UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25837
HEIDRICK & STRUGGLES INTERNATIONAL, INC.
-------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-2681268
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
233 South Wacker Drive-Suite 4200
Chicago, Illinois
60606-6303
----------
(Address of Principal Executive Offices)
(312) 496-1200
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding of the Company's common stock as of August 5,
1999 was 15,699,151
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998 3
Unaudited Consolidated Statements of Income for
the three months and six months ended June 30,
1999 and 1998 5
Unaudited Consolidated Statement of Stockholders'
Equity for the six months ended June 30, 1999 6
Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 7
Unaudited Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION 20
SIGNATURE 20
2
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, December 31,
1999 1998
----------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 65,737 $ 10,428
Accounts receivable, net of allowance for doubtful accounts 79,216 40,816
Other receivables 3,163 2,862
Notes receivable from affiliate - 1,900
Prepaid expenses 3,654 1,771
Prepaid income taxes - 3,575
Deferred income taxes 15,860 8,871
-------- --------
Total current assets 167,630 70,223
-------- --------
Property and equipment, net 46,623 24,778
-------- --------
Other assets:
Cash and investments designated for nonqualified retirement plans 30,924 13,552
Investment in Heidrick & Struggles International, Inc. - 4,766
Investments and other assets 12,544 -
Deferred income taxes 5,483 1,776
Goodwill and other intangibles, net 45,376 8,055
-------- --------
Total other assets 94,327 28,149
-------- --------
Total assets $308,580 $123,150
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
Current liabilities:
Short-term debt $ - $ 22,000
Current maturities of long-term debt 4,070 2,547
Accounts payable 9,649 2,918
Accrued expenses-
Salaries and employee benefits 94,375 27,165
Other 15,704 7,401
Income taxes payable 1,878 -
-------- --------
Total current liabilities 125,676 62,031
-------- --------
Long-term debt, less current maturities 2,024 5,150
-------- --------
Liability for nonqualified retirement plans 28,555 11,358
-------- --------
Mandatorily redeemable common and preferred stock
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued at December 31, 1998. - -
Common stock, $.01 par value, 100,000,000 shares authorized at
December 31, 1998, of which 7,910,850 and 2,873,870 shares
were issued and outstanding, respectively. - 44,611
-------- -------
Total mandatorily redeemable common and preferred stock - 44,611
-------- -------
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued at June 30, 1999. - -
Common stock, $.01 par value, 100,000,000 shares authorized, of which
15,699,151 shares where issued and outstanding at June 30, 1999 157 -
Additional paid-in capital 121,887 -
Retained earnings 26,343 -
Cumulative foreign currency translation adjustment (1,437) -
Unrealized gain on available-for-sale investments (net of tax) 5,375 -
-------- --------
Total stockholders' equity 152,325 -
-------- --------
Total liabilities, mandatorily redeemable common and preferred
stock and stockholders' equity $308,580 $123,150
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenue $108,612 $52,778 $180,331 $98,715
-------- ------- -------- -------
Operating expenses:
Salaries and employee benefits 73,110 37,852 119,952 72,613
General and administrative expenses 27,163 12,184 47,147 22,533
Nonrecurring charge - - 12,420 -
-------- ------- -------- -------
Total operating expenses 100,273 50,036 179,519 95,146
-------- ------- -------- -------
Operating income 8,339 2,742 812 3,569
-------- ------- -------- -------
Non-operating income (expense):
Interest income 418 250 580 405
Interest expense (417) (62) (850) (118)
Other, net 64 200 78 (164)
-------- ------- -------- -------
Net non-operating income (expense) 65 388 (192) 123
-------- ------- -------- -------
Equity in net loss of affiliate - (729) (630) (906)
-------- ------- -------- -------
Income (loss) before income taxes 8,404 2,401 (10) 2,786
Provision for income taxes 3,791 1,161 5,489 1,346
-------- ------- -------- -------
Net income (loss) $ 4,613 $ 1,240 $ (5,499) $ 1,440
======== ======= ======== ========
Basic earnings (loss) per common share $ 0.33 $ 0.46 $ (0.55) $ 0.53
======== ======= ======== ========
Basic weighted average common shares outstanding 14,113 2,680 10,019 2,709
======== ======= ======== ========
Diluted earnings (loss) per common share $ 0.33 $ 0.46 $ (0.55) $ 0.53
======== ======= ======== ========
Diluted weighted average common shares outstanding 14,141 2,680 10,019 2,710
======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Other
Compre-
Additional hensive
Common Paid-in Treasury Retained Income
Stock Capital Stock Earnings (Loss) Total
------ ------- -------- -------- ----------- --------
Balance as of December 31, 1998(1) $ 79 $ 28,564 $(16,471) $(12,769) $ 597 $ -
Treasury and common stock transactions:
Stock issued for Merger 29 26,581 16,471 - - 43,081
Stock issued in initial public offering 42 52,334 - - - 52,376
Stock issued to employees 7 14,408 - - - 14,415
Release of book value restriction - - - 44,611 - 44,611
Comprehensive income (loss)
Net loss - - - (5,499) - (5,499)
Other comprehensive income, net of tax
Unrealized gain on available-for-sale
investments - - - - 3,689 3,689
Foreign currency translation adjustments - - - - (348) (348)
---- -------- -------- -------- ------ --------
Balance as of June 30, 1999 (unaudited) $157 $121,887 $ - $ 26,343 $3,938 $152,325
==== ======== ======== ======== ====== ========
(1) Mandatorily redeemable
The accompanying notes are an integral part of these consolidated financial
statements.
6
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended
June 30,
-------------------
1999 1998
-------- --------
Cash flows from operating activities
Net income (loss) $ (5,499) $ 1,440
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,233 1,872
Loss (gain) on sale of property and equipment (12) 463
Deferred income taxes (673) (351)
Equity in net loss of affiliate 630 906
Stock based compensation - 31
Nonrecurring compensation charge 12,420 -
Changes in assets and liabilities:
Trade and other receivables (22,009) (11,439)
Other assets 935 (603)
Accounts payable 3,986 264
Accrued expenses 32,702 30,835
Income taxes payable 1,094 (4,526)
Liability for nonqualified retirement plans 848 93
-------- --------
Net cash provided by operating activities 28,655 18,985
-------- --------
Cash flows from investing activities
Acquisitions - (3,060)
Purchases of securities for nonqualified retirement plan (232) (1,049)
Purchases of property and equipment (12,300) (7,326)
Cash acquired in merger transaction with HSI 8,166 -
Other investing activities (176) 5
-------- --------
Net cash used in investing activities (4,542) (11,430)
-------- --------
Cash flows from financing activities
Net proceeds from issuance of common stock 61,708 -
Proceeds from debt 12,075 5,148
Payments of debt (41,868) (4,014)
-------- --------
Net cash provided by financing activities 31,915 1,134
-------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents (719) (254)
-------- --------
Net increase in cash and cash equivalents 55,309 8,435
Cash and cash equivalents:
Beginning of period 10,428 10,074
-------- --------
End of period $ 65,737 $ 18,509
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except share and per share figures)
(Unaudited)
1. Interim Financial Data
The accompanying unaudited consolidated financial statements of Heidrick &
Struggles International, Inc. and Subsidiaries, ("the Company"), included herein
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates. In the
opinion of management, the statements reflect all adjustments, which are of a
normal recurring nature, necessary to present fairly the Company's financial
position as of June 30, 1999, and December 31, 1998, the results of operations
for the three months and six months ended June 30, 1999 and 1998, stockholders'
equity for the six months ended June 30, 1999, and cash flows for the six months
ended June 30, 1999 and 1998. While these interim financial statements and
accompanying notes are unaudited, they have been reviewed by Arthur Andersen
LLP, the Company's independent public accountants. These financial statements
and notes are to be read in conjunction with the Company's Registration
Statement on Form S-1 (File No. 333-59931), as declared effective by the
Securities and Exchange Commission on April 26, 1999.
2. Merger
On February 26, 1999, Heidrick & Struggles, Inc. ("H&S Inc.") merged (the
"Merger") with and into Heidrick & Struggles International, Inc. (prior to the
Merger, "HSI"). The Merger combined the operations of H&S Inc., which operated
in all regions of the world except Europe, with HSI, a Europe-based company. The
transaction was accounted for using purchase accounting and the excess purchase
price was allocated to identifiable intangible assets and goodwill as follows:
Weighted Average
Remaining Useful
Asset Classification Fair Value Life in Years
- -------------------- ---------- ----------------
Intangible assets $12,478 17
Goodwill $23,152 40
8
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The unaudited condensed consolidated pro forma results of operations data
for the three months and six months ended June 30, 1999 and 1998, as if the
Merger had occurred on January 1, 1999 and 1998, respectively, is as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenue $108,612 $ 84,180 $200,316 $158,170
-------- -------- -------- --------
Operating expenses:
Salaries and employee benefits 73,110 60,397 135,788 114,878
General and administrative expenses 27,163 20,194 53,588 39,328
Nonrecurring charge - _ 12,420 -
-------- -------- -------- --------
Total operating expenses 100,273 80,591 201,796 154,206
-------- -------- -------- --------
Operating income (loss) 8,339 3,589 (1,480) 3,964
-------- -------- -------- --------
Net non-operating income (expense) 65 (2,959) (248) (3,377)
-------- -------- -------- --------
Income (loss) before income taxes 8,404 630 (1,728) 587
Provision for income taxes 3,791 1,414 5,252 1,972
-------- -------- -------- --------
Net income (loss) $ 4,613 $ (784) $ (6,980) $ (1,385)
======== ======== ======== ========
3. Nonrecurring Charge
During the first quarter of 1999, the Company incurred a nonrecurring
charge of $12.4 million. This charge was the result of the Company's agreement
to modify the terms of the Mulder & Partner GmbH & Co. KG ("Mulder") acquisition
agreement, including the termination of all employment contingencies. HSI
acquired 100% of Mulder on October 1, 1997, for a combination of cash and 32,000
shares of HSI common stock. On October 1, 1997, HSI delivered 4,000 shares of
HSI common stock, paid $8.7 million to the partners of Mulder and incurred $0.3
million of associated transaction costs. Under the original Mulder acquisition
agreement an additional $5.2 million (plus interest at an annual rate of 4%) was
due to the partners of Mulder in five equal annual installments, the first of
which was paid on October 1, 1998. The remaining shares were to be issued in
four annual installments beginning January 1, 1999. Because the total purchase
price was contingent upon the continued employment of the Mulder consultants,
the cost of the acquisition was accounted for as compensation expense to be
recognized over a five-year period beginning October 1, 1997. In connection with
the Merger, the Mulder acquisition agreement was amended such that the remaining
cash (plus interest) 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 the Company's
common stock (which were valued, based upon the estimated fair market value of
HSI, at $5.2 million) were issued to such Mulder partners immediately after the
Merger. During the six months ended June 30, 1999, the Company paid the
remaining $4.3 million cash due, issued 428,452 shares of the Company's common
stock and wrote off $2.9 million of deferred compensation assets resulting in a
total compensation charge of $12.4 million.
4. Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed by dividing net income
(loss) by weighted average common shares outstanding for the period. Diluted
earnings per common share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or converted.
9
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
The following is a reconciliation of the shares used in the computation of
basic and diluted earnings (loss) per common share ("EPS"):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Basic EPS
Income (loss) available to common stockholders $ 4,613 $ 1,240 $ (5,499) $ 1,440
Weighted average common shares outstanding 14,113 2,680 10,019 2,709
-------- -------- -------- --------
Basic EPS $ 0.33 $ 0.46 $ (0.55) $ 0.53
======== ======== ======== ========
Diluted EPS
Income (loss) available to common stockholders $ 4,613 $ 1,240 $ (5,499) $ 1,440
======== ======== ======== ========
Weighted average common shares outstanding 14,113 2,680 10,019 2,709
Dilutive effect of common stock options 28 - - 1
-------- -------- -------- --------
Weighted average diluted common shares outstanding 14,141 2,680 10,019 2,710
-------- -------- -------- --------
Diluted EPS $ 0.33 $ 0.46 $ (0.55) $ 0.53
======== ======== ======== ========
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 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. On February 11, 1999, the Board of
Directors adopted, and on February 12, 1999, the stockholders approved, these
amendments. The financial statements, including the number of shares of common
stock authorized, issued and outstanding, have been retroactively restated for
the effect of this split and the amendments to the Certificate of Incorporation.
5. Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income," in the fiscal year ended December 31,
1998. Comprehensive income is comprised of net income and all changes to
stockholders' equity, except those changes resulting from investments by owners
(changes in paid in capital) and distributions to owners (dividends). SFAS 130
requires disclosure of the components of comprehensive income in interim
periods.
Total comprehensive income is as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss) $ 4,613 $ 1,240 $ (5,499) $ 1,440
-------- -------- -------- --------
Other comprehensive income, before tax:
Foreign currency translation adjustment (551) 541 (541) 621
Unrealized gain on available-for-sale investments 1,188 163 6,360 1,071
-------- -------- -------- --------
Other comprehensive income, before tax 637 704 5,819 1,692
Income tax expense related to items of other comprehensive
income 301 305 2,478 720
-------- -------- -------- --------
Other comprehensive income, net of tax 336 399 3,341 972
-------- -------- -------- --------
Comprehensive income (loss) $ 4,949 $ 1,639 $ (2,158) $ 2,412
======== ======== ======== ========
10
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Segment Information
Management views the operations of the Company through the following
geographic segments:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- -------
Revenue:
United States $ 65,079 $ 45,495 $117,789 $84,704
Europe 34,265 - 46,297 -
Other International 9,268 7,283 16,245 14,011
-------- -------- -------- -------
Total $108,612 $ 52,778 $180,331 $98,715
======== ======== ======== =======
Operating income (loss):
United States $ 10,976 $ 6,468 $ 18,778 $10,335
Europe 1,234 - (9,574) -
Other International 1,645 (480) 1,846 (774)
Corporate unallocated (5,516) (3,246) (10,238) (5,992)
-------- -------- -------- -------
Total $ 8,339 $ 2,742 $ 812 $ 3,569
======== ======== ======== =======
As of As of
June 30, December 31,
1999 1998
-------- -----------
Identifiable Assets
United States $ 99,609 $ 78,882
Europe 81,654 -
Other International 17,972 14,287
Corporate unallocated 109,345 29,981
-------- --------
Total $308,580 $123,150
======== ========
7. Initial Public Offering
On April 26, 1999, the SEC declared effective the Company's Registration
Statement on Form S-1 (File No. 333-59931) relating to the public offering of
4.2 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 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 $52.4
million to the Company and $6.5 million to the selling stockholders. See Part
II "Use of Proceeds".
The Company's mandatory redemption feature on its common stock terminated as
a result of the completion of the initial public offering.
11
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. Pending Merger
On June 6, 1999, the Company signed a letter of intent to acquire Sullivan
& Company ("Sullivan"), an executive search firm that specializes in the
financial services industry. The Company expects to issue 964,000 shares of its
common stock in exchange for all of the outstanding stock of Sullivan. The
transaction would qualify as a tax-free exchange and would be accounted for with
pooling of interests accounting. The Company expects to incur merger costs of
between $2.3 million and $3.5 million, which includes a non-cash charge for
accelerated vesting of an employee equity ownership program in place at
Sullivan. It is expected that this transaction will close in the third quarter
of 1999. In 1998, Sullivan had revenues of $12.8 million.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is the leading global executive search firm and believes that,
based on comparative revenues, it is the largest executive search firm in the
world. The Company offers and conducts executive search services through its
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.
From the time of founding in 1953 until 1984, H&S Inc. and HSI operated
under a single ownership structure. In 1984, H&S Inc. consummated a spin-off of
HSI to its European partners while retaining a significant equity interest. As
discussed in Note 2 above, H&S Inc. and HSI consummated the Merger on February
26, 1999 in order to reunite the two companies into a single ownership
structure.
H&S Inc. was treated as the survivor of the Merger for accounting purposes.
As a result, in the discussion below, for periods prior to the Merger,
historical Company information reflects historical H&S Inc. information.
With offices in over 30 countries, the Company conducts business using
various currencies. Revenue earned in each country is generally matched with the
associated expenses incurred, thereby reducing currency risk to earnings.
However, because certain assets or liabilities are denominated in non-U.S.
currencies, changes in currency rates may cause fluctuations of the valuation of
such assets or liabilities. For financial information by geographic region, see
Note 6 above.
13
Results of Operations
The following table summarizes the results of the Company's operations for
the three months and six months ended June 30, 1999 and 1998 as a percentage of
revenue:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Salaries and employee benefits 67.3 71.7 66.5 73.6
General and administrative expenses 25.0 23.1 26.1 22.8
Nonrecurring charge - - 6.9 -
----- ----- ----- -----
Total operating expenses 92.3 94.8 99.5 96.4
----- ----- ----- -----
Operating income 7.7 5.2 0.5 3.6
----- ----- ----- -----
Non-operating income (expense)
Interest income 0.4 0.5 0.3 0.4
Interest expense (0.4) (0.1) (0.5) (0.1)
Other, net 0.1 0.4 - (0.2)
----- ----- ----- -----
Net non-operating income (expense) 0.1 0.8 (0.2) 0.1
----- ----- ----- -----
Equity in net loss of affiliate - (1.4) (0.3) (0.9)
----- ----- ----- -----
Income before income taxes 7.8 4.6 - 2.8
Provision for income taxes 3.5 2.2 3.0 1.4
----- ----- ----- -----
Net income (loss) 4.3 % 2.4 % (3.0)% 1.4 %
===== ===== ===== =====
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Revenue. Revenue increased $55.8 million, or 105.8%, to $108.6 million for
the three months ended June 30, 1999 from $52.8 million for the three months
ended June 30, 1998. This increase was primarily the result of the Merger, which
contributed $34.3 million in revenue for the three months ended June 30, 1999.
Excluding HSI, revenue increased by 40.9%. Continued strong demand for the
Company's services across a number of industries, especially technology and
e-commerce, aggressive business development activities, and an increase in the
number of consultants all contributed to the revenue growth as the number of
confirmed searches increased. In addition, fees per search were higher as the
Company's strategic focus on working at the top level of executive search and
higher levels of consultant productivity continued to drive performance.
Salaries and employee benefits. Salaries and employee benefits increased
$35.2 million, or 93.1%, to $73.1 million for the three months ended June 30,
1999 from $37.9 million for the three months ended June 30, 1998. This increase
was primarily the result of the Merger, which contributed $23.2 million in
salaries and employee benefits for the three months ended June 30, 1999.
Excluding HSI, as a percentage of revenue, salaries and employee benefits
decreased from 71.7% to 67.1%. This was due to increased search consultant
productivity, greater leveraging of the support staff and a change in the bonus
structure for management that replaces a portion of cash incentive compensation
with options.
14
General and administrative expenses. General and administrative expenses
increased $15.0 million, or 122.9%, to $27.2 million for the three months ended
June 30, 1999 from $12.2 million for the three months ended June 30, 1998. This
increase was primarily the result of the Merger, which contributed $10.4 million
in general and administrative expenses for the three months ended June 30, 1999.
Excluding HSI, as a percentage of revenue, general and administrative expenses
decreased from 23.1% to 22.5%. This percentage decrease was primarily a result
of the growth in revenue in the quarter outpacing increases in fixed operating
costs, costs of consulting services for the Company's technology initiatives and
investment spending for new complementary business services.
Net non-operating income (expense). Net non-operating income decreased
$323,000, or 83.2%, to $65,000 for the three months ended June 30, 1999 from
$388,000 for the three months ended June 30, 1998. This was due to an increase
in interest expense related to borrowings under the Company's line of credit
partially offset by an increase in interest income.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Revenue. Revenue increased $81.6 million, or 82.7%, to $180.3 million for
the six months ended June 30, 1999 from $98.7 million for the six months ended
June 30, 1998. This increase was primarily the result of the Merger, which
contributed $46.3 million in revenue for the six months ended June 30, 1999.
Excluding HSI, revenue increased by 35.8%. Strong demand for the Company's
services across a number of industries, especially technology and e-commerce,
aggressive business development activities and an increase in the number of
consultants all contributed to the revenue growth as the number of confirmed
searches increased. In addition, fees per search increased as the Company's
strategic focus on working at the top level of executive search and higher
levels of consultant productivity continued to drive performance.
Salaries and employee benefits. Salaries and employee benefits increased
$47.4 million, or 65.2%, to $120.0 million for the six months ended June 30,
1999 from $72.6 million for the six months ended June 30, 1998. This increase
was primarily the result of the Merger, which contributed $30.5 million in
salaries and employee benefits for the six months ended June 30, 1999. Excluding
HSI, as a percentage of revenue, salaries and employee benefits decreased from
73.6% to 66.7%. This was due to increased search consultant productivity, better
leveraging of the support staff and a change in the bonus structure for
management that replaces a portion of cash incentive compensation with options.
General and administrative expenses. General and administrative expenses
increased $24.6 million, or 109.2%, to $47.1 million for the six months ended
June 30, 1999 from $22.5 million for the six months ended June 30, 1998. This
increase was primarily the result of the Merger, which contributed $13.8 million
in general and administrative expenses for the six months ended June 30, 1999.
Excluding HSI, as a percentage of revenue, general and administrative expenses
increased from 22.8% to 24.9%. This percentage increase was primarily due to an
increase in costs of consulting services for the Company's technology
initiatives and investment spending for new complementary business services.
Nonrecurring charge. During the first quarter of 1999, the Company incurred
a nonrecurring charge of $12.4 million. See Note 3 above for further details.
Net non-operating income (expense). For the six months ended June 30, 1999,
net non-operating expense was $192,000 versus net non-operating income of
$123,000 for the six months ended June 30, 1998. The change was due to an
increase in interest expense related to borrowings under the Company's line of
credit partially offset by an increase in interest income.
Pro Forma Combined Results of Operations
The following table provides pro forma combined results of operations as
well as such data as a percentage of revenue of the Company for the three months
and six months ended June 30, 1999 and 1998. The data gives effect to the
Merger, the modification of the Mulder acquisition agreement and the
implementation of the Company's GlobalShare programs, as if the transactions had
occurred on January 1, 1998.
15
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------ ------------------------------------------
1999 1998 (1)(2) 1999 (1)(2) 1998 (1)(2)
------------------ ------------------ ------------------ ------------------
Revenue $ 108,612 100.0% $ 84,180 100.0% $ 200,316 100.0% $ 158,170 100.0%
--------- ----- --------- ----- --------- ----- --------- -----
Operating expenses:
Salaries and employee benefits (3) 73,110 67.3 58,476 69.5 134,868 67.3 110,837 70.1
General and administrative expenses (4) 27,163 25.0 20,194 24.0 53,588 26.8 39,328 24.9
--------- ----- --------- ----- --------- ----- --------- -----
Total operating expenses 100,273 92.3 78,670 93.5 188,456 94.1 150,165 95.0
--------- ----- --------- ----- --------- ----- --------- -----
Operating income $ 8,339 7.7% $ 5,510 6.5% $ 11,860 5.9% $ 8,005 5.0%
========= ===== ========= ===== ========= ===== ========= =====
(1) The June 30, 1999 and 1998 consolidated statements of income have been
adjusted by the following amounts to reflect the historical operations of
HSI:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Revenue -- $31,402 $19,985 $59,455
Salaries and employee benefits -- 22,545 15,836 42,265
General and administrative expenses -- 7,661 6,209 16,098
(2) Excludes the $12.4 million nonrecurring Mulder charge for the six months
ended June 30, 1999. See further discussion in Note 3 above. In addition,
$1.2 million, $0.9 million and $2.6 million of deferred compensation expense
relating to the acquisition has been excluded for the three months ended
June 30, 1998 and for the six months ended June 30, 1999 and 1998,
respectively.
(3) Amount has been adjusted by $0.7 million and $1.4 million for the three
months and six months ended June 30, 1998, respectively, to eliminate
compensation expense representing the difference between the amount actually
paid to management for bonuses over the amount which would have been paid
under the Company's GlobalShare programs. One of the plans within
GlobalShare allows the Company to issue options to management in lieu of a
portion of their annual cash performance bonus.
(4) Includes additional amortization related to acquired intangibles and
goodwill arising from the Merger of $0.3 million, $0.2 million and $0.7
million for the three months ended June 30, 1998 and for the six months
ended June 30, 1999 and 1998, respectively.
Pro Forma Combined Results of Operations for the Three Months Ended June 30,
1999 Compared to the Three Months Ended June 30, 1998
Revenue. Revenue increased $24.4 million, or 29.0%, to $108.6 million for
the three months ended June 30, 1999 from $84.2 million for the three months
ended June 30, 1998. Continued strong demand for the Company's services across
a number of industries, especially technology and e-commerce, aggressive
business development activities and an increase in the number of consultants all
contributed to the revenue growth as the number of confirmed searches increased
12%. In addition, fees per search increased 15% as the Company's strategic
focus on working at the top level of executive search and higher levels of
consultant productivity continued to drive performance.
Salaries and employee benefits. Salaries and employee benefits increased
$14.6 million, or 25.0%, to $73.1 million for the three months ended June 30,
1999 from $58.5 million for the three months ended June 30, 1998. As a
percentage of revenue, salaries and employee benefits decreased from 69.5% to
67.3%. This was due to increased search consultant productivity and greater
leveraging of the support staff.
General and administrative expenses. General and administrative expenses
increased $7.0 million, or 34.5%, to $27.2 million for the three months ended
June 30, 1999 from $20.2 million for the three months ended June 30, 1998. As a
percentage of revenue, general and administrative expenses increased from 24.0%
to 25.0%. This percentage increase was primarily due to an increase in costs of
consulting services for the Company's technology initiatives and investment
spending for new complementary business services.
16
Liquidity and Capital Resources
The Company evaluates its liquidity requirements, capital needs and
availability of capital resources based on its plans for expansion and other
operating needs. It historically has financed its operations primarily through
internally generated funds, supplemented by sales of common stock to certain key
employees and periodic borrowings under it credit facilities. The Company has
historically paid bonuses in December. Employee bonuses are accrued when earned
and are based on the performance of the respective employee and the Company.
The Company believes that the net proceeds from the initial public offering
and related sales of shares to employees pursuant to the GlobalShare Employee
Share Purchase program, together with funds expected to be generated from
operations and its lines of credit, will be sufficient to finance the Company's
operations for the foreseeable future. However, if the Company undertakes
significant acquisitions it may need access to additional sources of debt or
equity financing.
The Company maintained cash and cash equivalents at June 30, 1999 and 1998
amounting to $65.7 million and $18.5 million, respectively. Towards these sums,
cash flows from operating activities contributed $28.7 million for the six
months ended June 30, 1999, reflecting an increase in net income excluding the
nonrecurring charge of $12.4 million, a majority of which was non cash, a
decrease in working capital, and an increase in depreciation and amortization.
For the six months ended June 30, 1998, cash flows from operating activities
contributed $19.0 million, reflecting a reduction in working capital and non-
cash expenses for depreciation and amortization.
On February 26, 1999, H&S Inc. merged with and into HSI resulting in $8.2
million of cash being acquired. On June 26, 1998, the Company purchased selected
assets and liabilities of Fenwick Partners, Inc. for approximately $6.1 million
in cash and notes.
Cash flows provided by financing activities were $31.9 million for the six
months ended June 30, 1999, resulting primarily from the estimated net proceeds
raised in the initial public offering of $52.4 million and the related sales of
shares to employees pursuant to the Company's GlobalShare program of $9.3
million, offset by $41.9 million used to repay the Company's lines of credit.
Cash flows provided by financing activities were $1.1 million for the six months
ended June 30, 1998, resulting from the Company's net repayments under its lines
of credit and payments to former stockholders from whom it had repurchased
stock.
The Company has a $60.0 million reducing revolving credit facility. This
facility will terminate on December 31, 2001. The line of credit will reduce
annually by $10.0 million on December 31, 1999 and 2000. There was no balance
outstanding under this line of credit at June 30, 1999. 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"). Non-U.S. Borrowings bear interest at the then-
existing LIBOR plus a margin as determined by certain tests of the Company's
financial condition (the "Applicable Margin"). U.S. Borrowings bear interest at
the then-existing prime rate. This line of credit replaced a $25.0 million line
of credit, which had been effective since October 1, 1997. There was $5.1
million outstanding under the line of credit at June 30, 1998 and the borrowings
bore interest at LIBOR plus 1% or the prime rate, at the Company's discretion.
At June 30, 1998, the interest rate on the borrowings was fixed at approximately
6.7%. 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.
Capital expenditures amounted to $12.3 million and $7.3 million for the six
months ended June 30, 1999 and 1998, respectively. These expenditures were
primarily for systems development costs, office furniture and fixtures,
leasehold improvements, and computer equipment and software. The systems
development costs relate primarily to the Integrated Global Information System
("IGIS") initiative. IGIS expenditures of $6.3 million and $4.6 million have
been capitalized for the six months ended June 30, 1999 and 1998, respectively.
17
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written to use
two digits to define year dates. Computer programs running date-sensitive
software may recognize a date using "00" as the year 1900 rather than the
Year 2000. This could result in systems failures or miscalculations causing
disruptions of operations. The Company utilizes information technology to
facilitate (i) its search processes communications with candidates and
clients and (ii) its financial management systems and other support systems.
The Company has formed a task force to evaluate and correct its Year 2000
issues and to assess the compliance of its suppliers. The Company is replacing
systems that are not Year 2000 compliant. The IGIS systems currently being
deployed will be Year 2000 compliant. The Company currently has certification as
to Year 2000 compliance from its key software suppliers.
EDS has been retained as the Company's systems integrator and is conducting
Year 2000 testing. The Company has a complete duplication of hardware and
software to conduct on-site, realistic testing and is currently conducting its
own tests of these systems. In addition, the Company's personnel are currently
conducting testing and will continue to monitor and test the systems through the
end of 1999. The Company also has specifically addressed its non-information
technology-related systems and believes that there will be no significant
operational problems relating to the Year 2000 issue.
The Company's primary business does not depend on material relationships
with third party vendors, but the Company does utilize third party vendors for a
number of functions, including its automated payroll functions, insurance and
investment of pension funds. The Company is continuing formal communications
with third party providers to determine the extent to which these third parties
are moving toward Year 2000 compliance. The Company also utilizes third party
on-line information services and the Internet to communicate and to retrieve
information about potential candidates and clients. Failure of these third
parties to have their systems timely converted may have a material adverse
effect on the Company's operations.
The Company anticipates completing the Year 2000 project during the third
quarter of 1999. The Company has budgeted $1,000,000 in addition to the IGIS
budget to be expensed as incurred, to address Year 2000 issues. The Company's
total Year 2000 project cost estimates include the impact of third party Year
2000 issues.
The following scenarios with respect to the Company's systems could occur:
(i) the software code may not be Year 2000 compliant, (ii) integration of
upgrades may not be complete by the Year 2000 and (iii) the integration may be
complete by the Year 2000 but not be fully tested or monitored prior to the Year
2000 such that testing and monitoring will uncover problems that the Company
cannot remedy in a timely manner.
The Company believes that failure to be Year 2000 compliant will not have a
significant impact on its human resources functions. However, any failure of the
financial systems to be Year 2000 compliant could hinder timely reporting of
financial data and processing of financial information and cause delays to
client billings and collections as these functions would have to be performed
manually using non-networked computers. Failure of search-related systems might
force the Company to use older proprietary systems to conduct searches and might
cause sorting problems, lowering productivity. If any non-information technology
system is non-compliant, the Company will need to replace such a system.
The Company's cost and timing estimates to achieve Year 2000 compliance
were based on numerous assumptions about future events, including third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, costs of the retention of key staff, the ability to locate and
correct all relevant computer codes, and similar uncertainties.
18
European Monetary Union
Commencing January 1, 1999, eleven European countries entered into the
European Monetary Union ("EMU") and introduced the Euro as a common currency.
During a three-year transition period, the national currencies will continue to
circulate, but their relative values will be fixed denominations of the Euro.
The Company recognizes that there are risks and uncertainties associated with
the conversion to the Euro including, but not limited to, an increasingly
competitive European environment resulting from greater transparency of pricing,
increased currency exchange rate risk, uncertainty as to tax consequences and
the inability to update financial reporting systems on a timely basis.
The Company is upgrading its systems to enable them to process transactions
denominated in the Euro. The upgrade will allow the Company to utilize the Euro
or local currency as needed. The upgrade is scheduled to be completed during
1999. The Company will later seek to adapt its systems to comply fully with the
implications of the European single currency after January 1, 2002, when local
currencies of EMU member countries are expected to be abolished. Failure to
adapt information technology systems could have an adverse effect on the
Company's financial condition and results of operations. The Company is also
dependent on many third parties, including banks and other providers of
information, for proper transaction clearance and reporting. If any of these
systems are not appropriately upgraded to manage transactions denominated in the
Euro, the Company's operations could be adversely affected.
The Company can give no assurance that the Company or third parties on whom
the Company depends will have in place in a timely manner the systems necessary
to process Euro-denominated transactions. Moreover, any disruption of business
or financial activity in European markets resulting from the conversion to the
Euro may hurt the Company's business in those markets, resulting in lost
revenues.
Recently Issued Accounting Standards
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes new standards for
reporting information about derivatives and hedging. FASB issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," in 1999, which deferred the
effective date of SFAS No. 133 for one year. The standard is effective for
periods beginning after June 15, 2000 and will be adopted by the Company as of
January 1, 2001. The Company expects that adoption of this Standard will have
no material effect on its consolidated financial position or results of
operations.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results
of Operations as well as other sections of this Quarterly Report on Form 10-Q
contain forward-looking statements that are based on the current beliefs and
expectations of the Company's management, as well as assumptions made by, and
information currently available to, the Company's management. Such statements
include those regarding general economic and executive search industry trends.
Because such statements involve risks and uncertainties, actual actions and
strategies, and the timing and expected results thereof, may differ materially
from those expressed or implied by such forward-looking statements, and the
Company's future results, performance or achievements could differ materially
from those expressed in, or implied by, any such forward-looking statements.
Future events and actual results could differ materially from those set forth in
or underlying the forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted. These potential risks and uncertainties
include dependence on attracting and retaining qualified executive search
consultants, portability of client relationships, maintenance of professional
reputation and brand name, risks associated with global operations, ability to
manage growth, restrictions imposed by off-limits agreements, competition,
implementation of an acquisition strategy, reliance on information management
systems and the impact of Year 2000 issues, and employment liability risk. In
addition to the factors noted above, other risks, uncertainties,
19
assumptions, and factors that could affect the Company's financial results are
described in the Company's recent filings, which are on record with the
Securities and Exchange Commission.
PART II. OTHER INFORMATION
Legal Proceedings
From time to time the Company has been involved in litigation incidental to
its business. With exception to the litigation outlined in the Company's Form
10-Q filed on May 17, 1999, the Company currently is 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 the Company's business, financial
condition or results of operations.
Use of Proceeds
On April 30, 1999, the Company completed the 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 $52.4
million to the Company and $6.5 million to the selling stockholders. The
Company used approximately $18.4 million of the net proceeds to repay a portion
of borrowings under its credit facilities. The Company will in the near term
use the net proceeds to repay notes payable to former stockholders of
approximately $3.8 million. In addition, the Company expects to spend $16.3
million of the net proceeds for IGIS technology enhancements over the course of
the year. The remaining net proceeds will be used for funding of
LeadersOnline/TM/ and other complementary businesses, possible future
acquisitions, working capital and general corporate purposes. The Company has
currently invested the remaining net proceeds in short-term investment grade
securities. The Company received no proceeds from the sale of the common stock
in the offering by the selling stockholders.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 16, 1999.
Heidrick & Struggles International, Inc.
(Registrant)
By: /s/ Donald M. Kilinski
---------------------------------
Donald M. Kilinski
Chief Financial Officer
20
5
1,000
6-MOS
DEC-31-1999
JAN-01-1999
JUN-30-1999
65,737
0
92,963
13,747
0
167,630
74,296
27,673
308,580
125,676
0
0
0
157
152,168
308,580
0
180,331
0
179,519
(28)
0
850
(10)
5,489
(5,499)
0
0
0
(5,499)
(.55)
(.55)
