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, 2001 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 7,
2001 was 18,966,427.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2001 3
(Unaudited) and December 31, 2000
Unaudited Consolidated Statements of Income and Comprehensive
Income for the three months and six months ended June 30,
2001 and 2000 5
Unaudited Consolidated Statement of Stockholders'
Equity for the six months ended June 30, 2001 6
Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000 7
Unaudited Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure of Market Risk 20
PART II. OTHER INFORMATION 21
SIGNATURE 22
2
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 30, December 31,
2001 2000
-------- ------------
(unaudited)
Current assets:
Cash and cash equivalents $133,369 $184,836
Accounts receivable, net of allowance for doubtful accounts 90,298 106,334
Other receivables 7,346 7,357
Prepaid expenses 12,636 11,783
Deferred income taxes, net 28,783 26,071
-------- --------
Total current assets 272,432 336,381
-------- --------
Property and equipment, net 53,645 52,660
-------- --------
Other assets:
Cash and investments designated for nonqualified retirement plans 15,628 16,506
Investments and other assets 38,149 45,097
Deferred income taxes, net 5,878 6,792
Goodwill and other intangibles, net 64,104 66,208
-------- --------
Total other assets 123,759 134,603
-------- --------
Total assets $449,836 $523,644
======== ========
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,
2001 2000
---------- -------------
(unaudited)
Current liabilities:
Current maturities of long-term debt $ 269 $ 1,135
Accounts payable 18,376 10,051
Accrued expenses:
Salaries and employee benefits 96,177 160,552
Other 22,870 27,888
Income taxes payable 2,661 16,415
-------- --------
Total current liabilities 140,353 216,041
-------- --------
Long-term debt, less current maturities 511 610
-------- --------
Liability for nonqualified retirement plans 19,818 19,316
-------- --------
Stockholders' equity
Preferred stock, $.01 par value, 10,000,000
shares authorized, no shares issued at
June 30, 2001 and December 31, 2000 - -
Common stock, $.01 par value, 100,000,000
shares authorized, of which 19,402,229 and
19,373,286 shares were issued at June 30,
2001 and December 31, 2000, respectively 194 194
Treasury stock at cost, 468,000 shares at
June 30, 2001 (12,016) -
Additional paid-in capital 254,445 234,619
Retained earnings 62,223 56,862
Cumulative foreign currency translation
adjustment (7,703) (1,879)
Unrealized gain on available-for-sale
investments, net of tax 48 3,737
Deferred compensation (8,037) (5,856)
-------- --------
Total stockholders' equity 289,154 287,677
-------- --------
Total liabilities and stockholders' equity $449,836 $523,644
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue $123,171 $166,416 $262,439 $298,352
-------- -------- -------- --------
Operating expenses:
Salaries and employee benefits 80,550 108,263 167,640 200,663
General and administrative expenses 41,740 44,933 86,069 80,743
Special charge (See Note 7) 8,163 - 8,163 -
-------- -------- -------- --------
Total operating expenses 130,453 153,196 261,872 281,406
-------- -------- -------- --------
Operating income (loss) (7,282) 13,220 567 16,946
-------- -------- -------- --------
Non-operating income (expense):
Interest income 1,419 1,833 3,480 3,350
Interest expense (38) (52) (79) (127)
Realized gains on investments 394 3,082 648 4,604
Net unrealized loss on derivative instruments (1,194) - (2,669) -
Other, net (264) 98 (426) 272
-------- -------- -------- --------
Net non-operating income 317 4,961 954 8,099
-------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of accounting change (6,965) 18,181 1,521 25,045
Provision for (benefit from) income taxes (2,995) 8,183 654 11,532
-------- -------- -------- --------
Net income (loss) before cumulative effect of
accounting change (3,970) 9,998 867 13,513
Cumulative effect of accounting change,
net of tax - - 4,494 -
-------- -------- -------- --------
Net income (loss) $ (3,970) $ 9,998 $ 5,361 $ 13,513
======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of
accounting change $ (0.21) $ 0.52 $ 0.04 $ 0.72
Cumulative effect of accounting change - - 0.23 -
-------- -------- -------- --------
Total basic earnings (loss) per common share $ (0.21) $ 0.52 $ 0.28 $ 0.72
======== ======== ======== ========
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of
accounting change $ (0.21) $ 0.49 $ 0.04 $ 0.68
Cumulative effect of accounting change - - 0.22 -
-------- -------- -------- --------
Total diluted earnings (loss) per common share $ (0.21) $ 0.49 $ 0.26 $ 0.68
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 19,244 19,211 19,309 18,643
======== ======== ======== ========
Diluted 19,244 20,497 20,458 19,906
======== ======== ======== ========
Net income (loss) $ (3,970) $ 9,998 $ 5,361 $ 13,513
-------- -------- -------- --------
Other comprehensive loss, before income taxes:
Foreign currency translation adjustment (4,490) (909) (10,219) (2,783)
Unrealized loss on available-for-sale investments (718) (6,487) (178) (1,507)
Cumulative effect of accounting change - - (6,067) -
-------- -------- -------- --------
Total other comprehensive loss, before income taxes (5,208) (7,396) (16,464) (4,290)
Income tax benefit related to items of other
comprehensive loss (2,242) (3,237) (6,953) (1,865)
-------- -------- -------- --------
Other comprehensive loss, net of income taxes (2,966) (4,159) (9,511) (2,425)
-------- -------- -------- --------
Comprehensive income (loss) $ (6,936) $ 5,839 $ (4,150) $ 11,088
======== ======== ======== ========
5
The accompanying notes are an integral part
of these consolidated financial statements.
HEIDRICK & STRUGGLES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Accumulated
Other
Compre-
Additional hensive Deferred
Common Treasury Paid-in Retained Income Com-
Stock Stock Capital Earnings (Loss) pensation Total
------ -------- ---------- -------- ---------- --------- --------
Balance as of December 31, 2000 $194 $ - $234,619 $56,862 $ 1,858 $(5,856) $287,677
Treasury and common stock transactions:
Issuance of restricted stock - - 17,831 - - (3,663) 14,168
Amortization of deferred compensation - - - - - 1,458 1,458
Forfeitures of restricted stock - - (234) - - 24 (210)
Exercise of stock options - - 395 - - - 395
Repurchases of treasury stock - (12,279) - - - - (12,279)
Reissuance of treasury stock - 263 68 - - - 331
Accrued compensation - - 1,766 - - - 1,766
Cumulative effect of accounting change, net of tax - - - 4,494 (3,581) - 913
Net income - - - 867 - - 867
Unrealized loss on available-for-sale investments, - - - - (108) - (108)
net of tax
Foreign currency translation adjustments, net of tax - - - - (5,824) - (5,824)
---- -------- -------- -------- ------- ------- --------
Balance as of June 30, 2001 $194 $(12,016) $254,445 $62,223 $(7,655) $(8,037) $289,154
==== ======== ======== ======= ======= ======= ========
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,
--------------------------
2001 2000
--------- --------
Cash flows from operating activities
Net income $ 5,361 $ 13,513
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,439 8,191
Gain on sale of equity securities, net (648) (4,604)
Deferred income taxes (3,971) (1,840)
Special charge 8,163 -
Net unrealized loss on derivative instruments 2,669 -
Cumulative effect of accounting change, net of tax (4,494) -
Minority interest in loss of consolidated
subsidiary - (157)
Stock-based compensation 1,458 2,119
Changes in assets and liabilities:
Trade and other receivables 10,960 (45,477)
Accounts payable 4,008 2,651
Accrued expenses (46,895) 55,111
Income taxes payable (12,947) (1,391)
Other, net (2,025) (3,225)
-------- --------
Net cash provided by (used in)
operating activities (27,922) 24,891
-------- --------
Cash flows from investing activities
Acquisitions, net of cash acquired (810) (15,757)
Purchases of property and equipment (11,402) (10,651)
Purchases of long-term investments - (10,447)
Proceeds from sales of equity securities, net 648 4,604
Other, net 2,471 (1,582)
-------- --------
Net cash used in investing activities (9,093) (33,833)
-------- --------
Cash flows from financing activities
Proceeds from stock options exercised 395 247
Proceeds from sale of subsidiary stock - 2,919
Proceeds from sale of common stock - 76,239
Purchases of treasury stock, net of reissuances (7,320) -
Payments on debt (736) (1,822)
-------- --------
Net cash provided by (used in)
financing activities (7,661) 77,583
-------- --------
Effect of foreign currency exchange rates on cash
and cash equivalents (6,791) (1,275)
-------- --------
Net increase (decrease) in cash and cash equivalents (51,467) 67,366
Cash and cash equivalents:
Beginning of period 184,836 76,848
-------- --------
End of period $133,369 $144,214
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
7
Heidrick & Struggles International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(all tables in thousands, except per share figures)
(unaudited)
1. Interim Financial Data
The accompanying unaudited consolidated financial statements of
Heidrick & Struggles International, Inc. and Subsidiaries (the "Company"),
included herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from those
estimates. In the opinion of management, the statements reflect all adjustments,
which are of a normal recurring nature, necessary to present fairly the
Company's financial position, results of operations, stockholders' equity and
cash flows. Certain prior year amounts have been reclassified to conform with
the 2001 classifications. These financial statements and notes are to be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included in the Company's Annual Report to Shareholders on Form 10-K
(File No. 0-25837) for the year ended December 31, 2000, as filed with the
Securities and Exchange Commission on March 29, 2001.
2. Derivative Instruments
The Company receives warrants for equity securities in its client
companies, in addition to its cash fee, on some searches. Prior to January 1,
2001, when the warrants were received, revenue was 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, were accounted for as available-for-sale
investments with unrealized gains and losses reported as a component of other
comprehensive income. On January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and its subsequent amendments. SFAS 133
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. Some of the Company's warrants meet the definition
of a derivative instrument under SFAS 133 and therefore subsequent changes in
their fair value must now be recorded in earnings, rather than as a component of
other comprehensive income. Going forward, each quarter's earnings are
anticipated to be affected by the fluctuations in the fair value of these
derivative instruments. The Company recognized a net unrealized loss of $2.7
million in earnings, net of consultants' bonuses and administrative and other
costs, during the six months ended June 30, 2001, due to changes in the fair
value of these derivative instruments during the period. In addition, the fair
value of warrants received is no longer recorded in revenue upon receipt;
instead the fair value is being recorded as an unrealized gain, net of
consultants' bonuses and administrative and other costs, in non-operating
income.
As of June 30, 2000, the Company had an unrealized pre-tax gain of
$1.1 million for one of its equity securities, which was hedged by a collar
agreement. The Company's realized gain on this equity security for the six
months ended June 30, 2000 was $1.7 million. During 1999, the Company entered
into a collar agreement to hedge the impact of market value changes of one of
its equity securities. Collars consist of the sale of call options along with a
corresponding purchase of put options, with the effect of establishing the
highest and lowest prices at which the securities will be sold during a certain
time period. The collar 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 other 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.
8
3. Cumulative Effect of Change in Accounting Principle
As a result of the adoption of SFAS 133 on January 1, 2001, the
Company recorded, as a cumulative effect of accounting change, a transition
adjustment to income of $4.5 million, net of consultants' bonuses,
administrative and other costs, and taxes (See Note 2).
4. Basic and Diluted Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing net
income by the weighted average common shares outstanding for the period. Diluted
earnings (loss) per common share reflects the potential dilution that would
occur if securities or other contracts to issue common stock were exercised or
converted.
The following is a reconciliation of the shares used in the
computation of basic and diluted earnings (loss) per common share.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
------- ------- ------- -------
Basic earnings (loss) per common share
Income (loss) available to common stockholders $(3,970) $ 9,998 $ 5,361 $13,513
Weighted average common shares outstanding 19,244 19,211 19,309 18,643
------- ------- ------- -------
Basic earnings (loss) per common share $ (0.21) $ 0.52 $ 0.28 $ 0.72
======= ======= ======= =======
Diluted earnings (loss) per common share
Income (loss) available to common stockholders $(3,970) $ 9,998 $ 5,361 $13,513
------- ------- ------- -------
Weighted average common shares outstanding 19,244 19,211 19,309 18,643
Dilutive common shares - 1,286 1,149 1,263
------- ------- ------- -------
Weighted average diluted common shares outstanding 19,244 20,497 20,458 19,906
------- ------- ------- -------
Diluted earnings (loss) per common share $ (0.21) $ 0.49 $ 0.26 $ 0.68
======= ======= ======= =======
9
5. Segment Information
The Company adjusted its segment reporting in 2001 to reflect the current
internal management reporting structure, which included some changes in the
allocation of certain costs to operations and corporate expenses. Prior period
segment disclosures were revised to reflect these changes. 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 North America and Latin America. The North America
region includes the U.S. (except Miami) and Canada. The Latin America region
includes Mexico and the rest of Latin America, as well as Miami, which serves as
its gateway office to the region. The International segment consists of Europe
(which includes Africa and the Middle East) and Asia Pacific.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue:
Americas
North America $ 66,825 $ 98,784 $136,905 $173,583
Latin America 3,534 5,441 7,869 9,868
International
Europe 39,544 46,608 91,288 87,992
Asia Pacific 7,435 9,476 15,318 17,598
-------- -------- -------- --------
Total Executive Search 117,338 160,309 251,380 289,041
LeadersOnline 5,833 6,107 11,059 9,311
-------- -------- -------- --------
Total $123,171 $166,416 $262,439 $298,352
======== ======== ======== ========
Operating income (loss):
Americas
North America $ 7,102 $ 17,777 $ 14,390 $ 30,863
Latin America (378) 825 (595) 940
International
Europe 1,296 4,751 10,732 7,713
Asia Pacific 909 1,536 1,643 2,726
-------- -------- -------- --------
Total Executive Search 8,929 24,889 26,170 42,242
LeadersOnline (135) (4,333) (1,821) (8,519)
Corporate (7,913) (7,336) (15,619) (16,777)
-------- -------- -------- --------
Operating income before
special charge 881 13,220 8,730 16,946
Special charge (8,163) - (8,163) -
-------- -------- -------- --------
Total $ (7,282) $ 13,220 $ 567 $ 16,946
======== ======== ======== ========
June 30, December 31,
2001 2000
-------- ------------
Identifiable assets:
Americas
North America $107,981 $123,468
Latin America 8,225 10,424
International
Europe 126,371 144,230
Asia Pacific 20,409 22,237
-------- --------
Total Executive Search 262,986 300,359
LeadersOnline 3,355 4,805
Corporate 183,495 218,480
-------- --------
Total $449,836 $523,644
======== ========
10
6. Public Offering
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 the selling stockholders. The Company has used and will continue to use
the net proceeds from this offering for general corporate purposes including
funding LeadersOnline and other growth initiatives, selective hiring of
additional executive search consultants, expanding its technology
infrastructure, and funding acquisitions and share repurchases.
7. Special Charge
During the second quarter of 2001, the Company announced a strategic
reduction of its workforce in order to better adjust to current economic
conditions, while retaining the resources necessary to capitalize on growth
opportunities when the economy recovers. At the time of the announcement, the
Company estimated it would incur between $9.0 million and $10.0 million for
severance and other related costs. The strategic reduction will affect
approximately 300 people, or 13 percent of the firm's global workforce.
As a result of this workforce reduction, the Company incurred a special
charge of $8.2 million ($0.24 per share) for the three months ended June 30,
2001, for severance and other related costs. The charge for severance and
other related costs was established in accordance with Emerging Issues Task
Force No. 94-3. As of June 30, 2001, the Company notified 285 people that they
would be part of the workforce reduction. This workforce reduction affected all
levels of the Company, most of which were in the core Executive Search business,
including 63 consultants. The remainder was support staff in both Executive
Search and LeadersOnline, and in the corporate departments. Nearly two-thirds
of the layoffs were in North America, 20% in Europe, and the rest in Latin
America and Asia Pacific. The layoffs impacted virtually all practice groups.
In the Consolidated Statements of Income and Comprehensive Income, the
charge has been segregated on a separate line titled "Special Charge." For
segment reporting, the Special Charge has been segregated and, therefore, does
not impact the year-to-year comparisons.
The following table summarizes the restructuring reserve activity through
June 30, 2001:
Severance and Other
Other Employee Cash
Related Costs Charges
-------------- --------
Balance at March 31, 2001 $ - $ -
Special Charge 7,717 446
Payments (1,538) -
-------- --------
Balance at June 30, 2001 $ 6,179 $ 446
======== ========
The Company expects to incur an additional charge of approximately $2.0
million for severance and other costs related to the workforce reduction in the
third quarter of 2001. The Company intends to complete its actions related to
these special charges by the end of the third quarter of 2001.
8. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations." This statement requires that all business
combinations must be accounted for using the purchase method of accounting.
This approach reflects the conclusion that all business combinations are
acquisitions and,
11
thus, should be accounted for in the same way that other asset acquisitions are
accounted for, based on the values exchanged. In June 2001, the FASB issued SFAS
No. 142, "Goodwill and Other Intangible Assets." Under the new rules, goodwill
will no longer be amortized over its estimated useful life. Rather, goodwill
will be subject to at least an annual assessment for impairment by applying a
fair-value-based test. For intangible assets, the new rules state that an
acquired asset should be separately recognized if the benefit of the intangible
asset is obtained through contractual or other legal rights, or if the
intangible assets can be sold, transferred, licensed, rented, or exchanged,
regardless of the acquirer's intent to do so. This requirement may result in
more intangible assets being separated from goodwill than generally occurs in
practice today.
Management is assessing the impact of SFAS Nos. 141 and 142 and has not yet
determined the extent to which these new statements will affect the financial
statements. The provisions of the above-mentioned statements shall be applied
beginning January 2002. As a result, impairment, if any, will be recognized in
January 2002 as a cumulative effect of a change in accounting principle. Early
adoption is not permitted.
9. Business Combinations - Accounted for Using the Purchase Method
During the first six months ended June 30, 2001, the Company acquired one
executive search firm for $810,000. Results of operations of this business have
been included in the consolidated financial statements from the acquisition date
of June 8, 2001, and are not material to the consolidated financial statements
for the three months ended June 30, 2001.
The Company completed three acquisitions of executive search firms during
the six months ended June 30, 2000. The total purchase price for these
acquisitions was approximately $19.9 million, which was paid in cash and shares
of the Company's common stock.
10. Subsequent Events
On July 23, 2001, the Company completed the acquisition of SHP Associates,
a U.K.-based search firm specializing in work at the middle and senior
management levels. The acquisition enhances the European expansion efforts of
the Company's media-enhanced management search business for emerging leadership
talent and allows the Company to support its clients with a broader range of
services. SHP brings recognized market expertise in the technology, finance and
accounting, and financial services sectors in the U.K.
On August 8, 2001, the Company's Board of Directors elected Piers Marmion
Chief Executive Officer. He has been serving as Chief Operating Officer of
Heidrick & Struggles Executive Search and President of the Heidrick & Struggles
business outside the Americas. He will succeed Patrick S. Pittard, who is
currently Chairman, President and Chief Executive Officer. Mr. Pittard will
retain the duties of Chairman of the Board. David C. Anderson, currently Chief
Executive Officer of Heidrick & Struggles Executive Search, was named Chief
Operating Officer of Heidrick & Struggles International, Inc. All three changes
will be effective October 1, 2001.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 two years.
On June 8, 2001, we acquired H-S Uluslararasi Danismanlik Hizmetleri Anonim
Sirketi, an executive search company which gives us a local presence in Turkey.
On December 29, 2000, we acquired the Russian, Finnish 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 TAO International Group, a senior-level executive search firm with
offices in Asia. On March 1, 2000, we completed the acquisition of 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
completed the acquisition of Redelinghuys & Partners, a senior-level executive
search firm in the Republic of South Africa. 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 dates of the respective acquisitions. 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 the pooling of interests method of accounting.
With offices in over 75 locations 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 net earnings.
However, because certain assets or liabilities are denominated in non-U.S.
currencies, changes in currency rates may cause fluctuations in the valuation of
such assets or liabilities. For financial information by geographic segment see
Note 5 of our Consolidated Financial Statements.
13
Results of Operations
The following table summarizes the results of our operations as a
percentage of revenue for the three months and six months ended June 30, 2001
and 2000:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2001 2000 2001 2000
----- ----- ----- -----
Revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses:
Salaries and employee benefits 65.4 65.1 63.9 67.3
General and administrative expenses 33.9 27.0 32.8 27.1
Special charge 6.6 - 3.1 -
----- ----- ----- -----
Total operating expenses 105.9 92.1 99.8 94.4
----- ----- ----- -----
Operating income (loss) (5.9) 7.9 0.2 5.6
----- ----- ----- -----
Non-operating income (expense):
Interest income 1.2 1.1 1.3 1.1
Interest expense - - - -
Realized gains on investments 0.3 1.9 0.2 1.5
Net unrealized loss on derivative instruments (1.0) - (1.0) -
Other, net (0.2) 0.1 (0.2) 0.1
----- ----- ----- -----
Net non-operating income 0.3 3.1 0.3 2.7
----- ----- ----- -----
Income (loss) before income taxes and
cumulative effect of accounting change (5.6) 11.0 0.5 8.3
Provision for (benefit from) income taxes (2.4) 4.9 0.2 3.9
----- ----- ----- -----
Net income (loss) before cumulative effect of
accounting change (3.2) 6.1 0.3 4.4
Cumulative effect of accounting change,
net of tax - - 1.7 -
----- ----- ----- -----
Net income (loss) (3.2)% 6.1% 2.0% 4.4%
===== ===== ===== =====
14
The following table sets forth, for the periods indicated, our revenue and
operating income (loss) by segment. We adjusted our segment reporting in 2001
to reflect the current internal management reporting structure, which included
some changes in the allocation of certain costs to operations and corporate
expenses. Prior period segment disclosures were revised to reflect these
changes. We operate principally through two lines of business: Executive Search
and LeadersOnline. We break out revenue and operating income in our Executive
Search business into two broad geographic segments: Americas and International.
The Americas segment consists of North America and Latin America. The North
America region includes the U.S. (except Miami) and Canada. The Latin America
region includes Mexico and the rest of Latin America, as well as Miami, which
serves as our gateway office to the region. The International segment consists
of Europe (which includes Africa and the Middle East) and Asia Pacific.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue:
Americas
North America $ 66,825 $ 98,784 $136,905 $173,583
Latin America 3,534 5,441 7,869 9,868
International
Europe 39,544 46,608 91,288 87,992
Asia Pacific 7,435 9,476 15,318 17,598
-------- -------- -------- --------
Total Executive Search 117,338 160,309 251,380 289,041
LeadersOnline 5,833 6,107 11,059 9,311
-------- -------- -------- --------
Total $123,171 $166,416 $262,439 $298,352
======== ======== ======== ========
Operating income (loss):
Americas
North America $ 7,102 $ 17,777 $ 14,390 $ 30,863
Latin America (378) 825 (595) 940
International
Europe 1,296 4,751 10,732 7,713
Asia Pacific 909 1,536 1,643 2,726
-------- -------- -------- --------
Total Executive Search 8,929 24,889 26,170 42,242
LeadersOnline (135) (4,333) (1,821) (8,519)
Corporate (7,913) (7,336) (15,619) (16,777)
-------- -------- -------- --------
Operating income before special charge 881 13,220 8,730 16,946
Special charge (8,163) - (8,163) -
-------- -------- -------- --------
Total $ (7,282) $ 13,220 $ 567 $ 16,946
======== ======== ======== ========
Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30,
2000
Revenue. Our revenue decreased $43.2 million, or 26.0%, to $123.2 million
for the three months ended June 30, 2001 from $166.4 million for the three
months ended June 30, 2000. Excluding the effect of foreign currency
translation into the U.S. dollar, revenue would have declined by 24%. This
decrease was due to a soft economic environment. The U.S. weakened more than
the first quarter, and Latin America and Asia Pacific appear to be following a
similar pattern. Europe was a strong contributor in the first quarter but has
now begun to see signs of sluggishness, particularly in the last half of June.
Our revenue within Executive Search decreased 26.8% to $117.3 million in the
second quarter of 2001, down from $160.3 million in the second quarter of 2000.
Although fewer searches were conducted overall, CEO searches represented a
greater than typical proportion of the total. While confirmed searches
decreased 40% from the second quarter of 2000, fees per search rose 21% because
of this change in the mix.
15
Revenue in North America was $66.8 million, a decrease of $32.0 million or
32.4%, from $98.8 million in the second quarter of 2000. Strength in the health
care practice group was offset by declines in most of the other practices. In
Latin America, revenue was $3.5 million, a decrease of 35.0% from $5.4 million
in the second quarter of 2000. Excluding the impact of foreign currency
translation into the U.S. dollar, revenue decreased 25% on a local currency
basis from the comparable quarter in 2000. Most of the practice groups reported
declines, although health care was up slightly. Revenue in Europe was $39.5
million, a decrease of 15.2% from $46.6 million in the second quarter of 2000.
Excluding the impact of foreign currency translation into the U.S. dollar,
revenue decreased 9% on a local currency basis from the comparable quarter in
2000. Strength in the professional services practice group was more than offset
by declines in other practices. In Asia Pacific, revenue was $7.4 million, a
decrease of 21.5% from $9.5 million in the second quarter of 2000. Excluding
the impact of foreign currency translation into the U.S. dollar, revenue
decreased 13% on a local currency basis over the comparable quarter in 2000.
The technology and financial services practice groups reported the largest
declines.
Revenue for LeadersOnline was $5.8 million, a decrease of 4.5% from $6.1
million in the second quarter of 2000. During the second quarter of 2001,
LeadersOnline entered into contracts for 112 new searches, with an average fee
of $41,000 per placement. This average fee represents 29% of the average
compensation level of $142,000. LeadersOnline typically charges about one-third
of the placed candidate's salary, although its fees can vary depending on
several factors, most important of which is the number of positions per
assignment.
Salaries and employee benefits. Our salaries and employee benefits decreased
$27.7 million, or 25.6%, to $80.6 million for the three months ended June 30,
2001 from $108.3 million for the three months ended June 30, 2000. As a
percentage of revenue, salaries and employee benefits increased to 65.4% in the
second quarter of 2001 from 65.1% in the second quarter of 2000. The decrease
in dollar terms was due to lower accruals for performance-based compensation for
management, support staff and executive search consultants. The reduced level
of revenue, as well as an adjustment to the anticipated target payout to
executive search consultants for the 2001 year, were factors in the lower
accrual amounts. The decrease was partially offset by higher fixed compensation
costs related to the increase in the number of executive search teams added
during the past twelve months, resulting in a slight increase as a percent of
revenue. The total number of executive search consultants as of June 30, 2001
was 492. The number of executive search consultants at June 30, 2001 represents
a 15.2% increase over the 427 executive search consultants we employed at June
30, 2000, and a 9.9% decrease from the 546 executive search consultants employed
as of March 31, 2001.
General and administrative expenses. Our general and administrative expenses
decreased $3.2 million, or 7.1%, to $41.7 million for the three months ended
June 30, 2001 from $44.9 million for the three months ended June 30, 2000 due to
the implementation of additional cost controls at LeadersOnline. In Executive
Search, cost savings across a number of categories were offset by an increase in
business development costs, as well as fixed costs related to office space,
equipment and other items that support the higher number of search teams. As a
percentage of revenue, general and administrative expenses increased to 33.9% in
the second quarter of 2001 from 27.0% in the second quarter of 2000, primarily
because of the relatively large fixed component of the cost structure matched
against substantially lower than anticipated revenue.
Special charge. During the second quarter of 2001, we announced a strategic
reduction of our workforce in order to better adjust to current economic
conditions, while retaining the resources necessary to capitalize on growth
opportunities when the economy recovers. At the time of the announcement, we
estimated incurring between $9.0 million and $10.0 million for severance and
other related costs. The actions will affect approximately 300 people, or 13
percent of the firm's global workforce, and will result in estimated annual cost
savings of salaries and employee benefits and general and administrative
expenses of approximately $30.0 million to $35.0 million. The cost savings are
anticipated to be primarily cash related.
As a result of this workforce reduction, we incurred a special charge of $8.2
million ($0.24 per share) for the three months ended June 30, 2001, for
severance and other related costs. As of June 30, 2001, we notified 285 people
that they would be part of the reduction in workforce. This workforce reduction
affected all levels, most of which were in the core Executive Search business,
including 63 consultants. The remainder was support staff in both Executive
Search and LeadersOnline, and in the corporate departments. Nearly two-thirds
of the layoffs were in North America, 20% in Europe, and the rest in Latin
America and Asia Pacific. The layoffs impacted virtually all practice groups.
16
We expect to incur an additional charge of approximately $2.0 million for
severance and other costs related to the workforce reduction in the third
quarter of 2001. The charges are substantially all cash and most of the cash
outlay will occur in the third quarter of 2001. We intend to have the actions
related to these special charges completed by the end of the third quarter of
2001.
Net non-operating income. Our net non-operating income decreased $4.6
million to $317,000 for the three months ended June 30, 2001 from $5.0 million
for the three months ended June 30, 2000. This decrease was partly due to a
$1.2 million net unrealized loss on derivative instruments from a portion of our
warrant portfolio, net of consultants' bonuses and administrative and other
costs, during the three months ended June 30, 2001 (See Note 2 in the Notes to
Consolidated Financial Statements). In addition, our realized gains from the
sale of equity obtained as part of our warrant program were $394,000 for the
three months ended June 30, 2001 compared to $3.1 million for the three months
ended June 30, 2000. There was also a decrease in interest income from the
investment of our cash balances.
Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000
Revenue. Our revenue decreased $36.0 million, or 12.0%, to $262.4 million
for the six months ended June 30, 2001 from $298.4 million for the six months
ended June 30, 2000. Excluding the effect of foreign currency translation into
the U.S. dollar, revenue decreased 9%. This decline was due to decreased demand
for our executive search services across a number of industries and disciplines,
especially the technology, financial services, and consumer practice groups. We
believe this decrease reflects the impact of the recent global economic
slowdown.
Our revenue within Executive Search decreased 13.0% to $251.4 million in the
six months ended June 30, 2001, down from $289.0 million in the six months ended
June 30, 2000. Although fewer searches were conducted overall, CEO searches
remained strong, which resulted in a higher level of fees per search. Confirmed
searches decreased 26% from the comparable period in 2000, while fees per search
rose 18%.
Revenue in North America was $136.9 million in the six months ended June 30,
2001, a decrease of $36.7 million or 21.1%, from $173.6 million in the six
months ended June 30, 2000. Strength in the health care and professional
services practices was more than offset by a decline in the financial services,
technology and consumer practices. In Latin America, revenue decreased 20.3% to
$7.9 million in the six months ended June 30, 2001 from $9.9 million in the six
months ended June 30, 2000, as the region felt some of the effects of a
weakening U.S. economy. The decline in revenue was primarily in our technology
and industrial practices. Revenue in Europe increased $3.3 million or 3.7% to
$91.3 million from $88.0 million in the six months ended June 30, 2000, due to
particularly strong performance from the professional services practice.
Excluding the impact of foreign currency translation into the U.S. dollar,
Europe's revenue grew 12% on a local currency basis over the comparable period
in 2000. In Asia Pacific, revenue was $15.3 million, a decrease of 13.0% from
$17.6 million in the six months ended June 30, 2000. Excluding the impact of
foreign currency translation into the U.S. dollar, revenue decreased 4% on a
local currency basis over the comparable period in 2000.
LeadersOnline generated $11.1 million of revenue in the six months ended June
30, 2001 compared to $9.3 million of revenue in the six months ended June 30,
2000, due to increased demand for our services. During the six months ended
June 30, 2001, LeadersOnline entered into contracts for 202 new searches.
Salaries and employee benefits. Our salaries and employee benefits decreased
$33.1 million, or 16.5%, to $167.6 million for the six months ended June 30,
2001 from $200.7 million for the six months ended June 30, 2000. As a percentage
of revenue, salaries and employee benefits decreased to 63.9% for the six months
ended June 30, 2001 from 67.3% for the comparable period of 2000. This
improvement was primarily due to lower accruals for performance-based
compensation for management, support staff and executive search consultants.
The reduced level of revenue and our variable compensation structure, as well as
an adjustment to the anticipated target payout to executive search consultants
for the 2001 year, were factors in the lower accrual amounts. Under our variable
compensation structure, consultants do not earn compensation on fees not
collected and we recorded $10.3 million in bad debt related expenses in the
first quarter of 2001. In addition, the reduction was due to the recoupment of
previously recorded performance-related bonus accruals that were not earned due
to individuals not meeting required performance goals in 2000. Partially
offsetting the reduction was an increase in expense due to a greater
17
number of executive search consultants and support staff. The number of
executive search consultants at June 30, 2001 represents a 15.2% increase over
the 427 executive search consultants we employed at June 30, 2000.
General and administrative expenses. Our general and administrative expenses
increased $5.4 million, or 6.6%, to $86.1 million for the six months ended June
30, 2001 from $80.7 million for the six months ended June 30, 2000. This
increase was due to an increase in bad debt expense, higher facilities expenses
related to the increase in executive search consultants and support staff over
the past year, and an increase in depreciation and amortization due to office
expansions and investments in technology. As a percentage of revenue, general
and administrative expenses increased to 32.8% in the six months ended June 30,
2001 from 27.1% in the six months ended June 30, 2000, primarily because of the
relatively large fixed component of our cost structure matched against
substantially lower than anticipated revenue.
Special charge. During the second quarter of 2001, we announced a strategic
reduction of our workforce in order to better adjust to current economic
conditions, while retaining the resources necessary to capitalize on growth
opportunities when the economy recovers. At the time of the announcement, we
estimated incurring between $9.0 million and $10.0 million for severance and
other related costs. The actions will affect approximately 300 people, or 13
percent of the firm's global workforce, and will result in estimated annual cost
savings of salaries and employee benefits and general and administrative
expenses of approximately $30.0 million to $35.0 million. The cost savings are
anticipated to be primarily cash related.
As a result of this workforce reduction, we incurred a special charge of
$8.2 million ($0.23 per share on a diluted basis) for the six months ended June
30, 2001, for severance and other related costs. As of June 30, 2001, we
notified 285 people that they would be part of the reduction in workforce. This
workforce reduction affected all levels, most of which were in the core
Executive Search business, including 63 consultants. The remainder was support
staff in both Executive Search and LeadersOnline, and in the corporate
departments. Nearly two-thirds of the layoffs were in North America, 20% in
Europe, and the rest in Latin America and Asia Pacific. The layoffs impacted
virtually all practice groups.
We expect to incur an additional charge of approximately $2.0 million for
severance and other costs related to the workforce reduction in the third
quarter of 2001. The charges are substantially all cash and most of the cash
outlay will occur in the third quarter of 2001. We intend to have the actions
related to these special charges completed by the end of the third quarter of
2001.
Net non-operating income. Our net non-operating income decreased $7.1
million to $1.0 million for the six months ended June 30, 2001 from $8.1 million
for the six months ended June 30, 2000. This decrease was partly due to a $2.7
million net unrealized loss on derivative instruments from a portion of our
warrant portfolio, net of consultants' bonuses and administrative and other
costs, during the six months ended June 30, 2001 (See Note 2 in the Notes to
Consolidated Financial Statements). In addition, our realized gains from the
sale of equity obtained as part of our warrant program were $648,000 for the six
months ended June 30, 2001 compared to $4.6 million for the six months ended
June 30, 2000. The decrease was partially offset by an increase in interest
income arising from the investment of our available cash balances.
Cumulative effect of change in accounting principle. On January 1, 2001, we
adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," and its subsequent
amendments. As a result, we recorded a transition adjustment of $4.5 million,
net of consultants' bonuses, administrative and other costs, and taxes (See Note
3 in the Notes to Consolidated Financial Statements).
Liquidity and Capital Resources
We periodically evaluate our liquidity requirements, capital needs and
availability of capital resources based on our plans for expansion and other
operating needs. We finance our operations through internally generated funds
and the availability of borrowings under our credit facilities. In addition, we
received $51.8 million from our initial public offering in April 1999 and $76.2
million from our follow-on public offering in February 2000. We pay a portion
of our bonuses in December and the remainder in March. Employee bonuses are
accrued throughout the year and are based on Company performance and the
performance of the respective employee.
18
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.
We maintained cash and cash equivalents at June 30, 2001 and 2000 of $133.4
million and $144.2 million, respectively. For the six months ended June 30,
2001, cash flows used in operating activities were $27.9 million, due primarily
to the payment of the remaining 2000 bonuses in March 2001. For the six months
ended June 30, 2000, cash flows from operating activities contributed $24.9
million, reflecting net income and non-cash expenses for compensation,
depreciation and amortization, as well as a decrease in working capital.
Cash flows used in investing activities decreased from $33.8 million for the
six months ended June 30, 2000 to $9.1 million for the six months ended June 30,
2001. This decrease is primarily due to a lower level of acquisition activity
and no long-term investments in 2001.
During the first half of 2001, we acquired an executive search firm in Turkey
for $810,000 in cash while in the first half of 2000, we acquired three
executive search firms for $15.8 million in cash.
In the first half of 2000, we invested $10.0 million in Silicon Valley
Internet Capital ("SVIC"), a newly formed, San Francisco-based company that
creates and provides operating support for Internet infrastructure companies. In
the first six months of 2001, we have not entered into any long-term
investments.
The amount of cash received during the six months ended June 30, 2001 and
2000 as a result of the sale of equity securities received as part of our
warrant program was $648,000 and $4.6 million, net of consultants' bonuses and
administrative and other costs, respectively.
Capital expenditures were $11.4 million and $10.7 million for the six months
ended June 30, 2001 and 2000, respectively. These expenditures were primarily
for office furniture and fixtures, leasehold improvements, and computer
equipment and software.
Cash flows used in financing activities were $7.7 million for the six months
ended June 30, 2001, resulting primarily from purchases of treasury stock. On
March 16, 2001, we announced that our Board of Directors had authorized
management to repurchase up to two million shares of our common stock over the
next two years. During the six months ended June 30, 2001, we repurchased
477,500 shares of our common stock, for which some of the cash settlement
occurred in July 2001. Cash flows provided by financing activities were $77.6
million for the six months ended June 30, 2000, resulting from the net proceeds
raised in the follow-on public offering (See Note 6 in our Notes to
Consolidated Financial Statements).
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 June 30, 2001 and 2000, respectively. At our discretion, we may
borrow either U.S. dollars on deposit in the United States or U.S. dollars or
foreign currencies on deposit outside the United States. Non-U.S. borrowings
bear interest at the then-existing LIBOR plus a margin as determined by certain
tests of our financial condition. U.S. borrowings bear interest at the then-
existing prime rate.
The current line of credit has certain financial covenants we must meet
relating to consolidated net worth, liabilities, and debt in relation to cash
flows. At June 30, 2001, we were in compliance with these financial covenants.
Recently Issued Financial Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations." This statement requires that all business
combinations must be accounted for using the purchase method of accounting.
This approach reflects the conclusion that all business combinations are
acquisitions and, thus, should be accounted for in the same way that other asset
acquisitions are accounted for, based on the values
19
exchanged. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." Under the new rules, goodwill will no longer be amortized
over its estimated useful life. Rather, goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test. For
intangible assets, the new rules state that an acquired asset should be
separately recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible assets can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intent
to do so. This requirement may result in more intangible assets being separated
from goodwill than generally occurs in practice today.
Management is assessing the impact of SFAS Nos. 141 and 142 and has not yet
determined the extent to which these new statements will affect the financial
statements. The provisions of the above-mentioned statements shall be applied
beginning January 2002. As a result, impairment, if any, will be recognized in
January 2002 as a cumulative effect of a change in accounting principle. Early
adoption is not permitted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Derivative Instruments
We receive warrants for equity securities in our client companies, in
addition to our cash fee, on some searches. Some of these warrants meet the
definition of a derivative instrument under SFAS 133 and therefore subsequent
changes in their fair value must now be recorded in earnings, rather than as a
component of other comprehensive income. As a result of the adoption of SFAS
133 on January 1, 2001, we recorded, as a cumulative effect of accounting
change, a transition adjustment to income of $4.5 million, net of consultants'
bonuses, administrative and other costs, and taxes. Going forward, each
quarter's earnings are anticipated to be affected by the fluctuations in the
fair value of these derivative instruments. We recognized a net unrealized loss
of $2.7 million, net of consultants' bonuses and administrative and other costs,
during the six months ended June 30, 2001, due to changes in the fair value of
these derivative instruments during the period (See Note 2 in the Notes to
Consolidated Financial Statements).
Currency Market Risk
Historically, we have not experienced any significant translation gains or
losses on transactions involving U.S. dollars and other currencies. Revenue
earned in each country is generally matched with the associated expenses
incurred, thereby reducing currency risk to net earnings.
Forward-Looking Statements
The 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. 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. 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 continuing economic downturn in the
United States or a material economic downturn in Europe or elsewhere, 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. We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we have been involved in litigation that 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 2. Changes in Securities
Pursuant to a settlement agreement with an employee, we issued 9,500 shares
of our common stock on May 17, 2001 in exchange for an aggregate purchase price
of $61,750.00 and the release of certain claims made by such employee. Exemption
from registration is claimed under Regulation S of the Securities Act of 1933,
as amended.
Item 4. Submission of Matters to a Vote of Securities
At our Annual Meeting of Stockholders held on June 5, 2001 in Chicago,
Illinois, our stockholders voted on the following matters:
1. The election of four directors, Messrs. David C. Anderson, Thomas J. Friel,
Robert Louis-Dreyfus and Dr. John C. Viney, to serve for a term of three
years or until their successors have been elected and qualified. The
nominees of the Board of Directors were elected.
Number of Number of Votes
Name of Nominee Votes For Withheld
--------------- ---------- ---------------
David C. Anderson 14,130,803 462,930
Thomas J. Friel 14,067,530 526,203
Robert Louis-Dreyfus 13,221,666 1,372,067
Dr. John C. Viney 13,957,241 636,492
2. Adoption of a proposal to amend the 1998 Heidrick & Struggles GlobalShare
Program I and the 1998 Heidrick & Struggles GlobalShare Program II. The
amendment was approved.
Number of Votes For.................. 8,206,606
Number of Votes Against.............. 5,162,506
Number of Votes Withheld............. 0
Number of Broker Non-Votes........... 0
Number of Abstentions................ 593,713
21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
------- -----------
3.01 Form of Amended and Restated Certificate of Incorporation of
the Registrant (Incorporated by reference to Exhibit 3.02 of
this Registrant's Registration Statement on Form S-4 (File
No. 333-61023))
3.02 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))
10.12 Employment Agreement of Knox J. Miller
(b) Reports on Form 8-K
We filed a report under Item 5 of Form 8-K on June 5, 2001 related to
matters discussed at our Annual Meeting of Stockholders.
We filed a report under Item 5 of Form 8-K on June 25, 2001 related to the
strategic reduction in our workforce.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: August 14, 2001.
Heidrick & Struggles International, Inc.
(Registrant)
By: /s/ Donald M. Kilinski
-------------------------------------
Donald M. Kilinski
Chief Financial Officer and Treasurer
22
Exhibit 10.12
[LETTERHEAD OF HEIDRICK & STRUGGLES]
June 4, 2001
PERSONAL & CONFIDENTIAL
- -----------------------
Mr. Knox Millar
575 Park Avenue
Apartment 909
New York, New York 10021
Dear Knox:
On behalf of Heidrick & Struggles, Inc., I am pleased to confirm our offer of
employment to you as Chief Human Resources Officer reporting to the Chief
Executive Officer of Heidrick & Struggles International, Inc. (the "Parent").
You will also have the internal title of Senior Partner. You will be a member
of the Office of the CEO ("OOCEO") or its equivalent. Initially and until
otherwise specified within mid-town Manhattan, you will be located at our 245
Park Avenue, New York office.
I look forward to seeing you on June 25, 2001, your first day of employment.
Your monthly base salary is $41,666.67, which equals $500,000 annually.
Currently, salaries are reviewed annually in November/December, so you can
expect your first salary review in November/December 2001.
Your annual bonus target for 2001 is 100% of base salary to be paid when bonuses
are paid in December of 2001 and March of 2002. Following 2001, you will
participate in the regular bonus program then in effect for employees at your
level. Bonuses are discretionary and are not earned until approved by the
Compensation Committee and/or the Board of Directors of the Company and, subject
to the paragraph below relating to Termination Without Cause including
Resignation for Good Reason and Change in Control, will be payable only if you
are in the Company's employ on the regular bonus payment dates. Your total cash
compensation will be subject to the Heidrick & Struggles GlobalShare Program.
As such, any bonus you receive may be partially paid in equity in accordance
with the GlobalShare Program and in the same proportion as other members of the
OOCEO.
You will receive a stock option grant to purchase 25,000 shares of Heidrick &
Struggles International, Inc. common stock. The options will be granted to you
on the first trading day of the calendar quarter next succeeding the date on
which your employment commences. The options will be issued at Fair Market
Value on the date of grant, will vest in increments of 25% on the first, second,
third and fourth anniversaries on the date of grant, and will have a five-year
term, except to the extent that vesting will be accelerated pursuant to the
terms of the plan under which they are granted or in connection with a change
in control.
Mr. Knox Millar
June 4, 2001
Page 2
In addition, within 30 days following your employment start date, the Company
will loan you $700,000 to be evidenced by a non-interest bearing Promissory Note
("Note") payable on June 30, 2005, except that, unless your employment is
terminated by the Company without cause or you have resigned for Good Reason, if
you cease to be in the Company's employ, then the entire principal balance of
the Note then remaining due shall, without demand or notice of any kind, be and
become immediately due and payable within 30 days.
The Note will be forgiven if you are in the Company's employ (unless the Company
has terminated your employment without cause or if you have resigned for Good
Reason) on the following forgiveness dates: $125,000 on June 30, 2002, $225,000
on June 30, 2003; $175,000 on June 30, 2004 and the balance on June 30, 2005.
The income arising from the loan principal forgiveness will be subject to
personal income tax withholding attributable to the forgiveness income when due.
The Company will reimburse you on a grossed-up basis for any income tax arising
out of the interest-free nature of the loan. The Company is authorized to
deduct the amounts required to be withheld from your cash bonus, or, if the
bonus amount is less than the withholding, you will, within 10 days, reimburse
the Company for withholding payments made to the extent not covered by your
bonus.
In the event the Company terminates your employment without Cause or you resign
for Good Reason prior to August 31, 2002, you shall be entitled to receive as
severance pay, in a lump sum as soon as administratively feasible after the date
of termination or resignation for Good Reason, an amount equal to twelve months
of base salary plus the full amount of your target bonus for the year in which
the termination occurs. Thereafter, except in connection with a Change in
Control as set forth below, in the event the Company terminates your employment
without Cause, you shall be entitled to receive as severance pay an amount
consistent with the Company's then existing policy for members of the OOCEO.
In the event the Company terminates your employment without Cause or you resign
for Good Reason within one year following a Change in Control, you shall be
entitled to receive as severance pay, in a lump sum as soon as administratively
feasible after the date of termination or resignation for Good Reason, an amount
equal to (i) twelve months of base salary plus twelve months of target bonus and
(ii) the prorated portion of your target bonus for the year in which the
termination occurs based on the number of months worked in such year. You shall
also be entitled to either continuing participation in disability coverage or
the reimbursement on a gross-up basis for the premium costs for disability
coverage, until the first anniversary of termination of employment or
resignation for Good Reason or such time as you are covered by comparable
programs of a subsequent employer. The Company shall also reimburse you for
costs attributable to your participation in COBRA. In addition, all outstanding
options or other equity instruments may become immediately exercisable in
accordance with the terms of the 1998 Heidrick & Struggles GlobalShare Program
I, as amended from time-to-time, and the terms of any successor equity programs.
In the event that a Change of Control payment to you is required, the Company
agrees to reimburse you for the excise tax, if any, incurred by you under
Internal Revenue Code (S)280G.
The term "Good Reason" shall mean (i) a diminution of the amount of your base
salary or target bonus or benefits or level of eligibility for stock options or
other incentive programs unless such diminution is consistent with other
employees at your level; (ii) the elimination of your position or a diminution
of responsibilities associated with your position; or (iii) a change in the
location of your principal place of employment more than 50 miles in radius from
its initial location without your approval.
Mr. Knox Millar
June 4, 2001
Page 3
The term "Cause" shall mean:
(a) Fraud, or the embezzlement or misappropriation of funds or property of the
Company or any of its affiliates by you, the conviction of, or the entrance
of a plea of guilty or nolo contendre by you, to a felony, or a crime
involving moral turpitude;
(b) Neglect, misconduct or willful malfeasance which is materially injurious to
the Company or any of its affiliates;
(c) Willful failure or refusal to perform your duties, or a willful, material
breach of contract.
The term "Change in Control" shall mean the occurrence of any of the following
events:
(a) Any person (other than the Parent, any trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or any company
owned, directly or indirectly, by the stockholders of the Parent in
substantially the same proportions as their ownership of stock of the
Parent), becomes the beneficial owner, directly or indirectly, of
securities of the Parent representing 20 percent or more of the combined
voting power of the Company's then-outstanding securities;
(b) During any period of 24 months (not including any period prior to the
effective date), individuals who, at the beginning of such period,
constitute the Board, and any new directors (other than (A) a director
nominated by a person who has entered into an agreement with the Parent to
effect a transaction described in clauses (a), (c) or (d) under this
caption, (B) a director nominated by any Person (including the Parent) who
publicly announces an intention to take or to consider taking actions
(including, but not limited to, an actual or threatened proxy contest)
which, if consummated, would constitute a Change in Control, or (C) a
director nominated by any person who is the beneficial owner, directly or
indirectly, of securities of the Parent representing 10 percent or more of
the combined voting power of the Parent's securities) whose election by the
Board or nomination for election by the Parent's stockholders was approved
in advance by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for
any reason to constitute at least a majority thereof;
(c) The stockholders of the Parent approve any transaction or series of
transactions under which the Parent is merged or consolidated with any
other company, other than a merger or consolidation (A) which would result
in the voting securities of the Parent outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or its
parent corporation) more than 66-2/3 percent of the combined voting power
of the voting securities of the Parent or such surviving entity or its
parent corporation outstanding immediately after such merger or
consolidation, and (B) after which no person holds 20 percent or more of
the combined voting power of the then-outstanding securities of the Parent
or such surviving entity or its parent corporation; or
(d) The stockholders of the Parent approve a plan of complete liquidation of
the Parent or an agreement for the sale or disposition by the Parent of all
or substantially all of the Parent's assets.
Mr. Knox Millar
June 4, 2001
Page 4
You will be entitled to participate in the Heidrick & Struggles International,
Inc. GlobalShare equity programs based upon your performance and attainment of
your goals and objectives in the manner consistent with other employees at your
level. Grants under these programs are subject to approval by the Board of
Directors or Compensation Committee of Heidrick & Struggles International, Inc.
You will be eligible to participate in our benefits program and will receive a
detailed guide on your starting date. Our benefits program includes group
health and life/AD&D insurance, long-term disability, short-term disability
salary continuation, time-off benefits (vacation, paid holidays, paid sick
time), the Flexible Spending Account, and the Heidrick & Struggles, Inc. 401(k)
Profit-Sharing and Retirement Plan. Our benefits program, bonus programs, and
polices are reviewed from time to time by Company management and may be
modified, amended, or terminated at any time.
The Company will pay or reimburse you for dues for a health club.
The Company will provide you on a grossed-up basis with two round-trip tickets
per year between New York and London (or the equivalent location) in accordance
with the Company's travel policy in effect at the time.
The Company will reimburse you for all of your business expenses in accordance
with its policies. You will be entitled to first-class of air travel when you
determine there is a business need for it. The Company's Physical Examinations
Policy will apply to you effective immediately upon your employment start date.
The Financial Planning Program for Senior Partners will also apply to you.
Before I conclude, let me highlight a few legal matters:
. You will be an "employee at will" unless or until we otherwise agree in
writing. The purpose of this arrangement is to permit either of us to
terminate employment and compensation at any time with or without cause or
notice, except for such period of notice as may be expressly provided in
writing under written company employment policies in effect at the time of
such termination.
. Your initial and continuing employment will be subject to your having the
ability to work legally in the United States.
. You have advised us that you have not signed any agreements that will, in any
way, prohibit your joining our firm or performing your work with us.
. This letter agreement and enclosures contain our entire understanding and can
be amended only in writing and signed by you and the Chairman, President and
Chief Executive Officer. You specifically acknowledge that no promises or
commitments have been made to you that are not set forth in this letter.
Mr. Knox Millar
June 4, 2001
Page 5
To help clarify the programs and policies discussed above, I have included
several enclosures. There are also some documents for you to sign. Please
contact me directly if you have any questions. To acknowledge your acceptance
of our offer of employment, please sign and return to me the enclosed copy of
this letter along with the Confidentiality Agreement (relating to trade secrets,
confidential information, clients, etc.), which we ask all employees to sign.
Again, I am pleased that you have chosen to join the Heidrick & Struggles global
family. Please accept my best wishes for a most successful and prosperous
career with us.
Yours sincerely,
/s/ Patrick S. Pittard
Patrick S. Pittard
Chairman, President and Chief Executive Officer
I hereby accept the terms and conditions of employment as outlined above:
/s/ Knox Millar June 12, 2001
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Knox Millar Date
