10-Q 1 tenq0902.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-16025 HEADWAY CORPORATE RESOURCES, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2134871 (State of other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 317 Madison Avenue, New York, New York 10017 -------------------------------------------- (Address of principal executive offices) (212) 672-6501 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by the court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,914,627 shares of common stock. FORM 10-Q HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES INDEX Page PART I. Financial Information 3 Item 1. Financial Statements 3 Consolidated Balance Sheets September 30, 2002 (Unaudited) and December 31, 2001 3 Unaudited Consolidated Statements of Operations Three and Nine Months Ended September 30, 2002 and 2001 4 Unaudited Consolidated Statement of Stockholders' Equity/(Deficit) Nine Months Ended September 30, 2002 5 Unaudited Consolidated Statements of Cash Flows Nine Months Ended September 30, 2002 and 2001 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 18 PART II. Other Information 19 Item 1. Legal Proceedings 19 Item 3. Defaults upon Senior Securities 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 FORWARD-LOOKING STATEMENT NOTICE When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements within the meaning of Section 27a of the Securities Act of 1933 and Section 21e of the Securities Exchange Act of 1934 regarding events, conditions, and financial trends that may affect the Company's future plans of operations, business strategy, operating results, and financial position. Persons reviewing this report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are discussed under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," and also include general economic factors and conditions that may directly or indirectly impact the Company's financial condition or results of operations. 2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Headway Corporate Resources, Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands, except share data)

See accompanying notes. 3 Headway Corporate Resources, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) (Dollars in Thousands, except per share data)

See accompanying notes. 4 Headway Corporate Resources, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity (Deficit) Nine Months Ended September 30, 2002 (Unaudited) (Dollars in thousands, except share data)

See accompanying notes. 5 Headway Corporate Resources, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity (Deficit), Continued Nine Months Ended September 30, 2002 (Unaudited) (Dollars in thousands, except share data) ------------------------------------------------------------------------- Retained Accumulated Earnings Other Total (Accumulated Comprehensive Stockholders' Deficit) (Loss) Equity(Deficit) ------------------------------------------------------------------------- Balance at December 31, 2001 $ 9,220 $ (607) $ 26,429 Amortization of stock-based compensation - - 87 Preferred stock dividends (1,592) - (1,592) Exercise of warrants - - 474 Repricing of warrants (Note 6) - - 73 Issuance of warrants (Note 6) - - 105 Translation adjustment - 83 83 Change in fair value of drivative - 264 264 Net loss (52,264) - (52,264) -------- Comprehensive loss - - (51,917) ------------------------------------------------------------------------- Balance at September 30, 2002 $ (44,636) $ (260) $(26,341) ------------------------------------------------------------------------- See accompanying notes. 6 Headway Corporate Resources, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Dollars in Thousands)

Non-cash Financing Activity In May 2002, the holders of the Senior Subordinated Notes and the Series G Convertible Preferred Stock exchanged $474,000 in accrued and unpaid interest on the Senior Subordinated Notes to exercise the Series G Warrants. In connection with this exercise, the Company issued 3.0 million shares of common stock to the Holders. 7 HEADWAY CORPORATE RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited September 30, 2002 (1) BASIS OF PRESENTATION Headway Corporate Resources, Inc. and its wholly owned subsidiaries (collectively referred to as the "Company") provide strategic staffing solutions and personnel worldwide. Its operations include information technology staffing, temporary staffing, human resource staffing, permanent placement and executive search. Headquartered in New York, the Company has temporary staffing offices in California, Connecticut, Florida, New Jersey, North Carolina, Virginia, and Texas and executive search offices in New York, Illinois, Massachusetts, the United Kingdom, Hong Kong and Australia. These consolidated financial statements include the accounts of Headway Corporate Resources, Inc. and its subsidiaries. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. The Company's working capital deficit was $52,205,000 at September 30, 2002, compared to working capital of $34,813,000 at December 31, 2001. As of September 30, 2002, $72,000,000 in aggregate principal amount was outstanding under a senior credit facility ("Senior Credit Facility"), and $10,000,000 in aggregate principal amount was outstanding under certain senior subordinated notes (the "Senior Subordinated Notes"). The working capital deficiency is a direct result of the reclassification of the Company's borrowing under the Senior Credit Facility and the Senior Subordinated Notes as current liabilities. As of September 30, 2002, the Company is in default of the Senior Credit Facility, the indenture pertaining to the Senior Subordinated Notes (the "Indenture"), and the terms of the Company's outstanding Series G Convertible Preferred Stock (the "Preferred Stock"), with respect to the required maintenance of certain amounts of EBITDA, as defined. Notwithstanding the working capital deficiency, the Company believes that it has sufficient liquidity to operate its business through June 2003, the expiration date of the Senior Credit Facility, assuming that the lenders under the Senior Credit Facility, the holders of the Senior Subordinated Notes and the holders of the Preferred Stock (collectively "the Senior Creditors") do not exercise their rights of acceleration or redemption, as the case may be. The Senior Creditors have not, as of the date hereof, given any indication to the Company that they wish to accelerate or redeem, as the case may be. Although there can be no assurance, the Company believes that it is in the best interest of the Company and each of the Senior Creditors to negotiate amendments or waivers under the respective documents. If the Company is unable to obtain the necessary amendments or waivers, and the Senior Creditors elect to accelerate or redeem, or the Company is unable to adequately refinance the Senior Credit Facility by June 2003, the Company may not have adequate liquidity to operate as a "going concern". (2) GOODWILL In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", effective for all combinations initiated after June 30, 2001, and 8 No. 142, "Goodwill and Other Intangible Assets". Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. Upon adoption of SFAS No. 142 in the first quarter of 2002, the Company recorded a one-time, non-cash charge of $45 million to reduce the carrying value of its goodwill. Such charge is non-operational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. In calculating the impairment charge, the fair value of the impaired reporting units underlying the business segments (see Note 5) were estimated using a discounted cash flow methodology. A summary of the change in the Company's goodwill during the nine months ended September 30, 2002, by reporting units is as follows: Goodwill ----------------------------------------------------------- January 1, Adjustments Impairments September 2002 (i) 30, 2002 ------------- -------------- ------------- ------------- Executive Search $ 11,086,000 $ 61,000 $ (8,200,000) $ 2,947,000 Temporary 42,415,000 66,000 (10,800,000) 31,681,000 Staffing Technology 33,812,000 - (26,000,000) 7,812,000 Staffing ------------- -------------- ------------- ------------- Total $ 87,313,000 $127,000 $(45,000,000) $42,440,000 ============= ============== ============= ============= (i)During the nine months ended September 30, 2002, additional purchase price of $127,000 was recorded as goodwill upon the determination that the earnouts had been met on certain acquisitions made in 1997, 1998 and 1999. The 2001 results on a historical basis do not reflect the provisions of SFAS No. 142. Had the Company adopted SFAS No. 142 on January 1, 2001 and ceased to amortize goodwill at such date, the historical net loss and basic and diluted net loss per common share would have been changed to the adjusted amounts indicated below: Nine Months Ended September 30, 2001 ------------------------------------ Net loss per basic Net loss and diluted common share ------------------------------------ As reported--historical basis $(2,064,000) $ (.19) Add: Goodwill amortization 3,003,000 .28 Income tax impact (1,306,000) (.12) ------------------------------------ Adjusted $ (367,000) $ (.03) ==================================== Three Months Ended September 30, 2001 ------------------------------------ Net loss per basic Net loss and diluted common share ------------------------------------ As reported--historical basis $(2,392,000) $ (.22) Add: Goodwill amortization 995,000 .09 Income tax impact (433,000) (.04) ------------------------------------ Adjusted $(1,830,000) $ (.17) ==================================== (3) DERIVATIVE FINANCIAL INSTRUMENTS The Company used interest rate swap contracts for hedging purposes. The Company had entered into interest rate swap agreements that effectively converted a portion of its floating-rate debt to a fixed-rate basis through April 18, 2002, thus reducing the impact of interest-rate changes on interest expense. Approximately $30,000,000 of the Company's outstanding long-term debt was designated as the hedged item to an interest rate swap agreement which expired on April 18, 2002. For interest rate swaps, the net amounts paid or received and net amounts accrued through the end of the accounting period were included in interest expense. Unrealized gains or losses on interest rate swap contracts were not recognized in income. During the nine months ended September 30, 2002, the Company recognized a change in fair value of the derivative of $264,000 related to the change in fair value of the interest rate swap contract which is net of applicable income taxes of $16,000 as a component of other comprehensive income. 9 (4) LOSS PER SHARE The following table sets forth the computation of basic and diluted loss per share:

(5) BUSINESS SEGMENTS The Company classifies its business into two fundamental areas, staffing and executive search. Staffing consists of the placement and payrolling of temporary and permanent office, clerical and information technology professional personnel. Executive search focuses on placing middle to upper level management positions. The Company evaluates performance based on the segments' (loss) profit from operations before unallocated corporate overhead.

A reconciliation of combined segment (loss) profit to consolidated net (loss) is as follows:

10 (6) LONG-TERM DEBT AND CREDIT FACILITIES In March 1998, Headway obtained $105 million of financing consisting of $85 million in senior debt, $20 million of equity financing and $10 million of senior subordinated debt. As of September 30, 2002, $72,000,000 in aggregate principal amount was outstanding under the Company's Senior Credit Facility. The Company's Senior Credit Facility matures on June 30, 2003 (see below), resulting in a reclassification of the obligation from a long-term liability at December 31, 2001 to a current liability at September 30, 2002. Substantially all assets of the Company have been pledged as collateral for the senior credit facility. As of September 30, 2002, the Company is in default of the Senior Credit Facility, the Indenture and the terms of the Preferred Stock, with respect to the required maintenance of certain amounts of EBITDA, as defined. Upon the occurrence and during the continuation of an event of default, the holders of the Preferred Stock may require redemption of the Preferred Stock by the Company. As of September 30, 2002, $10,000,000 in aggregate principal amount was outstanding under the Senior Subordinated Notes and $20,000,000 in face amount of Preferred Stock was outstanding. The Senior Subordinated Notes are payable in March 2006 and originally bore interest at 12% per annum until March 2001, increasing to 14% per annum thereafter. In January 2001, the terms of the Senior Subordinated Notes were amended, including increasing the effective interest rate to 13% until March 2001 and 15% thereafter. On April 17, 2002, the Senior Credit Facility and Senior Subordinated Notes were amended and the Company entered into the Second Limited Waiver with the holders of the Senior Subordinated Notes Holders and Preferred Stock, which provided the following: (i) An extension of the Senior Credit Facility maturity date to June 30, 2003. (ii) A waiver of the events of default on the Senior Subordinated Notes from March 31, 2002 through the "Recap Amendment Termination Date", defined as the earliest of (1) June 30, 2003 or such earlier on date on which the Senior Credit Facility may mature; (2) the date on which all amounts due under the Senior Credit Facility shall have been paid in full in cash; (3) the date on which the Senior Credit Facility is amended or modified in a manner that (A) increases the Base Rate, the Default Rate, the Applicable Margin or any other interest rate on the Senior Indebtedness (B) decreases the PIK Amount (C) increases the amount of fees or other payments due to the agent or any lender under the Senior Credit Facility (other than increases made in connection with events of default under the Senior Credit Facility that do not exceed, in the aggregate, 0.50% of the outstanding payment obligations under the Senior Credit Facility), or (D) in consideration of which, the agent or any lender under the Senior Credit Facility is issued any additional equity interest in the Company; and (4) the acceleration of any indebtedness under the Senior Credit Facility or the exercise of any rights or remedies by any of the lenders under the Senior Credit Facility. (iii)A waiver of the payment of interest (but not the accrual of interest) under the Senior Subordinated Notes from March 31, 2002 through the Recap Amendment Termination Date. (iv) A waiver of the Preferred Stock events of default and a waiver of the payment of dividends (but not the accrual of dividends) on the Preferred Stock from March 31, 2002 through the Recap Amendment Termination Date. Under the terms of the Second Limited Waiver, dividends on the Preferred Stock accrue as additional liquidation preference. Accordingly, the accrued dividend balance as of December 31, 2001 has been re-classified from accrued expenses to preferred stock. (v) A waiver of the increase in interest rate on the Senior Subordinated Notes from 15% to 20% retroactive to July 1, 2001. (vi) An adjustment to the exercise price of the First Series G Warrants and the Third Series G Warrants to $0.25 per share. The re-pricing of the First Series G Warrants and the Third Series G Warrants resulted in deferred financing costs based on the fair value of the warrants of $73,000, which is being amortized through June 2003. (vii)Required maintenance of certain amounts of EBITDA, as defined, and maximum amounts of capital expenditures, as defined. (viii) That the Company take all actions necessary to obtain common stockholder approval of an increase in the number of authorized common shares of the Company to 80,000,000 at a stockholder meeting to be held no later than July 15, 2002, subject to extension under certain circumstances. Such approval was obtained on July 15, 2002. (ix) That the Company issue warrants to purchase 2,455,522 shares of common stock at $0.25 per share to the lenders in connection with the amendment of its Senior Credit Facility. Such warrants were issued in April 2002. The issuance of these warrants resulted in deferred financing costs based on the fair value of the warrants of $105,000, which is being amortized through June 2003. 11 The Senior Subordinated Notes due March 2006 have been classified on the balance sheet as current because the Second Limited Waiver and Amendment is through June 2003 and due to the default. In May 2002, the holders of the Senior Subordinated Notes and the Preferred Stock exchanged $474,000 in accrued and unpaid interest on the Senior Subordinated Notes to exercise the Series G Warrants. In connection with this exercise, the Company issued 3.0 million shares of common stock to the holders. The Company is currently negotiating with its lenders under the Senior Credit Facility and the holders of its Senior Subordinated Notes and Preferred Stock for a waiver, amendment or equity exchange of the Senior Credit Facility, Indenture and Certificate of Designations, respectively. The Company believes that it has sufficient liquidity to operate its business through June 2003, the expiration date of the Senior Credit Facility, assuming that the lenders under the Senior Credit Facility, the holders of the Senior Subordinated Notes and the holders of the Preferred Stock (collectively "the Senior Creditors") do not exercise their rights of acceleration or redemption, as the case may be. The Senior Creditors have not, as of the date hereof, given any indication to the Company that they wish to accelerate or redeem, as the case may be. Although there can be no assurance, the Company believes that it is in the best interest of the Company and each of the Senior Creditors to negotiate amendments or waivers under the respective documents. If the Company is unable to obtain the necessary amendments or waivers, and the Senior Creditors elect to accelerate or redeem, or the Company is unable to adequately refinance the Senior Credit Facility by June 2003, the Company may not have adequate liquidity to operate its business. (7) COMPREHENSIVE LOSS During the nine months ended September 30, 2002 and 2001, total comprehensive loss amounted to $(51,917,000) and $(1,426,000), respectively, and during the three months ended September 30, 2002 and 2001, total comprehensive loss amounted to $(1,833,000) and $(2,029,000), respectively. (8) LEGAL PROCEEDINGS In the ordinary course of its business, Headway is periodically threatened with or named as a defendant in various lawsuits, including discrimination, harassment, and other similar claims. Headway maintains insurance in such amounts and with such coverage and deductibles as management believes are reasonable. In May 2000, a lawsuit was filed in the Judicial District Court of Dallas County, Texas alleging breach of contract, fraud, negligence, negligent retention and supervision, civil conspiracy and harmful access by computer. In July 2002, a judgment was entered in the amount of $790,000 against Headway and the other defendants. The Company plans to appeal the ruling and believes it will be successful in reducing the amount of the judgment. The net loss for the nine months ended September 30, 2002 reflects the full amount of the judgment. (9) IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", effective for fiscal years beginning after December 15, 2001. This standard superceded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be disposed of", and provided a single accounting model for long-lived assets to be disposed of. The new standard also superceded the provisions of APB Opinion No. 30 with regard to reporting the effects of a disposal of a segment of a business and required expected future operating losses from discontinued operations in the period(s) in which the losses are incurred. SFAS No. 144 was effective for the Company beginning with the first quarter of 2002 and its adoption did not have a material impact on the Company's results of operations or financial positions. In April 2002, the FASB issued SFAS No. 145, "Recision of SFAS Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2000". SFAS No. 145 revises the criteria for classifying the extinguishment of debt as extraordinary and the accounting treatment of certain lease modifications. SFAS No. 145 is effective in fiscal 2003 and is not expected to have a material impact on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 provides guidance on the timing of the recognition of costs associated with exit or disposal activities. The new guidance requires costs associated with exit or disposal activities to be recognized when incurred. Previous guidance required recognition of costs at the date of commitment to an exit or disposal plan. The provisions of the statement are to be adopted prospectively after December 31, 2002. Although SFAS No. 146 may impact the accounting for costs related to exit or disposal activities the Company may enter into in the future, particularly the timing of recognition of these costs, the adoption of the statement will not have an impact on the Company's present financial condition or results of operations. 12 PART 1. FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Revenue Recognition Information technology staffing, temporary staffing and human resource staffing revenue is recognized when the temporary personnel perform the related services. Permanent placement revenue is recognized when the placement is employed. Provisions are made for estimated losses in realization (principally due to applicants not remaining in employment for the guaranteed period, usually 90 days) and for bad debts. These provisions are reviewed periodically and have always been found to be adequate based on Headway's experience in this regard. Executive search services are primarily engaged on a retainer basis. Income from retainer contracts, which provide for periodic billings over periods of up to one year, is recognized as earned based on the terms of the contract. Goodwill Goodwill prior to the first quarter of 2002 was amortized utilizing the straight-line method over a period of 20 to 30 years. Headway periodically evaluated the carrying value and the periods of amortization of goodwill based on the current and expected future non-discounted income from operations of the entities giving rise to the goodwill to determine whether events and circumstances warranted revised estimates of carrying value or useful lives. No such write-downs were made. During the first quarter of 2002 the Company adopted Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statement. Other intangible assets continue to be amortized over their useful lives. Under SFAS 142, goodwill impairment is deemed to exist if the net carrying value of a reporting unit's goodwill exceeds its estimated fair value. The Company's reporting units are one level below the operating segments underlying the segments identified in Note 5-"Business Segments". Upon adoption of SFAS 142 in the first quarter of 2002, the Company recorded a one-time, non-cash charge of $45 million to reduce the carrying value of its goodwill. Such charge is non-operational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. Results of Operations Overview The results for the third quarter reflect a significant reduction in the demand for the Company's staffing and executive search services. This trend is a direct result of the soft economy and is consistent with the performance of the other staffing and executive search companies in the sector. Many companies have instituted hiring freezes for both temporary and permanent positions. The financial services industry has reduced its demand for the Company's executive search services as a direct result of the poor financial performance across the financial services industry. The Company believes that the performance for the balance of the year will continue to be impacted by the performance in the general economy. The performance in executive search for the balance of the year will depend in part on the financial services industry. The Company has taken steps to reduce costs and is constantly looking for growth opportunities. Consolidated Revenues for the three and nine months ended September 30, 2002 decreased $9,580,000 and $46,956,000 or 12.6% and 18.9%, respectively, compared with the corresponding periods of the prior year. The decrease was attributable to an overall decline in the demand for the Company's staffing and executive search services as a direct result of weakness in the economy. The executive search subsidiary, Whitney Partners, LLC (Whitney) contributed $3,031,000 to consolidated revenues in the third quarter of 2002, a decrease of 13 $1,139,000 from $4,170,000 for the same period in 2001. Whitney's revenues for the nine months ended September 30, 2002 were $12,789,000 a decrease of $11,522,000 from $24,311,000 for the same period in 2001. The decrease reflects a sharp decline in the demand for new hires in the financial services industry. The staffing subsidiary, Headway Corporate Staffing Services, Inc. (HCSS) contributed revenues of $63,529,000 to consolidated revenues in the third quarter of 2002, a decrease of $8,441,000 from $71,970,000 for the same period in 2001. HCSS revenues for the nine months ended September 30, 2002 were $189,289,000 a decrease of $35,434,000 from $224,723,000 for the same period in 2001. The decline in revenues was a result of the negative impact of the unfavorable economic conditions on the demand for information technology and clerical staffing services. Total operating expenses for the three and nine months ended September 30, 2002 decreased $9,474,000 and $39,604,000, respectively, compared with the corresponding periods of the prior year. The decrease in operating expenses for the three months ended September 30, 2002 as compared to the same period in 2001 is the result of a $6.5 million decrease in direct costs, a $2.1 million decrease in selling, general and administrative expenses, and a $0.9 million decrease in depreciation and amortization. The decrease in operating expenses for the nine months ended September 30, 2002 as compared to the same period in 2001 is the result of a $27.4 million decrease in direct costs, a $9.4 million decrease in selling, general and administrative expenses, and a $2.8 million decrease in depreciation and amortization. Direct costs increased as a percentage of revenues from 80.6% to 82.4% for the third quarter of 2002 compared with the same period in 2001. Direct costs increased as a percentage of revenues to 80.9% from 76.6% for the nine months ended September 30, 2002 compared with the same period in 2001. The increase in direct costs as a percentage of revenues for the three and nine months ended September 30, 2002 compared with the same period in 2001 is a result of a change in Headway's business mix in 2002. Specifically, the executive search and permanent placement business that has no direct costs experienced more significant declines than the staffing business, therefore reducing its percentage of our total revenues. Selling, general and administrative expenses decreased as a percentage of revenues from 18.2% in third quarter 2001 to 17.7% in third quarter 2002. Selling, general and administrative expenses decreased as a percentage of revenues from 19.4% to 19.3% for the nine months ended September 30, 2002 as compared to the same period in 2001. The decrease in depreciation and amortization for both the three and nine months ended September 30, 2002 as compared to the corresponding periods of the prior year is a result of the adoption of Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), effective January 1, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statement. Amortization of goodwill recorded for the three and nine months ended September 30, 2001 was $1.0 million and $3.0 million, respectively. Whitney's selling, general and administrative expenses decreased $0.9 million in the third quarter of 2002 to $4.1 million as compared to $5.0 million for the same period last year. Whitney's selling, general and administrative expenses decreased $5.4 million for the nine months ended September 30, 2002 to $13.6 million as compared to $19.0 million for the same period last year. The decrease relates primarily to the reduced commissions related to the lower executive search revenues. HCSS' selling, general and administrative expenses decreased $1.3 million in the third quarter of 2002 to $7.1 million as compared to $8.4 million for the same period last year. HCSS' selling, general and administrative expenses decreased $4.0 million for the nine months ended September 30, 2002 to $23.9 million as compared to $27.9 million for the same period last year. The decrease in selling, general and administrative expenses is primarily attributable to the lower commission expense associated with the decline in revenues, as well as staff reductions and other cost-cutting initiatives implemented in the latter half of 2001, offset by a provision of $0.8 million in connection with a judgment against Headway as a result of a lawsuit (see Note 8). Interest expense for the three and nine months ended September 30, 2002 increased $0.3 million and $2.2 million, respectively, compared with the corresponding periods of the prior year. The increase in interest expense is due to increased amortization of deferred financing costs relating to the amendments completed in April 2002 and August 2001 and an increase in the applicable margin for base rate loans under the Amended Senior Credit Facility. During the first quarter of 2002 the Company adopted SFAS 142. Under the new rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests in accordance with the Statement. Other intangible assets continue to be amortized over their useful lives. Under SFAS 142, goodwill impairment is deemed to exist if the net carrying value of a reporting unit's goodwill exceeds its estimated fair value. The Company's reporting units are one level below the operating segments underlying the segments identified in Note 5-Segment Information. Upon adoption of SFAS 142 in the first quarter of 2002, the Company recorded a one-time, non-cash charge of $45 million to reduce the carrying value of its goodwill. Such charge is non-operational in nature and is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations. 14 Liquidity and Capital Resources As of September 30, 2002, $72,000,000 in aggregate principal amount was outstanding under the Company's Senior Credit Facility. The Company's Senior Credit Facility matures on June 30, 2003 (see below), resulting in a reclassification of the obligation from a long-term liability at December 31, 2001 to a current liability at September 30, 2002. Substantially all assets of the Company have been pledged as collateral for the senior credit facility. As of September 30, 2002, the Company is in default of the Senior Credit Facility, the indenture pertaining to the Senior Subordinated Notes (the "Indenture") and the terms of the Company's outstanding Series G Convertible Preferred Stock (the "Preferred Stock"), with respect to the required maintenance of certain amounts of EBITDA, as defined. Upon the occurrence and during the continuation of an event of default the holders of the Preferred Stock may require redemption of the Preferred Stock by the Company. As of September 30, 2002, $10,000,000 in aggregate principal amount was outstanding under the Senior Subordinated Notes and $20,000,000 in face amount of Preferred Stock was outstanding. The Senior Subordinated Notes are payable in March 2006 and originally bore interest at 12% per annum until March 2001, increasing to 14% per annum thereafter. In January 2001, the terms of the Senior Subordinated Notes were amended, including increasing the effective interest rate to 13% until March 2001 and 15% thereafter. On April 17, 2002, the Senior Credit Facility and Senior Subordinated Notes were amended and the Company entered into the Second Limited Waiver with the holders of the Senior Subordinated Notes Holders and Preferred Stock, which provided the following: (i) An extension of the Senior Credit Facility maturity date to June 30, 2003. (ii) A waiver of the events of default on the Senior Subordinated Notes from March 31, 2002 through the "Recap Amendment Termination Date", defined as the earliest of (1) June 30, 2003 or such earlier on date on which the Senior Credit Facility may mature; (2) the date on which all amounts due under the Senior Credit Facility shall have been paid in full in cash; (3) the date on which the Senior Credit Facility is amended or modified in a manner that (A) increases the Base Rate, the Default Rate, the Applicable Margin or any other interest rate on the Senior Indebtedness (B) decreases the PIK Amount (C) increases the amount of fees or other payments due to the agent or any lender under the Senior Credit Facility (other than increases made in connection with events of default under the Senior Credit Facility that do not exceed, in the aggregate, 0.50% of the outstanding payment obligations under the Senior Credit Facility), or (D) in consideration of which, the agent or any lender under the Senior Credit Facility is issued any additional equity interest in the Company; and (4) the acceleration of any indebtedness under the Senior Credit Facility or the exercise of any rights or remedies by any of the lenders under the Senior Credit Facility. (iii)A waiver of the payment of interest (but not the accrual of interest) under the Senior Subordinated Notes from March 31, 2002 through the Recap Amendment Termination Date. (iv) A waiver of the Preferred Stock events of default and a waiver of the payment of dividends (but not the accrual of dividends) on the Preferred Stock from March 31, 2002 through the Recap Amendment Termination Date. Under the terms of the Second Limited Waiver, dividends on the Preferred Stock accrue as additional liquidation preference. Accordingly, the accrued dividend balance as of December 31, 2001 has been re-classified from accrued expenses to preferred stock. (v) A waiver of the increase in interest rate on the Senior Subordinated Notes from 15% to 20% retroactive to July 1, 2001. (vi) An adjustment to the exercise price of the First Series G Warrants and the Third Series G Warrants to $0.25 per share. The re-pricing of the First Series G Warrants and the Third Series G Warrants resulted in deferred financing costs based on the fair value of the warrants of $73,000, which is being amortized through June 2003. (vii)Required maintenance of certain amounts of EBITDA, as defined, and maximum amounts of capital expenditures, as defined. (viii) That the Company take all actions necessary to obtain common stockholder approval of an increase in the number of authorized common shares of the Company to 80,000,000 at a stockholder meeting to be held no later than July 15, 2002, subject to extension under certain circumstances. Such approval was obtained on July 15, 2002. (ix) That the Company issue warrants to purchase 2,455,522 shares of common stock at $0.25 per share to the lenders in connection with the amendment of its Senior Credit Facility. Such warrants were issued in April 2002. The 15 issuance of these warrants resulted in deferred financing costs based on the fair value of the warrants of $105,000, which is being amortized through June 2003. The Senior Subordinated Notes due March 2006 have been classified on the balance sheet as current because the Second Limited Waiver and Amendment is through June 2003 and due to the default. In May 2002, the holders of the Senior Subordinated Notes and the Preferred Stock exchanged $474,000 in accrued and unpaid interest on the Senior Subordinated Notes to exercise the Series G Warrants. In connection with this exercise, the Company issued 3.0 million shares of common stock to the holders. The Company is currently negotiating with its lenders under the Senior Credit Facility and the holders of its Senior Subordinated Notes and Preferred Stock for a waiver, amendment or equity exchange of the Senior Credit Facility, Indenture and Certificate of Designation, respectively. The Company believes that it has sufficient liquidity to operate its business through June 2003, the expiration date of the Senior Credit Facility, assuming that the lenders under the Senior Credit Facility, the holders of the Senior Subordinated Notes and the holders of the Preferred Stock (collectively "the Senior Creditors") do not exercise their rights of acceleration or redemption, as the case may be. The Senior Creditors have not, as of the date hereof, given any indication to the Company that they wish to accelerate or redeem, as the case may be. Although there can be no assurance, the Company believes that it is in the best interest of the Company and each of the Senior Creditors to negotiate amendments or waivers under the respective documents. If the Company is unable to obtain the necessary amendments or waivers, and the Senior Creditors elect to accelerate or redeem, or the Company is unable to adequately refinance the Senior Credit Facility by June 2003, the Company may not have adequate liquidity to operate its business. Net cash provided by operations during the nine months ended September 30, 2002 and 2001, was $3,825,000 and $5,321,000, respectively. The cash provided in 2002 was primarily attributable to a decrease in accounts receivable and an increase in accounts payable and accrued expenses, and accrued payroll. The cash provided in 2001 was primarily attributable to a decrease in accounts receivable. Net cash used in investing activities during the nine months ended September 30, 2002 and 2001, was $2,049,000 and $5,759,000, respectively. The cash used for investing activities relates primarily to earnout payments for acquisitions completed during 1997 and 1998 as well as capital expenditures. Net cash used in financing activities during the nine months ended September 30, 2002 was $2,385,000, primarily relating to payments of fees for loan amendment. Net cash provided by financing activities during the nine months ended September 30, 2001 of $10,994,000 was primarily a result of additional borrowings under the Company's senior credit facility. The Company's working capital deficit was $52,205,000 at September 30, 2002, compared to working capital of $34,813,000 at December 31, 2001. The working capital deficiency is a direct result of the reclassification of the Company's borrowing under the Senior Credit Facility and the Senior Subordinated Notes as current liabilities. . Notwithstanding the working capital deficiency and the default of the Senior Credit Facility, the Indenture and the Certificate of Designations, the Company believes that it has sufficient liquidity to operate its business through June 2003, the expiration date of the Senior Credit Facility, assuming that the Senior Lenders, the holders of the Senior Subordinated Notes and the holders of the Preferred Stock (collectively "the Senior Creditors") do not exercise their rights of acceleration or redemption as the case may be. The Senior Creditors have not, as of the date hereof, given any indication to the Company that they wish to accelerate or redeem, as the case may be. Although there can be no assurance, the Company believes that it is in the best interest of the Company and each of the Senior Creditors to negotiate amendments or waivers under the respective documents. If the Company is unable to adequately refinance the Senior Credit Facility by June 2003, the Company may not have adequate liquidity to operate its business. On January 22, 2002, the Securities and Exchange Commission issued FR-61, Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations. The release sets forth certain views of the Securities and Exchange Commission regarding disclosure that should be considered by registrants. Headway's contractual obligations and commercial commitments are summarized below. The following table includes aggregate information about Headway's contractual obligations as of September 30, 2002 and the periods in which payments are due: 16 ------------------------------------------------------------------------------ Contractual Obligations Payments Due by Period (in thousands) ------------------------------------------------------------------------------ Total Less 1-3 4 - 5 After 5 than 1 years years years year ------------------------------------------------------------------------------ Loans Payable $82,000 $82,000 $ - $ - $ - ------------------------------------------------------------------------------ Capital Lease Obligations 181 162 19 - - ------------------------------------------------------------------------------ Operating Leases 8,670 2,536 3,284 1,911 939 ------------------------------------------------------------------------------ Unconditional Purchase Obligations None ------------------------------------------------------------------------------ Other Long Term Obligations (1) 245 245 - - - ------------------------------------------------------------------------------ Total Contractual Cash Obligations $91,096 $84,943 $3,303 $1,911 $ 939 ------------------------------------------------------------------------------ Preferred Stock (2) $22,717 $22,717 ------------------------------------------------------------------------------ The following table includes aggregate information about Headway's commercial commitments as of September 30, 2002. Commercial commitments are items that Headway could be obligated to pay in the future. They are not required to be included in the consolidated balance sheet.

(1) Represents earn out amounts payable to the former owners of businesses previously acquired by Headway. (2) In default of its terms, therefore, currently redeemable. Item 3. Quantitative and Qualitative Disclosures About Market Risk See Note 3 to the accompanying financial statements. Item 4. Controls and Procedures With the participation of management, the Company's chief executive officer, President and chief financial officer evaluated its disclosure controls and procedures on September 30, 2002. Based on this evaluation, the chief executive officer and the chief financial officer concluded that the disclosure controls and procedures are effective in connection with the Company's filing of its quarterly report on Form 10-Q for the quarterly period ended September 30, 2002. Subsequent to September 30, 2002, through the date of this filing of Form 10-Q for the quarterly period ended September 30, 2002, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, including any significant deficiencies or material weaknesses of internal controls that would require corrective action. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings In the ordinary course of its business, Headway is periodically threatened with or named as a defendant in various lawsuits, including discrimination, harassment, and other similar claims. Headway maintains insurance in such amounts and with such coverage and deductibles as management believes are reasonable. In May 2000, a lawsuit was filed in the Judicial District Court of Dallas County, Texas alleging breach of contract, fraud, negligence, negligent retention and supervision, civil conspiracy and harmful access by computer. In July 2002 a judgment was entered in the amount of $790,000 against Headway and the other defendants. The Company plans to appeal the ruling and believes it will be successful in reducing the amount of the judgment. The net loss for the nine months ended September 30, 2002 reflects the full amount of the judgment. Item 3. Defaults Upon Senior Securities As of September 30, 2002, the Company is in default of the Senior Credit Facility, the indenture pertaining to the Senior Subordinated Notes and the terms of the Company's outstanding Series G Convertible Preferred Stock with respect to the required maintenance of certain amounts of EBITDA, as defined (See Note 6). Item 6. Exhibits and Reports on Form 8-K EXHIBITS: None REPORTS ON FORM 8-K: None 18 SIGNATURES In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEADWAY CORPORATE RESOURCES, INC. Date: November 14, 2002 By: /s/ Gary S. Goldstein, Chief Executive Officer Date: November 14, 2002 By: /s/ Barry S. Roseman, President Date: November 14, 2002 By: /s/ Philicia G. Levinson, Chief Financial Officer 19 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. In connection with the Quarterly Report of Headway Corporate Resources, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gary S. Goldstein, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2002 By: /s/ Gary S. Goldstein, Chief Executive Officer In connection with the Quarterly Report of Headway Corporate Resources, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barry S. Roseman, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2002 By: /s/ Barry S. Roseman, President In connection with the Quarterly Report of Headway Corporate Resources, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Philicia G. Levinson, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2002 By: /s/ Philicia G. Levinson, Chief Financial Officer 20 CERTIFICATION I, Gary S. Goldstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Headway Corporate Resources, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By: /s/ Gary S. Goldstein, Chief Executive Officer 21 CERTIFICATION I, Barry S. Roseman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Headway Corporate Resources, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By: /s/ Barry S. Roseman, President 22 CERTIFICATION I, Philicia G. Levinson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Headway Corporate Resources, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By: /s/ Philicia G. Levinson, Chief Financial Officer 23

HEADWAY CORPORATE RESOURCES INC 10-Q