<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-25837
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
-------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2681268
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
233 South Wacker Drive-Suite 4200
Chicago, Illinois
60606-6303
-------------------
(Address of Principal Executive Offices)
(312) 496-1200
-------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding of the Company's common stock as of November 3,
2000 was 19,348,008 (excluding 439,990 of restricted stock units).
1
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2000
(Unaudited) and December 31, 1999 3
Unaudited Consolidated Statements of Income and
Comprehensive Income for the three months and nine
months ended September 30, 2000 and 1999 5
Unaudited Consolidated Statement of Stockholders'
Equity for the nine months ended September 30, 2000 6
Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999 7
Unaudited Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION 23
SIGNATURE 23
2
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 200,016 $ 76,848
Accounts receivable, net of allowance for doubtful accounts 126,801 83,162
Other receivables 7,837 4,241
Prepaid expenses 9,534 7,583
Deferred income taxes 22,771 19,881
--------- ---------
Total current assets 366,959 191,715
--------- ---------
Property and equipment, net 52,605 52,352
--------- ---------
Other assets:
Cash and investments designated for nonqualified retirement plans 15,129 32,702
Investments and other assets 21,658 11,772
Deferred income taxes 2,057 376
Goodwill and other intangibles, net 63,536 45,832
--------- ---------
Total other assets 102,380 90,682
--------- ---------
Total assets $ 521,944 $ 334,749
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
(unaudited)
Current liabilities:
Current maturities of long-term debt $ - $ 3,039
Accounts payable 9,091 8,052
Accrued expenses-
Salaries and employee benefits 190,967 100,762
Other 26,186 14,964
Income taxes payable 9,337 10,891
--------- ---------
Total current liabilities 235,581 137,708
--------- ---------
Liability for nonqualified retirement plans 17,456 29,161
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued at September 30, 2000 and December 31, 1999 - -
Common stock, $.01 par value, 100,000,000 shares authorized, of which
19,723,641 and 16,663,151 shares were issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 197 167
Treasury stock at cost, 9,243 shares at September 30, 2000 (376) -
Additional paid-in capital 230,270 124,363
Retained earnings 48,530 37,445
Cumulative foreign currency translation adjustment (4,749) (591)
Unrealized gain on available-for-sale investments (net of tax) 748 6,496
Deferred compensation (5,713) -
--------- ---------
Total stockholders' equity 268,907 167,880
--------- ---------
Total liabilities and stockholders' equity $ 521,944 $ 334,749
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $148,081 $114,936 $446,433 $302,583
-------- -------- -------- --------
Operating expenses:
Salaries and employee benefits:
Salaries and employee benefits 98,471 76,303 299,134 201,847
Nonrecurring compensation charges 12,222 2,028 12,222 14,448
General and administrative expenses:
General and administrative expenses 34,983 26,686 115,726 75,121
Nonrecurring general and administrative charges 1,753 772 1,753 772
-------- -------- -------- --------
Total operating expenses 147,429 105,789 428,835 292,188
-------- -------- -------- --------
Operating income 652 9,147 17,598 10,395
-------- -------- -------- --------
Non-operating income (expense):
Interest income 2,372 1,343 5,722 1,939
Interest expense (40) (361) (167) (1,298)
Minority interest 51 - 208 -
Other, net 2,467 281 7,186 357
-------- -------- -------- --------
Net non-operating income 4,850 1,263 12,949 998
-------- -------- -------- --------
Equity in net loss of affiliate - - - (630)
-------- -------- -------- --------
Income before income taxes 5,502 10,410 30,547 10,763
Provision for income taxes 7,930 4,983 19,462 10,635
-------- -------- -------- --------
Net income (loss) $ (2,428) $ 5,427 $ 11,085 $ 128
======== ======== ======== ========
Basic earnings (loss) per common share $ (0.13) $ 0.33 $ 0.59 $ 0.01
======== ======== ======== ========
Basic weighted average common shares outstanding 19,277 16,533 18,856 12,624
======== ======== ======== ========
Diluted earnings (loss) per common share $ (0.13) $ 0.32 $ 0.55 $ 0.01
======== ======== ======== ========
Diluted weighted average common shares outstanding 19,277 16,782 20,267 12,717
======== ======== ======== ========
Net income (loss) $ (2,428) $ 5,427 $ 11,085 $ 128
-------- -------- -------- --------
Other comprehensive income, before tax:
Foreign currency translation adjustment (4,512) (914) (7,295) (1,455)
Unrealized gain (loss) on available-for-sale investments (8,443) (1,468) (9,950) 4,892
-------- -------- -------- --------
Total other comprehensive income, before tax (12,955) (2,382) (17,245) 3,437
Income tax expense (benefit) related to items of other
comprehensive income (5,474) (1,027) (7,339) 1,451
-------- -------- -------- --------
Other comprehensive income (loss), net of tax (7,481) (1,355) (9,906) 1,986
-------- -------- -------- --------
Comprehensive income (loss) $ (9,909) $ 4,072 $ 1,179 $ 2,114
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Compre-
Additional hensive Deferred
Common Treasury Paid-in Retained Income Compen-
Stock Stock Capital Earnings (Loss) sation Total
------ -------- ---------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1999 $167 $ - $124,363 $37,445 $5,905 $ - $167,880
Treasury and common stock transactions:
Stock issued for acquisitions 1 - 5,216 - - - 5,217
Stock issued in follow-on public offering 25 - 76,160 - - - 76,185
Issuances of restricted stock 4 - 19,389 - - (6,285) 13,108
Amortization of deferred compensation - - - - - 539 539
Forfeitures of restricted stock - (376) - - - 33 (343)
Exercise of options - - 528 - - - 528
Gain on sale of subsidiary stock - - 2,711 - - - 2,711
Subsidiary stock repurchase and cancellation of options - - 1,903 - - - 1,903
Net income - - - 11,085 - - 11,085
Unrealized loss on available-for-sale investments - - - - (5,748) - (5,748)
Foreign currency translation adjustment - - - - (4,158) - (4,158)
---- ------ -------- ------- ------- ------- --------
Balance as of September 30, 2000 $197 $(376) $230,270 $48,530 $(4,001) $(5,713) $268,907
==== ====== ======== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,085 $ 128
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,032 7,353
Gain on sale of securities (7,313) (417)
Deferred income taxes (1,597) (22)
Equity in net loss of affiliate - 630
Minority interest in loss of consolidated subsidiary (208) -
Non-cash stock-based compensation 3,237 252
Nonrecurring charges 13,975 15,220
Changes in assets and liabilities:
Trade and other receivables (49,845) (23,523)
Accounts payable (594) 1,353
Accrued expenses 100,170 66,548
Income taxes payable (1,368) 2,006
Other, net (1,102) 3,408
-------- --------
Net cash provided by operating activities 80,472 72,936
-------- --------
Cash flows from investing activities:
Acquisitions (15,757) -
Purchases of property and equipment (13,817) (16,622)
Purchases of long-term investments (10,893) -
Proceeds from sale of securities, net 7,313 7,232
Cash acquired in merger transaction with HSI - 8,166
Other, net 2,028 (500)
-------- --------
Net cash used in investing activities (31,126) (1,724)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock 76,185 61,334
Proceeds from sale of subsidiary stock 2,919 -
Proceeds from stock options exercised 528 -
Proceeds from debt - 17,700
Payments on debt (1,822) (51,067)
-------- --------
Net cash provided by financing activities 77,810 27,967
-------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents (3,988) (1,171)
-------- --------
Net increase in cash and cash equivalents 123,168 98,008
Cash and cash equivalents:
Beginning of period 76,848 11,521
-------- --------
End of period $200,016 $109,529
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(All tables in thousands, except per share figures)
(Unaudited)
1. Interim Financial Data
The accompanying unaudited consolidated financial statements of Heidrick &
Struggles International, Inc. and Subsidiaries, (the "Company"), included herein
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses. Actual results could differ from those estimates. In the opinion
of management, the statements reflect all adjustments, which are of a normal
recurring nature, necessary to present fairly the Company's financial position
as of September 30, 2000, and December 31, 1999, the results of operations for
the three months and nine months ended September 30, 2000 and 1999,
stockholders' equity for the nine months ended September 30, 2000, and cash
flows for the nine months ended September 30, 2000 and 1999. Certain prior year
amounts have been reclassified to conform with 2000 classifications. These
financial statements and notes are to be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto included in the Company's
Annual Report to Shareholders on Form 10-K (File No. 0-25837) for the year ended
December 31, 1999, as filed with the Securities and Exchange Commission on March
24, 2000.
The consolidated financial statements of the Company for periods prior to
September 30, 1999, have been restated to give retroactive effect to the merger
with Sullivan & Company ("Sullivan") on September 1, 1999, which has been
accounted for using the pooling of interests method and, as a result, the
financial position, results of operations, stockholders' equity and cash flows
are presented as if the combining companies had been consolidated for all
periods presented and, as if the additional common stock issued in connection
with the merger had been issued for all periods presented.
2. Business Combinations
Acquisitions Accounted for Using Purchase Method
On February 26, 1999, Heidrick & Struggles, Inc. ("H&S") merged (the
"Merger") with and into Heidrick & Struggles International, Inc. (prior to the
Merger, "HSI"). The Merger combined the operations of H&S, which operated in
all regions of the world except Europe, with HSI, a Europe-based company.
The Company completed three acquisitions of executive search firms during
the nine months ended September 30, 2000. The total purchase price for these
acquisitions was approximately $19.9 million, which was paid in cash and shares
of the Company's common stock. Operations of these businesses have been included
in the consolidated financial statements from their acquisition dates.
Acquisition Accounted for Using Pooling of Interests Method
On September 1, 1999, the Company completed its merger with Sullivan, which
provided for the exchange of all the outstanding stock of Sullivan for 964,000
shares of the Company's common stock. The transaction was accounted for using
the pooling of interests method of accounting.
8
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3. Nonrecurring Charge and Merger Costs
During the first quarter of 1999, the Company incurred a nonrecurring
charge of $12.4 million. This charge was the result of the Company's agreement
to modify the terms of the Mulder & Partner GmbH & Co. KG ("Mulder") acquisition
agreement, including the termination of all employment contingencies. HSI
acquired 100% of Mulder on October 1, 1997, for a combination of cash and 32,000
shares of HSI common stock. On October 1, 1997, HSI delivered 4,000 shares of
HSI common stock, paid $8.7 million to the partners of Mulder and incurred $0.3
million of associated transaction costs. Under the original Mulder acquisition
agreement an additional $5.2 million (plus interest at an annual rate of 4%) was
due to the partners of Mulder in five equal annual installments, the first of
which was paid on October 1, 1998. The remaining shares were to be issued in
four annual installments beginning January 1, 1999. Because the total purchase
price was contingent upon the continued employment of the Mulder consultants,
the cost of the acquisition was accounted for as compensation expense to be
recognized over a five-year period beginning October 1, 1997. In connection with
the Merger, the Mulder acquisition agreement was amended such that the remaining
cash (plus interest) was paid within 90 days of the completion of the Merger and
428,452 shares (reflecting a split of 15.8217 for 1) of the Company's common
stock (which were valued, based upon the estimated fair market value of HSI, at
$5.2 million) were issued to such Mulder partners immediately after the Merger.
During the nine months ended September 30, 1999, the Company paid the remaining
$4.3 million of cash due, issued 428,452 shares of the Company's common stock
and wrote off $2.9 million of deferred compensation assets resulting in a total
compensation charge of $12.4 million.
In connection with the acquisition of Sullivan, the Company incurred merger
related costs of $2.8 million during the three months ended September 30, 1999.
The merger costs consist of a $2.0 million non-cash compensation charge for
accelerated vesting of an employee equity ownership program in place at Sullivan
and $0.8 million of general and administrative transaction related costs,
including legal, accounting and advisory fees.
In the third quarter of 2000, the Company decided to retain proprietary
control of LeadersOnline, Inc., ("LeadersOnline"), and its innovations in online
recruiting. As a result, LeadersOnline withdrew its registration statement with
the Securities and Exchange Commission relating to a proposed initial public
offering of Class A common stock. In connection with the IPO withdrawal, the
Company recorded nonrecurring charges in the third quarter. These included a
non-cash compensation charge of $12.2 million, which represents the remainder of
a $14.9 million non-cash compensation charge related to the issuance of options
by LeadersOnline at a price below the deemed fair market value for accounting
purposes at the time of issuance (see Note 9). The difference of $2.7 million
was recorded as a recurring charge over the first three quarters of 2000. The
resulting amount of $14.9 million was recorded to additional paid in capital.
Also, a $1.8 million charge was recorded for the write-off of expenses related
to planning the initial public offering.
In addition, there were two types of payments that were charged to
additional paid in capital. These included $10.0 million to compensate
management and employees for the value of their LeadersOnline options and $3.1
million to repurchase LeadersOnline stock from Company employees and
VerticalNet, Inc. (see Note 10).
9
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Basic and Diluted Earnings Per Share
Basic earnings per common share is computed by dividing net income by
weighted average common shares outstanding for the period. Diluted earnings per
common share reflects the potential dilution that would occur if securities or
other contracts to issue common stock were exercised or converted.
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings (loss) per common share ("EPS"):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic EPS
Income (loss) available to common stockholders $(2,428) $ 5,427 $11,085 $ 128
Weighted average common shares outstanding 19,277 16,533 18,856 12,624
------- ------- ------- -------
Basic EPS $ (0.13) $ 0.33 $ 0.59 $ 0.01
======= ======= ======= =======
Diluted EPS
Income (loss) available to common stockholders $(2,428) $ 5,427 $11,085 $ 128
------- ------- ------- -------
Weighted average common shares outstanding 19,277 16,533 18,856 12,624
Dilutive common shares - 249 1,411 93
------- ------- ------- -------
Weighted average diluted common shares
outstanding 19,277 16,782 20,267 12,717
------- ------- ------- -------
Diluted EPS $ (0.13) $ 0.32 $ 0.55 $ 0.01
======= ======= ======= =======
</TABLE>
10
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Segment Information
Management views the operations of the Company through two lines of
business: Executive Search and LeadersOnline. The Company breaks out revenue and
operating income in its Executive Search business into two broad geographic
segments: Americas and International. The Americas segment consists of the
United States and Other (Canada and Latin America). The International segment
consists of Europe (which includes Africa and the Middle East) and Asia Pacific.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Americas
United States $ 87,514 $ 68,500 $259,952 $193,455
Other 5,221 4,928 16,234 12,209
International
Europe 41,068 35,113 129,060 81,410
Asia Pacific 8,536 5,782 26,134 14,746
-------- -------- -------- --------
Total Executive Search 142,339 114,323 431,380 301,820
LeadersOnline 5,742 613 15,053 763
-------- -------- -------- --------
Total $148,081 $114,936 $446,433 $302,583
======== ======== ======== ========
Operating income (loss):
Americas
United States $17,909 $ 12,104 $ 46,184 $ 31,318
Other 784 745 2,074 1,699
International
Europe 4,123 3,402 12,807 (6,172)
Asia Pacific 1,313 1,144 4,304 2,036
-------- -------- -------- --------
Total Executive Search 24,129 17,395 65,369 28,881
LeadersOnline (16,786) (1,242) (25,305) (3,881)
Corporate (6,691) (7,006) (22,466) (14,605)
-------- -------- -------- --------
Total $ 652 $ 9,147 $ 17,598 $ 10,395
======== ======== ======== ========
As of As of
September 30, December 31,
2000 1999
------------- ------------
Identifiable Assets:
Americas
United States $143,562 $107,698
Other 13,883 10,104
International
Europe 128,160 102,398
Asia Pacific 22,598 11,958
-------- --------
Total Executive Search 308,203 232,158
LeadersOnline 7,990 4,150
Corporate 205,751 98,441
-------- --------
Total $521,944 $334,749
======== ========
</TABLE>
11
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Public Offerings
On April 26, 1999, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form S-1 (File No. 333-59931)
relating to the initial public offering of 4.2 million shares of the Company's
common stock and on April 27, 1999, the Company's common stock began trading on
the Nasdaq National Market under the symbol "HSII."
On April 30, 1999, the Company completed the initial public offering of an
aggregate of 4.2 million shares of common stock at $14.00 per share, of which
3.7 million shares were offered by the Company and 500,000 shares were offered
by selling stockholders. In addition, on June 1, 1999, the Company completed the
offering of an additional 505,000 shares of common stock which arose from the
exercise of a portion of the over-allotment option granted to certain
underwriters of the initial public offering. These offerings resulted in net
proceeds (after deducting the underwriting discount and estimated offering
expenses) of $51.8 million to the Company and $6.5 million to the selling
stockholders.
On February 9, 2000, the Company completed a follow-on public offering
under a Registration Statement on Form S-1 effective February 3, 2000 (File No.
333-94017) of an aggregate of 3,450,000 shares of common stock at $33.00 per
share, which included 450,000 shares from the exercise of the over-allotment
option granted to certain underwriters of the offering. The Company offered
2,458,306 shares and the selling stockholders offered 991,694 shares. This
offering resulted in net proceeds (after deducting the underwriting discount and
offering expenses) of $76.2 million to the Company and $31.0 million to the
selling stockholders. The Company has used and will continue to use the net
proceeds from this offering for general corporate purposes including the funding
of further development of LeadersOnline and other growth initiatives, hiring of
additional executive search consultants, expanding its technology infrastructure
and funding possible future acquisitions.
On April 10, 2000, LeadersOnline filed a registration statement with the
Securities and Exchange Commission relating to a proposed initial public
offering of its Class A common stock. On September 21, 2000, the Company
decided to retain proprietary control of LeadersOnline and its innovations in
online recruiting and therefore withdrew its proposed initial public offering.
7. Derivative Financial Instrument
The Company receives warrants for equity in its client companies, in
addition to its cash fee, for services rendered on some searches. When the
warrants are received, revenue is recorded equal to the estimated fair market
value of the instrument received. Thereafter, the securities are accounted for
as available-for-sale investments. The Company entered into a collar agreement
to hedge the impact of market value changes of one of these equity securities.
Collars consist of the sale of call options along with a corresponding purchase
of put options, with the effect of establishing the highest and lowest prices at
which the securities will be sold during a certain time period. The collar has
been designated and is effective as a hedge of the equity security. Unrealized
gains and losses on both the equity security and the collar are recorded in
equity and comprehensive income. When realized, gains and losses on the equity
security and the collar are recorded in income. Beginning in the fourth quarter
of 1999, the Company has the right to put and the counterparty has the right to
call a portion of the shares on a quarterly basis in accordance with an
established schedule. During the third quarter of 2000, the Company terminated
the options and sold the underlying security. The Company's realized gain on
these shares for the nine months ended September 30, 2000 was $2.8 million.
8. Investments
On June 29, 2000, the Company announced that it had formed a strategic
alliance with Silicon Valley Internet Capital ("SVIC"), a newly formed, San
Francisco-based company that will create and provide operating support for
Internet infrastructure companies. The Company will be the preferred global
executive search firm for SVIC's companies. The Company invested $10.0 million
in SVIC's first round of financing and will account for this investment using
the cost method.
12
<PAGE>
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Compensation Charge
During the nine months ended September 30, 2000, LeadersOnline issued 4.5
million stock options to certain of its employees and those of the Company at a
price below the deemed fair market value, for accounting purposes, at the time
of issuance. The resulting non-cash compensation charge in the amount of $14.9
million was to be amortized over the vesting period of the options, which was
approximately four years. The amortization expense for the nine months ended
September 30, 2000, is $2.7 million and is included in salaries and employee
benefits on the Consolidated Statements of Income and Comprehensive Income. As
a result of the decision to retain proprietary control of LeadersOnline, these
options were canceled and the Company decided to compensate option holders for
the cancellation of these options (see Note 3).
10. Sale of Subsidiary Stock
During the second quarter of 2000, LeadersOnline sold a total of 609,000
shares of its common stock to VerticalNet, Inc. and to certain employees of the
Company. The common stock was sold for $5 per share and resulted in net cash
proceeds, after expenses, of $2.9 million to LeadersOnline. The Company's
ownership interest in LeadersOnline was diluted from 100% to 96.4% as a result
of these transactions. The resulting gain to the Company of $2.7 million has
been recorded in stockholders' equity. As a result of the decision to retain
proprietary control of LeadersOnline, the Company decided to repurchase these
shares (see Note 3).
11. Subsequent Event
On October 26, 2000, the Company announced that it entered into an alliance
with, and invested $10.0 million in ETF Group, a global venture capital firm
that helps emerging companies expand into international markets. As part of the
agreement, the Company will be the preferred global recruiter of senior-level
executives for ETF Group's portfolio companies.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We are the world's largest and premier executive search firm. We provide
executive level search and consulting services through our global network of
offices to a broad range of organizations, including Fortune 500 companies,
financial institutions, major health care organizations, universities and not-
for-profit organizations, leading mid-cap companies and emerging growth
companies. Through our wholly owned Internet-based search subsidiary,
LeadersOnline, Inc., ("LeadersOnline"), we target the recruitment market for
mid-level executives and professionals. We also provide complimentary human
capital management services, including management evaluation and interim
management.
Prior to 1984, we operated under a single ownership structure. In 1984,
Heidrick & Struggles, Inc. (H&S) spun off Heidrick & Struggles International,
Inc. ("HSI") to its European partners while retaining a significant equity
interest in it. Between 1984 and February 26, 1999, HSI operated primarily in
Europe, while H&S operated in all other regions of the world. On February 26,
1999, H&S merged with HSI ("the Merger") to reunite the two companies into a
single corporate structure.
We completed several other acquisitions and mergers in the past two years.
On May 1, 2000, we acquired Lynch Miller Moore O'Hara, Inc., a Chicago-based
executive search firm that specializes in the venture capital and high tech
markets. On April 1, 2000, we acquired TAO International Group, a senior level
executive search firm with offices in Asia. On March 1, 2000, we acquired
Argonaut Search Group, LLC, a San Francisco-based executive search firm that
specializes in the real estate and financial services industries. In December
1999, we completed the acquisition of Redelinghuys & Partners, a senior level
executive search firm in the Republic of South Africa. In June 1998, we
acquired Fenwick Partners, Inc., a Boston-based executive search firm. These
acquisitions were accounted for using the purchase method of accounting, with
the results of the acquired companies included in
13
<PAGE>
the Consolidated Statements of Income and Comprehensive Income beginning on the
date of each acquisition. In September 1999, we merged with Sullivan & Company
("Sullivan"), an executive search firm that specializes in the financial
services industry. This transaction was accounted for using pooling of interests
accounting, with the results of Sullivan being included in the Consolidated
Statements of Income and Comprehensive Income for all periods presented.
With offices in more than 75 locations in 33 countries throughout North and
South America, Europe, the Middle East, Africa and Asia Pacific, we conduct
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 in the
valuation of such assets or liabilities.
Results of Operations
The following table summarizes the results of our operations as a
percentage of revenue for the three months and nine months ended September 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Salaries and employee benefits:
Salaries and employee benefits 66.5 66.4 67.0 66.7
Nonrecurring compensation charges 8.3 1.8 2.7 4.8
General and administrative expenses:
General and administrative expenses 23.6 23.2 25.9 24.8
Nonrecurring general and administrative expenses 1.2 0.7 0.4 0.3
----- ----- ----- -----
Total operating expenses 99.6 92.1 96.0 96.6
----- ----- ----- -----
Operating income 0.4 7.9 4.0 3.4
----- ----- ----- -----
Non-operating income (expense):
Interest income 1.6 1.2 1.3 0.6
Interest expense - (0.3) - (0.4)
Minority interest - - - -
Other, net 1.7 0.2 1.6 0.1
----- ----- ----- -----
Net non-operating income 3.3 1.1 2.9 0.3
----- ----- ----- -----
Equity in net loss of affiliate - - - (0.2)
----- ----- ----- -----
Income before income taxes 3.7 9.0 6.9 3.5
Provision for income taxes 5.4 4.3 4.4 3.5
----- ----- ----- -----
Net income (loss) (1.7)% 4.7% 2.5% 0.0%
===== ===== ===== =====
</TABLE>
14
<PAGE>
The following table sets forth, for the periods indicated, our revenue and
operating income (loss) by segment. Management views our operations through two
lines of business: Executive Search and LeadersOnline. We break out revenue and
operating income in our core Executive Search business into two broad geographic
segments: Americas and International. The Americas segment consists of the
United States and Other (Canada and Latin America). The International segment
consists of Europe (which includes Africa and the Middle East) and Asia Pacific.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Americas
United States $87,514 $68,500 $259,952 $193,455
Other 5,221 4,928 16,234 12,209
International
Europe 41,068 35,113 129,060 81,410
Asia Pacific 8,536 5,782 26,134 14,746
-------- -------- -------- --------
Total Executive Search 142,339 114,323 431,380 301,820
LeadersOnline 5,742 613 15,053 763
-------- -------- -------- --------
Total $148,081 $114,936 $446,433 $302,583
======== ======== ======== ========
Operating income (loss):
Americas
United States $ 17,909 $ 12,104 $ 46,184 $ 31,318
Other 784 745 2,074 1,699
International
Europe 4,123 3,402 12,807 (6,172)
Asia Pacific 1,313 1,144 4,304 2,036
-------- -------- -------- --------
Total Executive Search 24,129 17,395 65,369 28,881
LeadersOnline (16,786) (1,242) (25,305) (3,881)
Corporate (6,691) (7,006) (22,466) (14,605)
-------- -------- -------- --------
Total $ 652 $ 9,147 $ 17,598 $ 10,395
======== ======== ======== ========
</TABLE>
Three Months Ended September 30, 2000 Compared to the Three Months Ended
September 30, 1999
Revenue. Our revenue increased $33.2 million, or 28.8%, to $148.1 million
for the three months ended September 30, 2000 from $114.9 million for the third
quarter 1999. This increase was due to continued strong demand for our
executive search services across a number of industries and disciplines,
especially the financial services, professional services and consumer practice
groups, and an increase in the number of consultants, as the number of confirmed
searches increased. In addition, fees per search were higher as our strategic
focus on working at the top level of executive search continued to drive
performance.
We experienced revenue growth in all of our geographic segments during the
2000 third quarter. In the United States, our revenue increased $19.0 million,
or 27.8%, to $87.5 million in the third quarter 2000 from $68.5 million in the
third quarter 1999, with particular strength in the financial services, consumer
and professional services practice groups. In the Americas-Other segment,
revenue rose 5.9% to $5.2 million in the third quarter 2000 from $4.9 million in
the 1999 comparable period primarily due to the growth of our technology
practice in Latin America. In Europe, our revenue increased $6.0 million, or
17.0%, to $41.1 million from $35.1 million in last year's third quarter, due to
strength in the financial services and professional services practice groups.
Excluding the negative effect of foreign currency translations into U.S.
dollars, revenue grew 34% in Europe. In Asia Pacific, revenue increased 47.6%
to $8.5 million from $5.8 million in the third quarter 1999. The financial
services and technology practice groups drove the growth in Asia Pacific.
LeadersOnline generated $5.7 million of revenue
15
<PAGE>
in the third quarter of 2000 compared to $613,000 of revenue in the third
quarter 1999 due to increased demand for its services.
Salaries and employee benefits. Our salaries and employee benefits
increased $22.2 million, or 29.1%, to $98.5 million for the third quarter 2000
from $76.3 million in the third quarter 1999. As a percentage of revenue,
salaries and employee benefits increased slightly to 66.5% in the third quarter
2000 from 66.4% in the third quarter 1999. This increase was primarily due to a
significant increase in new hires in the third quarter 2000, partially offset by
an adjustment to bonuses to reflect our revenue growth rate.
Nonrecurring compensation charges. During the third quarter of 2000, we
incurred a nonrecurring compensation charge of $12.2 million as a result of the
decision to retain proprietary control of LeadersOnline. This charge represented
the remainder of the non-cash compensation charge related to the issuance of
options by LeadersOnline, at a price below the deemed fair market value for
accounting purposes, at the time of issuance. During the third quarter of 1999,
we incurred compensation-related merger costs of $2.0 million arising from the
merger with Sullivan, which consisted of a non-cash charge for accelerated
vesting of an employee equity ownership program in place at Sullivan. See Note
3 in the Notes to Consolidated Financial Statements.
General and administrative expenses. Our general and administrative
expenses increased $8.3 million, or 31.1%, to $35.0 million for the third
quarter 2000 from $26.7 million in the third quarter 1999. As a percentage of
revenue, general and administrative expenses increased to 23.6% in the third
quarter 2000 from 23.2% in the third quarter 1999, primarily due to investment
spending at LeadersOnline and higher depreciation expense as we continued to
invest in the growth of our company.
Nonrecurring general and administrative charges. During the third quarter
of 2000, we incurred a $1.8 million nonrecurring general and administrative
charge due to the write-off of expenses related to the planning of
LeadersOnline's initial public offering. During the third quarter of 1999, we
incurred general and administrative related merger costs of $772,000 arising
from the merger with Sullivan. This consisted of transaction-related costs
including legal, accounting and advisory fees. See Note 3 in the Notes to
Consolidated Financial Statements.
Net non-operating income. Our net non-operating income increased $3.6
million or 284.0%, to $4.9 million for the third quarter 2000 from $1.3 million
in the third quarter 1999. This increase was primarily due to a $2.7 million
gain (net of consultants' bonuses and administrative costs) from the sale of
equity obtained as part of our warrant program, under which we receive warrants
for equity in certain client companies in addition to our normal cash fee when
executing searches for such clients. Other items which increased net non-
operating income included higher interest income arising from a higher cash
balance due to the investment of the net proceeds received from our follow-on
public offering in February 2000 (See Note 6 in the Notes to Consolidated
Financial Statements), and a decrease in interest expense due to a lower debt
balance.
Nine Months Ended September 30, 2000 Compared to the Nine Months Ended September
30, 1999
Revenue. Our revenue increased $143.8 million, or 47.5%, to $446.4 million
for the nine months ended September 30, 2000 from $302.6 million in 1999. The
increase was due to several factors. Continued strong demand for our services
across a number of industries and disciplines, especially the financial
services, technology and consumer practice groups, and an increase in the number
of consultants, contributed to the revenue growth as the number of confirmed
searches increased. Fees per search were higher as our strategic focus on
working at the top level of executive search continued to drive performance. In
addition, the increase in revenue was partially due to the Merger that occurred
on February 26, 1999. As a result of the Merger, the full nine months of HSI
revenue is included in the nine months ended September 30, 2000, whereas only
approximately seven months of HSI revenue is included in the nine months ended
September 30, 1999. Excluding HSI from both periods, revenue increased 43.5%.
We experienced significant revenue growth in all of our geographic segments
during the nine months ended September 30, 2000. In the United States, our
revenue increased $66.5 million, or 34.4%, to $260.0 million for the nine months
ended September 30, 2000 from $193.5 million in 1999, with particular strength
in the financial services, technology and professional services practice groups.
In the Americas-Other segment, revenue rose 33.0% to $16.2 million for the nine
months ended September 30, 2000 from $12.2 million in the 1999 comparable
period,
16
<PAGE>
primarily due to the growth of our technology practice in Latin America. In
Europe, our revenue for the nine months ended September 30, 2000 increased $47.7
million, or 58.5%, to $129.1 million from $81.4 million in last year's
comparable period, due primarily to an increased number of searches on a
comparable basis, with particular strength in the financial services practice
group, and the Merger. Excluding the negative effect of foreign currency
translations into U.S. dollars, revenue grew 77.4% in Europe. In Asia Pacific,
revenue for the nine months ended September 30, 2000 increased 77.2% to $26.1
million from $14.7 million in the comparable period of 1999, primarily due to
strong performance in the financial services and technology practice groups.
LeadersOnline generated $15.1 million of revenue in the nine months ended
September 30, 2000 compared to $763,000 of revenue in the nine months ended
September 30, 1999 due to increased demand for its services.
Salaries and employee benefits. Our salaries and employee benefits
increased $97.3 million, or 48.2%, to $299.1 million for the nine months ended
September 30, 2000 from $201.8 million for the comparable period of 1999. As a
percentage of revenue, salaries and employee benefits increased to 67.0% in the
nine months ended September 30, 2000 from 66.7% in the nine months ended
September 30, 1999, due primarily to LeadersOnline; its costs include a non-cash
compensation charge arising from the issuance of stock options at a price below
their deemed fair market value for accounting purposes. See Note 9 in the Notes
to Consolidated Financial Statements.
Nonrecurring compensation charges. During the third quarter of 2000, we
incurred a nonrecurring compensation charge of $12.2 million as a result of the
decision to retain proprietary control of LeadersOnline. This charge represented
the remainder of the non-cash compensation charge related to the issuance of
options by LeadersOnline, at a price below the deemed fair market value for
accounting purposes, at the time of issuance. During the third quarter of 1999,
we incurred compensation-related merger costs of $2.0 million arising from the
merger with Sullivan, which consisted of a non-cash charge for accelerated
vesting of an employee equity ownership program in place at Sullivan. During the
first quarter of 1999, we incurred a $12.4 million nonrecurring compensation
charge related to the modification of the terms of the Mulder and Partners
acquisition agreement. See Note 3 in the Notes to Consolidated Financial
Statements.
General and administrative expenses. Our general and administrative
expenses increased $40.6 million, or 54.1%, to $115.7 million for the nine
months ended September 30, 2000 from $75.1 million for the nine months ended
September 30, 1999. As a percentage of revenue, general and administrative
expenses increased to 25.9% in the first nine months of 2000 from 24.8% in the
first nine months of 1999. This percentage increase was primarily due to
investment spending for LeadersOnline and for other complementary growth
initiatives. In addition, industry practice business development costs and
depreciation expense were higher as we continued to invest in the growth of our
company.
Nonrecurring general and administrative charges. During the third quarter
of 2000, we incurred a $1.8 million nonrecurring general and administrative
charge as a result of the write-off of expenses related to the planning of the
initial public offering of LeadersOnline. During the third quarter of 1999, we
incurred general and administrative related merger costs of $772,000 arising
from the merger with Sullivan. This consisted of transaction-related costs
including legal, accounting and advisory fees. See Note 3 in the Notes to
Consolidated Financial Statements.
Net non-operating income (expense). Our net non-operating income increased
$11.9 million to $12.9 million for the nine months ended September 30, 2000 from
$998,000 for the nine months ended September 30, 1999. This increase was
primarily due to a $7.3 million gain (net of consultants' bonuses and
administrative costs) from the sale of equity obtained as part of our warrant
program, under which we receive warrants for equity in certain client companies
in addition to our normal cash fee when executing searches for such clients.
Other items which increased net non-operating income included higher interest
income arising from the investment of the net proceeds received from our initial
public offering in April 1999 and our follow-on public offering in February 2000
(See Note 6 in the Notes to Consolidated Financial Statements), and a decrease
in interest expense due to a lower debt balance.
17
<PAGE>
Pro Forma Combined Results of Operations
The following table provides pro forma combined results of operations as
well as the corresponding percentage of our revenue for the three months and
nine months ended September 30, 2000 and 1999. The data gives effect to the
Merger, the modification of the Mulder acquisition agreement, the merger with
Sullivan and the decision to retain proprietary control of LeadersOnline, as if
the transactions had occurred on January 1, 1999.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ ------------------------------------
2000 (4) 1999 (3) 2000 (4) 1999 (1)(2)(3)
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $148,081 100.0% $114,936 100.0% $446,433 100.0% $322,568 100.0%
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Salaries and employee benefits 98,471 66.5 76,303 66.4 299,134 67.0 216,763 67.2
General and administrative expenses (5) 34,983 23.6 26,686 23.2 115,726 25.9 81,562 25.3
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 133,454 90.1 102,989 89.6 414,860 92.9 298,325 92.5
-------- ----- -------- ----- -------- ----- -------- -----
Operating income $ 14,627 9.9% $ 11,947 10.4% $ 31,573 7.1% $ 24,243 7.5%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
(1) The September 30, 1999 consolidated statements of income have been adjusted
by the following amounts to reflect the historical operations of HSI:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
------------------
<S> <C>
Revenue $19,985
Salaries and employee benefits 15,836
General and administrative expenses 6,209
</TABLE>
(2) Excludes the $12.4 million nonrecurring Mulder charge for the nine months
ended September 30, 1999. See further discussion in Note 3 in the Notes to
Consolidated Financial Statements. In addition, $0.9 million of deferred
compensation expense related to the acquisition has been excluded for the
nine months ended September 30, 1999.
(3) Excludes merger costs of $2.8 million for the three months and nine months
ended September 30, 1999, arising from the merger of the Company and
Sullivan on September 1, 1999. See Note 3 in the Notes to Consolidated
Financial Statements.
(4) Excludes the $14.0 million nonrecurring charge for the three months and
nine months ended September 30, 2000, as a result of the decision to retain
proprietary control of LeadersOnline. See Note 3 in the Notes to
Consolidated Financial Statements.
(5) Includes additional amortization related to acquired intangibles and
goodwill arising from the Merger of $0.2 million for the nine months ended
September 30, 1999.
18
<PAGE>
The following table sets forth, for the three months and nine months ended
September 30, 2000 and 1999, our proforma revenue and operating income (loss) by
segment. Management views our operations through two lines of business:
Executive Search and LeadersOnline. We break out revenue and operating income
in our core Executive Search business into two broad geographic segments:
Americas and International. The Americas segment consists of the United States
and Other (Canada and Latin America). The International segment consists of
Europe (which includes Africa and the Middle East) and Asia Pacific.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Americas
United States $ 87,514 $ 68,500 $259,952 $193,455
Other 5,221 4,928 16,234 12,209
International
Europe 41,068 35,113 129,060 101,395
Asia Pacific 8,536 5,782 26,134 14,746
-------- -------- -------- --------
Total Executive Search 142,339 114,323 431,380 321,805
LeadersOnline 5,742 613 15,053 763
-------- -------- -------- --------
Total $148,081 $114,936 $446,433 $322,568
======== ======== ======== ========
Operating income (loss):
Americas
United States $ 17,909 $ 12,104 $ 46,184 $ 31,318
Other 784 745 2,074 1,699
International
Europe 4,123 3,402 12,807 5,108
Asia Pacific 1,313 1,144 4,304 2,036
-------- -------- -------- --------
Total Executive Search 24,129 17,395 65,369 40,161
LeadersOnline (2,811) (1,242) (11,330) (3,881)
Corporate (6,691) (4,206) (22,466) (12,037)
-------- -------- -------- --------
Total $ 14,627 $ 11,947 $ 31,573 $ 24,243
======== ======== ======== ========
</TABLE>
Pro Forma Combined Results of Operations for the Three Months Ended September
30, 2000 Compared to the Three Months Ended September 30, 1999
Revenue. Our revenue increased $33.2 million, or 28.8%, to $148.1 million
for the three months ended September 30, 2000 from $114.9 million for the three
months ended September 30, 1999. Excluding the negative effect of foreign
currency translations into the U.S. dollar, revenue grew 34%. This increase was
due to continued strong demand for our executive search services across a number
of industries and disciplines, especially the financial services, professional
services and consumer practice groups, and an increase in the number of
consultants, as the number of confirmed searches increased. In addition, fees
per search were higher as our strategic focus on working at the top level of
executive search continued to drive performance.
Salaries and employee benefits. Our salaries and employee benefits
increased $22.2 million, or 29.1%, to $98.5 million for the three months ended
September 30, 2000 from $76.3 million for the three months ended September 30,
1999. As a percentage of revenue, salaries and employee benefits increased
slightly to 66.5% from 66.4%. This increase was primarily due to a significant
increase in new hires in the third quarter 2000, partially offset by an
adjustment to bonuses to reflect our revenue growth rate.
19
<PAGE>
General and administrative expenses. Our general and administrative
expenses increased $8.3 million, or 31.1%, to $35.0 million for the three months
ended September 30, 2000 from $26.7 million for the comparable period of 1999.
As a percentage of revenue, general and administrative expenses increased to
23.6% from 23.2%, primarily due to investment spending for LeadersOnline and
higher depreciation expense as we continued to invest in the growth of the
company.
Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and
availability of capital resources based on our plans for expansion and other
operating needs. We finance our operations through internally generated funds
and the availability of borrowings under our credit facilities. In addition, we
received $51.8 million from our initial public offering in April 1999 and $76.2
million from our follow-on public offering in February 2000. We pay a portion of
our bonuses in December and the remainder is paid in March. Employee bonuses are
accrued when earned and are based on our performance and the performance of the
respective employee.
We believe that the net proceeds from our common stock offerings, together
with funds expected to be generated from operations and our lines of credit,
will be sufficient to finance our operations for the foreseeable future.
However, if we undertake significant acquisitions or other investment
activities, we may need access to additional sources of debt or equity
financing.
On April 10, 2000, LeadersOnline filed a registration statement with the
Securities and Exchange Commission relating to a proposed initial public
offering of its Class A common stock. In April 2000, LeadersOnline sold a total
of 609,000 shares of its common stock to VerticalNet, Inc. and to certain of our
employees for $5 per share. The net cash proceeds, after expenses, were $2.9
million and we recorded a gain in stockholders' equity of $2.7 million as a
result of this transaction.
In the third quarter of 2000, we made a decision to retain proprietary
control of LeadersOnline and its innovations in online recruiting. As a result,
LeadersOnline withdrew its registration statement with the Securities and
Exchange Commission relating to the proposed initial public offering of Class A
common stock and will pay $3.1 million to repurchase the stock sold to
VerticalNet, Inc. and to certain of our employees. In addition, we will pay
$10.0 million to compensate option holders for the cancellation of their
options. These payments are expected to be made in the fourth quarter of 2000.
See Note 3 in the Notes to Consolidated Financial Statements.
We maintained cash and cash equivalents at September 30, 2000 and 1999 of
$200.0 million and $109.5 million, respectively. For the nine months ended
September 30, 2000, cash flows from operating activities contributed $80.5
million, reflecting net income and non-cash expenses for compensation,
depreciation and amortization, the $14.0 million nonrecurring charges, as well
as a decrease in working capital. For the nine months ended September 30, 1999,
cash flows from operating activities contributed $72.9 million, reflecting net
income and non-cash items such as depreciation and amortization, the $15.2
million nonrecurring charge and merger costs, as well as a decrease in working
capital.
During the nine months ended September 30, 2000 we acquired three executive
search firms for $15.8 million in cash and an additional $4.1 million in shares
of our common stock. On September 1, 1999, we completed our merger with
Sullivan, which provided for the exchange of all their outstanding stock for
964,000 shares of our common stock. The transaction was accounted for using the
pooling of interests method of accounting. On February 26, 1999, H&S merged with
and into HSI resulting in $8.2 million of cash being acquired.
During 1999, we began selling equity securities obtained as part of our
warrant program. The amount of cash received during the nine months ended
September 30, 2000, as a result of the sale of these securities was $7.3
million, net of consultants' bonuses and administrative costs of the program.
Capital expenditures were $13.8 million and $16.6 million for the nine
months ended September 30, 2000 and 1999, respectively. These expenditures were
primarily for office furniture and fixtures, leasehold improvements, technology
development costs and computer equipment and software.
20
<PAGE>
On June 29, 2000, we announced that we formed a strategic alliance with
Silicon Valley Internet Capital ("SVIC"), a newly formed, San Francisco-based
company that will create and provide operating support for Internet
infrastructure companies. We will be the preferred global executive search firm
for SVIC's companies. We invested $10.0 million in SVIC's first round of
financing during the nine months ended September 30, 2000.
Cash flows provided by financing activities were $77.8 million for the nine
months ended September 30, 2000, resulting from the net proceeds raised in the
follow-on public offering, exercise of stock options and the sale of
LeadersOnline stock, partially offset by payment on debt related to the Fenwick
acquisition. Cash flows provided by financing activities were $28.0 million for
the nine months ended September 30, 1999, resulting from the net proceeds raised
from our initial public offering partially offset by our net repayments under
our lines of credit.
We have a $50.0 million reducing revolving credit facility. The line of
credit will reduce by $10.0 million on December 31, 2000. This facility will
terminate on December 31, 2001. There were no borrowings outstanding under this
line of credit at September 30, 2000 and 1999. However, there is $549,000 of
letters of credit which have been issued against the available credit in this
facility. At our discretion, we may borrow either U.S. dollars on deposit in the
United States or U.S. dollars or foreign currencies on deposit outside the
United States. Non-U.S. borrowings bear interest at the then-existing LIBOR plus
a margin as determined by certain tests of our financial condition. U.S.
borrowings bear interest at the then-existing prime rate.
The current line of credit has certain financial covenants we must meet
relating to consolidated net worth, liabilities, and debt in relation to cash
flows. At September 30, 2000, we are in compliance with these financial
covenants.
On December 16, 1999, we announced that our board of directors approved the
formation of H&S Capital, a separate entity that will raise capital to establish
venture funds that invest in early stage companies, primarily in the technology
sector. We expect to invest up to $25 million of cash in H&S Capital, the timing
of which has yet to be determined.
Derivatives
We receive warrants for equity in our client companies, in addition to our
cash fee, for services rendered on some searches. When the warrants are
received, revenue is recorded equal to the estimated fair market value of the
instrument received. Thereafter, the securities are accounted for as available-
for-sale investments. We entered into a collar agreement to hedge the impact of
market value changes of one of these equity securities. Collars consist of the
sale of call options along with a corresponding purchase of put options, with
the effect of establishing the highest and lowest prices at which the securities
will be sold during a certain time period. The collar has been designated and is
effective as a hedge of the equity security. Unrealized gains and losses on both
the equity security and the collar are recorded in equity and comprehensive
income. When realized, gains and losses on the equity security and the collar
are recorded in income. We have the right to put and the counterparty has the
right to call a portion of the shares on a quarterly basis in accordance with an
established schedule. During the third quarter of 2000, we terminated the
options and sold the underlying security. Our realized gain on these shares for
the nine months ended September 30, 2000 was $2.8 million.
Currency Market Risk
Historically, we have not experienced any significant translation gains or
losses on transactions involving U.S. dollars and other currencies. Revenue
earned in each country is generally matched with the associated expenses
incurred, thereby reducing currency risk to earnings.
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.
21
<PAGE>
We recognize 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.
We have upgraded our systems to enable us to process transactions
denominated in the Euro. Further systems upgrades will be adopted between now
and December 2000. Failure to adapt information technology systems could have an
adverse effect on our financial condition and results of operations. We are also
dependent on many third parties, including banks and other providers of
information, for proper transaction clearance and reporting. If any of these
systems are not appropriately upgraded to manage transactions denominated in the
Euro, our operations could suffer.
Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes new standards
for reporting information about derivatives and hedging. The FASB issued SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133," in 1999, which deferred the
effective date of SFAS No. 133 for one year. The standard is effective for
annual periods beginning after June 15, 2000 and will be adopted by us as of
January 1, 2001. We expect that adoption of this Standard will have no material
effect on our consolidated financial position or results of operations.
During 2000, the FASB issued FASB Interpretation (FIN) No. 44 "Accounting
for Certain Transactions Involving Stock Compensation-an Interpretation of APB
Opinion No. 25." It clarifies a number of issues concerning stock compensation
accounting. The standard is effective for periods beginning after July 1, 2000
and was adopted by us as of that date. Adoption of FIN 44 resulted in a change
from fixed to variable accounting for stock options issued to individuals now
considered to be non-employees under the Standard's definitions.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" as amended by SAB 101A,
which provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. In June 2000, the SEC
issued SAB 101B which deferred the effective date of SAB 101 until the last
quarter of fiscal years beginning after December 15, 1999. We do not believe
that the adoption of SAB 101 will have a material impact on our financial
condition or results of operations.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations as well as other sections of this Quarterly Report on Form
10-Q contain forward-looking statements that are based on the current beliefs
and expectations of our management, as well as assumptions made by, and
information currently available to, our management. Such statements include
those regarding general economic and executive search industry trends. Because
such statements involve risks and uncertainties, actual actions and strategies,
and the timing and expected results thereof, may differ materially from those
expressed or implied by such forward-looking statements, and our future results,
performance or achievements could differ materially from those expressed in, or
implied by, any such forward-looking statements. Future events and actual
results could differ materially from those set forth in or underlying the
forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted. These potential risks and
uncertainties include dependence on attracting and retaining qualified executive
search consultants, portability of client relationships, maintenance of
professional reputation and brand name, risks associated with global operations,
ability to manage growth, restrictions imposed by off-limits agreements,
competition, implementation of our acquisition strategy, reliance on information
management systems and other technology, and employment liability risk. In
addition to the factors noted above, other risks, uncertainties, assumptions,
and factors that could affect our financial results are described in our recent
filings, which are on record with the Securities and Exchange Commission.
22
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we have been involved in litigation incidental to our
business. We currently are 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 our business, financial condition or results of operations.
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
During the month of October 2000, we issued 63,403 shares of our common
stock, in addition to cash, to certain of our employees and employees of
LeadersOnline in exchange for LeadersOnline's options for performance related to
LeadersOnline. We received no proceeds for such issuance of stock for which
exemption from registration is provided by Rule 506 of Regulation D and
Regulation S of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
--- -----------
3.01 Form of Amended and Restated Certificate of Incorporation of the
Registrant (Incorporated by reference to Exhibit 3.02 of this
Registrant's Registration Statement on Form S-4 (File No. 333-61023))
3.03 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))
27 Financial Data Schedule
(b) Reports on Form 8-K
We did not file any reports under Item 5 of Form 8-K during the three months
ended September 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: November 14, 2000.
Heidrick & Struggles International, Inc.
(Registrant)
By:/s/ Donald M. Kilinski
---------------------------------
Donald M. Kilinski
Chief Financial Officer
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