UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-16025
HEADWAY CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2134871
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
317 Madison Avenue, New York, New York 10017
--------------------------------------------
(Address of principal executive offices)
(212) 672-6501
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 13,914,627 shares of common
stock.
FORM 10-Q
HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES
INDEX
Page
PART I. Financial Information 3
Item 1. Financial Statements 3
Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001 3
Unaudited Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2002 and 2001 4
Unaudited Consolidated Statement of Stockholders'
Equity/(Deficit) Nine Months Ended September 30, 2002 5
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 18
Item 4. Controls and Procedures 18
PART II. Other Information 19
Item 1. Legal Proceedings 19
Item 3. Defaults upon Senior Securities 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
FORWARD-LOOKING STATEMENT NOTICE
When used in this report, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," and similar expressions are
intended to identify forward-looking statements within the meaning of Section
27a of the Securities Act of 1933 and Section 21e of the Securities Exchange Act
of 1934 regarding events, conditions, and financial trends that may affect the
Company's future plans of operations, business strategy, operating results, and
financial position. Persons reviewing this report are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such factors are discussed under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and also include
general economic factors and conditions that may directly or indirectly impact
the Company's financial condition or results of operations.
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands, except share data)
September December 31,
30, 2002 2001
-----------------------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 7,937 $ 8,641
Accounts receivable, trade, net 32,563 37,713
Prepaid expenses and other current assets 2,555 2,181
Deferred financing costs, current 1,389 979
Prepaid and refundable income taxes 4,817 4,279
-----------------------------
Total current assets 49,261 53,793
Property and equipment, net 5,040 5,691
Goodwill 42,440 87,313
Deferred financing costs 437 509
Other assets 1,947 1,858
-----------------------------
Total assets $ 99,125 $ 149,164
=============================
Liabilities and stockholders' (deficit) equity
Current liabilities:
Loans payable in default $ 82,000 $ -
Accounts payable 1,372 1,302
Accrued expenses 7,453 7,848
Accrued payroll 10,234 8,319
Capital lease obligations, current portion 162 224
Earnouts payable 245 1,287
------------------------------
Total current liabilities 101,466 18,980
Capital lease obligations, less current portion 19 111
Long-term debt - 82,000
Deferred rent 957 1,073
Deferred income taxes 307 307
Other liabilities - 264
Commitments and contingencies
Preferred stock---$.0001 par value, 5,000,000 shares
authorized: Series G, convertible preferred
stock--$.0001 par value, 1,000 shares authorized and
outstanding (aggregate liquidation value $22,717),
currently redeemable by its terms. 22,717 20,000
Stockholders' (deficit) equity
Common stock---$.0001 par value, 20,000,000 shares
authorized, 13,914,627 and 10,914,627 shares issued and
outstanding at September 30, 2002 and December 31,
2001, respectively 1 1
Additional paid-in capital 18,920 18,268
Notes receivable (71) (71)
Deferred compensation (295) (382)
(Accumulated deficit) / retained earnings (44,636) 9,220
Other comprehensive loss (260) (607)
------------------------------
Total stockholders' (deficit) equity (26,341) 26,429
------------------------------
Total liabilities and stockholders' (deficit) equity $ 99,125 $ 149,164
==============================
See accompanying notes.
3
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Dollars in Thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
-----------------------------------------------------
Revenues $ 66,560 $ 76,140 $ 202,078 $ 249,034
Operating expenses:
Direct costs 54,875 61,349 163,382 190,801
Selling, general and 11,759 13,833 38,925 48,339
administrative
Depreciation and amortization 589 1,515 1,555 4,326
-----------------------------------------------------
67,223 76,697 203,862 243,466
Operating (loss) income (663) (557) (1,784) 5,568
Other (income) expenses:
Interest expense 2,623 2,926 9,376 7,162
Interest income (12) (44) (53) (72)
-----------------------------------------------------
2,611 2,882 9,323 7,090
Loss before income tax benefit and
cumulative effect of accounting
change (3,274) (3,439) (11,107) (1,522)
Income tax benefit (1,419) (1,422) (3,843) (583)
-----------------------------------------------------
Loss before cumulative effect of (1,855) (2,017) (7,264) (939)
accounting change
Cumulative effect of accounting change - - (45,000) -
-----------------------------------------------------
Net loss (1,855) (2,017) (52,264) (939)
Preferred dividend requirements (555) (375) (1,592) (1,125)
-----------------------------------------------------
Net loss available for common
stockholders $ (2,410) $ (2,392) $ (53,856) $ (2,064)
=====================================================
Basic and diluted loss per share:
Basic and diluted loss per common
share before cumulative effect $ (.18) $ (.22) $ (.73) $ (.19)
of accounting change
Cumulative effect of accounting
change - - (3.72) -
-----------------------------------------------------
Basic and diluted loss per common
share $ (.18) $ (.22) $ (4.45) $ (.19)
=====================================================
See accompanying notes.
4
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Nine Months Ended September 30, 2002
(Unaudited)
(Dollars in thousands, except share data)
---------------------------------------------------------------------------------------
Additional
Common Stock Paid-in Notes Deferred
Shares Amount Capital Receivable Compensation
---------------------------------------------------------------------------------------
Balance at December 31, 2001 10,914,627 $ 1 $ 18,268 $ (71) $ (382)
Amortization of stock-based
compensation - - - - 87
Preferred stock dividends - - - - -
Exercise of warrants 3,000,000 - 474 - -
Repricing of warrants (Note 6) - - 73 - -
Issuance of warrants (Note 6) - - 105 - -
Translation adjustment - - - - -
Change in fair value of derivative - - - - -
Net loss - - - - -
Comprehensive loss - - - - -
---------------------------------------------------------------------------------------
Balance at September 30, 2002 13,914,627 $ 1 $ 18,920 $ (71) $ (295)
---------------------------------------------------------------------------------------
See accompanying notes.
5
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit), Continued
Nine Months Ended September 30, 2002
(Unaudited)
(Dollars in thousands, except share data)
- -------------------------------------------------------------------------
Retained Accumulated
Earnings Other Total
(Accumulated Comprehensive Stockholders'
Deficit) (Loss) Equity(Deficit)
- -------------------------------------------------------------------------
Balance at December 31, 2001 $ 9,220 $ (607) $ 26,429
Amortization of stock-based
compensation - - 87
Preferred stock dividends (1,592) - (1,592)
Exercise of warrants - - 474
Repricing of warrants (Note 6) - - 73
Issuance of warrants (Note 6) - - 105
Translation adjustment - 83 83
Change in fair value of drivative - 264 264
Net loss (52,264) - (52,264)
--------
Comprehensive loss - - (51,917)
- -------------------------------------------------------------------------
Balance at September 30, 2002 $ (44,636) $ (260) $(26,341)
- -------------------------------------------------------------------------
See accompanying notes.
6
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)
Nine months ended September 30,
2002 2001
------------------------------
Operating activities:
Net loss $ (52,264) $ (939)
Adjustments to reconcile net loss to net cash provided by
Operating activities:
Cumulative effect of accounting change 45,000 -
Depreciation and amortization 1,555 4,326
Amortization of deferred financing costs 2,473 913
Provision for bad debt 220 293
Amortization of deferred compensation 87 86
Changes in assets and liabilities
Accounts receivable 5,045 9,746
Prepaid expenses and other assets (760) (1,264)
Prepaid and refundable income taxes (425) -
Other assets (91) 47
Accounts payable and accrued expenses 1,104 (2,294)
Accrued payroll 1,997 (5,101)
Income taxes payable - (408)
Deferred rent (116) (84)
------------------------------
Net cash provided by operating activities 3,825 5,321
------------------------------
Investing activities:
Expenditures for property and equipment (877) (1,149)
Repayment from notes receivable - 13
Cash paid for acquisitions (1,172) (4,623)
------------------------------
Net cash (used in) investing activities (2,049) (5,759)
------------------------------
Financing activities:
Net proceeds from long-term debt - 12,300
Payment of capital lease obligations (154) (231)
Payments of loan acquisition fees (2,231) (325)
Cash dividends paid - (750)
------------------------------
Net cash (used in) provided by financing activities (2,385) 10,994
------------------------------
Effect of exchange rate changes on cash and cash (95) (83)
equivalents
------------------------------
(Decrease) increase in cash and cash equivalents (704) 10,473
Cash and cash equivalents at beginning of period 8,641 1,549
------------------------------
Cash and cash equivalents at end of period $ 7,937 $ 12,022
==============================
Non-cash Financing Activity
In May 2002, the holders of the Senior Subordinated Notes and the Series G
Convertible Preferred Stock exchanged $474,000 in accrued and unpaid interest on
the Senior Subordinated Notes to exercise the Series G Warrants. In connection
with this exercise, the Company issued 3.0 million shares of common stock to the
Holders.
7
HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
September 30, 2002
(1) BASIS OF PRESENTATION
Headway Corporate Resources, Inc. and its wholly owned subsidiaries
(collectively referred to as the "Company") provide strategic staffing solutions
and personnel worldwide. Its operations include information technology staffing,
temporary staffing, human resource staffing, permanent placement and executive
search. Headquartered in New York, the Company has temporary staffing offices in
California, Connecticut, Florida, New Jersey, North Carolina, Virginia, and
Texas and executive search offices in New York, Illinois, Massachusetts, the
United Kingdom, Hong Kong and Australia. These consolidated financial statements
include the accounts of Headway Corporate Resources, Inc. and its subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2002.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2001.
The Company's working capital deficit was $52,205,000 at September 30, 2002,
compared to working capital of $34,813,000 at December 31, 2001. As of September
30, 2002, $72,000,000 in aggregate principal amount was outstanding under a
senior credit facility ("Senior Credit Facility"), and $10,000,000 in aggregate
principal amount was outstanding under certain senior subordinated notes (the
"Senior Subordinated Notes"). The working capital deficiency is a direct result
of the reclassification of the Company's borrowing under the Senior Credit
Facility and the Senior Subordinated Notes as current liabilities. As of
September 30, 2002, the Company is in default of the Senior Credit Facility, the
indenture pertaining to the Senior Subordinated Notes (the "Indenture"), and the
terms of the Company's outstanding Series G Convertible Preferred Stock (the
"Preferred Stock"), with respect to the required maintenance of certain amounts
of EBITDA, as defined. Notwithstanding the working capital deficiency, the
Company believes that it has sufficient liquidity to operate its business
through June 2003, the expiration date of the Senior Credit Facility, assuming
that the lenders under the Senior Credit Facility, the holders of the Senior
Subordinated Notes and the holders of the Preferred Stock (collectively "the
Senior Creditors") do not exercise their rights of acceleration or redemption,
as the case may be. The Senior Creditors have not, as of the date hereof, given
any indication to the Company that they wish to accelerate or redeem, as the
case may be. Although there can be no assurance, the Company believes that it is
in the best interest of the Company and each of the Senior Creditors to
negotiate amendments or waivers under the respective documents. If the Company
is unable to obtain the necessary amendments or waivers, and the Senior
Creditors elect to accelerate or redeem, or the Company is unable to adequately
refinance the Senior Credit Facility by June 2003, the Company may not have
adequate liquidity to operate as a "going concern".
(2) GOODWILL
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", effective for all combinations initiated after June 30, 2001, and
8
No. 142, "Goodwill and Other Intangible Assets". Under the new rules, goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statement. Other intangible assets will continue to be amortized over their
useful lives.
Upon adoption of SFAS No. 142 in the first quarter of 2002, the Company recorded
a one-time, non-cash charge of $45 million to reduce the carrying value of its
goodwill. Such charge is non-operational in nature and is reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations. In calculating the impairment charge, the fair value of
the impaired reporting units underlying the business segments (see Note 5) were
estimated using a discounted cash flow methodology.
A summary of the change in the Company's goodwill during the nine months ended
September 30, 2002, by reporting units is as follows:
Goodwill
-----------------------------------------------------------
January 1, Adjustments Impairments September
2002 (i) 30, 2002
------------- -------------- ------------- -------------
Executive Search $ 11,086,000 $ 61,000 $ (8,200,000) $ 2,947,000
Temporary 42,415,000 66,000 (10,800,000) 31,681,000
Staffing
Technology 33,812,000 - (26,000,000) 7,812,000
Staffing
------------- -------------- ------------- -------------
Total $ 87,313,000 $127,000 $(45,000,000) $42,440,000
============= ============== ============= =============
(i)During the nine months ended September 30, 2002, additional purchase price of
$127,000 was recorded as goodwill upon the determination that the earnouts had
been met on certain acquisitions made in 1997, 1998 and 1999.
The 2001 results on a historical basis do not reflect the provisions of SFAS No.
142. Had the Company adopted SFAS No. 142 on January 1, 2001 and ceased to
amortize goodwill at such date, the historical net loss and basic and diluted
net loss per common share would have been changed to the adjusted amounts
indicated below:
Nine Months Ended September 30, 2001
------------------------------------
Net loss per basic
Net loss and diluted common
share
------------------------------------
As reported--historical basis $(2,064,000) $ (.19)
Add: Goodwill amortization 3,003,000 .28
Income tax impact (1,306,000) (.12)
------------------------------------
Adjusted $ (367,000) $ (.03)
====================================
Three Months Ended September 30, 2001
------------------------------------
Net loss per basic
Net loss and diluted common
share
------------------------------------
As reported--historical basis $(2,392,000) $ (.22)
Add: Goodwill amortization 995,000 .09
Income tax impact (433,000) (.04)
------------------------------------
Adjusted $(1,830,000) $ (.17)
====================================
(3) DERIVATIVE FINANCIAL INSTRUMENTS
The Company used interest rate swap contracts for hedging purposes. The Company
had entered into interest rate swap agreements that effectively converted a
portion of its floating-rate debt to a fixed-rate basis through April 18, 2002,
thus reducing the impact of interest-rate changes on interest expense.
Approximately $30,000,000 of the Company's outstanding long-term debt was
designated as the hedged item to an interest rate swap agreement which expired
on April 18, 2002. For interest rate swaps, the net amounts paid or received and
net amounts accrued through the end of the accounting period were included in
interest expense. Unrealized gains or losses on interest rate swap contracts
were not recognized in income. During the nine months ended September 30, 2002,
the Company recognized a change in fair value of the derivative of $264,000
related to the change in fair value of the interest rate swap contract which is
net of applicable income taxes of $16,000 as a component of other comprehensive
income.
9
(4) LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
------------------------------------------------------
Numerator:
Net loss $(1,855,000) $(2,017,000) $(52,264,000) $ (939,000)
Cumulative effect of accounting
change - - 45,000,000 -
Preferred dividend requirements (555,000) (375,000) (1,592,000) (1,125,000)
------------------------------------------------------
Numerator for basic and diluted
loss per share - net loss
available for common stockholders
before cumulative effect of
accounting change (2,410,000) (2,392,000) (8,856,000) (2,064,000)
======================================================
Denominator:
Denominator for basic and diluted
loss per share-- weighted average
shares 13,729,627 10,729,627 12,092,264 10,729,627
======================================================
Basic and diluted loss per share
before cumulative effect of
accounting change $ (.18) $ (.22) $ (.73) $ (.19)
======================================================
(5) BUSINESS SEGMENTS
The Company classifies its business into two fundamental areas, staffing and
executive search. Staffing consists of the placement and payrolling of temporary
and permanent office, clerical and information technology professional
personnel. Executive search focuses on placing middle to upper level management
positions. The Company evaluates performance based on the segments' (loss)
profit from operations before unallocated corporate overhead.
Three months ended Three months ended
September 30, 2002 September 30, 2001
--------------------------------------------------------
Staffing Executive Staffing Executive
Search Search
--------------------------------------------------------
Revenues $ 63,529,000 $ 3,031,000 $ 71,970,000 $ 4,170,000
Segment (loss) (625,000) (538,000) (1,131,000) (263,000)
Nine months ended Nine months ended
September 30, 2002 September 30, 2001
--------------------------------------------------------
Staffing Executive Staffing Executive
Search Search
--------------------------------------------------------
Revenues $189,289,000 $12,789,000 $224,723,000 $ 24,311,000
Segment (loss) profit (3,237,000) (1,255,000) (2,406,000) 2,973,000
A reconciliation of combined segment (loss) profit to consolidated net (loss) is
as follows:
Three months ended Nine months ended
September 30 September 30
2002 2001 2002 2001
--------------------------------------------------------
Total (loss) profit for
reportable segments $ (1,163,000 $(1,394,000) $ (4,492,000) $ 567,000
Unallocated amounts:
Interest expense (575,000) (466,000) (2,761,000) (1,017,000)
Corporate overhead (473,000) (386,000) (1,439,000) (1,411,000)
Cumulative effect of accounting
change - - (45,000,000) -
Income tax benefit 356,000 229,000 1,428,000 922,000
--------------------------------------------------------
Net (loss) $ (1,855,000) $(2,017,000) $(52,264,000) $ (939,000)
========================================================
10
(6) LONG-TERM DEBT AND CREDIT FACILITIES
In March 1998, Headway obtained $105 million of financing consisting of $85
million in senior debt, $20 million of equity financing and $10 million of
senior subordinated debt. As of September 30, 2002, $72,000,000 in aggregate
principal amount was outstanding under the Company's Senior Credit Facility. The
Company's Senior Credit Facility matures on June 30, 2003 (see below), resulting
in a reclassification of the obligation from a long-term liability at December
31, 2001 to a current liability at September 30, 2002. Substantially all assets
of the Company have been pledged as collateral for the senior credit facility.
As of September 30, 2002, the Company is in default of the Senior Credit
Facility, the Indenture and the terms of the Preferred Stock, with respect to
the required maintenance of certain amounts of EBITDA, as defined. Upon the
occurrence and during the continuation of an event of default, the holders of
the Preferred Stock may require redemption of the Preferred Stock by the
Company.
As of September 30, 2002, $10,000,000 in aggregate principal amount was
outstanding under the Senior Subordinated Notes and $20,000,000 in face amount
of Preferred Stock was outstanding. The Senior Subordinated Notes are payable in
March 2006 and originally bore interest at 12% per annum until March 2001,
increasing to 14% per annum thereafter. In January 2001, the terms of the Senior
Subordinated Notes were amended, including increasing the effective interest
rate to 13% until March 2001 and 15% thereafter.
On April 17, 2002, the Senior Credit Facility and Senior Subordinated Notes were
amended and the Company entered into the Second Limited Waiver with the holders
of the Senior Subordinated Notes Holders and Preferred Stock, which provided the
following:
(i) An extension of the Senior Credit Facility maturity date to June 30, 2003.
(ii) A waiver of the events of default on the Senior Subordinated Notes from
March 31, 2002 through the "Recap Amendment Termination Date", defined as
the earliest of (1) June 30, 2003 or such earlier on date on which the
Senior Credit Facility may mature; (2) the date on which all amounts due
under the Senior Credit Facility shall have been paid in full in cash; (3)
the date on which the Senior Credit Facility is amended or modified in a
manner that (A) increases the Base Rate, the Default Rate, the Applicable
Margin or any other interest rate on the Senior Indebtedness (B) decreases
the PIK Amount (C) increases the amount of fees or other payments due to
the agent or any lender under the Senior Credit Facility (other than
increases made in connection with events of default under the Senior Credit
Facility that do not exceed, in the aggregate, 0.50% of the outstanding
payment obligations under the Senior Credit Facility), or (D) in
consideration of which, the agent or any lender under the Senior Credit
Facility is issued any additional equity interest in the Company; and (4)
the acceleration of any indebtedness under the Senior Credit Facility or
the exercise of any rights or remedies by any of the lenders under the
Senior Credit Facility.
(iii)A waiver of the payment of interest (but not the accrual of interest)
under the Senior Subordinated Notes from March 31, 2002 through the Recap
Amendment Termination Date.
(iv) A waiver of the Preferred Stock events of default and a waiver of the
payment of dividends (but not the accrual of dividends) on the Preferred
Stock from March 31, 2002 through the Recap Amendment Termination Date.
Under the terms of the Second Limited Waiver, dividends on the Preferred
Stock accrue as additional liquidation preference. Accordingly, the accrued
dividend balance as of December 31, 2001 has been re-classified from
accrued expenses to preferred stock.
(v) A waiver of the increase in interest rate on the Senior Subordinated Notes
from 15% to 20% retroactive to July 1, 2001.
(vi) An adjustment to the exercise price of the First Series G Warrants and the
Third Series G Warrants to $0.25 per share. The re-pricing of the First
Series G Warrants and the Third Series G Warrants resulted in deferred
financing costs based on the fair value of the warrants of $73,000, which
is being amortized through June 2003.
(vii)Required maintenance of certain amounts of EBITDA, as defined, and maximum
amounts of capital expenditures, as defined.
(viii) That the Company take all actions necessary to obtain common stockholder
approval of an increase in the number of authorized common shares of the
Company to 80,000,000 at a stockholder meeting to be held no later than
July 15, 2002, subject to extension under certain circumstances. Such
approval was obtained on July 15, 2002.
(ix) That the Company issue warrants to purchase 2,455,522 shares of common
stock at $0.25 per share to the lenders in connection with the amendment of
its Senior Credit Facility. Such warrants were issued in April 2002. The
issuance of these warrants resulted in deferred financing costs based on
the fair value of the warrants of $105,000, which is being amortized
through June 2003.
11
The Senior Subordinated Notes due March 2006 have been classified on the balance
sheet as current because the Second Limited Waiver and Amendment is through June
2003 and due to the default.
In May 2002, the holders of the Senior Subordinated Notes and the Preferred
Stock exchanged $474,000 in accrued and unpaid interest on the Senior
Subordinated Notes to exercise the Series G Warrants. In connection with this
exercise, the Company issued 3.0 million shares of common stock to the holders.
The Company is currently negotiating with its lenders under the Senior Credit
Facility and the holders of its Senior Subordinated Notes and Preferred Stock
for a waiver, amendment or equity exchange of the Senior Credit Facility,
Indenture and Certificate of Designations, respectively. The Company believes
that it has sufficient liquidity to operate its business through June 2003, the
expiration date of the Senior Credit Facility, assuming that the lenders under
the Senior Credit Facility, the holders of the Senior Subordinated Notes and the
holders of the Preferred Stock (collectively "the Senior Creditors") do not
exercise their rights of acceleration or redemption, as the case may be. The
Senior Creditors have not, as of the date hereof, given any indication to the
Company that they wish to accelerate or redeem, as the case may be. Although
there can be no assurance, the Company believes that it is in the best interest
of the Company and each of the Senior Creditors to negotiate amendments or
waivers under the respective documents. If the Company is unable to obtain the
necessary amendments or waivers, and the Senior Creditors elect to accelerate or
redeem, or the Company is unable to adequately refinance the Senior Credit
Facility by June 2003, the Company may not have adequate liquidity to operate
its business.
(7) COMPREHENSIVE LOSS
During the nine months ended September 30, 2002 and 2001, total comprehensive
loss amounted to $(51,917,000) and $(1,426,000), respectively, and during the
three months ended September 30, 2002 and 2001, total comprehensive loss
amounted to $(1,833,000) and $(2,029,000), respectively.
(8) LEGAL PROCEEDINGS
In the ordinary course of its business, Headway is periodically threatened with
or named as a defendant in various lawsuits, including discrimination,
harassment, and other similar claims. Headway maintains insurance in such
amounts and with such coverage and deductibles as management believes are
reasonable.
In May 2000, a lawsuit was filed in the Judicial District Court of Dallas
County, Texas alleging breach of contract, fraud, negligence, negligent
retention and supervision, civil conspiracy and harmful access by computer. In
July 2002, a judgment was entered in the amount of $790,000 against Headway and
the other defendants. The Company plans to appeal the ruling and believes it
will be successful in reducing the amount of the judgment. The net loss for the
nine months ended September 30, 2002 reflects the full amount of the judgment.
(9) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets", effective for fiscal years beginning after
December 15, 2001. This standard superceded SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be disposed of",
and provided a single accounting model for long-lived assets to be disposed of.
The new standard also superceded the provisions of APB Opinion No. 30 with
regard to reporting the effects of a disposal of a segment of a business and
required expected future operating losses from discontinued operations in the
period(s) in which the losses are incurred. SFAS No. 144 was effective for the
Company beginning with the first quarter of 2002 and its adoption did not have a
material impact on the Company's results of operations or financial positions.
In April 2002, the FASB issued SFAS No. 145, "Recision of SFAS Nos. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections as of April 2000". SFAS
No. 145 revises the criteria for classifying the extinguishment of debt as
extraordinary and the accounting treatment of certain lease modifications. SFAS
No. 145 is effective in fiscal 2003 and is not expected to have a material
impact on the Company's consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 provides guidance on the timing
of the recognition of costs associated with exit or disposal activities. The new
guidance requires costs associated with exit or disposal activities to be
recognized when incurred. Previous guidance required recognition of costs at the
date of commitment to an exit or disposal plan. The provisions of the statement
are to be adopted prospectively after December 31, 2002. Although SFAS No. 146
may impact the accounting for costs related to exit or disposal activities the
Company may enter into in the future, particularly the timing of recognition of
these costs, the adoption of the statement will not have an impact on the
Company's present financial condition or results of operations.
12
PART 1. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies
Revenue Recognition
Information technology staffing, temporary staffing and human resource staffing
revenue is recognized when the temporary personnel perform the related services.
Permanent placement revenue is recognized when the placement is employed.
Provisions are made for estimated losses in realization (principally due to
applicants not remaining in employment for the guaranteed period, usually 90
days) and for bad debts. These provisions are reviewed periodically and have
always been found to be adequate based on Headway's experience in this regard.
Executive search services are primarily engaged on a retainer basis. Income from
retainer contracts, which provide for periodic billings over periods of up to
one year, is recognized as earned based on the terms of the contract.
Goodwill
Goodwill prior to the first quarter of 2002 was amortized utilizing the
straight-line method over a period of 20 to 30 years. Headway periodically
evaluated the carrying value and the periods of amortization of goodwill based
on the current and expected future non-discounted income from operations of the
entities giving rise to the goodwill to determine whether events and
circumstances warranted revised estimates of carrying value or useful lives. No
such write-downs were made.
During the first quarter of 2002 the Company adopted Statements of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS
142"). Under the new rules, goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but are subject to annual impairment
tests in accordance with the Statement. Other intangible assets continue to be
amortized over their useful lives. Under SFAS 142, goodwill impairment is deemed
to exist if the net carrying value of a reporting unit's goodwill exceeds its
estimated fair value. The Company's reporting units are one level below the
operating segments underlying the segments identified in Note 5-"Business
Segments". Upon adoption of SFAS 142 in the first quarter of 2002, the Company
recorded a one-time, non-cash charge of $45 million to reduce the carrying value
of its goodwill. Such charge is non-operational in nature and is reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations.
Results of Operations
Overview
The results for the third quarter reflect a significant reduction in the demand
for the Company's staffing and executive search services. This trend is a direct
result of the soft economy and is consistent with the performance of the other
staffing and executive search companies in the sector. Many companies have
instituted hiring freezes for both temporary and permanent positions. The
financial services industry has reduced its demand for the Company's executive
search services as a direct result of the poor financial performance across the
financial services industry. The Company believes that the performance for the
balance of the year will continue to be impacted by the performance in the
general economy. The performance in executive search for the balance of the year
will depend in part on the financial services industry. The Company has taken
steps to reduce costs and is constantly looking for growth opportunities.
Consolidated
Revenues for the three and nine months ended September 30, 2002 decreased
$9,580,000 and $46,956,000 or 12.6% and 18.9%, respectively, compared with the
corresponding periods of the prior year. The decrease was attributable to an
overall decline in the demand for the Company's staffing and executive search
services as a direct result of weakness in the economy.
The executive search subsidiary, Whitney Partners, LLC (Whitney) contributed
$3,031,000 to consolidated revenues in the third quarter of 2002, a decrease of
13
$1,139,000 from $4,170,000 for the same period in 2001. Whitney's revenues for
the nine months ended September 30, 2002 were $12,789,000 a decrease of
$11,522,000 from $24,311,000 for the same period in 2001. The decrease reflects
a sharp decline in the demand for new hires in the financial services industry.
The staffing subsidiary, Headway Corporate Staffing Services, Inc. (HCSS)
contributed revenues of $63,529,000 to consolidated revenues in the third
quarter of 2002, a decrease of $8,441,000 from $71,970,000 for the same period
in 2001. HCSS revenues for the nine months ended September 30, 2002 were
$189,289,000 a decrease of $35,434,000 from $224,723,000 for the same period in
2001. The decline in revenues was a result of the negative impact of the
unfavorable economic conditions on the demand for information technology and
clerical staffing services.
Total operating expenses for the three and nine months ended September 30, 2002
decreased $9,474,000 and $39,604,000, respectively, compared with the
corresponding periods of the prior year. The decrease in operating expenses for
the three months ended September 30, 2002 as compared to the same period in 2001
is the result of a $6.5 million decrease in direct costs, a $2.1 million
decrease in selling, general and administrative expenses, and a $0.9 million
decrease in depreciation and amortization. The decrease in operating expenses
for the nine months ended September 30, 2002 as compared to the same period in
2001 is the result of a $27.4 million decrease in direct costs, a $9.4 million
decrease in selling, general and administrative expenses, and a $2.8 million
decrease in depreciation and amortization. Direct costs increased as a
percentage of revenues from 80.6% to 82.4% for the third quarter of 2002
compared with the same period in 2001. Direct costs increased as a percentage of
revenues to 80.9% from 76.6% for the nine months ended September 30, 2002
compared with the same period in 2001. The increase in direct costs as a
percentage of revenues for the three and nine months ended September 30, 2002
compared with the same period in 2001 is a result of a change in Headway's
business mix in 2002. Specifically, the executive search and permanent placement
business that has no direct costs experienced more significant declines than the
staffing business, therefore reducing its percentage of our total revenues.
Selling, general and administrative expenses decreased as a percentage of
revenues from 18.2% in third quarter 2001 to 17.7% in third quarter 2002.
Selling, general and administrative expenses decreased as a percentage of
revenues from 19.4% to 19.3% for the nine months ended September 30, 2002 as
compared to the same period in 2001. The decrease in depreciation and
amortization for both the three and nine months ended September 30, 2002 as
compared to the corresponding periods of the prior year is a result of the
adoption of Statements of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), effective January 1, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests in accordance with
the Statement. Amortization of goodwill recorded for the three and nine months
ended September 30, 2001 was $1.0 million and $3.0 million, respectively.
Whitney's selling, general and administrative expenses decreased $0.9 million in
the third quarter of 2002 to $4.1 million as compared to $5.0 million for the
same period last year. Whitney's selling, general and administrative expenses
decreased $5.4 million for the nine months ended September 30, 2002 to $13.6
million as compared to $19.0 million for the same period last year. The decrease
relates primarily to the reduced commissions related to the lower executive
search revenues.
HCSS' selling, general and administrative expenses decreased $1.3 million in the
third quarter of 2002 to $7.1 million as compared to $8.4 million for the same
period last year. HCSS' selling, general and administrative expenses decreased
$4.0 million for the nine months ended September 30, 2002 to $23.9 million as
compared to $27.9 million for the same period last year. The decrease in
selling, general and administrative expenses is primarily attributable to the
lower commission expense associated with the decline in revenues, as well as
staff reductions and other cost-cutting initiatives implemented in the latter
half of 2001, offset by a provision of $0.8 million in connection with a
judgment against Headway as a result of a lawsuit (see Note 8).
Interest expense for the three and nine months ended September 30, 2002
increased $0.3 million and $2.2 million, respectively, compared with the
corresponding periods of the prior year. The increase in interest expense is due
to increased amortization of deferred financing costs relating to the amendments
completed in April 2002 and August 2001 and an increase in the applicable margin
for base rate loans under the Amended Senior Credit Facility.
During the first quarter of 2002 the Company adopted SFAS 142. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests in accordance with
the Statement. Other intangible assets continue to be amortized over their
useful lives. Under SFAS 142, goodwill impairment is deemed to exist if the net
carrying value of a reporting unit's goodwill exceeds its estimated fair value.
The Company's reporting units are one level below the operating segments
underlying the segments identified in Note 5-Segment Information. Upon adoption
of SFAS 142 in the first quarter of 2002, the Company recorded a one-time,
non-cash charge of $45 million to reduce the carrying value of its goodwill.
Such charge is non-operational in nature and is reflected as a cumulative effect
of an accounting change in the accompanying consolidated statement of
operations.
14
Liquidity and Capital Resources
As of September 30, 2002, $72,000,000 in aggregate principal amount was
outstanding under the Company's Senior Credit Facility. The Company's Senior
Credit Facility matures on June 30, 2003 (see below), resulting in a
reclassification of the obligation from a long-term liability at December 31,
2001 to a current liability at September 30, 2002. Substantially all assets of
the Company have been pledged as collateral for the senior credit facility.
As of September 30, 2002, the Company is in default of the Senior Credit
Facility, the indenture pertaining to the Senior Subordinated Notes (the
"Indenture") and the terms of the Company's outstanding Series G Convertible
Preferred Stock (the "Preferred Stock"), with respect to the required
maintenance of certain amounts of EBITDA, as defined. Upon the occurrence and
during the continuation of an event of default the holders of the Preferred
Stock may require redemption of the Preferred Stock by the Company.
As of September 30, 2002, $10,000,000 in aggregate principal amount was
outstanding under the Senior Subordinated Notes and $20,000,000 in face amount
of Preferred Stock was outstanding. The Senior Subordinated Notes are payable in
March 2006 and originally bore interest at 12% per annum until March 2001,
increasing to 14% per annum thereafter. In January 2001, the terms of the Senior
Subordinated Notes were amended, including increasing the effective interest
rate to 13% until March 2001 and 15% thereafter.
On April 17, 2002, the Senior Credit Facility and Senior Subordinated Notes were
amended and the Company entered into the Second Limited Waiver with the holders
of the Senior Subordinated Notes Holders and Preferred Stock, which provided the
following:
(i) An extension of the Senior Credit Facility maturity date to June 30, 2003.
(ii) A waiver of the events of default on the Senior Subordinated Notes from
March 31, 2002 through the "Recap Amendment Termination Date", defined as
the earliest of (1) June 30, 2003 or such earlier on date on which the
Senior Credit Facility may mature; (2) the date on which all amounts due
under the Senior Credit Facility shall have been paid in full in cash; (3)
the date on which the Senior Credit Facility is amended or modified in a
manner that (A) increases the Base Rate, the Default Rate, the Applicable
Margin or any other interest rate on the Senior Indebtedness (B) decreases
the PIK Amount (C) increases the amount of fees or other payments due to
the agent or any lender under the Senior Credit Facility (other than
increases made in connection with events of default under the Senior Credit
Facility that do not exceed, in the aggregate, 0.50% of the outstanding
payment obligations under the Senior Credit Facility), or (D) in
consideration of which, the agent or any lender under the Senior Credit
Facility is issued any additional equity interest in the Company; and (4)
the acceleration of any indebtedness under the Senior Credit Facility or
the exercise of any rights or remedies by any of the lenders under the
Senior Credit Facility.
(iii)A waiver of the payment of interest (but not the accrual of interest)
under the Senior Subordinated Notes from March 31, 2002 through the Recap
Amendment Termination Date.
(iv) A waiver of the Preferred Stock events of default and a waiver of the
payment of dividends (but not the accrual of dividends) on the Preferred
Stock from March 31, 2002 through the Recap Amendment Termination Date.
Under the terms of the Second Limited Waiver, dividends on the Preferred
Stock accrue as additional liquidation preference. Accordingly, the accrued
dividend balance as of December 31, 2001 has been re-classified from
accrued expenses to preferred stock.
(v) A waiver of the increase in interest rate on the Senior Subordinated Notes
from 15% to 20% retroactive to July 1, 2001.
(vi) An adjustment to the exercise price of the First Series G Warrants and the
Third Series G Warrants to $0.25 per share. The re-pricing of the First
Series G Warrants and the Third Series G Warrants resulted in deferred
financing costs based on the fair value of the warrants of $73,000, which
is being amortized through June 2003.
(vii)Required maintenance of certain amounts of EBITDA, as defined, and maximum
amounts of capital expenditures, as defined.
(viii) That the Company take all actions necessary to obtain common stockholder
approval of an increase in the number of authorized common shares of the
Company to 80,000,000 at a stockholder meeting to be held no later than
July 15, 2002, subject to extension under certain circumstances. Such
approval was obtained on July 15, 2002.
(ix) That the Company issue warrants to purchase 2,455,522 shares of common
stock at $0.25 per share to the lenders in connection with the amendment of
its Senior Credit Facility. Such warrants were issued in April 2002. The
15
issuance of these warrants resulted in deferred financing costs based on
the fair value of the warrants of $105,000, which is being amortized
through June 2003.
The Senior Subordinated Notes due March 2006 have been classified on the balance
sheet as current because the Second Limited Waiver and Amendment is through June
2003 and due to the default.
In May 2002, the holders of the Senior Subordinated Notes and the Preferred
Stock exchanged $474,000 in accrued and unpaid interest on the Senior
Subordinated Notes to exercise the Series G Warrants. In connection with this
exercise, the Company issued 3.0 million shares of common stock to the holders.
The Company is currently negotiating with its lenders under the Senior Credit
Facility and the holders of its Senior Subordinated Notes and Preferred Stock
for a waiver, amendment or equity exchange of the Senior Credit Facility,
Indenture and Certificate of Designation, respectively. The Company believes
that it has sufficient liquidity to operate its business through June 2003, the
expiration date of the Senior Credit Facility, assuming that the lenders under
the Senior Credit Facility, the holders of the Senior Subordinated Notes and the
holders of the Preferred Stock (collectively "the Senior Creditors") do not
exercise their rights of acceleration or redemption, as the case may be. The
Senior Creditors have not, as of the date hereof, given any indication to the
Company that they wish to accelerate or redeem, as the case may be. Although
there can be no assurance, the Company believes that it is in the best interest
of the Company and each of the Senior Creditors to negotiate amendments or
waivers under the respective documents. If the Company is unable to obtain the
necessary amendments or waivers, and the Senior Creditors elect to accelerate or
redeem, or the Company is unable to adequately refinance the Senior Credit
Facility by June 2003, the Company may not have adequate liquidity to operate
its business.
Net cash provided by operations during the nine months ended September 30, 2002
and 2001, was $3,825,000 and $5,321,000, respectively. The cash provided in 2002
was primarily attributable to a decrease in accounts receivable and an increase
in accounts payable and accrued expenses, and accrued payroll. The cash provided
in 2001 was primarily attributable to a decrease in accounts receivable.
Net cash used in investing activities during the nine months ended September 30,
2002 and 2001, was $2,049,000 and $5,759,000, respectively. The cash used for
investing activities relates primarily to earnout payments for acquisitions
completed during 1997 and 1998 as well as capital expenditures.
Net cash used in financing activities during the nine months ended September 30,
2002 was $2,385,000, primarily relating to payments of fees for loan amendment.
Net cash provided by financing activities during the nine months ended September
30, 2001 of $10,994,000 was primarily a result of additional borrowings under
the Company's senior credit facility.
The Company's working capital deficit was $52,205,000 at September 30, 2002,
compared to working capital of $34,813,000 at December 31, 2001. The working
capital deficiency is a direct result of the reclassification of the Company's
borrowing under the Senior Credit Facility and the Senior Subordinated Notes as
current liabilities. . Notwithstanding the working capital deficiency and the
default of the Senior Credit Facility, the Indenture and the Certificate of
Designations, the Company believes that it has sufficient liquidity to operate
its business through June 2003, the expiration date of the Senior Credit
Facility, assuming that the Senior Lenders, the holders of the Senior
Subordinated Notes and the holders of the Preferred Stock (collectively "the
Senior Creditors") do not exercise their rights of acceleration or redemption as
the case may be. The Senior Creditors have not, as of the date hereof, given any
indication to the Company that they wish to accelerate or redeem, as the case
may be. Although there can be no assurance, the Company believes that it is in
the best interest of the Company and each of the Senior Creditors to negotiate
amendments or waivers under the respective documents. If the Company is unable
to adequately refinance the Senior Credit Facility by June 2003, the Company may
not have adequate liquidity to operate its business.
On January 22, 2002, the Securities and Exchange Commission issued FR-61,
Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations. The release sets forth certain views of the
Securities and Exchange Commission regarding disclosure that should be
considered by registrants. Headway's contractual obligations and commercial
commitments are summarized below. The following table includes aggregate
information about Headway's contractual obligations as of September 30, 2002 and
the periods in which payments are due:
16
- ------------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
(in thousands)
- ------------------------------------------------------------------------------
Total Less 1-3 4 - 5 After 5
than 1 years years years
year
- ------------------------------------------------------------------------------
Loans Payable $82,000 $82,000 $ - $ - $ -
- ------------------------------------------------------------------------------
Capital Lease Obligations 181 162 19 - -
- ------------------------------------------------------------------------------
Operating Leases 8,670 2,536 3,284 1,911 939
- ------------------------------------------------------------------------------
Unconditional Purchase
Obligations None
- ------------------------------------------------------------------------------
Other Long Term
Obligations (1) 245 245 - - -
- ------------------------------------------------------------------------------
Total Contractual Cash
Obligations $91,096 $84,943 $3,303 $1,911 $ 939
- ------------------------------------------------------------------------------
Preferred Stock (2) $22,717 $22,717
- ------------------------------------------------------------------------------
The following table includes aggregate information about Headway's commercial
commitments as of September 30, 2002. Commercial commitments are items that
Headway could be obligated to pay in the future. They are not required to be
included in the consolidated balance sheet.
- -------------------------------------------------------------------------------------
Other Commercial Total Amount of Commitment Expiration Per Period
Commitments Amounts (in thousands)
Committed
---------------------------------------------
Less than 1 - 3 4 - 5 Over 5
1 year years years years
- -------------------------------------------------------------------------------------
Lines of Credit None
- -------------------------------------------------------------------------------------
Standby Letters of Credit $1,687 $1,687 $ - $ - $ -
- -------------------------------------------------------------------------------------
Guarantees None
- -------------------------------------------------------------------------------------
Standby Repurchase None
Obligations
- -------------------------------------------------------------------------------------
Other Commercial None
Commitments
- -------------------------------------------------------------------------------------
Total Commercial $ 1,687 $1,687 $ - $ - $ -
Commitments
- -------------------------------------------------------------------------------------
(1) Represents earn out amounts payable to the former owners of businesses
previously acquired by Headway.
(2) In default of its terms, therefore, currently redeemable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Note 3 to the accompanying financial statements.
Item 4. Controls and Procedures
With the participation of management, the Company's chief executive officer,
President and chief financial officer evaluated its disclosure controls and
procedures on September 30, 2002. Based on this evaluation, the chief executive
officer and the chief financial officer concluded that the disclosure controls
and procedures are effective in connection with the Company's filing of its
quarterly report on Form 10-Q for the quarterly period ended September 30, 2002.
Subsequent to September 30, 2002, through the date of this filing of Form 10-Q
for the quarterly period ended September 30, 2002, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, including any significant
deficiencies or material weaknesses of internal controls that would require
corrective action.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business, Headway is periodically threatened with
or named as a defendant in various lawsuits, including discrimination,
harassment, and other similar claims. Headway maintains insurance in such
amounts and with such coverage and deductibles as management believes are
reasonable.
In May 2000, a lawsuit was filed in the Judicial District Court of Dallas
County, Texas alleging breach of contract, fraud, negligence, negligent
retention and supervision, civil conspiracy and harmful access by computer. In
July 2002 a judgment was entered in the amount of $790,000 against Headway and
the other defendants. The Company plans to appeal the ruling and believes it
will be successful in reducing the amount of the judgment. The net loss for the
nine months ended September 30, 2002 reflects the full amount of the judgment.
Item 3. Defaults Upon Senior Securities
As of September 30, 2002, the Company is in default of the Senior Credit
Facility, the indenture pertaining to the Senior Subordinated Notes and the
terms of the Company's outstanding Series G Convertible Preferred Stock with
respect to the required maintenance of certain amounts of EBITDA, as defined
(See Note 6).
Item 6. Exhibits and Reports on Form 8-K
EXHIBITS: None
REPORTS ON FORM 8-K: None
18
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
HEADWAY CORPORATE RESOURCES,
INC.
Date: November 14, 2002 By: /s/ Gary S. Goldstein,
Chief Executive Officer
Date: November 14, 2002 By: /s/ Barry S. Roseman,
President
Date: November 14, 2002 By: /s/ Philicia G. Levinson,
Chief Financial Officer
19
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of 2002.
In connection with the Quarterly Report of Headway Corporate Resources,
Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Gary S. Goldstein, Chief Executive Officer of the Company, certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 14, 2002 By: /s/ Gary S. Goldstein,
Chief Executive Officer
In connection with the Quarterly Report of Headway Corporate Resources,
Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Barry S. Roseman, Chief Executive Officer of the Company, certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 14, 2002 By: /s/ Barry S. Roseman,
President
In connection with the Quarterly Report of Headway Corporate Resources,
Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Philicia G. Levinson, Chief Financial Officer of the Company,
certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and (2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 14, 2002 By: /s/ Philicia G. Levinson,
Chief Financial Officer
20
CERTIFICATION
I, Gary S. Goldstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Headway Corporate
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Gary S. Goldstein,
Chief Executive Officer
21
CERTIFICATION
I, Barry S. Roseman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Headway Corporate
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Barry S. Roseman,
President
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CERTIFICATION
I, Philicia G. Levinson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Headway Corporate
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Philicia G. Levinson,
Chief Financial Officer
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