Back to GetFilings.com



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 quarterly period ended June 30, 2003

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 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 in Rule 12b-2 of the Exchange Act).

Yes [ ] No [ X ]


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 as of August 14, 2003.





FORM 10-Q
HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES

INDEX

Page

PART I. Financial Information 3

Item 1. Financial Statements 3

Consolidated Balance Sheets
June 30, 2003 (Unaudited) and December 31, 2002 3

Unaudited Consolidated Statements of Operations
Three and Six Months Ended June 30, 2003 and 2002 4

Unaudited Consolidated Statement of Stockholders'
(Deficit) Six Months Ended June 30, 2003 5

Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002 7

Notes to Consolidated Financial Statements 8

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15

Item 3. Quantitative and Qualitative Disclosures About Market Risk 20

Item 4. Controls and Procedures 20

PART II. Other Information 20

Item 6. Exhibits and Reports on Form 8-K 20


Signatures 21

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)


June 30, December 31,
2003 2002
----------- -----------
Assets (Unaudited)

Current assets:
Cash and cash equivalents $ 6,680 $ 2,450
Short-term investments 1,200 1,200
Accounts receivable, trade, net 25,429 28,319
Prepaid expenses and other current assets 2,485 1,314
Deferred financing costs, current - 1,156
Prepaid and refundable income taxes - 5,325
Assets held for sale - 3,033
----------- -----------
Total current assets 35,794 42,797

Property and equipment, net 3,033 3,302
Investment in and note receivable from Whitney Group, LLC 1,445 -
Deferred financing costs - 413
Other assets 1,544 1,845
----------- -----------
Total assets $ 41,816 $ 48,357
=========== ===========
Liabilities and stockholders' (deficit)
Current liabilities:
Loans payable $ 82,000 $ 82,000
Accounts payable 493 904
Accrued interest 5,869 3,323
Accrued expenses 3,454 3,746
Accrued payroll 6,610 5,224
Capital lease obligations, current portion 50 120
Liabilities held for sale - 2,732
----------- -----------
Total current liabilities 98,476 98,049

Capital lease obligations, less current portion - 5
Deferred rent 123 139

Commitments and contingencies

Preferred stock---$.0001 par value, 5,000,000 shares
authorized: Series G, convertible preferred stock--1,000
shares authorized and outstanding (aggregate
liquidation value $24,463), currently redeemable by its
terms 24,463 23,285

Stockholders' (deficit)
Common stock---$.0001 par value, 80,000,000 shares
authorized, 13,914,627 shares issued and outstanding at
June 30, 2003 and December 31, 2002 1 1
Additional paid-in capital 18,678 18,920
Notes receivable (71) (71)
Deferred compensation - (267)
(Accumulated deficit) (99,854) (91,477)
Other comprehensive loss - (227)
----------- -----------
Total stockholders' (deficit) (81,246) (73,121)
----------- -----------
Total liabilities and stockholders' (deficit) $ 41,816 $ 48,357
=========== ===========

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 Six months ended
June 30, June 30,
2003 2002 2003 2002
--------- -------- --------- ---------

Revenues $64,497 $60,445 $129,695 $125,760

Operating expenses:
Direct costs 58,796 51,583 117,491 108,463
Selling, general and administrative 6,030 8,909 12,618 17,670
Depreciation and amortization 317 382 606 759
Reorganization costs 1,274 - 1,274 -
--------- -------- --------- ---------
66,417 60,874 131,989 126,892

Operating (loss) (1,920) (429) (2,294) (1,132)

Other (income) expenses:
Interest expense 2,979 2,899 5,598 6,753
Interest and other income (186) (16) (187) (41)
--------- -------- --------- ---------
2,793 2,883 5,411 6,712
Loss from continuing
operations before income tax
benefit and cumulative effect
of accounting change (4,713) (3,312) (7,705) (7,844)
Income tax benefit (200) (1,061) (793) (2,428)
--------- -------- --------- ---------
Loss from continuing
operations before cumulative effect
of accounting change (4,513) (2,251) (6,912) (5,416)
Discontinued operations:
(Loss) gain from discontinued
operations - 533 (380) 11
Income tax expense - 182 - 4
Gain on disposal of discontinued
operations - - 95 -
--------- -------- --------- ---------
(Loss) gain on discontinued operations - 351 (285) 7
--------- -------- --------- ---------
Loss before cumulative effect
of accounting change (4,513) (1,900) (7,197) (5,409)

Cumulative effect of accounting change - - - (45,000)
--------- -------- --------- ---------
Net loss (4,513) (1,900) (7,197) (50,409)

Preferred dividend requirements (597) (541) (1,180) (1,037)
--------- -------- --------- ---------

Net loss available for common
stockholders $ (5,110) $(2,441) $ (8,377) $(51,446)
========= ======== ========= =========

Basic and diluted loss per share:

Basic and diluted loss from
continuing operations per common
share before cumulative effect of
accounting change $ (.37) $ (.24) $ (.59) $ (.57)
Discontinued operations - .03 (.02) -
Cumulative effect of accounting
change - - - (4.00)
--------- -------- --------- ---------
Basic and diluted loss per common
share $ (.37) $ (.21) $ (.61) $ (4.57)
========= ======== ========= =========

See accompanying notes.

4




Headway Corporate Resources, Inc. and Subsidiaries

Consolidated Statement of Stockholders' (Deficit)
Six Months Ended June 30, 2003
(Unaudited)
(Dollars in thousands, except share data)


---------------------------------------------------------------------------------------
Additional
Common Stock Paid-in Notes Deferred
Shares Amount Capital Receivable Compensation
---------------------------------------------------------------------------------------

Balance at December 31, 2002 13,914,627 $ 1 $18,920 $ (71) $ (267)

Amortization of stock-based
compensation - - - - 25
Retirement of stock related to
stock-based compensation - - (242) - 242
Preferred stock dividend - - - - -
Translation adjustment - - - - -
Cumulative translation
adjustment relating to the
sale of the executive search
segment - - - - -
Net loss - - - - -
Comprehensive loss - - - - -
---------------------------------------------------------------------------------------
Balance at June 30, 2003 13,914,627 $ 1 $18,678 $ (71) $ -
---------------------------------------------------------------------------------------


See accompanying notes.


5





Headway Corporate Resources, Inc. and Subsidiaries

Consolidated Statement of Stockholders' (Deficit), Continued
Six Months Ended June 30, 2003
(Unaudited)
(Dollars in thousands, except share data)


- --------------------------------------------------------------------------
Accumulated
Other Total
(Accumulated Comprehensive Stockholders'
Deficit) (Loss) (Deficit)
- --------------------------------------------------------------------------
Balance at December 31, 2002 $ (91,477) $ (227) $ (73,121)
Amortization of stock-based
compensation - - 25
Retirement of stock related to
stock-based compensation - - -
Preferred stock dividends (1,180) - (1,180)
Translation adjustment - (133) (133)
Cumulative translation adjustment
relating to the sale of the
executive search segment - 360 360
Net loss (7,197) - (7,197)
-------
Comprehensive loss - - (6,970)
- -------------------------------------------------------------------------
Balance at June 30, 2003 $ (99,854) $ - $ (81,246)
- -------------------------------------------------------------------------

See accompanying notes.

6




Headway Corporate Resources, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in Thousands)


Six months ended June 30,
2003 2002
------------------------------

Operating activities:
Net loss $ (7,197) $ (50,409)
Loss (gain) from discontinued operations 380 (7)
Gain on disposal of discontinued operations (95) -
------------------------------
Loss from continuing operations (6,912) (50,416)
Adjustments to reconcile net loss from continuing
operations to net cash provided by operating activities:
Cumulative effect of accounting change - 45,000
Depreciation and amortization 606 759
Amortization of deferred financing costs 1,569 1,993
Provision for bad debts 89 172
Amortization of deferred compensation 25 58
Changes in assets and liabilities
Accounts receivable 2,801 2,743
Prepaid expenses and other assets (1,172) 298
Prepaid and refundable income taxes 5,325 727
Other assets 301 (23)
Accounts payable, accrued interest and expenses 1,842 (367)
Accrued payroll 1,386 1,903
Deferred rent (16) (19)
------------------------------
Net cash provided by continuing operations 5,844 2,828
Net cash (used in) provided by discontinued operations (1,202) 2,937
------------------------------
Net cash provided by operating activities 4,642 5,765
------------------------------

Investing activities:
Expenditures for property and equipment (337) (485)
Cash paid for acquisitions - (872)
------------------------------
Net cash used in investing activities (337) (1,357)
------------------------------

Financing activities:
Payment of capital lease obligations (75) (99)
Payments of loan acquisition fees - (2,179)
------------------------------
Net cash used in provided by financing activities (75) (2,278)
------------------------------

Increase in cash and cash equivalents 4,230 2,130
Cash and cash equivalents at beginning of period 2,450 7,564
------------------------------
Cash and cash equivalents at end of period $ 6,680 $ 5,434
==============================

See accompanying notes.

7





HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

June 30, 2003

(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 services nationally. Its operations include information technology
staffing, temporary staffing, human resource staffing, permanent placement and,
until recently, executive search. Headquartered in New York, the Company has
temporary staffing offices in California, Connecticut, Florida, New Jersey,
North Carolina, Virginia, and, until recently, Texas and had executive search
offices in New York, Illinois, Massachusetts, the United Kingdom and Hong Kong.
In March 2003, the Company exited its executive search segment through the sale
of its Whitney subsidiaries (see note 8). 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 six month periods ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the year ended December 31, 2003.

The balance sheet at December 31, 2002 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. Certain items previously reported in
specific financial statement captions have been reclassified due to the sale of
the Whitney subsidiaries (see note 8).

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, 2002.

As indicated below, substantial doubt exists about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability of assets or classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.

(2) CHAPTER 11 FILING

Subsequent to the end of the Company's fiscal quarter, on July 1, 2003 (the
"Petition Date"), Headway Corporate Resources, Inc. (the "Debtor") filed a
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code with
the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). Since that date, the Debtor has been operating as a
debtor-in-possession under Chapter 11. The Company's operating subsidiaries were
not included in the Chapter 11 filing. A brief chronology of the circumstances
that led to such filing is set forth below.

Despite the cost-reduction initiatives, which the Company undertook in 2001 and
2002, during 2003 the Company continued to experience financial difficulty
related primarily to restrictive covenants under its Senior Credit Facility and
its debt structure. Further, the Senior Credit Facility expired on June 30,
2003. The Company therefore entered into negotiations with its Senior Credit
Facility lenders to amend the Senior Credit Facility to extend the expiration
date and to revise certain financial ratios and minimum EBITDA covenants. The
Company and such lenders were unable to agree to amend the Senior Credit
Facility. As the June 30, 2003 expiration date approached, the Company's board
of directors determined that, in order to be able to operate successfully in
today's market environment, it would be necessary to reduce its debt burden and
de-lever its balance sheet. After negotiations with its Senior Lenders regarding

8



various alternatives, the Company concluded it would be in the best interests of
its stakeholders to effect a consensual restructuring under Chapter 11 of the
Bankruptcy Code and filed its Chapter 11 petition on July 1, 2003. The Company's
operating subsidiaries were not included in the Chapter 11 filing.

The Company has reached an agreement-in-principle with the holders of its senior
and subordinated indebtedness on the terms of a financial restructuring (the
"Restructuring") to be implemented through a pre-arranged Chapter 11 plan of
reorganization (the "Plan"). The Restructuring will involve a significant
reduction of the outstanding indebtedness and a conversion of the balance of
such indebtedness into 100% of the Company's equity. Pursuant to the Plan, the
holders of the Senior Credit Facility would receive new notes in the principal
amount of $25.0 million, the holders of the Senior Subordinated Notes would
receive a subordinated note in the principal amount of $1.0 million convertible
into 5% of the common equity of the Company, and the currently outstanding
shares of the Company's common and preferred stock will be cancelled without any
distribution to be made to the holders of such shares. The
agreement-in-principle is subject to numerous conditions and further agreements,
including the entry of an order confirming the plan of reorganization as
required by Chapter 11. Consequently, there can be no assurance that the
Restructuring will be consummated. The confirmation hearing has been scheduled
for September 16, 2003.

On July 2, 2003, the Bankruptcy Court approved a series of the Company's "first
day" motions that enable the Company to continue regular operations throughout
the reorganization proceeding. These motions authorized, among other things,
normal payment of employee salaries, wages and benefits; continued participation
in workers' compensation insurance programs; continued utilization of the
Company's centralized cash management system and maintenance of existing bank
accounts; and payment to vendors for post-petition delivery of goods and
services. The Bankruptcy Court also approved a Cash Collateral Stipulation
authorizing the Debtor's use of the Senior Lenders' cash collateral to fund its
operations, provided that these expenditures are consistent with the budget
submitted by the Company.

The Debtor is currently operating its business as a debtor-in-possession
pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, prepetition
obligations of the Debtor, including obligations under debt instruments,
generally may not be enforced against the Debtor, and any actions to collect
prepetition indebtedness are automatically stayed, unless the stay is lifted by
the Bankruptcy Court. The rights of and ultimate payments by the Company under
prepetition obligations may be substantially altered. This could result in
claims being liquidated in the Chapter 11 proceedings at less (and possibly
substantially less) than 100% of their face value. The Debtor cannot presently
determine or reasonably estimate the ultimate liability that may result from
rejecting contracts or leases or from the filing of claims for any rejected
contracts or leases, and no provisions have yet been made with respect to these
items. Except for the agreed upon distribution to the senior creditors and
subordinated note holders, the Plan provides for no distribution on any such
claims.

De-listing of Headway Corporate Resources, Inc. Common Stock

On June 26, 2003, the Company received a notice from the staff of the American
Stock Exchange ("AMEX" or the "Exchange") indicating that the Company no longer
complies with the Exchange's continued listing standards as set forth in Section
1003(a)(i) of the AMEX Company Guide due to losses in two of its three most
recent fiscal years and an equity value below $2 million. The Company's stock
was therefore subject to being de-listed from the Exchange. The Company decided
not to appeal this decision. Accordingly, the last day of trading was June 30,
2003. AMEX has advised the Company that it will file an application with the
Securities and Exchange Commission to strike the Company's stock from listing
and registration.

Basis of Presentation

The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States applicable to
a going concern. Except as otherwise disclosed, these principles assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating as a debtor-in-possession
under Chapter 11 of the Bankruptcy Code, and its continuation as a going concern
is contingent upon, among other things, its ability to have its Plan be
confirmed by the Bankruptcy Court, comply with the Cash Collateral Stipulation,
and generate sufficient cash flows from operations. There is no assurance that
the Company will be able to achieve any of these results. The Company's
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties.

9



The Company's consolidated financial statements do not reflect adjustments that
may occur in accordance with AICPA Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"),
which the Company will adopt for its financial reporting in periods ending after
July 1, 2003 assuming that the Company will continue as a "going concern." In
the Chapter 11 proceedings, substantially all unsecured liabilities as of the
Petition Date are subject to compromise or other treatment under a plan of
reorganization which must be confirmed by the Bankruptcy Court after submission
to any required vote by affected parties. For financial reporting purposes,
those liabilities and obligations whose treatment and satisfaction is dependent
on the outcome of the Chapter 11 proceedings will be segregated and classified
as Liabilities Subject to Compromise in the consolidated balance sheet under SOP
90-7 in future periods.

The ultimate amount of and settlement terms for the Company's pre-bankruptcy
liabilities are subject to the ultimate outcome of its Chapter 11 proceedings
and, accordingly, are not presently determinable. Pursuant to SOP 90-7,
professional fees associated with the Chapter 11 proceedings will be expensed as
incurred and reported as reorganization costs. Also, interest expense will be
reported only to the extent that it will be paid during the pendency of the
Chapter 11 proceedings or that it is probable that it will be an allowed claim.
The Company has incurred $1,274,000 of professional fees in the preparation of
its Chapter 11 filing and has classified such expenses as reorganization costs
for the three and six months ended June 30, 2003 which is reflected on the
Consolidated Statement of Operations.

(3) 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
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 $45,000,000 to reduce the carrying value of its
goodwill. Such charge was non-operational in nature and was reflected as a
cumulative effect of an accounting change in the accompanying consolidated
statement of operations. Based on the results of the Company's annual goodwill
impairment test in the fourth quarter of 2002 and the estimated implied value of
the Company based on the various restructuring proposals received by the
Company, it was determined that there was a further impairment of the remaining
goodwill and accordingly the balance of $42,471,000 was written off at such
time. This amount was reflected as impairment of goodwill and long-lived assets
in the fourth quarter of 2002 consolidated statement of operations.

10




(4) LOSS PER SHARE

The following table sets forth the computation of basic and diluted loss per
share:


Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
-------------------------------------------------------

Numerator:
Net loss $(4,513,000) $(1,900,000) $(7,197,000) $(50,409,000)
Discontinued operations, net of tax benefit - (351,000) 285,000 (7,000)
Cumulative effect of accounting change - - - 45,000,000
Preferred dividend requirements (597,000) (541,000) (1,180,000) (1,037,000)
-------------------------------------------------------

Numerator for basic and diluted
loss per share - net loss from continuing
operations available for common
stockholders before cumulative effect of
accounting change (5,110,000) (2,792,000) (8,092,000) (6,453,000)
Discontinued operations, net of tax benefit - 351,000 (285,000) 7,000
Cumulative effect of accounting change - - - (45,000,000)
-------------------------------------------------------
Numerator for basic and diluted
loss per share - net loss available for
common stockholders $(5,110,000) $(2,441,000) $(8,377,000) $(51,446,000)
=======================================================
Denominator:
Denominator for basic and diluted loss per
share--weighted average shares 13,729,627 11,784,572 13,729,627 11,260,014
=======================================================

Basic and diluted loss from continuing
operations per share before cumulative
effect of accounting change $ (.37) $ (.24) $ (.59) $ (.57)

Discontinued operations - .03 (.02) -
Cumulative effect of accounting change - - - (4.00)
-------------------------------------------------------
Basic and diluted loss per common share $ (.37) $ (.21) $ (.61) $ (4.57)
=======================================================


(5) LONG-TERM DEBT AND CREDIT FACILITIES

As of June 30, 2003, $72,000,000 in aggregate principal amount was outstanding
under the Company's Senior Credit Facility. The Company's Senior Credit Facility
expired in June 2003 with all outstanding amounts then due. Substantially all
assets of the Company have been pledged as collateral for the Senior Credit
Facility. In December 2002, the Company amended the Senior Credit Facility and
obtained a waiver of compliance with certain financial covenants, which the
Company had failed as of that date, including maintenance of a minimum level of
EBITDA and the requirement that the Company make a partial repayment of the loan
if the accounts receivable is below a certain level. The amendment provided a
waiver and reduced the amount of the monthly cash interest payment through March
31, 2003. The waiver expired on March 31, 2003 causing the Company to be in
default of the Senior Credit Facility. On May 7, 2003, the waiver was renewed
through May 31, 2003, and then again through June 27, 2003.

As of June 30, 2003, $10,000,000 in aggregate principal amount was outstanding
under the Company's Senior Subordinated Notes and $20,000,000 in face amount of
Company 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. In December 2002, the
Company obtained a waiver of the events of default on the Senior Subordinated
Notes and the Preferred Stock and the payment (but not the accrual) of interest
and dividends from March 31, 2002 through June 30, 2003, or such earlier date on
which indebtedness under the Senior Credit Facility is accelerated or the
lenders under the Senior Credit Facility exercise any of their rights or
remedies.

As of June 30, 2003, the Company had a working capital deficit of approximately
$62,682,000 compared to working capital deficit of $55,252,000 at December 31,
2002. The deficiency was a direct result of the classification of the Senior
Credit Facility and Senior Subordinated Notes as current liabilities.

11



As more fully described in Note 2, the Company reached an agreement-in-principle
with the holders of its senior and subordinated indebtedness for a restructuring
of the Company. The restructuring will involve a significant reduction of
outstanding indebtedness and a conversion of the balance of such indebtedness
into 100% of the Company's equity. The transaction is being implemented pursuant
to a Chapter 11 proceeding of the parent company, Headway Corporate Resources,
Inc., which was filed on July 1, 2003. The Company's operating subsidiaries were
not included in the Chapter 11 filing.

(6) COMPREHENSIVE LOSS

During the six months ended June 30, 2003 and 2002, total comprehensive loss
amounted to $(6,970,000) and $(50,084,000), respectively, and during the three
months ended June 30, 2003 and 2002, total comprehensive loss amounted to
$(4,513,000) and $(1,944,000), respectively.

(7) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("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 was effective for fiscal 2003 and its adoption
did not 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. SFAS No. 146 was effective for
the Company beginning with the first quarter of 2003 and its adoption did not
have a material impact on the Company's results of operations or financial
positions.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, (the Interpretation). The Interpretation significantly changes whether
entities included in its scope are consolidated by their sponsors, transferors
or investors. The Interpretation introduces a new consolidation model--the
variable interests model--which determines control (and consolidation) based on
potential variability in gains and losses of the entity being evaluated for
consolidation. The Interpretation's consolidation provisions apply immediately
to variable interests in variable interest entities (VIEs) created after January
31, 2003. It applies in the first fiscal year or interim period beginning after
June 15, 2003 (July 1, 2003 for calendar year-end companies) to VIEs in which a
public company holds a variable interest that it acquired before February 1,
2003. The Interpretation has no grandfathering provisions. The adoption of the
Interpretation is not expected to have a material effect on the Company's
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". This statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Instruments that are indexed to
and potentially settled in an issuer's own shares that are not within the scope
of SFAS 150 remain subject to existing guidance (e.g., EITF Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to or Potentially
Settled in, a Company's Own Stock," Accounting Series Release 268, Redeemable
Preferred Stocks). SFAS 150 is only the first phase of the FASB's Liabilities
and Equity Project. It represents a significant change in practice in the
accounting for a number of financial instruments, including mandatorily
redeemable equity instruments and certain equity derivatives that frequently are
used in connection with share repurchase programs. SFAS 150 generally requires
liability classification for two broad classes of financial instruments,
including mandatorily redeemable equity instruments. Many of the instruments
within the scope of SFAS 150 previously were classified by the issuer as equity
or temporary equity pursuant to Issue No. 00-19, Rule 5-02.28 of Regulation S-X,
or ASR 268, (FRR Section 211), as interpreted by EITF Topic No. D-98,
"Classification and Measurement of Redeemable Instruments." Instruments that are
indexed to and potentially settled in an issuer's own shares that are not within
the scope of SFAS 150 remain subject to existing guidance. SFAS 150 must be
applied immediately to instruments entered into or modified after May 31, 2003
and to all other instruments that exist as of the beginning of the first interim
financial reporting period beginning after June 15, 2003. Application to
pre-existing instruments should be recognized as the cumulative effect of a

12



change in accounting principle (application by retroactive restatement is
precluded). Early adoption of SFAS 150 is not permitted. The adoption of this
Statement is not expected to have a material effect on the consolidated
financial statements.

(8) SALE OF EXECUTIVE SEARCH SEGMENT

On March 13, 2003, Headway Corporate Resources, Inc. exited the executive search
segment of its business through a sale of its Whitney subsidiaries. All of
Headway's interest in the Whitney subsidiaries was sold to Whitney Group, LLC, a
New York limited liability company (the "Whitney Group"). Gary S. Goldstein, a
principal stockholder of Headway who had resigned his positions as an officer
and director of Headway and its subsidiaries, is an officer and principal owner
of membership interest in the Whitney Group. The results of operations of the
executive search segment have been classified as discontinued operations in the
accompanying statement of operations. The executive search segment had no
results of operations for the three months ended June 30, 2003. It had revenues
of $5,432,000, $1,626,000 and $9,758,000 and net income (loss) of $351,000,
$(380,000) and $7,000 for the three months ended June 30, 2002 and for the six
months ended June 30, 2003 and 2002, respectively.

In consideration for the sale, the Whitney Group (i) issued to the Company a 15
percent membership interest in the Whitney Group (subject to adjustment in
certain circumstances), (ii) issued a promissory note in the principal amount of
$2,000,000, and (iii) is obligated to pay an earnout equal to five percent of
Whitney Group's gross revenues, as defined, during a five-year period commencing
January 1, 2003. The note bears interest at the prime lending rate as in effect
from time to time, plus two percent per annum. Interest is payable quarterly and
the full principal amount of the note is payable in January 2005. The Whitney
Group may, at its election, prepay and terminate the promissory note and earnout
obligation through a lump sum payment of $5,000,000 less the actual amount of
principal previously paid on the promissory note and earnout payments. The
Whitney Group is obligated to prepay the promissory note and earnout obligation
on the foregoing terms if one or more specified events occur prior to January 1,
2006, that constitute a change in control or ownership of the Whitney Group. The
Company has estimated the fair market value of the promissory note at $1,400,000
and the 15% equity interest at $45,000. This transaction resulted in a gain of
$95,000 which is reflected as a gain on disposal of discontinued operations in
the consolidated statements of operations for the six months ended June 30,
2003.

The assets and liabilities of the executive search segment consisted of the
following at December 31, 2002:



Cash and cash equivalents $ 185
Accounts receivable 1,600
Prepaid expenses and other current assets 1,146
Other assets 102
-----------------
Total Assets $3,033
=================

Accounts payable $ 191
Accrued expenses 398
Accrued payroll 1,367
Capital lease obligations, current portion 3
Deferred rent 773
-----------------
Total liabilities $2,732
=================


(9) Income Taxes

The income tax benefits recorded in 2003 relate to income tax refunds received
in excess of amounts previously recorded.

(10) STOCK-BASED COMPENSATION

The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations because the Company believes the alternative fair value

13



accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation", requires the use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized on the date of grant.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based methods of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company has elected
to continue to follow the intrinsic value method of accounting as prescribed by
APB Opinion No. 25 to account for stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The Company's
pro forma information is as follows:



Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
-------------------------------------------------------

Net (loss) available for common
stockholders as reported $ (5,110) $(2,441) $ (8,377) $(51,446)
Stock based compensation - 29 25 58
Pro forma SFAS 123 compensation
income (expense), net of
income tax expense 10 (87) 36 (178)
-------------------------------------------------------
Pro forma net (loss) available
for common stockholders $ (5,100) $(2,499) $ (8,316) $(51,624)
=======================================================


Basic and diluted (loss) per
share as reported $ (.37) $ (.21) $ (.61) $ (4.57)
=======================================================
Basic and diluted pro forma
SFAS 123 compensation income
(expense), net of income
taxes per share - - - (.01)
=======================================================
Basic and diluted pro forma
(loss) per share $ (.37) $ (.21) $ (.61) $ (4.58)
=======================================================



The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model. There were no stock option grants during
2002 or the first two quarters of 2003.

In July 1999, the Company issued 125,000 shares of restricted common stock to
Gary Goldstein, the then Chairman of the Company. In August 2000, the Company
issued 60,000 shares of restricted common stock to an employee of a Whitney
subsidiary. In connection with the sale of the Whitney subsidiaries in March
2003 (see Note 8), these two individuals terminated their employment with the
Company. At the time of their termination, none of the aforementioned shares had
vested, and, as a result have been cancelled. As of March 31, 2003, there was
$242,000 of un-amortized deferred compensation relating to these restricted
stock grants. This amount was re-classified to additional paid-in capital as of
June 30, 2003, as a result of the employees' termination.

14




Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations


Chapter 11 Filing

Subsequent to the end of the Company's fiscal quarter, on July 1, 2003 (the
"Petition Date"), Headway Corporate Resources, Inc. (individually, the "Debtor"
and collectively with its subsidiaries, the "Company") filed a petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S.
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").
Since that date, the Debtor has been operating as a debtor-in-possession under
Chapter 11. The Company's operating subsidiaries were not included in the
Chapter 11 filing. A brief chronology of the circumstances that led to such
filing is set forth below.

Despite the cost-reduction initiatives, which the Company undertook in 2001 and
2002, during 2003 the Company continued to experience financial difficulty
related primarily to restrictive covenants under its Senior Credit Facility and
its debt structure. Further, the Senior Credit Facility expired on June 30,
2003. The Company therefore entered into negotiations with its Senior Credit
Facility lenders to amend the Senior Credit Facility to extend the expiration
date and to revise certain financial ratios and minimum EBITDA covenants. The
Company and such lenders were unable to agree to amend the Senior Credit
Facility. As the June 30, 2003 expiration date approached, the Company's board
of directors determined that, in order to be able to operate successfully in
today's market environment, it would be necessary to reduce its debt burden and
de-lever its balance sheet. After negotiations with its Senior Lenders regarding
various alternatives, the Company concluded it would be in the best interests of
its stakeholders to effect a consensual restructuring under Chapter 11 of the
Bankruptcy Code and filed its Chapter 11 petition on July 1, 2003. The Company's
operating subsidiaries were not included in the Chapter 11 filing

The Company has reached an agreement in principle with the holders of its senior
and subordinated indebtedness on the terms of a financial restructuring (the
"Restructuring") to be implemented through a pre-arranged Chapter 11 plan of
reorganization (the "Plan"). The Restructuring will involve a significant
reduction of the outstanding indebtedness and a conversion of the balance of
such indebtedness into 100% of the Company's equity. Pursuant to the Plan, the
holders of the Senior Credit Facility would receive new notes in the principal
amount of $25.0 million, the holders of the Senior Subordinated Notes would
receive a subordinate note in the principal amount of $1.0 million convertible
into 5% of the common equity of the Company, and the currently outstanding
shares of Headway's common and preferred stock will be cancelled without any
distribution to be made to the holders of such shares. The
agreement-in-principle is subject to numerous conditions and further agreements,
including the entry of an order confirming the plan of reorganization as
required by Chapter 11. Consequently, there can be no assurance that the
Restructuring will be consummated. The confirmation hearing has been scheduled
for September 16, 2003.

On July 2, 2003, the Bankruptcy Court approved a series of the Company's "first
day" motions that enable the Company to continue regular operations throughout
the reorganization proceeding. These motions authorized, among other things,
normal payment of employee salaries, wages and benefits; continued participation
in workers' compensation insurance programs; continued utilization of the
Company's centralized cash management system and maintenance of existing bank
accounts; and payment to vendors for post-petition delivery of goods and
services. The Bankruptcy Court also approved, under interim order, a Cash
Collateral Stipulation authorizing the Debtor's use of the Senior Lenders' cash
collateral to fund its operations, provided that these expenditures are
consistent with the budget submitted by the Company.

The Debtor is currently operating its business as a debtor-in-possession
pursuant to the Bankruptcy Code. Pursuant to the Bankruptcy Code, prepetition
obligations of the Debtor, including obligations under debt instruments,
generally may not be enforced against the Debtor, and any actions to collect
prepetition indebtedness are automatically stayed, unless the stay is lifted by
the Bankruptcy Court. The rights of and ultimate payments by the Company under
prepetition obligations may be substantially altered. This could result in
claims being liquidated in the Chapter 11 proceedings at less (and possibly
substantially less) than 100% of their face value. The Debtor cannot presently
determine or reasonably estimate the ultimate liability that may result from
rejecting contracts or leases or from the filing of claims for any rejected
contracts or leases, and no provisions have yet been made with respect to these
items. Except for the agreed upon distribution to the senior creditors and
subordinated note holders, the Plan provides for no distribution on any such
claims.

The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States applicable to
a going concern. Except as otherwise disclosed, these principles assume that

15



assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating as a debtor-in-possession
under Chapter 11 of the Bankruptcy Code, and its continuation as a going concern
is contingent upon, among other things, its ability to have its Plan be
confirmed by the Bankruptcy Court, comply with the Cash Collateral Stipulation,
and generate sufficient cash flows from operations. There is no assurance that
the Company will be able to achieve any of these results. The Company's
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties.

De-listing of Headway Corporate Resources, Inc. Common Stock

On June 26, 2003, the Company received a notice from the staff of the American
Stock Exchange ("AMEX" or the "Exchange") indicating that the Company no longer
complies with the Exchange's continued listing standards as set forth in Section
1003(a)(i) of the AMEX Company Guide due to losses in two of its three most
recent fiscal years and an equity value below $2 million. The Company's stock
was therefore subject to being de-listed from the Exchange. The Company decided
not to appeal this decision. Accordingly, the last day of trading was June 30,
2003. AMEX has advised the Company that it will file an application with the
Securities and Exchange Commission to strike the Company's stock from listing
and registration.

Liquidity and Capital Resources

As of June 30, 2003, $72,000,000 in aggregate principal amount was outstanding
under the Company's Senior Credit Facility. The Company's Senior Credit Facility
expired in June 2003 with all outstanding amounts then due. Substantially all
assets of the Company have been pledged as collateral for the senior credit
facility. In December 2002, the Company amended the Senior Credit Facility and
obtained a waiver of compliance with certain financial covenants, which the
Company had failed as of that date, including maintenance of a minimum level of
EBITDA and the requirement that the Company make a partial repayment of the loan
if the accounts receivable is below a certain level. The amendment provided a
waiver and reduced the amount of the monthly cash interest payment through March
31, 2003. The waiver expired on March 31, 2003 causing the Company to be in
default of the Senior Credit Facility. On May 7, 2003, the waiver was renewed
through May 31, 2003, and again through June 27, 2003.

As of June 30, 2003, $10,000,000 in aggregate principal amount was outstanding
under the Company's Senior Subordinated Notes and $20,000,000 in face amount of
Company 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. In December 2002, the
Company obtained a waiver of the events of default on the Senior Subordinated
Notes and the Preferred Stock and the payment (but not the accrual) of interest
and dividends from March 31, 2002 through June 30, 2003, or such earlier date on
which indebtedness under the Senior Credit Facility is accelerated or the
lenders under the Senior Credit Facility exercise any of their rights or
remedies.

As of June 30, 2003, the Company had a working capital deficit of approximately
$62,682,000 compared to working capital deficit of $55,252,000 at December 31,
2002. The deficiency was a direct result of the classification of the Senior
Credit Facility and Senior Subordinated Notes as current liabilities.

Net cash provided by operations during the six months ended June 30, 2003 and
2002, was $4,642,000 and $5,765,000, respectively. The cash provided in 2003 was
primarily attributable to a decrease in prepaid and refundable income taxes and
accounts receivable and an increase in accounts payable, accrued interest and
expenses and accrued payroll. The cash provided in 2002 was primarily
attributable to a decrease in accounts receivable and prepaid and refundable
income taxes and an increase in accrued payroll.

Net cash used in investing activities during the six months ended June 30, 2003
and 2002, was $337,000 and $1,357,000, respectively. The cash used for investing
activities in 2003 relates primarily to capital expenditures. The cash used for
investing activities in 2002 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 six months ended June 30, 2003
and 2002 was $75,000, and $2,278,000 respectively. The cash used for financing
activities in 2002 relates primarily to payments of fees for loan amendments.

16



Headway's contractual obligations and commercial commitments are summarized
below. The following table includes aggregate information about Headway's
contractual obligations as of June 30, 2003 and the periods in which payments
are due:

Contractual Obligations Payments Due by Period
(in thousands)
- ------------------------------------------------------------------------------
Total Less than 1 - 3 4 - 5 After 5
1 year years years years
- ------------------------------------------------------------------------------
Loans Payable $82,000 $82,000 $ - $ - $ -
- ------------------------------------------------------------------------------
Capital Lease Obligations 50 50 - - -
- ------------------------------------------------------------------------------
Operating Leases 5,036 1,338 2,074 1,146 478
- ------------------------------------------------------------------------------
Unconditional Purchase
Obligations None
- ------------------------------------------------------------------------------
Other Obligations (1) 2 2 - - -
- ------------------------------------------------------------------------------
Total Contractual Cash
Obligations $87,088 $83,390 $ 2,074 $ 1,146 $ 478
- ------------------------------------------------------------------------------
Preferred Stock (2) $24,463 $24,463 - - -
- ------------------------------------------------------------------------------
(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.

The following table includes aggregate information about Headway's commercial
commitments as of June 30, 2003. 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 $1,600 $1,600 $ - $ - $ -
- -------------------------------------------------------------------------------------
Guarantees None
- -------------------------------------------------------------------------------------
Standby Repurchase Obligations None
- -------------------------------------------------------------------------------------
Other Commercial Commitments None
- -------------------------------------------------------------------------------------
Total Commercial Commitments $ 1,600 $1,600 $ - $ - $ -
- -------------------------------------------------------------------------------------

Recent Transaction

On March 13, 2003, Headway Corporate Resources, Inc. exited the executive search
segment of its business through a sale of its Whitney subsidiaries. All of
Headway's interest in the Whitney subsidiaries were sold to Whitney Group, LLC,
a New York limited liability company (the Whitney Group"). Gary S. Goldstein,
who had resigned his positions as an officer and director of Headway and its
subsidiaries, is an officer and principal owner of membership interest in the
Whitney Group.

In consideration for the sale, the Whitney Group (i) issued to the Company a 15
percent membership interest in the Whitney Group (subject to adjustment in
certain circumstances), (ii) issued a promissory note in the principal amount of
$2,000,000, and (iii) is obligated to pay an earnout equal to five percent of
Whitney Group's gross revenues, as defined, during a five-year period commencing
January 1, 2003. The note bears interest at the Prime Lending Rate as in effect
from time to time, plus two percent per annum. Interest is payable quarterly and
the full principal amount of the note is payable in January 2005. The Whitney
Group may, at its election, prepay and terminate the promissory note and earnout
obligation through a lump sum payment of $5,000,000 less the actual amount of
principal previously paid on the promissory note and earnout payments. The
Whitney Group is obligated to prepay the promissory note and earnout obligation
on the foregoing terms if one or more specified events occur prior to January 1,
2006, that constitute a change in control or ownership of the Whitney Group. The
Company has estimated the fair market value of the promissory note at $1,400,000
and the 15% equity interest at $45,000. This transaction resulted in a gain of
$95,000, which is reflected as a gain on disposal of discontinued operations in
the consolidated statements of operations for the period ended June 30, 2003
(See note 8 to the unaudited financial statements).

17



Critical Accounting Policies

Basis of Presentation

The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States applicable to
a going concern. Except as otherwise disclosed, these principles assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business. The Company is currently operating as a debtor-in-possession
under Chapter 11 of the Bankruptcy Code, and its continuation as a going concern
is contingent upon, among other things, its ability to have its Plan be
confirmed by the Bankruptcy Court, comply with the Cash Collateral Stipulation,
and generate sufficient cash flows from operations. There is no assurance that
the Company will be able to achieve any of these results. The Company's
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties.

The Company's consolidated financial statements included elsewhere in this
Quarterly Report do not reflect adjustments that may occur in accordance with
AICPA Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"), which the Company will
adopt for its financial reporting in periods ending after July 1, 2003 assuming
that the Company will continue as a "going concern." In the Chapter 11
proceedings, substantially all unsecured liabilities as of the Petition Date are
subject to compromise or other treatment under a plan of reorganization which
must be confirmed by the Bankruptcy Court after submission to any required vote
by affected parties. For financial reporting purposes, those liabilities and
obligations whose treatment and satisfaction is dependent on the outcome of the
Chapter 11 proceedings will be segregated and classified as Liabilities Subject
to Compromise in the consolidated balance sheet under SOP 90-7 in future
periods.

The ultimate amount of and settlement terms for the Company's pre-bankruptcy
liabilities are subject to the ultimate outcome of its Chapter 11 proceedings
and, accordingly, are not presently determinable. Pursuant to SOP 90-7,
professional fees associated with the Chapter 11 proceedings will be expensed as
incurred and reported as reorganization costs. Also, interest expense will be
reported only to the extent that it will be paid during the pendency of the
Chapter 11 proceedings or that it is probable that it will be an allowed claim.
The Company has incurred $1,274,000 of professional fees in the preparation of
its Chapter 11 filing and has classified such expenses as reorganization costs
for the three and six months ended June 30, 2003 which is reflected on the
Consolidated Statement of Operations.

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 and Long-Lived Assets

On January 1, 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.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment

18



of a Business" ("APB 30"). The Company periodically evaluates whether there has
been impairment in any of its long-lived assets. An impairment in value exists
where the carrying value of a long-lived asset exceeds its fair value. If it is
determined that an impairment in value has occurred, the carrying value is
written down for its fair value. The Company adopted SFAS No. 144 in 2002.

Results of Operations

Overview

The results for the second quarter reflect a slight increase in the demand for
the Company's staffing services. Management cannot determine whether this trend
will continue for the rest of the year. The Company has taken steps to reduce
costs and is constantly looking for growth opportunities.

Consolidated

Revenues for the three and six months ended June 30, 2003 increased $4,052,000
and $3,935,000 or 6.7% and 3.1%, respectively, compared with the corresponding
periods of the prior year. ` Total operating expenses for the three and six
months ended June 30, 2003 increased $5,543,000, and $5,097,000, respectively,
compared with the corresponding periods of the prior year. The increase in
operating expenses for the three months ended June 30, 2003 as compared to the
same period in 2002 is the result of a $7.2 million increase in direct costs and
$1.3 million of reorganization costs, offset by a $2.9 million decrease in
selling, general and administrative expenses and a $0.1 million decrease in
depreciation and amortization. The increase in operating expenses for the six
months ended June 30, 2003 as compared to the same period in 2002 is the result
of a $9.0 million increase in direct costs and $1.3 million of reorganization
costs offset by a $5.0 million decrease in selling, general and administrative
expenses and a $0.2 million decrease in depreciation and amortization. Direct
costs increased as a percentage of revenues from 85.3% to 91.2% for the second
quarter of 2003 compared with the same period in 2002. Direct costs increased as
a percentage of revenues from 86.2% to 90.6% for the six months ended June 30,
2003 compared with the same period in 2002. The increase in direct costs as a
percentage of revenues for the three and six months ended June 30, 2003 compared
with the same period in 2002 is a result of: 1) a change in Headway's business
mix in 2003, whereby the permanent placement business that has no direct costs
experienced more significant declines than the staffing business, therefore
reducing its percentage of our total revenues; 2) increased workers compensation
insurance expenses; and 3) higher state unemployment tax rates as a result of
the weak economic conditions. Selling, general and administrative expenses
decreased as a percentage of revenues from 14.7% in the second quarter 2002 to
9.3% in second quarter 2003. Selling, general and administrative expenses
decreased as a percentage of revenues from 14.1% to 9.7% for the six months
ended June 30, 2003 compared with the same period in 2002. The decrease in
selling, general and administrative expenses for the three and six months ended
June 30, 2003 compared with the same period in 2002 is primarily attributable to
staff reductions and other cost-cutting initiatives implemented in the latter
half of 2002, as well as lower commission expense associated with the decline in
revenues. The reorganization costs for the three and six months ended June 30,
2003 are professional fees associated with the Chapter 11 proceedings.

Interest expense for the three months ended June 30, 2003 increased $0.1
million, compared with the corresponding period of the prior year. The increase
in interest expense is due to fully amortizing the deferred financing costs
related to the Company's Senior Subordinated Notes during the three months ended
June 30, 2003. Interest expense for the six months ended June 30, 2003 decreased
$1.2 million. The decrease in interest expense is due to decreased amortization
of deferred financing costs relating to the amendment completed in August 2001
offset by an increase in amortization of deferred financing costs relating to
the amendment completed in April 2002 and the elimination of expense relating to
the Company's interest rate swap contract that expired in April 2002.

Due to the Company exiting the executive search segment of its business through
the sale of its Whitney subsidiaries on March 13, 2003, the Company has recorded
a loss from discontinued operations of $380,000 and a gain on disposal of
discontinued operations of $95,000 in its consolidated statement of operations
for the six months ended June 30, 2003.

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.
Upon adoption of SFAS 142 in the first quarter of 2002, the Company recorded a
non-cash charge of $45,000,000 to reduce the carrying value of its goodwill.

19



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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company has previously used interest rate swap contracts for hedging
purposes. As of June 30, 2003 there were no interest rate swap contracts
outstanding.

Item 4. Controls and Procedures

The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of June 30, 2003. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2003.

There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended June 30, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K


EXHIBITS:

Exhibit No. Title of Document Location


2.1 Plan of Reorganization, filed with the Bankruptcy Court on July 1, 2003 (1) 99.1

31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 This Filing

31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 This Filing

32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 This Filing

32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 This Filing

99.1 Disclosure Statement, filed with the Bankruptcy Court on July 1,2003 (1) 99.3



(1) These exhibits are included in Headway's current report on Form 8-K, dated
July 1, 2003, and filed with the Commission on July 1, 2003, and are
incorporated herein by this reference. The reference under the column
"Location" is to the exhibit number in the report on Form 8-K.


REPORTS ON FORM 8-K: On July 1, 2003, the Company filed a report on Form 8-K
dated July 1, 2003 reporting under Item 3 that Headway Corporate Resources, Inc.
filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code
with the U.S. Bankruptcy Court for the Southern District of New York.

20





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HEADWAY CORPORATE RESOURCES,
INC.


Date: August 14, 2003 By: /s/ Barry S. Roseman,
President and Chief Executive Officer


Date: August 14, 2003 By: /s/ Philicia G. Levinson,
Chief Financial Officer


21