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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-25837
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HEIDRICK & STRUGGLES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2681268
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
233 South Wacker Drive, Suite 4200, Chicago, Illinois 60606-6303
(Address of principal executive offices) (Zip Code)
(312) 496-1200
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value Nasdaq National Market
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The number of shares outstanding of the Company's Common Stock as of March 1,
2000 was 19,142,142 shares. The aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant on March 1, 2000
(assuming that the Registrant's only affiliates are its officers, directors and
10% or greater stockholders) was approximately $709,352,365, based upon the
closing market price of $40.75 on that date of a share of Common Stock as
reported on the Nasdaq National Market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders scheduled to be held on June 2, 2000, are incorporated
by reference into Part III of this Form 10-K.
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HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I
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Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 12
Item 3. Legal Proceedings..................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 13
Item 6. Selected Financial Data............................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16
Item 7a. Quantitative and Qualitative Disclosures About Market Risk............................ 27
Item 8. Financial Statements and Supplementary Data........................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 28
PART III
Item 10. Our Directors and Executive Officers.................................................. 29
Item 11. Executive Compensation................................................................ 29
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 29
Item 13. Certain Relationships and Related Transactions........................................ 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K........................ 29
Signatures ...................................................................................... 31
Financial Statements and Financial Statement Schedules........................................... 33
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PART I
ITEM 1. BUSINESS
General
We are the leading global executive search firm and based on revenue, 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 886 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
The executive search industry is highly fragmented, consisting of more than
4,000 executive search firms worldwide. 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 search 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 search 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.
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 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.
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A Growing Acceptance by Corporate Leaders of Executive Search Consultants.
Many company management teams and boards of directors expect that their choices
for senior executives will be under greater scrutiny than in the past, due to
the influence of a number of factors including larger institutional
shareholdings, a rise in shareholder activism and an increased concern for
corporate governance. As a result of these trends, many boards of directors and
company management teams hire outside executive search firms to advise them on
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" at a number of companies, by eliminating
layers of management, 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 that 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 1999
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 1999
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 by:
. strengthening our brand name recognition and contacts with leading
decision makers, referral sources and highly talented candidates
. enhancing our ability to secure other senior level executive searches
. enabling us to attract and retain highly qualified consultants
Experienced Team of Executive Search Consultants. As of December 31, 1999, we
employed 391 executive search consultants. We estimate that 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. From January 1, 1995 through December 31, 1999,
an annual average of approximately 2% 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
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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 approximately two-thirds of our executive searches performed in
1999 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 after approximately two years of development, 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 year ended December 31,
1999, LeadersOnline reported revenues of $2.6 million.
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 207, 141, 27 and 16 consultants, as of December 31,
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: technology; financial services; industrial; consumer
products; 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 technology practice group is our largest and fastest growing
practice group representing approximately 33% of our revenues for the year
ended December 31, 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 495 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 33,000
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.
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 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 senior management teams in helping them to
address their human capital resource needs. These services
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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 $1.2 million in 1999 compared to $1.0 million in 1998. 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.
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 as many smaller firms have
joined with larger firms 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 the acquisition of Redelinghuys & Partners, a South African based senior
level executive search firm, completed on December 28, 1999.
The Merger
Prior to 1984, we operated under a single ownership structure. In 1984,
Heidrick & Struggles, Inc. ("H&S") spun off Heidrick & Struggles International,
Inc. ("HSI") to its European partners while retaining a significant equity
interest in it. Between 1984 and the effective date of the Merger, HSI
conducted primarily Europe-based operations, while H&S conducted all other
geographic operations. On February 26, 1999, H&S merged with HSI to reunite the
two companies in a single corporate structure.
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
. 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,
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the average annual compensation per position was approximately $120,000.
Candidates register with LeadersOnline by completing a simple on-line profile
that takes approximately eight to ten minutes. Candidates obtain confirmation
of receipt 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 consulting and other
services. A typical contract could contain one or more of these services:
. assesses clients' human capital needs; evaluates and recommends necessary
position skills and qualifications
. develops content for the LeadersOnline website which includes a company
and business overview and opportunity pages describing job specifications
and requirements
. 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, with the consent of the
candidates
. 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 subsidiary. On March 7,
2000, we announced that LeadersOnline is planning to file a Registration
Statement with the Securities and Exchange Commission covering the proposed
sale by LeadersOnline of its common stock. LeadersOnline anticipates that the
Registration Statement will be filed in the spring or summer of 2000. We may
investigate additional 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.
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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 revenue for
1999, are as follows:
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Percentage
Industry Practice Group of Revenue
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Technology..................................................... 33%
Financial Services............................................. 22
Industrial..................................................... 17
Consumer Products.............................................. 14
Health Care.................................................... 5
Professional Services.......................................... 3
Higher Education/Not-for-Profit................................ 2
Other.......................................................... 4
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100%
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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, 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. Because our functional specialists tend to have experience with
appropriate candidates from many different industries, they can bring the
necessary 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.
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Listed below are the segments, countries and locations in which we operate as
of December 31, 1999:
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Segment Country Location
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United States* 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.
Europe Austria Vienna
Belgium Brussels
Czech Republic Prague
Denmark Copenhagen
Finland Helsinki
France Paris
Germany Berlin
Dresden
Dusseldorf
Frankfurt
Hamburg
Munich (3 offices)
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Segment Country Location
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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
Israel Tel Aviv
South Africa Capetown
Johannesburg
Other International Canada Montreal
Toronto
Australia Melbourne
Sydney
China Hong Kong
India New Delhi
Japan Tokyo
Korea Seoul
Singapore Singapore
Argentina Buenos Aires
Brazil Sao Paulo
Chile Santiago
Mexico Mexico City
Peru Lima
Venezuela Caracas
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*Includes LeadersOnline operations.
United States
We have 23 locations in the United States. At December 31, 1999, we employed
a total of 200 consultants in this segment. Approximately 59% of our pro forma
worldwide revenue in 1999 was generated in the United States. The largest
offices in the United States in terms of revenue are New York, Chicago and
Menlo Park. The New York office is a leader of the financial services practice,
the Menlo Park office is the center of our 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
We have 28 locations in 17 European countries, one location in the Middle
East and two locations in South Africa. At December 31, 1999, we employed 141
consultants in this segment. Approximately 32% of our pro forma worldwide
revenue in 1999 was generated by this segment. Our locations in Germany, the
United
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Kingdom and France generate the highest revenue of our locations in this
segment. 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 1999, we believe we generated more revenue than any
other executive search firm in Germany, and, as measured by revenue, 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.
Other International
We have fifteen locations in the Other International segment, which includes
the Asia Pacific and Latin America regions, Mexico and Canada. At December 31,
1999, we employed 50 consultants and approximately 9% of our pro forma
worldwide revenue in 1999 was generated in the Other International segment.
For financial information relating to each segment, see Note 17 of our
Consolidated Financial Statements.
Clients and Marketing
We have a diverse group of clients in a variety of industries 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 revenue in 1999. Historically, we have been
successful both in adding to our client base and in generating repeat business
from existing clients.
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 1999, we succeeded in obtaining executive search engagements from
a majority of the presentations which we conducted.
We also publish a quarterly leadership journal, Taking Charge, which is
distributed to senior executives, features interviews with business leaders and
management-related articles, and publicizes our brand name.
One of the limitations of our marketing has been the existence or anticipated
existence of off-limits arrangements, but in recent years market conditions and
industry practices have resulted in off-limits arrangements that are becoming
narrower in scope and shorter in duration. Either by agreement with clients or
for client relations purposes, executive search firms sometimes 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 off-limits by strengthening our long-term
relationships with focused accounts.
Assignment Research and Information Management
Our technology infrastructure consists of internally developed global
databases containing over 1 million candidate profiles and approximately 33,000
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
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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 plan for the
deployment of technology and is designed to support our rapid growth. Phase I
of our technology initiative, which neared completion during the fourth
quarter of 1999, upgraded our financial management systems and our search
system. A PeopleSoft-based financial management system will provide for a
fully integrated worldwide accounting and financial reporting system. An
Oracle-based search system will allow 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 as
well as sharing knowledge
. through our extranet, as a means of communicating with clients, and of
connecting clients and candidates in our core executive search practice
on a secure network where each can review information about the other
Phase II of our technology initiative will expand the implementation outside
the United States, and 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 December 31, 1999, we had 1,621 full time employees, of which 391 were
consultants, 495 were associates and 735 were corporate and support staff. In
each of the past 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 excellent. Our
executive search professionals are categorized either as consultants or
associates. Associates assist consultants by performing research and other
functions.
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: Spencer Stuart &
Associates, Egon Zehnder International, Russell Reynolds Associates, Inc.,
Korn/Ferry International and TMP Worldwide Inc. To a lesser extent, we also
face competition from smaller boutique or specialty firms that specialize in
certain regional
9
<PAGE>
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 three 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.
Sullivan. On September 1, 1999, we merged with Sullivan & Company, an
executive search firm that specializes in the financial services industry,
which employed 12 consultants. Sullivan 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 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.
10
<PAGE>
OUR EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<C> <C> <S>
Patrick S. Pittard... 54 President and Chief Executive Officer,
Director
Donald M. Kilinski... 40 Chief Financial Officer and Treasurer
Richard D. Nelson.... 60 Chief Administrative Officer, Counsel and
Secretary
David C. Anderson.... 57 President--Americas, Director
Dr. Jurgen B. Mulder. 62 President--International, Director
</TABLE>
Our executive officers serve at the discretion of our board of directors.
There are no family relationships between any executive officer or director.
The following information sets forth the business experience for at least the
past five years for each of our executive officers as of March 1, 2000:
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.
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 America 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.
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.
11
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate office is located in Chicago, Illinois. We have 69
locations in 33 countries around the world and we lease all of our locations. A
list of our locations is set forth in Part I, Item I of this Report. The
aggregate square footage of office space under such leases was approximately
662,095 as of December 31, 1999. The leases for these offices call for future
minimum lease payments of approximately $143 million and have terms which will
expire between 2000 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of 1999.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market under the symbol
"HSII." The following table sets forth the high and low sales price per share
of the common stock for the periods indicated, as reported on the Nasdaq
National Market since trading began on April 27, 1999:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 High Low
---------------------------- ----- -----
<S> <C> <C>
First Quarter................................................. N/A N/A
Second Quarter................................................ 20.13 12.75
Third Quarter................................................. 19.50 14.63
Fourth Quarter................................................ 46.00 17.25
</TABLE>
As of March 1, 2000, the last reported sale price on the Nasdaq National Market
for our common stock was $40.75 per share and there were 304 shareholders of
record of the common stock.
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends on our common stock in the foreseeable future. We
intend to retain all of our earnings for the future operations and expansion of
our business. 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.
On April 30, 1999, we completed our initial public offering under a
Registration Statement on Form S-1 effective April 26, 1999 (File No. 333-
59931) of an aggregate of 4.2 million shares of common stock at $14.00 per
share, of which 3.7 million shares were offered by us and 500,000 shares were
offered by selling stockholders. In addition, on June 1, 1999, we completed the
offering of an additional 505,000 shares of common stock which arose from the
exercise of a portion of the over-allotment option granted to certain
underwriters of the initial public offering. These offerings resulted in net
proceeds (after deducting the underwriting discount and estimated offering
expenses) of $51.8 million to us and $6.5 million to the selling stockholders.
We used approximately $22.2 million of the net proceeds to repay borrowings
under our credit facilities and notes payable to former shareholders. In
addition, we spent a portion of net proceeds for technology enhancements. We
intend to use the remaining net proceeds for the further development of
LeadersOnline and other growth initiatives, expanding our technology
infrastructure, possible future acquisitions, working capital and general
corporate purposes. We have currently invested the remaining net proceeds in
short-term investment grade securities. We received no proceeds from the sale
of the common stock in the offering made by the selling stockholders.
Recent Event
On February 9, 2000, we completed a follow-on public offering under a
Registration Statement on Form S-1 effective February 3, 2000 (File No. 333-
94017) of an aggregate of 3,450,000 shares of common stock at $33.00 per share,
which included 450,000 shares from the exercise of the over-allotment option
granted to certain underwriters of the offering. We offered 2,458,306 shares
and the selling stockholders offered 991,694 shares. This offering resulted in
net proceeds (after deducting the underwriting discount and estimated offering
expenses) of $76.3 million to us and $31.0 million to the selling stockholders.
We intend to use the net proceeds from this offering to fund general corporate
purposes including further development of LeadersOnline and other growth
initiatives, hiring of additional executive search consultants, expanding our
technology infrastructure and funding possible future acquisitions.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each of the five years in the
period ended December 31, 1999 have been derived from the audited consolidated
financial statements of H&S which 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 Form 10-K.
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------------------------------------
1999(1) 1998 1997 1996 1995
------------- ----------- ----------- ----------- -----------
(in thousands, except per share and other operating data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................ $ 415,847 $ 216,836 $ 193,052 $ 147,428 $ 113,763
----------- ----------- ----------- ----------- -----------
Operating expenses:
Salaries and employee
benefits.............. 277,580 174,618 (2) 135,473 105,544 81,591
General and
administrative
expenses.............. 104,144 53,557 44,736 30,344 22,131
Nonrecurring charge and
merger costs.......... 15,220 (4) -- -- -- --
----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 396,944 228,175 180,209 135,888 103,722
----------- ----------- ----------- ----------- -----------
Operating income
(loss)............... 18,903 (11,339) 12,843 11,540 10,041
----------- ----------- ----------- ----------- -----------
Non-operating income
(expense):
Interest income........ 3,513 1,585 1,626 1,394 1,163
Interest expense....... (1,504) (505) (150) (180) (207)
Other income (expense). 630 (2,212)(3) 486 (94) 90
----------- ----------- ----------- ----------- -----------
Net non-operating
income (expense)..... 2,639 (1,132) 1,962 1,120 1,046
----------- ----------- ----------- ----------- -----------
Equity in net income
(loss) of affiliate... (630) (3,417) 20 775 778
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes.......... 20,912 (15,888) 14,825 13,435 11,865
Provision for income
taxes................. 15,120 1,302 7,999 6,216 6,158
----------- ----------- ----------- ----------- -----------
Net income (loss)...... $ 5,792 $ (17,190) $ 6,826 $ 7,219 $ 5,707
=========== =========== =========== =========== ===========
Basic earnings (loss)
per common share...... $ 0.42 $ (5.85) $ 2.31 $ 2.54
=========== =========== =========== ===========
Weighted average common
shares outstanding.... 13,642 2,940 2,949 2,847
=========== =========== =========== ===========
Diluted earnings (loss)
per common share...... $ 0.42 $ (5.85) $ 2.31 $ 2.54
=========== =========== =========== ===========
Diluted average common
shares outstanding.... 13,889 2,940 2,950 2,847
=========== =========== =========== ===========
Balance Sheet Data (at
end of period):
Working capital........ $ 54,007 $ 7,954 $ 25,570 $ 21,414 $ 17,777
Total assets........... 334,749 128,775 96,222 70,826 57,076
Long-term debt, less
current maturities.... -- 6,350 1,636 993 1,189
Mandatorily redeemable
common stock.......... -- 44,422 48,153 39,950 31,507
Stockholders' equity... 167,880 -- -- -- --
Other Operating Data:
Number of locations (at
end of period)........ 69 33 29 26 21
Average number of
consultants during the
period................ 347 207 164 142 124
</TABLE>
14
<PAGE>
(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. See Part I--Item I Business--"The
Merger."
(2) 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.
(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 $15.2 million of nonrecurring charge and merger costs arising from
the modification of the Mulder acquisition agreement and the merger with
Sullivan. See Part I--Item I--"Recent Strategic Acquisitions and Mergers."
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations as well as other sections of this Annual Report on Form 10-K
contain forward-looking statements that are based on the current beliefs and
expectations of our management, as well as assumptions made by, and information
currently available to, our management. Such statements include those regarding
general economic and executive search industry trends. Because such statements
involve risks and uncertainties, actual actions and strategies, and the timing
and expected results thereof, may differ materially from those expressed or
implied by such forward-looking statements, and our future results, performance
or achievements could differ materially from those expressed in, or implied by,
any such forward-looking statements. Future events and actual results could
differ materially from those set forth in or underlying the forward-looking
statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted. These potential risks and uncertainties
include dependence on attracting and retaining qualified executive search
consultants, portability of client relationships, maintenance of professional
reputation and brand name, risks associated with global operations, ability to
manage growth, restrictions imposed by off-limits arrangements, competition,
implementation of an acquisition strategy, reliance on information management
systems and the impact of Year 2000 issues, and employment liability risk. In
addition to the factors noted above, other risks, uncertainties, assumptions,
and factors that could affect our financial results are described in our recent
filings, which are on record with the Securities and Exchange Commission.
General
We are the leading global executive search firm and based on revenue, 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. ("H&S") spun off Heidrick & Struggles International,
Inc. ("HSI") to its European partners while retaining a significant equity
interest in it. Between 1984 and February 26, 1999, HSI conducted primarily
Europe-based operations, while H&S conducted all other operations. On February
26, 1999, H&S merged with HSI ("the Merger") to reunite the two companies in a
single corporate structure.
We completed several other acquisitions and mergers in the past three years.
In September 1999, we merged with Sullivan & Company ("Sullivan"), an executive
search firm that specializes in the financial services industry. This
transaction was accounted for using pooling of interests accounting, with the
results of Sullivan being included in H&S's consolidated statements of income
for all periods presented. In December 1999, we completed the acquisition of
Redelinghuys & Partners, a senior level executive search firm in the Republic
of South Africa. In June 1998, we acquired Fenwick Partners, Inc., a Boston-
based executive search firm focused on the technology sector. In October 1997,
HSI acquired Mulder & Partner GmbH & Co. KG ("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 and liabilities are denominated in non-U.S.
currencies, changes in currency rates may cause fluctuations of the valuation
of such assets and liabilities. For financial information by geographic region,
see Note 17 of our Consolidated Financial Statements.
16
<PAGE>
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 allocated costs in one-third increments over a 60-to-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 affected 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 significant
elements 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.
Nonrecurring Charges and Merger Costs
During the first quarter of 1999, we incurred a nonrecurring charge of $12.4
million. This charge was the result of our agreement to modify the terms of the
Mulder acquisition agreement, including the termination of all employment
contingencies. HSI acquired 100% of Mulder on October 1, 1997, for a
combination of cash
17
<PAGE>
and 32,000 shares of HSI common stock. On October 1, 1997, HSI delivered 4,000
shares of HSI common stock, paid $8.7 million to the partners of Mulder and
incurred $298,000 of associated transaction costs. Under the original Mulder
acquisition agreement an additional $5.2 million (plus interest at an annual
rate of 4%) was due to the partners of Mulder in five equal annual
installments, the first of which was paid on October 1, 1998. The remaining
shares were to be issued in four annual installments beginning January 1, 1999.
Because the total purchase price was contingent upon the continued employment
of the Mulder consultants, the cost of the acquisition was accounted for as
compensation expense to be recognized over a five-year period beginning October
1, 1997. In connection with the Merger, the Mulder acquisition agreement was
amended such that the remaining cash (plus interest) would be paid within 90
days of the completion of the Merger and 428,452 shares (reflecting a split of
15.8217 for 1) of our common stock (which were valued, based upon the estimated
fair market value of our company, at $5.2 million) were issued to such Mulder
partners immediately after the Merger. During 1999, we paid the remaining $4.3
million cash due, issued 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.
In connection with the acquisition of Sullivan, we recorded merger-related
costs of $2.8 million during 1999. The merger costs consist of a $2.0 million
non-cash charge for accelerated vesting of an employee equity ownership plan in
place at Sullivan and $772,000 of transaction-related costs, including legal,
accounting and advisory fees.
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, we held a significant interest in HSI. Equity in net
income (loss) of affiliate relates to the income earned or loss incurred from
our investment in HSI after giving effect to currency translation adjustments.
Taxes
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.
18
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, our selected
statements of operations data as a percentage of revenue:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenue................................................... 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Salaries and employee benefits.......................... 66.8 80.5 70.2
General and administrative expenses..................... 25.0 24.7 23.2
Nonrecurring charge and merger costs.................... 3.7 -- --
----- ----- -----
Total operating expenses.............................. 95.5 105.2 93.4
----- ----- -----
Operating income (loss)............................... 4.5 (5.2) 6.6
----- ----- -----
Non-operating income (expense):
Interest income......................................... 0.8 0.7 0.8
Interest expense........................................ (0.4) (0.2) (0.1)
Other income (expense).................................. 0.2 (1.0) 0.3
----- ----- -----
Net non-operating income (expense).................... 0.6 (0.5) 1.0
----- ----- -----
Equity in net loss of affiliate........................... (0.2) (1.6) --
----- ----- -----
Income (loss) before income taxes......................... 4.9 (7.3) 7.6
Provision for income taxes................................ 3.6 0.6 4.1
----- ----- -----
Net income (loss)......................................... 1.3% (7.9)% 3.5%
===== ===== =====
</TABLE>
The following table sets forth, for the periods indicated, our revenue and
operating income (loss) by segment. We include the Middle East and Africa with
our Europe segment. The Other International segment is comprised of Latin
America, Asia Pacific, Canada and Mexico.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Revenue
United States............................... $256,394 $190,855 $168,981
Europe...................................... 118,880 -- --
Other International......................... 37,956 25,981 24,071
LeadersOnline............................... 2,617 -- --
-------- -------- --------
Total..................................... $415,847 $216,836 $193,052
======== ======== ========
Operating Income (Loss)
United States............................... $ 38,638 $ 8,871 $ 23,970
Europe...................................... (1,614) -- --
Other International......................... 6,410 (6,743) (2,637)
LeadersOnline............................... (5,157) (1,539) --
Corporate unallocated....................... (19,374) (11,928) (8,490)
-------- -------- --------
Total..................................... $ 18,903 $(11,339) $ 12,843
======== ======== ========
</TABLE>
19
<PAGE>
1999 Compared to 1998
Revenue. Our revenue increased $199.0 million, or 91.8%, to $415.8 million
for 1999 from $216.8 million for 1998. This increase was primarily the result
of the Merger, which contributed $118.9 million in revenue for 1999. Excluding
HSI, revenue increased by 37.0%. 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 average number of consultants employed during the period all
contributed to the revenue growth as the number of confirmed searches
increased. In addition, average revenue per consultant was higher due to higher
fees per search and better leveraging of technology to enhance consultant
productivity.
We experienced revenue growth in all of our geographic segments during 1999.
In the United States, our revenue increased $65.5 million, or 34.3%, to $256.4
million for 1999 from $190.9 million for 1998. We opened offices in West Los
Angeles, Seattle and San Diego during 1999. The Merger in February of 1999
added $118.9 million of revenue to the Europe segment. The Merger would have
added $125.2 million of revenue were it not for the negative effects of foreign
currency translation, predominantly in Germany, France and the United Kingdom.
In addition, we opened an office in Austria, and purchased a business in South
Africa during 1999, both of which are included in the Europe segment. Our
revenue in Other International, which includes the Asia Pacific and Latin
America regions, Mexico and Canada, increased $12.0 million, or 46.1%, to $38.0
million for 1999 from $26.0 million for 1998. Revenue would have risen by 54.1%
were it not for the negative effects of foreign currency translation,
predominantly in Brazil. We opened offices in Korea and Canada during 1999.
LeadersOnline was officially launched in 1999 and had revenue of $2.6 million
for 1999 and no revenue for 1998.
Salaries and employee benefits. Our salaries and employee benefits increased
$103.0 million, or 59.0%, to $277.6 million for 1999 from $174.6 million for
1998. This increase was primarily the result of the Merger, which contributed
$78.3 million in salaries and employee benefits for 1999. Excluding HSI,
salaries and employee benefits decreased as a percentage of revenue from 80.5%
to 67.1%. Approximately $12.7 million of this decrease was due to nonrecurring
salaries and employee benefits in 1998 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 for 1998 were 74.7% of
revenue. The remainder of the percentage decrease was due to increased search
consultant productivity as a result of our technology initiatives, lower costs
related to the hiring of consultants, 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 in 1999.
General and administrative expenses. Our general and administrative expenses
increased $50.5 million, or 94.5%, to $104.1 million for 1999 from $53.6
million for 1998. This increase was primarily the result of the Merger, which
contributed $31.2 million in general and administrative expenses for 1999.
Excluding HSI, general and administrative expenses remained relatively flat as
a percentage of revenue, decreasing from 24.7% to 24.6%. Additional spending
for our technology initiatives and investment spending for LeadersOnline offset
the increase in revenue in 1999.
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.
Net non-operating income (expense). Our net non-operating income increased to
$2.6 million for 1999 from a net non-operating expense of $1.1 million for
1998. This change was primarily due to a $2.5 million charge incurred in 1998
in connection with the costs of the postponement of our initial public offering
in September 1998, and an increase in interest income arising from the
investment of the net proceeds from our initial public offering in April of
1999, partially offset by an increase in interest expense due to a higher
average outstanding debt balance during 1999. In addition, we recorded a
$782,000 gain, net of consultants'
20
<PAGE>
bonuses and administrative costs of the program, 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 26.7%
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 revenue, 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 revenue, 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.
Net non-operating income (expense). Our net non-operating income decreased
$3.1 million to a net non-operating expense of $1.1 million for 1998 from net
non-operating income 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.
21
<PAGE>
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 1999 and 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999(1)(2) 1998(1)(2)
--------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue .................................... $435,832 100.0% $341,820 100.0%
-------- ----- -------- -----
Operating expenses:
Salaries and employee benefits(3)(4)...... 292,496 67.1 246,209 72.0
General and administrative expenses(5).... 110,585 25.4 92,717 27.1
-------- ----- -------- -----
Total operating expenses................ 403,081 92.5 338,926 99.1
-------- ----- -------- -----
Operating income........................ 32,751 7.5 2,894 0.9
-------- ----- -------- -----
Non-operating income (expense):
Interest income........................... 3,513 0.8 1,585 0.5
Interest expense.......................... (1,560) (0.4) (1,209) (0.4)
Other, net(6)............................. 630 0.1 (3,787) (1.1)
-------- ----- -------- -----
Net non-operating income (expense)...... 2,583 0.5 (3,411) (1.0)
-------- ----- -------- -----
Minority interest in income of consolidated
subsidiaries............................... -- -- (81) --
-------- ----- -------- -----
Income (loss) before income taxes(7).... 35,334 8.0 (598) (0.1)
Provision for income taxes.................. 15,741 3.6 2,888 0.8
-------- ----- -------- -----
Net income (loss)....................... $ 19,593 4.4% $ (3,486) (0.9)%
======== ===== ======== =====
Basic earnings (loss) per common share...... $ 1.20 $ (0.23)
======== ========
Basic weighted average common shares
outstanding(8)............................. 16,326 14,994
======== ========
Diluted earnings (loss) per common share.... $ 1.18 $ (0.23)
======== ========
Diluted weighted average common shares
outstanding(8)(9).......................... 16,596 14,994
======== ========
</TABLE>
- --------
(1) The December 31, 1999 and 1998 consolidated statements of income have been
adjusted by the following amounts to reflect the historical operations of
HSI:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1999 1998
------- --------
<S> <C> <C>
Revenue............................................... $19,985 $124,984
Salaries and employee benefits........................ 15,836 102,861
General and administrative expenses................... 6,209 37,766
Net non-operating expense............................. (56) (6,116)
Minority interest in income of consolidated
subsidiaries......................................... -- (81)
Benefit from income taxes............................. (520) (4,475)
</TABLE>
22
<PAGE>
(2) Amount excludes the $15.2 million of nonrecurring charges for 1999. The
charges are comprised of $12.4 million for the renegotiation of the Mulder
acquisition agreement and $2.8 million of merger costs for the Sullivan
merger. In addition, amortization of deferred compensation expense of $0.9
million and $5.1 million relating to the acquisition of Mulder has been
eliminated from salaries and employee benefits for 1999 and 1998,
respectively.
(3) An adjustment of $2.8 million for 1998 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.
(4) 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.
(5) 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 1999 and 1998, $0.2 million and
$1.4 million, of amortization related to acquired intangibles and goodwill
has been charged to general and administrative expenses, respectively.
(6) Offering expenses of $3.8 million have been eliminated from non-operating
income for 1998. As required by Staff Accounting Bulletin No. 1, Topic 5A,
we 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 us for all periods
shown to reflect 100% ownership of HSI after the Merger.
(8) Amount has been adjusted to give effect to the initial public offering of
3.7 million shares and issuance of 0.7 million shares under our employee
incentive plan as of January 1, 1999 and 1998, respectively.
(9) Amounts have been adjusted to give effect to the issuance of options
pursuant to our employee incentive plans equivalent to 0.3 million shares
for 1999.
The following table sets forth, for the periods indicated, our revenue and
operating income (loss) by segment. We include the Middle East and Africa with
our Europe segment. The Other International segment is comprised of Latin
America, Asia Pacific, Canada and Mexico.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Revenue
United States............................................... $256,394 $190,855
Europe...................................................... 138,865 124,984
Other International......................................... 37,956 25,981
LeadersOnline............................................... 2,617 --
-------- --------
Total..................................................... $435,832 $341,820
======== ========
Operating Income (Loss)
United States............................................... $ 38,638 $ 21,616
Europe...................................................... 9,666 1,418
Other International......................................... 6,410 (3,918)
LeadersOnline............................................... (5,157) (1,539)
Corporate unallocated....................................... (16,806) (14,683)
-------- --------
Total..................................................... $ 32,751 $ 2,894
======== ========
</TABLE>
23
<PAGE>
Pro Forma Combined Results for 1999 Compared to 1998
Revenue. Our revenue increased $94.0 million, or 27.5%, to $435.8 million for
1999 from $341.8 million for 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 a 12% increase in the average number of consultants employed during the
period all contributed to the revenue growth as the number of confirmed
searches increased 21%. In addition, average revenue per consultant was $1.2
million, up 14% from $1.0 million in 1998 due to higher fees per search and
better leveraging of technology to enhance consultant productivity.
We experienced revenue growth in all of our geographic segments during 1999.
In the United States, our revenue increased $65.5 million, or 34.3%, to $256.4
million for 1999 from $190.9 million for 1998. We opened offices in West Los
Angeles, Seattle and San Diego during 1999. Our revenue in Europe, which
includes South Africa and the Middle East, increased $13.9 million, or 11.1%,
to $138.9 million from $125.0 million. Revenue would have grown 15.6% were it
not for the negative effects of foreign currency translation, predominantly in
Germany, France and the United Kingdom. We opened an office in Austria and
acquired a business in South Africa during 1999. Our revenue in Other
International, which includes the Asia Pacific and Latin America regions,
Mexico and Canada, rose $12.0 million, or 46.1%, to $38.0 million for 1999 from
$26.0 million for 1998. Revenue would have increased 54.1% were it not for the
negative effects of foreign currency translation, predominantly in Brazil. We
opened offices in Korea and Canada during 1999. LeadersOnline was officially
launched in 1999 and had revenue of $2.6 million for 1999 and no revenue for
1998.
Salaries and employee benefits. Our salaries and employee benefits increased
$46.3 million, or 18.8%, to $292.5 million for 1999 from $246.2 million for
1998. As a percentage of revenue, salaries and employee benefits decreased from
72.0% to 67.1%. This percentage decrease was due to significant costs in 1998
related to the hiring of new consultants and building the corporate and
technology staff infrastructure to support the needs of a global public
company.
General and administrative expenses. Our general and administrative expenses
increased $17.9 million, or 19.3%, to $110.6 million for 1999 from $92.7
million for 1998. As a percentage of revenue, general and administrative
benefits decreased from 27.1% to 25.4%. This percentage decrease was primarily
due to revenue growth outpacing increases in fixed operating costs, costs of
consulting services for our technology initiatives and investment spending for
LeadersOnline. In addition, this percentage decrease was due to cost cutting
efforts and the elimination of duplicate corporate staff in Europe during 1999.
Net non-operating income (expense). Our net non-operating income increased to
$2.6 million for 1999 from a net non-operating expense of $3.4 million for
1998. This increase was primarily due to provisions in 1998 totaling $4.1
million for the write-off of leasehold improvements and accruals for non-
cancelable lease commitments due to the decision to relocate the London office.
The remaining increase was due to an increase in interest income arising from
the investment of the net proceeds from our initial public offering in April
1999, partially offset by an increase in interest expense due to a higher
average outstanding debt balance during 1999. In addition, we recorded a
$782,000 gain, net of consultants' bonuses and administrative costs of the
program, 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.
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 and periodic borrowings under our credit
facilities. We pay a portion of our bonuses in December and the remainder is
paid in March. Employee bonuses are accrued when earned and are based on our
performance and the performance of the respective employee.
24
<PAGE>
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, we may investigate additional capital raising methods
to fund the further development of LeadersOnline, including investments by
third parties.
We maintained cash and cash equivalents at December 31, 1999, 1998 and 1997
totaling $76.8 million, $11.5 million and $10.7 million, respectively. For 1999
cash flows from operating activities contributed $54.8 million reflecting
increases to net income and for non-cash items such as depreciation and
amortization, the nonrecurring charge and merger costs, as well as a decrease
in working capital. For 1998, operating activities contributed $1.0 million of
cash reflecting the net loss offset by increases in non-cash items such as
stock-based compensation, depreciation and amortization and equity in net loss
of affiliate. Cash flows from operating activities contributed $7.9 million in
1997, reflecting principally the net income from operations.
On December 28, 1999, we completed our acquisition of Redelinghuys & Partners
for approximately $1.5 million in cash. 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 February
26, 1999, we merged with HSI which resulted in $8.2 million of cash being
acquired. 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
$1.5 million in 1999 and $4.1 million in 1998.
During 1999, we began selling equity securities obtained as part of our
warrant program. The amount of cash received during 1999, as a result of the
sale of these securities was $782,000, net of consultants' bonuses and
administrative costs of the program.
Capital expenditures were $21.5 million, $16.0 million and $5.9 million for
1999, 1998 and 1997, 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 initiatives, of which we
capitalized $12.2 million in 1999, $9.0 million in 1998 and $1.2 million in
1997. We anticipate that our capital expenditures for 2000 will be
approximately $25.0 million.
Cash flows provided by financing activities were $25.3 million for 1999,
resulting primarily from the estimated net proceeds raised in the initial
public offering of $51.8 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. Cash flows from financing activities were
$23.6 million and $5.8 million for 1998 and 1997, respectively. Our financing
activities consisted principally of sales of our common stock to employees, net
of repurchase obligations, of amounts due in connection with 1998 acquisitions,
and of borrowings and repayments under our line of credit.
We have a $50.0 million reducing revolving credit facility. This facility
will terminate on December 31, 2001. As part of the terms of the facility, the
line of credit will be reduced by $10.0 million on December 31, 2000. There
were no borrowings outstanding under this line of credit at December 31, 1999
and $22.0 million outstanding under this line of credit as of December 31,
1998. 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, the sum of
which equaled 6.8%. This line of credit replaced a $25.0 million line of credit
which had been in effect 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 our discretion. At
December 31, 1997, the interest rate on the debt was fixed at approximately
8.5%.
25
<PAGE>
The current line of credit has certain financial covenants we must meet
relating to consolidated net worth, liabilities, and debt in relation to cash
flows. At December 31, 1999, we are in compliance with these financial
covenants.
On December 16, 1999, we announced that our board of directors approved the
formation of H&S Capital, a separate entity that will raise capital to
establish venture funds that invest in early stage companies, primarily in the
technology sector. We expect to invest up to $25 million of cash in H&S
Capital. Although we expect to make investments in increments over the next
three years, the full investment may be made at any time.
Recent Events
On February 9, 2000, we completed a follow-on public offering under a
Registration Statement on Form S-1 effective February 3, 2000 (File No. 333-
94017) of an aggregate of 3,450,000 shares of common stock at $33.00 per share,
which included 450,000 shares from the exercise of the over-allotment option
granted to certain underwriters of the offering. We offered 2,458,306 shares
and selling stockholders offered 991,694 shares. This offering resulted in net
proceeds (after deducting the underwriting discount and estimated offering
expenses) of $76.3 million to us and $31.0 million to the selling stockholders.
We intend to use the net proceeds from this offering to fund general corporate
purposes including further developing LeadersOnline and other growth
initiatives, hiring of additional executive search consultants, expanding our
technology infrastructure and funding possible future acquisitions.
On March 7, 2000, we announced that LeadersOnline is planning to file a
Registration Statement with the Securities and Exchange Commission covering the
proposed sale by LeadersOnline of shares of its common stock. LeadersOnline
anticipates that the Registration Statement will be filed in the spring or
summer of 2000.
Recently Issued Financial Accounting Standards
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
annual periods beginning after June 15, 2000, and will be adopted by us as of
January 1, 2001. We expect that adoption of this Standard will have no material
effect on our consolidated financial position or results of operations.
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 the 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 the Euro, our operations could suffer.
26
<PAGE>
Year 2000 Compliance
We have not experienced any significant Year 2000-related issues. Based upon
information currently known to us, we believe that all critical areas of our
business are Year 2000 compliant. Our Year 2000 efforts focused on ensuring
that our information technology would achieve a Year 2000 date conversion with
no disruption to our business operations and that contingency plans were
developed to address most likely worst case scenarios. Information systems,
third-party suppliers and date-related issues, if any, related to our business
operations will continue to be monitored and contingency plans will remain in
place. We do not anticipate any further significant expenditures for these or
other Year 2000 compliance activities.
Quarterly Comparisons
The following table sets forth certain financial information for each quarter
of 1999 and 1998. The information is derived from our quarterly financial
statements 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 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
----------------------------------------------------------------------------
1999(1) 1998
------------------------------------------ ---------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------- -------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $74,601 $113,046 $114,936 $113,264 $49,675 $56,961 $62,278 $47,922
Operating income
(loss)................. (7,556)(2) 8,804 9,147(3) 8,508 1,177 3,051 3,910 (19,477)(4)
Net income (loss)....... (10,148) 4,849 5,427 5,664 391 1,387 1,785 (20,753)(5)
</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 a $12.4 million nonrecurring charge arising from the modification
of the Mulder acquisition agreement.
(3) Includes $2.8 million of merger costs arising from the merger with
Sullivan.
(4) 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.
(5) Includes a $2.5 million nonrecurring charge incurred in connection with the
costs of the postponement of our initial public offering in September 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivatives
We receive warrants for equity in our client companies, in addition to our
cash fee, for services rendered on some searches. When the warrants are
received, revenue is recorded equal to the estimated fair market value of the
instrument received. Thereafter, the securities are accounted for as available-
for-sale investments. We have entered into a collar agreement to hedge the
impact of market value changes of one of these equity securities. Collars
consist of the sale of call options along with a corresponding purchase of put
options, with the effect of establishing the highest and lowest prices at which
the securities will be sold during a certain time period. The collar has been
designated and is effective as a hedge of the equity security. Unrealized gains
and losses on both the equity security and the collar are recorded in equity
and comprehensive income. When realized, gains and losses on the equity
security and the collar are recorded in income. Beginning in the fourth quarter
of 1999, we have the right to put and the counterparty has the right to call a
portion of the shares on a quarterly basis in accordance with an established
schedule.
27
<PAGE>
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 net earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements beginning on page 33 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE>
PART III.
ITEM 10. OUR DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item will be included under the captions
"Election of Directors," "Nominees for Director--Class 2000," "Nominees for
Director--Class 2001," and "Nominees for Director--Class 2002" in our 2000
Proxy Statement, and is incorporated herein by reference. See also "Our
Executive Officers" included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be included under the captions
"Executive Compensation--Summary Compensation Table," "Executive Compensation--
Option Grant Table," "Executive Compensation--Aggregated Option Exercises and
Year-end Option Values" and "Employment Agreements" in our 2000 Proxy
Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included under the caption
"Security Ownership of Certain Beneficial Owners and Management" in our 2000
Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be included under the caption
"Certain Relationships and Related Transactions" in our 2000 Proxy Statement,
and is incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT.
1. Index to Consolidated Financial Statements:
See Consolidated Financial Statements included as part of this Form 10-K
beginning at page 33
2. Financial Statement Schedules:
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................... 56
Schedule II--Valuation and Qualifying Accounts.............................. 57
</TABLE>
3. Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
2.01 Agreement and Plan of Merger of Heidrick & Struggles,
Inc. and Heidrick & Struggles International, Inc.
(Incorporated by reference to Exhibit 2.01 of this
Registrant's Registration Statement on Form S-4 (File
No. 333-61023))
3.01 Form of Amended and Restated Certificate of
Incorporation of the Registrant (Incorporated by
reference to Exhibit 3.02 of this Registrant's
Registration Statement on Form S-4 (File No. 333-61023))
3.02 Form of Amended and Restated By-laws of the Registrant
(Incorporated by reference to Exhibit 3.03 of this
Registrant's Registration Statement on Form S-4 (File
No. 333-61023))
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
4.01 Specimen Stock Certificate (Incorporated by reference to
Exhibit 4.01 of this Registrant's Registration Statement
on Form S-4 (File No. 333-61023))
*10.01 Employment Agreement of Richard D. Nelson (Incorporated
by reference to Exhibit 10.01 of the Registrant's
Registration Statement on Form S-4 (File No. 333-61023))
*10.02 Employment Agreement of Patrick S. Pittard (Incorporated
by reference to Exhibit 10.02 of the Registrant's
Registration Statement on Form S-4 (File No. 333-61023))
*10.03 Employment Agreement of Donald M. Kilinski (Incorporated
by reference to Exhibit 10.03 of the Registrant's
Registration Statement on Form S-4 (File No. 333-61023))
*10.04 Employment Agreement of Jurgen B. Mulder (Incorporated
by reference to Exhibit 10.04 of the Registrant's
Registration Statement on Form S-4 (File No. 333-61023))
*10.06 Amended and Restated Employment Agreement of Patrick S.
Pittard (Incorporated by reference to Exhibit 10.06 of
the Registrant's Registration Statement on Form S-1/A
(File No. 333-59931))
*10.07 Amendment to Employment Agreement of Jurgen B. Mulder
(Incorporated by reference to Exhibit 10.07 of the
Registrant's Registration Statement on Form S-1/A (File
No. 333-59931))
*10.08 Employment Agreement of David C. Anderson (Incorporated
by reference to Exhibit 10.08 of the Registrant's
Registration Statement on Form S-1/A (File No. 333-
94017))
21.01 Subsidiaries of the Registrant (Incorporated by
reference to Exhibit 21 of the Registrant's Registration
Statement on Form S-1/A (File No. 333-94017))
27.01 Financial Data Schedule
</TABLE>
* Management contracts or compensatory plans or arrangements required to be
filed as an exhibit to this form pursuant to Item 14(c) of this report.
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 1999, no reports on Form 8-K were
filed by the Registrant
(c) SEE EXHIBIT INDEX ABOVE
(d) FINANCIAL STATEMENTS NOT PART OF ANNUAL REPORT
None
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Chicago, State of Illinois.
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
Donald M. Kilinski
By______________________________________
Chief Financial Officer and
Treasurer
Title___________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Patrick S. Pittard President, Chief
___________________________________________ Executive Officer and
Patrick S. Pittard Director
(principal executive officer)
/s/ Donald M. Kilinski Chief Financial Officer
___________________________________________ and
Donald M. Kilinski Treasurer
(principal financial and accounting
officer)
/s/ David C. Anderson Director
___________________________________________
David C. Anderson
/s/ Thomas J. Friel Director
___________________________________________
Thomas J. Friel
/s/ David B. Kixmiller Director
___________________________________________
David B. Kixmiller
/s/ Bengt Lejsved Director
___________________________________________
Bengt Lejsved
/s/ Robert Louis-Dreyfus Director
___________________________________________
Robert Louis-Dreyfus
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Dr. Jurgen B. Mulder Director
___________________________________________
Dr. Jurgen B. Mulder
/s/ Gerard R. Roche Director
___________________________________________
Gerard R. Roche
/s/ Robert W. Shaw Director
___________________________________________
Robert W. Shaw
/s/ Dr. John C. Viney Director
___________________________________________
Dr. John C. Viney
/s/ Carlene M. Ziegler Director
___________________________________________
Carlene M. Ziegler
</TABLE>
32
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. 34
Consolidated Balance Sheets as of December 31, 1999 and 1998.............. 35
Consolidated Statements of Income and Comprehensive Income For the Years
Ended December 31, 1999, 1998 and 1997................................... 37
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1999, 1998 and 1997......................................... 38
Consolidated Statements of Cash Flows For the Years Ended December 31,
1999, 1998 and 1997...................................................... 39
Notes to Consolidated Financial Statements................................ 40
</TABLE>
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and 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, 1999 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, 1999. 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, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted
accounting principles in the United States.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 14, 2000
34
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 76,848 $ 11,521
Accounts receivable--
Trade, less allowance for doubtful accounts of $12,435
and $4,669 at December 31, 1999 and 1998, respectively. 83,162 42,292
Other................................................... 4,241 2,862
Note receivable from affiliate........................... -- 1,900
Prepaid expenses......................................... 7,583 1,837
Prepaid income taxes..................................... -- 3,063
Deferred income taxes.................................... 19,881 8,871
-------- --------
Total current assets................................... 191,715 72,346
-------- --------
Property and equipment:
Leasehold improvements................................... 19,123 10,641
Office furniture and fixtures............................ 22,358 12,531
Automobiles.............................................. 2,227 898
Computer equipment and software.......................... 38,947 16,210
-------- --------
82,655 40,280
Less--Accumulated depreciation and amortization.......... (30,303) (13,226)
-------- --------
Property and equipment, net............................ 52,352 27,054
-------- --------
Other assets:
Cash and investments designated for nonqualified
retirement plans........................................ 32,702 13,552
Investment in affiliate.................................. -- 4,766
Investments and other assets............................. 11,772 353
Goodwill and other intangibles, net...................... 45,832 8,055
Deferred income taxes.................................... 376 2,649
-------- --------
Total other assets..................................... 90,682 29,375
-------- --------
Total assets........................................... $334,749 $128,775
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
35
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Current liabilities:
Short-term debt........................................... $ -- $ 22,000
Current maturities of long-term debt...................... 3,039 2,847
Accounts payable.......................................... 8,052 3,487
Accrued expenses--
Salaries and employee benefits........................... 93,606 26,973
Payroll taxes............................................ 7,156 920
Rent..................................................... 3,955 1,817
Other.................................................... 11,009 6,348
Income taxes payable...................................... 10,891 --
-------- --------
Total current liabilities............................... 137,708 64,392
-------- --------
Long-term debt, less current maturities..................... -- 6,350
-------- --------
Liability for nonqualified retirement plans................. 29,161 11,358
-------- --------
Other long-term liabilities................................. -- 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,
1998; 3,146,871 shares outstanding at December 31, 1998,
at book value............................................ -- 44,422
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued at December 31, 1999........ -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, of which 16,663,151 shares were issued and
outstanding at December 31, 1999......................... 167 --
Additional paid-in capital................................ 124,363 --
Retained earnings......................................... 37,445 --
Cumulative foreign currency translation adjustment........ (591) --
Unrealized gain on available-for-sale investments (net of
tax)..................................................... 6,496 --
-------- --------
Total stockholders' equity.............................. 167,880 --
-------- --------
Total liabilities, mandatorily redeemable common stock
and stockholders' equity............................... $334,749 $128,775
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
36
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share figures)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Revenue......................................... $415,847 $216,836 $193,052
--------- -------- --------
Operating expenses:
Salaries and employee benefits................ 277,580 174,618 135,473
General and administrative expenses........... 104,144 53,557 44,736
Nonrecurring charge and merger costs.......... 15,220 -- --
--------- -------- --------
Total operating expenses.................... 396,944 228,175 180,209
--------- -------- --------
Operating income (loss)..................... 18,903 (11,339) 12,843
--------- -------- --------
Non-operating income (expense):
Interest income............................... 3,513 1,585 1,626
Interest expense.............................. (1,504) (505) (150)
Other......................................... 630 (2,212) 486
--------- -------- --------
Net non-operating income (expense).......... 2,639 (1,132) 1,962
--------- -------- --------
Equity in net income (loss) of affiliate........ (630) (3,417) 20
--------- -------- --------
Income (loss) before income taxes .......... 20,912 (15,888) 14,825
Provision for income taxes...................... 15,120 1,302 7,999
--------- -------- --------
Net income (loss)........................... $ 5,792 $(17,190) $ 6,826
========= ======== ========
Basic earnings (loss) per common share.......... $ 0.42 $ (5.85) $ 2.31
========= ======== ========
Weighted average common shares outstanding...... 13,642 2,940 2,949
========= ======== ========
Diluted earnings (loss) per common share........ $ 0.42 $ (5.85) $ 2.31
========= ======== ========
Diluted weighted average common shares
outstanding.................................... 13,889 2,940 2,950
========= ======== ========
Net income (loss)............................... $ 5,792 $(17,190) $ 6,826
--------- -------- --------
Other comprehensive income (loss), before income
taxes:
Foreign currency translation adjustment....... 927 (475) (956)
Unrealized gain on available-for-sale
investments.................................. 8,294 1,626 1,110
--------- -------- --------
Total other comprehensive income, before
income taxes............................... 9,221 1,151 154
Income taxes related to items of other
comprehensive income........................... 3,913 494 64
--------- -------- --------
Other comprehensive income, net of income
taxes...................................... 5,308 657 90
--------- -------- --------
Comprehensive income (loss)................. $ 11,100 $(16,533) $ 6,916
========= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
37
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<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,
1996................... $ 82 $ 10,882 $(13,094) $ 2,280 $ (150) $ --
Treasury stock
transactions--
Stock issued........... -- 3,584 765 -- -- 4,349
Stock repurchased...... -- -- (2,850) -- -- (2,850)
Net income.............. -- -- -- 6,826 -- 6,826
Unrealized gain on
available-for-sale
investments............ -- -- -- -- 644 644
Foreign currency
translation
adjustment............. -- -- -- -- (554) (554)
Retained earnings
allocable to
mandatorily redeemable
common stock........... -- -- -- (8,415) -- (8,415)
---- -------- -------- -------- ------ ---------
Balance at December 31,
1997................... 82 14,466 (15,179) 691 (60) --
Treasury stock
transactions
Stock issued........... -- 14,095 857 -- -- 14,952
Stock repurchased...... -- -- (2,149) -- -- (2,149)
Net loss................ -- -- -- (17,190) -- (17,190)
Unrealized gain on
available-for-sale
investments............ -- -- -- -- 933 933
Foreign currency
translation adjustment. -- -- -- -- (276) (276)
Retained earnings
allocable to
mandatorily redeemable
common stock........... -- -- -- 3,730 -- 3,730
---- -------- -------- -------- ------ ---------
Balance at December 31,
1998................... 82 28,561 (16,471) (12,769) 597 --
Treasury and common
stock transactions:
Stock issued for
Merger................ 34 26,576 16,471 -- -- 43,081
Stock issued in initial
public offering....... 42 51,783 -- -- -- 51,825
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
Net income.............. -- -- -- 5,792 -- 5,792
Unrealized gain on
available-for-sale
investments............ -- -- -- -- 4,810 4,810
Foreign currency
translation
adjustment............. -- -- -- -- 498 498
---- -------- -------- -------- ------ ---------
Balance at December 31,
1999................... $167 $124,363 $ -- $ 37,445 $5,905 $167,880
==== ======== ======== ======== ====== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
38
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)................................ $ 5,792 $(17,190) $ 6,826
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 10,591 4,028 3,488
Loss on sale of property and equipment........... 63 578 50
Net gain on sale of securities................... (782) -- --
Deferred income taxes............................ 2,004 (2,230) (3,735)
Equity in net (income) loss of affiliate......... 630 1,667 (20)
Nonrecurring charge and merger costs............. 15,220 -- --
Stock-based compensation expense................. 252 10,166 300
Changes in assets and liabilities:
Trade & other receivables....................... (23,326) (2,885) (11,898)
Other assets.................................... (3,449) (5,508) (390)
Accounts payable................................ 1,058 299 1,627
Accrued expenses................................ 37,860 10,711 8,082
Income taxes payable............................ 6,930 1,128 (370)
Nonqualified retirement plan liability.......... 1,936 250 3,943
-------- -------- -------
Net cash provided by operating activities...... 54,779 1,014 7,903
-------- -------- -------
Cash flows from investing activities
Acquisitions..................................... (1,466) (4,060) --
Purchases of securities for nonqualified
retirement plan................................. (482) (1,488) (3,538)
Purchases of property and equipment.............. (21,519) (15,979) (5,914)
Purchases of marketable securities............... -- -- (8,176)
Proceeds from sales of securities, net .......... 782 -- 8,176
Cash acquired in merger transaction with HSI..... 8,166 -- --
Other investing activities....................... 445 12 (165)
-------- -------- -------
Net cash used in investing activities.......... (14,074) (21,515) (9,617)
-------- -------- -------
Cash flows from financing activities
Proceeds from debt............................... 17,700 28,648 3,500
Payments on debt................................. (53,512) (9,834) (1,085)
Proceeds from sales of treasury stock............ -- 4,875 4,349
Purchases of treasury stock...................... -- (68) (1,014)
Net proceeds from issuance of common stock....... 61,158 -- --
-------- -------- -------
Net cash provided by financing activities...... 25,346 23,621 5,750
-------- -------- -------
Effect of foreign currency exchange rates on cash
and cash equivalents............................. (724) (2,249) (557)
-------- -------- -------
Net increase in cash and cash equivalents......... 65,327 871 3,479
Cash and cash equivalents:
Beginning of period.............................. 11,521 10,650 7,171
-------- -------- -------
End of period.................................... $ 76,848 $ 11,521 $10,650
======== ======== =======
Supplemental disclosures of cash flow information
Cash paid for--
Interest........................................ $ 1,626 $ 402 $ 161
Income taxes.................................... 10,172 8,669 11,523
Supplemental schedule of noncash financing and
investing activities
Unrealized gain on available-for-sale
investments..................................... $ 8,294 $ 1,626 $ 1,110
Issuance of notes payable for the purchase of
treasury stock.................................. -- 2,081 1,836
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 --
Issuance of stock for merger..................... 43,081 -- --
Issuance of stock related to the Sullivan equity
ownership plan.................................. 3,037 -- --
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
39
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in thousands, except 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 located throughout North
America, Europe, South America and Asia Pacific.
Principles of Consolidation and Basis of Preparation
On February 26, 1999, Heidrick & Struggles, Inc. merged with and into
Heidrick & Struggles International, Inc. (prior to the merger "HSI"). For
accounting purposes, Heidrick & Struggles, Inc. was treated as the acquiring
company and Heidrick & Struggles International, Inc. was treated as the
acquired company. The resulting company was renamed Heidrick & Struggles
International, Inc.
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 4.)
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 ("FASB") 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.
The FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
in 1999, which deferred the effective date of SFAS No. 133 for one year. It is
effective for annual periods beginning after June 15, 2000 and will be adopted
by the Company as of January 1, 2001. The Company expects that adoption of this
Standard will have no material effect on its consolidated financial position,
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, 1999, the Company had no significant concentrations of credit
risk.
40
<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................................ 3-8 years
Automobiles.................................................... 3-4 years
</TABLE>
Depreciation for financial statement purposes for the years ended December
31, 1999, 1998 and 1997 totaled $8.8 million, $3.9 million, and $3.5 million,
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 1999. Amortization expense for the years ended
December 31, 1999, 1998 and 1997 totaled $1.8 million, $122,000 and $0,
respectively.
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," system
development costs are capitalized. Once the software is placed in service, it
is depreciated using the straight-line method over a five-to-eight 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.
Prior to February 26, 1999, the Company had an investment in HSI. This
investment was accounted for 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 was recognized in the Company's statement of income and comprehensive
income and added to the investment account. Dividends received, if any, from
the affiliate were 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,
41
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Typically, the Company is paid an initial retainer for its services equal to
approximately one-third of the estimated guaranteed first year cash
compensation for the position to be filled. In addition, if the actual cash
compensation of a placed candidate exceeds the retainer, the Company will 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.
The Company receives warrants for equity in some of its clients, 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. Realized gains, net of consultants' bonuses and
administrative costs from the warrant program, are recorded in other income.
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.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities,
applying enacted statutory tax rates in effect for the year in which the tax
differences are expected to reverse. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Earnings (Loss) per Common Share
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 8 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.
Reclassifications
Certain amounts in previously issued financial statements have been
reclassified to conform to 1999 classifications.
42
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Investments Designated for Nonqualified Retirement Plan
The Company's investments designated for the nonqualified retirement plan are
classified as investments available-for-sale (see Note 14). These securities
are carried at fair value based on publicly reported market quotes as of
December 31, 1999 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cost basis................................................ $11,100 $10,618
Gross unrealized gain..................................... 4,694 2,924
------- -------
Fair value.............................................. $15,794 $13,542
======= =======
</TABLE>
3. Investment in HSI
Prior to February 26, 1999, the Company had an investment in HSI which was
accounted for under the equity method. The percentage of common stock ownership
at December 31, 1998 was 35.7%. Based on an agreement between the Company and
HSI, effective January 1, 1995, 65% of the net income of HSI was allocated to
Class A shares and 35% of the net income of HSI was allocated to Class B
shares, regardless of the exact percentage of each class holding. The Company
owned all Class B shares of HSI.
4. Business Combinations
Acquisitions Accounted for Using the Purchase Method
On February 26, 1999, the Company merged (the "Merger") with and into
Heidrick & Struggles International, Inc. 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 on February 26, 1999, as follows:
<TABLE>
<CAPTION>
Weighted Average
Useful Life in
Asset Classification Fair Value Years
- -------------------- ---------- ----------------
<S> <C> <C>
Intangible assets................................... $12,478 17
Goodwill............................................ $23,152 40
</TABLE>
43
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The unaudited condensed consolidated pro forma results of operations data for
the years ended December 31, 1999 and 1998, as if the Merger had occurred on
January 1, 1999 and 1998, respectively, is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Revenue...................................................... $435,832 $341,820
-------- --------
Operating expenses:
Salaries and employee benefits............................. 293,416 277,479
General and administrative expenses........................ 110,585 92,717
Nonrecurring charge and merger costs....................... 15,220 --
-------- --------
Total operating expenses................................. 419,221 370,196
-------- --------
Operating income (loss).................................. 16,611 (28,376)
-------- --------
Net non-operating income (expense)........................... 2,583 (7,248)
-------- --------
Minority interest in income of consolidated subsidiaries... -- (81)
-------- --------
Income (loss) before income taxes........................ 19,194 (35,705)
Provision for (benefit from) income taxes.................... 14,883 (1,738)
-------- --------
Net income (loss)........................................ $ 4,311 $(33,967)
======== ========
</TABLE>
During 1996, the Company purchased selected assets of two companies in Latin
America. The purchase price for each of these transactions equaled the cost of
the net assets as of the date of the transaction. During 1998, the Company
incurred $2.8 million 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 $6.1 million which
is being paid in 3 installments. The first installment of $3.1 million was paid
on June 26, 1998. The second installment of $321,000 was paid on June 25, 1999.
The remaining installment, including interest at a rate of 5%, is due in June
of 2000 and approximates $3.0 million.
On October 1, 1998, the Company purchased selected assets of Heidrick
Partners, Inc. The purchase price of $2 million was paid in two installments.
The first installment of $1 million was paid on October 1, 1998 and the
remaining $1 million installment, including interest at the prime rate, was
paid on May 17, 1999.
During 1999, the Company purchased selected assets and liabilities of
Redelinghuys & Partners. The purchase price was approximately $1.5 million and
it was paid in cash.
Each acquisition was accounted for as a purchase. Goodwill is being amortized
over 15 to 40 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.
Acquisition Accounted for Using Pooling of Interests Method
On September 1, 1999, the Company completed its merger with Sullivan which
provided for the exchange of all the outstanding stock of Sullivan for 964,000
shares of the Company's common stock. Sullivan is an executive search firm that
specializes in the financial services industry and had revenue of $12.8 million
in 1998.
44
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 consolidated balance sheets reflect
the accrued compensation liability for the Phantom Shares at December 31, 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.
Revenue, net income (loss), and basic and diluted earnings (loss) per common
share of the combining companies are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue
The Company, as previously reported on Form S-1/A...... $204,015 $180,244
Sullivan............................................... 12,821 12,808
-------- --------
The Company, as restated............................... $216,836 $193,052
======== ========
Net income (loss)
The Company, as previously reported on Form S-1/A...... $(16,254) $ 6,443
Sullivan............................................... (936) 383
-------- --------
The Company, as restated............................... $(17,190) $ 6,826
======== ========
Earnings (loss) per common share
The Company, as previously reported on Form S-1/A
Basic................................................ $ (6.10) $ 2.41
======== ========
Diluted.............................................. $ (6.10) $ 2.41
======== ========
The Company, as restated
Basic................................................ $ (5.85) $ 2.31
======== ========
Diluted.............................................. $ (5.85) $ 2.31
======== ========
</TABLE>
5. Nonrecurring Charge and Merger Costs
During the first quarter of 1999, the Company incurred a nonrecurring charge
of $12.4 million. This charge was the result of the Company's agreement to
modify the terms of the Mulder & Partner GmbH & Co. KG ("Mulder") acquisition
agreement, including the termination of all employment contingencies. HSI
acquired 100% of Mulder on October 1, 1997, for a combination of cash and
32,000 shares of HSI common stock. On October 1, 1997, HSI delivered 4,000
shares of HSI common stock, paid $8.7 million to the partners of Mulder and
incurred $298,000 of associated transaction costs. Under the original Mulder
acquisition agreement an additional $5.2 million (plus interest at an annual
rate of 4%) was due to the partners of Mulder in five equal annual
installments, the first of which was paid on October 1, 1998. The remaining
shares were to
45
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 during 1999, the remaining cash due (plus interest) of $4.3 million was
paid, 428,452 shares (reflecting a split of 15.8217 for 1) of the Company's
common stock (which were valued, based upon the estimated fair market value of
the Company, at $5.2 million) were issued to such Mulder partners and $2.9
million of deferred compensation assets were written off resulting in a total
compensation charge of $12.4 million. All employment contingencies relating to
the Mulder consultants have been terminated.
In connection with the acquisition of Sullivan, the Company recorded merger-
related costs of $2.8 million during 1999. The merger costs consisted of a $2.0
million non-cash charge for accelerated vesting of an employee equity ownership
plan in place at Sullivan and $772,000 of transaction-related costs, including
legal, accounting and advisory fees.
6. 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 initial public
offering of 4.2 million shares of the Company's common stock and on April 27,
1999, the Company's common stock began trading on the Nasdaq National Market
under the symbol "HSII."
On April 30, 1999, the Company completed the initial public offering of an
aggregate of 4.2 million shares of common stock at $14.00 per share, of which
3.7 million shares were offered by the Company and 500,000 shares were offered
by selling stockholders. In addition, on June 1, 1999, the Company completed
the offering of an additional 505,000 shares of common stock which arose from
the exercise of a portion of the over-allotment option granted to certain
underwriters of the initial public offering. These offerings resulted in net
proceeds (after deducting the underwriting discount and estimated offering
expenses) of $51.8 million to the Company and $6.5 million to the selling
stockholders.
The Company's mandatory redemption feature on its common stock terminated as
a result of the completion of the initial public offering.
7. Derivative Financial Instrument
The Company receives warrants for equity in its client companies, in addition
to its cash fee, for services rendered on some searches. When the warrants are
received, revenue is recorded equal to the estimated fair market value of the
instrument received. Thereafter, the securities are accounted for as available-
for-sale investments. The Company has entered into a collar agreement to hedge
the impact of market value changes of one of these equity securities. Collars
consist of the sale of call options along with a corresponding purchase of put
options, with the effect of establishing the highest and lowest prices at which
the securities will be sold during a certain time period. The collar has been
designated and is effective as a hedge of the equity security. Unrealized gains
and losses on both the equity security and the collar are recorded in equity
and comprehensive income. When realized, gains and losses on the equity
security and the collar are recorded in income. Beginning in the fourth quarter
of 1999, the Company has the right to put and the counterparty has the right to
call a portion of the shares on a quarterly basis in accordance with an
established schedule. The unrealized pre-tax gain on these hedged shares at
December 31, 1999 was $3.5 million. The Company's realized gain on these shares
for the year ended December 31, 1999 was $883,000.
46
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is exposed to credit loss in the event of nonperformance by the
other party. However, the Company does not anticipate nonperformance by the
counterparty.
8. Basic and Diluted Earnings Per Common Share
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings (loss) per share ("EPS").
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Basic EPS
Income (loss) available to common shareholders. $ 5,792 $(17,190) $ 6,826
Weighted average common shares outstanding..... 13,642 2,940 2,949
------- -------- -------
Basic EPS.................................... $ 0.42 $ (5.85) $ 2.31
======= ======== =======
Diluted EPS
Income (loss) available to common shareholders. $ 5,792 $(17,190) $ 6,826
------- -------- -------
Weighted average common shares outstanding..... 13,642 2,940 2,949
Dilutive effect of common stock options........ 247 -- 1
------- -------- -------
Weighted average diluted common shares
outstanding................................... 13,889 2,940 2,950
------- -------- -------
Diluted EPS.................................. $ 0.42 $ (5.85) $ 2.31
======= ======== =======
</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 100,000,000 shares
and to authorize a class of preferred stock of 10,000,000 shares. In February,
1999, the Board of Directors adopted, and the stockholders approved, these
amendments. The consolidated 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.
9. Line of Credit
The Company has a $50.0 million reducing revolving credit facility ("line of
credit"). This facility will terminate on December 31, 2001. As part of the
terms of the facility, the line of credit will reduce by $10.0 million on
December 31, 2000. There was $0 and $22.0 million of borrowings outstanding
under this line of credit at December 31, 1999 and 1998, respectively. 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 the Company's financial condition (the "Applicable Margin"). A U.S.
Borrowing bears interest at the then-existing prime rate. At December 31, 1998,
the interest rate on the debt was LIBOR plus the Applicable Margin, the sum of
which equaled 6.8%. 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. As of December 31, 1999, 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, 1999 and 1998 totaled
$116,000 and $21,000, respectively.
47
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Related Party Transactions
At December 31, 1998, note receivable from affiliate was comprised of a loan
to HSI of $1.9 million. The interest rate on this receivable was 6.2% at
December 31, 1998. Accounts receivable included an intercompany receivable of
$3.0 million at December 31, 1998. All transactions between the Company and HSI
were recorded at cost.
11. Long-Term Debt
Long-term debt at December 31, 1999 was $3.0 million due as a result of the
Fenwick acquisition which will be paid in June 2000 (see Note 4). Long-term
debt at December 31, 1998 was $2.3 million and it consisted of amounts due to
former stockholders who had sold their stock back to the Company (see Note 12).
The obligations were unsecured and paid in annual installments over periods
ranging from two to five years with interest paid generally at the prime
commercial rate (7.75% at December 31, 1998). Long-term debt was also comprised
of amounts due as a result of the Fenwick acquisition.
The fair value of the debt based on current rates for similar debt is
estimated to be $2.8 million at December 31, 1999.
12. Stockholder Agreements
In accordance with the terms of stock purchase agreements between the Company
and its stockholders, the Company was obligated to purchase the shares of stock
owned by a stockholder if the stockholder desired 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 were 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 terminated upon the
successful completion of the Company's initial public offering on April 26,
1999.
13. Stock Compensation Plans
In 1998, the Company adopted the 1998 Heidrick & Struggles GlobalShare Plan
("the Plan"). The Plan serves as a means to attract, reward, and retain
selected key employees, directors and independent contractors. The Plan is
administered by the Compensation Committee of the Board of Directors. Awards
may be in the form of options, which may be incentive stock options or non-
qualified stock options; stock appreciation rights, or other awards, such as
restricted stock units, that are valued based upon the fair market value of
shares. Awards may be paid in shares, cash or a combination thereof. No options
can be for a term of greater than ten years and the option price per share of
common stock cannot be less than 100% of the fair market value of the shares on
the date of grant.
The maximum number of shares of common stock reserved for issuance under the
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. The maximum amount of a
performance-based award to any Participant with respect to a calendar year of
the Company is $2.0 million. As of December 31, 1999, 1,544,282 stock options
were granted at an exercise price of $14 per share under the Plan and 58,781 of
those options were forfeited. These options expire April 2009. The weighted
average fair value of options granted in 1999 was $8.56 per share. The weighted
average remaining contractual term of all outstanding options at December 31,
1999 was approximately 9.3 years. No options were exercisable during 1999. As
of December 31, 1999, no restricted stock units have been granted under the
Plan.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company has elected to account for stock-based compensation using the
intrinsic value method prescribed by Accounting
48
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Under this method, no compensation cost is recognized for stock option awards
granted at or above fair market value. Had compensation expense for the Plan
been determined based upon fair value at the grant date for awards under the
plan in accordance with SFAS No. 123, the Company's net earnings and basic and
diluted earnings per share for 1999 would have been $4.7 million and $0.34,
respectively.
The weighted average fair value of options granted during 1999, estimated on
the date of grant using the Black-Scholes option-pricing model was $8.56. The
fair value of 1999 options granted is estimated on the date of grant using the
following assumptions: average risk-free rate of 5.3%, dividend rate 0%,
expected volatility 54.3% and expected option life of seven years.
14. 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 $2,000 per participant for each of the years
ended December 31, 1999, 1998 and 1997. The Company has the option of making
discretionary contributions. For the years ended December 31, 1999, 1998 and
1997, the Company elected to contribute to each eligible participant a sum
equal to 3.03% of the participant's total compensation (as defined) and an
additional 3.03% of the participant's compensation above the Social Security
taxable wage base up to the maximum amount allowed by the Internal Revenue
Code.
The plan allows participants the option of having their account balances or
portions thereof invested in the Company's common stock. At December 31, 1999
and 1998, the plan held 4,755,951 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 terminated upon
successful completion of the Company's initial public offering on April 26,
1999.
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, 1999, 1998 and 1997 was $3.2
million, $2.5 million, and $2.2 million, 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, 1999, 1998 and 1997 was $0, $0 and
$1.4 million, respectively. The liability for this retirement plan consisted of
the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Employer contributions, less forfeitures................ $ 5,910 $ 6,390
Employee deferrals...................................... 3,785 3,785
Earnings of designated assets........................... 823 544
Distributions........................................... (448) (210)
------- -------
$10,070 $10,509
======= =======
</TABLE>
49
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999 and 1998 of $4.7 million
and $2.9 million, 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash and cash equivalents................................ $ 10 $ 10
Stock mutual fund........................................ 11,815 9,533
Bond mutual fund......................................... 3,979 4,009
------- -------
$15,804 $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, 1999, 1998 and 1997 was $532,000, $232,000, and $250,000,
respectively. The liability for this retirement plan at December 31, 1999 and
1998 was $1.4 million and $849,000, respectively.
15. Income Taxes
The deferred tax assets and liabilities consist of the following components
as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets--
Receivable allowances...................................... $ 4,921 $ 2,052
Accrued vacations.......................................... 1,074 772
Accrued bonuses............................................ 13,227 6,969
Liability for nonqualified retirement plans................ 8,464 5,569
Other accrued expenses..................................... 2,087 1,637
Deferred compensation...................................... 120 572
Leasehold improvements and equipment....................... 918 --
Foreign net operating loss carryforwards................... 2,856 1,515
Goodwill................................................... 1,441 --
Cumulative translation adjustment.......................... 792 1,503
-------- -------
35,900 20,589
Valuation allowance........................................ (2,929) (1,303)
-------- -------
Net deferred tax assets.................................. 32,971 19,286
-------- -------
Deferred tax liabilities--
Leasehold improvements and equipment....................... -- (273)
Equity in undistributed income of affiliate................ -- (125)
System development costs................................... (7,088) (3,678)
Unrealized gain on available-for-sale investments.......... (3,278) (1,228)
Other...................................................... (2,348) (2,462)
-------- -------
Net deferred tax liabilities............................. (12,714) (7,766)
-------- -------
Net deferred income taxes.............................. $ 20,257 $11,520
======== =======
</TABLE>
50
<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, 1999 and 1998, as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Current deferred tax assets............................ $ 21,429 $10,419
Current deferred tax liabilities....................... (1,548) (1,548)
-------- -------
Net current deferred tax asset....................... 19,881 8,871
-------- -------
Long-term deferred tax assets.......................... 11,542 8,867
Long-term deferred tax liabilities..................... (11,166) (6,218)
-------- -------
Net long-term deferred tax asset..................... 376 2,649
-------- -------
$ 20,257 $11,520
======== =======
</TABLE>
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current--
Federal....................................... $ 6,811 $ 1,883 $ 8,305
State......................................... 2,014 497 2,763
Foreign....................................... 4,291 436 540
Deferred........................................ 2,004 (1,514) (3,609)
------- ------- -------
$15,120 $ 1,302 $ 7,999
======= ======= =======
</TABLE>
A reconciliation of income tax expense for the years ended December 31, 1999,
1998 and 1997, to income taxes at the statutory federal income tax rate of 34%
for 1999 and 35% for 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Income taxes at statutory rate................... $ 7,110 $(5,561) $5,189
Increase due to--
State income taxes, net of federal tax benefit. 1,329 136 1,625
Nondeductible expenses......................... 5,852 4,985 357
Foreign taxes in excess of federal tax rates... 807 930 721
Other, net..................................... 22 812 107
------- ------- ------
Provision for income taxes....................... $15,120 $ 1,302 $7,999
======= ======= ======
</TABLE>
The accumulated undistributed earnings of HSI included in the Company's
income for the year ended December 31, 1998 totaled $655,000, which under
existing law, would 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 provided a deferred tax liability
for the undistributed earnings of HSI at December 31, 1998. 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,
-------------------------
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
United States.................................. $16,725 $(10,212) $16,908
Foreign........................................ 4,187 (5,676) (2,083)
------- -------- -------
Total...................................... $20,912 $(15,888) $14,825
======= ======== =======
</TABLE>
51
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. 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--
2000......................................................... $ 21,227
2001......................................................... 20,179
2002......................................................... 17,494
2003......................................................... 16,124
2004......................................................... 14,325
Thereafter................................................... 53,956
--------
$143,305
========
</TABLE>
Rent expense under operating leases for the years ended December 31, 1999,
1998 and 1997 was $21.1 million, $10.0 million, and $8.8 million, 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 $204,000 for each of the first five
years of retirement and approximately $102,000 for each of the succeeding five
years. The agreement also states the payments are ratably forfeited during the
period in which the individual remains an active employee after having reached
the age of 65. At December 31, 1999, the first forty-two 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.
52
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Segment Information
Management views the operations of the Company through geographic segments.
Europe includes the Middle East and Africa, and Other International includes
the Asia Pacific and Latin America regions, Canada and Mexico. As a result of
the Merger, the Company changed the structure of its internal organization and
therefore, its reportable segments changed. The Company has restated 1998 and
1997 segment information to conform with this structure.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
United States................................... $256,394 $190,855 $168,981
Europe.......................................... 118,880 -- --
Other International............................. 37,956 25,981 24,071
LeadersOnline................................... 2,617 -- --
-------- -------- --------
Total......................................... $415,847 $216,836 $193,052
======== ======== ========
Operating Income (Loss):
United States................................... $ 38,638 $ 8,871 $ 23,970
Europe.......................................... (1,614) -- --
Other International............................. 6,410 (6,743) (2,637)
LeadersOnline................................... (5,157) (1,539) --
Corporate unallocated........................... (19,374) (11,928) (8,490)
-------- -------- --------
Total......................................... $ 18,903 $(11,339) $ 12,843
======== ======== ========
<CAPTION>
As of December
31,
------------------
1999 1998
-------- --------
Identifiable Assets:
<S> <C> <C> <C>
United States................................... $107,698 $ 84,035
Europe.......................................... 102,398 --
Other International............................. 22,062 14,287
LeadersOnline................................... 4,150 472
Corporate unallocated........................... 98,441 29,981
-------- --------
Total......................................... $334,749 $128,775
======== ========
</TABLE>
During all years presented above, no individual customer accounted for
greater than 10% of revenue.
53
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Pension Plan and Life Insurance Contracts
The Company maintains a pension plan for certain employees in Germany. The
pensions are individually fixed German Mark 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>
1999
-------
<S> <C>
Change in benefit obligation:
Benefit obligation at January 1, 1999 ........................... $18,574
Service cost..................................................... 999
Interest cost.................................................... 1,146
Actuarial loss................................................... 1,133
Benefits paid.................................................... (302)
Translation difference........................................... (2,708)
-------
Benefit obligation at December 31................................ 18,842
Unrecognized net loss............................................ (1,133)
-------
Net amount recognized............................................ $17,709
=======
Unfunded status of the plan...................................... $18,842
Unrecognized actuarial loss...................................... (1,133)
-------
Accrued benefit cost............................................. $17,709
=======
<CAPTION>
1999
-------
<S> <C>
Assumptions as of December 31:
Discount rate (weighted average)................................. 6.0%
Rate of compensation increase.................................... 4.0%
Components of net periodic benefit cost:
Service cost..................................................... $ 999
Interest cost.................................................... 1,146
Expected return on plan assets................................... --
Amortization of prior service costs.............................. --
Recognized net actuarial loss.................................... --
-------
Net periodic benefit cost........................................ $ 2,145
=======
</TABLE>
The pension benefits are fully reinsured within a group insurance contract
with Victoria Lebensversicherung AG. The surrender value at December 31, 1999
was $16.9 million. 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. This
pension plan was included in the consolidated financial statements effective
with the Merger.
19. Stock-Based Compensation Expense
In the fourth quarter of 1998, the Company sold 735,809 shares to certain
employees, resulting in $9.9 million 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.
20. Subsequent Events
On February 9, 2000, the Company completed a follow-on public offering under
a Registration Statement on Form S-1 effective February 3, 2000 (File
No. 333-94017) of an aggregate of 3,450,000 shares of common
54
<PAGE>
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock at $33.00 per share, which included 450,000 shares from the exercise of
the over-allotment option granted to certain underwriters of the offering. The
Company offered 2,458,306 shares and selling stockholders offered
991,694 shares. This offering resulted in net proceeds (after deducting the
underwriting discount and estimated offering expenses) of $76.3 million to the
Company and $31.0 million to the selling stockholders. The net proceeds from
this offering have yet to be utilized.
On March 7, 2000, LeadersOnline, a wholly owned subsidiary of the Company,
announced that it is planning to file a Registration Statement with the
Securities and Exchange Commission covering the proposed sale by LeadersOnline
of shares of its common stock. LeadersOnline currently anticipates that the
Registration Statement will be filed in the spring or summer of 2000.
55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Heidrick & Struggles
International, Inc. and Subsidiaries:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of HEIDRICK & STRUGGLES INTERNATIONAL, INC.
AND SUBSIDIARIES included in this Form 10-K report and have issued our report
thereon dated February 14, 2000. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
Schedule II--Heidrick & Struggles International, Inc. Valuation and Qualifying
Accounts is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 14, 2000
56
<PAGE>
SCHEDULE II
Heidrick & Struggles International, Inc.
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Charged Deduction
Balance at to Including Balance at
Beginning of Costs & Currency End of
Year Expenses Translation Acquisitions Year
------------ -------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31:
Allowance for doubtful
accounts
1999................ $4,669 14,376 (10,454) 3,844 $12,435
------ ------ ------- ----- -------
1998................ $3,276 5,356 (3,963) -- $ 4,669
------ ------ ------- ----- -------
1997................ $1,925 3,324 (1,973) -- $ 3,276
------ ------ ------- ----- -------
</TABLE>
57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Heidrick & Struggles International, Inc. and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 76,848
<SECURITIES> 0
<RECEIVABLES> 95,597
<ALLOWANCES> (12,435)
<INVENTORY> 0
<CURRENT-ASSETS> 191,715
<PP&E> 82,655
<DEPRECIATION> (30,303)
<TOTAL-ASSETS> 334,749
<CURRENT-LIABILITIES> 137,708
<BONDS> 0
0
0
<COMMON> 167
<OTHER-SE> 167,713
<TOTAL-LIABILITY-AND-EQUITY> 334,749
<SALES> 0
<TOTAL-REVENUES> 415,847
<CGS> 0
<TOTAL-COSTS> 396,944
<OTHER-EXPENSES> (3,513)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,504
<INCOME-PRETAX> 20,912
<INCOME-TAX> 15,120
<INCOME-CONTINUING> 5,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,792
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.42
</TABLE>
