<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25837
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
-------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2681268
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
233 South Wacker Drive-Suite 4200
Chicago, Illinois
60606-6303
-------------------
(Address of Principal Executive Offices)
(312) 496-1200
-------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding of the Company's common stock as of November 5,
1999 was 16,663,151.
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1999
(Unaudited) and December 31, 1998 3
Unaudited Consolidated Statements of Income for the
three months and nine months ended September 30, 1999
and 1998 5
Unaudited Consolidated Statement of Stockholders'
Equity for the nine months ended September 30, 1999 6
Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 7
Unaudited Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION 21
SIGNATURE 22
</TABLE>
2
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 109,529 $ 11,521
Accounts receivable, net of allowance for doubtful accounts 86,207 42,292
Other receivables 3,349 2,862
Notes receivable from affiliate - 1,900
Prepaid expenses 4,518 1,837
Prepaid income taxes - 3,063
Deferred income taxes 15,228 8,871
------------- ------------
Total current assets 218,831 72,346
------------- ------------
Property and equipment, net 50,949 27,054
------------- ------------
Other assets:
Cash and investments designated for nonqualified retirement plans 31,521 13,552
Investment in Heidrick & Struggles International, Inc. - 4,766
Investments and other assets 5,896 353
Deferred income taxes 7,058 2,649
Goodwill and other intangibles, net 44,982 8,055
------------- ------------
Total other assets 89,457 29,375
------------- ------------
Total assets $ 359,237 $ 128,775
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
Current liabilities:
Short-term debt $ - $ 22,000
Current maturities of long-term debt 3,893 2,847
Accounts payable 8,456 3,487
Accrued expenses-
Salaries and employee benefits 132,899 27,893
Other 17,990 8,165
Income taxes payable 5,997 -
-------- --------
Total current liabilities 169,235 64,392
-------- --------
Long-term debt, less current maturities 1,591 6,350
-------- --------
Liability for nonqualified retirement plans 29,341 11,358
-------- --------
Other long-term liabilities - 2,253
-------- --------
Mandatorily redeemable common and preferred stock
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued at December 31, 1998. - -
Common stock, $.01 par value, 100,000,000 shares authorized
at December 31, 1998, of which 8,183,851 and 3,146,871
shares were issued and outstanding, respectively. - 44,422
-------- --------
Total mandatorily redeemable common and preferred stock - 44,422
-------- --------
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued at September 30, 1999. - -
Common stock, $.01 par value, 100,000,000 shares authorized,
of which 16,663,151 shares were issued and outstanding
at September 30, 1999. 167 -
Additional paid-in capital 124,539
Retained earnings 31,781
Cumulative foreign currency translation adjustment (1,940)
Unrealized gain on available-for-sale investments (net of tax) 4,523 -
-------- --------
Total stockholders' equity 159,070 -
-------- --------
Total liabilities, mandatorily redeemable common and
preferred stock and stockholders' equity $359,237 $128,775
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $114,936 $ 62,278 $302,583 $168,914
-------- -------- -------- --------
Operating expenses:
Salaries and employee benefits 76,303 42,705 201,847 121,585
General and administrative expenses 26,686 15,663 75,121 39,191
Nonrecurring charge and merger costs 2,800 -- 15,220 --
-------- -------- -------- --------
Total operating expenses 105,789 58,368 292,188 160,776
-------- -------- -------- --------
Operating income 9,147 3,910 10,395 8,138
-------- -------- -------- --------
Non-operating income (expense):
Interest income 1,343 523 1,939 941
Interest expense (361) (235) (1,298) (354)
Other, net 281 307 357 143
-------- -------- -------- --------
Net non-operating income 1,263 595 998 730
-------- -------- -------- --------
Equity in net income/(loss) of affiliate -- 134 (630) (772)
-------- -------- -------- --------
Income before income taxes 10,410 4,639 10,763 8,096
Provision for income taxes 4,983 2,854 10,635 4,533
-------- -------- -------- --------
Net income $ 5,427 $ 1,785 $ 128 $ 3,563
======== ======== ======== ========
Basic earnings per common share $ 0.33 $ 0.61 $ 0.01 $ 1.20
======== ======== ======== ========
Basic weighted average common shares outstanding 16,533 2,906 12,624 2,957
======== ======== ======== ========
Diluted earnings per common share $ 0.32 $ 0.61 $ 0.01 $ 1.20
======== ======== ======== ========
Diluted weighted average common shares outstanding 16,782 2,906 12,717 2,957
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Compre-
Additional hensive
Common Paid-in Treasury Retained Income
Stock Capital Stock Earnings (Loss) Total
--------- ---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1998 (1) $ 82 $ 28,561 $ (16,471) $ (12,769) $ 597 $ --
Treasury and common stock transactions:
Stock issued for Merger 34 26,576 16,471 -- -- 43,081
Stock issued in initial public offering 42 51,959 -- -- -- 52,001
Stock issued to employees 7 14,408 -- -- -- 14,415
Stock issued for termination of Sullivan
employee equity ownership plan 2 3,035 -- -- -- 3,037
Release of book value restriction -- -- -- 44,422 -- 44,422
Comprehensive income, net of tax
Net income -- -- -- 128 -- 128
Unrealized gain on available-for-sale
investments -- -- -- -- 2,837 2,837
Foreign currency translation adjustments -- -- -- -- (851) (851)
------- --------- ---------- ---------- --------- ----------
Balance as of September 30, 1999 $ 167 $ 124,539 $ -- $ 31,781 $ 2,583 $ 159,070
======= ========= ========== ========== ========= ==========
</TABLE>
(1) Mandatorily redeemable
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 128 $ 3,563
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,353 2,970
Loss (gain) on sale of property and equipment (33) 493
Gain on sale of securities (417) --
Deferred income taxes (22) (696)
Equity in net loss of affiliate 630 772
Stock-based compensation 252 331
Nonrecurring compensation charge and merger costs 15,220 --
Changes in assets and liabilities:
Trade and other receivables (23,523) (9,583)
Other assets 2,379 (1,621)
Accounts payable 1,353 570
Accrued expenses 66,548 53,883
Income taxes payable 2,006 (2,538)
Liability for nonqualified retirement plans 1,062 172
--------- ---------
Net cash provided by operating activities 72,936 48,316
--------- ---------
Cash flows from investing activities
Acquisitions -- (3,060)
Purchases of securities for nonqualified retirement plan (324) (1,344)
Purchases of property and equipment (16,622) (11,527)
Sale of securities 7,232 --
Cash acquired in merger transactions with HSI 8,166 --
Other investing activities (176) 5
--------- ---------
Net cash used in investing activities (1,724) (15,926)
--------- ---------
Cash flows from financing activities
Net proceeds from issuance of common stock 61,334 --
Proceeds from debt 17,700 5,848
Payments of debt (51,067) (9,559)
--------- ---------
Net cash provided by (used in) financing activities 27,967 (3,711)
--------- ---------
Effect of foreign currency exchange rates on cash
and cash equivalents (1,171) (567)
--------- ---------
Net increase in cash and cash equivalents 98,008 28,112
Cash and cash equivalents:
Beginning of period 11,521 10,650
--------- ---------
End of period $ 109,529 $ 38,762
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
7
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(All tables in thousands, except per share figures)
(Unaudited)
1. Interim Financial Data
The accompanying unaudited consolidated financial statements of Heidrick &
Struggles International, Inc. and Subsidiaries (the "Company"), included herein
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates. In the
opinion of management, the statements reflect all adjustments, which are of a
normal recurring nature, necessary to present fairly the Company's financial
position as of September 30, 1999, and December 31, 1998, the results of
operations for the three months and nine months ended September 30, 1999 and
1998, stockholders' equity for the nine months ended September 30, 1999, and
cash flows for the nine months ended September 30, 1999 and 1998. While these
interim financial statements and accompanying notes are unaudited, they have
been reviewed by Arthur Andersen LLP, the Company's independent public
accountants. These financial statements and notes are to be read in conjunction
with the Company's Registration Statement on Form S-1 (File No. 333-59931), as
declared effective by the Securities and Exchange Commission on April 26, 1999.
The consolidated financial statements of the Company for all periods
presented have been restated to give retroactive effect to the merger with
Sullivan & Company ("Sullivan") on September 1, 1999, which has been accounted
for using the pooling of interests method and, as a result, the financial
position, results of operations, stockholders' equity and cash flows are
presented as if the combining companies had been consolidated for all periods
presented and, as if the additional common stock issued in connection with the
merger had been issued for all periods presented.
2. Business Combinations
Acquisition Accounted for Using Purchase Method
On February 26, 1999, Heidrick & Struggles, Inc. ("H&S Inc.") merged (the
"Merger") with and into Heidrick & Struggles International, Inc. (prior to the
Merger, "HSI"). The Merger combined the operations of H&S Inc., which operated
in all regions of the world except Europe, with HSI, a Europe-based company. The
transaction was accounted for using purchase accounting and the excess purchase
price was allocated to identifiable intangible assets and goodwill as follows:
<TABLE>
<CAPTION>
Weighted Average
Remaining Useful
Asset Classification Fair Value Life in Years
- -------------------- ---------- ----------------
<S> <C> <C>
Intangible assets $12,478 17
Goodwill $23,152 40
</TABLE>
8
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The unaudited condensed consolidated pro forma results of operations data
for the three months and nine months ended September 30, 1999 and 1998, as if
the Merger had occurred on January 1, 1999 and 1998, respectively, is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 114,936 $ 96,568 $ 322,568 $ 262,659
--------- -------- --------- ---------
Operating expenses:
Salaries and employee benefits 76,303 66,316 216,763 187,461
General and administrative expenses 26,686 25,541 81,562 65,864
Nonrecurring charge and merger costs 2,800 -- 16,140 --
--------- -------- --------- ---------
Total operating expenses 105,789 91,857 314,465 253,325
--------- -------- --------- ---------
Operating income 9,147 4,711 8,103 9,334
--------- -------- --------- ---------
Net non-operating income (expense) 1,263 519 942 (2,846)
--------- -------- --------- ---------
Income before income taxes 10,410 5,230 9,045 6,488
Provision for income taxes 4,983 3,547 10,398 5,852
--------- -------- --------- ---------
Net income (loss) $ 5,427 $ 1,683 $ (1,353) $ 636
========= ======== ========= =========
</TABLE>
Acquisition Accounted for Using Pooling of Interests Method
On September 1, 1999, the Company completed its acquisition of Sullivan
which provided for the exchange of all the outstanding stock of Sullivan for
964,000 shares of the Company's common stock. The transaction was accounted for
using the pooling of interests method of accounting. Sullivan is an executive
search firm that specializes in the financial services industry and had revenue
of $12.8 million in 1998.
9
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
Revenue, net income, and basic and diluted earnings per common share of the
combining companies are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1998
----------------- -----------------
<S> <C> <C>
Revenue
H&S Inc., as previously reported
on Form S-1/A $ 59,261 $ 157,976
Sullivan 3,017 10,938
-------- ---------
H&S Inc., as restated $ 62,278 $ 168,914
======== =========
Net income
H&S Inc., as previously reported
on Form S-1/A $ 2,294 $ 3,734
Sullivan (509) (171)
-------- ---------
H&S Inc., as restated $ 1,785 $ 3,563
======== =========
Earnings per common share
H&S Inc., as previously reported
on Form S-1/A
Basic $ 0.87 $ 1.39
======== =========
Diluted $ 0.87 $ 1.39
======== =========
H&S Inc., as restated
Basic $ 0.61 $ 1.20
======== =========
Diluted $ 0.61 $ 1.20
======== =========
</TABLE>
3. Nonrecurring Charge and Merger Costs
During the first quarter of 1999, the Company incurred a nonrecurring
charge of $12.4 million. This charge was the result of the Company's agreement
to modify the terms of the Mulder & Partner GmbH & Co. KG ("Mulder") acquisition
agreement, including the termination of all employment contingencies. 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, paid $8.7 million to the partners of Mulder and incurred $0.3
million of associated transaction costs. Under the original Mulder acquisition
agreement an additional $5.2 million (plus interest at an annual rate of 4%) was
due to the partners of Mulder in five equal annual installments, the first of
which was paid on October 1, 1998. The remaining shares were to be issued in
four annual installments beginning January 1, 1999. Because the total purchase
price was contingent upon the continued employment of the 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 such that the remaining
cash (plus interest) would be paid within 90 days of the completion of the
Merger and 428,452 shares (reflecting a split of 15.8217 for 1) of the Company's
common stock (which were valued, based upon the estimated fair market value of
HSI, at $5.2 million) were issued to such Mulder partners immediately after the
Merger. During the nine months ended September 30, 1999, the Company paid the
remaining $4.3 million cash due, issued 428,452 shares of the Company's common
stock and wrote off $2.9 million of deferred compensation assets resulting in a
total compensation charge of $12.4 million.
In connection with the acquisition of Sullivan, the Company recorded merger
related costs of $2.8 million during the three months ended September 30, 1999.
The merger costs consist of a $2.0 million non-cash charge for accelerated
vesting of an employee equity ownership plan in place at Sullivan and $0.8
million of transaction related costs, including legal, accounting and advisory
fees.
10
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Basic and Diluted Earnings Per Share
Basic earnings per common share is computed by dividing net income by
weighted average common shares outstanding for the period. Diluted earnings per
common share reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted.
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings per common share ("EPS"):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Basic EPS
Income available to common stockholders $ 5,427 $ 1,785 $ 128 $ 3,563
Weighted average common shares outstanding 16,533 2,906 12,624 2,957
------- ------- -------- -------
Basic EPS $ 0.33 $ 0.61 $ 0.01 $ 1.20
======= ======= ======== =======
Diluted EPS
Income available to common stockholders $ 5,427 $ 1,785 $ 128 $ 3,563
------- ------- -------- -------
Weighted average common shares outstanding 16,533 2,906 12,624 2,957
Dilutive effect of common stock options 249 -- 93 --
------- ------- -------- -------
Weighted average diluted common shares
outstanding 16,782 2,906 12,717 2,957
------- ------- -------- -------
Diluted EPS $ 0.32 $ 0.61 $ 0.01 $ 1.20
======= ======= ======== =======
</TABLE>
The share amounts in the table above reflect a 15.8217 for 1 stock split
approved by the Board of Directors on March 26, 1999. Furthermore, the Company
filed amendments to the Certificate of Incorporation to increase the number of
authorized shares of common stock to 100,000,000 shares and to authorize a class
of preferred stock of 10,000,000 shares. On February 11, 1999, the Board of
Directors adopted, and on February 12, 1999, the stockholders approved, these
amendments. The financial statements, including the number of shares of common
stock authorized, issued and outstanding, have been retroactively restated for
the effect of this split and the amendments to the Certificate of Incorporation.
5. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," in the fiscal year ended
December 31, 1998. Comprehensive income is comprised of net income and all
changes to stockholders' equity, except those changes resulting from investments
by owners (changes in paid in capital) and distributions to owners (dividends).
SFAS 130 requires disclosure of the components of comprehensive income in
interim periods.
11
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
Total comprehensive income is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C>
Net income $ 5,427 $ 1,785 $ 128 $ 3,563
-------- ------- ------- -------
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment (914) (1,707) (1,455) (1,086)
Unrealized gain (loss) on available-
for-sale investments (1,468) (994) 4,892 77
-------- ------- ------- -------
Other comprehensive income (loss), before tax (2,382) (2,701) 3,437 (1,009)
Income tax expense (benefit) related to items
of other comprehensive income (loss) (1,027) (1,152) 1,451 (432)
-------- ------- ------- -------
Other comprehensive income (loss), net of tax (1,355) (1,549) 1,986 (577)
-------- ------- ------- -------
Comprehensive income $ 4,072 $ 236 $ 2,114 $ 2,986
======== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
6. Segment Information
Management views the operations of the Company through the following geographic segments:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C>
Revenue
United States $ 69,113 $55,261 $194,218 $147,886
Europe 35,113 - 81,410 -
Other International 10,710 7,017 26,955 21,028
-------- ------- -------- --------
Total $114,936 $62,278 $302,583 $168,914
======== ======= ======== ========
Operating income (loss):
United States $ 12,104 $ 8,440 $ 31,318 $ 19,434
Europe 3,402 - (6,172) -
Other International 1,889 (1,091) 3,735 (1,865)
Corporate Unallocated (8,248) (3,439) (18,486) (9,431)
-------- ------- -------- --------
Total $ 9,147 $ 3,910 $ 10,395 $ 8,138
======== ======= ======== ========
As of As of
September 30, December 31,
1999 1998
------------------ -----------------
<S> <C> <C>
Identifiable Assets
United States $ 106,838 $ 84,507
Europe 89,245 -
Other International 22,918 14,287
Corporate Unallocated 140,236 29,981
------------------ -----------------
Total $ 359,237 $ 128,775
================== =================
</TABLE>
12
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Initial Public Offering
On April 26, 1999, the SEC declared effective the Company's Registration
Statement on Form S-1 (File No. 333-59931) relating to the public offering of
4,200,000 shares of the Company's common stock and on April 27, 1999, the
Company's common stock began trading on the Nasdaq National Market under the
symbol "HSII".
On April 30, 1999, the Company completed the public offering of an
aggregate of 4,200,000 shares of common stock at $14.00 per share, of which
3,700,000 shares were offered by the Company and 500,000 shares were offered by
selling stockholders. In addition, on June 1, 1999, the Company completed the
offering of an additional 505,000 shares of common stock which arose from the
exercise of a portion of the over-allotment option granted to certain
underwriters of the initial public offering. These offerings resulted in net
proceeds (after deducting the underwriting discount and estimated offering
expenses) of $52.0 million to the Company and $6.5 million to the selling
stockholders. See Part II--"Use of Proceeds".
The Company's mandatory redemption feature on its common stock terminated
as a result of the completion of the initial public offering.
8. Derivative Financial Instrument
The Company receives warrants for equity in its client companies, in
addition to its cash fee, for services rendered on some searches. When the
warrants are received, revenue is recorded equal to the estimated fair market
value of the instrument received. Thereafter, the securities are accounted for
as available-for-sale investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Equity
Securities". The Company has entered into a collar agreement to hedge the impact
of market value changes of one of these equity securities. Collars consist of
the sale of call options along with a corresponding purchase of put options,
with the effect of establishing a "cap" and a "floor" with respect to the price
of the stock. The collar has been designated and is effective as a hedge of the
equity security. Unrealized gains and losses on both the equity security and the
collar are recorded in equity and comprehensive income. When realized, gains and
losses on the equity security and the collar are recorded in income. Beginning
in the fourth quarter of 1999, the Company has the right to put and the
counterparty has the right to call a portion of the shares on a quarterly basis
in accordance with an established schedule. The unrealized pre-tax gain on the
shares at September 30, 1999 was $4.0 million and the Company has not recorded
any gains or losses on this collar to date.
The Company is exposed to credit loss in the event of nonperformance by the
other party. However, the Company does not anticipate nonperformance by the
counterparty.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is the leading global executive search firm and believes that,
based on comparative revenues, it is the largest executive search firm 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.
From the time of founding in 1953 until 1984, Heidrick & Struggles, Inc.
("H&S Inc.") and Heidrick & Struggles International, Inc. ("HSI") 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. As
discussed in Note 2 above, H&S Inc. and HSI consummated the Merger
on February 26, 1999 in order to reunite the two companies into a single
ownership structure.
H&S Inc. was treated as the survivor of the Merger for accounting purposes.
As a result, in the discussion below, for periods prior to the Merger,
historical Company information reflects historical H&S Inc. information.
With offices in over 65 locations throughout North and South America,
Europe, the Middle East, Africa and Asia Pacific, 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. For financial information by geographic
region, see Note 6 above.
14
<PAGE>
Results of Operations
The following table summarizes the results of the Company's operations for
the three months and nine months ended September 30, 1999 and 1998 as a
percentage of revenue:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries and employee benefits 66.4 68.6 66.7 72.0
General and administrative expenses 23.2 25.2 24.8 23.2
Nonrecurring charge and merger costs 2.4 - 5.0 -
----- ----- ----- -----
Total operating expenses 92.0 93.8 96.5 95.2
----- ----- ----- -----
Operating income 8.0 6.2 3.5 4.8
----- ----- ----- -----
Non-operating income (expense)
Interest income 1.2 0.8 0.6 0.6
Interest expense (0.3) (0.4) (0.4) (0.2)
Other, net 0.2 0.5 0.1 0.1
----- ----- ----- -----
Net non-operating income 1.1 0.9 0.3 0.5
----- ----- ----- -----
Equity in net income/(loss) of affiliate - 0.2 (0.2) (0.5)
----- ----- ----- -----
Income before income taxes 9.1 7.3 3.6 4.8
Provision for income taxes 4.3 4.6 3.5 2.7
----- ----- ----- -----
Net income 4.8% 2.7% 0.1% 2.1%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Revenue. Revenue increased $52.6 million, or 84.6%, to $114.9 million for
the three months ended September 30, 1999 from $62.3 million for the three
months ended September 30, 1998. This increase was primarily the result of the
Merger, which contributed $35.1 million in revenue for the three months ended
September 30, 1999. Excluding HSI, revenue increased by 28.2%. Continued strong
demand for the Company's services across a number of industries and disciplines,
especially technology and e-commerce, financial services and industrial,
aggressive business development activities, and an increase in the number of
consultants all contributed to the revenue growth as the number of confirmed
searches increased.
Salaries and employee benefits. Salaries and employee benefits increased
$33.6 million, or 78.7%, to $76.3 million for the three months ended September
30, 1999 from $42.7 million for the three months ended September 30, 1998. This
increase was primarily the result of the Merger, which contributed $24.0 million
in salaries and employee benefits for the three months ended September 30, 1999.
Excluding HSI, as a percentage of revenue, salaries and employee benefits
decreased from 68.6% to 65.5%. This was due to increased search consultant
productivity, greater leveraging of the support staff and a change in the bonus
structure for management that replaces a portion of cash incentive compensation
with stock options.
15
<PAGE>
General and administrative expenses. General and administrative expenses
increased $11.0 million, or 70.4%, to $26.7 million for the three months ended
September 30, 1999 from $15.7 million for the three months ended September 30,
1998. This increase was primarily the result of the Merger, which contributed
$7.8 million in general and administrative expenses for the three months ended
September 30, 1999. Excluding HSI, as a percentage of revenue, general and
administrative expenses decreased from 25.2% to 23.6%. This percentage decrease
was primarily a result of growth in revenue in the quarter outpacing increases
in fixed operating costs, costs of consulting services for the Company's
technology initiatives and investment spending for new complementary business
services.
Nonrecurring charge and merger costs. During the third quarter of 1999, the
Company incurred merger costs of $2.8 million related to the acquisition of
Sullivan. See Note 2 above for further details.
Net non-operating income (expense). Net non-operating income increased
$668,000 or 112.3%, to $1.3 million for the three months ended September 30,
1999 from $595,000 for the three months ended September 30, 1998. This was
primarily due to an increase in interest income arising from the investment of
the net proceeds received from the initial public offering partially offset by
an increase in interest expense. In addition, the Company recorded a $331,000
net gain from the sale of equity obtained as part of its new warrant program.
Under this program, the Company receives warrants for equity in certain client
companies in addition to its cash fee when executing searches for such clients.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September
30, 1998
Revenue. Revenue increased $133.7 million, or 79.1%, to $302.6 million for
the nine months ended September 30, 1999 from $168.9 million for the nine months
ended September 30, 1998. This increase was primarily the result of the Merger,
which contributed $81.4 million in revenue for the nine months ended September
30, 1999. Excluding HSI, revenue increased by 30.9%. Strong demand for the
Company's services across a number of industries and disciplines, especially
technology and e-commerce, financial services and industrial, aggressive
business development activities and an increase in the number of consultants all
contributed to the revenue growth as the number of confirmed searches increased.
In addition, fees per search were higher as the Company's strategic focus on
working at the top level of executive search continued to drive performance.
Salaries and employee benefits. Salaries and employee benefits increased
$80.2 million, or 66.0%, to $201.8 million for the nine months ended September
30, 1999 from $121.6 million for the nine months ended September 30, 1998. This
increase was primarily the result of the Merger, which contributed $54.6 million
in salaries and employee benefits for the nine months ended September 30, 1999.
Excluding HSI, as a percentage of revenue, salaries and employee benefits
decreased from 72.0% to 66.6%. This was due to increased search consultant
productivity, better leveraging of the support staff and a change in the bonus
structure for management that replaces a portion of cash incentive compensation
with stock options.
General and administrative expenses. General and administrative expenses
increased $35.9 million, or 91.7%, to $75.1 million for the nine months ended
September 30, 1999 from $39.2 million for the nine months ended September 30,
1998. This increase was primarily the result of the Merger, which contributed
$21.6 million in general and administrative expenses for the nine months ended
September 30, 1999. Excluding HSI, as a percentage of revenue, general and
administrative expenses increased from 23.2% to 24.2%. This percentage increase
was primarily due to an increase in costs of consulting services for the
Company's technology initiatives and investment spending for new complementary
business services.
Nonrecurring charge and merger costs. During the first quarter of 1999, the
Company incurred a nonrecurring charge of $12.4 million. See Note 3 above for
further details. During the third quarter of 1999, the Company incurred merger
costs of $2.8 million related to the acquisition of Sullivan. See Note 2 above
for further details.
Net non-operating income (expense). Net non-operating income increased
$268,000 or 36.7%, to $998,000 for the nine months ended September 30, 1999 from
$730,000 for the nine months ended September 30, 1998. This was primarily due to
an increase in interest income arising from the investment of the net proceeds
received from the initial public offering partially offset by an increase in
interest expense. In addition, the Company recorded a
16
<PAGE>
$417,000 net gain from the sale of equity obtained as part of its new warrant
program. Under this program, the Company receives warrants for equity in certain
client companies in addition to its cash fee when executing searches for such
clients.
Pro Forma Combined Results of Operations
The following table provides pro forma combined results of operations as
well as such data as a percentage of revenue of the Company for the three months
and nine months ended September 30, 1999 and 1998. The data gives effect to the
Merger, the modification of the Mulder acquisition agreement, the
implementation of the Company's GlobalShare programs and the merger with
Sullivan, as if the transactions had occurred on January 1, 1998.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 (3) 1998(1)(2) 1999(1)(2)(3) 1998(1)(2)
-------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 114,936 100.0% $ 96,568 $100.0% $ 322,568 100.0% $ 262,659 100.0%
Operating expenses: --------- ----- -------- ------ --------- ----- --------- -----
Salaries and employee benefits(4) 76,303 66.4 64,395 66.7 216,763 67.2 181,499 69.1
General and administrative expenses(5) 26,686 23.2 25,541 26.4 81,562 25.3 65,864 25.1
--------- ----- -------- ----- --------- ----- --------- ------
Total operating expenses 102,989 89.6 89,936 93.1 298,325 92.5 247,363 94.2
--------- ----- -------- ----- --------- ----- --------- ------
Operating income $ 11,947 10.4% $ 6,632 6.9% $ 24,243 7.5% $ 15,296 5.8%
========= ===== ======== ====== ========= ===== ========= ====
</TABLE>
(1) The September 30, 1999 and 1998 consolidated statements of income have been
adjusted by the following amounts to reflect the historical operations of
HSI:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue -- $34,290 $19,985 $93,745
Salaries and
employee benefits -- 23,611 15,836 65,876
General and administrative
expenses -- 9,530 6,209 25,628
</TABLE>
Z
(2) Excludes the $12.4 million nonrecurring Mulder charge for the nine months
ended September 30, 1999. See further discussion in Note 3 above. In
addition, $1.2 million, $0.9 million and $3.9 million of deferred
compensation expense relating to the acquisition has been excluded for the
three months ended September 30, 1998 and for the nine months ended
September 30, 1999 and 1998, respectively.
(3) Excludes merger costs of $2.8 million for the three months and nine months
ended September 30, 1999, arising from the merger of the Company and
Sullivan on September 1, 1999. See further discussion in Note 2 above.
(4) Amount has been adjusted by $0.7 million and $2.1 million for the three
months and nine months ended September 30, 1998, respectively, to eliminate
compensation expense representing the difference between the amount
actually paid to management for bonuses over the amount that would have
been paid under the Company's GlobalShare programs. One of the plans within
GlobalShare allows the Company to issue options to management in lieu of a
portion of their annual cash performance bonus.
(5) Includes additional amortization related to acquired intangibles and
goodwill arising from the Merger of $0.3 million, $0.2 million and $1.0
million for the three months ended September 30, 1998 and for the nine
months ended September 30, 1999 and 1998, respectively.
17
<PAGE>
Pro Forma Combined Results of Operations for the Three Months Ended September
30, 1999 Compared to the Three Months Ended September 30, 1998
Revenue. Revenue increased $18.3 million, or 19.0%, to $114.9 million for
the three months ended September 30, 1999 from $96.6 million for the three
months ended September 30, 1998. Excluding the negative effect of foreign
currency translations into the U.S. dollar, revenue grew 21%. Continued strong
demand for the Company's services across a number of industries and disciplines,
especially technology, financial services and industrial, aggressive business
development activities and an increase in the number of consultants all
contributed to the revenue growth as the number of confirmed searches increased
21%.
Salaries and employee benefits. Salaries and employee benefits increased
$11.9 million, or 18.5%, to $76.3 million for the three months ended September
30, 1999 from $64.4 million for the three months ended September 30, 1998. As a
percentage of revenue, salaries and employee benefits decreased from 66.7% to
66.4%. This was due to increased search consultant productivity and greater
leveraging of the support staff.
General and administrative expenses. General and administrative expenses
increased $1.2 million, or 4.5%, to $26.7 million for the three months ended
September 30, 1999 from $25.5 million for the three months ended September 30,
1998. As a percentage of revenue, general and administrative expenses decreased
from 26.4% to 23.2%. This percentage decrease was primarily a result of growth
in revenue in the quarter outpacing increases in fixed operating costs, costs of
consulting services for the Company's technology initiatives and investment
spending for new complementary business services. In addition, the decrease was
partially attributable to cost control programs, particularly in Europe.
Liquidity and Capital Resources
The Company evaluates its liquidity requirements, capital needs and
availability of capital resources based on its plans for expansion and other
operating needs. It historically has financed its operations primarily through
internally generated funds, supplemented by sales of common stock to certain key
employees and periodic borrowings under it credit facilities. The Company has
historically paid bonuses in December. Employee bonuses are accrued when earned
and are based on the performance of the respective employee and the Company.
The Company believes that the net proceeds from the initial public
offering and related sales of shares to employees pursuant to the GlobalShare
Employee Share Purchase program, 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. However, if the Company
undertakes significant acquisitions or other investment activities, it may need
access to additional sources of debt or equity financing.
The Company maintained cash and cash equivalents at September 30, 1999 and
1998 of $109.5 million and $38.8 million, respectively. Towards these sums, cash
flows from operating activities contributed $72.9 million for the nine months
ended September 30, 1999, reflecting an increase in net income excluding the
nonrecurring charge and merger costs of $15.2 million, a majority of which was
non-cash, a decrease in working capital, and an increase in depreciation and
amortization. For the nine months ended September 30, 1998, cash flows from
operating activities contributed $48.3 million, reflecting a reduction in
working capital and non-cash expenses for depreciation and amortization.
On September 1, 1999, the Company completed its acquisition of Sullivan,
which provided for the exchange of all the outstanding stock of Sullivan for
964,000 shares of the Company's common stock. The transaction was accounted for
using the pooling of interests method of accounting. On February 26, 1999, H&S
Inc. merged with and into HSI resulting in $8.2 million of cash being acquired.
On June 26, 1998, the Company purchased selected assets and liabilities of
Fenwick Partners, Inc. for approximately $6.1 million in cash and notes.
Cash flows provided by financing activities were $28.0 million for the nine
months ended September 30, 1999, resulting primarily from the estimated net
proceeds raised in the initial public offering of $52.0 million and the related
sales of shares to employees pursuant to the Company's GlobalShare program of
$9.3 million, offset by net repayments under its lines of credit. Cash flows
used in financing activities were $3.7 million for the nine months ended
September 30, 1998, resulting from the Company's net repayments under its lines
of credit and payments to former stockholders from whom it had repurchased
stock.
18
<PAGE>
The Company has a $60.0 million reducing revolving credit facility. This
facility will terminate on December 31, 2001. The line of credit will reduce
annually by $10.0 million on December 31, 1999 and 2000. There was no balance
outstanding under this line of credit at September 30, 1999. At its discretion,
the Company may borrow either U.S. dollars on deposit in the United States
("U.S. Borrowings") or U.S. dollars or foreign currencies on deposit outside the
United States ("Non-U.S. Borrowings"). Non-U.S. Borrowings bear interest at the
then-existing LIBOR plus a margin as determined by certain tests of the
Company's financial condition (the "Applicable Margin"). U.S. Borrowings bear
interest at the then-existing prime rate. This line of credit replaced a $25.0
million line of credit, which had been effective since October 1, 1997. There
was no outstanding balance under the line of credit at September 30, 1998. The
line of credit has certain financial covenants the Company must meet relating to
consolidated net worth, liabilities, and debt in relation to cash flows.
Capital expenditures amounted to $16.6 million and $11.5 million for the
nine months ended September 30, 1999 and 1998, respectively. These expenditures
were primarily for systems development costs, office furniture and fixtures,
leasehold improvements, and computer equipment and software. The systems
development costs relate primarily to the Integrated Global Information System
("IGIS") initiative. IGIS expenditures of $9.9 million and $6.9 million have
been capitalized for the nine months ended September 30, 1999 and 1998,
respectively.
Derivatives
The Company receives warrants for equity in its client companies, in
addition to its cash fee, for services rendered on some searches. The Company
has utilized a derivative to seek to mitigate the impact of fluctuations in the
price of one of these equity securities. The Company has used a collar in order
to accomplish this. Collars consist of the sale of call options along with a
corresponding purchase of put options, with the effect of establishing a "cap"
and a "floor" with respect to the price of the stock. The Company has not
recorded any gains or losses on such instruments to date. See Note 8.
Currency Market Risk
Historically, the Company has not experienced any significant translation
gains or losses on transactions involving U.S. dollars and other currencies.
Revenue earned in each country is generally matched with the associated expenses
incurred, thereby reducing currency risk to earnings.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written to use
two digits to define year dates. Computer programs running date-sensitive
software may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in systems failures or miscalculations causing
disruptions of operations. The Company utilizes information technology to
facilitate (i) its search processes communications with candidates and clients
and (ii) its financial management systems and other support systems.
The Company has formed a task force to evaluate and correct its Year 2000
issues and to assess the compliance of its suppliers. The Company is replacing
systems that are not Year 2000 compliant. The IGIS systems currently being
deployed will be Year 2000 compliant. The Company currently has certification as
to Year 2000 compliance from its key software suppliers.
EDS has been retained as the Company's systems integrator and is conducting
Year 2000 testing. The Company has a complete duplication of hardware and
software to conduct on-site, realistic testing and is currently conducting its
own tests of these systems. In addition, the Company's personnel are currently
conducting testing and will continue to monitor and test the systems through the
end of 1999. The Company also has specifically addressed its non-information
technology-related systems and believes that there will be no significant
operational problems relating to the Year 2000 issue.
The Company's primary business does not depend on material relationships
with third party vendors, but the Company does utilize third party vendors for a
number of functions, including its automated payroll functions, insurance and
investment of pension funds. The Company is continuing formal communications
with third party
19
<PAGE>
providers to determine the extent to which these third parties are moving toward
Year 2000 compliance. The Company also utilizes third party on-line information
services and the Internet to communicate and to retrieve information about
potential candidates and clients. Failure of these third parties to have their
systems timely converted may have a material adverse effect on the Company's
operations.
All major systems are now Year 2000 compliant and any remaining work to be
done on non-critical components is expected to be completed in the fourth
quarter of 1999. The Company expects to spend approximately $1,000,000, in
addition to the IGIS budget, to address Year 2000 issues. The Company's total
Year 2000 project cost estimates include the impact of third party Year 2000
issues.
The following scenarios with respect to the Company's systems could occur:
(i) the software code may not be Year 2000 compliant, (ii) integration of
upgrades may not be complete by the Year 2000 and (iii) the integration may be
complete by the Year 2000 but not be fully tested or monitored prior to the Year
2000 such that testing and monitoring will uncover problems that the Company
cannot remedy in a timely manner.
The Company believes that failure to be Year 2000 compliant will not have a
significant impact on its human resources functions. However, any failure of the
financial systems to be Year 2000 compliant could hinder timely reporting of
financial data and processing of financial information and cause delays to
client billings and collections as these functions would have to be performed
manually using non-networked computers. Failure of search-related systems might
force the Company to use older proprietary systems to conduct searches and might
cause sorting problems, lowering productivity. If any non-information technology
system is non-compliant, the Company will need to replace such a system.
The Company's cost and timing estimates to achieve Year 2000 compliance
were based on numerous assumptions about future events, including third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, costs of the retention of key staff, the ability to locate and
correct all relevant computer codes, and similar uncertainties.
European Monetary Union
Commencing January 1, 1999, eleven European countries entered into the
European Monetary Union ("EMU") and introduced the Euro as a common currency.
During a three-year transition period, the national currencies will continue to
circulate, but their relative values will be fixed denominations of the Euro.
The Company recognizes that there are risks and uncertainties associated
with the conversion to the Euro including, but not limited to, an increasingly
competitive European environment resulting from greater transparency of pricing,
increased currency exchange rate risk, uncertainty as to tax consequences and
the inability to update financial reporting systems on a timely basis.
The Company is upgrading its systems to enable them to process transactions
denominated in the Euro. The upgrade will allow the Company to utilize the Euro
or local currency as needed. The upgrade is scheduled to be completed during
1999. The Company will later seek to adapt its systems to comply fully with the
implications of the European single currency after January 1, 2002, when local
currencies of EMU member countries are expected to be abolished. Failure to
adapt information technology systems could have an adverse effect on the
Company's financial condition and results of operations. The Company is also
dependent on many third parties, including banks and other providers of
information, for proper transaction clearance and reporting. If any of these
systems are not appropriately upgraded to manage transactions denominated in the
Euro, the Company's operations could be adversely affected.
The Company can give no assurance that the Company or third parties on whom
the Company depends will have in place in a timely manner the systems necessary
to process Euro-denominated transactions. Moreover, any disruption of business
or financial activity in European markets resulting from the conversion to the
Euro may hurt the Company's business in those markets, resulting in lost
revenues.
20
<PAGE>
Recently Issued Accounting Standards
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes new standards for
reporting information about derivatives and hedging. FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," in 1999, which deferred the effective
date of SFAS No. 133 for one year. The standard is effective for periods
beginning after June 15, 2000 and will be adopted by the Company as of January
1, 2001. The Company expects that adoption of this Standard will have no
material effect on its consolidated financial position or results of operations.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as well as other sections of this Quarterly Report on Form
10-Q contain forward-looking statements that are based on the current beliefs
and expectations of the Company's management, as well as assumptions made by,
and information currently available to, the Company's management. Such
statements include those regarding general economic and executive search
industry trends. Because such statements involve risks and uncertainties, actual
actions and strategies, and the timing and expected results thereof, may differ
materially from those expressed or implied by such forward-looking statements,
and the Company's future results, performance or achievements could differ
materially from those expressed in, or implied by, any such forward-looking
statements. Future events and actual results could differ materially from those
set forth in or underlying the forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted. These potential risks and
uncertainties include dependence on attracting and retaining qualified executive
search consultants, portability of client relationships, maintenance of
professional reputation and brand name, risks associated with global operations,
ability to manage growth, restrictions imposed by off-limits agreements,
competition, implementation of an acquisition strategy, reliance on information
management systems and the impact of Year 2000 issues, and employment liability
risk. For more information on these risks and uncertainties see "Risk Factors"
in the Company's Registration Statement on Form S-1 (File No. 333-59931), as
declared effective by the Securities and Exchange Commission on April 26, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company has been involved in litigation incidental to
its business. No further threats of litigation have arisen against the Company
in connection with the April 23, 1999 letter received by the Company alleging
the Company's improper use of confidential information, as more fully described
in the Company's Form 10Q filed on May 17, 1999. The Company 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.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
Pursuant to the terms and conditions of the Sullivan merger, on September
1, 1999, the Company issued 964,000 shares of its common stock in exchange for
all of the outstanding common stock of Sullivan. Pursuant to such merger, the
Company received no proceeds from the issuance of the stock to the Sullivan
shareholders. Exemption from the registration is claimed under Section
4(2) of the Securities Act.
21
<PAGE>
Use of Proceeds
On April 30, 1999, the Company completed the public offering of an
aggregate of 4.2 million shares of common stock at $14.00 per share, of which
3.7 million shares were offered by the Company and 500,000 shares were offered
by selling stockholders. In addition, on June 1, 1999, the Company completed the
offering of an additional 505,000 shares of common stock which arose from the
exercise of a portion of the over-allotment option granted to certain
underwriters of the initial public offering. These offerings resulted in net
proceeds (after deducting the underwriting discount and estimated offering
expenses) of $52.0 million to the Company and $6.5 million to the selling
stockholders. The Company used approximately $19.8 million of the net proceeds
to repay a portion of borrowings under its credit facilities and notes payable
to former stockholders. The Company will in the near term use the net proceeds
to repay notes payable to former stockholders of approximately $2.4 million. In
addition, the Company spent a portion of the net proceeds for IGIS technology
enhancements. The remaining net proceeds will be used for funding of
LeadersOnline/TM/ and other complementary businesses, continuing IGIS technology
costs, possible future acquisitions, working capital and general corporate
purposes. The Company has currently invested the remaining net proceeds in
short-term investment grade securities. The Company received no proceeds from
the sale of the common stock in the offering by the selling stockholders.
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
Exhibit
No. Description
------- -----------
3(a) Form of Amended and Restated Certificate of Incorporation of
the Registrant (Incorporated by reference to Exhibit 3.02 of
this Registrant's Registration Statement on Form S-4 (File No.
333-61023))
3(b) Form of Amended and Restated By-laws of the Registrant
(Incorporated by reference to Exhibit 3.03 of this
Registrant's Registration Statement on Form S-4 (File No. 333-
61023))
27 Financial Data
(b) Reports on Form 8K
During the first nine months of 1999, the Company filed no reports on Form 8K.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: November 15, 1999.
Heidrick & Struggles International, Inc.
(Registrant)
By: /s/ Donald M. Kilinski
--------------------------
Donald M. Kilinski
Chief Financial Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 109,529
<SECURITIES> 0
<RECEIVABLES> 100,556
<ALLOWANCES> 14,349
<INVENTORY> 0
<CURRENT-ASSETS> 218,831
<PP&E> 80,261
<DEPRECIATION> 29,312
<TOTAL-ASSETS> 359,237
<CURRENT-LIABILITIES> 169,235
<BONDS> 0
0
0
<COMMON> 167
<OTHER-SE> 158,903
<TOTAL-LIABILITY-AND-EQUITY> 359,237
<SALES> 302,583
<TOTAL-REVENUES> 302,583
<CGS> 0
<TOTAL-COSTS> 292,188
<OTHER-EXPENSES> (1,666)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,298
<INCOME-PRETAX> 10,763
<INCOME-TAX> 10,635
<INCOME-CONTINUING> 128
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
