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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, 2000
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:
Title of each class Name of each exchange on which registered
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Common Stock, $.01 par value Nasdaq National Market
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,
2001 was 19,374,986 shares. The aggregate market value of the Registrant's
Common Stock held by non-affiliates of the Registrant on March 1, 2001
(assuming that the Registrant's only affiliates are its officers, directors and
10% or greater stockholders) was approximately $623,711,940 based upon the
closing market price of $35.31 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 2001 Annual
Meeting of Stockholders scheduled to be held on June 5, 2001, 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
PAGE
----
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 14
Item 3. Legal Proceedings.............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders............ 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 15
Matters.......................................................
Item 6. Selected Financial Data........................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 18
Item 7a. Quantitative and Qualitative Disclosures About Market Risk..... 32
Item 8. Financial Statements and Supplementary Data.................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and 32
Financial Disclosure..........................................
PART III
Item 10. Our Directors and Executive Officers........................... 33
Item 11. Executive Compensation......................................... 33
Item 12. Voting Securities of Certain Beneficial Owners and Management.. 33
Item 13. Certain Relationships and Related Transactions................. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K. 33
Signatures.............................................................. 35
Financial Statements and Financial Statement Schedules.................. 37
PART I
ITEM 1. BUSINESS
General
Heidrick & Struggles International, Inc. ("HSI Group") is the world's premier
provider of executive-level search and leadership consulting services. We
partner with our clients with the objective to build the best leadership teams
in the world by helping them hire, develop and retain the most effective
leaders in their industries. We operate principally through two lines of
business: Executive Search and LeadersOnline. Heidrick & Struggles Executive
Search, specializing in chief executive, board member and senior-level
management assignments, has been fulfilling the leadership needs of the world's
largest and most complex organizations for more than 47 years. Through
LeadersOnline, Inc., ("LeadersOnline") our Internet-enhanced search business,
we target the recruitment market for mid-level executives and professionals. We
provide executive search and leadership consulting services in every major
business center in the world and mid-level management search primarily in the
U.S. and Europe. We focus on identifying, evaluating and recommending qualified
candidates for senior-level executive and mid-level management positions.
Through our worldwide network of 1,178 professionals in 78 locations throughout
North and South America, Europe, the Middle East, Africa and Asia Pacific, we
provide our services to a broad range of clients. Our clients include the
following:
.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
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 operations in
all other geographic regions. On February 26, 1999, H&S merged with HSI (the
"Merger") to reunite the two companies in a single corporate structure, HSI
Group.
Industry Overview
We operate in a rapidly changing and robust market of human capital
management solutions including traditional executive-level search, Internet-
enhanced recruiting and leadership consulting. The executive search industry is
highly fragmented, consisting of more than 5,000 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 $150,000 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 typically focus
primarily on positions with annual cash compensation of less than $150,000.
Contingency search firms are generally not retained on an exclusive basis and
are compensated only upon successfully placing a recommended candidate. Both
types of firms normally charge a fee for their services equal to approximately
one-third of the first year's total cash compensation for the position being
filled.
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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. There is a shortage of qualified
executive-level candidates, which has made the recruitment of senior-level
executives more difficult. 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
decade. Because fees for most executive search firms are based on cash
compensation, higher cash compensation levels have translated into higher
executive search fees.
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 with a worldwide presence 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 increasingly rely 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. More than two-thirds of our executive search revenue in 2000 was
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. 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
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.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, 2000, we
employed 510 executive search consultants. We estimate that our consultants, on
average, have approximately 20 years of experience in executive search and/or
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. In 2000, an annual average of approximately 4% of our
consultants left to work somewhere else in the executive search industry. Under
our compensation system, 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. This compensation
component encourages our consultants to work as a team. A significant number of
our executive searches are 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.
Expanding our Services Beyond Executive Search. Executive search has
traditionally been our only area of focus. We have begun recently to expand our
services beyond executive search by leveraging our access and influence with
the world's business leaders. Our strategy is to offer our clients a suite of
services that provides a natural complement to our best of class executive
search services.
In 2000, we extended our management assessment service, Heidrick & Struggles
Strategic Leadership Review, to a global platform. This service provides
senior-level executives with objective assessments of the individuals and teams
reporting to them. We believe management assessment will, over time, create an
additional revenue stream to complement our core Executive Search business. In
addition to management assessment, we are expanding our offering of interim
executive management placement due to increasing demand from our clients.
Complementary Internet-Enhanced 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 mid-level executives and professionals with
annual compensation in the $75,000 to $150,000 range.
Global Presence. We have offices in 78 locations in major business centers in
37 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 281, 170, 39, and 20 executive search consultants,
respectively, as of December 31, 2000. LeadersOnline employed 34 eConsultants
in North America and 7 eConsultants in Europe as of December 31, 2000. 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 and mid-level management
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 executive search consultants also specialize in searches
for functional positions such as members of boards of directors, chief
executive officers, chief financial officers, chief
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information officers and e-commerce business leaders. Our structure enables us
to better understand our clients' cultures, operations, business strategies and
industries.
Global Support Platform. Our executive search consultants work with a team of
607 associates, and our 41 eConsultants at LeadersOnline work with a team of 20
eSearchers, all of whom 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 37,000 client records. This global platform also offers a broad
range of on-line services and industry reference sources, and advanced
Internet-enhanced technology to support the research needs of our
professionals.
Our Growth Strategy
Our goal is to expand our leadership position as the global provider of
choice for executive search and other leadership consulting services that
complement our executive search business, 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 executive search 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 include
LeadersOnline, our Internet-enhanced recruiting business; Heidrick & Struggles
Strategic Leadership Review, our management assessment business; and Protem,
our interim management placement service.
Enhance Professional Productivity. We believe that our consultants generate
one of the highest levels of average revenue per consultant in the industry.
Our executive search consultants generated an average revenue per consultant of
$1.3 million in 2000 compared to $1.2 million in 1999. We also believe that our
infrastructure can be further leveraged to increase our consultants'
productivity over time. We view LeadersOnline as our incubator of change,
trying new concepts and innovative e-search capabilities as well as new
delivery processes, using technology and the Internet. Our goal is to apply
those innovative search capabilities and processes to our traditional executive
search model. Specifically, we expect that our technology initiatives over time
will enable our professionals to access a greater amount of information more
quickly. They will be able to perform more sophisticated searches to identify
candidates more efficiently and effectively.
Pursue Strategic Acquisitions and Alliances. We maintain an acquisition and
alliance strategy designed to expand our leadership position in executive
search as well as in other areas that complement executive search. This
strategy allows us to increase our penetration in existing and new geographic
markets and expand the depth and breadth of our industry practice groups and
functional specialties.
Services
Executive Search. 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
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.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
Heidrick & Struggles Strategic Leadership Review. Through our management
assessment service, we provide senior-level executives with objective
assessments of the individuals and teams reporting to them. Management
assessment provides a natural complement to our Executive Search business,
leveraging our access and influence to the senior executives we place. This
service is particularly critical for senior executives who want to establish a
framework for managing human capital during times of change, such as during
mergers, acquisitions or divestitures; when a new CEO joins an organization; or
when a company shifts its strategic direction or revises its succession plan.
Protem. As the demand for interim professionals in pro-active roles has
evolved, we have developed the capability to serve the strategic management
needs of our clients, as well as filling temporary gaps in Board level talent.
Through Protem, we offer placement of interim executive management in response
to increasing demand from our clients.
LeadersOnline. We launched our LeadersOnline business in March 1999 to solve
clients' recruitment needs for mid-level executives and professionals. Based on
specific client requirements, LeadersOnline's eConsultants plan, develop and
tailor the particular position specifications and the eConsulting search
strategy. The eConsultants then coordinate the design of the Opportunity Page
to be posted on the LeadersOnline web site. The Opportunity Page is a
description of the available position with information including salary,
location, promotion potential, and other facts about the opportunity. Only
members who have been matched by LeadersOnline as appropriate candidates will
be given access to view the Opportunity Page. LeadersOnline's eConsultants,
supported by their team of eSearch associates, identify the job candidates that
match the parameters of the position specifications. The Opportunity Page
allows prospective job candidates to review the position description and to
decide whether they are interested in proceeding with the hiring process.
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. 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 in connection with our mid-management recruiting process. A typical
contract could contain one or more of these services:
. assess the client's human capital needs; evaluate and recommend necessary
position skills and qualifications
. develop content for the LeadersOnline web site which includes a client
company's business overview and Opportunity Pages describing job
specifications and requirements
. match position specifications against the proprietary database and
produce a customized list of candidates
. notify matched candidates by e-mail to inform them about the position
. conduct profile verification
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. forward a verified candidate list to the client, with the consent of the
candidates
. generate 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.
Our Organization
We operate principally through two lines of business: Executive Search and
LeadersOnline. Our operational structure is designed to provide high quality
executive search and leadership consulting services to our clients worldwide.
We organize our executive search consultants as follows:
. geography, through our network of offices
. industry practice groups
. functional specialties
On a given search assignment, we will generally utilize the expertise of
executive search consultants in more than one of our offices, industry practice
groups and functional specialties. For example, an executive search for a CFO
of a technology company located in Hong Kong may involve an executive search
consultant in Hong Kong with an existing relationship with the client, another
executive search consultant in Los Angeles with expertise in the technology
practice group and a third executive search consultant in Singapore with
expertise in CFO recruiting. By utilizing executive search 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.
Industry Practice Groups. Our Executive Search 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 2000, are as follows:
Percentage
Industry Practice Group of Revenue
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Financial Services............................................. 29%
Technology..................................................... 29
Industrial..................................................... 14
Consumer Products.............................................. 14
Health Care.................................................... 6
Professional Services.......................................... 5
Higher Education/Not-for-Profit................................ 2
Other.......................................................... 1
---
100%
===
Executive search 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 build relationships with candidates and referral
sources within particular industries and to understand our clients' operations,
business strategies, industry dynamics and culture. We believe that these
factors are critical to the successful placement of a candidate.
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Functional Specialties. We recognize that 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 executive search 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 offices in 78 locations in 37 countries, and provide executive-level
search and leadership consulting 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 certain administrative functions are centralized, each region has its own
regional management as well as research and support functions. In addition,
eConsultants from LeadersOnline are located in many of our large executive
search offices in order for us to provide our global, regional and local
clients with a broader range of services.
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Listed below are the countries and locations in which we operate as of
December 31, 2000. The segment designations follow the way we report our
Executive Search business. LeadersOnline shares offices with Executive Search
in many of our major locations.
Segment Country Location
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Americas
United States United States Atlanta, GA
Austin, TX
Boston, MA
Charlotte, NC
Chicago, IL
Cleveland, OH
Dallas, TX
Denver, CO
Emeryville, CA
Foster City, CA
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
San Diego, CA
San Francisco, CA
Seattle, WA
Tysons Corner, VA
Washington, D.C.
Wellesley, MA
Other Canada Montreal
Toronto
Argentina Buenos Aires
Brazil Sao Paulo
Chile Santiago
Colombia Bogota
Mexico Mexico City
Peru Lima
Venezuela Caracas
Segment Country Location
- ------------- --------------- ------------------
International
Europe Austria Vienna
Belgium Brussels
Czech Republic Prague
Denmark Copenhagen
Estonia Tallin
Finland Helsinki
France Paris
Germany Berlin
Dresden
Dusseldorf
Frankfurt
Hamburg
Munich (3 offices)
Italy Milan
Rome
Latvia Riga
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
Asia Pacific Australia Melbourne
Sydney
China Hong Kong
Shanghai
India New Delhi
Japan Tokyo
Korea Seoul
Singapore Singapore
Taiwan Taipei
Executive Search
Americas--United States
We have 27 locations in the United States. At December 31, 2000, we employed
a total of 273 executive search consultants in this segment. Approximately 57%
of our worldwide revenue in 2000 was generated in the United States. The
largest offices in the United States in terms of revenue are New York, Chicago
and Silicon Valley.
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Americas--Other
We have 9 locations in the Americas--Other segment which includes Canada and
Latin America. At December 31, 2000, we employed 28 executive search
consultants. Approximately 4% of our worldwide revenue in 2000 was generated in
this segment.
International--Europe
We have 30 locations in 19 European countries, one location in the Middle
East and two locations in South Africa. At December 31, 2000, we employed 170
executive search consultants in this segment. Approximately 30% of our
worldwide revenue in 2000 was generated by this segment. Our locations in
Germany, the United Kingdom and France generate the highest revenue in this
segment.
International--Asia Pacific
We have 9 locations in Asia Pacific. At December 31, 2000, we employed 39
executive search consultants and approximately 6% of our worldwide revenue in
2000 was generated in the Asia Pacific segment.
LeadersOnline
LeadersOnline, headquartered in Aliso Viejo, California, as of January 26,
2001, had 84 full-time employees as of December 31, 2000, including 41
eConsultants, 20 eSearchers, and 23 administrative and corporate management
staff. Of these employees, 71 were located in North America and 13 were located
outside North America. Approximately 3% of our worldwide revenue in 2000 was
generated by LeadersOnline.
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 3% of our revenue in 2000. 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 and LeadersOnline 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 and LeadersOnline brand names. As a result of our efforts,
we are more frequently invited to make presentations to prospective clients,
often competing for executive search and online recruiting engagements with
major competitors in the industry. In 2000, we succeeded in obtaining executive
search and mid-level recruiting 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. It features interviews with business leaders
and management-related articles, and publicizes the Heidrick & Struggles brand
name.
In April 2000, LeadersOnline entered into a strategic five-year alliance with
Business Week, under which The Business Week Online Careers Channel and the
LeadersOnline site were linked to form a comprehensive online career
destination for professional and managerial talent.
In October 2000, Business Week launched a magazine called "LeadersOnline,"
with an initial circulation of 300,000. It is a magazine custom-published by
Business Week designed to be the premier career management resource for the
next generation of corporate leaders. Two issues were published in 2000 and
six issues are anticipated to be published in 2001.
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One of the limitations of our executive search marketing has been the
existence or anticipated existence of off-limits arrangements. In recent years
off-limits arrangements have become 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 these 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 37,000
client records, coupled with a broad range of online services and industry
reference sources. Our professionals use our information technology
infrastructure to do the following:
.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
Given the importance of technology to the search process, we are committed to
improving our information management by implementing new technology
initiatives. Our technology infrastructure is designed to enhance the
functionality, speed and quality of our information management, and to improve
the efficiency and effectiveness of completing searches.
Our technology initiatives represent a long-term strategic plan for the
deployment of technology and are designed to support our rapid growth. Our
financial management system provides us with an integrated accounting and
financial reporting system in the U.S. and certain other regions of the world.
We are upgrading and globalizing our search system. Our search systems allow
our employees to 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 of all
information processing including the Internet, one of our most valuable
information tools. In addition to our proprietary eSearch capabilities at
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, as well as sharing knowledge
. through our extranet, as a means of communicating with clients, and of
connecting clients and candidates on a secure network where each can
review information about the other
Our information technology infrastructure and development is overseen by a
technology management team that, among other services, provides our employees
with support and training programs. To address issues of data security
associated with increasingly remote access to our network and our proprietary
applications, we use encrypted VPN, industry-leading firewalls and password
protection. 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 our, and our
clients', needs evolve.
10
Professional Staff and Employees
Our executive search professionals are categorized either as consultants or
associates. Associates assist consultants by performing research and other
functions. As of December 31, 2000, we had 2,087 full time employees, of whom
510 were executive search consultants, 607 were associates, 886 were search
support and corporate staff, and 84 worked for LeadersOnline. 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.
Executive Search Competition
The executive search industry is highly competitive. It is estimated that
there are more than 5,000 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 established
retained search firms. In particular, we compete against 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 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.
LeadersOnline Competition
The market for LeadersOnline is intensely competitive, highly fragmented and
quickly evolving. We face competition from a number of sources, including
Internet-enhanced recruiting services, such as Korn Ferry International's
Futurestep and TMP Worldwide Inc.; traditional, regional and specialized
contingency-based search firms; alternative recruiting services, such as
Internet job boards and print advertising; internal resources of current or
potential employers; and large Internet information hubs or portals.
Recent Strategic Acquisitions and Mergers
Over the past four years, we have successfully completed the strategic
acquisition of nine executive search firms and a merger with one executive
search firm:
AMROP-Finland. On December 29, 2000 we acquired three executive search
companies: the Finnish, Russian and Baltic executive search companies of the
AMROP worldwide network. These acquisitions establish us as the largest
executive search firm in Finland and strengthen our presence in the emerging
markets of Estonia, Latvia and Russia.
Lynch Miller Moore O'Hara. On May 1, 2000, we acquired Lynch Miller Moore
O'Hara, Inc., a Chicago-based executive search firm that specialized in the
venture capital and high tech markets.
T.A.O. Group. On April 1, 2000, we acquired T.A.O. Group, an executive
recruitment firm based in Seoul, Korea, with offices in Taipei, Shanghai and
Singapore, expanding our presence in Asia Pacific.
Argonaut Search Group. On March 1, 2000, we acquired Argonaut Search Group,
LLC, a San Francisco-based executive search firm that specialized in the real
estate and financial services industries.
11
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 South Africa.
Sullivan. On September 1, 1999, we merged with Sullivan & Company, an
executive search firm that specialized in the financial services industry. This
transaction expanded our reach in the investment banking, investment management
and specialty finance sectors.
Fenwick. On June 26, 1998, we acquired Fenwick Partners, Inc., a Boston-based
executive search firm. This transaction expanded the reach of our technology
group into a third key technology center in the United States.
Mulder. On October 1, 1997, we acquired Mulder Partner GmbH & Co. KG. As a
result of this transaction we became the largest executive search firm in
Germany.
12
OUR EXECUTIVE OFFICERS
Name Age Position with Company
---- --- ---------------------
Patrick S. Pittard............... 55 Chairman, President and Chief Executive
Officer; Director
Donald M. Kilinski............... 41 Chief Financial Officer; Treasurer
Stephanie W. Abramson............ 56 Chief Legal Officer and Chief Corporate
Development Officer; Secretary
David C. Anderson................ 58 President and Chief Executive Officer,
Heidrick & Struggles Executive Search;
Director
Piers Marmion.................... 42 Chief Operating Officer and President--
International, Heidrick & Struggles
Executive Search; Director
Richard D. Nelson................ 61 Former Chief Administrative Officer,
Counsel and Secretary
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 15, 2001.
Patrick S. Pittard has been our Chairman of the Board of Directors since June
27, 2000, and President and Chief Executive Officer 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. After joining Heidrick & Struggles, Inc.
in 1983, Mr. Pittard 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 Inc. from July 1992 to August 1995 and from April
1997 through November 1997.
Stephanie W. Abramson has been our Chief Legal Officer and Chief Corporate
Development Officer and Secretary since February 12, 2001. Prior to joining us,
Ms. Abramson was Executive Vice President, General Counsel and Secretary of
Young & Rubicam Inc. From 1980 to 1995, she was a partner in the law firm of
Morgan, Lewis and Bockius.
David C. Anderson has been the President and Chief Executive Officer of
Heidrick & Struggles Executive Search, a division of Heidrick & Struggles
International, Inc., since June 27, 2000, and a member of our Board of
Directors since the Merger. Mr. Anderson also has been President--Americas
since September 23, 1999. He was North America Managing Partner from November
1998 to September 23, 1999, and he held the position of Office Managing Partner
of our Dallas office since joining the firm in 1992 until November 1998. He was
a member of the Board of Directors of Heidrick & Struggles, Inc. from 1992
until the Merger.
Piers Marmion has been the Chief Operating Officer and President--
International of Heidrick & Struggles Executive Search, a division of Heidrick
& Struggles International, Inc., since August 1, 2000, and a member of our
Board of Directors since March 6, 2001. Prior to joining Heidrick & Struggles
International, Inc., Mr. Marmion was Chief Operating Officer Worldwide and Head
of Europe and Asia for Spencer Stuart & Associates from 1994 to 2000.
13
Richard D. Nelson resigned from the positions of Chief Administrative
Officer, Counsel and Secretary in February 2001. He had held those offices
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. and a member of the Board of Directors of HSI from
1981 until the time of the Merger. He held the position of Chief Financial
Officer from 1981 until 1997.
ITEM 2. PROPERTIES
Our corporate office is located in Chicago, Illinois. We have 78 locations in
37 countries around the world and we lease space for 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
770,717 as of December 31, 2000. The leases for these offices call for future
minimum lease payments of approximately $223 million and have terms which will
expire between 2001 and 2020 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 2000.
14
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 intra-day stock 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:
Year Ended December 31, 2000 High Low
---------------------------- ------ ------
First Quarter.............................................. $42.50 $31.44
Second Quarter............................................. 64.75 32.50
Third Quarter.............................................. 75.00 42.75
Fourth Quarter............................................. 62.31 33.50
Year Ended December 31, 1999
----------------------------
First Quarter.............................................. N/A N/A
Second Quarter............................................. 20.13 12.75
Third Quarter.............................................. 19.50 14.63
Fourth Quarter............................................. 46.00 17.25
As of March 1, 2001, the last reported stock price on the Nasdaq National
Market for our common stock was $35.31 per share and there were approximately
383 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 without the consent of our lenders. Future
indebtedness and loan facilities also may prohibit or restrict our ability to
pay dividends and make distributions to our stockholders.
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 $76.2 million to us and $31.0 million to the selling stockholders.
We did not receive any of the proceeds resulting from the sale by selling
stockholders. We used and will continue to use the net proceeds from this
offering for general corporate purposes including funding the development of
LeadersOnline and other growth initiatives, hiring of additional executive
search consultants, expanding our technology infrastructure and funding
acquisitions.
During the month of October 2000, we issued 63,403 shares of our common
stock, in addition to cash, to certain of our employees and employees of
LeadersOnline in exchange for LeadersOnline stock options. We received no
proceeds for such issuance of stock for which exemption from registration is
provided by Rule 506 of Regulation D and Regulation S of the Securities Act of
1933.
Pursuant to the terms and conditions of the AMROP-Finland acquisition on
December 29, 2000, we issued an aggregate of 23,378 shares of our common stock,
in addition to cash, for one of our subsidiaries to purchase all of the
outstanding common stock of Koik & Partners SIA, Stahlber & Partner OY/Juha
Pekka Ahtikari OY, and Koik & Partners OU, the Latvian, Finnish and Estonian
acquired companies, respectively. Pursuant to such acquisitions, we received no
proceeds from the issuance of stock to the stockholders for which exemption
from registration is claimed under Regulation S of the Securities Act of 1933.
15
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each of the five years in the
period ended December 31, 2000 have been derived from the audited consolidated
financial statements of HSI Group 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
Year Ended
December 31,
---------------------------------------------------------------------------
2000 1999(1) 1998 1997 1996
----------- ------------- ----------- ----------- -----------
(in thousands, except per share and other operating data)
Statement of Operations
Data:
Revenue................ $ 594,394 $ 415,847 $ 216,836 $ 193,052 $ 147,428
----------- ----------- ----------- ----------- -----------
Operating expenses:
Salaries and employee
benefits:
Salaries and employee
benefits.............. 395,105 (2) 277,580 161,870 135,473 105,544
Nonrecurring
compensation charges.. 12,222 (4) 14,448 (5)(6) 12,748 (3) -- --
General and
administrative
expenses:
General and
administrative
expenses.............. 156,242 104,144 53,557 44,736 30,344
Nonrecurring general
and administrative
charges............... 1,753 (4) 772 (5) -- -- --
----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 565,322 396,944 228,175 180,209 135,888
----------- ----------- ----------- ----------- -----------
Operating income
(loss)............... 29,072 18,903 (11,339) 12,843 11,540
----------- ----------- ----------- ----------- -----------
Non-operating income
(expense):
Interest income........ 8,723 3,513 1,585 1,626 1,394
Interest expense....... (209) (1,504) (505) (150) (180)
Minority interest...... 208 -- -- -- --
Other income (expense). 7,369 630 (2,212)(7) 486 (94)
----------- ----------- ----------- ----------- -----------
Net non-operating
income (expense)..... 16,091 2,639 (1,132) 1,962 1,120
----------- ----------- ----------- ----------- -----------
Equity in net income
(loss) of affiliate... -- (630) (3,417) 20 775
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes......... 45,163 20,912 (15,888) 14,825 13,435
Provision for income
taxes................. 25,746 15,120 1,302 7,999 6,216
----------- ----------- ----------- ----------- -----------
Net income (loss)..... $ 19,417 $ 5,792 $ (17,190) $ 6,826 $ 7,219
=========== =========== =========== =========== ===========
Basic earnings (loss)
per common share...... $ 1.02 $ 0.42 $ (5.85) $ 2.31 $ 2.54
=========== =========== =========== =========== ===========
Weighted average common
shares outstanding.... 18,979 13,642 2,940 2,949 2,847
=========== =========== =========== =========== ===========
Diluted earnings (loss)
per common share...... $ 0.95 $ 0.42 $ (5.85) $ 2.31 $ 2.54
=========== =========== =========== =========== ===========
Diluted average common
shares outstanding.... 20,389 13,889 2,940 2,950 2,847
=========== =========== =========== =========== ===========
Balance Sheet Data (at
end of period):
Working capital........ $ 120,340 $ 54,007 $ 7,954 $ 25,570 $ 21,414
Total assets........... 523,644 334,749 128,775 96,222 70,826
Long-term debt, less
current maturities.... 610 -- 6,350 1,636 993
Mandatorily redeemable
common stock.......... -- -- 44,422 48,153 39,950
Stockholders' equity... 287,677 167,880 -- -- --
Other Operating Data:
Number of locations (at
end of period)........ 78 69 33 29 26
Average number of
consultants during the
period................ 441 347 207 164 142
16
(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 a non-cash compensation charge of $2.7 million ($0.13 per share on
a diluted basis). This charge is due to the issuance of options by
LeadersOnline, at a price below the deemed fair market value for accounting
purposes, at the time of issuance.
(3) Includes $12.7 million of nonrecurring charges ($4.34 per share on a
diluted basis) comprised of (a) $9.9 million of salaries and employee
benefits expense arising from the difference between the issuance price of
shares issued by the Company to certain of our directors in December 1998
and the fair market value of such shares at the date of grant and (b) $2.8
million of salaries and benefits expense relating to the early settlement
of profit sharing arrangements upon the acquisition of certain Latin
American locations.
(4) The Company incurred a $14.0 million nonrecurring charge ($0.60 per share
on a diluted basis) during the third quarter of 2000 as a result of the
withdrawal of LeadersOnline's proposed initial public offering. This
included a non-cash compensation charge of $12.2 million which represents
the remainder of the non-cash compensation charge related to the issuance
of options by LeadersOnline, at a price below the deemed fair market value
for accounting purposes, at the time of issuance. The remaining $1.8
million is due to the write-off of expenses related to the planning of the
proposed initial public offering and is included in nonrecurring general
and administrative charges.
(5) The Company incurred merger costs of $2.8 million ($0.14 per share on a
diluted basis) during the third quarter of 1999 as a result of the merger
with Sullivan & Company on September 1, 1999. The merger costs consist of
(1) a $2.0 million non-cash compensation charge for accelerated vesting of
an employee equity ownership program in place at Sullivan and (2) $0.8
million of transaction-related costs, including legal, accounting and
advisory fees which are included in nonrecurring general and administrative
charges.
(6) The Company incurred a $12.4 million nonrecurring compensation charge
($0.89 per share on a diluted basis) during the first quarter of 1999 as a
result of the modification of the terms of the Mulder acquisition
agreement, including the termination of all employment contingencies. This
nonrecurring charge represents the write-off of $2.9 million of deferred
compensation assets, the settlement of the remaining cash due of $4.3
million, and the issuance of 428,452 common shares (worth $5.2 million) to
the previous owners of Mulder.
(7) Includes a nonrecurring $2.5 million ($0.53 per share on a diluted basis)
charge incurred in connection with the costs of the postponement of an
initial public offering in September 1998.
17
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. The forward-looking statements are based on
current expectations, estimates, forecasts and projections about the industry
in which we operate and management's beliefs and assumptions regarding general
economic trends. Forward-looking statements may be identified by the use of
words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," and similar expressions. Forward-looking statements are
not guarantees of future performance and involve certain known and unknown
risks, uncertainties and assumptions that are difficult to predict. Actual
outcomes and results may differ materially from what is expressed, forecasted
or implied in the forward-looking statements. Factors that may affect the
outcome of the forward-looking statements include, among other things, our
ability to attract and retain qualified executive search consultants; a
material economic downturn in the United States or Europe, or social or
political instability in overseas markets; bad debt write-offs far in excess of
allowances for doubtful accounts; continued increased acceptance of online
recruiting; losses in our venture capital investments; an inability to control
expenses; and delays in the development and/or implementation of new technology
and systems.
General
Heidrick & Struggles International, Inc. ("HSI Group") is the world's premier
provider of executive-level search and leadership consulting services. Based on
revenue derived from placing senior-level executives, we believe we are one of
the largest senior-level executive search firms in the world. We provide
executive-level search and leadership consulting 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. Through our Internet-enhanced search business,
LeadersOnline, Inc. ("LeadersOnline"), we target the recruitment market for
mid-level executives and professionals. We also provide other human capital
management services that complement our core executive search business,
including management assessment and placement of interim executive management.
Prior to 1984, we operated under a single ownership structure. In 1984,
Heidrick & Struggles, Inc. ("H&S") spun off Heidrick & Struggles International,
Inc. ("HSI") to its European partners while retaining a significant equity
interest in it. Between 1984 and February 26, 1999, HSI operated primarily in
Europe, while H&S operated in all other regions of the world. On February 26,
1999, H&S merged with HSI ("the Merger") to reunite the two companies into a
single corporate structure, HSI Group.
We completed several other acquisitions and mergers in the past three years.
On December 29, 2000, we acquired the Finnish, Russian and Baltic executive
search companies of the AMROP worldwide network. On May 1, 2000, we acquired
Lynch Miller Moore O'Hara, Inc., a Chicago-based executive search firm that
specialized in the venture capital and high tech markets. On April 1, 2000, we
acquired T.A.O. International Group, a senior-level executive search firm with
offices in Asia. On March 1, 2000, we acquired Argonaut Search Group, LLC, a
San Francisco-based executive search firm that specialized in the real estate
and financial services industries. In December 1999, we acquired Redelinghuys &
Partners, a senior-level executive search firm in the Republic of South Africa.
In June 1998, we acquired Fenwick Partners, Inc., a Boston-based executive
search firm. These acquisitions were accounted for using the purchase method of
accounting, with the results of the acquired companies included in the
Consolidated Statements of Income and Comprehensive Income beginning on the
date of each acquisition. In September 1999, we merged with Sullivan & Company
("Sullivan"), an executive search firm that specialized in the financial
services industry. This transaction was accounted for using pooling of
interests accounting, with the results of Sullivan being included in the
Consolidated Statements of Income and Comprehensive Income for all periods
presented.
18
With offices in 78 locations in 37 countries throughout North and South
America, Europe, the Middle East, Africa and Asia Pacific we conduct business
using various currencies. Revenue earned in each country is
generally matched with the associated expenses incurred, thereby reducing
currency risk to earnings. However, because certain assets and liabilities are
denominated in non-U.S. currencies, changes in currency rates may cause
fluctuations in the valuation of such assets and liabilities. For financial
information by geographic segment, see Note 17 of our Consolidated Financial
Statements.
Revenue
We generate revenue primarily by providing executive search and leadership
consulting services to our clients. Our executive search 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 executive search consultant is a function of the number of
searches performed per consultant and the fee earned per search. Revenue
largely consists of fees earned from our Executive Search business and indirect
expenses, as well as fees earned from LeadersOnline, management assessment, and
placement of interim executive management.
Revenue from client services is recognized when such services are earned and
realizable. Revenue consists of retainers and indirect expenses billed to
clients. Typically, we are paid a retainer for our services equal to
approximately one-third of the estimated guaranteed first year compensation for
the position to be filled. In addition, if the actual compensation of a placed
candidate exceeds the estimated compensation, we often will be authorized to
bill the client for one-third of the excess. Indirect expenses are calculated
as a percentage of the retainer with certain dollar limits per search. We
generally bill our clients for our retainer and indirect expenses in one-third
increments over a three-month period commencing in the month of the acceptance
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.
We receive warrants for equity securities 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 investment received.
Hiring new executive search 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 executive search consultants), payroll taxes, profit sharing
and retirement benefits, and employee insurance benefits. An executive search
consultant's base salary represents, on average, less than one-half of the
consultant's total annual compensation, which is performance based and derived
from origination and execution credits. Typically, a portion of the credit for
a particular assignment goes to the consultants who originate the assignment,
and a portion goes to the consultants who perform the assignment. In addition,
a portion of each consultant's annual compensation is based on management's
assessment of that consultant's partnership and work quality. At LeadersOnline,
our eConsultant's base salary represents, on average, more than one-half of the
eConsultant's total annual compensation.
19
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 bad debt expense.
Nonrecurring Charges
In the third quarter of 2000, we decided to retain proprietary control of
LeadersOnline and its Internet-enhanced recruiting methods. As a result,
LeadersOnline withdrew its registration statement with the Securities and
Exchange Commission relating to a proposed initial public offering.
Accordingly, we recorded nonrecurring charges in the third quarter, including a
non-cash compensation charge of $12.2 million, which represents the remainder
of a $14.9 million non-cash compensation charge related to the issuance of
options by LeadersOnline at a price below the deemed fair market value for
accounting purposes at the time of issuance. The difference of $2.7 million was
recorded as a recurring charge over the first three quarters of 2000. The
resulting amount of $14.9 million was recorded to additional paid in capital.
Also, a $1.8 million charge was recorded for the write-off of expenses related
to planning the proposed initial public offering.
In addition, we charged to additional paid in capital $10.0 million to
compensate management and employees for the value of their LeadersOnline
options and $3.1 million to repurchase LeadersOnline stock from our employees
and VerticalNet, Inc.
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.
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 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 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 the 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 1998, we incurred nonrecurring compensation charges 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.
Non-Operating Income (Expense)
Non-operating income (expense) consists of interest income, interest expense,
realized gains from the sale of equity securities, net of consultants' bonuses
and administrative and other costs, and other income and
20
expenses. We receive warrants for equity securities in some of our client
companies, in addition to our cash fee, for services rendered on some searches.
Realized net gains from the sale of equity securities from our 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 U.S. 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 rate. Our provision for income taxes reflects our best
judgment as to the likely effective tax rate for a given period.
Results of Operations
The following table sets forth, for the periods indicated, our selected
statements of operations data as a percentage of revenue:
Year Ended
December 31,
-------------------
2000 1999 1998
----- ----- -----
Revenue................................................... 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Salaries and employee benefits:
Salaries and employee benefits.......................... 66.5 66.8 74.7
Nonrecurring compensation charges....................... 2.1 3.5 5.8
General and administrative expenses:
General and administrative expenses..................... 26.3 25.0 24.7
Nonrecurring general and administrative charges......... 0.3 0.2 --
----- ----- -----
Total operating expenses.............................. 95.2 95.5 105.2
----- ----- -----
Operating income (loss)............................... 4.8 4.5 (5.2)
----- ----- -----
Non-operating income (expense):
Interest income......................................... 1.5 0.8 0.7
Interest expense........................................ -- (0.4) (0.2)
Minority interest....................................... -- -- --
Other, net.............................................. 1.2 0.2 (1.0)
----- ----- -----
Net non-operating income (expense).................... 2.7 0.6 (0.5)
----- ----- -----
Equity in net loss of affiliate........................... -- (0.2) (1.6)
----- ----- -----
Income (loss) before income taxes......................... 7.5 4.9 (7.3)
Provision for income taxes................................ 4.3 3.6 0.6
----- ----- -----
Net income (loss)......................................... 3.2% 1.3% (7.9)%
===== ===== =====
21
The following table sets forth, for the periods indicated, our revenue and
operating income (loss) by segment. We operate principally through two lines of
business: Executive Search and LeadersOnline. We break out revenue and
operating income in our core Executive Search business into two broad
geographic segments: Americas and International. The Americas segment consists
of the United States and Other (Canada and Latin America). The International
segment consists of Europe (which includes Africa and the Middle East) and Asia
Pacific.
Year Ended
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Revenue:
Americas
United States................................... $341,553 $256,394 $190,855
Other........................................... 21,858 17,342 11,833
International
Europe.......................................... 176,431 118,880 --
Asia Pacific.................................... 34,361 20,614 14,148
-------- -------- --------
Total Executive Search............................ 574,203 413,230 216,836
LeadersOnline..................................... 20,191 2,617 --
-------- -------- --------
Total........................................... $594,394 $415,847 $216,836
======== ======== ========
Operating income (loss):
Americas
United States................................... $ 58,552 $ 38,638 $ 8,871
Other........................................... 2,556 3,466 (6,435)
International
Europe.......................................... 17,926 (1,614) --
Asia Pacific.................................... 5,367 2,944 (308)
-------- -------- --------
Total Executive Search............................ 84,401 43,434 2,128
LeadersOnline..................................... (27,178) (5,157) (1,539)
Corporate......................................... (28,151) (19,374) (11,928)
-------- -------- --------
Total........................................... $ 29,072 $ 18,903 $(11,339)
======== ======== ========
2000 Compared to 1999
Revenue. Our revenue increased $178.6 million, or 42.9%, to $594.4 million
for 2000 from $415.8 million in 1999, due to continued strong demand for our
services across a number of industries and disciplines, especially the
financial services, technology and consumer practice groups, and an increase in
the number of executive search consultants, which resulted in an increase in
the number of confirmed searches. Fees per search in Executive Search were
higher as our strategic focus on working at the most senior level of executive
search continued to drive performance. In addition, the increase in revenue was
partially due to the Merger that occurred on February 26, 1999. As a result of
the Merger, the full twelve months of HSI revenue is included in the year ended
December 31, 2000, whereas only approximately ten months of HSI revenue is
included in the year ended December 31, 1999. Excluding HSI from both periods,
revenue increased 40.7%.
We experienced significant revenue growth in all of our geographic segments
within Executive Search during 2000. In the United States, our revenue
increased $85.2 million, or 33.2%, to $341.6 million for 2000 from $256.4
million in 1999, with particular strength in the financial services,
technology, consumer products and health care practice groups. We opened
offices in Denver, Austin, Emeryville, and Foster City during 2000. In the
Americas--Other segment, revenue rose 26.0% to $21.9 million for 2000 from
$17.3 million in 1999, primarily due to the growth of our technology and
financial services practice groups in Latin America and Canada. We opened an
office in Bogota, Colombia during 2000. In Europe, our revenue for 2000
increased
22
$57.5 million, or 48.4%, to $176.4 million from $118.9 million in 1999, due
primarily to an increase in the number of searches, with particular strength in
the financial services practice group. In addition, the increase in Europe's
revenue was partially due to the Merger. Excluding the effect of foreign
currency translations into U.S. dollars, revenue grew 68.1% in Europe. In
addition, we acquired a company with offices in Estonia and Latvia during 2000.
In Asia Pacific, revenue for 2000 increased 66.7% to $34.4 million from
$20.6 million in 1999, primarily due to strong performance in the financial
services and technology practice groups. We acquired a company with offices in
Seoul, Taipei and Shanghai during 2000.
LeadersOnline generated $20.2 million of revenue in 2000 compared to $2.6
million of revenue in 1999 due to increased demand for our services.
LeadersOnline began generating revenue in the 1999 second quarter. During the
12 months ended December 31, 2000, LeadersOnline entered into contracts for 485
new searches worldwide, with an average annual compensation level of $135,900
per placement.
Salaries and employee benefits. Our salaries and employee benefits increased
$117.5 million, or 42.3%, to $395.1 million for 2000 from $277.6 million for
1999. As a percentage of revenue, salaries and employee benefits decreased
slightly to 66.5% in 2000 from 66.8% in 1999. The improvement was primarily
because under our variable compensation structure our consultants do not earn
compensation on what is not collected and we wrote off a greater amount of bad
debts compared to 1999, particularly in the 2000 fourth quarter, due partially
to failed dot-com start ups. In addition, the salaries and employee benefits
margin improved partially because we were able to leverage the fixed component
of our salaries against higher revenue.
Nonrecurring compensation charges. During the third quarter of 2000, we
incurred a nonrecurring compensation charge of $12.2 million as a result of our
decision to retain proprietary control of LeadersOnline. This charge
represented the remainder of the non-cash compensation charge related to the
issuance of options by LeadersOnline at a price below the deemed fair market
value for accounting purposes at the time of issuance. During the third quarter
of 1999, we incurred compensation-related merger costs of $2.0 million arising
from the merger with Sullivan, which consisted of a non-cash charge for
accelerated vesting of an employee equity ownership program in place at
Sullivan. During the first quarter of 1999, we incurred a $12.4 million
nonrecurring compensation charge related to the modification of the terms of
the Mulder acquisition agreement.
General and administrative expenses. Our general and administrative expenses
increased $52.1 million, or 50.0%, to $156.2 million for 2000 from $104.1
million for 1999. As a percentage of revenue, general and administrative
expenses increased to 26.3% in 2000 from 25.0% in 1999. This percentage
increase was primarily due to investment spending for LeadersOnline and for
other complementary growth initiatives. In addition, depreciation expense was
higher as we continued to invest in the growth of our company. Lastly, bad debt
expense was higher due to increased write-offs of bad debts in 2000 compared to
1999, particularly in the 2000 fourth quarter, due partially to failed dot-com
start ups.
Nonrecurring general and administrative charges. During the third quarter of
2000, we incurred a $1.8 million nonrecurring general and administrative charge
as a result of the write-off of expenses related to the planning of the
proposed initial public offering of LeadersOnline. During the third quarter of
1999, we incurred general and administrative-related merger costs of $772,000
arising from the merger with Sullivan. This consisted of transaction-related
costs including legal, accounting and advisory fees.
Operating Income. Our operating income increased $10.2 million, or 53.8%, to
$29.1 million in 2000 from $18.9 million in 1999. Within Executive Search,
operating income increased in all geographic segments, except Americas--Other,
primarily because of higher revenue growth. In the United States, our operating
income increased $20.0 million, or 51.5% to $58.6 million in 2000 from $38.6
million in 1999. In the Americas--Other segment, operating income decreased
$910,000, or 26.3%, to $2.6 million in 2000 from $3.5 million in 1999. In
Europe, operating income in 2000 was $17.9 million, compared to an operating
loss of $1.6 million in 1999. In Asia Pacific, operating income rose $2.5
million, or 82.3%, to $5.4 million in 2000 from
23
$2.9 million in 1999. LeadersOnline reported an operating loss of $27.2 million
in 2000, compared to an operating loss of $5.2 million in 1999 because of
increased investment spending required to grow the business during its early
stages of operation. Unallocated corporate expenses increased $8.8 million, or
45.3%, to $28.2 million in 2000 from $19.4 million in 1999, due primarily to
building the infrastructure of a growing, public company, and investment
spending in complementary growth initiatives.
Net non-operating income (expense). Our net non-operating income increased
$13.5 million to $16.1 million for 2000 from $2.6 million for 1999. This
increase was primarily due to a $7.2 million gain, net of consultants' bonuses
and administrative and other costs, from the sale of equity securities obtained
as part of our warrant program, under which we receive warrants for equity
securities in certain client companies, in addition to our normal cash fee,
when executing searches for such clients. Other items which increased net non-
operating income included higher interest income arising from the investment of
the net proceeds received from our initial public offering in April 1999 and
our follow-on public offering in February 2000, and a decrease in interest
expense due to a lower average debt balance.
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 executive search 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 within
Executive Search 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. In the
Americas--Other segment, revenue rose 46.6% to $17.3 million from $11.8
million. We opened a new office in Montreal during 1999. The Merger in February
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 effects of foreign
currency translation, predominantly in Germany, France and the United Kingdom.
We opened an office in Vienna, Austria, and purchased a business in South
Africa during 1999, both of which are included in the Europe segment. Our
revenue in Asia Pacific increased $6.5 million, or 45.7%, to $20.6 million for
1999 from $14.1 million for 1998. We opened an office in Seoul during 1999.
LeadersOnline began generating revenue in the second quarter of 1999 and had
revenue of $2.6 million for 1999.
Salaries and employee benefits. Our salaries and employee benefits increased
$115.7 million, or 71.5%, to $277.6 million for 1999 from $161.9 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 74.7%
in 1998 to 67.1% in 1999. The 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 replaced a portion of cash incentive
compensation with stock options in 1999.
Nonrecurring compensation charges. During the third quarter of 1999, we
incurred compensation-related merger costs of $2.0 million arising from the
merger with Sullivan, which consisted of a non-cash charge for accelerated
vesting of an employee equity ownership program in place at Sullivan. During
the first quarter of 1999, we incurred a $12.4 million nonrecurring
compensation charge related to the modification of the terms of the Mulder
acquisition agreement. In 1998, we incurred nonrecurring compensation charges
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.
24
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 general and administrative charges. During the third quarter of
1999, we incurred general and administrative-related merger costs of $772,000
arising from the merger with Sullivan. These consisted of transaction-related
costs including legal, accounting and advisory fees.
Operating Income. Our operating income increased $30.2 million to $18.9
million in 1999 from an operating loss of $11.3 million in 1998. Within
Executive Search, operating income increased in all geographic segments, except
Europe, primarily because of higher revenue growth. In the United States, our
operating income increased $29.7 million to $38.6 million in 1999 from $8.9
million in 1998. In the Americas--Other segment, operating income grew by $9.9
million to $3.5 million in 1999 from an operating loss of $6.4 million in 1998.
Europe reported an operating loss of $1.6 million in 1999 due to the Merger. In
Asia Pacific, operating income rose $3.2 million to $2.9 million in 1999 from
an operating loss of $308,000 in 1998. LeadersOnline reported an operating loss
of $5.2 million in 1999 compared to $1.5 million in 1998 because of investment
spending required to grow the business during its early stages of operation.
Unallocated corporate expenses increased $7.5 million, or 62.4%, to $19.4
million in 1999 from $11.9 million in 1998, due to building the infrastructure
of a growing, public company.
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 postponing 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 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 and other costs, from the sale of
equity securities obtained as part of our warrant program. We receive warrants
for equity securities in certain client companies, in addition to our cash fee,
when executing searches for such clients.
25
Pro Forma Combined Results of Operations
The following table provides our pro forma combined results of operations and
such data as a percentage of revenue for the years ended December 31, 2000 and
1999.
Year Ended December 31,
--------------------------------
2000(3) 1999(1)(2)
--------------- ---------------
(dollars in thousands)
Revenue ..................................... $594,394 100.0% $435,832 100.0%
-------- ----- -------- -----
Operating expenses:
Salaries and employee benefits(4).......... 395,105 66.5 292,496 67.1
General and administrative expenses(5)..... 156,242 26.3 110,585 25.4
-------- ----- -------- -----
Total operating expenses................. 551,347 92.8 403,081 92.5
-------- ----- -------- -----
Operating income......................... 43,047 7.2 32,751 7.5
-------- ----- -------- -----
Non-operating income (expense):
Interest income............................ 8,723 1.5 3,513 0.8
Interest expense........................... (209) -- (1,560) (0.4)
Minority interest ......................... 208 -- -- --
Other, net................................. 7,369 1.2 630 0.1
-------- ----- -------- -----
Net non-operating income................. 16,091 2.7 2,583 0.5
-------- ----- -------- -----
Income before income taxes(6)............ 59,138 9.9 35,334 8.0
Provision for income taxes................... 26,499 4.5 15,741 3.6
-------- ----- -------- -----
Net income............................... $ 32,639 5.4% $ 19,593 4.4%
======== ===== ======== =====
Basic earnings per common share.............. $ 1.72 $ 1.20
======== ========
Basic weighted average common shares
outstanding(7).............................. 18,979 16,326
======== ========
Diluted earnings per common share............ $ 1.60 $ 1.18
======== ========
Diluted weighted average common shares
outstanding(7)(8)........................... 20,389 16,596
======== ========
- --------
(1) The consolidated statement of income for the year ended December 31, 1999
has been adjusted by the following amounts to reflect the historical
operations of HSI from January 1, 1999 through the Merger date:
Revenue.......................................................... $19,985
Salaries and employee benefits................................... 15,836
General and administrative expenses.............................. 6,209
Net non-operating expense........................................ (56)
Benefit from income taxes........................................ (520)
(2) Amounts exclude 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 relating to the acquisition of Mulder has been eliminated from
salaries and employee benefits for 1999.
(3) Amounts exclude the $14.0 million of nonrecurring charges for 2000. The
charges are a result of the decision to retain proprietary control of
LeadersOnline and withdrawal of the proposed initial public offering. The
charges are comprised of $12.2 million, which represents the remainder of
the non-cash compensation charge related to the issuance of options by
LeadersOnline, at a price below the deemed fair market value for accounting
purposes, at the time of issuance. The remaining $1.8 million is due to the
write-off of expenses related to planning the proposed LeadersOnline
initial public offering.
(4) Amount includes a non-cash compensation charge of $2.7 million for 2000,
due to the issuance of options by LeadersOnline, at a price below the
deemed fair market value for accounting purposes, at the time of issuance.
(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, $0.2 million of
amortization related to acquired intangibles and goodwill has been charged
to general and administrative expenses.
26
(6) Equity in net loss of affiliate has been eliminated for all periods shown
to reflect 100% ownership of HSI after the Merger.
(7) Amount has been adjusted to give effect to the initial public offering of
3.7 million shares as of January 1, 1999.
(8) 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 years ended December 31, 2000 and
1999, our proforma revenue and operating income (loss) by segment. We operate
principally through two lines of business: Executive Search and LeadersOnline.
We break out revenue and operating income in our core Executive Search business
into two broad geographic segments: Americas and International. The Americas
segment consists of the United States and Other (Canada and Latin America). The
International segment consists of Europe (which includes Africa and the Middle
East) and Asia Pacific.
Year Ended
December 31,
------------------
2000 1999
-------- --------
(in thousands)
Revenue:
Americas
United States............................................. $341,553 $256,394
Other..................................................... 21,858 17,342
International
Europe.................................................... 176,431 138,865
Asia Pacific.............................................. 34,361 20,614
-------- --------
Total Executive Search...................................... 574,203 433,215
LeadersOnline............................................... 20,191 2,617
-------- --------
Total..................................................... $594,394 $435,832
======== ========
Operating income (loss):
Americas
United States............................................. $ 58,552 $ 38,638
Other..................................................... 2,556 3,466
International
Europe.................................................... 17,926 9,666
Asia Pacific.............................................. 5,367 2,944
-------- --------
Total Executive Search...................................... 84,401 54,714
LeadersOnline............................................... (13,203) (5,157)
Corporate................................................... (28,151) (16,806)
-------- --------
Total..................................................... $ 43,047 $ 32,751
======== ========
Pro Forma Combined Results of Operations for 2000 Compared to 1999
Revenue. Our revenue increased $158.6 million, or 36.4%, to $594.4 million
for 2000 from $435.8 million for 1999. Excluding the effect of foreign currency
translations into the U.S. dollar, revenue grew 41.9%. This increase was due to
continued strong demand for our executive search services across a number of
industries and disciplines, especially the financial services, technology and
consumer practice groups. In 2000, we hired 119 executive search consultants,
net of departures, bringing the total to 510 at December 31, 2000. This
represented a 30% increase over the 391 consultants we employed at the
beginning of the year. Our average fee per search for 2000 was $73,500, an
increase of 4% over our 1999 average fee per search of $70,900. This increase
was due to a general increase in compensation levels coupled with our strategic
focus of working at the most senior levels of executive search.
Salaries and employee benefits. Our salaries and employee benefits increased
$102.6 million, or 35.1% to $395.1 million for 2000 from $292.5 million for
1999. As a percentage of revenue, salaries and employee
27
benefits decreased to 66.5% from 67.1%. The improvement was primarily because
under our variable compensation structure our consultants do not earn
compensation on what is not collected and we wrote off a greater amount of bad
debts compared to 1999, particularly in the 2000 fourth quarter, due partially
to failed dot-com start ups. In addition, the salaries and employee benefits
margin improved partially because we were able to leverage the fixed component
of our salaries against higher revenue.
General and administrative expenses. Our general and administrative expenses
increased $45.6 million, or 41.3%, to $156.2 million for 2000 from $110.6
million for 1999. As a percentage of revenue, general and administrative
expenses increased to 26.3% from 25.4%. This percentage increase was primarily
due to investment spending for LeadersOnline and for other complementary growth
initiatives. In addition, depreciation expense was higher as we continued to
invest in the growth of our company. Lastly, bad debt expense was higher due to
increased write offs of bad debts in 2000 compared to 1999, particularly in the
2000 fourth quarter, due partially to failed dot-com start ups.
Net non-operating income (expense). Our net non-operating income increased to
$16.1 million for 2000 from $2.6 million for 1999. This increase was primarily
due to a $7.2 million gain, net of consultants' bonuses and administrative and
other costs, from the sale of equity securities obtained as part of our warrant
program. We receive warrants for equity securities in certain client companies,
in addition to our cash fee, when executing searches for such clients. The
increase also was due to an increase in interest income arising from the
investment of the net proceeds from our initial public offering in April 1999
and our follow-on public offering in February 2000, and a decrease in interest
expense due to a lower average debt balance.
Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and
availability of capital resources in view of plans for expansion and operating
cash needs. We have historically financed our operations primarily through
internally generated funds and periodic borrowings under our credit facilities.
In addition, we received $51.8 million from our initial public offering in
April 1999 and $76.2 million from our follow-on public offering in February
2000. We pay a portion of our bonuses in December and the remainder is paid in
March. Employee bonuses are accrued when earned and are based on our
performance and the performance of the respective employee.
We believe that the net proceeds from our common stock offerings, together
with funds expected to be generated from operations and our lines of credit,
will be sufficient to finance our operations for the foreseeable future.
However, if we undertake significant acquisitions or other investment
activities, we may need access to additional sources of debt or equity
financing.
On April 10, 2000, LeadersOnline filed a registration statement with the
Securities and Exchange Commission relating to a proposed initial public
offering of its Class A common stock. In April 2000, LeadersOnline sold a total
of 609,000 shares of its common stock to VerticalNet, Inc. and to certain of
our employees for $5 per share. The net cash proceeds, after expenses, were
$2.9 million and we recorded a gain in stockholders' equity of $2.7 million as
a result of this transaction.
In the third quarter of 2000, we made a decision to retain proprietary
control of LeadersOnline and its Internet-enhanced recruiting methods. As a
result, LeadersOnline withdrew its registration statement with the Securities
and Exchange Commission relating to the proposed initial public offering and
paid $3.1 million to repurchase the stock sold to VerticalNet, Inc. and to
certain of our employees. In addition, we paid $10.0 million to compensate
option holders for the cancellation of their options.
We maintained cash and cash equivalents at December 31, 2000, 1999, and 1998
totaling $184.8 million, $76.8 million and $11.5 million, respectively. For
2000, cash flows from operating activities contributed $89.4 million,
reflecting net income and non-cash expenses for stock-based compensation and
nonrecurring
28
charges, depreciation and amortization, as well as a decrease in working
capital. For 1999, cash flows from operating activities contributed $54.8
million, reflecting net income and non-cash expenses such as depreciation and
amortization and nonrecurring charges, as well as a decrease in working
capital. For 1998, cash flows from operating activities contributed $1.0
million of cash reflecting the net loss offset by non-cash expenses such as
stock-based compensation and depreciation and amortization, as well as a
decrease in working capital.
During 2000, we acquired six executive search firms for an aggregate of $19.4
million in cash and notes payable and an additional $5.1 million of our common
stock. During 1999, we acquired an executive search firm and merged with
Sullivan and HSI for an aggregate of $1.5 million in cash and an additional
$43.1 million in stock. During 1998, we acquired two executive search firms for
an aggregate of $8.1 million of cash and notes. These acquisitions resulted in
a use of cash, net of cash acquired, of $15.6 million in 2000, $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 2000 and 1999 as a result
of the sale of these equity securities, was $7.2 million and $782,000,
respectively, net of consultants' bonuses and administrative and other costs.
Capital expenditures were $17.9 million, $21.5 million and $16.0 million for
2000, 1999 and 1998, respectively. These expenditures were primarily for office
furniture and fixtures, leasehold improvements, and computer equipment and
software. We anticipate that our capital expenditures for 2001 will be
approximately $20 million to $25 million.
On October 26, 2000, we announced that we had entered into an alliance with
and invested $10.0 million in ETF Group, a global venture capital firm that
helps emerging companies expand into international markets. We are the
preferred global executive search firm for senior-level executives for ETF
Group's portfolio companies.
On June 29, 2000, we announced that we formed a strategic alliance with
Silicon Valley Internet Capital ("SVIC"), a newly formed, San Francisco-based
operating company that creates and provides operating support for Internet
infrastructure companies. We are the preferred global executive search firm for
SVIC's companies. We invested $10.0 million in SVIC's first round of financing
during 2000.
Cash flows provided by financing activities were $64.8 million for 2000,
resulting from the net proceeds raised in the follow-on public offering,
proceeds from stock options exercised and the sales of LeadersOnline stock,
partially offset by payments for the repurchase of LeadersOnline options and
stock and payment on debt related to the Fenwick acquisition. Cash flows
provided by financing activities were $25.3 million for 1999, resulting
primarily from the 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 for 1998. Our
financing activities consisted principally of sales of our treasury stock to
employees and net borrowings under our line of credit.
We have a $40.0 million reducing revolving credit facility. This facility
will terminate on December 31, 2001 but we expect to replace it with a similar
or larger facility. There were no borrowings outstanding under this line of
credit at December 31, 2000 and December 31, 1999. At our discretion, we may
borrow either U.S. dollars on deposit in the United States, or U.S. dollars or
foreign currencies on deposit outside the United States. Non-U.S. borrowings
bear interest at the then-existing LIBOR plus a margin as determined by certain
tests of our financial condition. U.S. borrowings bear interest at the then-
existing prime rate. There was $22.0 million outstanding under the line of
credit at December 31, 1998 and 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.
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, 2000 and 1999, we were in compliance with these
financial covenants.
29
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 may 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.
Recently Issued Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." In June
2000, the FASB issued Statement 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133." SFAS 133, as amended, establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative instrument's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS 133, as
amended, is effective for fiscal years beginning after June 15, 2000.
We receive warrants for equity securities in our client companies, in
addition to our cash fee, for services rendered on some searches. These
warrants are carried at fair value. Unrealized gains and losses on warrants are
currently excluded from earnings and are reported as a component of other
comprehensive income. Some of these warrants meet the definition of a
derivative under SFAS 133. As of January 1, 2001, SFAS 133 requires that these
warrants be accounted for at their fair value with subsequent changes in fair
value reported in earnings, not as a component of other comprehensive income.
On January 1, 2001, we recorded a transition adjustment to income of $4.5
million, net of consultants' bonuses, administrative and other costs, and
taxes, as a result of the adoption of SFAS 133. Going forward, each quarter's
earnings are anticipated to be affected by the fluctuations in the fair value
of these warrants. The unrealized gains or losses will be reported on a
separate line of the income statement.
During 2000, the FASB issued FASB Interpretation (FIN) No. 44 "Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25." It clarifies a number of issues concerning the accounting for
stock-based compensation. The standard is effective for periods beginning after
July 1, 2000 and was adopted by us as of that date. Adoption of FIN 44 resulted
in a change from fixed to variable accounting for stock options issued to
individuals now considered to be non-employees under the standard's
definitions. Adoption of FIN 44 has, at present, had no material impact on our
financial condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements," as amended by SAB 101A,
which provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. In June 2000, the SEC
issued SAB 101B which deferred the effective date of SAB 101 until the last
quarter of fiscal years beginning after December 15, 1999. The adoption of SAB
101 had no material impact on our financial condition or results of operations.
30
Quarterly Comparisons
The following table sets forth certain financial information for each quarter
of 2000 and 1999. The information is derived from our quarterly consolidated
financial statements which are unaudited but which, in the opinion of
management, have been prepared on the same basis as the consolidated financial
statements included in this document and include all adjustments, consisting
only of normal recurring items, necessary for the fair presentation of the
information for the periods presented. The consolidated 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.
Quarter Ended
-------------------------------------------------------------------------------------
2000 1999(1)
--------------------------------------- -------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Revenue................. $131,936 $166,416 $148,081 $147,961 $74,601 $113,046 $114,936 $113,264
Operating income
(loss)................. 3,726 13,220 652 (2) 11,474 (7,556) (3) 8,804 9,147 (4) 8,508
Net income (loss)....... 3,515 9,998 (2,428) 8,332 (10,148) 4,849 5,427 5,664
- --------
(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 $14.0 million nonrecurring charge as a result of the withdrawal
of LeadersOnline's proposed initial public offering.
(3) Includes a $12.4 million nonrecurring charge arising from the modification
of the Mulder acquisition agreement.
(4) Includes $2.8 million of merger costs arising from the merger with
Sullivan.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivatives
We receive warrants for equity securities 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. Upon a value event, such as an initial public
offering or acquisition, the warrants, and any equity securities arising from
their exercise, are accounted for as available-for-sale investments. During
1999, we entered into a collar agreement to hedge the impact of market value
changes of one of these equity securities. Collars consist of the sale of call
options along with a corresponding purchase of put options, with the effect of
establishing the highest and lowest prices at which the equity securities will
be sold during a certain time period. The collar had been designated and was
effective as a hedge of the equity security. Unrealized gains and losses on
both the equity security and the collar were recorded in equity and
comprehensive income. When realized, gains and losses on the equity security
and the collar were recorded in income. Beginning in the fourth quarter of
1999, we had the right to put and the counterparty had the right to call a
portion of the shares on a quarterly basis in accordance with an established
schedule. During the third quarter of 2000, we terminated the options and sold
the underlying equity security.
Currency Market Risk
Historically, we have not experienced significant 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 the operating income generated in each
respective country.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements beginning on page 37 of this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
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 2002 Directors," and
"Class 2003 Directors" in our 2001 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 2001 Proxy
Statement, and is incorporated herein by reference.
ITEM 12. VOTING SECURITIES OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included under the caption
"Voting Securities of Certain Beneficial Owners and Management" in our 2001
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 2001 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 37
2. Financial Statement Schedules:
Report of Independent Public Accountants................................. 62
Schedule II--Valuation and Qualifying Accounts........................... 63
3. Exhibits:
Exhibit No. Description
----------- -----------
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))
33
Exhibit No. Description
----------- -----------
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))
*10.05 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))
*10.06 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))
*10.07 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))
10.08 Employment Agreement of Piers Marmion
21.01 Subsidiaries of the Registrant
* 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, 2000, 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
34
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.
Signature Title Date
--------- ----- ----
/s/ Patrick S. Pittard Chairman, President, March 29, 2001
___________________________________________ Chief Executive
Patrick S. Pittard Officer and Director
(principal executive officer)
/s/ Donald M. Kilinski Chief Financial Officer March 29, 2001
___________________________________________ and
Donald M. Kilinski Treasurer
(principal financial and accounting
officer)
/s/ David C. Anderson Director March 29, 2001
___________________________________________
David C. Anderson
/s/ Thomas J. Friel Director March 29, 2001
___________________________________________
Thomas J. Friel
/s/ Bengt Lejsved Director March 29, 2001
___________________________________________
Bengt Lejsved
/s/ Robert Louis-Dreyfus Director March 29, 2001
___________________________________________
Robert Louis-Dreyfus
/s/ Piers Marmion Director March 29, 2001
___________________________________________
Piers Marmion
35
Signature Title Date
--------- ----- ----
/s/ Dr. Jurgen B. Mulder Director March 29, 2001
___________________________________________
Dr. Jurgen B. Mulder
/s/ Gerard R. Roche Director March 29, 2001
___________________________________________
Gerard R. Roche
/s/ Robert W. Shaw Director March 29, 2001
___________________________________________
Robert W. Shaw
/s/ Dr. John C. Viney Director March 29, 2001
___________________________________________
Dr. John C. Viney
/s/ Carlene M. Ziegler Director March 29, 2001
___________________________________________
Carlene M. Ziegler
/s/ Robert E. Knowling, Jr Director March 29, 2001
___________________________________________
Robert E. Knowling, Jr
36
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants.................................. 38
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. 39
Consolidated Statements of Income and Comprehensive Income For the Years
Ended December 31, 2000, 1999 and 1998................................... 41
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 2000, 1999 and 1998......................................... 42
Consolidated Statements of Cash Flows For the Years Ended December 31,
2000, 1999 and 1998...................................................... 43
Notes to Consolidated Financial Statements................................ 44
37
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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted 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, 2000 and 1999, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 6, 2001
38
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
December 31,
------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................ $184,836 $ 76,848
Accounts receivable--
Trade, less allowance for doubtful accounts of $16,452
and $12,435 at December 31, 2000 and 1999,
respectively........................................... 106,334 83,162
Other................................................... 7,357 4,241
Prepaid expenses......................................... 11,783 7,583
Deferred income taxes, net............................... 26,071 19,881
-------- --------
Total current assets................................... 336,381 191,715
-------- --------
Property and equipment:
Leasehold improvements................................... 23,904 19,123
Office furniture and fixtures............................ 27,160 22,358
Automobiles.............................................. 2,221 2,227
Computer equipment and software.......................... 39,192 38,947
-------- --------
92,477 82,655
Less--Accumulated depreciation and amortization.......... (39,817) (30,303)
-------- --------
Property and equipment, net............................ 52,660 52,352
-------- --------
Other assets:
Cash and investments designated for nonqualified
retirement plans........................................ 16,506 32,702
Investments and other assets............................. 45,097 11,772
Goodwill and other intangibles, net...................... 66,208 45,832
Deferred income taxes, net............................... 6,792 376
-------- --------
Total other assets..................................... 134,603 90,682
-------- --------
Total assets........................................... $523,644 $334,749
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
39
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share figures)
December 31,
------------------
2000 1999
-------- --------
Current liabilities:
Current maturities of long-term debt..................... $ 1,135 $ 3,039
Accounts payable......................................... 10,051 8,052
Accrued expenses--
Salaries and employee benefits.......................... 150,187 93,606
Payroll taxes........................................... 10,365 7,156
Other................................................... 27,888 14,964
Income taxes payable..................................... 16,415 10,891
-------- --------
Total current liabilities.............................. 216,041 137,708
-------- --------
Long-term debt, less current maturities.................... 610 --
-------- --------
Liability for nonqualified retirement plans................ 19,316 29,161
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued at December 31, 2000 and
1999.................................................... -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, of which 19,373,286 and 16,663,151 shares
were issued and outstanding at December 31, 2000 and
1999, respectively...................................... 194 167
Additional paid in capital............................... 234,619 124,363
Retained earnings........................................ 56,862 37,445
Cumulative foreign currency translation adjustment....... (1,879) (591)
Unrealized gain on available-for-sale investments, net of
tax..................................................... 3,737 6,496
Deferred compensation.................................... (5,856) --
-------- --------
Total stockholders' equity............................. 287,677 167,880
-------- --------
Total liabilities and stockholders' equity............. $523,644 $334,749
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
40
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share figures)
Year Ended December 31,
-----------------------------
2000 1999 1998
-------- --------- --------
Revenue......................................... $594,394 $415,847 $216,836
-------- --------- --------
Operating expenses:
Salaries and employee benefits:
Salaries and employee benefits................ 395,105 277,580 161,870
Nonrecurring compensation charges............. 12,222 14,448 12,748
General and administrative expenses:
General and administrative expenses........... 156,242 104,144 53,557
Nonrecurring general and administrative
charges...................................... 1,753 772 --
-------- --------- --------
Total operating expenses.................... 565,322 396,944 228,175
-------- --------- --------
Operating income (loss)..................... 29,072 18,903 (11,339)
-------- --------- --------
Non-operating income (expense):
Interest income............................... 8,723 3,513 1,585
Interest expense.............................. (209) (1,504) (505)
Minority interest............................. 208 -- --
Other, net.................................... 7,369 630 (2,212)
-------- --------- --------
Net non-operating income (expense).......... 16,091 2,639 (1,132)
-------- --------- --------
Equity in net loss of affiliate................. -- (630) (3,417)
-------- --------- --------
Income (loss) before income taxes .......... 45,163 20,912 (15,888)
Provision for income taxes...................... 25,746 15,120 1,302
-------- --------- --------
Net income (loss)........................... $ 19,417 $ 5,792 $(17,190)
======== ========= ========
Basic earnings (loss) per common share.......... $ 1.02 $ 0.42 $ (5.85)
======== ========= ========
Weighted average common shares outstanding...... 18,979 13,642 2,940
======== ========= ========
Diluted earnings (loss) per common share........ $ 0.95 $ 0.42 $ (5.85)
======== ========= ========
Diluted weighted average common shares
outstanding.................................... 20,389 13,889 2,940
======== ========= ========
Net income (loss)............................... $ 19,417 $ 5,792 $(17,190)
-------- --------- --------
Other comprehensive income (loss), before income
taxes:
Foreign currency translation adjustment....... (2,299) 927 (475)
Unrealized gain (loss) on available-for-sale
investments.................................. (4,885) 8,294 1,626
-------- --------- --------
Total other comprehensive income (loss),
before income taxes........................ (7,184) 9,221 1,151
Income tax expense (benefit) related to items of
other comprehensive income (loss).............. (3,137) 3,913 494
-------- --------- --------
Other comprehensive income (loss), net of
income taxes............................... (4,047) 5,308 657
-------- --------- --------
Comprehensive income (loss)................. $ 15,370 $ 11,100 $(16,533)
======== ========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
41
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Accumulated
Other
Additional Comprehensive
Common Treasury Paid in Retained Income Deferred
Stock Stock Capital Earnings (Loss) Compensation Total
------ -------- ---------- -------- ------------- ------------ --------
Balance at December 31,
1997................... $ 82 $(15,179) $ 14,466 $ 691 $ (60) $ -- $ --
Treasury stock
transactions:
Stock issued........... -- 857 14,095 -- -- -- 14,952
Stock repurchased...... -- (2,149) -- -- -- -- (2,149)
Net loss................ -- -- -- (17,190) -- -- (17,190)
Unrealized gain on
available-for-sale
investments, net of
tax.................... -- -- -- -- 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 (16,471) 28,561 (12,769) 597 -- --
Treasury and common
stock transactions:
Stock issued for
Merger................ 34 16,471 26,576 -- -- -- 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, net of
tax.................... -- -- -- -- 4,810 -- 4,810
Foreign currency
translation
adjustment............. -- -- -- -- 498 -- 498
---- -------- -------- -------- ------- ------- --------
Balance at December 31,
1999................... 167 -- 124,363 37,445 5,905 -- 167,880
Common stock
transactions:
Stock issued for
acquisitions.......... 1 -- 6,166 -- -- -- 6,167
Stock issued to
employees............. 1 -- 2,997 -- -- -- 2,998
Stock issued in follow-
on public offering.... 25 -- 76,160 -- -- -- 76,185
Issuance of restricted
stock................. -- -- 20,225 -- -- (7,117) 13,108
Amortization of
deferred compensation. -- -- -- -- -- 1,222 1,222
Forfeitures of
restricted stock...... -- -- (459) -- -- 39 (420)
Exercise of options.... -- -- 553 -- -- -- 553
Gain on sale of
subsidiary stock....... -- -- 2,711 -- -- -- 2,711
Subsidiary stock
repurchase and
cancellation of
options................ -- -- 1,903 -- -- -- 1,903
Net income.............. -- -- -- 19,417 -- -- 19,417
Unrealized loss on
available-for-sale
investments, net of
tax.................... -- -- -- -- (2,759) -- (2,759)
Foreign currency
translation
adjustment............. -- -- -- -- (1,288) -- (1,288)
---- -------- -------- -------- ------- ------- --------
Balance at December 31,
2000................... $194 $ -- $234,619 $ 56,862 $ 1,858 $(5,856) $287,677
==== ======== ======== ======== ======= ======= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
42
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities
Net income (loss)............................... $ 19,417 $ 5,792 $(17,190)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................... 19,064 10,591 4,028
Loss on sale of property and equipment.......... 538 63 578
Gain on sale of equity securities............... (7,159) (782) --
Deferred income taxes........................... (12,672) 2,004 (2,230)
Equity in net loss of affiliate................. -- 630 1,667
Minority interest in loss of consolidated
subsidiary..................................... (208) -- --
Nonrecurring charges............................ 13,975 15,220 --
Stock-based compensation expense................ 3,920 252 10,166
Changes in assets and liabilities:
Trade and other receivables.................... (26,435) (23,326) (2,885)
Accounts payable............................... 1,341 1,058 299
Accrued expenses............................... 75,175 37,860 10,711
Income taxes payable........................... 5,720 6,930 1,128
Nonqualified retirement plan liability......... 923 1,936 250
Other, net..................................... (4,240) (3,449) (5,508)
-------- -------- --------
Net cash provided by operating activities..... 89,359 54,779 1,014
-------- -------- --------
Cash flows from investing activities
Acquisitions, net of cash acquired.............. (15,648) (1,466) (4,060)
Purchases of securities for nonqualified
retirement plan................................ (239) (482) (1,488)
Purchases of property and equipment............. (17,885) (21,519) (15,979)
Purchases of long-term investments.............. (23,417) -- --
Proceeds from sales of equity securities, net .. 7,159 782 --
Cash acquired in merger transaction with HSI.... -- 8,166 --
Other, net...................................... 3,994 445 12
-------- -------- --------
Net cash used in investing activities......... (46,036) (14,074) (21,515)
-------- -------- --------
Cash flows from financing activities
Proceeds from sales of common stock and treasury
stock.......................................... 76,185 61,158 4,875
Proceeds from sale of subsidiary stock.......... 2,919 -- --
Proceeds from stock options exercised........... 553 -- --
Purchases of treasury stock..................... -- -- (68)
Repurchase of subsidiary options and stock...... (13,018) -- --
Proceeds from debt.............................. -- 17,700 28,648
Payments on debt................................ (1,822) (53,512) (9,834)
-------- -------- --------
Net cash provided by financing activities..... 64,817 25,346 23,621
-------- -------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents............................ (152) (724) (2,249)
-------- -------- --------
Net increase in cash and cash equivalents........ 107,988 65,327 871
Cash and cash equivalents:
Beginning of period............................. 76,848 11,521 10,650
-------- -------- --------
End of period................................... $184,836 $ 76,848 $ 11,521
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid for--
Interest....................................... $ 118 $ 1,626 $ 402
Income taxes................................... 33,400 10,172 8,669
Supplemental schedule of noncash financing and
investing activities
Unrealized gain (loss) on available-for-sale
investments.................................... $ (4,885) $ 8,294 $ 1,626
Issuance of notes payable for the purchase of
treasury stock................................. -- -- 2,081
Debt from the acquisition of net assets......... 1,745 -- 4,358
Receipt of note receivable for stock sale....... -- -- 98
Conversion of note receivable to equity......... -- -- 1,750
Issuance of stock for merger and acquisitions .. 5,084 43,081 --
Issuance of stock related to the Sullivan equity
ownership plan................................. -- 3,037 --
Issuance of stock related to debt from
acquisition.................................... 1,083 -- --
The accompanying notes to consolidated financial statements are an integral
part of these statements.
43
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 executive-level search and leadership consulting services
to clients on a retained basis. The Company operates throughout North and South
America, Europe, the Middle East, Africa 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"), (the
"Merger"). 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 3.)
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.
Recently Issued Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
Statement No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." In June
2000, the FASB issued Statement 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133." SFAS 133, as amended, establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. The Statement requires
that changes in the derivative instrument's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS 133, as
amended, is effective for fiscal years beginning after June 15, 2000.
The Company receives warrants for equity securities in its client companies,
in addition to its cash fee, for services rendered on some searches. These
warrants are carried at fair value. Unrealized gains and losses on warrants are
currently excluded from earnings and are reported as a component of other
comprehensive income. Some of these warrants meet the definition of a
derivative under SFAS 133. As of January 1, 2001, SFAS 133 requires that these
warrants be accounted for at their fair value with subsequent changes in fair
value reported in earnings, not as a component of other comprehensive income.
On January 1, 2001, the Company recorded a transition adjustment to income of
$4.5 million, net of consultants' bonuses, administrative and other costs, and
taxes, as a result of the adoption of SFAS 133.
44
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 2000, the FASB issued FASB Interpretation (FIN) No. 44 "Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB
Opinion No. 25." It clarifies a number of issues concerning the accounting for
stock-based compensation. The standard is effective for periods beginning after
July 1, 2000 and was adopted by the Company as of that date. Adoption of FIN 44
resulted in a change from fixed to variable accounting for stock options issued
to individuals now considered to be non-employees under the Standard's
definitions. Adoption has, at present, had no material impact on the Company's
financial condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" as amended by SAB 101A,
which provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. In June 2000, the SEC
issued SAB 101B which deferred the effective date of SAB 101 until the last
quarter of fiscal years beginning after December 15, 1999. The adoption of SAB
101 had no material impact on our financial condition or results of operations.
Cash and Cash Equivalents
The Company considers all highly liquid 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 and
geographies. At December 31, 2000, the Company had no significant
concentrations of credit risk.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets or, for leasehold improvements, the shorter of the lease term or the
estimated useful life of the asset, as follows:
Office furniture and fixtures.................................. 8-10 years
Computer equipment and software................................ 3-8 years
Automobiles.................................................... 3-4 years
Depreciation for financial statement purposes for the years ended December
31, 2000, 1999 and 1998 totaled $16.1 million, $8.8 million, and $3.9 million,
respectively. Depreciation is calculated for tax purposes using accelerated
methods, where applicable.
Goodwill and Other Intangibles
At December 31, 2000 and 1999 goodwill and other intangible assets consisted
of the following:
2000 1999
------- -------
Goodwill and other intangibles.......................... $72,670 $49,492
Accumulated amortization................................ (6,462) (3,660)
------- -------
Goodwill and other intangibles, net..................... $66,208 $45,832
======= =======
45
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
There were no adjustments to the carrying value of goodwill or intangible
assets in 2000. Amortization expense for the years ended December 31, 2000,
1999 and 1998 totaled $3.0 million, $1.8 million, and $122,000, respectively.
Computer Equipment and Software
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 three-to-eight year
period.
Investments
Investments designated for the nonqualified retirement plan are carried at
fair value in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Investments designated for the nonqualified
retirement plans are debt and equity securities that are classified as
available-for-sale securities as more fully described in Note 14.
The Company's warrants and equity securities in publicly traded and private
companies are also carried at fair value. Upon a value event such as an initial
public offering or acquisition, the warrants, and any equity securities arising
from their exercise, are accounted for as available-for-sale investments. These
investments are more fully described in Note 6.
Revenue Recognition
Revenue from client services is recognized when such services are earned and
realizable. Revenue consists of retainers and indirect expenses billed to
clients. Typically, the Company is paid a retainer for its services equal to
approximately one-third of the estimated guaranteed first year compensation for
the position to be filled. In addition, if the actual compensation of a placed
candidate exceeds the estimated compensation, the Company often will be
authorized to bill the client for one-third of the excess. Indirect expenses
are calculated as a percentage of the retainer with certain dollar limits per
search. The Company generally bills its clients for its retainer and indirect
expenses in one-third increments over a three-month period commencing in the
month of acceptance of the contract by its client. For each executive search
assignment, the Company and its client enter into a contract which outlines the
general terms and conditions of the assignment.
The Company receives warrants for equity securities 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.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis 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
46
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 other comprehensive income.
Reclassifications
Certain amounts in previously issued financial statements have been
reclassified to conform to 2000 classifications.
2. Investment in HSI
Prior to February 26, 1999, the Company had an investment in HSI which was
accounted for under the equity method. 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. As a result of this investment, the
Company recorded equity in net loss of affiliates of $630,000 and $3.4 million
for 1999 and 1998, respectively.
3. Business Combinations
Acquisitions Accounted for Using the Purchase Method
During 2000, the Company completed a total of six acquisitions of executive
search firms. On December 29, 2000, the Company acquired the Finnish, Russian
and Baltic executive search companies of the AMROP worldwide network. The AMROP
network is a group of independent loosely linked companies operating throughout
the world. The Company purchased Stahlber & Partner OY/Juha Pekka Ahtikari OY,
Koik & Partners SIA and Koik & Partners OU. These acquisitions established the
Company as the largest executive search firm in Finland and strengthened its
presence in the emerging markets of Estonia, Latvia and Russia. On May 1, 2000,
the Company acquired Lynch Miller Moore O'Hara, Inc., a Chicago-based executive
search firm that specialized in the venture capital and high tech markets. On
April 1, 2000, the Company acquired T.A.O. International Group, a senior-level
executive search firm with offices in Asia. On March 1, 2000, the Company
acquired Argonaut Search Group, LLC, a San Francisco-based executive search
firm that specialized in the real estate and financial services industries. The
aggregate purchase price of these acquisitions was $24.5 million, consisting of
the Company's stock valued at $5.1 million, notes payable of $1.7 million and
cash of $17.7 million. These acquisitions were accounted for under the purchase
method and resulted in a preliminary allocation to goodwill of $23.2 million.
The operating results of these entities have been included in the consolidated
financial statements from their acquisition dates.
47
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 26, 1999, the Company merged with and into HSI. The Merger
combined the operations of the Company which operated in all regions of the
world except Europe, with HSI, a Europe-based company. The transaction was
accounted for using purchase accounting and the excess purchase price was
allocated to identifiable intangible assets and goodwill on February 26, 1999,
as follows:
Weighted Average
Useful Life in
Asset Classification Fair Value Years
-------------------- ---------- ----------------
Intangible assets............................. $12,478 17
Goodwill...................................... $23,152 40
During 1999, the Company purchased selected assets and liabilities of
Redelinghuys & Partners. The purchase price of $1.5 million was paid in cash.
On October 1, 1998, the Company purchased selected assets of Heidrick Partners,
Inc. The purchase price was $2 million. On June 26, 1998, the Company purchased
selected assets and liabilities of Fenwick Partners, Inc. The purchase price
was $6.1 million. Each acquisition above 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 was an executive search firm
that specialized in the financial services industry and had revenue of $12.8
million in 1998.
The consolidated financial statements of the Company for all periods
presented have been restated to give retroactive effect to the merger with
Sullivan on September 1, 1999, which has been accounted for using the pooling
of interests method and, as a result, the financial position, results of
operations, stockholders' equity and cash flows are presented as if the
combining companies had been consolidated for all periods presented and, as if
the additional common stock issued in connection with the merger had been
issued for all periods presented.
Certain key employees of Sullivan participated in a Phantom Stock Plan, the
shares of which vested over an eight-year period. 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 which were then
exchanged for the Company's common stock.
4. Nonrecurring Charges
On April 10, 2000, LeadersOnline, Inc. ("LeadersOnline") filed a registration
statement with the Securities and Exchange Commission relating to a proposed
initial public offering of its common stock. In the third quarter of 2000, the
Company decided to retain proprietary control of LeadersOnline, and its
Internet-enhanced recruiting methods. As a result, LeadersOnline withdrew its
registration statement with the Securities and Exchange Commission relating to
the proposed initial public offering. In connection with the withdrawal of the
registration statement, the Company recorded nonrecurring charges in the third
quarter. These included a non-cash compensation charge of $12.2 million, which
represents the remainder of a $14.9 million non-cash compensation charge
related to the issuance of options by LeadersOnline at a price below the deemed
fair market value, for accounting purposes, at the time of issuance. The
difference of $2.7 million was recorded
48
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as a recurring charge over the first three quarters of 2000. The resulting
amount of $14.9 million was recorded to additional paid in capital. Also, a
$1.8 million charge was recorded for the write-off of expenses related to
planning the proposed initial public offering.
In addition, there were two types of payments that were charged to additional
paid in capital. These included $10.0 million to compensate management and
employees for the value of their LeadersOnline options and $3.1 million to
repurchase LeadersOnline stock from Company employees and VerticalNet, Inc.
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.
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 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 eliminated.
In 1998, the Company incurred nonrecurring compensation charges of $9.9
million arising from the difference between the issuance price of shares issued
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.
5. Public Offerings
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.
49
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 9, 2000, the Company completed a follow-on public offering under
a Registration Statement on Form S-1 effective February 3, 2000 (File No. 333-
94017) of an aggregate of 3,450,000 shares of common stock at $33.00 per share,
which included 450,000 shares from the exercise of the over-allotment option
granted to certain underwriters of the offering. The Company offered 2,458,306
shares and the selling stockholders offered 991,694 shares. This offering
resulted in net proceeds (after deducting the underwriting discount and
offering expenses) of $76.2 million to the Company and $31.0 million to the
selling stockholders. The Company did not receive any of the proceeds from the
sale by selling stockholders. The Company has used and will continue to use the
net proceeds from this offering for general corporate purposes including the
funding of LeadersOnline and other growth initiatives, hiring of additional
executive search consultants, expanding its technology infrastructure and
funding acquisitions.
6. Investments and Other Assets
The Company had investments and other assets of $45.1 million and $11.8
million at December 31, 2000 and 1999, respectively. Investments include the
value of the Company's warrants and equity securities in publicly traded and
private companies. The fair value of these warrants and equity securities were
$21.6 million and $10.8 million at December 31, 2000 and 1999, respectively.
Unrealized gains from warrants and equity securities were $3.7 million and
$3.8 million, net of consultants' bonuses, administrative and other costs, and
taxes at December 31, 2000 and 1999, respectively. Realized gains from the sale
of equity securities, net of consultants' bonuses, and administrative and other
costs, were $7.2 million and $782,000 for the years ended December 31, 2000 and
1999, respectively, and are included in other non-operating income.
On October 26, 2000, the Company announced that it entered into an alliance
with and invested $10.0 million in ETF Group, a global venture capital firm
that helps emerging companies expand into international markets. As part of the
agreement, the Company is the preferred global executive search firm for
senior-level executives for ETF Group's portfolio companies.
On June 29, 2000, the Company announced that it had formed a strategic
alliance with Silicon Valley Internet Capital ("SVIC"), a newly formed, San
Francisco-based company that will create and provide operating support for
Internet infrastructure companies. The Company is the preferred global
executive search firm for SVIC's companies. The Company invested $10.0 million
in SVIC's first round of financing and accounts for this investment using the
cost method. At December 31, 2000, the fair value of this investment was deemed
to be $9.8 million.
In addition, the Company had other assets and investments of $3.7 million and
$1.0 million at December 31, 2000 and 1999, respectively.
7. Derivative Financial Instrument
The Company receives warrants for equity securities 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. Upon a value event such as an initial public
offering or acquisition, the warrants, and any equity securities arising from
their exercise, are accounted for as available-for-sale investments. During
1999, the Company entered into a collar agreement to hedge the impact of market
value changes of one of these equity securities. Collars consist of the sale of
call options along with a corresponding purchase of put options, with the
effect of establishing the highest and lowest prices at which the equity
securities will be sold during a certain time period. The collar had been
designated and was effective as a hedge
50
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the equity security. Unrealized gains and losses on both the equity security
and the collar were recorded in equity and comprehensive income. When realized,
gains and losses on the equity security and the collar were recorded in income.
Beginning in the fourth quarter of 1999, the Company had the right to put and
the counterparty had the right to call a portion of the shares on a quarterly
basis in accordance with an established schedule. During the third quarter of
2000, the Company terminated the options and sold the underlying equity
security. The Company's realized gain on these shares for the years ended
December 31, 2000 and 1999, was $2.8 million and $883,000, respectively, and is
included in other non-operating income.
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").
Year Ended December 31,
------------------------
2000 1999 1998
------- ------- --------
Basic EPS
Income (loss) available to common shareholders. $19,417 $ 5,792 $(17,190)
Weighted average common shares outstanding..... 18,979 13,642 2,940
------- ------- --------
Basic EPS.................................... $ 1.02 $ 0.42 $ (5.85)
======= ======= ========
Diluted EPS
Income (loss) available to common shareholders. $19,417 $ 5,792 $(17,190)
------- ------- --------
Weighted average common shares outstanding..... 18,979 13,642 2,940
Dilutive common shares ........................ 1,410 247 --
------- ------- --------
Weighted average diluted common shares
outstanding................................... 20,389 13,889 2,940
------- ------- --------
Diluted EPS.................................. $ 0.95 $ 0.42 $ (5.85)
======= ======= ========
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 $40.0 million reducing revolving credit facility ("line of
credit"). This facility will terminate on December 31, 2001. There were no
borrowings outstanding under this line of credit at December 31, 2000 and 1999,
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. A U.S.
Borrowing bears interest at the then-existing prime rate. 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,
2000 and 1999, the Company met all of its financial covenants. 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, 2000,
1999 and 1998 totaled $79,000, $116,000 and $21,000, respectively.
51
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Long-Term Debt
At December 31, 2000, long-term debt consists of amounts due as a result of
the AMROP acquisitions. The future principal payments on the AMROP debt are as
follows:
Year ended December 31,
2001............................................................. $1,135
2002............................................................. 341
2003............................................................. 269
2004............................................................. --
------
$1,745
======
The fair value of debt based on current rates for similar debt is estimated
to be $1.5 million at December 31, 2000.
At December 31, 1999, long-term debt consisted of amounts arising from the
Fenwick Partners, Inc. acquisition. This debt was fully paid in June 2000.
11. Stockholder Agreements
Prior to the Company's initial public offering, 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
between the Company and its stockholders. Payments for shares were generally
made over a five-year period. Redemption amounts relating to the stock purchase
agreements were included in Mandatorily Redeemable Common Stock. These
agreements terminated upon the successful completion of the Company's initial
public offering on April 26, 1999.
12. Stock Compensation Plans
In 1998, the Company adopted the 1998 Heidrick & Struggles GlobalShare
Program I and the 1998 Heidrick & Struggles GlobalShare Program II
(collectively the "Plan"). The Plan serves as a means to attract, reward, and
retain selected key employees, outside 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 Company's common stock on the date of grant.
The maximum number of underlying shares of common stock reserved for issuance
under the Plan is based on a formula which shall not exceed an aggregate amount
equal to thirty percent (30%) of the highest number of shares of the Company's
common stock which are issued and outstanding from time to time during the term
of the Plan, provided, however, that in no event will the sum of the total
number of shares authorized or reserved for issuance upon the exercise or
issuance of all awards granted under the Plan plus the total amount of the
Company's issued and outstanding shares of common stock exceed the number of
shares of common stock authorized for issuance under the Company's Amended and
Restated Certificate of Incorporation.
52
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the Plan, 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.
In 2000, the Company adopted the Heidrick & Struggles International, Inc.
Restricted Stock Unit Plan (the "RSU Plan"). The RSU Plan is designed to reward
certain employees and independent contractors of the Company who hold the
internal title of Partner or Senior Partner through the issuance of restricted
stock units which, upon vesting, are immediately convertible into shares of the
Company's common stock at a ratio of 1:1.
The total number of restricted stock units and the underlying shares of the
Company's common stock which may be issued or delivered under the RSU Plan
shall be determined by the Compensation Committee of the Board of Directors on
an annual basis. Under both the Plan and the RSU Plan, the maximum number of
shares of common stock reserved for issuance are subject to adjustment for
certain anti-dilution provisions.
During 2000, the Company granted 469,833 restricted stock units to certain of
its employees under both the Plan and the RSU Plan. Under the RSU Plan, these
restricted stock units cliff vest at 3 years from the date of grant. Under the
Plan, the restricted stock units have vesting ranging from ratable vesting over
a 3 to 5 year period to a cliff vest of 3 to 5 years from the date of grant.
The deferred compensation expense related to restricted stock units is
amortized to expense on a straight-line basis over the vesting period and is
recorded in stockholders' equity. Total deferred compensation expense amortized
for restricted stock units for 2000 was $1.2 million. During 2000, no
restricted stock units were eligible for conversion, 11,292 were forfeited and
at December 31, 2000, 458,541 were outstanding.
Stock option activity for the years ended December 31, 2000 and 1999 is as
follows:
Weighted Average
Number of Exercise Price
Shares Per Share
---------- ----------------
Outstanding on December 31, 1998................... -- $ --
Granted............................................ 1,544,282 14.00
Forfeited.......................................... (58,781) 14.00
Outstanding on December 31, 1999................... 1,485,501 14.00
Granted............................................ 1,388,950 43.81
Exercised.......................................... (39,865) 14.00
Forfeited.......................................... (94,347) 14.73
---------- ------
Outstanding on December 31, 2000................... 2,740,239 $28.85
========== ======
53
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 pro forma net earnings and basic and diluted
earnings per share would have been:
Year Ended
December 31,
--------------
2000 1999
------- ------
Net earnings
As reported............................................. $19,417 $5,792
Pro forma............................................... 15,613 4,700
Basic earnings per share
As reported............................................. $ 1.02 $ 0.42
Pro forma............................................... 0.82 0.34
Diluted earnings per share
As reported............................................. $ 0.95 $ 0.42
Pro forma............................................... 0.77 0.34
The weighted-average fair value of options granted during 2000 and 1999,
estimated on the date of grant using the Black-Scholes option pricing model was
$23.99 and $8.56, respectively. The fair value of 2000 and 1999 options granted
is estimated on the date of grant using the following assumptions: average
risk-free rate of 6.2% and 5.3%, dividend yield of 0% and 0%, expected
volatility of 54.3% and 54.3%, and expected option life of 5.4 and 7 years,
respectively.
The following table summarizes information about stock options at December
31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life in Exercise Number Exercise
Prices Outstanding years Price Exercisable Price
-------- -------------- ----------- -------- -------------- --------
(in thousands) (in thousands)
$14.00 1,375,439 8.30 $14.00 147,847 $14.00
$36.65-
$44.88 1,049,800 6.45 41.17 -- --
$45.44-
$57.00 315,000 4.11 52.60 -- --
------- --------- ---- ------ ------- ------
$14.00-
$57.00 2,740,239 7.11 $28.85 147,847 $14.00
======= ========= ==== ====== ======= ======
13. Sale of Subsidiary Stock
During the second quarter of 2000, LeadersOnline sold a total of 609,000
shares of its common stock to VerticalNet, Inc. and to certain employees of the
Company. The common stock was sold for $5 per share and resulted in net cash
proceeds, after expenses, of $2.9 million to LeadersOnline. The Company's
ownership interest in LeadersOnline was diluted from 100% to 96.4% as a result
of these transactions. The resulting gain to the Company of $2.7 million has
been recorded in stockholders' equity. As a result of the decision to retain
proprietary control of LeadersOnline, the Company repurchased these shares.
54
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Employee Benefit Plans
Qualified Retirement Plans
The Company has a defined contribution retirement plan for all eligible
employees in the United States. 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 contribution of $2,000 per participant for each of the years ended
December 31, 2000, 1999 and 1998. The Company also has the option of making
discretionary contributions. For the years ended December 31, 2000, 1999 and
1998, the Company elected to contribute to each eligible participant a sum
equal to 3.03% of the participant's total compensation (as defined) and an
additional 3.03% of the participant's compensation above the Social Security
taxable wage base 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, 2000
and 1999, the plan held 4,265,809 and 4,755,951 shares, respectively, of the
Company's common stock.
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, 2000, 1999 and 1998 was $4.5
million, $3.2 million, and $2.5 million, respectively.
Nonqualified Retirement Plans
The Company had two separate nonqualified retirement plans, one of which was
terminated during 2000.
The first plan was for United States-based employees and included both an
optional employee contribution and a discretionary employer contribution.
During 2000, this plan was terminated and the proceeds were paid to the
participants. The total cash payout to participants was $12.4 million. There
was no plan expense for the years ended December 31, 2000, 1999 and 1998. The
liability for this retirement plan consisted of the following at December 31,
1999:
1999
-------
Employer contributions, less forfeitures......................... $ 5,910
Employee deferrals............................................... 3,785
Earnings of designated assets.................................... 823
Distributions.................................................... (448)
-------
$10,070
=======
The nonqualified retirement plan was fully funded by investments which where
classified as investments available-for-sale. These investments were carried at
fair value based on publicly reported market quotes as of December 31, 1999.
Any unrealized gains and losses on available-for-sale securities were excluded
from earnings and were reported as a component of other comprehensive income.
55
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table shows the cost and unrealized gain components of the fair
value of the investments at December 31, 1999:
1999
-------
Cost basis........................................................ $11,110
Gross unrealized gain............................................. 4,694
-------
Fair value...................................................... $15,804
=======
The fair value of the assets designated for the nonqualified retirement plan
consisted of the following at December 31, 1999:
1999
-------
Cash and cash equivalents........................................ $ 10
Stock mutual fund................................................ 11,815
Bond mutual fund................................................. 3,979
-------
$15,804
=======
These investments were sold when the plan was terminated and the Company
realized a gain of $3.7 million which was paid out to the plan's participants,
net of tax.
The Company has a nonqualified retirement plan for employees in the United
States classified as senior associates. This plan provides for only
discretionary employer contributions. The plan expense for the years ended
December 31, 2000, 1999, and 1998 was $504,000, $532,000, and $232,000,
respectively. The liability for this retirement plan at December 31, 2000 and
1999 was $1.6 million and $1.4 million, respectively.
15. Income Taxes
The sources of earnings before income taxes are as follows:
Years Ended December 31,
------------------------
2000 1999 1998
------- ------- --------
United States................................... $17,384 $16,725 $(10,212)
Foreign......................................... 27,779 4,187 (5,676)
------- ------- --------
Total....................................... $45,163 $20,912 $(15,888)
======= ======= ========
The provision for income taxes for the years ended December 31, 2000, 1999
and 1998, is as follows:
2000 1999 1998
------- ------- -------
Current--
Federal....................................... $18,159 $ 6,811 $ 1,883
State......................................... 6,515 2,014 497
Foreign....................................... 13,678 4,291 436
Deferred........................................ (12,606) 2,004 (1,514)
------- ------- -------
Total....................................... $25,746 $15,120 $ 1,302
======= ======= =======
56
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of income tax expense for the years ended December 31, 2000,
1999 and 1998, to income taxes at the statutory U.S. federal income tax rate of
35% for 2000, 34% for 1999 and 35% for 1998, is as follows:
2000 1999 1998
------- ------- -------
Income taxes at the statutory U.S. federal
rate.......................................... $15,807 $ 7,110 $(5,561)
Increase due to--
State income taxes, net of federal tax
benefit..................................... 3,075 1,329 136
Nondeductible expenses....................... 6,865 5,852 4,985
Foreign taxes at rates different from the
statutory U.S. federal tax rate............. 678 807 930
Other, net................................... (679) 22 812
------- ------- -------
Provision for income taxes..................... $25,746 $15,120 $ 1,302
======= ======= =======
The deferred tax amounts mentioned above have been classified in the
accompanying consolidated balance sheets as of December 31, 2000 and 1999, as
follows:
2000 1999
------- --------
Current deferred tax assets............................ $26,242 $21,429
Current deferred tax liabilities....................... (171) (1,548)
------- --------
Net current deferred tax asset....................... 26,071 19,881
------- --------
Long-term deferred tax assets.......................... 15,729 11,542
Long-term deferred tax liabilities..................... (8,937) (11,166)
------- --------
Net long-term deferred tax asset..................... 6,792 376
------- --------
Net deferred income tax asset...................... $32,863 $20,257
======= ========
The deferred tax assets and liabilities consist of the following components
as of December 31, 2000 and 1999:
2000 1999
------- --------
Deferred tax assets--
Receivable allowances................................ $ 5,716 $ 4,921
Accrued vacations.................................... 1,247 1,074
Accrued bonuses...................................... 20,521 13,347
Liability for nonqualified retirement plans.......... 4,881 8,464
Other accrued expenses............................... 4,992 2,087
Leasehold improvements and equipment................. 2,149 918
Foreign net operating loss carryforwards............. 581 2,856
Goodwill............................................. 1,703 1,441
Cumulative translation adjustment.................... 762 792
------- --------
42,552 35,900
Valuation allowance.................................. (581) (2,929)
------- --------
Net deferred tax assets............................ 41,971 32,971
------- --------
Deferred tax liabilities--
System development costs............................. (5,416) (7,088)
Unrealized gain on available-for-sale investments.... (2,597) (3,278)
Other................................................ (1,095) (2,348)
------- --------
Net deferred tax liabilities....................... (9,108) (12,714)
------- --------
Net deferred income taxes........................ $32,863 $20,257
======= ========
57
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 2020. 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:
Years ending December 31,
2001.......................................................... $ 29,196
2002.......................................................... 28,805
2003.......................................................... 26,335
2004.......................................................... 22,555
2005.......................................................... 17,895
Thereafter.................................................... 98,386
--------
$223,172
========
Rent expense under operating leases for the years ended December 31, 2000,
1999 and 1998 was $31.9 million, $21.1 million, and $10.0 million,
respectively.
Litigation
In the normal course of business, the Company is a party to various matters
involving disputes and litigation. While it is not possible at this time to
determine the ultimate outcome of these matters, management believes that the
ultimate liability, if any, will not be material to the consolidated results of
operations, financial condition or liquidity of the Company.
58
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Segment Information
The Company operates principally through two lines of business: Executive
Search and LeadersOnline. The Company breaks out revenue and operating income
in its Executive Search business into two broad geographic segments: Americas
and International. The Americas segment consists of the United States and Other
(Canada and Latin America). The International segment consists of Europe (which
includes Africa and the Middle East) and Asia Pacific.
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Revenue:
Americas
United States................................... $341,553 $256,394 $190,855
Other........................................... 21,858 17,342 11,833
International
Europe.......................................... 176,431 118,880 --
Asia Pacific.................................... 34,361 20,614 14,148
-------- -------- --------
Total Executive Search............................ 574,203 413,230 216,836
LeadersOnline..................................... 20,191 2,617 --
-------- -------- --------
Total........................................... $594,394 $415,847 $216,836
======== ======== ========
Operating income (loss):
Americas
United States................................... $ 58,552 $ 38,638 $ 8,871
Other........................................... 2,556 3,466 (6,435)
International
Europe.......................................... 17,926 (1,614) --
Asia Pacific.................................... 5,367 2,944 (308)
-------- -------- --------
Total Executive Search............................ 84,401 43,434 2,128
LeadersOnline..................................... (27,178) (5,157) (1,539)
Corporate......................................... (28,151) (19,374) (11,928)
-------- -------- --------
Total........................................... $ 29,072 $ 18,903 $(11,339)
======== ======== ========
As of
December 31,
------------------
2000 1999
-------- --------
Identifiable Assets:
Americas
United States................................... $119,988 $107,698
Other........................................... 13,904 10,104
International
Europe.......................................... 142,998 102,398
Asia Pacific.................................... 22,237 11,958
-------- --------
Total Executive Search............................ 299,127 232,158
LeadersOnline..................................... 6,037 4,150
Corporate......................................... 218,480 98,441
-------- --------
Total........................................... $523,644 $334,749
======== ========
59
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Pension Plans and Life Insurance Contract
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:
2000 1999
------- -------
Change in benefit obligation:
Benefit obligation at January 1,....................... $18,842 $18,574
Service cost........................................... 693 999
Interest cost.......................................... 1,072 1,146
Actuarial (gain) loss.................................. (482) 1,133
Benefits paid.......................................... (847) (302)
Translation difference................................. (1,064) (2,708)
------- -------
Benefit obligation at December 31, .................... 18,214 18,842
Unrecognized net loss.................................. (499) (1,133)
------- -------
Net amount recognized.................................. $17,715 $17,709
======= =======
Unfunded status of the plan............................ $18,214 $18,842
Unrecognized net loss.................................. (499) (1,133)
------- -------
Accrued benefit cost................................... $17,715 $17,709
======= =======
2000 1999
------- -------
Assumptions as of December 31:
Discount rate (weighted average)....................... 6.5% 6.0%
Rate of compensation increase.......................... 4.0% 4.0%
Components of net periodic benefit cost:
Service cost........................................... $ 693 $ 999
Interest cost.......................................... 1,072 1,146
------- -------
Net periodic benefit cost.............................. $ 1,765 $ 2,145
======= =======
The pension benefits are fully reinsured within a group insurance contract
with Victoria Lebensversicherung AG. The surrender value at December 31, 2000
and 1999 was $16.5 million and $16.9 million, respectively. Because the
reinsurance is not segregated from the Company's assets for purposes of SFAS
No. 87, "Employers' Accounting for Pensions," the reinsurance is not regarded
as an asset with respect to the pension plan. This pension plan was included in
the consolidated financial statements effective with the Merger.
60
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 2000, the Company established a defined benefit pension plan for its
CEO. The plan is not funded. The following provides a reconciliation of the
benefit obligation:
2000
------
Change in benefit obligation:
Benefit obligation at January 1,.................................. $ --
Service cost...................................................... 1,127
Interest cost..................................................... 338
Actuarial loss.................................................... --
------
Benefit obligation at December 31,................................ 1,465
Unrecognized net loss............................................. --
------
Accrued benefit cost.............................................. $1,465
======
Assumptions as of December 31:
Discount rate (weighted average).................................. 7.0%
Rate of compensation increase..................................... --
Components of net periodic benefit cost:
Service cost...................................................... $1,127
Interest cost..................................................... 338
------
Net periodic benefit cost......................................... $1,465
======
61
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 auditing standards generally accepted in
the United States, 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 6, 2001. 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 6, 2001
62
SCHEDULE II
Heidrick & Struggles International, Inc.
Valuation and Qualifying Accounts
Charged Deduction
Balance at to Including Balance at
Beginning of Costs & Currency End of
Year Expenses Translation Acquisitions Year
------------ -------- ----------- ------------ ----------
Year Ended December 31:
Allowance for doubtful
accounts
2000................ $12,435 26,322 (22,305) -- $16,452
------- ------ ------- ----- -------
1999................ $ 4,669 10,405 (6,483) 3,844 $12,435
------- ------ ------- ----- -------
1998................ $ 3,276 5,356 (3,963) -- $ 4,669
------- ------ ------- ----- -------
63