<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 541612 36-2681268
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION) CLASSIFICATION CODE
NUMBER)
233 SOUTH WACKER DRIVE--SUITE 4200
CHICAGO, ILLINOIS 60606-6303
(312) 496-1200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
C/O RICHARD D. NELSON
HEIDRICK & STRUGGLES, INC.
233 SOUTH WACKER DRIVE--SUITE 4200
CHICAGO, ILLINOIS 60606-6303
(312) 496-1200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES OF ALL CORRESPONDENCE TO:
VINCENT PAGANO, JR. C. JAMES LEVIN
SIMPSON THACHER & BARTLETT O'MELVENY & MYERS LLP
425 LEXINGTON AVENUE 400 SOUTH HOPE STREET
NEW YORK, NEW YORK 10017 LOS ANGELES, CA 90071
(212) 455-2000 (213) 430-6000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED AMOUNT OF
TITLE OF CLASS OF SECURITIES MAXIMUM REGISTRATION
TO BE REGISTERED OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, without par value............ $86,250,000 $25,444
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457(o) under the Securities Act of 1933 solely
for the purposes of calculating the registration fee.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
-------------------------------- ----------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back
Prospectus................................... Cover Pages
3. Summary Information, Risk Factors and Ratio Prospectus Summary; Risk
of Earnings to Fixed Charges................. Factors
4. Use of Proceeds.............................. Use of Proceeds
5. Determination of Offering Price.............. Outside Front Cover Page;
Underwriting
6. Dilution..................................... Dilution
7. Selling Security Holders..................... Principal and Selling
Stockholders
8. Plan of Distribution......................... Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered... Description of Capital Stock
10. Interests of Named Experts and Counsel....... Experts; Legal Opinions
11. Information with Respect to the Registrant... Prospectus Summary; The
Company; Dividend Policy;
Dilution; Capitalization;
Selected Financial Data;
Management's Discussion and
Analysis of the Financial
Condition and Results of
Operations; Business;
Management; Executive
Compensation; Principal and
Selling Stockholders;
Description of Capital Stock;
Shares Eligible for Future
Sale; Index to Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................. Not applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated July 24, 1998
PRELIMINARY PROSPECTUS
SHARES
LOGO
Common Stock
-------------
Of the shares of common stock, without par value (the "Common
Stock"), of Heidrick & Struggles International, Inc. ("H&S" or the "Company")
offered initially hereby, shares are being offered by the Company and
shares are being offered by certain selling stockholders (the
"Selling Stockholders," collectively the "Offering"). The Company will not
receive any proceeds from the sale of shares by the Selling Stockholders. See
Principal and Selling Stockholders" and "Underwriting."
Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price per share of
Common Stock will be between $ and $ . See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Company intends to apply to list the Common Stock on the New York
Stock Exchange under the proposed symbol "HSX."
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......... $ $ $ $
- ------------------------------------------------------------------------------
Total(3)........... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company of
approximately $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of additional shares of Common Stock on the same
terms and conditions set forth above solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ , and $ , respectively. See "Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered severally
by the Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery of
the certificates for the shares will be made at the offices of Lehman Brothers
Inc., New York, on or about , 1998.
-------------
LEHMAN BROTHERS GOLDMAN, SACHS & CO.
[ , 1998]
<PAGE>
[INSIDE FRONT COVER]
MAP OF WORLD SHOWING THE LOCATIONS OF THE COMPANY'S OFFICES.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised. Prior to the
completion of the Offering, Heidrick & Struggles, Inc., a Delaware company
("H&S Inc."), will merge with and into Heidrick & Struggles International, Inc.
(the "Merger"). Unless the context requires otherwise, all references herein to
"H&S" or the "Company" or "Heidrick & Struggles International, Inc." mean
Heidrick & Struggles International, Inc. after the Merger, its wholly and
majority owned subsidiaries and its and their respective predecessors,
collectively. All references to "HSI" refer to Heidrick & Struggles
International, Inc. before the Merger.
THE COMPANY
Heidrick & Struggles International, Inc. is one of the leading global
executive search firms and believes that, based on revenues, it is the largest
executive search firm in the United States and the second largest in the world.
With over 45 years of experience in fulfilling its clients' leadership needs,
H&S offers and conducts executive search services in nearly every major
business center in the world. The Company's services focus on the
identification, evaluation and recommendation of qualified candidates for
senior level executive positions. Through its worldwide network of
approximately 700 professionals in 54 offices, H&S provides executive search
services to a broad range of clients, including Fortune 500 companies, major
non-U.S. companies, middle market and emerging growth companies, governmental
and not-for-profit organizations and other leading private and public entities.
Taken together, the combined worldwide revenues of H&S Inc. and HSI have grown
from $108.5 million in 1993 to $263.0 million in 1997, a compound annual growth
rate of approximately 25%.
According to industry sources, worldwide executive search industry revenue
has grown at a 20% compound annual growth rate from approximately $3.5 billion
in 1993 to approximately $7.3 billion in 1997. H&S believes that a number of
favorable trends are contributing to the growth of the executive search
industry, including the following: (i) an increase in competition for executive
talent and a resulting increase in executive compensation levels and turnover,
(ii) a growing acceptance by corporate leadership of the use of executive
search consultants, (iii) the increasing globalization of business driving the
demand for executive talent by multinationals, (iv) an increased demand for
executive search services by start-up and newly-acquired companies, (v) a
greater need for managers with diverse leadership skills and (vi) a reduction
of the number of layers of executive management, which limits the internal pool
from which companies can draw for talent.
KEY COMPETITIVE STRENGTHS
The Company believes that it possesses several key competitive strengths
which position it to capitalize on the growing demand for its services. These
strengths include the following:
. EXPERIENCED TEAM OF EXECUTIVE SEARCH CONSULTANTS. H&S believes that its
executive search consultants ("consultants") are among the most
experienced within the executive search industry. As of June 30, 1998,
the Company employed approximately 320 consultants who, on average, have
approximately 11 years of experience in executive search and 9 years of
experience in other industries. H&S believes that this depth of
experience is a prerequisite to the effective performance of senior level
executive searches. The Company attributes its success in attracting and
retaining such high caliber consultants to its premier reputation, unique
team oriented culture and performance-based compensation system. The
Company believes that its attractiveness as an employer is reflected in
its low turnover rate among its consultants. For the period from January
1, 1995 through June 30, 1998, an annual average of fewer than 1.5% of
H&S's consultants have left to work elsewhere in the executive search
industry.
3
<PAGE>
. GLOBAL PRESENCE. The Company's 54 offices are located in major business
centers in 28 countries around the world. The Company's global presence
enables it to serve the needs of multinational companies and local
businesses worldwide, and provides it with access to an international
network of candidates and referral sources. The Company's offices in
North America, Europe, Asia Pacific and Latin America employed 161, 125,
21 and 15 consultants, as of June 30, 1998, respectively, and generated
1997 revenues of $159 million, $83 million, $13 million and $8 million,
respectively.
. EMPHASIS ON SENIOR LEVEL EXECUTIVE SEARCH. H&S is an industry leader in
placing senior level executives within the world's largest and most
complex organizations. Approximately 39% of the executive searches
performed by the Company worldwide (and approximately 50% of the searches
performed in North America) in 1997 were for chief executive officers
("CEOs"), presidents, chief financial officers ("CFOs"), chief operating
officers ("COOs"), chief administrative officers ("CAOs"), chief
information officers ("CIOs"), members of boards of directors and other
senior management positions (such as division heads). These senior level
executive searches generally provide a higher level of revenue per search
and result in greater visibility with the Company's clients and within
the executive search industry. The Company believes that performing
senior level, high profile executive search assignments: (i) strengthens
its brand name recognition and contacts with leading decision makers,
referral sources and high caliber candidates; (ii) enhances H&S's ability
to secure other senior level executive searches; and (iii) enables the
Company to attract and retain highly qualified consultants.
. INDUSTRY PRACTICE GROUPS AND FUNCTIONAL SPECIALTIES. H&S's business is
organized around seven core industry practice groups, each focused on a
specific industry. These core industry practice groups are international
technology, industrial, consumer products, financial services, health
care, professional services and higher education/not-for-profit. Certain
H&S consultants also specialize in searches for functional positions such
as members of boards of directors, CEOs, CFOs and CIOs. The Company
believes that its operational structure enables its consultants to
provide its clients with superior executive search services. By enabling
its consultants to specialize, the Company's consultants are better able
to successfully build relationships with candidates and referral sources
and to understand its clients' cultures, operations, business strategies
and industries. Understanding these factors is critical to understanding
the needs of clients' and candidates' and, therefore, to the successful
placement of candidates. The Company's industry practice groups and
functional specialties emphasize H&S's consultative approach and are
designed to build and maintain long-term relationships with its clients.
. GLOBAL SUPPORT PLATFORM. The Company's consultants work with a team of
more than 365 associates, all of whom have access to a sophisticated
global technology infrastructure. This technology infrastructure consists
of internally developed global databases containing over 650,000
candidate profiles and over 27,000 company records, coupled with a broad
range of on-line services and industry reference sources. H&S also
deploys advanced Internet-based technology to support the research needs
of the Company's professionals. The Company believes that its global
support structure enables its professionals to complete searches
efficiently and effectively. Given the importance of technology to the
search process, H&S is continuing to improve its information management
infrastructure by implementing its Integrated Global Information System
("IGIS"), an ongoing strategic technology initiative. IGIS is designed to
enhance the functionality, speed and quality of the Company's information
management. See "Business--Assignment Research and Information
Management."
4
<PAGE>
GROWTH STRATEGY
The Company's goal is to be the leading global provider of executive search
services while achieving sustainable revenue and earnings growth. The Company
pursues a focused growth strategy with the following key elements:
. EXPAND AND DEVELOP CLIENT RELATIONSHIPS. The Company continually seeks to
expand its relationships with existing clients and to develop new client
relationships. The Company accomplishes this by continuing to (i)
aggressively pursue the highest level executive search assignments, (ii)
expand the breadth and depth of its industry practice groups and
functional specialties, (iii) offer services across a broadening range of
geographic locations by strategically opening offices in cities where H&S
is not currently located and (iv) actively recruit consultants who have
the demonstrated ability to expand the Company's client base.
Historically, the Company has successfully expanded its client base and
generated repeat business from existing clients. For example, H&S had
approximately 1,800 clients in 1995 and approximately 2,600 in 1997. Of
the clients for which the Company performed searches in 1997, 77% had
also been clients of the firm between 1994 and 1996.
. PURSUE STRATEGIC ACQUISITIONS. The executive search industry is highly
fragmented, consisting of more than 4,000 executive search firms
worldwide. The industry has been consolidating in recent years as a
number of smaller firms have joined with larger firms in the industry,
such as H&S, in order to gain the benefits of superior managerial,
financial and technological resources. The Company maintains a focused
acquisition strategy designed to acquire executive search firms with
complementary corporate cultures in order to increase its penetration in
existing and new geographic markets and expand the depth and breadth of
its industry practice groups and functional specialties. The Company has
completed a number of strategic acquisitions worldwide that are
consistent with its acquisition strategy. See "--Recent Acquisitions."
. ENHANCE EXECUTIVE SEARCH PROFESSIONAL PRODUCTIVITY. The Company believes
that its consultants generate one of the highest levels of average
revenue per consultant in the industry. H&S's consultants generated an
average revenue per consultant of $1.2 million in the U.S. in 1997. H&S
believes that its infrastructure can be leveraged to allow for increases
in the productivity of its executive search professionals. Specifically,
the Company expects that its IGIS initiative will enable H&S's
professionals to access a greater amount of information sources more
quickly and to perform more sophisticated search functions to help them
identify candidates more efficiently and effectively. IGIS will provide
the Company with a scalable technology infrastructure that is designed to
support a significant number of additional users without significant
incremental costs.
THE MERGER
Throughout their history, H&S Inc. and HSI have operated as a single entity,
and from the time of founding in 1953 until 1984, operated under a single
ownership structure. In 1984, H&S Inc. consummated a spin-off of HSI to its
European partners while retaining a significant equity interest in HSI. Since
that time, HSI has conducted primarily European based operations, while H&S
Inc. has conducted all other operations. Prior to completion of the Offering,
H&S Inc. will merge with and into HSI (the "Merger"). The Merger will reunite
the two companies in a single ownership structure.
RECENT ACQUISITIONS
Over the past year, the Company has successfully completed the strategic
acquisition of two executive search firms:
. FENWICK. On June 26, 1998, the Company acquired Fenwick Partners, Inc.
("Fenwick"). Fenwick, a Boston-based executive search firm, employed nine
consultants and had fiscal 1997 revenues of $6.4
5
<PAGE>
million. This transaction expanded the reach of H&S's international
technology group into a third key technology center in the United States.
Fenwick, based in the "Route 128" technology corridor in Massachusetts,
complements the Company's existing offices in Menlo Park, California and
Tysons Corner, Virginia which also focus on senior level recruitment for
computer hardware and software, telecommunications, engineering and
medical electronics companies.
. MULDER. On October 1, 1997, the Company acquired Mulder & Partner GmbH &
Co. KG ("Mulder") which employed 13 consultants. Prior to the
acquisition, Mulder was the largest executive search firm in Germany, as
measured by revenues, with $21.8 million in revenues for the nine months
ended September 30, 1997. This transaction immediately positioned the
Company as the largest executive search firm in Germany and the second
largest in Europe.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company....... shares
Common Stock offered by the Selling
Stockholders............................. shares
Total Common Stock offered............ shares(1)
Common Stock outstanding after the
Offering................................. shares(1)(2)
Use of Proceeds........................... Proceeds to the Company will be used
to fund working capital and for
general corporate purposes,
including expenditures for the IGIS
technology enhancements, the
possible opening of new offices,
possible acquisitions and repayment
of debt.
Proposed New York Stock Exchange symbol... HSX
</TABLE>
- --------
(1) Does not include shares that may be issued to the Underwriters pursuant to
their over-allotment option. If the Underwriters exercise their over-
allotment option in full, the total number of shares of Common Stock
offered will be .
(2) Does not include up to shares that may be purchased by certain
employees of the Company under the Company's 1998 GlobalShare Plan, a
stock-based incentive compensation plan (the "GlobalShare Plan"), pursuant
to a separate offering to be made contemporaneously with the Offering (the
"Employee Share Purchase"), up to shares issuable pursuant to
options and restricted stock units that may be granted pursuant to the
GlobalShare Plan to such employees in connection with such purchase and
approximately shares to be issued to other employees at completion
of the Offering.
6
<PAGE>
SUMMARY FINANCIAL DATA
The following tables set forth summary historical financial and other data of
H&S Inc. and HSI as of the dates and for the periods indicated, which have been
derived from, and are qualified by reference to, H&S Inc.'s and HSI's financial
statements and other records, and unaudited summary pro forma condensed
consolidated financial data. See "Unaudited Pro Forma Condensed Consolidated
Financial Data." The unaudited pro forma financial data are presented for
informational purposes only and should not be construed to indicate (i) the
results of operations or the financial position of the Company that actually
would have occurred had the Merger and other matters reflected therein occurred
as of the dates indicated or (ii) the results of operations or the financial
position of the Company in the future. The following table should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto included elsewhere in this Prospectus.
UNAUDITED SUMMARY PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------ -------------------
1997 1997 1998
------------ ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE
AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue...................................... $284,792 $57,926 $73,990
Operating income............................. 20,051 3,419 2,744
Net income................................... $ 10,270 $ 1,793 $ 1,350
======== ======= =======
SHARE DATA:
Basic earnings per common share.............. $ $ $
======== ======= =======
Diluted earnings per common share............ $ $ $
======== ======= =======
Basic weighted average common shares
outstanding.................................
======== ======= =======
Diluted weighted average common shares
outstanding.................................
======== ======= =======
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital.............................. $13,675
Total assets................................. 186,957
Long-term debt, less current maturities...... 1,729
Total stockholders' equity................... 90,147
OTHER OPERATING DATA:
Number of offices (at end of period)......... 51 43 51
======== ======= =======
Average number of consultants during the
period...................................... 254 236 293
======== ======= =======
</TABLE>
- --------
(1) See Notes to "Unaudited Pro Forma Condensed Consolidated Financial Data" on
page 21.
7
<PAGE>
SUMMARY FINANCIAL DATA
H&S INC.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ ---------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $77,990 $96,127 $108,685 $137,665 $180,244 $39,973 $45,937
Operating income....... 9,168 10,670 10,617 10,712 11,945 1,440 827
Net income............. $ 5,744 $ 6,342 $ 6,358 $ 6,449 $ 6,645 $ 890 $ 115
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $13,024 $13,549 $ 17,193 $ 20,628 $ 24,768 $21,524 $23,590
Total assets........... 41,139 45,058 55,900 68,643 93,892 81,447 107,929
Long-term debt, less
current maturities.... 1,562 735 1,189 993 1,636 985 1,601
OTHER OPERATING DATA:
Number of offices (at
end of period)........ 16 18 20 25 28 25 28
Average number of
consultants during the
period................ 94 108 119 137 159 152 178
</TABLE>
SUMMARY FINANCIAL DATA
HSI
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $30,513 $39,634 $52,815 $64,558 $82,732 $17,953 $28,053
Operating income
(loss)................ 2,840 5,123 3,302 3,438 3,037 1,479 (103)
Net income (loss)...... $ 1,606 $ 2,649 $ 1,800 $ 2,141 $ 1,711 $ 910 $ (521)
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $ 4,478 $ 7,908 $ 7,777 $ 9,345 $(2,114) $10,190 $(4,477)
Total assets........... 15,273 21,998 25,756 32,851 59,947 29,644 61,559
Long-term debt, less
current maturities.... 59 -- -- 267 368 -- 128
OTHER OPERATING DATA:
Number of offices (at
end of period)........ 10 12 13 16 23 18 23
Average number of
consultants during the
period................ 51 55 59 71 95 84 115
</TABLE>
8
<PAGE>
RISK FACTORS
Purchasers of the Common Stock offered hereby should consider the specific
factors set forth below as well as the other information set forth in this
Prospectus. This Prospectus contains forward-looking statements. Such
statements are indicated by words or phrases such as "anticipates,"
"estimates," "projects," "management believes," "the Company believes,"
"intends," "expects" and similar words and phrases. Such forward-looking
statements are subject to certain risks, uncertainties or assumptions and may
be affected by certain other factors, including the specific factors set forth
below. Should one or more of these risks, uncertainties or other factors
materialize, or should underlying assumptions prove incorrect, actual results,
performance or achievements of the Company may vary materially from any future
results, performance or achievements expressed or implied by such forward-
looking statements. All written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this paragraph.
The Company disclaims any obligation to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
DEPENDENCE ON ATTRACTING AND RETAINING QUALIFIED CONSULTANTS
H&S's success depends upon its ability to attract and retain consultants who
possess the skills and experience necessary to fulfill its clients' executive
search needs. Competition for qualified consultants is intense. H&S generally
does not require its consultants to sign noncompetition agreements, and many
other executive search firms have experienced high consultant turnover rates.
H&S believes it has been able to attract and retain highly qualified,
effective consultants as a result of its premium reputation, its unique team
oriented culture and its performance-based compensation system. Consultants
have the potential to earn substantial bonuses based on the amount of revenue
generated by obtaining executive search assignments and executing search
assignments and by assisting other consultants to obtain or complete executive
search assignments. Bonuses represent a significant proportion of consultants'
total compensation. Any diminution of its reputation, reduction in H&S's
compensation levels or restructuring of H&S's compensation system could impair
H&S's ability to retain existing or attract additional qualified consultants.
In connection with the Offering, the Company has established new equity-based
compensation plans which were not previously a part of its compensation
structure. There can be no assurance that these plans will be as successful in
attracting and retaining consultants as were the Company's prior practices. In
addition, there can be no assurance that H&S will be successful in identifying
and hiring consultants with the requisite experience, skills and established
client relationships. Any such inability to attract and retain qualified
consultants could have a material adverse effect on H&S's business, results of
operations and financial condition. See "--Portable Client Relationships" and
"Business--Key Competitive Strengths."
PORTABLE CLIENT RELATIONSHIPS
H&S's success depends upon the ability of its consultants to develop and
maintain strong, long-term relationships with its clients. Usually, one or two
consultants have primary responsibility for a client relationship. When a
consultant leaves one executive search firm and joins another, clients that
have established relationships with the departing consultant may move their
business to the consultant's new employer. The loss of one or more clients is
more likely to occur if the departing consultant enjoys widespread name
recognition or has developed a reputation as a specialist in executing
searches in a specific industry or management function. Although client
portability historically has not caused significant problems for H&S, the
failure to retain its most effective consultants or maintain the quality of
service to which its clients are accustomed, and the ability of a departing
consultant to move business to his or her new employer, could have a material
adverse effect on H&S's business, results of operations and financial
condition. See "--Dependence on Attracting and Retaining Qualified
Consultants," "Business--Services" and "Business--Clients and Marketing."
9
<PAGE>
MAINTENANCE OF PROFESSIONAL REPUTATION AND BRAND NAME
The Company's ability to secure new engagements and hire qualified
professionals is highly dependent upon the Company's overall reputation and
brand name recognition as well as the individual reputations of its
professionals. Because the Company obtains a majority of its new engagements
from existing clients, or from referrals by those clients, the dissatisfaction
of any such client could have a disproportionate, adverse impact on the
Company's ability to secure new engagements. Any factor that diminishes the
reputation of the Company or any of its personnel, including poor performance,
could make it substantially more difficult for the Company to compete
successfully for both new engagements and qualified consultants, and could
have an adverse effect on the Company's business, results of operations and
financial condition. See "Business--Clients and Marketing."
NONRECURRING AND OTHER CHARGES
During the third quarter ending September 30, 1998, the Company will incur
certain nonrecurring charges net of income taxes, totaling $ million. These
charges arise in connection with (i) the modification of the terms of the
Mulder acquisition agreement and (ii) the early settlement of certain profit
sharing arrangements in connection with the acquisition of certain Latin
American offices.
The Company has agreed to modify the terms of the Mulder agreement,
resulting in a nonrecurring charge expected to total $ million, net of
income taxes. See Note 11 of "Heidrick & Struggles International, Inc. and
Subsidiaries--Notes to Consolidated Financial Statements." This charge
represents the prepayment of the purchase price of $ million and will be
recorded as compensation expense. This nonrecurring charge represents the
write-off of $5.9 million of deferred compensation assets and a cash payment
of $5.4 million and the issuance of 27,080 shares of common stock ($ based
on assumed initial public offering price of $ per share) to the previous
owners of Mulder.
On September 1, 1996, the Company acquired certain Latin American offices
for a purchase price of $609,000. The acquisition agreement called for the
sellers, who joined the Company as consultants, to receive, in addition to
salary and bonus, approximately 60% of future pre-tax profit from certain
operations net of certain corporate overhead. The Company intends to adjust
these consultants' compensation to be consistent with the consultant
compensation paid by the Company to all other consultants and in exchange for
a payment of $ , to allocate all future profits to the Company. This payment
will be recorded as compensation expense in the third quarter of 1998.
RESTRICTIONS IMPOSED BY BLOCKING ARRANGEMENTS
Either by agreement with clients or for marketing or client relationship
purposes, executive search firms frequently refrain, for a specified period of
time, from recruiting certain employees of a client, and possibly other
entities affiliated with such client, when conducting executive searches on
behalf of other clients (a "blocking" arrangement). Blocking arrangements
generally remain in effect for one or two years following completion of an
assignment. However, the duration and scope of the blocking arrangement or
"off limits" period, including whether it covers all operations of a client
and its affiliates or only certain divisions of a client, generally depends on
such factors as the length of the client relationship, the frequency with
which the executive search firm has been engaged to perform executive searches
for the client and the number of assignments the executive search firm has
generated or expects to generate from the client. Some of H&S's clients are
recognized as industry leaders and/or employ a significant number of qualified
executives who are potential candidates for other companies in that client's
industry. Blocking arrangements with such a client or awareness by a client's
competitors of such an arrangement may make it difficult for H&S to obtain
executive search assignments from, or to fulfill executive search assignments
for, competitors while employees of that client may not be solicited. As H&S's
client base grows, particularly in its targeted business sectors, blocking
arrangements increasingly may impede H&S's growth or its ability to attract
and serve new clients, which could have an adverse effect on H&S's business,
results of operations and financial condition. See "Business--Clients and
Marketing."
10
<PAGE>
COMPETITION
The global executive search industry is extremely competitive and highly
fragmented. H&S competes primarily with other large global executive search
firms and with smaller boutique or specialty firms that focus on regional or
functional markets or on particular industries. Some of H&S's competitors
possess greater resources, greater name recognition and longer operating
histories than H&S in particular markets, which may afford these firms
significant advantages in obtaining future clients and attracting qualified
professionals in those markets. There are limited barriers to entry into the
executive search industry and new executive search firms continue to enter the
market. Many executive search firms have a smaller client base than H&S and
therefore may be subject to fewer blocking arrangements than H&S. See "--
Restrictions Imposed by Blocking Arrangements." There can be no assurance that
H&S will be able to continue to compete effectively with existing or potential
competitors or that significant clients or prospective clients of H&S will not
decide to perform executive search services using in-house personnel. See
"Business--Competition."
IMPLEMENTATION OF ACQUISITION STRATEGY
H&S's ability to grow and remain competitive may depend on its ability to
consummate strategic acquisitions of other executive search firms. Although
H&S evaluates possible acquisitions on an ongoing basis, there can be no
assurance that H&S will be successful in identifying, competing for, financing
and completing such acquisitions. An acquired business may not achieve desired
levels of revenue, profitability or productivity or otherwise perform as
expected. Client satisfaction or performance problems at a single acquired
firm could have a material adverse effect on the Company. In addition, growth
through acquisition of existing firms involves risks such as diversion of
management's attention, difficulties in the integration of operations,
difficulties in retaining personnel, increased blocking conflicts or
liabilities not known at the time of acquisition, possibly including adverse
tax and accounting impacts (such as the effects on earnings resulting from
increased goodwill). Some or all of such factors could have material adverse
effects on H&S's business, results of operations and financial condition. The
Company may finance any future acquisitions in whole or in part with Common
Stock (which could result in dilution to purchasers of Common Stock offered
hereby), indebtedness, or cash. The Company's ability to finance acquisitions
using Common Stock may be dependent upon the market price of the Common Stock,
and a drop in the market price of the Common Stock may have the effect of
precluding it from accomplishing certain desirable acquisitions. See
"Business--Key Competitive Strengths."
ABILITY TO ACHIEVE AND MANAGE GROWTH
The Company has experienced and may continue to experience significant
growth in its revenue and employee base. The Company's growth has placed, and
may in the future continue to place, a significant strain on its
administrative, operational and financial resources. The Company anticipates
that, if successful in expanding its business, the Company will be required to
recruit and hire additional consultants and certain new administrative and
other personnel to support its operations. Failure to attract and retain such
additional personnel could have a material adverse effect on the Company and
its growth. In addition, the initial costs of recruiting such professionals
may not be offset by increased revenues. Moreover, the Company may open
offices in new geographic locations, which would entail certain start-up and
maintenance costs that could be substantial. To manage its growth
successfully, the Company will also have to continue to improve and upgrade
its financial, accounting and information systems, controls and infrastructure
as well as hire, train and manage additional employees. In the event the
Company is unable to upgrade its financial controls and accounting and
reporting systems adequately to support its anticipated growth, the Company's
business, results of operations and financial condition could be materially
adversely affected.
RELIANCE ON INFORMATION MANAGEMENT SYSTEMS
H&S's success depends in large part upon its ability to store, retrieve,
process and manage substantial amounts of information. To achieve its
operational goals and to remain competitive, H&S believes that it must
continue to improve and upgrade its information management systems, which will
require the licensing of third
11
<PAGE>
party software or the development, either internally or through engagement of
third parties, of new proprietary software and systems. See "Use of Proceeds."
Any failure in the implementation of IGIS, the Company's strategic technology
initiative, including H&S's inability to license, design, develop, implement
and utilize, in a cost-effective manner, improved information systems that
provide the capabilities necessary for H&S to compete effectively, or any
interruption or loss of H&S's information processing capabilities, for any
reason, could have a material adverse effect on H&S's business, results of
operations and financial condition. See "Business--Assignment Research and
Information Technology."
YEAR 2000 COMPLIANCE
While the Company believes its information systems will be able to
accommodate the "Year 2000" dating changes necessary to permit correct
recording of year dates for 2000 and later years, the Company has formed a
task force to evaluate and correct its Year 2000 issues. The initial
assessment indicates that the Company does not have a significant Year 2000
issue, and management believes that the cost of addressing its Year 2000
issues will not be material. The Company is pursuing Year 2000 certification
for its existing information systems and is currently conducting its own tests
of these systems. The Company believes that it will be able to achieve Year
2000 compliance by the end of the second quarter of 1999, and does not
anticipate any material disruption in its operations as the result of any
failure by the Company to be in compliance, although no assurance to such
effect can be given. The Company depends on third party vendors for a number
of functions, including its automated payroll functions and is seeking
certification from such vendors of their Year 2000 compliance. Any
difficulties with Year 2000 compliance may have an adverse effect on the
Company's operations.
EXECUTIVE SEARCH LIABILITY RISK
Executive search firms are exposed to potential claims with respect to the
executive search process. A client could assert a claim for such matters as
breach of a blocking arrangement or confidentiality agreement or for
presenting a candidate who proves to be unsuitable for the position filled. In
addition, a candidate could assert an action against H&S for failure to
maintain the confidentiality of the candidate's employment search or for
alleged discrimination or other violations of employment law by H&S or a
client of H&S. The Company maintains professional liability insurance in such
amounts and with such coverages and deductibles as management believes are
adequate. There can be no assurance, however, that the Company's insurance
will cover all such claims or that its insurance coverage will continue to be
available at economically feasible rates. See "Business--Insurance."
VOTING CONTROL BY CURRENT STOCKHOLDERS
Immediately following the completion of the Offering, the current
stockholders of H&S, all of whom are currently senior employees of the
Company, will be the beneficial owners of shares of Common Stock, not
including any shares that the current stockholders may purchase in the
Offering, representing approximately % of the then issued and outstanding
Common Stock. Immediately after the Offering, such stockholders will continue
to have sufficient voting power to elect the entire Board of Directors of H&S
and, in general, to determine (without the consent of H&S's other
stockholders) the outcome of any corporate transaction or other matter
submitted to the stockholders for approval, including mergers, consolidations
and the sale of all or substantially all of H&S's assets, and also the power
to prevent or cause a change in control of H&S. See "Shares Eligible for
Future Sale."
SOCIAL, POLITICAL AND ECONOMIC RISKS AFFECTING MULTINATIONAL OPERATIONS
For 1997 and 1996, 40.6% and 38.4%, respectively, of the Company's revenues
were generated from outside the United States. H&S offers its services in 28
countries from 54 offices around the world. The Company is exposed to the risk
of changes in social, political and economic conditions inherent in foreign
operations. In particular, the Company conducts business in various countries
where the systems and bodies of commercial law and trade practices arising
thereunder are evolving. Commercial laws in such countries are often vague,
arbitrary,
12
<PAGE>
contradictory, inconsistently administered and retroactively applied. Under
such circumstances, it is difficult for the Company to determine with
certainty at all times the exact requirements of such local laws. Failure of
the Company to remain in compliance with local laws could have a material
adverse impact on H&S's prospects, business, results of operations and
financial condition. In addition, the global nature of the Company's
operations poses various challenges to the Company's management and its
financial, accounting and other systems which, if not satisfactorily met,
could have a material adverse impact on the Company's business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
ANTITAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Bylaws (the "Bylaws") and Delaware
laws may make the acquisition of control of the Company in a transaction not
approved by the Company's Board of Directors more difficult or expensive. For
example, the Delaware takeover statute limiting transactions with "interested
stockholders" applies to the Company and the Company's Certificate of
Incorporation and Bylaws provide for a classified board of directors,
limitations on the removal of directors, limitations of stockholder action and
advance notification procedures. These provisions could discourage an
acquisition attempt or other transactions in which stockholders might receive
a premium over the then current market price for the Common Stock. See
"Description of Capital Stock--The Delaware General Corporation Law" and "--
Certificate of Incorporation; Bylaws."
MANAGEMENT DISCRETION CONCERNING USE OF PROCEEDS
Most of the net proceeds of the Offering have not been designated for
specific uses, and management will have substantial discretion in using the
proceeds of the Offering. See "Use of Proceeds."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active market will develop or be
sustained after the completion of the Offering. Consequently, the initial
public offering price of the Common Stock was determined by negotiations among
H&S and the Underwriters. See "Underwriting" for a description of the factors
considered in determining the initial public offering price.
The market price of the Common Stock may be significantly affected by, and
could be subject to significant fluctuations in response to, such factors as
H&S's operating results, changes in any earnings estimates publicly announced
by H&S or by securities analysts, announcements of significant business
developments by H&S or its competitors, other developments affecting H&S, its
clients, or its competitors, and various factors affecting the executive
search industry, the financial markets or the economy in general, some of
which may be unrelated to H&S's performance. In addition, the stock market has
experienced a high level of price and volume volatility, and the market prices
for the stock of many companies, especially companies that have recently
completed initial public offerings, have experienced a high level of price and
volume volatility not necessarily related to the operating performance of such
companies. Because the number of shares of Common Stock offered hereby is
small relative to the number of publicly traded shares of many other
companies, and because all existing H&S stockholders have agreed not to sell,
contract to sell or otherwise dispose of any Common Stock currently owned by
them for two years after the Offering, the market price of the Common Stock
may be more susceptible to fluctuation.
ABSENCE OF DIVIDENDS
The Company intends to retain all of its earnings for the future operation
and expansion of its business and does not anticipate paying cash dividends on
its Common Stock at any time in the foreseeable future. See "Dividend Policy."
13
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
A substantial number of shares of Common Stock already outstanding, or
issuable on exercise of stock options to be granted under the GlobalShare
Plan, are or will be eligible for future sale in the public market at
prescribed times pursuant to Rule 144 or Rule 701 under the Securities Act of
1933, as amended (the "Securities Act"). Sales of such shares in the public
market, or the perception that such sales may occur, could adversely affect
the market price of the Common Stock or impair H&S's ability to raise
additional capital in the future through the sale of equity securities. Upon
completion of the Offering, there will be outstanding shares of
Common Stock and stock options to purchase an additional shares and
shares reserved for issuance pursuant to the Company's incentive
plans. Of these shares, the shares of Common Stock sold in the
Offering ( shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable by persons other than "affiliates"
of H&S, without restriction under the Securities Act. The remaining
shares of Common Stock will be "restricted" securities within the meaning of
Rule 144 under the Securities Act and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemptions contained in Rule 144. The Company and all
current stockholders of the Company have agreed, for a period of 180 days
after the date of this Prospectus, not to, directly or indirectly, offer,
sell, or otherwise dispose of any shares of Common Stock without the prior
written consent of Lehman Brothers Inc., other than, with respect to the
Company, shares of Common Stock issued in the Offering, under its GlobalShare
Plan, or upon exercise of stock options granted pursuant to the Global Share
Plan. Additionally, all current stockholders of H&S have agreed not to,
directly or indirectly, offer, sell, or otherwise dispose of any shares of
Common Stock currently owned by them for a period of two years after the date
of this Prospectus without the prior written consent of Lehman Brothers Inc.,
which consent will be granted or denied after consultation with the Company.
See "Management--1998 Heidrick & Struggles GlobalShare Plan," "Shares Eligible
for Future Sale" and "Underwriting."
DILUTION
The initial public offering price is substantially higher than the book
value per share of the Common Stock. Accordingly, purchasers of the Common
Stock offered hereby would experience immediate and substantial dilution of
$ in tangible book value per share of the Common Stock. See "Dilution."
THE COMPANY
The Company is one of the leading global executive search firms and believes
that, based on revenues, it is the largest executive search firm in the United
States and the second largest in the world. With over 45 years of experience
in fulfilling its clients' leadership needs, H&S offers and conducts executive
search services in nearly every major business center in the world. The
Company's services focus on the identification, evaluation and recommendation
of qualified candidates for senior level executive positions. Through its
worldwide network of approximately 700 professionals in 54 offices, H&S
provides executive search services to a broad range of clients, including
Fortune 500 companies, major non-U.S. companies, middle market and emerging
growth companies, governmental and not-for-profit organizations and other
leading private and public entities.
H&S Inc. is a Delaware corporation that was incorporated in 1956 as
successor to a partnership formed in 1953, and HSI is a Delaware corporation
that was incorporated in 1968. The principal executive office of the Company
is 233 South Wacker Drive--Suite 4200, Chicago, Illinois 60606-6303, and its
telephone number is (312) 496-1200.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to H&S from the sale of the shares of Common Stock
offered hereby, after deducting the underwriting discount and estimated
offering expenses, are estimated to be approximately $ million ($
million if the Underwriters' over-allotment option is exercised in full). The
net proceeds of the Offering will be used for working capital and general
corporate purposes, including expenditures for the IGIS technology
enhancements, the possible opening of new offices, the repayment of debt and
possible acquisitions. The Company intends to use $ of the proceeds of
the Offering to repay indebtedness outstanding under its existing line of
credit and notes payable to certain former stockholders of H&S Inc. whose
stock has been repurchased by H&S Inc. or HSI. The interest rate on this line
of credit is fixed, at the time of borrowing, for the term of the borrowing at
the Company's option at either LIBOR plus 1% or the prime rate. At December
31, 1997, the interest rate on this indebtedness was the prime rate, 8.5%. At
March 31, 1998, the interest rate on the debt was fixed at approximately 6.7%.
In addition, $ of the proceeds will be used to repay balances under HSI's
line of credit. HSI's $9.9 million line of credit will be reduced annually by
$2 million on July 1, 1998, 1999, 2000 and 2001 and will expire on July 1,
2001. The interest rate on HSI's credit line is LIBOR plus 1% and at December
31, 1997 was 7.2%. The notes payable to such former stockholders are payable
over four years and bear interest at the prime rate. Pending such uses, H&S
intends to invest the net proceeds from the Offering in short-term, investment
grade securities, certificates of deposit, or direct guaranteed obligations of
the United States government. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company will receive no proceeds from the sale of the Common Stock in
the Offering by the Selling Stockholders.
DIVIDEND POLICY
H&S does not intend to pay any cash dividends for the foreseeable future but
instead intends to retain earnings, if any, for the future operation and
expansion of H&S's business. Any determination to pay dividends in the future
will be at the discretion of the Company's Board of Directors and will be
dependent upon H&S's results of operations, financial condition, contractual
restrictions, restrictions imposed by applicable law and other factors deemed
relevant by the Board of Directors. The Company's revolving credit facility
prohibits the Company from declaring and paying cash dividends on the Common
Stock. Future indebtedness and loan facilities also may prohibit or restrict
the ability of the Company to pay dividends and make distributions to its
stockholders.
15
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of H&S Inc. at March
31, 1998 on an actual basis, (ii) the capitalization of the combined Company
on a pro forma basis to reflect, among other matters, the Merger and (iii) the
capitalization of the Company on a pro forma as adjusted basis to reflect the
foregoing matters as well as (a) receipt by the Company of the net proceeds
from the sale of shares of Common Stock offered hereby at an assumed initial
public offering price of $ per share (after deducting underwriting
discounts, commissions and estimated offering expenses) and (b) the
application of the net proceeds therefrom as described under "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto and the Unaudited
Pro Forma Condensed Consolidated Data and the Notes thereto included elsewhere
in the Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
--------------------------------
COMPANY
H&S PRO FORMA
INC. COMPANY AS
ACTUAL PRO FORMA (1) ADJUSTED
------- ------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents..................... $14,944 $ 17,122 $
======= ======== ==========
Total debt(2)................................. $ 1,601 $ 1,729 $
------- -------- ----------
Mandatorily redeemable common stock(3)...... 48,293 -- --
------- -------- ----------
Stockholders' equity:
Common Stock, without par value,
shares authorized, shares issued and
outstanding shares issued and
outstanding as adjusted(4)................. -- 81,957 --
Preferred Stock............................. -- -- --
Shares authorized--None, shares as
adjusted
Shares issued and outstanding--None
Additional paid-in capital.................. -- -- --
Cumulative translation adjustment........... -- (1,369) --
Unrealized gain unavailable for sale
investments................................ -- 2,206 --
Treasury stock.............................. -- (15,178) --
Retained earnings........................... -- 22,531 --
------- -------- ----------
Total stockholders' equity................ -- 90,147
------- -------- ----------
Total capitalization.................... $49,894 $ 91,876 $
======= ======== ==========
</TABLE>
- --------
(1) For a discussion of the pro forma adjustments, see "Unaudited Pro Forma
Condensed Consolidated Data" on page 21.
(2) Excludes current maturities of $5,956 for H&S Inc. and $16,210 for Company
pro forma. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(3) H&S Inc.'s Common Stock and HSI's Class A Common Stock are subject to
mandatory repurchase agreements which require the classification of such
Common Stock as Mandatorily Redeemable Common Stock. These agreements will
terminate upon consummation of the Offering and the Common Stock will be
reclassified as Stockholders' equity.
(4) Does not include up to shares that may be purchased by certain
employees of the Company under the GlobalShare Plan pursuant to the
Employee Share Purchase, up to shares issuable pursuant to
options, grants of restricted stock and restricted stock units that may be
granted under the GlobalShare Plan to such employees in connection with
the Employee Share Purchase and approximately shares to be issued
to other employees at completion of the Offering. Does not include
shares of Common Stock available for future issuance under the
Company's incentive plans.
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<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
was $ million, or $ per outstanding share of Common Stock. The net
tangible book value per share of Common Stock is equal to the Company's total
tangible assets (total assets less intangible assets) less its total
liabilities, divided by the number of shares of Common Stock outstanding, all
on a pro forma basis. After giving effect to the sale of shares of
Common Stock to be sold by the Company in the Offering at an assumed initial
public offering price of $ per share (the midpoint of the estimated range
of the initial public offering price) and the application by the Company of
the estimated net proceeds therefrom as described in "Use of Proceeds," the
pro forma net tangible book value of the Company at March 31, 1998 would have
been $ million, or $ per share of Common Stock. This represents an
immediate increase in pro forma net tangible book value of $ per share of
Common Stock and an immediate dilution in pro forma net tangible book value of
$ per share of Common Stock to new investors of Common Stock in the
Offering. If the Underwriters' over-allotment option is exercised in full, the
pro forma net tangible book value upon completion of the Offering would be
$ per share.
The following table illustrates the per share dilution that would have
occurred if the Offering had been consummated on March 31, 1998:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share before the Offering..
----
Increase in pro forma net tangible book value per share
attributable to price paid by new investors in Common Stock in
the Offering....................................................
----
Pro forma net tangible book value per share after the Offering...
-----
Dilution per share to new investors.............................. $
=====
</TABLE>
The following table summarizes, on a pro forma basis, as of March 31, 1998,
after giving effect to the Offering, the number of shares of Common Stock to
be sold by the Company, the total consideration paid and the average price per
share paid by the existing stockholders and by the investors purchasing shares
of Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES
PURCHASED TOTAL CONSIDERATION
-------------- --------------------- AVERAGE
AMOUNT PRICE
NUMBER PERCENT (IN MILLIONS) PERCENT PER SHARE
------ ------- ------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ % $ % $
New investors....................
----- --- ------ ---
Total........................ % $ %
===== === ====== ===
</TABLE>
The foregoing computations do not give effect to up to shares that
may be purchased by certain employees of the Company under the GlobalShare
Plan pursuant to the Employee Share Purchase, up to shares issuable
pursuant to options, grants of restricted stock and restricted stock units
that may be granted under the GlobalShare Plan to such employees in connection
with the Employee Share Purchase, and approximately shares to be
issued to other employees at completion of the Offering. These calculations
also exclude shares of Common Stock available for future issuance
under the GlobalShare Plan. To the extent that shares are issued in connection
with the foregoing, there will be further dilution to new investors.
17
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data of
the Company give effect to (i) the Merger as described below, (ii) the
amendment of the Mulder acquisition agreement, (iii) the implementation of the
Company's stock option plan for managing partners and corporate officers, (iv)
the consolidation of the historical consolidated financial data of Mulder
prior to the acquisition of Mulder by HSI and (v) the termination of the
mandatory redemption feature of the common stock of each of H&S Inc. and HSI.
The pro forma data is presented as if the above transactions had occurred on
January 1, 1997 for the statement of operations and related data and on March
31, 1998 for balance sheet data.
The unaudited pro forma condensed consolidated statement of operations data
for the year ended December 31, 1997 reflects the results of operations of
HSI, and H&S Inc. for the year then ended and Mulder for the nine months ended
September 30, 1997. The historical results of operations of Mulder have been
included in HSI's financial statements subsequent to the date of the
acquisition.
This unaudited pro forma condensed consolidated data assume that the Merger
is effected by the exchange of shares of HSI Common Stock for each
share of H&S Inc., and that shares of HSI Common Stock are issued in
exchange for all outstanding shares of H&S Inc. upon which HSI Common Stock
becomes the Common Stock of the Company. This is a fixed exchange ratio agreed
upon by HSI and H&S Inc. The Merger will be accounted for as a reverse
acquisition, as the stockholders of H&S Inc. will own a majority of the
outstanding shares of the Common Stock of the Company upon completion of the
transaction. Accordingly, for accounting purposes, HSI is treated as the
acquired company and H&S Inc. is considered to be the acquiring company. Prior
to the Merger, H&S Inc. owned 35.5417% of all outstanding HSI Common Stock.
The acquisition by H&S Inc. of the remaining 64.4583% of HSI will be recorded
using the purchase method of accounting. The difference between the fair value
of HSI and HSI book value (the "Excess Purchase Price") will be allocated
first among identifiable tangible and intangible assets and then any residual
value will be recorded as goodwill.
The purchase price of HSI to H&S Inc. is based upon (i) the ownership in the
Company upon completion of the Merger of holders of HSI shares immediately
prior to the Merger and (ii) the fair market value of the Company after the
Merger based on the initial public offering price of the Common Stock less an
appropriate illiquidity discount. For purposes of this pro forma information,
the fair market value of HSI is based on an assumed initial public offering
price of $ per share. If the initial public offering price of the
Company's Common Stock used in these pro forma financial statements were
assumed to increase by $1 per share, the impact would be to increase annual
intangible and goodwill amortization and decrease net income by $ million
($ per share).
The unaudited pro forma condensed consolidated financial data are a
presentation of historical results with accounting adjustments. The unaudited
pro forma condensed consolidated financial data do not reflect, except as
indicated in the accompanying notes, the effects of any of the anticipated
changes to be made by the Company in its operations from the historical
operations, are presented for informational purposes only and should not be
construed to indicate (i) the results of operations or the consolidated
financial position of the Company that actually would have occurred had the
transactions described above been consummated as of the dates indicated or
(ii) the results of operations or the consolidated financial position of the
Company in the future.
The following unaudited pro forma condensed consolidated financial data and
accompanying notes are qualified in their entirety by reference to, and should
be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the consolidated financial
statements and notes thereto of H&S Inc., HSI and Mulder and the other
historical consolidated financial information included elsewhere in this
Prospectus.
18
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------ ----------------
1997 1997 1998
------------ ------- -------
(IN THOUSANDS EXCEPT PER
SHARE, SHARE AND OTHER
OPERATING DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenue........................................ $284,792 $57,926 $73,990
Operating expenses:
Salaries and employee benefits(2)(3).......... 193,637 39,879 52,082
General and administrative expenses(4)........ 71,104 14,628 19,164
--------- ------- -------
Total operating expenses.................... 264,741 54,507 71,246
--------- ------- -------
Operating income.............................. 20,051 3,419 2,744
--------- ------- -------
Non-operating income (expense):
Interest income............................... 1,622 146 155
Interest expense.............................. (309) (29) (56)
Other......................................... 1,159 108 (476)
--------- ------- -------
Total non-operating income (expense)........ 2,472 225 (377)
--------- ------- -------
Equity in net income of affiliate(5)........... -- -- --
--------- ------- -------
Minority interest in income of consolidated
subsidiaries.................................. (26) -- --
--------- ------- -------
Income before income taxes..................... 22,497 3,644 2,367
Provision for income taxes(6).................. 12,227 1,851 1,017
--------- ------- -------
Net income..................................... $ 10,270 $ 1,793 $ 1,350
========= ======= =======
Basic and diluted earnings per common share.... $ $ $
========= ======= =======
Basic and diluted weighted average common
shares outstanding............................
========= ======= =======
BALANCE SHEET DATA (AT END OF PERIOD)(7):
Working capital............................... $13,675
Total assets.................................. 186,957
Long-term debt, less current maturities....... 1,729
Total stockholders' equity.................... 90,147
OTHER OPERATING DATA:
Number of offices at the end of the period.... 51 43 51
Average number of consultants during the
period....................................... 254 236 293
</TABLE>
- --------
(1) HSI acquired 100% of Mulder on October 1, 1997, for a combination of cash
and 32,000 shares of HSI common stock. On October 1, 1997, HSI delivered
4,000 shares of HSI common stock and paid $8.7 million to the partners of
Mulder, and incurred $1.1 million of associated transaction costs. An
additional $5.2 million (plus interest at an annual percentage rate of 4%)
is due to the partners of Mulder in five equal annual installments
beginning October 1, 1998. The remaining shares are to be issued in four
annual installments beginning January 1, 1999. Because the total purchase
price was contingent upon the continued employment of Mulder consultants,
the cost of the acquisition was accounted for as compensation expense to
be recognized over a five-year period beginning October 1, 1997. In
connection with the Merger, the Mulder acquisition agreement was amended
on July 2, 1998. The Mulder acquisition agreement was modified such that
the remaining $5.2 million (plus interest) will be paid within 90 days of
the completion of the Merger and 27,080 shares of Common Stock that will
be valued, based on an assumed initial offering price, at $ million
will be issued to such Mulder partners immediately after the Merger. All
employment contingencies relating to the Mulder consultants will be
eliminated. The following accounts in the statement of operations have
been adjusted by the following amounts to reflect the historical
operations of Mulder prior to the Mulder acquisition.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Revenue............................. $21,816
Operating expenses
Salaries and employee benefits..... 14,610
General and administrative
expenses.......................... 5,557
Non-operating income................ 406
Provision for income taxes.......... 1,668
-------
Net income.......................... 387
=======
</TABLE>
19
<PAGE>
(2) Amortization of deferred compensation expense of $1.4 million relating to
the acquisition of Mulder has been eliminated from salaries and employee
benefits for the periods ending December 31, 1997 and March 31, 1998.
Under the amendment to the Mulder acquisition agreement, the remaining
$24.1 million of the $28.4 million of compensation, based upon an assumed
initial offering price, will be expensed in the third quarter of 1998
contingent upon the completion of the Merger.
(3) Adjustments have been made to eliminate from salaries and employee
benefits, compensation expense representing the difference between amounts
actually paid over amounts that would have been paid under the Company's
proposed stock option plan for managing partners and corporate officers
had such plan been in effect beginning January 1, 1997. The eliminations
are as follows:
<TABLE>
<CAPTION>
PERIOD ELIMINATION
------ -----------
<S> <C>
Three months ended March 31, 1997.............................. $1,000
Year ended December 31, 1997................................... $4,000
Three months ended March 31, 1998.............................. $1,100
</TABLE>
(4) Adjustments have been made to reflect the impact of allocating the Excess
Purchase Price to intangible assets and goodwill of HSI, and are subject
to change based upon the final determination of the respective fair values
of these assets. For the year ended December 31, 1997, $2.0 million of
amortization related to acquired intangibles and goodwill has been charged
to general and administrative expenses. For the three months ended March
31, 1997 and 1998, $500 of amortization related to acquired intangibles
and goodwill has been charged to general and administrative expenses.
(5) Equity in net income of affiliate has been eliminated from H&S Inc. for
all periods shown to reflect 100% ownership of HSI after the Merger.
(6) Adjustments are made to the provision for income taxes to reflect the
increased income tax liability resulting from the corresponding increase
in income before income taxes because of the compensation adjustment
discussed in footnote 3 above and the elimination of the equity in net
income of affiliate as discussed in footnote 5 above, as follows:
<TABLE>
<CAPTION>
EQUITY IN
NET INCOME
OF
AFFILIATE COMPENSATION
PERIOD ADJUSTMENT ADJUSTMENT
------ ---------- ------------
<S> <C> <C>
Three months ended March 31, 1997.................. $ (63) $ 420
Year ended December 31, 1997....................... $(154) $1,680
Three months ended March 31, 1998.................. $ 143 $ 462
</TABLE>
(7) See the Unaudited Pro Forma Condensed Consolidated Balance Sheet on page
21 for further details regarding pro forma balance sheet adjustments.
20
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA CONTRACT
MERGER REFLECTING AMENDMENT COMPANY
HSI H&S INC. ADJUSTMENTS MERGER ADJUSTMENTS PRO FORMA
------- -------- ----------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 7,616 $ 14,944 $ -- $ 22,560 $ (5,438)(2) $ 17,122
Accounts receivable,
net of allowance...... 26,456 39,152 (1,072)(1) 64,536 -- 64,536
Notes receivable from
affiliates............ -- 5,148 (5,148)(1) -- -- --
Other current assets... 4,717 10,239 14,956 -- 14,956
Property and equipment,
net.................... 10,831 17,433 -- 28,264 -- 28,264
Other assets:
Cash and investments
designated for
nonqualified
retirement plan....... -- 12,023 -- 12,023 -- 12,023
Investment in HSI...... -- 6,439 (6,439)(1) -- -- --
Goodwill............... 454 -- 24,693 (1) 25,147 -- 25,147
Deferred compensation
expense............... 7,345 -- 7,345 (7,345)(2) --
Intangibles............ -- -- 16,501 (1) 16,501 -- 16,501
Other non-current
assets................ 4,140 2,551 1,717 (1) 8,408 -- 8,408
------- -------- ------- -------- --------- --------
Total other assets.... 11,939 21,013 36,472 69,424 (7,345) 62,079
------- -------- ------- -------- --------- --------
Total assets.......... $61,559 $107,929 $30,252 $199,740 $ (12,783) $186,957
======= ======== ======= ======== ========= ========
Current liabilities:
Short-term debt........ $10,254 $ 5,956 $ -- $ 16,210 $ -- $ 16,210
Income taxes payable... 5,392 141 -- 5,533 -- 5,533
Accounts payable....... 3,917 2,700 (1,072)(1) 5,545 -- 5,545
Accrued expenses
Salaries and employee
benefits............. 8,033 31,468 -- 39,501 -- 39,501
Other accrued
expenses............. 10,522 5,628 -- 16,150 -- 16,150
Note payable to
affiliate............. 5,148 -- (5,148)(1) -- -- --
Long-term debt, less
current maturities..... 128 1,601 -- 1,729 -- 1,729
Liability for
nonqualified retirement
plans.................. -- 12,142 -- 12,142 -- 12,142
Commitments and
contingent liabilities. -- -- -- -- -- --
Mandatorily redeemable
common stock........... 12,380 48,293 42,257 (1) 102,930 (12,783)(2) --
(90,147)(3)
Stockholders' equity.... 5,785 -- (5,785)(1) -- 90,147 (3) 90,147
------- -------- ------- -------- --------- --------
Total liabilities and
stockholders' equity. $61,559 $107,929 $30,252 $199,740 $ (12,783) $186,957
======= ======== ======= ======== ========= ========
</TABLE>
- --------
(1) These pro forma adjustments reflect the impact of allocating the Excess
Purchase Price to intangibles and goodwill of HSI, and are subject to
change based upon the final determination of the respective fair values of
the assets. The Excess Purchase Price is assumed to be $41,194, based on
an assumed initial offering price of $ and takes into account the
elimination of a deferred tax liability of $1,717.
This Excess Purchase Price has been allocated to identifiable intangibles
and goodwill as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
FAIR MARKET REMAINING USEFUL
ASSET CLASSIFICATION VALUE LIFE IN YEARS
-------------------- ----------- ----------------
<S> <C> <C>
Intangible Assets............................. $16,501 12
Goodwill...................................... 24,693 40
-------
Total Excess Purchase Price.................. $41,194
=======
</TABLE>
The preliminary allocations of the Excess Purchase Price are based upon
current estimates and information available to H&S Inc.
In determining the foregoing estimated useful lives, management considered
the nature, competitive position of the Company, and historical and expected
future operating income. After the Merger, the Company will continually
review whether subsequent events and circumstances have occurred that
indicate the intangibles or goodwill may not be recoverable. If events and
circumstances indicate that intangibles or goodwill related to the acquired
business should be reviewed for possible impairment, the Company will use
projections to assess whether future operating income of the business, on a
non-discounted basis (before amortization), is likely to exceed the
amortization over the remaining life of the intangibles or goodwill, to
determine whether a write-down of intangibles or goodwill to recoverable
value is appropriate.
21
<PAGE>
The ultimate allocation of the Excess Purchase Price to intangibles and
goodwill acquired is subject to final determination of the fair value of the
assets of HSI. The ultimate allocation of the respective values will be
based upon the report of a professional appraiser that will be completed in
connection with the consummation of Merger. H&S Inc. management believes
that the above preliminary allocations of the purchase price are reasonable
and will not materially change.
The pro forma adjustments include the elimination of H&S Inc.'s investment
in HSI. In addition, $6,220 of intercompany debt and payables were also
eliminated. As of March 31, 1998, there were no other intercompany
transactions that required elimination.
(2) The amendment of the Mulder acquisition agreement resulted in the
following adjustments to HSI historical amounts:
(i) Cash has been adjusted by $5,438 to reflect the cash consideration to be
paid for Mulder.
(ii) Mandatorily redeemable common stock has been increased by $12,773 to
account for shares to be issued to Mulder partners and reduced by
$25,556 to eliminate the one-time compensation charge.
(iii) Deferred compensation expense has been reduced by $7,345 to eliminate
the asset due to the recording of the one-time compensation charge above.
(3) Reflects reclassification of H&S Inc.'s mandatorily redeemable common
stock of $90,147 to stockholders equity as the mandatory redemption
feature of the common stock will terminate upon consummation of the
Offering.
22
<PAGE>
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for each of the
five years in the period ended December 31, 1997 have been derived from the
respective audited consolidated financial statements of H&S Inc. and HSI which
in the case of HSI were audited by Barbier Frinault & Associes (Arthur
Andersen LLP), independent public accountants, and in the case of H&S Inc.
were audited for fiscal years 1994 through 1997 by Arthur Andersen LLP,
independent public accountants and for 1993 by McGladrey & Pullen, LLP,
independent public accountants. The selected consolidated financial data for
the three months ended March 31, 1998 and 1997 were derived from the
respective unaudited consolidated financial statements of H&S Inc. and HSI,
which in the opinion of management, reflect all adjustments necessary, which
consist only of normal recurring adjustments, for a fair presentation of the
interim period financial data. The results for the three months are not
necessarily indicative of the results to be expected for the full year. The
data set forth are qualified in their entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements, the
notes thereto and the other financial data and statistical information
included in this Prospectus.
The table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," H&S Inc.'s, HSI's
and Mulder's Financial Statements, related notes and other financial
information included elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
H&S INC.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE, SHARE AND OTHER OPERATING
DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $77,990 $96,127 $108,685 $137,665 $180,244 $39,973 $45,937
Operating expenses:
Salaries and employee
benefits.............. 53,402 66,379 77,215 98,272 125,308 28,693 34,761
General and
administrative
expenses.............. 15,420 19,078 20,853 28,681 42,991 9,840 10,349
------- ------- -------- -------- -------- ------- -------
Total operating
expenses............. 68,822 85,457 98,068 126,953 168,299 38,533 45,110
------- ------- -------- -------- -------- ------- -------
Operating income....... 9,168 10,670 10,617 10,712 11,945 1,440 827
------- ------- -------- -------- -------- ------- -------
Non-operating income
(expense):
Interest income........ 320 808 1,156 1,385 1,586 146 155
Interest expense....... (184) (180) (207) (180) (150) (29) (56)
Other income (expense). 71 89 108 (94) 486 70 (364)
------- ------- -------- -------- -------- ------- -------
Total non-operating
income (expense)..... 207 717 1,057 1,111 1,922 187 (265)
------- ------- -------- -------- -------- ------- -------
Equity in net income
(loss) of affiliate... 725 1,252 778 775 367 150 (341)
------- ------- -------- -------- -------- ------- -------
Income before income
taxes................. 10,100 12,639 12,452 12,598 14,234 1,777 221
Provision for income
taxes................. 4,356 6,297 6,094 6,149 7,589 887 106
------- ------- -------- -------- -------- ------- -------
Net income............. $ 5,744 $ 6,342 $ 6,358 $ 6,449 $ 6,645 $ 890 $ 115
======= ======= ======== ======== ======== ======= =======
Basic and diluted
earnings per common
share................. $ $ $ $ $
======== ======== ======== ======= =======
Weighted average common
shares outstanding....
======== ======== ======== ======= =======
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $13,024 $13,549 $ 17,193 $ 20,628 $ 24,768 $21,524 $23,590
Total assets........... 41,139 45,058 55,900 68,643 93,892 81,447 107,929
Long-term debt, less
current maturities.... 1,562 735 1,189 993 1,636 985 1,601
Mandatorily redeemable
common stock.......... 17,892 25,818 31,700 39,373 47,606 40,513 48,293
OTHER OPERATING DATA:
Number of offices (at
end of period)........ 16 18 20 25 28 25 28
Average number of
consultants during the
period................ 94 108 119 137 159 152 178
</TABLE>
23
<PAGE>
SELECTED FINANCIAL DATA
HSI
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE, SHARE AND OTHER
OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $30,513 $39,634 $52,815 $64,558 $82,732 $17,953 $28,053
Operating expenses:
Salaries and employee
benefits.............. 18,688 24,299 35,249 44,020 59,139 12,186 19,841
General and
administrative
expenses.............. 8,985 10,212 14,264 17,100 20,556 4,288 8,315
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 27,673 34,511 49,513 61,120 79,695 16,474 28,156
------- ------- ------- ------- ------- ------- -------
Operating income....... 2,840 5,123 3,302 3,438 3,037 1,479 (103)
------- ------- ------- ------- ------- ------- -------
Non-operating income
(expense)............. (477) (366) 338 133 144 38 (112)
------- ------- ------- ------- ------- ------- -------
Minority interest in
income of consolidated
subsidiaries.......... (107) (222) -- -- (26) -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes.......... 2,256 4,535 3,640 3,571 3,155 1,517 (215)
Provision for income
taxes................. 650 1,886 1,840 1,430 1,444 607 306
------- ------- ------- ------- ------- ------- -------
Net income (loss)...... $ 1,606 $ 2,649 $ 1,800 $ 2,141 $ 1,711 $ 910 $ (521)
======= ======= ======= ======= ======= ======= =======
Basic and diluted
earnings per common
class A shares........ $ $ $ $ $
======= ======= ======= ======= =======
Weighted average class
A common shares
outstanding...........
======= ======= ======= ======= =======
Basic and diluted
earnings per common
class B shares........ $ $ $ $ $
======= ======= ======= ======= =======
Weighted average class
B common shares
outstanding...........
======= ======= ======= ======= =======
BALANCE SHEET DATA (AT
END OF PERIOD):
Working capital........ $ 4,478 $ 7,908 $ 7,777 $ 9,345 $(2,114) $10,190 $(4,477)
Total assets........... 15,273 21,998 25,756 32,851 59,947 29,644 61,559
Long-term debt, less
current maturities.... 59 -- -- 267 368 -- 128
Mandatorily redeemable
common stock.......... 4,019 6,166 8,323 9,922 12,577 10,382 12,380
Total stockholders'
equity................ 3,112 4,757 5,758 6,440 6,548 6,392 5,785
OTHER OPERATING DATA:
Number of offices (at
end of period)........ 10 12 13 16 23 18 23
Average number of
consultants during the
period................ 51 55 59 71 95 84 115
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the historical results of operations and
liquidity and capital resources of H&S Inc. and HSI should be read in
conjunction with the Selected Combined Financial Data and the Audited
Consolidated Financial Statements of H&S Inc., HSI and Mulder and related
notes thereto appearing elsewhere in this Prospectus.
GENERAL
The Company is one of the leading global executive search firms and believes
that, based on revenues, it is the largest executive search firm in the United
States and the second largest in the world. The Company offers and conducts
executive search services through its global network of offices to a broad
range of clients, including Fortune 500 companies, major non-U.S. companies,
middle market and emerging growth companies, governmental and not-for-profit
organizations, and other leading private and public entities.
Throughout their history, H&S Inc. and HSI have operated as a single entity,
and from the time of founding in 1953 until 1984, operated under a single
ownership structure. In 1984, H&S Inc. consummated a spin-off of HSI to its
European partners while retaining a significant equity interest. H&S Inc. and
HSI plan to consummate the Merger immediately prior to the completion of the
Offering in order to reunite the two companies into a single ownership
structure. The selected financial data set forth herein reflects the
historical operations of each of H&S Inc. and HSI.
Pursuant to their focused growth strategies, H&S Inc. and HSI each completed
an acquisition in the past year. In June 1998, H&S Inc. acquired Fenwick a
Boston-based executive search firm focused on the technology sector. In
October 1997, HSI acquired Mulder, the largest executive search firm in
Germany. Both acquisitions were accounted for using the purchase method of
accounting, with the results of the acquired companies included in H&S Inc.'s
and HSI's respective consolidated statements of income beginning on the date
of each acquisition.
With 54 offices in 28 countries, the Company conducts business using various
currencies. Revenue earned in each country is generally matched with the
associated expenses incurred, thereby reducing currency risk to earnings.
However, because certain assets or liabilities are denominated in non-U.S.
currencies, changes in currency rates may cause fluctuations of the valuation
of such assets or liabilities.
REVENUE
The Company's revenue is derived from providing executive search services to
its clients, and is largely a function of average revenue per consultant and
the average number of consultants employed (based on number of months employed
during the period). Average revenue per consultant is a function of the number
of searches performed per consultant and the average fee earned per search.
Revenue largely consists of executive search fees (net of value added taxes in
Europe) and allocated costs. Allocated costs include charges for communication
expenses, research related materials, duplicating and similar items.
Revenue from executive search services is recognized when such services are
billed to clients and substantially rendered. Typically, the Company is paid
an initial retainer for its services equal to approximately one-third of the
estimated guaranteed first year cash compensation for the position to be
filled. In addition, if the actual cash compensation of a placed candidate
exceeds the retainer estimate, the Company will bill the client for one-third
of the excess. Allocated costs are calculated as a percentage of the expected
search fee for an assignment with certain dollar caps per search. The Company
generally bills its clients for its initial retainer and allocated costs in
one-third increments over a 90-day period commencing in the month of the
initial acceptance or confirmation of the contract by its client.
With respect to each executive search assignment, the Company and its client
enter into a contract, which outlines the general terms and conditions of the
assignment. These contracts generally are cancelable at the option of either
party with compensation payable pro rata for the first 90 days.
25
<PAGE>
As newly-hired consultants require a large initial investment in signing
bonuses, guaranteed bonuses and support staff and do not tend to immediately
provide proportionately higher revenues, the Company's average revenue per
consultant and overall profitability are typically negatively impacted in the
short term.
OPERATING EXPENSES
The Company's operating expenses are divided into two general categories:
(i) salaries and employee benefits; and (ii) general and administrative
expenses.
Salaries and employee benefits. The largest components of the Company's
operating expenses are compensation and benefits paid to consultants,
executive officers and administrative and support personnel, of which the most
important constituent parts are salaries and annual bonuses. Other items
included in this category are signing bonuses and guaranteed bonuses (often
incurred in connection with the hiring of new consultants), payroll taxes,
profit sharing and retirement benefits and employee insurance benefits. In
recent quarters the Company has hired a larger than normal number of
consultants, which has resulted in a higher than normal level of signing
bonuses and guaranteed bonuses. A consultant's base salary represents, on
average, less than one-half of the consultant's total annual compensation.
Typically, a portion of the credit for a particular assignment goes to the
consultants who originate the executive search assignment, and a portion goes
to the consultants who perform the executive search assignment. In addition, a
portion of each consultant's annual compensation is based on management's
assessment of that consultant's teamwork.
General and administrative expenses. The key components of general and
administrative expenses include rent, information systems costs, general
office expenses and professional service costs (including legal, accounting
and third party professional services). In addition, general and
administrative expenses include depreciation, amortization and allowance for
doubtful accounts.
NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) consists of interest income, interest expense
and other income and expenses.
EQUITY IN NET INCOME (LOSS) OF AFFILIATE
H&S Inc. holds a significant interest in HSI. For H&S Inc., equity in net
income (loss) of affiliate relates to the income earned or loss incurred from
H&S Inc.'s investment in HSI after giving effect to currency translation
adjustments.
TAXES
H&S Inc. and HSI are subject to federal, state and non-U.S. income taxes.
Income generated outside of the United States may be subject to higher tax
rates than U.S. income. As a result, the Company's effective tax rate may be
higher than prevailing U.S. tax rates. Historically, certain non-deductible
expenses have increased the Company's effective tax rate. H&S Inc.'s and HSI's
provisions for income taxes reflects their best judgment as to the likely
effective tax rate for a given period. In recent periods, due to volatility in
their actual effective income tax rates, HSI has elected to increase its
provision for income taxes while H&S Inc. has elected to decrease its
provision for income taxes.
YEAR 2000 COMPLIANCE
While the Company believes its information systems will be able to
accommodate the "Year 2000" dating changes necessary to permit correct
recording of year dates for 2000 and later years, the Company has formed a
task force to evaluate and correct its Year 2000 issues. The initial
assessment indicates that the Company does
26
<PAGE>
not have a significant Year 2000 issue, and management believes that the cost
of addressing its Year 2000 issues will not be material. The Company is
pursuing Year 2000 certification for its existing information systems and is
currently conducting its own tests of these systems. The Company believes that
it will be able to achieve Year 2000 compliance by the end of the second
quarter of 1999 and does not anticipate any material disruption in its
operations as the result of any failure by the Company to be in compliance,
although no assurance to such effect can be given. The Company depends on
third party vendors for a number of functions, including its automated payroll
functions and is seeking certification from such vendors of their Year 2000
compliance. Any such difficulties with Year 2000 compliance may have an
adverse effect on the Company's operations.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
new standards for reporting information about operating segments in interim
and annual financial statements. It is effective for annual periods beginning
after December 15, 1997 and will be adopted by the Company as of December 31,
1998. The Company does not expect that adoption of this Standard will have an
impact on its consolidated financial position or its results of operations.
However, it is expected that adoption of this Standard will result in
additional footnote disclosure.
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes new standards for
reporting information about derivatives and hedging. It is effective for
periods beginning after June 15, 1999 and will be adopted by the Company as of
January 1, 2000. The Company expects that adoption of this Standard will have
no effect on its consolidated financial position, results of operations or on
disclosures within the financial statements as they currently do not engage in
the use of derivative instruments or other hedging activities.
RESULTS OF OPERATIONS--H&S INC.
The following table sets forth selected statements of operations data for
H&S Inc., and such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries and employee benefits............. 71.0 71.4 69.5 71.8 75.7
General and administrative expenses........ 19.2 20.8 23.9 24.6 22.5
----- ----- ----- ----- -----
Total operating expenses................. 90.2 92.2 93.4 96.4 98.2
----- ----- ----- ----- -----
Operating income............................. 9.8 7.8 6.6 3.6 1.8
----- ----- ----- ----- -----
Non-operating income (expense):
Interest income............................ 1.1 1.0 0.9 0.4 0.3
Interest expense........................... (0.2) (0.1) (0.1) (0.1) (0.1)
Other income (expense)..................... 0.1 (0.1) 0.3 0.2 (0.8)
----- ----- ----- ----- -----
Total non-operating income (expense)..... 1.0 0.8 1.1 0.5 (0.6)
----- ----- ----- ----- -----
Equity in net income (loss) of affiliate..... 0.7 0.6 0.2 0.4 (0.7)
----- ----- ----- ----- -----
Income before income taxes................... 11.5 9.2 7.9 4.5 0.5
Provision for income taxes................... 5.6 4.5 4.2 2.2 0.2
----- ----- ----- ----- -----
Net Income................................... 5.9% 4.7% 3.7% 2.3% 0.3%
===== ===== ===== ===== =====
</TABLE>
27
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Revenue. H&S Inc. revenue increased $5.9 million, or 14.9% to $45.9 million
for the first quarter of 1998 from $40.0 million for the first quarter of
1997. This increase was due to a 17.3% rise in the average number of
consultants employed during the period. H&S Inc. employed 26 more consultants
at March 31, 1998 than at March 31, 1997. Average revenue per consultant
remained relatively constant despite the large number of consultants added in
the last quarter of 1997 and in the first quarter of 1998. Three new offices
were opened after the first quarter of 1997: Miami, Philadelphia, and Sao
Paulo, which generated approximately $1.3 million of revenue in the first
quarter of 1998.
Salaries and employee benefits. H&S Inc. salaries and employee benefits
increased $6.1 million, or 21.1%, to $34.8 million for the three months ended
March 31, 1998 from $28.7 million for the three months ended March 31, 1997.
As a percentage of revenues, salaries and employee benefits increased from
71.8% to 75.7%. A majority of this percentage increase was due to signing
bonuses and guaranteed bonuses associated with the hiring of 34 new
consultants between April 1, 1997 and March 31, 1998, consistent with H&S
Inc.'s growth strategy. H&S Inc. also added 25 associates and 45
administrative personnel, in part to support these consultants.
General and administrative expenses. H&S Inc. general and administrative
expenses increased $500,000, or 5.2%, to $10.3 million for the three months
ended March 31, 1998 from $9.8 million for the three months ended March 31,
1997. As a percentage of revenues, general and administrative expenses
decreased from 24.6% for the three months ended March 31, 1997 to 22.5% for
the three months ended March 31, 1998. This percentage decrease was primarily
due to a reduction in the allowance for doubtful accounts to more
appropriately accrue in accordance with historical collection experience. This
percentage decrease was partly offset by an increase in maintenance and
installation expenses and technical support expenses associated with IGIS.
Non-operating income (expense). H&S Inc. non-operating expense increased
$452,000 resulting in a net non-operating loss of $265,000 for the three
months ended March 31, 1998 from a net non-operating gain of $187,000 for the
three months ended March 31, 1997. The increase is primarily due to a loss on
the sale of certain computer equipment replaced by new computers in connection
with IGIS.
1997 COMPARED TO 1996
Revenue. H&S Inc. revenue increased $42.5 million, or 30.9%, to $180.2
million for 1997 from $137.7 million for 1996. This increase was primarily the
result of a 16.1% increase in the average number of consultants employed
during the year and an increase of 12.8% in the average revenue per consultant
to $1.1 million from $1.0 million in 1996. H&S Inc. employed 26 more
consultants at December 31, 1997 than at December 31, 1996. In addition three
new offices were added during 1997: Miami, Philadelphia and Sao Paulo, which
generated approximately $1.5 million of revenue.
Salaries and employee benefits. H&S Inc. salaries and employee benefits
increased $27.0 million, or 27.5%, to $125.3 million for 1997 from $98.3
million for 1996. As a percentage of revenues, salaries and employee benefits
decreased from 71.4% to 69.5%, reflecting increased search team productivity
as revenues increased relatively faster than staffing levels. This improvement
occurred despite an increase of approximately $833,000 in H&S Inc.'s
contributions to the employee 401(k) plan.
General and administrative expenses. H&S Inc. general and administrative
expenses increased $14.3 million, or 49.9%, to $43.0 million for 1997 from
$28.7 million for 1996. As a percentage of revenues, general and
administrative expenses increased from 20.8% in 1996 to 23.9% in 1997. This
percentage increase was principally relating to research and development in
connection with the IGIS initiative.
Non-operating income (expense). H&S Inc. non-operating income increased
$800,000 to $1.9 million for 1997 from $1.1 million for 1996. The increase was
primarily due to the absence of certain losses incurred in 1996 as a result of
H&S Inc.'s relocation of corporate offices in Chicago, partially offset by an
increase in interest income reflecting higher cash balances during the year.
28
<PAGE>
1996 COMPARED TO 1995
Revenue. H&S Inc. revenue increased $29.0 million, or 26.7% to $137.7
million for 1996 from $108.7 for 1995. This increase was primarily due to a
15.1% increase in the average number of consultants employed and an increase
of 10.1% in the average revenue per consultant to $1.0 million in 1996 from
$915,000 in 1995. H&S Inc. employed 23 more consultants at December 31, 1996
than at December 31, 1995. H&S opened five new offices in 1996 in Caracas,
Charlotte, Lima, Santiago and Singapore, which resulted in a $1.5 million
increase in revenue between 1995 and 1996.
Salaries and employee benefits. H&S Inc. salaries and employee benefits
increased $21.1 million, or 27.3% to $98.3 million for 1996 from $77.2 million
in 1995. As a percentage of revenues, salaries and employee benefits increased
slightly from 71.0% to 71.4%. This percentage increase primarily reflects
increased signing bonuses and guaranteed bonuses associated with hiring 33
consultants in 1996 as compared with hiring 22 in 1995.
General and administrative expenses. H&S Inc. general and administrative
expenses increased $7.8 million, or 37.5%, to $28.7 million for 1996 from
$20.9 for 1995. As a percentage of revenues, general and administrative
expenses increased from 19.2% in 1995 to 20.8% in 1996. This percentage
increase was primarily due to: (i) an increase in the reserve for doubtful
accounts and (ii) an increase in professional services costs due to increased
legal fees relating to a litigation matter and increased consulting fees
relating to an information technology analysis.
Non-operating income (expense). H&S Inc. non-operating income remained
relatively constant at $1.1 million for both 1996 and 1995. The primary
component was interest income, which increased slightly to $1.4 million for
1996 from $1.2 million for 1995. This increase was offset by asset write-offs
for 1996 relating to the relocation of H&S Inc.'s corporate offices.
RESULTS OF OPERATIONS--HSI
The following table sets forth selected statements of operations data for
HSI, and such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries and employee benefits ........ 66.7 68.2 71.5 67.9 70.7
General and administrative expenses.... 27.0 26.5 24.8 23.9 29.6
----- ----- ----- ------ ------
Total operating expenses............. 93.7 94.7 96.3 91.8 100.3
----- ----- ----- ------ ------
Operating income (loss).................. 6.3 5.3 3.7 8.2 (0.3)
Non-operating income (loss).............. 0.6 0.2 0.2 0.2 (0.4)
Minority interest in income of
consolidated subsidiaries............... 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ------ ------
Income (loss) before income taxes........ 6.9 5.5 3.9 8.4 (0.7)
Provision for income taxes............... 3.5 2.2 1.7 3.4 1.1
----- ----- ----- ------ ------
Net income (loss)........................ 3.4% 3.3% 2.2% 5.0% (1.8)%
===== ===== ===== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Revenue. HSI revenue increased $10.1 million, or 56.3% to $28.1 million for
the three months ended March 31, 1998 from $18.0 million for the three months
ended March 31, 1997. A significant reason for this increase
29
<PAGE>
was the acquisition of Mulder in the fourth quarter of 1997, which had $5.1
million in revenues for the three months ended March 31, 1998. Excluding
Mulder, revenue increased by 28.1%, primarily as a result of a 21.0% increase
in the average number of consultants employed during the period. Two new
offices were opened after the first quarter of 1997: Lisbon and Prague, which
generated approximately $0.5 million of revenue in the first quarter of 1998.
Average revenue per consultant, excluding Mulder, remained relatively
constant.
Salaries and employee benefits. HSI salaries and employee benefits
increased $7.6 million to $19.8 million for the first three months ended March
31, 1998 from $12.2 million for the first three months ended March 31, 1997.
As a percentage of revenues, salaries and employee benefits increased from
67.9% for the period ended March 31, 1997 to 70.7% for the period ended March
31, 1998. Approximately $1.4 million of such increase was due to the
amortization of deferred compensation expense resulting from the Mulder
acquisition. The remainder of this increase primarily reflects the
compensation expense relating to the addition of professional and
administrative support throughout Europe, including Mulder.
General and administrative expenses. HSI general and administrative expenses
increased $4.0 million to $8.3 million for the three months ended March 31,
1998 from $4.3 for the three months ended March 31, 1997. As a percentage of
revenues, general and administrative expenses increased from 23.9% at March
31, 1997 to 29.6% at March 31, 1998. This increase was primarily the result of
an increase in the provision for doubtful accounts and increases in system
development costs due to the development of enhancements to HSI's executive
search system.
Non-operating income (expense). HSI non-operating expense increased $150,000
to a net non-operating loss of $112,000 for the three months ended March 31,
1998 from a net non-operating gain of $38,000 for the three months ended March
31, 1997. The increase was primarily due to an increase in interest expense
related to borrowings on HSI's line of credit, borrowings by HSI from H&S Inc.
and lower interest income as a result of reduced cash balances, all resulting
from the use of available funds for the Mulder acquisition and the funding of
employee bonuses paid in March and purchases of certain property and
equipment.
1997 COMPARED TO 1996
Revenue. HSI revenue increased $18.1 million, or 28.2%, to $82.7 million for
1997 from $64.6 for 1996. A significant reason for the increase was the
acquisition of Mulder in the fourth quarter of 1997 which contributed revenue
of $5.7 million in 1997. Excluding Mulder, revenue increased by 19.2%,
primarily as a result of a 29.2% increase in the average number of consultants
employed during the period. HSI employed 26 more consultants at December 31,
1997 as compared to December 31, 1996. Excluding the impact of currency
exchange rate fluctuations, the average revenue per consultant increased
slightly from 1996 to 1997. In addition to Mulder, three new offices were
added in 1997: Oslo, Lisbon and Prague which generated approximately $1.9
million in revenue.
Salaries and employee benefits. HSI salaries and employee benefits increased
$15.1 million, or 34.3% to $59.1 million for 1997 from $44.0 million in 1996.
As a percentage of revenue, salaries and employee benefits increased from
68.2% to 71.5%. This percentage increase was primarily due to approximately
$2.4 million of additional compensation and benefits to administrative and
support staff resulting from the hiring of new employees in connection with
the development of enhancements to HSI's executive search system.
General and administrative expenses. HSI general and administrative expenses
increased $3.5 million, or 20.2% to $20.6 million for 1997 from $17.1 million
for 1996. As a percentage of revenue, general and administrative expenses
declined from 26.5% to 24.8%. This decline was due primarily to a reduction in
the provision for doubtful accounts and growth in revenue outpacing increases
in rent, telecommunications and other costs.
Non-operating income expenses. HSI non-operating income increased by $11,000
to $144,000 from $133,000 for 1996.
30
<PAGE>
1996 COMPARED TO 1995
Revenue. HSI revenue increased $11.8 million, or 22.2% to $64.6 million for
1996 from $52.8 for 1995. The increase was primarily the result of a 20.3%
increase in the average number of consultants employed and a 1.6% increase in
average revenue per consultant. HSI employed 5 more consultants at December
31, 1996 than at December 31, 1995. Two new offices were added in 1996:
Amsterdam and Copenhagen, which generated approximately $1.4 million in
revenue.
Salaries and employee benefits. HSI salaries and employee benefits increased
$8.8 million or 24.9%, to $44.0 million for 1996 from $35.2 million in 1995.
As a percentage of revenue, salaries and employee benefits increased from
66.7% to 68.2%. This percentage increase primarily reflects the addition of 38
employees and the fact that performance bonuses were paid at a higher
percentage of revenues.
General and administrative expenses. HSI general and administrative expenses
increased $2.8 million, or 19.9%, to $17.1 million for 1996 from $14.3 million
for 1995. As a percentage of revenue, general and administrative expenses
declined from 27.0% to 26.5%.
Non-operating income (expense). HSI non-operating income decreased $205,000
to $133,000 for 1996 from $338,000 for 1995. The decrease was due in part to
reduced interest income on cash balances.
NONRECURRING AND OTHER CHARGES
During the third quarter ending September 30, 1998, the Company will incur
certain nonrecurring charges net of income taxes, totaling $ million. These
charges arise in connection with (i) the modification of the terms of the
Mulder acquisition agreement and (ii) the early settlement of certain profit
sharing arrangements in connection with the acquisition of certain Latin
American offices.
The Company has agreed to modify the terms of the Mulder agreement,
resulting in a nonrecurring charge expected to total $ million, net of
income taxes. See Note 11 of "Heidrick & Struggles International, Inc. and
Subsidiaries--Notes to Consolidated Financial Statements". This charge
represents the prepayment of the purchase price of $ million and will be
recorded as compensation expense. This nonrecurring charge (calculated as of
September 30, 1998) represents the write-off of $5.9 million of deferred
compensation assets and a cash payment of $5.4 million and the issuance of
27,080 shares of common stock ($ based on assumed initial public offering
price of $ per share) to the previous owners of Mulder.
On September 1, 1996, the Company acquired certain Latin American offices
for a purchase price of $609,000. The acquisition agreement called for the
sellers, who joined the Company as consultants, to receive, in addition to
salary and bonus, approximately 60% of future pre-tax profit from certain
operations net of certain corporate overhead. The Company intends to adjust
these consultants' compensation to be consistent with the consultant
compensation paid by the Company to all other consultants and in exchange for
a payment of $ , to allocate all future profits to the Company. This payment
will be recorded as compensation expense in the third quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
H&S Inc. and HSI periodically evaluate their liquidity requirements, capital
needs and availability of capital resources in view of plans for expansion and
other operating cash needs. Both H&S Inc. and HSI have historically financed
their operations primarily through internally generated funds, supplemented by
sales of common stock to certain key employees and periodic borrowings under
their respective credit facilities. H&S Inc. and HSI have accrued employee
bonuses throughout the year. H&S Inc. has paid such bonuses in December, and
HSI has paid such bonuses in December and March.
The Company believes that the net proceeds from the Offering and related
sales of shares to employees pursuant to the GlobalShare Plan, together with
funds expected to be generated from operations and its lines of credit, will
be sufficient to finance the Company's operations for the foreseeable future.
If the Company undertakes significant acquisitions, however, it may need
access to additional sources of debt or equity financing.
31
<PAGE>
H&S Inc.
H&S Inc. maintained cash and cash equivalents at December 31, 1996 and 1997,
and at March 31, 1998, totalling $7.2 million, $10.1 million and $14.9
million, respectively. Towards these sums, cash flows from operating
activities contributed $5.6 million in 1996 and $6.7 million in 1997
reflecting principally net income from operations. Cash flows from operating
activities contributed $7.3 million for the three months ended March 31, 1998,
reflecting an increase in accrued expenses of $11.7 million, principally due
to accruals for bonuses.
Cash flows from financing activities were $610,000, $6.0 million, and $1.6
million for 1996 and 1997 and the three months ended March 31, 1998,
respectively. H&S Inc.'s financing activities consist principally of sales of
its common stock to employees net of repurchase obligations and borrowings
under its credit facility. H&S Inc.'s long-term debt consists of amounts
payable to former shareholders from whom H&S Inc. has repurchased stock.
H&S Inc. has a $25 million reducing revolving credit facility expiring on
September 30, 2001. The $25 million line of credit reduces annually by $5
million on September 30, 1998, 1999 and 2000. There was $3.5 million
outstanding under the line of credit at December 31, 1997 and $5.1 million
outstanding at March 31, 1998. These borrowings bear fixed interest at the
then existing LIBOR or prime rate, at H&S Inc.'s discretion at the time of
borrowing. At December 31, 1997, the interest rate on the debt was the prime
rate, 8.5%. At March 31, 1998, the interest rate on the debt was fixed at
approximately 6.7%. The line of credit has certain financial requirements H&S
Inc. must meet relating to net worth, liabilities and cash flows. As of
December 31, 1997 and March 31, 1998, H&S Inc. met all of its financial
requirements. H&S Inc. is required to pay commitment fees on the unused
portion of the line of credit on a quarterly basis. Outstanding borrowings
under this facility bear interest at the prime rate or LIBOR, at the option of
H&S Inc. See Note 5 to Consolidated Financial Statements.
Capital expenditures amounted to $6.7 million, $5.7 million, and $3.4
million for 1996 and 1997 and the three months ended March 31, 1998,
respectively. These expenditures consisted primarily of system development
costs, office furniture and fixtures, leasehold improvements and computer
equipment and software. The system development costs relate primarily to H&S
Inc.'s IGIS initiative. IGIS expenditures of $1.2 million in 1997 and $2.4
million for the three months ended March 31, 1998 have been capitalized.
Additional capital expenditures of $11.8 million are expected to be made
through the end of the first quarter of 1999 and will begin to be amortized in
the second quarter of 1999.
HSI.
HSI maintained cash and cash equivalents at December 31, 1996 and 1997, and
at March 31, 1998, amounting to $8.2 million, $8.1 million and $7.6 million.
Towards these sums, cash flows from operating activities contributed $6.3
million in 1996 and $6.9 million in 1997, principally reflecting increases in
working capital, non-cash expenses for depreciation and amortization and net
income offset by accruals for bonuses in connection with the Mulder
acquisition.
Cash flows from financing activities were $331,000, $9.7 million and $7.2
million, respectively for 1996 and 1997 and March 31, 1998, respectively.
Borrowings during 1997 increased significantly in connection with certain
payments to finance the Mulder acquisition. Borrowings during the first
quarter of 1998 principally reflect funding of employee bonuses paid in March
and the purchase of certain property and equipment. HSI's financing activities
include borrowings and payments on its credit facility, purchase and sales of
its common stock to employees and borrowings under a loan agreement with H&S.
HSI's long-term debt consists of amounts payable to former shareholders who
have sold their stock back to HSI. To provide additional liquidity, HSI
negotiated a multicurrency line of credit of $9.9 million, denominated in ECU
expiring on July 1, 2002. The interest rate on this credit line is LIBOR plus
1%. The interest rate at December 31, 1997 was 7.2%. The total outstanding
balance was $7,639 and $9,779 at December 31, 1997 and March 31, 1998,
respectively. Investments greater than $2 million and sales of significant
German assets are prohibited without prior written approval of the banks.
32
<PAGE>
Capital expenditures totaled $2.0 million, $6.0 million and $1.7 million for
1996 and 1997 and March 31, 1998, respectively. These expenditures consisted
primarily of purchases of office furniture and fixtures, computer equipment
and software. Additionally, HSI made payments of $10.2 million in cash and
stock in connection with the Mulder acquisition during 1997.
33
<PAGE>
BUSINESS
GENERAL
Heidrick & Struggles International, Inc. is one of the leading global
executive search firms and believes that, based on revenues, it is the largest
executive search firm in the United States and the second largest in the
world. With over 45 years of experience in fulfilling its clients' leadership
needs, H&S offers and conducts executive search services in nearly every major
business center in the world. The Company's services focus on the
identification, evaluation and recommendation of qualified candidates for
senior level executive positions. Through its worldwide network of
approximately 700 professionals in 54 offices, H&S provides executive search
services to a broad range of clients, including Fortune 500 companies, major
non-U.S. companies, middle market and emerging growth companies, governmental
and not-for-profit organizations and other leading private and public
entities. Taken together, the combined worldwide revenues of H&S Inc. and HSI
have grown from $108.5 million in 1993 to $263.0 million in 1997, a compound
annual growth rate of approximately 25%.
EXECUTIVE SEARCH INDUSTRY OVERVIEW
Executive search firms are generally separated into two broad categories:
retained search firms and contingency search firms. Retained search firms
fulfill their clients' senior leadership needs by working on a consultative
basis with clients in identifying, evaluating, assessing and recommending
qualified candidates for senior level positions, typically with annual cash
compensation of $100,000 and above. Retained firms generally are compensated
for their services whether or not they are successful in placing a candidate,
and are generally retained on an exclusive basis. On the other hand,
contingency search firms focus primarily on mid-level positions with annual
cash compensation of less than $150,000. Contingency firms are compensated
only upon successfully placing a recommended candidate, and are generally not
hired on an exclusive basis or involved in the evaluation, assessment or
recommendation of candidates. Both types of firms are normally paid a fee for
their services equal to approximately one-third of the first year total cash
compensation for the position being filled.
According to Kennedy Information LLC ("Kennedy"), a leading industry source,
revenue in the executive search industry historically has been divided almost
evenly between retained and contingency search firms; however, retained search
firms are estimated by Kennedy to employ only one-third of the consultants in
the industry. Thus, the average revenue per consultant for retained firms
generally is substantially higher than for contingency firms.
Worldwide executive search industry revenue has grown at a 20% compound
annual growth rate from approximately $3.5 billion in 1993 to approximately
$7.3 billion in 1997 according to Kennedy. The executive search industry is
highly fragmented, consisting of more than 4,000 executive search firms
worldwide. According to Kennedy's Executive Recruiter News ("ERN"), more than
80% of retained firms and approximately 90% of contingency firms generated
less than $2 million in revenues in 1997.
H&S believes that a number of favorable trends are contributing to the
growth of the executive search industry, including the following:
Increased Competition for Executive Talent. Historically, it was typical for
executives to spend an entire career with one or two organizations. However,
in today's rapidly changing business environment, companies have been
aggressively seeking outside talent and, as a result, successful executives
are often recruited by a number of different organizations in various
geographic locations over the course of their careers. This increase in
competition for management talent and the resulting executive turnover has
forced many companies to seek assistance in recruiting executives on a more
frequent basis. Increased competition has also caused compensation levels for
executives to increase considerably over the past several decades. According
to a study published in 1997 by William M. Mercer, Incorporated, a leading
compensation consulting firm, the average annual cash compensation for CEOs,
CFOs and COOs grew at compound annual growth rates of 5.7%, 4.2% and 3.1%,
respectively, between 1992 and 1996. This increase in executive compensation,
among other factors, has caused
34
<PAGE>
many companies to be more rigorous in their hiring practices, often retaining
an executive search firm to assist in the identification and evaluation of
qualified candidates. Because fees for executive search firms are based on
cash compensation, higher cash compensation levels have translated into higher
executive search fees.
Greater Acceptance by Corporate Leadership of the Use of Executive Search
Consultants. The influence of a number of factors including larger
institutional shareholdings, a rise in shareholder activism and a greater
concern for corporate governance have led many boards of directors and company
management teams to expect that their choices of senior executives will be
under greater scrutiny than was the case in the past. As a result of these
trends, many boards of directors and company management teams hire outside
executive search firms to advise them with respect to their selection and
recruitment of executives.
Increased Globalization of Business. The increasing globalization of
business has created demand, particularly from multinational enterprises, for
executives in parts of the world in which such enterprises do not have
significant prior operating experience. Because the process of identifying and
evaluating candidates across national borders can be difficult, these
enterprises have turned to executive search firms for assistance.
Increased Demand for Executive Search Services by Start-up and Newly-
acquired Companies. The recent growth in the amount of capital available for
investment in start-up companies and for acquisitions has created a need for
talented executives to manage these entities. The activities of private equity
investors and venture capital firms have been accelerating at such a pace that
they often find it difficult to identify leaders for the companies in which
they invest, and these investors have often sought the services of executive
search firms to aid them in this task.
Greater Need for Executives with Diverse Leadership Skills. In response to a
rapidly changing business environment, companies are setting more stringent
hiring standards for senior executives. The process of identifying and
evaluating such executives is therefore becoming more difficult and, as a
result, companies are increasingly relying on executive search firms to help
them meet their leadership needs.
Reduction in Number of Layers of Management. The recent trend of corporate
"right-sizing" by eliminating certain layers of management at a number of
companies has effectively reduced the pool from which such companies can draw
talented managers. In lieu of the traditional practice of grooming leaders
from within, companies have increasingly used executive search firms to find
appropriate talent from outside their organization.
KEY COMPETITIVE STRENGTHS
The Company believes that it possesses several key competitive strengths
which position it to capitalize on the growing demand for its services. These
strengths include the following:
Experienced Team of Executive Search Consultants. H&S believes that its
consultants are among the most experienced within the executive search
industry. As of June 30, 1998, the Company employed approximately 320
consultants who, on average, have approximately 11 years of experience in
executive search and 9 years of experience in other industries. H&S believes
that this depth of experience is a prerequisite to the effective performance
of senior level executive searches. The Company attributes its success in
attracting and retaining such high caliber consultants to its premier
reputation, unique team oriented culture and performance-based compensation
system. The Company believes that its attractiveness as an employer is
reflected in its low turnover rate among its consultants. For the period from
January 1, 1995 through June 30, 1998, an annual average of fewer than 1.5% of
H&S's consultants have left to work elsewhere in the executive search
industry. Under the Company's compensation system, a portion of the bonus for
a particular assignment goes to the consultants who originate the executive
search assignment, and a portion goes to the consultants who perform the
executive search assignment. In addition, a portion of each consultant's
annual compensation is based on management's assessment of that consultant's
teamwork. This compensation component encourages the Company's consultants to
work as a team and is part of the reason that 61% of the executive searches
performed in 1997 by H&S were
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shared by two or more consultants. The incentive to utilize the differing
talents of the Company's consultants means that those who originate an
assignment outside of their area of expertise often bring that assignment to
those with a specific industry or functional skill to execute the search.
Global Presence. The Company's 54 offices are located in major business
centers in 28 countries around the world. The Company's global presence
enables it to serve the needs of multinational companies and local businesses
worldwide, and provides it with access to an international network of
candidates and referral sources. The Company's offices in North America,
Europe, Asia Pacific and Latin America employ 161, 125, 21 and 15 consultants,
as of June 30, 1998, respectively, and generated 1997 revenues of $159
million, $83 million, $13 million and $8 million, respectively. The Company's
global reach allows it to benefit from the increasing globalization of
business and the demand, particularly from multinational enterprises, for
assistance in identifying and evaluating candidates for executive positions
across national borders.
Emphasis on Senior Level Executive Search. H&S is an industry leader in
placing senior level executives within the world's largest and most complex
organizations. Approximately 39% of the executive searches performed by the
Company worldwide (and approximately 50% of the searches performed in North
America) in 1997 were for CEOs, presidents, CFOs, COOs, CAOs, CIOs, members of
boards of directors and other senior management positions (such as division
heads). These senior level executive searches generally provide a higher level
of revenue per search and result in greater visibility with the Company's
clients and within the executive search industry. The Company believes that
performing senior level, high profile executive search assignments: (i)
strengthens its brand name recognition and contacts with leading decision
makers, referral sources and high caliber candidates; (ii) enhances H&S's
ability to secure other senior level executive searches; and (iii) enables the
Company to attract and retain highly qualified consultants.
Industry Practice Groups and Functional Specialties. H&S's business is
organized around seven core industry practice groups, each focused on a
specific industry. These core industry practice groups are international
technology, industrial, consumer products, financial services, health care,
professional services and higher education/not-for-profit. Certain H&S
consultants also specialize in searches for functional positions such as
members of boards of directors, CEOs, CFOs and CIOs. The Company believes that
its operational structure provides its clients with superior executive search
services by enabling its consultants to successfully build relationships with
candidates and referral sources and to understand its clients' cultures,
operations, business strategies and industries. These factors are critical to
understanding clients' and candidates' needs and ultimately to the successful
placement of a candidate. The Company's industry practice groups and
functional specialties emphasize H&S's consultative approach and are designed
to build and maintain long-term relationships with its clients.
Global Support Platform. The Company's consultants work with a team of more
than 365 associates, as of June 30, 1998, all of whom have access to a
sophisticated global technology infrastructure. This technology infrastructure
consists of internally developed global databases containing over 650,000
candidate profiles and over 27,000 company records, coupled with a broad range
of on-line services and industry reference sources. H&S also deploys advanced
Internet-based technology to support the research needs of the Company's
professionals. The Company believes that its global support structure enables
its professionals to complete searches efficiently and effectively. Given the
importance of technology to the search process, H&S is continuing to improve
its information management infrastructure by implementing its Integrated
Global Information System ("IGIS"), an ongoing strategic technology
initiative. IGIS is designed to enhance the functionality, speed and quality
of the Company's information management. See "--Assignment Research and
Information Management."
GROWTH STRATEGY
The Company's goal is to be the leading global provider of executive search
services while achieving sustainable revenue and earnings growth. The Company
pursues a focused growth strategy with the following key elements:
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<PAGE>
Expand and Develop Client Relationships. The Company continually seeks to
expand its relationships with existing clients and to develop new client
relationships. The Company accomplishes this by continuing to (i) aggressively
pursue the highest level executive search assignments, (ii) expand the breadth
and depth of its industry practice groups and functional specialties, (iii)
offer services across a broadening range of geographic locations by
strategically opening offices in cities where H&S is not currently located and
(iv) actively recruit consultants who have the demonstrated ability to expand
the Company's client base. Historically, the Company has successfully expanded
its client base and generated repeat business from existing clients. For
example, H&S had approximately 1,800 clients in 1995 and approximately 2,600
in 1997. Of the clients for which the Company performed searches in 1997, 77%
had also been clients of the firm between 1994 and 1996. As appropriate, H&S
will strategically open new offices in cities where it is not currently
located in order to serve the needs of its clients and plans to open one or
two offices in each of the next several years. Between 1995 and 1997,
including through acquisitions, the Company added 21 offices and 117
consultants.
Pursue Strategic Acquisitions. The executive search industry is highly
fragmented, consisting of more than 4,000 executive search firms worldwide.
The industry has been consolidating in recent years as a number of smaller
firms have joined with larger firms in the industry, such as H&S, in order to
gain the benefits of superior managerial, financial and technological
resources. The Company maintains a focused acquisition strategy designed to
acquire executive search firms with complementary corporate cultures in order
to increase its penetration in existing and new geographic markets and expand
the depth and breadth of its industry practice groups and functional
specialties. The Company has completed a number of strategic acquisitions
worldwide that are consistent with its acquisition strategy. See "--Recent
Acquisitions."
Enhance Executive Search Professional Productivity. The Company believes
that its consultants generate one of the highest levels of average revenue per
consultant in the industry. H&S's consultants generated an average revenue per
consultant of $1.2 million in the U.S. in 1997. H&S believes that its
infrastructure can be leveraged to allow for increases in the productivity of
its executive search professionals. Specifically, the Company expects that its
IGIS initiative will enable H&S's professionals to access a greater amount of
information sources more quickly and to perform more sophisticated search
functions to help them identify candidates more efficiently and effectively.
IGIS will provide the Company with a scalable technology infrastructure that
will support a significant number of additional users without significant
incremental costs.
SERVICES
H&S provides executive search services exclusively on a retained basis for a
broad range of clients, including Fortune 500 companies, major non-U.S.
companies, middle market and emerging growth companies, governmental and not-
for-profit organizations and other leading private and public entities.
The H&S executive search process typically consists of the following steps:
(i) analyze the client's needs in order to (a) determine the required set of
skills for the position, (b) understand its organizational structure,
relationships and culture, (c) define the required experience, and (d)
identify the other characteristics necessary for the successful candidate;
(ii) prepare a written position specification that outlines the
responsibilities of the position, qualifications required of the ideal
candidate, and criteria for success; (iii) share the written specification
with (a) other H&S consultants with relevant industry and functional expertise
to pinpoint referral sources and candidates and (b) the research team which
will identify candidates from a broad range of sources; (iv) identify
candidates; (v) interview and evaluate candidates on the basis of experience
and potential cultural fit with the client organization; (vi) present
confidential written reports on the candidates who most closely fit the
position specification; (vii) schedule a mutually convenient meeting between
the client and each candidate; (viii) collect references on the final
candidate; and (ix) assist in structuring of the compensation package and
supporting the successful candidate's integration into the client team.
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<PAGE>
COMPANY ORGANIZATION
The Company's operational structure is designed to provide high quality
executive search services to its clients worldwide. The Company organizes its
team of executive search consultants by (i) industry practice groups, (ii)
functional specialties and (iii) geography, through its network of offices. On
a given search assignment, the Company will generally utilize the expertise of
consultants in more than one of its offices, industry practice groups and
functional specialties. For example, an executive search for a CIO of a
financial services company located in London may involve an executive search
consultant in London with an existing relationship with the client, another
executive search consultant in New York with expertise in the financial
services practice group and a third executive search consultant in Menlo Park
with expertise in CIO recruiting. By combining consultants with varying
geographic, industry and functional expertise, the Company believes that it
can best ensure the successful completion of executive search assignments for
its clients.
Industry Practice Groups. The Company's business is organized around seven
core industry practice groups, each focused on a particular industry. These
core industry practice groups and their relative sizes, as measured by
revenues, are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
INDUSTRY PRACTICE GROUP 1997 REVENUE
----------------------- -------------
<S> <C>
International Technology.................................... 24%
Financial Services.......................................... 20
Industrial.................................................. 19
Consumer Products........................................... 18
Health Care................................................. 9
Professional Services....................................... 5
Higher Education/Not-for-Profit............................. 1
Other....................................................... 4
---
100%
</TABLE>
Consultants from each of these industry practice groups can be located in
any one of the Company's offices. Certain markets have a significant
concentration of companies within particular industry sectors, and the Company
has staffed its offices accordingly. For example, the Company's financial
services practice group has its largest concentration of consultants in New
York and London, the two largest financial centers in the world. Each industry
practice group is coordinated by a Practice Managing Partner who (i)
establishes marketing and search strategies, (ii) identifies focused accounts
and target clients and (iii) facilitates and assists the marketing activities
of the consultants in the group. The Company believes that this operational
structure provides its clients with superior services by enabling its
consultants to successfully build relationships with candidates and referral
sources within particular industries and to understand its clients'
operations, business strategies and industry dynamics and company culture. H&S
believes that these factors are critical to the successful placement of a
candidate.
Functional Specialties. H&S recognizes that the task of searching for
candidates for certain executive positions often requires specialized skills
in much the same way as a search for an executive in a particular industry. As
a result, certain H&S consultants specialize in searches for particular
positions such as a board of directors member, CEO, CFO or CIO. Typically, a
consultant in a particular industry practice group who receives an assignment
for a given functional position will consult with one or more colleagues with
the appropriate functional expertise throughout the search assignment. This
coordination benefits the Company's clients because the best candidate for
certain functional positions often will come from a different industry. For
example, a client in the industrial sector seeking a new CIO may benefit from
exposure to a candidate whose background is in the health care sector, even
though that candidate may be less well known by the members of H&S's
industrial practice group. Since the Company's functional specialists tend to
have experience with appropriate candidates from many different industries,
they can bring experience from a range of industry practice groups to the
assignment.
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<PAGE>
Global Network. H&S is a major executive search presence through its global
network of 54 offices located in 28 counties, and offers and conducts
executive searches in nearly every major business center in the world. Each
office is managed by an Office Managing Partner and staffed with consultants,
associates, administrative assistants and other support staff. While central
administrative functions are provided by the Chicago office, each region has
or will have its own regional manager as well as research and support
functions.
The following listing sets forth the regions, countries and locations where
the Company currently maintains offices:
<TABLE>
<CAPTION>
REGION COUNTRY LOCATION
- ------------- ------------- -----------------
<S> <C> <C>
North America United States Atlanta, GA
Boston, MA
Charlotte, NC
Chicago, IL
Cleveland, OH
Dallas, TX
Greenwich, CT
Houston, TX
Irvine, CA
Jacksonville, FL
Los Angeles, CA
Menlo Park, CA
Miami, FL
New York, NY
Philadelphia, PA
Route 128, MA
San Francisco, CA
Tysons Corner, VA
Washington, DC
Canada Toronto
Asia Pacific Australia Sydney
Hong Kong Hong Kong
Japan Tokyo
Singapore Singapore
Latin America Argentina Buenos Aires
Brazil Sao Paulo
Chile Santiago
Mexico Mexico City
Peru Lima
Venezuela Caracas
</TABLE>
<TABLE>
<CAPTION>
REGION COUNTRY LOCATION
- ------ --------------- ------------------
<S> <C> <C>
Europe Belgium Brussels
Czech Republic Prague
Denmark Copenhagen
Finland Helsinki
France Paris
Germany Berlin
Dresden
Dusseldorf
Frankfurt
Hamburg
Munich (2 offices)
Italy Milan
Rome
The Netherlands Amsterdam
Norway Oslo
Poland Warsaw
Portugal Lisbon
Russia Moscow
Spain Barcelona
Madrid
Sweden Stockholm
Switzerland Zurich
United Kingdom London
</TABLE>
North America
H&S has 19 offices in the United States and one in Canada and, as of June
30, 1998, employed a total of 161 consultants in the region. Approximately 60%
of the Company's worldwide revenues in 1997 were generated in the United
States and Canada. The largest offices in the North American region in terms
of revenues are New York, Menlo Park and Chicago. The New York office is a
leader of the financial services practice, the Menlo Park office is the center
of the Company's international technology practice, and the Chicago office has
a diverse practice which includes a significant concentration of consultants
in the industrial and health care practices.
Europe
H&S has 24 offices in 16 European countries and, as of June 30, 1998,
employed 125 consultants in the region. Approximately 32% of the Company's
worldwide revenues in 1997 were generated in Europe. The
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<PAGE>
Company's offices in Germany, the United Kingdom and France generate the
highest revenues of the H&S offices in the region. The markets in Germany and
the United Kingdom are the two largest executive search markets in Europe, and
the Company has a strong market position in both of these countries. In 1997,
H&S believes that (with the inclusion of Mulder) it generated more revenue
than any other executive search firm in Germany, and, as measured by revenues,
was the fourth largest in the United Kingdom. The German practice grew
significantly with H&S's 1997 acquisition of Mulder, and presently there are
seven H&S offices in Germany. See "--Recent Acquisitions." The United Kingdom
office is a leader in financial services placement, largely serving the needs
of multinational British financial enterprises based in the City of London.
Asia Pacific
H&S has offices in Sydney, Hong Kong, Tokyo and Singapore and, as of June
30, 1998, employed 21 consultants in the Asia Pacific region. Approximately 5%
of the Company's worldwide revenues in 1997 were generated in the Asia Pacific
region. The focus of the Company in the Asia Pacific region is to serve the
regional needs of multinational corporations headquartered in the United
States and Europe.
Latin America
H&S has six offices and, as of June 30, 1998, employed 15 consultants in
Latin America. Approximately 3% of the Company's worldwide revenues in 1997
were generated in the Latin American region. Similar to the Company's focus in
the Asia Pacific region, the focus of the Company in the Latin American region
is to serve the regional needs of multinational corporations headquartered in
the United States and Europe.
CLIENTS AND MARKETING
The Company has a diverse group of clients in a variety of industries
located throughout the world, including Fortune 500 companies, major non-U.S.
companies, middle market and emerging growth companies, governmental and not-
for-profit organizations and other leading private and public entities. No
single client accounted for over 2% of the Company's revenues in 1997.
Historically, the Company has been successful both in adding to its client
base and in generating repeat business from existing clients. For example, H&S
was engaged by approximately 1,800 clients in 1995 and approximately 2,600 in
1997, and, of the clients for which the Company performed searches in 1997,
77% had also been clients of the firm between 1994 and 1996.
The Company's consultants market the firm's executive search services
through two principal means: (i) targeted client calling and (ii) industry
networking with clients and referral sources. These efforts are assisted by
the Company's databases which provide all H&S consultants with up to date
information as to contacts made by their colleagues with particular referral
sources, candidates and clients.
In addition to its active marketing, the Company benefits from a significant
number of referrals generated by its reputation for successfully completed
assignments. To build on this advantage, H&S seeks to develop an enhanced
awareness of the Heidrick & Struggles brand name. As a result of its efforts,
H&S is more frequently invited to make presentations to prospective clients,
often competing for executive search engagements with major competitors in the
industry. In 1997, H&S succeeded in obtaining executive search engagements
from a majority of the presentations in which it participated. The Company
publishes a quarterly leadership journal, The Art of Taking Charge, which is
distributed to senior executives, featuring interviews with business leaders
and publicizes the Company's brand name.
One of the limitations of the firm's marketing is the existence or
anticipated existence of blocking arrangements. Either by agreement with
clients or for client relations purposes, executive search firms frequently
refrain from recruiting employees of a client, and possibly other entities
affiliated with that client, for a specified period of time (generally not
more than one year). See "Risk Factors--Restrictions Imposed by Blocking
Arrangements." H&S actively manages its blocking arrangements and seeks to
mitigate adverse effects of blocking by strengthening its long-term
relationships with focused accounts. Additionally, in recent years market
40
<PAGE>
conditions and industry practices have resulted in blocking arrangements that
are becoming narrower in scope and shorter in duration.
ASSIGNMENT RESEARCH AND INFORMATION MANAGEMENT
The Company's technology infrastructure consists of internally developed
global databases containing over 650,000 candidate profiles and over 27,000
company records, coupled with a broad range of on-line services and industry
reference sources. H&S's professionals use the Company's information
technology infrastructure to (i) gather business intelligence regarding
clients' businesses, industries, competitors and strategies, (ii) develop and
manage company and candidate profiles, (iii) identify market needs and new
business opportunities and (iv) coordinate and implement marketing,
communication, financial and administrative functions. The Company believes
that its global support structure allows its professionals to complete
searches efficiently and effectively. Given the importance of technology to
the search process, H&S is continuing to improve its information management
infrastructure by implementing IGIS. IGIS is designed to enhance the
functionality, speed and quality of the Company's information management.
IGIS represents a long-term strategic initiative for the deployment of
technology and is designed to support rapid growth of the Company. Phase I of
IGIS will upgrade the Company's financial management systems and the H&S
search system and is expected to be operational in the second quarter of 1999.
A PeopleSoft based financial management system will provide a fully integrated
worldwide accounting and financial reporting system. An Oracle based search
system will allow H&S consultants to more efficiently and effectively manage
complex search assignments, while keeping them informed about client and
candidate contacts. The IGIS upgrades will also enhance the ease and speed of
use and information processing on the Internet, one of the Company's most
valuable information tools. The Company uses Internet technology in three
primary ways: (i) as an external source of information through the broad range
of online information resources, (ii) through the Company's intranet, as a
tool for organizing and accessing its internally generated information,
including H&S's proprietary databases and (iii) through the Company's
extranet, Heidrick.com, as a means of connecting clients and candidates on a
secure network where each can review information about the other. Phase II of
IGIS will deploy refinements to the financial and search systems as well as
new systems to provide tailored automated data reporting and financial and
operating information to the Company's senior managers.
The Company's information technology infrastructure, including IGIS, is
overseen by a technology management team led by H&S's Managing Partner of
Global Technology. Among other services, this team provides the Company's
employees with coordinated training programs. To address issues of data
security associated with increasing remote database access, the Company uses
password protection and conducts regular security audits. In addition, the
Company currently utilizes video-conferencing technology in many of its
locations. This technology facilitates candidate interviews and presentations
to client search committee members in different locations. The Company intends
to continue to develop its technology infrastructure as its and its clients'
needs evolve.
PROFESSIONAL STAFF AND EMPLOYEES
As of June 30, 1998, H&S had 1,276 full time employees, of which 322 were
consultants, 367 were associates and 587 were corporate and support staff. H&S
is not a party to any collective bargaining agreement and considers relations
with its employees to be good. H&S's executive search professionals are
categorized either as consultants or associates. Associates assist consultants
by performing research and other functions.
COMPETITION
The executive search industry is highly competitive. It is estimated that
there are more than 4,000 executive search firms worldwide. There are
relatively few barriers to entry and new competitors frequently enter the
market. While H&S faces competition to some degree from all firms in the
industry, the Company believes its most direct competition comes from other
retained search firms. In particular, H&S competes with the largest
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<PAGE>
global search firms: Korn/Ferry International, Russell Reynolds Associates,
Inc., SpencerStuart & Associates and Egon Zehnder International. To a lesser
extent, H&S also faces competition from smaller boutique or specialty firms
that specialize in certain regional markets or industry segments. Each firm
with which H&S competes is also a competitor in seeking to attract the most
effective consultants. In the Company's experience, the executive search
business is more quality-sensitive than price-sensitive. As a result, H&S
competes on the level of service it offers, reflected by its industry practice
groups, functional specialties and client focus, and, ultimately, on the
quality of its search results.
RECENT ACQUISITIONS
Over the past year, the Company has successfully completed the strategic
acquisition of two executive search firms:
Fenwick. On June 26, 1998, the Company acquired Fenwick, a Boston-based
executive search firm which employed nine consultants and had fiscal 1997
revenues of $6.4 million. This transaction expanded the reach of H&S's
international technology group into a third key technology center in the
United States. Fenwick, based in the "Route 128" technology corridor in
Massachusetts, complements the Company's existing offices in Menlo Park,
California and Tysons Corner, Virginia which also focus on senior level
recruitment for computer hardware and software, telecommunications,
engineering and medical electronics companies.
Mulder. On October 1, 1997, the Company acquired Mulder which employed 13
consultants. Prior to the acquisition, Mulder was the largest executive search
firm in Germany, as measured by revenues, with $21.8 million in revenues for
the nine months ended September 30, 1997. This transaction immediately
positioned the Company as the largest executive search firm in Germany and the
second largest in Europe.
FACILITIES
The Company leases all of its office locations. The aggregate square footage
of office space under such leases is approximately 433,830. The leases for
these offices call for future minimum lease payments of approximately $100
million and have terms which will expire between 1998 and 2013 years
(exclusive of renewal options exercisable by H&S). H&S believes that its
facilities are adequate for its current needs and that it will not have
difficulty leasing additional office space to satisfy anticipated future
needs.
INSURANCE
H&S maintains insurance in such amounts and with such coverages and
deductibles as management believes are adequate. The principal risks that H&S
insures against are professional liability, workers' compensation, personal
injury, bodily injury, property damage and fidelity losses. There can be no
assurance that the Company's insurance will adequately protect it from
potential losses and liabilities. See "Risk Factors--Executive Search
Liability Risk."
LEGAL PROCEEDINGS
From time to time the Company has been involved in litigation incidental to
its business. H&S currently is not a party to any litigation the adverse
resolution of which, in management's opinion, would be likely to have a
material adverse effect on the Company's business, financial condition or
results of operations.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors initially will have eleven members, eight
of whom will be employees of the Company, and three of whom (to be named
later) will be outside directors. In accordance with the Certificate of
Incorporation, the members of the Board of Directors will be divided into
three classes and will be elected for a term of office expiring at the third
succeeding annual shareholders' meeting following their election to office or
until a successor is duly elected and qualified. The Certificate of
Incorporation also provides that such classes shall be as nearly equal in
number as possible. The terms of office of the Class I, Class II, and Class
III directors expire at the annual meeting of stockholders in 2001, 2000, and
1999, respectively. The employee directors and executive officers of the
Company will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY DIRECTOR CLASS
- ---- --- --------------------- --------------
<S> <C> <C> <C>
Patrick S. Pittard...... 52 President and Chief Executive Officer,
Director
Gerard Clery-Melin...... 53 Chairman of the Board of Directors
Donald M. Kilinski...... 38 Chief Financial Officer and Treasurer
Richard D. Nelson....... 58 Chief Administrative Officer,
Secretary, and Assistant Treasurer
Gerard R. Roche......... 67 Senior Chairman, Director
David C. Anderson....... 56 North America Managing Partner, Director
Thomas J. Friel......... 50 Asia Pacific Managing Partner, Director
David B. Kixmiller...... 48 Director
Dr. Jurgen B. Mulder.... 60 Vice Chairman, Director
Dr. John C. Viney....... 50 Vice Chairman, Director
</TABLE>
PATRICK S. PITTARD will be President and Chief Executive Officer of the
Company and a member of the Board of Directors of the Company after the
Merger. He has been President and Chief Executive Officer of H&S Inc. since
1997 and has been a member of the Board of Directors of H&S Inc. since 1986.
Since joining H&S Inc. in 1983, Mr. Pittard has held the positions of Office
Managing Partner for the Atlanta and Jacksonville offices and North America
Managing Partner. Mr. Pittard is also a member of the Board of Directors of
Jefferson Pilot Corporation.
GERARD CLERY-MELIN will be the Chairman of the Board of Directors of the
Company after the Merger. He joined HSI in 1978, served as President of
European Operations from 1980 until 1984, and has been President and Chief
Executive Officer since 1984. He has been a member of the Board of Directors
of HSI since 1978.
DONALD M. KILINSKI will be Chief Financial Officer and Treasurer of the
Company after the Merger. He has been Chief Financial Officer of H&S Inc.
since he joined H&S Inc. in 1997, and has been Chief Financial Officer and
Treasurer of HSI since 1998. Prior to joining H&S Inc., Mr. Kilinski was Chief
Financial Officer of BBDO Asia Pacific Ltd. from September 1995 to April 1997,
and Vice President of Finance of BBDO Worldwide from July 1992 to August 1995
and from April 1997 through November 1997.
RICHARD D. NELSON will be Chief Administrative Officer, Secretary and
General Counsel of the Company after the Merger. He joined H&S Inc. in 1981,
has been Chief Administrative Officer, Secretary and General Counsel of H&S
Inc. since 1981 and was Chief Financial Officer from 1981 until 1997. He was
Treasurer of HSI from 1980 until 1989, and then became Assistant Treasurer. He
has also been Secretary and a member of the Board of Directors of HSI since
1980.
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<PAGE>
GERARD R. ROCHE will be Senior Chairman and a member of the Board of
Directors of the Company after the Merger. Mr. Roche joined H&S Inc. in 1964,
and has been a member of the Board of Directors of H&S Inc. since 1970. He is
also a member of the Board of Directors for Gulfstream Aerospace Corporation.
DAVID C. ANDERSON will be North America Managing Partner and a member of the
Board of Directors of the Company after the Merger. Mr. Anderson has been the
Office Managing Partner of H&S Inc.'s Dallas office since joining the firm in
1992 and the North America Managing Partner since 1998. He has been a member
of the Board of Directors of H&S Inc. since 1992.
THOMAS J. FRIEL will be Managing Partner for Asia Pacific and a member of
the Board of Directors of the Company after the Merger. Since joining H&S Inc.
in 1979, Mr. Friel has served as Office Managing Partner of H&S Inc.'s Menlo
Park office, Worldwide Practice Managing Partner for the International
Technology Practice and since 1992 has been Managing Partner for Asia Pacific.
DAVID B. KIXMILLER will be a member of the Board of Directors of the Company
after the Merger. Mr. Kixmiller joined H&S Inc. in 1984 and was Office
Managing Partner of the Menlo Park Office from 1991 until 1998. He has been a
member of the Board of Directors of H&S Inc. since 1987.
DR. JURGEN B. MULDER will be Vice Chairman and a Director of the Company
after the Merger. He has been Vice Chairman of HSI since 1997. Prior to
joining HSI in 1997, Dr. Mulder was a Partner in Mulder & Partner GmbH & Co.
KG., the firm he founded in 1978.
DR. JOHN C. VINEY will be Vice Chairman and Practice Managing Partner for
the Global Board of Directors Practice of the Company after the Merger. Dr.
Viney joined HSI in 1985 and previously served as Office Managing Partner for
the London office. He has been a member of the Board of Directors of HSI since
1987.
COMMITTEES
Audit Committee. The Company has established an Audit Committee consisting
of . The duties of the
Audit Committee are generally to recommend to the Board of Directors the
selection of independent auditors to audit annually the books and records of
the Company, to review the activities and the reports of the Company's
independent auditors and to report the results of such review to the Board of
Directors. The Audit Committee also periodically reviews the activities of the
Company's audit staff and the adequacy of the Company's internal controls.
Executive Committee. The Company has established an Executive Committee
consisting of . The duties of the Executive Committee are generally to
serve as the Board of Directors during intervals between Board of Directors
meetings and also to review, approve and in some instances, make
recommendations to the Board of Directors in regard to projects, expenditures
and appropriations of the Company and to review the Company's financial
arrangements with third parties.
Compensation Committee. The Company has established a Compensation Committee
consisting of . The duties of the Compensation Committee are generally
to review employment, development, reassignment and compensation matters
involving corporate officers and such other executive level associates as may
be appropriate, including, without limitation, issues relative to salary,
bonus, stock options and other incentive arrangements.
DIRECTOR COMPENSATION
Each member of the Company's Board of Directors who is not also an employee
of the Company is entitled to receive a annual fee of $ and a $
fee for each Board of Directors meeting attended. None of the directors who
are also employees of the Company receive any compensation for their services
as directors. The Company will reimburse out-of-pocket expenses incurred by
all directors in attending Board of Directors and committee meetings.
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid to, or
earned by, the Company's Chief Executive Officer and each of the Company's
other two most highly compensated executive officers during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- ---------------------------------
AWARDS PAYOUTS
---------------------- ----------
OTHER
ANNUAL RESTRICTED SECURITIES LONG-TERM ALL OTHER
COMPEN- STOCK UNDERLYING INCENTIVE COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION AWARD(S)($) OPTIONS(#) PAYOUTS($) SATION($)
- --------------------------- ---- --------- ---------- ------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patrick S. Pittard,
President and Chief
Executive Officer of
H&S Inc................ 1997 $496,833 $1,070,000 -- -- -- -- $13,675
Gerard Clery-Melin,
President and Chief
Executive Officer of
HSI.................... 1997 218,532 823,794 -- -- -- -- --
Richard D. Nelson, Chief
Administrative Officer,
Secretary and Counsel
of H&S Inc............. 1997 425,000 525,000 -- -- -- -- 15,902
</TABLE>
Mr. Pittard and Mr. Nelson have agreements with H&S Inc. providing for
severance benefits. Mr. Pittard's agreement entitles him to 12 months of his
monthly base salary if he is terminated without cause. Mr. Nelson's agreement
entitles him to 6 months of his monthly base salary and the pro rata portion
of his bonus if his employment is terminated for any reason.
1998 HEIDRICK & STRUGGLES GLOBALSHARE PLAN
Prior to the Offering, the Company will adopt the 1998 Heidrick & Struggles
GlobalShare Plan (the "GlobalShare Plan") which will serve as a means to
attract, reward, and retain selected partners, principals, consultants, key
employees and Directors ("Participants") of the Company and its subsidiaries.
The maximum number of shares of Common Stock reserved for issuance under the
Plan is , subject to adjustment for certain anti-dilution
provisions. The maximum number of shares of Common Stock for which awards may
be granted during a calendar year to any Participant is .
Awards may be in the form of options, which may be Incentive Stock Options
("ISOs") or non-qualified stock options; stock appreciation rights ("SARs")
granted as a means to exercise options or designated portions thereof, or as
independent awards; or other awards that are valued in whole or in part by
reference to, or are otherwise based on, the fair market value of shares.
Awards may be paid in shares, cash or a combination thereof.
Administration. The GlobalShare Plan will be administered by the
Compensation Committee or the Board of Directors (the "Committee"). The
Committee will have the authority to select the participants to be granted
awards under the plan, determine the size and terms of an award, and determine
the time when grants of awards will be made. The Committee is authorized to
interpret the plan, establish, amend and rescind any rules and regulations
relating to the plan, and make any other determinations that it deems
necessary or desirable for the administration of the plan.
45
<PAGE>
Options. An option may be granted as an ISO, as defined in the Internal
Revenue Code of 1986, as amended, or as a non-qualified stock option, as
determined by the Committee and as set forth in any applicable award
agreement. The option price per share of Common Stock will be determined by
the Committee. Options granted under the GlobalShare Plan will be exercisable
at such time and upon such terms and conditions as may be determined by the
Committee, but in no event will an option be exercisable more than ten years
after the date it is granted.
SARs. The Committee may grant an SAR in conjunction with an option or
designated portion thereof at the time the related option is granted or at any
time prior to the exercise or cancellation of the related option. The exercise
price shall be an amount determined by the Committee, but in no event will
such amount be less than the greater of (i) the fair market value of a share
of Common Stock on the date the SAR is granted or, in the case of an SAR
granted in conjunction with an option, or a portion thereof, the option price
of the related option, and (ii) an amount permitted by applicable laws, rules,
by-laws, or policies of regulatory authorities or stock exchanges.
Upon the exercise of an SAR, the Participant will be entitled to receive,
with respect to each share of Common Stock to which such SAR relates, an
amount in cash and/or shares of Common Stock, as the case may be, equal to the
excess of (i) the fair market value of a share on the date of exercise over
(ii) the exercise price of the SAR. The Committee may impose conditions upon
the exercisability of SARs.
Other share-based awards. The Committee may grant, in its sole discretion,
other awards of shares of Common Stock and Awards that are valued in whole or
in part by reference to, or are otherwise based on the fair market value of,
shares of Common Stock ("Other Share-Based Awards"). Certain of such Other
Share-Based Awards ("Performance-Based Awards") may be granted on the basis of
performance of the Company, stock price, market share, sales, earnings per
share, return on equity, costs or other performance goals approved by the
Committee.
Exercise of awards. Except as otherwise provided in the plan or in an
applicable award agreement, an award may be exercised for all, or any part, of
the shares of Common Stock for which it is then exercisable. The purchase
price for the shares of Common Stock as to which an award is exercised shall
be paid to the Company in full at the time of exercise (i) in cash, (ii) in
shares of Common Stock having a fair market value equal to the aggregate
option price for the shares of Common Stock being purchased and satisfying
such other requirements as may be imposed by the Committee, (iii) partly in
cash and partly in such shares of Common Stock, (iv) through the withholding
of shares of Common Stock (which would otherwise be delivered to the
Participant) with an aggregate fair market value on the exercise date equal to
the aggregate option price, or (v) through the delivery of irrevocable
instructions to a broker to deliver promptly to the Company an amount equal to
the aggregate option price for the shares of Common Stock being purchased, in
each case, at the election of the Participant.
Transferability. Except to the extent provided by the Committee, each award
will be non-transferable during the lifetime of the Participant, otherwise
than by will or by the laws of descent and distribution.
Termination, amendment and term. The Board of Directors may suspend, amend
or terminate the plan, in whole or in part. No amendment may be made without
approval of the shareholders, however, if such approval is required by
applicable law. Furthermore, no amendment, suspension or termination of the
Plan may, without the consent of a Participant, impair any of the rights or
obligations existing under any award previously granted to such Participant
under the Plan. No new awards may be granted under the GlobalShare Plan after
the tenth anniversary of the plan's adoption.
Adjustments. In the event of any change in the outstanding shares of Company
Stock by reason of any Company Stock dividend or split, reorganization,
recapitalization, merger, consolidation, spin-off, combination or exchange of
shares of Common Stock or other corporate exchange, or any distribution to
stockholders of shares of Common Stock other than regular cash dividends, the
Committee, in its sole discretion, may make such
46
<PAGE>
substitution or adjustment as it deems to be equitable to any affected terms
of such awards. In the event of a change in control of the Company (as defined
in the plan) the Committee, in its sole discretion, may take such actions as
it deems appropriate, including, without limitation, acceleration or
cancellation (in return for cash payment) of awards, or issuance of substitute
awards.
Special Investment Opportunity. In connection with the Offering under the
GlobalShare Plan the Board of Directors granted awards to certain Participants
who, contemporaneously with the Offering, purchase shares of Common Stock from
the Company that will allow such Participants to receive one stock option and
one restricted share unit or one share of restricted stock for every two
shares that the Participant purchases as well as one additional option for
every four shares the Participant purchases. However, such individuals will
not receive any options or restricted stock units for any portion of the
Participant's share purchase that exceeds 20% of the average of that
Participant's 1997 and 1998 cash compensation. The restricted stock units will
vest upon five years of continued employment, but may be forfeited prior to
vesting, at the Committee's discretion, upon a termination of employment or
other specified events. Once a Participant's restricted stock units are fully
vested, some Participants will be entitled to receive shares of the Company
for each restricted stock unit held, while other Participants will be entitled
to receive either shares or a cash payment equivalent to the fair market value
of the shares on such vesting date. The options granted pursuant to these
awards have a term of ten years, vest in 20% installments over five years
commencing five years from the date of the Offering, and will be subject to
termination and other provisions as set forth in the applicable award
agreements.
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Prior to the Offering, the Company did not have a compensation committee.
The Company will establish a Compensation Committee no member of which will be
an insider of the Company.
47
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of December 31, 1997 by (i) directors of the
Company, (ii) each of the named executive officers of the Company, (iii) each
person known by the Company to be the beneficial owner of 5% or more of the
outstanding shares of Common Stock, (iv) the Selling Stockholders and (v) all
of the Company's directors and executive officers as a group. Unless otherwise
indicated, the Company believes that the beneficial owner has sole voting and
investment power over such shares. The table does not reflect the potential
sale of additional shares if the Underwriters' over-allotment options are
exercised. The table also does not reflect the purchase of any shares pursuant
to the GlobalShare Plan. The percentage ownership has been calculated based on
shares of Common Stock outstanding as of .
<TABLE>
<CAPTION>
NAME AND ADDRESS OF OWNERSHIP COMMON STOCK OWNERSHIP
BENEFICIAL OWNER(1) BEFORE OFFERING BEING SOLD AFTER OFFERING
------------------- -------------------- ------------ --------------------
SHARES OF PERCENT OF SHARES OF PERCENT OF
COMMON COMMON COMMON COMMON
STOCK STOCK HELD STOCK STOCK HELD
--------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Patrick S. Pittard......
Gerard Clery-Melin......
Donald M. Kilinski......
Richard D. Nelson.......
Gerard R. Roche.........
All directors and
executive officers of
the Company as a group
( persons)...........
Heidrick & Struggles,
Inc....................
Selling Stockholders....
</TABLE>
- --------
* Represents holdings of less than one percent.
(1) Each of such person's business address is 233 South Wacker Drive--Suite
4200, Chicago, IL 60606.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Following the Merger, the Company's authorized capital stock will consist of
shares of common stock, without par value, of which shares
will be issued and outstanding, on a pro forma basis, prior to completion of
the Offering. Except as otherwise expressly stated, all references in this
Prospectus to the Company or its capital stock (including the Common Stock)
are to such after effectiveness after the Merger. Immediately following
completion of the Offering, there are expected to be shares of
Common Stock ( shares of Common Stock if the Underwriters' over-allotment
options are exercised in full) and no shares of preferred stock outstanding.
This amount does not include up to shares that may be purchased by
certain employees of the Company under the GlobalShare Plan pursuant to a
separate offering to be made contemporaneously with the Offering made hereby,
up to shares issuable pursuant to options and restricted stock units that
may be granted under the GlobalShare Plan to such employees in connection with
such purchase and approximately shares to be issued to other employees at
completion of the Offering. Does not include shares of Common Stock
available for future issuance under the Company's incentive plans. The
following description of the Company's capital stock and related matters is
qualified in its entirety by reference to the Certificate of Incorporation and
the Company's Bylaws, copies of which have been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
COMMON STOCK
Following the Merger, the Certificate of Incorporation will authorize
shares of Common Stock, without par value. Stockholders are entitled
to one vote per share on all matters to be voted upon by the stockholders. The
holders of Common Stock do not have cumulative voting rights in the election
of directors. Holders of Common Stock are entitled to receive dividends if, as
and when dividends are declared from time to time by the Company's Board of
Directors out of funds legally available therefor, after payment of dividends
required to be paid on outstanding preferred stock (as described below), if
any. In the event of liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and accrued but unpaid dividends and
liquidation preferences on any outstanding Preferred Stock of the Company. The
shares of Common Stock have no preemptive or conversion rights and are not
subject to further calls or assessment by the Company. There are no redemption
or sinking fund provisions applicable to the Common Stock. The Common Stock
being sold by the Company in the Offering, when sold to the Underwriters in
the manner described in this Prospectus will be, and following the Merger all
other outstanding Common Stock of the Company will be, duly authorized,
validly issued, fully paid and non-assessable.
THE DELAWARE GENERAL CORPORATION LAW
The Company is a Delaware corporation subject to Section 203 of the DGCL.
("Section 203"). Section 203 provides in general that a stockholder acquiring
more than 15% of the outstanding voting stock of a corporation subject to
Section 203 (an "Interested Stockholder") but less than 85% of such stock may
not engage in certain Business Combinations (as defined in Section 203) with
the corporation for a period of three years subsequent to the date on which
the stockholder became an Interested Stockholder unless (i) prior to such date
the corporation's board of directors approved either the Business Combination
or the transaction in which the stockholder became an Interested Stockholder
or (ii) the Business Combination is approved by the corporation's board of
directors and authorized by a vote of at least 66 2/3% of the outstanding
voting stock of the corporation not owned by the Interested Stockholder. A
"Business Combination" includes mergers, asset sales and other transactions
resulting in financial benefit to a stockholder. Section 203 could prohibit or
delay mergers or other takeover or change of control attempts with respect to
the Company and, accordingly, may discourage attempts that might result in a
premium over the market price for the shares held by stockholders.
49
<PAGE>
CERTIFICATE OF INCORPORATION; BYLAWS
The Certificate of Incorporation and the Bylaws contain certain provisions
that could make more difficult the acquisition of the Company by means of a
tender offer, a proxy contest or otherwise.
Classified Board of Directors. The Bylaws provide that the Company's Board of
Directors will be divided into three classes of directors, with the classes to
be as nearly equal in number as possible. As a result, approximately one-third
of the Board of Directors will be elected each year. The classification of
directors will have the effect of making it more difficult for stockholders to
change the composition of the Company's Board of Directors. The Certificate of
Incorporation provides that the number of directors will be fixed in the manner
provided in the Bylaws. The Bylaws provide that the number of directors will be
fixed from time to time exclusively pursuant to a resolution adopted by
directors constituting a majority of the total number of directors that the
Company would have if there were no vacancies on the Board of Directors, but
must consist of not more than twelve nor less than nine directors. In addition,
the Certificate of Incorporation provides that unless the Board of Directors
otherwise determines, any vacancies will be filled only by the affirmative vote
of a majority of the remaining directors, though less than a quorum. The
Company believes that a classified Board of Directors will help to assure the
continuity and stability of the Board of Directors and the Company's business
strategies and policies, since a majority of the Directors at any given time
will have had prior experience as Directors of the Company. The Company
believes that this in turn will permit the Board of Directors to represent more
effectively the interests of stockholders.
With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the members of the Board of Directors. As a result, the
classification of the Board of Directors of the Company may discourage proxy
contests for the election of Directors, unsolicited tender offers or purchases
of a substantial block of the Common Stock because it could prevent a potential
acquiror from obtaining control of the Board of Directors in a relatively short
period of time.
Removal of Directors. Under the DGCL, unless otherwise provided in the
Certificate of Incorporation, directors serving on a classified board may be
removed by the stockholders only for cause. In addition, the Certificate of
Incorporation and the Bylaws provide that directors may be removed only for
cause and only upon the affirmative vote of holders of at least 75% of the
voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors ("Voting Stock"), voting together as a
single class. This provision delays stockholders who do not agree with the
policies of the Board of Directors from replacing Directors, unless they can
demonstrate that the Directors should be removed for cause and obtain the
requisite vote. Such a delay may help ensure that the Company's Board of
Directors, if confronted with a proxy contest or an unsolicited proposal for an
extraordinary corporate transaction, will have sufficient time to review the
proposal and appropriate alternatives to the proposal and to act in what it
believes is the best interest of the Company's stockholders.
Filling Vacancies on the Board of Directors. The Company's Certificate of
Incorporation provides that, subject to the rights of holders of any shares of
Preferred Stock, any vacancy in the Board of Directors that results from an
increase in the number of Directors may be filled only by a majority of the
Directors then in office, provided that a quorum is present, and any other
vacancy may be filled by a majority of the Directors then in office, even if
less than a quorum, or by the sole remaining Director. Accordingly, these
provisions could temporarily prevent any stockholder from obtaining majority
representation on the Board of Directors by enlarging the Board of Directors
and filling the new Directorships with its own nominees.
Stockholders Action. The Certificate of Incorporation and the Bylaws provide
that, subject to the rights of any holders of Preferred Stock to elect
additional directors under specified circumstances, stockholder action can be
taken only at an annual or special meeting of stockholders and may not be taken
by written consent in lieu of a meeting. The Bylaws provide that to elect
additional directors under specified circumstances, special meetings of
stockholders can be called only by the Board of Directors, pursuant to a
resolution adopted by a majority of the total number of directors. Stockholders
are not permitted to call a special meeting or to require that the Board
50
<PAGE>
of Directors call a special meeting of stockholders. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited to
the business brought before the meeting pursuant to the notice of meeting given
by the Company. The provisions of the Company's Certificate of Incorporation
prohibiting action by written consent without a meeting and the provisions of
the Company's By-Laws governing the calling of and matters considered at
special meetings may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting. These provisions would also prevent the
holders of a majority of the voting power of the outstanding shares of stock
entitled to vote generally in the election of Directors from using the written
consent procedure to take stockholder action and from taking action by written
consent without giving all the stockholders entitled to vote on a proposed
action the opportunity to participate in determining such proposed action at a
meeting.
Advance Notice Procedures. The Bylaws establish an advance notice procedure
for stockholders to make nominations of candidates for election as directors,
or bring other business before an annual meeting of stockholders of the Company
(the "Stockholders Notice Procedure"). The Stockholders Notice Procedure
provides that only persons who are nominated by, or at the direction of, the
Board of Directors, or by a stockholder who has given timely written notice to
the Secretary of the Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors of the Company. The
Stockholders Notice Procedure also provides that at an annual meeting only such
business may be conducted as has been brought before the meeting by, or at the
direction of, the Chairman of the Board of Directors or by a stockholder who
has given timely written notice to the Secretary of the Company of such
stockholder's intention to bring such business before such meeting. Under the
Stockholders Notice Procedure, for notice of stockholder nominations to be made
at an annual meeting to be timely, such notice must be received by the Company
not less than 60 days nor more than 90 days prior to the first anniversary of
the previous year's annual meeting (or, if the date of the annual meeting is
advanced by more than 30 days or delayed by more than 60 days from such
anniversary date, not earlier than the 90th day prior to such meeting and not
later than the later of (x) the 60th day prior to such meeting and (y) the 10th
day after public announcement of the date of such meeting is first made).
Notwithstanding the foregoing, in the event that the number of directors to be
elected is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased Board of
Directors made by the Company at least 70 days prior to the first anniversary
of the preceding year's annual meeting, a stockholder's notice will be timely,
but only with respect to nominees for any new positions created by such
increase, if it is received by the Company not later than the 10th day after
such public announcement is first made by the Company. Under the Stockholders
Notice Procedure, for notice of a stockholder nomination to be made at a
special meeting at which directors are to be elected to be timely, such notice
must be received by the Company not earlier than the 90th day before such
meeting and not later than the later of (x) the 60th day prior to such meeting
and (y) the 10th day after the public announcement of the date of such meeting
is first made. In addition, under the Stockholders Notice Procedure, a
stockholder's notice to the Company proposing to nominate a person for election
as a director or relating to the conduct of business other than the nomination
of directors must contain certain specified information. If the Chairman of the
Board of Directors or other officer presiding at a meeting determines that a
person was not nominated, or other business was not brought before the meeting,
in accordance with the Stockholders Notice Procedure, such person will not be
eligible for election as a director, or such business will not be conducted at
such meeting, as the case may be. By requiring advance notice of nominations by
stockholders, the Notice of Meeting Provision will afford the Board of
Directors a meaningful opportunity to consider the qualifications of the
proposed nominees and, to the extent deemed necessary or desirable by the Board
of Directors, to inform the stockholders about such qualifications. By
requiring advance notice of proposed business, the Notice of Meeting Proposal
Provision will provide the Board of Directors with a meaningful opportunity to
inform stockholders, prior to such meeting, of any business proposed to be
conducted at such meeting, together with any recommendation or statement of the
Board of Directors' position as to action to be taken with respect to such
business, so as to enable stockholders better to determine whether they desire
to attend such a meeting or to grant a proxy to the Board of Directors as to
the disposition of any such business. Although the Company's By-Laws do not
give the Board of Directors any power to approve or disapprove stockholder
nominations for the election of Directors or proposals for action, they may
have the effect of precluding a contest for the election of Directors or the
consideration of stockholder proposals if the proper
51
<PAGE>
procedures are not followed, and of discouraging or deterring a third party
from conducting a solicitation of proxies to elect its own slate of Directors
or to approve its proposal without regard to whether consideration of such
nominees or proposals might be harmful or beneficial to the Company and its
stockholders.
Liability of Directors; Indemnification. The Certificate of Incorporation
provides that a director will not be personally liable for monetary damages to
the Company or its stockholders for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for paying a dividend or approving a stock repurchase or redemption in
violation of Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit. The Certificate of
Incorporation also provides that each current or former director, officer,
employee or agent of the Company, or each such person who is or was serving or
who had agreed to serve at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including the heirs, executors, administrators or estate of
such person), will be indemnified by the Company to the full extent permitted
by the DGCL, as the same exists or may in the future be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Company to provide broader indemnification rights than said law permitted the
Company to provide prior to such amendment). The Certificate of Incorporation
also specifically authorizes the Company to enter into agreements with any
person providing for indemnification greater or different than that provided by
the Certificate of Incorporation.
Restrictions on Amendment. The Company's Certificate of Incorporation
provides that the approval of holders of at least 75% of the voting power
entitled to vote generally in the election of Directors, voting together as a
single class, is required to adopt any Certificate of Incorporation provision
inconsistent with or to alter, amend or repeal the provisions of the Company's
Certificate of Incorporation classifying the Board of Directors; governing the
removal of directors; establishing the minimum and maximum number of members of
the Board of Directors; eliminating the ability of stockholders to act by
written consent; authorizing the Board of Directors to consider the interests
of clients and other customers, creditors, employees; establishing the Board of
Directors' authority to issue, without a vote or any other action of the
stockholders, any or all authorized shares of stock of the Corporation,
securities convertible into or exchangeable for any authorized shares of stock
of the Corporation and warrants, options or rights to purchase, subscribe for
or otherwise acquire shares of stock of the Corporation for any such
consideration and on such terms as the Board of Directors in its discretion
lawfully may determine; and authorizing that the By-Laws of the Corporation may
establish procedures regulating the submission by stockholders of nominations
and proposals for consideration at meetings of stockholders of the Corporation.
In addition, the Company's Certificate of Incorporation provides that the
approval of the Board of Directors or the affirmative vote of the holders of
75% of the voting power entitled to vote generally in the election of
Directors, voting together as a single class, is required to alter, amend or
repeal the above provisions of the Company's Certificate of Incorporation or to
adopt any provision of the Certificate of Incorporation inconsistent with such
provisions or to alter, amend or repeal certain provisions of the Company's By-
Laws or to adopt any provision of the By-Laws inconsistent with such
provisions.
Preferred Stock. Subject to the Company's Certificate of Incorporation and
applicable law, the authority of the Company's Board of Directors with respect
to each series of Preferred Stock, includes but is not limited to the authority
to generally determine the following: the designation of such series, the
number of shares initially constituting such series and whether to increase or
decrease such number of shares, dividend rights and rates, terms of redemption
and redemption prices, liquidation preferences, voting rights, conversion
rights, whether a sinking fund will be provided for the redemption of the
shares of such series (and, if so, the terms and conditions thereof) and
whether a purchase fund shall be provided for the shares of such series (and,
if so, the terms and conditions thereof).
The Company believes that the availability of the Preferred Stock will
provide increased flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs that might arise. Having such
authorized shares available for issuance will allow the Company to issue shares
of Preferred Stock without the expense and delay of a special stockholders'
meeting. The authorized shares of Preferred Stock, as
52
<PAGE>
well as shares of Common Stock, will be available for issuance without further
action by the stockholders, unless such action is required by applicable law
or the rules of any stock exchange on which the Company's securities may be
listed. Although the Board of Directors has no current intention to do so, it
would have the power (subject to applicable law) to issue a series of
Preferred Stock that could, depending on the terms of such series, impede the
completion of a merger, tender offer or other takeover attempt. For instance,
subject to applicable law, such series of Preferred Stock might impede a
business combination by including class voting rights that would enable the
holder to block such a transaction. The Board of Directors will make any
determination to issue such shares based on its judgment as to the best
interests of the Company and its stockholders. The Board of Directors, in so
acting, could issue Preferred Stock having terms which could discourage an
acquisition attempt or other transaction that some, or a majority of the
stockholders might believe to be in their best interest or in which
stockholders might receive a premium for their stock over the then market
price of such stock.
The description set forth above is intended as a summary only and is
qualified in its entirety by reference to the forms of the Certificate of
Incorporation and the Bylaws, copies of which have been filed as exhibits to
the Registration Statement of which this Prospectus is a part. See "Additional
Information."
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Common Stock is
.
LISTING
The Company intends to apply to list the Common Stock on the New York Stock
Exchange under the proposed symbol "HSX."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be outstanding shares
of Common Stock, assuming the purchase of all of the shares that may be
purchased by employees of the Company in the separate offering being made
contemporaneously with the Offering (the "Employee Stock Purchase") and the
issuance of shares to other employees contemporaneously with the Offering,
shares reserved for issuance pursuant to the GlobalShare Plan
(including up to shares issuable pursuant to options and restricted stock
units in connection with the Employee Stock Purchase). Of these shares, the
shares of Common Stock sold in the Offering ( shares if the
Underwriters' over-allotment option is exercised in full) will be freely
tradeable by persons other than "affiliates" of H&S, without restriction under
the Securities Act. The remaining shares of Common Stock will be
"restricted" securities within the meaning of Rule 144 under the Securities
Act and may not be sold in the absence of registration under the Securities
Act unless an exemption from registration is available, including the
exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned
"restricted securities" for at least one but less than two years, and any
affiliate of the Company who has owned "restricted securities" for at least
one year, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then-outstanding shares of
Common Stock ( shares upon completion of the Offering) or the average
weekly trading volume in the Common Stock on all national securities exchanges
and/or reported through the automated quotation system of registered
securities associations during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions regarding the
manner of sale, notice requirements and the availability of current public
information about the Company. A stockholder (or stockholders whose shares are
aggregated) who is not an affiliate of the Company for at least 90 days prior
to a proposed transaction and who has beneficially owned "restricted
securities" for at least two years is entitled to sell such shares under Rule
144 without regard to the limitations described above.
All current stockholders of H&S, however, have agreed not to sell, contract
to sell or otherwise dispose of any shares of Common Stock currently owned by
them for a period of [two years] after the date of this Prospectus without the
prior written consent of Lehman Brothers Inc., which consent will be granted
or denied after consultation with the Company.
The Company and all current stockholders of the Company have agreed, for a
period of 180 days after the date of this Prospectus, not to, directly or
indirectly, offer, sell, or otherwise dispose of any shares of Common Stock
without the prior written consent of Lehman Brothers Inc., other than, with
respect to the Company, shares of Common Stock issued in the Offering, under
its GlobalShare Plan, or upon exercise of stock options granted pursuant to
the Global Share Plan. Additionally, all current stockholders of H&S have
agreed not to, directly or indirectly, offer, sell, or otherwise dispose of
any shares of Common Stock currently owned by them for a period of two years
after the date of this Prospectus without the prior written consent of Lehman
Brothers Inc., which consent will be granted or denied after consultation with
the Company. See "Management--Incentive and Benefit Plans," "Shares Eligible
for Future Sale" and "Underwriting."
Prior to the date of this Prospectus, there has been no public market for
the Common Stock. The Company can make no predictions as to the effect, if
any, that sales of shares of Common Stock or the availability of shares for
sale will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of the Common Stock in the public market, or the
perception that such sales could occur, could adversely affect the market
price of the Common Stock and could impair the Company's future ability to
raise capital through an offering of its equity securities. The Company
intends to apply to list the Common Stock on the NYSE under the proposed
symbol HSX.
54
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which the Prospectus forms a part, each of the
Underwriters named below, for whom Lehman Brothers Inc. and Goldman, Sachs &
Co. are acting as representatives (the "Representatives"), has severally
agreed to purchase from the Company and the Selling Stockholders, and the
Company and the Selling Stockholders have agreed to sell to each Underwriter,
the aggregate number of shares of Common Stock set forth opposite the name of
each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ----------
<S> <C>
Lehman Brothers Inc............................................
Goldman, Sachs & Co............................................
----------
Total......................................................
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Stock are subject to
certain conditions precedent, including the conditions that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending before or threatened by the
Commission, and that there has been no material adverse change in the
condition of the Company. The Underwriters will be obligated to purchase all
of the shares of Common Stock if any are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the Common Stock
directly to the public initially at the public offering price set forth on the
cover page of this Prospectus and to certain selected dealers (who may include
the Underwriters) at such initial public offering price less a concession not
in excess of $ per share. The selected dealers may reallow a concession
not in excess of $ per share to certain other brokers and dealers. After
commencement of the public offering, the offering price and other selling
terms may be changed by the Representatives.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that may be required to be made
in respect thereof.
The Company has granted the Underwriters an option to purchase up to an
aggregate of additional shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. Such option may be exercised at any time
until 30 days after the date of the Underwriting Agreement. To the extent that
the Underwriters exercise such option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase a number of
additional shares of Common Stock proportionate to such Underwriter's initial
commitment as indicated in the preceding table. The Company will be obligated,
pursuant to such option, to sell such shares to the Underwriters to the extent
such option is exercised. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of Common Stock offered
hereby.
55
<PAGE>
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to shares offered hereby for
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price was negotiated between the
Company and the Representatives. Among the factors considered in determining
the initial public offering price of the shares of Common Stock, in addition
to prevailing market conditions, were the Company's historical performance and
capital structure, estimates of business potential and earnings prospects of
the Company, an overall assessment of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
the market valuation of companies in related business.
Until the distribution of the Common Stock is completed, rules of the
Commissions may limit the ability of the Underwriters and certain selling
group members to bid for and purchase Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions may consist of
bids or purchases for the purposes of pegging, fixing or maintaining the price
of the Common Stock.
In addition, if the Representatives over-allot (i.e., if they sell more
shares of Common Stock than are set forth on the cover page of this
Prospectus), and thereby create a short position in the Common Stock in
connection with the Offering, the Representatives may reduce that short
position by purchasing Common Stock in the open market. The Representatives
also may elect to reduce any short position by exercising all or part of the
over-allotment option described therein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriter's short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchase. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters make any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Company, and all current stockholders of the Company have agreed, for a
period of 180 days from the date of this Prospectus, not to directly or
indirectly, offer, sell or otherwise dispose of any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for any such
shares of Common Stock or enter into any derivative transaction with similar
effect as a sale of Common Stock, without the prior written consent of Lehman
Brothers, Inc. Additionally, all current stockholders of H&S have agreed not
to, directly or indirectly, offer, sell or otherwise dispose of any shares of
Common Stock currently owned by them for a period of two years after the date
of this Prospectus without the prior written consent of Lehman Brothers Inc.,
which consent will be granted or denied after consultation with the Company.
The restrictions described in this paragraph do not apply to (i) the sale of
Common Stock to the Underwriters, (ii) the issuance by the Company of shares
of Common Stock under its GlobalShare Plan upon the exercise of options issued
under the GlobalShare Plan or (iii) transactions by any person other than the
Company relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Offering.
56
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences of the purchase, ownership and disposition
of Common Stock by a Non-U.S. Holder. As used herein the term "Non-U.S.
Holder" means any person or entity that is not a United States Holder ("U.S.
Holder"). A U.S. Holder is any beneficial owner of Common Stock that is (i) a
citizen or resident of the United States, (ii) a corporation or partnership
created or organized in or under the laws of the United States or any
political subdivision thereof, (iii) an estate the income of which is subject
to U.S. federal income taxation regardless of its source and (iv) a trust
which is subject to the supervision of a court within the United States and
the control of a United States person as described in section 7701(a)(30) of
the Internal Revenue Code of 1986, as amended (the "Code"). This discussion
does not address all aspects of United States federal income and estate taxes
and does not deal with foreign, state and local consequences that may be
relevant to such Non-U.S. Holders in light of their personal circumstances.
Furthermore, this discussion is based on provisions of the Code, existing and
proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change. EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY OR
OTHER TAXING JURISDICTION.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
However, dividends that are effectively connected with the conduct of a trade
or business by the Non-U.S. Holder within the United States and, where a tax
treaty applies, are attributable to a United States permanent establishment of
the Non-U.S. Holder, are not subject to the withholding tax, but instead are
subject to United States federal income tax on a net income basis at
applicable graduated individual or corporate rates. Certain certification and
disclosure requirements must be complied with in order to be exempt from
withholding under such effectively connected income exemption. Any such
effectively connected dividends received by a foreign corporation may, under
certain circumstances, be subject to an additional "branch profits tax" at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding tax discussed above
and, under the current interpretation of United States Treasury regulations,
for purposes of determining the applicability of a tax treaty rate. Under
recently finalized United States Treasury regulations (the "Final
Regulations"), a Non-U.S. Holder of Common Stock who wishes to claim the
benefit of an applicable treaty rate (and avoid back-up withholding as
discussed below) for dividends paid after December 31, 1999, will be required
to satisfy applicable certification and other requirements.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States, and, where a tax treaty
applies, is attributable to a United States permanent establishment of the
Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual
and holds the Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, or (iii) the Company is or
has been a "U.S. real property holding corporation" for United States federal
income tax purposes.
57
<PAGE>
The Company is not and does not anticipate becoming a "U.S. real property
holding corporation" for United States federal income tax purposes.
An individual Non-U.S. Holder described in clause (i) above will be subject
to tax on the net gain derived from the sale under regular graduated United
States federal income tax rates. An individual Non-U.S. Holder described in
clause (ii) above will be subject to a flat 30% tax on the gain derived from
the sale, which may be offset by United States source capital losses (even
though the individual is not considered a resident of the United States). If a
Non-U.S. Holder that is a foreign corporation falls under clause (i) above, it
will be subject to tax on its gain under regular graduated United States
federal income tax rates and, in addition, may be subject to a branch profits
tax equal to 30% of its effectively connected earnings and profits (within the
meaning of the Code) for the taxable year, as adjusted for certain items,
unless it qualifies for a lower rate under an applicable income tax treaty.
Special rules may apply to certain Non-U.S. Holders, such as "controlled
foreign corporations", "passive foreign investment companies" and "foreign
personal holding companies", that are subject to special treatment under the
Code. Such entities should consult their own tax advisors to determine the
United States federal, state, local and other tax consequences that may be
relevant to them.
FEDERAL ESTATE TAX
Common Stock held by an individual Non-U.S. Holder at the time of death will
be included in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% (as opposed to the
general withholding tax rate of 30% described above) generally will not apply
to dividends paid to a Non-U.S. Holder at an address outside the United States
(unless the payer has knowledge that the payee is a U.S. person). Under the
final regulations, however, a Non-US Holder will be subject to back-up
withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of Common Stock within the United States
or conducted through certain U.S. related financial intermediaries is subject
to both backup withholding and information reporting unless the beneficial
owner certifies under penalties of perjury that it is a Non-U.S. Holder (and
the payer does not have actual knowledge that the beneficial owner is a United
States person) or the holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby will be
passed on for the Company by Simpson Thacher & Bartlett, New York, New York.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by O'Melveny & Myers LLP, Los Angeles, California.
58
<PAGE>
EXPERTS
The Consolidated Financial Statements and Schedule of H&S Inc. as of
December 31, 1996 and 1997, and for each of the years in the three-year period
ended December 31, 1997 included in this Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
The Consolidated Financial Statements of HSI as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31,
1997 included in this Registration Statement have been audited by Barbier
Frinault & Associes (Arthur Andersen), independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and
auditing.
The Consolidated Statements of Income and Cash Flows of Mulder for each of
the years in the two-year period ended December 31, 1996 and the nine-month
period ended September 30, 1997 included in this Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (herein, together with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act with respect to the registration of the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement
as permitted by the rules and regulations of the Commission. Statements
contained herein concerning the provisions of any contract, agreement or other
document are not necessarily complete, and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference. The
Registration Statement, including the exhibits and schedules filed therewith,
may be inspected at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web
site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
The Company is not currently subject to the informational requirements of
the Securities and Exchange Act of 1934 (the "Exchange Act"). As a result of
the Offering, the Company will become subject to the informational
requirements of the Exchange Act. The Company will fulfill its obligations
with respect to such requirements by filing periodic reports with the
Commission. In addition, the Company will furnish its stockholders with annual
reports containing audited financial statements certified by its independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited summary financial information.
59
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
(unaudited) as of March 31, 1998......................................... F-3
Consolidated Statements of Income and Comprehensive Income For the Years
Ended December 31, 1995, 1996 and 1997 and (unaudited) for the Three
Months Ended March 31, 1997 and 1998..................................... F-5
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1995, 1996 and 1997 and (unaudited) for the Three Months
Ended March 31, 1998..................................................... F-6
Consolidated Statements of Cash Flows For the Years Ended December 31,
1995, 1996 and 1997 and (unaudited) for the Three Months Ended March 31,
1997 and 1998............................................................ F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-17
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
(unaudited) as of March 31, 1998......................................... F-18
Consolidated Statements of Income and Comprehensive Income For the Years
Ended December 31, 1995, 1996 and 1997 and (unaudited) for the Three
Months Ended March 31, 1997 and 1998..................................... F-19
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1995, 1996 and 1997 and (unaudited) for the Three Months
Ended March 31, 1998..................................................... F-20
Consolidated Statements of Cash Flows For the Years Ended December 31,
1995, 1996 and 1997 and (unaudited) for the Three Months Ended March 31,
1997 and 1998............................................................ F-21
Notes to Consolidated Financial Statements................................ F-22
</TABLE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-29
Consolidated Statements of Income and Comprehensive Income For the Years
Ended December 31, 1995 and 1996 and for the Nine Months Ended September
30, 1997................................................................ F-30
Consolidated Statements of Cash Flows For the Years Ended December 31,
1995 and 1996 and the Nine Months Ended September 30, 1997.............. F-31
Notes to Consolidated Financial Statements............................... F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Heidrick & Struggles, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of HEIDRICK &
STRUGGLES, INC. AND SUBSIDIARIES (a Delaware corporation) as of December 31,
1996 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heidrick & Struggles, Inc.
and Subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
July 19, 1998
F-2
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE FIGURES)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................... $ 7,171 $ 10,074 $ 14,944
Accounts receivable--
Trade, less allowances for doubtful accounts
of $1,925, $3,276, and $3,932 at December
31, 1996 and 1997 and March 31, 1998,
respectively................................ 27,184 38,349 39,152
Other........................................ 843 1,384 1,333
Notes receivable.............................. 273 193 297
Notes receivable from affiliate............... -- -- 5,148
Prepaid expenses.............................. 976 1,265 1,465
Deferred income taxes......................... 5,293 7,045 7,144
------- -------- --------
Total current assets........................ 41,740 58,310 69,483
------- -------- --------
PROPERTY AND EQUIPMENT:
Leasehold improvements........................ 5,894 6,724 7,068
Office furniture and fixtures................. 8,168 9,588 7,485
Computer equipment and software............... 7,500 8,368 8,552
Automobiles................................... 727 853 932
System development costs...................... -- 1,243 3,620
------- -------- --------
22,289 26,776 27,657
Less--Accumulated depreciation and
amortization................................. (8,850) (11,334) (10,224)
------- -------- --------
Property and equipment, net................. 13,439 15,442 17,433
------- -------- --------
OTHER ASSETS:
Cash and investments designated for
nonqualified retirement plan................. 5,791 10,439 12,023
Investment in Heidrick & Struggles
International, Inc........................... 6,413 6,780 6,439
Deferred income taxes......................... 1,260 2,921 2,551
------- -------- --------
Total other assets.......................... 13,464 20,140 21,013
------- -------- --------
Total assets.................................. $68,643 $ 93,892 $107,929
======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE FIGURES)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short-term debt.................................. $ -- $ 3,500 $ 5,148
Current maturities of long-term debt............. 490 808 808
Accounts payable................................. 1,734 2,909 2,700
Accrued expenses--
Salaries and employee benefits.................. 12,916 17,806 31,468
Profit sharing and retirement................... 1,538 2,732 933
Rent............................................ 1,833 1,817 1,851
Other........................................... 1,425 3,028 2,844
Income taxes payable............................. 1,176 942 141
------- ------- ---------
Total current liabilities...................... 21,112 33,542 45,893
------- ------- ---------
LONG-TERM DEBT, LESS CURRENT MATURITIES............ 993 1,636 1,601
------- ------- ---------
LIABILITY FOR NONQUALIFIED RETIREMENT PLANS........ 7,165 11,108 12,142
------- ------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES.............
MANDATORILY REDEEMABLE COMMON STOCK:
Common stock, $1 par value, 500,000 shares
authorized and issued at December 31, 1996 and
1997 and March 31, 1998; 166,512, 173,024 and
173,024 shares outstanding at December 31, 1996
and 1997 and March 31, 1998, respectively, at
book value...................................... 39,373 47,606 48,293
------- ------- ---------
Total liabilities and mandatorily redeemable
common stock.................................. $68,643 $93,892 $ 107,929
======= ======= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE FIGURES)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------------- ----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE........................ $108,685 $137,665 $180,244 $39,973 $45,937
OPERATING EXPENSES:
Salaries and employee
benefits.................... 77,215 98,272 125,308 28,693 34,761
General and administrative
expenses.................... 20,853 28,681 42,991 9,840 10,349
-------- -------- -------- ------- -------
Total operating expenses... 98,068 126,953 168,299 38,533 45,110
-------- -------- -------- ------- -------
Operating income........... 10,617 10,712 11,945 1,440 827
-------- -------- -------- ------- -------
NON-OPERATING INCOME (EXPENSE):
Interest income.............. 1,156 1,385 1,586 146 155
Interest expense............. (207) (180) (150) (29) (56)
Other........................ 108 (94) 486 70 (364)
-------- -------- -------- ------- -------
Net non-operating income
(expense)................. 1,057 1,111 1,922 187 (265)
-------- -------- -------- ------- -------
EQUITY IN NET INCOME (LOSS) OF
AFFILIATE..................... 778 775 367 150 (341)
-------- -------- -------- ------- -------
Income before income taxes
.......................... 12,452 12,598 14,234 1,777 221
PROVISION FOR INCOME TAXES..... 6,094 6,149 7,589 887 106
-------- -------- -------- ------- -------
Net income................. $ 6,358 $ 6,449 $ 6,645 $ 890 $ 115
======== ======== ======== ======= =======
BASIC EARNINGS PER COMMON
SHARE......................... $ 40.08 $ 39.64 $ 39.29 $ 5.40 $ 0.67
======== ======== ======== ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................... 158,661 162,718 169,161 164,920 173,115
======== ======== ======== ======= =======
DILUTED EARNINGS PER COMMON
SHARE......................... $ 40.08 $ 39.64 $ 39.29 $ 5.40 $ 0.67
======== ======== ======== ======= =======
DILUTED WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING............ 158,661 162,718 169,168 164,920 173,139
======== ======== ======== ======= =======
Net income..................... $ 6,358 $ 6,449 $ 6,645 $ 890 $ 115
======== ======== ======== ======= =======
Other comprehensive income
(loss), before tax:
Foreign currency translation
adjustment.................. (92) (465) (956) 292 80
Unrealized gain (loss) on
available-for-sale
investments................. -- 188 1,110 (36) 908
-------- -------- -------- ------- -------
Other comprehensive income
(loss), before tax............ (92) (277) 154 256 988
-------- -------- -------- ------- -------
Income tax benefit (expense)
related to items of other
comprehensive income (loss)... 39 116 (64) (108) (415)
-------- -------- -------- ------- -------
Other comprehensive income
(loss), net of tax............ (53) (161) 90 148 573
-------- -------- -------- ------- -------
Comprehensive income........... $ 6,305 $ 6,288 $ 6,735 $ 1,038 $ 688
======== ======== ======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE FIGURES)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK TREASURY STOCK COMPRE- COMPRE-
-------------- PAID-IN ------------------ RETAINED HENSIVE HENSIVE
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS INCOME INCOME TOTAL
------- ------ ------- -------- -------- -------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994.................. 500,000 $500 $ 6,492 (338,715) $(10,082) $3,026 $ 64 $ --
Treasury stock
transactions--
Stock sold............ -- -- 1,591 12,870 441 -- -- 2,032
Stock repurchased..... -- -- -- (14,770) (2,455) -- -- (2,455)
Comprehensive income
Net income............ -- -- -- -- -- 6,358 -- $6,358 6,358
------
Other comprehensive
income, net of tax
Foreign currency
translation
adjustment......... -- -- -- -- -- -- -- (53) --
------
Other comprehensive
income............... -- -- -- -- -- -- (53) (53) (53)
------
Comprehensive income... 6,305
======
Retained earnings
allocable to
mandatorily redeemable
common stock.......... -- -- -- -- -- (5,882) -- (5,882)
------- ---- ------- -------- -------- ------- ---- -------
BALANCE AT DECEMBER 31,
1995.................. 500,000 500 8,083 (340,615) (12,096) 3,502 11 --
Treasury stock
transactions--
Stock sold............ -- -- 2,381 14,507 543 -- -- 2,924
Stock repurchased..... -- -- -- (7,380) (1,541) -- -- (1,541)
Comprehensive income
Net income............ -- -- -- -- -- 6,449 -- 6,449 6,449
------
Other comprehensive
income, net of tax
Unrealized gain on
available-for-sale
investments........ -- -- -- -- -- -- -- 109 --
Foreign currency
translation
adjustment......... -- -- -- -- -- -- -- (270) --
------
Other comprehensive
income............... -- -- -- -- -- -- (161) (161) (161)
------
Comprehensive income... 6,288
======
Retained earnings
allocable to
mandatorily redeemable
common stock.......... -- -- -- -- -- (7,671) -- (7,671)
------- ---- ------- -------- -------- ------- ---- -------
BALANCE AT DECEMBER 31,
1996.................. 500,000 500 10,464 (333,488) (13,094) 2,280 (150) --
Treasury stock
transactions--
Stock sold............ -- -- 3,584 18,438 765 -- -- 4,349
Stock repurchased..... -- -- -- (11,926) (2,850) -- -- (2,850)
Comprehensive income
Net income............ -- -- -- -- -- 6,645 -- 6,645 6,645
------
Other comprehensive
income, net of tax
Unrealized gain on
available-for-sale
investments........ -- -- -- -- -- -- -- 644 --
Foreign currency
translation
adjustment......... -- -- -- -- -- -- -- (554) --
------
Other comprehensive
income............... -- -- -- -- -- -- 90 90 90
------
Comprehensive income... 6,735
======
Retained earnings
allocable to
mandatorily redeemable
common stock.......... -- -- -- -- -- (8,234) -- (8,234)
------- ---- ------- -------- -------- ------- ---- -------
BALANCE AT DECEMBER 31,
1997.................. 500,000 500 14,048 (326,976) (15,179) 691 (60) --
Comprehensive income
Net income
(unaudited).......... -- -- -- -- -- 115 -- 115 115
------
Other comprehensive
income, net of tax
Unrealized gain on
available-for-sale
investments
(unaudited)........ -- -- -- -- -- -- -- 527 --
Foreign currency
translation
adjustment
(unaudited)........ -- -- -- -- -- -- -- 46 --
------
Other comprehensive
income (unaudited)... -- -- -- -- -- -- 573 573 573
------
Comprehensive income
(unaudited)........... $ 688
======
Retained earnings
allocable to
mandatorily redeemable
common stock
(unaudited)........... -- -- -- -- -- (688) -- (688)
------- ---- ------- -------- -------- ------- ---- -------
BALANCE AT MARCH 31,
1998 (UNAUDITED)...... 500,000 $500 $14,048 (326,976) $(15,179) $ 118 $513 --
======= ==== ======= ======== ======== ======= ==== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
TWELVE MONTHS ENDED ENDED
DECEMBER 31, MARCH 31,
--------------------------- ----------------
1995 1996 1997 1997 1998
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income..................... $ 6,358 $ 6,449 $ 6,645 $ 890 $ 115
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization.. 2,217 2,705 3,417 844 915
Loss on sale of property and
equipment..................... 29 522 50 -- 485
Deferred income taxes.......... 293 (1,327) (3,499) 129 (125)
Equity in net income of
affiliates.................... (778) (775) (367) (150) 341
Accretion of discount on
securities.................... -- (321) -- -- --
Changes in assets and
liabilities:
Trade & other receivables..... (2,411) (7,301) (12,385) (5,246) (6,030)
Prepaid expenses.............. (169) (179) (379) (62) (225)
Accounts payable.............. (329) 348 1,485 (250) (153)
Accrued expenses.............. 611 3,687 8,046 11,921 11,659
Income taxes payable.......... 1,515 (737) (265) (49) (722)
Nonqualified retirement plan
liability.................... 2,135 2,560 3,943 492 1,034
------- -------- -------- ------- -------
Net cash provided by
operating activities........ 9,471 5,631 6,691 8,519 7,294
------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of securities for
nonqualified retirement plan.. -- (5,603) (3,538) (47) (676)
Purchases of property and
equipment..................... (4,136) (6,730) (5,718) (1,623) (3,416)
Proceeds from sales of property
and equipment................. -- 58 65 -- 5
Purchases of marketable
securities.................... (2,376) (10,303) (8,176) (368) --
Proceeds from maturities of
marketable securities......... -- 13,000 8,176 -- --
------- -------- -------- ------- -------
Net cash used in investing
activities.................. (6,512) (9,578) (9,191) (2,038) (4,087)
------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES.....................
Proceeds from long-term debt... -- -- 3,500 -- 5,148
Payments on long-term debt..... (1,213) (1,453) (875) (40) (3,535)
Proceeds from sales of treasury
stock......................... 2,032 2,924 4,349 150 --
Purchases of treasury stock.... (547) (861) (1,014) -- --
------- -------- -------- ------- -------
Net cash provided by
financing activities........ 272 610 5,960 110 1,613
------- -------- -------- ------- -------
EFFECT OF FOREIGN CURRENCY
EXCHANGE RATES ON CASH AND CASH
EQUIVALENTS.................... (278) (88) (557) 515 50
------- -------- -------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........... 2,953 (3,425) 2,903 7,106 4,870
Cash and cash equivalents:
Beginning of period............ 7,643 10,596 7,171 7,171 10,074
------- -------- -------- ------- -------
End of period.................. $10,596 $ 7,171 $ 10,074 $14,277 $14,944
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for--
Interest...................... $ 196 $ 221 $ 161 $ 1 $ 18
Income Taxes.................. $ 4,509 $ 7,589 $ 10,874 $ 356 $ 760
======= ======== ======== ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING AND INVESTING
ACTIVITIES
Unrealized gain (loss) on
available-for-sale
investments................... $ -- $ 188 $ 1,110 $ (36) $ 908
Issuance of notes payable for
the purchase of treasury
stock......................... $ 1,908 $ 680 $ 1,836 $ -- $ --
======= ======== ======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[INFORMATION RELATING TO MARCH 31, 1998 AND 1997 IS UNAUDITED]
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE FIGURES)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Heidrick & Struggles, Inc. and Subsidiaries (the "Company") are engaged in
providing management consulting and executive search services to clients on a
retained basis. The Company's clients are primarily located throughout North
America, South America and the Pacific Basin.
Principles of Consolidation
The consolidated financial statements include Heidrick & Struggles, Inc. and
its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Accounting Pronouncements to be Adopted in 1998
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which establishes
new standards for reporting information about operating segments in interim
and annual financial statements. It is effective for annual periods beginning
after December 15, 1997 and will be adopted by the Company as of December 31,
1998. The Company does not expect that adoption of this Standard will not have
an impact on its consolidated financial position or its consolidated results
of operations. However, it is expected that adoption of this Standard will
result in additional footnote disclosure.
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes new standards for
reporting information about derivatives and hedging. It is effective for
periods beginning after June 15, 1999 and will be adopted by the Company as of
January 1, 2000. The Company expects that adoption of this Standard will have
no effect on its consolidated financial position, results of operations or on
disclosures within the consolidated financial statements as they currently do
not engage in the use of derivative instruments or other hedging activities.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a purchased
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk consist primarily of accounts receivable. Concentrations of
credit risk with respect to accounts receivable are limited due to the
Company's large number of customers and their dispersion across many different
industries. At December 31, 1997, the Company had no significant
concentrations of credit risk.
F-8
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, the shorter of the lease term or the
estimated useful life of the asset, as follows:
<TABLE>
<S> <C>
Office furniture and fixtures................................... 10 years
Computer equipment and software................................. 3-5 years
Automobiles..................................................... 3 years
</TABLE>
Depreciation for financial statement purposes for the years ended December
31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998
totaled $2,217, $2,705, $3,417, $844, and $915, respectively. Depreciation is
calculated for tax purposes using accelerated methods.
System Development Costs
In accordance with Statement of Position No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," development
costs are capitalized. Once the software is placed in service, it will be
depreciated using the straight-line method over a three to five year period.
Investments Designated for Nonqualified Retirement Plan
Investments designated for the nonqualified retirement plan are carried at
the fair value of the security in accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Investments designated
for the nonqualified retirement plan are debt and equity securities that are
classified as available-for-sale securities as more fully described in Note 2.
Investment in Heidrick & Struggles International, Inc.
The Company accounts for its investment in Heidrick & Struggles
International, Inc. ("HSI") by the equity method as more fully described in
Note 3. Using this method, the Company's equity in the net income of the
affiliate is recognized in the Company's statement of income and added to the
investment account. Dividends received, if any, from the affiliate are treated
as reductions in the investment account.
Revenue Recognition
Revenue from client services is recognized when services are billed and
substantially rendered, generally over a 60 to 90 day period commencing in the
month of the initial acceptance of a search. Revenue consists of the amount
billed to clients, net of sales taxes.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities,
applying enacted statutory tax rates in effect for the year in which the tax
differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Earnings per Common Share
The Company adopted SFAS No. 128, "Earnings Per Share" at December 31, 1997.
Basic earnings per common share is computed by dividing net income by weighted
average common shares outstanding for the year.
F-9
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted.
Translation of Foreign Currencies
The translation of financial statements into U.S. dollars has been performed
in accordance with SFAS No. 52, "Foreign Currency Translation." The local
currency for all subsidiaries has been designated as the functional currency
except for subsidiaries which operate in highly inflationary economies which
use the U.S. dollar as their functional currency. Non-U.S. assets and
liabilities have been translated into U.S. dollars at the current rate of
exchange prevailing at the balance sheet date. Revenues and expenses have been
translated at the average exchange rate for the period. Translation gains and
losses are reflected as a separate component of stockholders' equity and not
included in income.
Interim Financial Information
The consolidated financial statements and related notes thereto for the
three months ended March 31, 1997 and March 31, 1998 are unaudited and have
been prepared on the same basis as the audited consolidated financial
statements included herein. In the opinion of management, such unaudited
consolidated financial statements include all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the information set
forth herein. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of results that may be expected for the fiscal year
ending December 31, 1998.
2. INVESTMENTS DESIGNATED FOR NONQUALIFIED RETIREMENT PLAN
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which requires investments
in debt and equity securities be classified as held-to-maturity, available-
for-sale or trading securities. The Company's investments designated for a
nonqualified plan are classified as investments available-for-sale (see Note
9). These securities are carried at fair value based on publicly reported
market quotes as of December 31, 1996 and 1997 and March 31, 1998. Any
unrealized gains and losses on available-for-sale securities have been
excluded from earnings and have been reported as a separate component of
stockholders' equity.
The following details the cost and unrealized gain components that make up
the fair value of the investments:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Cost basis............................ $4,888 $ 8,835 $ 9,314
Gross unrealized gain................. 188 1,298 2,206
------ ------- -------
Fair value.......................... $5,076 $10,133 $11,520
====== ======= =======
</TABLE>
3. INVESTMENT IN HSI
The Company has an investment in HSI which is accounted for under the equity
method. The percentage of common stock ownership at December 31, 1996 and 1997
and March 31, 1998 was 39.3%, 35.5%, and 35.5%, respectively. Based on an
agreement between the Company and HSI, effective January 1, 1995, 65% of the
net income of HSI is allocated to Class A shares and 35% of the net income of
HSI is allocated to Class B shares, regardless of the exact percentage of each
class holding. The Company owns all Class B shares of HSI.
4. ACQUISITIONS
During 1996, the Company purchased selected assets of two companies. Each
combination was accounted for by the purchase method of accounting. The
purchase price for each of these transactions includes the cost of the net
assets as of the date of the transaction.
F-10
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The selected assets of International Consultants S.A. were acquired on
September 1, 1996, for a total purchase price of $609, none of which was
recorded as goodwill. The selected assets of Global Management S.R.L. were
acquired on February 16, 1996, for a total purchase price of $55, none of
which was recorded as goodwill.
5. LINE OF CREDIT
The Company has a $25,000 reducing revolving credit facility ("line of
credit") which is valid until September 30, 2001. This new line of credit
became effective October 1, 1997. The $25,000 line of credit will be reduced
annually by $5,000 on September 30, 1998, 1999 and 2000. There were no
borrowings outstanding under the former line of credit at December 31, 1996.
There was $3,500 outstanding under the line of credit at December 31, 1997 and
$5,148 outstanding at March 31, 1998. The borrowings bear interest at either
LIBOR plus 1% or the prime rate, at the Company's discretion. At December 31,
1997, the interest rate on the debt was the prime rate, 8.5%. At March 31,
1998, the interest rate on the debt was fixed at approximately 6.7%. The line
of credit has certain financial requirements the Company must meet relating to
net worth, liabilities, and cash flows. As of December 31, 1997 and March 31,
1998, the Company met all of its financial requirements. The Company is
required to pay commitment fees on the unused portion of the line of credit on
a quarterly basis. Commitment fee expense for the year ended December 31, 1997
and for the three months ended March 31, 1998 totaled $8 and $8, respectively.
6. RELATED PARTY TRANSACTIONS
The Company loaned HSI $5,148 during the first quarter of 1998. The loan was
originally due in full on June 17, 1998, but was extended. It is now due in
two installments. The first installment of $2,500 is due on July 31, 1998 and
the balance is due on August 31, 1998. The interest rate on this loan is fixed
at 6.7%. Accounts payable includes a payable of $367 to HSI at December 31,
1996. Accounts receivable includes a receivable of $776 and $907 from HSI at
December 31, 1997 and March 31, 1998, respectively. All transactions between
the Company and HSI are recorded at cost.
7. LONG-TERM DEBT
Long-term debt consists of amounts due to former stockholders who have sold
their stock back to the Company (see Note 8). The obligations are unsecured
and payable in annual installments over periods ranging from two to five years
with interest payable generally at the prime commercial rate (8.25%, 8.50%,
and 8.50% at December 31, 1996 and 1997 and March 31, 1998, respectively).
The fair value of the debt based on current rates for similar debt is
estimated to be $2,055 at December 31, 1997.
Future principal payments on long-term debt are due as follows:
<TABLE>
<S> <C>
Years ending December 31--
1998........................................................... $ 808
1999........................................................... 808
2000........................................................... 428
2001........................................................... 400
2002........................................................... --
------
$2,444
======
</TABLE>
F-11
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDER AGREEMENTS
In accordance with the terms of stock purchase agreements between the
Company and its stockholders, the Company is obligated to purchase the shares
of stock owned by a stockholder if the stockholder desires to sell or transfer
the shares, or upon a stockholder's termination of employment at book value as
defined in the stock purchase agreements. Redemption amounts relating to the
stock purchase agreements are included in Mandatorily Redeemable Common Stock
in the accompanying balance sheets. Payments for shares are generally made
over a four year period. These agreements will be terminated upon successful
completion of an initial public offering.
9. EMPLOYEE BENEFIT PLANS
QUALIFIED RETIREMENT PLANS
The Company has a defined contribution retirement plan for all eligible
employees. The plan contains a 401(k) provision which provides for employee
tax deferred contributions.
The Company matched employee contributions on a two-for-one basis up to a
maximum Company contribution of $1, $1 and $2 per participant for the years
ended December 31, 1995, 1996 and 1997, respectively. The Company has the
option of making discretionary contributions. For the years ended December 31,
1995, 1996 and 1997, the Company elected to contribute to each eligible
participant a sum equal to 3.03% of the participant's total compensation (as
defined) and an additional 3.03% of the participant's compensation above the
Social Security taxable wage base.
The plan allows participants the option of having their account balances or
portions thereof invested in the Company's common stock. At December 31, 1996
and 1997 and at March 31, 1998, the plan held 131,182, 129,865 and 124,365
shares, respectively, of the Company's common stock. The Company sells shares
of common stock to the plan and is required to repurchase the shares issued to
the plan at net book value as defined in the stock purchase agreements. This
requirement will be cancelled upon successful completion of an initial public
offering.
The plan provides that forfeitures will be used to reduce the Company's
contributions. Forfeitures are created when participants terminate employment
before becoming entitled to their full benefits under the plan. Company
expense for the plan for the years ended December 31, 1995, 1996 and 1997 and
the three months ended March 31, 1997 and 1998 was $1,144, $1,339, $2,174,
$401, and $544, respectively.
In addition, the subsidiaries each maintain defined contribution retirement
plans for their eligible employees. Retirement plan expense for these plans
for the years ended December 31, 1995, 1996 and 1997 and the three months
ended March 31, 1997 and 1998 totaled $167, $128, $154, $46, and $64,
respectively.
NONQUALIFIED RETIREMENT PLANS
The Company also has two separate nonqualified retirement plans. The first
plan is for United States based employees and includes both an optional
employee contribution and a discretionary employer contribution. The plan
expense for the years ended December 31, 1995, 1996 and 1997 and for the three
months ended March 31, 1997 and 1998 was $1,254, $1,440, $1,350, $445, and
$500, respectively. The liability for this retirement plan consisted of the
following at December 31, 1996 and 1997 and March 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Employer contributions................ $4,980 $ 6,390 $ 7,360
Employee deferrals.................... 1,660 3,785 3,785
Earnings of designated assets......... 158 316 365
------ ------- -------
$6,798 $10,491 $11,510
====== ======= =======
</TABLE>
F-12
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investments designated for the nonqualified plan are carried at fair market
value based on publicly quoted prices. The Company has recognized an
unrealized gain as of December 31, 1996 and 1997 and March 31, 1998 of $188,
$1,298, and $2,206, respectively, which is recorded as a separate component of
stockholders' equity (see Note 2). The nonqualified plan was unfunded until
1996.
The fair value of the assets designated for the nonqualified plan consist of
the following at December 31, 1996 and 1997 and March 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ ---------
<S> <C> <C> <C>
Cash and cash equivalents............. $ 715 $ 306 $ 503
Stock mutual fund..................... 3,349 6,919 8,117
Bond mutual fund...................... 1,727 3,214 3,403
------ ------- -------
$5,791 $10,439 $12,023
====== ======= =======
</TABLE>
In 1995, the Company instituted a second nonqualified retirement plan for
employees classified as senior associates. This plan provides for only
discretionary employer contributions. The plan expense for the years ended
December 31, 1995, 1996 and 1997 was $197, $170 and $250, respectively. The
liability for this retirement plan at December 31, 1996 and 1997 was $367 and
$617, respectively.
10. INCOME TAXES
The deferred tax assets and liabilities consist of the following components
as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Deferred tax assets--
Receivable allowances........................................ $ 858 $ 1,515
Accrued vacations............................................ 308 433
Accrued bonuses.............................................. 4,491 6,206
Liability for nonqualified retirement plans.................. 3,055 5,035
Other accrued expenses....................................... 385 439
Foreign net operating loss carryforwards..................... 275 595
Cumulative translation adjustment............................ 234 636
------ -------
9,606 14,859
Valuation allowance.......................................... (276) (502)
------ -------
Net deferred tax assets.................................... 9,330 14,357
------ -------
Deferred tax liabilities--
Leasehold improvements and equipment......................... (232) (225)
Equity in undistributed income of affiliate.................. (1,718) (2,085)
System development costs..................................... -- (356)
Unrealized gain on available-for-sale investments............ (79) (545)
Other........................................................ (748) (1,180)
------ -------
Net deferred tax liabilities............................... (2,777) (4,391)
------ -------
Net deferred income taxes................................ $6,553 $ 9,966
====== =======
</TABLE>
F-13
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The deferred tax amounts mentioned above have been classified in the
accompanying consolidated balance sheets as of December 31, 1996 and December
31, 1997, as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Current deferred tax assets............................. $ 6,041 $ 8,593
Current deferred tax liabilities........................ (748) (1,548)
------- -------
Net current deferred tax asset........................ 5,293 7,045
------- -------
Long-term deferred tax assets........................... 3,289 5,764
Long-term deferred tax liabilities...................... (2,029) (2,843)
------- -------
Net long-term deferred tax asset...................... 1,260 2,921
------- -------
$ 6,553 $ 9,966
======= =======
</TABLE>
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Current--
Federal....................................... $4,322 $ 5,142 $ 7,962
State......................................... 1,600 2,478 2,500
Foreign....................................... 292 322 540
Deferred........................................ (120) (1,793) (3,413)
------ ------- -------
$6,094 $ 6,149 $ 7,589
====== ======= =======
</TABLE>
A reconciliation of income tax expense for the years ended December 31,
1995, 1996 and 1997, to income taxes at the statutory federal income tax rate
of 35%, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Income taxes at statutory rate..................... $4,358 $4,409 $4,982
Increase (decrease) due to--
State income taxes, net of federal tax benefit... 1,040 1,611 1,625
Nondeductible expenses........................... 272 341 357
Foreign taxes in excess of federal tax rates..... 41 408 721
Other, net....................................... 383 (620) (96)
------ ------ ------
$6,094 $6,149 $7,589
====== ====== ======
</TABLE>
The undistributed earnings of HSI included in the Company's income for the
years ended December 31, 1996 and 1997 and March 31, 1998 totaled $4,052,
$4,419, and $4,078, respectively, which under existing law, will not be
subject to U.S. tax until distributed as dividends. Furthermore, any taxes
paid to foreign governments on those earnings may be used in whole or in part
as credits against the U.S. tax on any dividends distributed from such
earnings. The Company has provided a deferred tax liability for the
undistributed earnings of HSI. As the earnings of the consolidated foreign
subsidiaries will be permanently reinvested in the Company, no deferred tax
liability has been provided.
The sources of earnings before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
United States.................................. $13,288 $13,508 $16,317
Foreign........................................ (836) (910) (2,083)
------- ------- -------
Total...................................... $12,452 $12,598 $14,234
======= ======= =======
</TABLE>
F-14
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes for the three months ended March 31, 1997 and
1998 is $887 and $106, respectively. The effective tax rate at March 31, 1997
and 1998 is 50% and 48%, respectively.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space in various buildings for its own use. The
terms of these operating leases provide that the Company pays base rent and a
share of increases in operating expenses and real estate taxes in excess of
defined amounts. These leases expire at various dates through 2013. The
Company also leases computer equipment which is accounted for as an operating
lease.
Minimum future lease payments due in each of the next five years ending
December 31, are as follows:
<TABLE>
<S> <C>
Years ending December 31--
1998.......................................................... $ 7,704
1999.......................................................... 7,936
2000.......................................................... 7,252
2001.......................................................... 5,695
2002.......................................................... 5,128
Thereafter.................................................... 13,182
-------
$46,897
=======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1995,
1996 and 1997 and for the three months ended March 31, 1997 and 1998 was
$5,875, $6,976, $8,374, $1,988, and $2,264, respectively.
EMPLOYMENT AGREEMENT
The Company has an employment agreement with an officer which provides for
certain payments upon retirement but requires the officer to provide services
and not to compete with the Company. The payments are indexed to the Consumer
Price Index and would currently approximate $196 for each of the first five
years of retirement and approximately $98 for each of the succeeding five
years. The agreement also states the payments are ratably forfeited during the
period which the individual remains an active employee after having reached
the age of 65. At December 31, 1997, the first eighteen months of payments
have been forfeited as a result of that provision. This agreement also
provides for the same payments to the officer in the event of his disability
while an employee of the Company except that the payments would be reduced by
any amounts received from disability insurance carried by the Company. If the
officer dies while an employee or during the ten years of the retirement plan,
the agreement provides for payments to his widow or estate of one-half of the
amounts for retirement. As future services expected to be received by the
Company are commensurate with retirement payments to be made, no provision for
any payment under this plan has been made in the accompanying financial
statements.
LITIGATION
In the normal course of business, the Company is a party to various matters
involving disputes and/or litigation. While it is not possible at this time to
determine the ultimate outcome of these matters, management believes that the
ultimate liability, if any, will not be material to the financial statements.
F-15
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates as a single business segment. The Company's geographic
data for operations is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
United States................................... $ 99,067 $124,568 $156,173
Foreign......................................... 9,618 13,097 24,071
-------- -------- --------
Total......................................... $108,685 $137,665 $180,244
======== ======== ========
Operating Income (loss):
United States................................... $ 11,568 $ 11,917 $ 14,558
Foreign......................................... (951) (1,205) (2,613)
-------- -------- --------
Total......................................... $ 10,617 $ 10,712 $ 11,945
======== ======== ========
Identifiable Assets:
United States................................... $ 49,995 $ 58,547 $ 79,086
Foreign......................................... 5,905 10,096 14,806
-------- -------- --------
Total......................................... $ 55,900 $ 68,643 $ 93,892
======== ======== ========
</TABLE>
During all years presented above, no individual customer accounted for
greater than 10% of revenue.
13. SUBSEQUENT EVENTS
On June 26, 1998, the Company purchased selected assets and liabilities of
Fenwick Partners, Inc. The purchase price was approximately $6,120 which is to
be paid in 3 installments. The first installment of $3,060 was paid on June
26, 1998. The remaining installments, including interest at a rate of 5%, are
due in June of 1999 and June of 2000 and approximate $321 and $3,036,
respectively.
On June 30, 1998, the Company's Board of Directors approved a merger
agreement with HSI which details the plan to merge the Company with and into
HSI prior to an initial public offering; and recommended that the merger
agreement be submitted to the stockholders for approval. After completion of
the merger, the corporation will be named Heidrick & Struggles International,
Inc.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Heidrick & Struggles International, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of HEIDRICK &
STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES (a Delaware corporation) as of
December 31, 1996 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heidrick & Struggles
International, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Barbier Frinault & Associes
Arthur Andersen
Neuilly-sur-Seine, France
July 19, 1998
F-17
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE FIGURES)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................... $ 8,202 $ 8,053 $ 7,616
Accounts receivable--
Trade, less allowances for doubtful accounts
of $1,730, $1,416, and $2,782 at December
31, 1996 and 1997 and March 31, 1998,
respectively................................ 14,464 23,617 26,456
Other........................................ 365 358 471
Prepaid expenses............................... 1,049 1,502 1,393
Deferred income taxes.......................... 1,528 4,810 2,853
------- ------- -------
Total current assets....................... 25,608 38,340 38,789
------- ------- -------
PROPERTY AND EQUIPMENT:
Leasehold improvements......................... 4,231 6,573 6,699
Office furniture and fixtures.................. 3,371 4,747 5,091
Computer equipment and software................ 3,381 6,498 7,466
Automobiles.................................... 684 1,675 1,574
------- ------- -------
11,667 19,493 20,830
Less--Accumulated depreciation and
amortization.................................. (5,981) (9,327) (9,999)
------- ------- -------
Property and equipment, net.................. 5,686 10,166 10,831
------- ------- -------
OTHER ASSETS:
Goodwill....................................... 948 808 454
Deferred compensation expense.................. -- 8,766 7,345
Deferred income taxes.......................... -- 568 3,092
Other assets................................... 609 1,299 1,048
------- ------- -------
Total other assets......................... 1,557 11,441 11,939
------- ------- -------
Total assets............................... $32,851 $59,947 $61,559
======= ======= =======
CURRENT LIABILITIES:
Short-term debt................................ $ -- $ 7,639 $ 9,779
Current maturities of long-term debt........... 57 178 475
Accounts payable............................... 720 4,265 3,917
Accrued expenses--
Salaries and employee benefits............... 9,530 16,436 8,033
Professional fees............................ 1,295 806 1,333
VAT.......................................... 1,201 1,855 1,998
Payroll taxes................................ 1,268 1,250 4,179
Other........................................ 982 2,676 3,012
Income taxes payable........................... 1,210 5,349 5,392
Note payable to affiliate...................... -- -- 5,148
------- ------- -------
Total current liabilities.................. 16,263 40,454 43,266
------- ------- -------
LONG-TERM LIABILITIES............................ 267 368 128
------- ------- -------
MANDATORILY REDEEMABLE COMMON STOCK:
Class A common stock, no par value, 150,000
shares authorized, 101,668, 122,055, and
122,055 shares issued and outstanding at
December 31, 1996 and 1997 and March 31, 1998,
respectively, at book value................... 9,922 12,577 12,380
STOCKHOLDERS' EQUITY:
Class B common stock, no par value, 150,000
shares authorized, 65,787 shares issued and
outstanding at December 31, 1996 and 1997 and
March 31, 1998, at book value................. 2,361 2,361 2,361
Retained earnings.............................. 3,981 5,077 4,753
Accumulated other comprehensive income......... 57 (665) (1,049)
Less--Treasury stock, at cost, 0, 2,244, and
2,744 shares at December 31, 1996 and 1997 and
March 31, 1998, respectively.................. -- (225) (280)
------- ------- -------
Total stockholders' equity................. 6,399 6,548 5,785
------- ------- -------
Total liabilities and stockholders' equity. $32,851 $59,947 $61,559
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-18
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE FIGURES)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE........................... $52,815 $64,558 $82,732 $17,953 $28,053
OPERATING EXPENSES:
Salaries and employee benefits.. 35,249 44,020 59,139 12,186 19,841
General and administrative ex-
penses......................... 14,264 17,100 20,556 4,288 8,315
------- ------- ------- ------- -------
Total operating expenses...... 49,513 61,120 79,695 16,474 28,156
------- ------- ------- ------- -------
Operating income (loss)....... 3,302 3,438 3,037 1,479 (103)
NON-OPERATING INCOME (EXPENSE).... 338 133 144 38 (112)
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES........ -- -- (26) -- --
------- ------- ------- ------- -------
Income (loss) before income
taxes........................ 3,640 3,571 3,155 1,517 (215)
PROVISION FOR INCOME TAXES........ 1,840 1,430 1,444 607 306
------- ------- ------- ------- -------
Net income (loss)............. $ 1,800 $ 2,141 $ 1,711 $ 910 $ (521)
======= ======= ======= ======= =======
BASIC EARNINGS PER CLASS A COMMON
SHARE............................ $ 12.44 $ 13.56 $ 9.92 $ 5.80 $ (2.83)
======= ======= ======= ======= =======
BASIC WEIGHTED AVERAGE CLASS A
COMMON SHARES OUTSTANDING........ 93,996 102,641 112,098 102,068 119,805
======= ======= ======= ======= =======
DILUTED EARNINGS PER CLASS A
COMMON SHARE..................... $ 12.44 $ 13.56 $ 9.36 $ 5.80 $ (2.31)
======= ======= ======= ======= =======
DILUTED WEIGHTED AVERAGE CLASS A
COMMON SHARES OUTSTANDING........ 93,996 102,641 118,868 102,068 146,885
======= ======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER
CLASS B COMMON SHARE............. $ 9.57 $ 11.39 $ 9.10 $ 4.84 $ (2.77)
======= ======= ======= ======= =======
WEIGHTED AVERAGE CLASS B COMMON
SHARES OUTSTANDING............... 65,787 65,787 65,787 65,787 65,787
======= ======= ======= ======= =======
Net income (loss)................. $ 1,800 $ 2,141 $ 1,711 $ 910 $ (521)
======= ======= ======= ======= =======
Other comprehensive income (loss),
before tax:
Foreign currency translation
adjustment..................... 232 (191) (1,331) (881) (686)
------- ------- ------- ------- -------
Other comprehensive income (loss),
before tax....................... 232 (191) (1,331) (881) (686)
------- ------- ------- ------- -------
Income tax (expense) benefit
related to items of other
comprehensive income (loss)...... (117) 76 609 353 302
------- ------- ------- ------- -------
Other comprehensive income (loss),
net of tax....................... 115 (115) (722) (528) (384)
------- ------- ------- ------- -------
Comprehensive income (loss)....... $ 1,915 $ 2,026 $ 989 $ 382 $ (905)
======= ======= ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-19
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE FIGURES)
<TABLE>
<CAPTION>
ACCUMULATED
CLASS B TREASURY OTHER TOTAL
COMMON STOCK STOCK COMPRE- COMPRE- STOCK-
------------- -------------- RETAINED HENSIVE HENSIVE HOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS INCOME INCOME EQUITY
------ ------ ------ ------ -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... 65,787 $2,361 -- $ -- $ 5,679 $ 57 $ 8,097
Treasury stock
transactions--
Stock repurchased...... -- -- (650) (61) -- -- (61)
Comprehensive income
Net income............. -- -- -- -- 1,800 -- $1,800 1,800
------
Foreign currency
translation
adjustment............ -- -- -- -- -- 115 115 115
------
Comprehensive income.... 1,915
======
Retained earnings
allocable to
mandatorily redeemable
Class A common stock... -- -- -- -- (4,310) -- (4,310)
------ ------ ------ ----- ------- ------- -------
BALANCE AT DECEMBER 31,
1995................... 65,787 2,361 (650) (61) 3,169 172 5,641
Treasury stock
transactions--
Stock sold............. -- -- 5,101 467 -- -- 467
Stock repurchased...... -- -- (4,451) (406) -- -- (406)
Comprehensive income
Net income............. -- -- -- -- 2,141 -- 2,141 2,141
------
Foreign currency
translation
adjustment............ -- -- -- -- -- (115) (115) (115)
------
Comprehensive income.... 2,026
======
Retained earnings
allocable to
mandatorily redeemable
Class A common stock... -- -- -- -- (1,329) -- (1,329)
------ ------ ------ ----- ------- ------- -------
BALANCE AT DECEMBER 31,
1996................... 65,787 2,361 -- -- 3,981 57 6,399
Treasury stock
transactions--
Stock sold............. -- -- 4,000 425 -- -- 425
Stock repurchased...... -- -- (6,244) (650) -- -- (650)
Comprehensive income
Net income............. -- -- -- -- 1,711 -- 1,711 1,711
------
Foreign currency
translation
adjustment............ -- -- -- -- -- (722) (722) (722)
------
Comprehensive income.... 989
======
Retained earnings
allocable to
mandatorily redeemable
Class A common stock... -- -- -- -- (615) -- (615)
------ ------ ------ ----- ------- ------- -------
BALANCE AT DECEMBER 31,
1997................... 65,787 2,361 (2,244) (225) 5,077 (665) 6,548
Treasury stock
transactions--
Stock repurchased
(unaudited)........... -- -- (500) (55) -- -- (55)
Comprehensive income
Net loss (unaudited)... -- -- -- -- (521) -- (521) (521)
------
Foreign currency
translation adjustment
(unaudited)........... -- -- -- -- -- (384) (384) (384)
------
Comprehensive income
(unaudited)............ $ (905)
======
Retained earnings
allocable to
mandatorily redeemable
Class A common stock
(unaudited)............ -- -- -- -- 197 -- 197
------ ------ ------ ----- ------- ------- -------
BALANCE AT MARCH 31,
1998 (UNAUDITED)....... 65,787 $2,361 (2,744) $(280) $ 4,753 $(1,049) $ 5,785
====== ====== ====== ===== ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-20
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
TWELVE MONTHS ENDED
ENDED DECEMBER 31, MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss).............. $ 1,800 $ 2,141 $ 1,711 $ 910 $ (521)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization................ 1,230 1,721 2,623 399 1,423
Loss on sale of property and
equipment................... 1 162 92 -- --
Deferred income taxes........ 17 (398) (1,061) -- (265)
Changes in assets and
liabilities:
Accounts receivable........ (2,861) (1,933) (4,480) (797) (3,273)
Prepaid expenses........... (721) 796 (521) (305) 368
Other assets............... 26 (612) (912) 52 837
Accounts payable........... (1,264) (563) 2,198 788 (451)
Accrued expenses........... 1,286 4,617 5,275 (3,397) (4,164)
Income taxes payable....... (78) 394 1,998 94 9
------- ------- -------- ------- -------
Net cash (used in)
provided by operating
activities.............. (564) 6,325 6,923 (2,256) (6,037)
------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisitions................... (561) (540) (10,186) -- --
Proceeds from sales of property
and equipment................. 104 72 82 154 --
Purchases of property and
equipment..................... (3,894) (2,039) (6,014) (499) (1,694)
------- ------- -------- ------- -------
Net cash used in
investing activities.... (4,351) (2,507) (16,118) (345) (1,694)
------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of
common stock.................. 892 737 2,465 377 --
Purchases of treasury stock.... (61) (406) (401) -- (55)
Proceeds from short-term debt.. -- -- 7,639 -- 7,288
------- ------- -------- ------- -------
Net cash provided by
financing activities.... 831 331 9,703 377 7,233
------- ------- -------- ------- -------
EFFECT OF FOREIGN CURRENCY
EXCHANGE RATES ON CASH AND CASH
EQUIVALENTS..................... 198 38 (657) (343) 61
------- ------- -------- ------- -------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS............ (3,886) 4,187 (149) (2,567) (437)
CASH AND CASH EQUIVALENTS:
Beginning of period............ 7,901 4,015 8,202 8,202 8,053
------- ------- -------- ------- -------
End of period.................. $ 4,015 $ 8,202 $ 8,053 $ 5,635 $ 7,616
======= ======= ======== ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for--
Interest..................... $ 3 $ 9 $ 3 $ -- $ 117
Income taxes................. $ 2,358 $ 1,467 $ 1,418 $ -- $ --
======= ======= ======== ======= =======
SUPPLEMENTAL SCHEDULE OF NONCASH
OPERATING ACTIVITIES
Payable from the acquisition of
net assets.................... $ 437 $ -- $ -- $ -- $ --
Issuance of notes payable for
the purchase of treasury
stock......................... $ -- $ -- $ 249 $ -- $ --
======= ======= ======== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-21
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[INFORMATION RELATING TO MARCH 31, 1998 AND 1997 IS UNAUDITED]
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE FIGURES)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Heidrick & Struggles International, Inc. and Subsidiaries, (the "Company"),
are engaged in providing management consulting and executive search services
to clients on a retained basis. The Company's clients are primarily located
throughout Europe.
Basis of Accounting
The financial statements of the Company have been prepared in conformity
with U.S. generally accepted accounting principles.
Principles of Consolidation
The consolidated financial statements include Heidrick & Struggles
International, Inc. and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Accounting Pronouncements to be Adopted in 1998
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which establishes
new standards for reporting information about operating segments in interim
and annual financial statements. It is effective for periods beginning after
December 15, 1997 and will be adopted by the Company as of December 31, 1998.
The Company does not expect that adoption of this Standard will not have an
impact on its consolidated financial position or its consolidated results of
operations. However, it is expected that adoption of this Standard will result
in additional footnote disclosure.
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities", which establishes new standards for
reporting information about derivatives and hedging. It is effective for
periods beginning after June 15, 1999 and will be adopted by the Company as of
January 1, 2000. The Company expects that adoption of this Standard will have
no effect on its consolidated financial position, results of operations or on
disclosures within the consolidated financial statements as they currently do
not engage in the use of derivative instruments or other hedging activities.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a purchased
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration
of credit risk consist primarily of accounts receivable. Concentrations of
credit risk with respect to accounts receivable are limited due to the
Company's large number of customers and their dispersion across many different
industries. At December 31, 1997, the Company had no significant
concentrations of credit risk.
F-22
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, the shorter of the lease term or the
estimated useful life of the asset, as follows:
<TABLE>
<S> <C>
Office furniture and fixtures.................................. 8-10 years
Computer equipment and software................................ 3-5 years
Automobiles.................................................... 4 years
</TABLE>
Depreciation for financial statement purposes for the years ended December
31, 1995, 1996, and 1997 and the three months ended March 31, 1997 and 1998
totaled $1,189, $1,594, $2,315, $399 and $1,289, respectively.
Intangible assets are stated at cost and amortized using the straight-line
method over the estimated economic useful life. The Company continually
evaluates whether subsequent events and circumstances have occurred that
indicate the remaining estimated useful life of an intangible asset may
warrant revision, or that the remaining balance of an intangible asset may not
be recoverable.
Revenue Recognition
Revenue from client services is recognized when services are billed and
substantially rendered, generally over a 60 to 90 day period commencing in the
month of the initial acceptance of a search. Revenue consists of the amount
billed to clients, net of sales taxes.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities,
applying enacted statutory tax rates in effect for the year in which the tax
differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Earnings per Common Share
The Company adopted SFAS No. 128, "Earnings Per Share" at December 31, 1997.
Basic earnings per common share is computed by dividing net income by weighted
average common shares outstanding for the year. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted. In accordance
with SFAS No. 128, the Company utilizes the two-class method of calculating
earnings per share. As such, the earnings are assigned to each class according
to the terms of the stock agreements and earnings per share are computed by
dividing the earnings assigned to each class by the shares outstanding in that
class.
Translation of Foreign Currencies
The translation of financial statements into U.S. dollars has been performed
in accordance with the SFAS No. 52, "Foreign Currency Translation." The local
currency for all subsidiaries has been designated as the functional currency
except for subsidiaries which operate in highly inflationary economies which
use the U.S. dollar as their functional currency. Non-U.S. assets and
liabilities have been translated into U.S. dollars at the current rate of
exchange prevailing at the balance sheet date. Revenues and expenses have been
translated at the
F-23
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
average exchange rates for the period. Translation gains and losses are
reflected as a separate component of stockholders' equity and not included in
income.
Interim Financial Information
The consolidated financial statements and related notes thereto for the
three months ended March 31, 1997 and March 31, 1998 are unaudited and have
been prepared on the same basis as the audited financial statements included
herein. In the opinion of management, such unaudited financial statements
include all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the information set forth herein. Operating results for the
three months ended March 31, 1998 are not necessarily indicative of results
that may be expected for the fiscal year ended December 31, 1998.
2. ACQUISITIONS
Tesco AG
On July 20, 1995, the Company acquired 100% of Tesco AG. The purchase price
amounted to $1,406 and the excess of purchase price over the fair value of net
assets was $969. Only $1,154 of the purchase price was paid and therefore only
$717 of the goodwill was recorded as of December 31, 1997. The goodwill is
being amortized over five years and the accumulated amortization amounts to
$314 at December 31, 1997. The amortization expense was $29, $127, and $158 in
1995, 1996, and 1997, respectively.
The remaining part of the purchase price has not yet been paid and is not
recorded, as the payment is contingent upon certain conditions, which have not
been met.
Mulder & Partner GmbH & Co. KG
Effective October 1, 1997 the Company acquired 100% of Mulder & Partner GmbH
& Co. KG ("Mulder"). The Company entered into a deferred contingent payment
agreement with the sellers as described below:
. $8,695 was paid on October 1, 1997 and $1,066 of associated transaction
costs were incurred; $5,228 plus 4% interest will be paid in annual equal
installments over a five year period ending October 1, 2002.
. Shares of the Company will be issued over a five year period to the
partners of Mulder as follows:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
TO BE ISSUED
------------
<S> <C>
October 1, 1997.............................................. 4,000
January 1, 1999.............................................. 8,000
January 1, 2000.............................................. 7,000
January 1, 2001.............................................. 7,000
January 1, 2002.............................................. 6,000
------
32,000
======
</TABLE>
At October 1, 1997, consideration corresponding to the issuance of the first
4,000 shares was accounted for at a value of $106.16 per share, representing
the fair value of the shares of the Company at this date. The entire purchase
price (initial cash payment, future cash installments and all shares) is
contingent upon the continued employment of the selling shareholders for the
five year period ending October 1, 2002. A pro rata portion of the total
purchase price is forfeited in the event a selling shareholder leaves the
employment of the Company prior to October 1, 2002. Due to these employment
contingencies, the purchase price has been accounted for as compensation
expense over the five year period of the contingency. The purchase agreement
between the Company and Mulder has subsequently been amended.
F-24
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 2, 1998, the Mulder acquisition agreement was amended. See Note 2 for
a description of the original Mulder agreement. The amended agreement is
contingent upon the merger of the Company and Heidrick & Struggles, Inc. The
amended purchase price is $28,396, which is to be paid as follows:
. $8,695 was due and paid in cash, $1,066 of associated transactions were
incurred, and 4,000 shares of the Company's stock were issued to the
former stockholders of Mulder on October 1, 1997.
. $5,228 plus interest accrued from October 1, 1997 at a rate of 4% is due
30 days after the merger of the Company and Heidrick & Struggles, Inc.
. $12,773 represented by shares in Heidrick & Struggles, Inc. is due to the
former stockholders of Mulder by October 1, 1998.
All employment contingencies were eliminated from the acquisition agreement.
3. LINE OF CREDIT
The Company was granted a multicurrency line of credit which became effective
on October 13, 1997. The $9,892 line of credit will be reduced annually by
$1,978 on July 1, 1998, 1999, 2000 and 2001. The line of credit will expire on
July 1, 2002. The interest rate on the credit line is LIBOR plus 1%. The
interest rate at December 31, 1997 was 7.2%. The total outstanding balance was
$7,639 and $9,779 at December 31, 1997 and March 31, 1998, respectively. The
interest expense on the debt was $21 and $115 for the year ended December 31,
1997 and the three month period ended March 31, 1998, respectively. The credit
line has a financial requirement, which requires that the ratio of total debt
to tangible net worth be less than 90%. As a result of this financial
requirement, retained earnings are restricted to the extent the ratio of debt
to tangible net worth exceeds 90%. Also, no investment greater than $2 million
is allowed without prior approval from the banks. Finally, there may be no
substantial sale of German assets without the bank's prior approval. As of
December 31, 1997 and March 31, 1998, the Company met all of its financial
requirements.
4. RELATED PARTY TRANSACTIONS
At December 31, 1997, Heidrick & Struggles, Inc. owned 35.5% of the stock of
the Company. Heidrick & Struggles, Inc. loaned the Company $5,148 during the
first quarter of 1998. The loan was originally due in full on June 17, 1998,
but was extended. It is now due in two installments. The first installment of
$2,500 is due on July 31, 1998 and the balance is due on August 31, 1998. The
interest rate on this loan is fixed at approximately 6.7%. Accounts receivable
includes a receivable of $367 from Heidrick & Struggles, Inc. at December 31,
1996. Accounts payable includes a payable of $776 and $907 to Heidrick &
Struggles, Inc. at December 31, 1997 and March 31, 1998, respectively. All
transactions between the Company and Heidrick & Struggles, Inc. are recorded at
cost.
Based on an agreement between the Company and Heidrick & Struggles, Inc.,
effective January 1, 1995, 65% of the net income of the Company is allocated to
Class A shares and 35% of the net income of the Company is allocated to Class B
shares, regardless of the exact percentage of each class holding. Heidrick &
Struggles, Inc. owns all Class B shares.
5. LONG-TERM DEBT
Long-term debt consists of amounts due to former stockholders who have sold
their stock back to the Company (see Note 7). The obligations are payable in
annual installments over a period of five years with interest payable at the
prime commercial rate (8.25%, 8.50%, and 8.50% at December 31, 1996 and 1997
and March 31, 1998, respectively).
The fair value of the debt based on current rates for similar debt is
estimated to be $454 at December 31, 1997.
F-25
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future principal payments on long-term debt are due as follows:
<TABLE>
<S> <C>
Years ending December 31--
1998............................................................. $178
1999............................................................. 242
2000............................................................. 56
2001............................................................. 56
2002............................................................. --
----
$532
====
</TABLE>
6. STOCKHOLDER AGREEMENTS
In accordance with the terms of the stock purchase agreements between the
Company and its Class A stockholders, the Company is obligated to purchase the
shares of stock owned by a Class A stockholder if the stockholder desires to
sell or transfer the shares, or upon a stockholder's termination of employment
at book value as defined in the stock purchase agreements. Redemption amounts
relating to the stock purchase agreements are included in Mandatorily
Redeemable Common Stock in the accompanying balance sheets. Payments for shares
are generally made over a four year period. These agreements will terminate
upon successful completion of an initial public offering.
7. INCOME TAXES
The deferred tax assets and liabilities consist of the following components
as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Deferred tax assets--
Receivable allowances................................... $ 616 $ 584
Accrued vacations....................................... 170 222
Accrued bonuses......................................... -- 496
Property and equipment.................................. 826 963
Pension reserve......................................... -- 2,222
Other accrued expenses.................................. -- 323
Cumulative translation adjustment....................... -- 568
------ ------
Net deferred tax assets............................... 1,612 5,378
------ ------
Deferred tax liabilities--
Other accrued expenses.................................. (84) --
Cumulative translation adjustment....................... (41) --
------ ------
Net deferred tax liabilities.......................... (125) --
------ ------
Net deferred income taxes........................... $1,487 $5,378
====== ======
</TABLE>
The deferred tax amounts mentioned above have been classified in the
accompanying consolidated balance sheets as of December 31, 1996, and December
31, 1997, as follows:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Current deferred tax assets............................... $1,612 $4,810
Current deferred tax liabilities.......................... (84) --
------ ------
Net current deferred tax asset........................ 1,528 4,810
------ ------
Long-term deferred tax asset.............................. -- 568
Long-term deferred tax liabilities........................ (41) --
------ ------
Net long-term deferred tax............................ (41) 568
------ ------
$1,487 $5,378
====== ======
</TABLE>
F-26
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes for the years ended December 31, 1995, 1996
and 1997, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Current--
U.S. Federal.................................... $ 428 $ 151 $ 533
Foreign......................................... 1,395 1,677 1,972
Deferred.......................................... 17 (398) (1,061)
------ ------ -------
$1,840 $1,430 $ 1,444
====== ====== =======
</TABLE>
The Company is a U.S. corporation, but operates entirely outside of the U.S.,
primarily in Europe. The Company pays foreign taxes for operations in each of
the foreign countries in which it operates and pays U.S. federal taxes on its
total operations after foreign tax credits.
A reconciliation of income tax expense for the years ended December 31, 1995,
1996, and 1997, to the statutory U.S. federal income tax rate of 35%, is as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Income taxes at statutory
rate..................... $ 1,274 $ 1,250 $ 1,104
Increase (decrease) due
to--
Foreign taxes in excess
of federal tax rates... 69 494 357
Alternative minimum tax. 3 67 --
Other, net.............. 494 (381) (17)
------- ------- -------
$1,840 $ 1,430 $ 1,444
======= ======= =======
</TABLE>
The provision for income taxes for the three months ended March 31, 1997 and
1998 is $607 and $306, respectively. The effective tax rate for March 31, 1997
and 1998 is 40% and 100%, respectively.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES:
The Company leases office space in various buildings for its own use. The
leases expire at various dates through 2012. The Company also leases computer
equipment which is accounted for as an operating lease.
Minimum future lease payments due in each of the next five years ending
December 31, are as follows:
<TABLE>
<S> <C>
Years ending December 31--
1998.......................................................... $ 6,877
1999.......................................................... 6,576
2000.......................................................... 5,937
2001.......................................................... 4,657
2002.......................................................... 2,195
Thereafter.................................................... 27,249
-------
$53,491
=======
</TABLE>
F-27
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Rent expense under operating leases for the years ended December 31, 1995,
1996 and 1997 and for the three months ended March 31, 1997 and 1998 was
$3,621, $4,707, $5,307, $1,202 and $1,829, respectively.
LITIGATION
In the normal course of business, the Company is a party to various matters
involving disputes and/or litigation. While it is not possible at this time to
determine the ultimate outcome of these matters, management believes that the
ultimate liability, if any, will not be material to the consolidated financial
statements.
9. SEGMENT INFORMATION
The Company operates in a single business segment. The Company's geographic
data for operations is as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenue:
United Kingdom....................................... $15,491 $20,565 $27,588
Germany.............................................. 10,898 12,614 19,900
France............................................... 9,243 11,211 12,253
Other................................................ 17,183 20,168 22,991
------- ------- -------
Total.............................................. $52,815 $64,558 $82,732
======= ======= =======
Operating income (loss):
United Kingdom....................................... $ 883 $ 589 $ 1,028
Germany.............................................. 1,134 1,279 1,042
France............................................... 877 (3) 915
Other................................................ 408 1,573 52
------- ------- -------
Total.............................................. $ 3,302 $ 3,438 $ 3,037
======= ======= =======
Identifiable assets:
United Kingdom....................................... $ 5,533 $ 6,295 $12,288
Germany.............................................. 4,799 4,729 24,093
France............................................... 5,424 6,985 9,921
Other................................................ 10,000 14,842 13,645
------- ------- -------
Total.............................................. $25,756 $32,851 $59,947
======= ======= =======
</TABLE>
During all years presented above, no individual customer accounted for greater
than 10% of revenue.
10. SUBSEQUENT EVENTS
On June 30, 1998, the Company's Board of Directors approved a merger
agreement with Heidrick & Struggles, Inc. which details the plan to merge
Heidrick & Struggles, Inc. with and into the Company prior to an initial public
offering; and recommended that the merger agreement be submitted to the
Stockholders for approval. After completion of the merger, the corporation will
be named Heidrick & Struggles International, Inc.
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Mulder & Partner GmbH & Co. KG:
We have audited the accompanying consolidated statements of income and
related consolidated statements of cash flows of MULDER & PARTNER GMBH & CO. KG
AND SUBSIDIARIES (a German limited partnership) for the nine months ended
September 30, 1997 and for each of the two years in the period ending December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the operations of Mulder & Partner GmbH &
Co. KG and Subsidiaries and their cash flows for the nine months ended
September 30, 1997 and for each of the two years in the period ending December
31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
July 19, 1998
F-29
<PAGE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE FIGURES)
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS
ENDED DECEMBER ENDED
31, SEPTEMBER 30,
---------------- -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
REVENUE......................................... $31,529 $32,560 $21,816
OPERATING EXPENSES:
Salaries and employee benefits................ 24,045 24,701 14,610
General and administrative expenses........... 6,560 7,404 5,557
------- ------- -------
Total operating expenses.................... 30,605 32,105 20,167
------- ------- -------
Operating income............................ 924 455 1,649
NON-OPERATING INCOME (EXPENSE):
Interest income............................... 13 28 36
Interest expense.............................. (133) (94) (159)
Other income.................................. 581 2,106 529
------- ------- -------
461 2,040 406
------- ------- -------
Income before income taxes.................. 1,385 2,495 2,055
PROVISION FOR INCOME TAXES...................... 1,149 2,663 1,668
------- ------- -------
Net income (loss)........................... $ 236 $ (168) $ 387
------- ------- -------
COMPREHENSIVE INCOME (LOSS)..................... $ 236 $ (168) $ 387
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-30
<PAGE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................ $ 236 $ (168) $ 387
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 25 356 231
Deferred income taxes...................... 89 72 (2)
Changes in assets and liabilities:
Trade & other receivables................ (1,530) (2,309) 1,319
Prepaid expenses......................... (52) (173) 170
Accounts payable......................... 138 292 (246)
Accrued expenses......................... 4,282 2,152 (165)
Income taxes payable..................... 195 2,130 1,409
------- ------- -------
Net cash provided by operating
activities............................ 3,383 2,352 3,103
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.......... (615) (991) (21)
Purchases of long-term investments........... (1,965) (2,212) (455)
------- ------- -------
Net cash used in investing activities.. (2,580) (3,203) (476)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid............................... (1,411) (872) (557)
Proceeds from long-term debt................. 376 1,299 --
Payments on long-term debt................... -- -- (1,964)
------- ------- -------
Net cash provided by (used in)
financing activities.................. (1,035) 427 (2,521)
------- ------- -------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES ON
CASH AND CASH EQUIVALENTS..................... 65 (38) (25)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (167) (462) 81
CASH AND CASH EQUIVALENTS:
Beginning of period.......................... 812 645 183
------- ------- -------
End of period................................ $ 645 $ 183 $ 264
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for--
Interest..................................... $ 133 $ 94 $ 159
Income taxes................................. $ 864 $ 761 $ 140
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-31
<PAGE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
NOTES TO CONSOLIDATED INCOME STATEMENTS AND
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997
1. NATURE OF BUSINESS AND SUMMARY OF GENERAL ACCOUNTING PRINCIPLES
Nature of Business
Mulder & Partner GmbH & Co. KG and Subsidiaries (as of December 31, 1995:
Mulder & Partner GmbH) (the "Company") are engaged in providing management
consulting and executive search services to clients on a retained basis. The
Company's clients are primarily located in Germany.
Basis of Accounting
The financial statements of the Company have been prepared in conformity
with U.S. generally accepted accounting principles.
Principles of Consolidation
The consolidated financial statements include Mulder & Partner GmbH & Co.,
KG and its wholly and majority owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ from those
estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the useful lives of the assets
and German tax law as follows:
<TABLE>
<S> <C>
Office furniture and fixtures.................................. 4-20 years
Computer equipment and software................................ 2-3 years
</TABLE>
Depreciation for consolidated financial statement purposes for the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997
totaled $25, $356 and $231, respectively.
Revenue Recognition
Revenue from client services is recognized when services are rendered,
generally over a 90 day period commencing in the month of the initial
acceptance of a search. Revenue consists of the amount billed to clients, net
of expenses and value added taxes.
Translation of Foreign Currencies
The consolidated financial statements were translated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." The functional currency for the Company is the German
Deutschmark. The consolidated financial statements have been translated into
U.S. Dollars by applying the average annual exchange rates on the consolidated
income statements and the consolidated statements of cash flows.
F-32
<PAGE>
2. INCOME TAXES
The provision for income taxes for the years ended December 31, 1995 and
1996 and the nine months ended September 30, 1997, is as follows:
<TABLE>
<CAPTION>
BEFORE AFTER AFTER
REORGANIZATION REORGANIZATION REORGANIZATION
(SEE BELOW) (SEE BELOW) (SEE BELOW)
NINE MONTHS ENDED
1995 1996 SEPTEMBER 30, 1997
-------------- -------------- ------------------
<S> <C> <C> <C>
Current taxes--
Trade taxes on income
(Municipality tax)......... $ 325 $2,591 $1,666
Corporate income tax
including Solidarity
Surcharge (Federal tax).... 735 -- --
Deferred taxes................ 89 72 2
------ ------ ------
$1,149 $2,663 $1,668
====== ====== ======
</TABLE>
A reconciliation of income tax expense for the years ended December 31, 1995
and 1996 and the nine months ended September 30, 1997 to the statutory German
trade tax rate of 19% is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
1995 1996 SEPTEMBER 30, 1997
------ ------ ------------------
<S> <C> <C> <C>
Income taxes at statutory rate................ $ 263 $ 474 $ 390
Increase due to--
Corporate income tax at statutory rate of
45% including Solidarity Surcharge of 7.5%. 670 -- --
Nondeductible expenses...................... 216 2,189 1,278
------ ------ ------
$1,149 $2,663 $1,668
====== ====== ======
</TABLE>
Since the change of the legal status of Mulder & Partner GmbH in 1996 the
Company is only subject to trade tax on income. With notarial deed dated June
13, 1996, Mulder & Partner GmbH was reorganized retroactively (effective
January 1, 1996) from a limited liability corporation into Mulder & Partner
GmbH & Co., KG (a limited partnership with a limited liability corporation as
general partner) according to Sect. 190 following the German Reorganization
Law ("Umwandlungsgesetz"). Due to the change of the legal status, the Company
is no longer subject to German corporate income taxation. The income of the
partnership is now taxed at the level of the individual partners.
The reorganization has been performed at book value without realizing any
capital gain or loss. Accordingly the reorganization has not had any German
income tax implications.
DEFERRED TAXES
Deferred taxes are applicable for German trade tax on income and German
corporate income tax.
3. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES:
The Company leases office space in various buildings for its own use. These
leases expire at various dates through 2002. The Company also leases computer
equipment and automobiles which are accounted for as operating leases.
F-33
<PAGE>
Minimum future lease payments due in each of the next five years ending
December 31, are as follows:
<TABLE>
<CAPTION>
Years ending December 31
<S> <C>
1998............................................................. $ 952
1999............................................................. 940
2000............................................................. 889
2001............................................................. 427
2002............................................................. 239
------
$3,447
======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1995,
1996, and the nine months ended September 30, 1997 was $978, $1,157 and $789,
respectively.
LITIGATION
In the normal course of business, the Company is a party to various matters
involving disputes and/or litigation. While it is not possible at this time to
determine the ultimate outcome of these matters, management believes that the
ultimate liability, if any, will not be material to the consolidated financial
statements.
4. SEGMENT INFORMATION
The Company operates as a single business segment and in a single primary
geographic location (Germany).
F-34
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION IN SUCH STATE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
The Company............................................................... 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Unaudited Pro Forma Condensed Consolidated Financial Data................. 18
Selected Financial Data................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 34
Management................................................................ 43
Principal and Selling Stockholders........................................ 48
Description of Capital Stock.............................................. 49
Shares Eligible for Future Sale........................................... 54
Underwriting.............................................................. 55
Certain United States Federal Tax Consequences to Non-U.S. Holders of
Common Stock............................................................. 57
Legal Matters............................................................. 58
Experts................................................................... 59
Additional Information.................................................... 59
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
LOGO
COMMON STOCK
------------------
PROSPECTUS
, 1998
------------------
LEHMAN BROTHERS
GOLDMAN, SACHS & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and the NASD filing fee, all amounts are
estimates.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 25,444
NASD Filing Fee............................................... 9,125
NYSE Filing Fee............................................... 135,000
Printing & Engraving Fees..................................... 160,000
Accounting Fees and Expenses.................................. 750,000
Legal Fees and Expenses....................................... 550,000
Equity Plan Design & Implementation........................... 600,000
Blue Sky Filing Fees and Expenses............................. 15,000
Registrar and Transfer Agent Fees............................. 10,000
Directors' and Officers' Insurance Fees and Expenses.......... 284,000
Miscellaneous................................................. 211,431
----------
Total..................................................... $2,750,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") authorizes the Registrant to indemnify the officers and
directors of the Company, under certain circumstances and subject to certain
conditions and limitations as stated therein, against all expenses and
liabilities incurred by or imposed upon them as a result of actions, suits and
proceedings, civil or criminal, brought against them as such officers and
directors if they acted in good faith and in a manner they reasonably believed
to be in or not opposed to the best interests of the Registrant and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe their conduct was unlawful.
Reference is hereby made to the Registrant's Amended By-laws, a copy of
which is filed as Exhibit 3.02, which provides for indemnification of officers
and directors of the Registrant to the full extent authorized by Section 145
of the Delaware Law. The Amended By-laws authorize the Registrant to purchase
and maintain insurance on behalf of any officer, director, employee, trustee
or agent of the Registrant or its subsidiaries against any liability asserted
against or incurred by them in such capacity or arising out of their status as
such, whether or not the Registrant would have the power to indemnify such
officer, director, employee, trustee or agent against such liability under the
provisions of such Article or Delaware law.
The Registrant maintains a directors' and officers' insurance policy which
insures the officers and directors of the Registrant from any claim arising
out of an alleged wrongful act by such persons in their respective capacities
as officers and directors of the Registrant.
Section 102(b)(7) of the Delaware Law permits corporations to eliminate or
limit the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of a fiduciary duty of care as a
director. Reference is made to the Registrant's Amended and Restated
Certificate of Incorporation, a copy of which is filed as Exhibit 3.01, which
limits a director's liability in accordance with such Section.
Reference is made to the Underwriting Agreement, which is filed as Exhibit
1.01, for information concerning indemnification arrangements among the
Registrant and the Underwriters.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the three years preceding the filing of this Registration Statement,
the Registrant and Heidrick & Struggles, Inc. ("H&S Inc.") sold shares of
their common stock to senior level employees without registration under the
Securities Act of 1933 (the "Act"). Exemption from registration under the Act
for these sales is claimed under Rule 701 for offers and sales pursuant to
benefit plans and compensation arrangements and under Section 4(2) of the Act
for transactions by an issuer not involving a public offering.
The Registrant sold shares on an annual basis in the last three years to
senior employees as part of its annual stock program at a purchase price equal
to the book value per share at the end of its then-applicable fiscal year: (i)
during the 1995 stock program, the Registrant sold 17,009 shares to 20
Partners for an aggregate amount of $1,359,834.20; (ii) during the 1996 stock
program, the Registrant sold 9,693 shares to 22 Partners for an aggregate
price of $840,867.75; (iii) during the 1997 stock program, the Registrant sold
20,387 shares to 37 Partners for an aggregate price of $2,040,330.96. On
October 1, 1997, the Registrant issued a total of 4,000 shares to 10 new
Partners in connection with the Mulder acquisition described in the Prospectus
for an aggregate price of $424,640.00.
H&S Inc. sold shares on an annual basis in the last three years to senior
employees as part of its annual stock programs at a purchase price equal to
the book value per share at the end of its then-applicable fiscal year: (i)
during the 1995 stock program, H&S Inc. sold 12,870 shares to 57 Partners for
an aggregate price of $2,031,143.36; (ii) during the 1996 stock program, H&S
Inc. sold 12,835 shares to 63 Partners for an aggregate price of
$2,533,954.25; (iii) during the 1997 stock program, H&S Inc. sold 16,801
shares to 66 Partners for an aggregate price of $3,958,651.62. As part of the
1996 Latin American Stock program, H&S Inc. sold 2,316 shares to 8 Partners
for an aggregate price of $538,956.36. In connection with the commencement of
his employment in December 1997, H&S Inc. issued 115 shares to a new employee
at a value of approximately $30,000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S> <C>
1.01 Form of Underwriting Agreement*
2.01 Merger Agreement for merger of Heidrick & Struggles, Inc. with the Regis-
trant*
3.01 Form of Amended Certificate of Incorporation of the Registrant*
3.02 Form of Amended By-laws of the Registrant*
4.01 Specimen stock certificate*
5.01 Opinion of Simpson Thacher & Bartlett as to the legality of the Common
Stock being registered*
10 Material contracts*
11 Statement re: computation of per share earnings*
12 Statement re: computation of ratios*
21 Subsidiaries of the Registrant*
23.01 Consent of Simpson Thacher & Bartlett (contained in Exhibit 5.01)
23.02 Consent of Arthur Andersen LLP
23.03 Consent of Barbier Frinault & Associes (Arthur Andersen)
24.01 Powers of Attorney (included in signature page)
27.01 Financial Data Schedule*
</TABLE>
- --------
* To be filed by amendment.
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES:
Schedule II--H&S Inc. Allowance for doubtful accounts.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide International Representative thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Chicago,
State of Illinois, on the 24th day of July, 1998.
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
/s/ Donald M. Kilinski
By______________________________________
Chief Financial Officer and
Treasurer
Title___________________________________
II-4
<PAGE>
SIGNATURES AND
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Richard D. Nelson and Donald M.
Kilinski, or any one of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments to the Registration Statement, including post-effective amendments,
and registration statements filed pursuant to Rule 462 under the Securities
Act of 1933, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, and does hereby grant unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities on the 24th day of July, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ Gerard Clery-Melin President, Chief Executive Officer and
___________________________________________ Director
Gerard Clery-Melin
(principal executive officer)
/s/ Donald M. Kilinski Chief Financial Officer and Treasurer
___________________________________________
Donald M. Kilinski
(principal financial and accounting
officer)
/s/ Peter R. Breen Director
___________________________________________
Peter R. Breen
/s/ Romeo Crameri Director
___________________________________________
Romeo Crameri
/s/ Milena Djurdjevic Director
___________________________________________
Milena Djurdjevic
/s/ Bengt Lejsved Director
___________________________________________
Bengt Lejsved
/s/ Jurgen Mulder Director
___________________________________________
Jurgen Mulder
/s/ Richard D. Nelson Director
___________________________________________
Richard D. Nelson
/s/ Christoph Netta Director
___________________________________________
Christoph Netta
/s/ Patrick S. Pittard Director
___________________________________________
Patrick S. Pittard
/s/ Reinhard H. Thiele Director
___________________________________________
Reinhard H. Thiele
</TABLE>
II-5
<PAGE>
SCHEDULE II
HEIDRICK & STRUGGLES, INC.
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO BALANCE AT
BEGINNING OF COSTS & END OF
YEAR EXPENSES DEDUCTION YEAR
------------ -------- --------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31:
Allowance for doubtful accounts
1997............................. $1,925 $3,324 $(1,973) $3,276
------ ------ ------- ------
1996............................. $1,617 $2,263 $(1,955) $1,925
------ ------ ------- ------
1995............................. $1,691 $1,504 $(1,578) $1,617
------ ------ ------- ------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
II-6
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our reports (and to all references to our firm) included in or made part of
this registration statement.
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 24, 1998
<PAGE>
EXHIBIT 23.03
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our reports (and to all references to our firm) included in or made part of
this registration statement.
BARBIER FRINAULT & ASSOCIES
ARTHUR ANDERSEN LLP
Neuilly-sur-Seine, France
July 24, 1998
