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Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 


 

FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

 

¨ 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

incorporation or organization)

  (IRS Employer Identification No.)

 

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 x No ¨

 

Indicate the number of shares outstanding of each of the issuer’s class of common stock, as of the latest practicable date.

 

Class


  

Outstanding on

October 1, 2004


Common Stock

   10,238,299

 



Table of Contents

 

HUDSON HIGHLAND GROUP, INC.

INDEX

 

          Page No.

     PART I-FINANCIAL INFORMATION     

Item 1.

   Financial Statements (unaudited)     
    

Consolidated Condensed Statements of Operations – Three Months and Nine Months Ended September 30, 2004 and 2003

   3
    

Consolidated Condensed Balance Sheets – September 30, 2004 and December 31, 2003

   4
    

Consolidated Condensed Statements of Cash Flows – Nine Months Ended September 30, 2004 and 2003

   5
    

Consolidated Condensed Statement of Changes in Stockholders’ Equity – September 30, 2004

   6
    

Notes to Consolidated Condensed Financial Statements

   7
    

Report of Independent Registered Public Accounting Firm

   16

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    17

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    26

Item 4.

   Controls and Procedures    26
     PART II-OTHER INFORMATION     

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    27

Item 6.

   Exhibits    27
     Signatures    28
     Exhibit Index    29

 


Table of Contents

 

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
September 30,


    Nine Months Ended
September 30,


 
     2004

    2003

    2004

    2003

 

Revenue

   $ 315,029     $ 272,181     $ 912,264     $ 800,653  

Direct costs (Note 4)

     198,615       173,959       570,970       501,181  
    


 


 


 


Gross margin

     116,414       98,222       341,294       299,472  

Selling, general and administrative expenses

     120,165       119,082       360,573       364,420  

Goodwill impairment charge

     —         202,785       —         202,785  

Business reorganization expenses

     3,314       2,082       3,450       9,543  

Merger and integration expenses (recoveries)

     (317 )     (102 )     (354 )     876  
    


 


 


 


Operating loss

     (6,748 )     (225,625 )     (22,375 )     (278,152 )

Other income (expense):

                                

Other, net

     128       (749 )     (1,759 )     (930 )

Interest income (expense), net

     203       (121 )     (53 )     (376 )
    


 


 


 


Loss before provision for (benefit of) income taxes

     (6,417 )     (226,495 )     (24,187 )     (279,458 )

Provision for (benefit of) income taxes

     530       (221 )     1,251       5,917  
    


 


 


 


Net loss

   $ (6,947 )   $ (226,274 )   $ (25,438 )   $ (285,375 )
    


 


 


 


Basic and diluted loss per share:

                                

Net loss

   $ (.68 )   $ (26.92 )   $ (2.66 )   $ (34.05 )

Weighted average shares outstanding

     10,154       8,405       9,575       8,382  

 

See accompanying notes to consolidated condensed financial statements.

 

- 3 -


Table of Contents

 

HUDSON HIGHLAND GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(in thousands, except per share amounts)

 

    

September 30,

2004


   

December 31,

2003


 
     (unaudited)        
ASSETS                 

Current assets:

                

Cash and cash equivalents

   $ 26,528     $ 26,137  

Accounts receivable, net

     181,852       149,042  

Other current assets

     11,633       17,719  

Due from Monster

     —         5,518  
    


 


Total current assets

     220,013       198,416  

Property and equipment, net

     36,652       38,625  

Other assets

     8,801       11,703  

Intangibles, net

     6,288       2,180  
    


 


     $ 271,754     $ 250,924  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current liabilities:

                

Accounts payable

   $ 29,407     $ 26,495  

Accrued expenses and other current liabilities

     134,196       118,548  

Accrued business reorganization expenses

     10,158       11,543  

Accrued merger and integration expenses

     2,021       2,960  
    


 


Total current liabilities

     175,782       159,546  

Accrued business reorganization expenses, non-current

     7,367       14,840  

Accrued merger and integration expenses, non-current

     2,176       3,484  

Other non-current liabilities

     5,856       3,693  
    


 


Total liabilities

     191,181       181,563  

Commitments and contingencies

                

Stockholders’ equity:

                

Preferred stock, $.001 par value, 10,000 shares authorized; none issued or outstanding

     —         —    

Common stock, $.001 par value, 100,000 shares authorized; issued 10,238 and 8,573 shares, respectively

     10       9  

Additional paid-in capital

     352,465       315,130  

Retained deficit

     (310,239 )     (284,801 )

Accumulated other comprehensive income - translation adjustments

     38,567       39,023  

Treasury stock, 8 shares

     (230 )     —    
    


 


Total stockholders’ equity

     80,573       69,361  
    


 


     $ 271,754     $ 250,924  
    


 


 

See accompanying notes to consolidated condensed financial statements.

 

- 4 -


Table of Contents

 

HUDSON HIGHLAND GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine Months Ended
September 30,


 
     2004

    2003

 

Cash flows from operating activities:

                

Net loss

   $ (25,438 )   $ (285,375 )

Adjustments to reconcile net loss to net cash used in operating activities:

                

Depreciation and amortization

     14,362       15,556  

(Recovery of) provision for doubtful accounts

     (950 )     14,923  

Net loss on disposal of assets

     1,182       2,063  

Deferred income taxes

     (20 )     5,603  

Restricted stock amortization

     670       632  

Goodwill impairment charge

     —         202,785  

Changes in assets and liabilities:

                

(Increase) decrease in accounts receivable

     (33,730 )     14,005  

Decrease in other assets

     6,584       2,694  

Increase in accounts payable, accrued expenses and other liabilities

     21,077       16,519  

Decrease in accrued business reorganization expenses

     (8,839 )     (14,267 )

Decrease in accrued merger and integration expenses

     (2,318 )     (3,530 )
    


 


Total adjustments

     (1,982 )     256,983  
    


 


Net cash used in operating activities

     (27,420 )     (28,392 )
    


 


Cash flows from investing activities:

                

Capital expenditures

     (6,245 )     (7,824 )

Payments related to prior years’ purchased businesses

     (43 )     (330 )
    


 


Net cash used in investing activities

     (6,288 )     (8,154 )
    


 


Cash flows from financing activities:

                

Proceeds from issuance of common stock

     27,919       —    

Borrowings under credit facility

     13,550       —    

Repayments under credit facility

     (13,550 )     —    

Net payments on short and long-term debt

     (1,200 )     (1,373 )

Issuance of common stock – Long Term Incentive Plan option exercises

     1,364       —    

Issuance of common stock – Employee Stock Purchase Plan

     1,078       737  

Payments received from Monster

     5,518       6,017  

Purchase of restricted stock from employees

     (230 )     —    

Net cash transfers received from Monster, prior to the Distribution

     —         41,317  
    


 


Net cash provided by financing activities

     34,449       46,698  
    


 


Effect of exchange rate changes on cash and cash equivalents

     (350 )     3,252  
    


 


Net increase in cash and cash equivalents

     391       13,404  

Cash and cash equivalents, beginning of period

     26,137       25,908  
    


 


Cash and cash equivalents, end of period

   $ 26,528     $ 39,312  
    


 


Supplemental disclosures of cash flow information

                

Cash paid during the period for:

                

Interest

   $ 1,540     $ 2,268  

Taxes

   $ 1,140     $ —    

 

See accompanying notes to consolidated condensed financial statements.

 

- 5 -


Table of Contents

 

HUDSON HIGHLAND GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

 

     Common
stock


   Additional
paid-in
capital


   Retained
deficit


    Treasury
stock


    Accumulated
other
comprehensive
income (loss)


    Total

 

Balance January 1, 2004

   $ 9    $ 315,130    $ (284,801 )   $ —       $ 39,023     $ 69,361  

Net loss

                   (25,438 )     —                 (25,438 )

Other comprehensive loss, translation adjustments

     —        —        —         —         (456 )     (456 )

Issuance of shares for 401(k) plan

     —        1,058      —         —         —         1,058  

Exercise of stock options

     —        1,364      —         —         —         1,364  

Issuance of shares for employee stock purchase plan

     —        1,078      —         —         —         1,078  

Issuance of shares for acquisition

     —        5,248      —         —         —         5,248  

Purchase of restricted stock from employees

     —        —        —         (230 )     —         (230 )

Issuance of shares

     1      27,918      —         —         —         27,919  

Compensation charge on restricted stock issuance

     —        669      —         —         —         669  
    

  

  


 


 


 


Balance September 30, 2004

   $ 10    $ 352,465    $ (310,239 )   $ (230 )   $ 38,567     $ 80,573  
    

  

  


 


 


 


 

See accompanying notes to consolidated condensed financial statements.

 

- 6 -


Table of Contents

 

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 consolidated audited financial statements and related notes of Hudson Highland Group, Inc. (the “Company”) in its Annual Report on Form 10-K filed with the SEC on March 10, 2004 (the “Form 10-K”). 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 accruals) 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 - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

 

Basis of Presentation

 

The Company was historically the combination of 67 acquisitions made between 1999 and 2002, which became the eResourcing and Executive Search divisions (“HH Group”) of Monster Worldwide, Inc. (“Monster”), formerly TMP Worldwide, Inc. Some of the Company’s constituent businesses have operated for more than 20 years. On March 31, 2003 (the “Distribution Date”), Monster distributed all of the outstanding shares of the newly named HH Group to its stockholders of record on March 14, 2003 on a basis of one share of HH Group common stock for each thirteen and one-third shares of Monster common stock so held (the “Distribution”). Since the Distribution, the Company has operated as an independent publicly held company, has added two small acquisitions, and reorganized a number of smaller business units after determining that those businesses were not viable profit centers.

 

For all periods through the Distribution Date, the consolidated financial statements have been derived from the financial statements and accounting records of Monster, 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 the Distribution Date, 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. HH Group’s costs and expenses in the accompanying consolidated condensed financial statements for periods prior to the Distribution Date 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 HH Group from Monster was $5,123 for the period ending the Distribution Date. 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 the Company’s revenue, net of direct costs of temporary contractors, compared to Monster as a whole. Monster also allocated to HH Group’s corporate expense certain business reorganization expenses of $137 for the period ending March 31, 2003. The financial information included herein prior to the Distribution Date may not necessarily reflect the financial position and results of operations of the Company in the future or what these amounts would have been had the Company been a separate, stand-alone entity during the periods presented prior to the Distribution.

 

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 loss by the weighted average number of shares outstanding during the period. Diluted loss per share reflect the potential dilution from the assumed exercise of all dilutive potential common shares, primarily stock options. The dilutive impact of stock options is determined by applying the “treasury stock” method. For the three- and nine-month periods ended September 30, 2004, the effect of approximately 459,000 and 476,000, respectively, of outstanding stock options and other common stock equivalents were excluded from the calculation of diluted loss per share because the effect was anti-dilutive. For the three- and nine-month periods ended September 30, 2003, the effect of approximately 333,000 and 310,000, respectively, of outstanding stock options and other common stock equivalents were excluded from the calculation of diluted loss per share because the effect was anti-dilutive.

 

- 7 -


Table of Contents

NOTE 2 - REORGANIZATION, BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS (Continued)

 

Description of Business Segments

 

The Company is one of the world’s largest specialized professional staffing, retained executive search and human capital solutions firms. The Company provides professional staffing services on a permanent, contract and temporary basis, as well as executive search and a range of human capital services to businesses operating in a wide variety of industries. The Company is organized into two business segments, the Hudson businesses (“Hudson”) and Highland Partners (“Highland”), which constituted approximately 87% and 13% of the Company’s gross margin, respectively, for the nine months ended September 30, 2004.

 

Hudson. Hudson provides temporary and contract personnel and permanent recruitment services to a wide range of clients through its Hudson Global Resources unit. With respect to temporary and contract personnel, Hudson focuses on providing candidates with professional qualifications, including accounting and finance, legal and technology. The length of temporary assignment can vary widely, but assignments in the professional sectors tend to be longer than those in the general clerical or industrial sectors. With respect to permanent recruitment, Hudson focuses on mid-level professionals typically earning between $50,000 and $150,000 annually and possessing the professional skills and/or profile required by clients. Hudson provides permanent recruitment services on both a retained and contingent basis. In larger markets, Hudson’s sales strategy focuses on both clients operating in particular business sectors, such as financial services, healthcare, or technology, and candidates possessing particular professional qualifications, such as accounting and finance, information technology and communications, legal and healthcare. Hudson uses both traditional and interactive methods to select potential candidates for its clients, employing a suite of products that assesses talent and helps predict whether a candidate will be successful in a given role.

 

Hudson also provides a variety of other services through its Human Capital Solutions and Hudson Inclusion Solutions units that encompass services including, among others, customized interactive recruiting and human resource solutions, executive assessment and coaching, diversity assessment and consulting, organizational effectiveness, and career transition. Through the Hudson Highland Center for High Performance, Hudson also offers leadership solutions designed to assist senior management in enhancing the operating performance of large organizations. These services enable Hudson to offer clients a comprehensive set of human capital management services, across the entire life cycle of employment, ranging from providing temporary workers, to assessment or coaching of permanent staff, to recruitment or search for permanent executives and professionals, to outplacement.

 

Hudson operates on a global basis in 21 countries and over 100 offices with its revenue generated approximately evenly among North America, Europe (including the United Kingdom), and the Asia Pacific region (primarily Australia and New Zealand).

 

Highland. Highland offers a comprehensive range of executive search services on a retained basis aimed at recruiting senior level executives or professionals. Highland also has an active practice in assisting clients desiring to augment their boards of directors.

 

Highland approaches the market through industry sectors, such as financial services, life sciences, retail and consumer products, industrial and technology. This industry sector sales approach is designed to enable Highland to better understand the market conditions and strategic management issues faced by clients within their specific business sectors. Highland also recruits candidates through functional specialist groups, including board of directors, chief financial officer, chief information officer, human resources and legal. These functional expertise groups are comprised of consultants who have extensive backgrounds in placing executives in certain specialist positions within a business.

 

Highland, an executive search boutique with global capabilities, operates in 15 practice offices in four countries. For the nine months ended September 30, 2004, approximately 72% of revenue in the Highland business was derived in North America.

 

Corporate expenses are reported separately from the two operating segments and consist primarily of compensation, marketing and lease expense, and professional fees.

 

In the third quarter of 2003, the Company determined that goodwill should be tested for impairment due to 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 revenue and costs for each business segment as well as appropriate discount rates. The estimates that were used were consistent with the plans and estimates the Company used to manage the underlying business.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the Company’s 2004 financial statement presentation; these reclassifications do not change revenue, total expenses, net loss, total assets, total liabilities or stockholders’ equity.

 

- 8 -


Table of Contents

NOTE 3 - STOCK BASED COMPENSATION

 

The Company accounts for employee stock-based compensation in accordance with APB No. 25 Accounting for Stock Issued to Employees (“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, Accounting for Stock-Based Compensation (“SFAS 123”) and SFAS 148 Accounting for Stock-Based Compensation – Transition and Disclosure (“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, including stock options and employee stock purchase plans, 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,


 
     2004

    2003

 

Risk fee interest rate

     4.0 %     4.0 %

Volatility

     55.0 %     65.0 %

Expected life (years)

     5.0       5.0  

Dividends

     0.0 %     0.0 %

Weighted average fair value of options granted during the period

   $ 14.30     $ 8.07  

 

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 nine months ended September 30, 2003 does not include expense from the period prior to the Distribution Date as no options related to the Company’s stock were outstanding and no expense was required for Monster stock options granted to the Company’s employees prior to the Distribution Date. 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,


 
     2004

    2003

    2004

    2003

 

Reported net loss

   $ (6,947 )   $ (226,274 )   $ (25,438 )   $ (285,375 )

Add: Total stock-based employee compensation expense determined under fair value based method for all awards

     (822 )     (978 )     (2,791 )     (2,150 )
    


 


 


 


Pro forma net loss

   $ (7,769 )   $ (227,252 )   $ (28,229 )   $ (287,525 )
    


 


 


 


Basic and diluted loss per share:

                                

As reported net loss

   $ (.68 )   $ (26.92 )   $ (2.66 )   $ (34.05 )
    


 


 


 


Pro forma net loss

   $ (.77 )   $ (27.04 )   $ (2.95 )   $ (34.30 )
    


 


 


 


 

- 9 -


Table of Contents

NOTE 4 - REVENUE, DIRECT COSTS AND GROSS MARGIN

 

The Company’s revenue and direct costs, classified by temporary contracting and other employment services, are as follows:

 

     Quarter Ended September 30, 2004

   Quarter Ended September 30, 2003

     Temporary    Other    Total    Temporary    Other    Total

Revenue

   $ 223,653    $ 91,376    $ 315,029    $ 196,790    $ 75,391    $ 272,181

Direct costs (1)

     184,308      14,307      198,615      164,364      9,595      173,959
    

  

  

  

  

  

Gross margin

   $ 39,345    $ 77,069    $ 116,414    $ 32,426    $ 65,796    $ 98,222
    

  

  

  

  

  

     Nine Months Ended September 30, 2004

   Nine Months Ended September 30, 2003

     Temporary    Other    Total    Temporary    Other    Total

Revenue

   $ 641,740    $ 270,524    $ 912,264    $ 571,499    $ 229,154    $ 800,653

Direct costs (1)

     531,525      39,445      570,970      473,686      27,495      501,181
    

  

  

  

  

  

Gross margin

   $ 110,215    $ 231,079    $ 341,294    $ 97,813    $ 201,659    $ 299,472
    

  

  

  

  

  

 

(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 Other category, which includes the search, permanent placement and other human resource solutions’ revenue. The salaries, commissions, payroll taxes and employee benefits related to recruitment professionals are included in selling, general and administrative expenses.

 

NOTE 5 - BUSINESS REORGANIZATION EXPENSES

 

In the second quarter of 2002, the Company, as part of Monster, announced reorganization initiatives to streamline operations, lower its cost structure, integrate businesses previously acquired and improve return on capital. These reorganization programs included a workforce reduction, consolidation of excess facilities, restructuring of certain business functions and other special charges, primarily for exiting activities that were no longer part of the Company’s strategic plan. In the fourth quarter of 2002, the Company also initiated reorganization efforts related to its separation from Monster, which consisted primarily of workforce reduction, office consolidation costs and related write-offs, professional fees and other special charges.

 

In 2003, the Company recorded additional charges and credits, as a result of changes in estimates related to the prior actions, and as a result of further actions in the fourth quarter of 2003 to close offices and business units that did not have the size or market capacity to provide future income growth.

 

Amounts in the “Change in estimate” column of the following tables represent amounts charged to business reorganization expenses in the Company’s statement of operations for the nine months ended September 30, 2004. Costs and (recoveries) under these plans are charged (credited) to expense as estimates are finalized and events become accruable and represent modifications to previously accrued amounts that were initially established under each plan. Amounts under the “Utilization” caption of the following tables are primarily the cash payments associated with the plans.

 

A summary of activity for business reorganization expenses for the nine months ended September 30, 2004 is as follows:

 

    

Balance

December 31, 2003


  

Change in

estimate


   Utilization

   

Balance

September 30, 2004


Workforce reductions

   $ 5,337    $ 168    $ (4,493 )   $ 1,012

Consolidation of excess facilities

     18,340      2,287      (6,110 )     14,517

Professional fees and other

     2,706      995      (1,705 )     1,996
    

  

  


 

Total

   $ 26,383    $ 3,450    $ (12,308 )   $ 17,525
    

  

  


 

 

A summary of plan activity for business reorganization expenses for the nine months ended September 30, 2004 is as follows:

 

    

Balance

December 31, 2003


  

Change in

estimate


    Utilization

   

Balance

September 30, 2004


Third Quarter 2002 Plan

   $ 4,717    $ 1,202     $ (2,107 )   $ 3,812

Fourth Quarter 2002 Plan

     8,523      2,459       (2,860 )     8,122

Fourth Quarter 2003 Plan

     13,143      (211 )     (7,341 )     5,591
    

  


 


 

Total

   $ 26,383    $ 3,450     $ (12,308 )   $ 17,525
    

  


 


 

 

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Table of Contents

NOTE 6 - BUSINESS COMBINATIONS

 

Acquisitions Accounted for Using the Purchase Method

 

In June 2004, the Company purchased one business through the issuance of 183,587 shares of common stock, with a fair value of $5,248. The Company recorded the preliminary allocation of the purchase price to the estimated fair value of the net assets acquired ($1,258 in assets, $562 in liabilities) with the excess of $4,552 allocated to goodwill. The purchase agreement provides for contingent payouts to the sellers over the next three years, based upon future minimum annual and cumulative earnings thresholds. If and when such payments come due, the amounts paid will be added to the recorded value of goodwill. There were no acquisitions during the nine months ended September 30, 2003.

 

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. These 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 recovered $354 and expensed $876 in the first nine months of 2004 and 2003, 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 $354 in recoveries for the first nine months of 2004 was entirely related to lease obligations on closed facilities.

 

Amounts reflected in the “Change in estimate” column represent modifications to plans subsequent to finalization and have been (recovered) expensed in the current period. Amounts under the “Utilization” caption of the following tables are primarily the cash payments associated with the plans.

 

A summary of activity for merger and integration expenses for the nine months ended September 30, 2004 is as follows:

 

    

Balance

December 31, 2003


  

Change in

Estimate


    Utilization

   

Balance

September 30, 2004


Assumed lease obligations on closed facilities

   $ 5,984    $ (354 )   $ (1,539 )   $ 4,091

Consolidation of acquired facilities

     460      —         (354 )     106
    

  


 


 

Total

   $ 6,444    $ (354 )   $ (1,893 )   $ 4,197
    

  


 


 

 

A summary of plan activity for merger and integration expenses for the nine months ended September 30, 2004 is as follows:

 

    

Balance

December 31, 2003


  

Change in

Estimate


    Utilization

   

Balance

September 30, 2004


2000 Plans

   $ 1,728    $ (102 )   $ (447 )   $ 1,179

2001 Plans

     2,293      (241 )     (808 )     1,244

2002 Plans

     2,423      (11 )     (638 )     1,774
    

  


 


 

Total

   $ 6,444    $ (354 )   $ (1,893 )   $ 4,197
    

  


 


 

 

NOTE 7 - TAXES

 

The provision for income taxes for the nine months ended September 30, 2004 was $1,251 on a pretax loss of $24,187, compared to $5,917 on a pretax loss of $279,458 for the same period of 2003. The higher tax provision in the first nine months of 2003 relates primarily to the increase in valuation allowances on certain foreign tax losses, which may not be realizable. In each period, the effective tax rate differs from the U.S. Federal statutory rate of 35% due primarily to valuation allowances on 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, asset impairment charges and variations from the U.S. tax rate in foreign jurisdictions. The Company records a valuation allowance against deferred tax assets to the extent that it is more likely than not that some portion, or all of, the deferred tax assets will not be realized.

 

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Table of Contents

NOTE 8 - RELATED PARTY TRANSACTIONS

 

Distribution Business Agreements

 

In connection with the Distribution, the Company and Monster entered into agreements covering employee benefit plans, real estate, transition services and tax separation.

 

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.

 

The Company and Monster 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.

 

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).

 

After the Distribution Date, the Company was 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 tax separation 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.

 

Monster Funding of HH Group Obligations

 

Monster agreed at the Distribution Date 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 $13,530 since the Distribution. 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 other 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 competitors.

 

NOTE 9 - 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 8. 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.

 

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Table of Contents

NOTE 10 - FINANCIAL INSTRUMENTS

 

The Company received $27,919 in net proceeds from the issuance of 1,273,885 shares of its common stock in a registered public offering on March 23, 2004.

 

Credit Facility

 

The Company has a senior secured credit facility for $50,000 with Wells Fargo Foothill, Inc., as agent, and certain lenders (the “Foothill Credit Facility”). The maturity date of the Foothill Credit Facility is March 31, 2007. 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 support letters of credit. During the nine months ended September 30, 2004, the Company borrowed and repaid a total of $13,550 under this credit facility. As of September 30, 2004, no borrowings were outstanding and the Company had letters of credit issued and outstanding of $13,179 leaving $36,821 of the credit facility available for use on the terms set forth in the Foothill Credit Facility.

 

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 its Adjusted EBITDA and capital expenditures within 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. On July 27, 2004, the Company entered into an amendment to the Foothill Credit Facility that approved the Company’s updated plan for consolidation of certain of its subsidiaries, clarified the basis for establishing the Company’s Adjusted EBITDA covenant for the Company’s fiscal year 2005 and thereafter, joined certain subsidiaries of the Company as parties to the Foothill Credit Facility, and made certain other changes.

 

Derivatives Held for Purposes Other Than Trading

 

The Company periodically enters into forward contracts in order to reduce exposure to exchange rate risk related to short-term intercompany loans denominated in currencies other than the functional currency. The fair values for all derivatives are recorded in other assets or other liabilities in the consolidated balance sheets. The Company had no outstanding derivatives as of September 30, 2004.

 

NOTE 11 - COMPREHENSIVE INCOME

 

     Quarter Ended September 30,

    Nine Months Ended September 30,

 
     2004

    2003

    2004

    2003

 

Net loss

   $ (6,947 )   $ (226,274 )   $ (25,438 )   $ (285,375 )

Other comprehensive income (loss) - translation adjustments

     (22 )     696       (456 )     9,301  
    


 


 


 


Total comprehensive loss

   $ (6,969 )   $ (225,578 )   $ (25,894 )   $ (276,074 )
    


 


 


 


 

NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION

 

During the nine month period ended September 30, 2004, the Company issued 183,587 shares of common stock, with a fair value of $5,248 to purchase a business in its Hudson segment. The Company also issued 46,083 shares of its common stock with a value of $1,058 to satisfy the 2003 contribution liability to the 401(k) Savings Plan. The Company entered into capital lease obligations for furniture and fixtures and telecommunications equipment with a fair value of $3,920, of which $3,767 was related to a renegotiation of an existing operating lease that upon initiation of the new lease was converted to a capital lease. The Company also entered into an arrangement for the financing of a financial and operational application software package with a fair value of $2,081, which for financial reporting purposes is being treated as a capital lease.

 

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Table of Contents

NOTE 13 - 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 are the only significant assets separated by segment for internal reporting purposes.

 

     For the
Quarter Ended September 30,


    As of and for the
Nine Months Ended September 30,


 

Information by business segment


   2004

    2003

    2004

    2003

 

Revenue

                                

Hudson

   $ 300,828     $ 256,516     $ 866,544     $ 753,091  

Highland

     14,201       15,665       45,720       47,562  
    


 


 


 


     $ 315,029     $ 272,181     $ 912,264     $ 800,653  
    


 


 


 


Gross Margin

                                

Hudson

   $ 102,931     $ 83,585     $ 298,288     $ 254,547  

Highland

     13,483       14,637       43,006       44,925  
    


 


 


 


     $ 116,414     $ 98,222     $ 341,294     $ 299,472  
    


 


 


 


Business reorganization expenses (recoveries)(a)

                                

Hudson

   $ 706     $ (335 )   $ 891     $ 6,205  

Highland

     2,608       2,417       2,559       3,201  
    


 


 


 


     $ 3,314     $ 2,082     $ 3,450     $ 9,543  
    


 


 


 


Goodwill impairment

                                

Hudson

   $ —       $ 195,404     $ —       $ 195,404  

Highland

     —         7,381       —         7,381  
    


 


 


 


     $ —       $ 202,785     $ —       $ 202,785  
    


 


 


 


Operating income (loss)

                                

Hudson

   $ 4,346     $ (204,195 )   $ 5,381     $ (231,018 )

Highland

     (2,597 )     (13,235 )     (1,932 )     (24,491 )
    


 


 


 


       1,749       (217,430 )     3,449       (255,509 )

Corporate expenses (a)

     (8,497 )     (8,195 )     (25,824 )     (22,643 )

Interest and other income (expense), net

     331       (870 )     (1,812 )     (1,306 )
    


 


 


 


Loss before provision for (benefit) of income taxes

   $ (6,417 )   $ (226,495 )   $ (24,187 )   $ (279,458 )
    


 


 


 


Accounts receivable, net

                                

Hudson

                   $ 173,641     $ 130,853  

Highland

                     8,211       10,123  
                    


 


                     $ 181,852     $ 140,976  
                    


 


Long-lived assets, net of accumulated amortization

                                

Hudson

                   $ 34,358     $ 30,086  

Highland

                     2,646       4,665  

Corporate

                     5,936       6,461  
                    


 


                     $ 42,940     $ 41,212  
                    


 


 

(a) Corporate expenses include $137 of business reorganization expenses in the first nine months of 2003.

 

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Table of Contents

NOTE 13 - SEGMENT AND GEOGRAPHIC DATA (continued)

 

Information by geographic region


   United
States


   Australia

   United
Kingdom


   Continental
Europe


   Other (b)

   Total

For the Quarter Ended September 30, 2004

                                         

Revenue

   $ 93,456    $ 79,987    $ 93,641    $ 22,634    $ 25,311    $ 315,029
    

  

  

  

  

  

Long-lived assets

   $ 21,445    $ 10,504    $ 5,786    $ 3,323    $ 1,882    $ 42,940
    

  

  

  

  

  

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 Nine Months Ended September 30, 2004

                                         

Revenue

   $ 265,310    $ 245,058    $ 258,465    $ 74,231    $ 69,200    $ 912,264
    

  

  

  

  

  

For the Nine Months Ended September 30, 2003

                                         

Revenue

   $ 239,852    $ 225,217    $ 205,316    $ 72,219    $ 58,049    $ 800,653
    

  

  

  

  

  

 

(b) Includes the Americas other than the United States and Asia Pacific other than Australia.

 

NOTE 14 - SUBSEQUENT EVENT

 

The Company filed a shelf registration on October 6, 2004 to enable it to issue up to 675,000 shares of its common stock from time to time in connection with acquisitions of businesses, assets or securities of other companies, whether by purchase, merger or any other form of acquisition or business combination. If any shares are issued using this shelf registration, the Company will not receive any proceeds from these offerings other than the assets, businesses or securities acquired. The registration statement replaced the Company’s existing acquisition shelf registration statement filed on April 22, 2004 under which 166,413 shares of its common stock remained available for issuance.

 

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Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors

Hudson Highland Group, Inc.

New York, New York

 

We have reviewed the consolidated condensed balance sheet of Hudson Highland Group, Inc. as of September 30, 2004, the related consolidated condensed statements of operations for the three month and nine month periods ended September 30, 2004 and 2003, the related consolidated condensed statements of cash flows for the nine month periods ended September 30, 2004 and 2003 and the consolidated condensed statement of changes in stockholders’ equity for the nine month period ended September 30, 2004 included in the accompanying Securities and Exchange Commission Form 10-Q for the period ended September 30, 2004. These interim financial statements are the responsibility of the Company’s management.

 

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 standards of the Public Company Accounting Oversight Board, 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 consolidated condensed 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 standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Hudson Highland Group, Inc. as of December 31, 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 5, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

 

/s/    BDO Seidman, LLP        
BDO Seidman, LLP

 

New York, New York

October 28, 2004

 

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Table of Contents

 

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.

 

Hudson Highland Group, Inc. (the “Company”) provides professional staffing services on a permanent, contract and temporary basis, as well as executive search and a range of human capital services to businesses operating in a wide variety of industries. The Company is organized into two principal business segments, Hudson businesses (“Hudson”) and Highland Partners (“Highland”), which constituted approximately 87% percent and 13% of gross margin, respectively, for the nine months ended September 30, 2004.

 

The Company’s management is focused primarily on returning the Company to profitability, after five years of losses. The Company has operated independently from Monster since April 1, 2003.

 

Since the Company’s spin-off from Monster, additional reorganization charges were recorded primarily as a result of actions designed to rationalize various aspects of the Company’s cost structure. These charges included costs related to rationalization of real estate, integration of financial and management information systems, reductions in headcount, the write-off of redundant assets and impairment charges related to the goodwill recorded for the acquisitions. The Company also closed or sold a number of its smaller business units in Europe and North America after determining that these businesses were not viable profit centers in the near term. In the first quarter of 2004, the Company abandoned its investment in its German subsidiary and recognized a loss on disposition of assets of $1,182 for the nine months ended September 30, 2004. The operation has filed for insolvency and is currently operated under an administrator in Germany. The ultimate financial outcome cannot be determined at this time. Within individual geographic regions, the Company has integrated the systems, management structures and compensation plans of its business units. Globally, the businesses operate under common financial policies and timetables, they report through a single consolidation system, and cash management is coordinated centrally from the corporate headquarters in New York.

 

Hudson. Hudson primarily provides temporary and contract personnel and permanent recruitment services to a wide range of clients. With respect to temporary and contract personnel, Hudson focuses on providing candidates with professional qualifications, including accounting and finance, legal and technology. The length of temporary assignment can vary widely, but assignments in the professional sectors tend to be longer than those in the general clerical or industrial sectors. With respect to permanent recruitment, Hudson focuses on mid-level professionals typically earning between $50,000 and $150,000 annually, and possessing professional skills and/or profile required by clients. Hudson provides permanent recruitment services on both a retained and contingent basis. In larger markets, the sales strategy focuses on both clients operating in particular business sectors, such as financial services, healthcare, or technology, and candidates possessing particular professional qualifications, such as accounting and finance, information technology and communications, legal and healthcare. Hudson uses both traditional and interactive methods to select 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 through its Human Capital Solutions and Hudson Inclusion Solutions units that encompass services including, among others, customized interactive recruiting and human resource solutions, executive assessment and coaching, diversity assessment and consulting, organizational effectiveness, and career transition. Through the Hudson Highland Center for High Performance, Hudson also offers leadership solutions designed to assist senior management in enhancing the operating performance of large organizations. These services enable Hudson to offer clients a comprehensive set of human capital management services, across the entire life cycle of employment, ranging from providing temporary workers, to assessment or coaching of permanent staff, to recruitment or search for permanent executives and professionals, to outplacement.

 

Hudson operates on a global basis in 21 countries and over 100 offices with its revenue generated approximately evenly among North America, Europe (including the United Kingdom), and the Asia Pacific region (primarily Australia and New Zealand).

 

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Table of Contents

Highland. Highland offers a comprehensive range of executive search services on a retained basis aimed at recruiting senior level executives or professionals. Highland also has an active practice in assisting clients desiring to augment their boards of directors.

 

Highland approaches the market through industry sectors, such as financial services, life sciences, retail and consumer products, industrial and technology. This industry sector sales approach is designed to enable Highland to better understand the market conditions and strategic management issues faced by clients within their specific business sectors. Highland also recruits candidates through functional specialist groups, including board of directors, chief financial officer, chief information officer, human resources and legal. These functional expertise groups are comprised of consultants who have extensive backgrounds in placing executives in certain specialist positions within a business.

 

Highland, an executive search boutique with global capabilities, operates in 15 practice offices in four countries. For the nine months ended September 30, 2004, approximately 72% of revenue in the Highland business was derived in North America.

 

Corporate expenses are reported separately from the two operating segments and consist primarily of compensation, marketing and lease expense, and professional fees.

 

For all of the periods presented in this Form 10-Q, prior to the Distribution (as defined below), HH Group operated as part of Monster. Immediately prior to the Distribution, Monster transferred the assets and liabilities of its Hudson and Highland business segments to HH Group at Monster’s historical cost. On March 31, 2003 (the “Distribution Date”), Monster distributed to all of its stockholders of record one share of the Company’s Common Stock for each thirteen and one third shares of Monster Common Stock so held (the “Distribution”). Following the Distribution, the Company became an independent public company and Monster has no continuing stock ownership interest in the Company. 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 8 of the Notes to Consolidated Condensed Financial Statements for a description of the agreements.

 

The Company’s consolidated condensed financial statements 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 were contributed to HH Group and are reflected as 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.

 

The Company’s costs and expenses 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 for the three months ended March 31, 2003. 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. Except as discussed above, interest charges from Monster have been allocated to HH Group only for that portion of third-party debt attributed to HH Group.

 

The Company recorded business reorganization and merger and integration expenses of $3,096 and $10,419 for the nine months ended September 30, 2004 and 2003, respectively. The merger and integration expenses 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. The business reorganization expenses were related to the reorganization of operations announced in 2002 and 2003 and the Distribution in the first quarter 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 were included in Monster’s tax return. Income taxes have been 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.

 

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Table of Contents

Results of Operations

 

The following table sets forth selected financial results for the Company.

 

     Quarter Ended
September 30,


    Nine Months Ended
September 30,


 
     2004

    2003

    2004

    2003

 

Revenue

   $ 315,029     $ 272,181     $ 912,264     $ 800,653  
    


 


 


 


Gross margin (1)

   $ 116,414     $ 98,222     $ 341,294     $ 299,472  
    


 


 


 


Gross margin as a percentage of revenue

     37.0 %     36.1 %     37.4 %     37.4 %

Operating loss

   $ (6,748 )   $ (225,625 )   $ (22,375 )   $ (278,152 )
    


 


 


 


Net loss

   $ (6,947 )   $ (226,274 )   $ (25,438 )   $ (285,375 )
    


 


 


 


TEMPORARY CONTRACTING DATA (2):

                                

Temporary contracting revenue

   $ 223,653     $ 196,790     $ 641,740     $ 571,499  

Direct costs of temporary contracting

     184,308       164,364       531,525       473,686  
    


 


 


 


Temporary contracting gross margin

   $ 39,345     $ 32,426     $ 110,215     $ 97,813  
    


 


 


 


Gross margin as a percent of revenue

     17.6 %     16.5 %     17.2 %     17.1 %

 

(1) Gross margin consists of permanent recruitment and search fees less their associated direct costs (which tend to only be a small percentage of the associated fees) and temporary contracting gross margin as derived by deducting the direct costs of temporary contractors from temporary contracting revenue. The Company’s calculation of gross margin may differ from those of other companies. Accordingly, the mix of temporary and permanent services, as well as the mix of temporary contracting services and geographic markets, affects the Company’s gross margin as a percentage of revenue.

 

(2) Temporary contracting revenue is a component of Hudson’s revenue. Temporary contracting gross margin and gross margin as a percentage of revenue are shown to provide additional information on the Company’s ability to manage its cost structure and provide further comparability relative to the Company’s peers.

 

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 revenue, 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. Changes in foreign currency exchange rates therefore generally impact only reported earnings and not the Company’s economic condition.

 

     Quarter Ended September 30,

     2004

   2003

     As reported

   Currency
Translation


    Constant
Currencies


   As reported

Hudson revenue

   $ 300,828    $ (19,858 )   $ 280,970    $ 256,516

Highland revenue

     14,201      (327 )     13,874      15,665
    

  


 

  

Total revenue

     315,029      (20,185 )     294,844      272,181

Direct costs

     198,615      (12,983 )     185,632      173,959
    

  


 

  

Gross margin

   $ 116,414    $ (7,202 )   $ 109,212    $ 98,222
    

  


 

  

Selling, general and administrative expenses

   $ 120,165    $ (7,068 )   $ 113,097    $ 119,082
    

  


 

  

 

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Table of Contents
     Nine Months Ended September 30,

     2004

   2003

     As
reported


   Currency
Translation


    Constant
Currencies


   As
reported


Hudson revenue

   $ 866,544    $ (73,945 )   $ 792,599    $ 753,091

Highland revenue

     45,720      (1,875 )     43,845      47,562
    

  


 

  

Total revenue

     912,264      (75,820 )     836,444      800,653

Direct costs

     570,970      (48,184 )     522,786      501,181
    

  


 

  

Gross margin

   $ 341,294    $ (27,636 )   $ 313,658    $ 299,472
    

  


 

  

Selling, general and administrative expenses

   $ 360,573    $ (27,641 )   $ 332,932    $ 364,420
    

  


 

  

 

Quarter Ended September 30, 2004 Compared to the Quarter Ended September 30, 2003

 

Revenue for the three months ended September 30, 2004 was $315,029, an increase of $42,848, or 15.7%, as compared to revenue of $272,181 in the third quarter of 2003. On a constant currencies basis, revenue would have increased 8.3% comparing the third quarter of 2004 with the third quarter of 2003. This increase was primarily due to higher temporary contracting revenue and permanent placement revenue in the Hudson North America and U.K. businesses, partially offset by declines in temporary contracting revenue in Hudson Australia and the closing of the Highland continental European businesses in 2003.

 

Hudson revenue was $300,828 for the three months ended September 30, 2004, an increase of 17.3% from $256,516 for the same period of 2003. On a constant currencies basis, Hudson revenue would have increased 9.5% comparing the third quarter of 2004 with the third quarter of 2003. The increase in revenue on a constant currencies basis reflected growth in almost all North American practice groups (+32%), particularly in accounting and finance, legal and information technology (“IT”), growth in the U.K. (+17%) from temporary contracting and permanent placement businesses, and permanent placement revenue in the Asian region (+41%), primarily Singapore and Japan. These increases were partially offset by lower Australian temporary contracting revenue (-17%). Continental Europe was essentially unchanged from the prior year period, with increases in Belgium (+32%) and the Netherlands (+13%) offset by the decrease resulting from abandonment of the German business at the end of the first quarter of 2004.

 

Highland revenue of $14,201 for the three months ended September 30, 2004 was down 9.3% from $15,665 in the same period of 2003. On a constant currencies basis, Highland revenue would have decreased 11.4% comparing the third quarter 2004 with the third quarter 2003. The decrease was primarily the result of the absence of revenue from continental Europe, where Highland closed essentially all of its operations at the end of 2003 and declines in the U.K. (-23%), partially offset by improved results in Australia (+20%) and moderate growth in revenue in North America (+5%).

 

Direct costs for the three months ended September 30, 2004 were $198,615, an increase of 14.2% compared to $173,959 for the same period of 2003. Direct costs related to temporary contracting as a percentage of revenue were 82.4%, a decrease from the prior year’s 83.5 %. On a constant currencies basis, direct costs would have increased by approximately 7% in the third quarter of 2004 in comparison to the prior year period.

 

Gross margin, defined as revenue less direct costs, for the three months ended September 30, 2004 was $116,414, an increase of $18,192, or 18.5%, from $98,222 reported in the three months ended September 30, 2003. Gross margin as a percentage of revenue rose to 37.0% for the third quarter of 2004, from 36.1% in the third quarter of 2003, primarily on improved temporary contracting margins in North America. On a constant currencies basis, the gross margin for the third quarter of 2004 would have increased by 11.2% compared to the third quarter of 2003. The increase in gross margin was attributable to improved margins in the Hudson North America temporary contracting business (+50%), and improvements in the Hudson permanent staffing businesses in North America (+87%), the U.K (+25%), and Asian regions (+47%), partially offset by absence of the Highland continental European business and decreases in the Highland U.K (-26%) and Hudson continental Europe (-1%).

 

Selling, general and administrative expenses for the three months ended September 30, 2004 were $120,165, an increase of 0.9% compared with $119,082 for the same period of 2003. Selling general and administrative expenses as a percentage of revenue were 38.1% and 43.8% for the third quarter of 2004 and 2003, respectively. Increases in support staff compensation, professional fees and other administrative expenses were essentially offset by lower provision for doubtful accounts ($6,622), lower depreciation and amortization ($887) and lower occupancy costs. On a constant currencies basis, the third quarter 2004 selling, general and administrative expenses would have decreased by 5.0% compared to the third quarter 2003.

 

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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 revenue 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 previously recorded goodwill related to both of the Company’s business segments. There were no comparable expenses in 2004.

 

Business reorganization expenses for the three months ended September 30, 2004 totaled $3,314 compared to $2,082 in the same period of 2003. The 2004 expenses primarily related to the completion of the relocation of Highland’s Toronto office and costs, net of recoveries associated with various U.S. and Australian office leases. The expenses for the third quarter of 2003 were primarily related new expenses related to leases for certain Highland European properties, partially offset by the finalization of the consolidation of certain facilities and leases at a lower than expected cost.

 

Merger and integration expenses (recoveries) reflect costs incurred or recoveries from prior accrued expenses as a result of pooling-of-interests transactions and the integration of such companies. For the three months ended September 30, 2004, merger and integration recoveries were $(317) compared to $(102) from the same period in the prior year.

 

As a result of the above, operating losses for the three months ended September 30, 2004 were $6,748, an improvement of $218,877 when compared to an operating loss of $225,625 for the comparable period in 2003. Hudson reported operating income in the third quarter of 2004 of $4,346 compared to an operating loss of $204,195 for the comparable period in 2003, which included a $195,404 goodwill impairment charge. Highland operating loss was $2,597 in the third quarter of 2004 compared to a loss of $13,235 for the comparable period in 2003, which included a goodwill impairment charge of $7,381. Corporate expenses in the third quarter of 2004 increased to $8,497 from $8,195 in the same period in 2003, as a result of higher professional fees and staff compensation, partially offset by reduced depreciation expense ($868).

 

Other non-operating income, including net interest income, was $331 in the third quarter of 2004 compared to expenses of $870 for the same period of 2003.

 

The expense for income taxes for the three months ended September 30, 2004 was $530 on a pretax loss of $6,417 compared with a benefit of $221 on a pretax loss of $226,495 for the same period of 2003. In each period, the effective tax rate differs from the U.S. Federal statutory rate of 35% due to valuation allowances on deferred tax assets, utilization of 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, asset impairment charges, and variations from the U.S. tax rate in foreign jurisdictions.

 

Net loss was $6,947 for the three months ended September 30, 2004, compared with a loss of $226,274 for the same period in 2003.

 

Basic and diluted loss per share for the third quarter of 2004 was a loss of $.68 per share compared to a loss of $26.92 per share in the third quarter of 2003. For the 2004 and 2003 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.

 

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Nine Months Ended September 30, 2004 Compared to the Nine Months Ended September 30, 2003

 

Revenue for the nine months ended September 30, 2004 was $912,264, an increase of $111,611, or 13.9%, as compared to revenue of $800,653 in the first nine months of 2003. On a constant currencies basis, revenue would have increased 4.5% comparing the first nine months of 2004 with the same period in 2003. This increase was primarily due to higher temporary contracting revenue and permanent placement revenue in the Hudson North America and U.K. businesses, partially offset by declines in temporary contracting revenue in Hudson Australia and the closing of the Highland continental European businesses in 2003.

 

Hudson revenue was $866,544 for the nine months ended September 30, 2004, up 15.1% from $753,091 for the same period of 2003. On a constant currencies basis, Hudson revenue would have increased 5.2% comparing the first nine months of 2004 with the same period in 2003. This increase reflected the higher revenue in the Hudson U.K. temporary contracting (+10%) and permanent placement (+27%) businesses, Hudson North America’s improved revenue in permanent placement (+48%) and temporary contracting (+10%) and Hudson Asia’s improved permanent placement business (+40%), offset by decreases in Hudson Australia (-6%) and slower revenue growth from Hudson Europe (+2%), as a result from the abandonment of its German subsidiary.

 

Highland revenue of $45,720 for the nine months ended September 30, 2004 was down 3.9% from $47,562 in same period of 2003, reflecting closure of its continental European operations, partially offset by an increase in the Australian business (+114%) and moderate growth in North America (+2%). On a constant currencies basis, Highland revenue would have decreased approximately 8% when compared with the same period in 2003.

 

Direct costs for the nine months ended September 30, 2004 increased $69,789, or 13.9%, to $570,970, compared to $501,181 for the same period of 2003. On a constant currencies basis, direct costs would have increased in the first nine months of 2004 in comparison to the prior year by 4.3%. The increase was primarily the result of increased costs for temporary contractors and increases in out-of-pocket expenses.

 

Gross margin, defined as revenue less direct costs, for the nine months ended September 30, 2004 was $341,294, higher by $41,822, or 14.0%, from $299,472 reported in the nine months ended September 30, 2003. Gross margin as a percentage of revenue was unchanged at 37.4% for the first nine months of 2004 and 2003. On a constant currencies basis, gross margin would have increased by 4.7% in the first nine months of 2004 when compared to the same period of 2003. The increase in gross margin was attributable to improved margin in the Hudson North America temporary contracting business (+19%), an improvement in the Hudson North America permanent staffing businesses in (+47%), the U.K (+9%), and Asian regions (+36%), partially offset by the absence of the Highland continental European business and decreases in the Hudson continental European business (-3%).

 

Selling, general and administrative expenses for the nine months ended September 30, 2004 were $360,573, lower by 1.1% when compared with $364,420 for the same period of 2003. Selling general and administrative expenses as a percentage of revenue were 39.5% and 45.5% for the first nine months of 2004 and 2003, respectively. A recovery of doubtful accounts in 2004 versus a provision for doubtful accounts in 2003 reduced 2004 selling general and administrative expenses by $15,873 for the first nine months of 2004 when compared to the same period of 2003. This reduction was partially offset by higher compensation costs related to sales commissions and support staff compensation. On a constant currencies basis the first nine months of 2004 selling, general and administrative expenses would have decreased by 8.6% compared to the same period of 2003.

 

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 revenue 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 previously recorded goodwill related to both of the Company’s business segments.

 

Business reorganization expenses for the nine months ended September 30, 2004 totaled $3,450, as compared to $9,543 in the same period of 2003. The 2004 expenses primarily related to the completion of the relocation of Highland’s Toronto office and costs, net of recoveries associated with various U.S. and Australian office leases. The 2003 expenses primarily related to consolidation of facilities related to the Distribution, the continuation of the process to streamline operations begun in 2002 and new expenses related to leases for certain Highland European properties.

 

Merger and integration expenses (recoveries) reflect costs incurred or recoveries from prior accrued expenses as a result of pooling-of-interests transactions and the integration of such companies. For the nine months ended September 30, 2004, merger and integration recoveries were $(354), compared to expense of $876 in the same period of the prior year. The decrease in expenses for the first nine months of 2004 compared to the same period of 2003 was a result of the finalization of the exit strategies related to the pooled businesses.

 

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Operating loss for the nine months ended September 30, 2004 was $22,375, compared to an operating loss of $278,152 for the comparable period in 2003. The decrease in the loss was primarily the result of the absence of the goodwill impairment charge of $202,785 in 2004 and improved gross margins, discussed above, and lower business reorganization expenses.

 

Hudson’s operating income for the nine months ended September 30, 2004 was $5,381, compared to an operating loss of $231,018 for the same period in 2003. Hudson’s nine-month 2004 operating income was higher when compared to the 2003 operating loss as a result of the absence of a goodwill impairment charge of $195,404, lower allowances for doubtful accounts of $15,873, improved gross margins in North America (+26%), the U.K. (+9%) and Asian (+36%) regions and lower business reorganization expenses $5,314 when compared to 2003 results.

 

Highland’s operating loss for the nine months ended September 30, 2004 was $1,932, compared to an operating loss of $24,491 for the same period in 2003. The nine-month 2004 loss was lower than the 2003 loss as a result of the absence of a goodwill impairment charge ($7,381) and lower selling general and administrative costs ($16,465), when compared to 2003 results.

 

Corporate expense for the nine months ended September 30, 2004 was $25,824, compared to $22,643 in the comparable period of 2003. Corporate expenses increased in the nine-month 2004 period as a result of higher marketing and professional fees.

 

Other non-operating expense, including net interest expense, was $1,812 in the first nine months of 2004 and $1,306 for the same period of 2003. Losses on the disposition and abandonment of assets were $1,182 and $2,063 for the nine-month periods ended September 30, 2004 and 2003, respectively.

 

The provision for income taxes for the nine months ended September 30, 2004 was $1,251 on a pretax loss of $24,187, compared with a provision for $5,917 on a pretax loss of $279,458 for the same period of 2003. The change in the Company’s tax provision for the nine months ended September 30, 2004 compared to the same period in 2003 was primarily due to establishment of a valuation allowance in 2003 on certain foreign tax losses, which may not be realizable and the inability of the Company to realize benefits from its current losses in businesses where the future earnings ability to utilize those losses is not certain. In each period, the effective tax rate differs from the U.S. Federal statutory rate of 35% due to valuation allowance on 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, asset impairment charges, and variations from the U.S. tax rate in foreign jurisdictions.

 

Net loss was $25,438 for the nine months ended September 30, 2004 compared with a net loss of $285,375 for the same period in 2003. Basic and diluted loss per share for the first nine months of 2004 was a loss of $2.66 per share, compared to a loss of $34.05 per share in the first nine months of 2003. For the 2004 and 2003 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.

 

Liquidity and Capital Resources

 

The Company received $27,919 in net proceeds from the issuance of 1,273,885 shares of its common stock in a registered public offering on March 23, 2004. The Company issued 183,587 shares of common stock, with a fair value of $5,248, to purchase a business in the Hudson segment on June 2, 2004.

 

The Company’s liquidity needs arise primarily from funding working capital requirements, as well as capital investment in information technology and reorganization costs. Prior to the Distribution, HH Group historically relied upon Monster’s centralized cash management function and Monster’s line of credit facility for its liquidity needs. Legal obligation for settlement of such liabilities remained with the Company. In connection with the Distribution, Monster provided HH Group with a cash balance of $40,000 upon completion of the Distribution on March 31, 2003, and agreed to reimburse the Company $13,530 of cash payments due under its accrued integration restructuring and business reorganization plans. The Company received full payment of this reimbursement before June 30, 2004.

 

The Company filed a shelf registration on October 6, 2004 to enable it to issue up to 675,000 shares of its common stock from time to time in connection with acquisitions of businesses, assets or securities of other companies, whether by purchase, merger or any other form of acquisition or business combination. If any shares are issued using this shelf registration, the Company will not receive any proceeds from these offerings other than the assets, businesses or securities acquired. The registration statement replaced the Company’s existing acquisition shelf registration statement filed on April 22, 2004 under which 166,413 shares of its common stock remained available for issuance.

 

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The Company has a senior secured credit facility for $50,000 with Wells Fargo Foothill, Inc., as agent, and certain lenders (the “Foothill Credit Facility”). The maturity date of the Foothill Credit Facility is March 31, 2007. 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 support letters of credit. As of September 30, 2004, the credit limit on the Foothill Credit Facility was $50,000. During the nine months ended September 30, 2004, the Company borrowed and repaid a total of $13,550 under this credit facility. As of September 30, 2004, no borrowings were outstanding and the Company had letters of credit issued and outstanding of $13,179 leaving $36,821 of the credit facility available for use on the terms set forth in the Foothill Credit Facility.

 

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 its Adjusted EBITDA and capital expenditures within 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. The Adjusted EBITDA covenant generally provides that the Company’s Adjusted EBITDA (as defined in the Foothill Credit Facility) loss for the trailing twelve-month periods ending March 31, June 30, September 30 and December 31, 2004 may not exceed $48,500, $35,500, $25,500 and $8,000, respectively. The capital expenditure covenant provides that the Company’s capital expenditures for 2004 may not exceed $11,000. 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. On July 27, 2004, the Company entered into an amendment to the Foothill Credit Facility that approved the Company’s updated plan for consolidation of certain of its subsidiaries, clarified the basis for establishing the Company’s Adjusted EBITDA covenant for the Company’s fiscal year 2005 and thereafter, joined certain subsidiaries of the Company as parties to the Foothill Credit Facility, and made certain other changes.

 

On April 22, 2004, the Company filed a registration statement on Form S-4 with the SEC to offer up to 350,000 shares of the Company’s common stock from time to time in connection with acquisitions of businesses, assets or securities of other companies whether by purchase, merger or any other form of acquisition or business combination. On June 2, 2004, the Company issued 183,587 shares of common stock registered on the Form S-4, with a fair value of $5,248, to purchase a business in its Hudson segment. With the filing of the new shelf registration on October 6, 2004, any shares not issued utilizing the April 22, 2004 shelf registration are no longer available for issuance.

 

During the nine months ended September 30, 2004 and 2003, the Company used cash in operating activities of $27,420 and $28,392, respectively. Cash usage decreased in the 2004 period from the 2003 period as a result of lower net losses ($259,937) and lower working capital requirements, primarily current liabilities, business reorganization expenses and merger and integration expenses ($11,198). These improvements in cash flow were partially offset by the absence of the 2003 non-cash goodwill impairment charge ($202,785), higher accounts receivable from improved revenue ($47,735) and a net recovery of doubtful accounts in 2004 versus a provision in 2003 ($15,873).

 

During the nine months ended September 30, 2004 and 2003, the Company used cash in investing activities of $6,288 and $8,154, 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 2004 compared to the same period of 2003 was the result of lower capital expenditures ($1,579) and lower payments related to purchases of businesses ($287).

 

During the nine months ended September 30, 2004 and 2003, the Company generated cash from financing activities of $34,449 and $46,698, respectively. The cash provided from financing was lower in 2004 as a result of the absence of Monster cash transfers ($41,317), partially offset by the proceeds from the issuance of common stock ($27,919), proceeds from the exercise of options ($1,364) and employee stock purchases ($1,078). Third-party debt and capital leases as of September 30, 2004 were $5,621.

 

The Company believes that the cash and cash equivalents on hand at September 30, 2004, 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.

 

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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, including statements regarding the Company’s future financial condition, results of operations, business operations and business prospects, 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. All forward-looking statements are subject to 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 or failing to develop technology, (6) competition in the Company’s markets, (7) fluctuations in the Company’s operating results 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 and key management personnel, (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 from both clients and employers and limits on related insurance coverage, (14) the impact of government regulations, (15) the Company’s ability to successfully operate as an independent company and the level of costs associated therewith, and (16) restrictions on the Company’s operating flexibility due to the terms of its credit facility. Please see “Risk Factors” in the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2004 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.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The majority of the Company’s borrowings are in fixed rate leases and seller financed notes. The carrying amounts of long-term debt approximate fair value, generally due to the short-term nature of the underlying instruments. During the nine months ended September 30, 2004, the Company borrowed and repaid a total of $13,550 under its credit facility, which bears interest equal to the prime rate plus 0.25% or LIBOR plus 2.00%, at the Company’s option. 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, the Netherlands, New Zealand and the United Kingdom. For the nine months ended September 30, 2004, approximately 74% of gross margin was earned outside the United States and collected in local currency, and related operating expenses also were 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 months ended September 30, 2004, the Company had a translation loss of $456, primarily attributable to the slight strenghtening of the U.S. dollar against the Australian dollar, partially offset by a weakening of the U.S. dollar against the British pound.

 

The Company’s objective is to reduce earnings and cash flow volatility associated with foreign exchange rate changes. Accordingly, the Company enters into foreign currency forward contracts to minimize the impact of foreign exchange movements on intercompany loan balances. At September 30, 2004, the Company had no outstanding foreign currency forward contracts.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) 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, with the participation of the Company’s Chairman of the Board and Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated 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, 2004. Based upon their evaluation of these disclosure controls and procedures, the Chairman of the Board and Chief Executive Officer and 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, 2004 to ensure that material information relating to the Company, including the Company’s 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.

 

(b) Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2004 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table contains information related to the repurchase of common stock by the Company during the third quarter of 2004. No repurchases were made pursuant to a publicly announced repurchase plan or program.

 

Period


   Total number of
shares purchased (a)


   Average price
paid per share


   Total number of shares
purchased as part of
publicly announced
plans or programs


   Maximum number of
shares that may yet
be purchased under
the plans or programs


July 1, 2004 to July 31, 2004

   442    $ 26.63    —      —  
                
  

August 1, 2004 to August 31, 2004

   —        —            
                       

September 1, 2004 to September 30, 2004

   —        —            
                       
    
                

Total

   442    $ 26.63    —      —  
    
         
  
                       

 

(a) Represents shares of vested restricted stock tendered to the Company by employees to satisfy tax-withholding obligations resulting from the vesting of restricted stock.

 

ITEM 6. EXHIBITS

 

Exhibits: The following Exhibits are filed herewith.

 

  3.1    Amended and Restated By-Laws (effective as of July 23, 2004)
10.1    Hudson Highland Group, Inc. board of directors stock option agreement
10.2    Hudson Highland Group, Inc. restricted stock award agreement
10.3    Hudson Highland Group, Inc. stock option agreement
15       Letter from BDO Seidman, LLP regarding unaudited interim financial information.
31.1    Certification by Chairman and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2    Certification by the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1    Certification of the Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2    Certification of the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

 

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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 and

Chief Executive Officer

(Principal Executive Officer)

Dated: November 2, 2004

       
            By:   /s/    RICHARD W. PEHLKE        
                Richard W. Pehlke
               

Executive Vice President and

Chief Financial Officer

(Principal Financial and Accounting Officer)

Dated: November 2, 2004

           

 

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HUDSON HIGHLAND GROUP, INC.

FORM 10-Q

 

EXHIBIT INDEX

 

Exhibit No.

  

Description


(a) Exhibits: The following Exhibits are filed herewith.
  3.1    Amended and Restated By-Laws (effective as of July 23, 2004)
10.1    Hudson Highland Group, Inc. board of directors stock option agreement
10.2    Hudson Highland Group, Inc. restricted stock award agreement
10.3    Hudson Highland Group, Inc. stock option agreement
15       Letter from BDO Seidman, LLP regarding unaudited interim financial information.
31.1    Certification by Chairman and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2    Certification by the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1    Certification of the Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2    Certification of the Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

 

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