10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on September 14, 1999
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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 July 31, 1999 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 001-14505
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KORN/FERRY INTERNATIONAL
(Exact name of registrant as specified in its charter)
California 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) 843-4100
(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 the Company's Common Stock as of
September 14, 1999 was 35,770,438.
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
The accompanying notes are an integral part of these consolidated financial
statements.
3
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - (Continued)
(in thousands)
The accompanying notes are an integral part of these consolidated financial
statements.
4
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(1) The proforma results for the three months ended July 31, 1998 take into
account a $4.9 million reduction in accrued bonus expense to reflect the
revised compensation program effective May 1, 1998 upon completion of the
initial public offering in February 1999 and the related $2.1 million
increase in the provision for income taxes.
The accompanying notes are an integral part of these consolidated financial
statements.
5
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(1) The proforma results for the three months ended July 31, 1998 take into
account a $4.9 million reduction in accrued bonus expense to reflect the
revised compensation program effective May 1, 1998 upon completion of the
initial public offering in February 1999 and the related $2.1 million
increase in the provision for income taxes.
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 month periods ended
July 31, 1999 and 1998 include the accounts of Korn/Ferry International, all of
its wholly owned domestic and international subsidiaries, and affiliated
companies in which the Company 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 fiscal year 1999 Annual Report on Form 10-K
as filed with the Securities and Exchange Commission ("SEC") on July 28, 1999
and should be read in conjunction with this Quarterly Report on Form 10-Q.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. As a result, actual results could differ from these
estimates.
Proforma July 31, 1998 Results
The Company implemented a revised compensation program, effective for the
fiscal year commencing May 1, 1998, upon completion of its initial public
offering in February 1999. The revised compensation program is intended to
reduce the amount of consultants' annual cash performance bonus payments and
provides for the issuance of options to purchase up to 7.0 million shares of
common stock at the market value at the grant date. The proforma results for
the three months ended July 31, 1998 give effect to the revised compensation
program, resulting in a reduction in accrued bonus expense of $4.9 million at
July 31, 1998 and an increase of $2.1 million in the provision for income taxes.
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 the first quarter ended July 31, 1999, the Company adopted Statement
of Position 98-1, "Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use," ("SOP 98-1"). The adoption of SOP 98-1 did not
materially change the Company's capitalization policy for software costs.
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) 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)
The Company had 3,327 options outstanding at July 31, 1999 that were anti-
dilutive and therefore, are excluded from the above reconciliation. The share
amounts in the table above reflect a four-to-one stock split approved by the
Board of Directors on July 24, 1998. The Company filed an amendment to the
existing Articles of Incorporation to increase the authorized capital stock and
effect the four-to-one split of the Common Stock on February 10, 1999. The
financial statements have been retroactively restated for the effects of this
split.
3. Comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," during its fiscal year ended
April 30, 1998. Comprehensive income is comprised of net income and all changes
to stockholders' equity, except those changes resulting from investments by
owners (changes in paid in capital) and distributions to owners (dividends).
SFAS 130 requires disclosure of the components of comprehensive income in
interim periods.
Total comprehensive income is as follows:
4. Business segments
The Company operates in one industry segment, retained executive
recruitment on a global basis. Management views the operations by line of
business, executive search and Futurestep, and geography. For purposes of the
geographic information below, Mexico's operating results are included in Latin
America. In January 1998, the Company formed Futurestep, a 93 percent owned
subsidiary, to provide Internet-based retained recruitment services for middle-
management positions.
8
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
A summary of the Company's operations by business segment follows:
(1) Corporate identifiable assets of $115,067 and $144,771 as of July 31, 1999
and April 30, 1999, respectively, are included in North America. Futurestep
identifiable assets are not material.
5. Acquisitions
On June 11, 1999, the Company completed the acquisition of Amrop
International's Australian business for approximately $3.2 million in cash
payable over a four-year period and $0.6 million in common stock. The
acquisition has been accounted for as a purchase. Of the total purchase price of
$3.8 million, $2.0 million represents deferred compensation. The fair market
value of the net assets acquired was approximately $0.2 million and $1.6 million
has been recorded as goodwill.
On July 29, 1999, the Company signed a letter of intent to acquire Levy-
Kerson, a leading search firm specializing in the retail/fashion industry with
revenues of approximately $6.0 million for the year ended December 31, 1998.
The purchase price is estimated to be approximately $7.3 million payable in
stock, notes and cash.
On September 8, 1999, the Company signed a letter of intent to acquire
Pearson, Caldwell and Farnsworth, a California-based search firm focused on
senior-level assignments for the financial services industry, with revenues of
approximately $3.2 million for the year ended December 31, 1998, for
approximately $4.3 million payable in cash, notes and stock.
On September 12, 1999, the Company signed a letter of intent to acquire the
search and selection recruitment business of PA Consulting Group, a leading
management, systems and technology consulting firm based in London for an
amount, payable in cash or substantially all in cash, equal to 1.05 times
trailing twelve months revenue,
9
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
estimated to be approximately $35.0 million subject to finalization of financial
statements. The purchase price is denominated in pounds sterling and the dollar
amount may vary with fluctuations in the exchange rate.
All three pending acquisitions are expected to close in the second quarter
of fiscal 2000 subject to completion of the Company's due diligence, negotiation
and execution of definitive acquisition agreements, receipt of applicable
regulatory approvals and absence of adverse changes in the financial condition
of these businesses. These acquisitions will be accounted for as purchases and
the fair market value of the net assets acquired in excess of the consideration,
if any, will be recorded as goodwill.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Korn/Ferry International is the world's largest executive search firm and
has the broadest global presence in the industry with 429 consultants based in
72 offices across 40 countries. The Company's 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 searches performed by the Company in fiscal
1999 were for board level, chief executive and other senior executive officer
positions and approximately 43% of the Company's 4,151 clients were Fortune 500
companies. The Company has established strong client loyalty; more than 90% of
the search assignments it performed in fiscal 1999 were on behalf of clients for
whom it had conducted multiple assignments over the last three fiscal years.
On February 17, 1999, the Company completed the public offering of 11.8
million shares of its common stock at $14.00 per share, approximately 10.0
million of which were sold by the Company, with the balance sold by certain
selling shareholders of the Company. Net proceeds received by the Company from
the offering were approximately $124.3 million.
In May 1998, the Company introduced its Internet-based service, Futurestep.
Futurestep combines the Company's search expertise with exclusive candidate
assessment tools and the reach of the Internet to accelerate recruitment of
candidates for middle-management positions. Futurestep's operating losses
approximated $12.6 million and $0.8 million for fiscal 1999 and 1998,
respectively, and are primarily related to compensation expense, start-up costs
and advertising expense to promote and expand the business roll-out. The Company
believes Futurestep will generate net operating losses through at least the end
of fiscal 2000.
In March 1999, the Company completed its national roll-out of Futurestep
expanding into the Midwest and Southwest regions of the United States.
Futurestep launched its international roll-out in the United Kingdom in May
1999, Canada in June 1999 and plans to expand in other selected foreign markets
in fiscal year 2000. As of July 31, 1999, approximately 350,000 candidates
worldwide had completed a detailed on-line profile. In July 1999, Futurestep
entered into its first global management recruitment agreement with Ernst &
Young, LLP to provide a range of services in addition to middle-management
recruitment including managing on-line job postings and campus recruitment
programs.
As the largest global executive search firm, the Company believes it has
the resources to be one of the leaders in the consolidation of the highly-
fragmented search industry. The Company frequently evaluates opportunities to
expand its business through acquisitions, and from time to time, the Company
engages in discussions with potential targets. The Company views strategic
acquisitions as a key component of its long term growth strategy and intends to
pursue future acquisition opportunities. In June 1999, the Company completed
the acquisition of the Australian business of Amrop International. The Company
has also signed letters of intent with Levy-Kerson, a leading search firm
specializing in the retail/fashion industry, Pearson, Caldwell and Farnsworth, a
leading search firm focused on senior-level assignments for the financial
services industry and PA Consulting Group, a leading management, systems and
technology consulting firm based in London. See "Recent Events."
10
Results of Operations
The following table summarizes the results of the Company's operations for
the three months ended July 31, 1999 and 1998 as a percentage of revenues.
_________
(1) The proforma results for the three months ended July 31, 1998 take
into account a $4.9 million reduction in accrued bonus expense to
reflect the revised compensation program effective May 1, 1998 upon
completion of the initial public offering in February 1999 and the
resulting $2.1 million increase in the provision for income taxes.
(2) For the three months ended July 31, 1999, 1998, and proforma 1998,
operating profit as a percentage of revenues excluding Futurestep
losses of $5.7 million and $2.5 million is 16%, 7% and 13%,
respectively.
The Company experienced growth in executive search revenues in all
geographic regions for the three months ended July 31,1999, except for Latin
America. The Company includes revenues generated from its Mexican operations
with its operations in Latin America.
In the following comparative analysis, all percentages are calculated based on
dollars in thousands.
Three Months Ended July 31, 1999 Compared to Three Months Ended July 31, 1998
Revenues
Revenues increased $20.1 million, or 23.6%, to $104.8 million for the three
months ended July 31, 1999 from $84.7 million for the three months ended July
31, 1998. The increase in revenues was primarily the result of a 21.5% increase
in the number of engagements, an 11.0% increase in the average number of
consultants and revenues from Futurestep in the current three month period.
In North America revenues increased $13.4 million, or 30.7%, to $57.2
million for the three months ended July 31, 1999 from $43.8 million for the
comparable period in the prior year. In Asia/Pacific, revenues increased $2.9
million, or 35.5%, to $11.1 million for the three months ended July 31, 1999
from $8.2 million for the three months ended July 31, 1998. Revenue growth in
North America and Asia/Pacific was attributable mainly to a 17.2% and 44.9%
increase, respectively, in the number of engagements and an increase of 11.3%
and 12.6%, respectively, in the average number of consultants. Revenues in
Europe increased $0.8 million, or 3.0%, to $25.2 million for the three months
ended July 31, 1999 from $24.4 million for the comparable period in the prior
year. The decline in revenues in Latin America of $1.0 million, or 11.8%, to
$7.3 million for the three months ended July 31, 1999 from $8.3 million for the
comparable three month period in fiscal 1998 is attributable to continued
economic uncertainty in that region. The Company believes the continued
uncertainty in Latin America will not have a significant impact on revenues in
the second quarter of fiscal 2000.
Futurestep revenue of $4.0 million for the three months ended July 31, 1999
is primarily attributable to 120 new engagements and reflects completion of the
roll-out of the North American operations at the end of prior fiscal year.
11
Compensation and Benefits
Compensation and benefits expense increased $8.6 million, or 15.4%, to
$64.7 million for the three months ended July 31, 1999 from $56.1 million for
the comparable period ended July 31, 1998 due primarily to an increase in the
number of consultants offset by a $6.5 million decrease in bonus expense in the
most recent fiscal quarter under the revised compensation plan. On a proforma
basis, compensation and benefits for the three months ended July 31, 1999
reflects a $4.9 million reduction in bonus expense under the revised
compensation program. The $13.6 million increase for the three months ended
July 31, 1999, including Futurestep expenses of $2.3 million, versus the
proforma three months ended July 31, 1998, reflects the 11.0% and 12.1% increase
in the average number of consultants to 429 from 386 and average total employees
to 1,578 from 1,408 for the three months ended July 31, 1999 over the comparable
period in 1998. On a comparable basis, excluding Futurestep and reflecting the
prior year three month period on a proforma basis, compensation and benefits
expense as a percentage of revenues increased slightly to 61.2% in the most
recent three month period from 59.5% in the proforma three months ended July 31,
1998.
General and Administrative Expenses
General and administrative expenses consist of occupancy expense associated
with the Company's leased premises, investments in information and technology
infrastructure, marketing and other general office expenses. General and
administrative expenses increased $4.8 million, or 19.1%, to $29.8 million for
the three months ended July 31, 1999 from $25.0 million for the comparable
period ended July 31, 1998. This increase was attributable to Futurestep
expenses of $4.8 million, primarily related to advertising and business
development in the current three month period. As a percentage of revenues,
general and administrative expenses, excluding Futurestep related expenses,
declined to 23.0% for the three months ended July 31, 1999 from 27.4% for the
comparable period in 1998. The decrease primarily reflects the higher percentage
increase in revenues and the elimination of excess costs in the current three
month period resulting from office rationalization in late fiscal 1999.
Operating Profit
Operating profit increased $6.6 million in the three months ended July 31,
1999, to $10.2 million, or 9.8% of revenues from $3.6 million, or 4.3% of
revenues in the prior year three month period. On a comparable basis, excluding
the Futurestep loss of $5.7 million and assuming the favorable impact of the
new compensation plan in the three months ended July 31, 1998, operating profit
for the three months ended July 31, 1999 increased $4.8 million, or 43.8% to
$15.9 million compared to the three months ended July 31, 1998. Operating
profit, on a comparable basis, as a percentage of revenues was 15.8% and 13.1%
for the three months ended July 31, 1999 and 1998, respectively. For the
current three month period, operating margins, on this same basis, increased in
all regions except in Latin America compared to the prior year three month
period due primarily to the increase in revenues and decline in general and
administrative expense as a percentage of revenues.
The percentage of the Company's operating profit contributed by North
America increased to 63.2% for the current three month period from 59.5% for the
proforma three months ended July 31, 1998, driven primarily by both volume and
consultant productivity. The Latin American region contribution decreased to
10.3% for the three months ended July 31, 1999 from 20.8% on a proforma basis
for the comparable prior year period mainly due to the percentage decline in
revenues commencing in the third quarter of fiscal 1999 while operating costs
remained relatively constant. The percentage of the Company's operating profit
contributed by the European and Asia/Pacific regions increased to approximately
19.9% and 6.6%, respectively, in the three months ended July 31, 1999 from 14.3%
and 5.4%, respectively, in the proforma three months ended July 31, 1998,
primarily reflecting the elimination of excess costs in late fiscal 1999
resulting from office rationalization.
Interest and other income (expense)
Interest and other income (expense) includes interest income of $1.3
million and $0.7 million and interest expense of $0.8 million and $1.2 million
for the three months ended July 31, 1999 and 1998, respectively. The increase in
interest income of $0.6 million and decrease in interest expense of $0.4 million
is due primarily to interest income earned on the investment of proceeds
received in the initial public offering and a decrease in interest expense
resulting from payment of the outstanding balance on bank borrowings upon
consummation of the public offering.
Provision for Income Taxes
The provision for income taxes increased $3.2 million to $4.6 million for
the three months ended July 31, 1999 from $1.4 million for the comparable period
ended July 31, 1998. The effective tax rate was 42% for the current year three
month period as compared to 43% for the prior year three month period.
12
Non-controlling Shareholders' Interests
Non-controlling shareholders' interests are comprised of the non-
controlling shareholders' majority interests in the Company's Mexico
subsidiaries and the controlling shareholders' interest in Futurestep in the
prior year three month period. Non-controlling shareholders' interests
increased $0.4 million to $0.7 million in the current three month period from
$0.3 million in the comparable prior year period. The increase primarily
reflects an increase in net income generated by the Mexican subsidiaries in the
three months ended July 31, 1999.
Liquidity and Capital Resources
The Company maintained cash and cash equivalents of $88.2 million as of
July 31, 1999. During the three months ended July 31, 1999 and 1998, cash used
in operating activities was $27.4 million and $19.5 million, respectively,
primarily for payment of bonuses accrued at each prior fiscal year end. Included
in the operating cash flows for the three months ended July 31, 1999, was
approximately $0.7 million of cash used for non-recurring items consisting of
severance and benefit payments related to staff downsizing, modification to
existing stock repurchase agreements and office rationalization.
Capital expenditures totaled $3.6 million and $2.5 million for the three
months ended July 31, 1999 and 1998, respectively. These expenditures consisted
primarily of systems development costs, upgrades to information systems and
leasehold improvements. The $1.1 million increase in capital expenditures in
the three months ended July 31, 1999 compared to the prior year three month
period, primarily relates to installation of a new financial system. For the
three months ended July 31, 1999, the new financial system expenditures of
approximately $1.6 million have been capitalized. The new financial system has
an expected installation cost of approximately $11.0 million over fiscal 2000
and 2001.
Included in cash flows from investing activities are premiums paid on
corporate-owned life insurance ("COLI") contracts. The Company purchases COLI
contracts to provide a funding vehicle for anticipated payments due under its
deferred executive compensation programs. Premiums on these COLI contracts were
$2.9 million and $1.4 million for the three months ended July 31, 1999 and 1998,
respectively. Generally, the Company borrows against the available 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. The increase in premium payments is attributable to the purchase of
additional policies for new and existing participants. The Company also sold
$7.8 million of marketable securities in the three months ended July 31, 1999.
On May 1, 1998, the Company acquired the assets and liabilities of Didier
Vuchot & Associates in France for approximately $6.0 million in cash, notes and
mandatorily redeemable stock of a subsidiary of the Company. On June 1, 1998,
the Company acquired all of the outstanding shares of Ray and Berndtson SA in
Switzerland for $3.6 million payable in cash, notes and mandatorily redeemable
common stock of the Company. The acquisitions resulted in a net cash outflow of
$1.3 million, comprised of an initial $2.5 million cash payment offset by $1.2
million of cash acquired.
On June 11, 1999, the Company acquired the assets and liabilities of the
Australian business of Amrop International for $3.8 million, including deferred
compensation of $2.0 million, resulting in a net cash outflow of $1.8 million.
Cash provided by financing activities was approximately $2.2 million and
$11.1 million during the three months ended July 31, 1999 and 1998,
respectively, which included borrowings under COLI contracts of $1.0 million and
$0.9 million in the three months ended July 31, 1999 and 1998, respectively, and
proceeds from sales of common stock of the Company to newly hired and promoted
consultants and payments on the related promissory notes of $1.7 million and
$1.3 million, respectively. Additionally, the Company paid $0.1 million and $1.2
million to repurchase common stock of the Company in the three months ended July
31, 1999 and 1998, respectively. During the three months ended July 31, 1998,
the Company also borrowed $10.0 million under its bank line of credit.
Total outstanding borrowings under life insurance policies were $43.6
million and $38.5 million for the three months ended July 31, 1999 and 1998,
respectively. Such borrowings are secured by the cash surrender value of the
life insurance policies, do not require principal payments and bear interest at
various variable rates.
The Company believes that cash on hand, funds from operations and its
credit facilities will be sufficient to meet its anticipated working capital,
capital expenditures, and general corporate requirements for the foreseeable
future.
13
Recent Events
On July 29, 1999, the Company signed a letter of intent to acquire Levy-
Kerson, a leading search firm specializing in the retail/fashion industry with
revenues of approximately $6.0 million for the year ended December 31, 1998.
The purchase price is estimated to be approximately $7.3 million payable in
stock, notes and cash.
On September 8, 1999, the Company signed a letter of intent to acquire
Pearson, Caldwell and Farnsworth, a California-based search firm focused on
senior-level assignments for the financial services industry, with revenues of
approximately $3.2 million for the year ended December 31, 1998, for
approximately $4.3 million payable in cash, notes and stock.
On September 12, 1999, the Company signed a letter of intent to acquire the
search and selection recruitment business of PA Consulting Group, a leading
management, systems and technology consulting firm based in London for an
amount, payable in cash or substantially all in cash, equal to 1.05 times
trailing twelve months revenue, estimated to be approximately $35.0 million
subject to finalization of financial statements. The purchase price is
denominated in pounds sterling and the dollar amount may vary with fluctuations
in the exchange rate.
All three pending acquisitions are expected to close in the second quarter
of fiscal 2000 subject to completion of the Company's due diligence, negotiation
and execution of definitive acquisition agreements, receipt of applicable
regulatory approvals and absence of adverse changes in the financial condition
of these businesses. These acquisitions will be accounted for as purchases and
the fair market value of the net assets acquired in excess of the consideration,
if any, will be recorded as goodwill.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written to use
two digits to define year dates. Computer programs running date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This defect could result in systems failure or miscalculations causing
disruptions of operations. The Company utilizes information technology to
facilitate (i) its internal search processes and inter-office communications,
(ii) communications with candidates and clients and (iii) its financial
management systems and other support systems. The statements contained in this
section are "Year 2000 Readiness Disclosures" as provided for in the Year 2000
Information and Readiness Disclosure Act.
The following scenarios with respect to the Company's systems could occur:
(i) its software may not be Year 2000 compliant, (ii) integration of upgrades
may not be complete by the year 2000 and (iii) replacement of its non-compliant
systems may be complete by the year 2000 but not fully tested or monitored prior
to the year 2000 such that testing and monitoring will uncover problems that the
Company cannot remedy in a timely manner.
Failure of search-related systems to be Year 2000 compliant might force the
Company to use different Year 2000 compliant systems to conduct searches and
might decrease productivity. Any failure of the Company's financial systems to
be Year 2000 compliant could hinder timely reporting of financial data and
processing of financial information as these functions would have to be
performed manually using non-networked computers. If any non-information
technology systems is not Year 2000 compliant, the Company will need to repair
or replace such systems. The Company believes that failure to be Year 2000
compliant will not have a significant impact on its human resource systems. The
Company's interruption or loss of information processing capabilities due to
Year 2000 issues could have a material adverse effect on the Company's business,
results of operations and financial condition.
In fiscal 1999, the Company completed an inventory and Year 2000 assessment
of its principal computer systems, network elements, software applications and
other business systems. The Company incurred costs of approximately $0.3 million
through July 31, 1999 to resolve Year 2000 issues and expects to incur
approximately $0.2 million to $0.3 million of additional costs in fiscal 2000.
Expenses incurred on the Year 2000 issues are being funded through operating
cash flows. The Company estimates full compliance by October 31, 1999. The costs
relating to the Year 2000 issues and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. Actual results could differ materially
from those anticipated.
The Company's primary business does not depend on material relationships
with third party vendors but utilizes third party vendors for a number of
functions, including its automated payroll functions, insurance and investment
of pension funds. The Company is initiating formal communications with third
party providers to determine the extent to which these third parties are moving
toward Year 2000 compliance. The Company also utilizes third party on-line
14
information services and the Internet to communicate and to retrieve information
about potential candidates and clients. Failure of these third parties to have
their systems Year 2000 compliant may have a material adverse effect on the
Company's operations.
The Company is in the process of developing a disaster recovery plan that
includes the implementation of alternative services in the event of a business
disruption. The plan is intended to address critical resources for the Company
and key resources for its remote offices, including interruptions that are the
result of problems arising from the Year 2000 issue. During and after any
disaster, these back-up solutions are intended to serve as temporary
replacements for the Company's e-mail, Internet access and proprietary
applications, which are integral to the Company's business. The Company intends
to have its disaster recovery plan completed by October 31, 1999 and to have the
plan fully implemented and tested for readiness of usage during December 1999.
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.
The conversion to the Euro has not had a significant impact on the Company's
operations to date.
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, 2002,
the participating countries will introduce Euro notes and coins and withdraw all
legacy currencies so that they will no longer be available.
The Company is currently assessing its information technology systems to
determine whether they allow for transactions to take place in both the legacy
currencies and the Euro and accommodate the eventual elimination of the legacy
currencies. The Company's currency risk may be reduced 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 the Company 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 the Company's operations to date.
Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") which establishes
new standards for reporting derivative and hedging information. FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB No. 133," in 1999, which deferred the
effective date of SFAS 133 for one year. The standard is effective for periods
beginning after June 15, 2000 and will be adopted by the Company as of May 1,
2001. It is not expected that the adoption of this standard will have any impact
on the consolidated financial statements nor require additional footnote
disclosure since the Company does not currently utilize derivative instruments
or participate in structured hedging activities.
Forward-looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Quarterly Report on Form 10-Q
contain forward looking statements that are based on the current beliefs and
expectations of the Company's management, as well as assumptions made by, and
information currently available to, the Company's management. Such statements
include those regarding general economic and executive search industry trends.
Because such statements involve risks and uncertainties, actual actions and
strategies and the timing and expected results thereof may differ materially
from those expressed or implied by such forward-looking statements, and the
Company's future results, performance or achievements could differ materially
from those expressed in, or implied by, any such forward-looking statements.
Future events and actual results could differ materially from those set forth in
or underlying the forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted. These potential risks and
uncertainties include, but are not limited to, dependence on attracting and
retaining qualified executive search consultants, portability of client
relationships, risks associated with global operations, ability to manage
growth, restrictions imposed by off-limits agreements, competition,
implementation of an acquisition strategy, risks related to the development and
growth of Futurestep, reliance on information processing systems and the impact
15
of Year 2000 issues, and employment liability risk. In addition to the factors
noted above, other risks, uncertainties, assumptions, and factors that could
affect the Company's financial results are referenced in the Company's fiscal
year 1999 Annual Report on Form 10-K as filed with the SEC on July 28, 1999 and
should be read in conjunction with this Quarterly Report on Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Market Risk
As a result of its global operating activities, the Company is exposed to
certain market risks including changes in foreign currency fluctuations,
fluctuations in interest rate and variability in interest rate spread
relationships. The Company manages its exposure to these risks in the normal
course of its business as described below. The Company has not utilized
financial instruments for trading or other speculative purposes nor does it
trade in derivative financial instruments.
Foreign Currency Risk
Historically, the Company has not experienced any significant translation
gains or losses on transactions involving U.S. dollars and other currencies.
This is primarily due to natural hedges of revenues and expenses in the
functional currencies of the countries in which its offices are located and
investment of excess cash balances in U.S. dollar denominated accounts.
Interest Rate Risk
The Company primarily manages its exposure to fluctuations in interest
rates through its regular financing activities that generally are short term and
provide for variable market rates. The Company has no outstanding balance on
either its term loan and revolving line of credit. As of July 31, 1999, the
Company had outstanding borrowings of $43.6 million against the cash surrender
value of COLI contracts bearing interest at various variable rates payable at
least annually and $1.6 million of long-term notes payable to former
shareholders payable through fiscal 2004 at variable market rates. The Company
has investments of approximately $85.9 million in interest bearing securities at
market rates with original maturities ranging from August 1999 to October 2001.
The Company has not experienced a material change in its primary market
risk exposures or how those exposures are managed compared to what was in effect
as of the fiscal year ended April 30, 1999.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Changes in Securities
None.
(b) Use of Proceeds
From May 1, 1999 until July 31, 1999, approximately $25 million
of the net proceeds to the Company from the Company's February 1999
initial public offering was used for working capital and acquisitions
of which $23.2 million was used primarily for fiscal 1999 bonus
payments in the ordinary course of business and $1.8 million was used
to complete acquisition of the Australian business of Amrop
International Australia.
Item 5. Other Information
On September 12, 1999, the Company signed a letter of intent to
acquire the search and selection recruitment business of PA Consulting
Group, a leading management, systems and technology consulting firm
based in London, for an amount in cash or substantially all in cash
equal to 1.05 times trailing twelve months revenue, estimated to be
approximately $35.0 million subject to finalization of financial
statements. The purchase price is denominated in pounds sterling and
the dollar amount may vary with fluctuations in the exchange rate. The
Company intends to fund the acquisition with currently available cash.
Consummation of the proposed transaction is subject to approval by the
Company's Board of Directors, completion of the Company's due
diligence, negotiation and execution of a definitive acquisition
agreement, receipt of applicable regulatory approvals and absence of
adverse changes in the financial condition of the search and selection
recruitment business.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
10.1* First Amendment to Stock Purchase Agreement between the
Company, Richard M. Ferry, Henry B. Turner and Peter W.
Mullin (as trustees of the Richard M. Ferry and Maude M.
Ferry 1972 Children's Trust), the California Community
Foundation and Richard M. Ferry Co-trustees, and the
California Community Foundation dated June 2, 1995.
27.1 Financial Data Schedule for the three months ended July 31,
1999
____________
* Management contract, compensatory plan or arrangement
(b) Reports on Form 8-K
None.
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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: September 14, 1999 By: /s/ Elizabeth S.C.S. Murray
------------------------------------
Elizabeth S.C.S. Murray
Chief Financial Officer and
Executive Vice President
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
10.1* First Amendment to Stock Purchase Agreement between the Company,
Richard M. Ferry, Henry B. Turner and Peter W. Mullin (as
trustees of the Richard M. Ferry and Maude M. Ferry 1972
Children's Trust), the California Community Foundation and
Richard M. Ferry Co-trustees, and the California Community
Foundation dated June 2, 1995.
27.1 Financial Data Schedule for the three months ended July 31, 1999
____________
* Management contract, compensatory plan or arrangement
19