UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		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)

1900 Avenue of the Stars, Suite 2600, Los Angeles, California 90067
(Address of principal executive offices) (Zip code)

(310) 552-1834
(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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of our common stock as of December 8, 2009 was 45,773,148 shares.

 

 

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents

Item #		Description		Page
Part I. Financial Information
Item 1		Condensed Consolidated Financial Statements			1
		Consolidated Balance Sheets as of October 31, 2009 (unaudited) and April 30, 2009			1
		Unaudited Consolidated Statements of Operations for the three and six months ended October 31, 2009 and 2008			2
		Unaudited Consolidated Statements of Cash Flows for the six months ended October 31, 2009 and 2008			3
		Notes to Unaudited Condensed Consolidated Financial Statements			4
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3		Quantitative and Qualitative Disclosures about Market Risk			29
Item 4		Controls and Procedures			30
Part II. Other Information
Item 1		Legal Proceedings			31
Item 1A		Risk Factors			31
Item 2		Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities			31
Item 4		Submission of Matters to a Vote of Security Holders			32
Item 5		Other Information			32
Item 6		Exhibits			32
		Signatures			33
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I. FINANCIAL INFORMATION

Item 1.		Condensed Consolidated Financial Statements

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

		October 31,				April 30,
		2009				2009
		(unaudited)
		(in thousands, except per share data)
ASSETS
Cash and cash equivalents		$	182,938			$	255,000
Marketable securities			3,783				4,263
Receivables due from clients, net of allowance for doubtful accounts of $7,520 and $11,197, respectively			101,311				67,308
Income taxes and other receivables			8,066				9,001
Deferred income taxes			19,942				14,583
Prepaid expenses and other assets			29,306				21,442
Total current assets			345,346				371,597
Marketable securities, non-current			74,518				70,992
Property and equipment, net			26,578				27,970
Cash surrender value of company owned life insurance policies, net of loans			65,528				63,108
Deferred income taxes			46,894				45,141
Goodwill			164,936				133,331
Intangible assets, net			21,792				16,928
Investments and other assets			15,777				11,812
Total assets		$	761,369			$	740,879
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	8,904			$	10,282
Income taxes payable			10,677				2,059
Compensation and benefits payable			88,065				116,705
Other accrued liabilities			50,418				44,301
Total current liabilities			158,064				173,347
Deferred compensation and other retirement plans			115,833				99,238
Other liabilities			13,104				9,195
Total liabilities			287,001				281,780
Stockholders’ equity:
Common stock: $0.01 par value, 150,000 shares authorized, 57,404 and 56,185 shares issued and 45,760 and 44,729 shares outstanding, respectively			376,964				368,430
Retained earnings			73,394				84,922
Accumulated other comprehensive income, net			24,544				6,285
Stockholders’ equity			474,902				459,637
Less: notes receivable from stockholders			(534	)			(538	)
Total stockholders’ equity			474,368				459,099
Total liabilities and stockholders’ equity		$	761,369			$	740,879

The accompanying notes are an integral part of these condensed consolidated financial statements.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2009				2008				2009				2008
		(in thousands, except per share data)
Fee revenue		$	140,145			$	189,300			$	256,948			$	395,033
Reimbursed out-of-pocket engagement expenses			6,411				10,437				12,896				22,176
Total revenue			146,556				199,737				269,844				417,209
Compensation and benefits			102,076				129,748				192,461				271,871
General and administrative expenses			27,164				32,323				55,218				66,353
Out-of-pocket engagement expenses			9,464				13,297				18,253				28,030
Depreciation and amortization			2,860				2,881				5,689				5,713
Restructuring charges			2,774				—				20,957				—
Total operating expenses			144,338				178,249				292,578				371,967
Operating income (loss)			2,218				21,488				(22,734	)			45,242
Interest and other income (loss), net			2,439				(104	)			7,172				1,500
Interest expense			1,259				1,080				2,701				2,304
Income (loss) before provision (benefit) for income taxes and equity in earnings of unconsolidated subsidiaries			3,398				20,304				(18,263	)			44,438
Provision (benefit) for income taxes			879				7,583				(6,486	)			16,876
Equity in earnings of unconsolidated subsidiaries, net			226				839				249				1,902
Net income (loss)		$	2,745			$	13,560			$	(11,528	)		$	29,464
Earnings (loss) per common share:
Basic		$	0.06			$	0.31			$	(0.26	)		$	0.68
Diluted		$	0.06			$	0.30			$	(0.26	)		$	0.66
Weighted-average common shares outstanding:
Basic			44,470				43,776				44,123				43,604
Diluted			45,291				44,676				44,123				44,590

The accompanying notes are an integral part of these condensed consolidated financial statements.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

		Six Months Ended
		October 31,
		2009				2008
		(in thousands)
Cash flows from operating activities:
Net (loss) income		$	(11,528	)		$	29,464
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization			5,689				5,712
Stock-based compensation expense			9,248				8,528
Loss on disposition of property and equipment			437				85
Provision for doubtful accounts			1,444				4,871
(Gain) loss on cash surrender value of life insurance policies			(5,196	)			4,005
Gain on marketable securities classified as trading			(6,115	)			—
Realized loss on available-for sale marketable securities			—				1,242
Deferred income taxes			(7,112	)			5,557
Change in other assets and liabilities:
Deferred compensation			16,595				(4,229	)
Receivables			(28,598	)			(9,054	)
Prepaid expenses			(4,764	)			(4,259	)
Investment in unconsolidated subsidiaries			(249	)			(3,724	)
Income taxes payable			6,530				(6,401	)
Accounts payable and accrued liabilities			(40,782	)			(95,317	)
Other			(4,389	)			(551	)
Net cash used in operating activities			(68,790	)			(64,071	)
Cash flows from investing activities:
Purchase of property and equipment			(2,723	)			(6,414	)
Purchase of intangible assets			(3,481	)			—
Proceeds from (purchase of) marketable securities, net			3,090				(9,637	)
Cash paid for acquisitions, net of cash acquired			(9,984	)			—
Premiums on life insurance policies			(439	)			(439	)
Dividends received from unconsolidated subsidiaries			157				1,799
Net cash used in investing activities			(13,380	)			(14,691	)
Cash flows from financing activities:
Payments on life insurance policy loans			—				(367	)
Borrowings under life insurance policies			3,219				429
Purchase of common stock			(1,362	)			(7,582	)
Proceeds from issuance of common stock upon exercise of employee stock options and in connection with an employee stock purchase plan			3,991				2,484
Tax (expense) benefit from exercise of stock options			(3,125	)			162
Net cash provided by (used in) financing activities			2,723				(4,874	)
Effect of exchange rate changes on cash and cash equivalents			7,385				(22,432	)
Net decrease in cash and cash equivalents			(72,062	)			(106,068	)
Cash and cash equivalents at beginning of period			255,000				305,296
Cash and cash equivalents at end of period		$	182,938			$	199,228

The accompanying notes are an integral part of these condensed consolidated financial statements.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES

1. Organization and Summary of Significant Accounting Policies

Nature of Business

Korn/Ferry International, a Delaware corporation (the “Company”), and its subsidiaries are engaged in the business of providing executive search, outsourced recruiting and leadership and talent consulting on a retained basis. The Company’s worldwide network of 78 offices in 37 countries enables it to meet the needs of its clients in all industries.

Basis of Consolidation and Presentation

The condensed consolidated financial statements for the three and six months ended October 31, 2009 and 2008 include the accounts of the Company and its wholly and majority owned/controlled domestic and international subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The preparation of the condensed consolidated financial statements conform with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and prevailing practice within the industry. The condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals and any other adjustments that 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 30, 2009 (the “Annual Report”) and should be read together with the Annual Report.

Investments in affiliated companies which are 50% or less owned and where the Company exercises significant influence over operations are accounted for using the equity method. Dividends and other distributions of earnings from cost-method investments are included in other income when declared.

Use of Estimates and Uncertainties

The preparation of the consolidated financial statements in conformity with GAAP 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. Actual results could differ from these estimates. The most significant areas that require management judgment are revenue recognition, deferred compensation, marketable securities, evaluation of the carrying value of receivables, goodwill and other intangible assets and deferred income taxes.

Revenue Recognition

Substantially all professional fee revenue is derived from fees for professional services related to executive recruitment, middle-management recruitment and related services performed on a retained basis. Fee revenue from recruitment activities 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 commencing the month of client acceptance. Fees earned in excess of the initial contract amount are billed upon completion of the engagement. Any services that are provided on a contingent basis are recognized once the contingency is fulfilled.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

Marketable Securities

The Company classifies its marketable securities as either trading securities or available-for-sale. These investments are recorded at fair value and are classified as marketable securities in the accompanying consolidated balance sheets. Certain investments, which the Company intends to sell within the next twelve months, are carried as current. Investments are made based on the Company’s investment policy which restricts the types of investments that can be made.

Trading securities consist of the Company’s investments, which are held in trust to satisfy obligations under the Company’s deferred compensation plans (see Note 5). The changes in fair values on trading securities are recorded as a component of net (loss) income in interest and other income, net.

Available-for-sale securities consist of time deposits. The changes in fair values, net of applicable taxes, on available-for-sale marketable securities are recorded as unrealized gains (losses) as a component of accumulated other comprehensive income (loss) in stockholders’ equity. When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be “other-than-temporary,” the investment’s cost or amortized cost is written-down to its fair value and the amount written-down is recorded in the statement of operations in interest and other income (loss), net. The determination of other-than-temporary decline includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write-down may be necessary. The amount of any write-down is determined by the difference between cost or amortized cost of the investment and its fair value at the time the other-than-temporary decline is identified. During the three and six months ended October 31, 2009 and 2008, no other-than-temporary impairment was recognized.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of assets acquired. Purchased intangible assets primarily consist of customer lists, non-compete agreements, proprietary databases, intellectual property and trademarks, and are recorded at the estimated fair value at the date of acquisition and are amortized using the straight-line method over their estimated useful lives of five to 24 years.

The Company’s annual goodwill impairment test is performed as of January 31. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit would be considered impaired. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. The implied fair value of goodwill shall be determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. For each of these tests, the fair value of each of the Company’s reporting units is determined using a combination of valuation techniques, including a discounted cash flow methodology. As of the last testing date, these impairment tests indicated that the fair value of each reporting unit exceeded its carrying amount. As a result, no impairment charge was recognized. There was also no indication of impairment as of October 31, 2009 and April 30, 2009.

As of October 31, 2009 and April 30 2009, there were no indicators of impairment with respect to the Company’s intangible assets.

Stock-Based Compensation

The Company has employee compensation plans under which various types of stock-based instruments are granted. These instruments, principally include stock options, stock appreciation rights (“SARs”), restricted stock and an Employee Stock Purchase Plan (“ESPP”). In addition to recognizing compensation expense related to restricted stock and SARs, the Company also recognizes compensation expense related to the estimated fair value of stock options and stock purchases under the ESPP.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

Restructuring Charges

The Company accounts for its restructuring charges as a liability when the costs are incurred and are recorded at fair value.

Fair Value of Financial Instruments

Effective May 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (“SFAS 157”) for financial assets and liabilities, which defines fair value, provides guidance for measuring fair value and requires certain disclosures. SFAS 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

•

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

•

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

As of October 31 2009 and April 30, 2009, the Company held certain assets that are required to be measured at fair value on a recurring basis. These included cash equivalents, marketable securities and a put option. The carrying amount of cash, cash equivalents and accounts receivable approximates fair value due to the short maturity of these instruments. The fair values of marketable securities, other than auction rate securities, are obtained from quoted market prices. The fair value of the auction rate securities and put option are determined by the use of pricing models (see Note 5).

The guidance for SFAS 157 may now be found in the new codification as a component of ASC 820, Fair Value Measurements and Disclosures.

Recently Adopted Accounting Standards

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a Replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009. The Company adopted SFAS 168 in the second fiscal quarter 2009. As the Codification was not intended to change or alter existing GAAP, it did not impact the Company’s condensed consolidated financial statements. The guidance for SFAS 168 may now be found in the new codification as a component of ASC 105, Generally Accepted Accounting Principles.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R expands the definition of transactions and events that qualify as business combinations; requires that the acquired assets and liabilities including contingencies and any noncontrolling interests in the acquiree, be recorded at the fair value determined on the acquisition date and changes thereafter be reflected in earnings, rather than goodwill; changes the recognition timing for restructuring costs; and requires acquisition costs to be expensed as incurred. SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R will have an impact on accounting for business combinations but the effect is dependent upon acquisitions at that time. For acquisitions completed prior to May 1, 2009, the new standard requires that changes in deferred tax valuation allowances and acquired income tax uncertainties after the measurement period must be recognized in earnings rather than as an adjustment to the cost of the acquisition. The impact of the adoption of SFAS 141R on the Company’s consolidated financial position and results of operations will largely be dependent on the size and nature of the business combinations completed after the adoption of this statement. The guidance for SFAS 141R may now be found in the new codification as a component of ASC 805, Business Combinations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, earlier adoption is not permitted. The Company currently does not have significant minority interests in its consolidated subsidiaries and as such SFAS 160 did not have an impact on the Company’s condensed consolidated financial statements. The guidance for SFAS 160 may now be found in the new codification as a component of ASC 810, Consolidation.

In April 2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 provides guidance on (1) estimating the fair value of an asset or liability when the volume and level of activity for the asset or liability have significantly decreased and (2) identifying transactions that are not orderly. FSP 157-4 was effective for interim and annual periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact on the Company’s condensed consolidated financial statements. The guidance for FSP 157-4 may now be found in the new codification as a component of ASC 820-10-65-4, Fair Value Measurements and Disclosures.

In April 2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 requires disclosures about the fair value of financial instruments in interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 was effective for interim periods ending after June 15, 2009. The adoption of FSP 107-1 did not have a material impact on the Company’s condensed consolidated financial statements. The guidance for FSP 107-1 may now be found in the new codification as a component of ASC 825-10-65-1, Financial Instruments.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. SFAS 165 is effective for interim and annual periods ending after June 15, 2009, and accordingly, the Company adopted this standard during the three months ended July 31, 2009. The implementation of this standard did not have any impact on the financial statements of the Company. Subsequent events through the filing date of this Form 10-Q have been evaluated for disclosure and recognition and the Company concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements. The guidance for SFAS 165 may now be found in the new codification as a component of ASC 855, Subsequent Events.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

2. Basic and Diluted Earnings (Loss) Per Share

Basic earnings (loss) per common share was computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding. Diluted earnings per common share reflects the potential dilution that would occur if all in-the-money outstanding options or other contracts to issue common stock were exercised or converted and was computed by dividing net earnings (loss) attributable to common stockholders by the weighted-average number of common shares outstanding plus dilutive common equivalent shares. During the three months ended October 31, 2009, SARs and options to purchase 1.6 million shares were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. Due to the loss attributable to common stockholders during the six months ended October 31, 2009, no potentially dilutive shares are included in the loss per share calculation as including such shares in the calculation would be anti-dilutive. During the three and six months ended October 31, 2008, SARs and options to purchase 1.6 million shares, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

The following table summarizes basic and diluted earnings (loss) per share calculations:

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2009				2008				2009				2008
		(in thousands, except per share data)
Net earnings (loss) attributable to common stockholders		$	2,745			$	13,560			$	(11,528	)		$	29,464
Weighted-average common shares outstanding:
Basic weighted-average number of common shares outstanding			44,470				43,776				44,123				43,604
Effect of dilutive securities:
Warrants			48				72				—				76
Restricted stock			385				98				—				160
Stock options			386				717				—				732
ESPP			2				13				—				18
Diluted weighted-average number of common shares outstanding			45,291				44,676				44,123				44,590
Net earnings (loss) per common share:
Basic earnings (loss) per share		$	0.06			$	0.31			$	(0.26	)		$	0.68
Diluted earnings (loss) per share		$	0.06			$	0.30			$	(0.26	)		$	0.66

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

3. Comprehensive Income (Loss)

Comprehensive income (loss) is comprised of net income (loss) and all changes to stockholders’ equity, except those changes resulting from investments by stockholders (changes in paid in capital) and distributions to stockholders (dividends).

Total comprehensive income (loss) is as follows:

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2009				2008				2009				2008
		(in thousands)
Net income (loss)		$	2,745			$	13,560			$	(11,528	)		$	29,464
Foreign currency translation adjustments			5,975				(41,330	)			18,259				(42,715	)
Unrealized losses on marketable securities, net of taxes			—				(4,829	)			—				(6,259	)
Comprehensive income (loss)		$	8,720			$	(32,599	)		$	6,731			$	(19,510	)

The components of accumulated other comprehensive income were as follows:

		October 31,				April 30,
		2009				2009
		(in thousands)
Foreign currency translation adjustments		$	21,782			$	3,523
Defined benefit pension adjustments, net of taxes			2,762				2,762
Accumulated other comprehensive income		$	24,544			$	6,285

4. Employee Stock Plans

Stock-Based Compensation

The following table summarizes the components of stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations for the periods indicated:

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2009				2008				2009				2008
		(in thousands)
Stock options and SARs		$	258			$	(64	)		$	494			$	224
Restricted stock			4,406				4,268				8,553				8,058
ESPP			88				113				201				246
Total stock-based compensation expense, pre-tax			4,752				4,317				9,248				8,528
Tax benefit from stock-based compensation expense			(1,735	)			(1,576	)			(3,376	)			(3,113	)
Total stock-based compensation expense, net of tax		$	3,017			$	2,741			$	5,872			$	5,415

The Company uses the Black-Scholes option valuation model to estimate the grant date fair value of employee stock options. The expected volatility reflects the consideration of the historical volatility in the Company’s publicly traded instruments during the period the option is granted. The Company believes historical volatility in these instruments is more indicative of expected future volatility than the implied volatility in the price of the Company’s common stock. The expected life of each option is estimated using historical data. The risk-free interest rate is based on the U.S. Treasury zero-coupon issue with a remaining term approximating the expected term of the option. The Company uses historical data to estimate forfeiture rates applied to the gross amount of expense determined using the option valuation model.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

The weighted-average assumptions used to estimate the fair value of each employee stock option and SARs were as follows:

		Six Months Ended
		October 31,
		2009				2008
Expected volatility			48.91	%			44.11	%
Risk-free interest rate			2.53	%			3.27	%
Expected option life (in years)			5.00				4.25
Expected dividend yield			0.00	%			0.00	%

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options. The assumptions used in option valuation models are highly subjective, particularly the expected stock price volatility of the underlying stock.

Stock Incentive Plans

The Korn/Ferry International 2008 Stock Incentive Plan (the “2008 Plan”) was amended by the Company’s stockholders on September 10, 2009, at the 2009 Annual Stockholder Meeting. The amendment makes available an additional 2,360,000 shares of the Company’s common stock for stock-based compensation awards. The 2008 Plan provides for, the grant of awards to eligible participants, designated as either nonqualified or incentive stock options, SARs, restricted stock and restricted stock units, any of which may be performance-based, and incentive bonuses, which may be paid in cash or a combination thereof.

Stock Options and SARs

Stock options and SARs transactions under the Company’s stock incentive plans were as follows:

		Six Months Ended October 31, 2009
										Weighted-
						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Options				Price				Life (In Years)				Value
		(in thousands, except per share data)
Outstanding, April 30, 2009			3,113			$	14.83
Granted			556			$	10.70
Exercised			(341	)		$	7.94
Forfeited/expired			(373	)		$	17.02
Outstanding, October 31, 2009			2,955			$	14.57				3.99			$	9,945
Exercisable, October 31, 2009			2,431			$	15.42				3.40			$	7,136

Included in the table above are 53,899 SARs outstanding and exercisable as of October 31, 2009 with a weighted-average exercise price of $11.31. As of October 31, 2009, there was $2.3 million of total unrecognized compensation cost related to non-vested awards of stock options and SARs. That cost is expected to be recognized over a weighted-average period of 2.0 years. For stock option awards subject to graded vesting, the Company recognizes the total compensation cost on a straight-line basis over the service period for the entire award.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

Additional information pertaining to stock options and SARs:

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2009				2008				2009				2008
		(in thousands, except per share data)
Weighted-average fair value of stock options granted		$	6.48			$	6.67			$	4.81			$	6.69
Total fair value of stock options and SARs vested		$	508			$	216			$	596			$	1,908
Total intrinsic value of stock options exercised		$	382			$	511			$	1,100			$	610
Total intrinsic value of SARs paid		$	—			$	—			$	—			$	—

Restricted Stock

The Company grants restricted stock to executive officers and other senior employees generally vesting over a three to four year period. Restricted stock is granted at a price equal to the fair market value of the Company’s common stock on the date of grant. Employees may receive restricted stock annually in conjunction with the Company’s performance review as well as upon commencement of employment. The fair value of restricted stock is determined based on the closing price of the Company’s common stock on the date of grant.

Restricted stock activity is summarized below:

		Six Months Ended
		October 31,
						Weighted-
						Average Grant
						Date Fair
		Shares				Value
		(in thousands, except per share data)
Non-vested, April 30, 2009			2,387			$	15.50
Granted			961			$	10.18
Vested			(678	)		$	20.34
Forfeited/expired			(74	)		$	14.40
Non-vested, October 31, 2009			2,596			$	12.92

As of October 31, 2009, there was $33.5 million of total unrecognized compensation cost related to non-vested awards of restricted stock, which is expected to be recognized over a weighted-average period of 2.4 years. For restricted stock awards subject to graded vesting, the Company recognizes the total compensation cost on a straight-line basis over the service period for the entire award. In the three and six months ended October 31, 2009, 8,737 shares and 128,654 shares of restricted stock totaling $0.2 million and $1.4 million, respectively, were repurchased by the Company at the option of the employee to pay for taxes related to vesting of restricted stock. In the three and six months ended October 31, 2008, 7,902 shares and 126,309 shares of restricted stock totaling $0.1 million and $2.1 million, respectively, were repurchased by the Company at the option of the employee to pay for taxes related to vesting of restricted stock.

Common Stock

In the three and six months ended October 31, 2009, the Company issued 50,050 shares and 340,880 shares of common stock as a result of the exercise of stock options. In the three and six months ended October 31, 2008, the Company issued 79,912 shares and 96,412 shares of common stock as a result of the exercise of stock options.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

Employee Stock Purchase Plan

In October 2003, the Company implemented an ESPP that, in accordance with Section 423 of the Internal Revenue Code, allows eligible employees to authorize payroll deductions of up to 15% of their salary to purchase shares of the Company’s common stock at 85% of the fair market price of the common stock on the last day of the enrollment period. The maximum number of shares of common stock reserved for ESPP issuance is 1.5 million shares, subject to adjustment for certain changes in the Company’s capital structure and other extraordinary events. During the six months ended October 31, 2009 and 2008, employees purchased 141,923 shares at $9.04 per share and 118,615 shares at $13.37 per share, respectively. No shares were purchased in the three months ended October 31, 2009 and 2008.

5. Marketable Securities

As of October 31, 2009 marketable securities consisted of the following:

		October 31,
		2009
		Trading
		(in thousands)
Auction rate securities		$	10,774
Auction rate securities put option			1,176
Equity securities (1)			29,874
Fixed income mutual fund (1)			15,388
Non-current money market (1)			21,089
Total			78,301
Less: current portion of marketable securities			(3,783	)
Non-current marketable securities		$	74,518

As of April 30, 2009 marketable securities consisted of the following:

		April 30, 2009
						Available-for-
		Trading				Sale(1)				Total
		(in thousands)
Auction rate securities		$	11,329			$	—			$	11,329
Auction rate securities put option			1,096				—				1,096
Equity securities (2)			23,816				—				23,816
Fixed income mutual fund (2)			14,320				—				14,320
Non-current money market (2)			22,692				—				22,692
Time deposits			—				2,002				2,002
Total			73,253				2,002				75,255
Less: current portion of marketable securities			(2,261	)			(2,002	)			(4,263	)
Non-current marketable securities		$	70,992			$	—			$	70,992

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

Investments in marketable securities are made based on the Company’s investment policy which restricts the types of investments that can be made. The Company’s investments associated with cash equivalents and marketable securities consist of money market funds, United States government and government agency bonds and equity securities for which market prices are readily available. The Company’s investments in marketable securities also include student loan portfolios (“ARS”), which are classified as noncurrent marketable securities and reflected at fair value.

As of October 31, 2009 and April 30, 2009, the Company’s marketable securities included $66.4 million (net of unrealized losses of $3.3 million) and $60.8 million (net of unrealized losses of $10.0 million) respectively, held in trust for settlement of the Company’s obligations under certain of its deferred compensation plans, of which $62.6 million and $58.5 million are classified as noncurrent. The Company’s obligations for which these assets were held in trust totaled $66.3 million and $60.7 million as of October 31, 2009 and April 30, 2009, respectively.

The following table represents the Company’s fair value hierarchy for financial assets measured at fair value on a recurring basis:

		October 31, 2009
		Total				Level 1				Level 2				Level 3
		(in thousands)
Cash equivalents		$	127,649			$	127,649			$	—			$	—
Auction rate securities			10,774				—				—				10,774
Auction rate securities put option			1,176				—				—				1,176
Equity securities			29,874				29,874				—				—
Fixed income mutual fund			15,388				15,388				—				—
Noncurrent money market mutual funds			21,089				21,089				—				—
Total		$	205,950			$	194,000			$	—			$	11,950

		April 30, 2009
		Total				Level 1				Level 2				Level 3
		(in thousands)
Cash equivalents		$	165,590			$	165,590			$	—			$	—
Auction rate securities			11,329				—				—				11,329
Auction rate securities put option			1,096				—				—				1,096
Equity securities			23,816				23,816				—				—
Fixed income mutual fund			14,320				14,320				—				—
Noncurrent money market mutual funds			22,692				22,692				—				—
Time deposits			2,002				2,002				—				—
Total		$	240,845			$	228,420			$	—			$	12,425

The following table presents the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods indicated:

		Auction Rate Securities
		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2009				2008				2009				2008
		(in thousands)
Balance, beginning of period		$	12,225			$	17,783			$	12,425			$	20,475
Auction rate securities put option			42				1,638				164				1,638
Reversal of unrealized loss associated with transfer of security to trading			—				780				—				780
Unrealized loss included in operations			(42	)			(1,638	)			(164	)			(1,638	)
Unrealized loss included in accumulated other comprehensive income			—				(327	)			—				(586	)
Sale of securities			(275	)			(700	)			(475	)			(3,250	)
Reversal of unrealized loss associated with sales of securities at par			—				41				—				158
Balance, ending of period		$	11,950			$	17,577			$	11,950			$	17,577

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

6. Restructuring Charges

During the three months ended October 31, 2009, the Company reorganized its go-to-market and operating structure in Europe, Middle East and Africa (EMEA”) region, and as a result incurred restructuring charges of $7.6 million against operations, all of which related to severance costs. This restructuring expense was partially offset by $4.8 million of reductions from previous restructuring charges resulting in net restructuring costs of $2.8 million during the three months ended October 31, 2009. The Company’s basic and diluted (loss) earnings per share for the three and six months ended October 31, 2009 would have decreased by $0.07 per share had reductions of previously recorded restructuring charges of $4.8 million (or $3.1 million, net of taxes) not been recorded.

Changes in the restructuring liability during the three months ended October 31, 2009 are as follows:

		Severance				Facilities				Total
		(in thousands)
Liability as of July 31, 2009		$	11,530			$	21,145			$	32,675
Additions charged to expense			7,592				—				7,592
Reductions			(1,911	)			(2,907	)			(4,818	)
Non-cash items			—				(2,272	)			(2,272	)
Reductions for cash payments			(6,504	)			(1,880	)			(8,384	)
Exchange rate fluctuations			169				166				335
Liability as of October 31, 2009		$	10,876			$	14,252			$	25,128

Changes in the restructuring liability during the six months ended October 31, 2009 are as follows:

		Severance				Facilities				Total
		(in thousands)
Liability as of April 30, 2009		$	10,554			$	12,807			$	23,361
Additions charged to expense			15,940				9,835				25,775
Reductions			(1,911	)			(2,907	)			(4,818	)
Non-cash items			(370	)			(2,341	)			(2,711	)
Reductions for cash payments			(13,917	)			(3,914	)			(17,831	)
Exchange rate fluctuations			580				772				1,352
Liability as of October 31, 2009		$	10,876			$	14,252			$	25,128

As of October 31, 2009 and April 30, 2009, the restructuring liability is included in the current portion of other accrued liabilities on the consolidated balance sheet, except for $5.4 million, of facilities costs which primarily relate to commitments under operating leases, net of sublease income, which are included in other long-term liabilities and will be paid over the next eight years.

The restructuring liability by segment is summarized below:

		October 31, 2009
		Severance				Facilities				Total
		(in thousands)
Executive Recruitment
North America		$	703			$	1,586			$	2,289
EMEA			9,719				9,469				19,188
Asia Pacific			—				827				827
South America			231				—				231
Total Executive Recruitment			10,653				11,882				22,535
Futurestep			223				2,370				2,593
Liability as of October 31, 2009		$	10,876			$	14,252			$	25,128

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

		April 30, 2009
		Severance				Facilities				Total
		(in thousands)
Executive Recruitment
North America		$	3,052			$	3,187			$	6,239
EMEA			4,714				2,514				7,228
Asia Pacific			48				1,243				1,291
South America			787				334				1,121
Total Executive Recruitment			8,601				7,278				15,879
Futurestep			1,953				5,529				7,482
Liability as of April 30, 2009		$	10,554			$	12,807			$	23,361

7. Deferred Compensation and Retirement Plans

The Company has several deferred compensation and retirement plans for vice-presidents that provide defined benefits to participants based on the deferral of current compensation subject to vesting and retirement or termination provisions.

The components of net periodic benefit costs are as follows:

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2009				2008				2009				2008
		(in thousands)
Service cost		$	85			$	174			$	170			$	348
Interest cost			945				910				1,890				1,820
Amortization of actuarial gain			(20	)			(21	)			(40	)			(42	)
Amortization of net transition obligation			—				53				—				106
Net periodic benefit costs		$	1,010			$	1,116			$	2,020			$	2,232

The Company also has an Executive Capital Accumulation Plan (“ECAP”) which is intended to provide certain employees an opportunity to defer salary and/or bonus on a pre-tax basis, or make an after-tax contribution. The Company made contributions to the ECAP during the three months ended October 31, 2009 and 2008, of $0.2 million and $2.9 million, respectively. The Company made contributions to the ECAP during the six months ended October 31, 2009 and 2008, of $0.6 million and $14.7 million, respectively. Participants generally vest in Company contributions over a four year period. The ECAP is accounted for whereby the changes in the fair value of the vested amounts owed to the participants are adjusted with a corresponding charge (or credit) to compensation and benefits costs. During the three and six months ended October 31, 2009, deferred compensation liability increased, therefore the Company recognized a compensation expense of $1.4 million and $4.0 million, respectively. The reduction in the deferred compensation liability recognized in income during the three and six months ended October 31, 2008 was $7.8 million and $8.6 million, respectively.

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

8. Business Segments

The Company operates in two global business segments; executive recruitment and Futurestep. The executive recruitment segment focuses on recruiting board-level, chief executive and other senior executive positions for clients predominantly in the consumer, financial services, industrial, life sciences and technology industries and provides other related recruiting services. Futurestep creates customized, flexible talent acquisition solutions to meet specific workforce needs of organizations around the world. Their portfolio of services include recruitment process outsourcing, talent acquisition and management consulting services, project-based recruitment, mid-level recruitment and interim professionals. The executive recruitment business segment is managed by geographic regional leaders. Futurestep’s worldwide operations are managed by the Chief Executive Officer of Futurestep. The executive recruitment geographic regional leaders and the Chief Executive Officer of Futurestep report directly to the Chief Executive Officer of the Company. The Company also operates a Corporate segment to record global expenses of the Company.

Financial highlights by business segment are as follows:

		Three Months Ended October 31, 2009
		Executive Recruitment
		North												South
		America				EMEA				Asia Pacific				America				Subtotal				Futurestep				Corporate(1)				Consolidated
		(in thousands)
Fee revenue		$	68,230			$	35,376			$	13,563			$	6,122			$	123,291			$	16,854			$	—			$	140,145
Total revenue		$	71,909			$	36,213			$	13,911			$	6,263			$	128,296			$	18,260			$	—			$	146,556
Operating income (loss)		$	12,529			$	(4,204	)		$	(26	)		$	1,375			$	9,674			$	2,617			$	(10,073	)		$	2,218

		Three Months Ended October 31, 2008
		Executive Recruitment
		North												South
		America				EMEA				Asia Pacific				America				Subtotal				Futurestep				Corporate(1)				Consolidated
		(in thousands)
Fee revenue		$	91,697			$	40,486			$	21,187			$	6,828			$	160,198			$	29,102			$	—			$	189,300
Total revenue		$	97,224			$	42,010			$	21,603			$	6,954			$	167,791			$	31,946			$	—			$	199,737
Operating income (loss)		$	16,197			$	5,910			$	3,267			$	1,214			$	26,588			$	1,221			$	(6,321	)		$	21,488

		Six Months Ended October 31, 2009
		Executive Recruitment
		North												South
		America				EMEA				Asia Pacific				America				Subtotal				Futurestep				Corporate(1)				Consolidated
		(in thousands)
Fee revenue		$	123,522			$	64,597			$	25,934			$	10,567			$	224,620			$	32,328			$	—			$	256,948
Total revenue		$	130,962			$	66,620			$	26,544			$	10,804			$	234,930			$	34,914			$	—			$	269,844
Operating income (loss)		$	16,736			$	(21,824	)		$	949			$	689			$	(3,450	)		$	1,802			$	(21,086	)		$	(22,734	)

		Six Months Ended October 31, 2008
		Executive Recruitment
		North												South
		America				EMEA				Asia Pacific				America				Subtotal				Futurestep				Corporate(1)				Consolidated
		(in thousands)
Fee revenue		$	185,671			$	92,076			$	42,590			$	14,413			$	334,750			$	60,283			$	—			$	395,033
Total revenue		$	197,068			$	95,490			$	43,458			$	14,647			$	350,663			$	66,546			$	—			$	417,209
Operating income (loss)		$	34,834			$	14,396			$	6,743			$	2,294			$	58,267			$	4,076			$	(17,101	)		$	45,242

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 31, 2009

9. Acquisition

On June 11, 2009, the Company acquired all of the outstanding share capital of Whitehead Mann Limited and Whitehead Mann SAS, together referred to as Whitehead Mann (“WHM”). WHM is engaged in providing executive recruitment and other related recruiting services in the United Kingdom, Dubai and France. Actual results of operations of WHM are included in the Company’s consolidated financial statements from June 11, 2009, the effective date of the acquisition, and include $10.4 million and $16.2 million in fee revenue from this acquisition during the three and six month periods ended October 31, 2009, respectively.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Quarterly Report on Form 10-Q 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, global, local political or economic developments in or affecting countries where we have operations, currency fluctuations in our international operations, ability to manage growth, competition, reliance on information processing systems, risks related to the growth and results of Futurestep, restrictions imposed by off-limits agreements, employment liability risk, an impairment in the carrying value of goodwill and other intangible assets, deferred tax assets that we may not be able to use and alignment of our cost structure to our revenue level, and also includes risks related to the successful integration of recently acquired businesses as well as the matters disclosed under the heading “Risk Factors” in Item 1A of the Company’s Annual Report of Form 10-K for the fiscal year ended April 30, 2009 (“Form 10-K”). Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q 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 and related notes included in this Quarterly Report on Form 10-Q.

Executive Summary

Korn/Ferry International (referred to herein as the “Company,” “Korn/Ferry,” or in the first person notations “we,” “our,” and “us”) is a premier global provider of talent management solutions that helps clients to attract, develop, retain and sustain their talent. We are the largest provider of executive recruitment, leadership and talent consulting and talent acquisition solutions, with the broadest global presence in the recruitment industry. Our services include executive recruitment, middle-management recruitment (through Futurestep), recruitment process outsourcing (“RPO”), leadership and talent consulting (“LTC”) and executive coaching. Over half of the executive recruitment searches we performed in fiscal 2009 were for board level, chief executive and other senior executive and general management positions. Our 4,238 clients in fiscal 2009 included many of the world’s largest and most prestigious public and private companies, middle market and emerging growth companies, as well as government and nonprofit organizations, including approximately 45% of the FORTUNE 500 companies. We have built strong client loyalty with 75% of the executive recruitment assignments we performed during fiscal 2009 being on behalf of clients for whom we had conducted assignments in the previous three fiscal years.

In an effort to maintain our long-term strategy of being the leading provider of executive search, middle-management recruitment, RPO, LTC and executive coaching, our strategic focus for the remainder of fiscal 2010 will center upon enhancing the cross-selling of our multi-service strategy. We plan to continue to address areas of increasing client demand, including RPO and LTC. We plan to explore new products and services, continue to pursue a disciplined acquisition strategy, enhance our technology and processes and aggressively leverage our brand through thought leadership and intellectual capital projects as a means of delivering world-class service to our clients.

Although global economic conditions and demand for our services continued to show signs of improvement during the three months ended October 31, 2009, the demand for executive searches has significantly declined as compared to the year-ago period, which caused declines in our results of operations. Fee revenue decreased 26% in the three months ended October 31, 2009 to $140.1 million compared to $189.3 million in the year-ago period, with decreases in fee revenue in all regions. The North America and Asia Pacific regions in executive recruitment experienced the largest dollar decreases in fee revenue. During the three months ended October 31, 2009, we recorded operating income of $2.2 million with operating income from executive recruitment and Futurestep of $9.7 million and $2.6 million, respectively and corporate expenses of $10.1 million. This represents a decrease of 90% from operating income of $21.5 million in the three months ended October 31, 2008.

During the three months ended October 31, 2009, we reorganized our go-to-market and operating structure in Europe, Middle East and Africa (“EMEA”) region, and as a result incurred restructuring charges in the three months ended October 31, 2009 of $7.6 million to reduce the combined work force. This restructuring expense was partially offset by $4.8 million of reductions from previous restructuring charges resulting in net restructuring costs of $2.8 million in the three months ended October 31, 2009.

Our cash, cash equivalents and marketable securities decreased $69.1 million, or 21% to $261.2 million at October 31, 2009 compared to $330.3 million at April 30, 2009, primarily due to the payment of annual bonuses. As of October 31, 2009, we held marketable securities, to settle obligations under our Executive Capital Accumulation Plan (“ECAP”) with a cost value of $69.7 million and a fair value of $66.4 million. Our working capital decreased $11.0 million in the six months ended October 31, 2009, to $187.3 million. We believe that cash on hand and funds from operations will be sufficient to meet our anticipated working capital, capital expenditures and general corporate requirements. We had no long-term debt nor any outstanding borrowings under our credit facility at October 31, 2009.

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements. Preparation of this Quarterly Report on Form 10-Q 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 amount of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions. In preparing our interim financial statements and accounting for the underlying transactions and balances, we apply our accounting policies as disclosed in the notes to our condensed consolidated financial statements. We consider the policies related to revenue recognition, deferred compensation and the carrying values of goodwill, intangible assets and deferred income taxes as critical to obtain an understanding of our interim consolidated financial statements because their application places the most significant demands on management’s judgment. Specific risks for these critical accounting policies are described in our Form 10-K.

Results of Operations

The following table summarizes the results of our operations as a percentage of fee revenue:

		Three Months Ended								Six Months Ended
		October 31,								October 31,
		2009				2008				2009				2008
Fee revenue			100.0	%			100.0	%			100.0	%			100.0	%
Reimbursed out-of-pocket engagement expenses			4.6				5.5				5.0				5.6
Total revenue			104.6				105.5				105.0				105.6
Compensation and benefits			72.8				68.5				74.9				68.8
General and administrative expenses			19.4				17.1				21.5				16.8
Out-of-pocket engagement expenses			6.8				7.0				7.1				7.1
Depreciation and amortization			2.0				1.5				2.2				1.4
Restructuring charges			2.0				—				8.1				—
Operating income (loss)			1.6				11.4				(8.8	)			11.5
Net income (loss)			2.0	%			7.2	%			(4.5	)%			7.5	%

The following tables summarize the results of our operations by business segment:

		Three Months Ended October 31,																Six Months Ended October 31,
		2009								2008								2009								2008
		Dollars				%				Dollars				%				Dollars				%				Dollars				%
		(dollars in thousands)
Fee revenue:
Executive recruitment:
North America		$	68,230				48.7	%		$	91,697				48.4	%		$	123,522				48.1	%		$	185,671				47.0	%
EMEA			35,376				25.2				40,486				21.4				64,597				25.1				92,076				23.3
Asia Pacific			13,563				9.7				21,187				11.2				25,934				10.1				42,590				10.8
South America			6,122				4.4				6,828				3.6				10,567				4.1				14,413				3.6
Total executive recruitment			123,291				88.0				160,198				84.6				224,620				87.4				334,750				84.7
Futurestep			16,854				12.0				29,102				15.4				32,328				12.6				60,283				15.3
Total fee revenue			140,145				100.0	%			189,300				100.0	%			256,948				100.0	%			395,033				100.0	%
Reimbursed out-of-pocket engagement expense			6,411								10,437								12,896								22,176
Total revenue		$	146,556							$	199,737							$	269,844							$	417,209
		Three Months Ended October 31,																Six Months Ended October 31,
		2009								2008								2009								2008
		Dollars				Margin (1)				Dollars				Margin (1)				Dollars				Margin (1)				Dollars				Margin (1)
		(dollars in thousands)
Operating income (loss):
Executive recruitment:
North America		$	12,529				18.4	%		$	16,197				17.7	%		$	16,736				13.5	%		$	34,834				18.8	%
EMEA			(4,204	)			(11.9	)			5,910				14.6				(21,824	)			(33.8	)			14,396				15.6
Asia Pacific			(26	)			(0.2	)			3,267				15.4				949				3.7				6,743				15.8
South America			1,375				22.5				1,214				17.8				689				6.5				2,294				15.9
Total executive recruitment			9,674				7.8				26,588				16.6				(3,450	)			(1.5	)			58,267				17.4
Futurestep			2,617				15.5				1,221				4.2				1,802				5.6				4,076				6.8
Corporate (2)			(10,073	)							(6,321	)							(21,086	)							(17,101	)
Operating income (loss)		$	2,218				1.6	%		$	21,488				11.4	%		$	(22,734	)			(8.8	)%		$	45,242				11.5	%