10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on December 17, 2001
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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 October 31, 2001 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File Number 001-14505
________________
KORN/FERRY INTERNATIONAL
(Exact name of registrant as specified in its charter)
Delaware 95-2623879
(State of other jurisdiction) (I.R.S. Employer
of incorporation or organization) Identification Number)
1800 Century Park East, Suite 900, Los Angeles, California 90067
(Address of principal executive offices) (zip code)
(310) 556-8553
(Registrant's telephone number, including area code)
________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of our common stock as of December 14, 2001
was 37,786,860.
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1
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
The accompanying notes are an integral part of these consolidated financial
statements.
3
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial
statements.
4
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial
statements.
5
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial
statements.
6
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements for the three months and six months
ended October 31, 2001 and 2000 include the accounts of Korn/Ferry International
("KFY"), all of its wholly and majority owned domestic and international
subsidiaries, and affiliated companies in which KFY has effective control
(collectively, the "Company") and are unaudited but include all adjustments,
consisting of normal recurring accruals and any other adjustments, which
management considers necessary for a fair presentation of the results for these
periods. These financial statements have been prepared consistently with the
accounting policies described in the Company's Annual Report on Form 10-K for
the fiscal year ended April 2001 ("Annual Report") and should be read together
with the Annual Report.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. As a result, actual results could differ from these
estimates.
Reclassifications
Certain prior year reported amounts have been reclassified in order to
conform to the current year consolidated financial statement presentation.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". In
conjunction with these new accounting standards the FASB has issued "Transition
Provisions for New Business Combination Accounting Rules" ("Provisions") that
allow non-calendar year-end companies to cease amortization of goodwill and
adopt the new impairment approach as of the beginning of their fiscal year that
starts during either 2001 or 2002. The Company elected to implement SFAS No. 141
and No. 142 in the first quarter of fiscal 2002.
The Provisions provide for a six month period from the date of
implementation of SFAS No. 142 to record impairment under the new method. The
impairment charge, if any, would be recorded as a cumulative effect of a change
in accounting principle. The Company completed this impairment analysis in the
second fiscal quarter of 2002. The fair value exceeded the book value of each
reporting unit or component and accordingly, there was no impairment charge. The
impact on operating results from the implementation of this pronouncement
related to the elimination of goodwill amortization of $2,981 and $5,982 for the
three months and six months ended October 31, 2001, respectively.
The asset impairment charges recognized in the first and second fiscal
quarters of 2002 are unrelated to the implementation of SFAS No. 142. "See Note
4".
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The purpose of this statement
is to develop consistent accounting of asset retirement obligations and related
costs in the financial statements and provide more information about future cash
outflows, leverage and liquidity regarding retirement obligations and the gross
investment in long-lived assets. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
does not believe that the adoption of this statement will have a significant
impact on the Company's financial position or results of operations.
7
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes a number of rules which govern accounting for
the impairment of long-lived assets, eliminates inconsistencies from having two
accounting models for long-lived assets to be disposed of by sale and expands
the definition of a discontinued operation to a component of an entity for which
identifiable cash flows exist. The statement is effective for fiscal years
beginning after December 15, 2002. The Company does not believe that the
adoption of this statement will have a significant impact on the Company's
financial position or results of operations.
2. Basic and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per common share ("basic EPS") was computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per common and common
equivalent share ("diluted EPS") reflects the potential dilution that would
occur if the outstanding options or other contracts to issue common stock were
exercised or converted and was computed by dividing the net income (loss) by the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares. Following is a reconciliation of the numerator (income
or loss) and denominator (shares in thousands) used in the computation of basic
and diluted EPS:
8
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
Assumed exercises or conversions have been excluded in computing the
diluted earnings per share when there is a net loss for the period. They have
been excluded because their inclusion would reduce the loss per share or be
antidilutive. If the assumed exercises or conversions had been used, the fully
diluted shares outstanding for the three months and six months ended October 31,
2001 would have been 37,650 and 37,743, respectively.
3. Comprehensive income (loss)
Comprehensive income (loss) is comprised of net income (loss) and all
changes to shareholders' equity, except those changes resulting from investments
by owners (changes in paid in capital) and distributions to owners (dividends).
Total comprehensive income (loss) is as follows:
Accumulated other comprehensive loss is comprised of:
Due to certain restructuring activities taken by the Company, as discussed
in Note 4, the extended decline in the stock market and other factors, the
Company believes that the loss in value related to certain equity securities is
no longer temporary in nature and reclassified the loss to net income (loss) in
the three months ended July 31, 2001. The reclassification adjustment excluded
an unrealized holding loss of $1,157, net of a tax benefit of $486, arising in
the three months ended July 31, 2001. In the three months ended October 31,
2001, the Company recognized an unrealized holding loss related to this
investment of $257, included in other income.
4. Asset Impairment and Restructuring Charges
Based on deteriorating economic conditions encountered in the first fiscal
quarter of 2002, the Company began developing a series of restructuring
initiatives to address the cost structure and to reposition the enterprise to
gain market share and take full advantage of any economic uptrend. The
immediate goals of these restructuring initiatives are to reduce losses,
preserve top employees and maintain high standards of client service.
In August 2001, the Company announced a series of these business
realignment initiatives. The Company estimated that these initiatives would
result in a total charge against earnings in fiscal 2002 of approximately $86
million, which would impact both the first and second fiscal quarters. The
Company finalized these realignment initiatives during the three months ended
October 31, 2001 and recognized a total charge of $84.3 million. The charge
reflects costs associated with a decision to reduce the work force by nearly
25%, or over 600 employees; consolidate all back-office functions for Futurestep
and Korn/Ferry; discontinue the operations of JobDirect and write-down other
related assets and goodwill. Restructuring activities occurred primarily in the
second quarter, however, certain
9
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
business units took actions approved by senior management in the first quarter
in response to a decline in revenue in the first two months of that quarter.
Operating results include asset impairment and restructuring charges
related to the following business segments:
The asset impairment charge related to goodwill was based on an analysis of
future undiscounted cashflows that indicated that goodwill was impaired. The
charge represents the excess of the carrying value over fair value, based on a
discounted cashflow method. The other asset impairment charge is primarily
related to property and equipment and other investments. The facilities
restructuring charge reflects lease costs net of estimated sublease income and
includes the write-off of related leasehold improvements.
In executive recruitment, the impaired goodwill related to the acquisition
in July 2000 of the Westgate Group, an executive recruitment firm specializing
in financial services in the eastern United States, and Webb Johnson, a New York
subsidiary of Pratzer and Partners in Toronto, acquired in April 2000. All of
the consultants of the acquired Westgate Group had terminated employment by
August 2001 and the impairment charge of $11,230 was recognized in the three
months ended July 31, 2001. The former shareholders of Webb Johnson re-acquired
the shares of this entity in November 2001 and the impairment charge of $2,745
was recognized in the three months ended October 31, 2001. The other asset
impairment charge of $726 resulted from the write-down of furniture, fixtures
and equipment to be disposed of as part of the restructuring to fair value less
cost to sell. The restructuring charge for executive recruitment severance of
$11,203 and $14,022 recognized in the three months and six months ended October
31, 2001, respectively, includes 147 and 221 employees in North America, 167 and
225 employees in Europe, and 37 and 41 employees in Asia/Pacific. The facilities
restructuring charge in executive recruitment recognized in the three months
ended October 31, 2001 of $6,425 relates primarily to lease termination costs,
net of estimated sublease income, for excess space in ten executive recruitment
offices due to the reduction in workforce. The charge also includes $330 related
to unamortized leasehold improvements.
The Futurestep asset impairment and restructuring charges result from the
restructuring of operations to streamline the business. The asset impairment
charge includes a recognized loss of $6,264 in the three months ended July 31,
2001 on an investment in a strategic relationship that will not be developed
with the integration of Futurestep and executive recruitment support services
(see Note 3). The asset impairment charge in the three months ended
10
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
October 31, 2001 of $2,694 includes $801 for the write-down of excess furniture,
fixtures and equipment to fair value less cost to sell and the write-off of
capitalized software costs of $1,893 due to the integration of Futurestep and
Korn/Ferry information technology support services. The Futurestep restructuring
charges of $1,517 and $1,681 for severance in the three months and six months
ended October 31, 2001, respectively, are for 76 employees severed in the
current three month period and eight employees severed in the three months ended
July 31, 2001. The facilities restructuring charge of $6,144 recognized in the
three months ended October 31, 2001 relates to five Futurestep offices that were
closed as employees were co-located with executive recruitment in North America.
The charge also includes $1,622 related to the write-off of unamortized
leasehold improvements.
JobDirect, an online recruiting service focused on college graduates and
entry level professionals, was acquired in July 2000. Although the college
market is very large and attractive, this market was severely impacted by the
recent economic downturn. The Company views this market favorably; however,
given the loss profile and cash requirements at the current level of operations,
the Company needed to make choices of resource allocation among the various
business operations. As a result, the Company decided to pursue a more
conservative approach towards the college market in August 2001 and scaled back
the operations of JobDirect to reduce the loss profile and cash requirements.
Based upon this revised outlook, the projection of undiscounted cashflow
indicated that the goodwill for JobDirect was impaired. The asset impairment
charge related to JobDirect goodwill of $28,951 was recorded in the three months
ended July 31, 2001. In the three months ended October 31, 2001, the Company
decided to exit the college market and completely discontinue the operations of
JobDirect. As a result, the Company recognized an other asset impairment charge
of $1,369, primarily comprised of the write-down of furniture, fixtures and
equipment at facilities that will be or have been closed to fair value less cost
to sell. The Company also recognized a restructuring charge comprised of
severance of $843 for 70 employees and $1,173, including the write-off of
leasehold improvements of $61, for lease termination costs in excess of
estimated sublease income for its three offices.
Included in accrued liabilities is $7,776 of severance restructuring costs
and $11,237 of facilities restructuring costs. The severance accrual includes
amounts paid monthly and lump sum amounts that have not been paid. These
liabilities are expected to be paid in full by October 31, 2002. The accrued
liability for facilities costs relates to lease payments, net of sublease
income, that will be paid over the next two to ten years.
5. Business segments
The Company operates in three business segments in the recruitment
industry. In retained recruitment, the Company operates in two global business
segments, executive recruitment and Futurestep. These segments are distinguished
primarily by the method used to identify candidates and the candidates' level of
compensation. The executive recruitment business segment is managed by
geographic regions led by a regional president. Futurestep's worldwide
operations are managed by an operating group comprised of a president of
operations for North America and Asia and a president of operations for Europe.
The regional presidents and this operating group report directly to the Chief
Executive Officer of the Company. With the acquisition of JobDirect in fiscal
2001, the Company expanded into the related college recruitment market. The
Company will exit this business segment by December 31, 2001 (See Note 4). For
purposes of the geographic information below, Mexico's operating results are
included in Latin America.
11
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
A summary of the Company's operations (excluding interest income and other
income, and interest expense) by business segment follows:
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q may contain statements that we believe are, or may be
considered to be, "forward-looking" statements, within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements generally can be identified by use of
statements that include phrases such as "believe", "expect", "anticipate",
"intend", "plan", "foresee", "may", "will", "estimates", "potential", "continue"
or other similar words or phrases. Similarly, statements that describe our
objectives, plans or goals also are forward-looking statements. All of these
forward-looking statements are subject to risks and uncertainties that could
cause our actual results to differ materially from those contemplated by the
relevant forward-looking statement. The principal risk factors that could cause
actual performance and future actions to differ materially from the forward-
looking statements include, but are not limited to, ability to renegotiate our
debt agreement with Bank of America, dependence on attracting and retaining
qualified and experienced consultants, portability of client relationships,
local political or economic developments in or affecting countries where we have
operations, ability to manage growth, restrictions imposed by off-limits
agreements, competition, implementation of an acquisition strategy, integration
of acquired businesses, risks related to the development and growth of
Futurestep, reliance on information processing systems, and employment liability
risk. Readers are urged to consider these factors carefully in evaluating the
forward-looking statements. The forward-looking statements included in this Form
10-Q are made only as of the date of this report and we undertake no obligation
to publicly update these forward-looking statements to reflect subsequent events
or circumstances.
The following presentation of management's discussion and analysis of our
financial condition and results of operations should be read together with our
consolidated financial statements included in this Form 10-Q.
Overview
We are the world's preeminent recruitment firm with the broadest global
presence in the recruitment industry. Our services include executive
recruitment, middle-management recruitment (through Futurestep) and other
related services including management assessment. Our clients are many of the
world's largest and most prestigious public and private companies, middle-market
and emerging growth companies as well as governmental and not-for-profit
organizations. Over half of the executive recruitment searches we performed in
fiscal 2001 were for board level, chief executive and other senior executive
officer positions and our 5,236 clients included nearly half of the Fortune 500
companies. We have established strong client loyalty; more than 81% of the
executive recruitment assignments we performed in fiscal 2001 were on behalf of
clients for whom we had conducted multiple assignments over the last three
fiscal years.
Based on deteriorating economic conditions, in the quarter ended July 31,
2001, we began developing a series of restructuring initiatives to address our
cost structure and to reposition the enterprise to gain market share and take
full advantage of the eventual economic recovery. Our immediate goals were to
reduce losses, preserve our top producers and maintain our high standards of
client service.
In August 2001, we announced a series of these business realignment
initiatives designed to reduce expenses in response to the current economic
environment and to reposition our company to take advantage of the increase in
the demand for recruitment services when the economy improves. These initiatives
resulted in a total charge against earnings in the first six months of fiscal
2002 of approximately $84 million. The charge reflects costs associated with a
decision to reduce the workforce by approximately 25%, or over 600 employees;
consolidate all back-office functions for Futurestep and Korn/Ferry; exit the
college recruitment market and write-down related assets and goodwill.
13
The following table summarizes the asset impairment and restructuring
charge:
See "Note 4 to Consolidated Financial Statements" for a complete description
of the components of this charge.
In the first quarter of fiscal 2002, we recognized a charge of $49.4 million
comprised of $46.4 million related to asset impairments, primarily goodwill, and
$3.0 million related to severance and benefits for 144 employees terminated
primarily in July 2001.
In the second quarter of fiscal 2002, we recognized a charge of $34.8
million comprised of $7.5 million related to asset impairments, primarily
impairment of property and equipment at downsized or closed offices; $13.6
million related to severance and benefits for 497 employees notified of
termination or terminated in the second quarter; and $13.7 million related to
facilities rationalization, primarily lease costs, net of sublease income and
impairment of related leasehold improvements.
The largest component of this $84.3 million charge is related to our
investment in JobDirect, acquired in July 2000. Although the college market is
very large and attractive, this market was severely impacted by the recent
economic downturn. Given the loss profile and cash requirements at the current
level of operations, we needed to make choices of resource allocation among the
various business operations. As a result, in August 2001, we decided to pursue a
more conservative approach towards the college market and scale back the
operations of JobDirect to reduce its prospective loss profile and cash
requirements. Based upon this revised outlook, the projection of undiscounted
cashflow indicated that the goodwill for JobDirect was impaired. The asset
impairment charge related to JobDirect goodwill of $29.0 million was recorded in
the three months ended July 31, 2001. In October 2001, we decided to exit the
college recruitment market and recognized an asset impairment and restructuring
charge of $3.4 million comprised of severance costs for 70 employees; lease
termination costs, net of estimated sublease income; and the write-down of
related property and equipment to fair value less cost to sell.
At this time, we see no indications of improving trends and anticipate the
revenue for the third fiscal quarter of 2002 to be less than the second fiscal
quarter of 2002, due to additional seasonal effects and continued weakness in
the economy worldwide. In line with our view on the continuing economic
uncertainty and the consequent revenue guidance for the third fiscal quarter of
2002, we anticipate a loss per share of $0.10 to $0.15 for the three months
ended January 31, 2002.
Results of Operations
The following table summarizes the results of our operations for the three
months and six months ended October 31, 2001 and 2000 as a percentage of
revenue:
14
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(1) Includes a credit of $4.2 million and $3.4 million in the three months and
six months ended October 31, 2001, respectively, resulting from the
reversal of substantially all of our contribution to the 401(k) plan that
will not be paid.
(2) Excluding the asset impairment and restructuring charges in fiscal 2002
and, for comparability (under SFAS No. 142), goodwill amortization in
fiscal 2001, operating profit (loss) as a percentage of revenue is
breakeven and 10% for the three month periods ending October 31, 2001 and
2000, respectively, and (1%) and 11% for the six month periods ending
October 31, 2001 and 2000, respectively.
(3) Excluding the asset impairment and restructuring charges in fiscal 2002
and, for comparability (under SFAS No. 142), goodwill amortization in
fiscal 2001, net income (loss) as a percentage of revenue is (1%) and 5%
for the three month periods ending October 31, 2001 and 2000, respectively,
and (2%) and 6% for the six month periods ending October 31, 2001 and 2000,
respectively.
The weakness in the global economy this period has resulted in decreases in
revenue in all of our business lines and geographic regions compared to the same
period last year.
For the three months and six months ended October 31, 2001, we experienced a
decline in executive recruitment revenue and in operating profit (loss),
excluding asset impairment and restructuring charges, in all geographic regions
compared to the same period last year. The decline is due primarily to the
slowdown of the United States economy that contributed to a $83.7 million or 44%
decline in executive recruitment revenue in North America for the six months
ended October 31, 2001 compared to the same period last year. We include
executive recruitment revenue generated from our operations in Mexico with Latin
America.
The decline in Futurestep revenue of 38% for the six months ended October
31, 2001 compared to the same period last year reflects a decline in all
geographic regions attributable to the weakness in the global economy.
Futurestep operations in North America experienced the largest decline compared
to the same period last year and reflects a decline in both the number of
engagements and the average fee per engagement.
The following table summarizes the results of our operations by business
segment for the three months and six months ended October 31, 2001 and 2000:
15
(1) Fiscal 2002: Pro forma operating loss for the three months ended October
31, 2001 excludes asset impairment and restructuring charges of: $16,735 in
North America, $2,575 in Europe, $1,789 in Asia/Pacific, $10,355 in
Futurestep and $3,385 in JobDirect. In the six months ended October 31,
2001, pro forma operating profit excludes asset impairment and
restructuring charges of $28,949 in North America, $4,353 in Europe, $1,846
in Asia/Pacific, $16,783 in Futurestep and $32,336 in JobDirect.
(2) Fiscal 2001: We adopted SFAS No. 142 "Goodwill and Other Intangible Assets"
as of the beginning of the current fiscal year. For comparability, pro
forma operating profit for the three months ended October 31, 2000 excludes
goodwill amortization of $1,547 in North America, $545 in Europe, $73 in
Asia/Pacific, $415 in Futurestep and $507 in JobDirect. Pro forma
operating profit for the six months ended October 31, 2000 excludes
goodwill amortization of $2,947 in North America, $1,154 in Europe, $149 in
Asia/Pacific, $826 in Futurestep and $563 in JobDirect.
In the following comparative analysis, all percentages are calculated based on
dollars in thousands.
Three Months Ended October 31, 2001 Compared to Three Months Ended October 31,
2000
Revenue. Revenue decreased $64.7 million, or 37%, to $108.9 million for the
three months ended October 31, 2001 from $173.6 million for the three months
ended October 31, 2000. This decrease in revenue was primarily the result of a
decrease in both the number of engagements in executive recruitment and a
decrease in both the number of engagements and the average fee per engagement at
Futurestep.
In North America, revenue decreased $40.2 million, or 43%, to $53.3 million
for the three months ended October 31, 2001 from $93.5 million for the
comparable period in the prior year. This revenue decline is due mainly to the
downturn in the U.S. economy resulting in a decrease in the number of
engagements, partially offset by an increase in the average fee per engagement.
The decrease in revenue is reflected in all specialties, with the largest
declines in advanced technology and financial services and the smallest
percentage decline in healthcare. The average number of consultants decreased
eight percent compared to the same period last year; however, the average
engagement per consultant and average fee per consultant decreased approximately
40%.
Revenue in Europe decreased $8.8 million, or 26%, to $25.6 million for the
three months ended October 31, 2001 from $34.4 million for the comparable period
in the prior year. The effect of foreign currency translation into U.S.
16
dollars was not material. The decrease in revenue is mainly due to a decrease in
the number of engagements partially offset by an increase in the average fee per
engagement.
In Asia/Pacific, revenue decreased $3.6 million, or 27%, to $9.9 million for
the three months ended October 31, 2001 from $13.5 million for the three months
ended October 31, 2000 primarily due to a decrease in both the number of
engagements and the average fee per engagement and includes a decline of five
percent due to the negative effects of translation into the U.S. dollar.
The decrease in revenue in Latin America of $2.1 million, or 22%, to $7.4
million for the three months ended October 31, 2001 from $9.5 million for the
comparable three month period in fiscal 2000 is due to a decline in the number
of engagements partially offset by an increase in the average fee per
engagement. The largest reported decrease was in Brazil, where nearly 40% of
the reported decline resulted from the negative effect of translation into U.S.
dollars.
Futurestep revenue declined $8.8 million, or 42%, to $12.3 million for the
three months ended October 31, 2001 from $21.1 million for the three months
ended October 31, 2000. The decline is primarily attributable to the economic
downturn in North America resulting in a decrease in both the number of
engagements and the average fee per engagement for this region. International
revenue declined $3.6 million or 28% compared to the same period last year and
is attributable to a decline in both the number of engagements and the average
fee per engagement resulting from the weakening global economy.
JobDirect revenue of $0.5 million for the three months ended October 31,
2001 reflects a decline of $1.1 million or 69% compared to the same period last
year. In the first quarter of this year, we recognized an asset impairment
charge of $29.0 million, representing the unamortized goodwill resulting from
our acquisition of JobDirect in July 2000. This charge reflected a decrease in
our planned level of cash support for this business as well as a decrease in
demand for these services due to the current economic environment in North
America and was based on our initial restructuring plan announced in August
2001. In October 2001, we decided to exit the college recruitment market and
recognized a restructuring charge comprised of $0.8 million for severance and
$1.2 million for lease related costs and an asset impairment charge of $1.4
million, primarily related to the write-down of furniture, fixtures and
equipment to fair value less cost to sell.
Compensation and Benefits. Compensation and benefits expense decreased
$30.3 million, or 29%, to $72.5 million for the three months ended October 31,
2001 from $102.8 million for the comparable period ended October 31, 2000. This
decline is due primarily to a decline in executive recruitment expense of $24.8
million, largely reflecting a decline in bonus expense in North America and a
credit in the current three month period of $3.9 million related to our decision
not to make substantially all of our contribution to the 401(k) plan accrued for
fiscal 2001 and the first quarter of 2002. In addition, Futurestep and JobDirect
expenses declined $4.4 million and $1.1 million, respectively, due primarily to
a decrease in the number of employees. Although compensation and benefits
expense declined in dollars, it increased as a percentage of revenue to 67% in
the most recent three month period from 59% in the three months ended October
31, 2000, primarily due to the larger percentage decrease in revenue.
General and Administrative Expenses. General and administrative expenses
consist of occupancy expense associated with our leased premises, information
and technology infrastructure, marketing and other general office expenses.
General and administrative expenses decreased $21.0 million, or 37%, to $36.3
million for the three months ended October 31, 2001 from $57.3 million for the
comparable period ended October 31, 2000. The decrease includes $3.1 million of
amortization expense in fiscal 2001 not recorded in the current fiscal quarter
based on the implementation of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" and a decrease of $10.4
million at Futurestep, largely due to a reduction in advertising expense of
approximately $5 million. As a percentage of revenue, general and administrative
expenses, excluding Futurestep and JobDirect related expenses and amortization
expense in fiscal 2001, increased to 29% in the first quarter of fiscal 2002
compared to 23% in the same three month period in the prior year due primarily
to the larger percentage decrease in revenue.
Operating Profit (Loss). The operating loss of $34.7 million in the three
months ended October 31, 2001 represents a decrease of $48.3 million from
operating profit of $13.6 million in the prior year three month period.
Excluding Futurestep and JobDirect losses, goodwill amortization in the prior
year three month period and the asset impairment and restructuring charge of
$34.8 million in fiscal 2002, operating profit decreased $23.9 million.
Operating profit as a percentage of revenue, on this same basis, decreased to
six percent in the current three month period from 20% in the
17
same prior year three month period. This decrease was due to the decline in
revenue and the increase in compensation and benefits and general and
administrative expenses as a percentage of revenue in the current period.
Interest Income and Other Income, Net. Interest income and other income,
net, includes interest income of $0.7 million and $0.8 million for the three
months ended October 31, 2001 and 2000, respectively.
Interest Expense. Interest expense increased slightly in the three months
ended October 31, 2001, to $2.2 million from $2.1 million in the prior year,
primarily due to an increase in average outstanding borrowings on our line of
credit offset by a decrease in the effective interest rate.
Benefit from/Provision for Income Taxes. In the current three month period,
the net loss resulted in a benefit from income taxes of $6.3 million compared to
a provision for income taxes of $4.9 million in the prior year three month
period. The effective tax rate was 17.3% and 40.4% for October 31, 2001 and
2000, respectively. The difference in the effective tax rates in these periods
is due primarily to certain non-deductible asset impairment charges in fiscal
2002.
Non-controlling Shareholders' Interest. Non-controlling shareholders'
interest is comprised of the non-controlling shareholders' majority interest in
our Mexico subsidiaries. Non-controlling shareholders' interest decreased $0.1
million to $0.9 million in the current three month period compared to $1.0
million in the same prior year period and reflects a slight decrease in net
income generated by the Mexico subsidiaries during the current fiscal three
month period.
Six Months Ended October 31, 2001 Compared to Six Months Ended October 31, 2000
Revenue. Revenue decreased $123.9 million, or 36%, to $223.4 million for the
six months ended October 31, 2001 from $347.2 million for the six months ended
October 31, 2000, including a decrease in revenue from Futurestep of $16.0
million compared to the same period in the prior year. The decrease in executive
recruitment revenue of $107.4 million, or 36%, was primarily the result of a
decrease in the number of executive recruitment engagements.
In North America, revenue decreased $83.7 million, or 44%, to $105.7 million
for the six months ended October 31, 2001 from $189.4 million for the comparable
period in the prior year due mainly to a decrease in the number of engagements.
The decrease in revenue and engagements resulted in a decrease of over 40% in
the average number of engagements and average fee per consultant.
In Europe, revenue decreased $15.3 million, or 23%, to $52.9 million for the
six months ended October 31, 2001 from $68.3 million for the six months ended
October 31, 2000. Excluding the negative effects of foreign currency translation
into the U.S. dollar, revenue decreased 20% compared to the same period in the
prior year. This decrease is primarily due to a decrease in the number of
engagements, partially offset by an increase in the average fee per engagement
compared to the prior year. The number of consultants increased by five percent
compared to the same period last year. This increase combined with the decrease
in revenue and engagements resulted in a decrease in the average number of
engagements per consultant and average fee per consultant of approximately 30%.
Revenue in Asia/Pacific decreased $5.3 million, or 20%, to $21.3 million for
the six months ended October 31, 2001 compared to $26.6 million for the
comparable period in the prior year. Excluding the negative effect of foreign
currency translation into the U.S. dollar, revenue on a constant dollar basis
declined 14% due primarily to a decrease in the average number of engagements
and the average fee per engagement compared to the same six month period last
year.
The decrease in revenue in Latin America of $3.0 million, or 16%, to $15.4
million for the six months ended October 31, 2001 from $18.3 million for the
comparable six month period in fiscal 2001 includes a five percent decline due
to the negative effect of translation into the U.S. dollar. The constant dollar
decline of 11% reflects relatively strong performance by Mexico while the
economy in Brazil weakened compared to the same period last year.
Futurestep revenue of $26.6 million for the six months ended October 31,
2001 decreased $16.0 million, or 38%, from the same period last year. This
decrease is primarily attributable to the weak global economy resulting in a
decline in the number of engagements in all geographic regions in the current
six month period.
Compensation and Benefits. Compensation and benefits expense decreased $60.4
million, or 29%, to $148.9 million for the six months ended October 31, 2001
from $209.3 million for the comparable period ended October 31, 2000 due
primarily to a decrease in executive recruitment bonuses, a decrease in the
number of executive recruitment and
18
Futurestep employees resulting from our restructuring initiatives in the current
six month period and a credit in the current year six month period of $3.4
million from the reversal of substantially all of our contribution to the 401(k)
plan accrued in fiscal 2001 that will not be paid. The $52.5 million decrease
for the six months ended October 31, 2001, excluding Futurestep expenses of
$19.6 million and JobDirect expenses of $3.0 million is primarily due to a
decrease in bonus expense for the six months ended October 31, 2001 compared to
the prior year. On a comparable basis, excluding Futurestep and JobDirect,
compensation and benefits expense as a percentage of revenue increased to 65% in
the most recent six month period from 59% in the six months ended October 31,
2000 due primarily to the larger percentage decrease in revenue.
General and Administrative Expenses. General and administrative expenses
consist of occupancy expense associated with our leased premises, information
and technology infrastructure, marketing and other general office expenses.
General and administrative expenses decreased $28.5 million, or 27%, to $77.2
million for the six months ended October 31, 2001 from $105.8 million for the
comparable period ended October 31, 2000. The decrease is primarily due to a
decline in advertising expense at Futurestep of $8.3 million, a decline in
engagement related expenses in executive recruitment and $5.6 million of
amortization expense in fiscal 2001 not recorded in the current six month period
based on implementation of SFAS No. 142. As a percentage of revenue, general and
administrative expenses, excluding Futurestep and JobDirect related expenses and
amortization expense in fiscal 2001, increased to 30% for the six months ended
October 31, 2001 from 21% for the comparable period in fiscal 2001. The increase
as a percent of revenue primarily reflects the higher percentage decrease in
revenue.
Operating Profit (Loss). Operating profit (loss) decreased $119.1 million in
the six months ended October 31, 2001, to a loss of $87.0 million from a profit
of $32.1 million in the prior year six month period. Excluding Futurestep and
JobDirect losses, goodwill amortization in fiscal 2001 and the $84.3 million
restructuring charge in fiscal 2002, operating profit for the six months ended
October 31, 2001 decreased $49.3 million, or 82%, to $10.0 million compared to
$59.3 million for the six months ended October 31, 2000. Operating profit as a
percentage of revenue, on this same basis, was 5% and 20% for the six months
ended October 31, 2001 and 2000, respectively. The decreased margin reflects a
decline in all regions compared to the prior year six month period due primarily
to the decrease in revenue and increase in compensation and benefits and general
and administrative expense as a percentage of revenue relative to the same
period last year.
Interest Income and Other Income, Net. Income interest and other income,
net, includes interest income of $1.5 million and $2.4 million for the six
months ended October 31, 2001 and 2000, respectively.
Interest Expense. Interest expense was $3.7 million in the six months ended
October 31, 2001 compared to $3.8 million in the prior year, primarily due to
an increase in average borrowings on our line of credit offset by a decrease in
the effective interest rate.
(Benefit from) Provision for Income Taxes. Income taxes resulted in a
benefit of $13.5 million for the six months ended October 31, 2001 compared to
an expense of $12.7 million for the comparable period ended October 31, 2000.
The effective tax rate was 15.2% and 41.4% for the current and prior year six
month periods, respectively. The decrease in the effective tax rates in these
periods is due primarily to certain non-deductible asset impairment charges in
fiscal 2002.
Non-controlling Shareholders' Interest. Non-controlling shareholders'
interest is comprised of the non-controlling shareholders' majority interest in
our Mexico subsidiaries. Non-controlling shareholders' interest was flat at $1.9
million in the current and prior year six month period and reflects the
consistent net income generated by the Mexico subsidiaries during these six
month periods.
Liquidity and Capital Resources
We were not in compliance with the fixed charge coverage and leverage ratios
under our credit agreement with Bank of America as of October 31, 2001. We are
working with Bank of America to amend the agreement or obtain a waiver relating
to such non-compliance, but they have informed us that they have no further
obligation or commitment to make loans pursuant to the agreement. Based upon the
results of discussions to date, we believe no additional borrowings will be
available through November 2, 2002.
As of October 31, 2001, we had outstanding borrowings of $48.0 million on
the line of credit. Due to these events of non-compliance Bank of America has
the ability to demand immediate payment of all amounts outstanding under
19
the line of credit. If this were to take place we would be required to obtain
alternate sources of financing. Borrowings under the line of credit bear
interest on a sliding scale based on a leverage ratio, currently the default
rate of LIBOR plus 4.0%. The financial covenants include a minimum fixed charge
coverage ratio, a maximum leverage ratio, a quick ratio and other customary
events of default.
We maintained cash and cash equivalents of $55.9 million at October 31, 2001
and $66.8 million at October 31, 2000. During the six months ended October 31,
2001 and 2000, cash used in operating activities was $85.3 million and $30.8
million, respectively. The increase in operating cash used in the current six
month period is primarily due to the decrease in net income to a net loss,
excluding the asset impairment and restructuring charges in fiscal 2002 and a
decrease in bonus expense accrued in the current six month period.
Cash provided by investing activities was $5.3 million for the current six
month period and cash used in investing activities was $9.9 million for the six
months ended October 31, 2000. Cash flows used in investing activities included
$44.3 million for business acquisitions and $2.6 million for purchase of
investments in the prior year. In addition, net sales of marketable securities
were $15.9 million in the current six month period compared to $53.1 million of
net sales of marketable securities in the prior year. Purchases of property and
equipment of $12.8 million for the prior six month period is also higher than
$7.5 million in the current six month period and premiums on life insurance were
$2.6 million and $3.4 million in the current six month period and prior six
month period, respectively.
Cash provided by financing activities was $49.1 million and $22.0 million
during the six months ended October 31, 2001 and 2000, respectively. The
increase is primarily due to net borrowings under our line of credit of $48
million compared to $15.0 million in the prior year. In addition, we made
payments of $3.7 million on shareholder acquisition notes in the current six
month period compared to $0.8 million in the same period last year. In the
current six month period, proceeds from stock options exercised were $1.0
million and receipts on shareholders' notes related to stock were $1.6 million.
Last year, proceeds from stock options exercised were $4.8 million and receipts
on shareholders' notes related to stock were $2.9 million.
We purchase COLI contracts to provide a funding vehicle for anticipated
payments due under our deferred executive compensation programs. Borrowings on
these COLI contracts were $2.6 million and $0.4 million for the six months ended
October 31, 2001 and 2000, respectively. Generally, we borrow against the cash
surrender value of the COLI contracts to fund the COLI premium payments to the
extent interest expense on the borrowings is deductible for U.S. income tax
purposes. Total outstanding borrowings under life insurance policies were $50.5
million and $45.3 million at October 31, 2001 and 2000, respectively. These
borrowings, which are secured by the cash surrender value of the life insurance
policies, do not require principal payments and bear interest at various
variable rates.
We believe that cash on hand, funds from operations and borrowings currently
outstanding under our credit facilities will be sufficient to meet our
anticipated working capital, capital expenditures and general corporate
requirements for the foreseeable future. We do, however, believe that we will
need to refinance our credit facility on or before its maturity in November
2002, or find alternate sources of financing. We may also need to refinance
notes due to shareholders relating to acquisitions of $11.8 million that mature
in December 2002 and April 2003.
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.
Between January 1, 2002 and February 28, 2002, the participating countries
will introduce Euro notes and coins and withdraw all legacy currencies so that
they will no longer be available. 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.
We have assessed our information technology systems and are satisfied that
they allow for the recording of transactions in both the legacy currencies and
the Euro and accommodate the elimination of the legacy currencies.
20
Recent Events
Our three year contract with The Wall Street Journal provided for reduced
advertising rates, the purchase of a minimum amount of print and on-line
advertising and permitted the use of The Wall Street Journal name in connection
with the promotion of Futurestep services through June 2001. The contract was
extended on a month-to-month basis through November 30, 2001 and was not
renewed. Effective December 31, 2001, Futurestep will no longer be co-branded
with The Wall Street Journal. We believe that our agreement with the Wall
Street Journal had great strategic benefit for the initial launch of Futurestep.
But after three years of operations, we believe that the Futurestep service will
be best promoted under the Korn/Ferry brand going forward. We do not believe
that the non-renewal of The Wall Street Journal contract will have any impact on
revenue, but will result in a decrease in advertising expense of approximately
$1.0 million per quarter and over $4.0 million on an annual basis compared to
fiscal 2001.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets". In conjunction with these new accounting standards the FASB
has issued "Transition Provisions for New Business Combination Accounting Rules"
("Provisions") that allow non-calendar year-end companies to cease amortization
of goodwill and adopt the new impairment approach as of the beginning of their
fiscal year that starts during either 2001 or 2002. We have elected to implement
SFAS No. 141 and 142 in the first quarter of fiscal 2002.
The Provisions provide for a six month period from the date of
implementation of SFAS No. 142 to record impairment under the new method. The
impairment charge, if any, would be recorded as a cumulative effect of a change
in accounting principle. We completed our impairment analysis in the second
fiscal quarter of 2002. The impact on operating results from the implementation
of this pronouncement related to the elimination of goodwill amortization of
$3,001 and $2,981 for the three months ended July 31, 2001 and October 31, 2001,
respectively.
The asset impairment charge recognized in the first and second fiscal
quarters of 2002 are unrelated to the implementation of SFAS No. 142. "See Notes
to Financial Statements."
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The purpose of this statement is to develop
consistent accounting of asset retirement obligations and related costs in the
financial statements and provide more information about future cash outflows,
leverage and liquidity regarding retirement obligations and the gross investment
in long-lived assets. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. We do not believe that
the adoption of this statement will have a significant impact on our financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This statement establishes a number of rules which govern accounting for
the impairment of long-lived assets, eliminates inconsistencies from having two
accounting models for long-lived assets to be disposed of by sale and expands
the definition of a discontinued operation to a component of an entity for which
identifiable cash flows exist. The statement is effective for fiscal years
beginning after December 15, 2002. We do not believe that the adoption of this
statement will have a significant impact on our financial position or results of
operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Market Risk
As a result of our global operating activities, we are exposed to certain
market risks including foreign currency exchange fluctuations, fluctuations in
interest rates and variability in interest rate spread relationships. We manage
our exposure to these risks in the normal course of our business as described
below. We have not utilized financial instruments for trading or other
speculative purposes nor do we trade in derivative financial instruments.
Foreign Currency Risk. Generally, financial results of our foreign
subsidiaries are measured in their local currencies. Assets and liabilities are
translated into U.S. dollars at the rates of exchange in effect at the end of
each period and
21
revenue and expenses are translated at average rates of exchange during the
period. Resulting translation adjustments are reported as a component of
comprehensive income.
Financial results of foreign subsidiaries in countries with highly
inflationary economies are measured in U.S. dollars. The financial statements of
these subsidiaries are translated using a combination of current and historical
rates of exchange and any translation adjustments are included in determining
net income.
Historically, we have not realized any significant translation gains or
losses on transactions involving U.S. dollars and other currencies. This is
primarily due to natural hedges of revenue and expenses in the functional
currencies of the countries in which our offices are located and investment of
excess cash balances in U.S. dollar denominated accounts. During the six months
ended October 31, 2001, we recognized foreign currency gains, after income
taxes, of $0.3 million primarily related to our European operations. In the same
period last year, we recognized foreign currency translation losses, after
income taxes, of $1.1 million primarily related to our European operations.
Realization of translation gains or losses due to the translation of
intercompany payables denominated in U.S. dollars is mitigated through the
timing of repayment of these intercompany borrowings.
Interest Rate Risk. We primarily manage our exposure to fluctuations in
interest rates through our regular financing activities that generally are short
term and provide for variable market rates. As of October 31, 2001, we had
outstanding borrowings of $48.0 million on our revolving line of credit bearing
interest at LIBOR plus 4.0%, $50.5 million of borrowings against the cash
surrender value of COLI contracts bearing interest at primarily variable rates
payable at least annually and $20.2 million of notes payable, of which $20.0
million is due to shareholders resulting from business acquisitions in fiscal
2000 and 2001, at rates ranging from 5.5% to 7.0%, of which $8.2 million matures
in 2002 and $11.8 million matures in 2003. Currently, we have all of our
investments in interest bearing money market accounts at market rates.
22
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
Under our credit agreement with Bank of America, we breached our fixed charge
coverage ratio covenant for the period ended July 31, 2001 and our fixed charge
coverage and leverage ratio covenants for the period ended October 31, 2001,
each of which constitutes an event of default. We are not in default in the
payment of any principal or interest thereunder. We are working with Bank of
America to amend the agreement or obtain a waiver relating to such non-
compliance, but they have informed us that they have no further obligation or
commitment to make loans pursuant to the agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources".
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on September 25, 2001. The
business at the meeting was (i) to elect four directors to serve on the board,
and (ii) to ratify the appointment of Arthur Andersen LLP as our independent
auditors for fiscal 2002. Each of the proposals was adopted.
(i) The number of votes for and withheld for each director were as
follows:
(ii) The number of votes for, against, abstaining, and broker non-vote
for the ratification of Arthur Andersen LLP were as follows:
For Against Abstaining Broker Non-Vote
--- ------- ---------- ---------------
21,001,221 585,783 16,981 0
23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------- -----------------------
10.1 Amendment to Employment Agreement between Korn/Ferry
International and Paul C. Reilly, dated December 1, 2001
10.2 Letter from Korn/Ferry International to Paul C. Reilly,
dated June 6, 2001
10.3 Amendment No. 2 to Loan Agreement, dated April 29, 2001
(b) Reports on Form 8-K
None.
24
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: December 17, 2001 By: /s/ Elizabeth S.C.S. Murray
-----------------------------
Elizabeth S.C.S. Murray
Chief Financial Officer and
Executive Vice President
25
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------- ----------------------
10.1 Amendment to Employment Agreement between Korn/Ferry International
and Paul C. Reilly, dated December 1, 2001
10.2 Letter from Korn/Ferry International to Paul C. Reilly, dated
June 6, 2001
10.3 Amendment No. 2 to Loan Agreement, dated April 29, 2001
__________
26