<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 JUNE 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 August 3,
2000 was 19,275,728 (excluding 382,732 of restricted stock units).
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000
(Unaudited) and December 31, 1999 3
Unaudited Consolidated Statements of Income and Comprehensive
Income for the three months and six months ended June 30, 2000
and 1999 5
Unaudited Consolidated Statement of Stockholders'
Equity for the six months ended June 30, 2000 6
Unaudited Consolidated Statements of Cash Flows
for the six months ended June 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 22
SIGNATURE 24
</TABLE>
2
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $144,214 $ 76,848
Accounts receivable, net of allowance for doubtful accounts 125,987 83,162
Other receivables 6,813 4,241
Prepaid expenses 9,742 7,583
Deferred income taxes 21,107 19,881
-------- --------
Total current assets 307,863 191,715
-------- --------
Property and equipment, net 55,708 52,352
-------- --------
Other assets:
Cash and investments designated for nonqualified retirement plans 32,076 32,702
Investments and other assets 26,731 11,772
Deferred income taxes 1,371 376
Goodwill and other intangibles, net 64,329 45,832
-------- --------
Total other assets 124,507 90,682
-------- --------
Total assets $488,078 $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>
June 30, December 31,
2000 1999
--------- ------------
(unaudited)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ -- $ 3,039
Accounts payable 10,598 8,052
Accrued expenses-
Salaries and employee benefits 141,008 100,762
Other 21,483 14,964
Income taxes payable 8,466 10,891
--------- ---------
Total current liabilities 181,555 137,708
--------- ---------
Liability for nonqualified retirement plans 28,399 29,161
--------- ---------
Other long-term liabilities 2,072 --
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued at June 30, 2000 and December 31, 1999 -- --
Common stock, $.01 par value, 100,000,000 shares authorized, of which
19,651,085 and 16,663,151 shares were issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 197 167
Treasury stock at cost, 9,243 shares at June 30, 2000 (376) --
Additional paid-in capital 224,952 124,363
Retained earnings 50,958 37,445
Cumulative foreign currency translation adjustment (2,143) (591)
Unrealized gain on available-for-sale investments (net of tax) 5,623 6,496
Deferred compensation (3,159) --
--------- ---------
Total stockholders' equity 276,052 167,880
--------- ---------
Total liabilities and stockholders' equity $ 488,078 $ 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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenue $ 166,416 $ 113,046 $ 298,352 $ 187,647
--------- --------- --------- ---------
Operating expenses:
Salaries and employee benefits 108,263 76,397 200,663 125,544
General and administrative expenses 44,933 27,845 80,743 48,435
Nonrecurring charge -- -- -- 12,420
--------- --------- --------- ---------
Total operating expenses 153,196 104,242 281,406 186,399
--------- --------- --------- ---------
Operating income 13,220 8,804 16,946 1,248
--------- --------- --------- ---------
Non-operating income (expense):
Interest income 1,833 426 3,350 596
Interest expense (52) (460) (127) (937)
Minority interest 157 -- 157 --
Other, net 3,023 63 4,719 76
--------- --------- --------- ---------
Net non-operating income (expense) 4,961 29 8,099 (265)
--------- --------- --------- ---------
Equity in net loss of affiliate -- -- -- (630)
--------- --------- --------- ---------
Income before income taxes 18,181 8,833 25,045 353
Provision for income taxes 8,183 3,984 11,532 5,652
--------- --------- --------- ---------
Net income (loss) $ 9,998 $ 4,849 $ 13,513 $ (5,299)
========= ========= ========= =========
Basic earnings (loss) per common share $ 0.52 $ 0.33 $ 0.72 $ (0.50)
========= ========= ========= =========
Basic weighted average common shares outstanding 19,211 14,884 18,643 10,636
========= ========= ========= =========
Diluted earnings (loss) per common share $ 0.49 $ 0.33 $ 0.68 $ (0.50)
========= ========= ========= =========
Diluted weighted average common shares outstanding 20,497 14,913 19,906 10,636
========= ========= ========= =========
Net income (loss) $ 9,998 $ 4,849 $ 13,513 $ (5,299)
--------- --------- --------- ---------
Other comprehensive income, before tax:
Foreign currency translation adjustment (909) (551) (2,783) (541)
Unrealized gain (loss) on available-for-sale investments (6,487) 1,188 (1,507) 6,360
--------- --------- --------- ---------
Total other comprehensive income, before tax (7,396) 637 (4,290) 5,819
Income tax expense (benefit) related to items of other
comprehensive income (3,237) 301 (1,865) 2,478
--------- --------- --------- ---------
Other comprehensive income (loss), net of tax (4,159) 336 (2,425) 3,341
--------- --------- --------- ---------
Comprehensive income (loss) $ 5,839 $ 5,185 $ 11,088 $ (1,958)
========= ========= ========= =========
</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 Comp-
Stock Stock Capital Earnings (Loss) ensation 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 -- 76,214 -- -- -- 76,239
Issuances of restricted stock 4 -- 16,201 -- -- (3,378) 12,827
Amortization of deferred compensation -- -- -- -- -- 186 186
Forfeitures of restricted stock -- (376) -- -- -- 33 (343)
Exercise of options -- -- 247 -- -- -- 247
Gain on sale of subsidiary stock -- -- 2,711 -- -- -- 2,711
Net income -- -- -- 13,513 -- -- 13,513
Unrealized loss on available-for-sale investments -- -- -- -- (873) -- (873)
Foreign currency translation adjustment -- -- -- -- (1,552) -- (1,552)
--------- --------- --------- --------- --------- --------- ---------
Balance as of June 30, 2000 $ 197 $ (376) $ 224,952 $ 50,958 $ 3,480 $ (3,159) $ 276,052
========= ========= ========= ========= ========= ========= =========
</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>
Six Months Ended
June 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 13,513 $ (5,299)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 8,191 4,397
Loss (gain) on sale of property and equipment 260 (12)
Gain on sale of securities (4,604) --
Deferred income taxes (1,840) (664)
Equity in net loss of affiliate -- 630
Minority interest in loss of consolidated subsidiary (157) --
Stock-based compensation 2,119 189
Nonrecurring compensation charge -- 12,420
Changes in assets and liabilities:
Trade and other receivables (45,477) (23,424)
Accounts payable 2,651 3,664
Accrued expenses 55,111 34,279
Income taxes payable (1,391) 628
Liability for nonqualified retirement plans 161 848
Other, net (3,646) 891
--------- ---------
Net cash provided by operating activities 24,891 28,547
--------- ---------
Cash flows from investing activities:
Acquisitions (15,757) --
Purchases of securities for nonqualified retirement plan (210) (232)
Purchases of property and equipment (10,651) (12,317)
Purchases of long-term investments (10,447) --
Proceeds from sale of securities, net 4,604 --
Cash acquired in merger transaction with HSI -- 8,166
Other, net (1,372) (176)
--------- ---------
Net cash used in investing activities (33,833) (4,559)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock 76,239 61,708
Proceeds from sale of subsidiary stock 2,919 --
Proceeds from stock options exercised 247 --
Proceeds from debt -- 17,700
Payments on debt (1,822) (47,643)
--------- ---------
Net cash provided by financing activities 77,583 31,765
--------- ---------
Effect of foreign currency exchange rates on cash
and cash equivalents (1,275) (719)
--------- ---------
Net increase in cash and cash equivalents 67,366 55,034
Cash and cash equivalents:
Beginning of period 76,848 11,521
--------- ---------
End of period $ 144,214 $ 66,555
========= =========
</TABLE>
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 June 30, 2000, and December 31, 1999, the
results of operations for the three months and six months ended June 30, 2000
and 1999, stockholders' equity for the six months ended June 30, 2000, and cash
flows for the six months ended June 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 six months ended June 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
Revenue, net income (loss), and basic and diluted income (loss) per common share
of the combining companies are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1999
--------- ---------
<S> <C> <C>
Revenue
The Company, as previously reported on Form 10-Q $ 108,612 $ 180,331
Sullivan 4,434 7,316
--------- ---------
The Company, as restated $ 113,046 $ 187,647
========= =========
Net income (loss)
The Company, as previously reported on Form 10-Q $ 4,613 $ (5,499)
Sullivan 236 200
--------- ---------
The Company, as restated $ 4,849 $ (5,299)
========= =========
Income (loss) per common share
The Company, as previously reported on Form 10-Q
Basic $ 0.33 $ (0.55)
========= =========
Diluted $ 0.33 $ (0.55)
========= =========
The Company, as restated
Basic $ 0.33 $ (0.50)
========= =========
Diluted $ 0.33 $ (0.50)
========= =========
</TABLE>
3. Nonrecurring Charge
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 six months ended June 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.
9
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic EPS
Income (loss) available to common stockholders $ 9,998 $ 4,849 $ 13,513 $ (5,299)
Weighted average common shares outstanding 19,211 14,884 18,643 10,636
-------- -------- -------- --------
Basic EPS $ 0.52 $ 0.33 $ 0.72 $ (0.50)
-------- -------- -------- --------
Diluted EPS
Income (loss) available to common stockholders $ 9,998 $ 4,849 $ 13,513 $ (5,299)
-------- -------- -------- --------
Weighted average common shares outstanding 19,211 14,884 18,643 10,636
Dilutive common shares 1,286 29 1,263 --
-------- -------- -------- --------
Weighted average diluted common shares
outstanding 20,497 14,913 19,906 10,636
-------- -------- -------- --------
Diluted EPS $ 0.49 $ 0.33 $ 0.68 $ (0.50)
======== ======== ======== ========
</TABLE>
10
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 comprises the United
States and Other (Canada and Latin America). The International segment comprises
Europe (which includes Africa and the Middle East) and Asia Pacific.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenue:
Americas
United States $ 98,112 $ 69,363 $ 172,438 $ 124,955
Other 6,113 4,117 11,013 7,281
International
Europe 46,608 34,265 87,992 46,297
Asia Pacific 9,476 5,151 17,598 8,964
--------- --------- --------- ---------
Total Executive Search 160,309 112,896 289,041 187,497
LeadersOnline 6,107 150 9,311 150
--------- --------- --------- ---------
Total $ 166,416 $ 113,046 $ 298,352 $ 187,647
========= ========= ========= =========
Operating income (loss):
Americas
United States $ 17,503 $ 11,441 $ 28,275 $ 19,214
Other 921 740 1,290 954
International
Europe 5,249 1,234 8,684 (9,574)
Asia Pacific 1,682 905 2,991 892
--------- --------- --------- ---------
Total Executive Search 25,355 14,320 41,240 11,486
LeadersOnline (4,333) (1,384) (8,519) (2,639)
Corporate (7,802) (4,132) (15,775) (7,599)
--------- --------- --------- ---------
Total $ 13,220 $ 8,804 $ 16,946 $ 1,248
========= ========= ========= =========
As of As of
June 30, December 31,
2000 1999
-------- ------------
Identifiable Assets:
Americas
United States $153,826 $107,698
Other 12,763 10,104
International
Europe 117,683 102,398
Asia Pacific 19,372 11,958
-------- --------
Total Executive Search 303,644 232,158
LeadersOnline 7,391 4,150
Corporate 177,043 98,441
-------- --------
Total $488,078 $334,749
======== ========
11
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, our subsidiary, LeadersOnline, Inc., filed a
registration statement with the Securities and Exchange Commission relating to a
proposed initial public offering of its Class A common stock.
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 has entered into a collar
agreement to hedge the impact of market value changes of one of these equity
securities. Collars consist of the sale of call options along with a
corresponding purchase of put options, with the effect of establishing 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. The unrealized pre-tax gain on these
hedged shares at June 30, 2000 was $1.1 million. The Company's realized gain on
these shares for the six months ended June 30, 2000 was $1.7 million.
The Company is exposed to credit loss in the event of nonperformance by
the other party. However, the Company does not anticipate nonperformance by the
counterparty.
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 million in
SVIC's first round of financing during the six months ended June 30, 2000 and
will account for this investment using the cost method.
12
<PAGE>
9. Compensation Charge
During the six months ended June 30, 2000, LeadersOnline, Inc.,
("Leaders") a subsidiary of the Company, 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 $16.8 million will be
amortized over the vesting period of the options, which is approximately four
years. The amortization expense for the six months ended June 30, 2000, is $2.0
million and is included in salaries and employee benefits on the Consolidated
Statements of Income and Comprehensive Income.
10. Sale of Subsidiary Stock
During the three months ended June 30, 2000, Leaders 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 Leaders. The Company's
ownership interest in Leaders 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.
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 search 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
majority-owned Internet-based search subsidiary, LeadersOnline, we target the
recruitment market for mid-level executives and professionals.
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 focused on
the technology sector. These acquisitions were accounted for using the purchase
method of accounting, with the results of the acquired companies included in 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.
13
<PAGE>
With offices in more than 70 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 six months ended June 30, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 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 65.1 67.6 67.3 66.9
General and administrative expenses 27.0 24.6 27.1 25.8
Nonrecurring charge -- -- -- 6.6
------- ------ ------ ------
Total operating expenses 92.1 92.2 94.4 99.3
------- ------ ------ ------
Operating income 7.9 7.8 5.6 0.7
------- ------ ------ ------
Non-operating income (expense):
Interest income 1.1 0.4 1.1 0.3
Interest expense -- (0.4) -- (0.5)
Minority interest 0.1 -- 0.1 --
Other, net 1.8 0.1 1.6 --
------- ------ ------ ------
Net non-operating income (expense) 3.0 0.1 2.8 (0.2)
------- ------ ------ ------
Equity in net loss of affiliate -- -- -- (0.3)
------- ------ ------ ------
Income before income taxes 10.9 7.9 8.4 0.2
Provision for income taxes 4.9 3.5 3.9 3.0
------- ------ ------ ------
Net income (loss) 6.0 % 4.4 % 4.5 % (2.8)%
======= ====== ====== ======
</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 comprises
the United States and Other (Canada and Latin America). The International
segment comprises Europe (which includes Africa and the Middle East) and Asia
Pacific.
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenue:
Americas
United States $ 98,112 $ 69,363 $ 172,438 $ 124,955
Other 6,113 4,117 11,013 7,281
International
Europe 46,608 34,265 87,992 46,297
Asia Pacific 9,476 5,151 17,598 8,964
--------- --------- --------- ---------
Total Executive Search 160,309 112,896 289,041 187,497
LeadersOnline 6,107 150 9,311 150
--------- --------- --------- ---------
Total $ 166,416 $ 113,046 $ 298,352 $ 187,647
========= ========= ========= =========
Operating income (loss):
Americas
United States $ 17,503 $ 11,441 $ 28,275 $ 19,214
Other 921 740 1,290 954
International
Europe 5,249 1,234 8,684 (9,574)
Asia Pacific 1,682 905 2,991 892
--------- --------- --------- ---------
Total Executive Search 25,355 14,320 41,240 11,486
LeadersOnline (4,333) (1,384) (8,519) (2,639)
Corporate (7,802) (4,132) (15,775) (7,599)
--------- --------- --------- ---------
Total $ 13,220 $ 8,804 $ 16,946 $ 1,248
========= ========= ========= =========
Three Months Ended June 30, 2000 Compared to the Three Months Ended June 30,
1999
Revenue. Our revenue increased $53.4 million, or 47.2%, to $166.4 million
for the three months ended June 30, 2000 from $113.0 million for the second
quarter 1999. This increase was due to continued strong demand for our executive
search services across a number of industries and disciplines, especially
financial services, technology and health care, and an increase in the number of
consultants, as the number of confirmed searches increased 23%. 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 significant revenue growth in all of our geographic
segments during the 2000 second quarter. In the United States, our revenue
increased $28.7 million, or 41.4%, to $98.1 million in the second quarter 2000
from $69.4 million in the second quarter 1999, with particular strength in the
financial services and technology practice groups. In the Americas-Other
segment, revenue rose 48.5% to $6.1 million in the second quarter 2000 from $4.1
million in the 1999 comparable period primarily due to the growth of our
technology practice in Latin America. In Europe, our revenue increased $12.3
million, or 36.0%, to $46.6 million from $34.3 million in last year's second
quarter, due to strength in the financial services, consumer and health care
practice groups. Excluding the negative effect of foreign currency translations
into U.S. dollars, revenue grew 51% in Europe. In Asia Pacific, revenue
increased 84.0% to $9.5 million from $5.2 million in the second quarter 1999.
The financial services and technology practice groups drove the growth in Asia
Pacific. LeadersOnline generated $6.1 million of revenue in
15
<PAGE>
the second quarter of 2000 compared to $150,000 of revenue in the second quarter
1999 when the newly launched subsidiary generated revenue for the first time.
Salaries and employee benefits. Our salaries and employee benefits
increased $31.9 million, or 41.7%, to $108.3 million for the second quarter 2000
from $76.4 million in the second quarter 1999. As a percentage of revenue,
salaries and employee benefits decreased to 65.1% in the second quarter 2000
from 67.6% in the second quarter 1999, as higher revenue enabled us to leverage
the fixed cost portion of our workforce.
General and administrative expenses. Our general and administrative
expenses increased $17.1 million, or 61.4%, to $44.9 million for the second
quarter 2000 from $27.8 million in the second quarter 1999. As a percentage of
revenue, general and administrative expenses increased to 27.0% in the second
quarter 2000 from 24.6% in the second quarter 1999. This percentage increase was
primarily due to investment spending for LeadersOnline and for other
complementary growth initiatives. In addition, industry practice development
costs and depreciation expense were higher as we continued to invest in the
growth of our company.
Net non-operating income (expense). Our net non-operating income
increased $5.0 million to $5.0 million for the second quarter 2000 from a net
non-operating income of $29,000 in the second quarter 1999. This increase was
primarily due to a $3.1 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 above), and a
decrease in interest expense due to a lower debt balance.
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Revenue. Our revenue increased $110.8 million, or 59.0%, to $298.4
million for the six months ended June 30, 2000 from $187.6 million in 1999. The
increase was due to several factors. Continued strong demand for our services
across a number of industries and disciplines, especially financial services,
technology and health care, 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 result of the Merger that occurred on February
26, 1999. As a result of the Merger, the full six months of HSI revenue is
included in the six months ended June 30, 2000, whereas only approximately four
months of HSI revenue is included in the six months ended June 30, 1999.
Excluding HSI from both periods, revenue increased 48.8%.
We experienced significant revenue growth in all of our geographic
segments during the six months ended June 30, 2000. In the United States, our
revenue increased $47.4 million, or 38.0%, to $172.4 million for the six months
ended June 30, 2000 from $125.0 million in 1999, with particular strength in the
financial services, technology and health care practice groups. In the
Americas-Other segment, revenue rose 51.3% to $11.0 million for the six months
ended June 30, 2000 from $7.3 million in the 1999 comparable period, primarily
due to the growth of our technology practice in Latin America. In Europe, our
revenue for the six months ended June 30, 2000 increased $41.7 million, or
90.1%, to $88.0 million from $46.3 million in last year's comparable period, due
primarily to the Merger, and an increased number of searches on a comparable
basis, with particular strength in the financial services practice group. In
Asia Pacific, revenue for the six months ended June 30, 2000 increased 96.3% to
$17.6 million from $9.0 million in the comparable period of 1999, primarily due
to strong performance in the financial services and technology practice groups.
LeadersOnline generated $9.3 million of revenue in the six months ended June 30,
2000 compared to $150,000 of revenue in the six months ended June 30, 1999 when
the newly launched subsidiary generated revenue for the first time.
Salaries and employee benefits. Our salaries and employee benefits
increased $75.2 million, or 59.8%, to $200.7 million for the six months ended
June 30, 2000 from $125.5 million for the comparable period of 1999. As a
percentage of revenue, salaries and employee benefits increased to 67.3% in the
six months ended June 30, 2000 from 66.9% in the six months ended June 30, 1999,
due primarily to LeadersOnline, which includes a recurring 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 above for further details.
16
<PAGE>
General and administrative expenses. Our general and administrative
expenses increased $32.3 million, or 66.7%, to $80.7 million for the six months
ended June 30, 2000 from $48.4 million for the six months ended June 30, 1999.
As a percentage of revenue, general and administrative expenses increased to
27.1% in the first six months of 2000 from 25.8% in the six months of 1999. This
percentage increase was primarily due to investment spending for LeadersOnline
and for other complementary growth initiatives. In addition, industry practice
development costs and depreciation expense were higher as we continued to invest
in the growth of our company.
Nonrecurring charge. During the first quarter of 1999, we incurred a
nonrecurring charge of $12.4 million. See Note 3 in the Notes to Consolidated
Financial Statements above for further details.
Net non-operating income (expense). Our net non-operating income
increased $8.4 million to $8.1 million for the six months ended June 30, 2000
from a net non-operating expense of $265,000 for the six months ended June 30,
1999. This increase was primarily due to a $4.6 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 above), and a decrease in interest expense due to a lower debt
balance.
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 six months ended
June 30, 2000 and 1999. The data gives affect to the Merger and the modification
of the Mulder acquisition agreement, both of which affect year-to-date amounts
only, as if the transactions had occurred on January 1, 1999.
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
2000 1999 (1)(2)
---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $298,352 100.0% $207,632 100.0%
-------- ----- -------- -----
Operating expenses:
Salaries and employee benefits 200,663 67.3 140,460 67.6
General and administrative expenses (3) 80,743 27.1 54,876 26.4
-------- ----- -------- -----
Total operating expenses 281,406 94.4 195,336 94.0
-------- ----- -------- -----
Operating income $ 16,946 5.6% $ 12,296 6.0%
======== ===== ======== =====
</TABLE>
(1) The June 30, 1999 consolidated statements of income have been adjusted by
the following amounts to reflect the historical operations of HSI:
Six Months Ended
June 30, 1999
----------------
Revenue $19,985
Salaries and employee benefits 15,836
General and administrative expenses 6,209
17
<PAGE>
(2) Excludes the $12.4 million nonrecurring Mulder charge for the six months
ended June 30, 1999. See further discussion in Note 3 in the Notes to
Consolidated Financial Statements above. In addition, $0.9 million of
deferred compensation expense relating to the acquisition has been excluded
for the six months ended June 30, 1999.
(3) Includes additional amortization related to acquired intangibles and
goodwill arising from the Merger of $0.2 million for the six months ended
June 30, 1999.
The following table sets forth, for the six months ended June 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 comprises the United States and Other (Canada and Latin
America). The International segment comprises Europe (which includes Africa and
the Middle East) and Asia Pacific.
Six Months Ended
June 30,
----------------------
2000 1999
--------- ---------
Revenue:
Americas
United States $ 172,438 $ 124,955
Other 11,013 7,281
International
Europe 87,992 66,282
Asia Pacific 17,598 8,964
--------- ---------
Total Executive Search 289,041 207,482
LeadersOnline 9,311 150
--------- ---------
Total $ 298,352 $ 207,632
========= =========
Operating income (loss):
Americas
United States $ 28,275 $ 19,214
Other 1,290 954
International
Europe 8,684 1,706
Asia Pacific 2,991 892
--------- ---------
Total Executive Search 41,240 22,766
LeadersOnline (8,519) (2,639)
Corporate (15,775) (7,831)
--------- ---------
Total $ 16,946 $ 12,296
========= =========
Pro Forma Combined Results of Operations for the Six Months Ended June 30, 2000
Compared to the Six Months Ended June 30, 1999
Revenue. Our revenue increased $90.8 million, or 43.7%, to $298.4 million
for the six months ended June 30, 2000 from $207.6 million for the six months
ended June 30, 1999. Excluding the negative effect of foreign currency
translations into the U.S. dollar, revenue grew 48.0%. This increase was due to
continued strong demand for our executive search services across a number of
industries and disciplines, especially financial services, technology and health
care, 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.
18
<PAGE>
Salaries and employee benefits. Our salaries and employee benefits
increased $60.2 million, or 42.9%, to $200.7 million for the six months ended
June 30, 2000 from $140.5 million for the six months ended June 30, 1999. As a
percentage of revenue, salaries and employee benefits decreased from 67.6% to
67.3%, as higher revenue enabled us to leverage the fixed cost portion of our
workforce.
General and administrative expenses. Our general and administrative
expenses increased $25.8 million, or 47.1%, to $80.7 million for the six months
ended June 30, 2000 from $54.9 million for the comparable period of 1999. As a
percentage of revenue, general and administrative expenses increased from 26.4%
to 27.1%. This percentage increase was primarily due to investment spending for
LeadersOnline and for other complementary growth initiatives. In addition,
industry practice development costs and depreciation expense were higher 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, our subsidiary, 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. We may investigate additional
capital raising methods to further the development of LeadersOnline including
investments by third parties.
We maintained cash and cash equivalents at June 30, 2000 and 1999 of
$144.2 million and $66.6 million, respectively. For the six months ended June
30, 2000, cash flows from operating activities contributed $24.9 million,
reflecting net income and non-cash expenses for compensation, depreciation and
amortization, as well as a decrease in working capital. For the six months ended
June 30, 1999, cash flows from operating activities contributed $28.5 million,
as the net loss was offset by non-cash items such as depreciation and
amortization, the $12.4 million nonrecurring charge, as well as a decrease in
working capital.
During the six months ended June 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 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 six months ended June
30, 2000, as a result of the sale of these securities was $4.6 million, net of
consultants' bonuses and administrative costs of the program. Since the second
half of 1999, we have been selling equity securities obtained as part of our
warrant program.
Capital expenditures were $10.7 million and $12.3 million for the six
months ended June 30, 2000 and 1999, respectively. These expenditures were
primarily for technology development costs, office furniture and fixtures,
leasehold improvements, and computer equipment and software.
19
<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 million in SVIC's first round of financing
during the three months ended June 30, 2000.
Cash flows provided by financing activities were $77.6 million for the
six months ended June 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. See Note 6 in our Notes to Consolidated Financial Statements
included in this document. Cash flows provided by financing activities were
$31.8 million for the six months ended June 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. This facility
will terminate on December 31, 2001. The line of credit will reduce by $10.0
million on December 31, 2000. There were no borrowings outstanding under this
line of credit at June 30, 2000 and 1999. 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 June 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 have 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. 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.
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.
Year 2000 Compliance
We have not experienced any significant Year 2000-related issues. Based
upon information currently known to us, we believe that all critical areas of
our business are Year 2000 compliant. Our Year 2000 efforts focused on ensuring
that our information technology would achieve a Year 2000 date conversion with
no disruption to our business operations and that contingency plans were
developed to address most likely worst case scenarios. Information systems,
third-party suppliers and date-related issues, if any, related to our business
operations will continue to be monitored and contingency plans will remain in
place. We do not anticipate any further significant expenditures for these or
any other Year 2000 compliance activities.
20
<PAGE>
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.
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 No. 44 (FIN) "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 will be adopted by us as of that date. Adoption of FIN 44 will result in a
change from fixed to variable accounting for stock options issued to individuals
now considered to be non-employees. Beginning on July 1, 2000, the company will
record compensation expense based on the change in the fair value of the related
options.
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 the impact of Year 2000 issues, and employment liability
risk. In addition to the factors noted above, other risks,
21
<PAGE>
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.
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
Pursuant to the terms and conditions of the Fenwick Partners, Inc.
acquisition, we issued 23,436 shares of our common stock on June 26, 2000 in
addition to cash, to settle the deferred consideration under the purchase
agreement. Pursuant to such acquisition, we received no proceeds from the
issuance of stock to the Fenwick stockholders for which exemption from
registration is claimed under Section 4(2) of the Securities Act of 1933.
Pursuant to the terms and conditions of the Lynch Miller Moore O'Hara,
Inc. acquisition, on May 1, 2000, we issued 87,883 shares of our common stock in
addition to cash, to purchase all of the oustanding common stock of the acquired
company. Pursuant to such acquisition, we received no proceeds from the issuance
of stock to the Lynch Miller Moore O'Hara stockholders for which exemption from
registration is claimed under Section 4(2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
At our Annual Meeting of Stockholders held on June 2, 2000 in New York,
New York, our stockholders voted on the following matters:
1. The election of four directors, Messrs. David B. Kixmiller, Bengt Lejsved
and Robert W. Shaw, and Ms. Carlene M. Ziegler, to serve for a term of
three years or until their successors have been elected and qualified.
The nominees to the Board of Directors were elected.
Number of Number of
Name of Nominee Votes For Votes Withheld
--------------- --------- --------------
David B. Kixmiller 13,110,824 726,122
Bengt Lejsved 13,161,123 655,823
Robert W. Shaw 13,569,601 247,345
Carlene M. Ziegler 13,591,274 225,672
22
<PAGE>
2. Adoption of a proposal to amend the 1998 Heidrick & Struggles GlobalShare
Program I and the 1998 Heidrick & Struggles GlobalShare Program II. The
amendment was approved.
Number of Votes For................ 9,712,148
Number of Votes Against........... 3,902,570
Number of Withheld................ 0
Number of Broker Non-Votes........ 0
Number of Abstentions............. 202,228
3. Adoption of a proposal to approve the material terms of a CEO
performance-based incentive compensation plan. The proposal was approved.
Number of Votes For................ 12,725,619
Number of Votes Against........... 779,763
Number of Withheld................ 0
Number of Broker Non-Votes........ 0
Number of Abstentions............. 311,564
4. Ratification of the appointment of Arthur Andersen LLP as our independent
public accountant for the year 2000. The appointment was ratified.
Number of Votes For................ 13,675,028
Number of Votes Against........... 810
Number of Withheld................ 0
Number of Broker Non-Votes........ 0
Number of Abstentions............. 141,108
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))
10.09 Amended and Restated Employment Agreement of Patrick S.
Pittard
99.03 Amendments 1 through 4 to the 1998 Heidrick & Struggles
GlobalShare Program I and the 1998 Heidrick & Struggles
GlobalShare Program II
27 Financial Data Schedule
23
<PAGE>
(b) Reports on Form 8-K
We filed a report under Item 5 of Form 8-K on June 30, 2000 related to our $10
million investment in SVIC.
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: August 14, 2000.
Heidrick & Struggles International, Inc.
(Registrant)
By:/s/ Donald M. Kilinski
---------------------------------
Donald M. Kilinski
Chief Financial Officer
24
