<PAGE>
As filed with the Securities and Exchange Commission on April 26, 1999
Registration No. 333-59931
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 4 to
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 7361-05 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. [_]
----------------
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.
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<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 Matters
11. Information with Respect to the Registrant... Prospectus Summary; The
Company; Dividend Policy;
Capitalization; Dilution;
Selected Financial Data;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Business;
Management; Principal and
Selling Stockholders;
Description of Capital Stock;
Shares Eligible for Future
Sale; 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 April 26, 1999
PRELIMINARY PROSPECTUS
4,200,000 Shares
Common Stock
-------------
Of the 4,200,000 shares of common stock, $0.01 par value per share (the
"Common Stock"), of Heidrick & Struggles International, Inc. ("H&S" or the
"Company") offered initially hereby, 3,700,000 shares are being offered by the
Company and 500,000 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 $14.00 and $16.00. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Common Stock has been approved for listing on the Nasdaq National
Market under the proposed symbol "HSII," subject to official notice of
issuance.
-------------
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.
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<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.......... $ $ $ $
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Total(3)........... $ $ $ $
</TABLE>
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(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 $5.5 million.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 630,000 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 , 1999.
-------------
Lehman Brothers Goldman, Sachs & Co.
, 1999
<PAGE>
[INSIDE FRONT COVER]
Map of world and list of 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 NASDAQ NATIONAL MARKET 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 and all pro forma
share amounts and per-share amounts have been adjusted to give retroactive
effect to a 15.8217 for 1 stock split of the Common Stock (the "Stock Split").
As of February 26, 1999, Heidrick & Struggles, Inc., a Delaware company ("H&S
Inc."), merged 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 750 professionals in 59 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.
The size of the Company's business has grown significantly over the past five
years as evidenced by the fact that the combined worldwide revenues of H&S Inc.
and HSI have grown at a compound annual rate of approximately 25%.
According to Kennedy Information LLC ("Kennedy"), 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. As of December 31,
1998, the Company employed 346 executive search consultants
("consultants") who, on average, have approximately 10 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
December 31, 1998, an annual average of fewer than 1.5% of H&S's
consultants left to work elsewhere in the executive search industry.
3
<PAGE>
. Global Presence. The Company's 59 offices are located in major business
centers in 30 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 174, 131,
26 and 15 consultants, as of December 31, 1998, respectively, and
generated 1998 revenues of $180 million, $125 million, $14 million and
$10 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 66% of the executive searches
performed by the Company worldwide, representing approximately 73% of
revenues (and approximately 81% of the searches performed in North
America, representing approximately 81% of revenues) in 1998, 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 and
department 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. 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
406 associates, all of whom have access to a sophisticated global
technology infrastructure. This technology infrastructure consists of
internally developed proprietary global databases containing over 840,000
candidate profiles and over 29,000 client 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
over 1,800 clients in 1995 and over 3,100 in 1998. Of the searches
performed in 1998, more than 75% were on behalf of clients or their
affiliates for whom the Company had conducted multiple assignments over
the last six years.
. 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 and evaluates potential
acquisitions on an ongoing basis. See "--Recent Strategic Acquisitions
and Alliance."
. 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 as
compared to $809,000 for the average of the other nine of the largest ten
U.S. executive search firms. 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 scaleable technology
infrastructure that is designed to support a significant number of
additional users without significant incremental costs.
. Pursue New, Complementary Lines of Business. H&S expects that it will
expand the range of services it offers, including Internet-based
recruiting, interim management placement, management audit and board of
directors consulting services. The Company's Internet-based recruiting
initiative, LeadersOnline ("LeadersOnline"), offers a comprehensive
recruiting service for technology professionals through its secure
Internet site. LeadersOnline utilizes proprietary software and a
methodology designed to serve clients' growing demand for such
professionals, especially those in critical-need positions. The service
provides an integrated recruiting solution, including: candidate
identification, screening, degree and job verification and recruiting
progress management, which allows the Company to expedite the search
process. Clients interact with LeadersOnline through a secure Internet
site where they may analyze pre-screened candidates for opportunities in
the $75,000 to $150,000 annual compensation range, a market not
previously targeted by the Company.
The Merger
Prior to 1984, H&S Inc. and 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 in HSI. Between 1984 and the effective
date of the Merger, HSI conducted primarily European-based operations, while
H&S Inc. conducted all other operations. H&S Inc. and HSI consummated the
Merger on February 26, 1999 in order to reunite the two companies in a single
corporate structure.
5
<PAGE>
Recent Strategic Acquisitions and Alliance
Over the past two years, the Company has successfully completed the strategic
acquisition of two executive search firms and a strategic alliance with one
executive search firm:
. 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 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.
. Redelinghuys. On August 31, 1998, the Company entered into an alliance
with Redelinghuys & Partners, a senior level executive search firm with
offices in Capetown and Johannesburg in the Republic of South Africa. The
alliance consists of a licensing agreement as well as a transfer fee
sharing agreement and allows the Company to expand its services to its
clients to the African continent.
The Offering
<TABLE>
<S> <C>
Common Stock offered by the Company....... 3,700,000 shares
Common Stock offered by the Selling
Stockholders............................. 500,000 shares
Total Common Stock offered............ 4,200,000 shares(1)
Common Stock outstanding after the
Offering................................. 15,194,941 shares(1)(2)
Use of Proceeds........................... Proceeds to the Company will be used
to fund working capital and for
general corporate purposes,
including repayment of debt,
expenditures for the IGIS technology
enhancements, funding the continuing
development of LeadersOnline, the
possible opening of new offices and
possible acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.... HSII
</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 4,830,000.
(2) Includes 666,667 shares that may be purchased by certain employees of the
Company under the Company's GlobalShare Plan (as defined herein), pursuant
to a separate offering to be made contemporaneously with the Offering (the
"Employee Share Purchase"), but excludes up to 735,000 shares issuable
pursuant to options that may be granted pursuant to the GlobalShare Plan to
such employees in connection with such purchase and approximately 855,000
shares issuable pursuant to options to be granted to 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 in the related notes 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, the Unaudited Pro Forma Condensed
Consolidated Financial Data and related notes thereto included elsewhere in
this Prospectus as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Unaudited Summary Pro Forma Condensed Consolidated Financial Data(1)
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
----------------
(in thousands,
except per share
and other
operating data)
<S> <C>
Statement of Operations
Data:
Revenue................. $ 328,999
Operating income........ 3,802
Net loss................ $ (1,423)
==========
Share Data:
Basic and diluted loss
per common share....... $ (.09)
==========
Basic and diluted
weighted average common
shares outstanding..... 15,194,941
==========
Balance Sheet Data (at
end of period):
Working capital......... $ (9,975)
Total assets............ 237,673
Long-term debt, less
current maturities..... 5,262
Total stockholders'
equity................. 82,395
Other Operating Data:
Number of offices (at
end of period)......... 59
==========
Average number of
consultants during the
period................. 320
==========
</TABLE>
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(1) See Notes to "Selected Unaudited Pro Forma Condensed Consolidated Financial
Data" on page 20.
7
<PAGE>
Summary Financial Data
(In thousands, except other operating data)
H&S Inc.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1995 1996 1997(1) 1998
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue....................... $96,127 $108,685 $137,665 $180,244 $204,015
Operating income (loss)....... 10,670 10,617 10,712 11,945 (10,392)(2)
Net income (loss)............. $ 6,342 $ 6,358 $ 6,449 $ 6,443 $(16,254)(3)
Balance Sheet Data (at end of
period):
Working capital............... $13,549 $ 17,193 $ 20,628 $ 24,873 $ 8,192
Total assets.................. 45,058 55,900 68,643 93,585 123,150
Long-term debt, less current
maturities................... 735 1,189 993 1,636 5,150
Other Operating Data:
Number of offices (at end of
period)...................... 18 20 25 28 32
Average number of consultants
during the period............ 108 119 137 159 197
</TABLE>
HSI
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1994 1995 1996 1997(1) 1998
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue......................... $39,634 $52,815 $64,558 $82,732 $124,984
Operating income (loss)......... 5,123 3,302 3,438 3,085 (15,643)(4)
Net income (loss)............... $ 2,649 $ 1,800 $ 2,141 $ 692 $(17,365)(5)
Balance Sheet Data (at end of
period):
Working capital................. $ 7,908 $ 7,777 $ 9,345 $(6,607) $(13,844)
Total assets.................... 21,998 25,756 32,851 75,560 94,997
Long-term debt, less current
maturities..................... -- -- 267 168 112
Other Operating Data:
Number of offices (at end of
period)........................ 12 13 16 23 27
Average number of consultants
during the period.............. 55 59 71 95 123
</TABLE>
- --------
(1) Certain 1997 amounts of H&S Inc. and HSI have been restated. See Note 15 of
"Heidrick & Struggles, Inc. and Subsidiaries--Notes to Consolidated
Financial Statements" and Note 14 of "Heidrick & Struggles International,
Inc. and Subsidiaries--Notes to Consolidated Financial Statements,"
respectively.
(2) Includes $12.7 million of non-recurring charges comprised of (i) $9.9
million of salaries and employee benefits expense arising from the
difference between the issuance price of shares issued by the Company to
certain of its directors in December 1998 and the fair market value of such
shares at the date of grant and (ii) $2.8 million of salaries and benefits
expense relating to the early settlement of profit sharing arrangements
upon the acquisition of certain Latin American offices.
(3) Includes a non-recurring $2.5 million charge incurred in connection with
the costs of the postponement of the Offering in September 1998.
(4) Includes $15.7 million of non-recurring charges comprised of (i) $5.1
million of salaries and employee benefits expense due to the amortization
of deferred compensation expense resulting from the Mulder acquisition,
(ii) $4.9 million of salaries and employee benefits expense arising from
the difference between the issuance price of shares issued by the Company
to certain of its directors in December 1998 and the fair market value of
such shares at the date of grant, and (iii) $5.7 million of salaries and
employee benefits expense arising from the termination agreement with
Gerard Clery-Melin, HSI's former President and Chief Executive Officer, and
the termination agreement of a non-executive HSI employee. See
"Management."
(5) Includes a non-recurring $1.3 million charge incurred in connection with
the costs of the postponement of the Offering in September 1998.
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.
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."
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
9
<PAGE>
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 Charge
During the quarter ending March 31, 1999, the Company expects to incur a
nonrecurring charge of $12.7 million, net of income taxes. This charge is the
result of the Company's agreement to modify the terms of the Mulder agreement,
including the termination of all employment contingencies. This nonrecurring
charge represents the write-off of $2.9 million of deferred compensation
assets as of February 26, 1999, a cash payment of $4.3 million and the
issuance of 428,452 shares of common stock (worth $5.5 million based upon the
estimated fair value of HSI) to the previous owners of Mulder. See Note 2 of
"Heidrick & Struggles International, Inc. and Subsidiaries--Notes to
Consolidated Financial Statements."
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."
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
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<PAGE>
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 H&S 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. Because newly-hired consultants require a large initial investment
in signing bonuses, guaranteed bonuses and salaries and benefits for
associated support staff and do not tend to immediately provide
proportionately higher revenues, the Company's average revenue per consultant
and overall profitability may be negatively impacted by such new hires in the
short term. 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.
Development of New Lines of Business
The Company expects to devote significant resources to developing and
implementing new lines of business that it believes are complementary to the
services it currently provides to its clients. In particular, the Company
expects to continue to develop LeadersOnline, which is designed to serve
clients' growing demand for technology professionals for positions in the
$75,000 to $150,000 annual compensation range. Because such lines of business
are new to the Company, their development and implementation may require
significant attention from key management personnel who are not as experienced
in these lines of business as they are in the Company's core business. No
assurance can be made that any particular new line of business will generate
revenues at any particular rate or over any particular period, and the
historical experience of the Company is not an indication of the possible or
likely performance of any new line of business. No assurance can be made that
the Company will recover the research, development and start-up costs
associated with any new line of business.
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 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
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<PAGE>
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 Management."
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
The current stockholders of H&S, substantially all of whom are currently
senior employees of the Company, will be the beneficial owners of 10,328,274
shares of Common Stock, not including any shares that the current stockholders
may purchase in the Offering or the Employee Share Purchase, representing
approximately 71.1% of the then issued and outstanding Common Stock. 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 1998 and 1997, 45.9% and 40.6%, respectively, of the Company's revenues
were generated from outside the United States. H&S offers its services in 30
countries from 59 offices around the world. The Company is exposed to the risk
of changes in social, political and economic conditions inherent in foreign
operations such as the recent economic developments in Asia and Latin America.
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,
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 features of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
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
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<PAGE>
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. In addition, the Company's Board of Directors
may authorize the issuance of one or more series of preferred stock with
certain voting rights and other powers. 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. The failure of management to apply the proceeds
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. 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 up to two years after the Offering, the market price of the Common
Stock may be more susceptible to fluctuation. See "--Shares Eligible For
Future Sale."
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."
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 15,194,941 shares of
Common Stock and stock options to purchase an additional 1,590,000 shares and
1,465,000 shares reserved for issuance pursuant to the Company's incentive
plans. Of these shares, the 4,200,000 shares of
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<PAGE>
Common Stock sold in the Offering (4,830,000 shares if the Underwriters' over-
allotment option is exercised in full) and the 666,667 shares purchased by
employees of the Company pursuant to the Employee Share Purchase will be
freely tradeable by persons other than "affiliates" of H&S, without
restriction under the Securities Act. The remaining 10,328,274 shares of
Common Stock outstanding 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 GlobalShare
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 and other than shares of Common Stock
issued pursuant to the GlobalShare Plan or upon exercise of stock options
granted pursuant to the GlobalShare Plan, 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
$9.70 in tangible book value per share of the Common Stock. See "Dilution."
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 Euro. The upgrade will allow the Company to utilize 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 fully comply 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 on many third
parties, including banks and providers of information. If any of these systems
are not appropriately upgraded to manage transactions denominated in 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.
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
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<PAGE>
than the Year 2000. This could result in systems failure 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 will replace
systems that are not Year 2000 compliant. The IGIS systems scheduled to be
deployed during the spring and summer of 1999 will be Year 2000 compliant. The
Company currently has certification as to Year 2000 compliance from its key
software suppliers.
MCI Systemhouse has been retained as the Company's system 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 will conduct testing during the spring of 1999 and will continue to
monitor and test the systems through the end of 1999. The Company has also
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 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.
The Company anticipates completing the Year 2000 project not later than the
third quarter of 1999. The Company has budgeted $1,000,000 in addition to the
IGIS budget to be expensed as incurred 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 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 resource 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.
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
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<PAGE>
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 750 professionals in 59 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. The size of the Company's business has grown significantly over the
past five years as evidenced by the fact that the combined worldwide revenues
of H&S Inc. and HSI have grown at a compound annual rate of approximately 25%.
H&S Inc. was a Delaware corporation that was incorporated in 1956 as
successor to a partnership formed in 1953, and HSI was 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.
USE OF PROCEEDS
The net proceeds to H&S from the sale of the 3,700,000 shares of Common
Stock offered hereby by the Company, after deducting the underwriting discount
and estimated offering expenses, are estimated to be approximately $46.1
million ($53.9 million if the Underwriters' over-allotment option is exercised
in full). The net proceeds of the Offering will be used to fund working
capital and for general corporate purposes, including repayment of debt,
expenditures for the IGIS technology enhancements, funding the continuing
development of LeadersOnline, the possible opening of new offices and possible
acquisitions. The Company expects to use the proceeds to repay debt as
follows: (i) approximately $17.5 million will be used to repay the outstanding
balance on H&S Inc.'s $60 million line of credit expiring on December 31, 2001
which bears interest at approximately 6.8%, (ii) approximately $3.9 million
will be used to repay balances under HSI's $10.5 million line of credit
expiring on July 1, 2002 which bears interest at approximately 6.6%, and (iii)
approximately $3.7 million will be used to repay balances under HSI's line of
credit expiring on May 31, 1999 and which bears interest at approximately
4.6%. The Company also intends to use $3.8 million of the proceeds of the
Offering to repay notes payable to certain former stockholders of H&S Inc. and
HSI whose stock has been repurchased by H&S Inc. and HSI, respectively. The
notes payable to such former stockholders are payable over four to five years
and bear interest at the prime rate. The Company also expects to spend $16.3
million of the proceeds of the Offering for the IGIS technology enhancements
over the course of the year. 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. The borrowings under H&S Inc.'s and HSI's respective credit lines
which are intended to be repaid were used to fund certain IGIS technology
enhancements, acquisitions and the working capital needs of the Company. 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.
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CAPITALIZATION
The following table sets forth (i) the capitalization of H&S Inc. at
December 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
price of $15.00 per share, the midpoint of the estimated range of the initial
public offering price (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 each of H&S Inc. and
HSI and the Notes thereto and the Unaudited Pro Forma Condensed Consolidated
Financial Data and the Notes thereto included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
At December 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...................... $10,428 $ 21,858 $ 26,077
======= ======== ========
Total debt..................................... $29,697 $ 41,917 $ --
------- -------- --------
Mandatorily redeemable common stock(2)......... 44,611 -- --
------- -------- --------
Stockholders' equity:
Common Stock, par value $.01 per share,
100,000,000 shares authorized, 10,828,274
shares issued and outstanding, 15,194,941
shares issued and outstanding as
adjusted(3)................................. -- 108 152
Preferred Stock, par value $.01 per share,
10,000,000 shares authorized, payable as
adjusted, no shares issued and outstanding.. -- -- --
Additional paid-in capital................... -- 80,124 126,216
Cumulative translation adjustment............ -- (1,089) (1,089)
Unrealized gain on available for sale
investments................................. -- 1,686 1,686
Treasury stock............................... -- (16,471) (16,471)
Retained earnings............................ -- 18,037 18,037
------- -------- --------
Total stockholders' equity................. -- 82,395 128,531
------- -------- --------
Total capitalization..................... $74,308 $124,312 $128,531
======= ======== ========
</TABLE>
- --------
(1) For a discussion of the pro forma adjustments, see "Unaudited Pro Forma
Condensed Consolidated Balance Sheet."
(2) H&S Inc.'s common stock and HSI's Class A common stock were subject to and
the Company's Common Stock is subject to mandatory repurchase agreements
which require the classification of such common stock as mandatorily
redeemable common stock. The agreements relating to the Common Stock will
terminate upon consummation of the Offering and the Common Stock will be
reclassified as stockholders' equity.
(3) Includes 666,667 shares that may be purchased by certain employees of the
Company under the GlobalShare Plan pursuant to the Employee Share
Purchase, but excludes up to 735,000 shares issuable pursuant to options
that may be granted under the GlobalShare Plan to such employees in
connection with the Employee Share Purchase and approximately 855,000
shares issuable pursuant to options to be issued to employees at
completion of the Offering. Does not include 1,465,000 shares of Common
Stock available for future issuance under the Company's incentive plans.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of December 31, 1998
was $34.4 million, or $2.99 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 3,700,000 shares of
Common Stock to be sold by the Company in the Offering at an assumed initial
public offering price of $15.00 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 December 31, 1998 would
have been $80.5 million, or $5.30 per share of Common Stock. This represents
an immediate increase in pro forma net tangible book value of $2.31 per share
of Common Stock to the existing stockholders and an immediate dilution in pro
forma net tangible book value of $9.70 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 $5.60 per share.
The following table illustrates the per share dilution that would have
occurred if the Offering had been consummated on December 31, 1998:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $15.00
Pro forma net tangible book value per share before the Offering. 2.99
Increase in pro forma net tangible book value per share
attributable to price paid by new investors in Common Stock in
the Offering................................................... 2.31
----
Pro forma net tangible book value per share after the Offering.. 5.30
------
Dilution per share to new investors............................. $ 9.70
======
</TABLE>
The following table summarizes, on a pro forma basis, as of December 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........ 11,494,941 75.6% $ 59.1 51.6% $ 5.14
New investors................ 3,700,000 24.4 55.5 48.4 15.00
---------- ----- ------ -----
Total.................... 15,194,941 100.0% $114.6 100.0%
========== ===== ====== =====
</TABLE>
The foregoing computations give effect to up to 666,667 shares that may be
purchased by certain employees of the Company under the GlobalShare Plan
pursuant to the Employee Share Purchase, but do not give effect to up to
735,000 shares issuable pursuant to options, that may be granted under the
GlobalShare Plan to such employees in connection with the Employee Share
Purchase, and approximately 855,000 shares issuable pursuant to options to be
issued to employees at completion of the Offering. These calculations also
exclude 1,465,000 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.
18
<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, (ii) the amendment of the Mulder
acquisition agreement, (iii) the implementation of the GlobalShare Plan, (iv)
the termination of the mandatory redemption feature of the common stock of
each of H&S Inc. and HSI, (v) the costs of the postponement of the Company's
initial public offering, (vi) the issuance of shares by the Company in
December 1998 at prices below their fair market value, (vii) the termination
of the employment of Gerard Clery-Melin, HSI's former President and Chief
Executive Officer, and a non-executive HSI employee, and (viii) the early
settlement of profit sharing arrangements relating to the acquisition of
certain Latin American offices. The pro forma data is presented as if the
above transactions had occurred on January 1, 1998 for the statement of
operations and related data and on December 31, 1998 for balance sheet data.
The unaudited pro forma condensed consolidated statement of operations data
for the year ended December 31, 1998 reflects the results of operations of HSI
and H&S Inc. for the year then ended. The historical results of operations of
Mulder have been included in HSI's financial statements subsequent to the date
of the acquisition.
The unaudited pro forma condensed consolidated financial data assume that
the Merger was effected by the exchange of 2.8249 shares of HSI Common Stock
for each share of H&S Inc. common stock outstanding at December 31, 1998. This
is the exchange ratio pursuant to which the Merger was consummated on February
26, 1999. The Merger is being accounted for as a reverse acquisition, as the
stockholders of H&S Inc. owned 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
35.6823% of all outstanding HSI Common Stock. The acquisition by H&S Inc. of
the remaining 64.3177% of HSI will be recorded using the purchase method of
accounting. The difference between the fair value and book value of the
interests in HSI being acquired, less the related deferred tax liability, (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 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 estimated fair value of the Company after the Merger.
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.
19
<PAGE>
Selected Unaudited Pro Forma Condensed Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
(in
thousands
except per
share and
share data)
<S> <C>
Statement of Operations Data(1):
Revenue........................................................... $ 328,999
Operating expenses:
Salaries and employee benefits.................................... 235,321
General and administrative expenses............................... 89,876
----------
Total operating expenses........................................ 325,197
----------
Operating income................................................ 3,802
----------
Non-operating income (expense):
Interest income................................................... 1,531
Interest expense.................................................. --
Other............................................................. (3,787)
----------
Net non-operating income (expense).............................. (2,256)
----------
Equity in net income of affiliate................................. --
----------
Minority interest in income of consolidated subsidiaries.......... (81)
----------
Income before income taxes........................................ 1,465
Provision for income taxes........................................ 2,888
----------
Net loss.......................................................... $ (1,423)
==========
Basic and diluted loss per common share........................... $ (.09)
==========
Basic and diluted weighted average common shares outstanding...... 15,194,941
==========
Balance Sheet Data (at end of period)(2):
Working capital................................................... $ (9,975)
Total assets...................................................... 237,673
Long-term debt, less current maturities........................... 5,262
Total stockholders' equity........................................ 82,395
</TABLE>
- --------
(1) See Unaudited Pro Forma Consolidated Statement of Operations Data on page
21.
(2) See Unaudited Pro Forma Condensed Consolidated Balance Sheet on page 22.
20
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations Data
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------
Historical
------------------ Pro Forma Pro Forma
HSI H&S Inc. Adjustments Consolidated
-------- -------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenue................... $124,984 $204,015 $ -- $328,999
-------- -------- ------- --------
Operating expenses:
Salaries and employee
benefits................ 102,861 163,730 (31,270)(1)(2)(3) 235,321
General and
administrative
expenses................ 37,766 50,677 1,433 (4) 89,876
-------- -------- ------- --------
Total operating
expenses.............. 140,627 214,407 (29,837) 325,197
-------- -------- ------- --------
Operating income
(loss)................ (15,643) (10,392) 29,837 3,802
-------- -------- ------- --------
Non-operating income
(expense):
Interest income.......... -- 1,531 -- 1,531
Interest expense......... (704) (462) 1,166 (5) --
Other.................... (5,412) (2,212) 3,837 (6) (3,787)
-------- -------- ------- --------
Net non-operating
income (expense)...... (6,116) (1,143) 5,003 (2,256)
-------- -------- ------- --------
Equity in net income of
affiliate................ -- (3,417) 3,417 (7) --
-------- -------- ------- --------
Minority interest in
income of consolidated
subsidiaries............. (81) -- -- (81)
-------- -------- ------- --------
Income (loss) before
income taxes............. (21,840) (14,952) 38,257 1,465
Provision for income
taxes.................... (4,475) 1,302 6,061 (8) 2,888
-------- -------- ------- --------
Net income (loss)......... $(17,365) $(16,254) $32,196 $ (1,423)
======== ======== ======= ========
</TABLE>
- -------
(1) HSI acquired 100% of Mulder on October 1, 1997, for a combination of cash
and 32,000 shares of HSI Class A common stock. On October 1, 1997, HSI
delivered 4,000 shares of HSI Class A 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 percentage 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 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 contemplation of the Merger, the Mulder acquisition agreement was amended
on July 2, 1998 such that the remaining $5.2 million (plus interest) was
required to be paid within 90 days of the completion of the Merger ($1.1
million of this amount plus interest was paid in October of 1998) and
428,452 shares of Common Stock (which were valued, based on the estimated
fair value of the Company, at $5.5 million) issued to such Mulder partners
immediately after the Merger. This non-recurring charge will be recorded
during the first quarter of 1999 and has not been reflected in the pro forma
statement of operations. All employment contingencies relating to the Mulder
consultants have been terminated.
Amortization of deferred compensation expense of $5.1 million relating to
the acquisition of Mulder has been eliminated from salaries and employee
benefits for the period ending December 31, 1998. Under the amendment to the
Mulder acquisition agreement, the remaining $13.8 million of the $20.5
million of compensation, based upon the estimated fair value of the Company,
will be expensed in the first quarter of 1999.
(2) An adjustment of $2.8 million has been made to eliminate from salaries and
employee benefits, compensation expense representing the difference
between the amount actually paid over the amount that would have been paid
under the Company's GlobalShare Plan for managing partners and corporate
officers had such plan been in effect beginning January 1, 1998. The
plan's participants will have the same duties and responsibilities and the
Company expects that the issuance of stock options in lieu of cash under
the plan for a portion of their bonuses will not diminish the output of
these employees resulting in additional costs being incurred. The
adjustment is to reduce compensation expense to reflect the differences in
compensation expense, as computed under the Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," based
on the intrinsic value of the stock options granted. Under APB No. 25, the
fair value of the options, as computed under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
is not recorded as compensation expense.
(3) Salaries and employee benefits have been adjusted by $23.3 million to
reflect the following charges recorded during the fourth quarter of 1998:
(i) $14.8 million arising from the difference between the issuance price
of shares issued by the Company in the period beginning twelve months
before the initial filing date of the registration statement relating to
the Offering and the fair market value of the shares at the date of grant,
(ii) $2.8 million arising from the early settlement of profit sharing
arrangements relating to the acquisition of certain Latin American offices
and (iii) $5.7 million arising from the termination agreement with Gerard
Clery-Melin, HSI's former President and Chief Executive Officer, and the
termination agreement of a non-executive HSI employee. The $5.7 million
charge is comprised of $3.0 million for compensation and other amounts to
be paid in accordance with the termination agreements and a $2.7 million
non-cash charge representing the difference between the current book value
and appraised fair market value of shares retained subsequent to
termination, see "Management."
(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, 1998, $1.4 million of
amortization related to acquired intangibles and goodwill has been charged
to general and administrative expenses. See Note 1 to the "Unaudited Pro
Forma Condensed Consolidated Balance Sheet."
(5) The Company's net proceeds from the Offering, estimated to be $46.1
million net of expenses and fees, will be applied as described in "Use of
Proceeds". At December 31, 1998, the outstanding debt to be repaid in
connection with the Offering totaled $41.9 million, resulting in excess
cash from the Offering of $4.2 million. Interest expense associated with
indebtedness assumed repaid with the proceeds from the Offering has been
eliminated.
(6) Offering expenses of $3.8 million have been eliminated from non-operating
income for the twelve month period ended December 31, 1998. As required by
Staff Accounting Bulletin No. 1, Topic 5A, H&S Inc. and HSI expensed all
charges incurred in connection with the postponement of the Company's
planned initial public offering in September 1998.
(7) 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.
(8) 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 footnotes 2 and 3 above, the elimination of tax deductible
Offering expenses discussed in footnote 5 above, and the elimination of
the equity in net income of affiliate as discussed in footnote 6 above.
Therefore, pro forma tax expense has been adjusted as follows:
<TABLE>
<CAPTION>
Equity in
Net Income
of Offering
Affiliate Compensation Expense
Period Adjustment Adjustment Adjustment
------ ---------- ------------ ----------
<S> <C> <C> <C>
Year ended December 31, 1998............ $1,435 $3,638 $988
</TABLE>
21
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
At December 31, 1998
<TABLE>
<CAPTION>
Pro Forma Contract
Merger Reflecting Amendment Pro Forma
HSI H&S Inc. Adjustments(1) Merger Adjustments Consolidated
------- -------- -------------- ---------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $15,753 $ 10,428 $ -- $ 26,181 $ (4,323)(2) $ 21,858
Accounts receivable,
net of allowance...... 23,250 40,816 (2,998) 61,068 -- 61,068
Notes receivable from
affiliates............ -- 1,900 (1,900) -- -- --
Other current assets... 10,104 17,079 -- 27,183 -- 27,183
Property and equipment,
net.................... 14,917 24,778 -- 39,695 -- 39,695
Other assets:
Cash and investments
designated for
nonqualified
retirement plan....... -- 13,552 -- 13,552 -- 13,552
Investment in HSI...... -- 4,766 (4,766) -- -- --
Goodwill and other
intangibles........... 2,531 8,055 37,434 48,020 -- 48,020
Deferred compensation
expense............... 4,046 -- -- 4,046 (4,046)(2) --
Other non-current
assets................ 24,396 1,776 125 26,297 -- 26,297
------- -------- ------- -------- --------- --------
Total other assets.... 30,973 28,149 32,793 91,915 (4,046) 87,869
------- -------- ------- -------- --------- --------
Total assets.......... $94,997 $123,150 $27,895 $246,042 $ (8,369) $237,673
======= ======== ======= ======== ========= ========
Current liabilities:
Short-term debt........ $12,108 $ 24,547 $ -- $ 36,655 $ -- $ 36,655
Income taxes payable... 3,286 -- -- 3,286 -- 3,286
Accounts payable....... 7,337 2,918 (2,998) 7,257 -- 7,257
Accrued expenses
Salaries and employee
benefits............. 22,434 23,299 -- 45,733 -- 45,733
Other accrued
expenses............. 15,886 11,267 -- 27,153 -- 27,153
Note payable to
affiliate............. 1,900 -- (1,900) -- -- --
Long-term debt, less
current maturities..... 112 5,150 -- 5,262 -- 5,262
Other long-term
liabilities............ 18,574 11,358 -- 29,932 -- 29,932
Commitments and
contingent liabilities. -- -- -- -- -- --
Mandatorily redeemable
common stock........... 8,578 44,611 37,575 90,764 (8,369)(2) --
(82,395)(3)
Stockholders' equity.... 4,782 -- (4,782) -- 82,395 (3) 82,395
------- -------- ------- -------- --------- --------
Total liabilities and
stockholders' equity. $94,997 $123,150 $27,895 $246,042 $ (8,369) $237,673
======= ======== ======= ======== ========= ========
</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 of $37,434 is based on an estimated
fair value of the HSI assets being acquired of $46,153 less their book
value of $8,594 and less a deferred tax liability of $125 recorded by H&S
Inc. This Excess Purchase Price has been allocated to identifiable
intangible assets and goodwill as follows:
<TABLE>
<CAPTION>
Weighted Average
Fair Remaining Useful
Asset Classification Value Life in Years
-------------------- ------- ----------------
<S> <C> <C>
Intangible assets
Trained workforce................................ $ 6,496
Non-compete agreements........................... 322
Database of executives........................... 193
Customer relationships........................... 5,338
-------
Total intangible assets........................... 12,349 17
Goodwill.......................................... 25,085 40
-------
Total Excess Purchase Price....................... $37,434
=======
</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. 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 intangible assets 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 intangible assets or goodwill to recoverable value is
appropriate.
22
<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 the 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, $1,900 of intercompany debt and $2,998 of intercompany
payables were also eliminated. As of December 31, 1998, there were no other
intercompany transactions that required elimination.
The reclassification of $4,782 of stockholders' equity and the $37,575
increase in mandatorily redeemable stock are a result of the application of
reverse acquisition accounting.
(2) The amendment of the Mulder acquisition agreement resulted in the
following adjustments to HSI historical amounts:
(i) Cash has been adjusted by $4,323 to reflect the cash consideration to be
paid for Mulder.
(ii) Mandatorily redeemable common stock has been increased by $5,476 to
account for shares to be issued to Mulder partners and reduced by
$13,845 to eliminate the one-time compensation charge.
(iii) Deferred compensation expense has been reduced by $4,046 to eliminate
the asset due to the recording of the one-time compensation charge
described in footnote 1 to the Unaudited Pro Forma Consolidated Statement
of Operations Data.
(3) Reflects reclassification of H&S Inc.'s mandatorily redeemable common
stock of $82,395 to stockholders' equity as the mandatory redemption
feature of the common stock will terminate upon consummation of the
Offering.
23
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for each of the five years in
the period ended December 31, 1998 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) and
in the case of H&S Inc. were audited by Arthur Andersen LLP, independent
public accountants. 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.
Selected Financial Data
H&S Inc.
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------------------------
1994 1995 1996 1997(1) 1998
------- -------- --------- --------- ---------
(in thousands, except per share, share
and other operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................ $96,127 $108,685 $ 137,665 $ 180,244 $ 204,015
------- -------- --------- --------- ---------
Operating expenses:
Salaries and employee
benefits.............. 66,379 77,215 98,272 125,308 163,730
General and
administrative
expenses.............. 19,078 20,853 28,681 42,991 50,677
------- -------- --------- --------- ---------
Total operating
expenses............. 85,457 98,068 126,953 168,299 214,407
------- -------- --------- --------- ---------
Operating income
(loss)............... 10,670 10,617 10,712 11,945 (10,392)(2)
------- -------- --------- --------- ---------
Non-operating income
(expense):
Interest income........ 808 1,156 1,385 1,586 1,531
Interest expense....... (180) (207) (180) (150) (462)
Other income (expense). 89 108 (94) 486 (2,212)
------- -------- --------- --------- ---------
Net non-operating
income (expense)..... 717 1,057 1,111 1,922 (1,143)
------- -------- --------- --------- ---------
Equity in net income
(loss) of affiliate... 1,252 778 775 20 (3,417)
------- -------- --------- --------- ---------
Income (loss) before
income taxes.......... 12,639 12,452 12,598 13,887 (14,952)
Provision for income
taxes................. 6,297 6,094 6,149 7,444 1,302
------- -------- --------- --------- ---------
Net income (loss)...... $ 6,342 $ 6,358 $ 6,449 $ 6,443 $ (16,254)(3)
======= ======== ========= ========= =========
Basic earnings (loss)
per common share...... $ 2.50 $ 2.41 $ (6.10)
========= ========= =========
Weighted average common
shares outstanding.... 2,574,475 2,676,415 2,666,526
========= ========= =========
Diluted earnings (loss)
per common share...... $ 2.50 $ 2.41 $ (6.10)
========= ========= =========
Diluted average common
shares outstanding.... 2,574,475 2,676,525 2,666,526
========= ========= =========
Balance Sheet Data (at
end of period):
Working capital........ $13,549 $ 17,193 $ 20,628 $ 24,873 $ 8,192
Total assets........... 45,058 55,900 68,643 93,585 123,150
Long-term debt, less
current maturities.... 735 1,189 993 1,636 5,150
Mandatorily redeemable
common stock.......... 25,818 31,700 39,373 47,404 44,611
Other Operating Data:
Number of offices (at
end of period)........ 18 20 25 28 32
Average number of
consultants during the
period................ 108 119 137 159 197
</TABLE>
24
<PAGE>
Selected Financial Data
HSI
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997(1) 1998
------- ------- --------- --------- ---------
(in thousands, except per share, share and
other operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................... $39,634 $52,815 $64,558 $82,732 $124,984
------- ------- --------- --------- ---------
Operating expenses:
Salaries and employee
benefits................. 24,299 35,249 44,020 59,080 102,861
General and
administrative expenses.. 10,212 14,264 17,100 20,567 37,766
------- ------- --------- --------- ---------
Total operating
expenses............... 34,511 49,513 61,120 79,647 140,627
------- ------- --------- --------- ---------
Operating income (loss). 5,123 3,302 3,438 3,085 (15,643)(4)
Net non-operating income
(expense)................ (366) 338 133 151 (6,116)
Minority interest in
income of consolidated
subsidiaries............. (222) -- -- (26) (81)
------- ------- --------- --------- ---------
Income (loss) before
income taxes............. 4,535 3,640 3,571 3,210 (21,840)
Provision for (benefit
from) income taxes....... 1,886 1,840 1,430 2,518 (4,475)
------- ------- --------- --------- ---------
Net income (loss)......... $ 2,649 $ 1,800 $ 2,141 $ 692 $ (17,365)(5)
======= ======= ========= ========= =========
Basic earnings (loss) per
Class A common share..... $ .86 $ .25 $ (5.96)
========= ========= =========
Basic weighted average
Class A common shares
outstanding.............. 1,623,955 1,773,581 1,892,908
========= ========= =========
Diluted earnings per Class
A common share........... $ .86 $ .24 $ (5.96)
========= ========= =========
Diluted weighted average
Class A common shares
outstanding.............. 1,623,955 1,880,694 1,892,908
========= ========= =========
Basic and diluted earnings
per Class B common share. $ .72 $ .23 $ (5.83)
========= ========= =========
Weighted average Class B
common shares
outstanding.............. 1,040,862 1,040,862 1,042,729
========= ========= =========
Balance Sheet Data (at end
of period):
Working capital........... $ 7,908 $ 7,777 $ 9,345 $ (6,607) $ (13,844)
Total assets.............. 21,998 25,756 32,851 75,560 94,997
Long-term debt, less
current maturities....... -- -- 267 168 112
Mandatorily redeemable
common stock............. 6,166 8,323 9,922 11,706 8,578
Total stockholders'
equity................... 4,757 5,758 6,440 6,423 4,782
Other Operating Data:
Number of offices (at end
of period)............... 12 13 16 23 27
Average number of
consultants during the
period................... 55 59 71 95 123
</TABLE>
- --------
(1) Certain 1997 amounts for H&S Inc. and HSI have been restated. See Note 15
of "Heidrick & Struggles, Inc. and Subsidiaries--Notes to Consolidated
Financial Statements" and Note 14 of "Heidrick & Struggles International,
Inc. and Subsidiaries--Notes to Consolidated Financial Statements,"
respectively.
(2) Includes $12.7 million of non-recurring charges comprised of (i) $9.9
million of salaries and employee benefits expense arising from the
difference between the issuance price of shares issued by the Company to
certain of its directors in December 1998 and the fair market value of
such shares at the date of grant and (ii) $2.8 million of salaries and
benefits expense relating to the early settlement of profit sharing
arrangements upon the acquisition of certain Latin American offices.
(3) Includes a non-recurring $2.5 million charge incurred in connection with
the costs of the postponement of the Offering in September 1998.
(4) Includes $15.7 million of non-recurring charges comprised of (i) $5.1
million of salaries and employee benefits expense due to the amortization
of deferred compensation expense resulting from the Mulder acquisition,
(ii) $4.9 million of salaries and employee benefits expense arising from
the difference between the issuance price of shares issued by the Company
to certain of its directors in December 1998 and the fair market value of
such shares at the date of grant, and (iii) $5.7 million of salaries and
employee benefits expense arising from the termination agreement with
Gerard Clery-Melin, HSI's former President and Chief Executive Officer,
and the termination agreement of a non-executive HSI employee. See
"Management."
(5) Includes a non-recurring $1.3 million charge incurred in connection with
the costs of the postponement of the Offering in September 1998.
25
<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 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 consummated the Merger on February 26, 1999 in order to reunite the two
companies into a single ownership structure. The selected financial data set
forth herein reflect the historical operations of each of H&S Inc. and HSI.
Pursuant to their focused growth strategies, H&S Inc. and HSI completed
several acquisitions in the past two years. 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. These 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 59 offices in 30 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. For financial information by geographic region,
see Note 13 of "Heidrick & Struggles, Inc. and Subsidiaries--Notes to
Consolidated Financial Statements" and Note 10 of "Heidrick & Struggles
International, Inc. and Subsidiaries--Notes to Consolidated Financial
Statements."
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 bills 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.
26
<PAGE>
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.
Because newly-hired consultants require a large initial investment in
signing bonuses, guaranteed bonuses and salaries and benefits for associated
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 by such new hires 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
Prior to the Merger, H&S Inc. held 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 were, and the Company is, 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 H&S Inc.'s and HSI's effective
tax rates. H&S Inc.'s and HSI's provisions for income taxes reflect their best
judgment as to the likely effective tax rate for a given period.
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
27
<PAGE>
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 will replace
systems that are not Year 2000 compliant. The IGIS systems scheduled to be
deployed during the spring and summer of 1999 will be Year 2000 compliant. The
Company currently has certification as to Year 2000 compliance from its key
software suppliers.
MCI Systemhouse has been retained as the Company's system 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 will conduct testing during the spring of 1999 and will continue to
monitor and test the systems through the end of 1999. The Company has also
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 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.
The Company anticipates completing the Year 2000 project not later than the
third quarter of 1999. The Company has budgeted $1,000,000 in addition to the
IGIS budget to be expensed as incurred, 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 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 resource 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.
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
28
<PAGE>
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 was adopted by the
Company as of December 31, 1998.
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 material effect on its consolidated financial position, results of
operations or on disclosures within the financial statements.
Pro Forma Combined Results of Operations
The following table provides pro forma combined results of operations and
such data as a percentage of revenue of the Company for the years ended
December 31, 1997 and 1998. For a discussion of the pro forma adjustments for
1998, see the Unaudited Pro Forma Consolidated Statement of Operations Data
and the notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997(1) 1998
----------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue ..................................... $284,792 100.0% $328,999 100.0%
-------- ----- -------- -----
Operating expenses:
Salaries and employee benefits............. 194,956(2) 68.5 235,321 71.5
General and administrative expenses........ 70,548(3) 24.8 89,876 27.3
-------- ----- -------- -----
Total operating expenses................. 265,504 93.3 325,197 98.8
-------- ----- -------- -----
Operating income......................... $ 19,288 6.7% $ 3,802 1.2%
======== ===== ======== =====
</TABLE>
- --------
(1) The December 31, 1997 statement of operations has been adjusted by the
following amounts to reflect the historical operations of Mulder:
<TABLE>
<S> <C>
Revenue........................................................... $21,816
Salaries and employee benefits.................................... 14,610
General and administrative expenses............................... 5,557
</TABLE>
In addition, $1.5 million of amortization of deferred compensation relating
to the acquisition has been eliminated from salaries and employee benefits.
See Note 1 of the "Selected Unaudited Pro Forma Condensed Consolidated
Financial Data" for further information regarding the Mulder acquisition.
(2) An adjustment of $2.5 million has been made to eliminate from salaries and
employee benefits, compensation expense representing the difference
between the amount actually paid and the amount that would have been paid
in cash under the Company's GlobalShare Plan. See Note 2 of the "Selected
Unaudited Pro Forma Condensed Consolidated Financial Data."
(3) Adjustments have been made to reflect the allocation of the Excess
Purchase Price to intangible assets and goodwill of HSI. The adjustments
are subject to change based upon the final determination of the respective
fair values of these assets. See Note 1 to the "Unaudited Pro Forma
Condensed Consolidated Balance Sheet." Amortization of $1.4 million
related to acquired intangible assets and goodwill has been charged to
general and administrative expenses.
Pro Forma Combined Results for 1998 Compared to 1997
Revenue. Revenue increased $44.2 million, or 15.5%, to $329.0 million for
1998 from $284.8 million for 1997. This increase was due to an increase in the
number of confirmed searches resulting from a 21.4% increase in the average
number of consultants employed during the period and the opening of the
following new offices in 1998: Geneva, Irvine, Manchester, Melbourne, New
Delhi, Route 128 and Tel Aviv.
Salaries and employee benefits. Salaries and employee benefits increased
$40.3 million, or 20.7%, to $235.3 million for 1998 from $195.0 million for
1997. As a percentage of revenues, salaries and employee benefits increased
from 68.5% to 71.5%, primarily due to signing bonuses and guaranteed bonuses
associated with the
29
<PAGE>
hiring of 61 new consultants in 1998, consistent with the Company's growth
strategy. The Company also added 76 associates and 151 administrative
personnel, in part to support these consultants.
General and administrative expenses. General and administrative expenses
increased $19.4 million, or 27.4%, to $89.9 million for 1998 from $70.5
million for 1997. As a percentage of revenues, general and administrative
expenses increased from 24.8% to 27.3%, primarily due to the launch of an
advertising campaign during the fourth quarter of 1998 and an increase in
maintenance and installation expenses, technical support and equipment rentals
associated with the IGIS initiative.
Results of Operations--H&S Inc.
The following table sets forth, for the periods indicated, selected
statements of operations data for H&S Inc. as a percentage of revenues:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenue................................................... 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Salaries and employee benefits.......................... 71.4 69.5 80.3
General and administrative expenses..................... 20.8 23.9 24.8
----- ----- -----
Total operating expenses.............................. 92.2 93.4 105.1
----- ----- -----
Operating income (loss)............................... 7.8 6.6 (5.1)
----- ----- -----
Non-operating income (expense):
Interest income......................................... 1.0 0.9 0.8
Interest expense........................................ (0.1) (0.1) (0.2)
Other income (expense).................................. (0.1) 0.3 (1.1)
----- ----- -----
Net non-operating income (expense).................... 0.8 1.1 (0.5)
----- ----- -----
Equity in net income (loss) of affiliate.................. 0.6 -- (1.7)
----- ----- -----
Income (loss) before income taxes......................... 9.2 7.7 (7.3)
Provision for income taxes................................ 4.5 4.1 0.6
----- ----- -----
Net income (loss)......................................... 4.7% 3.6% (7.9)%
===== ===== =====
</TABLE>
1998 Compared to 1997
Revenue. H&S Inc. revenue increased $23.8 million, or 13.2%, to $204.0
million for 1998 from $180.2 million for 1997. This increase was primarily due
to an increase in the number of confirmed searches resulting largely from a
24.4% increase in the average number of consultants employed during the
period. Average revenue per consultant was $1.0 million in 1998, as compared
to $1.1 million in 1997, a 9% decrease due to an increase in the number of
newly-hired consultants. Four new offices were opened in 1998: Melbourne,
Route 128, Irvine and New Delhi, which generated approximately $8.2 million of
revenue during 1998.
Salaries and employee benefits. H&S Inc. salaries and employee benefits
increased $38.4 million, or 30.7%, to $163.7 million for 1998 from $125.3
million for 1997. As a percentage of revenues, salaries and employee benefits
increased from 69.5% to 80.3%. Approximately $12.7 million of this increase
was due to non-recurring salary and employee benefits expense comprised of (i)
$9.9 million arising from the difference between the issuance price of shares
issued by the Company in December 1998 and the fair market value of such
shares at the date of grant and (ii) $2.8 million arising from the early
settlement of profit sharing arrangements relating to the acquisition of
certain Latin American offices. Excluding the impact of these expenses,
salaries and employee benefits were 74.0% of revenue for 1998. A majority of
this percentage increase was due to signing bonuses and
30
<PAGE>
guaranteed bonuses associated with the hiring of 41 new consultants in 1998,
consistent with H&S Inc.'s growth strategy. H&S Inc. also added 44 associates
and 79 administrative personnel, in part to support these consultants.
General and administrative expenses. H&S Inc. general and administrative
expenses increased $7.7 million, or 17.9%, to $50.7 million for 1998 from
$43.0 million for 1997. As a percentage of revenues, general and
administrative expenses increased from 23.9% to 24.8%. This percentage
increase was largely due to the launch of an advertising campaign during the
fourth quarter of 1998 and an increase in maintenance and installation
expenses, technical support expenses and equipment rentals associated with
IGIS.
Non-operating income (expense). H&S Inc. non-operating income decreased $3.0
million to a net non-operating loss of $1.1 million for 1998 from net non-
operating gain of $1.9 million for 1997. This decrease is primarily due to a
$2.5 million charge incurred in connection with the costs of the postponement
of the Company's initial public offering in September 1998. The remaining
decrease was due to a loss on the sale of certain computer equipment replaced
by new computers in connection with IGIS during 1998 and an increase in
interest expense due to an increase in borrowings under the Company's line of
credit.
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 to 69.5% from 71.4%, 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 to 23.9% in 1997. This percentage increase
principally relates 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 and an increase in
interest income reflecting higher cash balances during the year.
31
<PAGE>
Results of Operations--HSI
The following table sets forth, for the periods indicated, selected
statements of operations data for HSI as a percentage of revenues:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenue..................... 100.0% 100.0% 100.0%
Operating expenses:
Salaries and employee
benefits ................ 68.2 71.4 82.3
General and administrative
expenses................. 26.5 24.9 30.2
----- ----- -----
Total operating
expenses............... 94.7 96.3 112.5
----- ----- -----
Operating income (loss). 5.3 3.7 (12.5)
Non-operating income (loss). 0.2 0.2 (4.9)
Minority interest in income
of consolidated
subsidiaries............... 0.0 0.0 (0.1)
----- ----- -----
Income (loss) before income
taxes...................... 5.5 3.9 (17.5)
Provision for income taxes.. 2.2 3.0 (3.6)
----- ----- -----
Net income (loss)........... 3.3% 0.9% (13.9)%
===== ===== =====
</TABLE>
1998 Compared to 1997
Revenue. HSI revenue increased $42.3 million, or 51.1%, to $125.0 million
for 1998 from $82.7 million for 1997. This increase was primarily the result
of the acquisition of Mulder in the fourth quarter of 1997, which contributed
$21.2 million in revenue for 1998. Excluding Mulder, revenue increased by
25.4% mainly due to an increase in the number of searches resulting from an
increase in the average number of consultants from 94 for 1997 to 124 for
1998, and a 14.9% increase in average revenue per consultant. Three new
offices were opened in 1998: Geneva, Manchester and Tel Aviv, but their impact
on revenue during the year was insignificant.
Salaries and employee benefits. HSI salaries and employee benefits
increased $43.8 million, or 74.1%, to $102.9 million for 1998 from $59.1
million for 1997. As a percentage of revenues, salaries and employee benefits
increased from 71.4% for 1997 to 82.3% for 1998. Approximately $5.1 million of
this increase was due to the amortization of deferred compensation expense
resulting from the Mulder acquisition. In addition, approximately $10.6
million of this increase was due to non-recurring salary and employee benefits
expenses comprised of (i) $4.9 million arising from the difference between the
issuance price of shares issued by the Company in December 1998 and the fair
value of such shares at the date of grant and (ii) $5.7 million arising from a
termination agreement with Gerard Clery-Melin, HSI's former President and
Chief Executive Officer, and a termination agreement with a non-executive HSI
employee. The $5.7 million charge is comprised of $3.0 million for
compensation and other amounts to be paid in accordance with the termination
agreements and a $2.7 million non-cash charge representing the difference
between the current book value and appraised fair market value of shares
retained subsequent to termination, see "Management." Excluding the impact of
these charges, salaries and employee benefits were 73.6% of revenue for 1998.
General and administrative expenses. HSI general and administrative expenses
increased $17.2 million, or 83.6% to $37.8 million for 1998, from $20.6
million for 1997. As a percentage of revenues, general and administrative
expenses increased to 30.2% from 24.9%. This percentage increase was primarily
the result of an increase in the provision for doubtful accounts, integration
costs related to the Mulder acquisition, higher travel and meeting expenses
related to the Merger and increased depreciation expense related to the
Company's IGIS initiative.
Non-operating income (expense). HSI non-operating expense increased to a net
operating loss of $6.1 million for 1998 from a net non-operating gain of
$151,000 for 1997. This increase was primarily the result of provisions in
June and December of 1998 totaling $4.1 million for the writeoff of leasehold
improvements and
32
<PAGE>
accruals for non-cancelable lease commitments due to a decision to relocate
the London office. Also, the Company incurred a $1.3 million charge in
connection with the costs of the Company's initial public offering due to a
decision taken in September 1998 to postpone the Offering. The remaining
increase is 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 purchases of certain property
and equipment associated with new offices and investments in the IGIS
initiative.
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 to 71.4%
from 68.2%. 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 to 24.9% from 26.5%. 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. The provision for doubtful
accounts was decreased to reflect improved collection policies and efforts.
Non-operating income (expense). HSI non-operating income increased by
$18,000 to $151,000 from $133,000 for 1996.
Nonrecurring Charge
During the quarter ending March 31, 1999, the Company expects to incur a
nonrecurring charge of $12.7 million, net of income taxes. This charge is the
result of the Company's agreement to modify the terms of the Mulder agreement,
including the termination of all employment contingencies. This nonrecurring
charge represents the write-off of $2.9 million of deferred compensation
assets as of February 26, 1999, a cash payment of $4.3 million and the
issuance of 428,452 shares of common stock (worth $5.5 million based upon the
estimated fair value of HSI) to the previous owners of Mulder. See Note 2 of
"Heidrick & Struggles International, Inc. and Subsidiaries--Notes to
Consolidated Financial Statements."
Liquidity and Capital Resources
The Company periodically evaluates its liquidity requirements, capital needs
and availability of capital resources in view of plans for expansion and other
operating cash needs. H&S has historically financed its 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. Employee bonuses are accrued when earned and
are based on the performance of the respective employee and the Company.
33
<PAGE>
The Company believes that the net proceeds from the Offering and related
sales of shares to employees pursuant to the Employee Share Purchase, 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.
H&S Inc.
H&S Inc. maintained cash and cash equivalents at December 31, 1997 and 1998
totaling $10.1 million and $10.4 million, respectively. Towards these sums,
cash flows from operating activities contributed $6.7 million in 1997,
reflecting principally the net income from operations. For 1998, operating
activities used $174,000 of cash reflecting the net loss offset by increases
in non-cash expenses for stock based compensation, depreciation and
amortization and equity in net loss of affiliate.
On June 26, 1998, H&S Inc. purchased selected assets and liabilities of
Fenwick Partners, Inc. for approximately $6.1 million in cash and notes. On
October 1, 1998, H&S Inc. purchased selected assets of Heidrick Partners, Inc.
for $2.0 million in cash and notes. These acquisitions resulted in a use of
cash of $4.1 million.
Cash flows from financing activities were $6.0 million and $22.1 million for
1997 and 1998, respectively. H&S Inc.'s financing activities consisted
principally of sales of its common stock to employees net of repurchase
obligations, amounts due in connection with 1997 and 1998 acquisitions and
borrowings under its line of credit. H&S Inc.'s long-term debt consists of
amounts payable to former shareholders from whom H&S Inc. has repurchased
stock and amounts due in connection with the Fenwick acquisition.
H&S Inc. 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 $22.0
million outstanding under this line of credit at December 31, 1998. 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"). A Non-U.S.
Borrowing bears interest at the then existing LIBOR plus a margin as
determined by certain tests of H&S Inc.'s financial condition (the "Applicable
Margin"). A U.S. Borrowing bears interest at the then existing prime rate. At
December 31, 1998, the interest rate on the debt was LIBOR plus the Applicable
Margin, which sum equaled 6.8%. This line of credit replaced a $25.0 million
line of credit which had been effective since October 1, 1997. There was $3.5
million outstanding under the line of credit at December 31, 1997 and the
borrowings bore interest at LIBOR plus 1% or the prime rate, at the Company's
discretion. At December 31, 1997, the interest rate on the debt was fixed at
approximately 8.5%. 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. See Note 5 to Consolidated Financial Statements.
Capital expenditures amounted to $5.7 million and $13.8 million for 1997 and
1998, respectively. These expenditures were primarily for 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 $9.0
million in 1998 have been capitalized. Additional capital expenditures of
$10.2 million are expected to be made in 1999 and will begin being amortized
once they are implemented.
HSI.
HSI maintained cash and cash equivalents at December 31, 1997 and 1998,
amounting to $8.1 million and $15.8 million, respectively. Towards these sums,
cash flows from operating activities contributed $4.2 million in 1997
principally reflecting decreases in working capital and non-cash expenses for
depreciation and amortization. For 1998, cash flows provided by operating
activities were $7.5 million due primarily to decreases in working capital and
non-cash expenses for stock based compensation and depreciation and
amortization, offset by the net loss from operations.
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<PAGE>
Cash flows from financing activities were $9.7 million and $10.9 million,
respectively for 1997 and 1998. Borrowings during 1997 increased significantly
in connection with payments required to finance the Mulder acquisition.
Borrowings during 1998 principally reflect funding of employee bonuses 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 Inc.
HSI's long-term debt consists of amounts payable to former shareholders who
have sold their stock back to HSI. HSI has an $8.0 million multicurrency line
of credit. This facility will reduce to $4.9 million on March 1, 1999, $1.1
million on May 1, 1999 and will terminate on May 31, 1999. The borrowings bear
interest at the European OverNight Index Average ("EONIA") plus 100 basis
points or LIBOR plus 100 basis points, depending on the currency of the
borrowing. The borrowings can be drawn in Euros, ECU or British Pounds. At
December 31, 1998, there was $3.4 million outstanding under the facility and
the interest rate was 4.6%. In addition, HSI has a $10.5 million multicurrency
line of credit, 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
and 1998 was 7.2% and 6.6%, 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%. The total outstanding balance was $7.6 million and $8.3 million at
December 31, 1997 and 1998, respectively. Investments greater than $2 million
and sales of significant German assets are prohibited without prior written
approval of the banks. In addition, HSI has a $1.2 million line of credit
denominated in German Marks. The borrowings bear interest at a variable rate
between 4.9% and 7.5% depending on the number of days the relevant borrowing
is outstanding. At December 31, 1998, there was no balance outstanding.
Capital expenditures totaled $6.0 million and $9.7 million for 1997 and
1998, respectively. These expenditures consisted primarily of purchases of
computer equipment and software and, office furniture and fixtures.
Additionally, HSI made payments in connection with the Mulder acquisition of
$9.4 million in cash and stock during 1997 and $1.3 million in cash during
1998.
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<PAGE>
Quarterly Comparisons
The following table sets forth certain quarterly financial information of
H&S Inc. and HSI for each quarter of 1997 and 1998. The information is derived
from the quarterly financial statements of the companies which are unaudited
but which, in the opinion of management, have been prepared on the same basis
as the financial statements included herein and include all adjustments,
consisting only of normal recurring items, necessary for the fair presentation
of the information for the periods presented. The financial data shown below
should be read in conjunction with the respective Consolidated Financial
Statements and Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Fiscal Quarters Ended
H&S Inc. --------------------------------------------------------------------
1997 1998
--------------------------------- ----------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $39,973 $46,375 $49,961 $43,935 $45,937 $52,778 $59,261 $ 46,039
Operating income (loss). 1,440 3,965 5,383 1,157 827 2,742 4,493 (18,454)(1)
Net income (loss)....... 890 1,767 2,962 824 200 1,240 2,294 (19,988)(2)
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarters Ended
HSI --------------------------------------------------------------------------
1997 1998
--------------------------------- ---------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- ------- -------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $17,953 $18,121 $18,495 $28,163 $28,053 $31,402 $34,290 $ 31,239
Operating income (loss). 1,479 629 322 655 (103) 1,195 1,149 (17,884)(3)
Net income (loss)....... 724 214 14 (260) (549) (2,103)(4) 324 (15,037)(5)
</TABLE>
- --------
(1) Includes $12.7 million of non-recurring charges comprised of (i) $9.9
million of salaries and benefits expense arising from the difference
between the issuance price of shares issued by the Company in December
1998 and the fair market value of such shares at the date of grant and
(ii) $2.8 million of salaries and benefits expense arising from the early
settlement of profit sharing arrangements relating to the acquisition of
certain Latin American offices.
(2) Includes a non-recurring $2.5 million charge incurred in connection with
the costs of the postponement of the Offering in September 1998.
(3) Includes $11.9 million of non-recurring charges comprised of (i) $1.3
million of salaries and benefit expense due to the amortization of
deferred compensation expense resulting from the Mulder acquisition, (ii)
$4.9 million of salaries and benefits expense arising from the difference
between the issuance price of shares issued by the Company in December
1998 and the fair market value of such shares at the date of grant, (ii)
$5.7 million of salaries and benefits expense arising from the termination
agreement with Gerard Clery-Melin, HSI's former President and Chief
Executive Officer, and the termination agreement of a non-executive HSI
employee. The $5.7 million charge is comprised of $3.0 million for
compensation and other amounts to be paid in accordance with the
termination agreements and a $2.7 million non-cash charge representing the
difference between the current book value and appraised fair market value
of shares retained subsequent to termination. See "Management."
(4) Includes $2.9 million associated with the writeoff of leasehold
improvements and accruals for non-cancelable lease commitments due to a
decision to relocate the London office.
(5) Includes a non-recurring $1.3 million charge incurred in connection with
the costs of the postponement of the Offering in September 1998.
36
<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 750 professionals in 59 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. The size of the Company's business has grown significantly over the
past five years as evidenced by the fact that the combined worldwide revenues
of H&S Inc. and HSI have grown at a compound annual 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, 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. Because
fees for executive search firms are based on cash compensation, higher cash
compensation levels have translated into higher executive search fees.
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<PAGE>
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 internal 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. As of December 31, 1998,
the Company employed 346 consultants who, on average, have approximately 10
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 December 31, 1998, an
annual average of fewer than 1.5% of H&S's consultants 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 59% of the executive searches performed in 1998 by H&S were 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.
38
<PAGE>
Global Presence. The Company's 59 offices are located in major business
centers in 30 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 174, 131, 26 and 15 consultants,
as of December 31, 1998, respectively, and generated 1998 revenues of $180
million, $125 million, $14 million and $10 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 66% of the executive searches performed by the
Company worldwide, representing approximately 73% of revenues (and
approximately 81% of the searches performed in North America, representing
approximately 81% of revenues) in 1998, were for CEOs, presidents, CFOs, COOs,
CAOs, CIOs, members of boards of directors and other senior management
positions (such as division and department 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 406
associates (as of December 31, 1998), all of whom have access to a
sophisticated global technology infrastructure. This technology infrastructure
consists of internally developed proprietary global databases containing over
840,000 candidate profiles and over 29,000 client 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 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:
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)
39
<PAGE>
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 over 1,800 clients in
1995 and over 3,100 in 1998. Of the searches performed in 1998, more than 75%
were on behalf of clients or their affiliates for whom the Company had
conducted multiple assignments over the last six years. 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 1998,
including through acquisitions, the Company added 26 offices and 178
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 and evaluates
potential acquisitions on an ongoing basis. See "--Recent Strategic
Acquisitions and Alliance."
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 as compared to $809,000 for the
average of the other nine of the largest ten U.S. executive search firms. 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.
Pursue New, Complementary Lines of Business. H&S expects that it will expand
the range of services it offers, including Internet-based recruiting, interim
management placement, management audit and board of directors consulting
services. LeadersOnline offers a comprehensive recruiting service for
technology professionals through its secure Internet site, utilizing
proprietary software and a methodology designed to serve clients' growing
demand for such professionals, especially those in critical-need positions.
The service provides an integrated recruiting solution, including candidate
identification, screening, degree and job verification and recruiting progress
management, which allows the Company to expedite the search process. Clients
interact with LeadersOnline through a secure Internet site where they may
analyze pre-screened candidates for opportunities in the $75,000 to $150,000
annual compensation range, a market not previously targeted by the Company.
H&S may consider obtaining strategic partners, investors or alliances in
connection with such new lines of business.
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
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<PAGE>
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.
Internet-based Recruiting Initiative. The Company began the research and
development of LeadersOnline to focus upon critical-need technology
professionals, approximately two years ago and launched the service in March
1999. As of January 1999, LeadersOnline had an online proprietary database of
250,000 technology candidates. Candidates register with the Company's
Internet-based recruiting service by completing a simple on-line profile that
takes approximately eight to ten minutes. Candidates obtain confirmation
within 24 hours of submitting their profile and are notified periodically as
matching positions become available. Additional candidates are proactively
identified through targeted advertising and telephone recruiting. When the
Company's Internet-based recruiting service receives a search assignment from
a client, the Company designs a custom candidate database according to the
client's specifications and skill requirements.
LeadersOnline: (i) matches position specifications against the proprietary
database and produces a short-list of candidates, (ii) notifies matched
candidates by electronic mail, informs them about the position and requests
permission to perform verification of degrees, employment and other background
information, (iii) conducts profile verification through a third party
information service company, (iv) forwards a verified candidate list to the
client, and (v) generates recruiting progress management reports throughout
the process to track the progress of multiple searches and provide available
candidate feedback. The entire system is designed to ensure confidentiality to
both clients and candidates and is delivered through a secure customizable
extranet for client use.
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 1998 Revenue
----------------------- -------------
<S> <C>
International Technology.................................... 27%
Industrial.................................................. 19
Financial Services.......................................... 19
Consumer Products........................................... 17
Health Care................................................. 8
Professional Services....................................... 4
Higher Education/Not-for-Profit............................. 3
Other....................................................... 3
---
100%
</TABLE>
41
<PAGE>
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.
Global Network. H&S is a major executive search presence through its global
network of 59 offices located in 30 countries, 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
its own regional manager as well as research and support functions.
42
<PAGE>
The following listing sets forth the regions, countries and locations where
the Company maintained offices and had affiliate offices as of December 31,
1998:
<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 Melbourne
Sydney
Hong Kong Hong Kong
India New Delhi
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 Geneva
Zurich
United Kingdom London
Manchester
Middle East Israel Tel Aviv
Africa South Africa Capetown*
Johannesburg*
</TABLE>
<TABLE>
<S> <C> <C>
*Affiliate offices
</TABLE>
North America
The Company has 19 offices in the United States and one in Canada and, as of
December 31, 1998, employed a total of 174 consultants in the region.
Approximately 55% of the Company's worldwide revenues in 1998 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, Middle East and Africa
H&S has 26 offices in 16 European countries, one office in the Middle East,
a strategic alliance with an affiliate having two offices in South Africa and,
as of December 31, 1998, employed 131 consultants. Approximately 38% of the
Company's worldwide revenues in 1998 were generated by these offices. The
Company's offices in Germany, the United Kingdom and France generate the
highest revenues of the H&S offices in these regions. The markets in Germany
and the United Kingdom are the two largest executive search
43
<PAGE>
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 Strategic
Acquisitions and Alliance." 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 Melbourne, Sydney, Hong Kong, New Delhi, Tokyo and
Singapore and, as of December 31, 1998, employed 26 consultants in the Asia
Pacific region. Approximately 4% of the Company's worldwide revenues in 1998
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 December 31, 1998, employed 15 consultants in
Latin America. Approximately 3% of the Company's worldwide revenues in 1998
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 1998.
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 over 1,800 clients in 1995 and over 3,100 in 1998, and, of the
searches performed in 1998, more than 75% were on behalf of clients for whom
the Company had conducted multiple assignments over the last six years.
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 1998, 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, features 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
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<PAGE>
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
conditions and industry practices have resulted in blocking arrangements that
are becoming narrower in scope and shorter in duration.
Assignment Research and Information Management
In addition to LeadersOnline, the Company's Internet-based recruiting
service discussed above, the Company's technology infrastructure consists of
internally developed global databases containing over 840,000 candidate
profiles and approximately 29,000 client 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 such upgrades are expected to be operational in the second
and third quarters of 1999, respectively. 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. In addition to its Internet-based search service, the Company uses
Internet technology in three other 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, as a means of connecting clients and
candidates in its core executive search practice 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.
LeadersOnline utilizes a separate information technology infrastructure
consisting of a proprietary software platform and a technology management team
(currently consisting largely of contract professionals) also led by H&S's
Managing Partner of Global Technology.
Professional Staff and Employees
As of December 31, 1998, H&S had 1,412 full time employees, of which 346
were consultants, 406 were associates and 660 were corporate and support
staff. In each of the last five years, no single consultant accounted for any
material portion of the Company's revenues. 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.
45
<PAGE>
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 other large search
firms specializing in senior level executive search, including: SpencerStuart
& Associates, Egon Zehnder International, Russell Reynolds Associates, Inc.,
and Korn/Ferry 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 Strategic Acquisitions and Alliance
Over the past two years, the Company has successfully completed the
strategic acquisition of two executive search firms and a strategic alliance
with one executive search firm:
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.
Redelinghuys. On August 31, 1998, the Company entered into an alliance with
Redelinghuys & Partners, a senior level executive search firm with offices in
Capetown and Johannesburg in the Republic of South Africa. The alliance
consists of a licensing agreement as well as a transfer fee sharing agreement
and allows the Company to expand its services to its clients to the African
continent.
Facilities
The Company leases all of its office locations. The aggregate square footage
of office space under such leases was approximately 446,904 as of December 31,
1998. The leases for these offices call for future minimum lease payments of
approximately $97 million and have terms which will expire between 1999 and
2013 (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."
46
<PAGE>
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. On April 23, 1999 the Company received a letter from an
attorney representing a company for which a current H&S employee had provided
consulting services. This letter threatened litigation in connection with the
Company's LeadersOnline venture asserting that certain aspects of the
LeadersOnline website were prepared using confidential information learned by
the H&S employee while providing these consulting services. No action has yet
been commenced against the Company regarding this matter. While the Company
and its counsel are reviewing the assertions made in this letter, the Company
currently believes that such assertions are without merit and intends to
defend vigorously any litigation that may arise.
47
<PAGE>
MANAGEMENT
Directors and Executive Officers
The Company's Board of Directors initially will have eight members, all of
whom will be employees of the Company, and three vacancies. The Company
expects to fill the three vacancies with independent directors within 90 days
of the consummation of the Offering. In accordance with the Certificate of
Incorporation, the members of the Board of Directors are divided into three
classes whose terms of office expire at the third succeeding annual
stockholders' 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 2000, 2001, and 2002, respectively. The following
are the employee directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position with Company Director Class
- ---- --- --------------------- --------------
<S> <C> <C> <C>
Patrick S. Pittard...... 53 President and Chief Executive Officer,
Director III
Donald M. Kilinski...... 39 Chief Financial Officer and Treasurer --
Richard D. Nelson....... 59 Chief Administrative Officer, Counsel and
Secretary --
Gerard R. Roche......... 67 Senior Chairman, Director III
David C. Anderson....... 56 North America Managing Partner, Director II
Thomas J. Friel......... 51 Asia Pacific Managing Partner, Director II
David B. Kixmiller...... 49 Director I
Bengt Lejsved........... 54 Director I
Dr. Jurgen B. Mulder.... 61 President--Europe, Director III
Dr. John C. Viney....... 51 Chairman--Europe, Director II
</TABLE>
Patrick S. Pittard has been President and Chief Executive Officer of the
Company and a member of the Board of Directors of the Company since the
Merger. Prior to the Merger, he had been President and Chief Executive Officer
of H&S Inc. since 1997 and had 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.
Donald M. Kilinski has been Chief Financial Officer and Treasurer of the
Company since the Merger. Prior to the Merger, he had been Chief Financial
Officer of H&S Inc. since he joined H&S Inc. in 1997, and 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 has been Chief Administrative Officer, Counsel and
Secretary of the Company since the Merger. He joined H&S Inc. in 1981, and
prior to the Merger had been Chief Administrative Officer, Secretary and
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 was also Secretary and a member of the Board of Directors of HSI
from 1980 until the time of the Merger.
Gerard R. Roche has been Senior Chairman and a member of the Board of
Directors of the Company since the Merger. Mr. Roche joined H&S Inc. in 1964,
and was a member of the Board of Directors of H&S Inc. from 1970 until the
time of the Merger. He is also a member of the Board of Directors for
Gulfstream Aerospace Corporation.
48
<PAGE>
David C. Anderson has been North America Managing Partner and a member of
the Board of Directors of the Company since the Merger. Mr. Anderson has been
the Office Managing Partner of the Company's Dallas office since joining the
firm in 1992 and the North America Managing Partner since 1998. He was a
member of the Board of Directors of H&S Inc. from 1992 until the time of the
Merger.
Thomas J. Friel has been Managing Partner for Asia Pacific and a member of
the Board of Directors of the Company since the Merger. Since joining H&S Inc.
in 1979, Mr. Friel has served, at various times, as Office Managing Partner of
the Menlo Park office, Worldwide Practice Managing Partner for the
International Technology Practice and, since 1992, has been Managing Partner
for Asia Pacific. He was a member of the Board of Directors of H&S Inc. from
1983 until the time of the Merger.
David B. Kixmiller has been a member of the Board of Directors of the
Company since 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 was a
member of the Board of Directors of H&S Inc. from 1987 until the time of the
Merger and has been Worldwide Practice Managing Partner for the International
Technology Practice since 1998.
Bengt Lejsved has been a member of the Board of Directors of the Company
since the Merger. Mr. Lejsved joined HSI in 1990 and is currently the Area
Managing Partner for the Northern European Area. He was a member of the Board
of Directors of HSI from 1994 until the time of the Merger.
Dr. Jurgen B. Mulder has been President--Europe and a Director of the
Company since the Merger. He was President and Chief Executive Officer of HSI
from November 16, 1998 until the time of the Merger. He was Vice Chairman of
HSI from October 1, 1997 until November 16, 1998. 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 has been Chairman--Europe since the Merger. Dr. Viney
joined HSI in 1985 and previously served as Office Managing Partner for the
London office. He was a member of the Board of Directors of HSI from 1987
until the time of the Merger (except for a brief period in 1998).
Committees
Audit Committee. Following the Offering, the Company will establish an Audit
Committee consisting of at least two independent directors. The duties of the
Audit Committee will be 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 will also periodically review the activities of
the Company's audit staff and the adequacy of the Company's internal controls.
Compensation Committee. Following the Offering, the Company will establish a
Compensation Committee consisting of at least two independent directors. The
duties of the Compensation Committee will be 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
None of the directors who are also employees of the Company receive any
compensation for their services as directors. Non-employee directors will
receive an annual retainer of $30,000 in cash, an additional annual cash
payment of $4,000 for being the chair of any committee and up to $1,000 in
cash for each meeting attended. The Company will reimburse out-of-pocket
expenses incurred by all directors in attending Board of Directors and
committee meetings.
49
<PAGE>
Executive Compensation
The following table sets forth the compensation awarded or paid to, or
earned by, the executive officers of the Company and the former Chief
Executive Officers of HSI during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------- ---------------------------------
Awards Payouts
---------------------- ----------
Other
Annual Restricted Securities Long-Term All Other
Compen- Stock Underlying Incentive Compen-
Name and Principal Position Year Salary($) Bonus($) sation Award(s)($) Options(#) Payouts($) sation($)
--------------------------- ---- --------- ---------- ------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patrick S. Pittard, President and
Chief Executive Officer......... 1998 $600,000 $1,200,000 -- -- -- -- $ 16,320(1)
Donald M. Kilinski, Chief
Financial Officer.............. 1998 200,000 200,000 -- -- -- -- 83,652(2)
Richard D. Nelson,
Chief Administrative Officer.... 1998 450,000 525,000 -- -- -- -- 31,046(3)
Dr. Jurgen Mulder, (4) Former
President and Chief
Executive Officer of HSI........ 1998 512,000 1,518,000 -- -- -- -- --
Gerard Clery-Melin, (4) Former
President and Chief
Executive Officer of HSI........ 1998 329,000 127,000 -- -- -- -- 2,268,218(5)
</TABLE>
- -------
(1) This amount represents compensation for expenses relating to the personal
use of a vehicle ($2,500), club dues ($165), group term life insurance
($4,032), employer profit sharing contributions ($7,623) and employer
401(k) matching contributions ($2,000).
(2) This amount represents compensation for expenses relating to group term
life insurance ($726), relocation expenses ($73,302), employer profit
sharing contributions ($7,623) and employer 401(k) matching contributions
($2,000).
(3) This amount represents compensation for expenses relating to the personal
use of a vehicle ($7,336), club dues ($7,787), group term life insurance
($6,300), employer profit sharing contributions ($7,623) and employer
401(k) matching contributions ($2,000).
(4) Mr. Clery-Melin's employment as President and Chief Executive Officer of
HSI was terminated, and Dr. Jurgen Mulder was appointed President and
Chief Executive Officer of HSI on November 16, 1998.
(5) This amount represents compensation paid in connection with the
termination of Mr. Clery-Melin's employment, as further set forth below.
Mr. Pittard, Mr. Kilinski and Mr. Nelson have agreements with H&S Inc.
providing for severance benefits. Mr. Pittard's agreement entitles him to 30
months of his average total cash base and bonus compensation calculated based
on the three year period preceding the year of the termination of employment
if his employment is terminated without cause, and 24 months of such average
cash compensation if his employment is constructively terminated. Mr.
Kilinski's agreement entitles him to three months of his monthly base salary
if his employment 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.
In November 1998, Gerard Clery-Melin resigned as a director of HSI, and his
employment as President and Chief Executive Officer of HSI was terminated. In
connection with his termination, Mr. Clery-Melin was paid an aggregate of
$766,018 for contractual advance notice compensation and severance indemnity,
Mr. Clery-Melin will receive an additional $1,502,200 during 1999, subject, in
part, to compliance with certain restrictive covenants relating to his
employment and nonsolicitation of Company employees. In addition, in
connection with the termination of his
50
<PAGE>
employment, HSI expects to enter into an agreement to permit Mr. Clery-Melin
to retain the 142,395 shares of Common Stock owned by him, directly and in
trust, until December 31, 2000, at which time the Company will repurchase all
of the shares at an agreed price per share, unless the Offering has been
completed. If the Offering is completed prior to December 31, 2000, the shares
may be sold (to the extent permitted by any applicable lockup agreements), but
a portion of such proceeds from the sale of the shares will be held in escrow
until December 31, 2000, as security for Mr. Clery-Melin's performance of the
restrictive covenants.
1998 Heidrick & Struggles GlobalShare Plan
The Company has adopted the 1998 Heidrick & Struggles GlobalShare Program I
(the "GlobalShare Program I") which will serve as a means to attract, reward,
and retain selected key employees and directors ("Employee Participants") of
the Company and its subsidiaries. The Company has also adopted the 1998
Heidrick & Struggles GlobalShare Program II (the "GlobalShare Program II" and,
together with the GlobalShare Program I, the "GlobalShare Plan") which will
serve as a means to attract, reward and retain independent contractors
(together with the Employee Participants, the "Participants") of the Company
and its subsidiaries. The terms of each of the GlobalShare Program I and the
GlobalShare Program II are substantially the same in all material respects.
The maximum number of shares of Common Stock reserved for issuance under the
GlobalShare Plan is 3,721,667, 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 275,000. To date,
except for awards granted in connection with the Employee Share Purchase
described under the caption "Employee Share Purchase" below, there have been
no awards or grants made under the GlobalShare Plan.
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 of 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.
Options. An option may be granted as an ISO, as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), 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 but shall not be less than 100% of the fair market value of
the shares on the date of grant. 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 independent of an option or 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.
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<PAGE>
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. The maximum amount of a Performance-Based Award to any Participant
with respect to a fiscal year of the Company shall be $2,000,000.
Exercise of options. 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, or (iv) 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. Any amendment however, which would
increase the total number of shares reserved for purposes of the plan requires
the approval of the Company's stockholders. 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 substitution or adjustment as
it deems to be equitable to the number or kind of shares or securities issued
or reserved under the plan or to any affected terms of the 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.
Employee Share Purchase. Participants who purchase shares of Common Stock
from the Company pursuant to the Employee Share Purchase will receive an award
of stock options and/or restricted share units or shares of restricted stock
at varying levels depending upon the Participant's position within the Company
and the number of shares purchased. However, the Participant's share purchase
cannot exceed a fixed dollar amount established for each Participant which may
or may not be determined as a percentage of that Participant's cash
compensation. Stock options granted in conjunction with the Employee Share
Purchase will vest upon nine 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. Vesting can be accelerated to as
early as five years from the date of grant assuming continued employment, the
achievement of pre-established stock ownership guidelines and ongoing
ownership of the shares purchased pursuant to the Employee Share Purchase. The
Company has guaranteed a loan of up to $10,000,000 to Participants purchasing
shares of Common Stock pursuant to the Employee Share Purchase.
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.
52
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock before and after the Offering 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. All share amounts shown below give
effect to the Stock Split. The percentage ownership before the Offering has
been calculated based on 10,828,274 shares of Common Stock outstanding as of
March 29, 1999, and the percentage ownership after the Offering has been
calculated based on 14,528,274 shares of Common Stock outstanding.
<TABLE>
<CAPTION>
Ownership Ownership
Before Offering After Offering
-------------------- --------------------
Shares of Percent of Shares of Shares of Percent of
Name and Address of Common Common Common Stock Common Common
Beneficial Owner(1) Stock Stock Held Being Sold Stock Stock Held
------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Patrick S. Pittard...... 251,121 2.3% -- 251,121 1.7%
Donald M. Kilinski...... 44,237 * -- 44,237 *
Richard D. Nelson....... 251,121 2.3 -- 251,121 1.7
Gerard R. Roche......... 396,618 3.7 -- 396,618 2.7
David C. Anderson....... 110,119 1.0 -- 110,119 *
Thomas J. Friel......... 251,121 2.3 -- 251,121 1.7
David B. Kixmiller...... 159,182 1.5 -- 159,182 1.1
Bengt Lejsved........... 36,358 * -- 36,358 *
Dr. Jurgen B. Mulder.... 96,101 * -- 96,101 *
Dr. John C. Viney....... 150,449 1.4 -- 150,449 1.0
Gerard Clery-Melin...... 142,395 1.3 -- 142,395 1.0
All directors and
executive officers of
the Company as a group
(11 persons)........... 1,888,822 17.4 -- 1,888,822 13.0
Patrick Bazil........... 32,418 * 13,137 19,281 *
Ronald Dukes............ 152,758 1.4 152,758 -- *
Kenneth L. Rattner...... 88,300 * 88,300 -- *
Michael B. Schoettle.... 251,121 2.3 245,805 5,316 *
Selling Stockholders as
a group (4 persons).... 524,597 4.8 500,000 24,597 *
</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.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the completion of the Offering, the Company will amend and
restate its Certificate of Incorporation to provide for the Company's
authorized capital stock to consist of 100,000,000 shares of common stock, par
value $.01 per share, of which 10,828,274 shares were issued and outstanding
prior to completion of the Offering and 10,000,000 shares of preferred stock,
par value $.01 per share, none of which will then be outstanding. 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 completion
of the Offering. Immediately following completion of the Offering, there are
expected to be 15,194,941 shares of Common Stock (15,824,941 shares of Common
Stock if the Underwriters' over-allotment options are exercised in full) and
no shares of preferred stock outstanding. This amount includes 666,667 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, but excludes (i) 735,000 shares issuable
pursuant to options that may be granted under the GlobalShare Plan to such
employees in connection with such purchase, (ii) approximately 855,000 shares
issuable pursuant to options to be issued to employees at completion of the
Offering and (iii) 1,465,000 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
The Certificate of Incorporation authorizes 100,000,000 shares of Common
Stock, par value $.01 per share. 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.
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.
54
<PAGE>
Classified Board of Directors. The Certificate of Incorporation provides
that the Company's Board of Directors is 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 may 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 fifteen nor less than eight
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 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
55
<PAGE>
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 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
56
<PAGE>
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. The Certificate of Incorporation authorizes 10,000,000
shares of preferred stock, par value $.01 per share. 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 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
57
<PAGE>
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 ChaseMellon
Shareholder Services, L.L.C.
Listing
The Common Stock has been approved for listing on the Nasdaq National Market
under the proposed symbol HSII.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, there will be outstanding 16,784,941 shares
of Common Stock, assuming the purchase of all of the 666,667 shares that may
be purchased by employees of the Company in the separate offering being made
contemporaneously with the Offering (the "Employee Stock Purchase") as well as
up to 735,000 shares issuable pursuant to options in connection with the
Employee Stock Purchase and the issuance of 855,000 shares issuable pursuant
to options to employees contemporaneously with the Offering. Of these shares,
the 4,200,000 shares of Common Stock sold in the Offering (4,830,000 shares if
the Underwriters' over-allotment option is exercised in full) and the shares
purchased by employees of the Company pursuant to the GlobalShare Plan (and
issuable pursuant to the foregoing options) will be freely tradeable by
persons other than "affiliates" of H&S, without restriction under the
Securities Act. Of the remaining shares, 10,328,274 shares plus any shares of
Common Stock purchased by "affiliates" pursuant to the GlobalShare Plan 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 (151,949 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.
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 GlobalShare 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."
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 Common Stock
has been approved for listing on the Nasdaq National Market under the proposed
symbol HSII.
59
<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...................................................... 4,200,000
==========
</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 630,000 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.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 210,000 shares offered hereby for
directors, officers, employees, business associates and related persons of
60
<PAGE>
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 the same and related businesses.
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) shares of Common Stock issued by the
Company under its GlobalShare Plan or 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.
The Representatives have informed the Company and the Selling Stockholders
that the Underwriters do not intend to sell to, and therefore will not confirm
sales of more than 5% of the shares of Common Stock offered hereby to,
accounts over which they exercise discretionary authority.
61
<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 (1) a
citizen or resident of the United States, (2) a corporation or partnership
created or organized in or under the laws of the United States or any
political subdivision thereof, (3) an estate the income of which is subject to
U.S. federal income taxation regardless of its source, (4) a trust, (x) that
is subject to the supervision of a court within the United States and the
control of one or more United States persons as described in section
7701(a)(30) of the Internal Revenue Code of 1986, as amended (the "Code") or
(y) that has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a United States person. 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 for effectively
connected income to be exempt from withholding. Any such effectively connected
dividends received by a foreign corporation may 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.
Until December 31, 1999, 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. However, United States Treasury regulations (the "Final Regulations")
provide that 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 (1) 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, (2) 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
62
<PAGE>
more days in the taxable year of the sale or other disposition and certain
other conditions are met, or (3) the Company is or has been a "U.S. real
property holding corporation" for United States federal income tax purposes.
An individual Non-U.S. Holder described in clause (1) 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 (2) 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 (1) 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 or exemption under an applicable income
tax treaty.
The Company believes it is not and does not anticipate becoming a "U.S. real
property holding corporation" for United States federal income tax purposes.
Special rules may apply to certain Non-U.S. Holders, such as foreign
insurance companies, "controlled foreign corporations", "passive foreign
investment companies", "foreign personal holding companies", and companies
that accumulate earnings for the purpose of avoiding tax, 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-U.S. Holder will be subject to backup
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.
63
<PAGE>
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.
EXPERTS
The Consolidated Financial Statements and Schedule of H&S Inc. as of
December 31, 1997 and 1998, and for each of the years in the three-year period
ended December 31, 1998 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 reports of said firm and the authority of said firm as experts in
accounting and auditing.
The Consolidated Financial Statements of HSI as of December 31, 1997 and
1998 and for each of the years in the three-year period ended December 31,
1998 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 reports of said firm and the authority of said firm as
experts in accounting and auditing.
The Consolidated Statements of Income and Cash Flows of Mulder for the year
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 reports of said firm and
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.
64
<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, 1997 and 1998.............. F-3
Consolidated Statements of Income and Comprehensive Income For the Years
Ended December 31, 1996, 1997 and 1998................................... F-5
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1996, 1997
and 1998................................................................. F-6
Consolidated Statements of Cash Flows For the Years Ended December 31,
1996, 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-18
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. F-19
Consolidated Statements of Income and Comprehensive Income For the Years
Ended December 31, 1996, 1997 and 1998................................... F-20
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1996, 1997
and 1998................................................................. F-21
Consolidated Statements of Cash Flows For the Years Ended December 31,
1996, 1997 and 1998...................................................... F-22
Notes to Consolidated Financial Statements................................ F-23
</TABLE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-33
Consolidated Statements of Income and Comprehensive Income For the Year
Ended December 31, 1996 and for the Nine Months Ended September 30, 1997. F-34
Consolidated Statements of Cash Flows For the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1997............................. F-35
Notes to Consolidated Financial Statements................................ F-36
</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,
1997 and 1998, and the related consolidated statements of income and
comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998 (1997 as restated--see Note
15). 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, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 19, 1999
(except with respect to the matter discussed in Note 17, as to which the date
is March 26, 1999)
F-2
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 10,074 $ 10,428
Accounts receivable--
Trade, less allowances for doubtful accounts of $3,276,
and $4,669 at December 31, 1997 and 1998, respectively. 38,349 40,816
Other................................................... 1,384 2,643
Notes receivable......................................... 193 219
Note receivable from affiliate........................... -- 1,900
Prepaid expenses......................................... 1,265 1,771
Prepaid income taxes..................................... -- 3,575
Deferred income taxes.................................... 7,045 8,871
-------- --------
Total current assets................................... 58,310 70,223
-------- --------
Property and equipment:
Leasehold improvements................................... 6,724 8,812
Office furniture and fixtures............................ 9,588 12,211
Computer equipment and software.......................... 8,368 5,513
Automobiles.............................................. 853 898
System development costs................................. 1,243 10,244
-------- --------
26,776 37,678
Less--Accumulated depreciation and amortization.......... (11,334) (12,900)
-------- --------
Property and equipment, net............................ 15,442 24,778
-------- --------
Other assets:
Cash and investments designated for nonqualified
retirement plan......................................... 10,439 13,552
Investment in Heidrick & Struggles International, Inc.... 6,433 4,766
Goodwill and other intangibles........................... -- 8,055
Deferred income taxes.................................... 2,961 1,776
-------- --------
Total other assets..................................... 19,833 28,149
-------- --------
Total assets........................................... $ 93,585 $123,150
======== ========
</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,
----------------
1997 1998
------- --------
<S> <C> <C>
Current liabilities:
Short-term debt............................................. $ 3,500 $ 22,000
Current maturities of long-term debt........................ 808 2,547
Accounts payable............................................ 2,909 2,918
Accrued expenses--
Salaries and employee benefits............................. 17,806 23,299
Profit sharing and retirement.............................. 2,732 3,155
Rent....................................................... 1,817 1,817
Other...................................................... 3,028 6,295
Income taxes payable........................................ 837 --
------- --------
Total current liabilities................................. 33,437 62,031
------- --------
Long-term debt, less current maturities....................... 1,636 5,150
------- --------
Liability for nonqualified retirement plans................... 11,108 11,358
------- --------
Commitments and contingent liabilities
Mandatorily redeemable common stock:
Common stock, $1 par value, 7,910,850 shares authorized and
issued at December 31, 1997 and 1998; 2,737,533 and
2,873,870 shares outstanding at December 31, 1997 and 1998,
respectively, at book value................................ 47,404 44,611
------- --------
Total liabilities and mandatorily redeemable common stock. $93,585 $123,150
======= ========
</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 and per share figures)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue....................................... $ 137,665 $ 180,244 $ 204,015
--------- --------- ---------
Operating expenses:
Salaries and employee benefits.............. 98,272 125,308 163,730
General and administrative expenses......... 28,681 42,991 50,677
--------- --------- ---------
Total operating expenses.................. 126,953 168,299 214,407
--------- --------- ---------
Operating income (loss)................... 10,712 11,945 (10,392)
--------- --------- ---------
Non-operating income (expense):
Interest income............................. 1,385 1,586 1,531
Interest expense............................ (180) (150) (462)
Other....................................... (94) 486 (2,212)
--------- --------- ---------
Net non-operating income (expense)........ 1,111 1,922 (1,143)
--------- --------- ---------
Equity in net income (loss) of affiliate...... 775 20 (3,417)
--------- --------- ---------
Income (loss) before income taxes ........ 12,598 13,887 (14,952)
Provision for income taxes.................... 6,149 7,444 1,302
--------- --------- ---------
Net income (loss)......................... $ 6,449 $ 6,443 $ (16,254)
========= ========= =========
Basic earnings (loss) per common share........ $ 2.50 $ 2.41 $ (6.10)
========= ========= =========
Weighted average common shares outstanding.... 2,574,475 2,676,415 2,666,526
========= ========= =========
Diluted earnings (loss) per common share...... $ 2.50 $ 2.41 $ (6.10)
========= ========= =========
Diluted weighted average common shares
outstanding.................................. 2,574,475 2,676,525 2,666,526
========= ========= =========
Net income (loss)............................. $ 6,449 $ 6,443 $ (16,254)
========= ========= =========
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment..... (465) (956) (475)
Unrealized gain on available-for-sale
investments................................ 188 1,110 1,626
--------- --------- ---------
Other comprehensive income (loss), before tax. (277) 154 1,151
Income tax (benefit) expense related to items
of other comprehensive income (loss)......... (116) 64 494
--------- --------- ---------
Other comprehensive income (loss), net of tax. (161) 90 657
--------- --------- ---------
Comprehensive income (loss)................... $ 6,288 $ 6,533 $ (15,597)
========= ========= =========
</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
Compre- Compre-
Common Stock Treasury Stock hensive hensive
---------------- Paid-in -------------------- Retained Income Income
Shares Amount Capital Shares Amount Earnings (Loss) (Loss) Total
--------- ------ ------- ---------- -------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995.................. 7,910,850 500 8,083 (5,389,108) (12,096) 3,502 11 --
Treasury stock
transactions--
Stock issued.......... -- -- 2,381 229,525 543 -- -- 2,924
Stock repurchased..... -- -- -- (116,765) (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.................. 7,910,850 500 10,464 (5,276,348) (13,094) 2,280 (150) --
Treasury stock
transactions--
Stock issued.......... -- -- 3,584 291,721 765 -- -- 4,349
Stock repurchased..... -- -- -- (188,690) (2,850) -- -- (2,850)
Comprehensive income
Net income............ -- -- -- -- -- 6,443 -- 6,443 6,443
--------
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... 6,533
========
Retained earnings
allocable to
mandatorily redeemable
common stock.......... -- -- -- -- -- (8,032) -- (8,032)
--------- ---- ------- ---------- -------- -------- ---- -------
Balance at December 31,
1997.................. 7,910,850 500 14,048 (5,173,317) (15,179) 691 (60) --
Treasury stock
transactions
Stock issued.......... -- -- 14,095 262,292 857 -- -- 14,952
Stock repurchased..... -- -- -- (125,955) (2,149) -- -- (2,149)
Comprehensive income
(loss)
Net (loss)............ -- -- -- -- -- (16,254) -- (16,254) (16,254)
--------
Other comprehensive
income, net of tax
Unrealized gain on
available-for-sale
investments........ -- -- -- -- -- -- -- 933 --
Foreign currency
translation
adjustments........ -- -- -- -- -- -- -- (276) --
--------
Other comprehensive
income net of tax.... -- -- -- -- -- -- 657 657 657
--------
Comprehensive income
(loss)................ -- -- -- -- -- -- -- $(15,597) --
========
Retained earnings
allocable to
mandatorily redeemable
common stock.......... -- -- -- -- -- 2,794 -- 2,794
--------- ---- ------- ---------- -------- -------- ---- -------
Balance at December 31,
1998.................. 7,910,850 $500 $28,143 (5,036,980) $(16,471) $(12,769) $597 $ --
========= ==== ======= ========== ======== ======== ==== =======
</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>
Year Ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................... $ 6,449 $ 6,443 $(16,254)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................... 2,705 3,417 3,881
Loss on sale of property and equipment.......... 522 50 560
Deferred income taxes........................... (1,327) (3,539) (1,357)
Equity in net (income) loss of affiliate........ (775) (20) 1,667
Accretion of discount on securities............. (321) -- --
Stock based compensation expense................ -- -- 9,979
Changes in assets and liabilities:
Trade & other receivables...................... (7,301) (12,385) (2,823)
Prepaid expenses............................... (179) (379) (5,465)
Accounts payable............................... 348 1,485 (144)
Accrued expenses............................... 3,687 8,046 8,839
Income taxes payable........................... (737) (370) 693
Nonqualified retirement plan liability......... 2,560 3,943 250
-------- -------- --------
Net cash provided by (used in) operating
activities................................... 5,631 6,691 (174)
-------- -------- --------
Cash flows from investing activities
Acquisitions.................................... -- -- (4,060)
Purchases of securities for nonqualified
retirement plan................................ (5,603) (3,538) (1,488)
Purchases of property and equipment............. (6,730) (5,718) (13,801)
Proceeds from sales of property and equipment... 58 65 5
Purchases of marketable securities.............. (10,303) (8,176) --
Proceeds from maturities of marketable
securities..................................... 13,000 8,176 --
-------- -------- --------
Net cash used in investing activities......... (9,578) (9,191) (19,344)
-------- -------- --------
Cash flows from financing activities
Proceeds from long-term debt.................... -- 3,500 27,148
Payments on long-term debt...................... (1,453) (875) (9,834)
Proceeds from sales of treasury stock........... 2,924 4,349 4,875
Purchases of treasury stock..................... (861) (1,014) (68)
-------- -------- --------
Net cash provided by financing activities..... 610 5,960 22,121
-------- -------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents............................ (88) (557) (2,249)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (3,425) 2,903 354
Cash and cash equivalents:
Beginning of period............................. 10,596 7,171 10,074
-------- -------- --------
End of period................................... $ 7,171 $ 10,074 $ 10,428
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid for--
Interest....................................... $ 221 $ 161 $ 359
Income taxes................................... $ 7,589 $ 10,874 $ 8,231
Supplemental schedule of noncash financing and
investing activities
Unrealized gain on available-for-sale
investments.................................... $ 188 $ 1,110 $ 1,626
Issuance of notes payable for the purchase of
treasury stock................................. $ 680 $ 1,836 $ 2,081
Debt from the acquisition of net assets......... $ -- $ -- $ 4,358
Receipt of note receivable for stock sale....... $ -- $ -- $ 98
Conversion of note receivable to equity......... $ -- $ -- $ 1,750
</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
(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 Asia Pacific.
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 1999
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes new standards for
reporting information about derivatives and hedging activities. 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 material effect on its consolidated financial position,
results of operations or on disclosures within the consolidated financial
statements.
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, 1998, the Company had no significant
concentrations of credit risk.
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>
F-8
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation for financial statement purposes for the years ended December
31, 1996, 1997 and 1998 totaled $2,705, $3,417, and $3,759, respectively.
Depreciation is calculated for tax purposes using accelerated methods.
Goodwill and Other Intangibles
Goodwill and other 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 goodwill or an
intangible asset may warrant revision, or that the remaining balance of
goodwill or an intangible asset may not be recoverable. The Company evaluates
the recoverability of goodwill and intangible assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of such assets are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, there were no adjustments to the carrying value of
goodwill or intangible assets in 1998.
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 comprehensive
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 as clients are billed, generally
over a 60 to 90 day period commencing in the month of the initial acceptance
of a search. If a search is canceled within the first 90 days, the Company
will pro-rate the fee up to the date of cancellation. 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 (Loss) per Common Share
The Company adopted SFAS No. 128, "Earnings Per Share" at December 31, 1997.
Basic earnings (loss) per common share is computed by dividing net income
(loss) by weighted average common shares outstanding
F-9
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
for the year. Diluted earnings (loss) per share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted. See Note 11 for the reconciliation of basic
and diluted earnings per share.
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 rates for the period. Translation
adjustments are reported as a component of comprehensive income.
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 the
nonqualified retirement 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, 1997 and 1998. Any unrealized gains
and losses on available-for-sale securities have been excluded from earnings
and have been reported as a component of comprehensive income.
The following details the cost and unrealized gain components that make up
the fair value of the investments at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Cost basis................................................ $ 8,835 $10,618
Gross unrealized gain..................................... 1,298 2,924
------- -------
Fair value.............................................. $10,133 $13,542
======= =======
</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, 1997 and 1998
was 35.5%, and 35.7%, 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 in Latin
America. The purchase price for each of these transactions equals the cost of
the net assets as of the date of the transaction. During 1998, the Company
incurred $2,825 of salaries and employee benefits expense due to the early
settlement of profit sharing arrangements related to these acquisitions.
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 $3,037,
respectively. The amortization expense was $105 for 1998.
F-10
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 1, 1998, the Company purchased selected assets of Heidrick
Partners, Inc. The purchase price was $2 million which is to be paid in two
installments. The first installment of $1 million was paid on October 1, 1998
and the remaining installment, including interest at the prime rate, is due on
October 1, 1999. The amortization expense was $17 for 1998.
Each acquisition was accounted for as a purchase. Goodwill is being
amortized over 30 years using the straight-line method. Results of operations
of the acquired companies are included in the consolidated statements of
income and comprehensive income since the date of acquisition.
5. Line of Credit
The Company has a $40,000 reducing revolving credit facility ("line of
credit") which will be increased to $60,000 upon completion of the Merger with
HSI (see Note 14). This facility will terminate on December 31, 2001. The
$40,000 line of credit reduces annually by $5,000 on December 31, 1999 and
2000 and the $60,000 line of credit will reduce annually by $10,000 on
December 31, 1999 and 2000. There was $22,000 outstanding under this line of
credit at December 31, 1998. 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"). A Non-U.S. Borrowing bears interest at the then existing LIBOR
plus a margin as determined by certain tests of H&S Inc. financial condition
(the "Applicable Margin"). A U.S. Borrowing bears interest at the then
existing prime rate. At December 31, 1998, the interest rate on the debt was
LIBOR plus the Applicable Margin, which sum equaled 6.8%. This line of credit
replaced a $25,000 line of credit which had been effective since October 1,
1997. There was $3,500 outstanding under this line of credit at December 31,
1997 and the borrowings bore 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 fixed at approximately 8.5%. 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. There are also restrictions
in the line of credit limiting H&S Inc. loans to HSI. As of December 31, 1997,
the Company met all of its financial covenants. For the year ended December
31, 1998, the Company was not in compliance with the debt service coverage
ratio. The Company obtained a waiver from the lending institutions relating to
this requirement for the year ended December 31, 1998. The Company was in
compliance with all other financial covenants as of December 31, 1998. The
Company is required to pay a commitment fee on the unused portion of the line
of credit on a quarterly basis. Commitment fee expense for the year ended
December 31, 1997 and 1998 totaled $8 and $21, respectively.
6. Related Party Transactions
At December 31, 1998, note receivable from affiliate was comprised of a loan
to HSI of $1,900. The interest rate on this receivable is 6.2% at December 31,
1998. Accounts receivable includes an intercompany receivable of $776 and
$2,998 at December 31, 1997 and 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 (8.50% and 7.75%
at December 31, 1997 and 1998, respectively). Long-term debt also includes
amounts due as a result of the Fenwick acquisition (see Note 4).
F-11
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the debt based on current rates for similar debt is
estimated to be $8,035 at December 31, 1998.
Future principal payments on long-term debt are due as follows:
<TABLE>
<S> <C>
Years ending December 31--
1999........................................................... $2,547
2000........................................................... 3,890
2001........................................................... 834
2002........................................................... 426
2003........................................................... --
------
$7,697
======
</TABLE>
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 net book
value as defined in the stock purchase agreements. Payments for shares are
generally made over a five year period. Redemption amounts relating to the
stock purchase agreements are included in Mandatorily Redeemable Common Stock
in the accompanying consolidated balance sheets. These agreements will
terminate 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, $2 and $2 per participant for the years
ended December 31, 1996, 1997 and 1998, respectively. The Company has the
option of making discretionary contributions. For the years ended December 31,
1996, 1997 and 1998, 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, 1997
and 1998, the plan held 2,054,684 and 1,853,655 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
terminated 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, 1996, 1997 and 1998 was
$1,339, $2,174, and $2,532, 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, 1996, 1997 and 1998 totaled $128, $154, and
$159, respectively.
F-12
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1996, 1997 and 1998 was $1,440,
$1,350, and $0, respectively. The liability for this retirement plan consisted
of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Employer contributions................................... $ 6,390 $ 6,390
Employee deferrals....................................... 3,785 3,785
Earnings of designated assets............................ 316 544
Distributions............................................ -- (210)
------- -------
$10,491 $10,509
======= =======
</TABLE>
Investments designated for the nonqualified retirement plan are carried at
fair market value based on publicly quoted prices. The Company has an
accumulated unrealized gain as of December 31, 1997 and 1998 of $1,298, and
$2,924, 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 retirement plan
consist of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Cash and cash equivalents................................ $ 306 $ 10
Stock mutual fund........................................ 6,919 9,533
Bond mutual fund......................................... 3,214 4,009
------- -------
$10,439 $13,552
======= =======
</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, 1996, 1997 and 1998 was $170, $250, and $232, respectively. The
liability for this retirement plan at December 31, 1997 and 1998 was $617, and
$849, respectively.
F-13
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Income Taxes
The deferred tax assets and liabilities consist of the following components
as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets--
Receivable allowances....................................... $ 1,515 $ 2,052
Accrued vacations........................................... 433 772
Accrued bonuses............................................. 6,206 6,969
Liability for nonqualified retirement plans................. 5,035 5,569
Other accrued expenses...................................... 439 626
Foreign net operating loss carryforwards.................... 595 1,515
Cumulative translation adjustment........................... 636 1,503
------- -------
14,859 19,006
Valuation allowance......................................... (502) (1,059)
------- -------
Net deferred tax assets................................... 14,357 17,947
------- -------
Deferred tax liabilities--
Leasehold improvements and equipment........................ (225) (223)
Equity in undistributed income of affiliate................. (2,045) (125)
System development costs.................................... (356) (3,678)
Unrealized gain on available-for-sale investments........... (545) (1,228)
Other....................................................... (1,180) (2,046)
------- -------
Net deferred tax liabilities.............................. (4,351) (7,300)
------- -------
Net deferred income taxes............................... $10,006 $10,647
======= =======
</TABLE>
The deferred tax amounts mentioned above have been classified in the
accompanying consolidated balance sheets as of December 31, 1997 and 1998, as
follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Current deferred tax assets............................. $ 8,593 $10,419
Current deferred tax liabilities........................ (1,548) (1,548)
------- -------
Net current deferred tax asset........................ 7,045 8,871
------- -------
Long-term deferred tax assets........................... 5,764 7,528
Long-term deferred tax liabilities...................... (2,803) (5,752)
------- -------
Net long-term deferred tax asset...................... 2,961 1,776
------- -------
$10,006 $10,647
======= =======
</TABLE>
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Current--
Federal....................................... $ 5,142 $ 7,817 $1,298
State......................................... 2,478 2,500 209
Foreign....................................... 322 540 436
Deferred........................................ (1,793) (3,413) (641)
------- ------- ------
$ 6,149 $ 7,444 $1,302
======= ======= ======
</TABLE>
F-14
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of income tax expense for the years ended December 31,
1996, 1997 and 1998, to income taxes at the statutory federal income tax rate
of 35%, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Income taxes at statutory rate.................. $4,409 $4,860 $(5,233)
Increase (decrease) due to--
State income taxes, net of federal tax
benefit...................................... 1,611 1,625 136
Nondeductible expenses........................ 341 357 4,985
Foreign taxes in excess of federal tax rates.. 408 721 930
Other, net.................................... (620) (119) 484
------ ------ -------
Provision for income taxes...................... $6,149 $7,444 $ 1,302
====== ====== =======
</TABLE>
The accumulated undistributed earnings of HSI included in the Company's
income for the years ended December 31, 1997 and 1998 totaled $4,072 and $655,
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,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
United States................................. $13,508 $15,970 $ (9,276)
Foreign....................................... (910) (2,083) (5,676)
------- ------- --------
Total..................................... $12,598 $13,887 $(14,952)
======= ======= ========
</TABLE>
11. Basic and Diluted Earnings (Loss) Per Common Share
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings per share ("EPS").
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to common
shareholders.......................... $ 6,449 $ 6,443 $ (16,254)
Weighted average common shares
outstanding........................... 2,574,475 2,676,415 2,666,526
---------- ---------- ----------
Basic EPS............................ $ 2.50 $ 2.41 $ (6.10)
========== ========== ==========
Diluted EPS
Income (loss) available to common
shareholders.......................... $ 6,449 $ 6,443 $ (16,254)
---------- ---------- ----------
Weighted average common shares
outstanding........................... 2,574,475 2,676,415 2,666,526
Dilutive common shares issued.......... -- 110 --
---------- ---------- ----------
Total diluted common shares.......... 2,574,475 2,676,525 2,666,526
---------- ---------- ----------
Diluted EPS.......................... $ 2.50 $ 2.41 $ (6.10)
========== ========== ==========
</TABLE>
F-15
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. 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 and thereafter, are as follows:
<TABLE>
<S> <C>
Years ending December 31--
1999.......................................................... $ 8,455
2000.......................................................... 8,311
2001.......................................................... 6,868
2002.......................................................... 5,829
2003.......................................................... 4,914
Thereafter.................................................... 8,598
-------
$42,975
=======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1996,
1997 and 1998 was $6,976, $8,374, and $9,188, 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 $199 for each of the first five
years of retirement and approximately $99 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, 1998, the first thirty 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 consolidated
financial statements.
Litigation
In the normal course of business, the Company is a party to various matters
involving disputes and 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 results
of operations, financial condition or liquidity of the Company.
13. Segment Information
Management views the operations of the Company through geographic segments.
For purposes of the geographic information below, Mexico is included in Latin
America.
F-16
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
North America................................... $127,901 $158,753 $180,288
Latin America................................... 2,189 7,972 9,579
Asia Pacific.................................... 7,575 13,519 14,148
-------- -------- --------
Total......................................... $137,665 $180,244 $204,015
======== ======== ========
Operating Income (Loss):
North America................................... $ 12,087 $ 13,726 $ (5,573)
Latin America................................... (751) (1,708) (4,988)
Asia Pacific.................................... (624) (73) 169
-------- -------- --------
Total......................................... $ 10,712 $ 11,945 $(10,392)
======== ======== ========
Identifiable Assets:
North America................................... $ 60,675 $ 80,872 $111,199
Latin America................................... 2,206 4,920 5,410
Asia Pacific.................................... 5,762 7,793 6,541
-------- -------- --------
Total......................................... $ 68,643 $ 93,585 $123,150
======== ======== ========
</TABLE>
During all years presented above, no individual customer accounted for
greater than 10% of revenue.
14. Merger Agreement
On February 12, 1999, 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.
15. Restatement
In February 1999, an error was discovered in the HSI financial statements
for the year ended December 31, 1997. HSI has restated its financial
statements for the year ended December 31, 1997 accordingly. As a result, the
Company has restated its financial statements for the year ended December 31,
1997 to reflect the change in the Investment in Heidrick & Struggles
International, Inc. A summary of the restatements by category is as follows:
<TABLE>
<CAPTION>
Restatements as of
December 31, 1997
------------------
<S> <C>
Equity in net income of affiliate............................ $(95)
Provision for income taxes................................... 40
----
$(55)
====
</TABLE>
16. Stock Based Compensation Expense
In the fourth quarter of 1998, the Company sold 735,809 shares to its
directors, resulting in $9,947 of salaries and employee benefits expense
arising from the difference between the issuance price of the shares (book
value) of $6.76 per share and the fair market value of the shares at the date
of grant of $20.28 per share.
17. Subsequent Events
On January 20, 1999, HSI repaid its loan from the Company in the amount of
$1,900 plus interest.
On February 26, 1999, the Company merged with and into Heidrick & Struggles
International, Inc.
On March 26, 1999, Heidrick & Struggles International, Inc. declared a
15.8217 for 1 stock split to become effective upon completion of its initial
public offering of common stock.
F-17
<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, 1997 and 1998, and the related consolidated statements of income
and comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998 (1997 as restated--see Note
14). 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 in the United States. 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, 1997 and 1998, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Barbier Frinault & Associes
Arthur Andersen
Neuilly-sur-Seine, France
February 19, 1999
(except with respect to the matter discussed in Note 15, as to which the date
is March 26, 1999)
F-18
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 8,053 $15,753
Accounts receivable--
Trade, less allowances for doubtful accounts of $1,416,
and $5,011 at December 31, 1997 and 1998, respectively.. 23,617 23,250
Other.................................................... 358 819
Prepaid expenses........................................... 1,522 1,489
Deferred income taxes...................................... 1,554 7,796
------- -------
Total current assets................................... 35,104 49,107
------- -------
Property and equipment:
Leasehold improvements..................................... 4,747 4,432
Office furniture and fixtures.............................. 6,573 8,921
Computer equipment and software............................ 6,498 11,880
Automobiles................................................ 1,674 1,929
------- -------
19,492 27,162
Less--Accumulated depreciation and amortization............ (9,328) (12,245)
------- -------
Property and equipment, net.............................. 10,164 14,917
------- -------
Other assets:
Goodwill and other intangibles............................. 2,289 2,531
Deferred compensation expense.............................. 7,876 4,046
Deferred income taxes...................................... 4,523 6,035
Group insurance contracts designated for pension plan...... 14,304 17,469
Other assets............................................... 1,300 892
------- -------
Total other assets..................................... 30,292 30,973
------- -------
Total assets........................................... $75,560 $94,997
======= =======
Current liabilities:
Short-term debt............................................ $ 7,639 $11,753
Current maturities of long-term debt....................... 362 355
Accounts payable........................................... 4,265 7,337
Accrued expenses--
Salaries and employee benefits........................... 16,436 22,434
Professional fees........................................ 806 2,561
VAT...................................................... 1,855 1,537
Payroll taxes............................................ 1,250 7,135
Other.................................................... 2,676 4,653
Income taxes payable....................................... 6,422 3,286
Note payable to affiliate.................................. -- 1,900
------- -------
Total current liabilities.............................. 41,711 62,951
------- -------
Long-term debt, less current maturities...................... 168 112
------- -------
Pension and other long-term liabilities...................... 15,552 18,574
------- -------
Mandatorily redeemable common stock:
Class A common stock, no par value, 2,373,255 shares
authorized, 1,931,118 and 2,286,774 shares issued and
outstanding at December 31, 1997 and 1998, respectively,
at book value............................................. 11,706 8,578
------- -------
Stockholders' equity:
Class B common stock, no par value, 2,373,255 shares
authorized, 1,040,862 and 1,268,663 shares issued and
outstanding at December 31, 1997 and 1998, respectively,
at book value............................................. 2,361 4,111
Retained earnings.......................................... 4,952 1,210
Accumulated other comprehensive income (loss).............. (665) (539)
Less--Treasury stock, at cost, 35,504, and 0 shares at
December 31, 1997 and 1998, respectively.................. (225) --
------- -------
Total stockholders' equity............................. 6,423 4,782
------- -------
Total liabilities, mandatorily redeemable common stock
and stockholders' equity.............................. $75,560 $94,997
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-19
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share and per share figures)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue....................................... $ 64,558 $ 82,732 $ 124,984
Operating expenses:
Salaries and employee benefits.............. 44,020 59,080 102,861
General and administrative expenses......... 17,100 20,567 37,766
--------- --------- ---------
Total operating expenses.................. 61,120 79,647 140,627
--------- --------- ---------
Operating income (loss)................... 3,438 3,085 (15,643)
Non-operating income (expense)................ 133 151 (6,116)
Minority interest in income of consolidated
subsidiaries................................. -- (26) (81)
--------- --------- ---------
Income (loss) before income taxes......... 3,571 3,210 (21,840)
Provision for (benefit from) income taxes..... 1,430 2,518 (4,475)
--------- --------- ---------
Net income (loss)......................... $ 2,141 $ 692 $ (17,365)
========= ========= =========
Basic earnings per Class A common share....... $ .86 $ .25 $ (5.96)
========= ========= =========
Basic weighted average Class A common shares
outstanding.................................. 1,623,955 1,773,581 1,892,908
========= ========= =========
Diluted earnings per Class A common share..... $ .86 $ .24 $ (5.96)
========= ========= =========
Diluted weighted average Class A common shares
outstanding.................................. 1,623,955 1,880,694 1,892,908
========= ========= =========
Basic and diluted earnings per Class B common
share........................................ $ .72 $ .23 $ (5.83)
========= ========= =========
Weighted average Class B common shares
outstanding.................................. 1,040,862 1,040,862 1,042,729
========= ========= =========
Net income (loss)............................. $ 2,141 $ 692 $ (17,365)
========= ========= =========
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment..... (191) (1,331) 404
Income tax (benefit) expense related to items
of other comprehensive income (loss)......... (76) (609) 278
--------- --------- ---------
Other comprehensive income (loss), net of tax. (115) (722) 126
--------- --------- ---------
Comprehensive income (loss)................... $ 2,026 $ (30) $ (17,239)
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-20
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share figures)
<TABLE>
<CAPTION>
Accumulated
Other
Class B Compre- Compre- Total
Common Stock Treasury Stock hensive hensive Stock-
---------------- --------------- Retained Income Income holders'
Shares Amount Shares Amount Earnings (Loss) (Loss) Equity
--------- ------ ------- ------ -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 1,040,862 2,361 (10,284) (61) 3,169 172 5,641
Treasury stock
transactions--
Stock issued........... -- -- 80,706 467 -- -- 467
Stock repurchased...... -- -- (70,422) (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................... 1,040,862 2,361 -- -- 3,981 57 6,399
Treasury stock
transactions--
Stock issued........... -- -- 63,287 425 -- -- 425
Stock repurchased...... -- -- (98,791) (650) -- -- (650)
Comprehensive income
Net income............. -- -- -- -- 692 -- 692 692
--------
Foreign currency
translation
adjustment............ -- -- -- -- -- (722) (722) (722)
--------
Comprehensive income.... (30)
========
Retained earnings
allocable to
mandatorily redeemable
Class A common stock... -- -- -- -- 279 -- 279
--------- ------ ------- ---- -------- ----- --------
Balance at December 31,
1997................... 1,040,862 2,361 (35,504) (225) 4,952 (665) 6,423
Treasury stock
transactions--
Stock issued........... 227,801 1,750 43,415 280 -- -- 2,030
Stock repurchased...... -- -- (7,911) (55) -- -- (55)
Comprehensive income
(loss)
Net loss............... -- -- -- -- (17,365) -- (17,365) (17,365)
--------
Foreign currency
translation
adjustment............ -- -- -- -- -- 126 126 126
--------
Comprehensive income
(loss)................. $(17,239)
========
Retained earnings
allocable to
mandatorily redeemable
Class A common stock .. -- -- -- -- 13,623 -- 13,623
--------- ------ ------- ---- -------- ----- --------
Balance at December 31,
1998................... 1,268,663 $4,111 -- $-- $ 1,210 $(539) $ 4,782
========= ====== ======= ==== ======== ===== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-21
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................... $ 2,141 $ 692 $(17,365)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 1,721 2,623 4,624
Loss on sale of property and equipment........ 162 92 1,278
Deferred income taxes......................... (398) (1,777) (7,438)
Stock based compensation expense.............. -- -- 7,577
Changes in assets and liabilities:
Accounts receivable......................... (1,933) (4,480) 1,174
Prepaid expenses............................ 796 (1,113) 4,270
Group insurance contracts designated for
pension plan............................... -- (1,642) (1,978)
Other assets................................ (612) (912) 571
Accounts payable............................ (563) 2,198 2,291
Accrued expenses............................ 4,617 5,275 14,072
Income taxes payable........................ 394 3,063 (3,318)
Pension liability........................... -- 185 1,746
------- -------- --------
Net cash provided by operating activities. 6,325 4,204 7,504
------- -------- --------
Cash flows from investing activities
Acquisitions.................................... (540) (7,496) (559)
Proceeds from sales of property and equipment... 72 82 274
Purchases of property and equipment............. (2,039) (6,014) (9,673)
------- -------- --------
Net cash used in investing activities..... (2,507) (13,428) (9,958)
------- -------- --------
Cash flows from financing activities
Proceeds from issuance of common stock and
treasury stock................................. 737 2,465 4,913
Purchases of treasury stock..................... (406) (401) --
Proceeds from short-term debt................... -- 7,639 6,013
Payments on short-term debt..................... -- -- (55)
------- -------- --------
Net cash provided by financing activities. 331 9,703 10,871
------- -------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents............................. 38 (628) (717)
------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 4,187 (149) 7,700
Cash and cash equivalents:
Beginning of period............................. 4,015 8,202 8,053
------- -------- --------
End of period................................... $ 8,202 $ 8,053 $ 15,753
======= ======== ========
Supplemental disclosures of cash flow information
Cash paid for--
Interest...................................... $ 9 $ 3 $ 400
Income taxes.................................. $ 1,467 $ 1,418 $ 6,875
Supplemental schedule of noncash financing
activities
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-22
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 1999
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes new standards for
reporting information about derivatives and hedging activities. 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 material effect on its consolidated financial position,
results of operations or on disclosures within the consolidated financial
statements.
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, 1998, the Company had no significant
concentrations of credit risk.
F-23
<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, 1996, 1997 and 1998 totaled $1,594, $2,315 and $4,408, respectively.
During 1998, the Company incurred $4,127 of costs for the write off of
leasehold improvements and accruals for non-cancelable lease commitments due
to the decision to relocate the London office.
Goodwill and Other Intangibles
Goodwill and other 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 goodwill or an
intangible asset may warrant revision, or that the remaining balance of
goodwill or an intangible asset may not be recoverable. The Company evaluates
the recoverability of goodwill and intangible assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of such assets are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, there were no adjustments to the carrying value of
goodwill or intangible assets in 1998, 1997 and 1996.
Revenue Recognition
Revenue from client services is recognized as clients are billed, generally
over a 60 to 90 day period commencing in the month of the initial acceptance
of a search. If a search is canceled within the first 90 days, the Company
will pro-rate the fee up to the date of cancellation. 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.
Pension Plan
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employer's
Disclosure about Pensions and Other Postretirement Benefits." The provisions
of SFAS No. 132 revise employers' disclosures about pension plans. It does not
change the measurement or recognition of pension plans.
Earnings (Loss) per Common Share
The Company adopted SFAS No. 128, "Earnings Per Share" at December 31, 1997.
Basic earnings (loss) per common share is computed by dividing net income
(loss) by weighted average common shares outstanding for the year. Diluted
earnings (loss) per share reflects the potential dilution that could occur if
securities or other
F-24
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (loss) per share. As such, the earnings (loss) are assigned to each
class according to the terms of the stock agreements and earnings (loss) per
share are computed by dividing the earnings (loss) 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 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 rates for the period. Translation
adjustments are reported as a component of comprehensive income.
2. Acquisitions
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.
On July 2, 1998, the Mulder acquisition agreement was amended. The amended
agreement is contingent upon the merger of the Company and H&S Inc. The
amended purchase price is $20,471, which is to be paid as follows:
. $8,695 was due and paid in cash, $298 of associated transaction costs
were incurred, and 4,000 shares of the Company's stock were issued to the
former stockholders of Mulder on October 1, 1997.
F-25
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. $5,228 plus interest accrued from October 1, 1997 at a rate of 4% is due
90 days after the merger of the Company and Heidrick & Struggles, Inc.
The Company paid $1,254 of this amount in October 1998.
. $5,901 represented by shares in the newly merged entity is due to the
former stockholders of Mulder immediately after the merger.
All employment contingencies were eliminated from the acquisition agreement.
Due to the early settlement and elimination of employment contingencies, all
remaining amounts will be expensed in the first quarter of 1999 when the
amendment becomes effective.
3. Line of Credit
The Company was granted a multicurrency line of credit which became
effective on October 13, 1997. The $10,548 line of credit will be reduced
annually by $2,110 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 and 1998 was 7.2% and 6.6%,
respectively. The total outstanding balance was $7,639 and $8,316 at December
31, 1997 and 1998, respectively. The interest expense on the debt was $21 and
$402 for the year ended December 31, 1997 and 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.
HSI has negotiated a $7,969 multicurrency line of credit in addition to the
above line of credit. This facility will reduce to $4,922 on March 1, 1999,
$1,055 on May 1, 1999 and will terminate on May 31, 1999. The borrowings bear
interest at the Euro OverNight Index Average ("EONIA") plus 100 basis points
or LIBOR plus 100 basis points, depending on the currency borrowed. The
borrowings can be drawn in Euros, ECU or British Pounds. At December 31, 1998,
there was $3,437 outstanding under the facility and the interest rate was
4.6%.
HSI has a $1,198 line of credit denominated in German Marks. The borrowings
bear interest at a variable rate between 4.9% and 7.5% depending on the number
of days the relevant borrowing is outstanding. There is no expiration date for
this line of credit. At December 31, 1998, there was no balance outstanding.
4. Related Party Transactions
At December 31, 1998, note payable to affiliate is comprised of a loan from
H&S Inc. of $1,900. The interest rate on this loan is 6.2% at December 31,
1998. Accounts payable includes a payable of $776 and $2,998 to H&S Inc. at
December 31, 1997 and 1998, respectively. All transactions between the Company
and H&S Inc. are recorded at cost.
Based on an agreement between the Company and H&S 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. H&S 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 6). The obligations are unsecured
and payable in annual installments over a period of four years with interest
payable at the prime commercial rate (8.50%, and 7.75% at December 31, 1997
and 1998, respectively).
F-26
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the debt based on current rates for similar debt is
estimated to be $684 at December 31, 1998.
Future principal payments on long-term debt are due as follows:
<TABLE>
<S> <C>
Years ending December 31--
1999............................................................. $355
2000............................................................. 56
2001............................................................. 56
2002............................................................. --
2003............................................................. --
----
$467
====
</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 net book value as defined in the stock purchase agreements. Payments for
shares are generally made over a four year period. Redemption amounts relating
to the stock purchase agreements are included in Mandatorily Redeemable Common
Stock in the accompanying consolidated balance sheets. 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, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Deferred tax assets--
Receivable allowances................................... $ 584 $ 1,605
Accrued vacations....................................... 222 268
Accrued bonuses......................................... 496 2,451
Property and equipment.................................. 963 1,441
Mulder purchase......................................... 71 1,275
Accrued severance costs................................. -- 539
Pension reserve......................................... 2,921 3,028
Other accrued expenses.................................. 252 1,322
Net operating loss carryforwards........................ -- 1,611
Cumulative translation adjustment....................... 568 291
------ -------
Net deferred tax assets............................... 6,077 13,831
Deferred tax liabilities ................................. -- --
------ -------
Net deferred income taxes........................... $6,077 $13,831
====== =======
</TABLE>
F-27
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, 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, 1997 and 1998, as
follows:
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Current deferred tax assets............................... $1,554 $ 7,796
Current deferred tax liabilities.......................... -- --
------ -------
Net current deferred tax asset........................ 1,554 7,796
------ -------
Long-term deferred tax asset.............................. 4,523 6,035
Long-term deferred tax liabilities........................ -- --
------ -------
Net long-term deferred tax asset...................... 4,523 6,035
------ -------
$6,077 $13,831
====== =======
</TABLE>
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Current--
U.S. Federal.................................. $ 151 $ 533 $ 574
Foreign....................................... 1,677 3,046 1,264
Deferred........................................ (398) (1,061) (6,313)
------ ------- -------
$1,430 $ 2,518 $(4,475)
====== ======= =======
</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 consideration of foreign tax credits.
A reconciliation of income tax expense for the years ended December 31,
1996, 1997, and 1998, to the statutory U.S. federal income tax rate of 35%, is
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Income taxes at statutory rate.................... $1,250 $1,124 $(7,644)
Increase (decrease) due to--
Foreign taxes in excess of federal tax rates.... 494 357 1,507
Alternative minimum tax......................... 67 -- --
Stock based compensation expense adjustment..... -- -- 2,858
Other, net...................................... (381) 1,037 (1,196)
------ ------ -------
$1,430 $2,518 $(4,475)
====== ====== =======
</TABLE>
F-28
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Basic and Diluted Earnings (Loss) Per Common Share
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings per share ("EPS") for Class A common shares:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to Class A
common shareholders................... $ 1,392 $ 450 $ (11,287)
Weighted average Class A common shares
outstanding........................... 1,623,955 1,773,581 1,892,908
---------- ---------- ----------
Basic EPS.............................. $ .86 $ .25 $ (5.96)
========== ========== ==========
Diluted EPS
Income (loss) available to Class A
common shareholders................... $ 1,392 $ 450 $ (11,287)
---------- ---------- ----------
Weighted average Class A common shares
outstanding........................... 1,623,955 1,773,581 1,892,908
Stock purchase obligations............. -- 107,113 --
---------- ---------- ----------
Total diluted Class A common shares.... 1,623,955 1,880,694 1,892,908
---------- ---------- ----------
Diluted EPS............................ $ .86 $ .24 $ (5.96)
========== ========== ==========
</TABLE>
The following is a reconciliation of the shares used in the computation of
basic and diluted EPS for Class B common shares:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to Class B
common shareholders................... $ 749 $ 242 $ (6,078)
Weighted average Class B common shares
outstanding........................... 1,040,862 1,040,862 1,042,729
---------- ---------- ----------
Basic and Diluted EPS.................. $ .72 $ .23 $ (5.83)
========== ========== ==========
</TABLE>
9. 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 the increase in operating expenses and real estate taxes in excess of
defined amounts. The leases expire at various dates through 2013. The Company
also leases computer equipment which is accounted for as an operating lease.
F-29
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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--
1999.......................................................... $ 8,378
2000.......................................................... 7,667
2001.......................................................... 5,468
2002.......................................................... 3,722
2003.......................................................... 2,207
Thereafter.................................................... 26,261
-------
$53,703
=======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1996,
1997 and 1998 was $4,707, $5,307, and $6,897, respectively.
Litigation
In the normal course of business, the Company is a party to various matters
involving disputes and 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 results
of operations, financial condition or liquidity of the Company.
10. Segment Information
Management views the operations of the Company through the following
geographic segments:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenue:
United Kingdom..................................... $20,565 $27,588 $ 30,943
Germany............................................ 12,614 19,900 42,097
France............................................. 11,211 12,253 16,180
Other.............................................. 20,168 22,991 35,764
------- ------- --------
Total............................................ $64,558 $82,732 $124,984
======= ======= ========
Operating Income (Loss):
United Kingdom..................................... $ 589 $ 1,028 $ (3,466)
Germany............................................ 1,279 1,090 (9,162)
France............................................. (3) 915 (3,539)
Other.............................................. 1,573 52 524
------- ------- --------
Total............................................ $ 3,438 $ 3,085 $(15,643)
======= ======= ========
Identifiable Assets:
United Kingdom..................................... $ 6,295 $12,288 $ 13,411
Germany............................................ 4,729 39,706 41,216
France............................................. 6,985 9,921 15,516
Other.............................................. 14,842 13,645 24,854
------- ------- --------
Total............................................ $32,851 $75,560 $ 94,997
======= ======= ========
</TABLE>
During all years presented above, no individual customer accounted for greater
than 10% of revenue.
F-30
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Merger Agreement
On February 12, 1999, the Company's Board of Directors approved a merger
agreement with H&S Inc. which details the plan to merge H&S 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.
12. Pension Plan and Life Insurance Contracts
The Company maintains a pension plan for certain partners in Germany. The
pensions are individually fixed DM-amounts depending on the function and the
pensionable years of service of the employee. The following provides a
reconciliation of the benefit obligation:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at October 1, 1997 and January 1,
1998.................................................. $15,351 $16,010
Service cost........................................... 241 950
Interest cost.......................................... 234 924
Actuarial loss......................................... 474 1,871
Benefits paid.......................................... (26) (103)
Translation difference................................. (264) 793
------- -------
Benefit obligation at December 31...................... 16,010 20,445
Unrecognized net loss.................................. (474) (1,871)
------- -------
Net amount recognized.................................. $15,536 $18,574
======= =======
Unfunded status of the plan............................ $16,010 $20,445
Unrecognized actuarial loss............................ (474) (1,871)
------- -------
Accrued benefit cost................................... $15,536 $18,574
======= =======
Assumptions as of December 31:
Discount rate (weighted average)....................... 6.0% 6.0%
Rate of compensation increase.......................... 4.0% 4.0%
Components of net periodic benefit cost:
Service cost........................................... $ 234 $ 949
Interest cost.......................................... 227 923
Expected return on plan assets......................... -- --
Amortization of prior service costs.................... -- --
Recognized net actuarial loss.......................... -- --
------- -------
Net periodic benefit cost.............................. $ 461 $ 1,872
======= =======
</TABLE>
The pension benefits are fully reinsured within a group insurance contract
with Victoria Lebensversicherung AG. The surrender values at December 1, 1997
and 1998 were $14,304 and $17,469, respectively. Because the reinsurance is
not segregated from the Company's assets for purposes of SFAS No. 87,
"Employers' Accounting for Pensions," the reinsurance is not regarded as an
asset with respect to the pension plan.
13. Stock Based Compensation Expense
In the fourth quarter of 1998, the Company sold 399,071 shares to its
directors, resulting in $4,872 of salaries and employee benefits expense
arising from the difference between the issuance price of the shares (book
value) of $8.07 per share and the fair market value of the shares at the date
of grant of $20.28 per share.
F-31
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
14. Restatement and Reclassification
In February 1999, an error was discovered in the financial statements for
the year ended December 31, 1997 related to the accounting for the acquisition
of Mulder. The error was a result of the Company not recording a pension
liability and a related insurance asset and recording an erroneous tax credit.
In addition, certain entries were made to properly record the pension
liability and expense in accordance with SFAS No. 87 "Employer's Accounting
for Pensions." The Company has restated its financial statements for the year
ended December 31, 1997. A summary of the restatements by category is a
follows:
<TABLE>
<CAPTION>
Restatements as
of
December 31, 1997
-----------------
<S> <C>
Salaries and employee benefits................................ $ 59
General and administrative expenses........................... (11)
Non-operating income (expense)................................ 7
Provision for income taxes.................................... (339)
-----
$(284)
=====
</TABLE>
The Company has recorded the pension asset and pension liability (as
described in Note 12) on the Consolidated Balance Sheet. Certain 1997 balances
have been reclassified to conform with the 1998 presentation.
15. Subsequent Event
On January 20, 1999, the Company repaid its loan from H&S Inc. in the amount
of $1,900 plus interest.
On February 26, 1999, Heidrick & Struggles, Inc. merged with and into the
Company.
On March 26, 1999, the Company declared a 15.8217 for 1 stock split to
become effective upon completion of its initial public offering of common
stock.
F-32
<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 the year ended 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 the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
July 19, 1998
F-33
<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
Ended Nine Months Ended
December 31, 1996 September 30, 1997
----------------- ------------------
<S> <C> <C>
Revenue.................................... $32,560 $21,816
Operating expenses:
Salaries and employee benefits........... 24,701 14,610
General and administrative expenses...... 7,404 5,557
------- -------
Total operating expenses............... 32,105 20,167
------- -------
Operating income....................... 455 1,649
------- -------
Non-operating income (expense):
Interest income.......................... 28 36
Interest expense......................... (94) (159)
Other income............................. 2,106 529
------- -------
2,040 406
------- -------
Income before income taxes............. 2,495 2,055
Provision for income taxes................. 2,663 1,668
------- -------
Net income (loss)...................... $ (168) $ 387
------- -------
Comprehensive income (loss)................ $ (168) $ 387
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-34
<PAGE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Twelve Months Nine Months
Ended Ended
December 31, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................ $ (168) $ 387
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 356 231
Deferred income taxes.......................... 72 (2)
Changes in assets and liabilities:
Trade & other receivables.................... (2,309) 1,319
Prepaid expenses............................. (173) 170
Accounts payable............................. 292 (246)
Accrued expenses............................. 2,152 (165)
Income taxes payable......................... 2,130 1,409
------- -------
Net cash provided by operating activities.. 2,352 3,103
------- -------
Cash flows from investing activities
Purchases of property and equipment.............. (991) (21)
Purchases of long-term investments............... (2,212) (455)
------- -------
Net cash used in investing activities...... (3,203) (476)
------- -------
Cash flows from financing activities
Dividends paid................................... (872) (557)
Proceeds from long-term debt..................... 1,299 --
Payments on long-term debt....................... -- (1,964)
------- -------
Net cash provided by (used in) financing
activities................................ 427 (2,521)
------- -------
Effect of foreign currency exchange rates on cash
and cash equivalents.............................. (38) (25)
------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (462) 81
Cash and cash equivalents:
Beginning of period.............................. 645 183
------- -------
End of period.................................... $ 183 $ 264
======= =======
Supplemental disclosures of cash flow information
Cash paid for--
Interest......................................... $ 94 $ 159
Income taxes..................................... $ 761 $ 140
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-35
<PAGE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
NOTES TO CONSOLIDATED INCOME STATEMENTS AND
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 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 year
ended December 31, 1996 and the nine months ended September 30, 1997 totaled
$356 and $231, respectively.
Revenue Recognition
Revenue from client services is recognized as clients are billed, 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-36
<PAGE>
2. Income Taxes
The provision for income taxes for the year ended December 31, 1996 and the
nine months ended September 30, 1997, is as follows:
<TABLE>
<CAPTION>
Nine months ended
1996 September 30, 1997
------ ------------------
<S> <C> <C>
Current taxes--
Trade taxes on income (Municipality tax)............ $2,591 $1,666
Deferred taxes........................................ 72 2
------ ------
$2,663 $1,668
====== ======
</TABLE>
A reconciliation of income tax expense for the year ended December 31, 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
1996 September 30, 1997
------ ------------------
<S> <C> <C>
Income taxes at statutory rate........................ $ 474 $ 390
Increase due to--
Nondeductible expenses.............................. 2,189 1,278
------ ------
$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.
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>
F-37
<PAGE>
Rent expense under operating leases for the year ended December 31, 1996,
and the nine months ended September 30, 1997 was $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 results of operations,
financial condition or liquidity of the Company.
4. Segment Information
The Company operates as a single business segment and in a single primary
geographic location (Germany).
F-38
<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 Stockholders 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............................................................... 15
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Unaudited Pro Forma Condensed Consolidated Financial Data................. 19
Selected Financial Data................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 37
Management................................................................ 48
Principal and Selling Stockholders........................................ 53
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 59
Underwriting.............................................................. 60
Certain United States Federal Tax Consequences to Non-U.S. Holders of
Common Stock............................................................. 62
Legal Matters............................................................. 64
Experts................................................................... 64
Additional Information.................................................... 64
</TABLE>
------------------
Until , 1999 (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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,200,000 Shares
Common Stock
------------------
PROSPECTUS
, 1999
------------------
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 to be paid by the
Registrant in connection with the issuance and distribution of the securities
being registered hereunder. The selling stockholders will not pay for any of
these fees and expenses. 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
Nasdaq Filing Fee............................................. 90,000
Printing & Engraving Fees..................................... 500,000
Accounting Fees and Expenses.................................. 1,325,000
Legal Fees and Expenses....................................... 1,000,000
Equity Plan Design & Implementation........................... 1,175,000
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................................................. 1,045,000
----------
Total..................................................... $5,478,569
==========
</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 1996 stock program, the Registrant sold 9,693 shares to 22 Partners
for an aggregate price of $840,867.75; (ii) during the 1997 stock program, the
Registrant sold 20,387 shares to 37 Partners for an aggregate price of
$2,040,330.96; and (iii) during the 1998 stock program, the Registrant sold
25,223 shares to 74 Partners for an aggregate price of $3,220,220.41. 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 1996 stock program, H&S Inc. sold 12,835 shares to 63 Partners for
an aggregate price of $2,533,954.25; (ii) during the 1997 stock program, H&S
Inc. sold 16,801 shares to 66 Partners for an aggregate price of $3,958,651.62
and (iii) during the 1998 stock program, H&S Inc. sold 16,463 shares to 116
Partners for an aggregate price of $4,974,624.71. 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.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<C> <S>
***1.01 Form of Underwriting Agreement
2.01 Agreement and Plan of Merger of Heidrick & Struggles, Inc. and Heidrick &
Struggles International, Inc. (Incorporated by reference to Exhibit 2.01
of this Registrant's Registration Statement on Form S-4 (File No. 333-
61023))
3.01 Form of Amended and Restated Certificate of Incorporation of the Regis-
trant (Incorporated by reference to Exhibit 3.02 of this Registrant's Reg-
istration Statement on Form S-4 (File No. 333-61023))
3.03 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))
4.01 Specimen stock certificate (Incorporated by reference to Exhibit 4.01 of
this Registrant's Registration Statement on Form 8-A (File No. 000-25837))
***5 Opinion of Simpson Thacher & Bartlett as to the legality of the Common
Stock being registered
10.01 Employment Agreement of Richard D. Nelson (Incorporated by reference to
Exhibit 10.01 of the Registrant's Registration Statement on Form S-4 (File
No. 333-61023))
10.02 Employment Agreement of Patrick S. Pittard (Incorporated by reference to
Exhibit 10.02 of the Registrant's Registration Statement on Form S-4 (File
No. 333-61023))
10.03 Employment Agreement of Donald M. Kilinski (Incorporated by reference to
Exhibit 10.03 of the Registrant's Registration Statement on Form S-4 (File
No. 333-61023))
10.04 Employment Agreement of Jurgen B. Mulder (Incorporated by reference to Ex-
hibit 10.04 of the Registrant's Registration Statement on Form S-4 (File
No. 333-61023))
10.05 Employment Agreement of Gerard Clery-Melin (Incorporated by reference to
Exhibit 10.05 of the Registrant's Registration Statement on Form S-4 (File
No. 333-61023))
**10.06 Amended and Restated Employment Agreement of Patrick S. Pittard
***10.07 Amendment to Employment Agreement of Jurgen B. Mulder
***11 Statement re: computation of per share earnings
***21 Subsidiaries of the Registrant
23.01 Consent of Simpson Thacher & Bartlett (contained in Exhibit 5)
**23.02 Consent of Arthur Andersen LLP
**23.03 Consent of Barbier Frinault & Associes (Arthur Andersen)
**23.04 Consent of Arthur Andersen LLP
**23.05 Consent of Barbier Frinault & Associes (Arthur Andersen)
**23.06 Consent of Arthur Andersen LLP
**23.07 Consent of Barbier Frinault & Associes (Arthur Andersen)
***23.08 Consent of Arthur Andersen LLP
***23.09 Consent of Barbier Frinault & Associes (Arthur Andersen)
**24.01 Powers of Attorney
**24.02 Powers of Attorney
99.01 Consent of David C. Anderson (Incorporated by reference to Exhibit 99.01
of the Registrant's Registration Statement on Form S-4 (File No. 333-
61023))
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<C> <S>
99.02 Consent of Thomas J. Friel (Incorporated by reference to Exhibit 99.02 of
the Registrant's Registration Statement on Form S-4 (File No. 333-61023))
99.03 Consent of David B. Kixmiller (Incorporated by reference to Exhibit 99.03
of the Registrant's Registration Statement on Form S-4 (File No. 333-
61023))
99.04 Consent of Gerard R. Roche (Incorporated by reference to Exhibit 99.04 of
the Registrant's Registration Statement on Form S-4 (File No. 333-61023))
99.05 Consent of Dr. John C. Viney (Incorporated by reference to Exhibit 99.05
of the Registrant's Registration Statement on Form S-4 (File No. 333-
61023))
</TABLE>
- --------
* To be filed by amendment.
**Previously filed.
***Filed herewith.
(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 offering thereof.
II-4
<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 26th day of April, 1999.
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
/s/ Donald M. Kilinski
By______________________________________
Chief Financial Officer and
Treasurer
Title___________________________________
II-5
<PAGE>
SIGNATURES
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 26th day of April, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* President, Chief Executive Officer and
___________________________________________ Director
Patrick S. Pittard
(principal executive officer)
Donald M. Kilinski Chief Financial Officer and Treasurer
___________________________________________
Donald M. Kilinski
(principal financial and accounting
officer)
* Director
___________________________________________
Gerard R. Roche
* Director
___________________________________________
David C. Anderson
* Director
___________________________________________
Thomas J. Friel
* Director
___________________________________________
David B. Kixmiller
* Director
___________________________________________
Bengt Lejsved
* Director
___________________________________________
Dr. Jurgen B. Mulder
* Director
___________________________________________
Dr. John C. Viney
</TABLE>
*By Donald M. Kilinski, attorney-in-fact.
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Heidrick & Struggles, Inc. and
Subsidiaries:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Heidrick & Struggles, Inc. and
subsidiaries included in this registration statement and have issued our
report thereon dated February 19, 1999. Our audits were made for the purpose
of forming an opinion on the basic financial statements taken as a whole. The
Schedule II--Heidrick & Struggles, Inc. Allowance for Doubtful Accounts is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 19, 1999
II-7
<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
1998............................. $3,276 $5,356 $(3,963) $4,669
------ ------ ------- ------
1997............................. $1,925 $3,324 $(1,973) $3,276
------ ------ ------- ------
1996............................. $1,617 $2,263 $(1,955) $1,925
------ ------ ------- ------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
II-8
<PAGE>
Exhibit 1.01
4,200,000 Shares
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
April __, 1999
Lehman Brothers Inc.
Goldman, Sachs & Co.,
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Heidrick & Struggles International, Inc., a Delaware corporation (the
"Company"), and certain stockholders of the Company named in Schedule 2 hereto
(the "Selling Stockholders"), propose to sell an aggregate of 4,200,000 shares
(the "Firm Stock") of the Company's Common Stock, par value $0.01 per share (the
"Common Stock"). In addition, the Company proposes to grant to the Underwriters
named in Schedule 1 hereto (the "Underwriters") an option to purchase up to an
additional 630,000 shares of the Common Stock on the terms and for the purposes
set forth in Section 3 (the "Option Stock"). The Firm Stock and the Option
Stock, if purchased, are hereinafter collectively called the "Stock." This is to
confirm the agreement concerning the purchase of the Stock from the Company and
the Selling Stockholders by the Underwriters named in Schedule 1 hereto (the
"Underwriters").
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1, including amendments
thereto, with respect to the Stock has (i) been prepared by the Company in
conformity with the requirements of the United States Securities Act of
1933, as amended (the "Securities Act") and the rules and regulations (the
"Rule and Regulations") of the United States Securities and Exchange
Commission (the "Commission") thereunder, (ii) been filed with the
Commission under the Securities Act and (iii) become effective under the
Securities Act. Copies of such registration statement and each amendment
thereto have been delivered by
1
<PAGE>
the Company to you as the representatives (the "Representatives") of the
Underwriters. As used in this Agreement, "Effective Time" means the date
and the time as of which such registration statement, or the most recent
post-effective amendment thereto, if any, was declared effective by the
Commission; "Effective Date" means the date of the Effective Time;
"Preliminary Prospectus" means each prospectus included in such
registration statement, or amendments thereof, before it became effective
under the Securities Act and any prospectus filed with the Commission by
the Company with the consent of the Representatives pursuant to Rule 424(a)
of the Rules and Regulations; "Registration Statement" means such
registration statement, as amended at the Effective Time, including all
information contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in accordance with
Section 6(a) hereof and deemed to be a part of the registration statement
as of the Effective Time pursuant to paragraph (b) of Rule 430A of the
Rules and Regulations; and "Prospectus" means such final prospectus, as
first filed with the Commission pursuant to paragraph (1) or (4) of Rule
424(b) of the Rules and Regulations. The Commission has not issued any
order preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all material respects to the
requirements of the Securities Act and the Rules and Regulations and do not
and will not, as of the applicable effective date (as to the Registration
Statement and any amendment thereto) and as of the applicable filing date
(as to the Prospectus and any amendment or supplement thereto) contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or the
Prospectus in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein.
(c) The Company and each of its subsidiaries (as defined in Section
17) have been duly incorporated and are validly existing as corporations in
good standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in good standing
as foreign corporations in each jurisdiction in which their respective
ownership or lease of property or the conduct of their respective
businesses requires such qualification, except where the failure to be so
qualified would not reasonably be expected to have a material adverse
effect on the business, financial condition, results of operations,
stockholders' equity, or prospects of the Company and its subsidiaries,
taken as a whole (a "Material Adverse Effect"), and have all power and
authority necessary to own or hold their respective properties and to
conduct the businesses in which they are engaged; and none of the
subsidiaries of the Company, other than Heidrick & Struggles, Inc., a
Delaware corporation ("H&S Inc."), Heidrick & Struggles
Unternehmensberatung GmbH & Co. KG, a company incorporated under German
law, Heidrick & Struggles Unternehmensberatung Verwaltungs GmbH, a company
incorporated under German law, Heidrick & Struggles Latin America, Inc., an
Illinois corporation and Heidrick & Struggles do Brasil Ltda., a
2
<PAGE>
Brazilian limitada are "significant subsidiaries", as such term is defined
in Rule 405 of the Rules and Regulations.
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each active
subsidiary of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable and (except for directors' qualifying
shares) are owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims.
(e) The shares of the Stock to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued, fully paid and non-assessable, and will conform to
the description thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and delivered
by the Company.
(g) The execution, delivery and performance of this Agreement by the
Company, the consummation of the transactions contemplated hereby and the
amendment of the Company's certificate of incorporation described in the
Prospectus under the caption "Description of Capital Stock" (such action is
herein called the "Recapitalization") will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
is bound or to which any of the property or assets of the Company or any of
its subsidiaries is subject, nor will such actions result in any violation
of the provisions of the certificate of incorporation or by-laws of the
Company or any of its subsidiaries or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction
over the Company or any of its subsidiaries or any of their properties or
assets; and except for the registration of the Stock under the Securities
Act and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Securities Exchange Act of
1934, as amended (the "Exchange Act") and applicable state securities laws
in connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is
required for the execution, delivery and performance of this Agreement by
the Company and the consummation of the transactions contemplated hereby
and by the Recapitalization.
(h) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being
3
<PAGE>
registered pursuant to any other registration statement filed by the
Company under the Securities Act.
(i) Except as described in the Prospectus or the Registration
Statement, the Company has not sold or issued any shares of Common Stock
during the six-month period preceding the date of the Prospectus, including
any sales pursuant to Rule 144A under, or Regulations D or S of, the
Securities Act.
(j) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance,
from any labor dispute or from any court or governmental action, order or
decree, otherwise than as set forth or contemplated in the Prospectus; and,
since such date, there has not been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any material
adverse change, or any development involving a prospective material adverse
change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company and
its significant subsidiaries, otherwise than as set forth or contemplated
in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby, at the
dates and for the periods indicated, and have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved.
(l) Arthur Andersen LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and who
have delivered the initial letter referred to in Section 9(i) hereof, are
independent public accountants as required by the Securities Act and the
Rules and Regulations and Barbier, Frinault & Associes, who have delivered
the initial letter referred to in Section 9(i) hereof, were independent
accountants as required by the Securities Act and the Rules and Regulations
during the periods covered by the financial statements on which they
reported contained in the Prospectus.
(m) The Company and each of its subsidiaries have good and marketable
title to all personal property owned by them, free and clear of all liens,
encumbrances and defects except (i) for taxes not yet due and payable or
for taxes being contested in good faith and for which adequate reserves, in
accordance with generally accepted accounting principles, have been taken,
or (ii) such as are described in the Prospectus or such as do not
materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries, and all real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases, with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries.
4
<PAGE>
(n) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties.
(o) The Company and each of its subsidiaries own or possess adequate
rights to use all material patents, patent applications, trademarks,
service marks, trade names, trademark registrations, service mark
registrations, copyrights and licenses (including with respect to software
currently used by the Company or any of its subsidiaries) necessary for the
conduct of their respective businesses as described in the Prospectus and
have no reason to believe that the conduct of their respective businesses
will conflict with, and have not received any notice of any claim of
conflict with, any such rights of others, except where the failure to own
or possess any of the foregoing would not have a Material Adverse Effect.
(p) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property
or assets of the Company or any of its subsidiaries is the subject which,
if determined adversely to the Company or any of its subsidiaries, would
reasonably be expected to have a Material Adverse Effect, and to the best
of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
(q) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have
not been described in the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as permitted by
the Rules and Regulations.
(r) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required
to be described in the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent which might be expected to
have a Material Adverse Effect.
(t) The Company and its subsidiaries are in compliance in all
material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) has occurred with respect to any
"pension plan" (as defined in ERISA) for which the Company or any of its
subsidiaries would have any liability; the Company and its subsidiaries
have not incurred and does not expect to incur liability under (i) Title IV
of ERISA with respect to termination of, or withdrawal from, any "pension
plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published interpretations thereunder
(the "Code"); and each "pension plan" for which the Company or any of its
5
<PAGE>
subsidiaries would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects
and nothing has occurred, whether by action or by failure to act, which
would cause the loss of such qualification.
(u) The Company has filed all federal, state, local and foreign
income and franchise tax returns required to be filed through the date
hereof and has paid all taxes due thereon, and no tax deficiency has been
determined adversely to the Company or any of its subsidiaries which has
had (nor does the Company have any knowledge of any tax deficiency which,
if determined adversely to the Company or any of its subsidiaries, might
reasonably be expected to have) a Material Adverse Effect.
(v) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed in the
Prospectus or the Registration Statement, the Company and its subsidiaries
have not (i) issued or granted any securities, (ii) incurred any liability
or obligation, direct or contingent, other than liabilities and obligations
which were incurred in the ordinary course of business, (iii) entered into
any transaction not in the ordinary course of business or (iv) declared or
paid any dividend on its capital stock.
(w) The Company and its subsidiaries (i) have made and kept accurate
books and records and (ii) have maintained internal accounting controls
which provide reasonable assurance that (A) transactions are executed in
accordance with management's authorization, (B) transactions are recorded
as necessary to permit preparation of their respective financial statements
and to maintain accountability for their respective assets, (C) access to
their respective assets have been permitted only in accordance with
management's authorization and (D) the reported accountability for their
assets is compared with existing assets at reasonable intervals.
(x) Neither the Company nor any of its subsidiaries (i) is in
violation of its certificate of incorporation (or charter) or by-laws, (ii)
is in default in any material respect, and no event has occurred which,
with notice or lapse of time or both, would constitute such a default, in
the due performance or observance of any term, covenant or condition
contained in any material indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which it is a party or by
which it is bound or to which any of its properties or assets is subject or
(iii) is in violation of any law, ordinance, governmental rule, regulation
or court decree to which it or its property or assets may be subject or has
failed to obtain any material license, permit, certificate, franchise or
other governmental authorization or permit necessary to the ownership of
its property or to the conduct of its business, other than violations or
failures which, individually or in the aggregate, would not have a Material
Adverse Effect.
(y) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or
acting on behalf of the Company or any of its subsidiaries, has used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expense relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from
6
<PAGE>
corporate funds; violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
(z) Neither the Company nor any subsidiary is an "investment company"
within the meaning of such term under the United States Investment Company
Act of 1940 and the rules and regulations of the Commission thereunder.
2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder severally represents, warrants and
agrees that:
(a) The Selling Stockholder has, and immediately prior to the First
Delivery Date (as defined in Section 5 hereof) the Selling Stockholder will
have, or, for shares held for his benefit by Vanguard Fiduciary Trust
Company ("Vanguard"), Vanguard will have good and valid title to the shares
of Stock to be sold by the Selling Stockholder hereunder on such date, free
and clear of all liens, encumbrances, equities or claims (other than the
rights of the Company pursuant to the shareholder's agreement between the
Company and such Selling Stockholder), and upon delivery of such shares and
payment therefor pursuant hereto, good and valid title to such shares, free
and clear of all liens, encumbrances, equities or claims, will pass to the
several Underwriters.
(b) The Selling Stockholder has placed in custody under a custody
agreement (the "Custody Agreement" and, together with all other similar
agreements executed by the other Selling Stockholders, the "Custody
Agreements") with Heidrick & Struggles International, Inc, as custodian
(the "Custodian"), for delivery under this Agreement, certificates in
negotiable form (with signature guaranteed by a commercial bank or trust
company having an office or correspondent in the United States or a member
firm of the New York or American Stock Exchanges) representing the shares
of Stock to be sold by the Selling Stockholder hereunder.
(c) The Selling Stockholder has duly and irrevocably executed and
delivered a power of attorney (the "Power of Attorney" and, together with
all other similar agreements executed by the other Selling Stockholders,
the "Powers of Attorney") appointing the Custodian and one or more other
persons, as attorneys-in-fact, with full power of substitution, and with
full authority (exercisable by any one or more of them) to execute and
deliver this Agreement and to take such other action as may be necessary or
desirable to carry out the provisions hereof on behalf of the Selling
Stockholder.
(d) The Selling Stockholder has full right, power and authority to
enter into this Agreement, the Power of Attorney and the Custody Agreement;
the execution, delivery and performance of this Agreement, the Power of
Attorney and the Custody Agreement by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions contemplated
hereby and thereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Selling
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Stockholder is a party or by which the Selling Stockholder is bound or to
which any of the property or assets of the Selling Stockholder is subject,
nor will such actions result in any violation of any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Selling Stockholder or the property or assets of the
Selling Stockholder; and, except for the registration of the Stock under
the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange Act
and applicable state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Power of Attorney or the Custody
Agreement by the Selling Stockholder and the consummation by the Selling
Stockholder of the transactions contemplated hereby and thereby.
(e) The Registration Statement and the Prospectus and any further
amendments or supplements to the Registration Statement or the Prospectus
will, when they become effective or are filed with the Commission, as the
case may be, do not and will not, as of the applicable effective date (as
to the Registration Statement and any amendment thereto) and as of the
applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided that no representation or
warranty is made as to information contained in or omitted from the
Registration Statement or the Prospectus other than that provided by such
Selling Stockholder to the Company or to an Underwriter specifically for
inclusion therein.
(f) The Selling Stockholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in the stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the shares of the Stock.
3. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 3,700,000 shares of
the Firm Stock and each Selling Stockholder hereby agrees to sell the number of
shares of the Firm Stock set opposite his or her name in Schedule 2 hereto,
severally and not jointly, to the several Underwriters and each of the
Underwriters, severally and not jointly, agrees to purchase the number of shares
of the Firm Stock set opposite that Underwriter's name in Schedule 1 hereto.
Each Underwriter shall be obligated to purchase from the Company, and from each
Selling Stockholder, that number of shares of the Firm Stock which represents
the same proportion of the number of shares of the Firm Stock to be sold by the
Company, and by each Selling Stockholder, as the number of shares of the Firm
Stock set forth opposite the name of such Underwriter in Schedule 1 represents
of the total number of shares of the Firm Stock to be purchased by all of the
Underwriters pursuant to this Agreement. The respective purchase obligations of
the Underwriters with respect to the Firm Stock shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
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In addition, the Company grants to the Underwriters an option to
purchase up to 630,000 shares of Option Stock. Such option is granted for the
purpose of covering over-allotments in the sale of Firm Stock and is exercisable
as provided in Section 5 hereof. Shares of Option Stock shall be purchased
severally for the account of the Underwriters in proportion to the number of
shares of Firm Stock set opposite the name of such Underwriters in Schedule 1
hereto. The respective purchase obligations of each Underwriter with respect to
the Option Stock shall be adjusted by the Representatives so that no Underwriter
shall be obligated to purchase Option Stock other than in 100 share amounts. The
price of both the Firm Stock and any Option Stock shall be $__ per share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on any Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
4. Offering of Stock by the Underwriters.
Upon authorization by the Representatives of the release of the Firm
Stock, the several Underwriters propose to offer the Firm Stock for sale upon
the terms and conditions set forth in the Prospectus.
It is understood that 210,000 shares of the Firm Stock will initially
be reserved by the several Underwriters for offer and sale upon the terms and
conditions set forth in the Prospectus and in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. to
directors, officers, employees, business associates and related persons of the
Company and its subsidiaries who have heretofore delivered to the
Representatives offers or indications of interest to purchase shares of Firm
Stock in form satisfactory to the Representatives, and that any allocation of
such Firm Stock among such persons will be made in accordance with timely
directions received by the Representatives from the Company; provided, that
under no circumstances will the Representatives or any Underwriter be liable to
the Company or to any such person for any action taken or omitted in good faith
in connection with such offering to employees and persons having business
relationships with the Company and its subsidiaries. It is further understood
that any shares of such Firm Stock which are not purchased by such persons will
be offered by the Underwriters to the public upon the terms and conditions set
forth in the Prospectus.
5. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Simpson Thacher & Bartlett,
425 Lexington Avenue, New York, New York 10017, at 10:00 A.M., New York City
time, on the fourth full business day following the date of this Agreement or at
such other date or place as shall be determined by agreement between the
Representatives and the Company. This date and time are sometimes referred to as
the "First Delivery Date." On the First Delivery Date, the Company and the
Selling Stockholders shall deliver or cause to be delivered certificates
representing the Firm Stock to the Representatives for the account of each
Underwriter against payment to or upon the order of the Company and the Selling
Stockholders of the purchase price by wire transfer in immediately available
funds. Time shall be of the essence, and delivery at the time and place
specified pursuant to this Agreement is a further condition of the obligation of
each Underwriter hereunder. Upon delivery, the Firm Stock shall be registered in
such names and in such denominations as the
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Representatives shall request in writing not less than two full business days
prior to the First Delivery Date. For the purpose of expediting the checking and
packaging of the certificates for the Firm Stock, the Company and the Selling
Stockholders shall make the certificates representing the Firm Stock available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the First Delivery Date.
The option granted in Section 3 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Representatives. Such notice
shall set forth the aggregate number of shares of Option Stock as to which the
option is being exercised, the names in which the shares of Option Stock are to
be registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as a "Second Delivery Date" and the First Delivery
Date and any Second Delivery Date are sometimes each referred to as a "Delivery
Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on such
Second Delivery Date. On such Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall
be registered in such names and in such denominations as the Representatives
shall request in the aforesaid written notice. For the purpose of expediting the
checking and packaging of the certificates for the Option Stock, the Company
shall make the certificates representing the Option Stock available for
inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to such Second Delivery
Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under
the Securities Act not later than Commission's close of business on the
second business day following the execution and delivery of this Agreement
or, if applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Securities Act; to make no further amendment or any supplement to
the Registration Statement or to the Prospectus except as permitted herein;
to advise the Representatives, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been filed
or becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Representatives with copies
thereof; to advise the Representatives, promptly after it receives notice
thereof,
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of the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, of the suspension of the qualification of the Stock for
offering or sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of the issuance
of any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to counsel
for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed with
the Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits
other than this Agreement and the computation of per share earnings) and
(ii) each Preliminary Prospectus, the Prospectus and any amended or
supplemented Prospectus; and, if the delivery of a prospectus is required
at any time after the Effective Time in connection with the offering or
sale of the Stock or any other securities relating thereto and if at such
time any events shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, provided that
after the date which is one year following the completion of the issuance
and delivery of shares to the Underwriters and the sale contemplated by the
Prospectus, the Representatives shall bear the cost of such request, or, if
for any other reason it shall be necessary to amend or supplement the
Prospectus in order to comply with the Securities Act, to notify the
Representatives and, upon their request, to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies
as the Representatives may from time to time reasonably request of an
amended or supplemented Prospectus which will correct such statement or
omission or effect such compliance;
(d) To file promptly with the Commission an appropriate amendment to
the Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the reasonable judgment of the Company or the
Representatives, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy
thereof to the Representatives and counsel for the Underwriters, such
amendment to be reasonably satisfactory to the Representatives;
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<PAGE>
(f) As soon as practicable after the Effective Date, to make
generally available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Securities
Act and the Rules and Regulations (including, at the option of the Company,
Rule 158);
(g) For a period of three years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by the
Company to its shareholders and all public reports and all reports and
financial statements furnished by the Company to the principal national
securities exchange upon which the Common Stock may be listed pursuant to
requirements of or agreements with such exchange or to the Commission
pursuant to the Exchange Act or any rule or regulation of the Commission
thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering
and sale under the securities laws of such jurisdictions as the
Representatives may request and to comply with such laws so as to permit
the continuance of sales and dealings therein in such jurisdictions for as
long as may be necessary to complete the distribution of the Stock;
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(i) For a period of 180 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any transaction or device which is designed to,
or could be expected to, result in the disposition by any person at any
time in the future of) any shares of Common Stock or securities convertible
into or exchangeable for Common Stock (other than the Stock and shares
issued pursuant to employee benefit plans, qualified stock option plans or
other employee compensation plans existing on the date hereof or pursuant
to currently outstanding options, warrants or rights), or sell or grant
options, rights or warrants with respect to any shares of Common Stock or
securities convertible into or exchangeable for Common Stock, or (2) enter
into any swap or other derivatives transaction that transfers to another,
in whole or in part, any of the economic benefits or risks of ownership of
such shares of Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Common Stock or
other securities, in cash or otherwise, in each case without the prior
written consent of Lehman Brothers Inc., and to cause each officer and
director of the Company to furnish to the Representatives, prior to the
First Delivery Date, a letter or letters, in form and substance
satisfactory to counsel for the Underwriters, pursuant to which each such
person shall agree not to, directly or indirectly, (1) offer for sale,
sell, pledge or otherwise dispose of (or enter into any transaction or
device which is designed to, or could be expected to, result in the
disposition by any person at any time in the future of) any shares of
Common Stock or securities convertible into or exchangeable for Common
Stock or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic benefits or
risks of ownership of such shares of Common Stock, whether any such
transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or other securities, in cash or otherwise, in each
case for a period of 180 days from the date of the Prospectus, without the
prior written consent of
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Lehman Brothers Inc., other than shares of Common Stock issued in the
Offering, under the Company's GlobalShare Plan, or upon the exercise of
stock options granted pursuant to the GlobalShare Plan;
(j) Prior to the Effective Date, to apply for the listing of the
Stock on the Nasdaq National Market and to use its best efforts to complete
that listing, subject only to official notice of issuance and evidence of
satisfactory distribution, prior to the First Delivery Date;
(k) Prior to filing with the Commission its first periodic report
pursuant to Section 13(a) or 15(d) of the Securities Act that includes the
information required pursuant to Rule 463 of the Rules and Regulations, to
furnish a copy thereof to the counsel for the Underwriters and receive and
consider its comments thereon, and to deliver promptly to the
Representatives a copy of such report filed by it with the Commission;
(l) For a period of two years following the date hereof, to take such
steps as shall be necessary to ensure that neither the Company nor any
subsidiary shall become an "investment company" within the meaning of such
term under the United States Investment Company Act of 1940 and the rules
and regulations of the Commission thereunder; and
(m) To cause each current holder of Common Stock to execute and
deliver an agreement stating that, without the prior written consent of
Lehman Brothers Inc., such current stockholder will not, directly or
indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or
enter into any transaction or device that is designed to, or could
reasonably be expected to, result in the disposition by any person at any
time in the future of) any shares of Common Stock (including, without
limitation, shares of Common Stock that may be deemed to be beneficially
owned by such current stockholder in accordance with the rules and
regulations of the Securities and Exchange Commission and shares of Common
Stock that may be issued upon exercise of any option or warrant) or
securities convertible into or exchangeable for Common Stock (other than
the Shares) owned by such current stockholder on the date of the completion
of the offering, or (2) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of the
economic benefits or risks of ownership of such shares of Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or other securities, in cash or
otherwise: (a) for a period of 180 days after the date of the final
Prospectus relating to the Offering, and (b) with respect to shares
currently owned by such current stockholder (which shall not include any
shares of Common Stock purchased or acquired upon the exercise of options
granted pursuant to the 1998 Heidrick & Struggles GlobalShare Program I or
the 1998 Heidrick & Struggles GlobalShare Program II), for a period of two
years after the date of the final prospectus.
7. Further Agreements of the Selling Stockholders. Each Selling
Stockholder agrees:
(a) For a period of 180 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise
dispose of (or enter into any
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<PAGE>
transaction or device which is designed to, or could be expected to, result
in the disposition by any person at any time in the future of) any shares
of Common Stock or securities convertible into or exchangeable for Common
Stock (other than the Stock) or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in part, any
of the economic benefits or risks of ownership of such shares of Common
Stock, whether any such transaction described in clause (1) or (2) above is
to be settled by delivery of Common Stock or other securities, in cash or
otherwise, in each without the prior written consent of Lehman Brothers
Inc., which consent shall not be given without consultation by Lehman
Brothers, Inc. with officers of the Company.
(b) That the Stock to be sold by the Selling Stockholder
hereunder, which is represented by the certificates held in custody for the
Selling Stockholder, is subject to the interest of the Underwriters and the
other Selling Stockholders thereunder, that the arrangements made by the
Selling Stockholder for such custody are to that extent irrevocable, and
that the obligations of the Selling Stockholder hereunder shall not be
terminated by any act of the Selling Stockholder, by operation of law, by
the death or incapacity of any individual Selling Stockholder or, in the
case of a trust, by the death or incapacity of any executor or trustee or
the termination of such trust, or the occurrence of any other event.
(c) To deliver to the Representatives prior to the First Delivery
Date a properly completed and executed United States Treasury Department
Form W-8 (if the Selling Stockholder is a non-United States person) or Form
W-9 (if the Selling Stockholder is a United States person.)
8. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus and any
amendment or supplement to the Prospectus, all as provided in this Agreement;
(d) the costs of producing and distributing this Agreement and any other related
documents in connection with the offering, purchase, sale and delivery of the
stock; (e) the costs of delivering and distributing the Custody Agreements and
the Powers of Attorney; (f) the filing fees incident to securing any required
review by the National Association of Securities Dealers, Inc. of the terms of
sale of the Stock; (g) any applicable listing or other fees; (h) the fees and
expenses of qualifying the Stock under the securities laws of the several
jurisdictions as provided in Section 6(h) and of preparing, printing and
distributing a Blue Sky Memorandum; (h) all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters, incident to the offer and sale of shares of the Stock by the
Underwriters to employees and persons having business relationships with the
Company and its subsidiaries, as described in Section 4; and (i) all other costs
and expenses incident to the performance of the obligations of the Company and
the Selling Stockholders under this Agreement; provided that, except as provided
in this Section 8 and in Section 13, the Underwriters shall pay their own costs
and expenses, including the costs and expenses of their counsel, any transfer
taxes on the Stock which they may sell and the expenses of
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advertising any offering of the Stock made by the Underwriters. As set forth in
a side letter hereto, the Underwriters have agreed to pay for certain expenses
associated with travel by officers of the Company undertaken in connection with
the marketing of the Stock.
9. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
and the Selling Stockholders contained herein, to the performance by the Company
and the Selling Stockholders of their respective obligations hereunder, and to
each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a); no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and any request of the Commission for
inclusion of additional information in the Registration Statement or the
Prospectus or otherwise shall have been complied with.
(b) No Underwriter shall have discovered and disclosed to the
Company on or prior to such Delivery Date that the Registration Statement
or the Prospectus or any amendment or supplement thereto contains an untrue
statement of a fact which, in the opinion of O'Melveny & Myers LLP, counsel
for the Underwriters, is material or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein
or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to
the authorization, form and validity of this Agreement, the Custody
Agreements, the Powers of Attorney, the Stock, the Registration Statement
and the Prospectus, and all other legal matters relating to this Agreement
and the transactions contemplated hereby shall be reasonably satisfactory
in all material respects to counsel for the Underwriters, and the Company
and the Selling Stockholders shall have furnished to such counsel all
documents and information that they may reasonably request to enable them
to pass upon such matters.
(d) Simpson Thacher & Bartlett shall have furnished to the
Representatives their written opinion, as counsel to the Company, addressed
to the Underwriters and dated such Delivery Date, in form and substance
reasonably satisfactory to the Representatives, to the effect that:
(i) The Company and H&S Inc. have been duly incorporated and
are validly existing as corporations in good standing under the laws
of Delaware and have all corporate power and authority necessary to
own or hold their respective properties and conduct their respective
businesses in which they are engaged;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of the Company's
Common Stock (including the shares of Stock being delivered on such
Delivery Date) have been duly authorized and outstanding shares of the
Company's Common Stock have been and,
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upon delivery in accordance with this Agreement, the shares of Common
Stock being delivered on such Delivery Date will be validly issued,
are fully paid and non-assessable and conform to the description
thereof contained in the Prospectus, and all of the issued shares of
capital stock of H&S Inc. and any other subsidiary of the Company
incorporated in Delaware have been duly authorized and validly issued
and are fully paid, non-assessable and (except for directors'
qualifying shares) are owned of record by the Company;
(iii) There are no preemptive rights under federal law or
the General Corporation Law of the State of Delaware to subscribe for
or purchase, or any restriction upon the voting or transfer of, any
shares of the Stock pursuant to the Company's certificate of
incorporation or by-laws or any agreement or other instrument
identified on a schedule delivered by Company to such counsel and
attached hereto as Schedule 3;
(iv) The Registration Statement has become effective under
the Securities Act and the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date specified therein
and to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose is pending or threatened by the
Commission;
(v) The statements made in the Prospectus under the caption
"Certain United States Federal Income Tax Consequences to Non-U.S.
Holders of Common Stock," insofar as they purport to constitute
summaries of matters of United States federal income tax law and
regulations or legal conclusions with respect thereto, constitute
accurate summaries of the matters described therein in all material
respects.
(vi) The statements made in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute
a summary of the terms of such capital stock, constitute an accurate
summary thereof in all material respects;
(vii) To such counsel's knowledge, there are no contracts
or other documents which are required to be described in the
Prospectus or filed as exhibits to the Registration Statement by the
Securities Act or by the Rules and Regulations which have not been
described or filed as required by the Securities Act or the Rules and
Regulations;
(viii) This Agreement has been duly authorized, executed
and delivered by the Company;
(ix) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance by
the Company with all of the provisions of this Agreement and the
purchase and distribution of the Stock by the
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Underwriters will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument filed as an exhibit to the Registration
Statement, nor will such actions violate the certificate of
incorporation or by-laws of the Company or the charter or by-laws of
any of its significant subsidiaries incorporated in Delaware or New
York or any federal or New York statute or the Delaware General
Corporation Law or any rule or regulation that has been issued
pursuant to any federal or New York statute or the Delaware General
Corporation Law or any order known to such counsel of any court or
governmental agency or body having jurisdiction over the Company or
any of its subsidiaries or any of their properties or assets; and,
except for the registration of the Stock under the Securities Act and
such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any federal
or New York court or any Delaware Court acting pursuant to the General
Corporation Law or any such governmental agency or body is required
for the execution, delivery and performance of this Agreement by the
Company, the issuance and delivery of shares to the Underwriters, the
sale contemplated by the Prospectus, or the Recapitalization; and
(x) To such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Securities Act.
In rendering such opinion, such counsel may state that their
opinion is limited to matters governed by the Federal laws of the United
States of America, the laws of the State of New York and the General
Corporation Law of the State of Delaware. Such counsel shall also have
furnished to the Representatives a written statement, addressed to the
Underwriters and dated such Delivery Date, in form and substance
satisfactory to the Representatives, to the effect that (x) such counsel
has acted as counsel to the Company in connection with the preparation of
the Registration Statement, (y) based on the foregoing, such counsel has no
reason to believe that the Registration Statement, as of the Effective
Date, contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make
the statements therein not misleading, or that the Prospectus contains, as
of its date or the Delivery Date, any untrue statement of a material fact
or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, and (z) the
Registration Statement and the Prospectus and any further amendments or
supplements thereto made by the Company prior to such Delivery Date (other
than the financial statements and related schedules therein, as to which
such counsel need express no opinion) comply as to form in all material
respects with the
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requirements of the Securities Act and the Rules and Regulations. The
foregoing opinion and statement may be qualified by a statement to the
effect that such counsel does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus except for the statements made in
the Prospectus under the captions "Description of Capital Stock" and
"Certain United States Federal Tax Consequences To Non-U.S. Holders of
Common Stock" insofar as such statements relate to the Stock and concern
legal matters and that such counsel expresses no belief with respect to the
financial statements or other financial information contained in the
Prospectus or the Registration Statement.
(e) Lang & Rahman, Rechtsanwalte shall have furnished to the
Representatives their written opinion, as German counsel to the Company,
addressed to the Underwriters and dated the First Delivery Date, in form
and substance reasonably satisfactory to the Representatives, to the effect
that:
(i) Heidrick & Struggles Unternehmensberatung GmbH & Co. KG,
a company incorporated under German law and Heidrick & Struggles
Unternehmensberatung Verwaltungs GmbH, a company incorporated under
German law are in good standing under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and
are in good standing as foreign corporations in each jurisdiction in
which their respective ownership or lease of property or the conduct
of their respective businesses requires such qualification;
(ii) All of the issued shares of capital stock of Heidrick &
Struggles Unternehmensberatung GmbH & Co. KG and Heidrick & Struggles
Unternehmensberatung Verwaltungs GmbH have been duly authorized and
validly issued and are fully paid, non-assessable and (except for
directors' qualifying shares) are owned of record by the Company; and
(iii) The issue and sale of the shares of Stock being
delivered on such Delivery Date by the Company and the compliance by
the Company with all of the provisions of this Agreement and the
consummation of the transactions contemplated hereby will not violate
the provisions of the charter or by-laws of Heidrick & Struggles
Unternehmensberatung GmbH & Co. KG or Heidrick & Struggles
Unternehmensberatung Verwaltungs GmbH or any statute or any order,
rule or regulation known to such counsel of any court or governmental
agency or body having jurisdiction over Heidrick & Struggles
Unternehmensberatung GmbH & Co. KG or Heidrick & Struggles
Unternehmensberatung Verwaltungs GmbH or any of their properties or
assets.
(f) Richard D. Nelson, General Counsel for the Company, shall
have furnished to the Representatives his written opinion, as counsel to
the Company, addressed to the Underwriters and dated such Delivery Date, in
form and substance reasonably satisfactory to the Representatives, to the
effect that:
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(i) [The Company and each of its significant subsidiaries are in
good standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in good
standing as foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of their
respective businesses requires such qualification;]
(ii) All of the issued shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued
and are fully paid, non-assessable and (except for directors'
qualifying shares) are owned of record by the Company;
(iii) To the best of such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property or assets of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, might have a Material Adverse
Effect; and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others; and
(iv) The issue and sale of the shares of Stock being delivered
on such Delivery Date by the Company and the compliance by the Company
with all of the provisions of this Agreement and the consummation of
the transactions contemplated hereby will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument known to such counsel
to which the Company or any of its significant subsidiaries is a party
or by which the Company or any of its significant subsidiaries is
bound or to which any of the property or assets of the Company or any
of its significant subsidiaries is subject.
(g) Simpson Thacher & Bartlett, counsel for the Selling Stockholders,
shall have furnished to the Representatives their written opinion, as
counsel to each of the Selling Stockholders, addressed to the Underwriters
and dated the First Delivery Date, in form and substance reasonably
satisfactory to the Representatives, to the effect that:
(i) The execution, delivery and performance of this Agreement,
the related Custody Agreement and the related Power of Attorney by
each Selling Stockholder and the sale to and distribution of the Stock
by the Underwriters by each Selling Stockholder will not conflict with
or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument identified on a
schedule provided to such counsel to which any Selling Stockholder is
a party or by which any Selling Stockholder is bound, nor will such
actions result in any violation of the provisions of any federal or
New York statute or the Delaware General Corporation Law or any rule
or regulation that has been issued pursuant to any federal or New York
statute or the Delaware General Corporation Law or any order known to
such counsel and, except for the registration of the Stock under the
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Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange
Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no
consent, approval, authorization, order, registration or qualification
of or with, any such court or governmental agency or body is required
for the execution, delivery and performance of this Agreement the
related Custody Agreement or the related Power of Attorney by any
Selling Stockholder and the sale to and distribution of the Stock by
the Underwriters;
(ii) This Agreement has been duly executed and delivered by or
on behalf of each Selling Stockholder;
(iii) A Custody Agreement and Power-of-Attorney have been duly
executed and delivered by each Selling Stockholder and constitute
valid and binding agreements of each Selling Stockholder, enforceable
in accordance with their respective terms;
(iv) Each Selling Stockholder is the sole registered owner of
the Stocks to be sold by such Selling Stockholder, and upon payment
for and delivery of the Stock in accordance with the Underwriting
Agreement, the Underwriters will acquire all the rights of each
Selling Stockholder in the Stock and will also acquire all the
interest of such Selling Stockholders in such Stock free of any
adverse claim.
In rendering such opinion, such counsel may (i) state that their
opinion is limited to matters governed by the Federal laws of the United
States of America, the laws of the State of New York and the General
Corporation Law of the State of Delaware, (ii) in rendering the opinion in
Section 9(g)(i) above, rely upon a certificate of each Selling Stockholder
identifying any agreements material to such opinion and (iii) in rendering
the opinion in Section 9(g)(iv) above, may include Vanguard in its
definition of Selling Stockholders and may rely upon a certificate of each
Selling Stockholder in respect of matters of fact as to ownership of and
liens, encumbrances, equities or claims on the shares of Stock sold by such
Selling Stockholder, provided that such counsel shall furnish copies
thereof to the Representatives.
(h) The Representatives shall have received from O'Melveny & Myers
LLP, counsel for the Underwriters, such opinion or opinions, dated such
Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request for the
purpose of enabling them to pass upon such matters.
(i) At the time of execution of this Agreement, the Representatives
shall have received from Arthur Andersen a letter, in form and substance
satisfactory to the Representatives, addressed to the Underwriters and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in compliance
with the applicable requirements relating to the qualification of
accountants
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under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of
the date hereof (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Prospectus, as of a date not more than five
days prior to the date hereof), the conclusions and findings of such firm
with respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in connection
with registered public offerings.
(j) With respect to the letter of Arthur Andersen referred to in the
preceding paragraph and delivered to the Representatives concurrently with
the execution of this Agreement (the "initial letter"), the Company shall
have furnished to the Representatives a letter (the "bring-down letter") of
such accountants, addressed to the Underwriters and dated such Delivery
Date (i) confirming that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule 2-01
of Regulation S-X of the Commission, (ii) stating, as of the date of the
bring-down letter (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Prospectus, as of a date not more than five
days prior to the date of the bring-down letter), the conclusions and
findings of such firm with respect to the financial information and other
matters covered by the initial letter and (iii) confirming in all material
respects the conclusions and findings set forth in the initial letter.
(k) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President, its Chief Administrative Officer or a Vice President and its
chief financial officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date;
the Company has complied with all its agreements contained herein; and
the conditions set forth in Sections 9(a) and 9(o) have been
fulfilled; and
(ii) They have examined the Registration Statement and the
Prospectus and, in their opinion (A) as of the Effective Date, the
Registration Statement and Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (B) since the Effective Date no event has
occurred which should have been set forth in a supplement or amendment
to the Registration Statement or the Prospectus but was not so set
forth.
(l) Each Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Stockholders) shall have
furnished to the Representatives on the First Delivery Date a certificate,
dated the First Delivery Date, signed by, or on behalf of, the Selling
Stockholder (or the Custodian or one or more attorneys-in-fact) stating
that the representations, warranties and agreements of the Selling
Stockholder contained herein are true and correct as of the First Delivery
Date and that the Selling Stockholder has complied with all agreements
contained herein to be performed by the Selling Stockholder at or prior to
the First Delivery Date.
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(m) (i) Neither the Company nor any of its subsidiaries shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference with
its business from fire, explosion, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set
forth or contemplated in the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is, in the reasonable
judgment of the Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or
the delivery of the Stock being delivered on such Delivery Date on the
terms and in the manner contemplated in the Prospectus.
(n) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission, by
such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have
been declared by Federal or state authorities, (iii) the United States
shall have become engaged in hostilities, there shall have been an
escalation in hostilities involving the United States or there shall
have been a declaration of a national emergency or war by the United
States or (iv) there shall have occurred such a material adverse
change in general economic, political or financial conditions (or the
effect of international conditions on the financial markets in the
United States shall be such) as to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the
Stock being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
(o) Nasdaq National Market shall have approved the Stock for
listing, subject only to official notice of issuance and evidence of
satisfactory distribution.
(p) The Company shall have furnished to the Representatives
Certificates of Good Standing or Foreign Qualification (or equivalent
documents) from the Secretaries of State or relevant authorities (and
tax good standing certificates, where applicable, from the tax
authorities) in the States of California, Illinois, New York, Texas,
and Connecticut and in Germany, France, and the United Kingdom for
each subsidiary for which their respective ownership or lease of
property or the conduct of their respective businesses requires such
qualification in such jurisdiction.
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All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
10. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees, each person, if any, who controls any Underwriter
within the meaning of the Securities Act, and the Selling Stockholders from and
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Stock), to which that
Underwriter, officer, employee or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading,
(iii) any act or failure to act or any alleged act or failure to act by Lehman
Brothers Inc. in connection with, or relating in any manner to, the granting or
denial of consent to any sale, pledge, disposition or other transaction for
which consent may be required under any agreement restricting such dispositions
entered into by and between any current stockholder of the Company and Lehman
Brothers Inc.; or (iv) any act or failure to act or any alleged act or failure
to act by any Underwriter in connection with, or relating in any manner to, the
Stock or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of or
based upon matters covered by clause (i) or (ii) above (provided that the
Company shall not be liable under this clause (iv) to the extent that it is
determined in a final judgment by a court of competent jurisdiction that such
loss, claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter through
its gross negligence or willful misconduct), and shall reimburse each
Underwriter and each such officer, employee or controlling person promptly upon
demand for any legal or other expenses reasonably incurred by that Underwriter,
officer, employee or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus, or in
any such amendment or supplement, in reliance upon and in conformity with
written information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of any Underwriter specifically for
inclusion therein which information consists solely of the information specified
in Section 10(f); provided further, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter who it shall be established failed to deliver a Prospectus (as then
amended or supplemented, provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper deliver on or
prior to the Closing Date) to the person asserting any losses, claims, damages,
liabilities, and judgments caused by any untrue statement or
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alleged untrue statement of a material fact contained in any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if such material misstatement or omission or alleged
material misstatement or omission was cured in such Prospectus and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of such sale to such person. The foregoing indemnity agreement is
in addition to any liability which the Company may otherwise have to any
Underwriter or to any officer, employee or controlling person of that
Underwriter.
(b) The Selling Stockholders, severally in proportion to the number of
shares of Stock to be sold by each of them hereunder, shall indemnify and hold
harmless each Underwriter, its officers and employees, and each person, if any,
who controls any Underwriter within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Stock), to which that
Underwriter, officer, employee or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto provided by such Selling Stockholder, which information consists solely
of the statements made in the Prospectus under the caption "Principal and
Selling Stockholders" insofar as such statements relate to such Selling
Stockholder or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, Registration Statement or the Prospectus, or in any amendment or
supplement thereto, any material fact relating to such Selling Stockholder
required to be stated therein or necessary to make the statements therein not
misleading, and shall reimburse each Underwriter, its officers and employees and
each such controlling person for any legal or other expenses reasonably incurred
by that Underwriter, its officers and employees or controlling person in
connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Selling Stockholders shall not be liable in any such
case to the extent that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any such amendment or supplement
in reliance upon and in conformity with written information concerning such
Underwriter furnished to the Company through the Representatives by or on behalf
of any Underwriter specifically for inclusion therein which information consists
solely of the information specified in Section 10(f); provided further, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter who it shall be established failed
to deliver a Prospectus (as then amended or supplemented, provided by the
Company to the several Underwriters in the requisite quantity and on a timely
basis to permit proper deliver on or prior to the Closing Date) to the person
asserting any losses, claims, damages, liabilities, and judgments caused by any
untrue statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, if such material misstatement or omission or
alleged material misstatement or omission was cured in such Prospectus and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of such sale to such person. The foregoing indemnity agreement is
in
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addition to any liability which the Selling Stockholders may otherwise have to
any Underwriter or any officer, employee or controlling person of that
Underwriter.
(c) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors
(including any person who, with his or her consent, is named in the Registration
Statement as about to become a director of the Company), each person, if any,
who controls the Company within the meaning of the Securities Act, and the
Selling Stockholders from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company or any
such director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to make
the statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information concerning
such Underwriter furnished to the Company through the Representatives by or on
behalf of that Underwriter specifically for inclusion therein, and shall
reimburse the Company and any such director, officer or controlling person for
any legal or other expenses reasonably incurred by the Company or any such
director, officer or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred. The foregoing indemnity agreement is in
addition to any liability which any Underwriter may otherwise have to the
Company or any such director, officer, employee or controlling person.
(d) Promptly after receipt by an indemnified party under this Section
10 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 10.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the
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Underwriters against the Company or any Selling Stockholder under this Section
10 if, in the reasonable judgment of the Representatives, it is advisable for
the Representatives and those Underwriters, officers, employees and controlling
persons to be jointly represented by separate counsel, and in that event the
fees and expenses of such separate counsel shall be paid by the Company or
Selling Stockholders. No indemnifying party shall (i) without the prior written
consent of the indemnified parties (which consent shall not be unreasonably
withheld), settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action, suit or proceeding, or (ii) be liable for any settlement
of any such action effected without its written consent (which consent shall not
be unreasonably withheld), but if settled with the consent of the indemnifying
party or if there be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any indemnified party
from and against any loss or liability by reason of such settlement or judgment.
(e) If the indemnification provided for in this Section 10 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 10(a), 10(b) or 10(c) in respect of any loss, claim, damage
or liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other with
respect to such offering shall be deemed to be in the same proportion as the
total net proceeds from the offering of the Stock purchased under this Agreement
(before deducting expenses) received by the Company and the Selling
Stockholders, on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the shares of the Stock
purchased under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the shares of the Stock under this Agreement, in
each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Selling Stockholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section were to be determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid
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or payable by an indemnified party as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this Section shall
be deemed to include, for purposes of this Section 10(e), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 10(e), no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Stock
underwritten by it and distributed to the public was offered to the public
exceeds the amount of any damages which such Underwriter has otherwise paid or
become liable to pay by reason of any untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 10(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 10(e) are several in proportion to their respective underwriting
obligations and not joint.
(f) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, the legend concerning over-
allotments on the inside front cover page of and the concession and reallowance
figures appearing under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information concerning such Underwriters
furnished in writing to the Company by or on behalf of the Underwriters
specifically for inclusion in the Registration Statement and the Prospectus.
11. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1 hereto;
provided, however, that the remaining non-defaulting Underwriters shall not be
obligated to purchase any of the Stock on such Delivery Date if the total number
of shares of the Stock which the defaulting Underwriter or Underwriters agreed
but failed to purchase on such date exceeds 9.09% of the total number of shares
of the Stock to be purchased on such Delivery Date, and any remaining non-
defaulting Underwriter shall not be obligated to purchase more than 110% of the
number of shares of the Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 3. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the remaining Underwriters
or other underwriters satisfactory to the Representatives do not elect to
purchase the shares which the defaulting Underwriter or Underwriters agreed but
failed to purchase on such Delivery Date, this Agreement (or, with respect to
the Second Delivery Date, the obligation of the Underwriters to purchase, and of
the Company to sell, the Option Stock) shall terminate without liability on the
part of any non-defaulting Underwriter or the Company or the Selling
Stockholders, except that the Company will continue to be liable for the payment
of expenses to the extent set forth in Sections 8
27
<PAGE>
and 13. As used in this Agreement, the term "Underwriter" includes, for all
purposes of this Agreement unless the context requires otherwise, any party not
listed in Schedule 1 hereto who, pursuant to this Section 11, purchases Firm
Stock which a defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company and the Selling Stockholders for damages
caused by its default. If other underwriters are obligated or agree to purchase
the Stock of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business days
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
12. Termination. The obligations of the Underwriters hereunder may
be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 9(m) or 9(n), shall have occurred
or if the Underwriters shall decline to purchase the Stock for any reason
permitted under this Agreement.
13. Reimbursement of Underwriters' Expenses. If (a) the Company or
any Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or any Selling Stockholders to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or any Selling Stockholder is
not fulfilled (other than the conditions set forth in Section 9(n) hereof), the
Company and such Selling Stockholders will reimburse the U.S. Underwriters for
all reasonable out-of-pocket expenses (including fees and disbursements of
counsel) incurred by the Underwriters in connection with this Agreement and the
proposed purchase of the Stock, and upon demand the Company and the Selling
Stockholders shall pay the full amount thereof to the Representatives. If this
Agreement is terminated pursuant to Section 11 by reason of the default of one
or more Underwriters, neither the Company nor any Selling Stockholder shall be
obligated to reimburse any defaulting Underwriter on account of those expenses.
14. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to Lehman Brothers Inc., Three World Financial
Center, New York, New York 10285, Attention: Syndicate Department (Fax:
212-526-6588), with a copy, in the case of any notice pursuant to Section
10(d), to the Director of Litigation, Office of the General Counsel, Lehman
Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Richard D. Nelson (Fax: 312-496-1290);
28
<PAGE>
(c) if to any Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to such Selling Stockholder at the
address set forth on Schedule 2 hereto;
provided, however, that any notice to an Underwriter pursuant to Section 10(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Selling Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Underwriters by
Lehman Brothers Inc. on behalf of the Representatives, and the Company and the
Underwriters shall be entitled to act and rely upon any request, consent, notice
or agreement given or made on behalf of the Selling Stockholders by the
Custodian.
15. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, the
Selling Stockholders and their respective personal representatives and
successors. This Agreement and the terms and provisions hereof are for the sole
benefit of only those persons, except that (A) the representations, warranties,
indemnities and agreements of the Company and the Selling Stockholders contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 10(c) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 15, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
16. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Selling Stockholders and the
Underwriters contained in this Agreement or made by or on behalf on them,
respectively, pursuant to this Agreement, shall survive the delivery of and
payment for the Stock and shall remain in full force and effect, regardless of
any investigation made by or on behalf of any of them or any person controlling
any of them.
17. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
18. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
19. Consent to Jurisdiction. Each party irrevocably agrees that any
legal suit, action or proceeding arising out of or based upon this Agreement or
the transactions contemplated hereby
29
<PAGE>
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the City of New York or the courts of the State of
New York in each case located in the Borough of Manhattan in the City of New
York (collectively, the "Specified Courts"), and irrevocably submits to the
exclusive jurisdiction (except for proceedings instituted in regard to the
enforcement of a judgment of any such court (a "Related Judgment"), as to which
such jurisdiction is non-exclusive) of such courts in any such suit, action or
proceeding. The parties further agree that service of any process, summons,
notice or document by mail to such party's address set forth above shall be
effective service of process for any lawsuit, action or other proceeding brought
in any such court. The parties hereby irrevocably and unconditionally waive any
objection to the laying of venue of any lawsuit, action or other proceeding in
the Specified Courts, and hereby further irrevocably and unconditionally waive
and agree not to plead or claim in any such court that any such lawsuit, action
or other proceeding brought in any such court has been brought in an
inconvenient forum. Each party not located in the United States hereby
irrevocably appoints CT Corporation System, which currently maintains a New York
City office at 1633 Broadway, New York, New York 10019, United States of
America, as its agent to receive service of process or other legal summons for
purposes of any such action or proceeding that may be instituted in any state or
federal court in the City and State of New York.
20. Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
21. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
22. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
If the foregoing correctly sets forth the agreement among the Company,
the Selling Stockholders and the Underwriters, please indicate your acceptance
in the space provided for that purpose below.
Very truly yours,
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
30
<PAGE>
By
-----------------------------------------------
Name:
Title:
The Selling Stockholders named in Schedule 2 to
this Agreement
By
-----------------------------------------------
Attorney-in-Fact
Accepted:
Lehman Brothers Inc.
Goldman, Sachs & Co.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By Lehman Brothers Inc.
By
-----------------------------
Authorized Representative
31
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Lehman Brothers Inc...........................
Goldman, Sachs & Co...........................
-------
Total......................................
-------
</TABLE>
32
<PAGE>
SCHEDULE 2
<TABLE>
<CAPTION>
Number of Shares
Name and address of Selling Stockholder of Firm Stock
- --------------------------------------- ----------------
<S> <C>
Patrick Bazil............................................... 13,137
Ronald Dukes................................................ 152,758
Kenneth Rattner............................................. 88,300
Michael B. Schoettle........................................ 254,805
Total.................................................. 500,000
=======
</TABLE>
33
<PAGE>
Exhibit 5
[LETTERHEAD OF SIMPSON THACHER & BARTLETT]
April 26, 1999
Heidrick & Struggles International, Inc.
233 South Wacker Drive - Suite 4200
Chicago, Illinois 60606-6303
Ladies and Gentlemen:
We have acted as counsel to Heidrick & Struggles International, Inc., a
Delaware corporation (the "Company"), in connection with the Registration
Statement on Form S-1 (the "Registration Statement") filed by the Company with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended, relating to the issuance and sale by the Company of
3,700,000 shares (the "Company Shares") of Common Stock, par value $.01 per
share and the sale by certain stockholders of the Company (the "Selling
Stockholders") of 500,000 shares of Common Stock (the "Selling Stockholder
Shares") (the Company Shares and the Selling Stockholder Shares, together with
any additional shares of such stock that may be sold by the Company or the
Selling Stockholders pursuant to Rule 462(b) (as prescribed by the Commission
pursuant to the Act) in connection with the offering described in the
Registration Statement, the "Shares").
We have examined the Registration Statement and a form of the share
certificate, which has been filed with the Commission as an exhibit to the
Registration
<PAGE>
Heidrick & Struggles International, Inc. April 26, 1999
-2-
Statement. We also have examined the originals, or duplicates or certified or
conformed copies, of such records, agreements, instruments and other documents
and have made such other and further investigations as we have deemed relevant
and necessary in connection with the opinions expressed herein. As to questions
of fact material to this opinion, we have relied upon certificates of public
officials and of officers and representatives of the Company.
In such examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as duplicates or certified or conformed copies, and
the authenticity of the originals of such latter documents.
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that (1) when the Board of
Directors (the "Board") and the stockholders of the Company have taken all
necessary corporate action to authorize and approve the issuance of the Shares
and (2) upon payment and delivery in accordance with the applicable definitive
underwriting agreement approved by the Board, the Company Shares will be validly
issued, fully paid and nonassessable. The Selling Stockholders Shares have been
validly issued and are fully paid and nonassessable.
We are members of the Bar of the State of New York and we do not express
any opinion herein concerning any law other than the Delaware General
Corporation Law.
<PAGE>
Heidrick & Struggles International, Inc. April 26, 1999
-3-
We hereby consent to the filing of this opinion letter as Exhibit 5 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus included in the Registration Statement.
Very truly yours,
/s/ Simpson Thacher & Bartlett
SIMPSON THACHER & BARTLETT
<PAGE>
Exhibit 10.07
AMENDMENT
---------
According to Article VIII. Final Provisions and its paragraph (2) of the
Employment Agreement of September 25, 1997 the latter is amended as follows:
Wording of Article I. Date, Duties, Title in its paragraph (3) is amended
as follows:
"In addition to the titles stated in the present paragraph, the Partner shall
have effective November 16, 1998 the title of President/Europe"...(remaining
wording is left unchanged).
Wording of Article II. Compensation in its paragraph (2) Base Salary is
amended as follows:
"The gross salary of the Partner shall be effective November 16, 1998 DM
1,075,000 per annum"...(remaining wording is left unchanged).
Wording of Article II. Compensation in its paragraph (5) is amended as
follows:
"As long as the Partner has the title of President/Europe, the Partner is
entitled to a yearly guaranteed bonus of DM 1,400,000 which includes bonus for
production of SOB and brings the total amount of the Partner's TCF up to DM
2,500,000.
Wording of Article II. Compensation in its paragraph (6) Integration period
is cancelled.
This Amendment shall become invalid and the Employment Agreement in its version
of September 25, 1997 shall become exclusively applicable as soon as the Partner
no longer holds the position of President/Europe.
<PAGE>
Both Parties hereby accept the terms and conditions of the present Amendment to
the Employment Agreement signed on September 25, 1997.
In Witness Whereof, both parties have executed the present amendment on November
16, 1998.
/s/ Richard Nelson /s/ Jurgen Mulder
- -------------------------- ---------------------------
Heidrick & Struggles International, Inc. Partner
/s/ Herbert Bechtel
- --------------------------
Heidrick & Struggles: Unternehmensberatung GmbH & Co. KG (as legal successor of
Mulder & Partner & Co. KG).
<PAGE>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
Heidrick & Struggles, Inc.
The following is a reconciliation of the shares used in the computation of basic
and diluted earnings per share ("EPS"):
<TABLE>
<CAPTION>
12 Months Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to common shareholders $ 6,449 $ 6,443 $ (16,254)
Weighted average common shares outstanding 2,574,475 2,676,415 2,666,526
---------- ---------- ----------
Basic EPS $ 2.50 $ 2.41 $ (6.10)
========== ========== ==========
Diluted EPS
Income (loss) available to common shareholders $ 6,449 $ 6,443 $ (16,254)
Weighted average common shares outstanding 2,574,475 2,676,415 2,666,526
Dilutive common shares issued -- 110 --
---------- ---------- ----------
Total diluted common shares 2,574,475 2,676,525 2,666,526
---------- ---------- ----------
Diluted EPS $ 2.50 $ 2.41 $ (6.10)
========== ========== ==========
</TABLE>
Heidrick & Struggles International, Inc.
The following is a reconciliation of the shares used in the computation of basic
and diluted EPS for Class A common shares:
<TABLE>
<CAPTION>
12 Months Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to Class A common shareholders $ 1,392 $ 450 $ (11,287)
Weighted average Class A common shares outstanding 1,623,955 1,773,581 1,892,908
---------- ---------- ----------
Basic EPS $ 0.86 $ 0.25 $ (5.96)
========== ========== ==========
Diluted EPS
Income (loss) available to Class A common shareholders $ 1,392 $ 450 $ (11,287)
Weighted average Class A common shares outstanding 1,623,955 1,773,581 1,892,908
Stock purchase obligations -- 107,113 --
---------- ---------- ----------
Total diluted Class A common shares 1,623,955 1,880,694 1,892,908
---------- ---------- ----------
Diluted EPS $ 0.86 $ 0.24 $ (5.96)
========== ========== ==========
</TABLE>
The following is a reconciliation of the shares used in the computation of basic
and diluted EPS for Class B common shares:
<TABLE>
<CAPTION>
12 Months Ended December 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to Class B common shareholders $ 749 $ 242 $ (6,078)
Weighted average Class B common shares outstanding 1,040,862 1,040,862 1,042,729
---------- ---------- ----------
Basic and Diluted EPS $ 0.72 $ 0.23 $ (5.83)
========== ========== ==========
</TABLE>
<PAGE>
Exhibit 21
----------
SUBSIDIARIES OF HEIDRICK & STRUGGLES INTERNATIONAL, INC.
--------------------------------------------------------
Name State or Country of Domicile
- ---- ----------------------------
Heidrick & Struggles, Inc. Delaware
Heidrick & Struggles Asia-Pacific, Ltd. Illinois
Heidrick & Struggles Japan, Ltd. Illinois
Heidrick & Struggles Australia, Ltd. Illinois
Heidrick & Struggles Hong Kong, Ltd. Illinois
Heidrick & Struggles Singapore Pte Ltd. Singapore
Heidrick & Struggles (India) Private Limited India
Heidrick & Struggles Canada, Inc. Canada
Heidrick & Struggles Argentina, S.A. Argentina
Heidrick & Struggles Latin America, Inc. Illinois
Heidrick & Struggles de Chile Limitada Chile
Heidrick & Struggles del Peru S.A. Peru
Heidrick & Struggles, S.A. Venezuela
Heidrick & Struggles do Brasil Ltda. Brazil
Heidrick & Struggles, S.A. de C.V. Mexico
Center for Board Leadership, Inc. Delaware
Heidrick & Struggles Espana, Inc. Illinois
Heidrick & Struggles AB Sweden
Heidrick & Struggles AS Norway
Heidrick & Struggles OY Finland
Heidrick & Struggles International SRL Italy
Heidrick & Struggles sp.zo.o Poland
Heidrick & Struggles AG Switzerland
Heidrick & Struggles s.r.o. Czech Republic
Heidrick & Struggles BV Netherlands
<PAGE>
Heidrick & Struggles Consultores de Gestao Lda Portugal
Heidrick & Struggles Unternehmensberatung GmbH & Co. KG Germany
Mulder & Partner Interim Management GmbH Germany
JMA-JMP Anzeigenangentur GmbH Germany
Heidrick & Struggles Unternehmensberatung Verwaltungs-GmbH Germany
Heidrick & Struggles Ltd. Israel
<PAGE>
Exhibit 23.08
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Chicago, Illinois
April 26, 1999
<PAGE>
Exhibit 23.09
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
Barbier Frinault & Associes
Neuilly-sur-Seine, France
April 26, 1999
