XNAS:HSON Hudson Global Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549  

 
FORM 10-Q 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
or
o
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 GLOBAL, 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.)
 
560 Lexington Avenue, New York, New York 10022
(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   o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  x     No  o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
 
Smaller reporting company
o
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No x

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

Class
 
Outstanding on June 30, 2012
Common Stock - $0.001 par value
 
33,219,315



HUDSON GLOBAL, INC.
INDEX


 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) - Three and Six Months Ended June 30, 2012 and 2011
 
 
 
 
Condensed Consolidated Balance Sheets – June 30, 2012 and December 31, 2011
 
 
 
 
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2012 and 2011
 
 
 
 
Condensed Consolidated Statement of Changes in Stockholders’ Equity – Six Months Ended June 30, 2012
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 



PART I – FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Revenue
$
204,838

 
$
247,378

 
$
405,428

 
$
465,917

Direct costs
127,770

 
151,911

 
255,152

 
289,252

Gross margin
77,068

 
95,467

 
150,276

 
176,665

Operating expenses:
 

 
 

 
 
 
 
Selling, general and administrative expenses
73,535

 
87,405

 
147,998

 
166,213

Depreciation and amortization
1,610

 
1,636

 
3,115

 
3,213

Business reorganization expenses
5,090

 
396

 
6,030

 
747

Operating income (loss)
(3,167
)
 
6,030

 
(6,867
)
 
6,492

Non-operating income (expense):
 

 
 

 
 
 
 
Interest income (expense), net
(189
)
 
(375
)
 
(349
)
 
(581
)
Other income (expense), net
(369
)
 
(5
)
 
(375
)
 
482

Income (loss) before provision for income taxes
(3,725
)
 
5,650

 
(7,591
)
 
6,393

Provision for (benefit from) income taxes
(4,119
)
 
1,426

 
(4,765
)
 
2,175

Net income (loss)
$
394

 
$
4,224

 
$
(2,826
)
 
$
4,218

Earnings (loss) per share:
 

 
 

 
 
 
 
Basic
$
0.01

 
$
0.13

 
$
(0.09
)
 
$
0.13

Diluted
$
0.01

 
$
0.13

 
$
(0.09
)
 
$
0.13

Weighted-average shares outstanding:
 

 
 

 
 
 
 
Basic
32,122

 
31,593

 
31,956

 
31,501

Diluted
32,486

 
32,039

 
31,956

 
31,939

Comprehensive income (loss):
 

 
 

 
 
 
 
Net income (loss)
$
394

 
$
4,224

 
$
(2,826
)
 
$
4,218

Other comprehensive income (loss):
 

 
 

 
 
 
 
Foreign currency translation adjustment, net of income taxes
(1,351
)
 
1,230

 
439

 
3,275

Total other comprehensive income (loss), net of income taxes
(1,351
)
 
1,230

 
439

 
3,275

Comprehensive income (loss)
$
(957
)
 
$
5,454

 
$
(2,387
)
 
$
7,493

 
See accompanying notes to condensed consolidated financial statements.


- 1 -


HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited) 
 
 
June 30,
2012
 
December 31,
2011
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
28,935

 
$
37,302

Accounts receivable, less allowance for doubtful accounts of $1,613 and $1,772, respectively
126,026

 
131,489

Prepaid and other
13,394

 
13,132

Total current assets
168,355

 
181,923

Property and equipment, net
21,189

 
17,838

Deferred tax assets, non-current
11,499

 
8,628

Other assets
5,608

 
8,157

Total assets
$
206,651

 
$
216,546

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
10,995

 
$
12,025

Accrued expenses and other current liabilities
63,724

 
74,248

Short-term borrowings
1,460

 
3,384

Accrued business reorganization expenses
4,105

 
858

Total current liabilities
80,284

 
90,515

Other non-current liabilities
6,131

 
6,388

Deferred rent and tenant improvement contributions
8,666

 
4,479

Income tax payable, non-current
4,581

 
7,807

Total liabilities
99,662

 
109,189

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Preferred stock, $0.001 par value, 10,000 shares authorized; none issued or outstanding

 

Common stock, $0.001 par value, 100,000 shares authorized; issued 33,280 and 32,776 shares, respectively
33

 
33

Additional paid-in capital
472,674

 
470,786

Accumulated deficit
(400,116
)
 
(397,290
)
Accumulated other comprehensive income—translation adjustments
34,694

 
34,255

Treasury stock, 61 and 79 shares, respectively, at cost
(296
)
 
(427
)
Total stockholders’ equity
106,989

 
107,357

Total liabilities and stockholders' equity
$
206,651

 
$
216,546

 
See accompanying notes to condensed consolidated financial statements.
 



- 2 -


HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Six Months Ended
 
June 30,
 
2012
 
2011
Cash flows from operating activities:
 

 
 

Net income (loss)
$
(2,826
)
 
$
4,218

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
3,116

 
3,213

Provision for (recovery of) doubtful accounts
63

 
225

Provision for (benefit from) deferred income taxes
(2,815
)
 
(260
)
Stock-based compensation
1,876

 
1,826

Other, net
242

 
(55
)
Changes in assets and liabilities:
 

 
 

Decrease (increase) in accounts receivable
5,655

 
(25,820
)
Decrease (increase) in prepaid and other assets
2,225

 
(618
)
Increase (decrease) in accounts payable, accrued expenses and other liabilities
(10,244
)
 
18,053

Increase (decrease) in accrued business reorganization expenses
3,665

 
(759
)
Net cash provided by (used in) operating activities
957

 
23

Cash flows from investing activities:
 

 
 

Capital expenditures
(6,874
)
 
(3,348
)
Proceeds from sale of assets

 
247

Net cash  provided by (used in) investing activities
(6,874
)
 
(3,101
)
Cash flows from financing activities:
 

 
 

Borrowings under credit agreements
68,789

 
96,501

Repayments under credit agreements
(70,594
)
 
(88,407
)
Repayment of capital lease obligations
(222
)
 

Purchase of restricted stock from employees
(523
)
 
(291
)
Net cash provided by (used in) financing activities
(2,550
)
 
7,803

Effect of exchange rates on cash and cash equivalents
100

 
685

Net increase (decrease) in cash and cash equivalents
(8,367
)
 
5,410

Cash and cash equivalents, beginning of the period
37,302

 
29,523

Cash and cash equivalents, end of the period
$
28,935

 
$
34,933

Supplemental disclosures of cash flow information:
 

 
 

Cash paid during the period for interest
$
192

 
$
471

Cash payments during the period for income taxes, net of refunds
$
2,046

 
$
2,674

 
See accompanying notes to condensed consolidated financial statements. 
 



- 3 -


HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income (loss)
 
Treasury
stock
 
Total
 
Shares
 
Value
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
32,697

 
$
33

 
$
470,786

 
$
(397,290
)
 
$
34,255

 
$
(427
)
 
$
107,357

Net income (loss)

 

 

 
(2,826
)
 

 

 
(2,826
)
Other comprehensive income (loss), translation adjustments

 

 

 

 
439

 

 
439

Purchase of restricted stock from employees
(107
)
 

 

 

 

 
(523
)
 
(523
)
Issuance of shares for 401(k) plan contribution
124

 

 
12

 

 

 
654

 
666

Stock-based compensation
505

 

 
1,876

 

 

 

 
1,876

Balance at June 30, 2012
33,219

 
$
33

 
$
472,674

 
$
(400,116
)
 
$
34,694

 
$
(296
)
 
$
106,989

 
See accompanying notes to condensed consolidated financial statements.

- 4 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)


NOTE 1 – BASIS OF PRESENTATION
 These interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes of Hudson Global, Inc. and its subsidiaries (the “Company”) filed in its Annual Report on Form 10-K for the year ended December 31, 2011.
 The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of operating revenues and expenses. These estimates are based on management’s knowledge and judgments. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods presented have been included. The results of operations for interim periods are not necessarily indicative of the results of operations for the full year. The Condensed Consolidated Financial Statements include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries. All significant intra-entity balances and transactions between and among the Company and its subsidiaries have been eliminated in consolidation. 
Certain prior year amounts have been reclassified to conform to the current period presentation.
 
NOTE 2 – DESCRIPTION OF BUSINESS
The Company is comprised of the operations, assets and liabilities of the three Hudson regional businesses of Hudson Americas, Hudson Asia Pacific, and Hudson Europe (“Hudson regional businesses” or “Hudson”). The Company provides specialized professional-level recruitment and related talent solutions worldwide. The Company’s core service offerings include Permanent Recruitment, Contract Consulting, Legal eDiscovery, Recruitment Process Outsourcing (“RPO”) and Talent Management Solutions.
The Company has operated as an independent publicly-held company since April 1, 2003 when the eResourcing division of Monster Worldwide, Inc., formerly TMP Worldwide, Inc., composed of 67 acquisitions made between 1999 and 2001, was spun off. As of June 30, 2012, the Company had more than 2,000 employees operating in approximately 20 countries with three reportable geographic business segments: Hudson Americas, Hudson Asia Pacific, and Hudson Europe. For the three and six months ended June 30, 2012 and 2011, the amounts and percentage of total of the Company’s gross margins from the three reportable segments were as follows:

 
For The Three Months Ended
 
For The Three Months Ended
 
June 30, 2012
 
June 30, 2011
 
Gross Margin ($)
 
%
 
Gross Margin ($)
 
%
Hudson Americas
$
12,359

 
16
%
 
$
13,021

 
14
%
Hudson Asia Pacific
31,901

 
41
%
 
40,218

 
42
%
Hudson Europe
32,808

 
43
%
 
42,228

 
44
%
Total
$
77,068

 
100
%
 
$
95,467

 
100
%

 
For The Six Months Ended
 
For The Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
Gross Margin ($)
 
%
 
Gross Margin ($)
 
%
Hudson Americas
$
24,189

 
16
%
 
$
23,379

 
13
%
Hudson Asia Pacific
61,214

 
41
%
 
72,122

 
41
%
Hudson Europe
64,873

 
43
%
 
81,164

 
46
%
Total
$
150,276

 
100
%
 
$
176,665

 
100
%


- 5 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

The Company’s core service offerings include those services described below.
Permanent Recruitment: Offered on both a retained and contingent basis, Hudson’s Permanent Recruitment services leverage its consultants, psychologists and other professionals in the development and delivery of its proprietary methods to identify, select and engage the best-fit talent for critical client roles.
Contract Consulting: In Contract Consulting, Hudson provides a range of project management, interim management and professional contract staffing services. These services draw upon a combination of specialized recruiting and project management competencies to deliver a wide range of solutions. Hudson-employed professionals – either individually or as a team – are placed with client organizations for a defined period of time based on specific business need.
Legal eDiscovery: Hudson’s Legal eDiscovery services are composed of eDiscovery solutions, managed document review (encompassing logistical deployment, project management, process design and productivity management), and contract attorney staffing. The most comprehensive of these is the Company’s full-service eDiscovery solution, providing an integrated system of discovery management and review technology deployment for both corporate and law firm clients. 
RPO: Hudson RPO delivers outsourced recruitment solutions tailored to the individual needs of mid- to large-cap multinational companies. Hudson RPO’s delivery teams utilize state-of-the-art recruitment process methodologies and project management expertise in their flexible, turnkey solutions to meet clients’ ongoing business needs. Hudson RPO services include complete recruitment outsourcing, project-based outsourcing, contingent workforce solutions and recruitment consulting.
Talent Management Solutions: Featuring embedded proprietary talent assessment and selection methodologies, Hudson’s Talent Management capability encompasses services such as talent assessment (utilizing a variety of competency, attitude and experiential testing), interview training, executive coaching, employee development and outplacement.
On April 26, 2012, at the annual meeting of Stockholders, the Company received stockholders’ approved to change the Company’s corporate name to “Hudson Global, Inc.” from “Hudson Highland Group, Inc.” The Company’s name change became effective on April 26, 2012. The Company also changed its trading symbol on Nasdaq Stock Market to “HSON” from “HHGP,” effective on April 30, 2012.
Reporting Segments
In the fourth quarter of 2011, the Company reorganized its leadership team to align the Company’s operations with its business strategy to run its global operations in three regions. As a result, the Company revised its reportable segments by aggregating the segments of Hudson Australia New Zealand and Hudson Asia into one segment, Hudson Asia Pacific. The Company has reclassified information for the three and six months ended June 30, 2011 to reflect this change to the segment reporting in accordance with the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280-10-50-1 to 9 “Operating Segments” and ASC 280-10-50-10 “Reportable Segments.” See Note 15 for further details.
Corporate expenses are reported separately from the three reportable segments and pertain to certain functions, such as executive management, corporate governance, human resources, accounting, tax and treasury. A portion of these expenses are attributed to the reportable segments for providing the above services to them and have been allocated to the segments as management service fees and are included in the segments’ non-operating other income (expense).



- 6 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued Accounting Standards Update (“ASU”) ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This standard requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard does not change the items that must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. Additionally, the standard does not affect the calculation or reporting of net income and earnings per share. In December 2011, the FASB issued ASU 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASU 2011-12 deferred certain aspects of ASU 2011-05. Among the new provisions in ASU 2011-05 is a requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the other comprehensive income is presented. This requirement is indefinitely deferred by ASU 2011-12 and will be further deliberated by the FASB at a future date. The standard is effective for interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. The Company adopted ASU 2011-05 as of January 1, 2012, and presented the components of other comprehensive income in a single continuous Condensed Consolidated Statement of Operations and Other Comprehensive Income (loss). The Company’s adoption of ASU 2011-05 did not have any impact on the Company’s results of operations or financial condition.

NOTE 4 – REVENUE, DIRECT COSTS AND GROSS MARGIN
 The Company’s revenue, direct costs and gross margin were as follows: 

 
For The Three Months Ended
 
For The Three Months Ended
 
June 30, 2012
 
June 30, 2011
 
Temporary Contracting
 
Other
 
Total
 
Temporary Contracting
 
Other
 
Total
Revenue
$
149,629

 
$
55,209

 
$
204,838

 
$
180,806

 
$
66,572

 
$
247,378

Direct costs (1)
123,186

 
4,584

 
127,770

 
147,669

 
4,242

 
151,911

Gross margin
$
26,443

 
$
50,625

 
$
77,068

 
$
33,137

 
$
62,330

 
$
95,467

  
 
For The Six Months Ended
 
For The Six Months Ended
 
June 30, 2012
 
June 30, 2011
 
Temporary Contracting
 
Other
 
Total
 
Temporary Contracting
 
Other
 
Total
Revenue
$
300,066

 
$
105,362

 
$
405,428

 
$
343,867

 
$
122,050

 
$
465,917

Direct costs (1)
247,256

 
7,896

 
255,152

 
281,825

 
7,427

 
289,252

Gross margin
$
52,810

 
$
97,466

 
$
150,276

 
$
62,042

 
$
114,623

 
$
176,665


(1)
Direct costs include the direct staffing costs of salaries, payroll taxes, employee benefits, travel expenses and insurance costs for the Company’s contractors and reimbursed out-of-pocket expenses 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 recruitment and other human resource solutions’ revenue. Gross margin represents revenue less direct costs. The region where services are provided, the mix of contracting and permanent recruitment, and the functional nature of the staffing services provided can affect gross margin. The salaries, commissions, payroll taxes and employee benefits related to recruitment professionals are included in selling, general and administrative expenses.



- 7 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

NOTE 5 – STOCK-BASED COMPENSATION
 The Company accounts for stock-based compensation in accordance with ASC 718 "Compensation – Stock Compensation," as interpreted by the SEC Staff Accounting Bulletins No. 107 and No. 110. Under ASC 718, stock-based compensation is based on the fair value of the award on the date of grant, which is recognized over the related service period, net of estimated forfeitures. For awards with graded vesting conditions, the values of the awards are determined by valuing each tranche separately and expensing each tranche over the required service period. The service period is the period over which the related service is performed, which is generally the same as the vesting period. The Company uses the Black-Scholes option-pricing model to determine the compensation expense related to stock options.
Incentive Compensation Plan
The Company maintains the Hudson Global, Inc. 2009 Incentive Stock and Awards Plan (the “ISAP”) pursuant to which it can issue equity-based compensation incentives to eligible participants. The ISAP permits the granting of stock options and restricted stock as well as other types of equity-based awards. The Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) will establish such conditions as it deems appropriate on the granting or vesting of stock options or restricted stock. While the Company historically granted both stock options and restricted stock to its employees, since 2008 the Company has granted primarily restricted stock to its employees.
The Compensation Committee administers the ISAP and may designate any of the following as a participant under the ISAP: any officer or other employee of the Company or its affiliates or individuals engaged to become an officer or employee, consultants or other independent contractors who provide services to the Company or its affiliates and non-employee directors of the Company. On April 26, 2012, the Company’s stockholders approved an amendment to the ISAP to, among other things, increase the number of shares of the Company’s common stock that are reserved for issuance to participants by 2,500,000 shares. As of June 30, 2012, there were 2,546,375 shares of the Company’s common stock available for future issuance.
The Company also maintains the Director Deferred Share Plan (the “Director Plan”) pursuant to which it can issue restricted stock units to its non-employee directors. A restricted stock unit is equivalent to one share of the Company’s common stock and is payable only in common stock issued under the ISAP upon a director ceasing service as a member of the Board of Directors of the Company.
For the three and six months ended June 30, 2012 and 2011, the Company’s stock-based compensation expense related to stock options, restricted stock and restricted stock units were as follows: 

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Stock options
$
147

 
$
135

 
$
392

 
$
217

Restricted stock
368

 
915

 
993

 
1,416

Restricted stock units
440

 
193

 
491

 
193

Total
$
955

 
$
1,243

 
$
1,876

 
$
1,826

 
Stock Options
Stock options granted under the ISAP generally expire ten years after the date of grant and have an exercise price of at least 100% of the fair market value of the underlying stock on the date of grant and generally vest ratably over a four year period.
As of June 30, 2012, the Company had approximately $742 of unrecognized stock-based compensation expense related to outstanding non-vested stock options. The Company expects to recognize that cost over a weighted average service period of approximately 1.46 years.

- 8 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

Changes in the Company’s stock options for the six months ended June 30, 2012 and 2011 were as follows: 

 
Six Months Ended
 
June 30,
 
2012
 
2011
 
Number of
Options
Outstanding
 
Weighted
Average
Exercise Price
per Share
 
Number of
Options
Outstanding
 
Weighted
Average
Exercise Price
per Share
Options outstanding at January 1,
1,396,350

 
$
11.36

 
1,548,300

 
$
12.64

Granted

 

 
400,000

 
5.18

Expired
(14,700
)
 
15.29

 
(14,250
)
 
16.71

Options outstanding at June 30,
1,381,650

 
11.32

 
1,934,050

 
11.07

Options exercisable at June 30,
969,150

 
$
13.94

 
1,509,050

 
$
12.73


Restricted Stock
A summary of the quantity and vesting conditions for shares of restricted stock granted for the six months ended June 30, 2012 was as follows:
 
Vesting conditions
Number of Shares of Restricted Stock Granted
Performance and service conditions (1)
562,830

Vest 50% on each of the second and third anniversaries of the grant date with service conditions only
35,000

Immediately vested
1,400

Vest 2/3 on the second anniversary of the grant date and 1/3 on the third anniversary of the grant date with service conditions only
20,000

Vest one-third on each of the first three anniversaries of the grant date with service conditions only
15,000

Total shares of restricted stock granted for the six months ended June 30, 2012
634,230


(1)
The performance conditions with respect to the restricted stock may be satisfied as follows: 
(a)
50% of the shares of restricted stock may be earned on the basis of performance as measured by a “Take-out Ratio,” defined as the percentage of the direct, front line costs incurred for the year ending December 31, 2012 divided by the gross margin for the year ending December 31, 2012;
(b)
25% of the shares of restricted stock may be earned on the basis of performance as measured by an employee engagement score for the year ending December 31, 2012 based on an employee survey to be conducted by a global human resources consulting firm;
(c)
25% of the shares of restricted stock may be earned on the basis of performance as measured by “Cash Efficiency,” defined as (1) cash flow from operations for the year ending December 31, 2012 divided by (2) gross margin minus selling, general and administrative expenses for the year ending December 31, 2012.

- 9 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)


(2)
To the extent shares are earned on the basis of performance, such shares will vest on the basis of service as follows:
(a)
33% of the shares vest on the later of the first anniversary of the grant date or the determination that the performance conditions have been satisfied;
(b)
33% of the shares vest on the second anniversary of the grant date;
(c)
34% of the shares vest on the third anniversary of the grant date; provided that, in each case, the named executive officer remains employed by the Company from the grant date through the applicable service vesting date.
As of June 30, 2012, the Company had approximately $3,486 of unrecognized stock-based compensation expense related to outstanding non-vested restricted stock. The Company expects to recognize that cost over a weighted average service period of 1.58 years.
Changes in the Company’s restricted stock for the six months ended June 30, 2012 and 2011 were as follows:
 
 
For The Six Months Ended
 
June 30,
 
2012
 
2011
 
Number of
Shares of
Restricted
Stock
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares of
Restricted
Stock
 
Weighted
Average
Grant Date
Fair Value
Non-vested restricted stock at January 1,
1,166,082

 
$
5.12

 
953,037

 
$
3.64

Granted
634,230

 
4.59

 
736,625

 
6.23

Vested
(416,200
)
 
4.92

 
(241,123
)
 
3.72

Forfeited
(129,679
)
 
5.55

 
(69,819
)
 
2.41

Non-vested restricted stock at June 30,
1,254,433

 
$
4.88

 
1,378,720

 
$
5.08


Restricted Stock Units
 As of June 30, 2012, the Company had approximately $285 of unrecognized stock-based compensation expense related to outstanding non-vested restricted stock units. The Company expects to recognize that cost over a weighted average service period of 1.8 years.
Changes in the Company’s restricted stock units for the six months ended June 30, 2012 and 2011 were as follows:

 
For The Six Months Ended
 
June 30, 2012
 
2012
 
2011
 
Number of
Shares of
Restricted
Stock Unit
 
Weighted
Average
Grant-Date
Fair Value
 
Number of
Shares of
Restricted
Stock Unit
 
Weighted
Average
Grant-Date
Fair Value
Non-vested restricted stock units at January 1,
100,000

 
$
5.18

 

 
$

Granted
76,023

 
5.13

 
127,376

 
5.37

Vested
(76,023
)
 
5.13

 
(27,376
)
 
6.05

Non-vested restricted stock units at June 30,
100,000

 
$
5.18

 
100,000

 
$
5.18

 

- 10 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

Defined Contribution Plan and Non-cash Employer-matching contributions
The Company maintains the Hudson Global, Inc. 401(k) Savings Plan (the “401(k) plan”). The 401(k) plan allows eligible employees to contribute up to 15% of their earnings to the 401(k) plan. The Company has the discretion to match employees’ contributions up to 3% through a contribution of the Company’s common stock. Vesting of the Company’s contribution occurs over a five-year period. For the three months ended June 30, 2012 and 2011, the Company’s expenses and contributions to satisfy the prior years’ employer-matching liability for the 401(k) plan were as follows:
 
 
For The Three Months Ended
 
For The Six Months Ended
 
June 30,
 
June 30,
($ in thousands, except otherwise stated)
2012
 
2011
 
2012
 
2011
Expense recognized for the 401(k) plan
$
175

 
$
202

 
$
368

 
$
407

Contributions to satisfy prior years' employer-matching liability
 
 
 

 
 

 
 

Number of shares of the Company's common stock issued (in thousands)

 

 
124

 
92

Market value per share of the Company's common stock on contribution date (in dollars)
$

 
$

 
$
5.35

 
$
6.55

Non-cash contribution made for employer matching liability
$

 
$

 
$
666

 
$
602

  
NOTE 6 – INCOME TAXES
Under ASC 270, “Interim Reporting”, and ASC 740-270, “Income Taxes – Intra Tax Allocation”, the Company is required to adjust its effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. Jurisdictions with a projected loss for the full year where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. Applying the provisions of ASC 270 and ASC 740-270 could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.

- 11 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

Effective Tax Rate
The benefit from income taxes for the six months ended June 30, 2012 was $4,765 on a pre-tax loss of $7,591, compared with a provision for income taxes of $2,175 on pre-tax income of $6,393 for the same period in 2011. The Company’s effective income tax rate was 62.8% and 34.0% for the six months ended June 30, 2012 and 2011, respectively. The change in the effective tax rate was primarily attributable to the Company's reduction of reserves of approximately $3,000 for uncertain tax positions in connection with the settlement of an appeal with the State of Pennsylvania, partially offset by the inability to benefit from losses in certain foreign jurisdictions in 2012.
Uncertain Tax Positions 
As of June 30, 2012 and December 31, 2011, the Company had $4,581 and $7,807, respectively, of unrecognized tax benefits, including interest and penalties, which if recognized in the future, would lower the Company’s annual effective income tax rate. Accrued interest and penalties were $710 and $1,644 as of June 30, 2012 and December 31, 2011, respectively. Estimated interest and penalties are classified as part of the provision for income taxes in the Company’s Condensed Consolidated Statements of Operations and totaled to a benefit of $938 and $103 for the six months ended June 30, 2012 and 2011, respectively.
In many cases, the Company’s unrecognized tax benefits are related to tax years that remain subject to examination by the relevant tax authorities. Tax years with net operating losses remain open until the losses expire or the statutes of limitations for those years when the losses are used expire. The open tax years are 2008 through 2011 for the U.S. Federal and 2005 through 2011 for most state and local jurisdictions, 2010 through 2011 for the U.K., 2007 through 2011 for Australia and 2006 through 2011 for most other jurisdictions. The Company is currently under income tax examination in the State of Illinois (2008-2009) and New Zealand (2009). The Company believes that its tax reserves are adequate for all years subject to examination.
Based on information available as of June 30, 2012, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in a range of $500 to $1,100 within 12 months as a result of projected resolutions of global tax examinations and controversies and potential lapses of the applicable statutes of limitations.

NOTE 7 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (“EPS”) are computed by dividing the Company’s net income (loss) by the weighted average number of shares outstanding during the period. When the effects are not anti-dilutive, diluted earnings (loss) per share are computed by dividing the Company’s net income (loss) by the weighted average number of shares outstanding and the impact of all dilutive potential common shares, primarily stock options “in-the-money” and unvested restricted stock. The dilutive impact of stock options and unvested restricted stock is determined by applying the “treasury stock” method. Performance-based restricted stock awards are included in the computation of diluted earnings per share only to the extent that the underlying performance conditions: (i) are satisfied prior to the end of the reporting period, or (ii) would be satisfied if the end of the reporting period were the end of the related performance period and the result would be dilutive under the treasury stock method. Stock awards subject to vesting or exercisability based on the achievement of market conditions are included in the computation of diluted earnings per share only when the target stock price is met.
A reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share calculations were as follows:


- 12 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Earnings (loss) per share ("EPS"):
 

 
 

 
 

 
 

Basic
$
0.01

 
$
0.13

 
$
(0.09
)
 
$
0.13

Diluted
$
0.01

 
$
0.13

 
$
(0.09
)
 
$
0.13

EPS numerator - basic and diluted:
 

 
 

 
 

 
 
Net income (loss)
$
394

 
$
4,224

 
$
(2,826
)
 
$
4,218

EPS denominator (in thousands):
 

 
 

 
 

 
 
Weighted-average common stock outstanding - basic
32,122

 
31,593

 
31,956

 
31,501

Common stock equivalents: stock options and other stock-based awards (a)
364

 
446

 

 
438

Weighted-average number of common stock outstanding - diluted
32,486

 
32,039

 
31,956

 
31,939


(a)
For the periods in which net losses are presented, the diluted weighted average number of shares of common stock outstanding did not differ from the basic weighted average number of shares of common stock outstanding because the effects of any potential common stock equivalents (see Note 5 for further details on outstanding stock options, non-vested restricted stock units and non-vested restricted stock) were anti-dilutive and therefore not included in the calculation of the denominator of dilutive earnings per share.
The weighted average number of shares outstanding used in the computation of diluted net income (loss) per share for the three and six months ended June 30, 2012 and 2011 did not include the effect of the following potentially outstanding shares of common stock because the effect would have been anti-dilutive:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
Unvested restricted stock
557,830

 
290,125

 
1,254,433

 
290,125

Unvested restricted stock units

 

 
100,000

 

Stock options
1,381,650

 
1,934,050

 
1,381,650

 
1,934,050

Total
1,939,480

 
2,224,175

 
2,736,083

 
2,224,175




- 13 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

NOTE 8 – RESTRICTED CASH
A summary of the Company’s restricted cash included in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 were as follows:
 
 
June 30,
2012
 
December 31,
2011
Included under the caption "Other assets":
 

 
 

Collateral accounts
$
1,061

 
$
3,120

Rental deposits
299

 
268

Total amount under the caption "Other assets":
$
1,360

 
$
3,388

Included under the caption "Prepaid and other":
 

 
 

Other
$
115

 
$
3

Client guarantees
116

 
$
133

Collateral accounts
8

 
117

Total amount under the caption "Prepaid and other"
$
239

 
$
253

Total restricted cash
$
1,599

 
$
3,641


Collateral accounts primarily included deposits held under a collateral trust agreement, which supports the Company’s workers’ compensation policy. The rental deposits with banks were held as guarantees for the rent on the Company’s offices in the Netherlands and Spain. Other includes social tax payment reserves, which were held with banks for employee social tax payments required by law in the Netherlands. The client guarantees were held in banks in Belgium as deposits for various client projects.

NOTE 9 – PROPERTY AND EQUIPMENT, NET
As of June 30, 2012 and December 31, 2011, property and equipment, net were as follows:

 
June 30,
2012
 
December 31,
2011
Computer equipment
$
13,498

 
$
13,666

Furniture and equipment
9,663

 
9,692

Capitalized software costs
32,494

 
30,920

Leasehold and building improvements
24,465

 
21,650

 
80,120

 
75,928

Less: accumulated depreciation and amortization
58,931

 
58,090

Property and equipment, net
$
21,189

 
$
17,838


The Company had expenditures of approximately $487 and $1,137 for acquired property and equipment, mainly consisting of software development, fixtures, computer equipment and leasehold improvements, which had not been placed in service as of June 30, 2012 and December 31, 2011, respectively. Depreciation expense is not recorded for such assets until they are placed in service.

- 14 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

Non-Cash Capital Expenditures
The Company has acquired certain computer equipment under capital lease agreements. The current portion of the capital lease obligations are included under the caption “Accrued expenses and other current liabilities” in the Condensed Consolidated Balance Sheets and the non-current portion of the capital lease obligations are included under the caption “Other non-current liabilities” in the Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011. A summary of the Company’s equipment acquired under capital lease agreements were as follows:

 
June 30,
2012
 
December 31,
2011
Capital lease obligation, current
$
451

 
$
420

Capital lease obligation, non-current
$
561

 
$
720


The Company acquired $58 and $0 of property and equipment under capital lease agreements for the six months ended June 30, 2012 and 2011, respectively. Capital expenditures for the six months ended June 30, 2012 included $3,949 of landlord-funded tenant improvements for the Company's leased property in Sydney, Australia.

NOTE 10 – GOODWILL
The following is a summary of the changes in the carrying value of the Company’s goodwill for the six months ended June 30, 2012 and 2011. The goodwill related to the earn-out payment made in 2010 for the Company’s 2007 acquisition of the businesses of Tong Zhi (Beijing) Consulting Service Ltd and Guangzhou Dong Li Consulting Service Ltd.

 
Carrying Value
 
2012
 
2011
Goodwill, January 1,
$
1,992

 
$
1,909

Additions

 

Impairments

 

Currency translation
(11
)
 
38

Goodwill, June 30,
$
1,981

 
$
1,947


NOTE 11 – BUSINESS REORGANIZATION EXPENSES
In January 2012, the Company’s Chief Executive Officer approved a $1,000 plan of reorganization (“2012 Plan”) to streamline the Company’s support operations in each of Hudson’s regional businesses to match the aggregated operating segments and to improve support services to the Company’s regional and global professional business practices. The 2012 Plan primarily includes costs for actions to reduce support functions to match them to the revised operating structure. On April 26, 2012, the Company’s Board of Directors (the “Board”) approved an addition to the 2012 Plan up to $10,000 for additional actions to accelerate the Company’s plans for increased global alignment and redirection of resources from support to client facing activities. The Company expects to substantially complete the 2012 Plan in 2012.
The Company’s Board approved other reorganization plans in 2009 (“2009 Plan”), 2008 (“2008 Plan”), and 2006 (“2006 Plan”) to streamline the Company’s support operations and included actions to reduce support functions to match them to the scale of the business, to exit underutilized properties and to eliminate contracts for certain discontinued services. These actions resulted in costs for lease termination payments, employee termination benefits and contract cancellations. Business reorganization expenses for the three and six months ended June 30, 2012 and 2011 by plan were as follows:  
 

- 15 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
2006 Plan
$
1,809

 
$
393

 
$
1,809

 
$
766

2008 Plan

 

 

 

2009 Plan
77

 
3

 
28

 
(19
)
2012 Plan
3,204

 

 
4,193

 

Total
$
5,090

 
$
396

 
$
6,030

 
$
747

 
The following table contains amounts for Changes in Estimate, Additional Charges, and Payments related to prior restructuring plans that were incurred or recovered during the six months ended June 30, 2012. The amounts for Changes in Estimate and Additional Charges are classified as business reorganization expenses in the Company’s Condensed Consolidated Statements of Operations. Amounts in the “Payments” column represent primarily the cash payments associated with the reorganization plans. Changes in the accrued business reorganization expenses for the six months ended June 30, 2012 were as follows:
 
For The Six Months Ended June 30, 2012
December 31,
2011
 
Changes in
Estimate
 
Additional
Charges
 
Payments
 
June 30,
2012
Lease termination payments
$
1,309

 
$
1,760

 
$
488

 
$
(768
)
 
$
2,789

Employee termination benefits
75

 
77

 
3,578

 
(1,474
)
 
2,256

Other associated costs
5

 

 
127

 
(78
)
 
54

Total
$
1,389

 
$
1,837

 
$
4,193

 
$
(2,320
)
 
$
5,099

 
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Consulting, Employment and Non-compete Agreements
The Company has entered into various consulting, employment and non-compete agreements with certain key management personnel and former owners of acquired businesses. Agreements with key members of management are generally one year in length, on an at-will basis, provide for compensation and severance payments under certain circumstances and are automatically renewed annually unless either party gives sufficient notice of termination. Agreements with certain consultants and former owners of acquired businesses are generally two to five years in length.
Litigation and Complaints 
The Company is subject, from time to time, to various claims, lawsuits, and other complaints from, for example, clients, candidates, suppliers, landlords for both leased and subleased properties, former and current employees, and regulators or tax authorities arising in the ordinary course of business. The Company routinely monitors claims such as these, and records provisions for losses when the claim becomes probable and the amount due is estimable. Although the outcome of these claims cannot be determined, the Company believes that the final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
For matters that have reached the threshold of probable and estimable, the Company has established reserves for legal, regulatory and other contingent liabilities. The Company’s reserves were not significant as of June 30, 2012 and December 31, 2011.
Asset Retirement Obligations 
The Company has certain asset retirement obligations that are primarily the result of legal obligations for the removal of leasehold improvements and restoration of premises to their original condition upon termination of leases. The current portion of asset retirement obligations are included under the caption “Accrued expenses and other current liabilities” in the Condensed Consolidated Balance Sheets. The non-current portion of asset retirement obligations are included under the caption “Other non-current liabilities” in the Condensed Consolidated Balance Sheets. The Company’s asset retirement obligations that are included in the Condensed Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 were as follows:

- 16 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)


 
June 30,
2012
 
December 31,
2011
Current portion of asset retirement obligations
$
421

 
$
301

Non-current portion of asset retirement obligations
2,590

 
2,507

Total asset retirement obligations
$
3,011

 
$
2,808

 
Settlement of Pennsylvania Tax Matters
In January 2012, the Company and the Commonwealth of Pennsylvania engaged in discussions to settle the Company's appeal of a decision by the Pennsylvania Department of Revenue related to its 2004-2005 state income tax returns. The Company and the Commonwealth of Pennsylvania reached a settlement of the appeal effective May 21, 2012. As a result of the settlement, the Company recorded a benefit for income taxes of approximately $3,000 for the three months ended June 30, 2012 and canceled a bond of $4,200, which was required under the appeal. The Commonwealth of Pennsylvania also lifted its $3,500 tax lien against the Company.
 
NOTE 13 – CREDIT AGREEMENTS
Credit Agreement with RBS Citizens Business Capital 
On August 5, 2010, the Company and certain of its North American and U.K. subsidiaries entered into a senior secured revolving credit facility with RBS Citizens Business Capital, a division of RBS Asset Finance, Inc. (“RBS”), and on February 22, 2012, and June 26, 2012, the Company and certain of its North American and U.K. subsidiaries entered into Amendment No. 1 and Amendment No. 2, respectively, to the senior secured revolving credit facility with RBS (as amended, the “Revolver Agreement”). The Revolver Agreement provides the Company with the ability to borrow up to $40,000, including the issuance of letters of credit. The Company may increase the maximum borrowing amount to $50,000, subject to certain conditions including lender acceptance. Extensions of credit are based on a percentage of the eligible accounts receivable from the U.K. and North America operations, less required reserves. In connection with the Revolver Agreement, the Company incurred and capitalized approximately $1,457 of deferred financing costs, which are being amortized over the term of the agreement. The maturity date of the Revolver Agreement is August 5, 2014. Borrowings under the Revolver Agreement are secured by substantially all of the assets of the Company and could be made with an interest rate based on a base rate plus and applicable margin or on the LIBOR rate for the applicable period plus an applicable margin. The applicable margin for each rate is based on the Company’s Fixed Charge Coverage Ratio (as defined in the Revolver Agreement) and is determined as follows:
 
Level
Fixed Charge Coverage Ratio
Base Rate
Revolving Loans
 
LIBOR Revolving
Loans or Letter of
Credit Obligations
I
Greater than or equal to 1.25:1.0
1.25
%
 
2.25
%
II
Less than 1.25:1.0 but greater than or equal to 1.10:1.0
1.50
%
 
2.50
%
III
Less than 1.10:1.0
1.75
%
 
2.75
%
 
Amendment No. 2, which was deemed to be effective on June 26, 2012, effects the following key changes to the Revolver Agreement: (1) includes non-cash stock compensation expense in the calculation of EBITDA; (2) defines “Special 2012/2013 Restructuring Charges” as restructuring charges incurred in the fiscal quarters ending June 30, 2012, September 30, 2012, December 31, 2012 and March 31, 2013; (3) includes 50% of up to $10,000 of the “Special 2012/2013 Restructuring Charges” (i.e., up to $5,000) in the numerator of the calculation of the Company’s Fixed Charge Coverage Ratio; and (4) increases the Company’s required minimum excess availability to $7,500 until such time after December 31, 2012 that, for two consecutive fiscal quarters, the Company’s Fixed Charge Coverage Ratio (calculated without including “Special 2012/2013 Restructuring Charges” in the numerator) is at least 1.1x, at which time the Company’s required minimum excess availability will be reduced to $5,000.


- 17 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

The details of the Revolver Agreement as of June 30, 2012 were as follows:
 
 
June 30, 2012
Borrowing base
$
33,433

Less: adjustments to the borrowing base
 

Minimum availability
(7,500
)
Outstanding letters of credits
(2,285
)
Adjusted borrowing base
23,648

Less: outstanding borrowing

Additional borrowing availability
$
23,648

Interest rates on outstanding borrowing
4.50
%
 
The Revolver Agreement contains various restrictions and covenants including: (1) a requirement to maintain a minimum excess availability of $7,500, a Fixed Charge Coverage Ratio of at least 1.1x and EBITDA (as defined in the Revolver Agreement) for the Company’s North American and U.K. operations of at least $1,000; (2) a limit on the payment of dividends of not more than $5,000 per year and subject to certain conditions; (3) restrictions on the ability of the Company to make additional borrowings, acquire, merge or otherwise fundamentally change the ownership of the Company or repurchase the Company’s stock; (4) a limit on investments, and a limit on acquisitions of not more than $25,000 in cash and $25,000 in non-cash consideration per year, subject to certain conditions set forth in the Revolver Agreement; and (5) a limit on dispositions of assets of not more than $4,000 per year. The Company was in compliance with all financial covenants under the Revolver Agreement as of June 30, 2012.
Credit Agreement with Westpac Banking Corporation 
On November 29, 2011, certain Australian and New Zealand subsidiaries of the Company entered into a Facility Agreement, dated November 29, 2011 (the “Facility Agreement”), with Westpac Banking Corporation and Westpac New Zealand Limited (collectively, “Westpac”). 
The Facility Agreement provides three tranches: (a) an invoice discounting facility of up to $20,490 (AUD20,000) (“Tranche A”) for an Australian subsidiary of the Company, which is based on an agreed percentage of eligible accounts receivable; (b) an overdraft facility of up to $2,805 (NZD3,500) (“Tranche B”) for a New Zealand subsidiary of the Company; and (c) a financial guarantee facility of up to $5,123 (AUD5,000) (“Tranche C”) for the Australian subsidiary.   
The Facility Agreement does not have a stated maturity date and can be terminated by Westpac upon 90 days written notice. Borrowings under Tranche A may be made with an interest rate based on the Invoice Finance 30-day Bank Bill Rate (as defined in the Facility Agreement) plus a margin of 0.75%. Borrowings under Tranche B may be made with an interest rate based on the Commercial Lending Rate (as defined in the Facility Agreement) plus a margin of 0.83%. Each of Tranche A and Tranche B bears a fee, payable monthly, equal to 0.65% of the size of Westpac’s commitment under such tranche. Borrowings under Tranche C may be made incurring a fee equal to 1.10% of the face value of the financial guarantee requested. Amounts owing under the Facility Agreement are secured by substantially all of the assets of the Australian subsidiary, its Australian parent company and the New Zealand subsidiary (collectively, the “Obligors”) and certain of their subsidiaries.
The details of the Facility Agreement as of June 30, 2012 were as follows:
 

- 18 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

 
June 30,
2012
Tranche A:
 

Borrowing capacity
$
20,490

Less: outstanding borrowing

Additional borrowing availability
$
20,490

Interest rates on outstanding borrowing
5.55
%
Tranche B:
 

Borrowing capacity
$
2,805

Less: outstanding borrowing

Additional borrowing availability
$
2,805

Interest rates on outstanding borrowing
6.03
%
Tranche C:
 

Financial guarantee capacity
$
5,123

Less: outstanding financial guarantee requested
(4,417
)
Additional availability for financial guarantee
$
706

Interest rates on financial guarantee requested
1.10
%
 
The Facility Agreement contains various restrictions and covenants applicable to the Obligors and certain of their subsidiaries, including (a) a requirement that the Obligors maintain (1) a minimum Tangible Net Worth (as defined in the Facility Agreement) as of the last day of each calendar quarter of not less than the higher of 85% of the Tangible Net Worth as of the last day of the previous calendar year and $17,929 (AUD17,500); (2) at all times, a minimum Fixed Charge Coverage Ratio (as defined in the Facility Agreement) of 1.5x for the trailing twelve month period; and (3) a maximum Borrowing Base Ratio (as defined in the Facility Agreement) as of the last day of each calendar quarter of not more than 0.8; and (b) a limitation on certain intercompany payments with permitted payments outside the Obligor group restricted to a defined amount derived from the net profits of the Obligors and their subsidiaries. The Company was in compliance with all financial covenants under the Facility Agreement as of June 30, 2012.
Other Credit Agreements
The Company also has lending arrangements with local banks through its subsidiaries in the Netherlands, Belgium, Singapore and Mainland China. As of June 30, 2012, the Netherlands subsidiary could borrow up to $2,794 (€2,206) based on an agreed percentage of accounts receivable related to its operations. The Belgium subsidiary has a $1,266 (€1,000) overdraft facility. Borrowings under the Belgium and the Netherlands lending arrangements may be made using an interest rate based on the one month EURIBOR plus a margin, and the interest rate under each of these arrangements was 2.89% as of June 30, 2012. The lending arrangement in the Netherlands expires annually each June, but can be renewed for one year periods at that time. The lending arrangement in Belgium has no expiration date and can be terminated with a 15 day notice period. In Singapore, the Company’s subsidiary can borrow up to $790 (SGD1,000) for working capital purposes. Interest on borrowings under this overdraft facility is based on the Singapore Prime Rate plus a margin of 1.75%, and it was 6.0% on June 30, 2012. The Singapore overdraft facility expires annually each August, but can be renewed for one year periods at that time. In Mainland China, the Company’s subsidiary can borrow up to $1,000 for working capital purposes. Interest on borrowings under this overdraft facility is based on the People’s Republic of China’s six month rate plus 200 basis points, and it was 8.1% on June 30, 2012. This overdraft facility expires annually each September, but can be renewed for one year periods at that time. There were $1,460 of outstanding borrowings under the Belgium, the Netherlands, Singapore and Mainland China lending agreements as of June 30, 2012.
The average monthly outstanding borrowings for the Revolver Agreement, Facility Agreement and the various credit agreements in Belgium, the Netherlands, Singapore and Mainland China was $2,128  for the six months ended June 30, 2012. The weighted average interest rate on all outstanding borrowings as of June 30, 2012 was 5.04%.  
The Company continues to use the aforementioned credit to support its ongoing global working capital requirements, capital expenditures and other corporate purposes and to support letters of credit. Letters of credit and bank guarantees are used primarily to support office leases.

- 19 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

 
NOTE 14 – SHELF REGISTRATIONS
Acquisition Shelf Registration Statement
The Company has a shelf registration on file with the SEC to enable it to issue up to 1,350,000 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. As of June 30, 2012, all of the 1,350,000 shares were available for issuance.
Shelf Registration and Common Stock Offering
In December 2009, the Company filed a shelf registration statement (the “2009 Shelf Registration”) with the SEC to enable it to issue up to $30,000 equivalent of securities or combinations of securities. The types of securities permitted for issuance under the 2009 Shelf Registration are debt securities, common stock, preferred stock, warrants, stock purchase contracts and stock purchase units.
As a result of a 2010 public offering of common stock, the Company may issue up to $8,990 equivalent of securities or combinations of securities under the 2009 Shelf Registration.
 
NOTE 15 – SEGMENT AND GEOGRAPHIC DATA
Segment Reporting
In the fourth quarter of 2011, the Company reorganized its leadership team to align the Company’s operations with its business strategy to run its global operations in three regions. As a result, the Company revised its reportable segments by aggregating the segments of Hudson Australia New Zealand and Hudson Asia into one segment, Hudson Asia Pacific. The Company has reclassified information for the three and six months ended June 30, 2011 to reflect this change to the segment reporting in accordance with the requirements of ASC 280-10-50-1 to 9 “Operating Segments” and ASC 280-10-50-10 “Reportable Segments.
The Company operates in three reportable segments: the Hudson regional businesses of Hudson Americas, Hudson Asia Pacific, and Hudson Europe. Corporate expenses are reported separately from the three reportable segments and pertain to certain functions, such as executive management, corporate governance, human resources, accounting, administration, tax and treasury, the majority of which are attributable to and have been allocated to the reportable segments. Segment information is presented in accordance with ASC 280, “Segments Reporting.” This standard is based on a management approach that requires segmentation based upon the Company’s internal organization and disclosure of revenue and certain expenses 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 U.S. GAAP. Accounts receivable, net and long-lived assets are the only significant assets separated by segment for internal reporting purposes.


- 20 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

 
Hudson
Americas
 
Hudson
Asia Pacific
 
Hudson
Europe
 
Corporate
 
Inter-
segment
elimination
 
Total
For The Three Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Revenue, from external customers
$
45,487

 
$
76,926

 
$
82,425

 
$

 
$

 
$
204,838

Inter-segment revenue

 
21

 
19

 

 
(40
)
 

Total revenue
$
45,487

 
$
76,947

 
$
82,444

 
$

 
$
(40
)
 
$
204,838

Gross margin, from external customers
$
12,359

 
$
31,901

 
$
32,808

 
$

 
$

 
$
77,068

Inter-segment gross margin
(5
)
 
(7
)
 
14

 

 
(2
)
 

Total gross margin
$
12,354

 
$
31,894

 
$
32,822

 
$

 
$
(2
)
 
$
77,068

Business reorganization expenses (recovery)
$
749

 
$
1,007

 
$
3,149

 
$
185

 
$

 
$
5,090

EBITDA (loss) (a)
$
758

 
$
622

 
$
(2,305
)
 
$
(1,001
)
 
$

 
$
(1,926
)
Depreciation and amortization
276

 
794

 
353

 
187

 

 
1,610

Intercompany interest income (expense), net

 
(771
)
 
(108
)
 
879

 

 

Interest income (expense), net
(14
)
 
(77
)
 
3

 
(101
)
 

 
(189
)
Income (loss) from continuing operations before income taxes
$
468

 
$
(1,020
)
 
$
(2,763
)
 
$
(410
)
 
$

 
$
(3,725
)
As of June 30, 2012
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
$
27,639

 
$
42,750

 
$
55,637

 
$

 
$

 
$
126,026

Long-lived assets, net of accumulated depreciation and amortization
$
2,358

 
$
13,917

 
$
4,766

 
$
2,268

 
$

 
$
23,309

Total assets
$
32,942

 
$
80,676

 
$
77,418

 
$
15,615

 
$

 
$
206,651


 
Hudson
Americas
 
Hudson
Asia Pacific
 
Hudson
Europe
 
Corporate
 
Inter-
segment
elimination
 
Total
For The Three Months Ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Revenue, from external customers
$
50,912

 
$
96,275

 
$
100,191

 
$

 
$

 
$
247,378

Inter-segment revenue

 
1

 
70

 

 
(71
)
 

Total revenue
$
50,912

 
$
96,276

 
$
100,261

 
$

 
$
(71
)
 
$
247,378

Gross margin, from external customers
$
13,021

 
$
40,218

 
$
42,228

 
$

 
$

 
$
95,467

Inter-segment gross margin
(5
)
 
(53
)
 
53

 

 
5

 

Total gross margin
$
13,016

 
$
40,165

 
$
42,281

 
$

 
$
5

 
$
95,467

Business reorganization expenses (recovery)
$

 
$

 
$
396

 
$

 
$

 
$
396

EBITDA (loss) (a)
$
1,160

 
$
3,810

 
$
2,735

 
$
(44
)
 
$

 
$
7,661

Depreciation and amortization
180

 
793

 
421

 
242

 

 
1,636

Intercompany interest income (expense), net

 
(1,898
)
 
(130
)
 
2,028

 

 

Interest income (expense), net
(1
)
 
(208
)
 
(6
)
 
(160
)
 

 
(375
)
Income (loss) from continuing operations before income taxes
$
979

 
$
911

 
$
2,178

 
$
1,582

 
$

 
$
5,650

As of June 30, 2011
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
$
31,947

 
$
59,941

 
$
67,495

 
$

 
$

 
$
159,383

Long-lived assets, net of accumulated depreciation and amortization
$
2,040

 
$
10,010

 
$
4,644

 
$
2,637

 
$

 
$
19,331

Total assets
$
36,641

 
$
89,845

 
$
107,402

 
$
10,627

 
$

 
$
244,515



- 21 -

HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)


 
Hudson
Americas
 
Hudson
Asia Pacific
 
Hudson
Europe
 
Corporate
 
Inter-
segment
elimination
 
Total
For the Six Months Ended June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Revenue, from external customers
$
90,656

 
$
151,189

 
$
163,583

 
$

 
$

 
$
405,428

Inter-segment revenue

 
31

 
36

 

 
(67
)
 

Total revenue
$
90,656

 
$
151,220

 
$
163,619

 
$

 
$
(67
)
 
$
405,428

Gross margin, from external customers
$
24,189

 
$
61,214

 
$
64,873

 
$

 
$

 
$
150,276

Inter-segment gross margin
(8
)
 
(12
)
 
20

 

 

 

Total gross margin
$
24,181

 
$
61,202

 
$
64,893

 
$

 
$

 
$
150,276

Business reorganization expenses (recovery)
$
769

 
$
1,074

 
$
3,869

 
$
318

 
$

 
$
6,030

EBITDA (loss) (a)
$
267

 
$
630

 
$
(3,391
)
 
$
(1,633
)
 
$

 
$
(4,127
)
Depreciation and amortization
595

 
1,488

 
716

 
316

 

 
3,115

Intercompany interest income (expense), net

 
(2,516
)
 
(216
)
 
2,732

 

 

Interest income (expense), net
(33
)
 
(143
)
 
21

 
(194
)
 

 
(349
)
Income (loss) from continuing operations before income taxes
$
(361
)
 
$
(3,517
)
 
$
(4,302
)
 
$
589

 
$

 
$
(7,591
)

 
Hudson
Americas
 
Hudson
Asia Pacific
 
Hudson
Europe
 
Corporate
 
Inter-
segment
elimination
 
Total
For the Six Months Ended June 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Revenue, from external customers
$
96,725

 
$
175,291

 
$
193,901

 
$

 
$

 
$
465,917

Inter-segment revenue
(2
)
 
7

 
79

 

 
(84
)
 

Total revenue
$
96,723

 
$
175,298

 
$
193,980

 
$

 
$
(84
)
 
$
465,917

Gross margin, from external customers
$
23,379