10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on September 14, 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 July 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
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KORN/FERRY INTERNATIONAL
(Exact name of registrant as specified in its charter)
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 September 12,
2001 was 37,811,860.
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE 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 ended July 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 will complete this impairment analysis in
the second fiscal quarter of 2002. Based on the Company's analysis to date, the
Company does not expect to record a material cumulative effect of a change in
accounting principle related to impairment under SFAS No. 142. The impact on
operating results from the implementation of this pronouncement related to the
elimination of goodwill amortization of $3,001 for the three months ended July
31, 2001.
The asset impairment charge recognized in the first fiscal quarter of 2002
is 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)
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:
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
anti-dilutive. If the assumed exercises or conversions had been used, the fully
diluted shares outstanding for the three months ended July 31, 2001 would have
been 38,058.
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).
Due to certain restructuring activities being 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 has reclassified the losses to net income
(loss).
Total comprehensive income (loss) is as follows:
The reclassification adjustment excludes an unrealized holding loss of
$1,157, net of a tax benefit of $486, arising in the three months ended July 31,
2001.
8
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
Accumulated other comprehensive loss is comprised of:
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 estimates that these initiatives will
result in a total charge against earnings in fiscal 2002 of approximately $86
million, which will impact both the first and second fiscal quarters. The charge
reflects costs associated with a decision to reduce the work force by 20%, or
nearly 500 employees; consolidate all back-office functions for JobDirect,
Futurestep and Korn/Ferry; and write-down other related assets and goodwill. In
addition, certain 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
the quarter.
During the first quarter of fiscal 2002, operating results include asset
impairment and restructuring charges of $46,445 and $2,983, respectively,
related to the following business segments:
The asset impairment charge was primarily related to goodwill and was based
on an analysis of future undiscounted cashflows that indicated that these assets
were impaired. The charge represents the excess of the carrying value over fair
value, based on a discounted cashflow method. In executive recruitment, the
asset impairment charge represents goodwill related to the acquisition of the
Westgate Group, an executive recruitment firm specializing in financial services
in the eastern United States, in July 2000. All of the consultants of the
acquired Westgate Group had terminated employment by August 12, 2001. The
restructuring charge represents severance payments of $984 for 74 employees in
North America, $1,778 for 58 employees in Europe and $57 for four employees in
Asia/Pacific, primarily in July 2001.
The Futurestep asset impairment charge results from the restructuring of
operations to streamline the business and represents a realized loss on an
investment in a strategic relationship that will not be developed with the
integration of Futurestep and executive recruitment support services.
Restructuring charges of $164 resulted from severance payments, primarily in
July 2001, to 8 employees, in both North America and Europe.
9
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
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 has decided, at this time, to
review the various alternatives and pursue a more conservative approach towards
the college market, and scaled back the operations of JobDirect reducing 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 was $29.0
million.
The remaining charge of approximately $36.1 million will largely be
recognized in the second fiscal quarter and will consist primarily of severance
benefits and facilities rationalization. A summary of the planned charge by
business segment follows:
The remaining severance and benefits charge is for a current estimate of
183 executive recruitment employees, including 10 Corporate staff, 67 Futurestep
employees, primarily in Europe, and 54 JobDirect employees. The facilities
restructuring charge relates primarily to lease termination costs for three
executive recruitment offices and the remaining five Futurestep offices that
will be closed as employees are co-located with executive recruitment. The
Futurestep and JobDirect back-office support functions will be combined with
Korn/Ferry International as part of the plan to streamline
operations.
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 and Futurestep's worldwide
operations are managed by a chief executive officer. With the acquisition of
JobDirect in fiscal 2001, the Company expanded into the related college
recruitment market. JobDirect has operations throughout the United States and is
managed by a chief executive officer. For purposes of the geographic information
below, Mexico's operating results are included in Latin America.
A summary of the Company's operations (excluding interest income and other
income, and interest expense) by business segment follows:
10
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
Operating profit (loss) in fiscal 2002 includes asset impairment and
restructuring charges of: $12,214 in North America, $1,778 in Europe, $57 in
Asia/Pacific, $6,428 in Futurestep and $28,951 in JobDirect.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Statements
This 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, local political or economic developments in or affecting
countries where we have operations, ability to manage growth and control
expenses, restrictions imposed by off-limits agreements, competition,
implementation of an acquisition strategy, integration of acquired businesses,
risks related to the development and growth of Futurestep and JobDirect,
reliance on information processing systems, and employment liability risk.
Readers are urged to consider these factors carefully in evaluating the forward-
looking statements. The forward-looking statements included in this Form 10-Q
are made only as of the date of this report and we undertake no obligation to
publicly update these forward-looking statements to reflect subsequent events or
circumstances.
The following presentation of management's discussion and analysis of our
financial condition and results of operations should be read together with our
consolidated financial statements included in this Form 10-Q.
Overview
We are the world's preeminent recruitment firm with the broadest global
presence in the recruitment industry. Our services include executive
recruitment, middle-management recruitment (through Futurestep) and other
technology based services including services addressing the college recruitment
market. 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 any economic uptrend. Our immediate goals were to reduce
losses, preserve our top producers and maintain our high standards of client
service.
In August 2001, the Company 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. We
estimate that these initiatives will result in a total charge against earnings
in fiscal 2002 of approximately $86 million, which will impact both the first
and second fiscal quarters. The charge reflects costs associated with a decision
to reduce the workforce by 20%, or nearly 500 employees; consolidate all back-
office functions for JobDirect, Futurestep and Korn/Ferry; and write-down other
related assets and goodwill.
12
The following table summarizes the proposed asset impairment and restructuring
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 employees
terminated primarily in July 2001. The largest component of this charge related
to our investment in JobDirect, acquired in July 2001. Although the college
market is very large and attractive, this market was severely impacted by the
recent economic downturn. We view this market favorably, however, 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, we decided, at this time, to review the various alternatives and pursue
a more conservative approach towards the college market, and scaled back the
operations of JobDirect reducing the 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 was $29.0 million.
The remaining charge of approximately $36.1 million will primarily impact
the second quarter of fiscal 2002. "See Notes to Consolidated Financial
Statements".
At this time, we see no indications of improving trends and anticipate the
revenue for the second fiscal quarter of 2002 to be broadly in line with, or
slightly less than the first fiscal quarter of 2002, due to additional seasonal
effects. In line with our view on the continuing economic uncertainty and the
consequent revenue guidance for the second fiscal quarter of 2002, we anticipate
losses, before additional restructuring charge, will be broadly in the same
magnitude as the first fiscal quarter of 2002 or slightly less.
Results of Operations
The following table summarizes the results of our operations for the three
months ended July 31, 2001 and 2000 as a percentage of revenue:
____________
(1) Excluding the asset impairment and restructuring charges in 2001 and, for
comparability (under SFAS No.142), goodwill amortization in 2000, operating
profit (loss) as a percentage of revenue is 3% and 12%, respectively.
(2) Excluding the asset impairment and restructuring charges in 2001 and, for
comparability (under SFAS No.142), goodwill amortization in 2000, net
income (loss) as a percentage of revenue is 2% and 7%, 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 ended July 31, 2001, we experienced a decline in
executive recruitment revenue and in operating profit, 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 45% decline in executive recruitment
revenue in North America compared to the same period last year. We include
executive recruitment revenue generated from our operations in Mexico with Latin
America.
13
The decline in Futurestep revenue of 34% compared to the same period last year
is due primarily to a 60% decline in North America and is also largely due to
the slowdown in the United States economy resulting in a decline in both the
number of engagements and the average fee per engagement.
(1) Pro forma operating loss for the three months ended July 31, 2001 excludes
asset impairment and restructuring charges of: $12,214 in North America, $1,778
in Europe, $57 in Asia/Pacific, $6,428 in Futurestep and $28,951 in JobDirect.
In the three months ended July 31, 2001, we adopted SFAS No. 142 "Goodwill and
Other Intangible Assets." For comparability, pro forma operating profit for the
three months ended July 31, 2000 excludes goodwill amortization of $1,400 in
North America, $609 in Europe, $76 in Asia/Pacific, $411 in Futurestep and $56
in JobDirect.
In the following comparative analysis, all percentages are calculated based on
dollars in thousands.
Three Months Ended July 31, 2001 Compared to Three Months Ended July 31, 2000
Revenue. Revenue decreased $59.2 million, or 34%, to $114.4 million for the
three months ended July 31, 2001 from $173.6 million for the three months ended
July 31, 2000. This decrease in revenue was primarily the result of a
14
decrease in the number of engagements in executive recruitment and a decrease in
the number of engagements and the average fee per engagement in Futurestep.
In North America, revenue decreased $43.5 million, or 45%, to $52.5 million
for the three months ended July 31, 2001 from $96.0 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 while the
average fee per engagement remained constant. 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 was comparable in both periods.
Revenue in Europe decreased $6.5 million, or 19%, to $27.4 million for the
three months ended July 31, 2001 from $33.9 million for the comparable period in
the prior year. Excluding the negative effects of foreign currency translation
into the U.S. dollar, revenue would have decreased approximately 13% compared to
the same three month period last year. The decrease in constant dollars is
mainly due to a decrease in the number of engagements offset by an increase in
the average fee per engagement on a constant dollar basis.
In Asia/Pacific, revenue decreased $1.8 million, or 13%, to $11.4 million
for the three months ended July 31, 2001 from $13.2 million for the three months
ended July 31, 2000 primarily due to a decrease in the number of engagements and
the negative effects of foreign currency translation into the U.S. dollar.
The decrease in revenue in Latin America of $0.8 million, or 10%, to $8.0
million for the three months ended July 31, 2001 from $8.8 million for the
comparable three month period in fiscal 2000 is due primarily to a decline in
volume with the largest reported decline in Brazil offset by strong performance
in Mexico. The effect of the decrease in the number of engagements on revenue
was partially offset by an increase in the average fee per engagement.
Futurestep revenue declined $7.2 million to $14.3 million for the three
months ended July 31, 2001 from $21.5 million for the three months ended July
31, 2000. The decline is primarily attributable to the economic downturn in
North America and is due to a decrease in both the number of engagements and the
average fee for this region. International revenue declined $2.5 million or 18%
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 in Europe and the
average fee per engagement in Asia/Pacific.
JobDirect revenue of $0.9 million for the three months ended July 31, 2001
reflects over 400 corporate clients and approximately 400 college career offices
using our service. Compared to the prior year fourth fiscal quarter
(sequentially), the number of corporate clients decreased 6%, the number of
college career offices decreased 4% and revenue declined $0.5 million. In the
current quarter, we recognized an asset impairment charge of $29.0 million
representing substantially all of the unamortized goodwill resulting from our
acquisition of JobDirect in July 2000. This charge reflects 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. We
plan to integrate JobDirect and Futurestep where opportunities for ongoing cost
savings are identified.
Compensation and Benefits. Compensation and benefits expense decreased $30.2
million, or 28%, to $76.4 million for the three months ended July 31, 2001 from
$106.6 million for the comparable period ended July 31, 2000 due primarily to a
decline in executive recruitment bonus expense and a decrease in the number of
Futurestep employees. Although bonus expense, excluding Futurestep and
JobDirect, declined 77% compared to the prior year, compensation and benefits
increased as a percentage of revenue to 64.7% in the most recent three month
period from 60.6% in the three months ended July 31, 2000 due primarily to
comparable salary and benefits expense in each three month period.
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 $7.5 million, or 16%, to $41.0
million for the three months ended July 31, 2001 from $48.5 million for the
comparable period ended July 31, 2000. The decrease reflects $2.6 million
related to the elimination of amortization expense 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 $7.9
million at Futurestep, largely due to a reduction in marketing. As a percentage
of revenue, general and administrative expenses, excluding Futurestep and
JobDirect related expenses, increased to 31.2% in the first quarter of fiscal
2002 compared to 21.4% in the same three month period in the prior year. This
decrease is due primarily to the decrease in revenue while certain costs, such
as facilities remained comparable in each period. We expect to see further
reductions in general and administrative expenses with the implementation of the
restructuring initiatives in the second fiscal quarter of 2002.
15
Operating Profit (Loss). The operating loss of $52.4 million in the three
months ended July 31, 2001 represents a decrease of $70.9 million from operating
profit of $18.5 million in the prior year three month period. Excluding
Futurestep and JobDirect losses, goodwill amortization in the prior three month
period and the asset impairment and restructuring charge of $49.4 million in
fiscal 2002, operating profit decreased $23.4 million. Operating profit as a
percentage of revenue, on this same basis, decreased to 4.1% in the current
three month period from 19.4% in the prior 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 $0.9 million and $1.7 million for the three months
ended July 31, 2001 and 2000, respectively. The decrease in interest income is
due primarily to lower average cash and marketable securities balances compared
to the prior year.
Interest Expense. Interest expense decreased $0.1 million in the three months
ended July 31, 2001, to $1.6 million from $1.7 million in the prior year and is
primarily related to a decrease in notes due to shareholders offset by an
increase in outstanding borrowings under the line of credit.
Benefit from/Provision for Income Taxes. In the current three month period,
the Company's net loss resulted in the benefit from income taxes of $7.3 million
compared to the provision for income taxes of $7.8 million in the prior three
month period. The effective tax rate was 14% and 42% for July 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 increased $0.2
million to $1.0 million in the current three month period compared to $0.8
million in the prior year period.
Liquidity and Capital Resources
We finance operating expenditures through cash flows from operations and
borrowings under a line of credit. To provide additional liquidity, we maintain
a $100 million credit facility with Bank of America. The credit facility is a
revolving facility that matures on November 2, 2002 and includes a standby
letter of credit subfacility. Borrowings under the line of credit bear interest
on a sliding scale based on a leverage ratio. We have the option of borrowing
using either LIBOR or the higher of the bank's prime lending rate or the Federal
Funds rate plus 0.5%. The financial covenants include a minimum fixed charge
coverage ratio, a maximum leverage ratio, a quick ratio and other customary
events of default. We are not in compliance with the fixed charge coverage ratio
under our credit agreement with Bank of America. We are working with Bank of
America to amend the agreement or obtain a waiver relating to such
non-compliance. We believe these discussions will be completed by the end of the
second quarter of fiscal 2002. As of July 31, 2001 and July 31, 2000, we
borrowed $52.0 million and $28.0 million, respectively, on the line of credit to
partially fund bonus payments.
We maintained cash and cash equivalents of $63.7 million at July 31, 2001
and $88.5 million at July 31, 2000. During the three months ended July 31, 2001
and 2000, cash used in operating activities was $79.7 million and $64.0 million,
respectively. The increase in operating cash used in the current three month
period is primarily due to the decrease in net income, excluding the asset
impairment and restructuring charges in fiscal 2002.
Cash provided by investing activities was $5.7 million for the current
three month period and $11.3 million for the three months ended July 31, 2000.
Cash flows used in investing activities included $42.2 million for business
acquisitions in the prior year. In addition, net sales of marketable securities
were $13.0 million in the current three month period compared to $61.1 million
in the prior year. Purchases of property and equipment of $4.8 million and
premiums on life insurance of $2.5 million in the current period were comparable
to the prior period.
Cash provided by financing activities was $53.4 million and $31.6 million
during the three months ended July 31, 2001 and 2000, respectively. The increase
is primarily due to borrowings of $52.0 million under our line of credit
compared to $28 million in the prior year. We also borrowed $2.5 million under
life insurance policies in the current three month period compared to $0.8
million last year. The increase in borrowings in the current three month period
is due to the timing of borrowings. In addition, we made payments of $2.9
million on shareholder acquisition notes in the current three month period
compared to $0.6 million in the same period last year. In the current three
month period, proceeds from stock options exercised were $1.0 million and
receipts on shareholders' notes related to stock were $1.3 million. Last year,
proceeds from stock options exercised were $1.9 million and receipts on
shareholders' notes related to stock were $1.5 million.
We purchase COLI contracts to provide a funding vehicle for anticipated
payments due under our deferred executive compensation programs. Generally, we
borrow against the cash surrender value of the COLI contracts to partially fund
the COLI premium payments to the extent interest expense on the borrowings is
deductible for U.S.
16
income tax purposes. Total outstanding borrowings under life insurance policies
were $50.4 million and $45.7 million at July 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, investments in marketable securities, funds
from operations and available borrowings under our credit facility will be
sufficient to meet our anticipated working capital, capital expenditures and
general corporate requirements for the foreseeable future.
Euro Conversion
As of January 1, 1999, several member countries of the European Union
established fixed conversion rates among their existing local currencies, and
adopted the Euro as their new common legal currency. The Euro trades on currency
exchanges and the legacy currencies will remain legal tender in the
participating countries for a transition period which expires January 1, 2002.
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.
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 will complete our impairment analysis in the second
fiscal quarter of 2002. Based on our analysis to date, we do not expect to
record a material cumulative effect of a change in accounting principles related
to impairment under SFAS No. 142. The impact on operating results from the
implementation of this pronouncement related to the elimination of goodwill
amortization of $3,001 for the three months ended July 31, 2001.
The asset impairment charge recognized in the first fiscal quarter of 2002
is 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.
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.
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Foreign Currency Risk. Generally, financial results of our foreign
subsidiaries are measured in their local currencies. Assets and liabilities are
translated into U.S. dollars at the rates of exchange in effect at the end of
each period and revenue and expenses are translated at average rates of exchange
during the period. Resulting translation adjustments are reported as a component
of comprehensive income.
Financial results of foreign subsidiaries in countries with highly
inflationary economies are measured in U.S. dollars. The financial statements of
these subsidiaries are translated using a combination of current and historical
rates of exchange and any translation adjustments are included in determining
net income.
Historically, we have not realized any significant translation gains or
losses on transactions involving U.S. dollars and other currencies. This is
primarily due to natural hedges of revenue and expenses in the functional
currencies of the countries in which our offices are located and investment of
excess cash balances in U.S. dollar denominated accounts. During the three
months ended July 31, 2001, we recognized foreign currency losses, after income
taxes, of $0.2 million and during the three months ended July 31, 2000, we
recognized foreign currency gains after income taxes, of $0.1 million, primarily
related to our Europe and Asia/Pacific operations. Realization of translation
gains or losses due to the translation of intercompany payables denominated in
U.S. dollars is mitigated through the timing of repayment of these intercompany
borrowings.
Interest Rate Risk. We primarily manage our exposure to fluctuations in
interest rates through our regular financing activities that generally are short
term and provide for variable market rates. As of July 31, 2001, we had
outstanding borrowings of $52.0 million on our revolving line of credit bearing
interest at LIBOR plus 1.25%, $50.4 million of borrowings against the cash
surrender value of COLI contracts bearing interest at primarily variable rates
payable at least annually and $20.8 million of notes payable, of which $20.3
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 $8.5 million matures
in 2002 and $11.8 million matures in 2003. We have investments in interest
bearing securities at market rates with original maturities ranging from August
13, 2001 through March 14, 2002 and an average maturity period of less than six
months.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Employment Agreement between the Company and Windle B.
Priem, dated June 30, 2001.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KORN/FERRY INTERNATIONAL
Date: September 14, 2001 By: /s/ Elizabeth S.C.S. Murray
---------------------------
Elizabeth S.C.S. Murray
Chief Financial Officer, Treasurer and
Executive Vice President
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------ ----------------------
10.1 Employment Agreement between the Company and Windle B.
Priem, dated June 30, 2001.
__________________
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