10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on March 19, 2001
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2001 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File Number 001-14505
________________
KORN/FERRY INTERNATIONAL
(Exact name of registrant as specified in its charter)
Delaware 95-2623879
(State of other jurisdiction) (I.R.S. Employer
of incorporation or organization) Identification Number)
1800 Century Park East, Suite 900, Los Angeles, California 90067
(Address of principal executive offices) (zip code)
(310) 556-8503
(Registrant's telephone number, including area code)
________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of our common stock as of March 13, 2001
was 37,446,652.
================================================================================
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
The accompanying notes are an integral part of these consolidated financial
statements.
3
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial
statements.
4
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial
statements.
5
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial
statements.
6
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements for the three months and nine months
ended January 31, 2001 and 2000 include the accounts of Korn/Ferry International
("KFY"), all of its wholly and majority owned domestic and international
subsidiaries, and affiliated companies in which KFY has effective control
(collectively, the "Company") and are unaudited but include all adjustments,
consisting of normal recurring accruals and any other adjustments, which
management considers necessary for a fair presentation of the results for these
periods. These financial statements have been prepared consistently with the
accounting policies described in the Company's Annual Report on Form 10-K for
the fiscal year ended April 2000 ("Annual Report") and should be read together
with the Annual Report.
Use of Estimates
The preparation of 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.
Reclassifications
Certain prior year reported amounts have been reclassified in order to
conform to the current year consolidated financial statement presentation.
New Accounting Pronouncements
During fiscal 2000, the Company adopted the American Institute of Certified
Public Accountants Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use", and during
fiscal 2001, the Company adopted the related Emerging Issues Tax Force Issue No:
00-2 ("EITF 00-2"), "Accounting for Web Site Development Costs." The adoption
of SOP 98-1 and EITF 00-2 did not have a material effect on the consolidated
financial statements or the Company's capitalization policy.
2. Basic and Diluted Earnings Per Share
Basic earnings per common share ("basic EPS") was computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings 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 by the weighted average number of shares of
common stock outstanding and dilutive common equivalent shares. Following is a
reconciliation of the numerator (income) and denominator (shares in thousands)
used in the computation of basic and diluted EPS:
7
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
3. Comprehensive income
Comprehensive income is comprised of net income and all changes to
shareholders' equity, except those changes resulting from investments by owners
(changes in paid in capital) and distributions to owners (dividends).
Total comprehensive income is as follows:
8
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
4. Business segments
The Company operates in two global business segments in the retained
recruitment industry. These business segments, executive recruitment and
Futurestep, 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
and Futurestep's worldwide operations are managed by a chief executive officer.
With the acquisition of JobDirect in fiscal 2001, the Company expanded into the
related college recruitment market. JobDirect has operations throughout the
United States and is managed by a chief executive officer. For purposes of the
geographic information below, Mexico's operating results are included in Latin
America.
A summary of the Company's operations (excluding interest income and other
income, and interest expense) by business segment follows:
(1) The corporate office identifiable assets of $94,826 and $144,739 as of
January 31, 2001 and April 30, 2000, respectively, are included in North
America.
9
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
5. Acquisitions
In July 2000, the Company completed two acquisitions: Westgate Group, a
leading executive recruitment firm, specializing in financial services in the
eastern United States and JobDirect, an online recruiting service focused on
college graduates and entry level professionals. The purchase price was payable
in cash of $38.4 million, 154,923 shares of the Company's common stock, and
notes payable of $5.0 million. These acquisitions were accounted for under the
purchase method and resulted in $42.5 million of goodwill. Operating results of
these businesses have been included in the consolidated financial statements
from their acquisition dates.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q may contain 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, implementation of an acquisition
strategy, integration of acquired businesses, risks related to the development
and growth of Futurestep and JobDirect, 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 Form 10-Q are made only as of the date of
this report and we undertake no obligation to publicly update these forward-
looking statements to reflect subsequent events or circumstances.
The following presentation of management's discussion and analysis of our
financial condition and results of operations should be read together with our
consolidated financial statements included in this Form 10-Q.
Overview
We are the world's preeminent recruitment firm with the broadest global
presence in the recruitment industry. We lead the industry with approximately
500 executive recruitment consultants and over 100 Futurestep consultants based
in over 77 cities across 41 countries at April 30, 2000. Our clients are many of
the world's largest and most prestigious public and private companies, middle-
market and emerging growth companies as well as governmental and not-for-profit
organizations. Almost half of the executive recruitment searches we performed in
fiscal 2000 were for board level, chief executive and other senior executive
officer positions and nearly half of our 4,946 clients were Fortune 500
companies or their subsidiaries. We have established strong client loyalty; more
than 82% of the executive recruitment assignments we performed in fiscal 2000
were on behalf of clients for whom we had conducted multiple assignments over
the last three fiscal years.
In May 1998, we introduced our middle-management recruitment service,
Futurestep. Futurestep combines our recruitment expertise with exclusive
candidate assessment tools and the reach of the Internet to accelerate
recruitment of candidates for middle-management positions and assess cultural
compatibility. In March 1999, we completed the United States roll-out of
Futurestep. The international roll-out of Futurestep was launched in the United
Kingdom and Canada in the first fiscal quarter of the prior year. As of April
30, 2000, we had opened 15 additional international offices and completed the
integration of the acquired executive search and selection business of PA
Consulting Group with offices in 17 countries in Europe and Asia/Pacific. As of
January 31, 2001, over 904,000 candidates worldwide had completed a detailed on-
line profile.
In May 2000, we acquired a 9.2% interest in Jungle Interactive Media, Inc.,
a company providing internet based information, entertainment, products and
services to targeted groups within higher education. In July 2000, we completed
the acquisition of JobDirect.com, Inc., a leading online college recruitment
company exclusively serving clients' requirements for entry-level college
graduates. In August 2000, we purchased a 16% equity investment in Webhire,
Inc., the leading business services and technology solutions provider in the
Internet recruitment marketplace.
Through executive recruitment, Futurestep and JobDirect, supported by our
strategic investments in Webhire and Jungle Interactive, we are well positioned
to execute our strategy to provide clients with end-to-end human capital
management solutions.
11
Results of Operations
The following table summarizes the results of our operations for the three
months and nine months ended January 31, 2001 and 2000 as a percentage of
revenue.
__________
(1) For the three months ended January 31, 2001 and 2000, operating profit as a
percentage of revenue, excluding Futurestep losses of $4.6 million and $4.9
million , respectively, and JobDirect losses of $3.4 million in the current
year, is 17% in both periods. For the nine months ended January 31, 2001
and 2000, operating profit as a percentage of revenue, excluding Futurestep
losses of $23.1 million and $17.4 million, respectively, and JobDirect
losses of $7.8 million in the current year, is 18% and 17%, respectively.
For the three months ended January 31, 2001, we experienced solid growth in
executive recruitment revenue in all geographic regions and in operating profit
in all geographic regions, except Latin America compared to the same period last
year. However, in the current three month period, executive recruitment revenue
declined 11% compared to the previous three month period. The decline is due
primarily to the slowdown of the United States economy in the current three
month period that contributed to a 14% decline in executive recruitment revenue
in North America. We currently expect our fourth quarter revenue to be in line
with our third quarter results. We experienced strong growth in executive
recruitment revenue and operating profit in all geographic regions for the nine
months ended January 31, 2001. We include executive recruitment revenue
generated from our operations in Mexico with Latin America.
12
In the following comparative analysis, all percentages are calculated based on
dollars in thousands.
Three Months Ended January 31, 2001 Compared to Three Months Ended January 31,
2000
Revenue. Revenue increased $35.1 million, or 29% to $157.2 million for the
three months ended January 31, 2001 from $122.1 million for the three months
ended January 31, 2000. This increase in revenue was primarily the result of an
increase in the number of engagements and an increase in the average fee per
engagement in executive recruitment, an increase in revenue from Futurestep, and
the acquisition of JobDirect in the current fiscal year.
In North America, revenue increased $14.3 million, or 22%, to $80.1 million
for the three months ended January 31, 2001 from $65.8 million for the
comparable period in the prior year. This revenue growth is due mainly to an
increase in the number of engagements and an increase in the average fee per
engagement. The financial services, healthcare, industrial and general
specialty practices delivered particularly strong performance, while the retail,
entertainment and consumer goods specialty practices declined.
Revenue in Europe increased $5.4 million, or 20%, to $33.0 million for the
three months ended January 31, 2001 from $27.6 million for the comparable period
in the prior year. Excluding the negative effects of foreign currency
translation into the U.S. dollar, revenue would have increased approximately 31%
compared to the same three month period last year. This increase is mainly due
to an increase in the number of engagements, revenue related to the acquisition
in Germany in the prior year third quarter, and an increase in the average fee
per engagement.
In Asia/Pacific, revenue increased $1.5 million, or 13%, to $13.3 million for
the three months ended January 31, 2001 from $11.8 million for the three months
ended January 31, 2000 primarily due to an increase in the average fee per
engagement partially offset by a decrease in the number of engagements.
Excluding the negative effects of foreign currency translation into the U.S.
dollar, revenue would have increased approximately 22% compared to the same
three month period last year.
The increase in revenue in Latin America of $0.8 million, or 11%, to $8.2
million for the three months ended January 31, 2001 from $7.4 million for the
comparable three month period in fiscal 2000 is due primarily to continued
strong performance in Mexico offset by a decrease in Argentina due to the
reorganization of that office in the current fiscal year. Excluding the negative
effects of foreign currency translation into the U.S. dollar, revenue would have
increased approximately 14% compared to the same three month period last year.
Futurestep revenue of $21.1 million for the three months ended January 31,
2001 is primarily attributable to the worldwide roll-out of the business and the
acquisition of the ESS business of PA Consulting in January 2000, resulting in
an increase in the number of engagements in both Europe and Asia/Pacific during
the current fiscal quarter, while the number of engagements declined slightly in
North America. In the current three month period, Futurestep revenue remained
constant compared to the previous three month period due to an increase in
international revenue offset by a decrease in revenue in North America. In the
current three month period, approximately 60% of revenue in North America and
22% of worldwide revenue is the result of referrals from the executive
recruitment business.
JobDirect revenue of $1.5 million for the three months ended January 31, 2001
reflects approximately 480 corporate clients and 414 college career offices
using our service. Compared to the current year second fiscal quarter, the
number of corporate clients decreased 17% and the number of college career
offices increased 9% while revenue declined $0.2 million. As of January 31,
2001, over 1.3 million students had registered on the database.
Compensation and Benefits. Compensation and benefits expense increased $23.6
million, or 32%, to $95.7 million for the three months ended January 31, 2001
from $72.1 million for the comparable period ended January 31, 2000 due
primarily to an increase in the number of executive recruitment consultants and
Futurestep employees and the acquisition of JobDirect in the current fiscal
year. Excluding Futurestep expenses of $14.7 million and JobDirect expenses of
$2.3 million in the current three month period and Futurestep expenses of $6.0
million in the same period last year, compensation and benefits as a percentage
of revenue decreased slightly to 58.5% in the most recent three month period
from 58.8% in the three months ended January 31, 2000.
General and Administrative Expenses. General and administrative expenses
consist of occupancy expense associated with our leased premises, information
and technology infrastructure, marketing and other general office expenses.
General and administrative expenses increased $11.3 million, or 32%, to $46.6
million for the three months ended January 31, 2001 from $35.3 million for the
comparable period ended January 31, 2000. As a percentage of revenue, general
and administrative expenses, excluding Futurestep and JobDirect related
expenses, remained relatively constant at 24% in the most recent and in the
prior year three month period.
13
Operating Profit. Operating profit increased $0.4 million in the three months
ended January 31, 2001, to $15.0 million, or 9.5% of revenue, from $14.6
million, or 12.0% of revenue, in the prior year three month period. Excluding
the Futurestep losses of $4.6 million and JobDirect losses of $3.4 million in
the current year and Futurestep losses of $4.9 million in the prior year,
operating profit for the three months ended January 31, 2001 increased $3.4
million, or 18%, to $22.9 million compared to the three months ended January 31,
2000. Operating profit as a percentage of revenue, excluding Futurestep and
JobDirect, remained relatively constant at 17% for both the three months ended
January 31, 2001 and 2000.
Interest Income and Other Income, Net. Interest income and other income, net,
includes interest income of $1.0 million and $2.0 million for the three months
ended January 31, 2001 and 2000, respectively. The decrease in interest income
is due primarily to lower average cash and marketable securities balances
compared to the prior year. Other income, net is comprised primarily of gains
and losses on disposals of property and equipment and dividend income resulting
in expense of $0.2 million for the current year three month period and income of
$0.2 million in the prior year.
Interest Expense. Interest expense increased $0.9 million in the three months
ended January 31, 2001, to $2.3 million from $1.4 million in the prior year,
primarily due to borrowings under the line of credit associated with
acquisitions during the first quarter of fiscal 2001 and 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 decreased $0.9
million to $5.6 million for the three months ended January 31, 2001 from $6.5
million for the comparable period ended January 31, 2000. The effective tax
rate was 42% for both the current and the prior year three month periods.
Non-controlling Shareholders' Interest. Non-controlling shareholders'
interest is comprised of the non-controlling shareholders' majority interest in
our Mexico subsidiaries. Non-controlling shareholders' interest increased $0.2
million to $0.9 million in the current three month period compared to $0.7
million in the prior year period.
Nine Months Ended January 31, 2001 Compared to Nine Months Ended January 31,
2000
Revenue. Revenue increased $161.2 million, or 47%, to $504.4 million for the
nine months ended January 31, 2001 from $343.2 million for the nine months ended
January 31, 2000, including an increase in revenue from Futurestep of $43.9
million compared to the same period in the prior year and revenue of $3.3
million from JobDirect in the current nine month period. The increase in
executive recruitment revenue of $114.0 million, or 35%, was primarily the
result of an increase in the number of executive recruitment engagements
supported by an increase in the average number of consultants and an increase in
the average fee per engagement.
In North America, revenue increased $82.4 million, or 44% to $269.5 million
for the nine months ended January 31, 2001 from $187.1 million for the
comparable period in the prior year due mainly to an increase in the number of
engagements supported by an increase in the number of consultants and an
increase in the average fee per engagement. The advanced technology, financial
services, industrial, healthcare and general specialty practices performed
strongly in the current year compared to the same nine month period last year.
In Europe, revenue increased $22.8 million, or 29%, to $101.3 million for the
nine months ended January 31, 2001 from $78.5 million for the nine months ended
January 31, 2000. Excluding the negative effects of foreign currency
translation into the U.S. dollar, revenue would have increased approximately
42% compared to the same period in the prior year. This increase is primarily
due to an increase in the number of engagements, supported by an increase in the
number of consultants, an increase in the average fee per engagement and the
acquisition in Germany in the prior year third fiscal quarter.
Revenue in Asia/Pacific increased $4.4 million, or 12%, to $40.0 million for
the nine months ended January 31, 2001 from $35.6 million for the comparable
period in the prior year due primarily to an increase in the average fee per
engagement partially offset by a decline in the number of engagements.
Excluding the negative effects of foreign currency translation into the U.S.
dollar, revenue would have increased approximately 17% compared to the same nine
month period last year.
The increase in revenue in Latin America of $4.4 million, or 20%, to $26.5
million for the nine months ended January 31, 2001 from $22.1 million for the
comparable nine month period in fiscal 2000 is attributable mainly to continued
strong performance by Mexico and improvement in the economy in Brazil offset by
a decrease in Argentina due to a reorganization of that office in the current
year. Excluding the
14
negative effects of foreign currency translation into the U.S. dollar, revenue
would have increased approximately 23% compared to the same nine month period
last year.
Futurestep revenue of $63.8 million for the nine months ended January 31, 2001
increased $43.9 million from the same period last year. This increase is
primarily attributable to additional engagements in North America in the current
nine month period, the acquisition of the ESS business of PA Consulting in
January 2000, and reflects the worldwide roll-out of the business in late fiscal
2000.
Compensation and Benefits. Compensation and benefits expense increased $99.4
million, or 48%, to $305.0 million for the nine months ended January 31, 2001
from $205.6 million for the comparable period ended January 31, 2000 due
primarily to an increase in the number of executive recruitment consultants and
Futurestep employees and the acquisition of JobDirect in the current fiscal
year. The $64.6 million increase for the nine months ended January 31, 2001,
excluding Futurestep expenses of $42.8 million and JobDirect expenses of $4.6
million in the current nine month period and Futurestep expenses of $12.6
million in the same period last year, reflects a 31% increase in the average
number of consultants for the nine months ended January 31, 2001 over the
comparable period in 2000. On a comparable basis, excluding Futurestep and
JobDirect, compensation and benefits expense as a percentage of revenue
decreased to 58.9% in the most recent nine month period from 59.7% in the nine
months ended January 31, 2000.
General and Administrative Expenses. General and administrative expenses
consist of occupancy expense associated with our leased premises, information
and technology infrastructure, marketing and other general office expenses.
General and administrative expenses increased $51.1 million, or 50%, to $152.3
million for the nine months ended January 31, 2001 from $101.2 million for the
comparable period ended January 31, 2000. As a percentage of revenue, general
and administrative expenses, excluding Futurestep and JobDirect related
expenses, remained relatively constant at 23% for both the nine months ended
January 31, 2001 and 2000.
Operating Profit. Operating profit increased $10.7 million in the nine months
ended January 31, 2001, to $47.1 million, or 9.3% of revenue, from $36.4
million, or 10.6% of revenue, in the prior year nine month period. Excluding
the Futurestep losses of $23.1 million and JobDirect losses of $7.8 million in
the current nine month period and Futurestep losses of $17.4 million in the same
period in the prior year, operating profit for the nine months ended January 31,
2001 increased $24.3 million, or 45%, to $78.0 million compared to the nine
months ended January 31, 2000. Operating profit, excluding Futurestep and
JobDirect, as a percentage of revenue was 18% and 17% for the nine months
ended January 31, 2001 and 2000, respectively. The increased margin reflects
improvement in North America, Europe and Asia/Pacific, while Latin America
remained constant compared to the prior year nine month period. The increase is
driven primarily by our European operations and reflects the increase in revenue
and a decline in compensation and benefits and general and administrative
expense as a percentage of revenue relative to the same period last year.
Interest Income and Other Income, Net. Interest income and other income, net,
includes interest income of $3.4 million and $4.8 million for the nine months
ended January 31, 2001 and 2000, respectively. The decrease in interest income
is due primarily to lower average cash and marketable securities balances
compared to the prior year. Other income consists primarily of gains and losses
on the sale of property and equipment and dividend income resulting in expense
of $0.3 million in the current period and income of $0.5 million in the prior
year period.
Interest Expense. Interest expense increased $3.1 million in the nine months
ended January 31, 2001, to $6.1 million from $3.0 million in the prior 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 $2.1
million to $18.3 million for the nine months ended January 31, 2001 from $16.2
million for the comparable period ended January 31, 2000. The effective tax
rate was 42% for both the current and prior year nine month periods.
Non-controlling Shareholders' Interest. Non-controlling shareholders'
interest is comprised of the non-controlling shareholders' majority interest in
our Mexico subsidiaries. Non-controlling shareholders' interest increased $0.7
million in the current nine month period to $2.7 million, compared to $2.0
million in the comparable prior year period and reflects the increase in net
income generated by the Mexico subsidiaries during the current fiscal nine month
period.
15
Liquidity and Capital Resources
We maintained cash and cash equivalents of $65.2 million at January 31, 2001
and $110.9 million at January 31, 2000. During the nine months ended January 31,
2001 and 2000, cash provided by operating activities was $11.9 million and $33.6
million, respectively. Operating cash generated in the current nine month period
decreased primarily due to a decrease in accounts payable and accrued
liabilities mainly related to fiscal 2000 bonuses paid in fiscal 2001.
Excluded from cash flows is the non-cash charge to other comprehensive income
of $1.3 million, representing the unrealized loss, net of tax, on our investment
in Webhire. This unrealized loss was due to a decline in the market price per
share from the $2.35 acquisition price to $1.69 at January 31, 2001.
Cash used in investing activities was $33.3 million for the current nine month
period and $36.3 million for the nine months ended January 31, 2000. In the
current nine month period, cash flows used in investing activities included
$44.2 million for business acquisitions and $10.6 million for the purchase of
equity interests in Jungle Interactive and Webhire compared to $35.6 for
business acquisitions in the prior year. In addition, net sales of marketable
securities were $53.5 million in the current nine month period compared to $22.0
million in the prior year.
Cash flows from investing activities also includes premiums paid on corporate-
owned life insurance, or COLI, contracts. We purchase COLI contracts to provide
a funding vehicle for anticipated payments due under our deferred executive
compensation programs. Premiums on these COLI contracts were $10.1 million and
$8.6 million for the nine months ended January 31, 2001 and 2000, respectively.
Generally, we borrow against the cash surrender value of the COLI contracts to
fund the COLI premium payments to the extent interest expense on the borrowings
is deductible for U.S. income tax purposes.
Capital expenditures totaled $21.8 million and $14.1 million for the nine
months ended January 31, 2001 and 2000, respectively. These expenditures
consisted primarily of systems hardware and software costs, upgrades to
information systems and leasehold improvements. The $7.7 million increase in
capital expenditures in the nine months ended January 31, 2001 compared to the
prior year nine month period relates primarily to increased fixed asset spending
at Futurestep to support its worldwide infrastructure.
Cash provided by financing activities was $1.6 million and $2.1
million during the nine months ended January 31, 2001 and 2000, respectively.
In the current nine month period, borrowings of $28.0 million under our line of
credit were offset by payments of $25.0 million. In addition, we made payments
of $10.3 million on shareholder acquisition notes in the current nine month
period compared to $0.6 million in the same period last year. In the current
nine month period, proceeds from the issuance of common stock were $8.9 million,
including proceeds from stock options exercised of $5.4 million, compared to
$2.6 million in the prior year nine month period.
Total outstanding borrowings under life insurance policies were $46.6 million
and $43.7 million at January 31, 2001 and 2000, respectively. These borrowings,
which are secured by the cash surrender value of the life insurance policies, do
not require principal payments and bear interest at various variable rates.
To provide additional liquidity, we replaced our prior credit line with a
$100 million credit facility with Bank of America effective October 31, 2000.
The credit facility is a revolving facility that matures on November 2, 2002 and
includes a standby letter of credit subfacility. Borrowings under the line of
credit bear interest on a sliding scale based on a leverage ratio. We have the
option of borrowing using either LIBOR or the higher of the bank's prime lending
rate or the Federal Funds rate plus 0.5%. The financial covenants include a
fixed charge coverage ratio, a maximum leverage ratio, a minimum quick ratio and
other customary events of default.
We believe that cash on hand, funds from operations and available borrowings
under our credit facilities will be sufficient to meet our anticipated working
capital, capital expenditures and general corporate requirements for the
foreseeable future.
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 trades on
currency exchanges and the legacy currencies will remain legal tender in the
participating countries for a transition period which expires January 1, 2002.
During the transition period, cashless payments can be made in the Euro, and
parties can elect to pay for goods and services and transact business using
either the Euro or a legacy currency. Between January 1, 2002 and July 1,
16
2002, the participating countries will introduce Euro notes and coins and
withdraw all legacy currencies so that they will no longer be available.
We have assessed our information technology systems to determine that they
allow for transactions to take place in both the legacy currencies and the Euro
and accommodate the eventual elimination of the legacy currencies. Our currency
risk may be affected as the legacy currencies are converted to the Euro.
Accounting, tax and governmental legal and regulatory guidance generally has not
been provided in final form and we will continue to evaluate issues involving
introduction of the Euro throughout the transition period. The conversion to the
Euro has not had a significant impact on our operations to date.
Recently Issued Accounting Standards
During fiscal 2000, we adopted the American Institute of Certified Public
Accountants Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Cost of
Computer Software Development or Obtained for Internal Use" and during fiscal
2001, we adopted the related Emerging Issues Task Force Issue No: 00-2 ("EITF
00-2"), "Accounting for Web Site Development Costs." The adoption of SOP 98-1
and EITF 00-2 did not have a material effect on the consolidated financial
statements or our capitalization policy.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Market Risk
As a result of our 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 currently 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 period and revenue and expenses are translated at average rates of exchange
during the period. 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. During the nine months ended
January 31, 2001 and 2000, we recognized foreign currency losses, after income
taxes, of $0.3 million and $0.4 million, respectively, primarily related to our
Europe and Asia/Pacific 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 January 31, 2001, we had
outstanding borrowings of $3.0 million on our revolving line of credit bearing
interest at LIBOR plus 1.25%, $46.6 million of borrowings against the cash
surrender value of COLI contracts bearing interest at primarily variable rates
payable at least annually and $27.2 million of notes payable to shareholders
resulting from business acquisitions in fiscal 2000, payable through fiscal 2004
at rates ranging from 5.5% to 7%.
17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Employment Agreement between Korn/Ferry International and
Michael D. Bekins
10.2 Korn/Ferry International Special Severance Pay Policy
10.3 Employment Agreement between Korn/Ferry International and
Richard M. Ferry
10.4 Amendment I, dated as of January 30, 2001, to Loan
Agreement, dated as of October 31, 2000, among Korn/Ferry
International, Bank of America, N.A. and the other Lenders
referred to therein
(b) Reports on Form 8-K
None.
18
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KORN/FERRY INTERNATIONAL
Date: March 16, 2001 By: /s/ Elizabeth S.C.S. Murray
---------------------------
Elizabeth S.C.S. Murray
Chief Financial Officer and
Executive Vice President
19
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
10.1 Employment Agreement between Korn/Ferry International and Michael D.
Bekins
10.2 Korn/Ferry International Special Severance Pay Policy
10.3 Employment Agreement between Korn/Ferry International and Richard M.
Ferry
10.4 Amendment I, dated as of January 30 2001, to Loan Agreement, dated as
of October 31, 2000, among Korn/Ferry International, Bank of America,
N.A. and the other Lenders referred to therein
- ---------------
20