SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
___________
FORM 10-Q
___________
|x| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM to
COMMISSION FILE NUMBER: 000-50129
______
HUDSON HIGHLAND GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3547281
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
622 Third Avenue, New York, New York 10017
(Address of principal executive offices) (Zip code)
(212) 351-7300
(Registrant's telephone number, including area code)
______
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes _ No. X
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Outstanding on
Class October 31, 2003
- ----- ----------------
Common Stock 8,507,430
HUDSON HIGHLAND GROUP, INC.
INDEX
Page No.
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Condensed Statements of Operations - Three Months and Nine Months
Ended September 30, 3
Consolidated Condensed Balance Sheets - September 30, 2003 and December 31, 2002 4
Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30,
2003 and 2002 5
Notes to Consolidated Condensed Financial Statements 6
Report of Independent Certified Public Accountants 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
Exhibit Index 32
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUDSON HIGHLAND GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Revenue $ 272,181 $ 270,710 $ 800,653 $ 812,577
Direct costs (Note 5) 173,959 166,158 501,181 484,752
--------- --------- --------- ---------
Gross margin 98,222 104,552 299,472 327,825
Selling, general and administrative expenses 122,070 110,581 367,408 344,612
Goodwill impairment charge 202,785 - 202,785 -
Business reorganization expenses (recoveries) (906) 407 6,555 53,133
Merger and integration expenses (recoveries) (102) (902) 876 6,056
--------- --------- --------- ---------
Operating loss (225,625) (5,534) (278,152) (75,976)
Other income (expense):
Other, net (749) 415 (930) (8)
Interest income (expense), net (121) (287) (376) (273)
--------- --------- --------- ---------
Loss before provision for (benefit of) income taxes and
accounting change (226,495) (5,406) (279,458) (76,257)
Provision for (benefit of) income taxes (221) 66 5,917 (1,827)
--------- --------- --------- ---------
Loss before accounting change (226,274) (5,472) (285,375) (74,430)
Cumulative effect of accounting change - - - (293,000)
--------- --------- --------- ---------
Net loss $(226,274) $ (5,472) $(285,375) $(367,430)
========= ========= ========= =========
Basic and diluted loss per share:
Loss before accounting change $ (26.73) $ (0.65) $ (33.78) $ (8.91)
Net loss $ (26.73) $ (0.65) $ (33.78) $ (43.99)
Weighted average shares outstanding 8,466 8,364 8,448 8,353
See accompanying notes to consolidated condensed financial statements.
-3-
HUDSON HIGHLAND GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except per share amounts)
September 30, December 31,
2003 2002
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 39,312 $ 25,908
Accounts receivable, net 140,976 161,831
Due from Monster Worldwide, Inc. 7,513 -
Other current assets 22,505 28,177
-------- --------
Total current assets 210,306 215,916
Property and equipment, net 39,643 34,106
Intangibles, net 1,569 201,937
Other assets 17,197 15,145
-------- --------
$268,715 $467,104
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,831 $ 28,305
Accrued expenses and other current liabilities 105,123 84,669
Accrued merger and integration expenses 5,244 8,935
Accrued business reorganization expenses 12,752 25,845
-------- --------
Total current liabilities 157,950 147,754
Other liabilities 3,770 2,776
-------- --------
Total liabilities 161,720 150,530
-------- --------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000 shares authorized; none
issued or outstanding - -
Common stock, $0.001 par value, 100,000 shares authorized; issued and
outstanding: 8,507 and 0 shares, respectively 9 -
Additional paid-in capital 314,389 -
Retained deficit (241,364) -
Accumulated other comprehensive income:
Foreign currency translation adjustments 33,961 24,660
Total divisional equity - 291,914
-------- --------
Total stockholders' equity 106,995 316,574
-------- --------
$268,715 $467,104
======== ========
See accompanying notes to consolidated condensed financial statements.
-4-
HUDSON HIGHLAND GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss $(285,375) $(367,430)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 15,556 14,738
Provision for doubtful accounts 14,923 1,259
Net loss on disposal of assets 2,063 5,957
Deferred income taxes 5,603 -
Goodwill impairment charge 202,785 -
Cumulative effect of accounting change - 293,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 14,005 (26,082)
Payments received from Monster Worldwide, Inc. 6,017 -
Decrease in other assets 2,694 7,034
Increase (decrease) in accounts payable, accrued expenses and other liabilities 17,151 (31,706)
Decrease in accrued merger and integration expenses (3,530) (14,815)
(Decrease) increase in accrued business reorganization expenses (14,267) 21,117
--------- ---------
Total adjustments 263,000 270,502
--------- ---------
Net cash used in operating activities (22,375) (96,928)
--------- ---------
Cash flows from investing activities:
Capital expenditures (7,824) (6,626)
Payments related to prior years' purchased businesses (330) (7,926)
--------- ---------
Net cash used in investing activities (8,154) (14,552)
--------- ---------
Cash flows from financing activities:
Net payments on short and long-term debt (1,373) (47,540)
Issuance of common stock - Employee Stock Purchase Plan 737 -
Net cash transfers received from Monster Worldwide, Inc., prior to the Distribution 41,317 147,961
--------- ---------
Net cash provided by financing activities 40,681 100,421
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 3,252 2,315
--------- ---------
Net increase in cash and cash equivalents 13,404 (8,744)
Cash and cash equivalents, beginning of period 25,908 37,672
--------- ---------
Cash and cash equivalents, end of period $ 39,312 $ 28,928
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,268 $ 910
See accompanying notes to consolidated condensed financial statements.
-5-
HUDSON HIGHLAND GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)
NOTE 1 - INTERIM CONSOLIDATED CONDENSED QUARTERLY FINANCIAL STATEMENTS
These interim consolidated condensed quarterly financial statements have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC") and should be read in conjunction with the combined
audited financial statements and related notes of Hudson Highland Group, Inc.
and subsidiaries (the "Company" or "HH Group") in its Registration Statement on
Form 10 filed with the SEC on March 14, 2003 (the "Form 10"). The consolidated
results for interim periods are not necessarily indicative of results for the
full year or any subsequent period. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of financial position, results of operations and cash
flows at the dates and for the periods presented have been included.
NOTE 2 - REORGANIZATION, BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Reorganization
The accompanying consolidated condensed financial statements include the
operations, assets and liabilities of Hudson Global Resources ("Hudson") and
Highland Partners ("Highland"), formerly business segments of Monster Worldwide,
Inc. ("Monster") (formerly TMP Worldwide Inc). In October 2002, Monster
announced a plan to distribute to its stockholders the shares of HH Group, a
wholly owned subsidiary of Monster (the "Distribution"). Immediately prior to
the Distribution, Monster transferred substantially all the assets and
liabilities of its Hudson and Highland business segments to HH Group. These
assets and liabilities are reflected in HH Group's financial statements at
Monster's historical cost. On March 31, 2003 (the "Distribution Date"), Monster
distributed to all of its stockholders of record one share of HH Group common
stock for each thirteen and one-third shares of Monster common stock so held.
The assets and liabilities of the Company consist primarily of businesses
Monster acquired at various times in prior years.
Basis of Presentation
The consolidated condensed financial statements have been derived from the
financial statements and accounting records of Monster for all periods through
the Distribution Date, using the historical results of operations and historical
basis of the assets and liabilities of the Company's business. In connection
with the Distribution, the inter-company balances due to Monster were
contributed by Monster to equity; accordingly, such balances are reflected as
divisional equity for periods prior to March 31, 2003, at which time the amount
was reclassified to common stock and additional paid-in capital. Earnings and
losses are accumulated in retained earnings (deficit) starting April 1, 2003.
The terms of the distribution agreement with Monster did not require repayment
or distribution of any portion of the divisional equity back to Monster. The
Company's costs and expenses in the accompanying consolidated condensed
financial statements for periods prior to March 31, 2003 include allocations
from Monster for executive, legal, accounting, treasury, real estate,
information technology and other Monster corporate services and infrastructure
costs because specific identification of the expenses is not practicable. The
total corporate services allocation to the Company from Monster was $5,260 and
$23,181 for the nine months ended September 30, 2003 and 2002, respectively,
including $0 and $8,776 for the quarters ended September 30, 2003 and 2002,
respectively. The expense allocations were determined on the basis that Monster
and the Company considered to be reasonable reflections of the utilization of
services provided or the benefit received by the Company using ratios that are
primarily based on the Company's revenue, net of direct costs of temporary
contractors, compared to Monster as a whole. Certain merger and integration
costs and business reorganization costs were also allocated to the Company from
Monster and totaled $4,935 for the nine months ended September 30, 2002 and are
included in corporate expenses. The financial information included herein prior
to March 31, 2003 may not necessarily reflect the financial position and results
of operations of HH Group in the future or what these amounts would have been
had it been a separate, stand-alone entity during the periods presented prior to
the Distribution. However, management believes that if the Company had been a
stand-alone entity during the periods presented, the expenses would not have
been materially different from the allocations presented.
-6-
NOTE 2 - REORGANIZATION, BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
(Continued)
Loss Per Share
To determine the shares outstanding for the Company for the period prior to
the Distribution, Monster's weighted average number of shares is multiplied by
the distribution ratio of one share of HH Group common stock for every thirteen
and one-third shares of Monster common stock. Basic loss per share is computed
by dividing the Company's losses by the weighted average number of shares
outstanding during the period. When the effects are not anti-dilutive, diluted
loss per share is computed by dividing the Company's net losses by the weighted
average number of shares outstanding and the impact of all dilutive potential
common shares, primarily stock options. The dilutive impact of stock options is
determined by applying the "treasury stock" method. For all periods presented,
dilutive earnings per share calculations do not differ from basic earnings per
share because the effects of any potential common stock were anti-dilutive and
therefore not included in the calculation of dilutive earnings per share.
Earnings per share calculations for each quarter include the weighted
average effect for the quarter; therefore, the sum of quarterly earnings per
share amounts may not equal year-to-date earnings per share amounts, which
reflect the weighted average effect on a year-to-date basis.
Business Segments
The Company is one of the world's largest specialized staffing and
executive search firms. The Company provides professional staffing services on a
permanent, contract and temporary basis, as well as executive search and career
management services to clients operating in a wide range of businesses. The
Company focuses on mid-level executives having specialized professional
qualifications, or recruited by clients in specialized sectors.
The Company is organized into two divisions, Hudson Global Resources and
Highland Partners.
Hudson Global Resources. Hudson primarily focuses on providing professional
temporary and contract personnel and business solutions to its clients and
mid-level executive recruitment or placement services. Mid-level executives and
professionals are those who typically earn between $50,000 and $150,000
annually, and possess the set of executive or professional skills and/or profile
required by its clients. In the case of the temporary and contracting business,
Hudson primarily focuses on the placement of professionals or executives in
temporary assignments that can range from one day to more than 12 months.
Hudson's sales strategy focuses on clients operating in particular sectors, such
as health care, financial services, and technology and communications. Hudson
supplies candidates in a variety of specialist fields such as law, accounting,
banking and finance, health care, engineering, human resources, sales and
marketing, technology and science. Hudson uses both traditional and interactive
methods to find and recruit potential candidates for its clients, employing a
suite of products that assess talent and help predict whether a candidate will
be successful in a given role.
Hudson also provides a variety of other services, including career
management, executive assessment and coaching, and human resources consulting.
These service offerings are growing at a higher rate than the recruitment and
placement businesses and the Company's management believes this will help
balance the cyclical nature of its core offerings.
These services allow Hudson to offer clients a comprehensive set of human
capital management services, ranging from temporary workers, to assessment or
coaching of permanent staff, to recruitment or search for permanent workers, to
outplacement. These services are marketed under the name Hudson Human Resource
Consulting in certain markets around the world.
Highland Partners. Highland offers a comprehensive range of executive
search services aimed at recruiting senior level executives or professionals for
a wide range of clients operating in sectors such as health care, technology,
financial services, retail and consumer, and industrial. Highland also has an
active practice in recruiting individuals to serve on boards of directors.
Highland concentrates on searches for positions with annual compensation of
$150,000 or more and operates exclusively on a retained basis.
Corporate expenses are reported separately from the two operating segments
and consist primarily of compensation, marketing and lease expense, and
professional fees.
Reclassifications
In the current financial statement presentation, changes have been made
from presentations in prior SEC filings and new account descriptions are being
used. Certain prior period amounts have been reclassified to conform to the
Company's 2003 financial statement presentation; these reclassifications do not
change total revenues, total expenses, net loss, total assets, total liabilities
or stockholders' equity.
-7-
NOTE 3 - STOCK BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance
with APB No. 25. Under APB No. 25, no compensation expense is recognized in
connection with the awarding of stock option grants to employees provided that,
as of the grant date, all terms associated with the award are fixed and the
quoted market price of the stock is equal to or less than the amount an employee
must pay to acquire the stock. Because the Company issues only fixed term stock
option grants at or above the quoted market price on the date of the grant,
there is no related compensation expense recognized in the accompanying
financial statements. The Company adopted the disclosure only provisions of SFAS
123 and SFAS 148, which require certain financial statement disclosures,
including pro forma operating results as if the Company had prepared its
consolidated financial statements in accordance with the fair value based method
of accounting for stock-based compensation.
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no restrictions and are fully
transferable and negotiable in a free trading market. Black-Scholes does not
consider the employment, transfer or vesting restrictions that are inherent in
the Company's employee options. Use of an option valuation model, as required by
SFAS 123, includes highly subjective assumptions based on long-term predictions,
including the expected stock price volatility and average life of each option
grant. Because the Company's employee options have characteristics significantly
different from those of freely traded options, and because changes in the
subjective input assumptions can materially affect the Company's estimate of the
fair value of those options, in the Company's opinion the existing valuation
models, including Black-Scholes, are not reliable single measures and may
misstate the fair value of the Company's employee options.
As required under SFAS 123 and SFAS 148, the pro forma effects of
stock-based compensation on the Company's operating results and per share data
have been estimated at the date of grant using the Black-Scholes option-pricing
model based on the following weighted average assumptions:
Nine Months Ended September 30,
-------------------------------
2003 2002
---- ----
Risk fee interest rate 4.0% 4.2%
Volatility 65.0% 73.5%
Expected life (years) 5.0 7.5
Dividends 0.0% 0.0%
Weighted average fair value of
options granted during the period $8.07 $13.02
For purposes of pro forma disclosures, the options' estimated fair value is
assumed to be amortized to expense over the options' vesting periods. The pro
forma effects of stock-based compensation expense for the quarter and nine-month
periods ended September 30, 2002 and for the first quarter of 2003, are related
entirely to options in Monster stock granted to employees of Monster prior to
March 31, 2003 who transferred to the Company at the time of the Distribution.
As a result of the Company's inability to recognize current tax benefits on
reported net losses, total stock-based compensation expense is shown without tax
benefits for all periods presented. The pro forma effects of recognizing
compensation expense under the fair value method on the Company's operating
results and per share data are as follows:
Quarter Ended September 30, Nine Months Ended September 30,
-------------------------- ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Reported net loss $(226,274) $(5,472) $(285,375) $(367,430)
Add: Total stock-based employee compensation
expense determined under fair value based
method for all awards (978) (12,169) (2,150) (36,507)
--------- -------- --------- ---------
Pro forma net loss $(227,252) $(17,641) $(287,525) $(403,937)
========= ======== ========= =========
Basic and diluted earnings per share:
As reported net loss $(26.73) $(0.65) $(33.78) $(43.99)
======= ====== ======= =======
Pro forma net loss $(26.84) $(2.11) $(34.03) $(48.36)
======= ====== ======= =======
-8-
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, Accounting for
Costs Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 applies
to costs associated with an exit (including restructuring) or disposal activity.
Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS 146, a company records a liability for a cost associated with an exit or
disposal activity when that liability is incurred and can be measured at fair
value. SFAS 146 requires a company to disclose information about its exit and
disposal activities, the related costs and changes in those costs in the notes
to the interim and annual financial statements that include the period in which
an exit activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002. Under SFAS 146, a company may not restate its
previously issued financial statements. Liabilities recognized as a result of
disposal activities prior to the adoption of SFAS 146 continue to be accounted
for under Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3").
The Company's adoption of SFAS 146 on January 1, 2003, did not have a material
impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure ("SFAS 148"), an amendment of SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), which provides
alternatives for companies electing to account for stock-based compensation
using the fair value criteria established by SFAS 123. The Company intends to
account for stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25 ("APB No. 25").
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
the Indebtedness of Others, which addresses the accounting for and disclosure of
guarantees. Interpretation No. 45 requires a guarantor to recognize a liability
for the fair value of a guarantee at inception. The recognition of the liability
is required even if it is not probable that payments will be required under the
guarantee. The disclosure requirements are effective for interim and annual
financial statements ending after December 15, 2002. The initial recognition and
measurement provisions are effective on a prospective basis for guarantees
issued or modified after December 31, 2002. The Company's adoption of
Interpretation No. 45 did not have a material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities. The objective of this interpretation is to
provide guidance on how to identify a variable interest entity ("VIE") and
determine when the assets, liabilities, noncontrolling interests, and results of
operations of a VIE need to be included in a company's consolidated financial
statements. A company that holds variable interests in an entity will need to
consolidate the entity if the company's interest in the VIE is such that the
company will absorb a majority of the VIE's expected losses and/or receive a
majority of the entity's expected residual returns, if they occur.
Interpretation No. 46 also requires additional disclosures by primary
beneficiaries and other significant variable interest holders. The
interpretation became effective upon issuance. The Company's adoption of this
interpretation did not have an effect on its consolidated financial statements.
On May 1, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003. The Company's adoption of SFAS 149 should not have an
effect on its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150"). SFAS 150 changes the accounting for certain financial instruments that,
under previous guidance, could be classified as equity or "mezzanine" equity, by
now requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS 150 affects an entity's classification of the following
freestanding instruments; mandatorily redeemable instruments, financial
instruments to repurchase an entity's own equity instruments and financial
instruments embodying obligations that the issuer must or could choose to settle
by issuing a variable number of its shares or other equity instruments based
solely on (a) a fixed monetary amount known at inception or (b) something other
than changes in its own equity instruments. SFAS 150 is effective for periods
beginning after June 15, 2003. The Company's adoption of this interpretation did
not have an effect on its consolidated financial statements.
-9-
NOTE 5 - REVENUES, DIRECT COSTS AND GROSS MARGIN
Details of the Company's revenues and direct costs, classified by temporary
and permanent placement business, are as follows:
Quarter Ended September 30, 2003 Quarter Ended September 30, 2002
-------------------------------- --------------------------------
Temporary Permanent Total Temporary Permanent Total
Revenue $196,790 $ 75,391 $272,181 $199,117 $ 71,593 $270,710
Direct costs (1) 164,364 9,595 173,959 160,802 5,356 166,158
-------- -------- -------- -------- -------- --------
Gross margin $ 32,426 $ 65,796 $ 98,222 $ 38,315 $ 66,237 $104,552
======== ======== ======== ======== ======== ========
Nine Months Ended September 30, 2003 Nine Months Ended September 30, 2002
------------------------------------ ------------------------------------
Temporary Permanent Total Temporary Permanent Total
Revenue $571,499 $229,154 $800,653 $589,087 $223,490 $812,577
Direct costs (1) 473,686 27,495 501,181 473,290 11,462 484,752
-------- -------- -------- -------- -------- --------
Gross margin $ 97,813 $201,659 $299,472 $115,797 $212,028 $327,825
======== ======== ======== ======== ======== ========
(1) Direct costs include the direct staffing costs of salaries, payroll taxes,
employee benefits, travel expenses and insurance costs for the Company's
temporary contractors and reimbursed out-of-pocket expense and other direct
costs. Other than reimbursed out-of-pocket expenses, there are no other
direct costs associated with the search and permanent placement revenues.
The salaries, commissions, payroll taxes and employee benefits related to
recruitment professionals are included in selling, general and
administrative expenses.
NOTE 6 - INTANGIBLE ASSETS, NET
As of September 30, 2003 and December 31, 2002, the Company's intangible
assets consisted of the following:
September 30, 2003 December 31, 2002
------------------ -----------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Goodwill $ - $ - $200,760 $ -
Amortizable intangible assets:
Client lists and other amortizable intangibles 3,540 (1,971) 3,243 (2,066)
-------- -------- -------- --------
Total intangible assets $ 3,540 $ (1,971) $204,003 $ (2,066)
======== ======== ======== ========
Intangibles represent acquisition costs in excess of the fair value of net
tangible assets of businesses purchased and consist primarily of the value of
client lists, non-compete agreements, trademarks and goodwill. The Company
amortizes these intangibles, other than goodwill, over periods ranging from two
to thirty years. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets ("SFAS 142"), the Company no longer amortizes goodwill but instead
evaluates its goodwill annually for impairment, or earlier if indicators of
potential impairment exist.
In the third quarter of 2003, the Company determined that goodwill should
be tested for impairment due to current business conditions and changes in
circumstances resulting from the Distribution, which established the Company as
an independent entity with a separate market capitalization. As a result of this
test and the related fair value examination, the Company recorded a non-cash
goodwill impairment charge of $202,785. The impairment valuation was based upon
a discounted cash flow approach that used estimated future revenues and costs
for each business segment as well as appropriate discount rates. The estimates
that were used are consistent with the plans and estimates the Company is using
to manage the underlying business. The goodwill impairment charge wrote-off all
goodwill related to both of the Company's business segments. As a result of the
adoption of SFAS 142 on January 1, 2002, the Company recorded a non-cash
impairment charge of $293,000 to reduce the carrying value of goodwill.
Intangible asset amortization expense for the nine months ended September 30,
2003 and 2002 was $621 and $579, respectively.
-10-
NOTE 7 - TAXES
The provision for income taxes for the nine months ended September 30, 2003
was $5,917 on a pretax loss of $279,458, compared with a benefit of $1,827 on a
pretax loss of $76,257 for the same period of 2002. The Company's effective tax
rate for the nine months ended September 30, 2003 and 2002 differs significantly
from the U.S. Federal statutory rate of 35% as a result of the inability of the
Company to recognize benefits from its current losses related to the goodwill
impairment charge and current losses from its businesses where the possible
future ability to utilize its loss carryforwards is uncertain, as well as
valuation allowances on previously established deferred tax assets, net
operating losses retained or utilized by Monster, certain non-deductible
expenses such as amortization, business restructuring and spin-off costs, merger
costs from pooling of interests transactions, and variations from the U.S. tax
rate in foreign jurisdictions.
NOTE 8 - BUSINESS COMBINATIONS
Accrued Merger and Integration Expenses
Pursuant to the conclusions stated in EITF 94-3 and EITF Issue No. 95-3,
Recognition of Liabilities in Connection with a Purchase Business Combination,
and in connection with the acquisitions and mergers made in 2001 and 2000, the
Company formulated plans to integrate the operations of such companies. Such
plans involve the closure of certain offices of the acquired and merged
companies and the termination of certain management and employees. The
objectives of the plans are to eliminate redundant facilities and personnel and
to create a single brand in the related markets in which the Company operates.
In connection with plans relating to pooled entities, the Company expensed
$876 and $6,056 in the first nine months of 2003 and 2002, respectively,
relating to integration activities included as a component of merger and
integration expenses. Amounts recorded relating to business combinations
accounted for as purchases were charged to goodwill. The $876 expenses for the
first nine months were almost entirely related to lease obligations on closed
facilities. A summary of activity of the accrued merger and integration expenses
for the nine months ended September 30, 2003 is outlined as follows:
Changes
Balance in Balance
December 31, 2002 Estimate Utilization September 30, 2003
----------------- -------- ----------- ------------------
Assumed lease obligations on closed facilities $7,292 $906 $(3,561) $4,637
Consolidation of acquired facilities 1,607 (30) (970) 607
Severance, relocation and other employee costs 36 - (36) -
------ ---- ------- ------
Total $8,935 $876 $(4,567) $5,244
====== ==== ======= ======
The following table presents a summary of activity relating to the
Company's integration and restructuring plans for acquisitions made in prior
years. Amounts reflected in the "Changes in Estimate" column represent
modifications to plans subsequent to finalization and have been expensed in the
current period. Cash payments and associated write-offs relating to the plans
are reflected in the "Utilization" caption of the following table. Details of
the exit plan activity for the nine months ended September 30, 2003 are as
follows:
Changes
Balance in Balance
December 31, 2002 Estimate Utilization September 30, 2003
----------------- -------- ----------- ------------------
2000 Plans $2,388 $ (6) $ (481) $1,901
2001 Plans 3,291 808 (2,673) 1,426
2002 Plans 3,256 74 (1,413) 1,917
------ ----- ------- ------
Total $8,935 $ 876 $(4,567) $5,244
====== ===== ======= ======
-11-
NOTE 9 - BUSINESS REORGANIZATION EXPENSES
In the second quarter of 2002, the Company announced a reorganization
initiative to further streamline its operations, lower its cost structure,
integrate businesses previously acquired and improve its return on capital. This
reorganization program includes a workforce reduction, consolidation of excess
facilities, restructuring of certain business functions and other special
charges, primarily for exiting activities that are no longer part of the
Company's strategic plan.
In the fourth quarter of 2002, the Company announced further reorganization
efforts related to its separation from Monster and the streamlining of
operations, which continued through the first nine months of 2003. The charge
consisted primarily of workforce reduction, office consolidation costs and
related write-offs, professional fees and other special charges.
A summary of activity of the business reorganization expenses for the nine
months ended September 30, 2003 is outlined as follows:
Balance Changes in Balance
December 31, 2002 Additions Estimate Utilization September 30, 2003
----------------- --------- -------- ----------- ------------------
Workforce reductions $ 8,375 $2,343 $ (901) $ (8,675) $ 1,142
Consolidation of excess facilities 15,048 5,815 (1,420) (9,118) 10,325
Professional fees and other 2,422 1,287 (569) (1,855) 1,285
------- ------ ------- -------- -------
Total $25,845 $9,445 $(2,890) $(19,648) $12,752
======= ====== ======= ======== =======
The following table presents a summary of plan activity related to business
reorganization costs for the nine months ended September 30, 2003. Amounts in
the "Additions" column of the following table represent amounts charged to
business reorganization expense in the Company's statement of operations for the
nine months ended September 30, 2003. The expenses were primarily related to
consolidation of facilities, workforce reductions and professional fees related
to the Distribution. Costs under these plans are charged to expense as estimates
are finalized and events become accruable. Amounts reflected in the "Changes in
Estimate" column represent modifications to previously accrued amounts that were
initially established under each plan. Cash payments and associated write-offs
relating to the plans are reflected in the "Utilization" caption of the
following table.
Balance Changes in Balance
December 31, 2002 Additions Estimate Utilization September 30, 2003
----------------- --------- -------- ----------- ------------------
Second Quarter 2002 Plan $14,908 $1,073 $(1,829) $ (9,572) $ 4,580
Fourth Quarter 2002 Plan 10,937 8,372 (1,061) (10,076) 8,172
------- ------ ------- -------- -------
Total $25,845 $9,445 $(2,890) $(19,648) $12,752
======= ====== ======= ======== =======
NOTE 10 - COMPREHENSIVE INCOME
Quarter Ended Nine Months Ended
September 30, September 30,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss $(226,274) $(5,472) $(285,375) $(367,430)
Other comprehensive income - translation adjustments 696 (3,000) 9,301 26,809
--------- ------- --------- ---------
Total comprehensive loss $(225,578) $(8,472) $(276,074) $(340,621)
========= ======= ========= =========
-12-
NOTE 11 - RELATED PARTY TRANSACTIONS
In connection with the Distribution, Monster and HH Group entered into the
following agreements:
Distribution Agreement and Employee Benefits Plans
The Company entered into a distribution agreement with Monster effective as
of the Distribution Date, pursuant to which the Company, among other things,
agreed to maintain independent employee benefit plans and programs (other than
equity compensation) that are substantially similar to Monster's existing
employee benefit plans and programs. Following the Distribution, Monster
generally ceased to have any liability to the Company's current and former
employees and their beneficiaries including liability under any of Monster's
benefit plans or programs. Employees of the Company who held vested Monster
options at the Distribution Date retained those options for Monster common
stock, with no further vesting, until the options are exercised or expire, or
until they choose to leave or are terminated by the Company.
Real Estate Agreements
Monster and the Company entered into various lease and sublease
arrangements for the sharing of certain facilities for a transitional period on
commercial terms. In the case of subleases or sub-subleases of property, the
lease terms and conditions generally coincide with the remaining terms and
conditions of the primary lease or sublease, respectively.
Transition Services Agreement
The Company entered into a transition services agreement with Monster
effective as of the Distribution Date. Under the agreement, Monster provides to
the Company, and the Company provides to Monster, certain insurance, tax, legal,
facilities, human resources, information technology and other services that are
required for a limited time (generally for one year following the Distribution
Date, except as otherwise agreed).
Under the transition services agreement, the Company and Monster provide or
arrange to provide services to each other in exchange for fees, which the
Company believes are similar in material respects to what a third-party provider
would charge. Fees for transition services are based on two billing methods,
"agreed billing" and "pass-through billing." Under the agreed billing method,
Monster provides or arranges to provide the Company or the Company provides or
arranges to provide Monster, with services at the specified cost of providing
the services, plus, in the cases of some services, 5% of these costs, in any
case subject to increase by the party providing the relevant service, in the
exercise of its reasonable judgment, after the distribution. Under the
pass-through billing method, the Company and Monster reimburse each other for
all third party expenses, out-of-pocket costs and other expenses incurred in
providing or arranging to provide the relevant service.
The Company and Monster generally invoice each other monthly for the cost
of services provided under the transition services agreement. If either party
fails to pay an invoice by its due date, it is obligated to pay interest to the
invoicing party at the prime rate as reported in The Wall Street Journal.
Tax Separation Agreement
After the Distribution Date, the Company is no longer included in Monster's
consolidated group for United States federal income tax purposes. The Company
and Monster entered into a tax separation agreement to reflect the Company's
separation from Monster with respect to tax matters. The primary purpose of the
agreement is to reflect each party's rights and obligations relating to payments
and refunds of taxes that are attributable to periods beginning before and
including the date of the distribution and any taxes resulting from transactions
effected in connection with the distribution.
The tax separation agreement provides for payments between the two
companies to reflect tax liabilities, which may arise before and after the
distribution. It also covers the handling of audits, settlements, elections,
accounting methods and return filing in cases where both companies have an
interest in the results of these activities.
The Company has agreed to indemnify Monster for any tax liability
attributable to the distribution resulting from any action taken by the Company.
-13-
NOTE 11 - RELATED PARTY TRANSACTIONS (continued)
Monster Funding of HH Group Obligations
Monster has agreed to reimburse the Company for $13,530 of cash payments
related to the Company's accrued integration, restructuring and business
reorganization obligations and other expenses during the first year following
the spin-off. The Company received payments of $3,908 and $2,109 during the
third and second quarters of 2003, respectively, and will receive payments of
$2,500 from Monster in the first month subsequent to the end of each quarter
through the second quarter of 2004. Legal obligation for settlement of such
liabilities will remain with the Company.
Other Commercial Arrangements
The Company and Monster have entered into a three-year commercial contract
involving the utilization of Monster.com services for targeting, sourcing,
screening and tracking prospective job candidates around the world. The Company
and Monster may from time to time also negotiate and purchase further services
from the other, pursuant to customary terms and conditions. There is no
contractual commitment that requires the Company to use Monster services in
preference to other service providers.
Non-Cash Transfers
Monster transferred to the Company non-cash assets and liabilities in 2003
as a result of the Distribution. The approximate transfers by account were: due
from Monster Worldwide, Inc. $13,530, property and equipment $7,600, intangibles
$1,500, accrued expenses and other current liabilities $2,900, and other
liabilities $600.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Risks and Uncertainties
The Company has a history of operating losses and has only operated as an
independent company since the Distribution Date. Prior to the Distribution Date,
the Company's operations were historically financed by Monster as separate
segments of Monster's broader corporate organization rather than as a separate
stand-alone company. Monster assisted the Company by providing financing,
particularly for acquisitions, as well as providing corporate functions such as
identifying and negotiating acquisitions, legal and tax functions. Following the
Distribution, Monster has no obligation to provide assistance to the Company
other than the interim and transitional services, that will be provided by
Monster pursuant to the transition services agreement described in Note 11.
Because the Company's businesses have operated as an independent company only
since the Distribution Date, the Company cannot provide assurance that it will
be able to successfully implement the changes necessary to operate as a
profitable stand-alone business, or to secure additional debt or equity
financing on terms that are acceptable to the Company.
NOTE 13 - CREDIT FACILITY
The Company has a senior secured credit facility for $30,000 with Wells
Fargo Foothill, Inc. (the "Foothill Credit Facility"). The Foothill Credit
Facility has a term of three years, beginning March 31, 2003. Outstanding loans
will bear interest equal to the prime rate plus 0.25% or LIBOR plus 2.00%, at
the Company's option. The Foothill Credit Facility is secured by substantially
all of the assets of the Company and extensions of credit will be based on a
percentage of the accounts receivable of the Company. The Company expects to use
such credit, if and when required, to support its ongoing working capital
requirements, capital expenditures and other corporate purposes and to issue
letters of credit. As of September 30, 2003, the Company has not borrowed any
amounts under this credit facility, but has had letters of credit issued in an
outstanding amount of $1,843. On September 30, 2003, the Company entered into an
amendment to the original credit agreement that modified covenants and borrowing
capacity. The original agreement was for a credit facility of $50,000, which has
since been temporarily reduced to $30,000 until Wells Fargo Foothill has
arranged a syndication for the additional $20,000.
-14-
NOTE 14 - SEGMENT AND GEOGRAPHIC DATA
The Company operates in two business segments: Hudson and Highland. The
Company conducts operations in the following geographic regions: North America,
the Asia/Pacific Region (primarily Australia), the United Kingdom and
Continental Europe.
Segment information is presented in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
standard is based on a management approach that requires segmentation based upon
the Company's internal organization and disclosure of revenue and operating
income based upon internal accounting methods. The Company's financial reporting
systems present various data for management to run the business, including
internal profit and loss statements prepared on a basis not consistent with
generally accepted accounting principles. Accounts receivable, net and
long-lived assets (Property and equipment, net and Intangibles, net) are as of
the end of the period and separated by segment, but other assets are not
allocated to segments for internal reporting purposes.
Information by business segment Quarter Ended September 30, Nine Months Ended September 30,
- ------------------------------- -------------------------- -----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenue
Hudson $256,516 $254,672 $753,091 $760,403
Highland 15,665 16,038 47,562 52,174
-------- -------- -------- --------
$272,181 $270,710 $800,653 $812,577
======== ======== ======== ========
Goodwill impairment
Hudson $195,404 $ - $195,404 $ -
Highland 7,381 - 7,381 -
-------- -------- -------- --------
$202,785 $ - $202,785 $ -
======== ======== ======== ========
Operating (loss) income
Hudson $(204,195) $ 1,360 $ (231,018) $ (37,534)
Highland (13,235) 2,478 (24,491) (10,326)
-------- -------- -------- --------
(217,430) 3,838 (255,509) (47,860)
Corporate expenses (8,195) (9,372) (22,643) (28,116)
Interest and other income (expense), net (870) 128 (1,306) (281)
-------- -------- -------- --------
Loss before provision for (benefit of)
income taxes and accounting change $(226,495) $(5,406) $(279,458) $(76,257)
======== ======== ======== ========
Accounts receivable, net
Hudson $130,853 $176,153
Highland 10,123 13,950
-------- --------
$140,976 $190,103
======== ========
Long-lived assets
Hudson $30,086 $202,346
Highland 4,665 14,535
Corporate 6,461 820
-------- --------
$41,212 $217,701
======== ========
United United Continental
Information by geographic region States Australia Kingdom Europe Other(a) Total
- -------------------------------- ------ --------- ------- ------ -------- -----
For the Quarter Ended September 30, 2003
Revenue $72,869 $84,597 $71,324 $22,804 $20,587 $272,181
======= ======= ======= ======= ======= ========
Long-lived assets $18,918 $8,030 $6,906 $4,475 $2,883 $41,212
======= ======= ======= ======= ======= ========
For the Quarter Ended September 30, 2002
Revenue $92,676 $75,071 $63,463 $22,691 $16,809 $270,710
======= ======= ======= ======= ======= ========
Long-lived assets $80,194 $11,000 $61,181 $49,771 $15,555 $217,701
======= ======= ======= ======= ======= ========
For the nine months ended September 30, 2003
Revenue $239,852 $225,217 $205,316 $72,219 $58,049 $800,653
======= ======= ======= ======= ======= ========
For the nine months ended September 30, 2002
Revenue $274,392 $212,145 $196,543 $71,701 $57,796 $812,577
======= ======= ======= ======= ======= ========
(a) Includes the Americas other than the United States and Asia Pacific other
than Australia.
-15-
NOTE 15 - STOCK COMPENSATION PLANS
The Company maintains the Hudson Highland Group, Inc. Long Term Incentive
Plan (the "LTIP") pursuant to which it granted 734,356 stock options to purchase
shares of the Company's common stock to certain key employees in the second and
third quarters of 2003. Options canceled as of September 30, 2003 total 16,336.
Options outstanding have an average weighted exercise price of $13.99 and have
vesting periods over the next four years. Options exercisable within one year
from September 30, 2003 totaled 298,260. No options related to the common stock
of Monster were converted at the Distribution into options to purchase the
Company's stock.
The Company also granted 100,000 options to purchase shares of the
Company's common stock under the LTIP to four non-employee members of the Board
of Directors in the second quarter of 2003. These options had an average
weighted exercise price of $13.66 and had an immediate vesting of 40% of the
options granted with the remaining options vesting over the next three years.
All options granted were outstanding as of September 30, 2003. Options
exercisable within one year from September 30, 2003 totaled 60,000.
The Company also granted 65,375 shares of restricted stock under the LTIP
to certain key employees during the second quarter of 2003. Restricted stock
vests over a three-year period from the date of grant. Restricted stock of
32,688 shares will vest within one year. Amortization expense for restricted
stock for the three and nine-month periods ended September 30, 2003 were $163
and $293, respectively.
The Company maintains the Hudson Highland Group, Inc. Employee Stock
Purchase Plan (the "ESPP"), pursuant to which eligible employees may purchase
shares of the Company's common stock at the lesser of 85% of the fair market
value at the commencement of each plan purchase period or 85% of the fair market
value as of the purchase date. ESPP purchase dates for 2003 are August 31 and
December 31. This is a non-compensatory plan and no expenses were recorded for
the ESPP. The Company issued 65,354 shares of common stock pursuant to the ESPP
in the third quarter of 2003 at an average price of $11.28 per share.
The Company maintains the Hudson Highland Group, Inc. 401(k) Savings Plan
(the "401(k)"). The 401(k) plan allows eligible employees to contribute up to
15% of their earnings to the 401(k) plan. The Company matches contributions up
to 2% through a contribution of the Company's common stock. Vesting in the
Company's contribution is over a five-year period. Expense for the nine-month
period ended September 30, 2003 for the 401(k) plan was $711.
-16-
Report of Independent Certified Public Accountants
Board of Directors
Hudson Highland Group, Inc.
New York, New York
We have reviewed the consolidated condensed balance sheet of Hudson
Highland Group, Inc. and subsidiaries as of September 30, 2003, the related
consolidated condensed statements of operations for the three-month and
nine-month periods ended September 30, 2003 and 2002 and cash flows for the
nine-month periods ended September 30, 2003 and 2002 included in the
accompanying Securities and Exchange Commission Form 10-Q for the period ended
September 30, 2003. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the combined balance sheet as of
December 31, 2002, and the related combined statements of operations, divisional
equity, and cash flows for the year then ended (not presented herein); and in
our report dated February 12, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying combined balance sheet as of December 31, 2002 is fairly stated
in all material respects in relation to the combined balance sheet from which it
has been derived.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
New York, New York
October 28, 2003
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (in thousands, except per share data)
The following discussion should be read in conjunction with the
consolidated condensed financial statements and the notes thereto, included in
Item 1 of this Form 10-Q. This Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements. Please
see "Special Note Regarding Forward-Looking Statements" for a discussion of the
uncertainties, risks and assumptions associated with these statements
As one of the world's largest professional staffing and executive search
agencies, Hudson Highland Group, Inc. ("the Company" or "HH Group") helps its
clients (employers and professional recruiters) find the right employee, from
mid-level candidates to senior executives. HH Group was formed from the
distribution of the Hudson Global Resources ("Hudson") and Highland Partners
("Highland") divisions of Monster Worldwide, Inc., formerly known as TMP
Worldwide Inc. ("Monster"), and currently operates in 24 countries and employs
approximately 4,000 people globally. For the nine-month period ended September
30, 2003, 70% of the Company's revenues were earned outside of the United
States. The Company's two principal business segments are as follows:
Hudson Global Resources. Hudson primarily focuses on providing professional
temporary and contract personnel and business solutions to its clients and
mid-level executive recruitment or placement services. Mid-level executives and
professionals are those who typically earn between $50,000 and $150,000
annually, and possess the set of executive or professional skills and/or profile
required by its clients. In the case of the temporary and contracting business,
Hudson primarily focuses on the placement of professionals or executives in
temporary assignments that can range from one day to more than 12 months.
Hudson's sales strategy focuses on clients operating in particular sectors, such
as health care, financial services, and technology and communications. Hudson
supplies candidates in a variety of specialist fields such as law, accounting,
banking and finance, health care, engineering, technology and science. Hudson
uses both traditional and interactive methods to find and recruit potential
candidates for its clients, employing a suite of products, which assess talent
and help predict whether a candidate will be successful in a given role.
Hudson also provides a variety of other services, including career
management, executive assessment and coaching, and human resources consulting.
The Company's management believes these service offerings, which are growing at
a greater rate than other services, will help balance the cyclical nature of its
core offerings.
These services allow Hudson to offer clients a comprehensive set of human
capital management services, ranging from temporary workers, to assessment or
coaching of permanent staff, to recruitment or search for permanent workers, to
outplacement. These services are marketed under the name Hudson Human Resource
Consulting in certain markets around the world.
Highland Partners. Highland offers a comprehensive range of executive
search services aimed at finding the senior level executive or professional for
a wide range of clients operating in sectors such as health care, technology,
financial services, retail and consumer, and industrial. Highland also has an
active practice in assisting clients who desire to augment their boards of
directors. Highland concentrates on searches for positions with annual
compensation of $150,000 or more and operates exclusively on a retained basis.
For the periods presented in this Form 10-Q through March 31, 2003 (the
"Distribution Date"), HH Group operated as part of Monster. Prior to the
Distribution Date, the businesses described in this Form 10-Q were conducted by
Monster through various divisions and subsidiaries. Immediately prior to the
Distribution (as defined below), Monster transferred the assets and liabilities
of its Hudson and Highland business segments to HH Group at Monster's historical
cost. On the Distribution Date, Monster distributed to all of its stockholders
of record one share of HH Group Common Stock for each thirteen and one-third
shares of Monster Common Stock so held (the "Distribution"). Following the
Distribution, HH Group became an independent public company and Monster has no
continuing stock ownership interest in HH Group. Prior to the Distribution, HH
Group entered into several agreements with Monster in connection with, among
other things, employee matters, income taxes, leased real property and
transitional services. See Note 11 of the Notes to Consolidated Condensed
Financial Statements for a description of the agreements.
-18-
The Company's consolidated condensed financial statements prior to the
Distribution reflect the historical financial position, results of operations
and cash flows of the businesses transferred to HH Group from Monster as part of
the Distribution. Additionally, net intercompany balances due to Monster have
been contributed to HH Group and are reflected as divisional equity in the
accompanying consolidated condensed financial statements. The financial
information included herein, however, may not necessarily reflect HH Group's
financial position, results of operations and cash flows in the future or what
its financial position, results of operations and cash flows would have been had
HH Group been a stand-alone company during the periods presented prior to the
Distribution.
The Company's costs and expenses prior to March 31, 2003 in the
accompanying consolidated condensed financial statements include allocations
from Monster for executive, legal, accounting, treasury, real estate,
information technology, merger and integration costs and other Monster corporate
services and infrastructure costs because specific identification of the
expenses is not practicable. The total corporate services allocation to the
Company from Monster was $5,260 and $23,181 for the nine months ended September
30, 2003 and 2002, respectively, including $0 and $8,776 for the quarter ended
September 30, 2003 and 2002, respectively. The expense allocations were
determined on the basis that Monster and HH Group considered to be reasonable
reflections of the utilization of services provided or the benefit received by
HH Group using ratios that are primarily based on its revenue, net of costs of
temporary contractors compared to Monster as a whole. Interest charges from
Monster were allocated to HH Group only for that portion of third-party debt
attributed to HH Group.
The Company recorded merger, integration and reorganization and
restructuring expense of $7,431 and $59,189 for the nine months ended September
30, 2003 and 2002, respectively. The merger and integration charges were
recorded in connection with its pooling of interest transactions and consist of
costs to integrate and/or exit certain aspects of the operations of its pooled
entities, particularly in areas where duplicate functions and facilities
existed. During the first nine months of 2003, the Company recorded $876 related
to changes in estimates to plans in merger and integration expense. The expense
related to the reorganization of operations announced in the second and fourth
quarters of 2002 was $6,555 in the first nine months of 2003.
Prior to the Distribution, HH Group was not a separate taxable entity for
federal, state or local income tax purposes and its operating results are
included in Monster 's tax return. Income taxes were calculated as if HH Group
filed separate tax returns. However, Monster was managing its tax position for
the benefit of its entire portfolio of businesses, and its tax strategies are
not necessarily reflective of the tax strategies that HH Group would have
followed or will follow as a stand-alone company.
Critical Accounting Policies and Items Affecting Comparability
Quality financial reporting relies on consistent application of company
accounting policies that are based on generally accepted accounting principles.
Management considers the accounting policies discussed below to be critical to
understand HH Group's financial statements and often require management judgment
and estimates regarding matters that are inherently uncertain.
Revenue Recognition
Although the Company's revenue recognition policy involves a relatively low
level of uncertainty, it does require judgment on complex matters that is
subject to multiple sources of authoritative guidance.
Hudson. The Company recognizes revenue for services at the time services
are provided and revenue is recorded on a time and materials basis. Temporary
contracting revenues are reported gross when the Company acts as principal in
the transaction and is at risk for collection. Revenues that do not meet the
criteria for gross revenue reporting are reported on a net basis. Revenues
generated when the Company permanently places an individual with a client are
recorded at the time of placement, net of an allowance for estimated fee
reversals.
Highland. Substantially all professional fee revenue is derived from fees
for professional services related to executive recruitment, consulting and
related services performed on a retained basis. Fee revenue is generally
one-third of the estimated first year compensation and reimbursed expenses, plus
a percentage of the fee to cover indirect expenses. Fee revenue is recognized as
earned. The Company generally bills clients in three monthly installments. Fees
earned in excess of the initial contract amount are billed at completion of the
engagement. Reimbursed out-of-pocket expenses are included in revenue.
-19-
Direct Costs
Direct costs include the direct staffing costs of salaries, payroll taxes,
employee benefits, travel expenses and insurance costs for the Company's
temporary contractors and reimbursed out-of-pocket expense and other direct
costs. Other than reimbursed out-of-pocket expenses, there are no other direct
costs associated with the search and permanent placement revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the salaries,
commissions, payroll taxes and employee benefits related to recruitment
professionals, executive level employees, administrative staff and other
employees of HH Group who are not temporary contractors, and the expenses for
marketing and promotion, occupancy, equipment leasing and maintenance,
utilities, travel expenses, professional fees and depreciation and amortization.
Accounts Receivable
The Company is required to estimate the collectability of its trade
receivables and notes receivable. A considerable amount of judgment is required
in assessing the ultimate realization of these receivables including the current
credit-worthiness of each customer. Changes in required reserves may occur due
to changing circumstances, including changes in the current market environment
or in the particular circumstances of individual customers.
Merger, Integration, Restructuring and Business Reorganization Plans
The Company has recorded significant charges and accruals in connection
with its merger, integration, restructuring and business reorganization plans.
These reserves include estimates pertaining to employee separation costs and the
settlement of contractual obligations resulting from its actions. Although the
Company does not anticipate significant changes, the actual costs may differ
from these estimates.
Contingencies
The Company is subject to proceedings, lawsuits and other claims related to
labor, service and other matters. The Company is required to assess the
likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. The Company makes a determination of the
amount of reserves required, if any, for these contingencies after careful
analysis of each individual issue. The required reserves may change in the
future due to new developments in each matter or changes in approach, such as a
change in settlement strategy in dealing with these matters.
Intangibles
Intangibles represent acquisition costs in excess of the fair value of net
tangible assets of businesses purchased and consist primarily of the value of
client lists, non-compete agreements, trademarks and goodwill. The Company
amortizes these intangibles, other than goodwill, over periods ranging from two
to thirty years. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets ("SFAS 142"), the Company no longer amortizes goodwill but instead will
evaluate its goodwill annually for impairment, or earlier if indicators of
potential impairment exist. Changes in the Company's strategy and market
conditions could significantly impact these evaluations and require adjustments
to recorded amounts of intangible assets.
In the third quarter of 2003, the Company recorded a non-cash goodwill
impairment charge of $202,785. The impairment charge was recorded after the
Company determined that the goodwill value was impaired based on a fair-value
examination. The impairment valuation was based upon a discounted cash flow
approach that used estimated future revenues and costs for each business segment
as well as appropriate discount rates. The estimates that were used are
consistent with the plans and estimates the Company is using to manage the
underlying business. The goodwill impairment charge wrote-off all goodwill
related to both of the Company's business segments. As a result of the adoption
of SFAS 142 on January 1, 2002, the Company recorded a non-cash impairment
charge of $293,000 to reduce the carrying value of goodwill. Intangible asset
amortization expense for the nine months ended September 30, 2003 and 2002 was
$621and $579, respectively.
-20-
Results of Operations
The following table sets forth the Company's revenue, operating loss, net
loss, temporary contracting revenue, direct costs of temporary contracting and
temporary contracting gross margin for the quarters and nine month periods ended
September 30.
Quarter Ended September 30, Nine Months Ended September 30,
-------------------------- ------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenue $272,181 $270,710 $800,653 $812,577
========= ======== ========= =========
Operating loss $(225,625) $(5,534) $(278,152) $(75,976)
========= ======== ========= =========
Net loss $(226,274) $(5,472) $(285,375) $(367,430)
========= ======== ========= =========
TEMPORARY CONTRACTING DATA (1):
Temporary contracting revenue $196,790 $199,117 $571,499 $589,087
Direct costs of temporary contracting 164,364 160,802 473,686 473,290
--------- -------- --------- ---------
Temporary contracting gross margin $ 32,426 $ 38,315 $ 97,813 $115,797
========= ======== ========= =========
Gross margin as a percent of revenue 16.5% 19.2% 17.1% 19.7%
(1) Temporary contracting revenues are a component of Hudson revenues.
Temporary contracting gross margin and gross margin as a percent of revenue
are shown to provide additional information on the Company's ability to
manage its cost structure and provide further comparability relative to HH
Group's peers. Temporary contracting gross margin is derived by deducting
the direct costs of temporary contracting from temporary contracting
revenue. The Company's calculation of gross margin may differ from those of
other companies.
Constant Currencies
The Company defines the term "constant currencies" to mean that financial
data for a period are translated into U.S. Dollars using the same foreign
currency exchange rates that were used to translate financial data for the
previously reported period. Changes in revenues, direct costs, gross margin and
selling, general and administrative expenses include the effect of changes in
foreign currency exchange rates. Variance analysis usually describes
period-to-period variances that are calculated using constant currency as a
percentage. The Company's management reviews and analyzes business results in
constant currencies and believes these results better represent the Company's
underlying business trends.
The Company believes that these calculations are a useful measure,
indicating the actual change in operations. Earnings from subsidiaries are
rarely repatriated to the United States, and there are not significant gains or
losses on foreign currency transactions between subsidiaries therefore, changes
in foreign currency exchange rates generally impact only reported earnings and
not the Company's economic condition.
Quarter Ended September 30,
-----------------------------------------------------------------
2003 2002
----------------------------------------------- --------------
Currency Constant
As reported Translation Currencies As reported
----------- ----------- ---------- -----------
Hudson revenue $256,516 $(22,594) $233,922 $254,672
Highland revenue 15,665 (624) 15,041 16,038
-------- -------- -------- --------
Total revenue 272,181 (23,218) 248,963 270,710
-------- -------- -------- --------
Direct costs 173,959 (14,351) 159,608 166,158
-------- -------- -------- --------
Gross margin $ 98,222 $ (8,867) $ 89,355 $104,552
======== ======== ======== ========
Selling, general and
administrative expenses $122,070 $ (8,897) $113,173 $110,581
======== ======== ======== ========
-21-
Nine Months Ended September 30,
---------------------------------------------------------------
2003 2002
----------------------------------------------- ------------
Currency Constant
As reported Translation Currencies As reported
----------- ----------- ---------- -----------
Hudson revenue $753,091 $(67,732) $685,359 $760,403
Highland revenue 47,562 (2,273) 45,289 52,174
-------- -------- -------- --------
Total revenue 800,653 (70,005) 730,648 812,577
-------- -------- -------- --------
Direct costs 501,181 (41,588) 459,593 484,752
-------- -------- -------- --------
Gross margin $299,472 $(28,417) $271,055 $327,825
======== ======== ======== ========
Selling, general and
administrative expenses $367,408 $(31,166) $336,242 $344,612
======== ======== ======== ========
Quarter Ended September 30, 2003 Compared to the Quarter Ended September 30,
2002
Total revenues for the three months ended September 30, 2003 were $272,181,
an increase of $1,471 or 0.5%, as compared to total revenues of $270,710 in the
third quarter of 2002. On a constant currencies basis total revenues would have
decreased 8.0% comparing the third quarter 2003 with the third quarter 2002.
This decrease was primarily due to lower temporary contracting revenues in the
U.S. and Asia Pacific markets as a result of the effects of weak economic and
labor environments, which reduced demand for the Company's services.
Hudson revenues were $256,516 for the three months ended September 30,
2003, an increase of 0.7% from $254,672 for the same period of 2002. On a
constant currencies basis Hudson revenues would have decreased 8.1% comparing
the third quarter 2003 with the third quarter 2002, reflecting lower demand for
temporary staffing, particularly in the U.S. information technologies ("IT")
market and lower temporary staffing revenues in Australia, partially offset by
higher revenues in the U.K.
Highland revenues of $15,665 for the three months ended September 30, 2003
were down 2.3% from $16,038 in the same period of 2002, reflecting the continued
adverse impact that the challenging global economy is having on executive level
search placements. On a constant currencies basis, Highland revenues would have
decreased 6.2% comparing the third quarter 2003 with the third quarter 2002.
Direct costs for the three months ended September 30, 2003 were $173,959,
an increase of 4.7% compared to $166,158 for the same period of 2002. On a
constant currencies basis, direct costs would have decreased in the third
quarter of 2003 period in comparison to the prior year by 3.9%. The decrease in
direct costs is attributable to the lower demand for temporary contracting
services. This decrease was partially offset by permanent staffing out-of-pocket
expenses classified as direct costs in 2003.
Gross margin, defined as revenue less direct costs, for the three months
ended September 30, 2003 was $98,222, lower by $6,330 or 6.1% from $104,552
reported in the three months ended September 30, 2002. Gross margin as a
percentage of revenue declined to 36.1% for the third quarter of 2003, from
38.6% in the third quarter of 2002. The decrease was primarily due to a decline
in permanent staffing revenue, particularly in Asia, Canada and various
countries in continental Europe; lower margins in temporary staffing, largely
due to the domestic IT staffing market; and an increase in direct costs
associated with the classification of permanent staffing out-of-pocket expenses.
On a constant currencies basis, the third quarter 2003 gross margin would have
decreased by 14.5% compared to the third quarter 2002.
Selling, general and administrative expenses for the three months ended
September 30, 2003 were $122,070 an increase of 10.4% compared with $110,581 for
the same period of 2002. Selling general and administrative expenses were 44.8%
and 40.8%, as a percentage of revenue for the third quarter of 2003 and 2002,
respectively. A higher provision for doubtful accounts of $5,734, the cost
related to the repositioning of Highland Europe $3,000 and the reclassification
of certain transactions with Monster to selling expenses negatively impacted
third quarter 2003 results when compared to the same period in 2002. This was
partially offset by continued cost cutting in reaction to the current economic
and labor environment. On a constant currencies basis, the third quarter 2003
selling, general and administrative expenses would have increased by 2.3%
compared to the third quarter 2002.
-22-
In the third quarter of 2003, the Company determined that goodwill should
be tested for impairment due to current business conditions and changes in
circumstances resulting from the Distribution, which established the Company as
an independent entity with a separate market capitalization. As a result of this
test and the related fair value examination, the Company recorded a non-cash
goodwill impairment charge of $202,785. The impairment valuation was based upon
a discounted cash flow approach that used estimated future revenues and costs
for each business segment as well as appropriate discount rates. The estimates
that were used are consistent with the plans and estimates the Company is using
to manage the underlying business. The goodwill impairment charge wrote-off all
goodwill related to both of the Company's business segments.
Business reorganization and special charges (reversals) for the three
months ended September 30, 2003 totaled $(906) compared to $407 in the same
period of 2002. The 2002 expenses related to the cost for streamlining of
operations as announced in the second quarter of 2002. The reversals for the
third quarter of 2003 were primarily related to the finalization of the
consolidation of certain facilities and leases at a lower than expected cost.
Merger and integration recoveries reflect costs incurred as a result of
pooling-of-interests transactions and the integration of such companies. For the
three months ended September 30, 2003, merger and integration recoveries were
$102, compared to recoveries of $902 from the same period in the prior year.
Operating loss for the three months ended September 30, 2003 was $225,625,
compared to an operating loss of $5,534 for the comparable period in 2002. The
increase in the loss was primarily the result of the goodwill impairment charge
of $202,785. The remainder of the increase was the result of a lower gross
margin and higher selling, general and administrative costs.
Hudson's operating loss for the three months ended September 30, 2003 was
$204,195, compared to operating income of $1,360 for the same period in 2002.
The three-month 2003 loss included a goodwill impairment charge of $195,404 and
higher allowances for doubtful accounts of $4,485, when compared to 2002
results.
Highland's operating loss for the three months ended September 30, 2003 was
$13,235, compared to operating income of $2,478 for the same period in 2002. The
three-month 2003 loss included a goodwill impairment charge of $7,381 and cost
of $3,000 related to the repositioning of Highland Europe.
Corporate expense for the three months ended September 30, 2003 was $8,195,
compared to the Monster expense allocation of $9,372 in the comparable period of
2002.
Other non-operating expense, including net interest expense, was $870 in
the third quarter of 2003 and $128 for the same period of 2002.
The benefit for income taxes for the three months ended September 30, 2003
was $221 on a pretax loss of $226,495 compared with an expense of $66 on a
pretax loss of $5,406 for the same period of 2002. The Company's effective tax
rate for the three months ended September 30, 2003 and 2002 differs
significantly from the U.S. Federal statutory rate of 35% as a result of the
inability of the Company to recognize benefits from its current losses related
to the goodwill impairment charge and current losses from its businesses where
the possible future ability to utilize its loss carryforwards is uncertain, as
well as certain non-deductible expenses such as amortization, business
restructuring and spin-off costs, merger costs from pooling of interests
transactions, and variations from the U.S. tax rate in foreign jurisdictions.
Net loss was $226,274 for the three months ended September 30, 2003,
compared with a loss of $5,472 for the same period in 2002.
Basic and diluted loss per share for the third quarter of 2003 was a loss
of $26.73 per share compared to a loss of $.65 per share in the third quarter of
2002. For the 2003 and 2002 periods, dilutive earnings per share calculations do
not differ from basic earnings per share because the effects of any potential
common stock were anti-dilutive and therefore not included in the calculation of
dilutive earnings per share.
-23-
Nine Months Ended September 30, 2003 Compared to the Nine Months Ended September
30, 2002
The Company's financial results for the nine months ended September 30,
2003 include the results for the first quarter of 2003, when the Company was a
whole-owned subsidiary of Monster.
Total revenues for the nine months ended September 30, 2003 were $800,653,
a decrease of $11,924 or 1.5%, as compared to total revenues of $812,577 in the
first nine months of 2002. This decrease was primarily due to the effects of
weak global economic and labor environments, which reduced demand for the
Company's services. On a constant currencies basis total revenues would have
decreased 10.1% comparing the first nine months of 2003 with the same period in
2002.
Hudson revenues were $753,091 for the nine months ended September 30, 2003,
down 1.0% from $760,403 for the same period of 2002, reflecting lower demand for
permanent staffing revenue, particularly in various countries in continental
Europe and lower revenue from temporary staffing, largely due to lower demand in
the domestic IT staffing market. On a constant currencies basis Hudson revenues
would have decreased 9.9% comparing the first nine months of 2003 with the same
period in 2002.
Highland revenues of $47,562 for the nine months ended September 30, 2003
were down 8.8% from $52,174 in same period of 2002, reflecting the continued
adverse impact that the challenging global economy is having on executive level
search placements. On a constant currencies basis, Highland revenues would have
decreased 13.2% comparing the first nine months of 2003 with the same period in
2002.
Direct costs for the nine months ended September 30, 2003 were $501,181,
compared to $484,752 for the same period of 2002. On a constant currencies
basis, direct costs would have decreased in the first nine months of 2003 in
comparison to the prior year by 5.2%. The decrease was the result of lower
requirements for temporary contractors, partially offset by the classification
of permanent staffing out-of-pocket expenses as direct costs in 2003 only.
Gross margin, defined as revenue less direct costs, for the nine months
ended September 30, 2003 was $299,472, lower by $28,353 or 8.6% from $327,825
reported in the nine months ended September 30, 2002. Gross margin as a
percentage of revenue declined to 37.4% for the first nine months of 2003, from
40.3% in the first nine months of 2002. The decrease was primarily due to lower
revenue in temporary staffing, largely due to lower demand in the domestic IT
and engineering staffing market; a decline in permanent staffing revenue,
particularly Asia, Canada and various countries in continental Europe; and an
increase in direct costs associated with the classification of permanent
staffing out-of-pocket expenses. On a constant currencies basis gross margin
would have decreased by 17.3% in the first nine months of 2003 when compared to
the same period of 2002.
Selling, general and administrative expenses for the nine months ended
September 30, 2003 were $367,408, higher by 6.6% when compared with $344,612 for
the same period of 2002. Selling general and administrative expenses were 45.9%
and 42.4%, as a percentage of revenue for the first half of 2003 and 2002,
respectively. A higher provision for doubtful accounts of $13,664 and the
reclassification of certain transactions with Monster to selling expenses
negatively impacted these expenses for the 2003 nine month period compared to
the same period in 2002. This was partially offset by continued cost cutting in
reaction to the current economic and labor environment. On a constant currencies
basis the first nine months of 2003 selling, general and administrative expenses
would have decreased by 2.4% compared to the same period of 2002.
In the third quarter of 2003, the Company determined that goodwill should
be tested for impairment due to current business conditions and changes in
circumstances resulting from the Distribution, which established the Company as
an independent entity with a separate market capitalization. As a result of this
test and the related fair value examination, the Company recorded a non-cash
goodwill impairment charge of $202,785. The impairment valuation was based upon
a discounted cash flow approach that used estimated future revenues and costs
for each business segment as well as appropriate discount rates. The estimates
that were used are consistent with the plans and estimates the Company is using
to manage the underlying business. The goodwill impairment charge wrote-off all
goodwill related to both of the Company's business segments.
Business reorganization and special charges for the nine months ended
September 30, 2003 totaled $6,555, as compared to $53,133 in the same period of
2002. The 2002 expenses related to the cost of streamlining operations as
announced in the second quarter of 2002. The expenses for the first nine months
of 2003 were primarily related to consolidation of facilities, workforce
reductions and professional fees related to the Distribution and the
continuation of the process to streamline operations begun in 2002.
-24-
Merger and integration expenses reflect costs incurred as a result of
pooling-of-interests transactions and the integration of such companies. For the
nine months ended September 30, 2003, merger and integration costs were $876, a
reduction of $5,180 from the same period in the prior year. Merger and
integration expenses included lease obligations, office integration costs, the
write-off of fixed assets that will not be used in the future; and severance,
professional fees and employee stay bonuses to certain key personnel of the
merged companies. The decrease in expense for the first nine months of 2003
compared to the same period in 2002 was a result of the finalization of the exit
strategies related to the pooled businesses.
Operating loss for the nine months ended September 30, 2003 was $278,152,
compared to an operating loss of $75,976 for the comparable period in 2002. The
increase in the loss was primarily the result of the goodwill impairment charge
of $202,785 in 2003 and the remainder was due to higher selling, general and
administrative expenses and lower gross margin, partially offset by a reduction
in business reorganization expenses.
Hudson's operating loss for the nine months ended September 30, 2003 was
$231,018, compared to an operating loss of $37,534 for the same period in 2002.
The nine-month 2003 loss included a goodwill impairment charge of $195,404,
higher allowances for doubtful accounts of $10,857 and lower business
reorganization and merger and integration costs of $34,931, when compared to
2002 results.
Highland's operating loss for the nine months ended September 30, 2003 was
$24,491, compared to an operating loss of $10,326 for the same period in 2002.
The nine-month 2003 loss included a goodwill impairment charge of $7,381, the
cost related to the repositioning of Highland Europe $3,000 and lower business
reorganization and merger and integration costs of $12,029, when compared to
2002 results.
Corporate expense for the nine months ended September 30, 2003 was $22,643,
compared to the Monster expense allocation of $28,116 in the comparable period
of 2002. The nine-month 2003 expenses include lower business reorganization and
merger and integration costs of $4,798, when compared to 2002 results.
Other non-operating expense, including net interest expense, was $1,306 in
the first nine months of 2003 and $281 for the same period of 2002.
The provision for income taxes for the nine months ended September 30, 2003
was $5,917 on a pretax loss of $279,458, compared with a benefit of $1,827 on a
pretax loss of $76,257 for the same period of 2002. The Company's effective tax
rate for the nine months ended September 30, 2003 and 2002 differs significantly
from the U.S. Federal statutory rate of 35% as a result of the inability of the
Company to recognize benefits from its current losses related to the goodwill
impairment charge and current losses from its businesses where the possible
future ability to utilize its loss carryforwards is uncertain, as well as
valuation allowances on previously established deferred tax assets, net
operating losses retained or utilized by Monster, certain non-deductible
expenses such as amortization, business restructuring and spin-off costs, merger
costs from pooling of interests transactions, and variations from the U.S. tax
rate in foreign jurisdictions.
Net loss before cumulative accounting change was $285,375 for the nine
months ended September 30, 2003, compared with a loss of $74,430 for the same
period in 2002.
In conjunction with the adoption of SFAS 142 as of the beginning of fiscal
year 2002, the Company completed a goodwill impairment review for its operating
segments. The results of the impairment review indicated that the carrying value
of goodwill might not be recoverable. Accordingly, the Company recorded as a
cumulative effect of an accounting change a one-time goodwill impairment charge
of $293,000 at January 1, 2002 to reduce the carrying value of goodwill to its
estimated fair value.
Net loss was $285,375 for the nine months ended September 30, 2003 compared
with a net loss of $367,430 for the same period in 2002. Basic and diluted loss
per share on loss before accounting change for the first nine months was a loss
of $33.78 per share, compared to a loss of $8.91 per share in the first nine
months of 2002. Basic and diluted loss per share for the first nine months of
2003 was a loss of $33.78 per share, compared to a loss of $43.99 per share in
the first nine months of 2002. Basic average shares outstanding were essentially
unchanged between the two periods. For the 2003 and 2002 periods, dilutive
earnings per share calculations do not differ from basic earnings per share
because the effects of any potential common stock were anti-dilutive and
therefore not included in the calculation of dilutive earnings per share.
-25-
Liquidity and Capital Resources
Prior to the Distribution, cash receipts associated with the HH Group
business were largely retained by Monster and Monster provided funds to cover HH
Group's disbursements for operating activities, capital expenditures and
acquisitions. The cash balances at December 31, 2002 were based on the results
of the Company's operations and the net cash resulting from inter-company
transfers between HH Group and Monster. The investing and financing activities
discussed below during 2002 and the first quarter of 2003 were funded as a
result of activities entered into by Monster and relating to HH Group
operations. The long-term debt amounts reported by the Company primarily relate
to capital lease obligations and long-term debt that Monster incurred to acquire
businesses and other assets that were transferred to the Company immediately
prior to the Distribution.
The Company's liquidity needs arise primarily from funding working capital
requirements, as well as capital investment in information technology. Prior to
the Distribution, HH Group historically relied upon Monster's centralized cash
management function and Monster's line of credit facility. Legal obligation for
settlement of such liabilities will remain with the Company. In connection with
the Distribution, Monster provided HH Group cash in the aggregate amount of
$40,000 upon completion of the Distribution, agreed to reimburse the Company
$13,530 of cash payments (the Company received payments of $3,908 and $2,109
during the third and second quarters of 2003, respectively, and will receive
payments of $2,500 from Monster in the first month subsequent to the end of each
quarter through the second quarter of 2004) due under its accrued integration
restructuring and business reorganization plans.
The Company has a senior secured credit facility for $30,000 with Wells
Fargo Foothill, Inc. (the "Foothill Credit Facility"). The Foothill Credit
Facility has a term of three years, beginning March 31, 2003. Outstanding loans
will bear interest equal to the prime rate plus 0.25% or LIBOR plus 2.00%, at
the Company's option. The Foothill Credit Facility is secured by substantially
all of the assets of the Company and extensions of credit will be based on a
percentage of the accounts receivable of the Company. The Company expects to use
such credit, if and when required, to support its ongoing working capital
requirements, capital expenditures and other corporate purposes and to issue
letters of credit. As of September 30, 2003, the Company has not borrowed any
amounts under this credit facility, but has had letters of credit issued in an
outstanding amount of $1,843. On September 30, 2003, the Company entered into an
amendment to the original credit agreement that modified covenants and borrowing
capacity. The original agreement was for a credit facility of $50,000, which has
since been temporarily reduced to $30,000 until Wells Fargo Foothill has
arranged a syndication for the additional $20,000.
The Foothill Credit Facility contains various restrictions and covenants,
including (1) prohibitions on payments of dividends and repurchases of the
Company's stock; (2) requirements that the Company maintain certain financial
ratios at prescribed levels; (3) restrictions on the ability of the Company to
make additional borrowings, or to consolidate, merge or otherwise fundamentally
change the ownership of the Company; and (4) limitations on investments,
dispositions of assets and guarantees of indebtedness. These restrictions and
covenants could limit the Company's ability to respond to market conditions, to
provide for unanticipated capital investments, to raise additional debt or
equity capital, to pay dividends or to take advantage of business opportunities,
including future acquisitions.
During the nine months ended September 30, 2003 and 2002, the Company used
cash in operating activities of $22,375 and $96,928, respectively. Cash usage
decreased in 2003 from 2002 as a result of improved working capital accounts,
primarily accounts receivable and current liabilities. These improvements in
cash flow were partially offset by higher spending related to the business
reorganization plans in 2003.
During the nine months ended September 30, 2003 and 2002, the Company used
cash in investing activities of $8,154 and $14,552, respectively. This use of
cash was primarily related to capital expenditures in the normal course of
operations and payments related to businesses purchased in prior years. The
decreased use of cash in the first nine months of 2003 compared to 2002 was the
result of lower payments related to prior period purchases of businesses, as
these projects were essentially completed in 2002, partially offset by higher
capital expenditures.
During the nine months ended September 30, 2003 and 2002, the Company
generated cash from financing activities of $40,681 and $100,421, respectively.
The cash funding from Monster and debt payments to third parties were both lower
in 2003 compared to 2002. The Company received $737 for the issuance of its
common stock for the Employee Stock Purchase Plan in the third quarter of 2003.
The Company's debt relates to third-party debt and capital leases incurred to
acquire businesses during 2001. Total third-party debt and capital leases as of
September 30, 2003 were $1,408.
The Company believes that the cash and cash equivalents on hand at
September 30, 2003, supplemented by the Foothill Credit Facility, will provide
it with sufficient liquidity to satisfy its working capital needs, capital
expenditures, investment requirements and commitments through at least the next
twelve months. Cash generated from operating activities is subject to
fluctuations in the global economy and unemployment rates.
-26-
Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"). SFAS 146 applies to costs
associated with an exit (including restructuring) or disposal activity. Those
activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. Under
SFAS 146, a company records a liability for a cost associated with an exit or
disposal activity when that liability is incurred and can be measured at fair
value. SFAS 146 requires a company to disclose information about its exit and
disposal activities, the related costs and changes in those costs in the notes
to the interim and annual financial statements that include the period in which
an exit activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002. Under SFAS 146, a company may not restate its
previously issued financial statements. Liabilities recognized as a result of
disposal activities prior to the adoption of SFAS 146 continue to be accounted
for under Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) ("EITF 94-3").
The Company's adoption of SFAS 146 on January 1, 2003, did not have a material
impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure, ("SFAS 148") an amendment of SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), which provides
alternatives for companies electing to account for stock-based compensation
using the fair value criteria established by SFAS 123. The Company intends to
account for stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25.
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
the Indebtedness of Others, which addresses the accounting for and disclosure of
guarantees. Interpretation No. 45 requires a guarantor to recognize a liability
for the fair value of a guarantee at inception. The recognition of the liability
is required even if it is not probable that payments will be required under the
guarantee. The disclosure requirements are effective for interim and annual
financial statements ending after December 15, 2002. The initial recognition and
measurement provisions are effective on a prospective basis for guarantees
issued or modified after December 31, 2002. The Company's adoption of
Interpretation No. 45 did not have a material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities. The objective of this interpretation is to
provide guidance on how to identify a variable interest entity ("VIE") and
determine when the assets, liabilities, noncontrolling interests, and results of
operations of a VIE need to be included in a company's consolidated financial
statements. A company that holds variable interests in an entity will need to
consolidate the entity if the company's interest in the VIE is such that the
company will absorb a majority of the VIE's expected losses and/or receive a
majority of the entity's expected residual returns, if they occur.
Interpretation No. 46 also requires additional disclosures by primary
beneficiaries and other significant variable interest holders. The
interpretation became effective upon issuance. The Company's adoption of this
interpretation did not have an effect on its consolidated financial statements.
On May 1, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003. The Company's adoption of SFAS 149 should not have an
effect on its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150"). SFAS 150 changes the accounting for certain financial instruments that,
under previous guidance, could be classified as equity or "mezzanine" equity, by
now requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. SFAS 150 affects an entity's classification of the following
freestanding instruments; mandatorily redeemable instruments, financial
instruments to repurchase an entity's own equity instruments and financial
instruments embodying obligations that the issuer must or could choose to settle
by issuing a variable number of its shares or other equity instruments based
solely on (a) a fixed monetary amount known at inception or (b) something other
than changes in its own equity instruments. SFAS 150 is effective for periods
beginning after June 15, 2003. The Company's adoption of this interpretation did
not have an effect on its consolidated financial statements.
-27-
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand the future
prospects of a company and make informed investment decisions. This Form 10-Q
contains these types of statements, which the Company believes to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995.
All statements other than statements of historical fact included in this
Form 10-Q are forward-looking statements. Words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "predict," "believe" and
similar words, expressions and variations of these words and expressions are
intended to identify forward-looking statements. The Company uses such
forward-looking statements regarding its future financial condition and results
of operations and its business operations and future business prospects in this
Form 10-Q. All forward-looking statements reflect the Company's present
expectation of future events and are subject to a number of important factors,
risks, uncertainties and assumptions, including industry and economic
conditions, that could cause actual results to differ materially from those
described in the forward-looking statements. Such factors, risks, uncertainties
and assumptions include, but are not limited to, (1) the impact of global
economic fluctuations on the Company's temporary contracting operations, (2) the
cyclical nature of the Company's executive search and mid-market professional
staffing businesses, (3) the Company's ability to manage its growth, (4) risks
associated with expansion, (5) the Company's heavy reliance on information
systems and the impact of potentially losing that technology or failing to
further develop technology, (6) the Company's markets are highly competitive,
(7) the Company's operating results fluctuate from quarter to quarter, (8) risks
relating to the Company's foreign operations, including foreign currency
fluctuations, (9) the Company's dependence on its highly skilled professionals,
(10) the impact of employees departing with existing executive search clients,
(11) risks maintaining the Company's professional reputation and brand name,
(12) restrictions imposed by blocking arrangements, (13) the Company's exposure
to employment-related claims, legal liability and costs from both clients and
employers and limitations on insurance coverage related thereto, (14) the
Company's dependence on key management personnel, (15) the impact of government
regulations, (16) the Company's ability to successfully operate as an
independent company and the level of costs associated therewith and (17)
restrictions on the Company's operating flexibility due to the terms of its
credit facility. Please see "Risk Factors" in the Company's Registration
Statement on Form 10 filed with the Securities and Exchange Commission on March
14, 2003 for more information.
The Company cautions that undue reliance should not be placed on the
forward-looking statements, which speak only as of the date of this Form 10-Q.
The Company assumes no obligation, and expressly disclaims any obligation, to
update any forward-looking statements, whether as a result of new information,
future events or otherwise.
-28-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of the Company's borrowings are in fixed rate equipment leases
and seller financed notes. The carrying amounts of the Company's debt
approximate fair value, generally due to the short-term nature of the underlying
instruments. The Company does not trade derivative financial instruments for
speculative purposes.
The Company also conducts operations in various foreign countries,
including Australia, Belgium, Canada, France, Germany, Italy, the Netherlands,
New Zealand and the United Kingdom. For the nine months ended September 30,
2003, approximately 70% of the Company's revenues were earned outside the United
States and collected in local currency and related operating expenses were also
paid in such corresponding local currency. Accordingly, the Company is subject
to increased risk for exchange rate fluctuations between such local currencies
and the U.S. dollar.
The financial statements of the Company's non-U.S. subsidiaries are
translated into U.S. dollars using current rates of exchange, with translation
gains or losses included in the cumulative translation adjustment account, a
component of stockholders' equity. During the nine-month period ended September
30, 2003, the Company had a translation gain of approximately $9,301, primarily
attributable to the weakening of the U.S. dollar against the Australian dollar
and the Euro.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. In accordance with Rule
13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company's management evaluated, with the participation of the Company's Chairman
of the Board, President and Chief Executive Officer and Executive Vice President
and Chief Financial Officer, the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act) as of the end of the quarter ended September 30, 2003.
Based upon their evaluation of these disclosure controls and procedures, the
Chairman of the Board, President and Chief Executive Officer and the Executive
Vice President and Chief Financial Officer concluded that the disclosure
controls and procedures were effective as of the end of the quarter ended
September 30, 2003 to ensure that material information relating to the Company,
including its consolidated subsidiaries, was made known to them by others within
those entities, particularly during the period in which this Quarterly Report on
Form 10-Q was being prepared.
Changes in internal controls over financial reporting. There was no change
in the Company's internal control over financial reporting that occurred during
the quarter ended September 30, 2003 that has materially affected, or is
reasonably likely to materially to affect, the Company's internal control over
financial reporting.
-29-
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following Exhibits are filed herewith.
4 Amendment Number 1 to Amended and Restated Loan Security Agreement,
dated as of September 30, 2003, between Hudson Highland Group, Inc and
Wells Fargo Foothill, Inc.
15 Letter regarding unaudited interim financial information from BDO
Seidman, LLP, independent certified public accountants. (With respect
to the unaudited interim financial statements of Hudson Highland
Group, Inc. for the periods ended September 30, 2003 and 2002 included
in this Quarterly Report on Form 10-Q, BDO Seidman, LLP have applied
limited procedures in accordance with professional standards for a
review of such information. However, as stated in their report
included in this Quarterly Report on Form 10-Q, they did not audit and
they do not express an opinion on those unaudited interim financial
statements. Accordingly, the degree of reliance on their reports on
such information should be restricted in light of the limited nature
of the review procedures applied. To the extent that this Quarterly
Report on Form 10-Q is incorporated by reference in any registration
statements that Hudson Highland Group, Inc. has filed with the
Securities and Exchange Commission under the Securities Act of 1933,
as amended, BDO Seidman, LLP are not subject to the liability
provisions of Section 11 of that Act for their reports on the
unaudited interim financial statements because those reports are not
"reports" or a "part" of the registration statement prepared or
certified by an accountant within the meaning of Sections 7 and 11 of
the Act.)
31.1 Certification by the Chairman, President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act for Hudson Highland
Group, Inc.
31.2 Certification by the Executive Vice President and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act for Hudson
Highland Group, Inc.
32.1 Written Statement of the Chairman, President and Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350 for Hudson Highland Group,
Inc.
32.2 Written Statement of the Executive Vice President and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 for Hudson Highland Group,
Inc.
-30-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON HIGHLAND GROUP, INC.
(Registrant)
By: /s/ JON F. CHAIT
Jon F. Chait
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 10, 2003
By: /s/ RICHARD W. PEHLKE
Richard W. Pehlke
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: November 10, 2003
-31-
HUDSON HIGHLAND GROUP, INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
4 Amendment Number 1 to Amended and Restated Loan Security Agreement,
dated as of September 30, 2003, between Hudson Highland Group, Inc and
Wells Fargo Foothill, Inc.
15 Letter regarding unaudited interim financial information from BDO
Seidman, LLP, independent certified public accountants. (With respect
to the unaudited interim financial statements of Hudson Highland
Group, Inc. for the periods ended September 30, 2003 and 2002 included
in this Quarterly Report on Form 10-Q, BDO Seidman, LLP have applied
limited procedures in accordance with professional standards for a
review of such information. However, as stated in their report
included in this Quarterly Report on Form 10-Q, they did not audit and
they do not express an opinion on those unaudited interim financial
statements. Accordingly, the degree of reliance on their reports on
such information should be restricted in light of the limited nature
of the review procedures applied. To the extent that this Quarterly
Report on Form 10-Q is incorporated by reference in any registration
statements that Hudson Highland Group, Inc. has filed with the
Securities and Exchange Commission under the Securities Act of 1933,
as amended, BDO Seidman, LLP are not subject to the liability
provisions of Section 11 of that Act for their reports on the
unaudited interim financial statements because those reports are not
"reports" or a "part" of the registration statement prepared or
certified by an accountant within the meaning of Sections 7 and 11 of
the Act.)
31.1 Certification by the Chairman, President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act for Hudson Highland
Group, Inc.
31.2 Certification by the Executive Vice President and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act for Hudson
Highland Group, Inc.
32.1 Written Statement of the Chairman, President and Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350 for Hudson Highland Group,
Inc.
32.2 Written Statement of the Executive Vice President and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 for Hudson Highland Group,
Inc.
-32-
AMENDMENT NUMBER 1 TO
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER 1 TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(this "Amendment"), dated as of September 30, 2003, is entered into by HUDSON
HIGHLAND GROUP, INC., a Delaware corporation ("Parent"), and each of Parent's
Subsidiaries identified on the signature pages hereof (such Subsidiaries,
together with Parent, are referred to hereinafter each individually as a
"Borrower", and individually and collectively, jointly and severally, as
"Borrowers"), WELLS FARGO FOOTHILL, INC. (formerly known as FOOTHILL CAPITAL
CORPORATION), a California corporation, as the arranger and administrative agent
for the Lenders ("Agent"), and the lenders identified on the signature pages
hereof (such lenders, together with their respective successors and assigns, are
referred to hereinafter each individually as a "Lender" and collectively as the
"Lenders"), in light of the following:
W I T N E S S E T H
WHEREAS, Borrowers, Agent and Lenders are parties to that certain Amended
and Restated Loan and Security Agreement, dated as of June 25, 2003 (as amended,
restated, supplemented, or modified from time to time, the "Loan Agreement");
and
WHEREAS, Borrowers have requested that the Loan Agreement be amended to
include certain Bank Products (as defined below) extended to Borrowers by Wells
Fargo Bank, N.A., or any of its affiliates; and
WHEREAS, subject to the satisfaction of the conditions set forth herein,
Agent and Lenders are willing to so consent to the amendment of the Loan
Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree to amend the
Loan Agreement as follows:
1. DEFINITIONS Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Loan Agreement, as amended
hereby.
2. AMENDMENTS TO LOAN AGREEMENT
(a) Section 1.1 of the Loan Agreement is hereby amended by adding the
following defined terms in proper alphabetical order or amending and restating
the following definitions in their entirety, as the case may be:
"ACH Transactions" means any cash management or related services (including
the Automated Clearing House processing of electronic funds transfers through
the direct Federal Reserve Fedline system) provided by Wells Fargo or its
Affiliates for the account of a Borrower or its Subsidiaries.
"Adjusted EBITDA" means, with respect to any fiscal period, Parent's and
its Subsidiaries' consolidated net earnings (or loss), minus extraordinary
gains, plus (a) interest expense, (b) income taxes, (c) depreciation, (d)
amortization, (e) restructuring charges for the Highland Partners line of
business not to exceed $12,000,000 in the aggregate, (f) write-offs of bad debt
receivables that (i) relate to receivables that existed prior to the Spin-Off
and (ii) are written off on or before September 30, 2003, and (g) write-offs of
goodwill taken in accordance with accounting principles for such period, as
determined in accordance with GAAP.
"Availability" means, as of any date of determination, if such date is a
Business Day, and determined at the close of business on the immediately
preceding Business Day, if such date of determination is not a Business Day, the
amount that Borrowers are entitled to borrow as Advances under Section 2.1
(after giving effect to all then outstanding Obligations (other than Bank
Products Obligations) and all sublimits and reserves applicable hereunder).
"Bank Product Agreements" means those certain cash management service
agreements entered into from time to time by a Borrower or Borrowers or any of
its or their Subsidiaries in connection with any of the Bank Products.
"Bank Product Obligations" means all obligations, liabilities, contingent
reimbursement obligations, fees, and expenses owing by Borrowers or their
Subsidiaries to Wells Fargo or its Affiliates pursuant to or evidenced by the
Bank Product Agreements and irrespective of whether for the payment of money,
whether direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter arising, and including all such amounts that Borrowers are
obligated to reimburse to Lenders or any Lender as a result of Lenders or any
Lender purchasing participations or executing indemnities or reimbursement
obligations with respect to the Bank Products provided to Borrowers or their
Subsidiaries pursuant to the Bank Product Agreements.
"Bank Products" means any service or facility extended to a Borrower or its
Subsidiaries by Wells Fargo or any Affiliate of Wells Fargo including: (a)
credit cards, (b) credit card processing services, (c) debit cards, (d) purchase
cards, (e) ACH Transactions, (f) cash management, including controlled
disbursement, accounts or services, or (g) Hedge Agreements.
"Bank Product Reserves" means, as of any date of determination, the amount
of reserves that Agent has established (based upon Wells Fargo's or its
Affiliate's reasonable determination of the credit exposure in respect of then
extant Bank Products) for Bank Products then provided or outstanding.
"Hedge Agreement" means any and all transactions, agreements, or documents
now existing or hereafter entered into between a Borrower or its Subsidiaries
and Wells Fargo or its Affiliates, which provide for an interest rate, credit,
commodity or equity swap, cap, floor, collar, forward foreign exchange
transaction, currency swap, cross currency rate swap, currency option, or any
combination of, or option with respect to, these or similar transactions, for
the purpose of hedging such Borrower's or its Subsidiaries' exposure to
fluctuations in interest or exchange rates, loan, credit exchange, security or
currency valuations or commodity prices.
2
"Line Block" means (a) $20,000,000 less (b) any Commitment or aggregate
Commitments successfully syndicated by Foothill to another Lender or Lenders up
to a maximum amount, in the aggregate, of $20,000,000.
"Loan Documents" means this Agreement, the Bank Product Agreements, the
Cash Management Agreements, the Control Agreements, the Due Diligence Letter,
the Fee Letter, the Guaranties, the Letters of Credit, the Officers'
Certificate, the Stock Pledge Agreement, the Trademark Security Agreement, the
Intercompany Subordination Agreement, the UK Security Documents, the Subsidiary
Documents, the Australian Security Documents, the Canadian Security Documents,
any note or notes executed by a Borrower in connection with this Agreement and
payable to a member of the Lender Group, and any other agreement entered into,
now or in the future, by any Borrower and the Lender Group in connection with
this Agreement.
"Maximum Revolver Amount" means an amount equal to (i) $50,000,000 less
(ii) at such times as it is in effect, the Line Block.
"Obligations" means (a) all loans, Advances, debts, principal, interest
(including any interest that, but for the provisions of the Bankruptcy Code,
would have accrued), contingent reimbursement obligations with respect to
outstanding Letters of Credit, premiums, liabilities (including all amounts
charged to Borrowers' Loan Account pursuant hereto), obligations, fees
(including the fees provided for in the Fee Letter), charges, costs, Lender
Group Expenses (including any fees or expenses that, but for the provisions of
the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants,
and duties of any kind and description owing by Borrowers to the Lender Group
pursuant to or evidenced by the Loan Documents and irrespective of whether for
the payment of money, whether direct or indirect, absolute or contingent, due or
to become due, now existing or hereafter arising, and including all interest not
paid when due and all Lender Group Expenses that Borrowers are required to pay
or reimburse by the Loan Documents, by law, or otherwise, and (b) all Bank
Product Obligations. Any reference in this Agreement or in the Loan Documents to
the Obligations shall include all amendments, changes, extensions,
modifications, renewals replacements, substitutions, and supplements, thereto
and thereof, as applicable, both prior and subsequent to any Insolvency
Proceeding.
(b) Section 2.1(a)(z) of the Loan Agreement is hereby amended and restated
in its entirety as follows:
"(z) the sum of (i) the Bank Products Reserve, and (ii) the aggregate
amount of reserves, if any, established by Agent under Section 2.1(b)."
(c) Section 2.4(b)(i) of the Loan Agreement is hereby amended and restated
in its entirety as follows:
"(i) Except as otherwise provided with respect to Defaulting Lenders
and except as otherwise provided in the Loan Documents (including letter
agreements between Agent and individual Lenders), aggregate principal and
interest payments shall be apportioned ratably among the Lenders (according
to the unpaid principal balance of the Obligations to which such payments
relate held by each Lender) and payments of fees and expenses (other than
fees or
3
expenses that are for Agent's separate account, after giving effect to any
letter agreements between Agent and individual Lenders) shall be
apportioned ratably among the Lenders having a Pro Rata Share of the type
of Commitment or Obligation to which a particular fee relates. All payments
shall be remitted to Agent and all such payments (other than payments
received while no Default or Event of Default has occurred and is
continuing and which relate to the payment of principal or interest of
specific Obligations or which relate to the payment of specific fees), and
all proceeds of Accounts or other Collateral received by Agent, shall be
applied as follows:
(A) first, to pay any Lender Group Expenses then due to Agent
under the Loan Documents, until paid in full,
(B) second, to pay any Lender Group Expenses then due to the
Lenders under the Loan Documents, on a ratable basis, until paid in
full,
(C) third, to pay any fees then due to Agent (for its separate
accounts, after giving effect to any letter agreements between Agent
and the individual Lenders) under the Loan Documents until paid in
full,
(D) fourth, to pay any fees then due to any or all of the Lenders
(after giving effect to any letter agreements between Agent and
individual Lenders) under the Loan Documents, on a ratable basis,
until paid in full,
(E) fifth, to pay interest due in respect of all Agent Advances,
until paid in full,
(F) sixth, ratably to pay interest due in respect of the Advances
(other than Agent Advances) and the Swing Loans until paid in full,
(G) seventh, to pay the principal of all Agent Advances until
paid in full,
(H) eighth, to pay the principal of all Swing Loans until paid in
full,
(I) ninth, so long as no Event of Default has occurred and is
continuing, and at Agent's election, to pay amounts then due and owing
by Borrowers or their Subsidiaries in respect of Bank Products, until
paid in full,
(J) tenth, so long as no Event of Default has occurred and is
continuing, to pay the principal of all Advances until paid in full,
(K) eleventh, if an Event of Default has occurred and is
continuing, ratably (i) to pay the principal of all Advances until
paid in full, and (ii) to Agent, to be held by Agent, for the benefit
of Wells Fargo or its Affiliates, as applicable, as cash collateral in
an amount up to the amount of the Bank Products Reserve established
prior to the occurrence of, and not in contemplation of, the subject
Event of Default until Borrowers' and their Subsidiaries' obligations
in respect of the then extant Bank Products have been paid in full or
the cash collateral amount has been exhausted,
4
(L) twelfth, if an Event of Default has occurred and is
continuing, to Agent, to be held by Agent, for the ratable benefit of
Issuing Lender and Lenders as cash collateral in an amount up to 105%
of the then extant Letter of Credit Usage until paid in full,
(M) thirteenth, to pay any other Obligations until paid in full,
and
(N) fourteenth, to Borrowers (to be wired to the Designated
Account) or such other Person entitled thereto under applicable law."
(d) Section 2.5 of the Loan Agreement is hereby amended and restated in its
entirety as follows:
"If, at any time or for any reason, the amount of Obligations (other
than Bank Product Obligations) owed by Borrowers to the Lender Group
pursuant to Sections 2.1 and 2.12 is greater than either the Dollar or
percentage limitations set forth in Sections 2.1, 2.2 or 2.12, (an
"Overadvance"), Borrowers immediately shall pay to Agent, in cash, the
amount of such excess, which amount shall be used by Agent to reduce the
Obligations in accordance with the priorities set forth in Section 2.4(b).
In addition, Borrowers hereby promise to pay the Obligations (including
principal, interest, fees, costs, and expenses) in Dollars in full to the
Lender Group as and when due and payable under the terms of this Agreement
and the other Loan Documents."
(e) Section 2.6(a) of the Loan Agreement is hereby amended and restated in
its entirety as follows:
"(a) Interest Rates. Except as provided in clause (c) below, all
Obligations (except for undrawn Letters of Credit and except for Bank
Product Obligations) that have been charged to the Loan Account pursuant to
the terms hereof shall bear interest on the Daily Balance thereof as
follows (i) if the relevant Obligation is an Advance that is a LIBOR Rate
Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate
Margin, and (ii) otherwise, at a per annum rate equal to the Base Rate plus
the Base Rate Margin.
The foregoing notwithstanding, at no time shall any portion of the
Obligations (other than undrawn Letters of Credit and Bank Product
Obligations) bear interest on the Daily Balance thereof at a per annum rate
less than 4.25%. To the extent that interest accrued hereunder at the rate
set forth herein would be less than the foregoing minimum daily rate, the
interest rate chargeable hereunder for such day automatically shall be
deemed increased to the minimum rate."
(f) Section 2.6(c)(i) of the Loan Agreement is hereby amended and restated
in its entirety as follows:
"(i) all Obligations (except for undrawn Letters of Credit and except
for Bank Product Obligations) that have been charged to the Loan Account
pursuant to the terms hereof shall bear interest on the Daily Balance
thereof at a per annum rate equal to 4 percentage points above the per
annum rate otherwise applicable hereunder, and"
5
(g) Section 2.6(d) of the Loan Agreement is hereby amended and restated in
its entirety as follows:
"(d) Payment. Interest, Letter of Credit fees, and all other fees
payable hereunder shall be due and payable, in arrears, on the first day of
each month at any time that Obligations or Commitments are outstanding.
Borrowers hereby authorize Agent, from time to time, without prior notice
to Borrowers, to charge such interest and fees, all Lender Group Expenses
(as and when incurred), the charges, commissions, fees, and costs provided
for in Section 2.12(e) (as and when accrued or incurred), the fees and
costs provided for in Section 2.11 (as and when accrued or incurred), and
all other payments as and when due and payable under any Loan Document
(including any amounts due and payable to Wells Fargo or its Affiliates in
respect of Bank Products up to the amount of the then extant Bank Products
Reserve) to Borrowers' Loan Account, which amounts thereafter constitute
Advances hereunder and shall accrue interest at the rate then applicable to
Advances hereunder. Any interest not paid when due shall be compounded by
being charged to Borrowers' Loan Account and shall thereafter constitute
Advances hereunder and shall accrue interest at the rate then applicable to
Advances that are Base Rate Loans hereunder."
(h) Section 2.10 of the Loan Agreement is hereby amended and restated in
its entirety as follows:
"Agent shall maintain an account on its books in the name of Borrowers
(the "Loan Account") on which Borrowers will be charged with all Advances
(including Agent Advances and Swing Loans) made by Agent, Swing Lender, or
the Lenders to Borrowers or for Borrowers' account, the Letters of Credit
issued by Issuing Lender for Borrowers' account, and with all other payment
Obligations hereunder or under the other Loan Documents (except for Bank
Product Obligations), including, accrued interest, fees and expenses, and
Lender Group Expenses. In accordance with Section 2.8, the Loan Account
will be credited with all payments received by Agent from Borrowers or for
Borrowers' account, including all amounts received in the Agent's Account
from any Cash Management Bank. Agent shall render statements regarding the
Loan Account to Administrative Borrower, including principal, interest,
fees, and including an itemization of all charges and expenses constituting
Lender Group Expenses owing, and such statements shall be presumed to be
correct and accurate and constitute an account stated between Borrowers and
the Lender Group absent manifest error unless, within 30 days after receipt
thereof by Administrative Borrower, Administrative Borrower shall deliver
to Agent written objection thereto describing the error or errors contained
in any such statements."
(i) Sections 3.5(c) and 3.5(d) of the Loan Agreement are hereby amended and
restated in their entirety as follows:
"(b) within ninety (90) days of the Activation Date, Borrowers shall
obtain Collateral Access Agreements with respect to premises occupied by HH
Canada at 40 King Street West, Suite 3200, Toronto, and by HH Australia at
16 Angel Place, 123 Pitt Street, Sydney;
6
(c) on or before October 27, 2003, Borrowers shall obtain a Collateral
Access Agreement with respect to premises occupied by HH Australia at 333
Collins Street, Melbourne; and
(d) on or before December 1, 2003, Agent shall have received statutory
searches for all Canadian jurisdictions in which Borrowers and Collateral
may be located, the results of which searches show the recording of Agent's
security interests and otherwise shall be satisfactory to Agent in its
Permitted Discretion."
(j) Section 3.6 of the Loan Agreement is hereby amended and restated in its
entirety as follows:
"On the date of termination of this Agreement, all Obligations
(including contingent reimbursement obligations of Borrowers with respect
to any outstanding Letters of Credit and including all Bank Products
Obligations) immediately shall become due and payable without notice or
demand (including (a) either (i) providing cash collateral to be held by
Agent in an amount equal to 105% of the then extant Letter of Credit Usage,
or (ii) causing the original Letters of Credit to be returned to Agent, and
(b) providing cash collateral to be held by Agent for the benefit of Wells
Fargo or its Affiliates with respect to the then extant Bank Products
Obligations). No termination of this Agreement, however, shall relieve or
discharge Borrowers of their duties, Obligations, or covenants hereunder
and the Agent's Liens in the Collateral shall remain in effect until all
Obligations have been fully and finally discharged and the Lender Group's
obligations to provide additional credit hereunder have been terminated.
When this Agreement has been terminated and all of the Obligations have
been fully and finally discharged and the Lender Group's obligations to
provide additional credit under the Loan Documents have been terminated
irrevocably, Agent will, at Borrowers' sole expense, execute and deliver
any UCC and PPSA termination statements, lien releases, mortgage releases,
re-assignments of trademarks, discharges of security interests, and other
similar discharge or release documents (and, if applicable, in recordable
form) as are reasonably necessary to release, as of record, the Agent's
Liens and all notices of security interests and liens previously filed by
Agent with respect to the Obligations."
(k) Section 3.7 of the Loan Agreement is hereby amended and restated in its
entirety as follows:
"Borrowers have the option, at any time upon 90 days prior written
notice by Administrative Borrower to Agent, to terminate this Agreement by
paying to Agent, for the benefit of the Lender Group, in cash, the
Obligations (including (a) either (i) providing cash collateral to be held
by Agent in an amount equal to 105% of the then extant Letter of Credit
Usage, or (ii) causing the original Letters of Credit to be returned to the
Issuing Lender, and (b) providing cash collateral to be held by Agent for
the benefit of Wells Fargo or its Affiliates with respect to the then
extant Bank Products Obligations), in full, together with the Applicable
Prepayment Premium (to be allocated based upon letter agreements between
Agent and individual Lenders). If Administrative Borrower has sent a notice
of termination pursuant to the provisions of this Section, then the
Commitments shall terminate and Borrowers shall be obligated to repay the
Obligations (including (a) either (i) providing cash collateral to be held
by
7
Agent in an amount equal to 105% of the then extant Letter of Credit Usage,
or (ii) causing the original Letters of Credit to be returned to the
Issuing Lender, and (b) providing cash collateral to be held by Agent for
the benefit of Wells Fargo or its Affiliates with respect to the then
extant Bank Products Obligations), in full, together with the Applicable
Prepayment Premium, on the date set forth as the date of termination of
this Agreement in such notice. In the event of the termination of this
Agreement and repayment of the Obligations at any time prior to the
Maturity Date, for any other reason, including (a) termination upon the
election of the Required Lenders to terminate after the occurrence of an
Event of Default, (b) foreclosure and sale of Collateral, (c) sale of the
Collateral in any Insolvency Proceeding, or (d) restructure, reorganization
or compromise of the Obligations by the confirmation of a plan of
reorganization, or any other plan of compromise, restructure, or
arrangement in any Insolvency Proceeding, then, in view of the
impracticability and extreme difficulty of ascertaining the actual amount
of damages to the Lender Group or profits lost by the Lender Group as a
result of such early termination, and by mutual agreement of the parties as
to a reasonable estimation and calculation of the lost profits or damages
of the Lender Group, Borrowers shall pay the Applicable Prepayment Premium
to Agent (to be allocated based upon letter agreements between Agent and
individual Lenders), measured as of the date of such termination."
(l) Section 7.20(a)(i) of the Loan Agreement is hereby amended and restated
in its entirety as follows:
"(i) Minimum Adjusted EBITDA. Adjusted EBITDA, measured on a month-end
or quarter-end basis as set forth below, of not less than the required
amount set forth in the following table (in thousands) for the applicable
month set forth opposite thereto;
- ---------------------------- -------------------------
Applicable Applicable Amount
Month 2003
- ---------------------------- -------------------------
April ($7,425)
- ---------------------------- -------------------------
May ($11,547)
- ---------------------------- -------------------------
June ($11,000)
- ---------------------------- -------------------------
July ($21,720)
- ---------------------------- -------------------------
August ($28,519)
- ---------------------------- -------------------------
September ($25,121)
- ---------------------------- -------------------------
October ($28,721)
- ---------------------------- -------------------------
November ($30,990)
- ---------------------------- -------------------------
December ($33,554)
- ---------------------------- -------------------------
Adjusted EBITDA shall be determined: (a) from the Closing Date until the
date of determination for the first twelve calendar months occurring after
the Closing Date, on a trailing basis for the number of full calendar
months elapsed since the Closing Date, and (b) thereafter on a trailing
twelve-month basis. Prior to the first month-end occurring on or after the
Activation Date,
8
Adjusted EBITDA shall be measured (x) on a month-end basis at all times
that the Account Report Base is less than $20,000,000 and (y) on a
quarter-end basis at all other times. From and after the first month-end
occurring on or after the Activation Date, Adjusted EBITDA shall be
measured (x) on a month-end basis at all times that the Account Report Base
is less than $30,000,000 and (y) on a quarter-end basis at all other times.
Agent shall establish required minimum amounts for periods ending after
December 31, 2003 on the basis of 80% of projections of Adjusted EBITDA
earnings or 120% of Adjusted EBITDA losses for such periods delivered by
Borrower and accepted by Agent in its Permitted Discretion."
3. CONDITIONS PRECEDENT TO THIS AMENDMENT. The satisfaction of each of the
following shall constitute conditions precedent to the effectiveness of this
Amendment and each and every provision hereof:
(a) The representations and warranties in the Loan Agreement and the other
Loan Documents shall be true and correct in all respects on and as of the date
hereof, as though made on such date (except to the extent that such
representations and warranties relate solely to an earlier date);
(b) Agent shall have received the reaffirmation and consent of each
Guarantor, attached hereto as Exhibit A, duly executed and delivered by an
authorized official of such Guarantor;
(c) No Default or Event of Default shall have occurred and be continuing on
the date hereof or as of the date of the effectiveness of this Amendment; and
(d) No injunction, writ, restraining order, or other order of any nature
prohibiting, directly or indirectly, the consummation of the transactions
contemplated herein shall have been issued and remain in force by any
Governmental Authority against any Borrower, any Guarantor, Agent, or any
Lender.
4. CONSTRUCTION. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED IN THE STATE OF NEW YORK.
5. ENTIRE AMENDMENT; EFFECT OF AMENDMENT. This Amendment, and the terms and
provisions hereof, constitute the entire agreement among the parties pertaining
to the subject matter hereof and supersede any and all prior or contemporaneous
amendments relating to the subject matter hereof. Except for the amendments to
the Loan Agreement expressly set forth in Section 2 hereof, the Loan Agreement
and other Loan Documents shall remain unchanged and in full force and effect. To
the extent any terms or provisions of this Amendment conflict with those of the
Loan Agreement or other Loan Documents, the terms and provisions of this
Amendment shall control. This Amendment is a Loan Document.
6. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Amendment by
signing any such
9
counterpart. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver an original executed
counterpart of this Amendment, but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
7. MISCELLANEOUS
(a) Upon the effectiveness of this Amendment, each reference in the Loan
Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like
import referring to the Loan Agreement shall mean and refer to the Loan
Agreement as amended by this Amendment.
(b) Upon the effectiveness of this Amendment, each reference in the Loan
Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words
of like import referring to the Loan Agreement shall mean and refer to the Loan
Agreement as amended by this Amendment.
[SIGNATURE PAGES FOLLOW]
10
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
and delivered as of the date first written above.
HUDSON HIGHLAND GROUP, INC.,
as Parent and a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HUDSON GLOBAL RESOURCES AMERICA, INC.,
fka HUDSON HIGHLAND GROUP GLOBAL
RESOURCES AMERICA, INC.,
as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HUDSON GLOBAL RESOURCES HOLDINGS, INC.,
fka HUDSON HIGHLAND GROUP GLOBAL
RESOURCES HOLDINGS, INC., as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HUDSON GLOBAL RESOURCES MANAGMENT, INC.,
fka HUDSON HIGHLAND GROUP GLOBAL
RESOURCES MANAGEMENT, INC., as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HUDSON GLOBAL RESOURCES LIMITED,
as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HIGHLAND PARTNERS LIMITED, as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HUDSON GLOBAL RESOURCES (AUST) PTY LTD.,
as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HUDSON TRADE & INDUSTRIAL SERVICES PTY LTD.,
as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HUDSON TRADE & INDUSTRIAL SOLUTIONS PTY LTD.,
as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HUDSON GLOBAL RESOURCES (NEWCASTLE) PTY LTD.,
as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HIGHLAND PARTNERS (AUST) PTY LTD., as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HUDSON HIGHLAND GROUP SEARCH, INC., as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
JAMES BOTRIE AND ASSOCIATES INC., as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
HIGHLAND PARTNERS CO. (CANADA), fka 3057313 NOVA
SCOTIA COMPANY, as a Borrower
By: /s/ Steven B. London
--------------------------------
Title: VP Global Treasurer
--------------------------------
WELLS FARGO FOOTHILL, INC.,
as Agent and as a Lender
By: /s/
--------------------------------
Title: AVP
--------------------------------
Exhibit A
REAFFIRMATION AND CONSENT
All capitalized terms used herein but not otherwise defined herein shall
have the meanings ascribed to them in that certain Amended and Restated Loan and
Security Agreement by and among HUDSON HIGHLAND GROUP, INC., a Delaware
corporation ("Parent"), and each of Parent's Subsidiaries identified on the
signature pages thereto (such Subsidiaries, together with Parent, are referred
to hereinafter each individually as a "Borrower", and individually and
collectively, jointly and severally, as "Borrowers"), WELLS FARGO FOOTHILL, INC.
(formerly known as FOOTHILL CAPITAL CORPORATION), a California corporation, as
the arranger and administrative agent for the Lenders ("Agent"), and the lenders
identified on the signature pages thereto (such lenders, together with their
respective successors and assigns, are referred to hereinafter each individually
as a "Lender" and collectively as the "Lenders"), dated as of June 25, 2003 (as
amended, restated, supplemented or otherwise modified, the "Loan Agreement"), or
in Amendment Number 1 to Amended and Restated Loan and Security Agreement, dated
as of September 30, 2003 (the "Amendment"), among Borrowers, Agent and Lenders.
The undersigned each hereby (a) represent and warrant to Agent and Lenders that
the execution, delivery, and performance of this Reaffirmation and Consent are
within its powers, have been duly authorized by all necessary action, and are
not in contravention of any law, rule, or regulation, or any order, judgment,
decree, writ, injunction, or award of any arbitrator, court, or governmental
authority, or of the terms of its charter or bylaws, or of any contract or
undertaking to which it is a party or by which any of its properties may be
bound or affected; (b) consents to the transactions contemplated by the
Amendment; (c) acknowledges and reaffirms its obligations owing to Agent and
Lenders under any Loan Documents to which it is a party; and (d) agrees that
each of the Loan Documents to which it is a party is and shall remain in full
force and effect. Although each of the undersigned has been informed of the
matters set forth herein and has acknowledged and agreed to same, it understands
that Agent and Lenders have no obligations to inform it of such matters in the
future or to seek its acknowledgment or agreement to future amendments, and
nothing herein shall create such a duty. Delivery of an executed counterpart of
this Reaffirmation and Consent by telefacsimile shall be equally as effective as
delivery of an original executed counterpart of this Reaffirmation and Consent.
Any party delivering an executed counterpart of this Reaffirmation and Consent
by telefacsimile also shall deliver an original executed counterpart of this
Reaffirmation and Consent but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Reaffirmation and Consent. This Reaffirmation and Consent shall be governed
by the laws of the State of New York.
[SIGNATURE PAGES FOLLOW]
IN WITNESS WHEREOF, the undersigned have each caused this Reaffirmation and
Consent to be executed as of the date of the Amendment.
People.com Consultants, Inc.
People.com Technology Partners, Inc.
Hudson Highland Group Holdings International, Inc.
Cornell Technical Services, Inc.
Hudson Highland (APAC) Pty Limited
Morgan & Banks Holdings Australasia Pty Limited
Highland HoldCo (Aust) Pty Ltd.
MORGAN & BANKS MANAGEMENT SERVICES PTY LIMITED
Hudson Global Resources (NZ) Ltd.
M&B Holdco NZ
Highland HoldCo (NZ)
Highland Partners (NZ) Limited
By: _____________________________
Title: _____________________________
Highland Partners SA/NV
By: _____________________________
Title: _____________________________
De Witte & Morel Global Resources NV/SA
By: _____________________________
Title: _____________________________
Highland Partners SARL
By: _____________________________
Title: _____________________________
Hudson Global Resources SAS
By: _____________________________
Title: _____________________________
Highland Partners Holding BV
By: _____________________________
Title: _____________________________
Hudson Group Holdings BV
By: _____________________________
Title: _____________________________
November 7, 2003
Board of Directors and Stockholders
Hudson Highland Group, Inc.
New York, New York
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of Hudson Highland Group, Inc. for the periods ended September 30,
2003 and 2002, as indicated in our report dated October 28, 2003; because we did
not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, is
incorporated by reference in the Registration Statements of Hudson Highland
Group, Inc. on Forms S-8, numbers 333-104209, 333-104210 and 333-104212.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ BDO Seidman, LLP
New York, New York
Exhibit 31.1
- ------------
CERTIFICATIONS
I, Jon F. Chait, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hudson Highland
Group, Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially attested, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: November 10, 2003 /s/ JON F. CHAIT
Jon F. Chait
Chairman, President and
Chief Executive Officer
Exhibit 31.2
- ------------
CERTIFICATIONS
I, Richard W. Pehlke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hudson Highland
Group, Inc.;
2. Based on my knowledge, this 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially attested, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: November 10, 2003 /s/ RICHARD W. PEHLKE
Richard W. Pehlke
Executive Vice President and
Chief Financial Officer
EXHIBIT 32.1
- ------------
Written Statement of the Chairman, President and Chief Executive Officer
Pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002
Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the
undersigned Chairman of the Board, President and Chief Executive Officer of
Hudson Highland Group, Inc. (the "Company"), hereby certify, based on my
knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter
ended September 30, 2003 (the "Report") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ JON F. CHAIT
Jon F. Chait
November 10, 2003
EXHIBIT 32.2
- ------------
Written Statement of the Executive Vice President and Chief Financial Officer
Pursuant to 18 U.S.C. ss.1350, as adopted pursuant to
ss.906 of the Sarbanes-Oxley Act of 2002
Solely for the purposes of complying with 18 U.S.C. ss.1350, I, the
undersigned Executive Vice President and Chief Financial Officer of Hudson
Highland Group, Inc. (the "Company"), hereby certify, based on my knowledge,
that the Quarterly Report on Form 10-Q of the Company for the quarter ended
September 30, 2003 (the "Report") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ RICHARD W. PEHLKE
Richard W. Pehlke
November 10, 2003
