UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934:
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934:
For the transition period from to
Commission file number 0-23170
HEADWAY CORPORATE RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2134871
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
850 Third Avenue, 11th Floor, New York, NY 10022
(Address of Principal Executive Offices and Zip Code)
Registrant's Telephone Number: (212) 508-3560
Securities registered pursuant to Section 12(b) of the Act:
NoneSecurities registered pursuant to section 12(g) of the
Act:Common Stock, Par Value $0.0001
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this chapter)
is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant. The
aggregate market value computed on the basis of of the last sale
price on March 11, 1999, is $31,350,354.
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date. 10,362,020
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DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference in Part III of this report is the
definitive proxy statement of the Company for the 1999 annual
meeting of stockholders, which the Company proposes to file with
the Securities and Exchange Commission on or before April 30,
1999.
TABLE OF CONTENTS
ITEM NUMBER AND CAPTION Page
Part I
1. Business 3
2. Properties 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
Part II
5. Market for Registrant's Common Equity and Related 13
Stockholder Matters
6. Selected Financial Data 15
7. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
7A. Quantitative and Qualitative Disclosures About Market 23
Risk
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants 23
on Accounting and Financial Disclosure
Part III
10. Directors and Executive Officers of the Registrant *
11. Executive Compensation *
12. Security Ownership of Certain Beneficial Owners and *
Management
13. Certain Relationships and Related Transactions *
Part IV
14. Exhibits, Financial Statement Schedules, and Reports 24
on Form 8-K
* These items are incorporated by reference from the
definitive proxy statement of the Company for the 1999 annual
meeting of stockholders to be filed with the Securities and
Exchange Commission on or before April 30, 1999.
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PART I
Item 1. Business
General
Headway Corporate Resources, Inc. ("Headway" or the
"Company") is a leading provider of human resource and staffing
services to the financial services industry. The financial
services industry consists of investment banking firms, banking
institutions, insurance companies, credit card service companies,
and other finance companies, and extends by association to real
estate companies, appraisal firms, law firms, accounting firms,
and other service companies that participate in the financial
services industry. Headway's history of service in the industry,
which began in 1984 with executive search services, enables it to
understand the complexity of the products and services offered by
the financial services industry, assist the client in identifying
the human resources required to support those products and
services, and develop industry specific solutions for the human
resources needs of the client. Headway established its staffing
service business in the financial service industry through 16
acquisitions of staffing and professional services companies
since 1996. The Company's acquisitions and internal business
development over the past two years have resulted in substantial
growth. Total revenues in 1998 were $291.3 million, as compared
to $142.8 million in 1997.
The human resource management services offered by the
Company consist of
- temporary staffing and value added services,
- information technology ("IT") and professional staff
services,
- executive search and permanent placement services, and
- contract staff administration services.
In temporary staffing and value added services, the Company
provides employees to clients for periods ranging from one day to
several months. These employees satisfy a specific job skill
need arising from absenteeism, special projects, fluctuations in
the client's volume of business inherent in the business cycle,
technology and business system changes, and other causes. The
thrust of Headway's marketing approach is "SmartSizing", which is
a human resource management policy of controlling and minimizing
the fixed cost of employees by expanding and contracting the
client's workforce as needed to meet its specific business needs
as they change. The job skills required by clients and offered
by the Company consist of "office/clerical" personnel, including
secretaries, office workers, and, administrative staff. Value
added services include payroll services and more involved
arrangements where the Company assumes some or all of the
administrative functions of employment on-site at the client's
business, which is commonly referred to as "vendor-on-premises".
Headway offers IT/professional staff services in which
accountants, computer programmers and technicians, desktop
publishing operators, network administrators, and computer
graphic specialists are placed on a temporary, contract, or
permanent basis.
Executive search services focuses on placing middle to upper
level management positions in the financial services industry and
permanent placement involves placement of office/clerical and
IT/professional personnel.
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Headway offers contract staff administration services where
it assumes the position of employer for independent contractors
used frequently by clients and manages the scheduling of the
independent contractors to make them available to service
clients' needs.
The Company's goal is to build a national staffing business
focused on providing these services primarily to the financial
services industry. Headway's strategy for achieving this goal is
to make acquisitions and conduct operations through a
decentralized "Hub-Spoke" management model. The Company will
seek strategic acquisitions in major United States metropolitan
markets, which will serve as Hubs for business operations and
development, and rely on a combination of additional acquisitions
within existing and future Hub locations and internal growth to
expand its business.
Industry Overview
The temporary employment service industry has experienced
significant growth in response to the changing work environment
in the United States. Fundamental changes in the employer-
employee relationship continue to occur, with employers
developing increasingly stringent criteria for permanent
employees, while moving toward project-oriented temporary and
contract hiring. These changes are a result of increasing
automation that has resulted in shorter technological cycles, and
global competitive pressures. Many employers responded to these
challenges by turning to temporary and contract personnel to keep
personnel costs variable, achieve maximum flexibility, outsource
highly specialized skills, and avoid the negative effects of
layoffs.
Changes in employment practices are especially evident in
the financial services industry. Due to the robust economy over
the past several years, the financial services industry
experienced substantial growth and developed new products and
services for investors and other participants in the capital and
asset-based markets. Changes in the regulation of banking
institutions, securities firms, and insurance companies allow
them to go beyond their traditional activities into new lines of
business. These changes in the industry, together with peaks and
valleys in business activity within the financial services
industry, result in a substantial demand for more flexible and
efficient workforce resources, management expertise, and
improvements in IT resources.
Rapidly changing regulations concerning employee benefits,
health insurance, retirement plans, and the highly competitive
business climate have also prompted many employers to take
advantage of the flexibility offered through temporary and
contract staffing. Additionally, Internal Revenue Service and
Department of Labor regulations concerning the classification of
employees and independent contractors have significantly
increased demand by prompting many independent contractors to
affiliate with employers like Headway.
The temporary staffing industry grew rapidly in recent years
as companies used temporary employees to manage personnel costs,
while meeting specialized or fluctuating staffing requirements.
According to the Staffing Industry Report, the United States
temporary staffing industry grew from approximately $24.6 billion
in revenue in 1992 to approximately $54.5 billion in revenue in
1997, a compound annual growth rate of approximately 17.2%. One
of the fastest growing sectors for the Company, as well as the
industry, is information technology services. Revenue for this
sector grew at an estimated compound annual rate of 23.8% from
approximately $5.1 billion in 1992 to approximately $14.8 billion
in 1997. Professional and technical staffing within the
temporary staffing industry requires longer-term, more highly-
skilled personnel services. The Company believes professional
and technical staffing offers the opportunity for higher
profitability than clerical staffing, because of the value-added
nature of professional and technical staffing personnel. The
Company believes the staffing services industry is highly
fragmented with over 6,000 staffing companies and 2,500
information technology and
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professional staffing companies. The National Association of
Temporary and Staffing Services has estimated that more than 90%
of all U.S. businesses utilize temporary staffing services.
Growth Strategy
The Company's strategy for growth in existing and new
markets is to
- pursue strategic acquisitions,
- increase the Company's focus on IT/professional staffing
services, and
- enhance and expand offices.
Pursue Strategic Acquisitions. The Company intends to
continue to acquire independent staffing services companies
located in attractive geographic locations with strong
management, profitable operating results, and recognized local
and regional presence in the financial services industry. Since
May 1996, the Company has acquired 16 companies in 9 states. The
Company intends to pursue strategic acquisitions of staffing
services companies in major metropolitan areas where the Company
already has an established presence to serve as Hubs, and tuck-in
additional acquisitions, or spokes, in the same area as
established Hubs that increase penetration of existing markets.
In the coming year, the Company expects to focus its acquisition
activity primarily on spokes or tuck-in acquisitions that are in
the same area as established Hubs, rather than on new Hub
acquisitions. The Company has established a team of corporate
officers responsible for identifying prospective acquisitions,
performing due diligence, negotiating contracts, and subsequently
integrating the acquired companies. The Company typically
retains management of acquired companies and includes in the
consideration for the acquisitions long-term earnout arrangements
based on performance as incentive for improving operating
results. The Company intends to use available cash, debt, long-
term earnout arrangements, equity, and a combination of these as
consideration in future acquisitions.
Increase Focus on Professional and Technical Staffing
Services. The Company's strategy is to increase the percentage
of total revenues and gross profits contributed by
IT/professional staffing services by expanding its service
offerings in the fields of information technology staffing and
consulting and accounting and finance staffing. The Company also
intends to grow its pool of skilled professionals, hire
additional sales consultants, target mid-size and large
companies, and leverage client relationships. The Company
believes that providing professional and technical staffing
services to its clients offers attractive opportunities for
growth in sales and profits. Based on client demand for
IT/professional staffing services on a national basis, the
Company intends to increase the pace of acquisitions of
IT/professional staffing services companies in major metropolitan
markets.
Enhance and Expand Offices. The Company plans to develop
its current and future Hubs by expanding the services offered,
adding temporary staffing and permanent placement consultants,
pursuing new clients, expanding current client relationships,
cross-marketing services, and assisting Hubs in developing
successful marketing and internal business growth techniques. To
facilitate the offering of new services in Hub markets, the
Company plans to acquire companies offering services which
complement and expand the Hub's existing services, and transfer
or recruit experienced personnel for positions in its Hub
locations that will expand the services offered. Increased
service offerings enables the Company to expand existing client
relationships through cross-selling, and to approach new clients
with a variety of staffing needs. The Company relies on its
regional managers, in consultation with corporate staff, to drive
this internal growth and to determine which service, marketing,
and business techniques are most appropriate for their local
markets.
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Operating Strategy
The key elements of the Company's operating strategy include
- emphasis on the financial services industry
- integrate acquired companies quickly
- foster an entrepreneurial environment with Hub-Spoke
management model
- provide corporate level support, and
- deliver high, value-added quality service.
Emphasis on the Financial Services Industry. The Company
has a strong presence in the financial services industry.
Headway will continue to focus on this industry, because the
Company believes there is a substantial untapped market for its
services in this industry and because its core strengths of
industry experience and human resources expertise enable it to
develop unique, value-added staffing solutions for the financial
services industry. The Company will work to maintain its
relationships with existing clients in the industry, expand
service offerings in existing and future Hub locations, cross-
sell services to existing clients, and seek acquisitions with an
existing client base in the financial services industry.
Although the Company expects to focus on this industry, it
expects that it will continue to have a diversified client base,
with no more than 60% of its annual revenues being derived from
financial services clients.
Integrate Acquired Companies Quickly. As soon as
practicable after an acquisition is completed, management begins
integrating newly acquired companies into the Hub-Spoke
management model. The Company has a dedicated team of
professionals who implement a formal process of budgeting and
quarterly performance reviews as well as its disciplined
financial management system at all newly acquired companies. The
integration process involves installing back-office management
information systems and standardizing each acquired company's
accounting and financial procedures with those of the Company.
Marketing, sales, field operations, and personnel programs of the
acquired companies are reviewed and, where appropriate, corporate
management provides guidance and assistance on improving these
functions.
Foster Entrepreneurial Environment With Hub-Spoke Management
Model. The Company employs a decentralized, Hub-Spoke management
model. Local regional managers manage the Company's operations
in each market, including any satellite offices in that market.
The Company believes it has a strong market in each of its major
markets largely due to the commitment, ability, and creativity of
its regional managers who drive each local business. The Company
fosters this entrepreneurial environment by giving its regional
managers the authority to respond quickly and creatively to
client needs. Regional managers are responsible for achieving
operational and financial objectives, including revenues and
earnings growth, and have authority over hiring, recruiting,
compensation, pricing, and sales management. The Company
believes that accountability and authority, combined with the
support of the Company's corporate level support services,
enables its regional managers to compete successfully in the
local marketplace. The Company also believes this
entrepreneurial environment allows the Company to attract
talented managers and successfully serve its clients' needs.
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Provide Corporate Level Support. The Company's philosophy
is that the central function of corporate management is to
support the staffing consultants who directly interact with
clients. The Company provides regional managers corporate level
support to lessen their administrative burden and allow them to
focus on servicing clients and growing the business. Corporate
management has developed certain financial, risk management, and
administrative control procedures, which are applied to each Hub.
These control procedures include the preparation of annual
business plans and budgets and the submission of detailed monthly
financial reports. This information is reviewed at the end of
each fiscal quarter by the Company's management together with
regional managers. Additional support functions include
marketing, management information system support, training, human
resources, accounting, and other back office functions. The
Company believes its Hub-Spoke management model is readily
adaptable and scaleable as the Company continues to grow.
Deliver High, Value-Added Quality Service. The Company
emphasizes recruiting, training, and retaining experienced sales
consultants and providing highly qualified temporary employees.
The Company trains its sales consultants to operate as partners
with their clients in evaluating and meeting the client's
staffing requirements. The Company promotes and monitors quality
of service a number of ways. It seeks highly qualified temporary
employees through referrals from existing temporary employees and
conducts in-depth interviews by Company personnel experienced in
the temporary employees' field. The Company performs skill
evaluations and offers programs to its temporary employees to
improve their skills. The Company contacts clients within hours
of the beginning of a project to receive a preliminary
determination of satisfaction, and obtains client satisfaction
reports upon the completion of projects. The Company seeks to
understand and proactively assess clients' needs, respond
promptly to clients' requests, and continually monitor job
performance and client satisfaction. The Company believes that
its commitment to providing quality service has enabled it to
establish and maintain long-term relationships with clients.
Services
The human resource management services offered by the
Company include
- temporary staffing and value added services
- IT/professional staff services
- executive search and permanent placement services, and
- contract staff administration services.
Temporary Staffing and Value Added Services. The Company
provides employees to clients for periods ranging from one day to
several months to satisfy a specific job skill need arising from
absenteeism, special projects, fluctuations in the client's
volume of business inherent in the business cycle, technology and
business system changes, and other causes. The job skills
required by clients and offered by the Company range from entry
level clerks and secretaries to master administrative assistants.
Under vendor-on-premise programs, the Company assumes
administrative responsibility for coordinating some or all
staffing services at a client's location or organization,
including skills testing and training. The Company also provides
payroll services to its clients for its permanent employees,
thereby mitigating the administrative burden of employment. By
using the Company's services, clients can make changes in
workforce quickly without the administrative burden and cost of
hiring and firing.
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IT/Professional Staff Services. Rapid changes in technology
and competitive pressures in the financial services industry
create demand by employers for computer programmers and
technicians, desktop publishing operators, network
administrators, and computer graphic specialists to help
implement the systems required to meet these challenges. The
Company offers to its clients IT/professional staff services in
which persons with these special skills are placed on a
temporary, contract, or permanent basis.
Executive Search and Permanent Placement. The Company,
through its subsidiary Whitney Partners, LLC ("Whitney") is one
of the leading executive search firms in the financial services
industry. The Company uses a complete consultative approach with
its clients, including, market analysis, product recommendations,
and staffing new and existing business divisions of its clients.
The Company conducts executive searches in a broad range of
product areas in the financial services industry, including,
investment banking, capital markets, leveraged financing,
research, emerging markets, investment management, financial
administration, and risk management. Executive search services
are provided in major financial markets, including, New York,
Chicago, London, Tokyo, Hong Kong, and Singapore.
The Company also provides permanent placement services to
its clients for office/clerical positions and IT/professional
personnel. Clients also use Headway's temporary staffing
services as a means for locating and evaluating new personnel
with a view to permanent employment. Clients are able to
evaluate the abilities and productivity of workers during
temporary employment through the Company and make informed
decisions on whether to retain the workers on a permanent basis,
all without the administrative burden associated with adding the
workers to their workforce from the outset.
Contract Staff Administration Services. Many of the
Company's clients use independent contractors on a regular basis
to satisfy recurring needs for highly skilled workers in the
areas of accounting, finance, business administration, marketing,
computer programming, computer graphics, and other areas
requiring a high level of business or technical expertise. The
use of independent contractors on a regular basis can create a
number of problems for clients. The possibility always exists
that the independent contractors will accept employment elsewhere
that prevents him from being available to the client when needed.
Furthermore, there is always a risk independent contractors will
be viewed by federal and state taxing authorities as employees
rather than independent contractors for income tax withholding
and benefits purposes. To mitigate these potential problems, the
Company offers a service where it assumes the position of
employer for the independent contractors. As employer, the
Company manages the scheduling of the independent contractors to
make them available to service the needs of the clients, and
implements income tax withholding and other employee benefit
programs to ensure compliance with the legal requirements of
employment under applicable federal and state laws.
Client Relationships
The Company has a broad client base. The Company's largest
client accounted for approximately 14% of the Company's 1998
revenues. The revenues generated by this client represent
primarily payrolling services provided by the Company, which
generates a low gross margin compared to the Company's other
staffing services.
Human Resources
Employees. As of December 31, 1998, the Company had
approximately 400 full-time employees. By the fourth quarter of
1998, the Company employed over 9,000 temporary employees in a
typical week. None of the Company's employees, including its
temporary employees, is represented by a collective bargaining
agreement. The Company believes its employee relations to be
strong. Hourly wages for the Company's temporary employees are
determined according to local market conditions. The Company
pays mandated costs of employment, including the employer's share
of social security taxes, federal and state unemployment taxes,
unemployment compensation insurance, general payroll expenses and
workers' compensation insurance. The Company offers access to
various insurance programs and other benefits, such as vacations,
holidays and 401(k) programs to qualified temporary employees and
professionals.
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Recruiting. The Company's recruiting process is influenced
by its clients' changing demands and recognizes that the
competition for quality is high. In order to ensure that the
Company attracts high caliber candidates, it maintains ongoing
exposure and communication with recruiting sources. Recruiting
sources include, newspaper advertisement, internet sourcing,
referrals from our employees and clients, and outreach to various
educational institutions, community groups, job fairs, and other
sources. Every internal and temporary employee is empowered to
recruit new temporary workers. Their positive experience with
the Company is a motivating factor, as well as a number of
special bonuses and incentives that are offered.
Assessment, Training and Quality Control. The Company's
process begins with the applicant completing an application for
employment followed by an interview with an experienced
recruiter. The interview seeks to determine the level of
responsibility the applicant is capable of handling in addition
to assessing the motivation, enthusiasm, and energy level of the
candidate. The Company uses a variety of job skill evaluating
methods. For example, basic software skills are evaluated by the
applicant's use of the QWIZ product, a comprehensive office skill
evaluation program, helping the Company efficiently screen large
numbers of applicants each week in basic word processing,
spreadsheet, and business graphics functionality. The QWIZ
system analyzes the range and depth of an individual's skill in
each area tested. Automated scoring supplies consistent and
standard methods of assessing skill levels. Computerized
tutorials are generally available for temporary employees who
seek to upgrade their typing, data entry, office automation, or
word processing skills. Each Hub carefully monitors client
satisfaction with the performance of employees provided by the
Company to assess and control quality of service.
Operations
Sales and Marketing. The Company's services are marketed
through its network of Hubs whose managers and placement
coordinators make regular personal sales visits to clients and
prospective clients. The Company emphasizes long-term personal
relationships with clients which are developed through regular
assessment of client requirements and constant monitoring of
temporary staff performance. New clients are obtained through
sales calls, consultation meetings with target companies, and
client referrals. The Company's management and regional managers
participate in national and regional trade associations, local
chambers of commerce, and other civic associations. The Company
monitors sales, marketing, and recruiting functions to identify
opportunities to deliver high value-added quality services. The
Company believes that its clients select service providers
principally on the basis of quality of service, range of services
offered, specialized expertise, and ability to service multiple
locations, and the Company is striving to satisfy these criteria
in its marketing efforts.
Hubs. The Company's decentralized operating strategy uses a
Hub-Spoke management model in which regional managers manage the
Company's operations in each market. The Company's current hubs
are located in New York, California, North Carolina and Texas,
with spoke offices in Connecticut, Florida, New Jersey and
Virginia. Whitney, the Company's executive search division, has
offices in New York, Illinois, the United Kingdom, Japan, Hong
Kong and Singapore.
Regional managers operate their Hubs with a significant
degree of autonomy and specific areas of accountability to the
Company. The Company's practice of including long-term earnout
arrangements as part of the acquisition consideration for its
Hubs is designed to motivate the regional managers and former
owners to maximize the growth and profitability of their branches
while securing long-term client
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relationships. Regional managers report directly to corporate
management. Operating within the guidelines set by the Company,
the regional managers are responsible for pursuing new business
opportunities and focusing on sales and marketing, account
development and retention, and employee recruitment, development,
and retention.
Management Information Systems. The Company licenses
StaffCord software from Concord Technologies. StaffCord is an
integrated front/back office operating platform for temporary
services and permanent employment agencies. The software runs in
a Novell LAN environment throughout most of the Company's
branches. The Company has recently entered into a licensing
agreement with Great Plains Software to install Great Plains
Dynamics C/S+, an enterprise-wide client/server based accounting
software product. In addition, the Company has purchased the
underlying code of the Dynamics product and is producing a
derivative work for the exclusive use of the Company, pursuant to
a special addendum to the licensing agreement. The new product
will run on a Microsoft SQL server platform with high-speed data
communication being provided through a Frame Relay connection
with MCI. The Company maintains a state of the art software
development lab in Knoxville, TN staffed with professional
programmers and system analysts who support the applications of
the firm nationally. The Company believes that its systems are
readily expandable and scaleable to support a rapidly growing
infrastructure.
Competition
The staffing industry is intensely competitive and
fragmented and has limited barriers to entry. The Company
competes for employees and clients in national, regional, and
local markets with full-service and specialized temporary
staffing service businesses. A significant number of the
Company's competitors have greater marketing, financial, and
other resources and more established operations than the Company.
Price competition in the staffing industry is intense and pricing
pressures from competitors and customers are increasing. Many of
the Company's clients have relationships with more than one
staffing service company. However, in recent years, an
increasing number of companies have consolidated their staffing
services purchases and entered into exclusive contracts with a
single temporary staffing company or small number of temporary
staffing companies. If current or potential clients enter into
exclusive contracts with competitors of the Company, it will be
difficult or impossible for the Company to obtain business from
such clients. The Company expects that the level of competition
will remain high in the future, which could limit the Company's
ability to maintain or increase its market share or maintain or
increase gross margins. However, the Company believes that its
strategy of becoming a dominant provider in each of its markets
will allow it to remain competitive in this environment
In addition, the Company competes for acquisition candidates
with other staffing services companies, and there can be no
assurance that the Company will be able to successfully identify
suitable acquisition candidates or complete acquisitions.
Regulation
Generally, the Company's operations are not subject to state
or local licensing requirements or other regulations specifically
governing the provision of commercial and professional staffing
services. There can be no assurance, however, that states in
which the Company operates or may in the future operate will not
adopt such licensing or other regulations affecting the Company.
The laws of various states require the Company to maintain
workers' compensation and unemployment insurance coverage for its
temporary employees. The Company maintains state mandated
workers' compensation and unemployment insurance coverage. The
extent and type of health insurance benefits that employers are
required to provide employees have been the subject of intense
scrutiny and debate in recent years at both the national and
state levels. Proposals have been made to mandate that
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employers provide health insurance benefits to staffing
employees. In addition, some states could impose sales taxes, or
raise sales tax rates, on staffing services. Further increases in
such premiums or rates, or the introduction of new regulatory
provisions, could substantially raise the costs associated with
hiring and employing staffing employees.
Intellectual Property
The Company maintains a number of trademarks, tradenames,
service marks and other intangible rights. The Company believes
that it has all rights to trademarks and trade names necessary
for the conduct of its business and is not currently aware of any
infringing uses or other conditions that would materially and
adversely affect its use of proprietary rights.
Acquisition History
In 1996, the Company acquired Irene Cohen Temps, Inc.,
Corporate Staffing Alternatives, Inc., Certified Technical
Staffing, Inc., and the operating assets of Irene Cohen
Personnel, Inc. (collectively the "Irene Cohen Group"), all of
which are based in New York City, and the assets of Vogue
Personnel Services, Inc., of New York City, which were
incorporated into the operations of the Irene Cohen Group.
In 1997, the Company acquired Advanced Staffing Solutions,
Inc., based in Raleigh-Durham, North Carolina; Administrative
Sales Associates Temporaries, Inc., and Administrative Sales
Associates, Inc., both operating in New York City; Quality
OutSourcing, Inc., based in New York; and E.D.R. Associates,
Inc., and Electronic Data Resources, L.L.C., both based in
Windsor, Connecticut.
In 1998, the Company acquired Cheney Associates and Cheney
Consulting Group of Hamden, Connecticut; Shore Resources,
Incorporated, of Los Angeles, California; substantially all of
the assets of the Southern Virginia offices of Select Staffing
Services, Inc., based in McLean, Virginia; Staffing Solutions,
Inc., and Intelligent Staffing, Inc., of Miami Lakes, Florida;
Phoenix Communication Group, Inc. of N.J., based in Woodbridge,
New Jersey; Carlyle Group Ltd. Of and Staffing Alternatives
International, Inc. and VSG Consulting, Inc. based in Dallas,
Texas.
The following table sets forth certain information with
respect to companies acquired through the date of this Annual
Report.
Table on following page.
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Date Year
Company Acquired Location Founded Services
Irene Cohen Group May 1996 New York City 1977 Temporary,
IT, Contract,
Permanent
Vogue Personnel Services Oct. 1996 New York City 1974 Temporary,
IT
Advanced Staffing Mar. 1997 Raleigh-Durham, NC 1965 Temporary,
Solutions, Inc. IT, Contract
Administrative Sales July 1997 New York City 1976 Temporary,
Associates Temporaries, IT,
Inc., and Administrative Permanent
Sales Associates, Inc.
Quality OutSourcing, Inc. Sept. 1997 New York City 1989 Temporary,
Permanent
E.D.R. Associates, Inc. Sept. 1997 Windsor, CT 1984 IT
and Electronic Data
Resources, L.L.C.
Cheney Associates and Mar. 1998 Hamden, CT 1987 IT
Cheney Consulting Group
Shore Resources, Mar. 1998 Los Angeles, CA 1976 Temporary,
Incorporated IT,
Permanent
Select Staffing Mar. 1998 Southern, VA 1960 Temporary,
Services, Inc. Payrolling
Staffing Solutions, Inc. June 1998 Southern, FL 1989 Temporary,
and Itelligent Permanent
Staffing, Inc.
Phoenix Communication June 1998 Woodbridge, NJ 1987 IT
Group, Inc.
Carlyle Group, Ltd. July 1998 Chicago, IL 1982 Search
Staffing Alternatives Nov. 1998 Dallas, TX 1995 IT
International, Inc. and
VSG Consulting, Inc.
The Company's acquisitions and internal business development
since May 1996, have resulted in substantial growth. Total
revenues in 1998 were $291.3 million as compared to $142.8
million in 1997, and $53.4 in 1996.
Item 2. Properties
The Company's corporate headquarters are currently located
at 850 Third Avenue, 11th Floor, New York, NY 10022. The Company
believes that space at its corporate headquarters will be
adequate for its needs.
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The Company leases space for all of its Hub-Centers and does
not own any real property. The Company believes that its
facilities are adequate for its needs and does not anticipate
inordinate difficulty in replacing such facilities or opening
additional facilities, if needed.
Item 3. Legal Proceedings
In the ordinary course of its business, the Company is
periodically threatened with or named as a defendant in various
lawsuits, including discrimination, harassment, and other similar
claims. The Company maintains insurance in such amounts and with
such coverage and deductibles as management believes are
reasonable. The Company is not a party to any material legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders in the
fourth quarter of 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Since September 4, 1998, the Company's Common Stock has
traded on the Nasdaq National Market under the symbol "HDWY."
Previously, quotations for the Company's Common Stock were
reported on the Nasdaq SmallCap Market. The following table sets
forth, (i) the high and low closing sale prices for the Common
Stock as reported on the Nasdaq National Market for the last
calendar quarter of 1998, and (ii) the high and low bid prices
for the Common Stock for all prior periods listed, which are
based on inter-dealer bid prices without markup, markdown,
commissions, or adjustments, and may not represent actual
transactions.
Calendar Quarter Ended High ($) Low ($)
March 31, 1997 4.750 3.625
June 30, 1997 4.625 3.00
September 30, 1997 5.344 3.688
December 31, 1997 5.938 4.125
March 31, 1998 8.875 4.125
June 30, 1998 12.750 7.375
September 30, 1998 11.875 4.313
December 31, 1998 7.000 4.250
In March 1998, the Company completed a new financing
consisting of a $75,000,000 senior credit facility, $20,000,000
of Series F Convertible Preferred Stock and $10,000,000 of senior
subordinated debt. The Company used a portion of the new
financing to pay down existing debt obligations and a portion to
finance the acquisitions completed in 1998. The balance of the
financing will be used for future acquisitions and for general
working capital. NationsBank N.A. acted as agent for the senior
credit facility. NationsBanc Montgomery Securities, LLC, acted as
placement agent for the Series F Convertible Preferred Stock and
senior subordinated notes. The Company incurred total
transaction costs of $1,235,000 in connection with the senior
credit facility and $2,134,000 relating to the subordinated debt
and equity. All of the securities were offered and sold under the
exemption from registration set forth in Section 4(2) of the
Securities Act of 1933.
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<PAGE>
In October 1998, the senior credit facility was increased to
$90,000,000 from $75,000,000 on substantially the same terms as
the original facility.
The Company has authorized and outstanding 1,000 shares of
Series F Convertible Preferred Stock ("Series F Stock"). The
Series F Stock is convertible to Common Stock of the Company on
the basis of the liquidation preference of the Series F Stock at
a conversion price of $5.58 per share, subject to adjustment in
certain circumstances including a provision to the effect that
conversion within the first two years of the date of issuance
will be at a conversion price of $6.00 per share. The Series F
Stock is senior to the Common Stock with respect to payment of
dividends and distributions in liquidation. Holders of the
Series F Stock are entitled to receive dividends payable
quarterly equal to 5.5% of the liquidation preference value of
the Series F Stock, which is $20,000 per share or a total of
$20.0 million. No dividends or distributions may be made with
respect to the Common Stock unless all dividend payments on the
Series F Stock are current. Holders of the Company's Series F
Convertible Preferred Stock have the right to elect one member of
the Board of Directors, elect one-third of the Board of Directors
so long as a default in dividend payments exists and is
continuing, and approve certain corporate transactions and
activities, including, acquisitions in excess of specified
limits, sales of substantial assets or subsidiaries, implementing
additional debt facilities in excess of specified limits, sales
of Company securities in certain circumstances, amending the
Company's charter documents, effecting or permitting a sale of
the Company, issuing stock options and similar incentive
arrangements involving the Company's securities, and other
matters. The existence of these rights could inhibit the ability
of the Company to effect or participate in transactions
acceptable to the Company but not the holders of the Series F
Convertible Preferred Stock, or the ability of stockholders to
participate in a transaction in which they might otherwise
receive a premium for their shares over the then-current market
price.
Since its inception, no dividends have been paid on the
Company's Common Stock. The Company intends to retain any
earnings for use in its business activities, so it is not
expected that any dividends on the Common Stock will be declared
and paid in the foreseeable future.
As of March 8, 1999, the Company had approximately 250
stockholders of record and approximately 2,800 beneficial
shareholders.
This space left blank.
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Item 6. Selected Financial Data
The selected consolidated financial data set forth below as
of and for the years ended December 31, 1998, 1997, 1996, 1995,
and 1994, were derived from audited consolidated financial
statements of the Company.
Statement of Income Data
In Thousands, Except Per Share Data
For Year Ended December 31
1994 1995 1996 1997 1998
Revenues $12,920 $10,996 $53,389 $142,842 $291,303
Direct expenses - - 29,703 104,396 224,993
General and administrative
expenses 10,576 9,364 19,535 29,588 48,638
Depreciation and amortization 116 226 514 1,453 2,952
Total operating expenses 10,692 9,590 20,049 31,041 51,590
Operating income from
continuing operations 2,228 1,406 3,637 7,405 14,720
Other (income) expenses:
Interest expenses 32 65 1,088 2,662 4,515
Interest incom (67) (60) (91) (104) (152)
(Gain) on sale of investment - - - (4,272) (901)
Other expenses, net - - (51) (750) -
(35) 5 946 (2,464) 3,462
Income from continuing operations
before income tax expense 2,263 1,401 2,691 9,869 11,258
Income tax expense 999 696 945 4,064 4,639
Income from continuing operations 1,264 705 1,746 5,805 6,619
(Loss) from discontinued operations (323) (1,800) (564) (2,999) -
Net (loss) income before
extraordinary item 941 (1,085) 1,182 2,806 6,619
Extraordinary (loss) - - - - (1,557)
Net income (loss) 941 (1,085) 1,182 2,806 5,062
Deemed dividend on preferred stock - - (1,470) - -
Preferred dividend requirements (98) (56) (276) (137) (866)
Net income (loss) available for
common stockholders $ 843 $(1,141) $(564) $2,669 $4,196
Basic earnings (loss) per
common share:
Continuing operations $0.27 $0.14 $ - $0.79 $ 0.58
Discontinued operations (0.07) (0.39) (0.11) (0.42) -
Extraordinary item - - - - (0.15)
Net income (loss) $0.20 $(0.25) $(0.11) $0.37 $ 0.43
Diluted earnings (loss)
per common share:
Continuing operations $0.21 $0.10 $ - $0.58 $ 0.47
Discontinued operations (0.05) (0.35) (0.11) (0.30) -
Extraordinary item - - - - (0.11)
Net income (loss) 0.16 (0.25) (0.11) 0.28 $ 0.36
Average shares outstanding
Basic 4,315,277 4,597,358 4,995,523 7,223,462 9,853,354
Diluted 6,030,151 6,771,032 4,995,523 10,012,198 14,157,012
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Balance Sheet Data
In Thousands
As of December 31
1994 1995 1996 1997 1998
Working capital 245 1,494 1,648 450 32,139
Total assets 14,522 12,142 34,669 67,336 126,946
Long term debt,
excluding current portion 750 1,901 7,250 19,059 60,959
Stockholders' equity 4,030 5,302 13,424 16,452 42,571
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Headway Corporate Resources, Inc., is a leading provider of
human resource and staffing services to the financial services
industry. The financial services industry consists primarily of
investment banking firms, banking institutions, insurance
companies, credit card service companies, and other finance
companies, and extends by association to real estate companies,
appraisal firms, law firms, accounting firms, and other service
companies that participate in the financial services industry.
Headway's history of service in the industry, which began in 1984
with executive search services, enables it to understand the
complexity of the products and services offered by the financial
services industry, assist the client in identifying the human
resources required to support those products and services, and
develop industry specific solutions for the human resources needs
of the client. Headway has established its staffing service
business in the financial service industry through 16
acquisitions of staffing and professional services companies
since 1996. The Company's acquisitions and internal business
development over the past two years have resulted in substantial
growth. Total revenues in 1998 were $291.3 million, as compared
to $142.8 million in 1997 and $53.4 million in 1996.
The human resource management services offered by the
Company consist primarily of temporary staffing and value-added
services, IT/professional staff services, executive search and
permanent placement services, and contract staff administration
services. In temporary staffing and value added services, the
Company provides employees to clients for periods ranging from
one day to several months to satisfy a specific job skill need
arising from absenteeism, special projects, fluctuations in the
client's volume of business inherent in the business cycle,
technology and business system changes, and other causes. The
thrust of Headway's marketing approach for its temporary staffing
and value added services is "SmartSizing", which is a human
resource management policy of controlling and minimizing the
fixed cost of employees by expanding and contracting the client's
workforce as needed to meet its specific business needs as they
change. The job skills required by clients and offered by the
Company consist primarily of "office/clerical" personnel,
including, secretaries, office workers, and, administrative
staff. Value added services include payroll services and more
involved arrangements where the Company assumes some or all of
the administrative functions of employment on-site at the
client's business, which is commonly referred to as "vendor-on-
premises". Headway offers IT/professional staff services in
which accountants, computer programmers and technicians, desktop
publishing operators, network administrators, and computer
graphic specialists are placed on a temporary, contract, or
permanent basis. Executive search services focuses on placing
middle to upper level management positions in the financial
services industry and permanent placement involves placement of
office/clerical and IT/professional personnel. Headway offers
contract staff administration services where it assumes the
position of employer for independent contractors used frequently
by clients and manages the scheduling of the independent
contractors to make them available to service clients' needs.
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<PAGE>
The Company's goal is to build a national staffing business
focused on providing these services primarily to the financial
services industry. Headway's strategy for achieving this goal is
to make acquisitions and conduct operations through a
decentralized "Hub-Spoke" management model. The Company will
seek strategic acquisitions in major United States metropolitan
markets, which will serve as Hubs for business operations and
development, and rely on a combination of seeking additional
acquisitions within existing and future Hub locations and
internal growth to expand its business.
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<PAGE>
1998
In 1998 the Company continued to execute its strategy of
becoming a full service provider of human resource management and
staffing services primarily serving the financial services
industry. The Company completed seven acquisitions and expanded
into four new markets during the year. In 1998, the Company
experienced internal growth of 38% while achieving record
revenues, net income and earnings per share. The Company is
expecting to continue to grow both internally and through
additional acquisitions. While there are a number of competitive
companies in the staffing industry, the Company believes that its
strategy of focusing on the financial services industry is unique
as is its ability to provide a broad range of human resource
services.
In March 1998, the Company completed a new financing
consisting of a $75,000,000 senior credit facility, $20,000,000
of convertible preferred stock and $10,000,000 of senior
subordinated debt. A portion of the proceeds were used to pay
down existing debt obligations, finance the Company's
acquisitions in 1998 and for general working capital. In October
1998, the Company expanded its senior credit facility to $90
million. The unused portion of the senior credit facility is
available to finance future acquisitions and for working capital.
In connection with the financing in March 1998, the Company had
an extraordinary loss after tax of $1.6 million related to the
early retirement of its prior debt.
In March 1998, the Company acquired substantially all of the
assets of the Southern Virginia offices of Select Staffing
Services Inc., a provider of temporary services. The offices are
located in Richmond, Virginia Beach and Hampton, Virginia.
In March 1998, the Company acquired substantially all of the
assets of Cheney Associates and Cheney Consulting Group of New
Haven, Connecticut engaged in the business of offering permanent
and temporary information technology staffing services primarily
in Connecticut.
In March 1998, the Company acquired all of the outstanding
capital stock of Shore Resources, Incorporated of Los Angeles,
California. With offices in Newport Beach and Lake Forest, Shore
is engaged in the business of offering temporary and permanent
staffing, primarily in Southern California.
In June 1998, the Company acquired substantially all of the
assets of Staffing Solutions, Inc. and Intelligent Staffing,
Inc., both Florida corporations (collectively "SSI") in a single
transaction. SSI is engaged in the business of providing
clerical temporary and permanent staffing principally in Southern
Florida.
In June 1998, the Company acquired substantially all of the
assets of Phoenix Communication Group, Inc. of N.J. Phoenix is
engaged in the business of offering information technology
temporary and permanent staffing services. The principal offices
of Phoenix are located in Woodbridge, New Jersey.
In July 1998, the Company acquired all of the outstanding
capital stock of Carlyle Group, Ltd. ("Carlyle"). With principal
offices in Chicago, Illinois, Carlyle is an executive search firm
specializing in real estate and management consulting search
assignments.
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<PAGE>
In November 1998, the Company acquired substantially all of
the assets of Staffing Alternatives International, Inc. and VSG
Consulting, Inc. in a single transaction. The two companies
provide information technology staffing services in the Dallas,
Texas area.
During 1998, the Company realized an after tax gain of
$595,000 on the sale of its remaining investment in Incepta.
During 1998, the Company's common stock began trading on the
Nasdaq National Market System under the symbol HDWY.
In March 1999, the Company made a decision to buy-out the
employment agreement of Ronald Wendlinger, vice chairman and
executive vice president of Headway Corporate Staffing Services,
a wholly owned subsidiary. In connection with this termination,
the Company will incur a non-recurring charge of approximately
$1.5 million after tax in the first quarter of 1999. The Company
expects to realize cost savings for the balance of 1999 and in
future years as a result of this transaction.
The services of the Company are targeted to the financial
services industry, and it is expected that this focus will
continue in the current year. Accordingly, the performance of
the Company has been, and will continue to be heavily dependent
of the performance of the financial services industry.
1997
In 1997 the Company completed four acquisitions and expanded
into three new markets during the year. In 1997, the Company
experienced internal growth of 20% while achieving record
revenues, net income, and earnings per share.
In March 1997, the Company acquired substantially all of the
assets of Advanced Staffing Solutions, Inc., ("ASSI") a North
Carolina-based provider of temporary staffing and human resource
management services. The principal offices of ASSI are located
in Durham, North Carolina.
In July 1997, the Company acquired substantially all of the
assets of Administrative Sales Associates, Inc., and
Administrative Sales Associates Temporaries, Inc. (collectively,
"ASA"), both New York corporations engaged in the business of
offering permanent and temporary staffing services to the
financial services industry. The principal offices of ASA are
located in New York City.
In September 1997, the Company acquired substantially all of
the assets of Quality OutSourcing, Inc., a New Jersey corporation
engaged in the business of offering temporary staffing and
outsourcing services, primarily in New Jersey, New York, and
North Carolina.
Also in September 1997, the Company acquired all of the
capital stock of E.D.R. Associates, Inc., and substantially all
the assets of Electronic Data Resources, L.L.C. (collectively
"EDR"). EDR is engaged in the business of offering information
technology staffing and consulting services. The principal
office of EDR is located in Windsor, Connecticut.
Funding for these acquisitions was provided by debt
financing obtained from ING Capital Corporation ("ING"), the
lender for the Company's acquisitions in 1996. In connection
with these acquisitions, ING increased the Company's credit
facility from $15,000,000 to $50,000,000.
In December 1997, the Company completed the sale of Furash &
Company, Inc. ("FCI"), in exchange for 1,500 shares of preferred
stock in a privately held corporation. The Company recorded a
loss on the sale of approximately $2,700,000 net of tax.
Accordingly, FCI's results of operations for 1997
18
<PAGE>
and 1996 are included in discontinued operations. This divestiture
marked the completion of the Company's plan to divest all non-core business
segments, allowing it to focus on its core business of human
resource management and staffing services.
During 1997, the Company realized an after-tax gain of
approximately $2,772,000 on its investment in Incepta.
Results of Operations
Years Ended December 31, 1998 and 1997
Revenue increased $148,461,000 to $291,303,000 for the year
ended December 31, 1998, from $142,842,000 for the year ended
December 31, 1997. The increase in revenue for 1998 is
attributable to a full year of results from the acquisitions
completed during 1997 as well as the seven acquisitions completed
during 1998. In addition, the Company experienced internal
growth in 1998 of 38%, as a result of the continued dependence by
the Company's customers on the use of contingent workers.
The executive search subsidiary, Whitney Partners, L.L.C.
("Whitney") contributed $19,785,000 to consolidated revenues in
1998, an increase of $2,259,000 from $17,526,000 in 1997. This
increase is due to the continued strong performance in the
financial services industry and the related increase in the
hiring activities of Whitney's clients, and the contribution that
Carlyle made since its acquisition in July 1998. During the
fourth quarter however, the financial markets experienced a short-
term crisis. This resulted in lower fourth quarter revenues than
was expected. The downturn turned out to be short-lived as
revenue picked up the end of the quarter and this trend continues
in the first quarter of 1999.
Total operating expenses increased $141,146,000 to
$276,583,000 for 1998 from $135,437,000 for 1997. Of the
increase, $120,597,000 relates to the increase in direct costs
that are the wages, taxes and benefits of work-site employees of
the staffing companies. Direct costs increased as a percentage
of revenues to 77.2% in 1998 from 73.1% in 1997. The increase
primarily reflects the Company's changing mix of business.
Specifically, the executive search business that has no direct
costs is becoming a smaller percentage of the Company's revenues.
The balance of the increase in operating expenses relates to the
acquisitions of the staffing companies in late 1997 and 1998.
General and administrative expenses decreased as a percentage of
revenues from 20.7% in 1997 to 16.7% in 1998. This trend is
expected to continue as the Company grows and gains critical mass
Whitney's operating expenses increased $744,000 to
$15,313,000 for the year ended December 31, 1998 as compared to
$14,569,000 for the same period last year. The increase relates
primarily to the operating expenses of Carlyle.
Net income from continuing operations before extraordinary
item increased $814,000 to $6,619,000 for the year ended December
31, 1998 compared to net income from continuing operations of
$5,805,000 for the year ended December 31, 1997. Included in the
results for 1998 and 1997 is an after tax gain of $595,000 and
$2,772,000 respectively on the sale of the Company's investment
in Incepta. In addition, the 1997 results include a reversal of
a loan reserve of $405,000 after tax. Net income was $5,062,000
for the year ended December 31, 1998 after an extraordinary loss
after tax of $1,557,000 on early retirement of debt. This
compares to net income of $2,806,000 for 1997 which includes
losses after tax from discontinued operations of $2,999,000.
The Company's operations were not significantly impacted by
inflation during the years ended December 31, 1998 and 1997, and
it is not anticipated that inflation will have any significant
impact on the Company's results of operations for at least the
next year.
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Discontinued Operations
In December 1997, the Company sold its wholly-owned
subsidiary Furash & Company, Inc. ("Furash"). The sale of Furash
has been accounted for as a discontinued operation. The
financial statements reflect the discontinuation of the advisory
services segment.
Years Ended December 31, 1997 and 1996
Revenues increased $89,453,000 to $142,842,000 for the year
ended December 31, 1997, from $53,389,000 for the year ended
December 31, 1996. The increase in revenues for 1997 is
attributable to a full year of the IC Group and Vogue
acquisitions, which were completed in May and October 1996,
respectively, as well as the other acquisitions of temporary
staffing companies completed during 1997. All acquisitions were
effected through the Company's subsidiary, Headway Corporate
Staffing Services, Inc. ("Staffing Services"). In addition, the
Company experienced internal growth in 1997 of 20% as a result of
the continued dependence by the Company's customers on the use of
contingent workers. The Company believes that this trend will
continue in 1998.
The executive search subsidiary, Whitney, contributed
$17,526,000 to revenues in 1997, an increase of $1,218,000 from
$16,308,000 in 1996. This increase is due to the continued
strong performance in the financial services industry and the
related increase in the hiring activities of Whitney's clients.
Total operating expenses increased $85,685,000 to
$135,437,000 for the year ended December 31, 1997, from
$49,752,000 for the year ended December 31, 1996. Of the
increase, $74,693,000 relates to the increase in direct costs
which are the wages, taxes, and benefits of worksite employees of
Staffing Services. Furthermore, direct costs as a percentage of
revenues increased in 1997 as compared to 1996 as a result of the
increase in the percentage of the Company's total revenues
attributable to the workforce business of Staffing Services. The
balance of the increase relates to the operating expenses
associated with the acquisitions of the staffing companies in
late 1996 and 1997. General and administrative expenses
decreased as a percentage of revenues to 20.7% in 1997 from 36.6%
in 1996. This percentage is expected to continue to decrease as
the Company grows.
Whitney's operating expenses increased $1,273,000 to
$14,569,000 for the year ended December 31, 1997 as compared to
$13,296,000 for the same period last year. The increase relates
to additional compensation expense directly attributable to the
increase in revenue and start-up costs for Whitney's new Hong
Kong and Singapore offices.
Net income from continuing operations increased $4,059,000
to $5,805,000 for the year ended December 31, 1997, compared to
net income from continuing operations of $1,746,000 for the year
ended December 31, 1996. The increase in 1997 relates to the
acquisitions of the staffing companies in late 1996 and 1997, an
after-tax gain of approximately $2,772,000 on the Company's
investment in Incepta, and a reversal of a loan reserve of
$405,000, net of tax. Net income was $2,806,000 for the year
ended December 31, 1997, compared to net income of $1,182,000 for
the year ended December 31, 1996. Included in net income are
losses after tax from discontinued operations of $2,999,000 in
1997 and $564,000 in 1996.
The Company's operations were not significantly impacted by
inflation during the years ended December 31, 1997 and 1996, and
it is not anticipated that inflation will have any significant
impact on the Company's results of operations for at least the
next year.
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Discontinued Operations
In December 1997, the Company sold its wholly owned
subsidiary FCI. The sale of FCI has been accounted for as a
discontinued operations and the prior years financial statements
have been restated to reflect the discontinuation of the advisory
services segment.
FCI had a loss after tax for the year ended December 31,
1997, of $301,000 compared to a loss after tax of $564,000 for
the same period in 1996. In addition, the Company recorded a
loss on the disposal of the segment of approximately $2,700,000.
Liquidity and Capital Resources
Net cash generated from operating activities was $124,000 in
1998. This is a result primarily due to net income of $5,062,000
and depreciation and amortization expenses of $3,354,000, and an
increase in accrued payroll, offset by an increase in accounts
receivable of $13,426,000 attributable to the high level of
internal growth and from the acquisitions of the staffing
companies. This is a trend that is likely to continue as the
Company continues to grow and acquire additional staffing
companies. In 1997 cash used for operating activities of
$5,808,000 primarily related to the increase of accounts
receivable as a result of acquisitions.
Total cash used in investing activities of $42,693,000 in
1998 and $12,714,000 in 1997 was primarily the result of the
acquisitions completed during 1998 and 1997, offset by the
proceeds of the sale of the Company's investment in Incepta Group
plc and purchases of property and equipment.
Total cash generated from financing activities was
$44,285,000 for 1998, compared to $20,025,000 generated from
financing activities in fiscal 1997. Cash from financing
activities in 1998 was primarily related to the net proceeds from
the financing completed in March 1998. Cash from financing
activities in 1997 was primarily related to the net proceeds from
the ING financing arrangement.
In September 1998, the Company announced that its Board of
Directors had authorized a stock repurchase program of up to 1.0
million shares. Since the announcement, the Company has used a
total of $290,000 to repurchase approximately 57,000 shares. All
purchases were made between October 1, 1998 and December 2, 1998.
The program is still in place, however the Company anticipates
that future purchases under the program will not be material.
In March 1998, the Company completed a financing for
$105,000,000 a portion of which was used to refinance existing
debt, for acquisitions completed during 1998 and for general
working capital. This was subsequently increased to $120
million. At December 31, 1998, the Company had approximately $37
million available under its senior credit facility.
At December 31, 1998 the Company had working capital of
$32,139,000 compared to working capital of $450,000 at December
31, 1997. This increase is primarily the result of the
refinancing completed in March 1998. Estimated cash earnout
payments to be made in 1999 are $10,489,000 of which $1,987,000
are included in current liabilities at December 31, 1998.
Management anticipates that working capital will continue to
improve in 1999 if the Company's performance continues at present
levels. Management estimates that cash flow from operations in
1999 as well as the availability under the existing credit
facility with NationsBank will be sufficient for meeting payment
obligations and working capital needs as they arise.
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Recently Issued Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999.
The Statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Company expects to adopt
the new Statement effective January 1, 2000. The Statement will
require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change
in fair value of the hedged asset, liability, or firm commitment
through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not
anticipate that the adoptions of this Statement will have a
significant effect on its results of operations or financial
position.
Year 2000 Compliance
The Company's internal computer information system is Year
2000 compliant, since its database does not store dates as plain
text. The dates are converted into an internal date format that
does not rely on the year to determine the century. Any new
software purchases will conform to the same type of internal date
storage specifications, which should eliminate any internal Year
2000 issues.
The Company's Year 2000 issues and any potential business
interruptions, costs, damages or losses related thereto are
primarily dependent upon the Year 2000 compliance of third
parties. The Company's suppliers that provide mission-critical
services are primarily large companies, such as local and long
distance telephone service providers, banks, and utility
companies. The Company has no reason to believe that these
suppliers will not be Year 2000 compliant. However, the Company
is in the process of reviewing its third party relationships in
order to assess and address Year 2000 issues with respect to
these third parties.
The costs associated with Year 2000 compliance have been
nominal and the Company believes that the remaining costs will be
minimal and will not have a material adverse effect on its
financial condition or results of operations.
The Company intends to develop a contingency plan to be able
to react to any Year 2000 problems should they arise.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1985
provides a safe harbor for forward-looking statements made by the
Company. All statements, other than statements of historical
fact, which address activities, actions, goals, prospects, or new
developments that the Company expects or anticipates will or may
occur in the future, including such things as expansion and
growth of the Company's operations and other such matters are
forward-looking statements. Any one or a combination of factors
could materially affect the Company's operations and financial
condition. These factors include competitive pressures, the
availability of new acquisitions on terms acceptable to the
Company, changes in the performance of the financial services
industry or the economy, legal and regulatory initiates affecting
temporary employment, and conditions in the capital markets.
Forward-looking statements made by the Company are based on
knowledge of its business and the environment in which it
operates as of the date of this report. Because of the factors
listed above, as well as other factors beyond its control, actual
results may differ from those in the forward-looking statements.
22
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
The Company is exposed to changes in interest rates
primarily from its long-term debt arrangements. Under its
current policies, the Company uses interest rate derivative
instruments to manage exposure to interest rate changes. As of
December 31, 1998, the Company had two interest rate exchange
agreements converting $40,000,000 of variable rate borrowings
under the senior credit agreement to a fixed rate of 5.42% per
annum plus the applicable margin, expiring in 2000. Subsequent
to year-end, the terms of the swap were changed, lowering the
fixed rate to 5.2% per annum plus the applicable margin, and
extending the term of the swap by one-year, at the counterparty's
option.
The Company is exposed to credit loss in the event of
nonperformance by the counterparty, a large financial
institution. However, the Company does not anticipate
nonperformance by the counterparty.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data
of the Company appear at the end of this report beginning with
the Index to Consolidated Financial Statements on page F-1.
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
There were no changes in or disagreements with the Company's
independent auditors during the preceding two calendar years.
PART III
The information required by each of the Items listed below
is incorporated herein by reference to the definitive proxy
statement of the Company for the 1999 annual meeting of
stockholders, which the Company proposes to file with the
Securities and Exchange Commission on or before April 30, 1999:
Information required by "Item 10. Directors and Executive
Officers of the Registrant," is incorporated by reference to the
proposed caption "Directors and Executive Officers" in the proxy
statement;
Information required by "Item 11. Executive Compensation,"
is incorporated by reference to the proposed caption "Executive
Compensation" in the proxy statement;
Information required by "Item 12. Security Ownership of
Certain Beneficial Owners and Management," is incorporated by
reference to the proposed caption "Security Ownership of
Management and Principal Stockholders" in the proxy statement;
and
Information required by "Item 13. Certain Relationships and
Related Transactions," is incorporated by reference to the
proposed caption "Certain Relationships and Related Transactions"
in the proxy statement.
23
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Financial Statements and Financial Statement Schedules
The information required by this subsection of this item is
presented in the index to the financial statements on page F-1.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
last calendar quarter of 1998.
Exhibits
Copies of the following documents are included as exhibits
to this report pursuant to Item 601 of Regulation S-K.
Exhibit SEC Ref. Title of Document Location
No. No.
1 (2) Stock Purchase Agreement dated Jan/Fm8-K
December 24, 1997, pertaining Ex. No. 1
to the sale of Furash & Company Page E-1
Inc. (1)
2 (2) Asset Purchase Agreement dated Apr/Fm8-K
March 23, 1998 for Cheney Ex. No. 1
Associates, L.L.C. (2) Page E-1
3 (2) Asset Purchase Agreement dated Apr/Fm8-K
March 23, 1998, Select Staffing Ex. No. 2
Services, Inc. (2) Page E-31
4 (2) Stock Purchase Agreement dated Apr/Fm8-K
March 23, 1998 for Shore Ex. No. 3
Resources, Incorporated (2) Page E-58
5 (2) Asset Purchase Agreement dated Jun/Fm8-K
June 22, 1998, pertaining to Ex. No. 2
the purchase of assets of Page E-36
Staffing Solution, Inc., and
Intelligent Staffing, Inc (3)
6 (2) Asset Purchase Agreement dated Jun/Fm8-K
June 29, 1998, pertaining to Ex. No. 1
the purchase of assets of Page E-1
Phoenix Communication Group,
Inc. (3)
7 (3)(I) Certificate of Incorporation (4) 1996 Fm10-K
Ex. No. 1
Page E-1
24
<PAGE>
8 (3)(ii) By-Laws (4) 1996 Fm10-K
Ex. No. 2
Page E-5
9 (3)(ii) By-Law Amendments (2) Apr/Fm8-K
Ex. No. 5
Page E-113
10 (4) Certificate of Designation 1996 Fm10-K
of Preferred Stock (4) Ex. No. 3
Page E-16
11 (4) Series F Preferred Stock Apr/Fm8-K
Designation (2) Ex. No. 4
Page E-85
12 (4) Securities Purchase Agreement Apr/Fm8-K
dated March 19, 1998 (2) Ex. No. 6
Page E-116
13 (4) Registration Rights Agreement Apr/Fm8-K
dated March 19, 1998 (2) Ex. No. 7
Page E-164
14 (4) Indenture dated March 19, 1998 Apr/Fm8-K
(2) Ex. No. 8
Page E-183
15 (4) Form of Senior Subordinated Apr/Fm8-K
Note (2) Ex. No. 9
Page E-271
16 (4) Guaranty Agreement dated March Apr/Fm8-K
19, 1998 (2) Ex. No.10
Page E-282
17 (4) Credit Agreement dated March Apr/Fm8-K
19, 1998 including Exhibit A Ex. No. 11
Commitment Percentage, and Page E-291
Exhibit F - Form of
Revolving Note (2)
18 (4) Guaranty Agreement dated March Apr/Fm8-K
19, 1998 (2) Ex. No. 12
Page E-393
19 (4) Security Agreement dated March Apr/Fm8-K
19, 1998 (2) Ex. No. 13
Page E-402
25
<PAGE>
20 (4) Pledge Agreement dated March Apr/Fm8-K
19, 1998 (2) Ex. No. 14
Page E-423
21 (4) LC Account Agreement dated Apr/Fm8-K
March 19, 1998 (2) Ex. No. 15
Page E-435
22 (4) Intellectual Property Security Apr/Fm8-K
Agreement dated March 19, 1998 Ex. No. 16
(2) Page E-445
23 (21) Subsidiaries of the Company This Filing
Page E-1
24 (23) Consent of Ernst & Young LLP This Filing
Page E-2
25 (27) Financial Data Schedule (5) Not
Applicable
(1) This exhibit is included in the Company's current report on
Form 8-K, dated December 31, 1997, and filed with the Commission
on January 15, 1998, and is incorporated herein by this
reference. The reference under the column "Location" is to the
exhibit number and page in the report on Form 8-K.
(2) These exhibit are included in the Company's current report
on Form 8-K, dated March 19, 1998, and filed with the Commission
on April 3, 1998, and is incorporated herein by this reference.
The reference under the column "Location" is to the exhibit
number and page in the report on Form 8-K.
(3) These exhibit is included in the Company's current report on
Form 8-K, dated June 29, 1998, and filed with the Commission on
July 13, 1998, and is incorporated herein by this reference. The
reference under the column "Location" is to the exhibit number
and page in the report on Form 8-K.
(4) These exhibits are included in the Company's annual report
on Form 10-KSB, for the fiscal year ended December 31, 1996, and
filed with the Securities and Exchange Commission on March 27,
1997, and are incorporated herein by this reference. The
reference under the column "Location" is to the exhibit number
and page in the report on Form 10-KSB.
(5) The Financial Data Schedule for the year ended December 31,
1998, is presented only in the electronic filing with the
Securities and Exchange Commission.
26
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
Headway Corporate Resources,
Inc.
Date: March 8, 1999 By: /s/ Barry S.
Roseman, President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: March 8, 1999 /s/ Gary S. Goldstein, Principal
Executive Officer and Director
Dated: March 8, 1999 /s/ Barry S. Roseman Principal
Financial and Accounting Officer and
Director
Dated: March 4, 1999 /s/ G. Chris Andersen, Director
Dated: March 8, 1999 /s/ E. Garrett Bewkes, III, Director
Dated March 8, 1999 /s/ Bruce R. Ellig, Director
Dated: March 8, 1999 /s/ Ehud D. Laska, Director
Dated: March 8, 1999 /s/ Richard B. Salomon, Director
27
<PAGE>
Form 10-K Item 14 (a) (1) and (2)
Headway Corporate Resources, Inc. and Subsidiaries
List of Financial Statements and Financial Statement
Schedules
The following consolidated financial statements of Headway
Corporate Resources, Inc. and Subsidiaries are included in
Item 8:
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 1998, 1997 and 1996 F-9
Notes to Consolidated Financial Statements F-10
The following consolidated financial statement schedule of
Headway Corporate Resources, Inc. and Subsidiaries is
included in Item 14 (a) (2):
Schedule II - Valuation and Qualifying Accounts F-34
All other schedules for which provision is made in the
applicable regulation of the securities and exchange
commission are not required under the related instruction or
are inapplicable and, therefore, have been omitted.
F-1
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders
Headway Corporate Resources, Inc.
We have audited the accompanying consolidated balance sheets
of Headway Corporate Resources, Inc. and Subsidiaries as of
December 31, 1998 and 1997 and the related consolidated
statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31,
1998. Our audits also included the financial statement
schedule listed in the Index at item 14 (a). These financial
statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on
our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the consolidated financial position of Headway Corporate
Resources, Inc. and Subsidiaries at December 31, 1998 and
1997 and the consolidated results of their operations and
their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
New York, New York
February 18, 1999
F-2
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in Thousands)
December 31
1998 1997
Assets
Current assets:
Cash and cash equivalents $4,157 $ 2,472
Accounts receivable, trade, net of allowance
for doubtful accounts of $593 (1998) and $371 (1997) 47,017 27,332
Prepaid expenses and other current assets 954 368
Prepaid income taxes 1,217 -
Due from related party - 638
Total current assets 53,345 30,810
Property and equipment, net 4,566 2,181
Intangibles, net of accumulated amortization
$3,628 (1998) and $1,437 (1997) 66,388 28,079
Deferred financing costs 1,757 2,821
Deferred income taxes - 426
Other assets 890 3,019
Total assets $126,946 $67,336
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,190 $ 2,211
Accrued expenses 2,969 1,776
Accrued payroll 13,492 8,097
Line of credit - 13,404
Capital lease obligations, current portion 416 199
Long-term debt, current portion 150 1,855
Income taxes payable - 618
Other liabilities 1,989 2,200
Total current liabilities 21,206 30,360
Capital lease obligations, less current portion 755 318
Long-term debt, less current portion 60,959 19,059
Deferred rent 1,251 1,147
Deferred income taxes 204 -
Commitments and contingencies
Stockholder's equity:
Preferred stock-$.0001 par value, 5,000,000
shares authorized:
Series B, convertible preferred stock-$.0001 par
value, 6,858 shares authorized, none and 572 shares
issued and outstanding at December 31, 1998 and
1997, respectively - 200
Series D, convertible preferred stock-$.0001 par value,
44 shares authorized, none and 4 shares issued and
outstanding at December 31, 1998 and 1997, respectively - 200
Series F, convertible preferred stock-$.0001, 1,000
shares authorized, 1,000 shares and none issued and
outstanding at December 31, 1998 and 1997, respectively,
(aggregate liquidation value $20,000) 20,000 -
Common stock-$.0001 par value, 20,000,000 shares
authorized, 10,419,220 shares and 10,362,020 shares
issued and outstanding, respectively, at December
31, 1998; 8,907,110 shares issued and outstanding at
December 31, 1997 1 1
Additional paid in capital 15,779 13,247
Treasury stock, at cost (290) -
Note receivable (172) (285)
Retained earnings 7,244 3,048
Other comprehensive income 9 41
Total stockholders' equity 42,571 16,452
Total liabilities and stockholders' equity $126,946 $67,336
See accompanying notes.
F-3
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in Thousands)
Year ended December 31
1998 1997 1996
Revenues $291,303 $142,842 $53,389
Operating expenses:
Direct costs 224,993 104,396 29,703
General and administrative 48,638 29,588 19,535
Depreciation and amortization 2,952 1,453 514
276,583 135,437 49,752
Operating income from continuing
operations 14,720 7,405 3,637
Other (income) expenses:
Interest expense 4,515 2,662 1,088
Interest income (152) (104) (91)
Gain on sale of investment (901) (4,272) -
Other (income) expense, net - (750) (51)
3,462 (2,464) 946
Income from continuing operations
before income tax expense 11,258 9,869 2,691
Income tax expense 4,639 4,064 945
Income from continuing operations 6,619 5,805 1,746
Discontinued operations:
Loss from operations of
discontinued segment (net of
income tax benefit of $95 (1997)
and $245 (1996)) - (301) (564)
Loss on disposal of segment (net
of income tax benefit of $117) - (2,698) -
Loss from discontinued operations - (2,999) (564)
Net income before extraordinary item 6,619 2,806 1,182
Extraordinary loss on early
extinguishment of debt (net income
tax benefit of $1,141) (1,557) - -
Net income 5,062 2,806 1,182
Deemed dividend on preferred stock - - (1,470)
Preferred dividend requirements (866) (137) (276)
Net income (loss) available for
common stockholders $4,196 $2,669 $(564)
Basic earnings (loss) per common
share:
Continuing operations $ .58 $ .79 $ -
Discontinued operations - (.42) (.11)
Extraordinary item (.15) - -
Net income (loss) $ .43 $ .37 $(.11)
Diluted earnings (loss) per common
share:
Continuing operations $ .47 $ .58 $ -
Discontinued operations - (.30) (.11)
Extraordinary item (.11) - -
Net income (loss) $ .36 $ .28 $(.11)
See accompanying notes.
F-4
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands)
Series A Series B Series C
Convertible Convertible Convertible
Preferred Preferred Preferred
Stock Stock Stock
Shares Amount Shares Amount Shares Amount
Balance at December 31, 1995 2,800 $700 6,858 $2,400 - $ -
Issuance of preferred stock - - - - 150 3,000
Notes receivable - - - - - -
Conversion of preferred stock - - - - (145) (2,900)
Change in par value - - - - - -
Retirement of treasury stock - - - - - -
Repayment of notes receivable - - - - - -
Warrants issued in connection
with financing transactions - - - - - -
Fair value of warrants issued - - - - - -
Preferred stock dividends - - - - - -
Translation adjustments - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
Balance at December 31, 1996 2,800 700 6,858 2,400 5 100
Conversion of preferred
stock (2,800) (700) (6,286) (2,200) (5) (100)
Retirement of tresury stock - - - - - -
Repayment of notes receivable - - - - - -
Issuance of stock for
acquistion - - - - - -
Exercise of options and
warrants - - - - - -
Fair value of warrants issued - - - - - -
Preferred stock dividends - - - - - -
Translation adjustments - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
Balance at December 31, 1997 - - 572 200 - -
Issuance of preferred stock - - - - - -
Conversion of preferred stock - - (572) (200) - -
Repayment of notes receivable - - - - - -
Issuance of stock for
acquisitions - - - - - -
Exercise of options and warrants - - - - - -
Preferred stock dividends - - - - - -
Treasury stock - - - - - -
Translation adjustment - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
Balance at December 31, 1998 - $ - - $ - - $ -
See accompanying notes.
F-5
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
(Dollars in Thousands)
Series D Series F
Convertible Convertible Common Stock
Preferred Preferred
Stock Stock
Shares Amount Shares Amount Shares Amount
Balance at December 31, 1995 - $ - - $ - 4,597,358 $46
Issuance of preferred stock 80 4,000 - - - -
Notes receivable - - - - - -
Conversion of preferred stock (43) (2,150) - - 1,818,050 -
Change in par value - - - - - (45)
Retirement of treasury stock - - - - (113,960) -
Repayment of notes receivable - - - - - -
Warrants issued in connection
with financing transaction - - - - - -
Fair value of warrants issued - - - - - -
Preferred stock dividends - - - - - -
Translation adjustments - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
Balance at December 31, 1996 37 1,850 - - 6,301,448 1
Conversion of preferred stock (33) (1,650) - - 2,565,775 -
Retirement of treasury stock - - - - (83,462) -
Repayment of notes receivable - - - - - -
Issuance of stock for acquistion - - - - 121,066 -
Exercise of options and warrants - - - - 2,283 -
Fair value of warrants issued - - - - - -
Preferred stock dividends - - - - - -
Translation adjustments - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
Balance at December 31, 1997 4 200 - - 8,907,110 1
Issuance of preferred stock - - 1,000 20,000 - -
Conversion of preferred stock (4) (200) - - 114,540 -
Repayment of notes receivable - - - - - -
Issuance of stock for
acquisitions - - - - 175,488 -
Exercise of options and warrants - - - - 1,222,082 -
Preferred stock dividends - - - - - -
Treasury stock - - - - - -
Translation adjustment - - - - - -
Net income - - - - - -
Comprehensive income - - - - - -
Balance at December 31, 1998 - $ - 1,000 $20,000 10,419,220 $ 1
See accompanying notes.
F-6
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
(Dollars in Thousands)
Additional
Paid-in Treasury Stock Notes
Capital Shares Amount Receivable
Balance at December 31, 1995 $ 2,592 - $ - $ -
Issuance of preferred stock - - - -
Notes receivable - - - (507)
Conversion of preferred stock 5,178 - - -
Change in par value 45 - - -
Retirement of treasury stock (577) - - -
Repayment of notes receivable - - - 50
Warrants issued in connection
with financing transactions 1,867 - - -
Fair value of warrants issued (734) - - -
Preferred stock dividends - - - -
Translation adjustments - - - -
Net income - - - -
Comprehensive income - - - -
Balance at December 31, 1996 8,371 - - (457)
Conversion of preferred stock 4,799 - - -
Retirement of treasury stock (438) - - -
Repayment of notes receivable - - - 172
Issuance of stock for acquisition 500 - - -
Exercise of options and warrants 5 - - -
Fair value of warrants issued 10 - - -
Preferred stock dividends - - - -
Translation adjustments - - - -
Net income - - - -
Comprehensive income - - - -
Balance at December 31, 1997 13,247 - - (285)
Issuance of preferred stock (1,367) - - -
Conversion of preferred stock 400 - - -
Repayment of notes receivable - - - 113
Issuance of stock for acquisitions 1,233 - - -
Exercise of options and warrants 2,266 - - -
Preferred stock dividends - - - -
Treasury stock - (57,200) (290) -
Translation adjustment - - - -
Net income - - - -
Comprehensive income - - - -
Balance at December 31, 1998 $15,779 (57,200) $(290) $ (172)
See accompanying notes.
F-7
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
(Dollars in Thousands)
Other Total
Retained Comprehensive Stockholders'
Earnings Income Equity
Balance at December 31, 1995 $(527) $90 $ 5,301
Issuance of preferred stock - - 7,000
Notes receivable - - (507)
Conversion of preferred stock - - 128
Change in par value - - -
Retirement of treasury stock - - (577)
Repayment of notes receivable - - 50
Warrants issued in connection
with financing transaction - - 1,867
Fair value of warrants issued - - (734)
Preferred stock dividends (276) - (276)
Translation adjustments - (10) (10)
Net income 1,182 - 1,182
Comprehensive income - - 1,172
Balance at December 31, 1996 379 80 13,424
Conversion of preferred stock - - 149
Retirement of treasury stock - - (438)
Repayment of notes receivable - - 172
Issuance of stock for acquisition - - 500
Exercise of options and warrants - - 5
Fair value of warrants issued - - 10
Preferred stock dividends (137) - (137)
Translation adjustments - (39) (39)
Net income 2,806 - 2,806
Comprehensive income - - 2,767
Balance at December 31, 1997 3,048 41 16,452
Issuance of preferred stock - - 18,633
Conversion of preferred stock - - -
Repayment of notes receivable - - 113
Issuance of stock for acquisitions - - 1,233
Exercise of options and warrants - - 2,266
Preferred stock dividends (866) - (866)
Treasury stock - - (290)
Translation adjustment - (32) (32)
Net income 5,062 - 5,062
Comprehensive income - - 5,030
Balance at December 31, 1998 $7,244 $ 9 $ 42,571
See accompanying notes.
F-8
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in Thousands)
Year ended December 31
1998 1997 1996
Net income $5,062 $2,806 $1,182
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Gain on sale of investment (901) (4,272) -
Loss on disposal of segment - 2,698 -
Depreciation and amortization 3,354 2,253 1,099
Deferred income taxes 379 475 (830)
Loss on early extinguishment of debt 1,557 - -
Changes in assets and liabilities net
of effects of acquisitions:
Accounts receivable (13,426) (14,471) (4,163)
Prepaid expenses and other current assets (548) 54 622
Other assets (148) 264 (329)
Accounts payable and accrued expenses 752 1,211 347
Accrued payroll 4,657 4,222 2,092
Income taxes payable (718) (568) 260
Deferred rent 104 - 39
Changes in working capital related to
discontinued operations - (480) -
Net cash provided by (used in)
operating activities 124 (5,808) 319
Investing activities
Expenditures for property and equipment (1,759) (695) (286)
Repayment from notes receivable 113 172 50
Repayment / advances to employees - - (257)
Repayment / advances to related parties 638 - (167)
Proceeds from sale of investment 3,178 4,363 -
Cash paid for acquisitions (44,863) (16,512) (12,139)
Other assets - (42) (107)
Net cash used in investing activities (42,693) (12,714) (12,906)
Financing activities
Cash pledged - - 85
Net change in revolving credit line (13,404) 9,554 -
Proceeds from long-term debt 60,800 14,352 12,850
Repayment of long-term debt (20,605) (2,641) (5,675)
Payment of capital lease obligations (246) (136) (72)
Payments of loan acquisition fees (2,003) (1,051) (857)
Sale of preferred stock, net 18,633 - 6,267
Proceeds from exercise of options and warrants 2,266 - -
Purchase of treasury stock (290) - -
Cash dividends paid (866) (53) (56)
Net cash provided by financing activities 44,285 20,025 12,542
Effect of exchange rate changes on cash
and cash equivalents (31) (39) (10)
Increase (decrease) in cash and cash
equivalents 1,685 1,464 (55)
Cash and cash equivalents at beginning of year 2,472 1,008 1,063
Cash and cash equivalents at end of year $4,157 $2,472 $1,008
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $3,736 $2,016 $ 736
Income taxes $5,129 $2,870 $1,043
F-9
<PAGE>
Supplemental disclosure of noncash investing and financing
activities
In December 1997, an officer and in December 1996, the
officer and a former employee sold 83,462 and 113,960 shares
of common stock valued at $438,000 and $577,000,
respectively, to the Company which was used to reduce
amounts due to the Company from these individuals.
In 1998, the Company purchased property and equipment under
capital leases amounting to approximately $900,000.
See accompanying notes.
F-10
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Organization
Headway Corporate Resources, Inc. and its wholly owned
subsidiaries provide strategic staffing solutions and
personnel worldwide. Its operations include information
technology staffing, temporary staffing, contract staffing,
permanent placement and executive search. Headquartered in
New York, the Company has offices in California,
Connecticut, Florida, New Jersey, North Carolina, Virginia,
and Texas and executive search offices in New York,
Illinois, the United Kingdom, Japan, Hong Kong and
Singapore.
In December 1997, the Company sold its wholly owned
subsidiary Furash & Company, Inc. ("FCI"), which was engaged
in providing management and consulting advisory services.
The disposal of FCI was accounted for as a discontinued
operation in 1997 and the 1996 financial statements were
restated to reflect the discontinuation of the advisory
services segment.
In 1998, 1997 and 1996, the Company purchased the stock or
certain assets of several temporary staffing companies and
an executive search firm (see Note 6).
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts
of Headway Corporate Resources, Inc. and its subsidiaries
after elimination of all intercompany accounts and
transactions.
Revenue Recognition
Information technology staffing, temporary staffing and
contract staffing revenue is recognized when the personnel
perform the related services, and revenue from permanent
placement services is recognized when the placement is
employed.
F-10
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Executive search services are primarily engaged on a
retainer basis. Income from retainer contracts which provide
for periodic billings over periods of up to one year, is
recognized as earned based on the terms of the contract.
Cash Equivalents
Cash equivalents are comprised of certain highly liquid
investments with a maturity of three months or less when
purchased.
Property and Equipment
Property and equipment are stated at cost. Depreciation is
computed utilizing the straight-line method over the
estimated useful lives of the assets which range from three
to seven years. Leasehold improvements are amortized
utilizing the straight-line method over the lesser of the
useful life of the leasehold or the term of the lease.
Deferred Rent
The Company leases premises under leases which provide for
periodic increases over the lease term. Pursuant to
Statement of Financial Accounting Standards No. 13,
"Accounting for Leases," the Company records rent expense on
a straight-line basis. The effect of these differences is
recorded as deferred rent.
Deferred Taxes
The Company provides for deferred taxes pursuant to
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the
recognition of deferred taxes utilizing the liability
method.
Foreign Currency Translation
Balance sheet accounts of the Company's United Kingdom and
Asian subsidiaries are translated using year-end exchange
rates. Statement of operations accounts are translated at
monthly average exchange rates. The resulting translation
adjustment is recorded as a separate component of
stockholders' equity.
F-11
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Goodwill
Goodwill is amortized utilizing the straight-line method
over a period of 20 to 30 years. The Company periodically
evaluates the carrying value and the periods of amortization
of goodwill based on the current and expected future non-
discounted income from operations of the entities giving
rise to the goodwill to determine whether events and
circumstances warrant revised estimates of carrying value or
useful lives.
Deferred Financing Costs
Deferred financing costs are amortized utilizing the
straight-line method over the term of the related debt.
Concentration of Credit Risk
Financial instruments that potentially subject the Company
to concentration of credit risk include cash and cash
equivalents and accounts receivable arising from its normal
business activities. The Company places its cash and cash
equivalents with high credit quality financial institutions.
The Company believes that its credit risk regarding accounts
receivable is limited due to the large number of entities
comprising the Company's customer base. In addition, the
Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit
risk of its customers, establishes an allowance for
uncollectible accounts, where appropriate and, as a
consequence, believes that its accounts receivable credit
risk exposure is limited.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-12
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules
for the reporting and display of comprehensive income and
its components, however, the adoption of this Statement had
no impact on the Company's net income or stockholders'
equity. Statement 130 requires foreign currency translation
adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other
comprehensive income.
Segment Information
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information".
Statement 131 superseded FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement
131 establishes standards for the way that public business
enterprises report information about operating segments in
annual financial statements and requires that those
enterprises report selected information about operating
segments in interim financial reports. Statement 131 also
establishes standards for related disclosures about products
and services, geographic areas, and major customers. The
adoption of Statement 131 did not affect results of
operations or financial position, but did affect the
disclosure of segment information (see Note 14).
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 accounting provided for
under FASB Statement 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.
F-13
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Property and Equipment
Property and equipment consists of the following:
December 31
1998 1997
Leasehold improvements $1,248,000 $881,000
Furniture and fixtures 1,537,000 1,043,000
Office and computer equipment 3,730,000 1,405,000
6,515,000 3,329,000
Less accumulated depreciation and
amortization 1,949,000 1,148,000
$ 4,566,000 $ 2,181,000
4. Due from Related Parties and Related Party Transactions
In December 1997, the Chairman repaid approximately $290,000
of amounts due from him. The remaining $638,000 due from him
as of December 31, 1997 was repaid on March 3, 1998.
Accordingly, in 1997, a $750,000 reserve against such
receivable previously established in 1992 was reversed, and
is included in other income.
During 1996, certain other borrowings and accrued interest,
aggregating $197,000, were repaid in their entirety by the
Chairman.
In 1998 and 1996, financial advisory services were provided
to the Company by entities in which a director of the
Company was a principal. Amounts paid for such services
amounted to $147,000 in 1998 and was related to an
acquisition made by the Company. In 1996, the Company paid
$582,500 and issued warrants to purchase 240,000 shares of
common stock at $4.25 per share to this entity for such
services. The warrants were valued at $270,000. Financial
advisory services provided in 1996 related to the Company's
debt and equity financings and, accordingly, these expenses
were allocated between share issuance expenses ($160,000)
and deferred financing expense ($110,000).
During the years ended December 31, 1998, 1997 and 1996, the
Company incurred fees of approximately $615,000, $282,000
and $246,000, respectively, for legal services to an entity,
whose partner is a member of the Board of Directors.
F-14
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt and Credit Facilities
Under the terms of a credit agreement entered into with ING
U.S. Capital Corporation ("ICC") in May 1996, the Company
obtained a revolving line of credit of $6,000,000 and a term
loan of $9,000,000. In connection with this financing
agreement, the Company granted to ICC a Series E warrant to
purchase 575,000 shares of Series E Convertible Preferred
Stock of the Company at $.02 per share exercisable at any
time through May 31, 2004. The Series E warrant was valued
by an independent appraiser at $1,757,000 and was amortized
over the period of the term loan. The Series E warrants
issued in connection with the ICC credit facility were
exercised for 575,000 shares of common stock in April 1998.
In 1997, amendments were made to the credit agreement
resulting in three term loans with principal balances of
$7,675,000, $7,360,000 and $5,425,000 as of December 31,
1997. These term loans were payable in varying quarterly
installments, bearing interest at varying rates which ranged
from 9.16% to 9.40% per annum at December 31, 1997. Under
the amended agreement, the Company's revolving line of
credit, due on demand, was increased to $17,000,000 bearing
interest at varying rates based on LIBOR. The Company
retired the balance outstanding under its credit facility
with ICC from the proceeds of the new financing (see below)
and incurred an extraordinary loss on the early retirement
of this credit facility of $1,557,000.
In March 1998, the Company completed a financing totaling
$105,000,000 consisting of a $75,000,000 senior credit
facility, $10,000,000 of senior subordinated notes, and
$20,000,000 of Series F Convertible Preferred Stock (see
Note 7).
In October 1998, the lender increased the amounts available
under its senior credit facility to $90,000,000 from
$75,000,000. The amount that can be borrowed under the
senior credit facility is reduced to $85,000,000 in March
2001 and to $75,000,000 in March 2002. This credit facility
expires within five years and bears interest at varying
rates based on LIBOR ranging from 7.08% to 7.69% per annum
at December 31, 1998. The Company incurred expenses in
connection with the issuance of the senior credit facility
of $1,235,000 which have been deferred and are being
amortized over the five year term of the senior credit
facility. As of December 31, 1998, $50,800,000 was
outstanding under the senior credit facility. The carrying
amount of the borrowings under the senior credit facility
approximates fair value. Substantially all assets of the
Company have been pledged as collateral for the senior
credit facility. In addition, the Company is required to
meet certain financial ratios, as defined.
F-15
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt and Credit Facilities (continued)
The senior subordinated notes are payable in March 2006 and
bear interest at 12% per annum until March 2001, increasing
to 14% per annum thereafter. The Company incurred expenses
in connection with the issuance of the senior subordinated
notes of $767,000 which have been deferred and are being
amortized over the eight year term of the senior
subordinated notes. The carrying amount of the senior
subordinated notes was approximately $10,273,000 at December
31, 1998 and was estimated using discounted cash flows based
on the Company's incremental borrowing rate for similar
types of borrowing arrangements.
In connection with an acquisition made in July 1997 (see
Note 6), the Company entered into a $451,000 note payable to
the seller. This note is payable in six equal semi-annual
installments commencing in January 1998 and bears interest
at 6% per annum. At December 31, 1998, approximately
$309,000 of the note payable is outstanding.
Annual maturities of long-term debt as of December 31, 1998
are as follows:
Years ending December 31:
1999 $150,000
2000 159,000
2001 -
2002 -
2003 50,800,000
Thereafter 10,000,000
$61,109,000
As of December 31, 1998, the Company had two interest rate
exchange agreements converting $40,000,000 (notional amount)
of variable rate borrowings under the senior credit
agreement to a fixed rate of 5.42% per annum plus the
applicable margin. The notional amount does not represent
amounts exchanged by the parties and is not a measure of the
exposure of Company through its use of derivatives. The term
of the exchange agreements expire in 2000. Subsequent to
December 31, 1998, the terms of the interest rate exchange
agreements were revised to reduce the fixed interest rate to
5.2% per annum plus the applicable margin, and to provide an
option to the counterparty to extend the term of the
exchange agreements to 2001. The fair value of the interest
rate exchange agreements based on a notional amount of
$40,000,000 and other terms of the agreements, was
calculated based on the buyback value of such exchange
agreements and, amounted to approximately $(355,000) at
December 31,
F-16
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt and Credit Facilities (continued)
1998. The Company is exposed to credit loss in the event of
nonperformance by the counterparty, a large financial
institution. However, the Company does not anticipate
nonperformance by the counterparty.
6. Acquisitions
In May 1996, the Company acquired all of the capital stock
and certain assets of four related New York staffing
companies and, in October 1996, the Company acquired certain
assets of another staffing company. The purchase price for
these acquisitions which amounted to approximately
$12,203,000 exceeded the fair value of the net assets
acquired resulting in goodwill of approximately $8,833,000.
In March and July 1997, the Company acquired certain assets
of a North Carolina corporation and two New York
corporations, respectively. In September 1997, the Company
acquired (i) substantially all of the assets of a New Jersey
corporation and (ii) all of the outstanding stock and
substantially all of the assets of a Connecticut corporation
and related limited liability company, respectively. In
addition, to the purchase price paid at closing, the sellers
are entitled to earnouts based on future earnings. The
purchase price for these acquisitions which amounted to
approximately $25,198,000, including earnouts recorded in
1998 of $5,640,000, exceeded the fair value of the net
assets acquired resulting in goodwill of approximately
24,092,000. In addition, in 1997 and 1998, the Company
issued 121,066 and 80,710 shares of the Company's common
stock, valued at $500,000 and $333,000, respectively, as
consideration for a portion of the purchase price.
In March 1998, the Company acquired substantially all of the
assets of two related Connecticut entities, three Southern
Virginia Offices of a Virginia corporation, and the stock of
a California corporation in three separate transactions; in
June 1998, the Company acquired substantially all of the
assets of two Florida corporations and a New Jersey
corporation in two separate transactions; in July 1998, the
Company acquired all of the outstanding stock of an Illinois
corporation; and in November 1998, the Company acquired
substantially all of the assets of two Texas corporations.
In addition, to the purchase price paid at closing, the
sellers are entitled to earnouts based on future earnings.
The purchase price for these acquisitions which amounted to
approximately $40,385,000, including earnouts recorded in
1998 of
F-17
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Acquisitions
$640,000, exceeded the fair value of the net assets acquired
resulting in goodwill of approximately $35,061,000. A
portion of the purchase price for two acquisitions consisted
of 94,778 shares of the Company's common stock valued at
$900,000.
The aforementioned acquisitions have been accounted for as
purchases and have been included in the Company's operations
from the dates of the respective purchases. Any additional
purchase price based on future earnings related to the
aforementioned acquisitions will be recorded as additional
goodwill upon the determination that the earnouts have been
met. The amortization of goodwill for the years ended
December 31, 1998, 1997 and 1996 was approximately
$2,191,000, $854,000 and $582,000, respectively.
The pro forma unaudited consolidated results of operations
assuming consummation of the aforementioned transactions as
of the beginning of the respective periods, are as follows:
Year ended December 31
1998 1997
(Unaudited)
Total revenue $320,150,000 $220,769,000
Net income before
extraordinary item 7,297,000 4,592,000
Net income 5,740,000 4,592,000
Net income available for
common stockholders $ 4,639,000 $ 3,355,000
Earnings per share:
Basic $ .47 $ .45
Diluted $ .38 $ .33
F-18
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity
In 1997, 2,800 shares of Series A 8% cumulative convertible
preferred stock that were outstanding as of December 31,
1996 were converted into 1,332,412 shares of common stock.
In 1995, 6,858 shares of Series B convertible preferred
stock were issued for all of the capital stock of FCI. The
Series B preferred stock was convertible into a minimum of
628,600 shares and a maximum of 685,744 shares of common
stock and participated fully with the common stock in all
dividends. The holders of 572 and 6,286 shares of Series B
Preferred Stock converted their shares into 55,885 and
628,600 shares of common stock in 1998 and 1997,
respectively.
In April 1996, the Company issued 150 shares of Series C 8%
convertible preferred stock for $3,000,000. Warrants to
purchase 240,000 shares of common stock at $4.25 per share
were issued to related parties for services rendered in
connection with this transaction. The Series C preferred
stock was convertible into common stock of the Company at
the lesser of $4.558125 or 80% of the market price of
Company's common stock. In 1997 and 1996, the holders of
5 and 145 shares of Series C preferred stock, respectively,
converted their shares into common stock.
In June 1996, the Company completed a private placement of
80 shares of Series D 8% convertible preferred stock for
$4,000,000. The Series D preferred stock was convertible to
common stock of the Company at the lesser of $5.21065 or 80%
of the market price of the Company's common stock. In
addition, on conversion, the holders of Series D convertible
preferred stock were entitled to receive a warrant to
purchase one share of common stock at an exercise price of
$4.25 per share, for every four shares of common stock
issued upon conversion. The guaranteed discount on
conversion ($1,000,000) and the valuation of warrants to be
issued upon conversion, which amounted to $470,000 (based on
an independent appraisal), was deemed to be a dividend for
purposes of calculating net income available to common
stockholders. Accordingly, a deemed dividend of $1,470,000
was recorded and shown as a reduction to earnings available
to common stockholders for the year ended December 31, 1996.
In 1998, 1997 and 1996, the holders of 4, 33 and 43 shares
of Series D preferred stock, respectively, converted their
shares into common stock. In addition, warrants to purchase
12,937, 130,743 and 184,470 shares of common stock,
respectively, at $4.25 per share were issued upon
conversion.
F-19
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
In March 1998, the Company authorized and issued 1,000
shares of Series F Convertible Preferred Stock for
$20,000,000. The Series F Convertible Preferred Stock
accrues dividends at the rate of 5.5% per annum and is
convertible into common stock at an initial conversion price
of $5.58 per share (the market value of the Company's common
stock at closing). The initial conversion price may be
adjusted up to $6 per share if the market value of the
Company's common stock exceeds $8.50 per share. Expenses in
connection with the issuance of the preferred stock amounted
to $1,367,000 and were accounted for as share issuance
expenses.
In December 1997 the Chairman and, in December 1996, the
Chairman and a former employee of the Company, sold 83,462
and 113,960 shares of common stock, respectively, at the
current market price of $438,000 and $577,000, respectively,
to the Company. Such amount was used to reduce amounts due
to the Company from these individuals. The shares purchased
by the Company were retired.
In May 1996, the Company loaned a total of $507,000 to ten
employees of the Company at 8% interest per annum payable
quarterly over a term of five years. The funds were used by
the employees to purchase a total of 2,170 shares of the
Company's Series A Convertible Preferred Stock from the then
current Series A Convertible Preferred Stock stockholder.
The loans outstanding are collateralized by common stock and
assets with a value in excess of the principal amount of
each loan.
In April 1996, the Company issued warrants to purchase
200,000 shares of common stock at $3.50 per share as
consideration for services rendered in connection with
equity financing obtained by Company and investor relations
services.
In November 1997, warrants to purchase 50,000 shares of
common stock at $5.25 per share were issued for financial
advisory services to be performed over a two year period.
The warrants were valued at approximately $52,000 and such
value is being amortized over the two year period.
In September 1998, the Company authorized a stock repurchase
program of up to 1.0 million shares of the Company's common
stock. In 1998, the Company repurchased 57,200 shares of
the Company's common stock for approximately $290,000.
F-20
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
At December 31, 1998, approximately 7,880,000 shares of
common stock have been reserved for future issuance as
follows:
Convertible Preferred Stock 3,584,000
Warrants issued upon conversion of
Series D Preferred Stock 102,000
Other Warrants 550,000
Stock Incentive Plan (see Note 10) 3,644,000
7,880,000
At December 31, 1998, all warrants issued by the Company are
fully vested and have exercise prices ranging from $3.50 to
$5.25. During 1998, 1,097,970 warrants, including 575,000
Series E warrants were exercised.
F-21
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share pursuant to FASB Statement No.
128, "Earnings per Share", for the years ended December 31,
1998, 1997, and 1996:
1998 1997 1996
Numerator:
Income from continuing operations $6,619,000 $5,805,000 $1,746,000
Discontinued operations - (2,999,000) (564,000)
Extraordinary loss (1,557,000) - -
Deemed dividend on preferred stock - - (1,470,000)
Preferred stock dividend requirements (866,000) (137,000) (276,000)
Numerator for basic earnings per share-
net income (loss) available for
common stockholders 4,196,000 2,669,000 (564,000)
Effective of dilutive securities:
Preferred dividend requirements 866,000 137,000 -
Numerator for diluted earnings per share-
net income (loss) available for common
stockholders after assumed conversions $5,062,000 $2,806,000 $(564,000)
Denominator:
Denominator for basic earnings per
share-weighted average shares 9,853,354 7,223,462 4,995,523
Effect of dilutive securities:
Stock options and warrants 1,615,486 1,120,324 -
Convertible preferred stock 2,688,172 1,758,412 -
Dilutive potential common stock 4,303,658 2,878,736 4,995,523
Denominator for diluted earnings per
share-adjusted weighted-average
shares and assumed conversions 14,157,012 10,102,198 4,995,523
Basic earnings (loss) per share $ .43 $ .37 $ (.11)
Diluted earnings (loss) per share $ .36 $ .28 $ (.11)
F-22
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
Income tax expense from continuing operations consists of
the following:
December 31
1998 1997 1996
Current:
Domestic $4,241,000 $3,545,000 $1,737,000
Foreign 19,000 44,000 38,000
4,260,000 3,589,000 1,775,000
Deferred expense (benefit):
Domestic 379,000 475,000 (830,000)
Total deferred expense
(benefit) 379,000 475,000 (830,000)
$4,639,000 $4,064,000 $ 945,000
The components of deferred tax assets and liabilities are as follows:
December 31,
1998 1997
Deferred tax assets:
Deferred rent $515,000 $528,000
Allowances for doubtful accounts 243,000 150,000
758,000 678,000
Deferred tax liabilities:
Depreciation (113,000) (29,000)
Intangibles (468,000) (51,000)
Cash to accrual adjustments (336,000) (172,000)
Other (45,000) -
(962,000) (252,000)
$(204,000) $426,000
The Company recorded a change in the valuation allowance of
$69,000 for the year ended December 31, 1996.
F-23
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
A reconciliation of the statutory Federal income tax rate to
the effective rates is as follows:
December 31
1998 1997 1996
Statutory rate 34% 34% 34%
State and local income taxes
(net of federal tax benefit) 7 6 22
Deferred tax benefit - - (21)
Other - 1 -
Effective tax rate 41% 41% 35%
10. Stock Incentive Plan
Pursuant to the Company's Stock Incentive Plan (the "Plan"),
up to 3,771,567 options to purchase common stock were
reserved for grant. The Plan provides for the granting of
stock options, stock appreciation rights and stock awards.
Stock options intended to be incentive stock options will be
granted at prices equal to at least market price on the date
of the grant. A summary of the activity in the Plan is as
follows:
Number Weighted Average
of Shares Exercise Price
Outstanding at December 31, 1995 593,000 $2.86
Granted 719,950 3.28
Canceled (92,503) 2.85
Outstanding at December 31, 1996 1,220,947 $3.12
Granted 641,962 4.13
Canceled (131,964) 2.91
Exercised (1,033) 2.55
Outstanding at December 31, 1997 1,729,912 3.52
Granted 403,000 6.53
Canceled (40,671) 2.79
Exercised (124,112) 3.10
Outstanding at December 31, 1998 1,968,129 4.16
Exercisable at December 31, 1996 374,225 2.74
Exercisable at December 31, 1997 758,443 3.52
Exercisable at December 31, 1998 1,061,680 3.57
F-24
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Stock Incentive Plan (continued)
Options generally vest equally over 3 years. Options
outstanding as of December 31, 1998 have exercise prices
ranging from $2.50 to $9.88 per share.
11. Stock-Based Compensation
Pro forma information regarding net income and earnings per
share is required by SFAS 123, and has been determined as if
the Company had accounted for its employee stock options
under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following
weighted-average assumptions for 1998, 1997 and 1996:
1998 1997 1996
Assumptions
Risk-free rate 5.30% 5.65% 6.6%
Dividend yield 0% 0% 0%
Volatility factor of
the expected market
price of the Company's .76 .62 .50
common stock
Average life 5 years 3 years 3 years
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of
highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock
options have characteristics significantly different from
those of traded options, and because changes in the
subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
F-25
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Stock-Based Compensation (continued)
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the
vesting period of the options. The Company's pro forma
information is as follows:
Year ended December 31
1998 1997 1996
Pro forma net income
(loss) available for
common stockholders $3,694,000 $2,112,000 $(897,000)
Pro forma earnings
(loss) per share:
Basic $ .37 $ .29 $ (.18)
Diluted $ .32 $ .21 $ (.18)
The weighted average fair value of options granted during
the years ended December 31, 1998, 1997 and 1996 was $4.26,
$1.84 and $1.32, respectively. The weighted average
remaining contractual life of options exercisable at
December 31, 1998 is 7.2 years.
12. Commitments and Contingencies
The Company leases office space under operating leases which
expire through 2012. The leases provide for additional rent
based on increases in operating costs and real estate taxes.
The Company also leases equipment under capital leases
expiring at various times through 2003.
Future minimum lease payments at December 31, 1998, under
capital leases and noncancelable operating leases (shown net
of $538,000 of sublease income per annum through 2000) with
remaining terms of one year or more are as follows:
F-26
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Commitments and Contingencies (continued)
Capital Operating
Leases Leases
1999 $ 491,000 $2,178,000
2000 422,000 2,186,000
2001 266,000 2,279,000
2002 102,000 2,044,000
2003 52,000 1,702,000
Thereafter - 7,829,000
Total minimum lease payments 1,333,000 $18,218,000
Less amounts representing interest 162,000
Present value of net minimum
lease payments 1,171,000
Less current portion 416,000
Long-term portion $ 755,000
Included in property and equipment at December 31, 1998 and
1997 are assets recorded under capital leases with a cost of
$1,656,000 and $756,000, respectively, and accumulated
depreciation and amortization of $332,000 and $140,000,
respectively. Amortization of assets recorded under capital
leases is included with depreciation expense.
Rent expense, including escalation charges, for the years
ended December 31, 1998, 1997 and 1996 was $1,912,000 (net
of sublease income of $538,000), $1,661,000 (net of sublease
income of $538,000) and $1,524,000 (net of sublease income
of $628,000), respectively.
The Company is party to litigation arising out of the normal
course of its business. In the opinion of management, all
matters are adequately covered by insurance or, if not
covered, are without merit or are of such kind or involve
such amounts, as would not have a material adverse effect on
the financial position, results of operation or cash flows
of the Company if disposed of unfavorably.
F-27
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Retirement Plan
The Company has a 401(k) plan covering substantially all its
domestic employees. The plan does not require a matching
contribution by the Company.
14. Segment Information
Major Customers
For the year ended December 31, 1998, one customer accounted
for 14% of revenues from continuing operations. For the
year ended December 31, 1997, another customer accounted for
10% of revenues from continuing operations. For the year
ended December 31, 1996, another customer accounted for 11%
of revenues from continuing operations.
Geographic Information
For the years ended December 31, 1998, 1997 and 1996, the
Company derived substantially all of its revenues from
businesses located in the United States, and no other
country accounted for more than 10% of the Company's
revenues.
Business Segments
The Company classifies its business into two fundamental
areas, staffing and executive search. Staffing consists of
the placement and payrolling of temporary and permanent
office, clerical and information technology professional
personnel. Executive search focuses on placing middle to
upper level management positions.
The Company evaluates performance based on the segments'
profit from operations before unallocated corporate
overhead. The accounting policies of the reportable segments
are the same as those described in the summary of
significant accounting policies (see Note 2).
F-28
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Segment Information (continued)
Business Segments (continued)
Executive
Staffing Search
Year ended December 31, 1998 Services Services Total
Revenues $271,518,000 $19,785,000 $291,303,000
Depreciation and
amortization 2,694,000 258,000 2,952,000
Interest expense 4,107,000 6,000 4,113,000
Interest income (26,000) (43,000) (69,000)
Segment income from
continuing operations before
before income tax expense 8,654,000 4,509,000 13,163,000
Income tax expense 3,609,000 1,880,000 5,489,000
Segment income from
continuing operations and
before extraordinary item 5,045,000 2,629,000 7,674,000
Extraordinary loss (1,557,000) - (1,557,000)
Segment profit 3,488,000 2,629,000 6,117,000
Segment assets 106,636,000 19,602,000 126,238,000
Expenditures for long
lived assets 1,493,000 266,000 1,759,000
Executive
Staffing Search
Year ended December 31, 1997 Services Services Total
Revenues $125,316,000 $17,526,000 $ 142,842,000
Depreciation and
amortization 1,225,000 228,000 1,453,000
Interest expense 2,004,000 12,000 2,016,000
Interest income - (20,000) (20,000)
Segment income from
continuing operations
before income tax expense 2,858,000 3,754,000 6,612,000
Income tax expense 1,334,000 1,752,000 3,086,000
Segment profit 1,524,000 2,002,000 3,526,000
Segment assets 48,332,000 15,416,000 63,748,000
Expenditures for long
lived assets 541,000 154,000 695,000
F-29
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Segment Information (continued)
Business Segments (continued)
Executive
Staffing Search
Year ended December 31, 1996 Services Services Total
Revenues $37,082,000 $16,307,000 $ 53,389,000
Depreciation and amortization 344,000 170,000 514,000
Interest expense 669,000 189,000 858,000
Interest income - (13,000) (13,000)
Segment income from continuing
operations before income tax
expense 447,000 2,822,000 3,269,000
Income tax expense 264,000 986,000 1,250,000
Segment profit 183,000 1,836,000 2,019,000
Segment assets 17,632,000 10,629,000 28,261,000
Expenditures for long
lived assets 58,000 109,000 167,000
Year ended December 31
Reconciliation to net income 1998 1997 1996
Total profit for reportable segments $ 6,117,000 $3,526,000 $2,019,000
Unallocated amounts:
Gain on sale of investment 901,000 4,272,000 -
Interest expense (402,000) (646,000) (230,000)
Interest income 83,000 84,000 78,000
Corporate overhead (2,487,000) (453,000) (426,000)
Loss from operations of
discontinued segment - (2,999,000) (564,000)
Income tax (expense) benefit 850,000 (978,000) 305,000
Net income $5,062,000 $2,806,000 $1,182,000
F-30
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Segment Information (continued)
Business Segments (continued)
December 31
Reconciliation to total assets 1998 1997 1996
Total assets for reportable
segments $126,238,000 $63,748,000 $28,261,000
Other assets 708,000 3,588,000 6,408,000
Total assets $126,946,000 $67,336,000 $34,669,000
15. Discontinued Operations
In December 1997, the Company sold its wholly owned
subsidiary FCI to InterBank/Furash, Inc. ("IBF") in exchange
for 1,500 shares of Series A Preferred Stock of IBF. In
addition, the Company provided a short-term working capital
advance to FCI of $250,000 which was repaid within a week
following the sale. In consideration for providing the short-
term loan, the Company received a warrant to purchase
approximately 18% of the outstanding common stock of FCI at
an exercise price of $.10 per share. FCI has had recurring
losses and, accordingly, no value was assigned to the Series
A Preferred Stock or warrant. The sale of FCI was accounted
for as a discontinued operation and the 1996 statement of
operations were restated to reflect the discontinuation of
FCI. The loss on the disposal of the segment represents the
write-off of (i) unamortized goodwill related to the
purchase of FCI in 1995 amounting to approximately
$1,500,000 and (ii) advances to FCI of $1,200,000.
F-31
<PAGE>
Headway Corporate Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Gain on Sale of Investment
In December 1995, the Company adopted a formal plan to
discontinue its marketing communications segment and entered
into an agreement to exchange substantially all of the
operating assets of the segment to Citigate Communications
Group Limited ("Citigate") for an 18.3% interest in Citigate
valued at $2,368,000 and the assumption by Citigate of
$9,191,000 in liabilities. In March 1997, Citigate was
acquired by Incepta Group, plc. ("Incepta"), a United
Kingdom public company. The Company received 13,805,406
shares of Incepta in exchange for its investment in
Citigate. The Company sold these shares in March and October
1997 for $4,363,000 and recognized a gain of approximately
$1,719,000. The Company was also entitled to an additional
7,072,307 shares of Incepta if Incepta met certain earnings
targets for the year ended September 30, 1997. In October
1997, the Company was advised that such targets had been met
and, accordingly, an additional gain of approximately
$2,553,000 was recognized in 1997. The shares receivable
were included in other assets as of
December 31, 1997. In May 1998, the Company sold its
remaining investment in Incepta and recognized a gain of
approximately $901,000.
F-32
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Headway Corporate Resources, Inc. and Subsidiaries
December 31, 1998
COL. A COL. B COL. C COL. D COL. E
Additions
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expense Accounts Deductions Period
Year Ended December
31, 1998:
Deducted from asset
account
Allowance for
doubtful accounts $371,000 427,000 - 205,000 $593,000
Year Ended December
31, 1997:
Deducted from asset
account
Allowance for
doubtful accounts $122,000 249,000 - - $371,000
Year Ended December
31, 1996:
Deducted from asset
account
Allowance for
doubtful accounts $ - 122,000 - - $122,000
F-33
<PAGE>
Exhibit No. 23
Headway Corporate Resources, Inc.
Form 10-K
File No. 0-23170
SUBSIDIARIES OF THE COMPANY
Name State or
Jurisdiction
(1) Headway Corporate Staffing Services, Inc. ("HCSS") Delaware
(2) HCSS East, Inc. ("East") Delaware
(3) HCSS West, Inc. ("West") Delaware
(4) HCSS Holdings, Inc. Delaware
(5) Headway Corporate Staffing Service of New York, Inc. New York
(a subsidiary of HCSS)
(6) Corporate Staff Administration, Inc. (a subsidiary of HCSS) New York
(7) Certified Technical Staffing, Inc. (a subsidiary of HCSS) New York
(8) Headway Corporate Staffing Services of North Carolina, Inc. Delaware
(a subsidiary of HCSS)
(9) Headway Corporate Staffing Services of Connecticut, Inc. Delaware
(a subsidiary of HCSS)
(10) ASA Personnel Services, L.L.C. (a subsidiary of HCSS) Delaware
(11) Cheney Associates, L.L.C. (a subsidiary of East) Delaware
(12) Headway Corporate Staffing Services of Florida, L.L.C. Delaware
(a subsidiary of East)
(13) Headway Corporate Staffing Services of New Jersey, L.L.C. Delaware
(a subsidiary of East)
(14) Headway Technology Resources of Texas, L.L.C. Delaware
(a subsidiary of East)
(15) Headway Corporate Staffing Services of California One, Delaware
L.L.C. (a subsidiary of West)
(16) Headway Corporate Staffing Services of California Two, Delaware
L.L.C. (a subsidiary of West)
(17) Carlyle Group, Ltd. Illinois
(18) Whitney Partners, L.L.C. ("Whitney") Delaware
(19) The Whitney Group (Europe) Limited (a subsidiary of United Kingdom
Whitney)
(20) Whitney Asia PTE Ltd. (a subsidiary of Whitney) Singapore
(21) The Whitney Group (Asia) Limited Hong Kong
Exhibit No. 24
Headway Corporate Resources, Inc.
Form 10-K
File No. 0-23170
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 333-08615) of Headway Corporate
Resources, Inc. and in the related Prospectus of our report dated
February 18, 1999, with respect to the consolidated financial
statements and schedule of Headway Corporate Resources, Inc.
included in this Annual Report (Form 10-K) for the year ended
December 31, 1998.
ERNST & YOUNG LLP
New York, New York
March 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HEADWAY CORPORATE RESOURCES, INC., FOR THE
YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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