expenses would have decreased by
approximately 6% compared to the second quarter of 2002.
22
Business reorganization and special charges (reversals) for the three
months ended June 30, 2003 totaled $(500) compared to $52,726 in the same period
of 2002. The 2002 expenses related to the cost for streamlining of operations as
announced in the second quarter of 2002. The reversals for the second quarter of
2003 were primarily related to the finalization at a lower than expected cost of
the consolidation of certain facilities and leases.
Merger and integration expenses reflect costs incurred as a result of
pooling-of-interests transactions and the integration of such companies. For the
three months ended June 30, 2003, merger and integration costs were $3, a
reduction of $1,215 from the same period in the prior year. These expenses
included lease obligations, office integration costs, the write-off of fixed
assets that will not be used in the future, separation pay, professional fees
and employee stay bonuses to certain key personnel of the merged companies.
Operating loss for the three months ended June 30, 2003 was $16,705,
compared to an operating loss of $55,138 for the comparable period in 2002. The
decrease in the loss was primarily the result of the absence in 2003 of $52,726
of business reorganization costs accrued in 2002, partially offset by lower
gross margins and higher selling, general and administrative expenses.
Other non-operating income (expense), including net interest expense, were
$1,604 in the second quarter of 2003 and $5 for the same period of 2002. Other
income in 2003 included a $1,200 gain related to the receipt of payment from the
settlement of a claim.
The benefit for income taxes for the three months ended June 30, 2003 was
$11 on a pretax loss of $15,101 compared with a benefit of $1,180 on a pretax
loss of $55,133 for the same period of 2002. The reduction in the Company's tax
benefit for the quarter ended June 30 from prior year was primarily due to the
inability of the Company to realize benefits from its current losses, in
businesses where the future earnings ability to utilize those losses is not
certain. In each period, the effective tax rate differs from the U.S. Federal
statutory rate of 35% due to valuation allowances on deferred tax assets,
utilization of net operating losses retained or utilized by Monster, certain
non-deductible expenses such as amortization, business restructuring and spin
off costs, merger costs from pooling of interests transactions, and variations
from the U.S. tax rate in foreign jurisdictions.
Net loss was $15,090 for the three months ended June 30, 2003, compared
with a loss of $53,953 for the same period in 2002.
Basic and diluted loss per share for the second quarter of 2003 was a loss
of $1.79 per share, compared to a loss of $6.46 per share in the second quarter
of 2002. For the 2003 and 2002 periods, dilutive earnings per share calculations
do not differ from basic earnings per share because the effects of potential
common stock were anti-dilutive and therefore not included in the calculation of
dilutive earnings per share.
Six Months Ended June 30, 2003 Compared to the Six Months Ended June 30, 2002
Total revenues for the six months ended June 30, 2003 were $528,472, a
decrease of $13,395 or 2.5%, as compared to total revenues of $541,867 in the
first six months of 2002. This decrease was primarily due to the effects of weak
global economic and labor environments, which reduced demand for the Company's
services. On a constant currencies basis total revenues would have decreased
approximately 11% comparing the first six months of 2003 when compared with the
same period in 2002.
Hudson revenues were $496,575 for the six months ended June 30, 2003, down
1.8% from $505,731 for the same period of 2002, reflecting lower demand for
permanent staffing revenue, particularly in the U.K. and various countries in
continental Europe and lower revenue from temporary staffing, largely due to
lower demand in the domestic IT staffing market. On a constant currencies basis
Hudson revenues would have decreased approximately 11% comparing the first six
months of 2003 when compared with the same period in 2002.
Highland revenues of $31,897 for the six months ended June 30, 2003 were
down 11.7% from $36,136 in same period of 2002, reflecting the continued adverse
impact that the challenging global economy is having on executive level search
placements.
Direct costs for the six months ended June 30, 2003 were $327,222, compared
to $318,594 for the same period of 2002. On a constant currencies basis, direct
costs would have decreased in the first six months of 2003 period in comparison
to the prior year by approximately 6%. A portion of the increase in direct costs
is due to the classification of permanent staffing out-of-pocket expenses in
direct costs in 2003.
23
Gross margin, defined as revenue less direct costs, for the six months
ended June 30, 2003 was $201,250, lower by $22,023 or 9.9% from $223,273
reported in the six months ended June 30, 2002. Gross margin as a percentage of
revenue declined to 38.1% for the first half of 2003, from 41.2% in the first
half of 2002. The decrease was primarily due to lower revenue in temporary
staffing, largely due to lower demand in the domestic IT and engineering
staffing market; a decline in permanent staffing revenue, particularly in the
U.K. and various countries in continental Europe; and an increase in direct
costs associated with the permanent staffing out-of-pocket expenses. .
Selling, general and administrative expenses for the six months ended June
30, 2003 were $245,338 compared with $234,031 for the same period of 2002.
Selling general and administrative expenses were 46.4% and 43.2%, as a
percentage of revenue for the first half of 2003 and 2002, respectively. On a
constant currencies basis, the first six months of 2003 gross margin would have
decreased by approximately 19% compared to the same period of 2002. A higher
provision for doubtful accounts of $7,930 and the reclassification of certain
transactions with Monster to selling expenses negatively impacted those expenses
for the 2003 six month period compared to the same period of 2002. This was
partially offset by continued cost cutting in reaction to the current economic
and labor environment. On a constant currencies basis the first six months of
2003 selling, general and adminitrative expenses would have decreased by
approximately 5% compared to the same period of 2002. During 2002, the Company
terminated approximately 1,000 employees in connection with its business
reorganization and other special charges.
Business reorganization and special charges for the six months ended June
30, 2003 totaled $7,461, as compared to $52,726 in the same period of 2002. The
2002 expenses related to the cost of streamlining operations as announced in the
second quarter of 2002. The expenses for the first six months of 2003 were
primarily related to consolidation of facilities, workforce reductions and
professional fees related to the Distribution and streamlining of operations.
Merger and integration expenses reflect costs incurred as a result of
pooling-of-interests transactions and the integration of such companies. For the
six months ended June 30, 2003, merger and integration costs were $978, a
reduction of $5,980 from the same period in the prior year. Merger and
integration expenses included lease obligations, office integration costs, the
write-off of fixed assets that will not be used in the future, severance,
professional fees and employee stay bonuses to certain key personnel of the
merged companies. The decrease in expense for the first six months of 2003 for
the same period in 2002 was a result of the finalization of the exit strategies
related to the pooled businesses.
Operating loss for the six months ended June 30, 2003 was $52,527, compared
to an operating loss of $70,442 for the comparable period in 2002. The decrease
in the loss was primarily the result of the reduction in 2003 by $45,265 for
business reorganization expense from the same period in 2002, offset by higher
selling, general and administrative expenses and lower gross margin.
Other non-operating expense, including net interest expense, was $436 in
the first six months of 2003 and $409 for the same period of 2002.
The provision for income taxes for the six months ended June 30, 2003 was
$6,138 on a pretax loss of $52,963 compared with a benefit of $(1,893) on a
pretax loss of $70,851 for the same period of 2002. The change in the Company's
tax provision (benefit) for the six months ended June 30 was primarily due to
establishment of a valuation allowance on certain foreign tax losses, which may
not be realizable and the inability of the Company to realize benefits from its
current losses in businesses where the future earnings ability to utilize those
losses is not certain. In each period, the effective tax rate differs from the
U.S. Federal statutory rate of 35% due to a valuation allowance on deferred tax
assets, net operating losses retained or utilized by Monster, certain
non-deductible expenses such as amortization, business restructuring and spin
off costs, merger costs from pooling of interests transactions, and variations
from the U.S. tax rate in foreign jurisdictions.
Net loss before cumulative accounting change was $59,101 for the six months
ended June 30, 2003, compared with a loss of $68,958 for the same period in
2002.
In conjunction with the adoption of SFAS 142 as of the beginning of fiscal
year 2002, the Company completed a goodwill impairment review for its operating
segments. The results of the impairment review indicated that the carrying value
of goodwill may not be recoverable. Accordingly, the Company recorded as a
cumulative effect of an accounting change a one-time goodwill impairment charge
of $293,000 at January 1, 2002 to reduce the carrying value of goodwill to its
estimated fair value. No charges were taken in 2003.
Net loss was $59,101 for the six months ended June 30, 2003 compared with a
net loss of $361,958 for the same period in 2002.
24
Basic and diluted loss per share on loss before accounting change for the
first six months was a loss of $7.03 per share, compared to a loss of $8.26 per
share in the first six months of 2002. Basic and diluted loss per share for the
first six months of 2003 was a loss of $7.03 per share, compared to a loss of
$43.36 per share in the first six months of 2002. Basic average shares
outstanding were essentially unchanged between the two periods. For the 2003 and
2002 periods, dilutive earnings per share calculations do not differ from basic
earnings per share because the effect of potential common stock were
anti-dilutive and therefore not included in the calculation of dilutive earnings
per share.
Liquidity and Capital Resources
Prior to the Distribution, cash receipts associated with the HH Group
business were largely retained by Monster and Monster provided funds to cover HH
Group's disbursements for operating activities, capital expenditures and
acquisitions. The cash balances at December 31, 2002 were based on the results
of the Company's operations and the net cash resulting from inter-company
transfers between HH Group and Monster. The investing and financing activities
discussed below during 2002 and the first quarter of 2003 were funded as a
result of activities entered into by Monster and relating to HH Group
operations. The long-term debt amounts reported by the Company primarily relate
to capital lease obligations and long-term debt that Monster incurred to acquire
businesses and other assets that were transferred to the Company immediately
prior to the Distribution.
The Company's liquidity needs arise primarily from funding working capital
requirements, as well as capital investment in information technology. Prior to
the Distribution HH Group historically relied upon Monster's centralized cash
management function and Monster's line of credit facility. In connection with
the Distribution, Monster provided HH Group cash in the aggregate amount of
$40,000 upon completion of the Distribution, agreed to reimburse the Company
$13,530 of cash payments ($2,109 was received in the second quarter of 2003 and
the Company will receive $2,500 per quarter, to be received in the first month
subsequent to the end of each quarter, beginning with the second quarter of
2003) due under its accrued integration restructuring and business
reorganization plans.
On March 31, 2003, the Company closed a senior secured credit facility for
$50,000 with Wells Fargo Foothill, Inc. (the "Foothill Credit Facility"). The
Foothill Credit Facility has a term of three years. Outstanding loans will bear
interest equal to the prime rate plus 0.25% or LIBOR plus 2.00%, at the
Company's option. The Foothill Credit Facility is secured by substantially all
of the assets of the Company and extensions of credit will be based on a
percentage of the accounts receivable of the Company. The Company activated the
Foothill Credit Facility in June 2003 and expects to use such credit when
required, to support its ongoing working capital requirements, capital
expenditures and other corporate purposes. As of June 30, 2003, the Company has
not borrowed under this facility.
The Foothill Credit Facility contains various restrictions and covenants,
including (1) prohibitions on payments of dividends and repurchases of the
Company's stock; (2) requirements that the Company maintain certain financial
ratios at prescribed levels; (3) restrictions on the ability of the Company to
make additional borrowings, or to consolidate, merge or otherwise fundamentally
change the ownership of the Company; and (4) limitations on investments,
dispositions of assets and guarantees of indebtedness. These restrictions and
covenants could limit the Company's ability to respond to market conditions, to
provide for unanticipated capital investments, to raise additional debt or
equity capital, to pay dividends or to take advantage of business opportunities,
including future acquisitions.
During the six months ended June 30, 2003 and 2002, the Company used cash
in operating activities of $23,555 and $73,222, respectively. Cash usage
decreased in 2003 from 2002 as a result of improved working capital accounts,
primarily accounts receivable and current liabilities. These improvements in
cash flow were partially offset by higher spending related to the business
reorganization plans in 2003.
During the six months ended June 30, 2003 and 2002, the Company used cash
in investing activities of $5,692 and $17,161, respectively. This use of cash
was primarily related to capital expenditures in the normal course of operations
and payments related to businesses purchased in prior years. The decreased use
of cash in the first six months of 2003 compared to 2002 was the result of lower
payments related to prior period purchases of businesses, as these projects were
essentially completed in 2002 and lower capital expenditures.
During the six months ended June 30, 2003 and 2002, the Company generated
cash from financing activities of $40,019 and $90,654, respectively. The cash
funding from Monster and debt payments to third parties were both lower in 2003,
compared to 2002. The Company's debt relates to third-party debt and capital
leases incurred to acquire businesses during 2001. Total third-party debt and
capital leases as of June 30, 2003 were $1,488.
The Company believes that the cash and cash equivalents on hand at June 30,
2003, supplemented by the Foothill Credit Facility, will provide it with
sufficient liquidity to satisfy its working capital needs, capital expenditures,
investment requirements and commitments through at least the next twelve months.
Cash generated from operating activities is subject to fluctuations in the
global economy and unemployment rates.
25
Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"). SFAS 146 applies to costs
associated with an exit (including restructuring) or disposal activity. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS 146, a company records a liability for a cost associated with an exit or
disposal activity when that liability is incurred and can be measured at fair
value. SFAS 146 requires a company to disclose information about its exit and
disposal activities, the related costs and changes in those costs in the notes
to the interim and annual financial statements that include the period in which
an exit activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002. Under SFAS 146, a company may not restate its
previously issued financial statements. Liabilities recognized as a result of
disposal activities prior to the adoption of SFAS 146 continue to be accounted
for under Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3").
The Company's adoption of SFAS 146 on January 1, 2003, did not have a material
impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure, ("SFAS 148") an amendment of SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), which provides
alternatives for companies electing to account for stock-based compensation
using the fair value criteria established by SFAS 123. The Company intends to
account for stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
the Indebtedness of Others, which addresses the accounting for and disclosure of
guarantees. Interpretation No. 45 requires a guarantor to recognize a liability
for the fair value of a guarantee at inception. The recognition of the liability
is required even if it is not probable that payments will be required under the
guarantee. The disclosure requirements are effective for interim and annual
financial statements ending after December 15, 2002. The initial recognition and
measurement provisions are effective on a prospective basis for guarantees
issued or modified after December 31, 2002. The Company's adoption of
Interpretation No. 45 did not have a material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities. The objective of this interpretation is to
provide guidance on how to identify a variable interest entity ("VIE") and
determine when the assets, liabilities, noncontrolling interests, and results of
operations of a VIE need to be included in a company's consolidated financial
statements. A company that holds variable interests in an entity will need to
consolidate the entity if the company's interest in the VIE is such that the
company will absorb a majority of the VIE's expected losses and/or receive a
majority of the entity's expected residual returns, if they occur.
Interpretation No. 46 also requires additional disclosures by primary
beneficiaries and other significant variable interest holders. The
interpretation became effective upon issuance. The Company's adoption of this
interpretation did not have an effect on its consolidated financial statements.
On May 1, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003. The Company's adoption of SFAS 149 should not have an
effect on its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150"). SFAS 150 changes the accounting for certain financial instruments that,
under previous guidance, could be classified as equity or "mezzanine" equity, by
now requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS 150 affects an entity's classification of the following
freestanding instruments; mandatorily redeemable instruments, financial
instruments to repurchase an entity's own equity instruments and financial
instruments embodying obligations that the issuer must or could choose to settle
by issuing a variable number of its shares or other equity instruments based
solely on (a) a fixed monetary amount known at inception or (b) something other
than changes in its own equity instruments. SFAS 150 is effective for periods
beginning after June 15, 2003. The Company's adoption of this interpretation is
not expected to have an effect on its consolidated financial statements.
26
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand the future
prospects of a company and make informed investment decisions. This Form 10-Q
contains these types of statements, which the Company believes to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
All statements other than statements of historical fact included in this
Form 10-Q are forward-looking statements. Words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "predict," "believe" and
similar words, expressions and variations of these words and expressions are
intended to identify forward-looking statements. The Company uses such
forward-looking statements regarding its future financial condition and results
of operations and its business operations and future business prospects in this
Form 10-Q. All forward-looking statements reflect the Company's present
expectation of future events and are subject to a number of important factors,
risks, uncertainties and assumptions, including industry and economic
conditions, that could cause actual results to differ materially from those
described in the forward-looking statements. Such factors, risks, uncertainties
and assumptions include, but are not limited to, (1) the impact of global
economic fluctuations on the Company's temporary contracting operations, (2) the
cyclical nature of the Company's executive search and mid-market professional
staffing businesses, (3) the Company's ability to manage its growth, (4) risks
associated with expansion, (5) the Company's heavy reliance on information
systems and the impact of potentially losing that technology or failing to
further develop technology, (6) the Company's markets are highly competitive,
(7) the Company's operating results fluctuate from quarter to quarter, (8) risks
relating to the Company's foreign operations, including foreign currency
fluctuations, (9) the Company's dependence on its highly skilled professionals,
(10) the impact of employees departing with existing executive search clients,
(11) risks maintaining the Company's professional reputation and brand name,
(12) restrictions imposed by blocking arrangements, (13) the Company's exposure
to employment-related claims, legal liability and costs from both clients and
employers and limitations on insurance coverage related thereto, (14) the
Company's dependence on key management personnel, (15) the impact of government
regulations, (16) the Company's ability to successfully operate as an
independent company and the level of costs associated therewith and (17)
restrictions on the Company's operating flexibility due to the terms of its
credit facility. Please see "Risk Factors" in the Company's Registration
Statement on Form 10 filed with the Securities and Exchange Commission on March
14, 2003 for more information.
You are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this Form 10-Q. The Company
assumes no obligation, and expressly disclaims any obligation, to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of the Company's borrowings are in fixed rate equipment leases
and seller financed notes. The carrying amounts of the Company's debt
approximate fair value, generally due to the short-term nature of the underlying
instruments. The Company does not trade derivative financial instruments for
speculative purposes.
The Company also conducts operations in various foreign countries,
including Australia, Belgium, Canada, France, Germany, Italy, the Netherlands,
New Zealand and the United Kingdom. For the six months ended June 30, 2003,
approximately 68% of the Company's revenues were earned outside the United
States and collected in local currency and related operating expenses were also
paid in such corresponding local currency. Accordingly, the Company is subject
to increased risk for exchange rate fluctuations between such local currencies
and the U.S. dollar.
The financial statements of the Company's non-U.S. subsidiaries are
translated into U.S. dollars using current rates of exchange, with translation
gains or losses included in the cumulative translation adjustment account, a
component of stockholders' equity. During the six-month period ended June 30,
2003, the Company had a translation gain of approximately $8,605, primarily
attributable to the weakening of the U.S. dollar against the Australian dollar
and the Euro.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. In accordance with Rule
13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company's management evaluated, with the participation of the Company's Chairman
of the Board, President and Chief Executive Officer and Executive Vice President
and Chief Financial Officer, the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act) as of the end of the quarter ended June 30, 2003. Based
upon their evaluation of these disclosure controls and procedures, the Chairman
of the Board, President and Chief Executive Officer and the Executive Vice
President and Chief Financial Officer concluded that the disclosure controls and
procedures were effective as of the end of the quarter ended June 30, 2003 to
ensure that material information relating to the Company, including its
consolidated subsidiaries, was made known to them by others within those
entities, particularly during the period in which this Quarterly Report on Form
10-Q was being prepared.
Changes in internal controls over financial reporting. There was no change
in the Company's internal control over financial reporting that occurred during
the quarter ended June 30, 2003 that has materially affected, or is reasonably
likely to materially to affect, the Company's internal control over financial
reporting.
28
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following Exhibits are filed herewith.
4.1 Amended Restated Loan and Security Agreement, dated as of June 25,
2003, by and among Hudson Highland Group, Inc. and each of its
subsidiaries that are signatories thereto, as Borrowers, the lenders
that are signatories thereto, as the Lenders, and Wells Fargo
Foothill, Inc. as the Arranger and Administrative Agent.
15 Letter regarding unaudited interim financial information from BDO
Seidman, LLP, independent certified public accountants. (With respect
to the unaudited interim financial statements of Hudson Highland
Group, Inc. for the periods ended June 30, 2003 and 2002 included in
this Quarterly Report on Form 10-Q, BDO Seidman, LLP have applied
limited procedures in accordance with professional standards for a
review of such information. However, as stated in their report
included in this Quarterly Report on Form 10-Q, they did not audit and
they do not express an opinion on those unaudited interim financial
statements. Accordingly, the degree of reliance on their reports on
such information should be restricted in light of the limited nature
of the review procedures applied. To the extent that this Quarterly
Report on Form 10-Q is incorporated by reference in any registration
statements that Hudson Highland Group, Inc. has filed with the
Securities and Exchange Commission under the Securities Act of 1933,
as amended, BDO Seidman, LLP are not subject to the liability
provisions of Section 11 of that Act for their reports on the
unaudited interim financial statements because those reports are not
"reports" or a "part" of the registration statement prepared or
certified by an accountant within the meaning of Sections 7 and 11 of
the Act.)
31.1 Certification by the Chairman, President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act for Hudson Highland
Group, Inc.
31.2 Certification by the Executive Vice President and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act for Hudson
Highland Group, Inc.
32.1 Written Statement of the Chairman, President and Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350 for Hudson Highland Group,
Inc.
32.2 Written Statement of the Executive Vice President and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 for Hudson Highland Group,
Inc.
29
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON HIGHLAND GROUP, INC.
(Registrant)
By: /s/ JON F. CHAIT
Jon F. Chait
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Dated: August 13, 2003
By: /s/ RICHARD W. PEHLKE
Richard W. Pehlke
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: August 13, 2003
30
HUDSON HIGHLAND GROUP, INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
(a) Exhibits: The following Exhibits are filed herewith.
4.1 Amended Restated Loan and Security Agreement, dated as of June 25,
2003, by and among Hudson Highland Group, Inc. and each of its
subsidiaries that are signatories thereto, as Borrowers, the lenders
that are signatories thereto, as the Lenders, and Wells Fargo
Foothill, Inc. as the Arranger and Administrative Agent.
15 Letter regarding unaudited interim financial information from BDO
Seidman, LLP, independent certified public accountants. (With respect
to the unaudited interim financial statements of Hudson Highland
Group, Inc. for the periods ended June 30, 2003 and 2002 included in
this Quarterly Report on Form 10-Q, BDO Seidman, LLP have applied
limited procedures in accordance with professional standards for a
review of such information. However, as stated in their report
included in this Quarterly Report on Form 10-Q, they did not audit and
they do not express an opinion on those unaudited interim financial
statements. Accordingly, the degree of reliance on their reports on
such information should be restricted in light of the limited nature
of the review procedures applied. To the extent that this Quarterly
Report on Form 10-Q is incorporated by reference in any registration
statements that Hudson Highland Group, Inc. has filed with the
Securities and Exchange Commission under the Securities Act of 1933,
as amended, BDO Seidman, LLP are not subject to the liability
provisions of Section 11 of that Act for their reports on the
unaudited interim financial statements because those reports are not
"reports" or a "part" of the registration statement prepared or
certified by an accountant within the meaning of Sections 7 and 11 of
the Act.)
31.1 Certification by the Chairman, President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act for Hudson Highland
Group, Inc.
31.2 Certification by the Executive Vice President and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act for Hudson
Highland Group, Inc.
32.1 Written Statement of the Chairman, President and Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350 for Hudson Highland Group,
Inc.
32.2 Written Statement of the Executive Vice President and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 for Hudson Highland Group,
Inc.
31