<PAGE>
Pursuant to rule 424(b)(4)
Registration Number 333-94017
PROSPECTUS
3,000,000 Shares
[HEIDRICK & STRUGGLES INTERNATIONAL]
Common Stock
- --------------------------------------------------------------------------------
We are offering 2,008,306 shares of our common stock and selling stockholders
are offering 991,694 shares of our common stock. We will not receive any of the
proceeds from the sale of shares being sold by the selling stockholders.
Our common stock is listed on the Nasdaq National Market under the symbol of
"HSII." The last reported sale price of our common stock on the Nasdaq National
Market on February 3, 2000 was $33.00 per share.
Investing in the shares involves risks. Risk Factors begin on page 6.
<TABLE>
<CAPTION>
Per
Share Total
------ -----------
<S> <C> <C>
Public Offering Price....................................... $33.00 $99,000,000
Underwriting Discount....................................... $ 1.73 $ 5,190,000
Proceeds to Heidrick & Struggles............................ $31.27 $62,799,729
Proceeds to Selling Stockholders............................ $31.27 $31,010,271
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 450,000
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares
on or about February 9, 2000.
- --------------------------------------------------------------------------------
Lehman Brothers
Goldman, Sachs & Co.
The Robinson-Humphrey Company
Fidelity Capital Markets
a division of National Financial
Services Corporation
February 3, 2000
<PAGE>
[INSIDE FRONT COVER]
Map of world and list of the locations of the Company's offices.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................ 1
Risk Factors...................... 6
Use of Proceeds................... 11
Dividend Policy................... 11
Price Range of Common Stock....... 11
Capitalization.................... 12
Unaudited Pro Forma Condensed
Consolidated Financial Data...... 13
Selected Financial Data........... 17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 19
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................ 30
Management.......................... 41
Principal and Selling Stockholders.. 47
Description of Capital Stock........ 49
Shares Eligible for Future Sale..... 54
Underwriting........................ 55
Certain United States Federal Tax
Consequences to Non-U.S. Holders of
Common Stock....................... 58
Legal Matters....................... 60
Experts............................. 60
Index to Financial Statements....... F-1
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information with the
SEC. You may read our SEC filings over the Internet at the SEC's website at
http://www.sec.gov. You may also read and copy documents at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Full addresses: Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549; 7 World Trade Center, New York, New York 10048; Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference
rooms.
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933, as amended, with respect to the shares of common stock
offered by this prospectus. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in
the registration statement. For further information about us and our common
stock, you should refer to the registration statement. This prospectus
summarizes potential provisions of contracts and other documents to which we
refer you. Since the prospectus may not contain all of the information that you
may find important, you should review the full text of these documents. We have
included copies of these documents as exhibits to our registration statement.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information in this prospectus, but it may
not contain all of the information that is important to you. To better
understand this offering, and for a more complete description of the offering
and related transactions, you should read this entire prospectus carefully,
including the "Risk Factors" section and the consolidated financial statements
and the notes to those statements, which are included elsewhere in this
prospectus. The information in this prospectus assumes that the underwriters'
over-allotment option will not be exercised.
OUR COMPANY
We are the leading global executive search firm and we believe that, based on
revenues, we are the largest executive search firm in the world. With over 46
years of experience in fulfilling our clients' leadership needs, we offer and
conduct executive search services in every major business center in the world.
We focus on identifying, evaluating and recommending qualified candidates for
senior level executive positions. Through our worldwide network of
approximately 832 professionals in 69 locations, we provide executive search
services to a broad range of public and private clients. From 1993 to 1998, we
have grown significantly, with combined worldwide revenues growing at a
compound annual rate of approximately 25%.
We believe that the following favorable trends are contributing to the growth
of the executive search industry:
. an increase in competition for executive talent
. an increasing demand for executive search services by start-up and newly-
acquired companies
. a growing acceptance by corporate leaders of executive search consultants
. the increasing globalization of business driving the demand for executive
talent by multinationals
. a greater need for managers with diverse leadership skills
. a decrease in the number of layers of management within a company,
limiting its internal talent pool
Key Competitive Strengths
We possess several key competitive strengths which position us to capitalize
on the growing demand for our services. Our strengths include the following:
. Emphasis on Senior Level Executive Search. We are an industry leader in
placing senior level executives within the world's largest and most
complex organizations. Senior level executive searches generally provide
a higher level of revenue per search and greater visibility within the
executive search industry.
. Experienced Team of Executive Search Consultants. As of September 30,
1999, we employed 372 executive search consultants. Our consultants, on
average, have 10 years of experience in executive search and 9 years of
experience in other industries. We believe that this depth of experience
is necessary to effectively perform senior level executive searches.
1
<PAGE>
. Complementary Internet-Based Recruiting Business. LeadersOnline, which
was launched in March 1999, utilizes the internet and our proprietary
candidate matching and tracking technology to recruit and place
prescreened middle management professionals with annual compensation in
the $75,000 to $150,000 range. For the nine months ended September 30,
1999, LeadersOnline reported revenues of $763,000. We expect
LeadersOnline to have revenues of approximately $1.9 million for the
fourth quarter ending December 31, 1999.
. Global Presence. We have 69 locations in major business centers in 33
countries around the world. With our global presence we can serve the
needs of multinational companies and local businesses worldwide. Our
global presence also provides us with access to an international network
of candidates and referral sources.
. Industry Practice Groups and Functional Specialties. We have seven core
industry practice groups: international technology; industrial; consumer
products; financial services; health care; professional services; and
higher education/not-for-profit. Many of our consultants also specialize
in searches for functional positions such as members of boards of
directors, chief executive officers, chief financial officers, chief
information officers and e-commerce business leaders. Our international
technology practice group is our largest and fastest growing practice
group representing approximately 31% of our revenues for the nine months
ended September 30, 1999. Our structure enables us to better understand
our clients' cultures, operations, business strategies and industries.
. Global Support Platform. Our consultants work with a team of 460
associates who have access to a sophisticated global technology
infrastructure. This technology infrastructure includes internally
developed private databases containing over 1 million candidate profiles
and approximately 32,000 client records.
Our Growth Strategy
Our goal is to be the leading global provider of executive search services
while achieving sustainable revenue and earnings growth. We pursue a focused
growth strategy with the following key elements:
. Expand and Develop Client Relationships. We continually seek to expand
our relationships with existing clients and to develop new client
relationships. We accomplish this by:
. aggressively pursuing the highest level executive search assignments
. expanding the breadth and depth of our industry practice groups and
functional specialties
. offering services across a broad range of geographic locations
. actively recruiting consultants who demonstrate the ability to expand
our client base
. Pursue New, Complementary Lines of Business. We intend to continue to
expand the range of services we offer, including our internet-based
recruiting business, LeadersOnline, interim management placement,
management evaluation and corporate governance consulting services.
. Enhance Productivity. We believe that our consultants generate one of the
highest levels of average revenue per consultant in the industry. We also
believe that our infrastructure can be further leveraged to increase our
consultants' productivity. Specifically, we expect that our technology
initiatives will enable our professionals to access a greater amount of
information more quickly.
. Pursue Strategic Acquisitions and Alliances. We maintain an acquisition
and alliance strategy designed to expand our presence in the executive
search industry and to build complementary business lines. This strategy
will increase our penetration in existing and new geographic markets as
well as expand the depth and breadth of our industry practice groups and
functional specialties.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by Heidrick & Struggles
International, Inc.............................. 2,008,306 shares
Common stock offered by the selling stockholders. 991,694 shares
Total common stock offered....................... 3,000,000 shares(1)
Common stock outstanding after the offering...... 18,671,457 shares(1)(2)
Use of Proceeds.................................. We will use the proceeds
from this offering to fund
general corporate purposes
including:
. the further development of
LeadersOnline
. hiring additional
executive search
consultants
. expanding our technology
infrastructure
. the possible acquisition
or development of other
complementary businesses
Nasdaq National Market symbol.................... HSII
</TABLE>
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(1) Does not include shares that may be issued to the underwriters pursuant to
their over-allotment option. If the underwriters exercise their over-
allotment option in full, the total number of shares of common stock
offered will be 3,450,000.
(2) Excludes 1,509,275 shares issuable pursuant to options and restricted stock
units which have been granted under our employee incentive plans.
----------------
Heidrick & Struggles, Inc., merged into Heidrick & Struggles International,
Inc. on February 26, 1999. All references to the Merger refer to this
transaction. The Merger was accounted for as an acquisition by Heidrick &
Struggles, Inc. of Heidrick & Struggles International, Inc. All references to
Heidrick & Struggles International, Inc. refer to Heidrick & Struggles
International, Inc. after the Merger. All references to HSI refer to Heidrick &
Struggles International, Inc. before the Merger. All references to H&S refer to
Heidrick & Struggles, Inc. before the Merger and Heidrick & Struggles
International, Inc. after the Merger. Heidrick & Struggles, Inc. was a Delaware
corporation that was incorporated in 1956 as successor to a partnership formed
in 1953, and HSI was a Delaware corporation that was incorporated in 1968. Our
principal executive office is 233 South Wacker Drive--Suite 4200, Chicago,
Illinois 60606-6303, and our telephone number is (312) 496-1200.
----------------
3
<PAGE>
SUMMARY FINANCIAL DATA
The following tables set forth summary historical financial and other data of
H&S and HSI, which have been derived from, and are qualified by reference to,
H&S and HSI's financial statements and other records, and unaudited summary pro
forma condensed consolidated financial data. The unaudited pro forma financial
data are presented for informational purposes only and should not be construed
to indicate our results of operations or our financial position that actually
would have occurred had the Merger and other matters reflected in the pro forma
financial data occurred as of the dates indicated in the related notes or our
results of operations or our financial position in the future. The following
table should be read in conjunction with the consolidated financial statements
and related notes thereto, the unaudited pro forma condensed consolidated
Financial Data and related notes thereto included elsewhere in this prospectus
as well as "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Unaudited Summary Pro Forma Condensed Consolidated Financial Data(1)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
--------------------------------------------
1998 1998 1999
------------------------------ -------------
(in thousands, except per share and other
operating data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... $ 341,820 $ 262,659 $ 322,568
Operating income................. 2,894 15,296 24,243
Net income (loss)................ $ (3,486) $ 5,716 $ 13,929
============= ============= =============
Share Data:
Basic earnings (loss) per common
share........................... $ (0.21) $ 0.34 $ 0.76
============= ============= =============
Basic weighted average common
shares outstanding.............. 17,002 17,047 18,221
============= ============= =============
Diluted earnings (loss) per
common share.................... $ (0.21) $ 0.33 $ 0.76
============= ============= =============
Diluted weighted average common
shares outstanding.............. 17,002 17,206 18,344
============= ============= =============
Balance Sheet Data (at end of
period):
Working capital (deficit)........ $ (10,213) $ 6,762 $ 49,596
Total assets..................... 238,306 247,431 359,237
Long-term debt, less current
maturities...................... 6,462 6,367 1,591
Total stockholders' equity....... 80,277 85,754 159,070
Other Operating Data:
Number of locations (at end of
period)......................... 60 56 65
============= ============= =============
Average number of consultants
during the period............... 330 322 366
============= ============= =============
</TABLE>
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(1) See Notes to "Selected Unaudited Pro Forma Condensed Consolidated Financial
Data" on page 16.
4
<PAGE>
Summary Financial Data
(In thousands, except other operating data)
H&S
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
-------------------------------------------- -----------------
1994 1995 1996 1997(1) 1998 1998 1999(2)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................ $101,589 $113,763 $147,428 $193,052 $216,836 $168,914 $302,583
Operating income
(loss)................ 10,751 10,041 11,540 12,843 (11,339)(3) 8,138 10,395(5)
Net income (loss)...... 6,434 5,707 7,219 6,826 (17,190)(4) 3,563 128
Balance Sheet Data (at
end of period):
Working capital........ $ 13,447 $ 17,777 $ 21,414 $ 25,570 $ 7,954 $ 16,258 $ 49,596
Total assets........... 45,339 57,076 70,826 96,222 128,775 153,356 359,237
Long-term debt, less
current maturities.... 735 1,189 993 1,636 6,350 6,304 1,591
Other Operating Data:
Number of locations (at
end of period)........ 19 21 26 29 33 32 65
Average number of
consultants during the
period................ 113 124 142 164 207 202 336
</TABLE>
HSI
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1994 1995 1996 1997(1) 1998
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue......................... $39,634 $52,815 $64,558 $82,732 $124,984
Operating income (loss)......... 5,123 3,302 3,438 3,085 (15,643)(6)
Net income (loss)............... 2,649 1,800 2,141 692 (17,365)(7)
Balance Sheet Data (at end of
period):
Working capital (deficit) ...... $ 7,908 $ 7,777 $ 9,345 $(6,607) $(13,844)
Total assets.................... 21,998 25,756 32,851 75,560 94,997
Long-term debt, less current
maturities..................... -- -- 267 168 112
Other Operating Data:
Number of locations (at end of
period)........................ 12 13 16 23 27
Average number of consultants
during the period.............. 55 59 71 95 123
</TABLE>
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(1) Certain 1997 amounts of H&S and HSI have been restated. See Note 16 of
"Heidrick & Struggles, Inc. and Subsidiaries--Notes to Consolidated
Financial Statements" and Note 14 of "Heidrick & Struggles International,
Inc. and Subsidiaries--Notes to Consolidated Financial Statements",
respectively.
(2) Because H&S acquired HSI on February 26, 1999, the historical results of
operations of HSI have been included in H&S's financial statements
subsequent to the date of acquisition.
(3) Includes $12.7 million of nonrecurring charges comprised of (a) $9.9
million of salaries and employee benefits expense arising from the
difference between the issuance price of shares issued by us to certain of
our directors in December 1998 and the fair market value of such shares at
the date of grant and (b) $2.8 million of salaries and benefits expense
relating to the early settlement of profit sharing arrangements upon the
acquisition of certain Latin American locations.
(4) Includes a nonrecurring $2.5 million charge incurred in connection with the
costs of the postponement of an offering in September 1998.
(5) Includes $15.2 million of nonrecurring charge and merger costs arising from
the modification of the Mulder acquisition agreement and the merger with
Sullivan.
(6) Includes $15.7 million of nonrecurring charges comprised of (a) $5.1
million of salaries and employee benefits expense due to the amortization
of deferred compensation expense resulting from the Mulder acquisition, (b)
$4.9 million of salaries and employee benefits expense arising from the
difference between the issuance price of shares issued by HSI to certain of
its directors in December 1998 and the fair market value of such shares at
the date of grant, and (c) $5.7 million of salaries and employee benefits
expense arising from the termination agreement with HSI's former President
and Chief Executive Officer, and the termination agreement of a non-
executive HSI employee.
(7) Includes a nonrecurring $1.3 million charge incurred in connection with the
costs of the postponement of an offering in September 1998.
5
<PAGE>
RISK FACTORS
As a stockholder, you will be subject to all risks inherent in our business.
The market value of your shares will reflect the performance of our business
relative to, among other things, that of our competitors and general economic,
market and industry conditions. The value of your investment may increase or
may decline and could result in a loss. You should carefully consider the
following factors as well as the other information contained in this prospectus
before deciding to invest in our common stock.
We depend on attracting and retaining qualified consultants
Our success depends upon our ability to attract and retain consultants who
possess the skills and experience necessary to fulfill our clients' executive
search needs. Competition for qualified consultants is intense. Our ability to
attract and retain qualified consultants could be impaired by any diminution of
our reputation, decrease in compensation levels or restructuring of our
compensation system. In addition, we may not be successful in identifying and
hiring consultants with the requisite experience, skills and established client
relationships. If we cannot attract and retain qualified consultants, our
business, financial condition and results of operations will suffer.
We may not be able to prevent our consultants from taking our clients with them
to another firm
Our success depends upon the ability of our consultants to develop and
maintain strong, long-term relationships with our clients. Usually, one or two
consultants have primary responsibility for a client relationship. When a
consultant leaves one executive search firm and joins another, clients that
have established relationships with the departing consultant may move their
business to the consultant's new employer. We may also lose clients if the
departing consultant has widespread name recognition or a reputation as a
specialist in executing searches in a specific industry or management function.
Historically, we have not experienced significant problems with this client
portability. However, if we fail to prevent our departing consultants from
moving business to his or her new employer, our business, financial condition
and results of operations will be adversely affected.
Our success depends on our ability to maintain our professional reputation and
brand name
We depend on our overall reputation and brand name recognition to secure new
engagements and hire qualified professionals. Our success also depends on the
individual reputations of our professionals. We obtain a majority of our new
engagements from existing clients or from referral by those clients. Any client
who is dissatisfied with our work can adversely affect our ability to secure
those new engagements. If any factor hurts our reputation, including poor
performance, we may experience difficulties in competing successfully for both
new engagements and qualified consultants. Failing to maintain our professional
reputation and brand name could seriously harm our business.
Our LeadersOnline business has a history of losses
Our LeadersOnline business has incurred significant losses. For the nine
months ended September 30, 1999, LeadersOnline had an operating loss of $3.8
million. In addition, we expect to devote significant resources to the future
development of LeadersOnline. The limited operating history of LeadersOnline
makes the prediction of future results of operations difficult and there can be
no assurance that LeadersOnline's operating losses will not increase in the
future or that LeadersOnline will ever achieve or sustain profitability. In
addition, the online recruiting market is new and rapidly evolving, and we do
not yet know how effective online recruiting will be compared to traditional
recruiting methods.
We may lose part or all of our investments made in venture capital funds
On December 16, 1999, we announced that we expect to invest up to $25 million
in venture capital funds. These funds expect to make investments in start-up
companies, primarily in the technology sector. Although we expect to make
investments in increments over the next three years, the full investment may be
made at any time. These investments are inherently risky and we may lose part
or all of our investment.
6
<PAGE>
Because our clients may restrict us from recruiting their employees we may be
unable to fill existing executive search assignments
We frequently refrain from recruiting employees of a client when conducting
executive searches on behalf of other clients. We enter into these blocking
arrangements with clients by agreement or for marketing and client relationship
purposes. These restrictions generally remain in effect for one year following
the commencement of an engagement. However, the specific duration and scope of
the blocking arrangements depend on the following factors:
. the length of the client relationship
. the frequency with which the client engages us to perform searches
. the number of assignments we have performed for the client
. the potential for future business with the client
Some of our clients are industry leaders that employ a large number of
qualified executives who are potential candidates for other companies in that
client's industry. If the clients' competitors discover that we are restricted
from recruiting the employees of our clients these competitors may not engage
us to perform their executive searches. In addition, as our client base grows,
we may be unable to fulfill existing search assignments if this restriction
prohibits us from recruiting from our other clients. If we are overly
restricted by these blocking arrangements, our business, financial condition
and results of operations will suffer.
We face aggressive competition
The global executive search industry is extremely competitive and highly
fragmented. We compete with other large global executive search firms and with
smaller specialty firms. Specialty firms can focus on regional or functional
markets or on particular industries. Some of our competitors possess greater
resources, greater name recognition and longer operating histories than we do
in particular markets. Our competitors can use these advantages to obtain
future clients and attract qualified professionals in those markets. There are
limited barriers to entry into the search industry and new search firms
continue to enter the market. Many executive search firms that have a smaller
client base may be subject to fewer blocking arrangements than we. We may not
be able to continue to compete effectively with existing or potential
competitors. In addition, our significant clients or prospective clients may
decide to perform executive searches using in-house personnel.
We may have difficulty implementing our acquisition strategy
Our ability to grow and remain competitive depends on our ability to acquire
other executive search firms. Although we continually evaluate possible
acquisitions, we may not succeed in identifying and completing these strategic
acquisitions. In addition, an acquired business may not achieve desired levels
of revenue, profitability or productivity. If any acquired firm performs
poorly, we could be adversely affected because of client dissatisfaction. In
addition, these acquisitions may involve the following risks:
. diversion of management's attention
. difficulties in the integration of operations
. difficulties in retaining personnel
. increased conflict of interest among clients
. adverse tax and accounting impacts
We may finance future acquisitions with common stock, debt or cash. Our ability
to finance acquisitions using common stock is dependent upon the market price
of our common stock. We may be unable to accomplish desirable acquisitions
because of a drop in the market price of our common stock.
7
<PAGE>
Our success depends on our ability to achieve and manage growth
We are experiencing and may continue to experience significant growth in our
operations and employee base. This growth places significant strains on our
administrative, operational and financial resources and may not generate
proportionate revenue growth. If we are successful in expanding our business,
we must recruit and hire additional consultants and administrative personnel.
Our growth will diminish if we fail to attract and retain additional personnel.
In addition, we make large initial investments to recruit new consultants. Our
average revenue per consultant and overall profitability may suffer in the
short term from new hires. If we need to open offices in new geographic
locations, we will incur substantial start-up and maintenance costs. To manage
our growth successfully, we must continue to improve and upgrade our financial,
accounting and information systems. Failure to upgrade our systems could
materially adversely affect our business.
We rely heavily on information management systems
Our success depends upon our ability to store, retrieve, process and manage
substantial amounts of information. To achieve our goals, we must continue to
improve and upgrade our information management systems. We may be unable to
license, design and implement, in a cost-effective manner, improved information
systems that allow us to compete effectively. If we experience any
interruptions or loss in our information processing capabilities, our business,
financial condition and results of operations will suffer.
We face the risk of liability in performing executive searches
We are exposed to potential claims with respect to the executive search
process. A client could assert a claim for violations of blocking arrangements,
breaches of confidentiality agreements or malpractice. In addition, a candidate
could assert an action against us. Possible claims include failure to maintain
the confidentiality of the candidate's employment search or for discrimination
or other violations of the employment laws. We maintain professional liability
insurance in amounts and coverages as we believe are adequate. However, we
cannot guarantee that our insurance will cover all claims and that the coverage
will be available at reasonable rates.
Our employee stockholders have voting control of our company and, as a result,
certain decisions may be made by them that may be detrimental to your interests
Our employee stockholders are, and will continue to be, after the offering
beneficial owners of a majority of our common stock. These employee
stockholders will have sufficient voting power to elect the entire Board of
Directors and cause or prevent any change of control. Without consent of the
other stockholders, these employee stockholders can determine the outcome of
any corporate transaction, including a merger, a consolidation, or a sale of
any or all of our assets.
Our multinational operations may be adversely affected by social, political and
economic risks
We generated revenues outside the United States of 39.8%, for the nine months
ended September 30, 1999, and 44.2%, for the year ended December 31, 1998. We
offer our services in 33 countries from 69 locations around the world. We are
exposed to the risk of changes in social, political and economic conditions
inherent in foreign operations. In particular, we conduct business in countries
where the legal systems and trade practices are evolving. Commercial laws in
these countries are often vague, arbitrary and inconsistently applied. Under
these circumstances, it is difficult for us to determine at all times the exact
requirements of such local laws. If we fail to comply with local laws, our
business, financial condition and results of operations will suffer. In
addition, the global nature of our operations poses challenges to our
management, financial systems and accounting systems. Failure to meet these
challenges could seriously harm our business.
We have antitakeover provisions that make an acquisition of us more difficult
and expensive
Antitakeover provisions in our Certificate of Incorporation, our Bylaws and
the Delaware laws make the acquisition of us in a transaction not approved by
our board of directors more difficult or expensive. Some of the provisions in
our Certificate of Incorporation and Bylaws include:
. a classified board of directors
8
<PAGE>
. limitations on the removal of directors
. limitations of stockholder actions
. advance notification procedures for director nominations and actions to
be taken at stockholder meetings
. the authorization to issue one or more series of preferred stock with
specific voting rights and other powers
These provisions could discourage an acquisition attempt or other transaction
in which stockholders receive a premium over the current market price for the
common stock.
The net proceeds from this offering may be allocated in ways with which you may
not agree
Our management has significant flexibility in applying the net proceeds we
receive in this offering. Because the net proceeds are not required to be
allocated to any specific investment or transaction, you cannot determine at
this time the value or propriety of our management's application of the
proceeds and you and other shareholders may not agree with our decisions.
Failure of management to apply the proceeds effectively could have a material
adverse effect on our business.
Our stock price continues to be volatile
We have been a public company with shares selling on the Nasdaq National
Market for less than one year. Although a market has developed for our shares,
we cannot guarantee that this market will be sustained after the completion of
this offering.
The market price of our common stock may be significantly affected by the
following factors:
. results of operations
. changes in any earnings estimate published by securities analysts
. developments affecting us, our clients or our competitors
. factors affecting the executive search industry
. conditions of the financial markets and economy in general
In addition, the stock market has experienced a high level of price and volume
volatility. The volatility of a company's stock price may not necessarily be
related to the operating performance of a company. We cannot guarantee that the
market price for our common stock will be stable.
The recent increase in our stock price may negatively impact our earnings per
share
Our stock price increased significantly during the last quarter of 1999.
Because we report fully diluted earnings per share using the treasury method,
the significant increase in our stock price will require us to report a greater
number of shares outstanding on a fully diluted basis than forecasted. Such
reporting could negatively impact the fully diluted earnings per share we
report for our fiscal year ending December 31, 1999, and may cause our reported
fully diluted earnings per share to be lower than estimates published by
certain financial analysts.
We do not anticipate paying dividends
We intend to retain all of our earnings for the future operation and
expansion of our business. We do not anticipate paying cash dividends on our
common stock at any time in the foreseeable future.
Shares eligible for future sale may adversely affect our stock price
Prior to this offering there were 16,663,151 shares of common stock issued
and outstanding. Of these shares, there are approximately 11.3 million shares
which may not be sold in the absence of registration under the Securities Act
or an exemption from the Securities Act. In addition, there are currently
1,509,275 shares of
9
<PAGE>
common stock issuable pursuant to stock options and restricted stock units
which have been granted under our employee incentive plans. Upon issuance,
these shares will be freely tradeable by persons other than our affiliates,
without restriction under the Securities Act. When the shares which are not
freely tradeable are eligible for future sale in the public market, these sales
or the perception of these sales could adversely affect the market price of our
common stock. The future sales of these shares could also impair our ability to
raise additional capital through the sale of equity securities.
We have agreed, for a period of 90 days after the date of this prospectus,
not to offer, sell or dispose of any shares without prior written consent of
Lehman Brothers Inc. other than shares of common stock issued in the offering,
under our employee incentive plans or upon exercise of stock options granted
pursuant to employee incentive plans. Additionally, in our initial public
offering, all of our then current employees agreed for a period of two years
from April 27, 1999, not to offer, sell, or dispose of any of their shares
without prior written consent of Lehman Brothers Inc. except for shares and
options issued under our employee incentive plans or shares acquired in the
open market after completion of this offering.
Our multinational operations may be adversely affected by the European Monetary
Union
Starting January 1, 1999, eleven European countries entered into the European
Monetary Union 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. These risks and uncertainties include:
. an increasingly competitive European environment resulting from greater
transparency of pricing
. inability to update financial reporting systems on a timely basis
We have upgraded our systems to enable us to process transactions denominated
in Euro. Further system upgrades will be adopted between now and December 2000
in preparation for full implementation of the single European currency in 2002.
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 providers of information. If any of
these systems are not appropriately upgraded to manage transactions denominated
in Euro, our operations will suffer.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" for purposes of the
Securities Act of 1933 and the Securities Act of 1934. All statements other
than statements of historical fact in this prospectus, including statements
regarding our competitive strengths, business strategy, future financial
position, projected costs and plans and objectives of management are forward-
looking statements. Forward-looking statements generally can be identified by
the use of forward-looking terminology such as "may", "will", "expect",
"should", "intend", "estimate", "anticipate", "believe", "continue" or similar
terminology. Although we believe that the expectations reflected in any such
forward-looking statements are reasonable, we can give no assurance that these
expectations will prove to be correct. Important factors that could cause
actual results to differ materially from our expectations are disclosed under
"Risk Factors" and elsewhere in this prospectus and expressly qualify all
written and oral forward-looking statements attributable to us.
10
<PAGE>
USE OF PROCEEDS
We estimate net proceeds from the sale of the 2,008,306 shares of common
stock, after deducting the underwriting discount and estimated offering
expenses, to be approximately $62.2 million ($76.3 million if the underwriters'
over-allotment option is exercised in full). We will use the proceeds from this
offering to fund general corporate purposes including:
. further development of LeadersOnline
. hiring additional executive search consultants
. expanding our technology infrastructure
. the possible acquisition or development of other complementary businesses
We will receive no proceeds from the sale of the common stock in the offering
by the selling stockholders.
DIVIDEND POLICY
We intend to retain all of our earnings for the future operation and
expansion of our business. We do not anticipate paying cash dividends on our
common stock at any time in the foreseeable future. Any determination to pay
dividends in the future will be at the discretion of our board of directors and
will be dependent upon our results of operations, financial condition,
contractual restrictions, restrictions imposed by applicable law and other
factors deemed relevant by the board of directors. Our revolving credit
facility prohibits us from declaring and paying cash dividends on the common
stock. Future indebtedness and loan facilities also may prohibit or restrict
our ability to pay dividends and make distributions to our stockholders.
PRICE RANGE OF COMMON STOCK
Our common shares commenced trading on the Nasdaq National Market on April
27, 1999 and are traded under the symbol "HSII". The following table sets
forth, for the periods indicated, the high and low closing sales prices for our
common stock as reported on the Nasdaq National Market. We paid no dividends
during the listed periods.
<TABLE>
<CAPTION>
Common Stock
-------------
High Low
------ ------
<S> <C> <C>
1999
Second Quarter.................................................. $19.00 $13.50
Third Quarter................................................... $19.13 $14.63
Fourth Quarter.................................................. $43.00 $17.50
2000
First Quarter (through February 3, 2000)........................ $41.88 $31.44
</TABLE>
11
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at September 30, 1999 on an
actual basis and our capitalization on an as adjusted basis to reflect the
receipt by us of $62.2 million in net proceeds from our sale of shares of
common stock offered in this offering (after deducting underwriting discounts,
commissions and estimated offering expenses) and the application of the net
proceeds from the common stock offered in this offering as described under "Use
of Proceeds". This table should be read in conjunction with the consolidated
financial statements of each of H&S and HSI and the notes thereto and the
unaudited pro forma condensed consolidated financial data and the notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
At September 30,
1999
------------------
As
Actual Adjusted
-------- --------
(in thousands)
<S> <C> <C>
Cash and cash equivalents.................................. $109,529 $171,729
======== ========
Total debt................................................. $ 5,484 $ 5,484
-------- --------
Stockholders' equity:
Common stock, par value $.01 per share, 100,000,000
shares authorized, 16,663,151 shares issued and
outstanding, 18,671,457 shares issued and outstanding as
adjusted................................................ 167 187
Preferred stock, par value $.01 per share, 10,000,000
shares authorized, payable as adjusted, no shares issued
and outstanding......................................... -- --
Additional paid-in capital............................... 124,539 186,719
Cumulative foreign currency translation adjustment....... (1,940) (1,940)
Unrealized gain on available-for-sale investments (net of
tax).................................................... 4,523 4,523
Retained earnings........................................ 31,781 31,781
-------- --------
Total stockholders' equity............................. 159,070 221,270
-------- --------
Total capitalization................................. $164,554 $226,754
======== ========
</TABLE>
12
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data gives
effect to:
. the Merger
. the amendment of the Mulder acquisition agreement
. the implementation of our employee incentive plans
. the merger costs arising from the merger with Sullivan
. the costs of the postponement of our initial public offering in September
1998
. the issuance of shares by H&S and HSI in December 1998 at prices below
their fair market value
. the termination of the employment of HSI's former President and Chief
Executive Officer, and a non-executive HSI employee
. the early settlement of profit sharing arrangements relating to the
acquisition of certain Latin American locations.
The pro forma data is presented as if the above transactions had occurred on
January 1, 1998 for the statement of operations and related data.
The unaudited pro forma condensed consolidated statement of operations data
for the year ended December 31, 1998, and for the nine months ended September
30, 1998 and 1999, reflect the results of operations of HSI, H&S and Sullivan.
The historical results of operations of Mulder have been included in HSI's
financial statements subsequent to the date of the acquisition.
The unaudited pro forma condensed consolidated financial data assume that the
Merger was effected by the exchange of 2.8249 shares of HSI common stock for
each share of Heidrick & Struggles, Inc. common stock outstanding. This is the
exchange ratio pursuant to which the Merger was consummated on February 26,
1999. The Merger was accounted for as a reverse acquisition, as the
stockholders of Heidrick & Struggles, Inc. owned a majority of our outstanding
shares of the common stock upon completion of the transaction. Accordingly, for
accounting purposes, HSI was treated as the acquired company and Heidrick &
Struggles, Inc. was considered to be the acquiring company. Prior to the
Merger, Heidrick & Struggles, Inc. owned 35.6823% of all outstanding HSI common
stock. The acquisition by Heidrick & Struggles, Inc. of the remaining 64.3177%
of HSI was recorded using the purchase method of accounting. The difference
between the fair value and book value of the interests in HSI acquired, less
the related deferred tax liability, was allocated first among identifiable
tangible and intangible assets and then any residual value was recorded as
goodwill.
The purchase price of HSI was based upon the ownership in us upon completion
of the Merger of holders of HSI shares immediately prior to the Merger and the
estimated fair value of us after the Merger.
The unaudited pro forma condensed consolidated financial data are a
presentation of historical results with accounting adjustments. The unaudited
pro forma condensed consolidated financial data do not reflect, except as
indicated in the accompanying notes, the effects of any of the anticipated
changes to be made by us in our operations from the historical operations and
are presented for informational purposes only. This data should not be
construed to indicate our results of operations or our consolidated financial
position that actually would have occurred had the transactions described above
been consummated as of the dates indicated or our results of operations or our
consolidated financial position in the future.
The following unaudited pro forma condensed consolidated financial data and
accompanying notes are qualified in their entirety by reference to, and should
be read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the consolidated financial statements and
notes thereto of H&S, HSI and Mulder and the other historical consolidated
financial information included elsewhere in this prospectus.
13
<PAGE>
Selected Unaudited Pro Forma Condensed Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------ -------------------
1998 1998 1999
------------ -------- ---------
(in thousands except per share
data)
<S> <C> <C> <C>
Statement of Operations Data(1):
Revenue..................................... $341,820 $262,659 $ 322,568
-------- -------- ---------
Operating expenses:
Salaries and employee benefits.............. 246,209 181,499 216,763
General and administrative expenses......... 92,717 65,864 81,562
-------- -------- ---------
Total operating expenses.................. 338,926 274,363 298,325
-------- -------- ---------
Operating income.......................... 2,894 15,296 24,243
-------- -------- ---------
Non-operating income (expense):
Interest income............................. 1,585 941 1,939
Interest expense............................ (1,209) (758) (1,354)
Other....................................... (3,787) (3,029) 357
-------- -------- ---------
Net non-operating income (expense)........ (3,411) (2,846) 942
-------- -------- ---------
Minority interest in income of consolidated
subsidiaries............................... (81) -- --
-------- -------- ---------
Income (loss) before income taxes........... (598) 12,450 25,185
Provision for income taxes.................. 2,888 6,734 11,256
-------- -------- ---------
Net income (loss)........................... $ (3,486) $ 5,716 $ 13,929
======== ======== =========
Basic earnings (loss) per common share...... $ (0.21) $ 0.34 $ 0.76
======== ======== =========
Basic weighted average common shares
outstanding(2)............................. 17,002 17,047 18,221
======== ======== =========
Diluted earnings (loss) per common share.... $ (0.21) $ 0.33 $ 0.76
======== ======== =========
Diluted weighted average common shares
outstanding(2)(3).......................... 17,002 17,206 18,344
======== ======== =========
Balance Sheet Data (at end of period):
Working capital (deficit)................... $(10,213) $ 6,762 $ 49,596
Total assets................................ 238,306 247,431 359,237
Long-term debt, less current maturities..... 6,462 6,367 1,591
Total stockholders' equity.................. 80,277 85,754 159,070
</TABLE>
- --------
(1) See Unaudited Pro Forma Consolidated Statement of Operations Data on page
15.
(2) Amounts have been adjusted to give retroactive effect to the sale of 3.7
million shares of common stock in our initial public offering, 2.0 million
shares of common stock in this offering and the issuance of 0.7 million
shares of common stock under our employee incentive plans.
(3) Amounts have been adjusted to give effect to the issuance of options
pursuant to our employee incentive plans equivalent to 0.2 million and 0.1
million shares for the nine months ended September 30, 1998 and 1999,
respectively.
14
<PAGE>
Unaudited Pro Forma Consolidated Statement of Operations Data
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------------
Historical
------------------- Pro Forma Pro Forma
HSI H&S Adjustments Consolidated
--------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue.................. $ 124,984 $216,836 $ -- $341,820
--------- -------- ------- --------
Operating expenses:
Salaries and employee
benefits............... 102,861 174,618 (31,270)(1)(2)(3) 246,209
General and
administrative
expenses............... 37,766 53,557 1,394 (4) 92,717
--------- -------- ------- --------
Total operating
expenses............. 140,627 228,175 (29,876) 338,926
--------- -------- ------- --------
Operating income
(loss)............... (15,643) (11,339) 29,876 2,894
--------- -------- ------- --------
Non-operating income
(expense):
Interest income......... -- 1,585 -- 1,585
Interest expense........ (704) (505) -- (1,209)
Other................... (5,412) (2,212) 3,837 (6) (3,787)
--------- -------- ------- --------
Net non-operating
income (expense)..... (6,116) (1,132) 3,837 (3,411)
--------- -------- ------- --------
Equity in net loss of
affiliate............... -- (3,417) 3,417 (7) --
--------- -------- ------- --------
Minority interest in
income of consolidated
subsidiaries............ (81) -- -- (81)
--------- -------- ------- --------
Income (loss) before
income taxes............ (21,840) (15,888) 37,130 (598)
Provision (benefit) for
income taxes............ (4,475) 1,302 6,061 (8) 2,888
--------- -------- ------- --------
Net income (loss)........ $(17,365) $(17,190) $31,069 $ (3,486)
========= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
------------------------------------------------
Historical
----------------- Pro Forma Pro Forma
HSI H&S Adjustments Consolidated
------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue....................... $93,745 $168,914 $ -- $262,659
------- -------- ------- --------
Operating expenses:
Salaries and employee
benefits.................... 65,876 121,585 (5,962)(1)(2) 181,499
General and administrative
expenses.................... 25,628 39,191 1,045 (4) 65,864
------- -------- ------- --------
Total operating expenses... 91,504 160,776 (4,917) 247,363
------- -------- ------- --------
Operating income........... 2,241 8,138 4,917 15,296
------- -------- ------- --------
Non-operating income
(expense):
Interest income.............. -- 941 -- 941
Interest expense............. (404) (354) -- (758)
Other........................ (3,172) 143 -- (3,029)
------- -------- ------- --------
Total non-operating income
(expense):................ (3,576) 730 -- (2,846)
------- -------- ------- --------
Equity in net loss of
affiliate.................... -- (772) 772 (7) --
------- -------- ------- --------
Income (loss) before income
taxes........................ (1,335) 8,096 5,689 12,450
Provision for income taxes.... 995 4,533 1,206 (8) 6,734
------- -------- ------- --------
Net income (loss)............. $(2,330) $ 3,563 $ 4,483 $ 5,716
======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
------------------------------------------------
Historical
----------------- Pro Forma Pro Forma
HSI H&S Adjustments Consolidated
------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue....................... $19,985 $302,583 $ -- $322,568
------- -------- ------- --------
Operating expenses:
Salaries and employee
benefits.................... 15,836 201,847 (920)(1) 216,763
General and administrative
expenses.................... 6,209 75,121 232 (4) 81,562
Nonrecurring charge and
merger costs ............... -- 15,220 (15,220)(1)(5) --
------- -------- ------- --------
Total operating expenses:.. 22,045 292,188 (15,908) 298,325
------- -------- ------- --------
Operating income (loss).... (2,060) 10,395 15,908 24,243
------- -------- ------- --------
Non-operating income
(expense):
Interest income.............. -- 1,939 -- 1,939
Interest expense............. (56) (1,298) -- (1,354)
Other........................ -- 357 -- 357
------- -------- ------- --------
Total non-operating income
(expense)................. (56) 998 -- 942
------- -------- ------- --------
Equity in net loss of
affiliate.................... -- (630) 630 (7) --
------- -------- ------- --------
Income (loss) before income
taxes........................ (2,116) 10,763 16,538 25,185
Provision (benefit) for income
taxes........................ (520) 10,635 1,141 (8) 11,256
------- -------- ------- --------
Net income (loss)............. $(1,596) $ 128 $15,397 $ 13,929
======= ======== ======= ========
</TABLE>
15
<PAGE>
- --------
(1) HSI acquired 100% of Mulder on October 1, 1997, for a combination of cash
and 32,000 shares of HSI Class A common stock. On October 1, 1997, HSI
delivered 4,000 shares of HSI Class A common stock, paid $8.7 million to
the partners of Mulder and incurred $0.3 million of associated transaction
costs. Under the original Mulder acquisition agreement, an additional $5.2
million (plus interest at an annual percentage rate of 4%) was due to the
partners of Mulder in five equal annual installments, the first of which
was paid on October 1, 1998. The remaining shares were to be issued in four
annual installments beginning January 1, 1999. Because the total purchase
price was contingent upon the continued employment of Mulder consultants,
the cost of the acquisition was accounted for as compensation expense to be
recognized over a five-year period beginning October 1, 1997.
In contemplation of the Merger, the Mulder acquisition agreement was amended
on July 2, 1998 such that the remaining $5.2 million (plus interest) was
required to be paid within 90 days of the completion of the Merger ($1.1
million of this amount plus interest was paid in October of 1998) and 428,452
shares of our common stock (which were valued, based on the estimated fair
value of us, at $5.2 million) were to be issued to such Mulder partners
immediately after the Merger. This nonrecurring charge was recorded during
the first quarter of 1999. All employment contingencies relating to the
Mulder consultants have been terminated.
During the nine months ended September 30, 1999, we paid the remaining $4.3
million cash due, issued the 428,452 shares of our common stock and wrote off
$2.9 million of deferred compensation assets resulting in a total
compensation charge of $12.4 million. This charge has been eliminated from
the nine months ended September 30, 1999.
Amortization of deferred compensation expense of $5.1 million, $3.9 million
and $0.9 million relating to the acquisition of Mulder has been eliminated
from salaries and employee benefits for the year ended December 31, 1998, and
for the nine months ended September 30, 1998 and 1999, respectively.
(2) An adjustment of $2.8 million and $2.1 million for the year ended December
31, 1998, and for the nine months ended September 30, 1998, respectively,
has been made to eliminate from salaries and employee benefits,
compensation expense representing the difference between the amount
actually paid over the amount that would have been paid under our employee
incentive plan for managing partners and corporate officers had such plan
been in effect beginning January 1, 1998. The plan's participants will have
the same duties and responsibilities and we expect that the issuance of
stock options in lieu of cash under the plan for a portion of their bonuses
will not diminish the output of these employees resulting in additional
costs being incurred. The adjustment is to reduce compensation expense to
reflect the differences in compensation expense, as computed under the
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," based on the intrinsic value of the stock options
granted. Under APB No. 25, the fair value of the options, as computed under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," is not recorded as compensation expense.
(3) Salaries and employee benefits have been adjusted by $23.3 million to
reflect the following charges recorded during the fourth quarter of 1998:
(a) $14.8 million arising from the difference between the issuance price of
shares issued by H&S and HSI in the period beginning twelve months before
the initial filing date of the registration statement relating to our
initial public offering and the fair market value of the shares at the date
of grant, (b) $2.8 million arising from the early settlement of profit
sharing arrangements relating to the acquisition of certain Latin American
locations and (c) $5.7 million arising from the termination agreement with
HSI's former President and Chief Executive Officer, and the termination
agreement of a non-executive HSI employee. The $5.7 million charge is
comprised of $3.0 million for compensation and other amounts to be paid in
accordance with the termination agreements and a $2.7 million non-cash
charge representing the difference between the current book value and
appraised fair market value of shares retained subsequent to termination.
(4) Adjustments have been made to reflect the impact of allocating the
difference between the fair market value and the book value of the
interests in HSI acquired (less the related deferred tax liability) to
intangible assets and goodwill of HSI, based upon the determination of the
respective fair values of these assets. For the year ended December 31,
1998, and for the nine months ended September 30, 1998 and 1999, $1.4
million, $1.0 million and $0.2 million of amortization related to acquired
intangibles and goodwill has been charged to general and administrative
expenses, respectively.
(5) Amounts exclude merger costs of $2.8 million ($1.9 million after tax) for
the nine months ended September 30, 1999, arising from the merger with
Sullivan on September 1, 1999. The merger costs consist of $2.0 million for
accelerated vesting of an employee equity ownership program in place at
Sullivan and $0.8 million of transaction-related costs, including legal,
accounting and advisory fees. This transaction was accounted for using the
pooling of interests method.
(6) Offering expenses of $3.8 million have been eliminated from non-operating
income for the year ended December 31, 1998. As required by Staff
Accounting Bulletin No. 1, Topic 5A, H&S and HSI expensed all charges
incurred in connection with the postponement of the planned initial public
offering in September 1998.
(7) Equity in net loss of affiliate has been eliminated from H&S for all
periods shown to reflect 100% ownership of HSI after the Merger.
(8) Adjustments are made to the provision for income taxes to reflect the
increased income tax liability resulting from the corresponding increase in
income before income taxes because of the compensation adjustments
discussed in footnotes 2 and 3 above, the elimination of merger costs
discussed in footnote 5 above, the elimination of tax deductible offering
expenses discussed in footnote 6 above, and the elimination of the equity
in net income of affiliate as discussed in footnote 7 above. Therefore, pro
forma tax expense has been adjusted as follows:
<TABLE>
<CAPTION>
Equity in
Net Loss
Merger of Offering
Costs Affiliate Compensation Expense
Period Adjustment Adjustment Adjustments Adjustment
------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Year ended December 31,
1998....................... $ -- $1,435 $3,638 $988
Nine months ended September
30, 1998................... -- 324 882 --
Nine months ended September
30, 1999................... 858 283 -- --
</TABLE>
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for each of the five years in the
period ended December 31, 1998 have been derived from the respective audited
consolidated financial statements of H&S and HSI which in the case of HSI were
audited by Barbier Frinault & Associes (Arthur Andersen) and in the case of H&S
were audited by Arthur Andersen LLP, independent public accountants. The data
set forth are qualified in their entirety by, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements, the notes thereto and
the other financial data and statistical information included in this
prospectus.
Selected Financial Data
H&S
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
------------------------------------------------ ------------------
1994 1995 1996 1997(1) 1998 1998 1999(2)
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share and other operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................ $101,589 $113,763 $147,428 $193,052 $216,836 $168,914 $302,583
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Salaries and employee
benefits.............. 70,769 81,591 105,544 135,473 174,618 (3) 121,585 201,847
General and
administrative
expenses.............. 20,069 22,131 30,344 44,736 53,557 39,191 75,121
Nonrecurring charge and
merger costs.......... -- -- -- -- -- -- 15,220(5)
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses............. 90,838 103,722 135,888 180,209 228,175 160,776 292,188
-------- -------- -------- -------- -------- -------- --------
Operating income
(loss)............... 10,751 10,041 11,540 12,843 (11,339) 8,138 10,395
-------- -------- -------- -------- -------- -------- --------
Non-operating income
(expense):
Interest income........ 821 1,163 1,394 1,626 1,585 941 1,939
Interest expense....... (182) (207) (180) (150) (505) (354) (1,298)
Other income (expense). 89 90 (94) 486 (2,212)(4) 143 357
-------- -------- -------- -------- -------- -------- --------
Net non-operating
income (expense)..... 728 1,046 1,120 1,962 (1,132) 730 998
-------- -------- -------- -------- -------- -------- --------
Equity in net income
(loss) of affiliate... 1,252 778 775 20 (3,417) (772) (630)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes.......... 12,731 11,865 13,435 14,825 (15,888) 8,096 10,763
Provision for income
taxes................. 6,297 6,158 6,216 7,999 1,302 4,533 10,635
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 6,434 $ 5,707 $ 7,219 $ 6,826 $(17,190) $ 3,563 $ 128
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per common share...... $ 2.54 $ 2.31 $ (5.85) $ 1.20 $ 0.01
======== ======== ======== ======== ========
Weighted average common
shares outstanding.... 2,847 2,949 2,940 2,957 12,624
======== ======== ======== ======== ========
Diluted earnings (loss)
per common share...... $ 2.54 $ 2.31 $ (5.85) $ 1.20 $ 0.01
======== ======== ======== ======== ========
Diluted average common
shares outstanding.... 2,847 2,950 2,940 2,957 12,717
======== ======== ======== ======== ========
Balance Sheet Data (at
end of period):
Working capital........ $ 13,447 $ 17,777 $ 21,414 $ 25,570 $ 7,954 $ 16,258 $ 49,596
Total assets........... 45,339 57,076 70,826 96,222 128,775 153,356 359,237
Long-term debt, less
current maturities.... 735 1,189 993 1,636 6,350 6,304 1,591
Mandatorily redeemable
common stock.......... 25,997 31,507 39,950 48,153 44,422 49,024 --
Stockholders' equity... -- -- -- -- -- -- 159,070
Other Operating Data:
Number of locations (at
end of period)........ 19 21 26 29 33 32 65
Average number of
consultants during the
period................ 113 124 142 164 207 202 336
</TABLE>
17
<PAGE>
Selected Financial Data
HSI
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1994 1995 1996 1997(1) 1998
------- ------- ------- ------- --------
(in thousands, except per share and
other operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue........................ $39,634 $52,815 $64,558 $82,732 $124,984
------- ------- ------- ------- --------
Operating expenses:
Salaries and employee
benefits...................... 24,299 35,249 44,020 59,080 102,861 (6)
General and administrative
expenses...................... 10,212 14,264 17,100 20,567 37,766
------- ------- ------- ------- --------
Total operating expenses..... 34,511 49,513 61,120 79,647 140,627
------- ------- ------- ------- --------
Operating income (loss)...... 5,123 3,302 3,438 3,085 (15,643)
Net non-operating income
(expense)..................... (366) 338 133 151 (6,116)(7)
Minority interest in income of
consolidated subsidiaries..... (222) -- -- (26) (81)
------- ------- ------- ------- --------
Income (loss) before income
taxes......................... 4,535 3,640 3,571 3,210 (21,840)
Provision for (benefit from)
income taxes.................. 1,886 1,840 1,430 2,518 (4,475)
------- ------- ------- ------- --------
Net income (loss).............. $ 2,649 $ 1,800 $ 2,141 $ 692 $(17,365)
======= ======= ======= ======= ========
Basic earnings (loss) per Class
A common share................ $ 0.86 $ 0.25 $ (5.96)
======= ======= ========
Basic weighted average Class A
common shares outstanding..... 1,624 1,774 1,893
======= ======= ========
Diluted earnings (loss) per
Class A common share.......... $ 0.86 $ 0.24 $ (5.96)
======= ======= ========
Diluted weighted average Class
A common shares outstanding... 1,624 1,881 1,893
======= ======= ========
Basic and diluted earnings
(loss) per Class B common
share......................... $ 0.72 $ 0.23 $ (5.83)
======= ======= ========
Weighted average Class B common
shares outstanding............ 1,041 1,041 1,043
======= ======= ========
Balance Sheet Data (at end of
period):
Working capital (deficit)...... $ 7,908 $ 7,777 $ 9,345 $(6,607) $(13,844)
Total assets................... 21,998 25,756 32,851 75,560 94,997
Long-term debt, less current
maturities.................... -- -- 267 168 112
Mandatorily redeemable common
stock......................... 6,166 8,323 9,922 11,706 8,578
Total stockholders' equity..... 4,757 5,758 6,440 6,423 4,782
Other Operating Data:
Number of locations (at end of
period)....................... 12 13 16 23 27
Average number of consultants
during the period............. 55 59 71 95 123
</TABLE>
- --------
(1) Certain 1997 amounts for H&S and HSI have been restated. See Note 16 of
"Heidrick & Struggles, Inc. and Subsidiaries--Notes to Consolidated
Financial Statements" and Note 14 of "Heidrick & Struggles International,
Inc. and Subsidiaries--Notes to Consolidated Financial Statements,"
respectively.
(2) Because H&S acquired HSI on February 26, 1999, the historical results of
operations of HSI have been included in H&S's financial statements
subsequent to the date of acquisition.
(3) Includes $12.7 million of nonrecurring charges comprised of (a) $9.9
million of salaries and employee benefits expense arising from the
difference between the issuance price of shares issued by us to certain of
our directors in December 1998 and the fair market value of such shares at
the date of grant and (b) $2.8 million of salaries and benefits expense
relating to the early settlement of profit sharing arrangements upon the
acquisition of certain Latin American locations.
(4) Includes a nonrecurring $2.5 million charge incurred in connection with the
costs of the postponement of an offering in September 1998.
(5) Includes $15.2 million of nonrecurring charge and merger costs arising from
the modification of the Mulder acquisition agreement and the merger with
Sullivan.
(6) Includes $15.7 million of nonrecurring charges comprised of (a) $5.1
million of salaries and employee benefits expense due to the amortization
of deferred compensation expense resulting from the Mulder acquisition, (b)
$4.9 million of salaries and employee benefits expense arising from the
difference between the issuance price of shares issued by HSI to certain of
its directors in December 1998 and the fair market value of such shares at
the date of grant, and (c) $5.7 million of salaries and employee benefits
expense arising from the termination agreement with HSI's former President
and Chief Executive Officer, and the termination agreement of a non-
executive HSI employee.
(7) Includes a nonrecurring $1.3 million charge incurred in connection with the
costs of the postponement of an offering in September 1998.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the historical results of operations and
liquidity and capital resources of H&S and HSI should be read in conjunction
with the selected financial data and the audited consolidated financial
statements of H&S, HSI and Mulder and related notes appearing elsewhere in this
prospectus.
General
We are the leading global executive search firm and we believe that, based on
revenues, we are the largest executive search firm in the world. We offer and
conduct executive search services through our global network of offices to a
broad range of clients, including Fortune 500 companies, major non-U.S.
companies, middle market and emerging growth companies, governmental and not-
for-profit organizations, and other leading private and public entities.
Prior to 1984, we operated under a single ownership structure. In 1984,
Heidrick & Struggles, Inc. spun-off HSI to its European partners while
retaining a significant equity interest in it. Between 1984 and the effective
date of the Merger, HSI conducted primarily European-based operations, while
Heidrick & Struggles, Inc. conducted all other operations. On February 26,
1999, Heidrick & Struggles, Inc. merged with HSI to reunite the two companies
in a single corporate structure.
We completed several acquisitions and mergers in the past two years. In
September 1999, we merged with 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 H&S's consolidated statements of income for all periods presented.
In June 1998, we acquired Fenwick, a Boston-based executive search firm focused
on the technology sector. In October 1997, HSI acquired Mulder, the largest
executive search firm in Germany. These acquisitions were accounted for using
the purchase method of accounting, with the results of the acquired companies
included in H&S's and HSI's respective consolidated statements of income
beginning on the date of each acquisition.
With 69 locations in 33 countries, 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 of the valuation
of such assets or liabilities. For financial information by geographic region,
see Note 14 of "Heidrick & Struggles, Inc. and Subsidiaries--Notes to
Consolidated Financial Statements" and Note 10 of "Heidrick & Struggles
International, Inc. and Subsidiaries--Notes to Consolidated Financial
Statements."
Revenue
We generate revenue by providing executive search services to our clients.
Our revenue growth is largely a function of increasing the revenue per
consultant and the number of consultants employed (based on number of months
employed during the period). Average revenue per consultant is a function of
the number of searches performed per consultant and the fee earned per search.
Revenue largely consists of executive search fees (net of value added taxes in
Europe) and allocated costs. Allocated costs include charges for communication
expenses, research related materials, duplicating and similar items.
Revenue from executive search services is recognized when such services are
billed to clients and substantially rendered. Typically, we are paid an initial
retainer for our services equal to approximately one-third of the estimated
guaranteed first year cash compensation for the position to be filled. In
addition, if the actual cash compensation of a placed candidate exceeds the
retainer, we bill the client for one-third of the excess. Allocated costs are
calculated as a percentage of the expected search fee for an assignment with
certain dollar limits per search. We generally bill our clients for our initial
retainer and allocate costs in one-third
19
<PAGE>
increments over a 90-day period commencing in the month of the initial
acceptance or confirmation of the contract by our client.
For each executive search assignment, we and our client enter into a
contract, which outlines the general terms and conditions of the assignment.
These contracts generally are cancelable at the option of either party with
compensation payable pro rata for the first 90 days.
Hiring new consultants requires a large initial investment in signing
bonuses, guaranteed bonuses and salaries and benefits for associated support
staff and does not tend to immediately provide proportionately higher revenues.
As a result of new hires, our average revenue per consultant and overall
profitability are typically negatively impacted in the short term.
Operating Expenses
Our operating expenses are divided into two general categories: salaries and
employee benefits and general and administrative expenses.
Salaries and employee benefits. The largest components of our operating
expenses are compensation and benefits paid to consultants, executive officers
and administrative and support personnel, of which the most important
constituent parts are salaries and annual bonuses. Other items included in this
category are signing bonuses and guaranteed bonuses (often incurred in
connection with the hiring of new consultants), payroll taxes, profit sharing
and retirement benefits and employee insurance benefits. A consultant's base
salary represents, on average, less than one-half of the consultant's total
annual compensation. Typically, a portion of the credit for a particular
assignment goes to the consultants who originate the executive search
assignment, and a portion goes to the consultants who perform the executive
search assignment. In addition, a portion of each consultant's annual
compensation is based on management's assessment of that consultant's teamwork
and work quality.
General and administrative expenses. The key components of general and
administrative expenses include rent, information systems costs, general office
expenses and professional service costs (including legal, accounting and third
party professional services). In addition, general and administrative expenses
include depreciation, amortization and allowance for doubtful accounts.
Non-Operating Income (Expense)
Non-operating income (expense) consists of interest income, interest expense,
realized gains from the sale of equities and other income and expenses. We
receive warrants for equity in some of our clients, 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. Realized net gains from the warrant program are recorded in other
income.
Equity in Net Income (Loss) of Affiliate
Prior to the Merger, Heidrick & Struggles, Inc. held a significant interest
in HSI. For Heidrick & Struggles, Inc., equity in net income (loss) of
affiliate relates to the income earned or loss incurred from its investment in
HSI after giving effect to currency translation adjustments.
Taxes
Heidrick & Struggles, Inc. and HSI were, and we are, subject to federal,
state and non-U.S. income taxes. Income generated outside of the United States
may be subject to higher tax rates than U.S. income. As a result, our effective
tax rate may be higher than prevailing U.S. tax rates. Historically, certain
non-deductible expenses have increased our effective tax rates. Our provisions
for income taxes reflect our best judgment as to the likely effective tax rate
for a given period.
20
<PAGE>
Derivatives
We receive warrants for equity in our client companies, in addition to our
cash fee, for services rendered on some searches. We have utilized a derivative
to seek to mitigate the impact of fluctuations in the price of one of these
equity securities. We have used a collar in order to accomplish this. Collars
consist of the sale of call options along with a corresponding purchase of put
options, with the effect of establishing a "cap" and a "floor" with respect to
the price of the stock. We have not recorded any gains or losses on such
instruments to date.
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.
Recently Issued Financial Accounting Standards
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes new
standards for reporting information about operating segments in interim and
annual financial statements. It is effective for annual periods beginning after
December 15, 1997, and was adopted by us as of December 31, 1998.
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes new standards for
reporting information about derivatives and hedging. FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," in 1999, which deferred the
effective date of SFAS No. 133 for one year. The Standard is effective for
periods beginning after June 15, 2000, and will be adopted by 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.
Pro Forma Combined Results of Operations
The following table provides our pro forma combined results of operations and
such data as a percentage of revenue for the nine months ended September 30,
1998 and 1999. For a discussion of the pro forma adjustments, see the
"Unaudited Pro Forma Condensed Consolidated Financial Data" and the notes
thereto.
<TABLE>
<CAPTION>
Nine Months Ended September
30,
------------------------------
1998(1)(2) 1999(1)(2)(3)
-------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue ........................................ $262,659 100.0% $322,568 100.0%
-------- ----- -------- -----
Operating expenses:
Salaries and employee benefits(4)............. 181,499 69.1 216,763 67.2
General and administrative expenses(5)........ 65,864 25.1 81,562 25.3
-------- ----- -------- -----
Total operating expenses.................... 247,363 94.2 298,325 92.5
-------- ----- -------- -----
Operating income............................ $ 15,296 5.8% $ 24,243 7.5%
======== ===== ======== =====
</TABLE>
- --------
(1) The September 30, 1998 and 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,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Revenue................................................. $93,745 $19,985
Salaries and employee benefits.......................... 65,876 15,836
General and administrative expenses..................... 25,628 6,209
</TABLE>
21
<PAGE>
(2) Excludes the $12.4 million nonrecurring Mulder charge for the nine months
ended September 30, 1999. In addition, $3.9 million and $0.9 million of
deferred compensation expense relating to the Mulder acquisition has been
excluded for the nine months ended September 30, 1998 and 1999,
respectively. See further discussion in Note 1 of the "Selected Unaudited
Pro Forma Condensed Consolidated Financial Data."
(3) Excludes merger costs of $2.8 million for nine months ended September 30,
1999, arising from our merger with Sullivan on September 1, 1999. See
further discussion in Note 5 of the "Selected Unaudited Pro Forma Condensed
Consolidated Financial Data."
(4) Amount has been adjusted by $2.1 million for the nine months ended
September 30, 1998, to eliminate compensation expense representing the
difference between the amount actually paid to management for bonuses over
the amount that would have been paid under our employee incentive programs.
One of our employee incentive programs allows us to issue options to
management in lieu of a portion of their annual cash performance bonus. See
further discussion in Note 2 of the "Selected Unaudited Pro Forma Condensed
Consolidated Financial Data."
(5) Includes additional amortization related to acquired intangibles and
goodwill arising from the Merger of $1.0 million and $0.2 million for the
nine months ended September 30, 1998 and 1999, respectively. See further
discussion in Note 4 of the "Selected Unaudited Pro Forma Condensed
Consolidated Financial Data."
Pro Forma Combined Results for the Nine Months Ended September 30, 1999
Compared to the Nine Months Ended September 30, 1998
Revenue. Revenue increased $59.9 million, or 22.8%, to $322.6 million for the
nine months ended September 30, 1999 from $262.7 million for the nine months
ended September 30, 1998. Strong demand for our services across a number of
industries and disciplines, especially technology, e-commerce, financial
services and industrial, aggressive business development activities and an
increase in the number of consultants all contributed to the revenue growth as
the number of confirmed searches increased. In addition, fees per search were
higher as our strategic focus on working at the top level of executive search
continued to drive performance.
Salaries and employee benefits. Salaries and employee benefits increased
$35.3 million, or 19.4%, to $216.8 million for the nine months ended September
30, 1999 from $181.5 million for the nine months ended September 30, 1998. As a
percentage of revenue, salaries and employee benefits decreased from 69.1% to
67.2%. This was due to increased search consultant productivity and better
leveraging of our support staff.
General and administrative expenses. General and administrative expenses
increased $15.7 million, or 23.8%, to $81.6 million for the nine months ended
September 30, 1999 from $65.9 million for the nine months ended September 30,
1998. As a percentage of revenue, general and administrative expenses increased
from 25.1% to 25.3%. This percentage increase was primarily due to an increase
in costs of consulting services for our technology initiatives and investment
spending for new complementary business services.
22
<PAGE>
Results of Operations--H&S
The following table sets forth, for the periods indicated, our selected
statements of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue..................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ------ ------
Operating expenses:
Salaries and employee
benefits................. 71.6 70.2 80.5 72.0 66.7
General and administrative
expenses................. 20.6 23.2 24.7 23.2 24.8
Nonrecurring charge and
merger costs............. -- -- -- -- 5.0
----- ----- ----- ------ ------
Total operating
expenses............... 92.2 93.4 105.2 95.2 96.5
----- ----- ----- ------ ------
Operating income (loss). 7.8 6.6 (5.2) 4.8 3.5
----- ----- ----- ------ ------
Non-operating income
(expense):
Interest income........... 0.9 0.8 0.7 0.6 0.6
Interest expense.......... (0.1) (0.1) (0.2) (0.2) (0.4)
Other income (expense).... (0.1) 0.3 (1.0) 0.1 0.1
----- ----- ----- ------ ------
Net non-operating income
(expense).............. 0.7 1.0 (0.5) 0.5 0.3
----- ----- ----- ------ ------
Equity in net income (loss)
of affiliate............... 0.5 -- (1.6) (0.5) (0.2)
----- ----- ----- ------ ------
Income (loss) before income
taxes...................... 9.0 7.6 (7.3) 4.8 3.6
Provision for income taxes.. 4.2 4.1 0.6 2.7 3.5
----- ----- ----- ------ ------
Net income (loss)........... 4.8% 3.5% (7.9)% 2.1% 0.1%
===== ===== ===== ====== ======
</TABLE>
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Revenue. Revenue increased $133.7 million, or 79.1%, to $302.6 million for
the nine months ended September 30, 1999 from $168.9 million for the nine
months ended September 30, 1998. This increase was primarily the result of the
Merger, which contributed $81.4 million in revenue for the nine months ended
September 30, 1999. Excluding HSI, revenue increased by 30.9%. Strong demand
for our services across a number of industries and disciplines, especially
technology, e-commerce, financial services and industrial, aggressive business
development activities and an increase in the number of consultants all
contributed to the revenue growth as the number of confirmed searches
increased. In addition, fees per search were higher as our strategic focus on
working at the top level of executive search continued to drive performance.
Salaries and employee benefits. Salaries and employee benefits increased
$80.2 million, or 66.0%, to $201.8 million for the nine months ended September
30, 1999 from $121.6 million for the nine months ended September 30, 1998. This
increase was primarily the result of the Merger, which contributed $54.6
million in salaries and employee benefits for the nine months ended September
30, 1999. Excluding HSI, as a percentage of revenue, salaries and employee
benefits decreased from 72.0% to 66.6%. This was due to increased search
consultant productivity, better leveraging of our support staff and a change in
the bonus structure for management that replaces a portion of cash incentive
compensation with stock options.
General and administrative expenses. General and administrative expenses
increased $35.9 million, or 91.7%, to $75.1 million for the nine months ended
September 30, 1999 from $39.2 million for the nine months ended September 30,
1998. This increase was primarily the result of the Merger, which contributed
$21.6 million in general and administrative expenses for the nine months ended
September 30, 1999. Excluding HSI, as a percentage of revenue, general and
administrative expenses increased from 23.2% to 24.2%. This
23
<PAGE>
percentage increase was primarily due to an increase in costs of consulting
services for our technology initiatives and investment spending for new
complementary business services, including LeadersOnline.
Nonrecurring charge and merger costs. During the first quarter of 1999, we
incurred a nonrecurring charge of $12.4 million related to the Mulder
acquisition and the Merger. During the third quarter of 1999, we incurred
merger costs of $2.8 million related to the merger with Sullivan. See Note 3 of
"Heidrick & Struggles International, Inc. and Subsidiaries (formerly known as
Heidrick & Struggles, Inc.)--Notes to Consolidated Financial Statements" for
further information.
Net non-operating income (expense). Net non-operating income increased
$268,000 or 36.7%, to $998,000 for the nine months ended September 30, 1999
from $730,000 for the nine months ended September 30, 1998. This was primarily
due to an increase in interest income arising from the investment of the net
proceeds received from the initial public offering partially offset by an
increase in interest expense. In addition, we recorded a $417,000 net gain from
the sale of equity obtained as part of our warrant program. We receive warrants
for equity in certain client companies in addition to our cash fee when
executing searches for such clients.
1998 Compared to 1997
Revenue. Our revenue increased $23.7 million, or 12.3%, to $216.8 million for
1998 from $193.1 million for 1997. This increase was primarily due to an
increase in the number of confirmed searches resulting largely from a 6.7%
increase in the average number of consultants employed during the period.
Average revenue per consultant was $1.0 million in 1998, as compared to $1.2
million in 1997, an 11% decrease due to an increase in the number of newly-
hired consultants. Four new offices were opened in 1998: Melbourne, Route 128,
Irvine and New Delhi, which generated approximately $8.2 million of revenue
during 1998.
Salaries and employee benefits. Our salaries and employee benefits increased
$39.1 million, or 28.9%, to $174.6 million for 1998 from $135.5 million for
1997. As a percentage of revenues, salaries and employee benefits increased
from 70.2% to 80.5%. Approximately $12.7 million of this increase was due to
nonrecurring salaries and employee benefits comprised of $9.9 million arising
from the difference between the issuance price of shares issued by us in
December 1998 and the fair market value of such shares at the date of grant and
$2.8 million arising from the early settlement of profit sharing arrangements
relating to the acquisition of certain Latin American locations. Excluding the
impact of these expenses, salaries and employee benefits were 74.7% of revenue
for 1998. A majority of this percentage increase was due to signing bonuses and
guaranteed bonuses associated with the hiring of 41 new consultants in 1998,
consistent with our growth strategy. We also added 44 associates and 79
administrative personnel, in part to support these consultants.
General and administrative expenses. Our general and administrative expenses
increased $8.9 million, or 19.7%, to $53.6 million for 1998 from $44.7 million
for 1997. As a percentage of revenues, general and administrative expenses
increased from 23.2% to 24.7%. This percentage increase was largely due to the
launch of an advertising campaign during the fourth quarter of 1998 and an
increase in maintenance and installation expenses, technical support expenses
and equipment rentals associated with our technology initiative.
Non-operating income (expense). Our non-operating income decreased $3.1
million to a net non-operating loss of $1.1 million for 1998 from net non-
operating gain of $2.0 million for 1997. This decrease is primarily due to a
$2.5 million charge incurred in connection with the costs of the postponement
of our initial public offering in September 1998. The remaining decrease was
due to a loss on the sale of certain computer equipment replaced by new
computers in connection with our technology initiative during 1998 and an
increase in interest expense due to an increase in borrowings under our line of
credit.
1997 Compared to 1996
Revenue. Our revenue increased $45.7 million, or 30.9%, to $193.1 million for
1997 from $147.4 million for 1996. This increase was primarily the result of a
15.5% increase in the average number of consultants
24
<PAGE>
employed during the year and an increase of 13.3% in the average revenue per
consultant to $1.2 million from $1.0 million in 1996. We employed 26 more
consultants at December 31, 1997 than at December 31, 1996. In addition, three
new offices were added during 1997: Miami, Philadelphia and Sao Paulo, which
generated approximately $1.5 million of revenue.
Salaries and employee benefits. Our salaries and employee benefits increased
$30.0 million, or 28.4%, to $135.5 million for 1997 from $105.5 million for
1996. As a percentage of revenues, salaries and employee benefits decreased to
70.2% from 71.6%, reflecting increased search team productivity as revenues
increased relatively faster than staffing levels. This improvement occurred
despite an increase of approximately $833,000 in our contributions to the
employee 401(k) plan.
General and administrative expenses. Our general and administrative expenses
increased $14.4 million, or 47.4%, to $44.7 million for 1997 from $30.3 million
for 1996. As a percentage of revenues, general and administrative expenses
increased to 23.2% from 20.6%. This percentage increase principally relates to
research and development in connection with our technology initiative.
Non-operating income (expense). Our non-operating income increased $900,000
to $2.0 million for 1997 from $1.1 million for 1996. The increase was primarily
due to the absence of certain losses incurred in 1996 as a result of our
relocation of corporate offices in Chicago and an increase in interest income
reflecting higher cash balances during the year.
Results of Operations--HSI
The following table sets forth, for the periods indicated, selected
statements of operations data for HSI as a percentage of revenues:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Revenue.................................................. 100.0% 100.0% 100.0%
Operating expenses:
Salaries and employee benefits ........................ 68.2 71.4 82.3
General and administrative expenses.................... 26.5 24.9 30.2
----- ----- -----
Total operating expenses............................. 94.7 96.3 112.5
----- ----- -----
Operating income (loss).............................. 5.3 3.7 (12.5)
Non-operating income (loss).............................. 0.2 0.2 (4.9)
Minority interest in income of consolidated
subsidiaries............................................ 0.0 0.0 (0.1)
----- ----- -----
Income (loss) before income taxes........................ 5.5 3.9 (17.5)
Provision for (benefit from) income taxes................ 2.2 3.0 (3.6)
----- ----- -----
Net income (loss)........................................ 3.3% 0.9% (13.9)%
===== ===== =====
</TABLE>
1998 Compared to 1997
Revenue. HSI revenue increased $42.3 million, or 51.1%, to $125.0 million for
1998 from $82.7 million for 1997. This increase was primarily the result of the
acquisition of Mulder in the fourth quarter of 1997, which contributed $21.2
million in revenue for 1998. Excluding Mulder, revenue increased by 25.4%
mainly due to an increase in the number of searches resulting from an increase
in the average number of consultants from 94 for 1997 to 124 for 1998, and a
14.9% increase in average revenue per consultant. Three new offices were opened
in 1998: Geneva, Manchester and Tel Aviv, but their impact on revenue during
the year was insignificant.
Salaries and employee benefits. HSI salaries and employee benefits increased
$43.8 million, or 74.1%, to $102.9 million for 1998 from $59.1 million for
1997. As a percentage of revenues, salaries and employee
25
<PAGE>
benefits increased from 71.4% for 1997 to 82.3% for 1998. Approximately $5.1
million of this increase was due to the amortization of deferred compensation
expense resulting from the Mulder acquisition. In addition, approximately $10.6
million of this increase was due to nonrecurring salaries and employee benefits
expenses comprised of $4.9 million arising from the difference between the
issuance price of shares issued by HSI in December 1998 and the fair value of
such shares at the date of grant and $5.7 million arising from a termination
agreement with HSI's former President and Chief Executive Officer, and a
termination agreement with a non-executive HSI employee. The $5.7 million
charge is comprised of $3.0 million for compensation and other amounts to be
paid in accordance with the termination agreements and a $2.7 million non-cash
charge representing the difference between the current book value and appraised
fair market value of shares retained subsequent to termination. Excluding the
impact of these charges, salaries and employee benefits were 73.6% of revenue
for 1998.
General and administrative expenses. HSI general and administrative expenses
increased $17.2 million, or 83.6% to $37.8 million for 1998, from $20.6 million
for 1997. As a percentage of revenues, general and administrative expenses
increased to 30.2% from 24.9%. This percentage increase was primarily the
result of an increase in the provision for doubtful accounts, integration costs
related to the Mulder acquisition, higher travel and meeting expenses related
to the Merger and increased depreciation expense related to HSI's technology
initiative.
Non-operating income (expense). HSI non-operating expense increased to a net
operating loss of $6.1 million for 1998 from a net non-operating gain of
$151,000 for 1997. This increase was primarily the result of provisions in June
and December of 1998 totaling $4.1 million for the writeoff of leasehold
improvements and accruals for non-cancelable lease commitments due to a
decision to relocate the London office. Also, HSI incurred a $1.3 million
charge in connection with the costs of H&S's initial public offering due to a
decision taken in September 1998 to postpone the offering. The remaining
increase is due to an increase in interest expense related to borrowings on
HSI's line of credit, borrowings by HSI from H&S Inc. and lower interest income
as a result of reduced cash balances, all resulting from the use of available
funds for the Mulder acquisition, and purchases of certain property and
equipment associated with opening new offices and investments in the technology
initiative.
1997 Compared to 1996
Revenue. HSI revenue increased $18.1 million, or 28.2%, to $82.7 million for
1997 from $64.6 for 1996. A significant reason for the increase was the
acquisition of Mulder in the fourth quarter of 1997 which contributed revenue
of $5.7 million in 1997. Excluding Mulder, revenue increased by 19.2%,
primarily as a result of a 29.2% increase in the average number of consultants
employed during the period. HSI employed 26 more consultants at December 31,
1997 as compared to December 31, 1996. Excluding the impact of currency
exchange rate fluctuations, the average revenue per consultant increased
slightly from 1996 to 1997. In addition to Mulder, three new offices were added
in 1997: Oslo, Lisbon and Prague which generated approximately $1.9 million in
revenue.
Salaries and employee benefits. HSI salaries and employee benefits increased
$15.1 million, or 34.3%, to $59.1 million for 1997 from $44.0 million in 1996.
As a percentage of revenue, salaries and employee benefits increased to 71.4%
from 68.2%. This percentage increase was primarily due to approximately $2.4
million of additional compensation and benefits to administrative and support
staff resulting from the hiring of new employees in connection with the
development of enhancements to HSI's executive search system.
General and administrative expenses. HSI general and administrative expenses
increased $3.5 million, or 20.2%, to $20.6 million for 1997 from $17.1 million
for 1996. As a percentage of revenue, general and administrative expenses
declined to 24.9% from 26.5%. This decline was due primarily to a reduction in
the provision for doubtful accounts and growth in revenue outpacing increases
in rent, telecommunications and other costs. The provision for doubtful
accounts was decreased to reflect improved collection policies and efforts.
Non-operating income (expense). HSI non-operating income increased by $18,000
to $151,000 from $133,000 for 1996.
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Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and
availability of capital resources in view of plans for expansion and other
operating cash needs. We have historically financed our operations primarily
through internally generated funds, supplemented by sales of common stock to
certain key employees and periodic borrowings under our respective credit
facilities. We have historically paid bonuses in December. Employee bonuses are
accrued when earned and are based on our performance and the performance of the
respective employee. As of September 30, 1999, we had accrued $121.1 million in
bonuses.
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. In particular, from time to time we may investigate capital raising
methods to fund the further development of LeadersOnline, including investments
by third parties.
H&S
We maintained cash and cash equivalents at December 31, 1997 and 1998 and
September 30, 1999 totaling $10.7 million, $11.5 million and $109.5 million,
respectively. Toward these sums, cash flows from operating activities
contributed $7.9 million in 1997, reflecting principally the net income from
operations. For 1998, operating activities contributed $1.0 million of cash
reflecting the net loss offset by increases in non-cash expenses for stock
based compensation, depreciation and amortization and equity in net loss of
affiliates. For the nine months ended September 30, 1999 cash flows from
operating activities contributed $72.9 million reflecting an increase in net
income excluding the nonrecurring charge and merger costs of $15.2 million, a
majority of which was non-cash, a decrease in working capital and an increase
in depreciation and amortization.
On September 1, 1999, we completed our merger with Sullivan, which provided
for the exchange of all of the outstanding stock of Sullivan for 964,000 shares
of our common stock. This transaction was accounted for using the pooling of
interests method of accounting. On June 26, 1998, we purchased selected assets
and liabilities of Fenwick Partners, Inc. for approximately $6.1 million in
cash and notes. On October 1, 1998, we purchased selected assets of Heidrick
Partners, Inc. for $2.0 million in cash and notes. These acquisitions resulted
in a use of cash of $4.1 million.
Cash flows from financing activities were $5.8 million and $23.6 million for
1997 and 1998, respectively. Our financing activities consisted principally of
sales of our common stock to employees net of repurchase obligations, amounts
due in connection with 1997 and 1998 acquisitions and borrowings under our line
of credit. Our long-term debt consists of amounts payable to former
shareholders from whom we have repurchased stock and amounts due in connection
with the Fenwick acquisition. Cash flows provided by financing activities were
$28.0 million for the nine months ended September 30, 1999, resulting primarily
from the estimated net proceeds raised in the initial public offering of $52.0
million and the related sales of shares to employees pursuant to our employee
incentive plans of $9.3 million, offset by 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 be reduced by
$10.0 million on December 31, 2000. There was $22.0 million outstanding under
this line of credit at December 31, 1998 and no amounts were outstanding under
this line of credit as of September 30, 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. At December 31, 1998, the interest rate on the debt was
LIBOR plus the applicable margin, which sum equaled 6.8%. This line of credit
replaced a $25.0 million line of credit which had been effective since October
1, 1997. There was $3.5 million outstanding under the line of credit at
December 31, 1997 and the borrowings bore interest at LIBOR plus 1% or the
prime rate, at
27
<PAGE>
our discretion. At December 31, 1997, the interest rate on the debt was fixed
at approximately 8.5%. The line of credit has certain financial covenants we
must meet relating to consolidated net worth, liabilities, and debt in relation
to cash flows.
Capital expenditures amounted to $5.9 million, $16.0 million and $16.6
million for 1997 and 1998 and the nine months ended September 30, 1999,
respectively. These expenditures were primarily for system development costs,
office furniture and fixtures, leasehold improvements and computer equipment
and software. The system development costs relate primarily to our expenditures
in connection with our technology initiative, of which we capitalized $1.2
million in 1997, $9.0 million in 1998 and $9.9 million for the nine months
ended September 30, 1999. We expect that our capital expenditures for 2000 will
be approximately $25.0 million.
On December 16, 1999, we announced that we expect to invest up to $25 million
in venture capital funds. These funds expect to make investments in start-up
companies, primarily in the technology sector. Although we expect to make
investments in increments over the next three years, the full investment may be
made at any time.
On December 21, 1999, we announced that we had signed a letter of intent to
acquire Baines Gwinner Holdings Ltd. Baines Gwinner is a London-based executive
search firm employing 33 professionals that focuses on the financial services
and legal industries and had fiscal 1999 revenues of approximately 7.5 million
British pounds. The acquisition is expected to close in the second quarter of
this year.
As part of Mr. Pittard's proposed employment agreement, we will pay
approximately $2.8 million a year for seven years for a life insurance policy
that is anticipated to commence in the first calendar quarter of 2000. At the
end of the seven years, our payments will be returned less the cost of key man
life insurance coverage we would have otherwise purchased for Mr. Pittard. At
the same time, we will also receive interest on that cash at a pre-tax rate of
5% per year. In connection with the life insurance policy Mr. Pittard has
agreed that his year 2000 bonus will be reduced to help fund the first year's
policy premium.
HSI
HSI maintained cash and cash equivalents at December 31, 1997 and 1998,
amounting to $8.1 million and $15.8 million, respectively. Toward these sums,
cash flows from operating activities contributed $4.2 million in 1997
principally reflecting decreases in working capital and non-cash expenses for
depreciation and amortization. For 1998, cash flows provided by operating
activities were $7.5 million due primarily to decreases in working capital and
non-cash expenses for stock based compensation and depreciation and
amortization, offset by the net loss from operations.
Cash flows from financing activities were $9.7 million and $10.9 million,
respectively for 1997 and 1998. Borrowings during 1997 increased significantly
in connection with payments required to finance the Mulder acquisition.
Borrowings during 1998 principally reflect funding of employee bonuses and the
purchase of certain property and equipment. HSI's financing activities include
borrowings and payments on its credit facility, purchase and sales of its
common stock to employees and borrowings under a loan agreement with H&S Inc.
HSI's long-term debt as of December 31, 1997 and 1998 consisted of amounts
payable to former stockholders who have sold their stock back to HSI. HSI had
an $8.0 million multicurrency line of credit. This facility reduced to $4.9
million on March 1, 1999, $1.1 million on May 1, 1999 and terminated on May 31,
1999. These borrowings bore interest at the European OverNight Index Average
plus 100 basis points or LIBOR plus 100 basis points, depending on the currency
of the borrowing. The borrowings could be in Euros, ECU or British Pounds. At
December 31, 1998, there was $3.4 million outstanding under the facility which
bore an interest rate of 4.6%. In addition, HSI has a $10.5 million
multicurrency line of credit, denominated in ECU expiring on July 1, 2002. The
interest rate on this credit line is LIBOR plus 1%. The interest rate at
December 31, 1997 and 1998 was 7.2% and 6.6%, respectively. The credit line has
a financial requirement which requires that the ratio of total debt to tangible
net worth be less than 90%. As a result of this financial requirement, retained
earnings are restricted to the extent the ratio of debt to tangible net worth
exceeds 90%. The total outstanding balance was $7.6 million and $8.3 million at
December 31, 1997 and 1998, respectively.
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<PAGE>
Investments greater than $2 million and sales of significant German assets are
prohibited without prior written approval of the banks. In addition, HSI has a
$1.2 million line of credit denominated in German Marks. The borrowings bear
interest at a variable rate between 4.9% and 7.5% depending on the number of
days the relevant borrowing is outstanding. At December 31, 1998, there was no
balance outstanding.
Capital expenditures totaled $6.0 million and $9.7 million for 1997 and 1998,
respectively. These expenditures consisted primarily of purchases of computer
equipment and software and, office furniture and fixtures. Additionally, HSI
made payments in connection with the Mulder acquisition of $9.4 million in cash
and stock during 1997 and $1.3 million in cash during 1998.
Quarterly Comparisons
The following table sets forth certain quarterly financial information of H&S
and HSI for each quarter of 1998 and for the first three quarters of 1999 for
H&S. The information is derived from the quarterly financial statements of the
companies which are unaudited but which, in the opinion of management, have
been prepared on the same basis as the financial statements included herein and
include all adjustments, consisting only of normal recurring items, necessary
for the fair presentation of the information for the periods presented. The
financial data shown below should be read in conjunction with the respective
consolidated financial statements and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Fiscal Quarters Ended
H&S ---------------------------------------------------------------------------
1998 1999(1)
--------------------------------- ------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30
-------- ------- -------- ------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $49,675 $56,961 $62,278 $47,922 $74,601 $113,046 $114,936
Operating income
(loss)................. 1,177 3,051 3,910 (19,477)(2) (7,556)(4) 8,804 9,147(5)
Net income (loss)....... 391 1,387 1,785 (20,753)(3) (10,148) 4,849 5,427
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarters Ended
HSI -----------------------------------------------------------
1998
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $28,053 $31,402 $34,290 $ 31,239
Operating income
(loss)................. (103) 1,195 1,149 (17,884)(6)
Net income (loss)....... (549) (2,103)(7) 324 (15,037)(8)
</TABLE>
- --------
(1) Because H&S acquired HSI on February 26, 1999, the historical results of
operations of HSI have been included in H&S's financial statements
subsequent to the date of acquisition.
(2) Includes $12.7 million of nonrecurring charges comprised of (a) $9.9
million of salaries and benefits expense arising from the difference
between the issuance price of shares issued by us in December 1998 and the
fair market value of such shares at the date of grant and (b) $2.8 million
of salaries and benefits expense arising from the early settlement of
profit sharing arrangements relating to the acquisition of certain Latin
American locations.
(3) Includes a nonrecurring $2.5 million charge incurred in connection with the
costs of the postponement of an offering in September 1998.
(4) Includes $12.4 million of nonrecurring charge arising from the modification
of the Mulder acquisition agreement.
(5) Includes $2.8 million of merger costs arising from the merger with
Sullivan.
(6) Includes $11.9 million of nonrecurring charges comprised of (a) $1.3
million of salaries and benefit expense due to the amortization of deferred
compensation expense resulting from the Mulder acquisition, (b) $4.9
million of salaries and benefits expense arising from the difference
between the issuance price of shares issued by HSI in December 1998 and the
fair market value of such shares at the date of grant, (c) $5.7 million of
salaries and benefits expense arising from the termination agreement with
HSI's former President and Chief Executive Officer, and the termination
agreement of a non-executive HSI employee. The $5.7 million charge is
comprised of $3.0 million for compensation and other amounts to be paid in
accordance with the termination agreements and a $2.7 million non-cash
charge representing the difference between the current book value and
appraised fair market value of shares retained subsequent to termination.
(7) Includes $2.9 million of costs associated with the writeoff of leasehold
improvements and accruals for non-cancelable lease commitments due to a
decision to relocate the London office.
(8) Includes a nonrecurring $1.3 million charge incurred in connection with the
costs of the postponement of an offering in September 1998.
29
<PAGE>
BUSINESS
General
We are the leading global executive search firm and we believe that, based on
revenues, we are the largest executive search firm in the world. With over 46
years of experience in fulfilling our clients' leadership needs, we offer and
conduct executive search services in every major business center in the world.
We focus on identifying, evaluating and recommending qualified candidates for
senior level executive positions. Through our worldwide network of
approximately 832 professionals in 69 locations, we provide executive search
services to a broad range of clients. Our clients include:
. Fortune 500 companies
. major non-U.S. companies
. middle market and emerging growth companies
. governmental and not-for-profit organizations
. other leading private and public entities
Executive Search Industry Overview
Executive search firms are generally separated into two broad categories:
retained search firms and contingency search firms. Retained search firms
fulfill their clients' senior leadership needs by identifying, evaluating,
assessing and recommending qualified candidates for senior level positions,
typically with annual cash compensation of $100,000 and above. Retained firms
generally are compensated for their services whether or not they are successful
in placing a candidate, and are generally retained on an exclusive basis. On
the other hand, contingency search firms focus primarily on positions with
annual cash compensation of less than $150,000. Contingency firms are
compensated only upon successfully placing a recommended candidate. They are
generally not hired on an exclusive basis or involved in the evaluation,
assessment or recommendation of candidates. Both types of firms normally charge
a fee for their services equal to approximately one-third of the first year
total cash compensation for the position being filled.
According to Kennedy Information LLC, a leading industry source, revenue in
the executive search industry is divided almost evenly between retained and
contingency search firms; however, retained search firms are estimated by
Kennedy to employ only one-third of the consultants in the industry. Thus, the
average revenue per consultant for retained firms generally is substantially
higher than for contingency firms.
The executive search industry is highly fragmented, consisting of more than
4,000 executive search firms worldwide. According to Kennedy's Executive
Recruiter News, more than 80% of retained firms and approximately 90% of
contingency firms generated less than $2 million in revenues in 1998.
We believe that the following favorable trends are contributing to the growth
of the executive search industry:
An Increase in Competition for Executive Talent. Historically, it was typical
for executives to spend an entire career with one or two organizations.
However, in today's rapidly changing business environment, companies
aggressively seek outside talent and, as a result, successful executives are
often recruited by a number of different organizations in various geographic
locations over the course of their careers. This increase in competition for
management talent and the resulting executive turnover forces many companies to
seek assistance in recruiting executives more frequently. Increased competition
has also caused compensation
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levels for executives to increase considerably over the past several decades.
Because fees for executive search firms are based on cash compensation, higher
cash compensation levels have translated into higher executive search fees.
An Increased Demand for Executive Search Services by Start-up and Newly-
acquired Companies. Recent growth in the amount of capital available for
investment in start-up companies and for acquisitions has created a need for
talented executives to manage these entities. The activities of private equity
investors and venture capital firms have been accelerating at such a pace that
they often find it difficult to identify leaders for the companies in which
they invest. These investors often seek the services of executive search firms
to aid them in this task.
A Growing Acceptance by Corporate Leaders of Executive Search Consultants.
The influence of a number of factors including larger institutional
shareholdings, a rise in shareholder activism and a greater concern for
corporate governance are leading many boards of directors and company
management teams to expect that their choices of senior executives will be
under greater scrutiny than was the case in the past. As a result of these
trends, many boards of directors and company management teams hire outside
executive search firms to advise them with respect to their selection and
recruitment of executives.
An Increasing Globalization of Business Driving the Demand for Executive
Talent by Multinationals. The increasing globalization of business creates
demand, particularly from multinational enterprises, for executives in parts of
the world where such enterprises do not have significant prior operating
experience. Because the process of identifying and evaluating candidates across
national borders can be difficult, these enterprises turn to executive search
firms for assistance.
A Greater Need for Executives with Diverse Leadership Skills. In response to
a rapidly changing business environment, companies are setting more stringent
hiring standards for senior executives. The process of identifying and
evaluating such executives is therefore becoming more difficult. As a result,
companies are increasingly relying on executive search firms to help them meet
their leadership needs.
A Decrease in the Number of Layers of Management Within a Company. The recent
trend of corporate "right-sizing" by eliminating layers of management at a
number of companies effectively reduces the internal pool from which such
companies can draw talented managers. In lieu of the traditional practice of
grooming leaders from within, companies increasingly use executive search firms
to find appropriate talent from outside their organization.
Key Competitive Strengths
We possess several key competitive strengths which position us to capitalize
on the growing demand for our services. Our strengths include the following:
Emphasis on Senior Level Executive Search. We are an industry leader in
placing senior level executives within the world's largest and most complex
organizations. Approximately 66% of our executive searches worldwide in 1998
were for chief executive officers, presidents, chief financial officers, chief
operating officers, chief administrative officers, chief information officers,
members of boards of directors and other senior management positions, such as
division and department heads. These senior level executive searches in 1998
represented 73% of revenues. Senior level executive searches generally provide
a higher level of revenue per search and greater visibility within the
executive search industry. We believe that performing senior level, high
profile executive search assignments benefits us as follows:
. strengthens our brand name recognition and contacts with leading decision
makers, referral sources and highly talented candidates
. enhances our ability to secure other senior level executive searches
. enables us to attract and retain highly qualified consultants
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<PAGE>
Experienced Team of Executive Search Consultants. As of September 30, 1999,
we employed 372 executive search consultants. Our consultants, on average, have
10 years of experience in executive search and 9 years of experience in other
industries. We believe that this depth of experience is necessary to
effectively perform senior level executive searches. We attribute our success
in attracting and retaining our high quality consultants to our premier
reputation, unique team oriented culture and performance-based compensation
system. Our low turnover rate among our consultants reflects our attractiveness
as an employer. For the period from January 1, 1995 through December 31, 1998,
an annual average of less than 1.5% of our consultants left to work somewhere
else in the executive search industry. Under our compensation system, a portion
of the bonus for a particular assignment goes to the consultants who originate
the executive search assignment, and a portion goes to the consultants who
perform the executive search assignment. In addition, a portion of each
consultant's annual compensation is based on management's assessment of that
consultant's teamwork. This compensation component encourages our consultants
to work as a team and is part of the reason that 59% of our executive searches
performed in 1998 were shared by two or more consultants. The incentive to
utilize the differing talents of our consultants means that those who originate
an assignment outside of their area of expertise often bring that assignment to
those with a specific industry or functional skill to execute the search.
Complementary Internet-Based Recruiting Business. LeadersOnline, which was
launched in March 1999, utilizes the internet and our proprietary candidate
matching and tracking technology to recruit and place prescreened middle
management professionals with annual compensation in the $75,000 to $150,000
range. For the nine months ended September 30, 1999, LeadersOnline reported
revenues of $763,000. We expect LeadersOnline to have revenues of approximately
$1.9 million for the fourth quarter ending December 31, 1999.
Global Presence. We have 69 locations in major business centers in 33
countries around the world. With our global presence we can serve the needs of
multinational companies and local businesses worldwide. Our global presence
also provides us with access to an international network of candidates and
referral sources. Our locations in North America, Europe, Asia Pacific and
Latin America employed 194, 136, 27 and 15 consultants, as of September 30,
1999, respectively. Our global reach allows us to benefit from the increasing
globalization of business and the demand, particularly from multinational
enterprises, for assistance in identifying and evaluating candidates for
executive positions across national borders.
Industry Practice Groups and Functional Specialties. We have seven core
industry practice groups: international technology; industrial; consumer
products; financial services; health care; professional services; and higher
education/not-for-profit. Many of our consultants also specialize in searches
for functional positions such as members of boards of directors, chief
executive officers, chief financial officers, chief information officers and e-
commerce business leaders. Our international technology practice group is our
largest and fastest growing practice group representing approximately 31% of
our revenues for the nine months ended September 30, 1999. Our structure
enables us to better understand our clients' cultures, operations, business
strategies and industries.
Global Support Platform. Our consultants work with a team of 460 associates
who have access to a sophisticated global technology infrastructure. This
technology infrastructure includes internally developed proprietary global
databases containing over 1 million candidate profiles and approximately 32,000
client records. This global platform also offers a broad range of on-line
services and industry reference sources, and advanced Internet-based technology
to support the research needs of our professionals. Our consultants complete
searches efficiently and effectively using our global support structure. Given
the importance of technology to the search process, we are committed to
implementing our strategic technology initiative. This integrated system will
enhance the functionality, speed and quality of our information management.
32
<PAGE>
Our Growth Strategy
Our goal is to be the leading global provider of executive search services
while achieving sustainable revenue and earnings growth. We pursue a focused
growth strategy with the following key elements:
Expand and Develop Client Relationships. We continually seek to expand
relationships with existing clients and to develop new client relationships. We
accomplish this by:
. aggressively pursuing the highest level executive search assignments
. expanding the breadth and depth of our industry practice groups and
functional specialties
. offering services across a broad range of geographic locations
. actively recruiting consultants who demonstrate the ability to expand our
client base
We have succeeded in expanding our client base and generating repeat business
from existing clients. For example, we had over 1,800 clients in 1995 and over
3,100 in 1998. More than 75% of our searches in 1998 were for clients or their
affiliates with whom we completed multiple assignments over the last six years.
As appropriate, we will strategically open new locations in cities where we
currently do not operate in order to serve the needs of our clients. Between
1995 and 1998, including through acquisitions, we added 26 locations and 178
consultants.
Pursue New, Complementary Lines of Business. We intend to continue to expand
the range of services we offer senior management teams in helping them to
address their human capital resource needs. These services currently include
our internet-based recruiting business, LeadersOnline, interim management
placement, management evaluation and corporate governance consulting services.
Our interim management placement service provides senior level management
executives on a temporary basis for assignments of limited duration. Our
management evaluation service assesses the skills and cultural fit of
management teams within an existing organization or combining organizations.
Enhance Executive Search Professional Productivity. We believe that our
consultants generate one of the highest levels of average revenue per
consultant in the industry. Our consultants generated an average revenue per
consultant of $1.1 million in the U.S. in 1998 as compared to $864,000 for the
average of the other nine of the largest ten U.S. executive search firms. We
also believe that our infrastructure can be further leveraged to increase our
consultants' productivity. Specifically, we expect that our technology
initiatives will continue to enable our professionals to access a greater
amount of information more quickly. They are able to perform more sophisticated
searches to identify candidates more efficiently and effectively. Our
technology initiative is designed to support a significant number of additional
users without large incremental costs.
Pursue Strategic Acquisitions and Alliances. The executive search industry is
highly fragmented, with more than 4,000 executive search firms worldwide. The
industry has been consolidating in recent years. Many smaller firms have joined
with larger firms in order to gain the benefits of superior managerial,
financial and technological resources. We maintain an acquisition and alliance
strategy designed to expand our presence in the executive search industry and
to build complementary business lines. This strategy will increase our
penetration in existing and new geographic markets and expand the depth and
breadth of our industry practice groups and functional specialties. Examples of
this strategy include our merger with Sullivan & Company, a New York based
executive search firm that specializes in the financial services industry, on
September 1, 1999 and acquisition of Redelinghuys & Partners, a South African
based senior level executive search firm, completed on December 28, 1999.
Services
We provide executive search services primarily on a retained basis for a
broad range of clients. Our executive search process typically consists of the
following steps:
. analyze the client's needs in order to determine the required set of
skills for the position, understand its organizational structure,
relationships and culture, define the required experience, and identify
the other characteristics necessary for the successful candidate
33
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. interview and evaluate candidates on the basis of experience and
potential cultural fit with the client organization
. present confidential written reports on the candidates who most closely
fit the position specification
. schedule a mutually convenient meeting between the client and each
candidate
. collect references on the final candidate
. assist in structuring of the compensation package and supporting the
successful candidate's integration into the client team
LeadersOnline. We began the research and development of our LeadersOnline
business approximately two years ago and launched the service in March 1999. Of
the engagements completed by LeadersOnline in 1999, the average annual
compensation per position was approximately $100,000. Candidates register with
LeadersOnline by completing a simple on-line profile that takes approximately
eight to ten minutes. Candidates obtain confirmation within 24 hours of
submitting their profile and are notified periodically as matching positions
become available. Candidates are proactively identified through targeted
advertising and referral of potential candidates that do not currently meet our
clients' senior level needs. When LeadersOnline receives a search assignment
from a client, we develop job opportunity pages that describe the company and
the position specifications. We present a customized list of qualified and
interested candidates according to the client's skill requirements and
specifications.
Our LeadersOnline business provides the following services:
. matches position specifications against the proprietary database and
produces a customized list of candidates
. notifies matched candidates by electronic mail, informs them about the
position and requests permission to perform verification of degrees,
employment and other background information
. conducts profile verification through a third party information service
company
. forwards a verified candidate list to the client
. generates recruiting progress management reports throughout the process
to track the progress of multiple searches and provide candidate feedback
The entire system is designed to ensure confidentiality to both clients and
candidates and is delivered through a secure customizable extranet for client
use.
We established LeadersOnline in October 1999 as a separate subsidiary. From
time to time we may investigate capital raising methods to fund the further
development of LeadersOnline, including investments by third parties.
Our Organization
Our operational structure is designed to provide high quality executive
search services to our clients worldwide. We organize our team of executive
search consultants by:
. industry practice groups
. functional specialties
. geography, through our network of offices
On a given search assignment, we will generally utilize the expertise of
consultants in more than one of our offices, industry practice groups and
functional specialties. For example, an executive search for a CIO of a
financial services company located in London may involve an executive search
consultant in London with an existing relationship with the client, another
executive search consultant in New York with expertise in the financial
services practice group and a third executive search consultant in Menlo Park
with expertise in CIO recruiting. By utilizing consultants with varying
geographic, industry and functional expertise, we believe that we can best
ensure the successful completion of executive search assignments for our
clients.
34
<PAGE>
Industry Practice Groups. Our business is organized around seven core
industry practice groups, each focused on a specific industry. These core
industry practice groups and their relative sizes, as measured by revenues for
nine months ended September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Percentage
Industry Practice Group of Revenue
----------------------- ----------
<S> <C>
International Technology....................................... 31%
Financial Services............................................. 22
Industrial..................................................... 19
Consumer Products.............................................. 15
Health Care.................................................... 5
Professional Services.......................................... 3
Higher Education/Not-for-Profit................................ 2
Other.......................................................... 3
---
100%
</TABLE>
Consultants from each of these industry practice groups may reside in any one
of our locations. Certain markets have a significant concentration of companies
within particular industry sectors, and we have staffed our locations
accordingly. For example, our financial services practice group has our largest
concentration of consultants in New York and London, the two largest financial
centers in the world. Each industry practice group is coordinated by a Practice
Managing Partner who establishes marketing and search strategies, identifies
focused accounts and target clients and facilitates and assists the marketing
activities of the consultants in the group. We believe that this operational
structure provides our clients with superior services by enabling our
consultants to successfully build relationships with candidates and referral
sources within particular industries and to understand our clients' operations,
business strategies and industry dynamics and company culture. We believe that
these factors are critical to the successful placement of a candidate.
Functional Specialties. We recognize that the task of searching for
candidates for certain executive positions often requires specialized skills in
much the same way as a search for an executive in a particular industry. As a
result, many of our consultants specialize in searches for particular positions
such as a board of directors member, CEO, CFO, CIO or e-commerce business
leader. Typically, a consultant in a particular industry practice group who
receives an assignment for a given functional position will consult with one or
more colleagues with the appropriate functional expertise throughout the search
assignment. This coordination benefits our clients because the best candidate
for certain functional positions often will come from a different industry. For
example, a client in the industrial sector seeking a new CIO may benefit from
exposure to a candidate whose background is in the health care sector, even
though that candidate may be less well known by the members of our industrial
practice group. Since our functional specialists tend to have experience with
appropriate candidates from many different industries, they can bring
experience from a range of industry practice groups to the assignment.
Global Network. We are a major executive search presence through our global
network of 69 locations in 33 countries, and offer and conduct executive
searches in nearly every major business center in the world. Each office is
managed by an Office Managing Partner and staffed with consultants, associates,
administrative assistants and other support staff. While central administrative
functions are provided by the Chicago corporate office, each region has its own
regional management as well as research and support functions.
35
<PAGE>
Listed below are the regions, countries and locations in which we operate as
of December 31, 1999:
<TABLE>
<CAPTION>
Region Country Location
- ------------- ------------- -----------------
<S> <C> <C>
North America United States Atlanta, GA
Boston, MA
Charlotte, NC
Chicago, IL
Cleveland, OH
Dallas, TX
Greenwich, CT
Houston, TX
Irvine, CA
Jacksonville, FL
Los Angeles, CA
(2 offices)
Menlo Park, CA
Miami, FL
New York, NY
(2 offices)
Philadelphia, PA
Route 128, MA
San Diego, CA
San Francisco, CA
Seattle, WA
Tysons Corner, VA
Washington, D.C.
Canada Montreal
Toronto
Asia Pacific Australia Melbourne
Sydney
China Hong Kong
India New Delhi
Japan Tokyo
Korea Seoul
Singapore Singapore
</TABLE>
<TABLE>
<CAPTION>
Region Country Location
- ------------- --------------- ------------------
<S> <C> <C>
Latin America Argentina Buenos Aires
Brazil Sao Paulo
Chile Santiago
Mexico Mexico City
Peru Lima
Venezuela Caracas
Europe Austria Vienna
Belgium Brussels
Czech Republic Prague
Denmark Copenhagen
Finland Helsinki
France Paris
Germany Berlin
Dresden
Dusseldorf
Frankfurt
Hamburg
Munich (3 offices)
Italy Milan
Rome
The Netherlands Amsterdam
Norway Oslo
Poland Warsaw
Portugal Lisbon
Russia Moscow
Spain Barcelona
Madrid
Sweden Stockholm
Switzerland Geneva
Zurich
United Kingdom London
Manchester
Middle East Israel Tel Aviv
Africa South Africa Capetown
Johannesburg
</TABLE>
North America
We have 23 locations in the United States and two in Canada. At September 30,
1999, we employed a total of 194 consultants in the region. Approximately 56%
of our worldwide revenues in 1998 were generated in the United States and
Canada. The largest offices in the North American region in terms of revenues
are New York, Menlo Park and Chicago. The New York office is a leader of the
financial services practice, the Menlo Park office is the center of our
international technology practice, and the Chicago office has a diverse
practice which includes a significant concentration of consultants in the
industrial and health care practices.
Europe, Middle East and Africa
We have 28 locations in 17 European countries, one location in the Middle
East and two locations in South Africa. At September 30, 1999, we employed 136
consultants in these regions. Approximately 37% of our worldwide revenues in
1998 were generated by these locations. Our locations in Germany, the United
Kingdom
36
<PAGE>
and France generate the highest revenues of our locations in these regions.
The markets in Germany and the United Kingdom are the two largest executive
search markets in Europe, and we have a strong market position in both of
these countries. In 1998, we generated more revenue than any other executive
search firm in Germany, and, as measured by revenues, we were the fourth
largest in the United Kingdom. The German practice grew significantly with our
1997 acquisition of Mulder, and presently there are eight locations in
Germany. The United Kingdom office is a leader in financial services
placement, largely serving the needs of multinational British financial
enterprises based in the City of London.
Asia Pacific
We have seven locations in the Asia Pacific region. At September 30, 1999,
we employed 27 consultants in the Asia Pacific region. Approximately 4% of the
our worldwide revenues in 1998 were generated in the Asia Pacific region. Our
focus in the Asia Pacific region is to serve the regional needs of
multinational corporations headquartered in the United States and Europe.
Latin America
We have six locations and, as of September 30, 1999, employed 15 consultants
in Latin America. Approximately 3% of our worldwide revenues in 1998 were
generated in the Latin American region. Similar to our focus in the Asia
Pacific region, our focus in the Latin American region is to serve the
regional needs of multinational corporations headquartered in the United
States and Europe.
Clients and Marketing
We have a diverse group of clients in a variety of industries located
throughout the world. Our clients include Fortune 500 companies, major non-
U.S. companies, middle market and emerging growth companies, governmental and
not-for-profit organizations and other leading private and public entities. No
single client accounted for over 2% of our revenues in 1998. Historically, we
have been successful both in adding to our client base and in generating
repeat business from existing clients. For example, we were engaged by over
1,800 clients in 1995 and over 3,100 in 1998, and, of the searches performed
in 1998, more than 75% were on behalf of clients for whom we had conducted
multiple assignments over the last six years.
Our consultants market the firm's executive search services through two
principal means: targeted client calling and industry networking with clients
and referral sources. These efforts are assisted by our databases which
provide all our consultants with up to date information as to contacts made by
their colleagues with particular referral sources, candidates and clients.
In addition to our active marketing, we benefit from a significant number of
referrals generated by our reputation for successfully completed assignments.
To build on this advantage, we seek to develop an enhanced awareness of the
Heidrick & Struggles brand name. As a result of our efforts, we are more
frequently invited to make presentations to prospective clients, often
competing for executive search engagements with major competitors in the
industry. In 1998, we succeeded in obtaining executive search engagements from
a majority of the presentations which we conducted.
We also publish a quarterly leadership journal, The Art of Taking Charge,
which is distributed to senior executives, features interviews with business
leaders and publicizes our brand name.
One of the limitations of our marketing is the existence or anticipated
existence of blocking arrangements. Either by agreement with clients or for
client relations purposes, executive search firms frequently refrain from
recruiting employees of a client, and possibly other entities affiliated with
that client, for a specified period, generally not more than one year from the
commencement of a search. We actively manage our blocking arrangements and
seek to mitigate adverse effects of blocking by strengthening our long-term
relationships with focused accounts. Additionally, in recent years market
conditions and industry practices have resulted in blocking arrangements that
are becoming narrower in scope and shorter in duration.
37
<PAGE>
Assignment Research and Information Management
Our technology infrastructure consists of internally developed global
databases containing over 1 million candidate profiles and approximately
32,000 client records, coupled with a broad range of on-line services and
industry reference sources. Our professionals use our information technology
infrastructure to:
. gather business intelligence regarding clients' businesses, industries,
competitors and strategies
. develop and manage company and candidate profiles
. identify market needs and new business opportunities
. coordinate and implement marketing, communication, financial and
administrative functions
Our consultants complete searches efficiently and effectively using our
global support structure. Given the importance of technology to the search
process, we are committed to improving our information management by
implementing our technology initiative. Our technology infrastructure is
designed to enhance the functionality, speed and quality of our information
management.
Our technology initiative represents a long-term strategic initiative for
the deployment of technology and is designed to support our rapid growth.
Phase I of our technology initiative, which was completed during the fourth
quarter of 1999, upgraded our financial management systems and our search
system. A PeopleSoft based financial management system provides a fully
integrated worldwide accounting and financial reporting system. An Oracle-
based search system allows our consultants to more efficiently and effectively
manage complex search assignments, while keeping them informed about client
and candidate contacts. Our technology infrastructure upgrades also enhance
the ease and speed of use and information processing on the Internet, one of
our most valuable information tools. In addition to LeadersOnline, we use
Internet technology in three other primary ways:
. as an external source of information through a broad range of online
information resources
. through our intranet, as a tool for organizing and accessing our
internally generated information including our proprietary databases
. through our extranet, as a means of connecting clients and candidates in
its core executive search practice on a secure network where each can
review information about the other
Phase II of our technology initiative will deploy refinements to the
financial and search systems as well as new systems to provide tailored
automated data reporting and financial and operating information to our senior
managers.
Our information technology infrastructure is overseen by a technology
management team led by our Managing Partner of Global Technology. Among other
services, this team provides our employees with coordinated training programs.
To address issues of data security associated with increasing remote database
access, we use password protection and conduct regular security audits. In
addition, we currently utilize video-conferencing technology in many of our
locations. This technology facilitates candidate interviews and presentations
to client search committee members in different locations. We intend to
continue to develop our technology infrastructure as ours and our clients'
needs evolve.
Professional Staff and Employees
As of September 30, 1999, we had 1,529 full time employees, of which 372
were consultants, 460 were associates and 697 were corporate and support
staff. In each of the last five years, no single consultant accounted for any
material portion of our revenues. We are not a party to any collective
bargaining agreement and we consider relations with our employees to be good.
Our executive search professionals are categorized either as consultants or
associates. Associates assist consultants by performing research and other
functions.
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<PAGE>
Competition
The executive search industry is highly competitive. It is estimated that
there are more than 4,000 executive search firms worldwide. There are
relatively few barriers to entry and new competitors frequently enter the
market. While we face competition to some degree from all firms in the
industry, we believe our most direct competition comes from other retained
search firms. In particular, we compete with other large search firms
specializing in senior level executive search, including: SpencerStuart &
Associates, Egon Zehnder International, Russell Reynolds Associates, Inc., and
Korn/Ferry International. To a lesser extent, we also face competition from
smaller boutique or specialty firms that specialize in certain regional markets
or industry segments. Each firm with which we compete is also a competitor in
seeking to attract the most effective consultants. In our experience, the
executive search business is more quality-sensitive than price-sensitive. As a
result, we compete on the level of service we offer, reflected by our industry
practice groups, functional specialties and client focus, and, ultimately, on
the quality of our search results.
Recent Strategic Acquisitions and Mergers
Over the past approximately two years, we have successfully completed the
strategic acquisition of three executive search firms and a merger with one
executive search firm:
Redelinghuys. On December 28, 1999, we completed the acquisition of
Redelinghuys & Partners, a senior level executive search firm with offices in
Capetown and Johannesburg in the Republic of South Africa. Prior to this
acquisition, we had an alliance with Redelinghuys which allowed us to expand
our services in Africa.
Baines Gwinner. On December 21, 1999, we announced that we had signed a
letter of intent to acquire Baines Gwinner Holdings Ltd. Baines Gwinner is a
London-based executive search firm employing 33 professionals that focuses on
the financial services and legal industries and had fiscal 1999 revenues of
approximately 7.5 million British pounds. The acquisition is expected to close
in the second quarter of this year.
Sullivan. On September 1, 1999, we merged with Sullivan & Company which
employed 12 consultants. Sullivan is an executive search firm that specializes
in the financial services industry and had 1998 revenues of $12.8 million. This
transaction expanded our reach in the investment banking, investment management
and specialty finance sectors.
Fenwick. On June 26, 1998, we acquired Fenwick, a Boston-based executive
search firm which employed nine consultants and had fiscal 1997 revenues of
$6.4 million. This transaction expanded the reach of our international
technology group into a third key technology center in the United States.
Fenwick, based in the technology corridor called "Route 128" in Massachusetts,
complements our existing offices in Menlo Park, California and Tysons Corner,
Virginia. These two existing offices also focus on senior level recruitment for
computer hardware and software, telecommunications, engineering and medical
electronics companies.
Mulder. On October 1, 1997, we acquired Mulder Partner GmbH & Co. KG which
employed 13 consultants. Prior to the acquisition, Mulder was the largest
executive search firm in Germany, as measured by revenues, with $21.8 million
in revenues for the nine months ended September 30, 1997. After this
transaction we became the largest executive search firm in Germany and the
second largest in Europe.
Facilities
We lease all of our locations. The aggregate square footage of office space
under such leases was approximately 481,484 as of December 31, 1998. The leases
for these offices call for future minimum lease payments of approximately $106
million and have terms which will expire between 1999 and 2013 exclusive of
renewal options that we can exercise. We believe that our facilities are
adequate for our current needs and that we will not have difficulty leasing
additional office space to satisfy anticipated future needs.
39
<PAGE>
Insurance
We maintain insurance in such amounts and with such coverages and deductibles
as management believes are adequate. The principal risks that we insure against
are professional liability, workers' compensation, personal injury, bodily
injury, property damage and fidelity losses. There can be no assurance that our
insurance will adequately protect us from potential losses and liabilities.
Legal Proceedings
From time to time we have been involved in litigation which is 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.
40
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our Board of Directors has eleven members, eight of whom are our employees,
and three of whom are independent directors. In accordance with the Certificate
of Incorporation, the members of the Board of Directors are divided into three
classes whose terms of office expire at the third succeeding annual
stockholders' meeting following their election to office or until a successor
is duly elected and qualified. The Certificate of Incorporation also provides
that such classes shall be as nearly equal in number as possible. The terms of
office of the Class I, Class II, and Class III directors expire at the annual
meeting of stockholders in 2000, 2001, and 2002, respectively. The following
are our directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position with Company Director Class
---- --- --------------------- --------------
<C> <C> <S> <C>
Patrick S. Pittard... 54 President and Chief Executive
Officer,
Director III
Donald M. Kilinski... 40 Chief Financial Officer and
Treasurer --
Richard D. Nelson.... 60 Chief Administrative Officer,
Counsel and
Secretary --
Gerard R. Roche...... 68 Senior Chairman, Director III
David C. Anderson.... 57 President--Americas, Director II
Thomas J. Friel...... 52 President--Global Practices,
Director II
David B. Kixmiller... 50 Practice Managing Partner,
International Technology, Director I
Bengt Lejsved........ 55 Area Managing Partner, Northern &
Eastern Europe, Director I
Dr. Jurgen B. Mulder. 62 President--International, Director III
Dr. John C. Viney.... 52 Chairman--Europe, Director II
Robert Louis-Dreyfus. 53 Director II
Robert W. Shaw....... 52 Director I
Carlene M. Ziegler... 43 Director I
</TABLE>
Patrick S. Pittard has been our President and Chief Executive Officer and a
member of our Board of Directors since the Merger. Prior to the Merger, he had
been President and Chief Executive Officer of Heidrick & Struggles, Inc. since
1997 and had been a member of the Board of Directors of Heidrick & Struggles,
Inc. since 1986. Since joining Heidrick & Struggles, Inc. in 1983, Mr. Pittard
has held the positions of Office Managing Partner for the Atlanta and
Jacksonville offices and North America Managing Partner. Mr. Pittard is also a
member of the Board of Directors of Jefferson Pilot Corporation.
Donald M. Kilinski has been our Chief Financial Officer and Treasurer since
the Merger. Prior to the Merger, he had been Chief Financial Officer of
Heidrick & Struggles, Inc. since he joined Heidrick & Struggles, Inc. in 1997,
and Chief Financial Officer and Treasurer of HSI since 1998. Prior to joining
Heidrick & Struggles, Inc., Mr. Kilinski was Chief Financial Officer of BBDO
Asia Pacific Ltd. from September 1995 to April 1997, and Vice President of
Finance of BBDO Worldwide from July 1992 to August 1995 and from April 1997
through November 1997.
Richard D. Nelson has been our Chief Administrative Officer, Counsel and
Secretary since the Merger. He joined Heidrick & Struggles, Inc. in 1981, and
prior to the Merger had been Chief Administrative Officer, Secretary and
Counsel of Heidrick & Struggles, Inc. since 1981 and was Chief Financial
Officer from 1981 until 1997. He was Treasurer of HSI from 1980 until 1989, and
then became Assistant Treasurer. He was also Secretary and a member of the
Board of Directors of HSI from 1980 until the time of the Merger.
41
<PAGE>
Gerard R. Roche has been our Senior Chairman and a member of our Board of
Directors since the Merger. Mr. Roche joined Heidrick & Struggles, Inc. in
1964, and was a member of the Board of Directors of Heidrick & Struggles, Inc.
from 1970 until the time of the Merger. He is also a member of the Board of
Directors for Gulfstream Aerospace Corporation and Value America Inc.
David C. Anderson has been our President--Americas since September 23, 1999
and a member of our Board of Directors since the Merger. Mr. Anderson was the
North American Managing Partner from 1998 until September 23, 1999 and has been
the Office Managing Partner of our Dallas office since joining the firm in
1992. He was a member of the Board of Directors of Heidrick & Struggles, Inc.
from 1992 until the time of the Merger.
Thomas J. Friel has been our President--Global Practices since September 23,
1999 and a member of our Board of Directors since the Merger. Since joining
Heidrick & Struggles, Inc. in 1979, Mr. Friel has served, at various times, as
Office Managing Partner of the Menlo Park office, Worldwide Practice Managing
Partner for the International Technology Practice and Managing Partner for Asia
Pacific. He was a member of the Board of Directors of Heidrick & Struggles,
Inc. from 1983 until the time of the Merger.
David B. Kixmiller has been Practice Managing Partner, International
Technology since 1998 and a member of our Board of Directors since the Merger.
Mr. Kixmiller joined Heidrick & Struggles, Inc. in 1984 and was Office Managing
Partner of the Menlo Park Office from 1991 until 1998. He was a member of the
Board of Directors of Heidrick & Struggles, Inc. from 1987 until the time of
the Merger.
Bengt Lejsved has been a member of our Board of Directors since the Merger.
Mr. Lejsved joined HSI in 1990 and is currently the Area Managing Partner,
Northern and Eastern Europe. He was a member of the Board of Directors of HSI
from 1994 until the time of the Merger.
Dr. Jurgen B. Mulder has been our President--International since September
23, 1999 and a member of our Board of Directors since the Merger. He was
President--Europe from the Merger until September 23, 1999 and he was President
and Chief Executive Officer of HSI from November 16, 1998 until the time of the
Merger. He was Vice Chairman of HSI from October 1, 1997 until November 16,
1998. Prior to joining HSI in 1997, Dr. Mulder was a partner in Mulder &
Partner GmbH & Co. KG., the firm he founded in 1978.
Dr. John C. Viney has been our Chairman--Europe and a member of our Board of
Directors since the Merger. Dr. Viney joined HSI in 1985 and previously served
as Office Managing Partner for the London office. He was a member of the Board
of Directors of HSI from 1987 until the time of the Merger (except for a brief
period in 1998).
Robert Louis-Dreyfus has been a member of our Board of Directors since
September 14, 1999. He has been Chairman of the Board of Directors and Chief
Executive Officer of Adidas-Salomon AG since April 1993. He also serves on the
Board of Directors of EMCORE Corporation.
Robert W. Shaw has been a member of our Board of Directors since September
14, 1999. He is the Chief Executive Officer and a member of the Board of
Directors of USWeb Corp. Prior to joining USWeb Corp. in 1998, he was Executive
Vice President of Worldwide Consulting Services and Vertical Markets since
February 1997 and Senior Vice President of Worldwide Applications and Services
at Oracle Corporation from August 1995 to January 1997. From June 1992 to July
1995, Mr. Shaw was Senior Vice President of Global Services at Oracle
Corporation.
Carlene M. Ziegler has been a member of our Board of Directors since December
7, 1999. She has been a Managing Director of Artisan Partners since January
1995. Prior to founding Artisan Partners, she was a Portfolio Manager at Strong
Corneliuson Capital Management from March 1991 to October 1994.
42
<PAGE>
Committees
Audit Committee. Our Audit Committee consists of our three independent
directors. The duties of the Audit Committee are generally to recommend to our
Board of Directors the selection of independent auditors to audit annually our
books and records, to review the activities and the reports of our independent
auditors and to report the results of such review to our Board of Directors.
The Audit Committee also periodically reviews the activities of our audit staff
and the adequacy of our internal controls.
Compensation Committee. Our Compensation Committee consists of our three
independent directors. The duties of the Compensation Committee are generally
to review employment, development, reassignment and compensation matters
involving corporate officers and such other executive level associates as may
be appropriate, including, without limitation, issues relative to salary,
bonus, stock options and other incentive arrangements.
Director Compensation
None of our directors who are also our employees receive any compensation for
their services as directors. Non-employee directors receive an annual retainer
of $30,000 in cash, an additional annual cash payment of $4,000 for being the
chair of any committee and up to $1,000 in cash for each meeting attended. We
reimburse out-of-pocket expenses incurred by all directors in attending Board
of Directors and committee meetings.
Executive Compensation
The following table sets forth the compensation awarded or paid to, or earned
by, our executive officers during 1998 and 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------- ---------------------------------
Awards Payouts
---------------------- ----------
Other
Annual Restricted Securities Long-Term All Other
Compen- Stock Underlying Incentive Compen-
Name and Principal Position Year Salary($) Bonus($) sation Award(s)($) Options(#) Payouts($) sation($)
- --------------------------- ---- --------- ---------- ------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patrick S. Pittard, $700,000 (1) -- (1) (1) (1) 12,376(2)
President 1999
and Chief Executive 1998 600,000 $1,200,000 -- -- -- -- $13,655(2)
Officer
Donald M. Kilinski, 1999 $300,000 (1) -- (1) (1) (1) 12,076(3)
Chief Financial Officer 1998 200,000 200,000 -- -- -- -- 83,651(3)
Richard D. Nelson, 1999 $450,000 (1) -- (1) (1) (1) 12,376(4)
Chief 1998 450,000 525,000 -- -- -- -- 15,923(4)
Administrative Officer
David C. Anderson, 1999 $400,000 (1) -- (1) (1) (1) 12,376(5)
President--Americas 1998 275,000 799,000 -- -- -- -- 12,263(5)
Dr. Jurgen B. Mulder, 1999 $580,000 (1) -- (1) (1) (1) --
President-- 1998 512,000 1,518,000 -- -- -- -- --
International(6)
</TABLE>
- --------
(1) As of the date of this prospectus, bonuses and long-term compensation have
not been determined.
(2) For the year ended December 31, 1999, this amount represents compensation
for expenses relating to group term life insurance ($2,880), employer
profit sharing contributions ($7,496) and employer 401(k) matching
contributions ($2,000). For the year ended December 31, 1998, this amount
represents compensation for expenses relating to group term life insurance
($4,032), employer profit sharing contributions ($7,623) and employer
401(k) matching contributions ($2,000).
(3) For the year ended December 31, 1999, this amount represents compensation
for expenses relating to group term life insurance ($2,580), employer
profit sharing contributions ($7,496) and employer 401(k) matching
contributions ($2,000). For the year ended December 31, 1998, this amount
represents compensation for expenses relating to group term life insurance
($726), relocation expenses ($73,302), employer profit sharing
contributions ($7,623) and employer 401(k) matching contributions ($2,000).
(4) For the year ended December 31, 1999, this amount represents compensation
for expenses relating to group term life insurance ($2,880), employer
profit sharing contributions ($7,496) and employer 401(k) matching
contributions ($2,000). For the year ended December 31, 1998, this amount
represents
43
<PAGE>
compensation for expenses relating to group term life insurance ($6,300),
employer profit sharing contributions ($7,623) and employer 401(k) matching
contributions ($2,000).
(5) For the year ended December 31, 1999, this amount represents compensation
for expenses relating to group term life insurance ($2,880), employer
profit sharing contributions ($7,496) and employer 401(k) matching
contributions ($2,000). For the year ended December 31, 1998, this amount
represents compensation for expenses relating to group term life insurance
($2,640), employer profit sharing contributions ($7,623) and employer
401(k) matching contributions ($2,000).
(6) Dr. Mulder was appointed President and Chief Executive Officer of HSI on
November 16, 1998 and resigned from these positions on February 27, 1999.
Dr. Mulder is presently our President--International.
Stock Options Granted in 1999. The following table sets forth information
concerning individual grants of stock options to purchase our common stock
made in 1999 to each of the named executive officers. No options were
exercised during 1999.
Option Grants in Last Fiscal Year 1999
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------
Percent of
Total
Number of Options
Securities Granted to Grant-
Underlying Employees Exercise Date
Options in Fiscal Price Expiration Value
Name and Principal Position Granted Year ($/Sh) Date (3)
- --------------------------- ---------- ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Patrick S. Pittard, 17,586(1) 10.0% $14 4/26/2009 $8.56
President and Chief 131,500(2)
Executive Officer.........
Donald M. Kilinski, Chief 6,510(1) 1.9% $14 4/26/2009 $8.56
Financial Officer......... 21,500(2)
Richard D. Nelson,
Chief Administrative 6,900(1) 1.4% $14 4/26/2009 $8.56
Officer................... 14,500(2)
David C. Anderson, 12,084(1) 3.4% $14 4/26/2009 $8.56
President--Americas....... 38,500(2)
Dr. Jurgen B. Mulder, 19,824(1) 3.9% $14 4/26/2009 $8.56
President--International.. 38,500(2)
</TABLE>
- -------
(1) These options will vest on April 26, 2008. Vesting may accelerate to as
early as April 26, 2004 if certain guidelines are met.
(2) Twenty percent of these options vest on each of the first five anniversary
dates from April 26, 2000.
(3) The present value of the grant at the date of the grant was determined
using a Black-Scholes option pricing model. The present value of options
granted in 1999 is estimated using the following assumptions: average
risk-free interest rate of 5.3%, dividend rate of 0%, expected volatility
of 54.3% and expected option life of seven years.
Employment Agreements
Mr. Pittard, Mr. Kilinski and Mr. Nelson have agreements with us providing
for severance benefits. Mr. Pittard's agreement entitles him to 30 months of
his average total cash base and bonus compensation calculated based on the
three year period preceding the year of the termination of employment if his
employment is terminated without cause, and 24 months of such average cash
compensation if his employment is constructively terminated.
As part of Mr. Pittard's proposed employment agreement, we will pay
approximately $2.8 million a year for seven years for a life insurance policy
that is anticipated to commence in the first calendar quarter of 2000. At the
end of the seven years, our payments will be returned less the cost of key man
life insurance coverage we would have otherwise purchased for Mr. Pittard. At
the same time, we will also receive interest on that cash at a pre-tax rate of
5% per year. In connection with the life insurance policy Mr. Pittard has
agreed that his year 2000 bonus will be reduced to help fund the first year's
policy premium.
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<PAGE>
Mr. Kilinski's agreement entitles him to three months of his monthly base
salary if his employment is terminated without cause. Mr. Nelson's agreement
entitles him to 6 months of his monthly base salary and the pro rata portion of
his bonus if his employment is terminated for any reason.
Mr. Anderson's agreement entitles him to three months of his monthly base
salary if his employment is terminated without cause.
1998 Heidrick & Struggles GlobalShare Plan
We have adopted the 1998 Heidrick & Struggles GlobalShare Program I (the
"GlobalShare Program I") which serves as a means to attract, reward, and retain
our selected key employees and directors ("Employee Participants") . We have
also adopted the 1998 Heidrick & Struggles GlobalShare Program II (the
"GlobalShare Program II" and, together with the GlobalShare Program I, the
"GlobalShare Plan") which serves as a means to attract, reward and retain
independent contractors (together with the Employee Participants, the
"Participants"). The terms of each of the GlobalShare Program I and the
GlobalShare Program II are substantially the same in all material respects.
The maximum number of shares of common stock reserved for issuance under our
GlobalShare Plan is 3,721,667, subject to adjustment for certain anti-dilution
provisions. The maximum number of shares of common stock for which awards may
be granted during a calendar year to any Participant is 275,000. As of
September 30, 1999, we had granted 1,509,275 stock options and zero restricted
stock units under the GlobalShare Plan.
Awards may be in the form of options, which may be Incentive Stock Options
("ISOs") or non-qualified stock options; stock appreciation rights ("SARs")
granted as a means to exercise options or designated portions thereof, or as
independent awards; or other awards, such as restricted stock units, that are
valued in whole or in part by reference to, or are otherwise based on, the fair
market value of shares. Awards may be paid in shares, cash or a combination
thereof.
Administration. The GlobalShare Plan is administered by the Compensation
Committee of the Board of Directors (the "Committee"). The Committee has the
authority to select the Participants to be granted awards under the Plan,
determine the size and terms of an award, and determine the time when grants of
awards will be made. The Committee is authorized to interpret the Plan,
establish, amend and rescind any rules and regulations relating to the Plan,
and make any other determinations that it deems necessary or desirable for the
administration of the Plan.
Options. An option may be granted as an ISO, as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), or as a non-qualified stock
option, as determined by the Committee and as set forth in any applicable award
agreement. The option price per share of common stock is determined by the
Committee but cannot be less than 100% of the fair market value of the shares
on the date of grant. Options granted under the GlobalShare Plan are
exercisable at such time and upon such terms and conditions as may be
determined by the Committee, but in no event will an option be exercisable more
than ten years after the date it is granted.
SARs. The Committee may grant an SAR independent of an option or in
conjunction with an option or designated portion thereof at the time the
related option is granted or at any time prior to the exercise or cancellation
of the related option. The exercise price shall be an amount determined by the
Committee, but in no event will such amount be less than the greater of the
fair market value of a share of common stock on the date the SAR is granted or,
in the case of an SAR granted in conjunction with an option, or a portion
thereof, the option price of the related option, and an amount permitted by
applicable laws, rules, by-laws, or policies of regulatory authorities or stock
exchanges.
Upon the exercise of an SAR, the Participant is entitled to receive, with
respect to each share of common stock to which such SAR relates, an amount in
cash and/or shares of common stock, as the case may be, equal to the excess of
(a) the fair market value of a share on the date of exercise over (b) the
exercise price of the SAR. The Committee may impose conditions upon the
exercisability of SARs.
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<PAGE>
Other share-based awards. The Committee may grant, in its sole discretion,
other awards of shares of common stock and Awards that are valued in whole or
in part by reference to, or are otherwise based on the fair market value of,
shares of common stock ("Other Share-Based Awards"). Certain of such Other
Share-Based Awards ("Performance-Based Awards") may be granted on the basis of
our performance, stock price, market share, sales, earnings per share, return
on equity, costs or other performance goals approved by the Committee. The
maximum amount of a Performance-Based Award to any Participant with respect to
a fiscal year shall be $2,000,000.
Exercise of options. Except as otherwise provided in the Plan or in an
applicable award agreement, an award may be exercised for all, or any part, of
the shares of common stock for which it is then exercisable. The purchase
price for the shares of common stock as to which an award is exercised shall
be paid to us in full at the time of exercise
. in cash
. in shares of common stock having a fair market value equal to the
aggregate option price for the shares of common stock being purchased
and satisfying such other requirements as may be imposed by the
Committee
. partly in cash and partly in such shares of common stock
. through the delivery of irrevocable instructions to a broker to deliver
promptly to us an amount equal to the aggregate option price for the
shares of common stock being purchased, in each case, at the election of
the Participant
Transferability. Except to the extent provided by the Committee, each award
will be non-transferable during the lifetime of the Participant, otherwise
than by will or by the laws of descent and distribution.
Termination, amendment and term. The Board of Directors may suspend, amend
or terminate the plan, in whole or in part. Any amendment however, which would
increase the total number of shares reserved for purposes of the plan requires
the approval of our stockholders. Furthermore, no amendment, suspension or
termination of the Plan may, without the consent of a Participant, impair any
of the rights or obligations existing under any award previously granted to
such Participant under the Plan. No new awards may be granted under the
GlobalShare Plan after the tenth anniversary of the Plan's adoption.
Adjustments. In the event of any change in the outstanding shares of our
common stock by reason of any dividend or split, reorganization,
recapitalization, merger, consolidation, spin-off, combination or exchange of
shares of common stock or other corporate exchange, or any distribution to
stockholders of shares of common stock other than regular cash dividends, the
Committee, in its sole discretion, may make such substitution or adjustment as
it deems to be equitable to the number or kind of shares or securities issued
or reserved under the Plan or to any affected terms of the awards. In the
event of a change in our control (as defined in the Plan) the Committee, in
its sole discretion, may take such actions as it deems appropriate, including,
without limitation, acceleration or cancellation (in return for cash payment)
of awards, or issuance of substitute awards.
46
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock before and after the offering by:
. our directors
. each of our named executive officers
. each person that we know of to be the beneficial owner of 5% or more of
the outstanding shares of common stock
. our selling stockholders
. all of our directors and executive officers, as a group
Unless otherwise indicated, we believe that the beneficial owner has sole
voting and investment power over such shares. The table does not reflect the
potential sale of additional shares if the underwriters' over-allotment option
are exercised. The percentage ownership before the offering has been calculated
based on 16,663,151 shares of common stock outstanding as of September 30,
1999, and the percentage ownership after the offering has been calculated based
on 18,671,457 shares of common stock outstanding.
<TABLE>
<CAPTION>
Ownership Ownership
Before Offering After Offering
-------------------- --------------------
Shares of Percent of Shares of Shares of Percent of
Name and Address of Common Common Common Stock Common Common
Beneficial Owner(1) Stock Stock Held Being Sold Stock Stock Held
------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers
Patrick S. Pittard...... 263,847 1.6% 37,668 226,179 1.2%
Donald M. Kilinski...... 48,580 * 0 48,580 *
Richard D. Nelson....... 255,724 1.5 37,668 218,056 1.2
Gerard R. Roche......... 411,399 2.5 0 411,399 2.2
David C. Anderson....... 118,176 * 0 118,176 *
Thomas J. Friel......... 259,404 1.6 0 259,404 1.4
David B. Kixmiller...... 163,872 * 23,877 139,995 *
Bengt Lejsved........... 38,529 * 0 38,529 *
Dr. Jurgen B. Mulder.... 109,319 * 0 109,319 *
Dr. John C. Viney....... 163,085 * 0 163,085 *
Robert Louis-Dreyfus.... 0 0 0 0 0
Robert W. Shaw.......... 0 0 0 0 0
Carlene M. Ziegler...... 0 0 0 0 0
All directors and
executive officers of
the Company as a group
(13 persons)........... 1,831,935 11.0 99,213 1,732,722 9.3
Selling Stockholders
Jean-Louis Alpeyrie..... 95,894 * 14,207 81,687 *
Ricardo Backer.......... 30,288 * 3,847 26,441 *
Caroline R. Ballantine.. 153,121 * 22,968 130,153 *
Patrick Bazil........... 21,886 * 4,820 17,066 *
Jean Belda.............. 63,539 * 9,531 54,008 *
Dennis M. Boyer......... 32,099 * 4,196 27,903 *
Peter Breen............. 103,342 * 14,588 88,754 *
Geoff Brown............. 31,042 * 4,656 26,386 *
Brendan G. Burnett-
Stohner................ 96,400 * 17,000 79,400 *
Thomas J. Campbell...... 207,375 1.2 30,878 176,497 *
I. Wayne Carter......... 201,648 1.2 30,019 171,629 *
Michael T. Christy...... 72,175 * 9,557 62,618 *
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Ownership Ownership
Before Offering After Offering
-------------------- --------------------
Shares of Percent of Shares of Shares of Percent of
Name and Address of Common Common Common Stock Common Common
Beneficial Owner(1) Stock Stock Held Being Sold Stock Stock Held
------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
W. Christopher Clark.... 79,313 * 11,897 67,416 *
Gerard Clery-Melin...... 142,394 * 21,359 121,035 *
Romeo Crameri........... 90,750 * 13,074 77,676 *
Nestor O. D'Angelo...... 37,421 * 5,288 32,133 *
Orlin R. Davis.......... 50,612 * 7,143 43,469 *
John P. De Regt......... 49,949 * 6,890 43,059 *
Lauren M. Doliva........ 116,906 * 17,536 99,370 *
David P. Francis........ 191,941 1.2 28,128 163,813 *
Dieter Frisee........... 84,392 * 12,659 71,733 *
John T. Gardner......... 80,047 * 11,031 69,016 *
John A. Griffin......... 135,951 * 18,730 117,221 *
Rajinder M. Gupta....... 56,404 * 7,874 48,530 *
Richard P. Gustafson.... 77,082 * 11,562 65,520 *
Randall W. Hill......... 48,470 * 6,555 41,915 *
Charles R. Hoskins...... 79,347 * 11,294 68,053 *
Theodore Jadick......... 299,710 1.8 43,972 255,738 1.4
David S. Joys........... 71,726 * 10,107 61,619 *
P. Fredrick Kahn........ 67,020 * 9,550 57,470 *
Jory J. Marino.......... 96,400 * 17,000 79,400 *
J. Rucker McCarty....... 66,919 * 9,552 57,367 *
Thomas M. Mitchell...... 159,706 * 23,630 136,076 *
Emanuel N. Monogenis.... 123,598 * 18,540 105,058 *
Peter Nater............. 88,681 * 13,074 75,607 *
Kenneth V. O'Brien...... 50,361 * 7,326 43,035 *
David R. Pasahow........ 92,670 * 13,575 79,095 *
Madelaine Pfau.......... 164,814 * 24,722 140,092 *
Leonard Pfeiffer IV..... 58,385 * 8,432 49,953 *
Eugene M. Rackley....... 250,649 1.5 37,272 213,377 1.1
George A. Rossi......... 129,789 * 19,273 110,516 *
Melanie Kusin Rowe...... 34,109 * 4,075 30,034 *
Robert Sauer............ 196,647 1.2 29,497 167,150 *
Robert F. Saydah........ 74,582 * 49,739 24,843 *
Florian Schilling....... 44,320 * 6,085 38,235 *
John R. Schlosser Jr.... 41,846 * 5,862 35,984 *
Gene L. Spence.......... 183,595 1.1 26,580 157,015 *
Hans Steckling.......... 60,060 * 8,328 51,732 *
Roger W. Stoy Jr........ 142,436 * 20,310 122,126 *
Brian M. Sullivan....... 713,360 4.3 107,004 606,356 3.2
Han van Halder.......... 32,332 * 4,355 27,977 *
Michel Vigan............ 79,107 * 11,866 67,241 *
Charles E. Wallace...... 42,543 * 5,468 37,075 *
Selling Stockholders as
a group (56
persons)(2)............ 6,478,596 38.9% 991,694 5,486,902 29.4%
</TABLE>
- --------
* Represents holdings of less than one percent.
(1) Each of such person's business address is 233 South Wacker Drive--Suite
4200, Chicago, IL 60606.
(2) Includes shares sold by Mr. Pittard, Mr. Nelson and Mr. Kixmiller.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our Certificate of Incorporation provides for our authorized capital stock
to consist of 100,000,000 shares of common stock, par value $.01 per share, of
which 16,663,151 shares were issued and outstanding on September 30, 1999 and
10,000,000 shares of preferred stock, par value $.01 per share, none of which
is outstanding. Except as otherwise expressly stated, all references in this
prospectus to us or our capital stock (including the common stock) are to such
after completion of the offering. Immediately following completion of the
offering, there are expected to be 18,671,457 shares of common stock
(19,121,457 shares of common stock if the underwriters' over-allotment options
is exercised in full) and no shares of preferred stock outstanding. This
amount excludes:
. 1,509,275 shares issuable pursuant to options and restricted stock units
which have been granted pursuant to our employee incentive plans
. 1,545,725 shares of common stock available for future issuance under our
incentive plans
The following description of our capital stock and related matters is
qualified in its entirety by reference to our Certificate of Incorporation and
our Bylaws, copies of which have been filed as an exhibit to the registration
statement of which this prospectus forms a part.
Common Stock
The Certificate of Incorporation authorizes 100,000,000 shares of common
stock, par value $.01 per share. Stockholders are entitled to one vote per
share on all matters to be voted upon by the stockholders. The holders of
common stock do not have cumulative voting rights in the election of
directors. Holders of common stock are entitled to receive dividends if, as
and when dividends are declared from time to time by our Board of Directors
out of funds legally available, after payment of dividends required to be paid
on outstanding preferred stock (as described below), if any. In the event of
our liquidation, dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and accrued but unpaid dividends and liquidation preferences on any
outstanding preferred stock . The shares of common stock have no preemptive or
conversion rights and are not subject to our further calls or assessment.
There are no redemption or sinking fund provisions applicable to the common
stock. The common stock we are selling in this offering, when sold to the
Underwriters in the manner described in this Prospectus will be duly
authorized, validly issued, fully paid and non-assessable.
The Delaware General Corporation Law
We are a Delaware corporation subject to Section 203 of the DGCL. ("Section
203"). Section 203 provides in general that a stockholder acquiring more than
15% of the outstanding voting stock of a corporation subject to Section 203
(an "Interested Stockholder") but less than 85% of such stock may not engage
in certain Business Combinations (as defined in Section 203) with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (prior to such date the
corporation's board of directors approved either the Business Combination or
the transaction in which the stockholder became an Interested Stockholder or
the Business Combination is approved by the corporation's board of directors
and authorized by a vote of at least 66 2/3% of the outstanding voting stock
of the corporation not owned by the Interested Stockholder. A "Business
Combination" includes mergers, asset sales and other transactions resulting in
financial benefit to a stockholder. Section 203 could prohibit or delay
mergers or other takeover or change of control attempts with respect to us
and, accordingly, may discourage attempts that might result in a premium over
the market price for the shares held by stockholders.
Certificate of Incorporation; Bylaws
Our Certificate of Incorporation and our Bylaws contain certain provisions
that could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise.
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<PAGE>
Classified Board of Directors. The Certificate of Incorporation provides that
our Board of Directors is divided into three classes of directors, with the
classes to be as nearly equal in number as possible. As a result, approximately
one-third of our Board of Directors will be elected each year. The
classification of directors has the effect of making it more difficult for
stockholders to change the composition of our Board of Directors. The
Certificate of Incorporation provides that the number of directors may be fixed
from time to time exclusively pursuant to a resolution adopted by directors
constituting a majority of the total number of directors that we would have if
there were no vacancies on the Board of Directors, but must consist of not more
than fifteen nor less than eight directors. In addition, our Certificate of
Incorporation provides that unless the Board of Directors otherwise determines,
any vacancies will be filled only by the affirmative vote of a majority of the
remaining directors, though less than a quorum. We believe that a classified
Board of Directors helps to assure the continuity and stability of the Board of
Directors and our business strategies and policies, since a majority of the
Directors at any given time will have had prior experience as our Directors. We
believe that this in turn permits the Board of Directors to represent more
effectively the interests of stockholders.
With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the members of the Board of Directors. As a result, the
classification of our Board of Directors may discourage proxy contests for the
election of directors, unsolicited tender offers or purchases of a substantial
block of the common stock because it could prevent a potential acquiror from
obtaining control of the Board of Directors in a relatively short period of
time.
Removal of Directors. Under the DGCL, unless otherwise provided in the
Certificate of Incorporation, directors serving on a classified board may be
removed by the stockholders only for cause. In addition, our Certificate of
Incorporation and our Bylaws provide that directors may be removed only for
cause and only upon the affirmative vote of holders of at least 75% of the
voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors ("Voting Stock"), voting together as a
single class. This provision delays stockholders who do not agree with the
policies of the Board of Directors from replacing Directors, unless they can
demonstrate that the Directors should be removed for cause and obtain the
requisite vote. Such a delay may help ensure that our Board of Directors, if
confronted with a proxy contest or an unsolicited proposal for an extraordinary
corporate transaction, will have sufficient time to review the proposal and
appropriate alternatives to the proposal and to act in what it believes is the
best interest of our stockholders.
Filling Vacancies on the Board of Directors. Our Certificate of Incorporation
provides that, subject to the rights of holders of any shares of preferred
stock, any vacancy in the Board of Directors that results from an increase in
the number of Directors may be filled only by a majority of the Directors then
in office, provided that a quorum is present, and any other vacancy may be
filled by a majority of the Directors then in office, even if less than a
quorum, or by the sole remaining Director. Accordingly, these provisions could
temporarily prevent any stockholder from obtaining majority representation on
the Board of Directors by enlarging the Board of Directors and filling the new
Directorships with its own nominees.
Stockholders Action. Our Certificate of Incorporation and our Bylaws provide
that, subject to the rights of any holders of preferred stock to elect
additional directors under specified circumstances, stockholder action can be
taken only at an annual or special meeting of stockholders and may not be taken
by written consent. The Bylaws provide that to elect additional directors under
specified circumstances, special meetings of stockholders can be called only by
the Board of Directors, pursuant to a resolution adopted by a majority of the
total number of directors. Stockholders are not permitted to call a special
meeting or to require that the Board of Directors call a special meeting of
stockholders. Moreover, the business permitted to be conducted at any special
meeting of stockholders is limited to the business brought before the meeting
pursuant to the notice of meeting that we gave. The provisions of our
Certificate of Incorporation prohibiting action by written consent without a
meeting, and the provisions of our By-Laws governing the calling of and matters
considered at special meetings may have the effect of delaying consideration of
a stockholder proposal until the next annual meeting. These provisions would
also prevent the holders of a majority of the voting power of the outstanding
shares of stock entitled to vote generally in the election of Directors from
using the written consent procedure
50
<PAGE>
to take stockholder action and from taking action by written consent without
giving all the stockholders entitled to vote on a proposed action the
opportunity to participate in determining such proposed action at a meeting.
Advance Notice Procedures. The Bylaws establish an advance notice procedure
for stockholders to make nominations of candidates for election as directors,
or bring other business before an annual meeting of our stockholders (the
"Stockholders Notice Procedure"). The Stockholders Notice Procedure provides
that only persons who are nominated by, or at the direction of, the Board of
Directors, or by a stockholder who has given timely written notice to our
Secretary prior to the meeting at which directors are to be elected, will be
eligible for election as directors. The Stockholders Notice Procedure also
provides that at an annual meeting only such business may be conducted as has
been brought before the meeting by, or at the direction of, our Chairman of the
Board of Directors or by a stockholder who has given timely written notice to
our Secretary of such stockholder's intention to bring such business before
such meeting. Under the Stockholders Notice Procedure, for notice of
stockholder nominations to be made at an annual meeting to be timely, we must
receive the notice not less than 60 days nor more than 90 days prior to the
first anniversary of the previous year's annual meeting (or, if the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date, not earlier than the 90th day prior to such meeting
and not later than the later of (x) the 60th day prior to such meeting and (y)
the 10th day after public announcement of the date of such meeting is first
made). Notwithstanding the foregoing, in the event that the number of directors
to be elected is increased and we have not made a public announcement naming
all of the nominees for director or specifying the size of the increased Board
of Directors at least 70 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice will be timely, but only with
respect to nominees for any new positions created by such increase, if we
receive it not later than the 10th day after we make such public announcement.
Under the Stockholders Notice Procedure, for notice of a stockholder nomination
to be made at a special meeting at which directors are to be elected to be
timely, we must receive such notice not earlier than the 90th day before such
meeting and not later than the later of (x) the 60th day prior to such meeting
and (y) the 10th day after the public announcement of the date of such meeting
is first made. In addition, under the Stockholders Notice Procedure, a
stockholder's notice to us proposing to nominate a person for election as a
director or relating to the conduct of business other than the nomination of
directors must contain certain specified information. If the Chairman of the
Board of Directors or other officer presiding at a meeting determines that a
person was not nominated, or other business was not brought before the meeting,
in accordance with the Stockholders Notice Procedure, such person will not be
eligible for election as a director, or such business will not be conducted at
such meeting, as the case may be. By requiring advance notice of nominations by
stockholders, the Notice of Meeting Provision will afford the Board of
Directors a meaningful opportunity to consider the qualifications of the
proposed nominees and, to the extent deemed necessary or desirable by the Board
of Directors, to inform the stockholders about such qualifications. By
requiring advance notice of proposed business, the Notice of Meeting Proposal
Provision will provide the Board of Directors with a meaningful opportunity to
inform stockholders, prior to such meeting, of any business proposed to be
conducted at such meeting, together with any recommendation or statement of the
Board of Directors' position as to action to be taken with respect to such
business, so as to enable stockholders better to determine whether they desire
to attend such a meeting or to grant a proxy to the Board of Directors as to
the disposition of any such business. Although our Bylaws do not give the Board
of Directors any power to approve or disapprove stockholder nominations for the
election of Directors or proposals for action, they may have the effect of
precluding a contest for the election of Directors or the consideration of
stockholder proposals if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of Directors or to approve its proposal without
regard to whether consideration of such nominees or proposals might be harmful
or beneficial to us and our stockholders.
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<PAGE>
Liability of Directors; Indemnification. The Certificate of Incorporation
provides that a director will not be personally liable for monetary damages to
us or our stockholders for breach of fiduciary duty as a director, except for
liability:
. for any breach of the director's duty of loyalty to us or our
stockholders
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
. for paying a dividend or approving a stock repurchase or redemption in
violation of Section 174 of the DGCL
. for a transaction from which the director derived an improper personal
benefit
The Certificate of Incorporation also provides that each of our current or
former director, officer, employee or agent, or each such person who is or was
serving or who had agreed to serve at our request as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including the heirs, executors, administrators or estate of
such person), will be indemnified by us to the full extent permitted by the
DGCL, as the same exists or may in the future be amended (but, in the case of
any such amendment, only to the extent that such amendment permits us to
provide broader indemnification rights than permitted us to provide prior to
such amendment). The Certificate of Incorporation also specifically authorizes
us to enter into agreements with any person providing for indemnification
greater or different than that provided by the Certificate of Incorporation.
Restrictions on Amendment. Our Certificate of Incorporation provides that the
approval of holders of at least 75% of the voting power entitled to vote
generally in the election of Directors, voting together as a single class, is
required to adopt any Certificate of Incorporation provision inconsistent with
or to alter, amend or repeal the provisions of our Certificate of
Incorporation:
. classifying the Board of Directors
. governing the removal of directors
. establishing the minimum and maximum number of members of the Board of
Directors
. eliminating the ability of stockholders to act by written consent
. authorizing the Board of Directors to consider the interests of clients
and other customers, creditors, employees
. establishing the Board of Directors' authority to issue, without a vote
or any other action of the stockholders, any or all authorized shares of
our stock, securities convertible into or exchangeable for any authorized
shares of our stock and warrants, options or rights to purchase,
subscribe for or otherwise acquire shares of our stock for any such
consideration and on such terms as the Board of Directors in its
discretion lawfully may determine
. authorizing that our By-Laws may establish procedures regulating the
submission by stockholders of nominations and proposals for consideration
at meetings of our stockholders
In addition, our Certificate of Incorporation provides that the approval of the
Board of Directors or the affirmative vote of the holders of 75% of the voting
power entitled to vote generally in the election of Directors, voting together
as a single class, is required to alter, amend or repeal the above provisions
of our Certificate of Incorporation or to adopt any provision of the
Certificate of Incorporation inconsistent with such provisions or to alter,
amend or repeal certain provisions of our By-Laws or to adopt any provision of
the By-Laws inconsistent with such provisions.
Preferred stock. The Certificate of Incorporation authorizes 10,000,000
shares of preferred stock, par value $.01 per share. Subject to our Certificate
of Incorporation and applicable law, the authority of our Board of Directors
with respect to each series of preferred stock, includes but is not limited to
the authority to generally determine the following: the designation of such
series, the number of shares initially constituting such series
52
<PAGE>
and whether to increase or decrease such number of shares, dividend rights and
rates, terms of redemption and redemption prices, liquidation preferences,
voting rights, conversion rights, whether a sinking fund will be provided for
the redemption of the shares of such series (and, if so, the terms and
conditions thereof) and whether a purchase fund shall be provided for the
shares of such series (and, if so, the terms and conditions thereof).
We believe that the availability of the preferred stock will provide
increased flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs that might arise. Having such
authorized shares available for issuance will allow us to issue shares of
preferred stock without the expense and delay of a special stockholders'
meeting. The authorized shares of preferred stock, as well as shares of common
stock, will be available for issuance without further action by the
stockholders, unless such action is required by applicable law or the rules of
any stock exchange on which our securities may be listed. Although the Board of
Directors has no current intention to do so, it would have the power (subject
to applicable law) to issue a series of preferred stock that could, depending
on the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. For instance, subject to applicable law, such series of
preferred stock might impede a business combination by including class voting
rights that would enable the holder to block such a transaction. The Board of
Directors will make any determination to issue such shares based on its
judgment as to our best interests and our stockholders. The Board of Directors,
in so acting, could issue preferred stock having terms which could discourage
an acquisition attempt or other transaction that some, or a majority of the
stockholders might believe to be in their best interest or in which
stockholders might receive a premium for their stock over the then market price
of such stock.
The description set forth above is intended as a summary only and is
qualified in its entirety by reference to the forms of the Certificate of
Incorporation and the Bylaws, copies of which have been filed as exhibits to
the Registration Statement of which this Prospectus is a part. See "Additional
Information."
Registrar and Transfer Agent
The registrar and transfer agent for the common stock is ChaseMellon
Shareholder Services, L.L.C.
Listing
The common stock is listed on the Nasdaq National Market under the symbol
HSII.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 10.3 million shares and the shares, stock option and restricted stock
units granted under our employee incentive plans and held by our affiliates are
"restricted" securities within the meaning of Rule 144 under the Securities Act
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including the exemptions
contained in Rule 144.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned
"restricted securities" for at least one but less than two years, and any of
our affiliates who has owned "restricted securities" for at least one year, is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then-outstanding shares of common stock
(186,715 shares upon completion of the offering) or the average weekly trading
volume in the common stock on all national securities exchanges and/or reported
through the automated quotation system of registered securities associations
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain provisions regarding the manner of sale, notice
requirements and the availability of current public information about us. A
stockholder (or stockholders whose shares are aggregated) who is not our
affiliate for at least 90 days prior to a proposed transaction and who has
beneficially owned "restricted securities" for at least two years is entitled
to sell such shares under Rule 144 without regard to the limitations described
above.
Prior to this offering there were 16,663,151 shares of common stock issued
and outstanding. Of these shares, there are approximately 11.3 million shares
which may not be sold in the absence of registration under the Securities Act
or an exemption from the Securities Act. In addition, there are currently
1,509,275 shares of common stock issuable pursuant to stock options and
restricted stock units which have been granted under our employee incentive
plans. Upon issuance, these shares will be freely tradeable by persons other
than our affiliates, without restriction under the Securities Act.
We can make no predictions as to the effect, if any, that sales of shares of
common stock or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of the common stock in the public market, or the perception that such sales
could occur, could adversely affect the market price of the common stock and
could impair our future ability to raise capital through an offering of its
equity securities.
54
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, Lehman Brothers Inc.,
Goldman, Sachs & Co., The Robinson-Humphrey Company, LLC and Fidelity Capital
Markets, a division of National Financial Services Corporation, are acting as
representatives of the underwriters named below. Under the underwriting
agreement each of the underwriters has agreed to purchase from us and the
selling stockholders the respective number of shares of common stock shown
opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Lehman Brothers Inc. .......................................... 1,120,000
Goldman, Sachs & Co. .......................................... 1,120,000
The Robinson-Humphrey Company, LLC............................. 400,000
Fidelity Capital Markets, a division of National Financial
Services Corporation.......................................... 40,000
Banc of America Securities LLC................................. 40,000
Bear, Stearns & Co. Inc........................................ 40,000
PaineWebber Incorporated....................................... 40,000
Warburg Dillon Read LLC........................................ 40,000
First Union Securities, Inc.................................... 40,000
Raymond James & Associates, Inc................................ 40,000
Robert W. Baird & Co. Incorporated............................. 20,000
CJS Securities, Inc............................................ 20,000
Gardner Rich & Company......................................... 20,000
Gerard Klauer Mattison & Co., Inc.............................. 20,000
---------
Total...................................................... 3,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of the common stock depend on the satisfaction of the
conditions contained in the underwriting agreement and that if any of the
shares of common stock are purchased by the underwriters under the underwriting
agreement, all of the shares of common stock that the underwriters have agreed
to purchase under the underwriting agreement must be purchased. The conditions
contained in the underwriting agreement include the condition that all the
representatives and warranties made by us to the underwriters are true, that
there has been no material adverse change in our condition or in the financial
markets and that we and the selling stockholders deliver to the underwriters
customary closing documents.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock. This underwriting fee is the
difference between the public offering price and the amount the underwriters
pay to us to purchase the shares from us. On a per share basis, the
underwriting fee is 5.24% of the initial public offering price.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
---------- ----------
<S> <C> <C>
Fee................................................. $ 1.73 $ 1.73
Total............................................... $5,190,000 $5,968,500
</TABLE>
We and the selling stockholders have been advised by the representatives that
the underwriters propose to offer the common stock directly to the public at
the public offering price set forth on the cover page of this prospectus and to
dealers (who may include the underwriters) at this public offering price less a
concession not in excess of $1.02 per share. The underwriters may allow and the
dealers may reallow a concession not in excess of $.10 per share to brokers and
dealers. After the offering, the representatives may change the offering price
and other selling terms.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments that may be required to be made in respect thereof.
55
<PAGE>
We have granted the underwriters an option to purchase up to an aggregate of
450,000 additional shares of common stock at the initial public offering price
less the underwriting discounts and commissions set forth on the cover page of
this prospectus exercisable solely to cover over-allotments. Such option may be
exercised at any time until 30 days after the date of the underwriting
agreement. If this option is exercised, each underwriter will be committed,
subject to satisfaction of the conditions specified in the underwriting
agreement, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial commitment as indicated in the
preceding table, and we will be obligated, pursuant to such option, to sell
such shares to the underwriters.
We have agreed, for a period of 90 days from the date of this prospectus, not
to directly or indirectly, offer, sell or otherwise dispose of any shares of
common stock or any securities convertible into or exchangeable or exercisable
for any such shares of common stock or enter into any derivative transaction
with similar effect as a sale of common stock, without the prior consent of
Lehman Brothers Inc. written consent. The restrictions described in this
paragraph do not apply to (a) the sale of common stock to the underwriters, (b)
shares of common stock issued by us under employee incentive plans or upon the
exercise of options issued under employee incentive plans or (c) transactions
by any person other than us relating to shares of common stock or other
securities acquired in open market transactions after the completion of the
offering.
Fidelity Capital Markets, a division of National Financial Services
Corporation is acting as an underwriter of this offering, and will be
facilitating electronic distribution of information through the Internet, their
Intranet and other proprietary electronic technology.
Until the distribution of the common stock is completed, rules of the SEC may
limit the ability of the underwriters to bid for and purchase shares of common
stock. As an exception to these rules, the representatives are permitted to
engage in transactions that stabilize the price of the common stock. These
transactions may consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option.
The representatives also may impose a penalty bid on underwriters. This means
that, if a representative purchases shares of common stock in the open market
to reduce the underwriters' short position or to stabilize the price of the
common stock, they may reclaim the amount of the selling concession from the
underwriters that sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of these purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
may have on the price of the common stock. In addition, neither we nor any of
the underwriters makes any representation that the representatives will engage
in these transactions or that these transactions, once commenced, will not be
discontinued without notice.
As permitted by Rule 103 of Regulation M promulgated by the SEC under the
Securities Exchange Act of 1934, the underwriters, if any, that are market
makers, referred to as passive market makers, in the common stock, may make
bids for or purchases of the common stock on the Nasdaq National Market System
until such time, if any, when a stabilizing bid for such securities has been
made. Rule 103 generally provides that:
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months (or any 60 consecutive days ending
within the 10 days) immediately preceding the filing date of the
registration statement of which this prospectus forms a part;
56
<PAGE>
. a passive market maker may not effect transactions or display bids for
the common stock at a price that exceeds the highest independent bid for
the common stock by persons who are not passive market makers; and
. bids made by passive market makers must be identified as such.
Some of the underwriters or their affiliates have from time to time provided
investment banking and financial advisory services to us and our affiliates in
the ordinary course of business, for which they have received customary fees,
and they may continue to provide such services to us and our affiliates in the
future.
This prospectus is not, and under no circumstances is to be construed as, an
advertisement or a public offering of the shares in Canada or any province or
territory thereof. Any offer or sale of shares in Canada will be made only
under an exemption from the requirements to file a prospectus and an exemption
from the dealer registration requirement in the relevant province or territory
of Canada in which such offer or sale is made.
57
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain United States federal income
and estate tax consequences of the purchase, ownership and disposition of
common stock by a Non-U.S. Holder. As used herein the term "Non-U.S. Holder"
means any person or entity that is not a United States Holder ("U.S. Holder").
A U.S. Holder is any beneficial owner of common stock that is:
. a citizen or resident of the United States,
. a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision thereof,
. an estate the income of which is subject to United States federal income
taxation regardless of its source,
. a trust, (x) that is subject to the supervision of a court within the
United States and the control of one or more United States persons as
described in section 7701(a)(30) of the Internal Revenue Code of 1986,
as amended (the "Code") or (y) that has a valid election in effect under
applicable United States Treasury regulations to be treated as a United
States person.
This discussion does not address all aspects of United States federal income
and estate taxes and does not deal with foreign, state and local consequences
that may be relevant to such Non-U.S. Holders in light of their personal
circumstances. Furthermore, this discussion is based on provisions of the Code,
existing and proposed regulations promulgated thereunder and administrative and
judicial interpretations thereof, as of the date hereof, all of which are
subject to change. Each prospective purchaser of common stock is advised to
consult a tax advisor with respect to current and possible future tax
consequences of acquiring, holding and disposing of common stock as well as any
tax consequences that may arise under the laws of any United States state,
municipality or other taxing jurisdiction.
Dividends
Dividends paid to a Non-U.S. Holder of common stock generally will be subject
to withholding of United States federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. However, dividends
that are effectively connected with the conduct of a trade or business by the
Non-U.S. Holder within the United States and, where a tax treaty applies, are
attributable to a United States permanent establishment of the Non-U.S. Holder,
are not subject to the withholding tax, but instead are subject to United
States federal income tax on a net income basis at applicable graduated
individual or corporate rates. Certain certification and disclosure
requirements must be complied with in order for effectively connected income to
be exempt from withholding. Any such effectively connected dividends received
by a foreign corporation may be subject to an additional "branch profits tax"
at a 30% rate or such lower rate as may be specified by an applicable income
tax treaty.
Through December 31, 2000, dividends paid to an address outside the United
States are presumed to be paid to a resident of such country (unless the payer
has knowledge to the contrary) for purposes of the withholding tax discussed
above and, under the current interpretation of United States Treasury
regulations, for purposes of determining the applicability of a tax treaty
rate. However, United States Treasury regulations (the "Final Regulations")
provide that a Non-U.S. Holder of common stock who wishes to claim the benefit
of an applicable treaty rate (and avoid back-up withholding as discussed below)
for dividends paid after December 31, 2000, will be required to satisfy
applicable certification and other requirements.
A Non-U.S. Holder of common stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
58
<PAGE>
Gain on Disposition of Common Stock
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
common stock unless (1) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States, and, where a tax treaty
applies, is attributable to a United States permanent establishment of the Non-
U.S. Holder, (2) in the case of a Non-U.S. Holder who is an individual and
holds the common stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, or (3) we are or have been a
"United States real property holding corporation" for United States federal
income tax purposes.
An individual Non-U.S. Holder described in clause (1) above will be subject
to tax on the net gain derived from the sale under regular graduated United
States federal income tax rates. An individual Non-U.S. Holder described in
clause (2) above will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by United States source capital losses (even though
the individual is not considered a resident of the United States). If a Non-
U.S. Holder that is a foreign corporation falls under clause (1) above, it will
be subject to tax on its gain under regular graduated United States federal
income tax rates and, in addition, may be subject to a branch profits tax equal
to 30% of its effectively connected earnings and profits (within the meaning of
the Code) for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate or exemption under an applicable income tax treaty.
We believe we are not and do not anticipate becoming a "United States real
property holding corporation" for United States federal income tax purposes.
Special rules may apply to certain Non-U.S. Holders, such as foreign
insurance companies, "controlled foreign corporations", "passive foreign
investment companies", "foreign personal holding companies", and companies that
accumulate earnings for the purpose of avoiding tax, that are subject to
special treatment under the Code. Such entities should consult their own tax
advisors to determine the United States federal, state, local and other tax
consequences that may be relevant to them.
Federal Estate Tax
Common stock held by an individual Non-U.S. Holder at the time of death will
be included in such holder's gross estate for United States federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
We must report annually to the IRS and to each Non-U.S. Holder the amount of
dividends paid to such holder and the tax withheld with respect to such
dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% (as opposed to the
general withholding tax rate of 30% described above) generally will not apply
to dividends paid to a Non-U.S. Holder at an address outside the United States
(unless the payer has knowledge that the payee is a U.S. person). Under the
Final Regulations, however, a Non-U.S. Holder will be subject to backup
withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of common stock within the United States or
conducted through certain U.S. related financial intermediaries is subject to
both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a Non-U.S. Holder (and the
payer does not have
59
<PAGE>
actual knowledge that the beneficial owner is a United States person) or the
holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed on for us by Simpson Thacher & Bartlett, New York, New York. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by O'Melveny & Myers LLP, Los Angeles, California.
EXPERTS
The Consolidated Financial Statements and Schedule of Heidrick & Struggles,
Inc. as of December 31, 1997 and 1998, and for each of the years in the three-
year period ended December 31, 1998 included in this Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the reports of said firm and the authority of said firm as
experts in accounting and auditing.
The Consolidated Financial Statements of HSI as of December 31, 1997 and 1998
and for each of the years in the three-year period ended December 31, 1998
included in this Registration Statement have been audited by Barbier Frinault &
Associes (Arthur Andersen), independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
reports of said firm and the authority of said firm as experts in accounting
and auditing.
The Consolidated Statements of Income and Cash Flows of Mulder for the year
ended December 31, 1996 and the nine-month period ended September 30, 1997
included in this Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the reports of said firm and
the authority of said firm as experts in accounting and auditing.
60
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. F-3
Consolidated Statements of Income and Comprehensive Income For the Years
Ended December 31, 1996, 1997 and 1998................................... F-5
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1996, 1997
and 1998................................................................. F-6
Consolidated Statements of Cash Flows For the Years Ended December 31,
1996, 1997 and 1998...................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Consolidated Balance Sheet as of September 30, 1999............. F-20
Unaudited Consolidated Statements of Income and Comprehensive Income For
the Nine months Ended September 30, 1998 and 1999........................ F-22
Unaudited Consolidated Statement of Stockholders' Equity For the Nine
Months Ended September 30, 1999.......................................... F-23
Unaudited Consolidated Statements of Cash Flows For the Nine Months Ended
September 30,
1998 and 1999............................................................ F-24
Unaudited Notes to Consolidated Financial Statements...................... F-25
</TABLE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-30
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. F-31
Consolidated Statements of Income and Comprehensive Income For the Years
Ended December 31, 1996, 1997 and 1998................................... F-32
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1996, 1997
and 1998................................................................. F-33
Consolidated Statements of Cash Flows For the Years Ended December 31,
1996, 1997 and 1998...................................................... F-34
Notes to Consolidated Financial Statements................................ F-35
</TABLE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-45
Consolidated Statements of Income and Comprehensive Income For the Year
Ended December 31, 1996 and for the Nine Months Ended September 30, 1997. F-46
Consolidated Statements of Cash Flows For the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1997............................. F-47
Notes to Consolidated Financial Statements................................ F-48
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Heidrick & Struggles, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of HEIDRICK &
STRUGGLES, INC. AND SUBSIDIARIES (a Delaware corporation) as of December 31,
1997 and 1998, and the related consolidated statements of income and
comprehensive income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998 (1997 as restated--see Note 16).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Heidrick & Struggles, Inc. and
Subsidiaries as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 19, 1999
(except with respect to the matter discussed in Note 18, as to which the date
is March 26, 1999 and except with respect to the matter discussed in Note 5, as
to which the date is September 1, 1999)
F-2
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 10,650 $ 11,521
Accounts receivable--
Trade, less allowances for doubtful accounts of $3,276
and $4,669 at December 31, 1997 and 1998, respectively. 39,764 42,292
Other................................................... 1,384 2,643
Notes receivable......................................... 193 219
Note receivable from affiliate........................... -- 1,900
Prepaid expenses......................................... 1,289 1,837
Prepaid income taxes..................................... -- 3,063
Deferred income taxes.................................... 7,045 8,871
-------- --------
Total current assets................................... 60,325 72,346
-------- --------
Property and equipment:
Leasehold improvements................................... 6,787 10,641
Office furniture and fixtures............................ 9,811 12,531
Computer equipment and software.......................... 8,711 5,966
Automobiles.............................................. 853 898
System development costs................................. 1,243 10,244
-------- --------
27,405 40,280
Less--Accumulated depreciation and amortization.......... (11,683) (13,226)
-------- --------
Property and equipment, net............................ 15,722 27,054
-------- --------
Other assets:
Cash and investments designated for nonqualified
retirement plans........................................ 10,439 13,552
Investment in Heidrick & Struggles International, Inc.... 6,433 4,766
Investments and other assets............................. 342 353
Goodwill and other intangibles........................... -- 8,055
Deferred income taxes.................................... 2,961 2,649
-------- --------
Total other assets..................................... 20,175 29,375
-------- --------
Total assets........................................... $ 96,222 $128,775
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- --------
<S> <C> <C>
Current liabilities:
Short-term debt............................................. $ 3,500 $ 22,000
Current maturities of long-term debt........................ 808 2,847
Accounts payable............................................ 3,076 3,487
Accrued expenses--
Salaries and employee benefits............................. 18,880 24,027
Profit sharing and retirement.............................. 2,732 3,155
Rent....................................................... 1,817 1,817
Other...................................................... 3,028 7,059
Income taxes payable........................................ 914 --
------- --------
Total current liabilities................................. 34,755 64,392
------- --------
Long-term debt, less current maturities....................... 1,636 6,350
------- --------
Liability for nonqualified retirement plans................... 11,108 11,358
------- --------
Other long-term liabilities................................... 570 2,253
------- --------
Commitments and contingent liabilities
Mandatorily redeemable common stock:
Common stock, $.01 par value, 100,000,000 shares authorized
and 8,183,851 shares issued at December 31, 1997 and 1998;
3,010,534 and 3,146,871 shares outstanding at December 31,
1997 and 1998, respectively, at book value................. 48,153 44,422
------- --------
Total liabilities and mandatorily redeemable common stock
......................................................... $96,222 $128,775
======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share and per share figures)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenue.................................... $ 147,428 $ 193,052 $ 216,836
---------- ---------- ----------
Operating expenses:
Salaries and employee benefits........... 105,544 135,473 174,618
General and administrative expenses...... 30,344 44,736 53,557
---------- ---------- ----------
Total operating expenses............... 135,888 180,209 228,175
---------- ---------- ----------
Operating income (loss)................ 11,540 12,843 (11,339)
---------- ---------- ----------
Non-operating income (expense):
Interest income.......................... 1,394 1,626 1,585
Interest expense......................... (180) (150) (505)
Other.................................... (94) 486 (2,212)
---------- ---------- ----------
Net non-operating income (expense)..... 1,120 1,962 (1,132)
---------- ---------- ----------
Equity in net income (loss) of affiliate... 775 20 (3,417)
---------- ---------- ----------
Income (loss) before income taxes ..... 13,435 14,825 (15,888)
Provision for income taxes................. 6,216 7,999 1,302
---------- ---------- ----------
Net income (loss)...................... $ 7,219 $ 6,826 $ (17,190)
========== ========== ==========
Basic earnings (loss) per common share..... $ 2.54 $ 2.31 $ (5.85)
========== ========== ==========
Weighted average common shares outstanding. 2,847,476 2,949,416 2,939,527
========== ========== ==========
Diluted earnings (loss) per common share... $ 2.54 $ 2.31 $ (5.85)
========== ========== ==========
Diluted weighted average common shares
outstanding............................... 2,847,476 2,949,526 2,939,527
========== ========== ==========
Net income (loss).......................... $ 7,219 $ 6,826 $ (17,190)
========== ========== ==========
Other comprehensive income (loss), before
tax:
Foreign currency translation adjustment.. (465) (956) (475)
Unrealized gain on available-for-sale
investments............................. 188 1,110 1,626
---------- ---------- ----------
Other comprehensive income (loss), before
tax....................................... (277) 154 1,151
Income tax (benefit) expense related to
items of other comprehensive income
(loss).................................... (116) 64 494
---------- ---------- ----------
Other comprehensive income (loss), net of
tax....................................... (161) 90 657
---------- ---------- ----------
Comprehensive income (loss)................ $ 7,058 $ 6,916 $ (16,533)
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share figures)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Treasury Stock Comprehensive
---------------- Paid-in --------------------- Retained Income Comprehensive
Shares Amount Capital Shares Amount Earnings (Loss) Income (Loss) Total
--------- ------ -------- ---------- --------- --------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1995............ 8,183,851 $82 $ 8,501 (5,389,108) $ (12,096) $ 3,502 $ 11 $ --
Treasury stock
transactions--
Stock issued........ -- -- 2,381 229,525 543 -- -- 2,924
Stock repurchased... -- -- -- (116,765) (1,541) -- -- (1,541)
Comprehensive income
Net income.......... -- -- -- -- -- 7,219 -- $ 7,219 7,219
--------
Other comprehensive
income, net of tax
Unrealized gain on
available-for-
sale investments. -- -- -- -- -- -- -- 109 --
Foreign currency
translation
adjustment....... -- -- -- -- -- -- -- (270) --
--------
Other comprehensive
income............. -- -- -- -- -- -- (161) (161) (161)
--------
Comprehensive income. 7,058
========
Retained earnings
allocable to
mandatorily
redeemable common
stock............... -- -- -- -- -- (8,441) -- (8,441)
--------- --- -------- ---------- --------- --------- ----- --------
Balance at December
31, 1996............ 8,183,851 82 10,882 (5,276,348) (13,094) 2,280 (150) --
Treasury stock
transactions--
Stock issued........ -- -- 3,584 291,721 765 -- -- 4,349
Stock repurchased... -- -- -- (188,690) (2,850) -- -- (2,850)
Comprehensive income
Net income.......... -- -- -- -- -- 6,826 -- 6,826 6,826
--------
Other comprehensive
income, net of tax
Unrealized gain on
available-for-
sale investments. -- -- -- -- -- -- -- 644 --
Foreign currency
translation
adjustment....... -- -- -- -- -- -- -- (554) --
--------
Other comprehensive
income............. -- -- -- -- -- -- 90 90 90
--------
Comprehensive income. 6,916
========
Retained earnings
allocable to
mandatorily
redeemable common
stock............... -- -- -- -- -- (8,415) -- (8,415)
--------- --- -------- ---------- --------- --------- ----- --------
Balance at December
31, 1997............ 8,183,851 82 14,466 (5,173,317) (15,179) 691 (60) --
Treasury stock
transactions
Stock issued........ -- -- 14,095 262,292 857 -- -- 14,952
Stock repurchased... -- -- -- (125,955) (2,149) -- -- (2,149)
Comprehensive income
(loss)
Net (loss).......... -- -- -- -- -- (17,190) -- (17,190) (17,190)
--------
Other comprehensive
income, net of tax
Unrealized gain on
available-for-
sale investments. -- -- -- -- -- -- -- 933 --
Foreign currency
translation
adjustments...... -- -- -- -- -- -- -- (276) --
--------
Other comprehensive
income net of tax.. -- -- -- -- -- -- 657 657 657
--------
Comprehensive income
(loss).............. $(16,533)
========
Retained earnings
allocable to
mandatorily
redeemable common
stock............... -- -- -- -- -- 3,730 -- 3,730
--------- --- -------- ---------- --------- --------- ----- --------
Balance at December
31, 1998............ 8,183,851 $82 $ 28,561 (5,036,980) $ (16,471) $ (12,769) $ 597 $ --
========= === ======== ========== ========= ========= ===== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)................................ $ 7,219 $ 6,826 $(17,190)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 2,789 3,488 4,028
Loss on sale of property and equipment........... 522 50 578
Deferred income taxes............................ (1,327) (3,735) (2,230)
Equity in net (income) loss of affiliate......... (775) (20) 1,667
Accretion of discount on securities.............. (321) -- --
Stock-based compensation expense................. 251 300 10,166
Changes in assets and liabilities:
Trade & other receivables....................... (8,399) (11,898) (2,885)
Other assets.................................... (193) (390) (5,508)
Accounts payable................................ 516 1,627 299
Accrued expenses................................ 3,506 8,082 10,711
Income taxes payable............................ (737) (370) 1,128
Nonqualified retirement plan liability.......... 2,560 3,943 250
-------- ------- --------
Net cash provided by operating activities...... 5,611 7,903 1,014
-------- ------- --------
Cash flows from investing activities
Acquisitions..................................... -- -- (4,060)
Purchases of securities for nonqualified
retirement plan................................. (5,603) (3,538) (1,488)
Purchases of property and equipment.............. (6,819) (5,914) (15,979)
Purchases of marketable securities............... (10,303) (8,176) --
Proceeds from maturities of marketable
securities...................................... 13,000 8,176 --
Other investing activities....................... 58 (165) 12
-------- ------- --------
Net cash used in investing activities.......... (9,667) (9,617) (21,515)
-------- ------- --------
Cash flows from financing activities
Proceeds from debt............................... -- 3,500 28,648
Payments on debt................................. (1,453) (1,085) (9,834)
Proceeds from sales of treasury stock............ 2,924 4,349 4,875
Purchases of treasury stock...................... (861) (1,014) (68)
-------- ------- --------
Net cash provided by financing activities...... 610 5,750 23,621
-------- ------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents............................. (88) (557) (2,249)
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (3,534) 3,479 871
Cash and cash equivalents:
Beginning of period.............................. 10,705 7,171 10,650
-------- ------- --------
End of period.................................... $ 7,171 $10,650 $ 11,521
======== ======= ========
Supplemental disclosures of cash flow information
Cash paid for--
Interest........................................ $ 221 $ 161 $ 402
Income taxes.................................... $ 7,657 $11,523 $ 8,669
Supplemental schedule of noncash financing and
investing activities
Unrealized gain on available-for-sale
investments..................................... $ 188 $ 1,110 $ 1,626
Issuance of notes payable for the purchase of
treasury stock.................................. $ 680 $ 1,836 $ 2,081
Debt from the acquisition of net assets.......... $ -- $ -- $ 4,358
Receipt of note receivable for stock sale........ $ -- $ -- $ 98
Conversion of note receivable to equity.......... $ -- $ -- $ 1,750
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share figures)
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Heidrick & Struggles, Inc. and Subsidiaries (the "Company") are engaged in
providing management consulting and executive search services to clients on a
retained basis. The Company's clients are primarily located throughout North
America, South America and Asia Pacific.
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include Heidrick & Struggles
International, Inc. and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Financial data for all periods presented reflect the
retroactive effect of the merger, accounted for as a pooling of interests, with
Sullivan & Company ("Sullivan"), consummated in September 1999. (See Note 5.)
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Accounting Pronouncements to be Adopted
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes new standards for
reporting information about derivatives and hedging activities. It is effective
for periods beginning after June 15, 1999 and will be adopted by the Company as
of January 1, 2000. The Company expects that adoption of this Standard will
have no material effect on its consolidated financial position, results of
operations or on disclosures within the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a purchased
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration of
credit risk consist primarily of accounts receivable. Concentrations of credit
risk with respect to accounts receivable are limited due to the Company's large
number of customers and their dispersion across many different industries. At
December 31, 1998, the Company had no significant concentrations of credit
risk.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, the shorter of the lease term or the
estimated useful life of the asset, as follows:
<TABLE>
<S> <C>
Office furniture and fixtures................................... 10 years
Computer equipment and software................................. 3-5 years
Automobiles..................................................... 3 years
</TABLE>
F-8
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Depreciation for financial statement purposes for the years ended December
31, 1996, 1997 and 1998 totaled $2,789, $3,488, and $3,906, respectively.
Depreciation is calculated for tax purposes using accelerated methods.
Goodwill and Other Intangibles
Goodwill and other intangible assets are stated at cost and amortized using
the straight-line method over the estimated economic useful life. The Company
continually evaluates whether subsequent events and circumstances have occurred
that indicate the remaining estimated useful life of goodwill or an intangible
asset may warrant revision, or that the remaining balance of goodwill or an
intangible asset may not be recoverable. The Company evaluates the
recoverability of goodwill and intangible assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of such assets are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, there were no adjustments to the carrying value of
goodwill or intangible assets in 1998.
System Development Costs
In accordance with Statement of Position No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," development costs
are capitalized. Once the software is placed in service, it will be depreciated
using the straight-line method over a three to five year period.
Investments Designated for Nonqualified Retirement Plan
Investments designated for the nonqualified retirement plan are carried at
the fair value of the security in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Investments designated for
the nonqualified retirement plan are debt and equity securities that are
classified as available-for-sale securities as more fully described in Note 2.
Investment in Heidrick & Struggles International, Inc.
The Company accounts for its investment in Heidrick & Struggles
International, Inc. ("HSI") by the equity method as more fully described in
Note 3. Using this method, the Company's equity in the net income of the
affiliate is recognized in the Company's statement of income and comprehensive
income and added to the investment account. Dividends received, if any, from
the affiliate are treated as reductions in the investment account.
Revenue Recognition
Revenue from client services is recognized as clients are billed, generally
over a 60 to 90 day period commencing in the month of the initial acceptance of
a search. If a search is canceled within the first 90 days, the Company will
pro-rate the fee up to the date of cancellation. Revenue consists of the amount
billed to clients, net of sales taxes.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities,
applying enacted statutory tax rates in effect for the year in which the tax
differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance when, in the
F-9
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Earnings (Loss) per Common Share
The Company adopted SFAS No. 128, "Earnings Per Share" at December 31, 1997.
Basic earnings (loss) per common share is computed by dividing net income
(loss) by weighted average common shares outstanding for the year. Diluted
earnings (loss) per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted. See Note 12 for the reconciliation of basic and diluted earnings per
share.
Translation of Foreign Currencies
The translation of financial statements into U.S. dollars has been performed
in accordance with SFAS No. 52, "Foreign Currency Translation." The local
currency for all subsidiaries has been designated as the functional currency
except for subsidiaries which operate in highly inflationary economies which
use the U.S. dollar as their functional currency. Non-U.S. assets and
liabilities have been translated into U.S. dollars at the current rate of
exchange prevailing at the balance sheet date. Revenues and expenses have been
translated at the average exchange rates for the period. Translation
adjustments are reported as a component of comprehensive income.
2. Investments Designated for Nonqualified Retirement Plan
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which requires investments
in debt and equity securities be classified as held-to-maturity, available-for-
sale or trading securities. The Company's investments designated for the
nonqualified retirement plan are classified as investments available-for-sale
(see Note 10). These securities are carried at fair value based on publicly
reported market quotes as of December 31, 1997 and 1998. Any unrealized gains
and losses on available-for-sale securities have been excluded from earnings
and have been reported as a component of comprehensive income.
The following details the cost and unrealized gain components that make up
the fair value of the investments at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Cost basis................................................ $ 8,835 $10,618
Gross unrealized gain..................................... 1,298 2,924
------- -------
Fair value.............................................. $10,133 $13,542
======= =======
</TABLE>
3. Investment in HSI
The Company has an investment in HSI which is accounted for under the equity
method. The percentage of common stock ownership at December 31, 1997 and 1998
was 35.5%, and 35.7%, respectively. Based on an agreement between the Company
and HSI, effective January 1, 1995, 65% of the net income of HSI is allocated
to Class A shares and 35% of the net income of HSI is allocated to Class B
shares, regardless of the exact percentage of each class holding. The Company
owns all Class B shares of HSI.
F-10
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisitions
During 1996, the Company purchased selected assets of two companies in Latin
America. The purchase price for each of these transactions equals the cost of
the net assets as of the date of the transaction. During 1998, the Company
incurred $2,825 of salaries and employee benefits expense due to the early
settlement of profit sharing arrangements related to these acquisitions.
On June 26, 1998, the Company purchased selected assets and liabilities of
Fenwick Partners, Inc. The purchase price was approximately $6,120 which is to
be paid in 3 installments. The first installment of $3,060 was paid on June 26,
1998. The remaining installments, including interest at a rate of 5%, are due
in June of 1999 and June of 2000 and approximate $321 and $3,037, respectively.
The amortization expense was $105 for 1998.
On October 1, 1998, the Company purchased selected assets of Heidrick
Partners, Inc. The purchase price was $2 million which is to be paid in two
installments. The first installment of $1 million was paid on October 1, 1998
and the remaining installment, including interest at the prime rate, is due on
October 1, 1999. The amortization expense was $17 for 1998.
Each acquisition was accounted for as a purchase. Goodwill is being amortized
over 30 years using the straight-line method. Results of operations of the
acquired companies are included in the consolidated statements of income and
comprehensive income since the date of acquisition.
5. Sullivan Merger
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. Sullivan is an executive search firm that
specializes in the financial services industry and had revenue of $12,821 in
1998.
The consolidated financial statements of the Company for all periods
presented have been restated to give retroactive effect to the merger with
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.
Certain key employees of Sullivan participated in a Phantom Stock Plan, the
shares of which vested over an eight year period. At December 31, 1998, the
shares were 40% vested. The accompanying balance sheets reflect the accrued
compensation liability for the Phantom Shares at December 31, 1997 and 1998.
Upon consummation of the merger with the Company, the vesting of the Phantom
Shares accelerated to 100% and the Phantom Shares were converted into Sullivan
shares.
F-11
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue, net income, and basic and diluted earnings per common share of the
combining companies are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Revenue
H&S, as previously reported on Form
S-1/A................................................ $180,244 $204,015
Sullivan.............................................. 12,808 12,821
-------- --------
H&S, as restated...................................... $193,052 $216,836
======== ========
Net income (loss)
H&S, as previously reported on Form
S-1/A................................................ $ 6,443 $(16,254)
Sullivan.............................................. 383 (936)
-------- --------
H&S, as restated...................................... $ 6,826 $(17,190)
======== ========
Earnings (loss) per common share
H&S, as previously reported on Form
S-1/A
Basic............................................... $ 2.41 $ (6.10)
======== ========
Diluted............................................. $ 2.41 $ (6.10)
======== ========
H&S, as restated
Basic............................................... $ 2.31 $ (5.85)
======== ========
Diluted............................................. $ 2.31 $ (5.85)
======== ========
</TABLE>
6. Line of Credit
The Company has a $60,000 reducing revolving credit facility ("line of
credit"). This facility will terminate on December 31, 2001. The line of credit
will reduce annually by $10,000 on December 31, 1999 and 2000. There was
$22,000 outstanding under this line of credit at December 31, 1998. At its
discretion, the Company may borrow either U.S. dollars on deposit in the United
States ("U.S. Borrowings") or U.S. dollars or foreign currencies on deposit
outside the United States ("Non-U.S. Borrowings"). A Non-U.S. Borrowing bears
interest at the then existing LIBOR plus a margin as determined by certain
tests of H&S Inc. financial condition (the "Applicable Margin"). A U.S.
Borrowing bears interest at the then existing prime rate. At December 31, 1998,
the interest rate on the debt was LIBOR plus the Applicable Margin, which sum
equaled 6.8%. This line of credit replaced a $25,000 line of credit which had
been effective since October 1, 1997. There was $3,500 outstanding under this
line of credit at December 31, 1997 and the borrowings bore interest at either
LIBOR plus 1% or the prime rate, at the Company's discretion. At December 31,
1997, the interest rate on the debt was fixed at approximately 8.5%. The line
of credit has certain financial covenants the Company must meet relating to
consolidated net worth, liabilities, and debt in relation to cash flows. There
are also restrictions in the line of credit limiting loans to HSI. As of
December 31, 1997, the Company met all of its financial covenants. For the year
ended December 31, 1998, the Company was not in compliance with the debt
service coverage ratio. The Company obtained a waiver from the lending
institutions relating to this requirement for the year ended December 31, 1998.
The Company was in compliance with all other financial covenants as of December
31, 1998. The Company is required to pay a commitment fee on the unused portion
of the line of credit on a quarterly basis. Commitment fee expense for the year
ended December 31, 1997 and 1998 totaled $8 and $21, respectively.
F-12
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Related Party Transactions
At December 31, 1998, note receivable from affiliate was comprised of a loan
to HSI of $1,900. The interest rate on this receivable is 6.2% at December 31,
1998. Accounts receivable includes an intercompany receivable of $776 and
$2,998 at December 31, 1997 and 1998, respectively. All transactions between
the Company and HSI are recorded at cost.
8. Long-Term Debt
Long-term debt consists of amounts due to former stockholders who have sold
their stock back to the Company (see Note 9). The obligations are unsecured and
payable in annual installments over periods ranging from two to five years with
interest payable generally at the prime commercial rate (8.50% and 7.75% at
December 31, 1997 and 1998, respectively). Long-term debt also includes amounts
due as a result of the Fenwick acquisition (see Note 4).
The fair value of the debt based on current rates for similar debt is
estimated to be $8,009 at December 31, 1998.
Future principal payments on long-term debt are due as follows:
<TABLE>
<S> <C>
Years ending December 31--
1999........................................................... $2,847
2000........................................................... 4,190
2001........................................................... 1,134
2002........................................................... 726
2003........................................................... 300
------
$9,197
======
</TABLE>
9. Stockholder Agreements
In accordance with the terms of stock purchase agreements between the Company
and its stockholders, the Company is obligated to purchase the shares of stock
owned by a stockholder if the stockholder desires to sell or transfer the
shares, or upon a stockholder's termination of employment at net book value as
defined in the stock purchase agreements. Payments for shares are generally
made over a five year period. Redemption amounts relating to the stock purchase
agreements are included in Mandatorily Redeemable Common Stock in the
accompanying consolidated balance sheets. These agreements will terminate upon
successful completion of an initial public offering.
10. Employee Benefit Plans
Qualified Retirement Plans
The Company has a defined contribution retirement plan for all eligible
employees. The plan contains a 401(k) provision which provides for employee tax
deferred contributions.
The Company matched employee contributions on a two-for-one basis up to a
maximum Company contribution of $1, $2 and $2 per participant for the years
ended December 31, 1996, 1997 and 1998, respectively. The Company has the
option of making discretionary contributions. For the years ended December 31,
1996, 1997 and 1998, the Company elected to contribute to each eligible
participant a sum equal
F-13
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to 3.03% of the participant's total compensation (as defined) and an additional
3.03% of the participant's compensation above the Social Security taxable wage
base.
The plan allows participants the option of having their account balances or
portions thereof invested in the Company's common stock. At December 31, 1997
and 1998, the plan held 2,054,684 and 1,853,655 shares, respectively, of the
Company's common stock. The Company sells shares of common stock to the plan
and is required to repurchase the shares issued to the plan at net book value
as defined in the stock purchase agreements. This requirement will be
terminated upon successful completion of an initial public offering.
The plan provides that forfeitures will be used to reduce the Company's
contributions. Forfeitures are created when participants terminate employment
before becoming entitled to their full benefits under the plan. Company expense
for the plan for the years ended December 31, 1996, 1997 and 1998 was $1,339,
$2,174, and $2,532, respectively.
In addition, the subsidiaries each maintain defined contribution retirement
plans for their eligible employees. Retirement plan expense for these plans for
the years ended December 31, 1996, 1997 and 1998 totaled $128, $154, and $159,
respectively.
Nonqualified Retirement Plans
The Company also has two separate nonqualified retirement plans. The first
plan is for United States based employees and includes both an optional
employee contribution and a discretionary employer contribution. The plan
expense for the years ended December 31, 1996, 1997 and 1998 was $1,440,
$1,350, and $0, respectively. The liability for this retirement plan consisted
of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Employer contributions................................... $ 6,390 $ 6,390
Employee deferrals....................................... 3,785 3,785
Earnings of designated assets............................ 316 544
Distributions............................................ -- (210)
------- -------
$10,491 $10,509
======= =======
</TABLE>
Investments designated for the nonqualified retirement plan are carried at
fair market value based on publicly quoted prices. The Company has an
accumulated unrealized gain as of December 31, 1997 and 1998 of $1,298, and
$2,924, respectively, which is recorded as a separate component of
stockholders' equity (see Note 2). The nonqualified plan was unfunded until
1996.
The fair value of the assets designated for the nonqualified retirement plan
consist of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Cash and cash equivalents................................ $ 306 $ 10
Stock mutual fund........................................ 6,919 9,533
Bond mutual fund......................................... 3,214 4,009
------- -------
$10,439 $13,552
======= =======
</TABLE>
In 1995, the Company instituted a second nonqualified retirement plan for
employees classified as senior associates. This plan provides for only
discretionary employer contributions. The plan expense for the years ended
December 31, 1996, 1997 and 1998 was $170, $250, and $232, respectively. The
liability for this retirement plan at December 31, 1997 and 1998 was $617, and
$849, respectively.
F-14
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
The deferred tax assets and liabilities consist of the following components
as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets--
Receivable allowances....................................... $ 1,515 $ 2,052
Accrued vacations........................................... 433 772
Accrued bonuses............................................. 6,206 6,969
Liability for nonqualified retirement plans................. 5,035 5,569
Other accrued expenses...................................... 667 1,393
Deferred compensation....................................... -- 572
Foreign net operating loss carryforwards.................... 595 1,515
Cumulative translation adjustment........................... 636 1,503
------- -------
15,087 20,345
Valuation allowance......................................... (502) (1,303)
------- -------
Net deferred tax assets................................... 14,585 19,042
------- -------
Deferred tax liabilities--
Leasehold improvements and equipment........................ (225) (273)
Equity in undistributed income of affiliate................. (2,045) (125)
System development costs.................................... (356) (3,678)
Unrealized gain on available-for-sale investments........... (545) (1,228)
Other....................................................... (1,408) (2,218)
------- -------
Net deferred tax liabilities.............................. (4,579) (7,522)
------- -------
Net deferred income taxes............................... $10,006 $11,520
======= =======
</TABLE>
The deferred tax amounts mentioned above have been classified in the
accompanying consolidated balance sheets as of December 31, 1997 and 1998, as
follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Current deferred tax assets............................. $ 8,593 $10,419
Current deferred tax liabilities........................ (1,548) (1,548)
------- -------
Net current deferred tax asset........................ 7,045 8,871
------- -------
Long-term deferred tax assets........................... 5,992 8,867
Long-term deferred tax liabilities...................... (3,031) (6,218)
------- -------
Net long-term deferred tax asset...................... 2,961 2,649
------- -------
$10,006 $11,520
======= =======
</TABLE>
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Current--
Federal....................................... $ 5,209 $ 8,305 $1,883
State......................................... 2,478 2,763 497
Foreign....................................... 322 540 436
Deferred........................................ (1,793) (3,609) (1,514)
------- ------- ------
$ 6,216 $ 7,999 $1,302
======= ======= ======
</TABLE>
F-15
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of income tax expense for the years ended December 31, 1996,
1997 and 1998, to income taxes at the statutory federal income tax rate of 35%,
is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Income taxes at statutory rate................... $4,702 $5,189 $(5,561)
Increase (decrease) due to--
State income taxes, net of federal tax benefit. 1,611 1,625 136
Nondeductible expenses......................... 341 357 4,985
Foreign taxes in excess of federal tax rates... 408 721 930
Other, net..................................... (846) 107 812
------ ------ -------
Provision for income taxes....................... $6,216 $7,999 $ 1,302
====== ====== =======
</TABLE>
The accumulated undistributed earnings of HSI included in the Company's
income for the years ended December 31, 1997 and 1998 totaled $4,072 and $655,
respectively, which under existing law, will not be subject to U.S. tax until
distributed as dividends. Furthermore, any taxes paid to foreign governments on
those earnings may be used in whole or in part as credits against the U.S. tax
on any dividends distributed from such earnings. The Company has provided a
deferred tax liability for the undistributed earnings of HSI. As the earnings
of the consolidated foreign subsidiaries will be permanently reinvested in the
Company, no deferred tax liability has been provided.
The sources of earnings before income taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
United States................................. $14,345 $16,908 $(10,212)
Foreign....................................... (910) (2,083) (5,676)
------- ------- --------
Total..................................... $13,435 $14,825 $(15,888)
======= ======= ========
</TABLE>
12. Basic and Diluted Earnings (Loss) Per Common Share
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings per share ("EPS").
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to common
shareholders.......................... $ 7,219 $ 6,826 $ (17,190)
Weighted average common shares
outstanding........................... 2,847,476 2,949,416 2,939,527
---------- ---------- ----------
Basic EPS............................ $ 2.54 $ 2.31 $ (5.85)
========== ========== ==========
Diluted EPS
Income (loss) available to common
shareholders.......................... $ 7,219 $ 6,826 $ (17,190)
---------- ---------- ----------
Weighted average common shares
outstanding........................... 2,847,476 2,949,416 2,939,527
Dilutive common shares issued.......... -- 110 --
---------- ---------- ----------
Weighted average diluted common shares
outstanding........................... 2,847,476 2,949,526 2,939,527
---------- ---------- ----------
Diluted EPS.......................... $ 2.54 $ 2.31 $ (5.85)
========== ========== ==========
</TABLE>
F-16
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Commitments and Contingencies
Operating Leases
The Company leases office space in various buildings for its own use. The
terms of these operating leases provide that the Company pays base rent and a
share of increases in operating expenses and real estate taxes in excess of
defined amounts. These leases expire at various dates through 2013. The Company
also leases computer equipment which is accounted for as an operating lease.
Minimum future lease payments due in each of the next five years ending
December 31 and thereafter, are as follows:
<TABLE>
<S> <C>
Years ending December 31--
1999.......................................................... $ 8,857
2000.......................................................... 9,184
2001.......................................................... 7,741
2002.......................................................... 6,728
2003.......................................................... 5,891
Thereafter.................................................... 13,580
-------
$51,981
=======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1996,
1997 and 1998 was $7,286, $8,793, and $10,002, respectively.
Employment Agreement
The Company has an employment agreement with an officer which provides for
certain payments upon retirement but requires the officer to provide services
and not to compete with the Company. The payments are indexed to the Consumer
Price Index and would currently approximate $199 for each of the first five
years of retirement and approximately $99 for each of the succeeding five
years. The agreement also states the payments are ratably forfeited during the
period which the individual remains an active employee after having reached the
age of 65. At December 31, 1998, the first thirty months of payments have been
forfeited as a result of that provision. This agreement also provides for the
same payments to the officer in the event of his disability while an employee
of the Company except that the payments would be reduced by any amounts
received from disability insurance carried by the Company. If the officer dies
while an employee or during the ten years of the retirement plan, the agreement
provides for payments to his widow or estate of one-half of the amounts for
retirement. As future services expected to be received by the Company are
commensurate with retirement payments to be made, no provision for any payment
under this plan has been made in the accompanying consolidated financial
statements.
Litigation
In the normal course of business, the Company is a party to various matters
involving disputes and litigation. While it is not possible at this time to
determine the ultimate outcome of these matters, management believes that the
ultimate liability, if any, will not be material to the consolidated results of
operations, financial condition or liquidity of the Company.
F-17
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Segment Information
Management views the operations of the Company through geographic segments.
For purposes of the geographic information below, Mexico is included in Latin
America.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
North America................................... $137,664 $171,561 $193,109
Latin America................................... 2,189 7,972 9,579
Asia Pacific.................................... 7,575 13,519 14,148
-------- -------- --------
Total......................................... $147,428 $193,052 $216,836
======== ======== ========
Operating Income (Loss):
North America................................... $ 12,915 $ 14,624 $ (6,520)
Latin America................................... (751) (1,708) (4,988)
Asia Pacific.................................... (624) (73) 169
-------- -------- --------
Total......................................... $ 11,540 $ 12,843 $(11,339)
======== ======== ========
<CAPTION>
Identifiable Assets:
<S> <C> <C> <C>
North America................................... $ 62,858 $ 83,509 $116,824
Latin America................................... 2,206 4,920 5,410
Asia Pacific.................................... 5,762 7,793 6,541
-------- -------- --------
Total......................................... $ 70,826 $ 96,222 $128,775
======== ======== ========
</TABLE>
During all years presented above, no individual customer accounted for
greater than 10% of revenue.
15. Merger Agreement
On February 12, 1999, the Company's Board of Directors approved a merger
agreement with HSI which details the plan to merge the Company with and into
HSI prior to an initial public offering; and recommended that the merger
agreement be submitted to the stockholders for approval. After completion of
the merger, the corporation will be named Heidrick & Struggles International,
Inc.
16. Restatement
In February 1999, an error was discovered in the HSI financial statements for
the year ended December 31, 1997. HSI has restated its financial statements for
the year ended December 31, 1997 accordingly. As a result, the Company has
restated its financial statements for the year ended December 31, 1997 to
reflect the change in the Investment in Heidrick & Struggles International,
Inc. A summary of the restatements by category is as follows:
<TABLE>
<CAPTION>
Restatements as of
December 31, 1997
------------------
<S> <C>
Equity in net income of affiliate............................ $(95)
Provision for income taxes................................... 40
----
$(55)
====
</TABLE>
F-18
<PAGE>
HEIDRICK & STRUGGLES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Stock Based Compensation Expense
In the fourth quarter of 1998, the Company sold 735,809 shares to its
directors, resulting in $9,947 of salaries and employee benefits expense
arising from the difference between the issuance price of the shares (book
value) of $6.76 per share and the fair market value of the shares at the date
of grant of $20.28 per share.
18. Subsequent Events
On January 20, 1999, HSI repaid its loan from the Company in the amount of
$1,900 plus interest.
On February 26, 1999, the Company merged with and into Heidrick & Struggles
International, Inc.
In February 1999, the Company filed amendments to the Certificate of
Incorporation to change the par value, increase the number of authorized shares
of common stock to 100,000,000 shares and to authorize a class of preferred
stock of 10,000,000 shares. The board of directors adopted and the stockholders
approved these amendments. The financial statements have been retroactively
restated for the effect of the par value and common stock authorization change.
On March 26, 1999, Heidrick & Struggles International, Inc. declared a
15.8217 for 1 stock split to become effective upon completion of its initial
public offering of common stock.
F-19
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
(unaudited)
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Current assets:
Cash and cash equivalents...................................... $109,529
Accounts receivable--
Trade, less allowances for doubtful accounts of $14,349 at
September 30, 1999........................................... 86,207
Other......................................................... 3,119
Notes receivable............................................... 230
Prepaid expenses............................................... 4,518
Deferred income taxes.......................................... 15,228
--------
Total current assets......................................... 218,831
--------
Property and equipment:
Leasehold improvements......................................... 18,259
Office furniture and fixtures.................................. 19,852
Computer equipment and software................................ 19,586
Automobiles.................................................... 2,427
System development costs....................................... 20,138
--------
80,262
Less--Accumulated depreciation and amortization................ (29,313)
--------
Property and equipment, net.................................. 50,949
--------
Other assets:
Cash and investments designated for nonqualified retirement
plans......................................................... 31,521
Investments and other assets................................... 5,896
Goodwill and other intangibles................................. 44,982
Deferred income taxes.......................................... 7,058
--------
Total other assets........................................... 89,457
--------
Total assets................................................. $359,237
========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-20
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
(unaudited)
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
Current liabilities:
Current maturities of long-term debt........................... $ 3,893
Accounts payable............................................... 8,456
Accrued expenses--
Salaries and employee benefits................................ 132,899
Other......................................................... 17,990
Income taxes payable........................................... 5,997
--------
Total current liabilities.................................... 169,235
--------
Long-term debt, less current maturities.......................... 1,591
--------
Liability for nonqualified retirement plans...................... 29,341
--------
Commitments and contingent liabilities
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued at
September 30, 1999............................................ --
Common stock, $.01 par value, 100,000,000 shares authorized, of
which 16,663,151 shares were issued and outstanding at
September 30, 1999............................................ 167
Additional paid-in capital..................................... 124,539
Retained earnings.............................................. 31,781
Cumulative foreign currency translation adjustment............. (1,940)
Unrealized gain on available-for-sale investments (net of tax). 4,523
--------
Total stockholders' equity................................... 159,070
--------
Total liabilities and stockholders' equity................... $359,237
========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-21
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share figures)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Revenue.................................................... $168,914 $302,583
-------- --------
Operating expenses:
Salaries and employee benefits........................... 121,585 201,847
General and administrative expenses...................... 39,191 75,121
Nonrecurring charge and merger costs..................... -- 15,220
-------- --------
Total operating expenses............................... 160,776 292,188
-------- --------
Operating income....................................... 8,138 10,395
-------- --------
Non-operating income (expense):
Interest income.......................................... 941 1,939
Interest expense......................................... (354) (1,298)
Other.................................................... 143 357
-------- --------
Net non-operating income............................... 730 998
-------- --------
Equity in net loss of affiliate............................ (772) (630)
-------- --------
Income before income taxes ............................ 8,096 10,763
Provision for income taxes................................. 4,533 10,635
-------- --------
Net income............................................. $ 3,563 $ 128
======== ========
Basic earnings per common share............................ $ 1.20 $ 0.01
======== ========
Weighted average common shares outstanding................. 2,957 12,624
======== ========
Diluted earnings per common share.......................... $ 1.20 $ 0.01
======== ========
Diluted weighted average common shares outstanding......... 2,957 12,717
======== ========
Net income................................................. $ 3,563 $ 128
======== ========
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment.................. (1,086) (1,455)
Unrealized gain on available-for-sale investments........ 77 4,892
-------- --------
Other comprehensive income (loss), before tax.............. (1,009) 3,437
Income tax (benefit) expense related to items of other
comprehensive income (loss)............................... (432) 1,451
-------- --------
Other comprehensive income (loss), net of tax.............. (577) 1,986
-------- --------
Comprehensive income....................................... $ 2,986 $ 2,114
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-22
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-in Treasury Retained Income
Stock Capital Stock Earnings (Loss) Total
------ ---------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998................... $ 82 $ 28,561 $(16,471) $(12,769) $ 5597 $ --
Treasury and common
stock transactions:
Stock issued for
Merger................ 34 26,576 16,471 -- -- 43,081
Stock issued in initial
public offering....... 42 51,959 -- -- -- 52,001
Stock issued to
employees............. 7 14,408 -- -- -- 14,415
Stock issued for
termination of
Sullivan employee
equity ownership plan. 2 3,035 -- -- -- 3,037
Release of book value
restriction........... -- -- -- 44,422 -- 44,422
Comprehensive income,
net of tax
Net income............. -- -- -- 128 -- 128
Unrealized gain on
available-for-sale
investments........... -- -- -- -- 2,837 2,837
Foreign currency
translation
adjustments........... -- -- -- -- (851) (851)
---- -------- -------- -------- ------ --------
Balance at September 30,
1999................... $167 $124,539 $ -- $ 31,781 $2,583 $159,070
==== ======== ======== ======== ====== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-23
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income................................................ $ 3,563 $ 128
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization............................. 2,970 7,353
Loss on sale of property and equipment.................... 493 (33)
Gain on sale of securities................................ -- (417)
Deferred income taxes..................................... (696) (22)
Equity in net loss of affiliate........................... 772 630
Stock-based compensation expense.......................... 331 252
Nonrecurring charge and merger costs...................... -- 15,220
Changes in assets and liabilities:
Trade & other receivables................................ (9,583) (23,523)
Other assets............................................. (1,621) 2,379
Accounts payable......................................... 570 1,353
Accrued expenses......................................... 53,883 66,548
Income taxes payable..................................... (2,538) 2,006
Nonqualified retirement plan liability................... 172 1,062
-------- --------
Net cash provided by operating activities............... 48,316 72,936
-------- --------
Cash flows from investing activities
Acquisitions.............................................. (3,060) --
Purchases of securities for nonqualified retirement plan.. (1,344) (324)
Purchases of property and equipment....................... (11,527) (16,622)
Proceeds from sales of securities......................... -- 7,232
Cash acquired in merger transaction with HSI.............. -- 8,166
Other investing activities................................ 5 (176)
-------- --------
Net cash used in investing activities................... (15,926) (1,724)
-------- --------
Cash flows from financing activities
Proceeds from debt........................................ 5,848 17,700
Payments on debt.......................................... (9,559) (51,067)
Net proceeds from issuance of common stock................ -- 61,334
-------- --------
Net cash provided by (used in) financing activities..... (3,711) 27,967
-------- --------
Effect of foreign currency exchange rates on cash and cash
equivalents............................................... (567) (1,171)
-------- --------
Net increase in cash and cash equivalents.................. 28,112 98,008
Cash and cash equivalents:
Beginning of period....................................... 10,650 11,521
-------- --------
End of period............................................. $ 38,762 $109,529
======== ========
Supplemental disclosures of cash flow information
Cash paid for--
Interest................................................. $ 278 $ 1,280
Income taxes............................................. $ 6,829 $ 1,844
Supplemental schedule of noncash financing and investing
activities
Unrealized gain on available-for-sale investments......... $ 77 $ 4,892
Issuance of notes payable for the purchase of treasury
stock.................................................... $ 2,081 $ --
Debt from the acquisition of net assets................... $ 3,385 $ --
Issuance of stock for merger.............................. $ -- $ 43,081
Issuance of stock for termination of Sullivan equity
ownership plan........................................... $ -- $ 3,037
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-24
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share figures)
(unaudited)
1. Interim Financial Data
The accompanying unaudited consolidated financial statements of Heidrick &
Struggles International, Inc. and Subsidiaries (the "Company"), included herein
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates. In the
opinion of management, the statements reflect all adjustments, which are of a
normal recurring nature, necessary to present fairly the Company's financial
position as of September 30, 1999, the results of operations for the nine
months ended September 30, 1998 and 1999, stockholders' equity for the nine
months ended September 30, 1999, and cash flows for the nine months ended
September 30, 1998 and 1999. While these interim financial statements and
accompanying notes are unaudited, they have been reviewed by Arthur Andersen
LLP, the Company's independent public accountants.
The consolidated financial statements of the Company for all periods
presented have been restated to give retroactive effect to the merger with
Sullivan & Company ("Sullivan") on September 1, 1999, which has been accounted
for using the pooling of interests method and, as a result, the financial
position, results of operations, stockholders' equity and cash flows are
presented as if the combining companies had been consolidated for all periods
presented and, as if the additional common stock issued in connection with the
merger had been issued for all periods presented.
2. Business Combinations
Acquisition Accounted for Using the Purchase Method
On February 26, 1999, the Company merged (the "Merger") with and into
Heidrick & Struggles International, Inc. (prior to the Merger, "HSI"). The
Merger combined the operations of the Company which operated in all regions of
the world except Europe, with HSI, a Europe-based company. The transaction was
accounted for using purchase accounting and the excess purchase price was
allocated to identifiable intangible assets and goodwill as follows:
<TABLE>
<CAPTION>
Weighted Average
Remaining Useful
Asset Classification Fair Value Life in Years
- -------------------- ---------- ----------------
<S> <C> <C>
Intangible assets................................... $12,478 17
Goodwill............................................ $23,152 40
</TABLE>
F-25
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The unaudited condensed consolidated pro forma results of operations data for
the nine months ended September 30, 1998 and 1999, as if the Merger had
occurred on January 1, 1998 and 1999, respectively, is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Revenue.................................................... $262,659 $322,568
-------- --------
Operating expenses:
Salaries and employee benefits........................... 187,461 216,763
General and administrative expenses...................... 65,864 81,562
Nonrecurring charge and merger costs..................... -- 16,140
-------- --------
Total operating expenses............................... 253,325 314,465
-------- --------
Operating income....................................... 9,334 8,103
-------- --------
Net non-operating income (expense)......................... (2,846) 942
-------- --------
Income before income taxes............................. 6,488 9,045
Provision for income taxes................................. 5,852 10,398
-------- --------
Net income (loss)...................................... $ 636 $ (1,353)
======== ========
</TABLE>
Acquisition Accounted for Using Pooling of Interests Method
On September 1, 1999, the Company completed its acquisition of Sullivan which
provided for the exchange of all the outstanding stock of Sullivan for 964
shares of the Company's common stock. The transaction was accounted for using
the pooling of interests method of accounting. Sullivan is an executive search
firm that specializes in the financial services industry and had revenue of
$12,821 in 1998.
Revenue, net income, and basic and diluted earnings per common share of the
combining companies are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998
-----------------
<S> <C>
Revenue
H&S, as previously reported on Form S-1/A............... $157,976
Sullivan................................................ 10,938
--------
H&S, as restated........................................ $168,914
========
Net income (loss)
H&S, as previously reported on Form S-1/A............... $ 3,734
Sullivan................................................ (171)
--------
H&S, as restated........................................ $ 3,563
========
Earnings per common share
H&S, as previously reported on Form S-1/A
Basic................................................. $ 1.39
========
Diluted............................................... $ 1.39
========
H&S, as restated
Basic................................................. $ 1.20
========
Diluted............................................... $ 1.20
========
</TABLE>
F-26
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
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 $12,420. 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 shares of HSI
common stock. On October 1, 1997, HSI delivered 4 shares of HSI common stock,
paid $8,695 to the partners of Mulder and incurred $298 of associated
transaction costs. Under the original Mulder acquisition agreement an
additional $5,288 (plus interest at an annual rate of 4%) was due to the
partners of Mulder in five equal annual installments, the first of which was
paid on October 1, 1998. The remaining shares were to be issued in four annual
installments beginning January 1, 1999. Because the total purchase price was
contingent upon the continued employment of the Mulder consultants, the cost of
the acquisition was accounted for as compensation expense to be recognized over
a five-year period beginning October 1, 1997. In connection with the Merger,
the Mulder acquisition agreement was amended such that the remaining cash (plus
interest) would be paid within 90 days of the completion of the Merger and 428
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
$5,184) were issued to such Mulder partners immediately after the Merger.
During the nine months ended September 30, 1999, the Company paid the remaining
$4,333 cash due, issued 428 shares of the Company's common stock and wrote off
$2,903 of deferred compensation assets resulting in a total compensation charge
of $12,420.
In connection with the acquisition of Sullivan, the Company recorded merger
related costs of $2,800 during the nine months ended September 30, 1999. The
merger costs consist of a $2,028 non-cash charge for accelerated vesting of an
employee equity ownership plan in place at Sullivan and $772 of transaction
related costs, including legal, accounting and advisory fees.
4. Initial Public Offering
On April 26, 1999, the SEC declared effective the Company's Registration
Statement on Form S-1 (File No. 333-59931) relating to the public offering of
4,200 shares of the Company's common stock and on April 27, 1999, the Company's
common stock began trading on the Nasdaq National Market under the symbol
"HSII."
On April 30, 1999, the Company completed the public offering of an aggregate
of 4,200 shares of common stock at $14.00 per share, of which 3,700 shares were
offered by the Company and 500 shares were offered by selling stockholders. In
addition, on June 1, 1999, the Company completed the offering of an additional
505 shares of common stock which arose from the exercise of a portion of the
over-allotment option granted to certain underwriters of the initial public
offering. These offerings resulted in net proceeds (after deducting the
underwriting discount and estimated offering expenses) of $52,012 to the
Company and $6,510 to the selling stockholders.
The Company's mandatory redemption feature on its common stock terminated as
a result of the completion of the initial public offering.
5. 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
F-27
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
investments in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Equity Securities." The Company has
entered into a collar agreement to hedge the impact of market value changes of
one of these equity securities. Collars consist of the sale of call options
along with a corresponding purchase of put options, with the effect of
establishing a "cap" and a "floor" with respect to the price of the stock. The
collar has been designated and is effective as a hedge of the equity security.
Unrealized gains and losses on both the equity security and the collar are
recorded in equity and comprehensive income. When realized, gains and losses on
the equity security and the collar are recorded in income. Beginning in the
fourth quarter of 1999, the Company has the right to put and the counterparty
has the right to call a portion of the shares on a quarterly basis in
accordance with an established schedule. The unrealized pre-tax gain on the
shares at September 30, 1999 was $3,964 and the Company has not recorded any
gains or losses on this collar to date.
The Company is exposed to credit loss in the event of nonperformance by the
other party. However, the Company does not anticipate nonperformance by the
counterparty.
6. Basic and Diluted Earnings Per Common Share
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings per share ("EPS").
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1999
-------- ---------
<S> <C> <C>
Basic EPS
Income available to common shareholders................ $ 3,563 $ 128
Weighted average common shares outstanding............. 2,957 12,624
-------- ---------
Basic EPS............................................ $ 1.20 $ 0.01
======== =========
Diluted EPS
Income available to common shareholders................ $ 3,563 $ 128
-------- ---------
Weighted average common shares outstanding............. 2,957 12,624
Dilutive effect of common stock options................ -- 93
-------- ---------
Weighted average diluted common shares outstanding..... 2,957 12,717
-------- ---------
Diluted EPS.......................................... $ 1.20 $ .01
======== =========
</TABLE>
The share amounts in the table above reflect a 15.8217 for 1 stock split
approved by the Board of Directors on March 26, 1999. Furthermore, the Company
filed amendments to the Certificate of Incorporation to change the par value,
increase the number of authorized shares of common stock to 100,000 shares and
to authorize a class of preferred stock of 10,000 shares. In February, 1999,
the Board of Directors adopted, and the stockholders approved, these
amendments. The financial statements, including the number of shares of common
stock authorized, issued and outstanding, have been retroactively restated for
the effect of this split and the amendments to the Certificate of
Incorporation.
F-28
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
(formerly known as Heidrick & Struggles, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Segment Information
Management views the operations of the Company through the following
geographic segments.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Revenue:
United States....................................... $147,886 $194,218
Europe.............................................. -- 81,410
Other International................................. 21,028 26,955
-------- --------
Total............................................. $168,914 $302,583
======== ========
Operating Income (Loss):
United States....................................... $ 19,434 $ 31,318
Europe.............................................. -- (6,172)
Other International................................. (1,865) 3,735
Corporate Unallocated............................... (9,431) (18,486)
-------- --------
Total............................................. $ 8,138 $ 10,395
======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30,
1999
Identifiable Assets: -------------
<S> <C>
United States............................................. $106,838
Europe.................................................... 89,245
Other International....................................... 22,918
Corporate Unallocated..................................... 140,236
--------
Total................................................... $359,237
========
</TABLE>
During all years presented above, no individual customer accounted for
greater than 10% of revenue.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Heidrick & Struggles International, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of HEIDRICK &
STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES (a Delaware corporation) as of
December 31, 1997 and 1998, and the related consolidated statements of income
and comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998 (1997 as restated--see Note
14). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Heidrick & Struggles
International, Inc. and Subsidiaries as of December 31, 1997 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Barbier Frinault & Associes
Arthur Andersen
Neuilly-sur-Seine, France
February 19, 1999
(except with respect to the matter discussed in Note 15, as to which the date
is March 26, 1999)
F-30
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 8,053 $15,753
Accounts receivable--
Trade, less allowances for doubtful accounts of $1,416,
and $5,011 at December 31, 1997 and 1998, respectively.. 23,617 23,250
Other.................................................... 358 819
Prepaid expenses........................................... 1,522 1,489
Deferred income taxes...................................... 1,554 7,796
------- -------
Total current assets................................... 35,104 49,107
------- -------
Property and equipment:
Leasehold improvements..................................... 4,747 4,432
Office furniture and fixtures.............................. 6,573 8,921
Computer equipment and software............................ 6,498 11,880
Automobiles................................................ 1,674 1,929
------- -------
19,492 27,162
Less--Accumulated depreciation and amortization............ (9,328) (12,245)
------- -------
Property and equipment, net.............................. 10,164 14,917
------- -------
Other assets:
Goodwill and other intangibles............................. 2,289 2,531
Deferred compensation expense.............................. 7,876 4,046
Deferred income taxes...................................... 4,523 6,035
Group insurance contracts designated for pension plan...... 14,304 17,469
Other assets............................................... 1,300 892
------- -------
Total other assets..................................... 30,292 30,973
------- -------
Total assets........................................... $75,560 $94,997
======= =======
Current liabilities:
Short-term debt............................................ $ 7,639 $11,753
Current maturities of long-term debt....................... 362 355
Accounts payable........................................... 4,265 7,337
Accrued expenses--
Salaries and employee benefits........................... 16,436 22,434
Professional fees........................................ 806 2,561
VAT...................................................... 1,855 1,537
Payroll taxes............................................ 1,250 7,135
Other.................................................... 2,676 4,653
Income taxes payable....................................... 6,422 3,286
Note payable to affiliate.................................. -- 1,900
------- -------
Total current liabilities.............................. 41,711 62,951
------- -------
Long-term debt, less current maturities...................... 168 112
------- -------
Pension and other long-term liabilities...................... 15,552 18,574
------- -------
Mandatorily redeemable common stock:
Class A common stock, no par value, 2,373,255 shares
authorized, 1,931,118 and 2,286,774 shares issued and
outstanding at December 31, 1997 and 1998, respectively,
at book value............................................. 11,706 8,578
------- -------
Stockholders' equity:
Class B common stock, no par value, 2,373,255 shares
authorized, 1,040,862 and 1,268,663 shares issued and
outstanding at December 31, 1997 and 1998, respectively,
at book value............................................. 2,361 4,111
Retained earnings.......................................... 4,952 1,210
Accumulated other comprehensive income (loss).............. (665) (539)
Less--Treasury stock, at cost, 35,504, and 0 shares at
December 31, 1997 and 1998, respectively.................. (225) --
------- -------
Total stockholders' equity............................. 6,423 4,782
------- -------
Total liabilities, mandatorily redeemable common stock
and stockholders' equity.............................. $75,560 $94,997
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-31
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share and per share figures)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenue....................................... $ 64,558 $ 82,732 $ 124,984
Operating expenses:
Salaries and employee benefits.............. 44,020 59,080 102,861
General and administrative expenses......... 17,100 20,567 37,766
--------- --------- ---------
Total operating expenses.................. 61,120 79,647 140,627
--------- --------- ---------
Operating income (loss)................... 3,438 3,085 (15,643)
Non-operating income (expense)................ 133 151 (6,116)
Minority interest in income of consolidated
subsidiaries................................. -- (26) (81)
--------- --------- ---------
Income (loss) before income taxes......... 3,571 3,210 (21,840)
Provision for (benefit from) income taxes..... 1,430 2,518 (4,475)
--------- --------- ---------
Net income (loss)......................... $ 2,141 $ 692 $ (17,365)
========= ========= =========
Basic earnings (loss) per Class A common
share........................................ $ .86 $ .25 $ (5.96)
========= ========= =========
Basic weighted average Class A common shares
outstanding.................................. 1,623,955 1,773,581 1,892,908
========= ========= =========
Diluted earnings (loss) per Class A common
share........................................ $ .86 $ .24 $ (5.96)
========= ========= =========
Diluted weighted average Class A common shares
outstanding.................................. 1,623,955 1,880,694 1,892,908
========= ========= =========
Basic and diluted earnings (loss) per Class B
common share................................. $ .72 $ .23 $ (5.83)
========= ========= =========
Weighted average Class B common shares
outstanding.................................. 1,040,862 1,040,862 1,042,729
========= ========= =========
Net income (loss)............................. $ 2,141 $ 692 $ (17,365)
========= ========= =========
Other comprehensive income (loss), before tax:
Foreign currency translation adjustment..... (191) (1,331) 404
Income tax (benefit) expense related to items
of other comprehensive income (loss)......... (76) (609) 278
--------- --------- ---------
Other comprehensive income (loss), net of tax. (115) (722) 126
--------- --------- ---------
Comprehensive income (loss)................... $ 2,026 $ (30) $ (17,239)
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-32
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share figures)
<TABLE>
<CAPTION>
Accumulated
Other
Class B Compre- Compre- Total
Common Stock Treasury Stock hensive hensive Stock-
---------------- --------------- Retained Income Income holders'
Shares Amount Shares Amount Earnings (Loss) (Loss) Equity
--------- ------ ------- ------ -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 1,040,862 $2,361 (10,284) $ (61) $3,169 $1172 $ 5,641
Treasury stock
transactions--
Stock issued........... -- -- 80,706 467 -- -- 467
Stock repurchased...... -- -- (70,422) (406) -- -- (406)
Comprehensive income
Net income............. -- -- -- -- 2,141 -- $ 2,141 2,141
--------
Foreign currency
translation
adjustment............ -- -- -- -- -- (115) (115) (115)
--------
Comprehensive income.... 2,026
========
Retained earnings
allocable to
mandatorily redeemable
Class A common stock... -- -- -- -- (1,329) -- (1,329)
--------- ------ ------- ----- -------- ----- --------
Balance at December 31,
1996................... 1,040,862 2,361 -- -- 3,981 57 6,399
Treasury stock
transactions--
Stock issued........... -- -- 63,287 425 -- -- 425
Stock repurchased...... -- -- (98,791) (650) -- -- (650)
Comprehensive income
Net income............. -- -- -- -- 692 -- 692 692
--------
Foreign currency
translation
adjustment............ -- -- -- -- -- (722) (722) (722)
--------
Comprehensive income.... (30)
========
Retained earnings
allocable to
mandatorily redeemable
Class A common stock... -- -- -- -- 279 -- 279
--------- ------ ------- ----- -------- ----- --------
Balance at December 31,
1997................... 1,040,862 2,361 (35,504) (225) 4,952 (665) 6,423
Treasury stock
transactions--
Stock issued........... 227,801 1,750 43,415 280 -- -- 2,030
Stock repurchased...... -- -- (7,911) (55) -- -- (55)
Comprehensive income
(loss)
Net loss............... -- -- -- -- (17,365) -- (17,365) (17,365)
--------
Foreign currency
translation
adjustment............ -- -- -- -- -- 126 126 126
--------
Comprehensive income
(loss)................. $(17,239)
========
Retained earnings
allocable to
mandatorily redeemable
Class A common stock .. -- -- -- -- 13,623 -- 13,623
--------- ------ ------- ----- -------- ----- --------
Balance at December 31,
1998................... 1,268,663 $4,111 -- $ -- $ 1,210 $(539) $ 4,782
========= ====== ======= ===== ======== ===== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-33
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)............................... $ 2,141 $ 692 $(17,365)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 1,721 2,623 4,624
Loss on sale of property and equipment........ 162 92 1,278
Deferred income taxes......................... (398) (1,777) (7,438)
Stock based compensation expense.............. -- -- 7,577
Changes in assets and liabilities:
Accounts receivable......................... (1,933) (4,480) 1,174
Prepaid expenses............................ 796 (1,113) 4,270
Group insurance contracts designated for
pension plan............................... -- (1,642) (1,978)
Other assets................................ (612) (912) 571
Accounts payable............................ (563) 2,198 2,291
Accrued expenses............................ 4,617 5,275 14,072
Income taxes payable........................ 394 3,063 (3,318)
Pension liability........................... -- 185 1,746
------- -------- --------
Net cash provided by operating activities. 6,325 4,204 7,504
------- -------- --------
Cash flows from investing activities
Acquisitions.................................... (540) (7,496) (559)
Proceeds from sales of property and equipment... 72 82 274
Purchases of property and equipment............. (2,039) (6,014) (9,673)
------- -------- --------
Net cash used in investing activities..... (2,507) (13,428) (9,958)
------- -------- --------
Cash flows from financing activities
Proceeds from issuance of common stock and
treasury stock................................. 737 2,465 4,913
Purchases of treasury stock..................... (406) (401) --
Proceeds from short-term debt................... -- 7,639 6,013
Payments on short-term debt..................... -- -- (55)
------- -------- --------
Net cash provided by financing activities. 331 9,703 10,871
------- -------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents............................. 38 (628) (717)
------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 4,187 (149) 7,700
Cash and cash equivalents:
Beginning of period............................. 4,015 8,202 8,053
------- -------- --------
End of period................................... $ 8,202 $ 8,053 $ 15,753
======= ======== ========
Supplemental disclosures of cash flow information
Cash paid for--
Interest...................................... $ 9 $ 3 $ 400
Income taxes.................................. $ 1,467 $ 1,418 $ 6,875
Supplemental schedule of noncash financing
activities
Issuance of notes payable for the purchase of
treasury stock................................. $ -- $ 249 $ --
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-34
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share figures)
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business
Heidrick & Struggles International, Inc. and Subsidiaries (the "Company") are
engaged in providing management consulting and executive search services to
clients on a retained basis. The Company's clients are primarily located
throughout Europe.
Basis of Accounting
The financial statements of the Company have been prepared in conformity with
U.S. generally accepted accounting principles.
Principles of Consolidation
The consolidated financial statements include Heidrick & Struggles
International, Inc. and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Accounting Pronouncements to be Adopted in 1999
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities," which establishes new standards for
reporting information about derivatives and hedging activities. It is effective
for periods beginning after June 15, 1999 and will be adopted by the Company as
of January 1, 2000. The Company expects that adoption of this Standard will
have no material effect on its consolidated financial position, results of
operations or on disclosures within the consolidated financial statements.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with a purchased
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentration of
credit risk consist primarily of accounts receivable. Concentrations of credit
risk with respect to accounts receivable are limited due to the Company's large
number of customers and their dispersion across many different industries. At
December 31, 1998, the Company had no significant concentrations of credit
risk.
F-35
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, the shorter of the lease term or the
estimated useful life of the asset, as follows:
<TABLE>
<S> <C>
Office furniture and fixtures.................................. 8-10 years
Computer equipment and software................................ 3-5 years
Automobiles.................................................... 4 years
</TABLE>
Depreciation for financial statement purposes for the years ended December
31, 1996, 1997 and 1998 totaled $1,594, $2,315 and $4,408, respectively.
During 1998, the Company incurred $4,127 of costs for the write off of
leasehold improvements and accruals for non-cancelable lease commitments due to
the decision to relocate the London office.
Goodwill and Other Intangibles
Goodwill and other intangible assets are stated at cost and amortized using
the straight-line method over the estimated economic useful life. The Company
continually evaluates whether subsequent events and circumstances have occurred
that indicate the remaining estimated useful life of goodwill or an intangible
asset may warrant revision, or that the remaining balance of goodwill or an
intangible asset may not be recoverable. The Company evaluates the
recoverability of goodwill and intangible assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of such assets are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, there were no adjustments to the carrying value of
goodwill or intangible assets in 1998, 1997 and 1996.
Revenue Recognition
Revenue from client services is recognized as clients are billed, generally
over a 60 to 90 day period commencing in the month of the initial acceptance of
a search. If a search is canceled within the first 90 days, the Company will
pro-rate the fee up to the date of cancellation. Revenue consists of the amount
billed to clients, net of sales taxes.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities,
applying enacted statutory tax rates in effect for the year in which the tax
differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Pension Plan
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employer's
Disclosure about Pensions and Other Postretirement Benefits." The provisions of
SFAS No. 132 revise employers' disclosures about pension plans. It does not
change the measurement or recognition of pension plans.
Earnings (Loss) per Common Share
The Company adopted SFAS No. 128, "Earnings Per Share" at December 31, 1997.
Basic earnings (loss) per common share is computed by dividing net income
(loss) by weighted average common shares outstanding for the year. Diluted
earnings (loss) per share reflects the potential dilution that could occur if
securities or
F-36
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
other contracts to issue common stock were exercised or converted. In
accordance with SFAS No. 128, the Company utilizes the two-class method of
calculating earnings (loss) per share. As such, the earnings (loss) are
assigned to each class according to the terms of the stock agreements and
earnings (loss) per share are computed by dividing the earnings (loss)
assigned to each class by the shares outstanding in that class.
Translation of Foreign Currencies
The translation of financial statements into U.S. dollars has been performed
in accordance with SFAS No. 52, "Foreign Currency Translation." The local
currency for all subsidiaries has been designated as the functional currency
except for subsidiaries which operate in highly inflationary economies which
use the U.S. dollar as their functional currency. Non-U.S. assets and
liabilities have been translated into U.S. dollars at the current rate of
exchange prevailing at the balance sheet date. Revenues and expenses have been
translated at the average exchange rates for the period. Translation
adjustments are reported as a component of comprehensive income.
2. Acquisitions
Mulder & Partner GmbH & Co. KG
Effective October 1, 1997 the Company acquired 100% of Mulder & Partner GmbH
& Co. KG ("Mulder"). The Company entered into a deferred contingent payment
agreement with the sellers as described below:
. $8,695 was paid on October 1, 1997 and $1,066 of associated transaction
costs were incurred; $5,228 plus 4% interest will be paid in annual equal
installments over a five year period ending October 1, 2002.
. Shares of the Company will be issued over a five year period to the
partners of Mulder as follows:
<TABLE>
<CAPTION>
Number
of shares
to be issued
------------
<S> <C>
October 1, 1997.............................................. 4,000
January 1, 1999.............................................. 8,000
January 1, 2000.............................................. 7,000
January 1, 2001.............................................. 7,000
January 1, 2002.............................................. 6,000
------
32,000
======
</TABLE>
At October 1, 1997, consideration corresponding to the issuance of the first
4,000 shares was accounted for at a value of $106.16 per share, representing
the fair value of the shares of the Company at this date. The entire purchase
price (initial cash payment, future cash installments and all shares) is
contingent upon the continued employment of the selling shareholders for the
five year period ending October 1, 2002. A pro rata portion of the total
purchase price is forfeited in the event a selling shareholder leaves the
employment of the Company prior to October 1, 2002. Due to these employment
contingencies, the purchase price has been accounted for as compensation
expense over the five year period of the contingency.
On July 2, 1998, the Mulder acquisition agreement was amended. The amended
agreement is contingent upon the merger of the Company and H&S Inc. The
amended purchase price is $20,471, which is to be paid as follows:
. $8,695 was due and paid in cash, $298 of associated transaction costs
were incurred, and 4,000 shares of the Company's stock were issued to the
former stockholders of Mulder on October 1, 1997.
F-37
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. $5,228 plus interest accrued from October 1, 1997 at a rate of 4% is due
90 days after the merger of the Company and Heidrick & Struggles, Inc.
The Company paid $1,254 of this amount in October 1998.
. $5,901 represented by shares in the newly merged entity is due to the
former stockholders of Mulder immediately after the merger.
All employment contingencies were eliminated from the acquisition agreement.
Due to the early settlement and elimination of employment contingencies, all
remaining amounts will be expensed in the first quarter of 1999 when the
amendment becomes effective.
3. Line of Credit
The Company was granted a multicurrency line of credit which became
effective on October 13, 1997. The $10,548 line of credit will be reduced
annually by $2,110 on July 1, 1998, 1999, 2000 and 2001. The line of credit
will expire on July 1, 2002. The interest rate on the credit line is LIBOR
plus 1%. The interest rate at December 31, 1997 and 1998 was 7.2% and 6.6%,
respectively. The total outstanding balance was $7,639 and $8,316 at December
31, 1997 and 1998, respectively. The interest expense on the debt was $21 and
$402 for the year ended December 31, 1997 and 1998, respectively. The credit
line has a financial requirement, which requires that the ratio of total debt
to tangible net worth be less than 90%. As a result of this financial
requirement, retained earnings are restricted to the extent the ratio of debt
to tangible net worth exceeds 90%. Also, no investment greater than $2 million
is allowed without prior approval from the banks. Finally, there may be no
substantial sale of German assets without the bank's prior approval.
HSI has negotiated a $7,969 multicurrency line of credit in addition to the
above line of credit. This facility will reduce to $4,922 on March 1, 1999,
$1,055 on May 1, 1999 and will terminate on May 31, 1999. The borrowings bear
interest at the Euro OverNight Index Average ("EONIA") plus 100 basis points
or LIBOR plus 100 basis points, depending on the currency borrowed. The
borrowings can be drawn in Euros, ECU or British Pounds. At December 31, 1998,
there was $3,437 outstanding under the facility and the interest rate was
4.6%.
HSI has a $1,198 line of credit denominated in German Marks. The borrowings
bear interest at a variable rate between 4.9% and 7.5% depending on the number
of days the relevant borrowing is outstanding. There is no expiration date for
this line of credit. At December 31, 1998, there was no balance outstanding.
4. Related Party Transactions
At December 31, 1998, note payable to affiliate is comprised of a loan from
H&S Inc. of $1,900. The interest rate on this loan is 6.2% at December 31,
1998. Accounts payable includes a payable of $776 and $2,998 to H&S Inc. at
December 31, 1997 and 1998, respectively. All transactions between the Company
and H&S Inc. are recorded at cost.
Based on an agreement between the Company and H&S Inc., effective January 1,
1995, 65% of the net income of the Company is allocated to Class A shares and
35% of the net income of the Company is allocated to Class B shares,
regardless of the exact percentage of each class holding. H&S Inc. owns all
Class B shares.
5. Long-Term Debt
Long-term debt consists of amounts due to former stockholders who have sold
their stock back to the Company (see Note 6). The obligations are unsecured
and payable in annual installments over a period of four years with interest
payable at the prime commercial rate (8.50%, and 7.75% at December 31, 1997
and 1998, respectively).
F-38
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the debt based on current rates for similar debt is
estimated to be $684 at December 31, 1998.
Future principal payments on long-term debt are due as follows:
<TABLE>
<S> <C>
Years ending December 31--
1999............................................................. $355
2000............................................................. 56
2001............................................................. 56
2002............................................................. --
2003............................................................. --
----
$467
====
</TABLE>
6. Stockholder Agreements
In accordance with the terms of the stock purchase agreements between the
Company and its Class A stockholders, the Company is obligated to purchase the
shares of stock owned by a Class A stockholder if the stockholder desires to
sell or transfer the shares, or upon a stockholder's termination of employment
at net book value as defined in the stock purchase agreements. Payments for
shares are generally made over a four year period. Redemption amounts relating
to the stock purchase agreements are included in Mandatorily Redeemable Common
Stock in the accompanying consolidated balance sheets. These agreements will
terminate upon successful completion of an initial public offering.
7. Income Taxes
The deferred tax assets and liabilities consist of the following components
as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Deferred tax assets--
Receivable allowances................................... $ 584 $ 1,605
Accrued vacations....................................... 222 268
Accrued bonuses......................................... 496 2,451
Property and equipment.................................. 963 1,441
Mulder purchase......................................... 71 1,275
Accrued severance costs................................. -- 539
Pension reserve......................................... 2,921 3,028
Other accrued expenses.................................. 252 1,322
Net operating loss carryforwards........................ -- 1,611
Cumulative translation adjustment....................... 568 291
------ -------
Net deferred tax assets............................... 6,077 13,831
Deferred tax liabilities ................................. -- --
------ -------
Net deferred income taxes........................... $6,077 $13,831
====== =======
</TABLE>
F-39
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The deferred tax amounts mentioned above have been classified in the
accompanying consolidated balance sheets as of December 31, 1997 and 1998, as
follows:
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Current deferred tax assets............................... $1,554 $ 7,796
Current deferred tax liabilities.......................... -- --
------ -------
Net current deferred tax asset........................ 1,554 7,796
------ -------
Long-term deferred tax asset.............................. 4,523 6,035
Long-term deferred tax liabilities........................ -- --
------ -------
Net long-term deferred tax asset...................... 4,523 6,035
------ -------
$6,077 $13,831
====== =======
</TABLE>
The provision for income taxes for the years ended December 31, 1996, 1997
and 1998, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Current--
U.S. Federal.................................. $ 151 $ 533 $ 574
Foreign....................................... 1,677 3,046 1,264
Deferred........................................ (398) (1,061) (6,313)
------ ------- -------
$1,430 $ 2,518 $(4,475)
====== ======= =======
</TABLE>
The Company is a U.S. corporation, but operates entirely outside of the U.S.,
primarily in Europe. The Company pays foreign taxes for operations in each of
the foreign countries in which it operates and pays U.S. federal taxes on its
total operations after consideration of foreign tax credits.
A reconciliation of income tax expense for the years ended December 31, 1996,
1997, and 1998, to the statutory U.S. federal income tax rate of 35%, is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Income taxes at statutory rate.................... $1,250 $1,124 $(7,644)
Increase (decrease) due to--
Foreign taxes in excess of federal tax rates.... 494 357 1,507
Alternative minimum tax......................... 67 -- --
Stock based compensation expense adjustment..... -- -- 2,858
Other, net...................................... (381) 1,037 (1,196)
------ ------ -------
$1,430 $2,518 $(4,475)
====== ====== =======
</TABLE>
F-40
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Basic and Diluted Earnings (Loss) Per Common Share
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings per share ("EPS") for Class A common shares:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to Class A
common shareholders................... $ 1,392 $ 450 $ (11,287)
Weighted average Class A common shares
outstanding........................... 1,623,955 1,773,581 1,892,908
---------- ---------- ----------
Basic EPS.............................. $ .86 $ .25 $ (5.96)
========== ========== ==========
Diluted EPS
Income (loss) available to Class A
common shareholders................... $ 1,392 $ 450 $ (11,287)
---------- ---------- ----------
Weighted average Class A common shares
outstanding........................... 1,623,955 1,773,581 1,892,908
Stock purchase obligations............. -- 107,113 --
---------- ---------- ----------
Total diluted Class A common shares.... 1,623,955 1,880,694 1,892,908
---------- ---------- ----------
Diluted EPS............................ $ .86 $ .24 $ (5.96)
========== ========== ==========
</TABLE>
The following is a reconciliation of the shares used in the computation of
basic and diluted EPS for Class B common shares:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to Class B
common shareholders................... $ 749 $ 242 $ (6,078)
Weighted average Class B common shares
outstanding........................... 1,040,862 1,040,862 1,042,729
---------- ---------- ----------
Basic and Diluted EPS.................. $ .72 $ .23 $ (5.83)
========== ========== ==========
</TABLE>
9. Commitments and Contingencies
Operating Leases
The Company leases office space in various buildings for its own use. The
terms of these operating leases provide that the Company pays base rent and a
share of the increase in operating expenses and real estate taxes in excess of
defined amounts. The leases expire at various dates through 2013. The Company
also leases computer equipment which is accounted for as an operating lease.
F-41
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Minimum future lease payments due in each of the next five years ending
December 31, are as follows:
<TABLE>
<S> <C>
Years ending December 31--
1999.......................................................... $ 8,378
2000.......................................................... 7,667
2001.......................................................... 5,468
2002.......................................................... 3,722
2003.......................................................... 2,207
Thereafter.................................................... 26,261
-------
$53,703
=======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1996,
1997 and 1998 was $4,707, $5,307, and $6,897, respectively.
Litigation
In the normal course of business, the Company is a party to various matters
involving disputes and litigation. While it is not possible at this time to
determine the ultimate outcome of these matters, management believes that the
ultimate liability, if any, will not be material to the consolidated results of
operations, financial condition or liquidity of the Company.
10. Segment Information
Management views the operations of the Company through the following
geographic segments:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Revenue:
United Kingdom..................................... $20,565 $27,588 $ 30,943
Germany............................................ 12,614 19,900 42,097
France............................................. 11,211 12,253 16,180
Other.............................................. 20,168 22,991 35,764
------- ------- --------
Total............................................ $64,558 $82,732 $124,984
======= ======= ========
Operating Income (Loss):
United Kingdom..................................... $ 589 $ 1,028 $ (3,466)
Germany............................................ 1,279 1,090 (9,162)
France............................................. (3) 915 (3,539)
Other.............................................. 1,573 52 524
------- ------- --------
Total............................................ $ 3,438 $ 3,085 $(15,643)
======= ======= ========
Identifiable Assets:
United Kingdom..................................... $ 6,295 $12,288 $ 13,411
Germany............................................ 4,729 39,706 41,216
France............................................. 6,985 9,921 15,516
Other.............................................. 14,842 13,645 24,854
------- ------- --------
Total............................................ $32,851 $75,560 $ 94,997
======= ======= ========
</TABLE>
During all years presented above, no individual customer accounted for greater
than 10% of revenue.
F-42
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Merger Agreement
On February 12, 1999, the Company's Board of Directors approved a merger
agreement with H&S Inc. which details the plan to merge H&S Inc. with and into
the Company prior to an initial public offering; and recommended that the
merger agreement be submitted to the stockholders for approval. After
completion of the merger, the corporation will be named Heidrick & Struggles
International, Inc.
12. Pension Plan and Life Insurance Contracts
The Company maintains a pension plan for certain partners in Germany. The
pensions are individually fixed DM-amounts depending on the function and the
pensionable years of service of the employee. The following provides a
reconciliation of the benefit obligation:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at October 1, 1997 and January 1,
1998.................................................. $15,351 $16,010
Service cost........................................... 241 950
Interest cost.......................................... 234 924
Actuarial loss......................................... 474 1,871
Benefits paid.......................................... (26) (103)
Translation difference................................. (264) 793
------- -------
Benefit obligation at December 31...................... 16,010 20,445
Unrecognized net loss.................................. (474) (1,871)
------- -------
Net amount recognized.................................. $15,536 $18,574
======= =======
Unfunded status of the plan............................ $16,010 $20,445
Unrecognized actuarial loss............................ (474) (1,871)
------- -------
Accrued benefit cost................................... $15,536 $18,574
======= =======
Assumptions as of December 31:
Discount rate (weighted average)....................... 6.0% 6.0%
Rate of compensation increase.......................... 4.0% 4.0%
Components of net periodic benefit cost:
Service cost........................................... $ 234 $ 949
Interest cost.......................................... 227 923
Expected return on plan assets......................... -- --
Amortization of prior service costs.................... -- --
Recognized net actuarial loss.......................... -- --
------- -------
Net periodic benefit cost.............................. $ 461 $ 1,872
======= =======
</TABLE>
The pension benefits are fully reinsured within a group insurance contract
with Victoria Lebensversicherung AG. The surrender values at December 1, 1997
and 1998 were $14,304 and $17,469, respectively. Because the reinsurance is not
segregated from the Company's assets for purposes of SFAS No. 87, "Employers'
Accounting for Pensions," the reinsurance is not regarded as an asset with
respect to the pension plan.
13. Stock Based Compensation Expense
In the fourth quarter of 1998, the Company sold 399,071 shares to its
directors, resulting in $4,872 of salaries and employee benefits expense
arising from the difference between the issuance price of the shares (book
value) of $8.07 per share and the fair market value of the shares at the date
of grant of $20.28 per share.
F-43
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
14. Restatement and Reclassification
In February 1999, an error was discovered in the financial statements for the
year ended December 31, 1997 related to the accounting for the acquisition of
Mulder. The error was a result of the Company not recording a pension liability
and a related insurance asset and recording an erroneous tax credit. In
addition, certain entries were made to properly record the pension liability
and expense in accordance with SFAS No. 87 "Employer's Accounting for
Pensions." The Company has restated its financial statements for the year ended
December 31, 1997. A summary of the restatements by category is as follows:
<TABLE>
<CAPTION>
Restatements as
of
December 31, 1997
-----------------
<S> <C>
Salaries and employee benefits................................ $ 59
General and administrative expenses........................... (11)
Non-operating income (expense)................................ 7
Provision for income taxes.................................... (339)
-----
$(284)
=====
</TABLE>
The Company has recorded the pension asset and pension liability (as
described in Note 12) on the Consolidated Balance Sheet. Certain 1997 balances
have been reclassified to conform with the 1998 presentation.
15. Subsequent Events
On January 20, 1999, the Company repaid its loan from H&S Inc. in the amount
of $1,900 plus interest.
On February 26, 1999, Heidrick & Struggles, Inc. merged with and into the
Company.
On March 26, 1999, the Company declared a 15.8217 for 1 stock split to become
effective upon completion of its initial public offering of common stock.
F-44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Mulder & Partner GmbH & Co. KG:
We have audited the accompanying consolidated statements of income and
related consolidated statements of cash flows of MULDER & PARTNER GMBH & CO. KG
AND SUBSIDIARIES (a German limited partnership) for the nine months ended
September 30, 1997 and for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the operations of Mulder & Partner GmbH &
Co. KG and Subsidiaries and their cash flows for the nine months ended
September 30, 1997 and for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Chicago, Illinois
July 19, 1998
F-45
<PAGE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except share and per share figures)
<TABLE>
<CAPTION>
Twelve Months
Ended Nine Months Ended
December 31, 1996 September 30, 1997
----------------- ------------------
<S> <C> <C>
Revenue.................................... $32,560 $21,816
Operating expenses:
Salaries and employee benefits........... 24,701 14,610
General and administrative expenses...... 7,404 5,557
------- -------
Total operating expenses............... 32,105 20,167
------- -------
Operating income....................... 455 1,649
------- -------
Non-operating income (expense):
Interest income.......................... 28 36
Interest expense......................... (94) (159)
Other income............................. 2,106 529
------- -------
2,040 406
------- -------
Income before income taxes............. 2,495 2,055
Provision for income taxes................. 2,663 1,668
------- -------
Net income (loss)...................... $ (168) $ 387
------- -------
Comprehensive income (loss)................ $ (168) $ 387
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-46
<PAGE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Twelve Months Nine Months
Ended Ended
December 31, September 30,
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)................................ $ (168) $ 387
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 356 231
Deferred income taxes.......................... 72 (2)
Changes in assets and liabilities:
Trade & other receivables.................... (2,309) 1,319
Prepaid expenses............................. (173) 170
Accounts payable............................. 292 (246)
Accrued expenses............................. 2,152 (165)
Income taxes payable......................... 2,130 1,409
------- -------
Net cash provided by operating activities.. 2,352 3,103
------- -------
Cash flows from investing activities
Purchases of property and equipment.............. (991) (21)
Purchases of long-term investments............... (2,212) (455)
------- -------
Net cash used in investing activities...... (3,203) (476)
------- -------
Cash flows from financing activities
Dividends paid................................... (872) (557)
Proceeds from long-term debt..................... 1,299 --
Payments on long-term debt....................... -- (1,964)
------- -------
Net cash provided by (used in) financing
activities................................ 427 (2,521)
------- -------
Effect of foreign currency exchange rates on cash
and cash equivalents.............................. (38) (25)
------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (462) 81
Cash and cash equivalents:
Beginning of period.............................. 645 183
------- -------
End of period.................................... $ 183 $ 264
======= =======
Supplemental disclosures of cash flow information
Cash paid for--
Interest......................................... $ 94 $ 159
Income taxes..................................... $ 761 $ 140
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-47
<PAGE>
MULDER & PARTNER GMBH & CO. KG AND SUBSIDIARIES
NOTES TO CONSOLIDATED INCOME STATEMENTS AND
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 1996
and the nine months ended September 30, 1997
1. Nature of Business and Summary of General Accounting Principles
Nature of Business
Mulder & Partner GmbH & Co. KG and Subsidiaries (as of December 31, 1995:
Mulder & Partner GmbH) (the "Company") are engaged in providing management
consulting and executive search services to clients on a retained basis. The
Company's clients are primarily located in Germany.
Basis of Accounting
The financial statements of the Company have been prepared in conformity with
U.S. generally accepted accounting principles.
Principles of Consolidation
The consolidated financial statements include Mulder & Partner GmbH & Co., KG
and its wholly and majority owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
the accompanying notes. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the useful lives of the assets and
German tax law as follows:
<TABLE>
<S> <C>
Office furniture and fixtures.................................. 4-20 years
Computer equipment and software................................ 2-3 years
</TABLE>
Depreciation for consolidated financial statement purposes for the year ended
December 31, 1996 and the nine months ended September 30, 1997 totaled $356 and
$231, respectively.
Revenue Recognition
Revenue from client services is recognized as clients are billed, generally
over a 90 day period commencing in the month of the initial acceptance of a
search. Revenue consists of the amount billed to clients, net of expenses and
value added taxes.
Translation of Foreign Currencies
The consolidated financial statements were translated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." The functional currency for the Company is the German
Deutschmark. The consolidated financial statements have been translated into
U.S. Dollars by applying the average annual exchange rates on the consolidated
income statements and the consolidated statements of cash flows.
F-48
<PAGE>
2. Income Taxes
The provision for income taxes for the year ended December 31, 1996 and the
nine months ended September 30, 1997, is as follows:
<TABLE>
<CAPTION>
Nine months ended
1996 September 30, 1997
------ ------------------
<S> <C> <C>
Current taxes--
Trade taxes on income (Municipality tax)............ $2,591 $1,666
Deferred taxes........................................ 72 2
------ ------
$2,663 $1,668
====== ======
</TABLE>
A reconciliation of income tax expense for the year ended December 31, 1996
and the nine months ended September 30, 1997 to the statutory German trade tax
rate of 19% is as follows:
<TABLE>
<CAPTION>
Nine months ended
1996 September 30, 1997
------ ------------------
<S> <C> <C>
Income taxes at statutory rate........................ $ 474 $ 390
Increase due to--
Nondeductible expenses.............................. 2,189 1,278
------ ------
$2,663 $1,668
====== ======
</TABLE>
Since the change of the legal status of Mulder & Partner GmbH in 1996 the
Company is only subject to trade tax on income. With notarial deed dated June
13, 1996, Mulder & Partner GmbH was reorganized retroactively (effective
January 1, 1996) from a limited liability corporation into Mulder & Partner
GmbH & Co., KG (a limited partnership with a limited liability corporation as
general partner) according to Sect. 190 following the German Reorganization Law
("Umwandlungsgesetz"). Due to the change of the legal status, the Company is no
longer subject to German corporate income taxation. The income of the
partnership is now taxed at the level of the individual partners.
The reorganization has been performed at book value without realizing any
capital gain or loss. Accordingly the reorganization has not had any German
income tax implications.
Deferred Taxes
Deferred taxes are applicable for German trade tax on income and German
corporate income tax.
3. Commitments and Contingencies
Operating Leases:
The Company leases office space in various buildings for its own use. These
leases expire at various dates through 2002. The Company also leases computer
equipment and automobiles which are accounted for as operating leases.
Minimum future lease payments due in each of the next five years ending
December 31, are as follows:
<TABLE>
<CAPTION>
Years ending December 31
<S> <C>
1998............................................................. $ 952
1999............................................................. 940
2000............................................................. 889
2001............................................................. 427
2002............................................................. 239
------
$3,447
======
</TABLE>
F-49
<PAGE>
Rent expense under operating leases for the year ended December 31, 1996, and
the nine months ended September 30, 1997 was $1,157 and $789, respectively.
Litigation
In the normal course of business, the Company is a party to various matters
involving disputes and/or litigation. While it is not possible at this time to
determine the ultimate outcome of these matters, management believes that the
ultimate liability, if any, will not be material to the results of operations,
financial condition or liquidity of the Company.
4. Segment Information
The Company operates as a single business segment and in a single primary
geographic location (Germany).
F-50
<PAGE>
3,000,000 Shares
Common Stock
------------------
PROSPECTUS
February 3, 2000
------------------
Lehman Brothers
Goldman, Sachs & Co.
The Robinson-Humphrey Company
Fidelity Capital Markets
a division of National Financial
Services Corporation
