10-K/A: Annual report pursuant to Section 13 and 15(d)
Published on August 12, 2002
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended April 30, 2002
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-14505
KORN/FERRY INTERNATIONAL
(Exact Name of
Registrant as Specified in its Charter)
Delaware |
95-2623879 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
1800 Century Park East, Suite 900
Los Angeles, California 90067
(Address of principal executive offices) (Zip code)
(310) 552-1834
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Name of each exchange on which registered | |
Common Stock, par value $0.01 per share |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
The
number of shares outstanding of our common stock as of July 26, 2002 was 37,860,871 shares. The aggregate market value of the Registrants common stock held by non-affiliates of the Registrant on July 26, 2002 (assuming that the
Registrants only affiliates are its officers, directors and 10% or greater stockholders) was approximately $227,593,616, based upon the closing market price of $6.18 on that date of a share of common stock as reported on the New York Stock
Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for its 2002 Annual Meeting of Stockholders scheduled to be held on September 24, 2002 are incorporated by
reference into Part III of this Form 10-K.
Table of Contents
KORN/FERRY INTERNATIONAL
Index to Annual Report on Form 10-K for the Fiscal Year Ended April 30, 2002
Page | ||||
PART I. |
||||
Item 1. |
3 | |||
Item 2. |
14 | |||
Item 3. |
14 | |||
Item 4. |
14 | |||
14 | ||||
PART II. |
||||
Item 5. |
16 | |||
Item 6. |
17 | |||
Item 7. |
19 | |||
Item 7A. |
30 | |||
Item 8. |
31 | |||
Item 9. |
31 | |||
PART III. |
||||
Item 10. |
32 | |||
Item 11. |
32 | |||
Item 12. |
32 | |||
Item 13. |
32 | |||
PART IV. |
||||
Item 14. |
33 | |||
(a) 1. Index to Financial Statements |
||||
2. Financial Statement Schedules |
||||
3. Exhibits |
||||
35 | ||||
36 | ||||
F-1 |
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EXPLANATORY NOTE
This Form 10-K/A amends the registrants Annual Report on Form 10-K filed on July 29, 2002 for the fiscal year ended April 30, 2002 and is being filed soley to reflect
changes to the reports of our independent accountants and the notes relating to our audited consolidated financial statements referred to in Item 6 and to file additional exhibits found in Item 14. Except for the changes in these two Items, no other
information included in the original report on Form 10-K is amended by this Form 10-K/A.
PART I.
Business Overview
Korn/Ferry International, or KFY, is the worlds leading recruitment firm with the broadest global presence in the recruitment industry. Since 1969 when we opened our
first office in Los Angeles, we have grown to 71 cities in 36 countries. In 1998, we extended our market reach into the middle-management recruitment market with the introduction of Futurestep, our technology based recruitment service. As of April
30, 2002, we have approximately 1,799 employees, including 443 executive recruitment and 81 Futurestep consultants who are primarily responsible for client services. Our clients include many of the worlds largest and most prestigious public
and private companies, middle-market and emerging growth companies, as well as governmental and not-for-profit organizations. We have established strong client loyalty; more than 81% of the executive recruitment assignments we performed in fiscal
2002 were on behalf of clients for whom we had conducted multiple assignments over the last three fiscal years.
We provide the following recruitment services:
Executive
Recruitment: Executive recruitment, our core business, focuses on board level, chief executive and other senior executive positions for clients predominantly in the advanced technology, consumer goods, industrial,
financial services, healthcare and professional services industries. The relationships that we develop through this business are valuable for introducing our other service offerings to clients.
Middle-Management Recruitment: Futurestep, our leading middle-management recruitment business, draws from Korn/Ferrys more than 30
years of industry experience to create customized recruitment strategies based on clients individual workforce needs. In addition to middle management search, Futurestep offers project recruitment and integrated managed services. Futurestep
combines solution-oriented service with todays leading technologies to deliver strong candidates and fast cycle times. At April 30, 2002, the Futurestep database contained approximately 1,161,000 recruitment candidates.
Industry Overview
We have historically operated in the executive search market and have aggressively used technology to expand our presence into middle-management search.
Executive Recruitment: The executive recruitment market concentrates on searches for positions with annual compensation of $150,000 or more,
which generally involve board level, chief executive and other senior executive positions. The industry is comprised of retained and contingency search firms. Retained firms typically charge a fee for their services equal to approximately one-third
of the annual cash compensation for the position being filled and bill for their services in three installments, irrespective of whether a position has been filled. Contingency firms generally work on a non-exclusive basis and are compensated only
upon successfully placing a recommended candidate.
Middle-Management
Recruitment: The middle-management recruitment market focuses on searches for middle and lower management positions with annual compensation of $75,000 to $150,000. Firms in this market usually operate on a contingency
basis. This market has undergone a fundamental transformation over the past two years towards a technology based environment. Technology and the Internet have made identifying, targeting and reaching potential candidates much quicker. This market
also benefits from the efficiencies of maintaining large databases of qualified candidates, employing advanced assessment software, and reducing placement times. As a result, technology enabled on-line recruiting services are becoming more
important.
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Other Human Capital Services: In addition to
executive and middle-management recruitment, we provide management assessment and executive coaching services.
Industry Trends
There are and will be times, such as the present, when the recruitment industry is adversely affected by
worldwide economic conditions. However, we believe that a number of favorable trends will contribute to the long-term growth of the recruitment industry:
One-Stop Shopping of Executive Human Capital SolutionsIn choosing their recruitment and human resource service providers, companies are increasingly looking to those companies that can
address a broad range of their recruitment needs. Clients are seeking trusted partners who understand their business and their unique organizational culture and who can manage their business on a global basis.
Increased Use of Advanced TechnologyThe emphasis of the recruitment business is shifting from candidate identification to
candidate assessment and placement. The emphasis on assessment and placement is being driven by enhancements in technology as it has become easier to identify candidates in on-line and off-line databases. In addition, information technology and the
Internet are creating efficient ways to manage the recruitment process and identify, recruit and assess candidates. At the same time, new barriers to entry into the executive recruitment industry are being created as investments in information
technology become critical to serve clients needs globally.
Increased Outsourcing of Recruitment
FunctionsRecent economic factors are requiring companies to focus on core competencies and to outsource recruitment functions to providers who can efficiently provide high quality recruitment services. A shortage of qualified
management-level candidates has made identifying and recruiting exceptional candidates more difficult. Companies increasingly rely on experienced global executive recruitment firms to address their management recruitment needs. By hiring global
executive recruitment firms, companies can expect to:
|
Access a diverse and highly qualified field of candidates on an as-needed basis; |
|
Reduce the costs required to maintain and train a recruiting department in a rapidly changing industry; |
|
Benefit from the most updated industry and specific geographic market information; |
|
Access leading search technology software; and |
|
Maintain management focus on strategic business issues. |
Globalization of BusinessAs the world markets continue to integrate into one global economy, more companies are required to supplement internal talent with
experienced senior executives who can operate effectively in a global economy. The rapidly changing competitive environment increasingly challenges multinational and local companies to identify qualified executives with the right combination of
skills, experience and cultural compatibility. Clients are increasingly turning only to those firms that have the necessary proven expertise and intimate knowledge of key industries and local markets that enable them to address their clients
global recruitment needs.
Other Industry TrendsIn addition to the industry trends mentioned
above, we believe the following trends will also contribute to the growth of the recruitment industry:
|
Increasing demand for managers with broader qualifications; |
|
Increasing desire by candidates to more actively manage their careers; |
|
Aging baby-boom generation resulting in a smaller pool of available candidates; and |
|
Shortening executive management tenures and more frequent job changes. |
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Growth Strategy
Our objective is to expand our position as the preeminent global recruitment firm. The principal elements of our strategy include:
Broadening our Product and Service Offerings
In addition to being the worlds leading executive recruitment firm, we also offer clients middle management recruitment, project recruitment and
integrated managed services through Futurestep, strategic management assessment services and executive coaching. We will continue to develop and add new products and services that our clients demand and that we feel are consistent with our brand
positioning.
Global Account Management
In an effort to better coordinate global recruiting and to gain operational efficiencies, multinational clients will increasingly turn to strategic partners that can manage
their recruitment needs on a centralized basis. This will require vendors with a global network of offices and technological support systems to manage multiple hires across geographical regions. In fiscal year 2002, we formally launched our global
account management program which identifies account leaders for multinational clients, provides training and software support to manage these accounts, and develops guidelines and protocols to support cross-border assignments for these clients.
Expanding our Market Reach and Presence through Technology and Assessment Solutions
An advanced technology infrastructure has become a critical element of the recruitment business. In the executive recruitment
market, we have invested approximately $65.0 million over the past three fiscal years to develop a state-of-the-art technology infrastructure, including a worldwide network and our proprietary executive recruitment software. In June 2000, we
introduced e-Korn/Ferry, our executive search Internet tool that allows executives to submit relevant employment information to us. We will continue to refine our technology, including our exclusive candidate assessment tools, in order to strengthen
our relationships with our existing clients, attract new clients, expand into new markets and position ourselves to gain a competitive advantage in marketing complementary services.
Leveraging our Leadership and Brand Name in Executive Recruitment
We believe that there are significant opportunities to extend our market share and develop new client relationships by aggressively marketing our proven global recruitment expertise. Our leadership in
executive recruitment enables us to grow our business by increasing the number of recruitment assignments we handle for existing clients in all areas of recruitment. We also believe that our strong relationships and well-recognized brand name will
enable us to introduce new services to our existing clients and potential new clients and that our brand name will allow us to build communities of candidates to directly market services, such as career management, to executives and other candidates
who are actively seeking to manage their careers.
Our Services and Organization
We address the global recruitment needs of our clients at all levels of management by offering the following services:
Executive Recruitment Services
Overview. Our executive recruitment services are typically used to fill executive-level positions, such as board of directors, chief executive officers, chief financial
officers and other senior executive officers. Once we are retained by a client to conduct an assignment, we assemble a team comprised of consultants with geographic,
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industry and functional expertise. Our search consultants serve as management advisors and work closely with the client in identifying, assessing and placing a qualified candidate. In fiscal
2002, we performed over 5,200 executive recruitment assignments.
We use a search methodology that has been
developed through many years of experience in conducting executive recruitment. We emphasize a close working relationship with the client and a comprehensive understanding of the clients business issues, strategy and culture, as well as an
in-depth knowledge of the skills necessary to succeed within a clients organization. Initially, the search team consults with the client to better understand its history, culture, structure, expectations, challenges, future direction and
operations. In these meetings, the team identifies the specific needs of the client and develops a profile of an ideal candidate for the position. Early in the process, the team also works with the client to develop the general parameters of a
compensation package that will attract high quality candidates.
Once the position is defined, the research team
identifies, through the use of our proprietary databases and a number of key technology-based information resources, companies that are in related industries facing similar challenges and issues with operating characteristics similar to those of the
client. In addition, the team consults with its established network of resources, and our databases that contain profiles of over 2,300,000 executives, including those obtained through e-Korn/Ferry, to help identify individuals with the right
backgrounds and personal abilities. These sources are a critical element in assessing the marketplace. The original list of candidates is carefully screened through phone interviews, video conferences or in-person meetings. The client is then
presented with up to five qualified candidates to interview. We conduct reference checks throughout the process, sometimes with the assistance of an independent third party.
The finalist for the position will usually meet with the client for a second and possibly a third round of discussions. At this point, the compensation package for each
will have been discussed in detail increasing the likelihood that offers will be accepted. Generally, the search consultants will participate in the negotiations until a final offer is made and accepted. Throughout the process, ongoing communication
with the client is critical to keep client management apprised of progress.
Industry
Specialization. Consultants in our five global markets and three regional specialty practice groups bring an in-depth understanding of the market conditions and strategic and management issues faced by clients within their
specific industry. We plan to continue to expand our specialized expertise through internal development and strategic hiring in targeted growth areas.
Percentage of Fiscal 2002 Assignments by Industry Specialization
Global Markets: |
|||
Financial Services |
20 |
% | |
Industrial |
20 |
% | |
Technology |
20 |
% | |
Consumer |
19 |
% | |
Life Sciences |
10 |
% | |
Regional Specialties: |
|||
Education/Not-for-profit |
5 |
% | |
Healthcare Provider |
5 |
% | |
General |
1 |
% |
Functional Expertise. We have
organized executive recruitment centers of functional expertise, made up of consultants who have extensive backgrounds in placing executives in certain functions, such as directors, chief executive officers and other senior executive and financial
officers. Our board services practice, for example, was first established in 1972 to help clients assemble an effective, knowledgeable and cohesive board of directors to
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meet the growing demands for accountability and more effective board performance. The shortage of experienced directors, the tightening of governance policies and the desire on the part of
companies to broaden the expertise of their board are raising the standards required to identify and recruit directors with the needed skills. We have established significant expertise in this area and have built a proprietary database with the
names and backgrounds of all the Fortune 1000 directors, plus a significant number of middle-market and high-growth company board members, to help support board searches. Members of functional groups are located throughout our regions and across our
specialty practice groups.
Percentage of Fiscal 2002 Assignments by Functional Expertise
Board Level/CEO/CFO/Senior Executive and General Management |
54 |
% | |
Marketing and Sales |
20 |
% | |
Manufacturing/Engineering/Research and Development/Technology |
8 |
% | |
Finance and Control |
7 |
% | |
Human Resources and Administration |
7 |
% | |
Information Systems |
4 |
% |
Organization
North AmericaWe opened our first office in Los Angeles in 1969, and currently have 23 offices throughout the United States
and Canada. The North America region has grown from $154.9 million in revenue in fiscal 1998 to a high of $343.1 million in fiscal 2001 and fell to $204.0 million in fiscal 2002. In fiscal 2002, we handled over 2,100 assignments in this region, with
an average of 241 consultants.
EuropeWe opened our first European office in London in 1972 and
currently have 22 offices throughout 17 countries in the region. The European region has grown from $81.5 million in revenue in fiscal 1998 to a high of $135.3 million in fiscal 2001 and fell to $93.0 million in fiscal 2002. We handled over 1,800
assignments in fiscal 2002 in this region, with an average of 146 consultants.
Asia/PacificWe opened
our first Asia/Pacific office in Tokyo in 1973, and have built a 14-office network throughout ten countries in the region. The Asia/Pacific region has grown from $34.4 million in revenue in fiscal 1998 to a high of $54.0 million in fiscal 2001 and
fell to $38.9 million in fiscal 2002. We handled nearly 900 assignments in fiscal 2002 in this region, with an average of 62 consultants. The latest Economist Intelligence Unit report on Executive Search in Asia and Australia describes us as
the leading executive search firm in the region.
South AmericaWe opened our first South American
office in Brazil in 1974. We expanded our practice to Mexico through the 1977 acquisition of a 49% interest in a company in Mexico City and currently conduct operations in Mexico through subsidiaries in which we hold a minority interest. As of April
30, 2002, we operated a network of seven offices in six countries covering the entire South America region and two offices in Mexico. The region, including Mexico, generated revenue of $27.5 million in fiscal 2002 compared to $30.1 million in fiscal
1998. This decrease includes the negative impact on fiscal 2002 revenue of translation into U.S. dollars compared to fiscal 1998 exchange rates, with the greatest impact in Brazil. We handled nearly 800 assignments in fiscal 2002 in this region,
with an average of 39 consultants. On a constant dollar basis, our share of the operating results for our Mexico subsidiaries are included net in equity in earnings of unconsolidated subsidiaries on the consolidated statements of operations.
Client Base. Our clients are many of the worlds largest and most prestigious
public and private companies, including 35% of the Fortune 500 companies. In fiscal 2002, approximately 4.7% of our total revenue was derived from our top ten customers. We have established strong client loyalty; more than 81% of the executive
recruitment assignments we performed in fiscal 2002 were on behalf of clients for whom we had conducted multiple assignments over the last three fiscal years.
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Competition. We are the leading global executive
recruitment firm. Other multinational executive recruitment firms include Heidrick & Struggles International, Inc., Spencer Stuart & Associates, Egon Zehnder International and Russell Reynolds Associates, Inc. Although these firms are our
primary competitors, we also compete with smaller firms that specialize in specific regional, industry or functional searches. We believe our brand name, global network, prestigious client list, strong specialty practices and quality of service are
recognized worldwide. We also believe that our equity-based compensation scheme distinguishes us from many of our competitors and is important for retaining consultants.
Middle-Management Recruitment Services
Overview. Futurestep offers clients a multi-tiered portfolio of services, ranging from middle-management search to project recruitment and integrated managed services. Each Futurestep solution benefits
from the in-depth industry and functional-area expertise of our global consultant network, guaranteeing that clients work with people who understand their business and have the knowledge base to qualify candidates effectively.
Futurestep was the first company to combine traditional search expertise with the reach and speed of the Internet. Futurestep
consultants, based in more than 20 countries, have instant access to the worlds largest database of prescreened middle-management professionals. The global candidate pool complements our international presence and multi-channel sourcing
strategy to ensure speed, efficiency and quality of service for clients worldwide.
Futuresteps
middle-management search uses multiple sourcing channels, validated cultural assessments and a global database of more then one million prescreened professionals to offer a low overhead approach that accelerates the recruitment process and provides
a diverse set of candidates matched toward specific cultural and strategic requirements.
For multiple recruiting
projects, Futurestep consultants work with clients to analyze existing internal recruitment capabilities and develop a co-sourcing platform that emphasizes shared ownership of the recruitment process. Futurestep also offers managed services to
clients seeking a fully integrated, single source for their recruitment needs.
Organization. We opened our first Futurestep office in Los Angeles in May 1998. In January 2000, we acquired the ESS business of PA Consulting with operations in Europe and Asia/Pacific. In fiscal 2002,
we consolidated all of Futuresteps back office functions with Korn/Ferry and co-located Futurestep with Korn/Ferry offices in North America to streamline the business. At April 30, 2002, we had Futurestep operations in ten cities in North
America, eighteen in Europe and seven in Asia/Pacific.
Competition. We
believe that there is no competitor that currently competes directly with all of the services provided by Futurestep. Futurestep competes for assignments:
|
generally, with contingency firms who do not have the same pricing structure or provide all of the same services and |
|
to a lesser extent in the technology based middle-management recruitment industry, with firms such as TMP Worldwide. |
Although technology oriented companies may be drawn to the recruitment business by their ability to leverage their existing technology,
their lack of a recognized brand name, experienced consultants and global footprint act as significant barriers to entry.
Strategic Management Assessment. We have expanded strategic management assessment beyond Europe to cover North and Latin America, Australia and Japan. This service focuses on helping corporate leadership
evaluate the individual and collective performance of their management team. This service, which further
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extends the range of leadership capital solutions we offer to our clients, is a valuable tool for the chief executive, board of directors and other senior officers in pursuing organizational
transformation and the alignment of senior management with the Companys strategic goals and internal values. This service responds to our clients needs for a tool to address the challenges of changing company relationships and global
restructuring and, for venture capital firms, to evaluate the leadership team in existing or prospective portfolio companies. The assessment process is performed by consultants with extensive experience in interviewing and evaluating senior
executives and who understand local cultural differences and the relevant business and industry challenges. The assessment process is backed by a statistically validated and proprietary assessment instrument that was developed for us by leading
assessment experts and is supported by a proprietary systems platform.
Technology
Our technology enhances the functionality, speed and quality of our human capital services. It also represents a long-term strategic
initiative designed to create competitive advantages and sustained growth. We have evolved our technology capability through acquisition, purchase, and development of state-of-the-art components. Our technology is scaleable and will accommodate
future growth in our current services as well as the addition of new services.
In fiscal 2002, we consolidated
our technology operations to support all business units via a common data center and global telecommunications infrastructure. This consolidation brought significant cost savings through the elimination of duplicate resources, as well as enhanced
disaster recovery capabilities and scaleable storage solutions. Our enterprise systems and global database are housed in the Qwest CyberCenter 24x7 secure hosting facility in Burbank, California.
Our professionals use our information technology infrastructure to:
|
develop and manage company and candidate profiles; |
|
obtain information from and correspond with candidates; |
|
identify market needs and new business opportunities; and |
|
coordinate and implement marketing, communication, financial and administrative functions throughout our global operations. |
The core component and driving force of our technology is e-Korn/Ferry, our worldwide Executive Center web site and
global candidate management system. In fiscal 2002, the e-Korn/Ferry architecture was enhanced and expanded to support operational consolidation and to leverage our core technology across multiple business channels. We now support all of our major
product lines on a common technology platform. Our multi-business technology platform not only enables us to develop new products for our diverse businesses, but positions us to share the benefits of our technology with our clients to complement our
consulting based human capital services.
This multi-business architecture enabled us to rapidly partner with
Yahoo! in fiscal 2002 to develop a co-branded Yahoo-Futurestep web site. In addition, in fiscal 2002, we delivered three new management assessment products under the e-Korn/Ferry architecture: an assessment tool using a proprietary and statistically
validated model and a series of best-in-class success profiles; a web site where executives and candidates are individually invited to create a resume and take the on-line assessment tests; and a web-based application to manage objective
setting, measurement and performance evaluation for managers and their staff.
Organization
Our executive recruitment business is managed on a geographic basis through four regions: North America, Europe, Asia/Pacific and South
America. Our executive recruitment business in Mexico is operated through our equity investments, primarily Korn/Ferry S.A. de CV in Mexico City and Korn/Ferry Del Norte in Monterrey and
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is included in South America for management reporting. Futurestep is managed on a worldwide basis with operations in North America, Europe and Asia/Pacific.
Professional Staff and Employees
As of April 30, 2002, we had approximately 1,495 executive recruitment employees consisting of 443 consultants, 991 associates, researchers, administrative and support staff; and 61 corporate
professionals. In addition, we had 14 consultants in our two unconsolidated Mexico offices. Futurestep had 304 employees at April 30, 2002 consisting of 81 consultants and 223 administrative and support staff. We have not been a party to a
collective bargaining agreement and consider our relations with our employees to be good.
In executive search,
senior associates, associates and researchers support the efforts of our consultants with candidate sourcing and identification, but do not generally lead an assignment. We have training and professional development programs and a high rate of
internal promotions. Promotion to vice president is based on a variety of factors, including demonstrated superior execution and business development skills, the ability to identify solutions to complex issues, personal and professional ethics, a
thorough understanding of the market, how to retain clients and develop repeat business, and the ability to help build effective teams. In addition, we have a program of recruiting experienced professionals into our firm.
The following table provides information relating to each of our business segments for fiscal 2002:
Revenue |
Operating (Loss) |
Pro forma Operating Profit (Loss)(1) |
Number of Offices as of April 30, 2002 |
Number of Consultants as of
April 30, 2002 | |||||||||||
(in millions) |
|||||||||||||||
Executive Recruitment: |
|||||||||||||||
North America |
$ |
204.0 |
$ |
(10.7 |
) |
$ |
18.5 |
|
23 |
224 | |||||
Europe |
|
93.0 |
|
(15.3 |
) |
|
(8.0 |
) |
22 |
132 | |||||
Asia/Pacific |
|
38.9 |
|
(1.5 |
) |
|
0.4 |
|
14 |
62 | |||||
South America |
|
11.3 |
|
(2.1 |
) |
|
(2.2 |
) |
7 |
25 | |||||
Futurestep(2) |
|
45.3 |
|
(37.8 |
) |
|
(15.4 |
) |
19 |
81 | |||||
JobDirect |
|
1.4 |
|
(38.2 |
) |
|
(5.8 |
) |
(1) |
Pro forma operating profit (loss) excludes asset impairment and restructuring charges of $93.2 million on a consolidated basis. |
(2) |
Futurestep offices exclude 16 offices co-located with executive recruitment. |
Mexico, with two offices and 14 consultants at April 30, 2002, reported revenue, operating profit and pro forma operating profit of $16.2 million, $6.1 million and
$6.1 million for fiscal 2002 excluded from the table above. Our less than 50% interest in the Mexico operations is accounted for under the equity method and included in the consolidated statement of operating results as equity in earnings of
unconsolidated subsidiaries. See Notes to the Consolidated Financial Statements, Note 10 for business segment and geographic area results for the past three fiscal years.
Risk Factors
The risks described below are the material
risks facing our company. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operation. Our business, financial condition or results of operations could be materially adversely affected by
any of these risks.
Competition in our industry could result in our losing market share and our charging lower prices for our
service, which could reduce our revenue.
We compete for executive search business with numerous executive
search firms and businesses that provide job placement services. Traditional executive search competitors include Heidrick & Struggles, Inc.,
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Spencer Stuart & Associates, Egon Zehnder International and Russell Reynolds Associates, Inc. In each of our markets, our competitors may possess greater resources, greater name recognition
and longer operating histories than we do, which may give them an advantage in obtaining future clients and attracting qualified professionals in these markets. There are few barriers to entry into the executive search industry and new recruiting
firms continue to enter the market. We believe the continuing development and increased availability of information technology will continue to attract new competitors. Increased competition may lead to pricing pressures that could negatively impact
our business.
If we fail to attract and retain qualified and experienced consultants, our revenue could decline and our business
could be harmed.
We compete with other executive search firms for qualified consultants. Consultants are paid
salaries with the potential to earn performance-based bonuses. Any decrease in the quality of our reputation, reduction in our compensation levels or restructuring of our compensation system, whether as a result of insufficient revenue, a decline in
the market price of the common stock or for any other reason, could impair our ability to retain existing or attract additional qualified consultants with the requisite experience, skills or established client relationships. In addition, many of our
consultants hold shares of our common stock that will become freely tradable in February 2003 or earlier if we agree. Our failure to retain our most productive consultants or maintain the quality of service to which our clients are accustomed, and
the ability of a departing consultant to move business to his or her new employer could result in a loss of clients and harm our business.
Economic conditions in the geographic regions and the industries from which we derive a significant portion of our revenue could undermine our future profitability.
Demand for our services is significantly affected by the general level of economic activity in the geographic regions and industries in which we operate. When economic
activity slows, many companies hire fewer permanent employees. Therefore, a significant economic downturn, on a global basis, in North America, or in other regions or industries where our operations are heavily concentrated, such as the advanced
technology and financial services industries could harm our business, results of operations and financial condition. Currently, the global financial markets, especially in the United States, continue to experience significant turmoil, negatively
impacting our revenue and operating profits. In addition, in fiscal 2002, our total assignments included 20% related to the technology industry and 20% related to the financial services/investments industry, both of which have experienced volatility
recently.
We face risks associated with political instability, legal requirements and currency fluctuations in our international
operations.
We operate in 36 countries and generate nearly half our total revenue from operations outside of
North America. There are certain risks inherent in transacting business worldwide, such as:
|
changes in and compliance with applicable laws and regulatory requirements; |
|
tariffs and other trade barriers; |
|
difficulties in staffing and managing global operations; |
|
problems in collecting accounts receivable; |
|
political instability; |
|
fluctuations in currency exchange rates; |
|
repatriation controls; and |
|
potential adverse tax consequences. |
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We have no hedging or similar foreign currency contracts, and therefore
fluctuations in the value of foreign currencies could harm our global operations. We cannot assure you that one or more of these factors will not harm our business, financial condition or results of operations.
We are limited in our ability to recruit employees of our clients and we could lose those opportunities to our competition, which could harm our business.
Either by agreement with clients, or for client relations or marketing purposes, executive search firms
sometimes refrain, for a specified period of time, from recruiting employees of a client when conducting searches on behalf of other clients. These off-limits agreements can generally remain in effect for up to two years following completion of an
assignment. The duration and scope of the off-limits agreement, including whether it covers all operations of the client and its affiliates or only certain divisions of a client, generally are subject to negotiation or internal policies and may
depend on factors such as the scope, size and complexity of the clients business, the length of the client relationship and the frequency with which the executive search firm has been engaged to perform executive searches for the client. Our
inability to recruit employees of these clients may make it difficult for us to obtain search assignments from, or to fulfill search assignments for, other companies in that clients industry. We cannot assure you that off-limits agreements
will not impede our growth or our ability to attract and serve new clients, or otherwise harm our business.
Our financial results may
suffer if Futurestep does not become profitable.
Futurestep has incurred operating losses of $100.1 million
from inception through April 30, 2002. In addition, we believe Futurestep, primarily overseas, will continue to generate operating losses through at least the end of fiscal 2003. We cannot assure you that Futuresteps operating losses will not
increase in the future. If Futurestep does not become profitable, our financial results may suffer. The success of Futurestep is dependent on the use of the Internet by candidates, our ability to attract candidates to Futuresteps website, the
relationships that our executive recruitment consultants have with clients and client acceptance of Futuresteps recruitment services. If our executive recruitment consultants do not actively promote our technology-based services to our
clients, the revenue growth and profitability of these services could be harmed.
If we are unable to retain our executive officers
and key personnel, or to integrate new members of our senior management that are critical to our business, we may not be able to successfully manage our business in the future.
Our future success depends upon the continued service of our executive officers and other key management personnel. If we lose the services of one or more of our executives
or key employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives.
We rely heavily on our information systems and if we lose that technology, or fail to further develop our technology, our business would be harmed.
Our success depends in large part upon our ability to store, retrieve, process and manage substantial amounts
of information. To achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our information systems. This may require the acquisition of equipment and software and the development, either internally or
through independent consultants, of new proprietary software. If we are unable to design, develop, implement and utilize, in a cost-effective manner, information systems that provide the capabilities necessary for us to compete effectively, or any
interruption or loss of our information processing capabilities, for any reason, could harm our business, results of operations and financial condition.
12
Table of Contents
If we are unable to maintain our professional reputation and brand name, our business will be harmed.
We depend on our overall reputation and brand name recognition to secure new engagements and hire qualified
professionals. Our success also depends on the individual reputations of our professionals. We obtain a majority of our new engagements from existing clients or from referral by those clients. Any client who is dissatisfied with our work can
adversely affect our ability to secure those new engagements.
If any factor hurts our reputation, including poor
performance, we may experience difficulties in competing successfully for both new engagements and qualified consultants. Failing to maintain our professional reputation and brand name could seriously harm our business.
We are subject to potential legal liability from both clients and employers, and our insurance coverage may not cover all of our potential liability.
We are exposed to potential claims with respect to the executive search process. A client could assert a
claim for matters such as breach of an off-limits agreement or recommending a candidate who subsequently proves to be unsuitable for the position filled. Further, the current employer of a candidate whom we place could file a claim against us
alleging interference with an employment contract. In addition, a candidate could assert an action against us for failure to maintain the confidentiality of the candidates employment search or for alleged discrimination or other violations of
employment law by one of our clients. We cannot assure you that our insurance will cover all claims or that our insurance coverage will continue to be available at economically feasible rates.
Certain of our historical statements were audited by Arthur Andersen LLP, and your ability to rely on those statements and recover from them may be limited.
On April 11, 2002, our board of directors, upon recommendation of the audit committee, dismissed Arthur Andersen LLP as our independent
auditors and appointed Ernst & Young LLP as our new independent auditors. Ernst & Young LLP has audited our financial statements for the fiscal year ended April 30, 2002 but not any prior fiscal year. We have restated our financial
statements for the fiscal years ended April 30, 2000 and 2001 relating to the consolidation of our Mexico subsidiaries. The statements for those fiscal years were audited by Arthur Andersen LLP, and we have not been able to have their reports for
those fiscal years reissued. In addition, we will not be able to obtain the written consent of Arthur Andersen LLP for any registration statement we may file as required by Section 7 of the Securities Act. Accordingly, investors will not be able to
sue Arthur Andersen LLP pursuant to Section 11(a)(4) of the Securities Act relating to those registration statements and therefore may have their recovery limited as a result of the lack of consent. The ability of investors to recover from Arthur
Andersen LLP may also be limited as a result of their financial condition or other matters relating to the various civil and criminal lawsuits relating to them.
Our stock price could fluctuate significantly.
The market price of our common
stock has fluctuated in the past and is likely to fluctuate in the future. Significant fluctuation in the market price of our common stock can occur for a number of reasons, including:
|
changes in economic conditions; |
|
fluctuations in our financial performance; |
|
changes in our capital structure and liquidity; |
|
the expiration of employee lock-up agreements in February 2003 or earlier if we agree; |
|
changes in management or key consultants; and |
|
industry developments. |
13
Table of Contents
In addition, the securities markets have experienced significant price and volume
fluctuations that are independent of the operating performance of individual companies. These market fluctuations could also materially and adversely affect the market price of our common stock. Past stock price performance is not an indication of
future performance.
Our corporate office is located in Los Angeles, California. We
lease all 85 of our executive recruitment and Futurestep offices located in North America, Europe, Asia/Pacific and South America. As of April 30, 2002, we leased an aggregate of approximately 812,000 square feet of office space. The leases
generally are for terms of one to ten years and contain customary terms and conditions. We believe that our facilities are adequate for our current needs and we do not anticipate any difficulty replacing such facilities or locating additional
facilities to accommodate any future growth.
From time to time, we are involved in litigation both as
plaintiff and defendant, relating to claims arising out of our operations. As of the date of this report, we are not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our
business, financial condition or results of operations.
No matters were
submitted to a vote of security holders during the last quarter of fiscal 2002.
Name |
Age |
Position | ||
Paul C. Reilly |
48 |
Chairman of the Board and Chief Executive Officer | ||
Gary D. Burnison |
41 |
Chief Financial Officer, Treasurer and Executive Vice President | ||
Gary C. Hourihan |
53 |
Executive Vice PresidentPresident Global Management Assessment | ||
James E. Boone |
54 |
President of the Americas | ||
Robert H. McNabb |
55 |
Chief Executive Officer for Futurestep |
Our executive officers serve at the discretion of our Board of
Directors. There is no family relationship between any executive officer or director. The following information sets forth the business experience for at least the past five years for of each of our executive officers as of April 30, 2002.
Paul C. Reilly has been Chief Executive Officer and President since June 2001. Prior to joining Korn/Ferry
International, Mr. Reilly was at KPMG International, where he was Chief Executive Officer. Mr. Reilly joined KPMG International in 1987.
Gary D. Burnison has been Executive Vice President, Chief Financial Officer and Treasurer since March 2002 and is a member of our Global Operating Committee. Prior to joining Korn/Ferry International,
Mr. Burnison was Principal and Chief Financial Officer of Guidance Solutions, a privately held consulting firm, from 1999 to 2001. Prior to that, Mr. Burnison served as Senior Vice President, Strategic Planning, Treasurer and Corporate
Development and a member of the board of directors of Jefferies and Company, an investment bank and brokerage firm, from 1995 to 1999. Mr. Burnison began his career at KPMG Peat Marwick, where he was a partner.
Gary C. Hourihan is a Corporate Executive Vice President and President of Management Assessment, for Korn/Ferry International,
responsible for overseeing global operations and strategy for our Management Assessment business. Mr. Hourihan is also a member of our Global Operating Committee and was our Executive
14
Table of Contents
Vice PresidentOrganizational Development from January 1999 to December 2001. Prior to joining Korn/Ferry International, he was the co-founder, Chairman, and Chief Executive Officer of SCA
Consulting, L.L.C., one of the leading executive compensation consulting firms in the United States, where he was employed from November 1984 until joining Korn/Ferry International.
James E. Boone is President of the Americas and Chairman of the Global Operating Committee. Prior to joining Korn/Ferry International in 1995, Mr. Boone was a senior
partner and executive committee member of a leading international executive search firm.
Robert H. McNabb
was elected Chief Executive Officer for Futurestep in July 2002 and is a member of our Global Operating Committee. Prior to becoming the Chief Executive Officer for Futurestep, he was President of the Futurestep Americas and Asia/Pacific regions
since December 2001. Prior to joining Futurestep, he was the President and Chief Executive Officer of Corestaff from 1998 to 2001 and President and Chief Operating Officer at Republic Industries in 1997.
15
Table of Contents
PART II.
Common Stock
Our common stock is listed on the New York Stock Exchange under the symbol KFY. The following
table sets forth the high and low sales price per share of the common stock for the periods indicated, as reported on the New York Stock Exchange:
High |
Low | |||||
Fiscal Year Ended April 30, 2002 |
||||||
First Quarter |
$ |
23.99 |
$ |
14.90 | ||
Second Quarter |
$ |
15.79 |
$ |
6.66 | ||
Third Quarter |
$ |
11.40 |
$ |
6.90 | ||
Fourth Quarter |
$ |
11.40 |
$ |
5.80 | ||
Fiscal Year Ended April 30, 2001 |
||||||
First Quarter |
$ |
36.63 |
$ |
21.13 | ||
Second Quarter |
$ |
40.44 |
$ |
29.69 | ||
Third Quarter |
$ |
38.00 |
$ |
16.25 | ||
Fourth Quarter |
$ |
20.60 |
$ |
14.90 | ||
Fiscal Year Ended April 30, 2000 |
||||||
First Quarter |
$ |
17.00 |
$ |
11.75 | ||
Second Quarter |
$ |
25.25 |
$ |
12.50 | ||
Third Quarter |
$ |
39.00 |
$ |
20.75 | ||
Fourth Quarter |
$ |
44.13 |
$ |
21.38 |
On July 26, 2002 the last reported sales price on the New York
Stock Exchange for the common stock was $6.18 per share and there were approximately 2,800 beneficial holders of the common stock.
Dividends
We have not paid any dividends since April 30, 1996 and do not intend to pay any
cash dividends in the foreseeable future, but instead intend to retain future earnings to finance our operations and growth of the business. Future dividend policy will depend on our earnings, capital requirements, financial condition and other
factors considered relevant by our board of directors. Our credit facility also contains provisions that may limit our ability to pay dividends.
Recent Sales of Unregistered Securities
We issued securities convertible into or
exercisable for approximately 4.9 million shares of common stock in June 2002 to purchasers affiliated with Friedman, Fleischer & Lowe. These issuances were exempt pursuant to Regulation D under the Securities Act.
We issued 105,672 shares of common stock in April 2002 to three individuals in France in connection with the acquisition of an executive
recruitment firm in that country, which closed in fiscal 1999. These issuances were exempt pursuant to Regulation S under the Securities Act.
We issued 5,120 shares of common stock in June 2001 to an individual in Switzerland in connection with the acquisition of an executive recruitment firm in that country, which closed in fiscal 1999.
This issuance was exempt pursuant to Regulation S under the Securities Act.
16
Table of Contents
We issued 10,076 shares of common stock in June 2001 to four individuals in
Australia in connection with the acquisition of the Australian business of Amrop International, which closed in fiscal 2000. These issuances were exempt pursuant to Regulation S under the Securities Act.
The following selected financial data are qualified
by reference to, and should be read together with, our Audited Consolidated Financial Statements and Related Notes and Managements Discussion and Analysis of Financial Condition and Results of Operations appearing
elsewhere in this Form 10-K report. The selected statement of operations data set forth below for the fiscal years ended April 30, 2002, 2001 and 2000 and the selected balance sheet data as of April 30, 2002 and 2001 are derived from our
consolidated financial statements, audited by Ernst & Young LLP in 2002 and Arthur Andersen LLP in prior years, appearing elsewhere in this Form 10-K report. The selected statement of operations data set forth below for the fiscal years ended
April 30, 1999 and 1998 and the balance sheet data as of April 30, 2000, 1999 and 1998 are derived from consolidated financial statements and notes thereto, audited by Arthur Andersen LLP, which are not included in this Form 10-K report. However,
data for the years ended and as of April 30, 2001, 2000, 1999 and 1998 have been restated to reflect the operating results of our Mexico subsidiaries under the equity method. Ernst & Young LLP has applied certain procedures to the restatement
adjustments for fiscal 2001 and 2000 as described in their report on the 2002 consolidated financial statements. Ernst & Young LLP has not performed any procedures with respect to the data and restatement adjustments for fiscal 1999 and 1998.
17
Table of Contents
Fiscal Year Ended April 30, |
|||||||||||||||||||
2002 |
2001 |
2000 |
1999 |
1998 |
|||||||||||||||
Restated(3) |
Restated(3) |
Restated(3) |
Restated(3) |
||||||||||||||||
(in thousands, except per share amounts) |
|||||||||||||||||||
Selected Statement of Operations Data: |
|||||||||||||||||||
Revenue |
$ |
393,891 |
|
$ |
636,298 |
|
$ |
487,562 |
$ |
344,265 |
|
$ |
290,659 |
| |||||
Compensation and benefits |
|
273,994 |
|
|
383,277 |
|
|
295,307 |
|
223,788 |
|
|
194,504 |
| |||||
General and administrative expenses |
|
132,327 |
|
|
197,948 |
|
|
143,344 |
|
92,027 |
|
|
85,663 |
| |||||
Goodwill and asset impairment and restructuring charges(1) |
|
93,203 |
|
||||||||||||||||
Non-recurring charges(2) |
|
89,202 |
|
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating profit (loss) |
|
(105,633 |
) |
|
55,073 |
|
|
48,911 |
|
(60,752 |
) |
|
10,492 |
| |||||
Interest and other income (expense) |
|
(6,087 |
) |
|
(3,278 |
) |
|
2,328 |
|
(275 |
) |
|
(1,394 |
) | |||||
(Benefit from) provision for income taxes |
|
(12,328 |
) |
|
22,443 |
|
|
21,938 |
|
6,928 |
|
|
4,897 |
| |||||
Equity in earnings of unconsolidated subsidiaries |
|
1,141 |
|
|
1,661 |
|
|
1,510 |
|
1,529 |
|
|
1,043 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income (loss) |
$ |
(98,251 |
) |
$ |
31,013 |
|
$ |
30,811 |
$ |
(66,426 |
) |
$ |
5,244 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income (loss) per share: |
|||||||||||||||||||
Basic |
$ |
(2.62 |
) |
$ |
0.83 |
|
$ |
0.85 |
$ |
(2.37 |
) |
$ |
0.24 |
| |||||
Diluted |
|
(2.62 |
) |
|
0.81 |
|
|
0.82 |
|
(2.37 |
) |
|
0.23 |
| |||||
Weighted average common shares outstanding: |
|||||||||||||||||||
Basic |
|
37,547 |
|
|
37,266 |
|
|
36,086 |
|
28,086 |
|
|
21,885 |
| |||||
Diluted |
|
37,547 |
|
|
38,478 |
|
|
37,680 |
|
28,086 |
|
|
23,839 |
| |||||
Other Data: |
|||||||||||||||||||
Revenue by business segment: |
|||||||||||||||||||
Executive recruitment: |
|||||||||||||||||||
North America |
$ |
203,986 |
|
$ |
343,095 |
|
$ |
271,313 |
$ |
185,525 |
|
$ |
154,903 |
| |||||
Europe |
|
92,972 |
|
|
135,278 |
|
|
112,045 |
|
101,515 |
|
|
81,543 |
| |||||
Asia/Pacific |
|
38,936 |
|
|
53,977 |
|
|
48,603 |
|
35,024 |
|
|
34,411 |
| |||||
South America |
|
11,350 |
|
|
17,183 |
|
|
17,307 |
|
17,863 |
|
|
19,802 |
| |||||
Futurestep |
|
45,261 |
|
|
82,082 |
|
|
38,294 |
|
4,338 |
|
||||||||
JobDirect |
|
1,386 |
|
|
4,683 |
|
|||||||||||||
Number of offices (at period end) |
|
85 |
|
|
103 |
|
|
102 |
|
69 |
|
|
69 |
| |||||
Number of consultants (at period end) |
|
524 |
|
|
663 |
|
|
583 |
|
414 |
|
|
384 |
| |||||
Number of assignments |
|
7,682 |
|
|
11,291 |
|
|
8,636 |
|
6,347 |
|
|
5,493 |
| |||||
Selected Balance Sheet Data: |
|||||||||||||||||||
Cash and cash equivalents |
$ |
66,128 |
|
$ |
85,661 |
|
$ |
83,653 |
|
111,739 |
|
|
29,313 |
| |||||
Marketable securities, current |
|
16,397 |
|
|
59,978 |
|
21,839 |
|
|||||||||||
Working capital |
|
25,610 |
|
|
51,211 |
|
|
78,470 |
|
112,927 |
|
|
23,188 |
| |||||
Total assets |
|
377,574 |
|
|
496,102 |
|
|
472,178 |
|
301,311 |
|
|
173,679 |
| |||||
Total long-term debt |
|
1,634 |
|
|
11,842 |
|
|
16,915 |
|
2,360 |
|
|
6,151 |
| |||||
Total shareholders equity and mandatorily redeemable stock |
|
179,297 |
|
|
270,166 |
|
|
231,224 |
|
172,686 |
|
|
58,754 |
|
(1) |
In response to deteriorating economic conditions encountered in the first fiscal quarter of 2002, we developed a series of restructuring initiatives to address
the cost structure and to reposition us to gain market share and take full advantage of any economic upturn. In the fourth fiscal quarter, we further streamlined European operations and identified an additional investment that was permanently
impaired. As a result, we recognized asset impairment and restructuring charges of $93.2 million in fiscal 2002 comprised of (a) goodwill impairment for JobDirect of $28.9 million and for North America executive recruitment of $14.0 million,
(b) other asset impairments of $15.1 million, (c) a severance restructuring charge of $19.1 million, and (d) a facilities restructuring charge of $16.1 million. |
18
Table of Contents
(2) |
In fiscal 1999, we recognized a non-recurring compensation and benefits expense of $89.2 million, at the completion of the initial public offering, comprised of
(a) $49.3 million representing the difference between the issuance price of the shares issued by us in the period beginning twelve months before the initial filing date of the Registration Statement relating to the initial public offering and the
fair market value of the shares at the date of grant, (b) $25.7 million from the completion of the redemption by us of certain shares of our capital stock, primarily the payment of additional redemption amounts to certain shareholders under the
terms of a 1994 stock redemption agreement, and (c) $4.3 million from the payment of existing obligations to former holders of phantom units and stock appreciation rights. We also recognized non-recurring charges of $7.3 million related to costs,
primarily severance and benefits expense, incurred to achieve operating efficiencies in fiscal 1999 and $2.6 million related to the resignation of the former President and Chief Executive Officer. |
(3) |
As further described in notes 1 and 14 to the consolidated financial statements, we have restated our previously reported results to account for our investment
in our Mexico subsidiaries under the equity method of accounting. The restatement from the consolidation method to the equity method reduced revenue and expenses in each fiscal year, but had no impact on net income, earnings per share or total
shareholders equity. |
Forward-looking Statements
This Annual Report on Form 10-K may contain certain
statements that we believe are, or may be considered to be, forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements generally can be identified by use of statements that include phrases such as believe, expect, anticipate, intend, plan, foresee, may, will,
estimates, potential, continue or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are
subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal risk factors that could cause actual performance and future actions to
differ materially from the forward-looking statements include, but are not limited to, dependence on attracting and retaining qualified and experienced consultants, portability of client relationships, local political or economic developments in or
affecting countries where we have operations, ability to manage growth, restrictions imposed by off-limits agreements, competition, risks related to the growth and results of Futurestep, reliance on information processing systems, and employment
liability risk. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Annual Report are made only as of the date of this Annual Report and we undertake no
obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.
The following presentation of managements discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements included in this annual report on Form
10-K.
Overview
We are the worlds leading recruitment firm with the broadest global presence in the recruitment industry. Our services include executive recruitment, middle-management recruitment (through Futurestep), strategic
management assessment and executive coaching. We have approximately 443 executive recruitment consultants and 81 Futurestep consultants based in nearly 90 offices across 36 countries. Our clients are many of the worlds largest and most
prestigious public and private companies, middle-market and emerging growth companies as well as government and not-for-profit organizations. Over half of the executive recruitment searches we performed in fiscal 2002 were for board level, chief
executive and other senior executive positions and our 3,908 clients included approximately 35% of the Fortune 500 companies. We have established strong client loyalty;
19
Table of Contents
more than 81% of the executive recruitment assignments we performed in fiscal 2002 were on behalf of clients for whom we had conducted multiple assignments over the last three fiscal years.
Based on deteriorating economic conditions in late fiscal 2001, we began developing a series of restructuring
initiatives in the quarter ended July 31, 2001, to address our cost structure and to reposition the enterprise to gain market share and take full advantage of the eventual economic recovery. Our immediate goals were to reduce losses, preserve our
top producers and maintain our high standards of client service.
In August 2001, we announced these business
realignment initiatives designed to reduce expenses in response to the current economic environment and to reposition our company to take advantage of the increase in the demand for recruitment services when the economy improves. These initiatives
resulted in a total charge against earnings in the first six months of fiscal 2002 of approximately $84 million. The charge reflects costs associated with a decision to reduce the workforce by approximately 25%, or over 600 employees; consolidate
all back-office functions for Futurestep and Korn/Ferry; exit the college recruitment market and write-down related assets and goodwill.
In April 2002, we implemented additional business realignment initiatives to further downsize our operations in Europe, resulting in severance and facilities related charges for Futurestep and executive recruitment of $4.9
million. In addition, we recognized a one-time non-cash charge of $4.0 million to write-off a non-strategic investment that we believe is permanently impaired.
In June 2002, we announced that we would account for our ownership interests in our Mexico subsidiaries, which have been part of Korn/Ferry since 1977, under the equity method and restate our prior
years results. Previously, we had consolidated the Mexico subsidiaries operating results with a deduction for the other shareholders interest after tax. While we believe that the consolidation method reflects the way these subsidiaries are
managed and operate, the equity method best reflects our less than 50% voting interest in the common stock of these entities. There is no impact on earnings, EPS, shareholders equity or net cash flow as a result of this restatement; however,
revenue and expenses will be reduced.
Critical Accounting Policies
The following discussion and analysis of our financial condition and operating results are based on our consolidated financial statements. Preparation of this Annual Report
on Form 10-K requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results may differ from those estimates and assumptions. In preparing our financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in
our Notes to Consolidated Financial Statements. We consider the policies discussed below as critical to an understanding of our financial statements because their application places the most significant demands on managements judgment.
Specific risks for these critical accounting policies are described in the following paragraphs. Senior management has discussed the development and selection of the critical accounting estimates with the Audit Committee of the Board of Directors.
Revenue Recognition. Management is required to establish policies and procedures
to ensure that revenue is only recorded for valid engagements, that the revenue from each engagement is recorded over the period of performance and related costs are matched against this revenue. We provide recruitment services on a retained basis.
Since the search is not contingent upon placement of a candidate, our assumptions are mainly related to establishing the period over which the service is performed. These assumptions determine the timing of revenue recognition and profitability for
the period reported. If these assumptions do not accurately reflect the period over which revenue is earned, revenue and profit could be over or understated.
20
Table of Contents
Deferred Compensation. Deferred compensation
requires assumptions regarding participant data and the discount rate that can significantly impact the liability on our balance sheet and the related cost in our statement of operations. Management engages an actuary to review these assumptions to
ensure that they reflect the population and economics of our deferred compensation plans in all material respects. The actuarial assumptions we use may differ from actual results due to changing market conditions, or changes in the participant
population. These differences could have a significant impact on our costs and liability.
Carrying
Values. Valuations are required under U.S. generally accepted accounting principles to determine the carrying value of various assets. Our most significant assets that require management to prepare or obtain valuations are
goodwill and deferred income taxes. Management must identify whether events have occurred that may impact the carrying value of these assets and make assumptions regarding future events, such as profitability. Differences between the assumptions
used to prepare these valuations and actual results could materially impact the carrying amount of these assets and net earnings.
Results of Operations
The following table summarizes the results of our operations with
Mexico on an equity basis for each of the past three fiscal years as a percentage of revenue:
Fiscal Year Ended April 30, |
|||||||||
2002 |
2001* |
2000* |
|||||||
Revenue |
100 |
% |
100 |
% |
100 |
% | |||
Compensation and benefits |
70 |
|
60 |
|
61 |
| |||
General and administrative expenses |
34 |
|
31 |
|
29 |
| |||
Asset impairment and restructuring charges |
24 |
|
|||||||
Operating profit (loss) |
(27 |
) |
9 |
|
10 |
| |||
Net income (loss) |
(25 |
) |
5 |
|
6 |
|
* |
Restated with Mexico reported on the equity method. |
Excluding the impairment and restructuring charges in fiscal 2002 and, for comparability (under Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other
Intangible Assets), goodwill amortization in fiscal 2001 and 2000, operating profit (loss) as a percentage of revenue is (3%), 11%, and 11% for the fiscal years ended April 30, 2002, 2001 and 2000, respectively. On this same basis, net income
(loss) as a percentage of revenue is (4%), 7%, and 7% for the fiscal years ended April 30, 2002, 2001 and 2000, respectively.
The continued weakness in the global economy has resulted in decreases in revenue in all of our business lines and geographic regions in fiscal 2002. This decline follows a 10 year period of double digit growth.
Executive recruitment revenue and operating profit (loss), excluding asset impairment and restructuring charges, declined in
all geographic regions in fiscal 2002 compared to each of the last two fiscal years. The decline is due primarily to the slowdown of the United States economy that contributed to a decline of $139 million or 41% in executive recruitment revenue
in North America for fiscal 2002 compared to fiscal 2001.
The decline in Futurestep revenue of 45% for the fiscal
year ended 2002 compared to fiscal 2001 reflects a decline in all geographic regions that is attributed to the weakness in the global economy. Futurestep operations in North America experienced the largest decline compared to the prior year
primarily due to a decline in the number of engagements.
The following tables summarize the results of our
operations by business segment for each of the past three fiscal years with Mexico on an equity basis. As a result of our change in accounting for our Mexico operations,
21
Table of Contents
we have renamed our Latin America segment South America. The South America business segment excludes Mexico revenue of $16,179, $17,479 and $13,181 and operating profit of $6,139, $7,834, and
$5,894 in fiscal 2002, 2001 and 2000, respectively.
Fiscal Year Ended April 30, (dollars in thousands) |
|||||||||||||||||||||
2002 |
2001 |
2000 |
|||||||||||||||||||
Dollars |
% |
Dollars |
% |
Dollars |
% |
||||||||||||||||
Restated |
Restated |
||||||||||||||||||||
Revenue |
|||||||||||||||||||||
Executive recruitment: |
|||||||||||||||||||||
North America |
$ |
203,986 |
|
52 |
% |
$ |
343,095 |
|
54 |
% |
$ |
271,313 |
|
56 |
% | ||||||
Europe |
|
92,972 |
|
24 |
|
|
135,278 |
|
21 |
|
|
112,045 |
|
23 |
| ||||||
Asia/Pacific |
|
38,936 |
|
10 |
|
|
53,977 |
|
9 |
|
|
48,603 |
|
10 |
| ||||||
South America |
|
11,350 |
|
3 |
|
|
17,183 |
|
3 |
|
|
17,307 |
|
4 |
| ||||||
Futurestep |
|
45,261 |
|
12 |
|
|
82,082 |
|
13 |
|
|
38,294 |
|
8 |
| ||||||
JobDirect |
|
1,386 |
|
|
4,683 |
|
1 |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total revenue |
$ |
393,891 |
|
100 |
% |
$ |
636,298 |
|
100 |
% |
$ |
487,562 |
|
100 |
% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Pro forma Fiscal Year Ended April 30, (dollars in thousands) |
|||||||||||||||||||||
2002 |
2001 |
2000 |
|||||||||||||||||||
Dollars |
Margin |
Dollars |
Margin |
Dollars |
Margin |
||||||||||||||||
Restated |
Restated |
||||||||||||||||||||
Operating profit (loss) before asset impairment and restructuring charges |
|||||||||||||||||||||
Executive recruitment: |
|||||||||||||||||||||
North America |
$ |
18,503 |
|
9 |
% |
$ |
70,833 |
|
21 |
% |
$ |
53,673 |
|
20 |
% | ||||||
Europe |
|
(7,990 |
) |
(9 |
) |
|
21,826 |
|
16 |
|
|
13,850 |
|
12 |
| ||||||
Asia/Pacific |
|
393 |
|
1 |
|
|
6,918 |
|
13 |
|
|
5,468 |
|
11 |
| ||||||
South America |
|
(2,154 |
) |
(19 |
) |
|
672 |
|
4 |
|
|
1,798 |
|
10 |
| ||||||
Futurestep |
|
(15,351 |
) |
(34 |
) |
|
(23,982 |
) |
(29 |
) |
|
(23,216 |
) |
(61 |
) | ||||||
JobDirect |
|
(5,831 |
) |
|
(9,668 |
) |
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Pro forma total operating profit (loss) |
$ |
(12,430 |
) |
(3 |
)% |
$ |
66,599 |
|
11 |
% |
$ |
51,573 |
|
11 |
% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the asset impairment and
restructuring charges in fiscal 2002 and the goodwill amortization in fiscal 2001 and 2000 excluded from the table immediately above.
Fiscal Year Ended April 30, | |||||||||
2002 |
2001 |
2000 | |||||||
(dollars in thousands) | |||||||||
Executive recruitment: |
|||||||||
North America |
$ |
29,249 |
$ |
5,753 |
$ |
890 | |||
Europe |
|
7,350 |
|
1,866 |
|
816 | |||
Asia/Pacific |
|
1,846 |
|
286 |
|
294 | |||
South America |
|||||||||
Futurestep |
|
22,422 |
|
2,040 |
|
662 | |||
JobDirect |
|
32,336 |
|
1,581 |
|||||
|
|
|
|
|
| ||||
Total |
$ |
93,203 |
$ |
11,526 |
$ |
2,662 | |||
|
|
|
|
|
|
22
Table of Contents
Operating profit (loss) based on reported results follows:
Fiscal Year Ended April 30, (dollars in thousands) |
|||||||||||||||||||||
2002 |
2001 |
2000 |
|||||||||||||||||||
Dollars |
Margin |
Dollars |
Margin |
Dollars |
Margin |
||||||||||||||||
Restated |
Restated |
||||||||||||||||||||
Operating profit (loss) |
|||||||||||||||||||||
Executive recruitment: |
|||||||||||||||||||||
North America |
$ |
(10,746 |
) |
(5 |
)% |
$ |
65,080 |
|
19 |
% |
$ |
52,783 |
|
20 |
% | ||||||
Europe |
|
(15,339 |
) |
(17 |
) |
|
19,960 |
|
15 |
|
|
13,034 |
|
12 |
| ||||||
Asia/Pacific |
|
(1,453 |
) |
(4 |
) |
|
6,632 |
|
12 |
|
|
5,174 |
|
11 |
| ||||||
South America |
|
(2,154 |
) |
(19 |
) |
|
672 |
|
4 |
|
|
1,798 |
|
10 |
| ||||||
Futurestep |
|
(37,774 |
) |
|
(26,022 |
) |
|
(23,878 |
) |
||||||||||||
JobDirect |
|
(38,167 |
) |
|
(11,249 |
) |
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total operating profit (loss) |
$ |
(105,633 |
) |
(27 |
)% |
$ |
55,073 |
|
9 |
% |
$ |
48,911 |
|
10 |
% | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates the impact of the change in the
presentation of the operating results of our Mexico subsidiaries in fiscal 2002 from the consolidation method to the equity method on revenue and operating profit for fiscal 2001 and 2000:
Fiscal Year Ended April 30, (dollars in thousands) | ||||||||||||||||||
2001 |
2000 | |||||||||||||||||
Previously Reported(1) |
Decrease |
Restated |
Previously Reported(1) |
Decrease |
Restated | |||||||||||||
Revenue: |
||||||||||||||||||
South America |
$ |
34,662 |
$ |
17,479 |
$ |
17,183 |
$ |
30,488 |
$ |
13,181 |
$ |
17,307 | ||||||
Total revenue |
$ |
653,777 |
$ |
17,479 |
$ |
636,298 |
$ |
500,743 |
$ |
13,181 |
$ |
487,562 | ||||||
Operating Profit: |
||||||||||||||||||
South America |
$ |
8,506 |
$ |
7,834 |
$ |
672 |
$ |
7,692 |
$ |
5,894 |
$ |
1,798 | ||||||
Total operating profit |
$ |
62,907 |
$ |
7,834 |
$ |
55,073 |
$ |
54,805 |
$ |
5,894 |
$ |
48,911 |
(1) |
South America was previously referred to as Latin America. |
There was no impact on net income or EPS as a result of this change in presentation.
In the following comparative analysis, all percentages are calculated based on dollars in thousands.
Fiscal 2002 Compared to Fiscal 2001
Revenue
Revenue decreased $242.4 million, or 38%, to $393.9 million for fiscal 2002 from $636.3 million for fiscal 2001. The decrease in revenue
was primarily the result of a decrease in demand reflecting weakness in the global economy throughout fiscal 2002 compared to the prior year.
Executive RecruitmentAll geographic regions reported lower revenue in fiscal 2002 compared to the prior year. North America experienced the largest decline in revenue of $139.1 million or
41% to $204.0 million in fiscal 2002, due primarily to a decrease in demand while average fees remained constant. Europe reported revenue of $93.0 million, a decline of $42.3 million, or 31%, compared to the prior year driven primarily by a decrease
in the number of engagements while average fees increased slightly.
23
Table of Contents
FuturestepRevenue decreased $36.8 million, or 45%, to $45.3 million
in fiscal 2002 from $82.1 million in fiscal 2001 across all geographic regions. Of the total decrease in revenue, North America declined $16.5 million or 62%, Europe declined $15.6 million, or 34%, and Asia/Pacific declined $4.7 million, or
46%.
JobDirectIn fiscal 2002, we decided to reduce our investment in the college recruitment market
in the first quarter and ultimately exit this market in the third quarter. JobDirect reported revenue of $1.4 million through December 31, 2001, the close of business, compared to $4.7 million in fiscal 2001. In fiscal 2002, we recognized impairment
charges of $30.3 million and a restructuring charge of $2.0 million related to the wind down of JobDirect operations.
Compensation and Benefits
Compensation and benefits expense decreased $109.3 million, or
29%, to $274.0 million in fiscal 2002 from $383.3 million in fiscal 2001. Executive recruitment compensation and benefits costs decreased $87.6 million in the current fiscal year compared to the prior fiscal year. This decrease reflects a 30%
reduction in our workforce in the last half of fiscal 2002 and a 57% decrease in executive recruitment bonus expense due primarily to a decline in revenue related to the slow down in the global economy during this period. Executive recruitment
compensation and benefits expense as a percentage of revenue increased to 68% in fiscal 2002 from 59% in fiscal 2001 due primarily to the decrease in executive recruitment bonuses offset by the larger percentage decrease in revenue. Futurestep
compensation and benefits expense declined $18.6 million, or 34%, to $35.3 million in fiscal 2002 compared to the prior year reflecting a 42% decrease in employees for the last half of the current year, largely in the United States.
General and Administrative Expenses
General and administrative expenses decreased $65.6 million, or 33%, to $132.3 million in fiscal 2002 from $197.9 million in fiscal 2001. Excluding goodwill amortization in
fiscal 2001 of $11.5 million, general and administrative expenses declined $54.1 million, or 29%, in fiscal 2002. In executive recruitment, general and administrative expenses decreased $23.2 million, or 18%, excluding goodwill amortization of $7.9
million in fiscal 2001, due primarily to reduced facilities costs resulting from the restructuring initiatives implemented in August 2001. On this same basis, Futurestep general and administrative expenses decreased $26.9 million, or 51%, mainly due
to reduced office costs, professional fees and advertising expenses that are also primarily related to the fiscal 2002 restructuring. As a percentage of revenue, general and administrative expenses in executive recruitment, increased to 30% in
fiscal 2002 from 23% in fiscal 2001 excluding goodwill amortization. Futurestep general and administrative expenses as a percentage of revenue decreased to 56% in fiscal 2002 from 64% in the prior year, excluding goodwill amortization, primarily due
to the larger percentage decrease in these expenses compared to revenue.
Operating Profit
Operating profit decreased $160.7 million in the current fiscal year, to a loss of $105.6 million from a profit of $55.1
million in the prior fiscal year. Excluding the impairment and restructuring charges in fiscal 2002 of $93.2 million and goodwill amortization of $11.5 million in fiscal 2001, operating profit decreased $79.0 million to a loss of $12.4 million in
fiscal 2002. Executive recruitment operating profit, on this same basis, decreased to $8.8 million or 2.5% of revenue from $100.2 million or 18.2% of revenue in fiscal 2001. This decrease was driven primarily by the decrease in revenue partially
offset by a decline in general and administrative expense and compensation and benefits expense. Operating profit declined in each region within executive recruitment with the largest dollar decreases in North America and Europe and margin decreases
in Europe and South America.
Futurestep operating losses, excluding asset impairment and restructuring charges
and goodwill amortization, improved by $8.6 million or 36% reflecting the reduced compensation and benefits costs and
24
Table of Contents
general and administrative expenses discussed above. The operating margin however, declined to 34% in fiscal 2002 from 29% in fiscal 2001 reflecting the larger percentage decrease in revenue
compared to costs.
Interest Income and Other Income, Net
Interest income and other income, net includes interest income of $2.4 million and $4.4 million for fiscal 2002 and 2001, respectively.
The decrease in interest income of $2.0 million is due primarily to lower average cash and marketable securities balances compared to the prior year. The increase in other income is due primarily to a decrease in losses on the disposal of property
to $0.1 million in fiscal 2002 compared to $0.7 million in fiscal 2001.
Interest Expense
Interest expense increased $1.1 million in the current fiscal year, to $8.5 million from $7.4 million in the prior fiscal year,
primarily due to an increase in average borrowings under the line of credit and an increase in the effective interest rate in fiscal 2002.
(Benefit From) Provision for Income Taxes
The benefit from income taxes was $12.3
million in fiscal 2002 compared to a provision of $22.4 million in fiscal 2001. The effective tax rate was 11% and 43% for fiscal 2002 and 2001, respectively.
Equity in Earnings of Unconsolidated Subsidiaries
Equity
in earnings of unconsolidated subsidiaries (equity in earnings) is comprised of our less than 50% shareholder interest in our Mexico subsidiaries. In fiscal 2002, we restated our prior years operating results to account for our
investment in our Mexico subsidiaries under the equity method instead of the consolidation method. Under the equity method, we report our interest in the earnings or loss of the Mexico subsidiaries as a one line adjustment to net income. Previously,
we reported all of the revenue and expenses of these subsidiaries offset by a one line adjustment for the other shareholders interests. The decrease in equity in earnings of $0.6 million to $1.1 million in fiscal 2002 from $1.7 million in
fiscal 2001 is due primarily to lower revenue in fiscal 2002.
Fiscal 2001 Compared to Fiscal 2000
Revenue
Revenue increased $148.7 million, or 31%, to $636.3 million for fiscal 2001 from $487.6 million for fiscal 2000. The increase in revenue was primarily the result of a 12% increase in the number of executive recruitment engagements, a
12% increase in the average fee per executive recruitment engagement, executive recruitment acquisitions in fiscal 2000, an increase in revenue from Futurestep of $43.8 million compared to the prior year and revenue of $4.7 million from JobDirect in
the current year.
Executive RecruitmentIn North America, revenue increased $71.8 million, or 26%, to
$343.1 million in fiscal 2001 from $271.3 million in fiscal 2000. In Europe, revenue increased $23.3 million, or 21%, to $135.3 million in fiscal 2001 from $112.0 million in the prior fiscal year. Excluding the negative effects of foreign currency
translation into U.S. dollars, European revenue increased approximately 34% on a constant dollar basis. Revenue growth in North America and Europe, on a constant dollar basis, was primarily due to an increase in the number of engagements and the
average fee per engagement. In North America and Europe, revenue from fiscal 2001 acquisitions accounted for approximately one-third of the percent increase in revenue in North America and two-thirds of the percent increase in revenue in Europe. The
increase in revenue in Asia/Pacific of $5.4 million, or 11%, to $54.0 million in fiscal 2001 compared to $48.6 million in fiscal 2000 was due primarily to an increase in the average fee which more than offset a decline in the number of engagements.
In South America, revenue remained relatively constant.
25
Table of Contents
FuturestepRevenue increased $43.8 million to $82.1 million in fiscal
2001 from $38.3 million in fiscal 2000. The increase in revenue is primarily driven by the international expansion of Futurestep in late fiscal 2000. Of the total increase in revenue, Europe contributed $29.8 million or 68% and Asia/Pacific
contributed $8.1 million, or 19%.
JobDirectRevenue of $4.7 million reflects annual subscription
fees from over 400 corporate clients at April 30, 2001. As of April 30, 2001, over 1.4 million students had registered on the database and over 400 college career offices were using their service. JobDirect charges corporate clients an annual fee,
payable monthly based on the estimated number of students the client expects to interview.
Compensation and
Benefits
Compensation and benefits expense increased $88.0 million, or 30%, to $383.3 million in fiscal 2001
from $295.3 million in fiscal 2000, primarily due to an increase in the number of executive recruitment consultants, an increase of $30.6 million related primarily to the international expansion of Futurestep in late fiscal 2000 and $6.4 million
from the acquisition of JobDirect in the current fiscal year. Executive recruitment compensation and benefits costs increased $50.9 million in fiscal 2001 compared to the prior fiscal year. This increase reflects a 29% increase in the average number
of consultants for fiscal 2001 over fiscal 2000 and a 10% reduction in our workforce in the last half of fiscal 2001 due primarily to a decline in revenue related to the slow down in the United States economy during this period. On a comparable
basis, excluding Futurestep and JobDirect, compensation and benefits expense as a percentage of revenue decreased to 59% in fiscal 2001 from 61% in fiscal 2000 due primarily to a decrease in executive recruitment bonuses as a percentage of revenue.
General and Administrative Expenses
General and administrative expenses increased $54.6 million, or 38%, including JobDirect expenses of $9.5 million in fiscal 2001 to $197.9 million from $143.3 million
in fiscal 2000. In executive recruitment, general and administrative expenses increased $29.8 million, or 29%, due primarily to additional costs related to an increase in our leased premises resulting from acquisitions in North America and Europe.
Futurestep general and administrative expenses increased $15.3 million, or 39%, mainly due to office costs and professional fees primarily related to the international expansion in late fiscal 2000. As a percentage of revenue, general and
administrative expenses, excluding Futurestep and JobDirect related expenses, increased to 24% in fiscal 2001 from 23% in fiscal 2000 reflecting these additional costs.
Operating Profit
Operating
profit increased $6.2 million in fiscal 2001 to $55.1 million, or 8.7% of revenue, from $48.9 million, or 10.0% of revenue, in the prior fiscal year. Excluding the Futurestep losses of $26.0 million and JobDirect losses of $11.2 million in
fiscal 2001 and Futurestep losses of $23.9 million in fiscal 2000, operating profit for the current fiscal year increased $19.5 million, or 27% to $92.3 million compared to $72.8 million in the prior fiscal year. On this same basis, operating profit
was 17% and 16% as a percentage of revenue for the fiscal years ended 2001 and 2000, respectively. The increased margin is driven primarily by our operations in Europe and Asia/Pacific and reflects the increase in revenue and a decline in general
and administrative expense as a percentage of revenue relative to the prior fiscal year and a decline in compensation and benefits expense as a percentage of revenue in Europe compared to the prior fiscal year. The percentage of operating profit
contributed by each region within executive recruitment remained relatively constant in fiscal 2001 compared to the last fiscal year.
Interest Income and Other Income, Net
Interest income and other income, net
includes interest income of $4.4 million and $6.5 million for fiscal 2001 and 2000, respectively. The decrease in interest income of $2.1 million is due primarily to lower average
26
Table of Contents
cash and marketable securities balances compared to the prior year. The decrease in other income is due to losses on the disposal of property of $0.7 million in fiscal 2001.
Interest Expense
Interest expense increased $3.0 million in the current fiscal year, to $7.4 million from $4.4 million in the prior fiscal year, primarily due to borrowings under the line of credit associated with
acquisitions during the first quarter of fiscal 2001 and to an increase in notes payable to shareholders resulting from acquisitions in the fourth quarter of fiscal 2000.
Provision for Income Taxes
The provision for income taxes increased $0.5 million to $22.4 million in fiscal 2001 from $21.9 million in fiscal 2000. The effective tax rate was 43% for both fiscal 2001 and 2000.
Equity in Earnings of Unconsolidated Subsidiaries
Equity in earnings of unconsolidated subsidiaries (equity in earnings) is comprised of our less than 50% interest in our Mexico subsidiaries. Equity in earnings
increased $0.2 million, or 10%, to $1.7 million in fiscal 2001 from $1.5 million in the prior year.
Liquidity and Capital
Resources
In June 2002, we closed a $50.0 million private placement comprised of $40.0 million
of convertible 7.5% subordinated notes and $10.0 million of convertible 7.5% preferred stock with Friedman, Fleischer & Lowe, a San Francisco based private equity firm. The securities are convertible into shares of Korn/Ferry stock at
$10.25 per share which if converted would represent approximately 4.9 million shares or 11.4% of our outstanding common stock. Additionally, we issued warrants to purchase 272,727 common shares with an exercise price of $12.00 per share.
In the first half of fiscal 2002, we were in default under our credit agreement with Bank of America. In March
2002, we reached an agreement to amend our credit facility from $100.0 million to $45.0 million, to waive prior defaults, to secure it by certain assets and to amend our financial covenants to make compliance more achievable going forward. The
financial covenants include a minimum fixed charge coverage ratio, a maximum leverage ratio, a quick ratio and other customary events of default. The amended agreement required payment of a fee of $1.0 million at inception. We paid additional fees
of $0.5 million in June 2002 and the remaining fees of $1.0 million were waived upon completion of the private placement. As of April 30, 2002 and 2001, we had $39.0 million and no outstanding borrowings under the credit facility, respectively.
Outstanding credit facility borrowings bear interest at Prime plus 3.75% under the amended agreement. In June 2002, the outstanding borrowings under the facility were repaid and the credit facility commitment, which matures in November 2002, was
reduced from $45.0 million to $31.2 million.
We believe that cash on hand, proceeds from the private placement in
June 2002 and funds from operations will be sufficient to meet our anticipated working capital, capital expenditures and general corporate requirements for the foreseeable future.
The following table sets forth our obligations and commitments to make future payments under contracts and other commitments. In addition to the amounts set forth below, we
have contingent commitments under certain employment agreements that are payable only upon termination of employment.
Contractual Obligations |
Payments Due by Period | ||||||||||||||
Total |
2003 |
2004-2005 |
2006-2007 |
After 2007 | |||||||||||
Lease Commitments |
$ |
100,041 |
$ |
23,313 |
$ |
36,671 |
$ |
22,881 |
$ |
17,176 | |||||
Long term debt |
$ |
14,452 |
$ |
12,818 |
$ |
1,634 |
27
Table of Contents
The following table presents selected financial information as of the end of the
past three fiscal years:
As of April 30, | |||||||||
2002 |
2001 |
2000 | |||||||
Restated |
Restated | ||||||||
(in thousands) | |||||||||
Cash and cash equivalents |
$ |
66,128 |
$ |
85,661 |
$ |
83,653 | |||
Working capital |
|
25,610 |
|
51,211 |
|
78,470 | |||
Total long-term debt, net of current maturities |
|
1,634 |
|
11,842 |
|
16,916 |
The decrease in working capital of $25.6 million, or 50%, in fiscal
2002 compared to the prior fiscal year is due primarily to the decrease in cash discussed below. Changes in other current assets, primarily a decrease in marketable securities of $16.4 million and accounts receivable of $34.6 million, were offset by
changes in other current liabilities, primarily an increase in borrowings on our credit line of $39.0 million offset by a decrease in compensation and benefits of $61.6 million. The decrease in working capital of $27.3 million, or 35%, in fiscal
2001 compared to fiscal 2000 is due primarily to a decrease in marketable securities.
Cash used in operating
activities was $59.5 million in fiscal 2002 due primarily to the payment of fiscal 2001 bonuses in fiscal 2002. Cash provided by operating activities was $63.8 million and $73.1 million for fiscal 2001 and 2000, respectively, due primarily to
operating income.
Cash used in investing activities was $2.5 million, $55.7 million and $107.3 million for fiscal
years ended April 30, 2002, 2001 and 2000, respectively. In fiscal 2002, cash used in investing activities was comprised of cash of $16.4 million received from the sale of marketable securities offset by capital expenditures of $8.5 million and
premiums on company owned life insurance policies (COLI) of $9.5 million. The COLI premiums were funded through borrowings under these life insurance policies of $11.7 million in fiscal 2002. In fiscal 2001, cash used in investing
activities included $44.5 million for business acquisitions and $12.6 million for the purchase of equity investments in Jungle Interactive and Webhire compared to $42.9 million for business acquisitions in fiscal 2000. Net sales of marketable
securities were $61.1 million in fiscal 2001 compared to purchases of $31.1 million in fiscal 2000.
Capital
expenditures totaled approximately $8.5 million, $33.9 million and $22.8 million for fiscal 2002, 2001 and 2000, respectively. These expenditures consisted primarily of systems hardware and software costs, upgrades to information systems and
leasehold improvements. The decrease in fiscal 2002 of $25.4 million compared to fiscal 2001 reflects reduced spending in line with our cost saving initiatives. The $11.1 million increase in capital expenditures in fiscal 2001 over fiscal year 2000,
primarily relates to increased fixed asset spending at Futurestep to support its worldwide infrastructure and to the installation of a new financial system in Europe.
Cash provided by (used in) financing activities was $44.1 million, ($2.3) million and $8.7 million in fiscal 2002, 2001 and 2000, respectively. In fiscal 2002, we had net
borrowings of $39.0 million on our credit facility and borrowings of $11.7 million on our COLI policies, primarily for the related premiums, compared to net payments on the credit facility of $1.4 million and borrowings against COLI policies of $3.5
million in fiscal 2001. In the fiscal year 2001, we also made payments of $14.2 million on shareholder acquisition notes and received proceeds from the issuance of common stock of $10.3 million, including proceeds from stock options exercised of
$5.9 million. During fiscal 2000, we borrowed $3.3 million under COLI contracts and received proceeds from the issuance of common stock of $8.4 million, including proceeds from stock options exercised of $6.1 million, offset by $1.5 million
paid to repurchase common stock and make payments on the related notes.
Total outstanding borrowings under COLI
policies were $59.9 million, $47.9 million and $44.9 million as of April 30, 2002, 2001 and 2000, respectively. Generally, we borrow under our COLI policies to pay premiums. Such borrowings do not require principal payments, bear interest at
primarily variable rates and are secured by
28
Table of Contents
the cash surrender value of the life insurance policies of $112.9 million and $102.3 million at April 30, 2002 and 2001, respectively. At April 30, 2002, the net cash value of these policies
was $53.0 million of which $44.2 million is held in trust limiting our borrowing ability to premiums on these policies.
Quarterly Results
The following table sets forth certain unaudited statement of operations
data for the quarters in fiscal 2001 and 2002. The unaudited quarterly information has been prepared on the same basis as the annual financial statements and, in managements opinion, includes all adjustments necessary to present fairly the
information for the quarters presented. Results for the previous fiscal quarter are not necessarily indicative of results for the full fiscal year or for any future fiscal quarter.
Quarters Ended (in thousands,
except per share amounts) |
|||||||||||||||||||||||||||||
Fiscal 2001 (2)(4) |
Fiscal 2002 (1)(4) |
||||||||||||||||||||||||||||
July 31 |
Oct. 31 |
Jan. 31 |
April 30 |
July 31 |
Oct. 31 |
Jan. 31 |
April 30 |
||||||||||||||||||||||
Restated |
Restated |
Restated |
Restated |
Restated |
Restated |
Restated |
|||||||||||||||||||||||
Revenue |
$ |
169,518 |
$ |
168,934 |
$ |
152,633 |
|
$ |
145,213 |
$ |
109,537 |
|
$ |
104,489 |
|
$ |
89,771 |
|
$ |
90,094 |
| ||||||||
South America |
|
4,731 |
|
4,814 |
|
3,644 |
|
|
3,994 |
|
3,071 |
|
|
2,920 |
|
|
2,327 |
|
|
3,032 |
| ||||||||
Operating profit (loss) |
|
16,361 |
|
11,031 |
|
12,779 |
|
|
14,902 |
|
(54,584 |
) |
|
(36,596 |
) |
|
(3,772 |
) |
|
(10,681 |
) | ||||||||
South America |
|
68 |
|
61 |
|
(384 |
) |
|
927 |
|
(446 |
) |
|
(382 |
) |
|
(1,428 |
) |
|
102 |
| ||||||||
Net income (loss)(3) |
|
10,007 |
|
6,108 |
|
6,903 |
|
|
7,995 |
|
(46,859 |
) |
|
(30,867 |
) |
|
(7,253 |
) |
|
(13,272 |
) | ||||||||
Net income (loss) per share |
|||||||||||||||||||||||||||||
Basic |
|
0.27 |
|
0.16 |
|
0.18 |
|
|
0.21 |
|
(1.25 |
) |
|
(0.82 |
) |
|
(0.19 |
) |
|
(0.35 |
) | ||||||||
Diluted |
|
0.26 |
|
0.16 |
|
0.18 |
|
|
0.21 |
|
(1.25 |
) |
|
(0.82 |
) |
|
(0.19 |
) |
|
(0.35 |
) |
(1) |
We recognized goodwill impairment, asset impairment and restructuring charges of $49,428, $34,839, 0, and $8,936 in the fiscal quarters of 2002 comprised of (a)
$42,926 representing the asset impairment charge related to goodwill, (b) $15,053 for the impairment of other assets, primarily property and equipment and other investments, (c) $19,102 of severance restructuring costs, and (d) $16,122 of facilities
restructuring costs. |
(2) |
Fiscal 2001 quarterly results include goodwill amortization of $2,552, $3,087, $2,992 and $2,895. |
(3) |
Net income, excluding goodwill amortization in fiscal 2001 would have been $12,559, $9,195, $9,895 and $10,890. Net loss, excluding asset impairment and
restructuring charges in fiscal 2002 would have been $2,616, $1,536, $7,253 and $4,336. |
(4) |
As further described in notes 1 and 14 to the consolidated financial statements, we have restated our previously reported results to account for our investment
in our Mexico subsidiaries under the equity method. The restatement from the consolidation method to the equity method reduced revenue and expenses in each fiscal year, but had no impact on net income, earnings per share or total shareholders
equity. |
Euro Conversion
As of January 1, 1999, several member countries of the European Union established fixed conversion rates among their existing local currencies and adopted the Euro as their
new common legal currency. The Euro traded on currency exchanges and the legacy currencies remained legal tender in the participating countries for a transition period which expired January 1, 2002.
At January 1, 2002, the participating countries introduced Euro notes and coins and withdrew all legacy currencies. Our information
technology systems allow for the recording of transactions in the Euro. Our conversion to the Euro was successful and did not have a material impact on our business or financial condition to date.
29
Table of Contents
Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not believe that
the adoption of this statement will have a significant impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. This statement establishes a number of rules which govern accounting for the impairment of long-lived assets, eliminates inconsistencies from having two accounting models for long-lived assets to be disposed of by sale and
expands the definition of a discontinued operation to a component of an entity for which identifiable cash flows exist. The statement is effective for fiscal years beginning after December 15, 2001. We do not believe that the adoption of this
statement will have a significant impact on our financial position or results of operations.
As a result of
its global operating activities, we are exposed to certain market risks, including foreign currency exchange fluctuations, fluctuations in interest rates and variability in interest rate spread relationships. We manage our exposure to these risks in
the normal course of our business as described below. We have not utilized financial instruments for trading or other speculative purposes nor do we trade in derivative financial instruments.
Foreign Currency Risk
Generally, financial results of our foreign subsidiaries are measured in their local currencies. Assets and liabilities are translated into U.S. dollars at the rates of exchange in effect at the end of each year and revenue and
expenses are translated at average rates of exchange during the year. Resulting translation adjustments are reported as a component of comprehensive income.
Financial results of foreign subsidiaries in countries with highly inflationary economies are measured in U.S. dollars. The financial statements of these subsidiaries are translated using a combination
of current and historical rates of exchange and any translation adjustments are included in determining net income.
Historically, we have not realized any significant translation gains or losses on transactions involving U.S. dollars and other currencies. This is primarily due to natural hedges of revenue and expenses in the functional currencies
of the countries in which our offices are located and investment of excess cash balances in U.S. dollar denominated accounts. In fiscal 2002, 2001 and 2000, we recognized foreign currency (gains) losses, after income taxes, of ($0.2) million, $0.6
million and $1.7 million, respectively, primarily related to our Europe operations. Realization of translation gains or losses due to the translation of intercompany payables denominated in U.S. dollars is mitigated through the timing of repayment
of these intercompany borrowings.
Interest Rate Risk
We primarily manage our exposure to fluctuations in interest rates through our regular financing activities that generally are short term and provide for variable
market rates. As of April 30, 2002, we had an outstanding balance of $39.0 million on our revolving line of credit bearing interest at Prime plus 3.75%, $59.9 million of borrowings against the cash surrender value of COLI contracts bearing interest
primarily at variable rates payable at least annually and $14.4 million of notes payable, of which $14.2 million is due to shareholders resulting from business acquisitions in fiscal 2000 and 2001, at rates ranging from 5.2% to 7.0%, of which
$12.7 million matures in fiscal 2003 and $1.5 million matures in fiscal 2004. Currently, we have all of our investments in interest bearing money market accounts at market rates.
30
Table of Contents
See Consolidated Financial
Statements beginning on page F-1 of this Annual Report on Form 10-K.
Report on Form 8-K. Current report event dated April 11, 2002 reported a change in certifying accountants from Arthur Andersen LLP to Ernst & Young LLP is incorporated herein by reference.
31
Table of Contents
PART III.
The information required
by this Item will be included under the captions The Board of Directors, Nominees for DirectorClass 2003, Nominees for DirectorClass 2004, Nominees for DirectorsClass 2005 and
Section 16(a) Beneficial Ownership Reporting Compliance in our fiscal 2002 Proxy Statement, and is incorporated herein by reference. See also Executive Officers of the Registrant in Part I of this report.
The information required by this Item will be
included under the captions Executive CompensationSummary Compensation Table, Executive CompensationOption Grant Table, Executive CompensationAggregated Option Exercises and Year-end Option
Values and Employment Agreements in our fiscal 2002 Proxy Statement, and is incorporated herein by reference.
The
information required by this Item will be included under the caption Security Ownership of Certain Beneficial Owners and Management in our fiscal 2002 Proxy Statement, and is incorporated herein by reference.
The information required by
this Item will be included under the caption Certain Relationships and Related Transactions in our fiscal 2002 Proxy Statement, and is incorporated herein by reference.
32
Table of Contents
PART IV.
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT.
Page | ||||
1. |
Index to Financial Statements: |
|||
See Consolidated Financial Statements included as part of this Form 10-K |
F-1 | |||
2. |
Financial Statement Schedules: |
|||
Schedule IIValuation and Qualifying Accounts |
F-33 | |||
3. |
Exhibits: |
Exhibit Number |
Description of Exhibit | |
3.1 |
Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Companys Quarterly Report on Form
10-Q, dated December 15, 1999, and incorporated herein by reference. | |
3.2 |
Certificate of Designations of 7.5% Convertible Preferred Stock, filed as Exhibit 3.1 to the Companys Current
Report on Form 8-K, dated June 18, 2002, and incorporated herein by reference. | |
3.3 |
Amended and Restated Bylaws of the Company, filed as Exhibit 3.3 to the Companys Annual Report on
Form 10-K, dated July 29, 2002, and incorporated herein by reference. | |
4.1 |
Form of Common Stock Certificate of the Company, filed as Exhibit 4.1 to the Companys Registration Statement on
Form S-3 (No. 333-49286), and incorporated herein by reference. | |
4.2 |
Form of 7.5% Convertible Subordinated Note Due 2010, filed as Exhibit 4.1 to the Companys Current Report on
Form 8-K, dated June 18, 2002, and incorporated herein by reference. | |
4.3 |
Form of Stock Purchase Warrant, filed as Exhibit 4.2 to the Companys Current Report on Form 8-K, dated June 18,
2002, and incorporated herein by reference. | |
4.4 |
Subordination Agreement, dated as of June 13, 2002, made by Korn/Ferry International, a Delaware corporation,
Friedman Fleischer & Lowe Capital Partners, L.P., a Delaware limited partnership, and FFL Executive Partners, L.P., a Delaware limited partnership in favor of Bank of America, N.A., filed as Exhibit 4.3 to the Companys Current Report on
Form 8-K, dated June 18, 2002, and incorporated herein by reference. | |
10.1* |
Form of Indemnification Agreement between the Company and some of its executive officers and directors, filed as
Exhibit 10.1 to the Companys Registration Statement on Form S-1 (No. 333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.2* |
Form of U.S. and International Worldwide Executive Benefit Retirement Plan, filed as Exhibit 10.3 to the
Companys Registration Statement of Form S-1 (No. 333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.3* |
Form of U.S. and International Worldwide Executive Benefit Life Insurance Plan, filed as Exhibit 10.4 to the
Companys Registration Statement on Form S-1 (No. 333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.4* |
Worldwide Executive Benefit Disability Plan (in the form of Long-Term Disability Insurance Policy), filed as
Exhibit 10.5 to the Companys Registration Statement on Form S-1 (No. 333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.5* |
Form of U.S. and International Enhanced Executive Benefit and Wealth Accumulation Plan, filed as Exhibit 10.6 to the
Companys Registration Statement on Form S-1 (No. 333-61697), effective February 10, 1999, and incorporated herein by reference. |
33
Table of Contents
Exhibit Number |
Description of Exhibit | |
10.6* |
Form of U.S. and International Senior Executive Incentive Plan, filed as Exhibit 10.7 to the Companys
Registration Statement on Form S-1 (No. 333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.7* |
Executive Salary Continuation Plan, filed as Exhibit 10.8 to the Companys Registration Statement on Form S-1
(No. 333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.8* |
Form of Amended and Restated Stock Repurchase Agreement, filed as Exhibit 10.10 to the Companys Registration
Statement on Form S-1 (No. 333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.9* |
Form of Standard Employment Agreement, filed as Exhibit 10.11 to the Companys Registration Statement on Form
S-1 (No. 333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.10* |
Form of U.S. and Foreign Executive Participation Program, filed as Exhibit 10.27 to the Companys Registration
Statement on Form S-1 (No. 333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.11* |
Employment Agreement between the Company and Paul C. Reilly, dated May 24, 2001, filed as Exhibit 10.14 to the
Companys Annual Report on Form 10-K, dated July 30, 2001, and incorporated herein by reference. | |
10.12* |
Amendment to Employment Agreement between the Company and Paul C. Reilly, dated December 1, 2001, filed as
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q, dated December 17, 2001, and incorporated herein by reference. | |
10.13* |
Letter from the Company to Paul C. Reilly, dated June 6, 2001, filed as Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q, dated December 17, 2001, and incorporated herein by reference. | |
10.14* |
Employment Agreement between the Company and Windle B. Priem, dated June 30, 2001, filed as Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q, dated September 14, 2001, and incorporated herein by reference. | |
10.15* |
Employment Agreement between the Company and Gary C. Hourihan effective March 6, 2000, filed as Exhibit 10.22 to the
Companys Annual Report on Form 10-K, dated July 31, 2000 and incorporated herein by reference. | |
10.16* |
Korn/Ferry International Special Severance Pay Policy, dated January 1, 2000, filed as Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q, dated March 19, 2001 and incorporated herein by reference. | |
10.17 |
Loan Agreement, dated as of October 31, 2000, among Korn/Ferry International, the lenders thereto and Bank of
America, N.A. as administrative agent, filed as Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q, dated December 14, 2000, and incorporated herein by reference. | |
10.18 |
Amendment No. 1 to Loan Agreement, dated January 30, 2001, filed as Exhibit 10.4 to the Companys Quarterly
Report on Form 10-Q, dated March 19, 2001, and incorporated herein by reference. | |
10.19 |
Amendment No. 2 to Loan Agreement, dated April 29, 2001, filed as Exhibit 10.3 to the Companys Quarterly Report
on Form 10-Q, dated December 17, 2001, and incorporated herein by reference. | |
10.20 |
Amendment No. 3 to Loan Agreement, dated March 7, 2002, filed as Exhibit 10.1 to the Companys Quarterly Report
on Form 10-Q, dated March 18, 2002, and incorporated herein by reference. | |
10.21 |
Amendment No. 4 to Loan Agreement, dated March 29, 2002, filed as Exhibit 10.2 to the Companys Current Report
on Form 8-K, dated June 18, 2002, and incorporated herein by reference. |
34
Table of Contents
Exhibit Number |
Description of Exhibit | ||
10.22 |
|
Amendment No. 5 to Loan Agreement, dated June 13, 2002, filed as Exhibit 10.3 to the Companys Current Report on
Form 8-K, dated June 18, 2002, and incorporated herein by reference. | |
10.23* |
|
Performance Award Plan filed as Exhibit 10.2 to the Companys Registration Statement on Form S-1 (No.
333-61697), effective February 10, 1999, and incorporated herein by reference. | |
10.24* |
|
Amendments to Performance Award Plan, filed as Exhibit 10.4 on the Companys Annual Report on Form 10-K, dated
July 30, 2001, and incorporated herein by reference. | |
10.25* |
|
Amendments to Performance Award Plan, filed as Exhibit 10.25 to the Companys Annual Report on Form 10-K, dated
July 29, 2002, and incorporated herein by reference. | |
10.26 |
|
Investor Rights Agreement, dated as of June 13, 2002, by and among Korn/Ferry International, a Delaware corporation,
Friedman Fleischer & Lowe Capital Partners, L.P., a Delaware limited partnership, and FFL Executive Partners, L.P., a Delaware limited partnership filed as Exhibit 10.1 to the Companys Current Report on Form 8-K, dated June 18, 2002, and
incorporated herein by reference. | |
10.27 |
* |
Letter from the Company to James E. Boone, dated February 28, 1995. | |
10.28 |
* |
Employment Agreement between the Company and James E. Boone, dated May 1, 1995. | |
10.29 |
* |
Letter from Korn/Ferry International Futurestep, Inc. to Robert H. McNabb, dated December 3, 2001. |
|
10.30 |
* |
Letter from the Company to Robert H. McNabb, dated November 29, 2001. | |
10.31 |
* |
Employment Agreement between the Company and Robert H. McNabb, dated December 7, 2001. | |
16.1 |
|
Letter of Arthur Andersen LLP to the Securities and Exchange Commission, dated April 12, 2002, regarding change in
certifying accountant filed as Exhibit 16.1 to the Companys Current Report on Form 8-K, dated April 11, 2002, and incorporated herein by reference. | |
21.1 |
|
Subsidiaries of Korn/Ferry International, filed as Exhibit 21.1 to the Companys Annual Report on Form 10-K,
dated July 29, 2002, and incorporated herein by reference. | |
23.1 |
|
Consent of Independent Auditors, filed as Exhibit 23.1 to the Companys Annual Report on Form 10-K, dated
July 29, 2002, and incorporated herein by reference. | |
24.1 |
|
Power of Attorney, filed as Exhibit 24.1 to the Companys Annual Report on Form 10-K, dated July 29, 2002,
and incorporated herein by reference. |
* |
Management contract, compensatory plan or arrangement. |
Current report event dated April 11, 2002 (Item 4 and Item 7) was
filed with the SEC on April 15, 2002.
35
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KORN/FERRY INTERNATIONAL | ||
By: |
/s/ GARY D.
BURNISON | |
Gary D. Burnison Chief
Financial Officer, Treasurer and Executive Vice President |
Date: August 12, 2002
36
Table of Contents
F-2 | ||
F-5 | ||
F-6 | ||
F-7 | ||
F-8 | ||
F-9 | ||
INDEX TO FINANCIAL STATEMENT SCHEDULE |
||
F-33 |
F-1
Table of Contents
Shareholders and Board of Directors
Korn/Ferry International
We have audited the accompanying consolidated balance sheet of KORN/FERRY INTERNATIONAL AND SUBSIDIARIES (the Company), as of April 30, 2002, and the related consolidated statements of operations,
shareholders equity and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended April 30, 2002 included in the index at Item 14(a). The consolidated financial statements of the Company as
of April 30, 2001, and for the two years then ended, and the schedule for the two years ended April 30, 2001 included in the index at Item 14(a), were audited by other auditors whose report dated June 11, 2001, expressed an
unqualified opinion on those statements and schedule prior to the restatement described in Notes 1 and 14. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with
auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of KORN/FERRY INTERNATIONAL AND SUBSIDIARIES as of April 30, 2002 and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Notes 1 and 2 to the financial statements, in fiscal 2002 the Company changed its method of accounting for goodwill and ceased amortization of goodwill effective as of the beginning of the year.
As discussed above, the consolidated financial statements of the Company as of April 30, 2001, and for the two years then
ended were audited by other auditors who have ceased operations. As described in Notes 1 and 14, these consolidated financial statements have been restated to reflect the Companys investment in its Mexico subsidiaries on the equity method
of accounting. Previously, these subsidiaries were included in the consolidated financial statements as consolidated subsidiaries. We audited the adjustments that were applied to restate the disclosures reflected in Note 14 with respect to fiscal
2001 and fiscal 2000, and the adjustments that were applied to the schedule for the two years ended April 2001. Our procedures principally consisted of the following: (i) examining evidence of the appropriateness of the equity method of
accounting for the investment in the Mexico subsidiaries, (ii) agreeing the adjustment amounts for Mexico subsidiaries to the Companys consolidating financial statements obtained from management and (iii) testing the
mathematical accuracy in computing the restated consolidated financial statement amounts reflected in Note 14. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or
apply any procedures to the fiscal 2001 and fiscal 2000 consolidated financial statements and schedule of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the
fiscal 2001 and fiscal 2000 consolidated financial statements and schedule taken as a whole.
/s/ ERNST & YOUNG LLP
Los Angeles, California
June 20, 2002
F-2
Table of Contents
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Korn/Ferry International:
We have audited the accompanying consolidated balance sheets of KORN/FERRY INTERNATIONAL AND SUBSIDIARIES (the Company), a Delaware corporation, as of April 30, 2001 and 2000, and the
related consolidated statements of operations, shareholders equity and cash flows for each of the three years in the period ended April 30, 2001. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our
audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of KORN/FERRY INTERNATIONAL AND SUBSIDIARIES as of April 30, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period ended April 30, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
June 11, 2001
THIS IS A COPY OF AN ACCOUNTANTS REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. THE FINANCIAL STATEMENTS REFERRED TO IN THIS REPORT HAVE BEEN RESTATED SUBSEQUENT TO THE DATE OF THE REPORT TO ACCOUNT FOR KORN/FERRY INTERNATIONALS INVESTMENT IN ITS
MEXICO SUBSIDIARIES UNDER THE EQUITY METHOD INSTEAD OF THE CONSOLIDATION METHOD. (SEE NOTES 1 AND 14). THE RESTATEMENT ADJUSTMENTS HAVE BEEN REPORTED ON BY ERNST & YOUNG LLP.
WE WILL NOT BE ABLE TO OBTAIN THE WRITTEN CONSENT OF ARTHUR ANDERSEN LLP FOR ANY REGISTRATION STATEMENT WE MAY FILE AS REQUIRED BY SECTION 7 OF THE SECURITIES ACT. ACCORDINGLY, INVESTORS WILL NOT BE
ABLE TO SUE ARTHUR ANDERSEN LLP PURSUANT TO SECTION 11(a)(4) OF THE SECURITIES ACT RELATING TO THOSE REGISTRATION STATEMENTS AND THEREFORE MAY HAVE THEIR RECOVERY LIMITED AS A RESULT OF THE LACK OF CONSENT. THE ABILITY OF INVESTORS TO RECOVER FROM
ARTHUR ANDERSEN LLP MAY ALSO BE LIMITED AS A RESULT OF THEIR FINANCIAL CONDITION OR OTHER MATTERS RELATING TO THE VARIOUS CIVIL AND CRIMINAL LAWSUITS RELATING TO THEM.
F-3
Table of Contents
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Korn/Ferry International:
We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Korn/Ferry International and Subsidiaries (the
Company) included in this Form 10-K report and have issued our report thereon dated June 11, 2001. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule
IIKorn/Ferry International and Subsidiaries Valuation and Qualifying Accounts is the responsibility of the Companys management and is presented for purposes of complying with the Securities and Exchange Commissions rules and is not
part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Los
Angeles, California
June 11, 2001
THIS IS A COPY OF AN ACCOUNTANTS REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. THE FINANCIAL STATEMENTS
REFERRED TO IN THIS REPORT HAVE BEEN RESTATED SUBSEQUENT TO THE DATE OF THE REPORT TO ACCOUNT FOR KORN/FERRY INTERNATIONALS INVESTMENT IN ITS MEXICO SUBSIDIARIES UNDER THE EQUITY METHOD INSTEAD OF THE CONSOLIDATION METHOD. (SEE NOTES 1 AND
14). THE RESTATEMENT ADJUSTMENTS HAVE BEEN REPORTED ON BY ERNST & YOUNG LLP.
WE WILL NOT BE ABLE TO OBTAIN THE WRITTEN
CONSENT OF ARTHUR ANDERSEN LLP FOR ANY REGISTRATION STATEMENT WE MAY FILE AS REQUIRED BY SECTION 7 OF THE SECURITIES ACT. ACCORDINGLY, INVESTORS WILL NOT BE ABLE TO SUE ARTHUR ANDERSEN LLP PURSUANT TO SECTION 11(a)(4) OF THE SECURITIES ACT RELATING
TO THOSE REGISTRATION STATEMENTS AND THEREFORE MAY HAVE THEIR RECOVERY LIMITED AS A RESULT OF THE LACK OF CONSENT. THE ABILITY OF INVESTORS TO RECOVER FROM ARTHUR ANDERSEN LLP MAY ALSO BE LIMITED AS A RESULT OF THEIR FINANCIAL CONDITION OR OTHER
MATTERS RELATING TO THE VARIOUS CIVIL AND CRIMINAL LAWSUITS RELATING TO THEM.
F-4
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
(in thousands, except per share amounts)
April 30, |
||||||||
2002 |
2001 |
|||||||
Restated* |
||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ |
66,128 |
|
$ |
85,661 |
| ||
Marketable securities |
|
16,397 |
| |||||
Receivables due from clients, net of allowance for doubtful accounts of $7,767 and $12,937 |
|
54,960 |
|
|
89,562 |
| ||
Income tax and other receivables |
|
30,140 |
|
|
11,046 |
| ||
Deferred income taxes |
|
10,336 |
|
|
8,821 |
| ||
Prepaid expenses |
|
10,331 |
|
|
9,818 |
| ||
|
|
|
|
|
| |||
Total current assets |
|
171,895 |
|
|
221,305 |
| ||
|
|
|
|
|
| |||
Property and equipment, net |
|
40,248 |
|
|
54,456 |
| ||
Cash surrender value of company owned life insurance policies, net of loans |
|
53,048 |
|
|
54,361 |
| ||
Investment in unconsolidated subsidiaries |
|
2,172 |
|
|
1,403 |
| ||
Deferred income taxes |
|
21,794 |
|
|
24,942 |
| ||
Goodwill, net of accumulated amortization of $15,101 and $17,718 |
|
85,346 |
|
|
126,006 |
| ||
Other intangibles, net of accumulated amortization of $4,103 and $3,154 |
|
396 |
|
|
2,060 |
| ||
Marketable securities, other investments and other assets |
|
2,675 |
|
|
11,569 |
| ||
|
|
|
|
|
| |||
Total assets |
$ |
377,574 |
|
$ |
496,102 |
| ||
|
|
|
|
|
| |||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Notes payable and current maturities of long-term debt |
$ |
12,818 |
|
$ |
11,832 |
| ||
Borrowings under credit facility |
|
39,000 |
|
|||||
Accounts payable |
|
8,319 |
|
|
12,944 |
| ||
Income taxes payable |
|
332 |
|
|
2,720 |
| ||
Compensation and benefits |
|
48,774 |
|
|
110,404 |
| ||
Other accrued liabilities |
|
37,042 |
|
|
32,194 |
| ||
|
|
|
|
|
| |||
Total current liabilities |
|
146,285 |
|
|
170,094 |
| ||
|
|
|
|
|
| |||
Deferred compensation and other retirement plans |
|
44,806 |
|
|
41,522 |
| ||
Long-term debt |
|
1,634 |
|
|
11,842 |
| ||
Other |
|
5,552 |
|
|
2,478 |
| ||
|
|
|
|
|
| |||
Total liabilities |
|
198,277 |
|
|
225,936 |
| ||
Shareholders equity: |
||||||||
Common stock, $0.01 par value, 150,000 shares authorized, 38,587 and 38,082 shares issued and 37,869 and 37,516 shares
outstanding |
|
301,488 |
|
|
296,069 |
| ||
Retained earnings (deficit) |
|
(102,853 |
) |
|
(4,602 |
) | ||
Unearned restricted stock compensation |
|
(2,988 |
) |
|||||
Accumulated other comprehensive loss |
|
(14,101 |
) |
|
(16,598 |
) | ||
|
|
|
|
|
| |||
Shareholders equity |
|
181,546 |
|
|
274,869 |
| ||
Less: Notes receivable from shareholders |
|
(2,249 |
) |
|
(4,703 |
) | ||
|
|
|
|
|
| |||
Total shareholders equity |
|
179,297 |
|
|
270,166 |
| ||
|
|
|
|
|
| |||
Total liabilities and shareholders equity |
$ |
377,574 |
|
$ |
496,102 |
| ||
|
|
|
|
|
|
* |
The restatement to account for the operating results of our less than 50% interest in subsidiaries in Mexico under the equity method instead of the
consolidation method had no impact on shareholders equity. (See Notes 1 and 14). |
The
accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
(in thousands, except per share amounts)
Fiscal Year Ended April 30, | ||||||||||
2002 |
2001 |
2000 | ||||||||
Restated* |
Restated* | |||||||||
Revenue |
$ |
393,891 |
|
$ |
636,298 |
$ |
487,562 | |||
Compensation and benefits |
|
273,994 |
|
|
383,277 |
|
295,307 | |||
General and administrative expenses |
|
132,327 |
|
|
197,948 |
|
143,344 | |||
Asset impairment and restructuring charges |
|
50,277 |
|
|||||||
Goodwill impairment charges |
|
42,926 |
|
|||||||
Interest income and other income, net |
|
2,434 |
|
|
4,122 |
|
6,748 | |||
Interest expense |
|
8,521 |
|
|
7,400 |
|
4,420 | |||
|
|
|
|
|
|
| ||||
Income (loss) before provision for income taxes and equity in earnings of unconsolidated subsidiaries |
|
(111,720 |
) |
|
51,795 |
|
51,239 | |||
(Benefit from) provision for income taxes |
|
(12,328 |
) |
|
22,443 |
|
21,938 | |||
Equity in earnings of unconsolidated subsidiaries |
|
1,141 |
|
|
1,661 |
|
1,510 | |||
|
|
|
|
|
|
| ||||
Net income (loss) |
$ |
(98,251 |
) |
$ |
31,013 |
$ |
30,811 | |||
|
|
|
|
|
|
| ||||
Basic earnings (loss) per common share |
$ |
(2.62 |
) |
$ |
0.83 |
$ |
0.85 | |||
|
|
|
|
|
|
| ||||
Basic weighted average common shares outstanding |
|
37,547 |
|
|
37,266 |
|
36,086 | |||
|
|
|
|
|
|
| ||||
Diluted earnings (loss) per common share |
$ |
(2.62 |
) |
$ |
0.81 |
$ |
0.82 | |||
|
|
|
|
|
|
| ||||
Diluted weighted average common shares outstanding |
|
37,547 |
|
|
38,478 |
|
37,680 | |||
|
|
|
|
|
|
|
* |
The restatement to account for the operating results of our less than 50% interest in subsidiaries in Mexico under the equity method instead of the
consolidation method reduced revenue and expenses, but had no impact on net income or earnings per share in either 2001 or 2000. (See Notes 1 and 14). |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
(in thousands)
Common Stock |
Retained Earnings (Deficit) |
Unearned Restricted Stock Compensation |
Accumulated Other Comprehensive Income (Loss) |
Shareholders Equity |
Comprehensive Income (Loss) |
|||||||||||||||||||
Balance as of April 30, 1999* |
$ |
253,021 |
|
$ |
(66,426 |
) |
$ |
(2,360 |
) |
$ |
184,235 |
|
||||||||||||
Purchase of stock |
|
(964 |
) |
|
(964 |
) |
||||||||||||||||||
Issuance of stock |
|
31,220 |
|
|
31,220 |
|
||||||||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||
Net income |
|
30,811 |
|
|
30,811 |
|
$ |
30,811 |
| |||||||||||||||
Foreign currency translation adjustments |
|
(4,940 |
) |
|
(4,940 |
) |
|
(4,940 |
) | |||||||||||||||
|
|
| ||||||||||||||||||||||
Comprehensive income |
$ |
25,871 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance as of April 30, 2000* |
|
283,277 |
|
|
(35,615 |
) |
|
(7,300 |
) |
|
240,362 |
|
||||||||||||
Purchase of stock. |
|
(118 |
) |
|
(118 |
) |
||||||||||||||||||
Issuance of stock. |
|
12,910 |
|
|
12,910 |
|
||||||||||||||||||
Comprehensive Income: |
||||||||||||||||||||||||
Net income |
|
31,013 |
|
|
31,013 |
|
$ |
31,013 |
| |||||||||||||||
Foreign currency translation adjustments |
|
(6,336 |
) |
|
(6,336 |
) |
|
(6,336 |
) | |||||||||||||||
Unrealized loss on investment, net of tax benefit of $2,145 |
|
(2,962 |
) |
|
(2,962 |
) |
|
(2,962 |
) | |||||||||||||||
|
|
| ||||||||||||||||||||||
Comprehensive income |
$ |
21,715 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance as of April 30, 2001* |
|
296,069 |
|
|
(4,602 |
) |
|
(16,598 |
) |
|
274,869 |
|
||||||||||||
Purchase of stock |
|
(376 |
) |
|
(376 |
) |
||||||||||||||||||
Issuance of stock |
|
1,655 |
|
|
1,655 |
|
||||||||||||||||||
Issuance of restricted stock |
|
4,923 |
|
$ |
(4,921 |
) |
|
2 |
|
|||||||||||||||
Forfeiture of restricted stock |
|
(783 |
) |
|
783 |
|
||||||||||||||||||
Amortization of unearned restricted stock compensation |
|
1,150 |
|
|
1,150 |
|
||||||||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss |
|
(98,251 |
) |
|
(98,251 |
) |
$ |
(98,251 |
) | |||||||||||||||
Foreign currency translation adjustments |
|
(465 |
) |
|
(465 |
) |
|
(465 |
) | |||||||||||||||
Reclassification adjustment for losses realized on investment, net of tax benefit of $2,145 |
|
2,962 |
|
|
2,962 |
|
|
2,962 |
| |||||||||||||||
|
|
| ||||||||||||||||||||||
Comprehensive loss |
$ |
(95,754 |
) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance as of April 30, 2002 |
$ |
301,488 |
|
$ |
(102,853 |
) |
$ |
(2,988 |
) |
$ |
(14,101 |
) |
$ |
181,546 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
The restatement to account for the operating results of our less than 50% interest in subsidiaries in Mexico under the equity method instead of the
consolidation method had no impact on shareholders equity. (See Notes 1 and 14). |
The
accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
(in thousands)
Fiscal Year Ended April 30, |
||||||||||||
2002 |
2001 |
2000 |
||||||||||
Restated* |
Restated* |
|||||||||||
Cash from operating activities: |
||||||||||||
Net income (loss) |
$ |
(98,251 |
) |
$ |
31,013 |
|
$ |
30,811 |
| |||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
||||||||||||
Depreciation |
|
16,533 |
|
|
14,712 |
|
|
9,912 |
| |||
Amortization of goodwill |
|
11,526 |
|
|
2,662 |
| ||||||
Amortization of other intangible assets |
|
949 |
|
|
637 |
|
|
696 |
| |||
Amortization of note payable discount |
|
467 |
|
|
724 |
|
|
269 |
| |||
Loss on disposition of property and equipment |
|
63 |
|
|
651 |
|
||||||
Unrealized loss on marketable securities |
|
946 |
|
|||||||||
Provision for doubtful accounts |
|
10,853 |
|
|
22,581 |
|
|
11,858 |
| |||
Cash surrender value (gains) losses and benefits in excess of premiums paid |
|
(806 |
) |
|
2,270 |
|
|
(1,371 |
) | |||
Deferred income tax provision (benefit) |
|
1,003 |
|
|
(4,220 |
) |
|
(1,463 |
) | |||
Tax benefit from exercise of stock options |
|
188 |
|
|
2,779 |
|
|
2,837 |
| |||
Asset impairment charges |
|
57,730 |
|
|||||||||
Restructuring charges, including $12,578 of liabilities |
|
14,844 |
|
|||||||||
Restricted stock compensation |
|
1,152 |
|
|||||||||
Change in other assets and liabilities, net of acquisitions: |
||||||||||||
Deferred compensation |
|
3,284 |
|
|
4,039 |
|
|
5,400 |
| |||
Receivables |
|
5,160 |
|
|
(14,893 |
) |
|
(53,647 |
) | |||
Prepaid expenses |
|
(147 |
) |
|
(2,458 |
) |
|
(1,625 |
) | |||
Investment in unconsolidated subsidiaries |
|
(769 |
) |
|
726 |
|
|
(676 |
) | |||
Income taxes |
|
(3,903 |
) |
|
2,298 |
|
|
(3,779 |
) | |||
Accounts payable and accrued liabilities |
|
(70,249 |
) |
|
(9,056 |
) |
|
71,075 |
| |||
Other |
|
1,434 |
|
|
519 |
|
|
123 |
| |||
|
|
|
|
|
|
|
|
| ||||
Net cash (used in) provided by operating activities |
|
(59,519 |
) |
|
63,848 |
|
|
73,082 |
| |||
|
|
|
|
|
|
|
|
| ||||
Cash from investing activities: |
||||||||||||
Purchase of property and equipment |
|
(8,539 |
) |
|
(33,854 |
) |
|
(22,755 |
) | |||
Purchase of marketable securities |
|
(16,397 |
) |
|
(31,050 |
) | ||||||
Sale of marketable securities |
|
16,397 |
|
|
61,107 |
|
||||||
Business acquisitions, net of cash acquired |
|
(834 |
) |
|
(44,488 |
) |
|
(42,882 |
) | |||
Premiums on life insurance, net of benefits received |
|
(9,543 |
) |
|
(9,485 |
) |
|
(10,611 |
) | |||
Purchase of investments |
|
(12,570 |
) |
|||||||||
|
|
|
|
|
|
|
|
| ||||
Net cash used in investing activities |
|
(2,519 |
) |
|
(55,687 |
) |
|
(107,298 |
) | |||
|
|
|
|
|
|
|
|
| ||||
Cash from financing activities: |
||||||||||||
Net borrowings (repayments) on credit line |
|
39,000 |
|
|
(1,365 |
) |
||||||
Payment of shareholder acquisition notes |
|
(9,449 |
) |
|
(14,200 |
) |
|
(1,555 |
) | |||
Net borrowings under life insurance policies |
|
11,662 |
|
|
3,486 |
|
|
3,324 |
| |||
Purchase of common stock and payment of related notes |
|
(532 |
) |
|
(533 |
) |
|
(1,527 |
) | |||
Issuance of common stock and receipts on shareholders notes |
|
3,462 |
|
|
10,287 |
|
|
8,427 |
| |||
|
|
|
|
|
|
|
|
| ||||
Net cash provided by (used in) financing activities |
|
44,143 |
|
|
(2,325 |
) |
|
8,669 |
| |||
|
|
|
|
|
|
|
|
| ||||
Effect of foreign currency exchange rate changes on cash flows |
|
(1,638 |
) |
|
(3,828 |
) |
|
(2,539 |
) | |||
|
|
|
|
|
|
|
|
| ||||
Net increase (decrease) in cash and cash equivalents |
|
(19,533 |
) |
|
2,008 |
|
|
(28,086 |
) | |||
Cash and cash equivalents at beginning of the year |
|
85,661 |
|
|
83,653 |
|
|
111,739 |
| |||
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents at end of the year |
$ |
66,128 |
|
$ |
85,661 |
|
$ |
83,653 |
| |||
|
|
|
|
|
|
|
|
|
* |
The restatement to account for the operating results of our less than 50% interest in subsidiaries in Mexico under the equity method instead of the
consolidation method had no impact on net income or shareholders equity. (See Notes 1 and 14). |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
April 30, 2002
(dollars in thousands, except per share amounts)
1. Organization and Summary
of Significant Accounting Policies
Nature of Business
Korn/Ferry International, a Delaware corporation, and its subsidiaries are engaged in the business of providing executive recruitment,
technology enhanced middle-management recruitment, through Futurestep, and consulting and related services globally on a retained basis.
Basis of Consolidation and Accounting for Investments
The consolidated financial
statements include the accounts of Korn/Ferry International (KFY) and all of its wholly and majority owned domestic and international subsidiaries. All material intercompany accounts and transactions have been eliminated.
In prior years, the Company consolidated the accounts of its subsidiaries in Mexico, in which KFY believes it has effective
control but owns less than 50% of the shareholder voting interest. While the Company believes that this presentation reflected the way in which these subsidiaries are managed and operate, the legal structure of these entities requires the use of the
equity method of accounting under accounting principles generally accepted in the United States (GAAP). This legal structure was established in 1977, which at that time, limited foreign investment. Accordingly, the accompanying
consolidated financial statements for prior periods have been restated to comply with GAAP and reflect the operations of the Mexico subsidiaries under the equity method of accounting. The restatement to properly apply the equity method of accounting
for the Mexico subsidiaries had no impact on net income, EPS or cash flow but did reduce previously reported revenue and expenses. See Notes 14 and 15 (unaudited) for a comparison of the restated results to the previously reported results.
Investments in companies in which KFY does not have a controlling interest, or an ownership and voting interest
so large as to exert significant influence, are accounted for at market value if the investment is publicly traded and there are no resale restrictions greater than one year, or if the investment is not publicly traded, then the investment is
accounted for at cost. Dividends and other distributions of earnings from both market-value and cost-method investments are included in income when declared. Unrealized gains and losses on investments accounted for at market value are reported net
of tax as a component of accumulated other comprehensive income (loss) until the investment is sold or an unrealized loss is no longer temporary, at which time the realized or recognized gain or loss is included in income or expense.
In fiscal 2002, due to certain restructuring activities taken by the Company, the extended decline in the stock market and
other factors, the Company believed that the loss in value related to a publicly traded investment was no longer temporary and reclassified a loss of $2,962, net of a tax benefit of $2,145, on this investment that was included in other comprehensive
income (loss) at April 30, 2001 to net income (loss) in fiscal 2002. This loss is included in the asset impairment charge of $6,264 related to this investment that was recognized in the first fiscal quarter of 2002 (see Note 4). The Company
recognized an additional unrealized holding loss on this investment of $946 in fiscal 2002, included in other income.
Basis of Presentation
The accounting and reporting policies of the Company conform with
accounting practices generally accepted in the United States and prevailing practice within the industry.
F-9
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
Critical Accounting Policies and Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from these estimates. The most significant areas that require management judgment are revenue recognition (discussed below), deferred
compensation (see Note 6) and deferred income taxes (see Note 7).
Revenue Recognition
Substantially all professional fee revenue is derived from fees for professional services related to executive recruitment,
middle-management recruitment, consulting and related services performed on a retained basis. Fee revenue is generally one-third of the estimated first year compensation plus a percentage of the fee to cover indirect expenses. Fee revenue is
recognized as earned. The Company generally bills clients in three monthly installments. Fees earned in excess of the initial contract amount are billed at completion of the engagement.
Goodwill and Other Intangibles
Goodwill represents the excess of the acquisition cost over the net assets acquired in business combinations. Other intangibles arising from business acquisitions include contractual obligations contingent upon future performance
that are amortized on a straight-line basis over the contractual period.
In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. In conjunction with these new
accounting standards the FASB has issued Transition Provisions for New Business Combination Accounting Rules (Provisions) that allow non-calendar year-end companies to cease amortization of goodwill and adopt the new
impairment approach as of the beginning of their fiscal year that starts during either 2001 or 2002. The Company elected to implement SFAS No. 141 and 142 in the first quarter of fiscal 2002.
The Provisions provide for a six month period from the date of implementation of SFAS No. 142 to record impairment under the new method. The impairment charge, if any,
would be recorded as a cumulative effect of a change in accounting principle. The Company completed their impairment analysis in the second fiscal quarter of 2002. The fair value exceeded the book value of each reporting unit as of May 1, 2001 and,
accordingly, there was no impairment charge as a result of the implementation of the new standard. The impact on net income and earnings per share for the twelve months ended April 30, 2001 as if SFAS No. 142 had been implemented as of the beginning
of fiscal 2001 is disclosed in Note 2.
Under SFAS No. 142, the Company is required to assess whether goodwill is
impaired at least annually using a two-step process. This assessment was made as of April 30, 2002, and no impairment was indicated.
The Company re-evaluates other intangibles based on undiscounted operating cash flows whenever significant events or changes occur which might impair recovery of recorded costs, and writes down the recorded costs of the
assets to fair value (based on discounted cash flows or market values) when recorded costs, prior to
F-10
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
impairment, are higher. The Company has not recorded any charges against income for impairment based on these evaluations. Prior to the implementation of SFAS No. 142, goodwill was assessed for
impairment in the same manner.
The asset impairment charges recognized in fiscal 2002 are unrelated to the
implementation of SFAS No. 142. See Note 4.
Translation of Foreign Currencies
Generally, financial results of the Companys foreign subsidiaries are measured in their local currencies. Assets and
liabilities are translated into U.S. dollars at the rates of exchange in effect at the end of each year and revenue and expenses are translated at average rates of exchange during the year. Resulting translation adjustments are reported as a
component of comprehensive income (loss).
Gains and losses from foreign currency transactions of these
subsidiaries and the translation of the financial results of subsidiaries operating in highly inflationary economies are included in general and administrative expenses. Net foreign currency transaction and translation (gains) losses, on an after
tax basis, included in net income (loss), were ($246), $646 and $1,708 in fiscal 2002, 2001 and 2000, respectively.
Cash Flows
Cash equivalents consist of highly liquid investments with maturities of three
months or less at the date of purchase.
Net cash from operating activities includes cash payments for interest of
$8,324, $7,401 and $3,591 in fiscal 2002, 2001 and 2000, respectively. Cash payments for income taxes, net of refunds, amounted to $7,908, $24,222, and $24,594 in fiscal 2002, 2001 and 2000, respectively.
Marketable Securities
Management determines the appropriate classification of its investments in marketable securities at the time of purchase and reevaluates this classification at each balance sheet date. At April 30,
2002, we had no investments in marketable securities and at April 30, 2001, we had short term municipal securities of $13,450, municipal auction preferred of $2,000 and certificates of deposit of $947.
The certificates of deposit as of April 30, 2001 were purchased to serve as collateral for the letters of credit issued under the
Companys former line of credit. The maturity dates of the certificates of deposit correspond with the expiration dates of the letters of credit. The final certificate of deposit maturity date under this arrangement was March 2002.
Fair Value of Financial Instruments
The carrying amount of cash, cash equivalents and accounts receivable approximates fair value due to the short maturity of these instruments. Notes payable and long-term
debt bear interest at rates that approximate the current market interest rates for similar instruments and, accordingly the carrying value approximates fair value. The fair value of notes receivable from shareholders based on discounting the
estimated future cash flows using a current market rate approximates the carrying value.
F-11
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to significant concentrations of credit risk consist principally of
receivables due from clients. Concentrations of credit risk with respect to receivables are limited due to the Companys large number of customers and their dispersion across many different industries and countries worldwide.
Cash Surrender Value of Life Insurance
The change in the cash surrender value (CSV) of company owned life insurance (COLI) contracts net of insurance premiums paid is reported in
compensation and benefits expense. See Note 6.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement addresses financial
accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15,
2002. The Company does not believe that the adoption of this statement will have a significant impact on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which replaces SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. This statement establishes a number of rules which govern accounting for the impairment of long-lived assets, eliminates inconsistencies from having two accounting models for long-lived
assets to be disposed of by sale and expands the definition of a discontinued operation to a component of an entity for which identifiable cash flows exist. The statement is effective for fiscal years beginning after December 15, 2001. The Company
does not believe that the adoption of this statement will have a significant impact on its financial position or results of operations.
Reclassifications
Certain prior year reported amounts have been reclassified in
order to conform to the current year consolidated financial statement presentation.
F-12
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
2. Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per common share (basic EPS) was computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period. Diluted earnings (loss) per common and common equivalent share (diluted EPS) reflects the potential dilution that would occur if the outstanding options or other contracts to
issue common stock were exercised or converted and was computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding and dilutive common equivalent shares. Following is a reconciliation of the
numerator (income or loss) and denominator (shares in thousands) used in the computation of basic and diluted EPS:
Fiscal Year Ended April 30, | ||||||||||||||||||||||||||
2002 |
2001 |
2000 | ||||||||||||||||||||||||
(Loss) |
Weighted Average Shares |
Per Share Amount |
Income |
Weighted Average Shares |
Per Share Amount |
Income |
Weighted Average Shares |
Per Share Amount | ||||||||||||||||||
Basic EPS |
||||||||||||||||||||||||||
Income (loss) available to common shareholders |
$ |
(98,251 |
) |
37,547 |
$ |
(2.62 |
) |
$ |
31,013 |
37,266 |
$ |
0.83 |
$ |
30,811 |
36,086 |
$ |
0.85 | |||||||||
|
|
|
|
|
|
| ||||||||||||||||||||
Effect of dilutive securities |
||||||||||||||||||||||||||
Shareholder common stock purchase commitments |
270 |
373 |
||||||||||||||||||||||||
Stock options |
942 |
1,221 |
||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Diluted EPS |
||||||||||||||||||||||||||
Income (loss) available to common shareholders plus assumed conversions |
$ |
(98,251 |
) |
37,547 |
$ |
(2.62 |
) |
$ |
31,013 |
38,478 |
$ |
0.81 |
$ |
30,811 |
37,680 |
$ |
0.82 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended April 30, 2002, assumed exercises or conversions
have been excluded in computing the diluted earnings per share since there was a net loss for the year and their inclusion would be anti-dilutive.
The following table adjusts net income (loss) and earnings (loss) per share for the impact of the implementation of SFAS No. 142 in the current year:
Year Ended April 30, | ||||||||||
2002 |
2001 |
2000 | ||||||||
Net income (loss) |
||||||||||
Reported net income (loss) |
$ |
(98,251 |
) |
$ |
31,013 |
$ |
30,811 | |||
Add back: goodwill amortization |
|
11,526 |
|
2,662 | ||||||
|
|
|
|
|
|
| ||||
Adjusted net income (loss) |
$ |
(98,251 |
) |
$ |
42,539 |
$ |
33,473 | |||
|
|
|
|
|
|
| ||||
Basic earnings (loss) per share |
||||||||||
Reported net income (loss) |
$ |
(2.62 |
) |
$ |
0.83 |
$ |
0.85 | |||
Goodwill amortization |
|
0.31 |
|
0.07 | ||||||
|
|
|
|
|
|
| ||||
Adjusted net income (loss) |
$ |
(2.62 |
) |
$ |
1.14 |
$ |
0.92 | |||
|
|
|
|
|
|
| ||||
Diluted earnings (loss) per share |
||||||||||
Reported net income (loss) |
$ |
(2.62 |
) |
$ |
0.81 |
$ |
0.82 | |||
Goodwill amortization |
|
0.30 |
|
0.07 | ||||||
|
|
|
|
|
|
| ||||
Adjusted net income (loss) |
$ |
(2.62 |
) |
$ |
1.11 |
$ |
0.89 | |||
|
|
|
|
|
|
|
F-13
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
3. Stock Incentive Plans
In July 1998, the Company adopted the Performance Award Plan (the Plan) to provide a means to
attract, motivate, reward and retain talented and experienced officers, non-employee directors, other key employees and certain other eligible persons who may be granted awards from time to time by the Board of Directors (the Board) or
the Compensation Committee, or, for non-employee directors, under a formula provided in the Plan. The maximum number of shares of common stock reserved for issuance is thirteen million, subject to adjustment for certain changes in the Companys
capital structure and other extraordinary events. Shares subject to awards that are not paid for or exercised before they expire or are terminated are available for other grants under the Plan to the extent permitted by law. The Plan is not
exclusive. The Board may grant stock and performance incentives or other compensation, in stock or cash, under other plans or authority.
Awards under the Plan may be in the form of nonqualified stock options, incentive stock options, stock appreciation rights (SARs), restricted stock, stock unit awards, performance shares, stock bonuses or cash
bonuses based on performance. The maximum term of options, SARs and other rights to acquire common stock under the Plan is generally ten years after the initial date of award, subject to provisions for further deferred payment in certain
circumstances. Awards may be granted individually or in combination with other awards. No incentive stock option may be granted at a price that is less than the fair market value of the common stock (110% of fair market value of the common stock for
certain participants) on the date of grant. Nonqualified stock options and other awards may be granted at prices below the fair market value of the common stock on the date of grant. Restricted stock awards can be issued for nominal or the minimum
lawful consideration. Typically, the participant may vote restricted stock, but any dividend on restricted shares will be held in escrow subject to forfeiture until the shares have vested. No more than 350,000 shares will be available for restricted
stock awards, subject to exceptions for restricted stock awards based on past service, deferred compensation and performance awards.
Under the Plan, each director who is not an officer or employee (a Non-Employee Director) is automatically granted a nonqualified stock option to purchase 2,500 shares of common stock when the person takes office
and on the day of each annual shareholders meeting, at an exercise price equal to the market price of the common stock at the close of trading on that date. Non-Employee Directors may also be granted discretionary awards. All automatically granted
Non-Employee Director stock options will have a ten-year term and will be immediately exercisable.
F-14
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
The status of stock options and SARs issued under the Companys
performance award plan is summarized below:
Number of Shares (in thousands) |
Weighted Average
Exercise Price | |||||
Outstanding at April 30, 1999 |
3,572 |
|
$ |
13.76 | ||
Granted |
897 |
|
|
25.30 | ||
Exercised |
(443 |
) |
|
13.89 | ||
Canceled/forfeited |
(197 |
) |
|
14.81 | ||
|
|
|
| |||
Outstanding at April 30, 2000 |
3,829 |
|
$ |
16.40 | ||
Granted |
4,125 |
|
|
23.71 | ||
Exercised |
(429 |
) |
|
13.65 | ||
Canceled/forfeited |
(466 |
) |
|
20.47 | ||
|
|
|
| |||
Outstanding at April 30, 2001 |
7,059 |
|
$ |
20.66 | ||
Granted |
2,176 |
|
|
15.79 | ||
Exercised |
(74 |
) |
|
13.70 | ||
Canceled/forfeited |
(1,139 |
) |
|
22.03 | ||
Canceled subject to exchange |
(3,581 |
) |
|
22.03 | ||
|
|
|
| |||
Outstanding at April 30, 2002 |
4,441 |
|
$ |
16.94 | ||
|
|
|
|
In March 2002, the Company accepted for exchange 3,580,641 options
and SARs relating to shares of the Companys common stock, representing approximately 53% of the shares subject to options and SARs that were eligible to be exchanged in the offer. Subject to the terms and conditions of the Offer to Exchange,
the Company will issue replacement options and SARs relating to an aggregate of approximately 1,575,000 shares of the Companys common stock to some or all of the 347 option and SAR holders that participated in the exchange no sooner than six
months and one day after the options were canceled.
The Company has elected to follow Accounting Principles Board
Opinion No. 25 Accounting for Stock Issued to Employees (APB 25) and related interpretations to account for its stock-based compensation arrangements. Under APB 25, no compensation expense is recognized for stock option
awards granted at or above fair market value.
F-15
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
The following table presents pro forma information regarding net
income (loss) and EPS determined as if the Company had accounted for its employee stock options and SARs under the fair value method prescribed by SFAS No. 123 Accounting for Stock-Based Compensation.
Fiscal Year Ended April 30, | ||||||||||
2002 |
2001 |
2000 | ||||||||
Net income (loss) |
||||||||||
As reported |
$ |
(98,251 |
) |
$ |
31,013 |
$ |
30,811 | |||
Pro forma |
|
(115,852 |
) |
|
10,484 |
|
22,849 | |||
Basic EPS |
||||||||||
As reported |
|
(2.62 |
) |
|
0.83 |
|
0.85 | |||
Pro forma |
|
(3.09 |
) |
|
0.28 |
|
0.63 | |||
Dilutive EPS |
||||||||||
As reported |
|
(2.62 |
) |
|
0.81 |
|
0.82 | |||
Pro forma |
|
(3.09 |
) |
|
0.27 |
|
0.61 |
The weighted average fair value of options granted in fiscal 2002,
2001 and 2000 was $8.61, $16.49 and $17.99, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with a zero dividend rate and the following assumptions:
Fiscal Year Ended April 30, |
|||||||||
2002 |
2001 |
2000 |
|||||||
Expected stock volatility |
63.9 |
% |
64.5 |
% |
55.3 |
% | |||
Risk-free interest rate |
4.14 |
% |
5.37 |
% |
6.33 |
% | |||
Expected option life (in years) |
4 to 6 |
|
5 to 9 |
|
5 to 9 |
|
Summary information about the Companys stock options and SARs
outstanding at April 30, 2002 is presented in the following table:
Options Outstanding |
Options Exercisable | |||||||||
Range of Exercise
Price |
Number Outstanding |
Weighted Average Remaining Contractual Life in years |
Weighted Average Exercise Price
|
Number Exercisable |
Weighted Average Exercise Price
| |||||
(in thousands) |
(in thousands) |
|||||||||
$ 4.20 to $ 8.40 |
32 |
9.8 |
$7.62 |
|||||||
8.40 to 12.60 |
60 |
9.3 |
10.65 |
21 |
$9.78 | |||||
12.60 to 16.80 |
3,156 |
6.4 |
14.60 |
1,887 |
13.78 | |||||
16.80 to 21.00 |
26 |
8.7 |
18.21 |
12 |
18.40 | |||||
21.00 to 25.20 |
957 |
7.7 |
22.42 |
374 |
22.46 | |||||
25.20 to 29.40 |
100 |
7.8 |
27.64 |
45 |
27.52 | |||||
29.40 to 33.60 |
63 |
7.3 |
29.77 |
44 |
29.77 | |||||
33.60 to 37.80 |
46 |
6.6 |
35.26 |
36 |
35.26 | |||||
37.80 to 42.00 |
1 |
0.2 |
42.00 |
1 |
42.00 | |||||
|
|
|
|
|
| |||||
$ 4.20 to $42.00 |
4,441 |
6.8 |
$16.94 |
2,420 |
$15.99 | |||||
|
|
|
|
|
|
F-16
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
In June 2001, the Company granted the Chief Executive Officer 100,000
shares of restricted stock with a fair market value of $15.50 per share which vests evenly over three years. The Company also granted 43 employees 210,333 shares of restricted stock and stock unit awards with a fair market value of $16.04 per share
which vest evenly over three years. At April 30, 2002, 261,500 shares of restricted stock and stock unit awards were outstanding. Compensation expense related to these awards is charged to earnings on a straight-line basis over the 36 month vesting
period and totaled $1,150 at April 30, 2002.
As of April 30, 2002, Futurestep has granted options to purchase
1,724,784 shares and 62,200 SARs under its Performance Award Plan. All awards have been granted at an estimate of the fair value on the date of the grant, as determined by the Futurestep Board of Directors. The maximum number of shares which may be
awarded under the Futurestep Performance Award Plan is 3,500,000. Upon exercise, at the election of Futurestep, the SARs may be settled either by a cash payment or the issuance of shares of common stock of Futurestep having equivalent value. If all
stock options outstanding as of April 30, 2002 were exercised, the option holders of such stock options would own approximately 8.3% of the then issued and outstanding shares of the common stock of Futurestep.
4. Asset Impairment and Restructuring Charges
Based on deteriorating economic conditions encountered in the first fiscal quarter of 2002, the Company began developing a series of restructuring initiatives to address
the cost structure and to reposition the enterprise to gain market share and take full advantage of any economic uptrend. The immediate goals of these restructuring initiatives were to reduce losses, preserve top employees and maintain high
standards of client service. In the first quarter, certain business units took actions approved by senior management, that did not require approval by the Board of Directors (Board), in response to a decline in revenue in the first two
months of that quarter resulting in a restructuring charge for severance of $3.0 million.
In August 2001, the
Board approved a series of business realignment initiatives designed to reduce the work force by nearly 25%, or over 600 employees; consolidate all back-office functions for Futurestep and Korn/Ferry; reduce the investment in the operations of
JobDirect and write-down other related assets and goodwill. Based upon these initiatives, the Companys analysis indicated that goodwill associated with JobDirect was impaired. As a result, the Company recognized an asset impairment charge
related to JobDirect goodwill of $28,951 in the first quarter of fiscal 2002. In addition, all of the consultants of an acquired executive recruitment firm that was never integrated into the Companys operations terminated their employment on
August 1, 2001 and the Company recognized a goodwill impairment charge of $11,230 in the first fiscal quarter of 2002.
During the three months ended October 31, 2001, the Company finalized the realignment initiatives approved by the Board in August 2001. The Company also decided to exit the college recruitment market and discontinue the operations of
JobDirect. As a result, the Company recognized an additional goodwill impairment charge of $2,745, an asset impairment charge of $7.5 million and a restructuring charge of $27.3 million.
During the fourth quarter of fiscal 2002, the Company implemented additional restructuring initiatives for executive recruitment and Futurestep businesses in Europe
resulting in a restructuring charge of $4.9 million, consisting of $2.5 million of severance and $2.4 million of facilities costs for excess space. In addition, the Company determined that a non-strategic investment was permanently impaired and
recognized a non-cash charge of $4.0 million.
F-17
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
Operating results include asset impairment and restructuring charges
related to the following business segments:
Fiscal Year Ended April 30, 2002 | |||||||||||||||
Asset Impairment |
Restructuring |
Total | |||||||||||||
Goodwill |
Other |
Severance |
Facilities |
||||||||||||
Executive recruitment |
|||||||||||||||
North America |
$ |
13,975 |
$ |
711 |
$ |
9,073 |
$ |
5,490 |
$ |
29,249 | |||||
Europe |
|
4,833 |
|
2,517 |
|
7,350 | |||||||||
Asia/Pacific |
|
15 |
|
1,761 |
|
70 |
|
1,846 | |||||||
|
|
|
|
|
|
|
|
|
| ||||||
Total executive recruitment |
$ |
13,975 |
$ |
726 |
$ |
15,667 |
$ |
8,077 |
$ |
38,445 | |||||
Futurestep |
|
12,958 |
|
2,592 |
|
6,872 |
|
22,422 | |||||||
JobDirect |
|
28,951 |
|
1,369 |
|
843 |
|
1,173 |
|
32,336 | |||||
|
|
|
|
|
|
|
|
|
| ||||||
Total |
$ |
42,926 |
$ |
15,053 |
$ |
19,102 |
$ |
16,122 |
$ |
93,203 | |||||
|
|
|
|
|
|
|
|
|
|
The goodwill impairment charge in executive recruitment was related
to two prior year acquisitions, which were never integrated into the Companys operations, and for which there is no continuing business. All of the consultants were terminated in one of the acquired entities and the other entity was
re-acquired by the former shareholders. The total goodwill write-off associated with these two acquisitions was $13,975. The other asset impairment charge of $726 is for the write-down of excess furniture and equipment to fair value less costs to
sell.
The restructuring charge for executive recruitment severance of $15,667 included 222 employees in North
America, 277 employees in Europe, and 41 employees in Asia/Pacific, respectively. The facilities restructuring charge for executive recruitment of $8,077 relates primarily to lease termination costs, net of estimated sublease income, for excess
space in ten executive recruitment offices due to the reduction in workforce. The charge also includes $330 related to unamortized leasehold improvements.
The Futurestep asset impairment and restructuring charges resulted from the restructuring of operations to streamline the business. The asset impairment charge of $12,958 includes a recognized loss of
$6,264 on an investment in a strategic relationship that will not be developed with the integration of Futurestep and executive recruitment support services, the write-off of a $4,000 investment that is no longer considered strategic that management
believes is permanently impaired, $801 for the write-down of excess furniture, fixtures and equipment to estimated fair value less costs to sell and the write-off of capitalized software costs of $1,893 due to the integration of Futurestep and
executive recruitment information technology support services.
The Futurestep restructuring charge of $2,592 for
severance is for 48, 84 and 17 employees in North America, Europe and Asia/Pacific, respectively. The facilities restructuring charge of $6,144 relates to six Futurestep offices that were closed as employees were co-located with executive
recruitment. The charge also includes $1,622 related to the write-off of unamortized leasehold improvements.
Initially in fiscal 2002, the Company had attempted to reposition JobDirect to continue its business operations resulting in an impairment charge for goodwill of $28,951 in the first fiscal quarter. The Company subsequently decided
to discontinue the business and recognized an asset impairment charge of $1,369, primarily for the write-down of furniture, fixtures and equipment at facilities that were closed to estimated fair value less costs to sell. The restructuring charge
was comprised of severance of $843 for 70 employees and $1,173 for lease
F-18
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
termination costs in excess of estimated sublease income for its three offices, including the write-off of leasehold improvements of $61.
A summary of the components of the restructuring liability by business segment at April 30, 2002 follows:
Charged to Expense |
Non-Cash Items |
Payments |
Liability at April 30, 2002 | |||||||||
Executive recruitment |
||||||||||||
North America |
$ |
14,563 |
$ |
330 |
$ |
9,625 |
$ |
4,608 | ||||
Europe |
|
7,350 |
|
4,378 |
|
2,972 | ||||||
Asia/Pacific |
|
1,831 |
|
1,702 |
|
129 | ||||||
Futurestep |
|
9,464 |
|
1,874 |
|
3,467 |
|
4,123 | ||||
JobDirect |
|
2,016 |
|
61 |
|
1,209 |
|
746 | ||||
|
|
|
|
|
|
|
| |||||
Total |
$ |
35,224 |
$ |
2,265 |
$ |
20,381 |
$ |
12,578 | ||||
|
|
|
|
|
|
|
|
The restructuring liability at April 30, 2002 includes $2,179 of
severance restructuring costs and $10,399 of facilities restructuring costs. The severance accrual includes amounts paid monthly and are expected to be paid in full by October 31, 2002. The accrued liability for facilities costs primarily relates to
commitments under operating leases, net of sublease income, of which $3,277 is included in other long-term liabilities, that will be paid over the next two to ten years.
5. Employee Profit-Sharing
The
Company has an Employee Tax Deferred Savings Plan that covers eligible employees in the United States. The discretionary accrued contribution to this plan was $537, $3,892 and $3,027 for fiscal 2002, 2001 and 2000, respectively. In fiscal 2002, the
Company contributed $294 of the contribution accrued in fiscal 2001 to the plan.
6. Deferred Compensation and Retirement Plans, Pension Plan and Company Owned Life Insurance Policies
The Company has a defined benefit pension plan, referred to as the Worldwide Executive Benefit Plans (WEB plans), covering all of its employees in the United States and certain employees in
other countries. The WEB plans are designed to integrate with government sponsored and local benefits and provide a monthly benefit to vice presidents and shareholders upon retirement from the Company. Each year a plan participant accrues and is
fully vested in one-twentieth of the targeted benefits expressed as a percentage set by the Company for that year. Upon retirement, a participant receives a monthly benefit payment equal to the sum of the percentages accrued over such
participants term of employment, up to a maximum of 20 years, multiplied by the participants highest average monthly salary during any 36 consecutive months in the final 72 months of active full-time employment.
The Company also has established several deferred compensation plans for vice-presidents that provide defined benefit payments to
participants based on the deferral of current compensation subject to vesting and retirement or termination provisions.
F-19
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
The Enhanced Wealth Accumulation Plan (EWAP) was
established in fiscal 1994. Certain vice presidents elect to participate in a deferral unit that requires the contribution of current compensation for an eight year period in return for defined benefit payments from the Company over a
fifteen year period generally at retirement at age 65 or later. Participants may acquire additional deferral units every five years. The EWAP replaced the Wealth Accumulation Plan (WAP) in fiscal 1994 and executives who did
not choose to roll over their WAP units into the EWAP continue to be covered under the earlier version in which participants generally vest and commence receipt of benefit payments at retirement at age 65.
The Company also maintains a Senior Executive Incentive Plan (SEIP) for participants elected by the Board. Generally, to be
eligible, the executive must be participating in the EWAP. Participation in the SEIP requires the participant to contribute a portion of their compensation during a four-year period, or in some cases make an after tax contribution, in return for a
defined benefit paid by the Company generally over a fifteen year period after ten years of participation in the plan or such later date as may be elected by the participant.
Certain current and former employees also have individual deferred compensation arrangements with the Company which provide for payment of defined amounts over certain
periods commencing at specified dates or events.
For financial accounting purposes, the Company estimates the
present value of the future benefits payable under these plans as of the estimated payment commencement date. The Company also estimates the remaining number of years a participant will be employed by the Company. Then, each year during the period
of estimated employment, the Company accrues a liability and recognizes expense for a portion of the future benefit using the benefit/years of service attribution method for the SEIP, WAP and EWAP plans and the projected unit
credit method for the WEB plan.
In calculating the accrual for future benefit payments, management has made
assumptions regarding employee turnover, participant vesting, violation of non-competition provisions, and the discount rate. Management periodically reevaluates all assumptions. If assumptions change in future reporting periods, the changes may
impact the measurement and recognition of benefit liabilities and related compensation expense.
As of April 30,
2002 and 2001, the Company had unrecognized losses related to the deferred compensation plans of $2,505 and $5,533, respectively, due primarily to changes in assumptions of the discount rate used for calculating the accruals for future benefits. As
of April 30, 2002 and 2001, the Company also had unrecognized (gains) losses related to the pension plan of ($1,899) and $282, respectively, due to changes in assumptions of the discount rate used for calculating the accruals for future benefits in
fiscal 2001 and changes in assumptions related to the participant population in fiscal 2002. The Company amortizes unrecognized (gains) losses over the average remaining service period of active participants. The discount rate was 7.25% in both
fiscal 2002 and 2001.
The Company also maintains various retirement plans statutorily required in five foreign
jurisdictions. The aggregate of the long-term benefit obligation accrued at April 30, 2002 and 2001 is $2,727 for 108 participants and $3,246 for 75 participants, respectively. The Companys contribution to these plans was $1,299 and $1,427 in
fiscal 2002 and 2001, respectively.
F-20
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
The total long-term benefit obligations for the deferred
compensation, retirement and pension plans were:
Fiscal Year Ended April 30, | ||||||
2002 |
2001 | |||||
Deferred compensation plans |
$ |
36,583 |
$ |
33,334 | ||
Retirement plans |
|
2,727 |
|
3,246 | ||
Pension plan |
|
5,496 |
|
4,942 | ||
|
|
|
| |||
Total long-term benefit obligation |
$ |
44,806 |
$ |
41,522 | ||
|
|
|
|
The following tables reconcile the benefit obligation for the
deferred compensation plans and the pension plan:
Fiscal Year Ended April 30, |
||||||||
2002 |
2001 |
|||||||
Deferred compensation plans: |
||||||||
Benefit obligation at beginning of year |
$ |
34,673 |
|
$ |
32,621 |
| ||
Service cost |
|
2,788 |
|
|
3,080 |
| ||
Interest cost |
|
1,225 |
|
|
366 |
| ||
Plan participants contributions |
|
1,629 |
|
|
1,541 |
| ||
Recognized loss due to change in assumption |
|
332 |
|
|
306 |
| ||
|
|
|
|
|
| |||
Total expense |
$ |
5,974 |
|
$ |
5,293 |
| ||
Benefits paid |
|
(2,602 |
) |
|
(3,241 |
) | ||
|
|
|
|
|
| |||
Benefit obligation at end of fiscal year |
$ |
38,045 |
|
$ |
34,673 |
| ||
Less: current portion of benefit obligation |
|
(1,462 |
) |
|
(1,339 |
) | ||
|
|
|
|
|
| |||
Long-term benefit obligation at end of year |
$ |
36,583 |
|
$ |
33,334 |
| ||
|
|
|
|
|
|
Fiscal Year Ended April 30, |
||||||||
2002 |
2001 |
|||||||
Pension plan: |
||||||||
Benefit obligation at beginning of year |
$ |
4,942 |
|
$ |
3,713 |
| ||
Service cost |
|
576 |
|
|
981 |
| ||
Interest cost |
|
243 |
|
|
253 |
| ||
Recognized (gain) loss due to change in assumption |
|
(136 |
) |
|
19 |
| ||
|
|
|
|
|
| |||
Total expense |
$ |
683 |
|
$ |
1,253 |
| ||
Benefits paid |
|
(129 |
) |
|
(24 |
) | ||
|
|
|
|
|
| |||
Long-term benefit obligation at end of year |
$ |
5,496 |
|
$ |
4,942 |
| ||
|
|
|
|
|
|
The Company has purchased COLI contracts insuring participants and
former participants in the deferred compensation and pension plans. The gross CSV of these contracts of $112,915 and $102,286 is offset by outstanding policy loans of $59,867 and $47,925, in the accompanying consolidated balance sheets as of
April 30, 2002 and 2001, respectively. Total death benefits payable under COLI contracts were $238,425 and $248,460 at April 30, 2002 and 2001, respectively. Management intends to use the future death benefits (if any)
F-21
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
from these insurance contracts to fund the deferred compensation and pension arrangements; however, there may not be a direct correlation between the timing of the future cash receipts and
disbursements under these arrangements. In addition, certain policies are held in trusts to provide additional benefit security for the deferred compensation and pension plans. As of April 30, 2002, COLI contracts with a net cash surrender value of
$44,207 and death benefits payable of $185,927 were held in trust for these purposes.
7. Income Taxes
The provision for income taxes is based on reported income before income taxes. Deferred income tax assets
and liabilities reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes, as measured by applying the currently enacted tax
laws.
The (benefit from) provision for domestic and foreign income taxes is comprised of the following
components:
Fiscal Year Ended April 30, |
||||||||||||
2002 |
2001 |
2000 |
||||||||||
Restated |
Restated |
|||||||||||
Current income taxes: |
||||||||||||
Federal |
$ |
(14,186 |
) |
$ |
11,258 |
|
$ |
12,786 |
| |||
State |
|
(4,092 |
) |
|
3,879 |
|
|
4,718 |
| |||
|
|
|
|
|
|
|
|
| ||||
Total |
$ |
(18,278 |
) |
|
15,137 |
|
|
17,504 |
| |||
|
|
|
|
|
|
|
|
| ||||
Deferred income taxes: |
||||||||||||
Federal |
|
3,906 |
|
|
(4,231 |
) |
|
(1,097 |
) | |||
State |
|
(841 |
) |
|
11 |
|
|
(366 |
) | |||
|
|
|
|
|
|
|
|
| ||||
Total |
|
3,065 |
|
|
(4,220 |
) |
|
(1,463 |
) | |||
|
|
|
|
|
|
|
|
| ||||
Foreign income taxes |
|
2,885 |
|
|
11,526 |
|
|
5,897 |
| |||
|
|
|
|
|
|
|
|
| ||||
(Benefit from) provision for income taxes |
$ |
(12,328 |
) |
$ |
22,443 |
|
$ |
21,938 |
| |||
|
|
|
|
|
|
|
|
|
The domestic and foreign components of income (loss) from
continuing operations before domestic and foreign income and other taxes and equity in earnings of unconsolidated subsidiaries were as follows:
Fiscal Year Ended April 30, | ||||||||||
2002 |
2001 |
2000 | ||||||||
Restated |
Restated | |||||||||
Domestic |
$ |
(82,478 |
) |
$ |
27,269 |
$ |
37,784 | |||
Foreign |
|
(29,242 |
) |
|
24,526 |
|
13,455 | |||
|
|
|
|
|
|
| ||||
Income (loss) before provision for income taxes and equity in earnings of unconsolidated subsidiaries |
$ |
(111,720 |
) |
$ |
51,795 |
$ |
51,239 | |||
|
|
|
|
|
|
|
F-22
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
The difference between the effective tax rate in the consolidated
financial statements and the statutory federal income tax rate can be attributed to the following:
Fiscal Year Ended April 30, |
|||||||||
2002 |
2001 |
2000 |
|||||||
Restated |
Restated |
||||||||
U.S. federal statutory tax rate |
35.0 |
% |
35.0 |
% |
35.0 |
% | |||
Foreign source dividend income |
(2.7 |
) |
13.2 |
|
10.2 |
| |||
Foreign income tax credits utilized |
(11.4 |
) |
(8.3 |
) | |||||
Income subject to net higher foreign tax rates |
0.3 |
|
5.3 |
|
2.3 |
| |||
COLI CSV decrease (increase), net |
1.3 |
|
(3.4 |
) | |||||
Non-deductible goodwill amortization |
4.2 |
|
1.3 |
| |||||
Impairment of acquired net operating losses |
(4.4 |
) |
|||||||
Non-deductible restructuring charge |
(15.5 |
) |
|||||||
Other |
(1.7 |
) |
(4.3 |
) |
5.7 |
| |||
|
|
|
|
|
| ||||
Effective tax rate |
11.0 |
% |
43.3 |
% |
42.8 |
% | |||
|
|
|
|
|
|
The significant components of deferred tax assets and liabilities are as follows:
As of April 30, |
||||||||
2002 |
2001 |
|||||||
Restated |
||||||||
Deferred income tax assets (liabilities): |
||||||||
Deferred compensation |
$ |
17,462 |
|
$ |
15,490 |
| ||
Allowance for doubtful accounts |
|
1,582 |
|
|
3,319 |
| ||
Other accrued liabilities |
|
949 |
|
|
(472 |
) | ||
Property and equipment |
|
3,471 |
|
|
2,101 |
| ||
Loss and credit carryforwards |
|
2,912 |
|
|
9,217 |
| ||
Other (foreign) |
|
12,766 |
|
|
4,108 |
| ||
|
|
|
|
|
| |||
Total deferred tax asset |
$ |
39,142 |
|
$ |
33,763 |
| ||
Less: valuation allowance |
|
(7,012 |
) |
|||||
|
|
|
|
|
| |||
Net deferred tax asset |
$ |
32,130 |
|
$ |
33,763 |
| ||
|
|
|
|
|
|
SFAS No. 109, Accounting for Income Taxes, requires
that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management believes sufficient uncertainty exists regarding the realizability of the
asset that a valuation allowance is required. Although realization is not assured, management believes that it is more likely than not that all of the deferred income tax asset will be realizable. Realization of the deferred income tax asset is
dependent on the Company generating sufficient taxable income in future years as the deferred income tax charges become currently deductible for tax reporting purposes.
For the year ended April 30, 2002, the Company generated a net operating tax loss in the United States of approximately $54.0 million. This U.S. net operating tax loss was
carried back to the tax years ended April 30, 2000 and April 30, 2001. The Company expects to receive approximately $18.3 million of federal and state tax refunds as a result of this carryback claim.
F-23
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
At April 30, 2002, the Company had foreign tax credit carryforwards
of $2,912 to offset future tax liabilities in the United States that expire in fiscal 2007.
The Company has not
provided for U.S. deferred income taxes on approximately $34.0 million of undistributed earnings and associated withholding taxes of the foreign subsidiaries as the Company has taken the position under Accounting Principles Board Opinion No. 23,
Accounting for Income Taxes-Special Areas, that its foreign earnings will be permanently reinvested offshore. If a distribution of these earnings was to be made, the Company might be subject to both foreign withholding taxes and U.S.
income taxes, net of any allowable foreign tax credits or deductions. However, an estimate of these taxes is not practicable.
8. Property and Equipment and Long-lived Assets
Property and
equipment is carried at cost, less accumulated depreciation. Leasehold improvements are amortized over the useful life of the asset, or the lease term, whichever is less, using the straight-line method. Software development costs for internal use
are capitalized in accordance with Statement of Position 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use and, once placed in service, amortized using the straight-line method over the estimated
useful life, generally five years. All other property and equipment is depreciated or amortized over the estimated useful lives of three to ten years, using the straight-line method.
Property and equipment consists of the following:
As of April 30, |
||||||||
2002 |
2001 |
|||||||
Restated |
||||||||
Property and equipment: |
||||||||
Computer equipment and software |
$ |
49,627 |
|
$ |
48,528 |
| ||
Furniture and fixtures |
|
22,325 |
|
|
24,011 |
| ||
Leasehold improvements |
|
23,357 |
|
|
23,482 |
| ||
Automobiles |
|
815 |
|
|
1,697 |
| ||
|
|
|
|
|
| |||
|
96,124 |
|
|
97,718 |
| |||
Less: Accumulated depreciation and amortization |
|
(55,876 |
) |
|
(43,262 |
) | ||
|
|
|
|
|
| |||
Property and equipment, net |
$ |
40,248 |
|
$ |
54,456 |
| ||
|
|
|
|
|
|
The Company reviews long-lived assets for impairment at least
annually and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying value of assets are calculated at the lowest level for which there are identifiable cash flows. Recoverability
of the carrying value is measured by comparing the carrying value of the asset to future net cash flows expected to be generated by the asset. If the carrying value is greater than the future net cash flows, the impairment charge recognized is the
amount by which the carrying value exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
As a result of the restructuring initiatives in fiscal 2002, the Company recognized an asset impairment charge of $4,789 related to the write-down of excess furniture and
equipment to fair value less costs to sell and a restructuring charge of $2,013 to write-off leasehold improvements. See Note 4.
F-24
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
9. Notes Payable and Long-Term Debt
The Companys long-term debt consists of the following:
As of April 30, |
||||||||
2002 |
2001 |
|||||||
Restated |
||||||||
Unsecured subordinated notes payable to shareholders due through 2004, bearing interest at various rates up to
8.50% |
$ |
14,452 |
|
$ |
23,674 |
| ||
Less: current maturities |
|
(12,818 |
) |
|
(11,832 |
) | ||
|
|
|
|
|
| |||
Long-term debt |
$ |
1,634 |
|
$ |
11,842 |
| ||
|
|
|
|
|
|
Long-term debt due to shareholders outstanding at April 30, 2002 of
$1,634 is due in fiscal 2004.
At April 30, 2002, the Company maintained a $45.0 million credit facility with Bank
of America that matures in November 2002. Borrowings under the credit facility bear interest at Prime plus 3.75%. The financial covenants include a minimum fixed charge coverage ratio, a maximum leverage ratio, a quick ratio and other customary
events of default. The outstanding balance under the revolving line of credit was $39.0 million at April 30, 2002. In June 2002, the outstanding borrowings under the facility were repaid and the credit facility commitment, which matures in November
2002, was reduced from $45.0 million to $31.2 million.
The Company has outstanding borrowings against the CSV of
COLI contracts of $59,867 and $47,925 at April 30, 2002 and 2001, respectively. These borrowings are secured by the CSV, principal payments are not scheduled and interest is payable at least annually, at various fixed and variable rates ranging from
5.5% to 8.0%. See Note 6.
10. Business Segments
The Company operates in two global business segments in the retained recruitment industry, executive recruitment and Futurestep. These segments are distinguished
primarily by the method used to identify candidates and the candidates level of compensation. The executive recruitment business segment is managed by geographic regions led by a regional president. Revenue from strategic management assessment
engagements is included in executive recruitment. Futuresteps worldwide operations are managed by an operating group comprised of a president of operations for North America and Asia and a president of operations for Europe. The regional
presidents and this operating group report directly to the Chief Executive Officer of the Company.
With the
acquisition of JobDirect in fiscal 2001, the Company expanded into the college recruitment market. The Company decided to exit this business segment in the fiscal quarter ended October 31, 2001 and ceased operations in the fiscal quarter ending
January 31, 2002. See Note 4.
F-25
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
A summary of the Companys operations (excluding interest income
and other income, and interest expense) by business segment follows:
Fiscal Year Ended April 30, | |||||||||
2002 |
2001 |
2000 | |||||||
Restated |
Restated | ||||||||
Revenue: |
|||||||||
Executive recruitment: |
|||||||||
North America |
$ |
203,986 |
$ |
343,095 |
$ |
271,313 | |||
Europe |
|
92,972 |
|
135,278 |
|
112,045 | |||
Asia/Pacific |
|
38,936 |
|
53,977 |
|
48,603 | |||
South America |
|
11,350 |
|
17,183 |
|
17,307 | |||
Futurestep |
|
45,261 |
|
82,082 |
|
38,294 | |||
JobDirect |
|
1,386 |
|
4,683 |
|||||
|
|
|
|
|
| ||||
Total revenue |
$ |
393,891 |
$ |
636,298 |
$ |
487,562 | |||
|
|
|
|
|
|
Fiscal Year Ended April 30, |
||||||||||||
2002 |
2001 |
2000 |
||||||||||
Restated |
Restated |
|||||||||||
Operating profit (loss) before asset impairment and restructuring charges: |
||||||||||||
Executive recruitment: |
||||||||||||
North America |
$ |
18,503 |
|
$ |
65,080 |
|
$ |
52,783 |
| |||
Europe |
|
(7,990 |
) |
|
19,960 |
|
|
13,034 |
| |||
Asia/Pacific |
|
393 |
|
|
6,632 |
|
|
5,174 |
| |||
South America |
|
(2,154 |
) |
|
672 |
|
|
1,798 |
| |||
Futurestep |
|
(15,351 |
) |
|
(26,022 |
) |
|
(23,878 |
) | |||
JobDirect |
|
(5,831 |
) |
|
(11,249 |
) |
||||||
|
|
|
|
|
|
|
|
| ||||
Subtotal operating profit (loss) before asset impairment and restructuring charges |
$ |
(12,430 |
) |
$ |
55,073 |
|
$ |
48,911 |
| |||
Asset impairment and restructuring charges (Note 4) |
|
93,203 |
|
|||||||||
|
|
|
|
|
|
|
|
| ||||
Total operating profit (loss) |
$ |
(105,633 |
) |
$ |
55,073 |
|
$ |
48,911 |
| |||
|
|
|
|
|
|
|
|
|
Goodwill amortization expense included in operating profit (loss)
by business segment in fiscal 2001 and 2000 was: $5,753 and $890 in North America, $1,866 and $816 in Europe, $286 and $294 in Asia/Pacific, $2,040 and $662 in Futurestep and $1,581 in JobDirect.
F-26
Table of Contents
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
April 30, 2002
(dollars in thousands, except per share amounts)
Identifiable assets by business segment are as follows:
As of April 30, | |||||||||
2002 |
2001 |
2000 | |||||||
Restated |
Restated | ||||||||
Identifiable assets: |
|||||||||
Executive recruitment: |
|||||||||
North America(1) |
$ |
237,392 |
$ |
259,811 |
$ |
287,603 | |||
Europe |
|
64,091 |
|
93,735 |
|
91,790 | |||
Asia/Pacific |
|
32,952 |
|
39,259 |
|
33,376 | |||
South America |
|
8,504 |
|
12,481 |
|
12,686 | |||
Futurestep |
|