10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on March 18, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2002
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) 552-1834
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
The number of shares outstanding of our common stock as of
March 14, 2002 was 37,767,027.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
TABLE OF CONTENTS
| Page | ||||
| PART I. FINANCIAL INFORMATION | ||||
| Item 1. |
Financial Statements |
|||
| 3 | ||||
| 5 | ||||
| 6 | ||||
| 7 | ||||
| Item 2. |
14 | |||
| Item 3. |
22 | |||
| PART II. OTHER INFORMATION | ||||
| Item 3. |
24 | |||
| Item 6. |
24 | |||
| 25 | ||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(in thousands)
| As of January 31, 2002 |
As of April 30, 2001 |
|||||||
| (unaudited) |
||||||||
| ASSETS |
||||||||
| Cash and cash equivalents |
$ |
57,749 |
|
$ |
88,463 |
| ||
| Marketable securities |
|
545 |
|
|
16,397 |
| ||
| Receivables due from clients, net of allowance for doubtful accounts of $10,375 and $13,319 |
|
59,726 |
|
|
91,513 |
| ||
| Income tax and other receivables |
|
31,678 |
|
|
11,299 |
| ||
| Deferred income taxes |
|
6,354 |
|
|
8,821 |
| ||
| Prepaid expenses |
|
12,308 |
|
|
9,909 |
| ||
| |
|
|
|
|
| |||
| Total current assets |
|
168,360 |
|
|
226,402 |
| ||
| |
|
|
|
|
| |||
| Property and equipment: |
||||||||
| Computer equipment and software |
|
49,923 |
|
|
48,715 |
| ||
| Furniture and fixtures |
|
22,127 |
|
|
24,223 |
| ||
| Leasehold improvements |
|
23,373 |
|
|
23,814 |
| ||
| Automobiles |
|
1,016 |
|
|
1,889 |
| ||
| |
|
|
|
|
| |||
| |
96,439 |
|
|
98,641 |
| |||
| LessAccumulated depreciation and amortization |
|
(52,143 |
) |
|
(43,652 |
) | ||
| |
|
|
|
|
| |||
| Property and equipment, net |
|
44,296 |
|
|
54,989 |
| ||
| |
|
|
|
|
| |||
| Cash surrender value of company owned life insurance policies, net of loans |
|
53,524 |
|
|
54,361 |
| ||
| Marketable securities and other investments |
|
5,008 |
|
|
6,894 |
| ||
| Deferred income taxes |
|
27,927 |
|
|
24,942 |
| ||
| Goodwill, net of accumulated amortization of $15,101 and $17,718 |
|
83,336 |
|
|
126,006 |
| ||
| Intangibles, net of accumulated amortization of $3,693 and $3,154 |
|
875 |
|
|
2,060 |
| ||
| Other |
|
2,847 |
|
|
4,675 |
| ||
| |
|
|
|
|
| |||
| Total assets |
$ |
386,173 |
|
$ |
500,329 |
| ||
| |
|
|
|
|
| |||
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)
| |
|
|||||||
| As of January 31, 2002 |
As of April 30, 2001 |
|||||||
| (unaudited) |
||||||||
| LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
| Notes payable and current maturities of long-term debt |
$ |
58,578 |
|
$ |
11,881 |
| ||
| Accounts payable |
|
7,278 |
|
|
13,360 |
| ||
| Income taxes payable |
|
535 |
|
|
2,728 |
| ||
| Compensation and related taxes |
|
36,210 |
|
|
110,702 |
| ||
| Other accrued liabilities |
|
40,925 |
|
|
32,523 |
| ||
| |
|
|
|
|
| |||
| Total current liabilities |
|
143,526 |
|
|
171,194 |
| ||
| Deferred compensation |
|
43,764 |
|
|
41,522 |
| ||
| Long-term debt |
|
5,084 |
|
|
11,842 |
| ||
| Other |
|
2,098 |
|
|
2,319 |
| ||
| |
|
|
|
|
| |||
| Total liabilities |
|
194,472 |
|
|
226,877 |
| ||
| |
|
|
|
|
| |||
| Non-controlling shareholders interest |
|
4,453 |
|
|
3,286 |
| ||
| |
|
|
|
|
| |||
| Shareholders equity |
||||||||
| Common stock: $0.01 par value, 150,000 shares authorized, 38,481 and 38,082 shares issued and 37,767 and 37,516 shares
outstanding |
|
301,219 |
|
|
296,069 |
| ||
| Deficit |
|
(89,581 |
) |
|
(4,602 |
) | ||
| Unearned restricted stock compensation |
|
(3,556 |
) |
|||||
| Accumulated other comprehensive loss |
|
(17,984 |
) |
|
(16,598 |
) | ||
| |
|
|
|
|
| |||
| Shareholders equity |
|
190,098 |
|
|
274,869 |
| ||
| Less: Notes receivable from shareholders |
|
(2,850 |
) |
|
(4,703 |
) | ||
| |
|
|
|
|
| |||
| Total shareholders equity |
|
187,248 |
|
|
270,166 |
| ||
| |
|
|
|
|
| |||
| Total liabilities and shareholders equity |
$ |
386,173 |
|
$ |
500,329 |
| ||
| |
|
|
|
|
| |||
The accompanying notes are an integral part of
these consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Three Months Ended January 31, |
Nine Months Ended January 31, | |||||||||||||
| 2002 |
2001 |
2002 |
2001 | |||||||||||
| (unaudited) |
(unaudited) | |||||||||||||
| Revenue |
$ |
93,268 |
|
$ |
157,171 |
$ |
316,660 |
|
$ |
504,415 | ||||
| Compensation and benefits |
|
64,633 |
|
|
95,651 |
|
213,535 |
|
|
304,990 | ||||
| General and administrative expenses |
|
31,084 |
|
|
46,568 |
|
108,322 |
|
|
152,345 | ||||
| Asset impairment and restructuring charges |
|
41,341 |
|
|||||||||||
| Goodwill impairment charges |
|
42,926 |
|
|||||||||||
| Interest income and other income, net |
|
630 |
|
|
734 |
|
1,997 |
|
|
3,051 | ||||
| Interest expense |
|
2,235 |
|
|
2,300 |
|
5,949 |
|
|
6,075 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Income (loss) before provision for income taxes and non-controlling shareholders interest |
|
(4,054 |
) |
|
13,386 |
|
(93,416 |
) |
|
44,056 | ||||
| (Benefit from) provision for income taxes |
|
2,572 |
|
|
5,622 |
|
(10,974 |
) |
|
18,307 | ||||
| Non-controlling shareholders interest |
|
627 |
|
|
861 |
|
2,537 |
|
|
2,731 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Net income (loss) |
$ |
(7,253 |
) |
$ |
6,903 |
$ |
(84,979 |
) |
$ |
23,018 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Basic earnings (loss) per common share |
$ |
(0.19 |
) |
$ |
0.18 |
$ |
(2.26 |
) |
$ |
0.62 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Basic weighted average common shares outstanding |
|
37,536 |
|
|
37,443 |
|
37,538 |
|
|
37,201 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Diluted earnings (loss) per common share |
$ |
(0.19 |
) |
$ |
0.18 |
$ |
(2.26 |
) |
$ |
0.60 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Diluted weighted average common shares outstanding |
|
37,536 |
|
|
38,705 |
|
37,538 |
|
|
38,661 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
The
accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine Months Ended January 31, |
||||||||
| 2002 |
2001 |
|||||||
| (unaudited) |
||||||||
| Cash from operating activities: |
||||||||
| Net income (loss) |
$ |
(84,979 |
) |
$ |
23,018 |
| ||
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
||||||||
| Depreciation |
|
12,702 |
|
|
10,708 |
| ||
| Amortization of goodwill |
|
8,631 |
| |||||
| Amortization of intangible assets |
|
539 |
|
|
317 |
| ||
| Amortization of note payable discount |
|
367 |
|
|
585 |
| ||
| Loss on disposition of property and equipment |
|
75 |
|
|
879 |
| ||
| Unrealized loss on marketable securities and other assets |
|
846 |
|
|||||
| Provision for doubtful accounts |
|
9,509 |
|
|
14,612 |
| ||
| Cash surrender value gains and benefits in excess of premiums paid |
|
(306 |
) |
|
(404 |
) | ||
| Deferred income tax benefit |
|
(5,130 |
) |
|
(2,405 |
) | ||
| Tax benefit from exercise of stock options |
|
188 |
|
|
2,733 |
| ||
| Asset impairment charge |
|
53,730 |
|
|||||
| Restructuring charge, including $12,889 in accrued liabilities |
|
14,902 |
|
|||||
| Restricted stock compensation |
|
609 |
|
|||||
| Change in other assets and liabilities, net of acquisitions: |
||||||||
| Deferred compensation |
|
2,242 |
|
|
2,534 |
| ||
| Receivables |
|
1,868 |
|
|
(30,354 |
) | ||
| Prepaid expenses |
|
(2,033 |
) |
|
(4,729 |
) | ||
| Income taxes |
|
275 |
|
|
(594 |
) | ||
| Accounts payable and accrued liabilities |
|
(84,896 |
) |
|
(13,566 |
) | ||
| Non-controlling shareholders interest and other, net |
|
2,916 |
|
|
(55 |
) | ||
| |
|
|
|
|
| |||
| Net cash (used in) provided by operating activities |
|
(76,576 |
) |
|
11,910 |
| ||
| |
|
|
|
|
| |||
| Cash from investing activities: |
||||||||
| Purchase of property and equipment |
|
(8,332 |
) |
|
(21,808 |
) | ||
| Purchases of marketable securities |
|
(7,646 |
) | |||||
| Sale of marketable securities |
|
15,852 |
|
|
61,107 |
| ||
| Business acquisitions, net of cash acquired |
|
(513 |
) |
|
(44,238 |
) | ||
| Premiums on life insurance, net of benefits received |
|
(9,308 |
) |
|
(10,102 |
) | ||
| Purchase of investments |
|
(10,570 |
) | |||||
| |
|
|
|
|
| |||
| Net cash used in investing activities |
|
(2,301 |
) |
|
(33,257 |
) | ||
| |
|
|
|
|
| |||
| Cash from financing activities: |
||||||||
| Net borrowings on credit line |
|
48,000 |
|
|
1,635 |
| ||
| Payment of shareholder acquisition notes |
|
(8,270 |
) |
|
(10,343 |
) | ||
| Net borrowings under life insurance policies |
|
10,451 |
|
|
1,668 |
| ||
| Purchase of common stock and payment on related notes |
|
(532 |
) |
|
(308 |
) | ||
| Issuance of common stock and receipts on shareholders notes |
|
2,862 |
|
|
8,927 |
| ||
| |
|
|
|
|
| |||
| Net cash provided by financing activities |
|
52,511 |
|
|
1,579 |
| ||
| |
|
|
|
|
| |||
| Effect of exchange rate changes on cash flows |
|
(4,348 |
) |
|
(1,969 |
) | ||
| |
|
|
|
|
| |||
| Net decrease in cash and cash equivalents |
|
(30,714 |
) |
|
(21,737 |
) | ||
| Cash and cash equivalents at beginning of the period |
|
88,463 |
|
|
86,975 |
| ||
| |
|
|
|
|
| |||
| Cash and cash equivalents at end of the period |
$ |
57,749 |
|
$ |
65,238 |
| ||
| |
|
|
|
|
| |||
The accompanying notes are an integral part of the concolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis
of Presentation
The consolidated financial statements for the three months and nine months ended January 31, 2002 and 2001
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 Companys 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 net income and earnings per share for the three months and nine months ended January 31, 2001 as if SFAS No. 142 had been implemented as of the beginning of fiscal 2001 is disclosed in Note 2.
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 for
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 Companys 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 Companys 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:
| Three months ended January 31, | ||||||||||||||||||
| 2002 |
2001 | |||||||||||||||||
| (Loss) |
Weighted Average Shares |
Per Share Amount |
Income |
Weighted Average Shares |
Per Share Amount | |||||||||||||
| Basic EPS |
||||||||||||||||||
| Income (loss) available to common shareholders |
$ |
(7,253 |
) |
37,536 |
$ |
(0.19 |
) |
$ |
6,903 |
37,443 |
$ |
0.18 | ||||||
| |
|
|
|
| ||||||||||||||
| Effect of dilutive securities |
||||||||||||||||||
| Shareholder common stock purchase commitments |
267 |
|||||||||||||||||
| Stock options |
995 |
|||||||||||||||||
| |
|
|
|
|
|
|
||||||||||||
| Diluted EPS |
||||||||||||||||||
| Income (loss) available to common shareholders plus assumed conversions |
$ |
(7,253 |
) |
37,536 |
$ |
(0.19 |
) |
$ |
6,903 |
38,705 |
$ |
0.18 | ||||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||||
| Nine months ended January 31, | ||||||||||||||||||
| 2002 |
2001 | |||||||||||||||||
| (Loss) |
Weighted Average Shares |
Per Share Amount |
Income |
Weighted Average Shares |
Per Share Amount | |||||||||||||
| Basic EPS |
||||||||||||||||||
| Income (loss) available to common shareholders |
$ |
(84,979 |
) |
37,538 |
$ |
(2.26 |
) |
$ |
23,018 |
37,201 |
$ |
0.62 | ||||||
| |
|
|
|
| ||||||||||||||
| Effect of dilutive securities |
||||||||||||||||||
| Shareholder common stock purchase commitments |
288 |
|||||||||||||||||
| Stock options |
1,172 |
|||||||||||||||||
| |
|
|
|
|
|
|
||||||||||||
| Diluted EPS |
||||||||||||||||||
| Income (loss) available to common shareholders plus assumed conversions |
$ |
(84,979 |
) |
37,538 |
$ |
(2.26 |
) |
$ |
23,018 |
38,661 |
$ |
0.60 | ||||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||||
8
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Assumed exercises or conversions have been excluded in computing the diluted earnings per share when there is a net loss
for the period 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 and nine months ended January 31, 2002 would
have been 37,668 and 37,674, respectively.
The following table adjusts net income (loss) and earnings (loss) per share for the
impact of the implementation of SFAS No. 142 in the current year:
| Three months ended January 31, |
Nine months ended January 31, | |||||||||||||
| 2002 |
2001 |
2002 |
2001 | |||||||||||
| Net income (loss) |
||||||||||||||
| Reported net income (loss) |
$ |
(7,253 |
) |
$ |
6,903 |
$ |
(84,979 |
) |
$ |
23,018 | ||||
| Add back: goodwill amortization |
|
2,992 |
|
8,631 | ||||||||||
| |
|
|
|
|
|
|
|
|
| |||||
| Adjusted net income (loss) |
$ |
(7,253 |
) |
$ |
9,895 |
$ |
(84,979 |
) |
$ |
31,649 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Basic earnings (loss) per share |
||||||||||||||
| Reported net income (loss) |
$ |
(0.19 |
) |
$ |
0.18 |
$ |
(2.26 |
) |
$ |
0.62 | ||||
| Goodwill amortization |
|
0.08 |
|
0.23 | ||||||||||
| |
|
|
|
|
|
|
|
|
| |||||
| Adjusted net income (loss) |
$ |
(0.19 |
) |
$ |
0.26 |
$ |
(2.26 |
) |
$ |
0.85 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
| Diluted earnings (loss) per share |
||||||||||||||
| Reported net income (loss) |
$ |
(0.19 |
) |
$ |
0.18 |
$ |
(2.26 |
) |
$ |
0.60 | ||||
| Goodwill amortization |
|
0.08 |
|
0.22 | ||||||||||
| |
|
|
|
|
|
|
|
|
| |||||
| Adjusted net income (loss) |
$ |
(0.19 |
) |
$ |
0.26 |
$ |
(2.26 |
) |
$ |
0.82 | ||||
| |
|
|
|
|
|
|
|
|
| |||||
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:
| Three months ended January 31, |
Nine months ended January 31, |
||||||||||||||
| 2002 |
2001 |
2002 |
2001 |
||||||||||||
| Net income (loss) |
$ |
(7,253 |
) |
$ |
6,903 |
$ |
(84,979 |
) |
$ |
23,018 |
| ||||
| Foreign currency translation adjustment |
|
(2,740 |
) |
|
3,032 |
|
(4,348 |
) |
|
(700 |
) | ||||
| Unrealized gain (loss) on investment, net of tax provision of $90 and tax benefit of $947, respectively |
|
123 |
|
(1,308 |
) | ||||||||||
| Reclassification adjustment for losses realized in net income (loss), net of tax benefit of $2,145 |
|
2,962 |
|
||||||||||||
| |
|
|
|
|
|
|
|
|
|
| |||||
| Comprehensive income (loss) |
$ |
(9,993 |
) |
$ |
10,058 |
$ |
(86,365 |
) |
$ |
21,010 |
| ||||
| |
|
|
|
|
|
|
|
|
|
| |||||
Accumulated other comprehensive loss is comprised of:
| Foreign Currency |
Loss on Securities |
Accumulated Other Comprehensive Loss |
||||||||||
| Beginning balance at May 1, 2001 |
$ |
(13,636 |
) |
$ |
(2,962 |
) |
$ |
(16,598 |
) | |||
| Activity through January 31, 2002 |
|
(4,348 |
) |
|
2,962 |
|
|
(1,386 |
) | |||
| |
|
|
|
|
|
|
|
| ||||
| Ending balance at January 31, 2002 |
$ |
(17,984 |
) |
$ |
|
|
$ |
(17,984 |
) | |||
| |
|
|
|
|
|
|
|
| ||||
9
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 of $2,962, net of a tax benefit of $2,145,
included in other comprehensive income (loss) at April 30, 2001 to net income (loss) in the three months ended July 31, 2001 resulting in a pretax charge of $5,107. In addition, the Company recognized a holding loss on these securities of $1,157
arising in the three months ended July 31, 2001. The total pretax charge related to the recognized loss on this investment of $6,264 was included in the asset impairment charge for the three months ended July 31, 2001.
In the three months and nine months ended January 31, 2002, the Company recognized an unrealized holding loss related to this investment of $472 and
$729, respectively, 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 the first quarter, certain business units took actions approved by senior management, that did not require Board approval, in response to a decline in revenue in the first two months of that quarter
resulting in a restructuring charge for severance of $3.0 million.
In August 2001, the Company announced a series of business
realignment initiatives. The Company estimated that these initiatives would result in a total charge against earnings in fiscal 2002, including the $3.0 million of severance in the first quarter, of approximately $86 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. Based upon these initiatives, the projection of undiscounted cashflows indicated that the goodwill related to JobDirect was impaired. As a result, the Company recognized an asset impairment charge related to JobDirect goodwill of
$28,951 in the first quarter.
During the three months ended October 31, 2001, the Company finalized the realignment initiatives
approved by the Board in August 2001 and recognized an additional asset impairment charge of $7.5 million and an additional restructuring charge of $27.3 million. There were no additional restructuring or asset impairment charges in the three months
ended January 31, 2002.
Operating results for the nine months ended January 31, 2002 include asset impairment and restructuring
charges recorded in the first and second quarter of fiscal 2002 related to the following business segments:
| | |||||||||||||||
| Asset Impairment |
Restructuring |
||||||||||||||
| Goodwill |
Other |
Severance |
Facilities |
Total | |||||||||||
| Executive recruitment |
|||||||||||||||
| North America |
$ |
13,975 |
$ |
711 |
$ |
8,773 |
$ |
5,490 |
$ |
28,949 | |||||
| Europe |
|
3,488 |
|
865 |
|
4,353 | |||||||||
| Asia/Pacific |
|
15 |
|
1,761 |
|
70 |
|
1,846 | |||||||
| Futurestep |
|
8,958 |
|
1,681 |
|
6,144 |
|
16,783 | |||||||
| JobDirect |
|
28,951 |
|
1,369 |
|
843 |
|
1,173 |
|
32,336 | |||||
| |
|
|
|
|
|
|
|
|
| ||||||
| Total |
$ |
42,926 |
$ |
11,053 |
$ |
16,546 |
$ |
13,742 |
$ |
84,267 | |||||
| |
|
|
|
|
|
|
|
|
| ||||||
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.
10
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 estimated fair value less costs to sell. The restructuring charge for executive recruitment severance of $14,022 is comprised of $2,819 and $11,203 recognized in the three months ended July 31, 2001 and October 31, 2001,
respectively, and included 74 and 147 employees in North America, 58 and 167 employees in Europe, and 4 and 37 employees in Asia/Pacific, respectively. The facilities restructuring charge for 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 October 31, 2001 of $2,694 includes $801 for the write-down of excess furniture, fixtures and equipment to estimated fair value
less costs to sell and the write-off of capitalized software costs of $1,893 due to the integration of Futurestep and executive recruitment information technology support services. The Futurestep restructuring charge of $1,681 for severance is
comprised of $164 for 8 employees and $1,517 for 76 employees severed in the three months ended July 31, 2001 and October 31, 2001, respectively. 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. Given the loss profile and cash requirements of JobDirect based on operating results in the first quarter of fiscal 2002, 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 were closed to estimated fair value less costs 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 at January 31, 2002 is $2,981 of severance restructuring costs and $9,908 of facilities restructuring costs. The severance accrual includes amounts paid
monthly and are expected to be paid in full by October 31, 2002. The accrued liability for facilities costs primarily relates to lease payments, net of sublease income, that will be paid over the next two to ten years.
11
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in thousands, except per share amounts)
A summary of the components of the restructuring liability by business segment at
January 31, 2002 follows:
| Charged to Expense |
Non-Cash Items |
Payments |
Liability at January 31, 2002 | |||||||||
| Executive recruitment |
||||||||||||
| North America |
$ |
14,263 |
$ |
330 |
$ |
7,635 |
$ |
6,298 | ||||
| Europe |
|
4,353 |
|
3,163 |
|
1,190 | ||||||
| Asia/Pacific |
|
1,831 |
|
1,516 |
|
315 | ||||||
| Futurestep |
|
7,825 |
|
1,622 |
|
2,230 |
|
3,973 | ||||
| JobDirect |
|
2,016 |
|
61 |
|
842 |
|
1,113 | ||||
| |
|
|
|
|
|
|
| |||||
| Total |
$ |
30,288 |
$ |
2,013 |
$ |
15,386 |
$ |
12,889 | ||||
| |
|
|
|
|
|
|
| |||||
5. Business segments
The Company operates in two global business segments in the retained recruitment industry, 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. Futuresteps 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 college recruitment market. The Company decided to exit this
business segment in the fiscal quarter ended October 31, 2001 and ceased operations in the fiscal quarter ending January 31, 2002. (See Note 4). For purposes of the geographic information below, Mexicos operating results are included in Latin
America.
A summary of the Companys operations (excluding interest income and other income, and interest expense) by
business segment follows:
| Three months ended January 31, |
Nine months ended January 31, | |||||||||||
| 2002 |
2001 |
2002 |
2001 | |||||||||
| Revenue: |
||||||||||||
| Executive recruitment: |
||||||||||||
| North America |
$ |
47,944 |
$ |
80,078 |
$ |
153,682 |
$ |
269,528 | ||||
| Europe |
|
20,891 |
|
32,975 |
|
73,823 |
|
101,277 | ||||
| Asia/Pacific |
|
8,959 |
|
13,335 |
|
30,274 |
|
39,985 | ||||
| Latin America |
|
5,824 |
|
8,183 |
|
21,181 |
|
26,520 | ||||
| Futurestep |
|
9,650 |
|
21,119 |
|
36,314 |
|
63,800 | ||||
| JobDirect |
|
1,481 |
|
1,386 |
|
3,305 | ||||||
| |
|
|
|
|
|
|
| |||||
| Total revenue |
$ |
93,268 |
$ |
157,171 |
$ |
316,660 |
$ |
504,415 | ||||
| |
|
|
|
|
|
|
| |||||
12
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(in thousands, except per share amounts)
| Three months ended January 31, |
Nine months ended January 31, |
|||||||||||||||
| 2002 |
2001 |
2002 |
2001 |
|||||||||||||
| Operating profit (loss) before asset impairment and restructuring charges |
||||||||||||||||
| Executive recruitment: |
||||||||||||||||
| North America |
$ |
5,551 |
|
$ |
14,774 |
|
$ |
14,091 |
|
$ |
51,549 |
| ||||
| Europe |
|
(4,081 |
) |
|
4,961 |
|
|
(5,689 |
) |
|
14,810 |
| ||||
| Asia/Pacific |
|
146 |
|
|
1,423 |
|
|
(120 |
) |
|
5,007 |
| ||||
| Latin America |
|
(105 |
) |
|
1,789 |
|
|
3,232 |
|
|
6,654 |
| ||||
| Futurestep |
|
(3,072 |
) |
|
(4,591 |
) |
|
(10,871 |
) |
|
(23,138 |
) | ||||
| JobDirect |
|
(888 |
) |
|
(3,404 |
) |
|
(5,840 |
) |
|
(7,802 |
) | ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Subtotal operating profit (loss) before asset impairment and restructuring charges |
$ |
(2,449 |
) |
$ |
14,952 |
|
$ |
(5,197 |
) |
$ |
47,080 |
| ||||
| Asset impairment and restructuring charge (Note 4) |
|
84,267 |
|
|||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
| Total operating profit (loss) |
$ |
(2,449 |
) |
$ |
14,952 |
|
$ |
(89,464 |
) |
$ |
47,080 |
| ||||
| |
|
|
|
|
|
|
|
|
|
|
| |||||
6. Subsequent Event
At January 31, 2002, the Company was not in compliance with the fixed charge coverage and leverage ratios under the credit agreement with Bank of America. The Company reached an
agreement with Bank of America in March 2002 to amend the credit facility from $100.0 million to $45.0 million, to waive prior defaults, to secure it with certain assets and to amend the financial covenants to make compliance more achievable through
maturity in November 2002. The amended agreement requires payment of a $1.0 million fee at inception. Additional fees of up to $1.5 million may be payable in three installments of $500.0 million through October 2002 if additional financing
is not obtained prior to the installment due date. In addition, the Company paid $8.7 million in March 2002 to reduce the outstanding balance from $48.0 million at January 31, 2002 to $39.3 million, which combined with outstanding letters of
credit, utilized the $45.0 million facility. Outstanding credit facility borrowings bear interest at Prime plus 3.75% under the amended agreement compared to the default rate of Prime plus 4% at January 31, 2002.
13
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, access to capital, 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, 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 managements 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 worlds 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 worlds 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.
14
The following table summarizes the asset impairment and restructuring charge recorded in the
first and second quarters of fiscal 2002:
| | |||||||||||||||
| Asset Impairment |
Restructuring |
||||||||||||||
| Goodwill |
Other |
Severance |
Facilities |
Total | |||||||||||
| Executive recruitment |
$ |
13,975 |
$ |
726 |
$ |
14,022 |
$ |
6,425 |
$ |
35,148 | |||||
| Futurestep |
|
8,958 |
|
1,681 |
|
6,144 |
|
16,783 | |||||||
| JobDirect |
|
28,951 |
|
1,369 |
|
843 |
|
1,173 |
|
32,336 | |||||
| |
|
|
|
|
|
|
|
|
| ||||||
| Total |
$ |
42,926 |
$ |
11,053 |
$ |
16,546 |
$ |
13,742 |
$ |
84,267 | |||||
| |
|
|
|
|
|
|
|
|
| ||||||
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 estimated fair value less costs to sell.
Included in accrued liabilities at January 31, 2002 is $2,981 of severance restructuring costs and $9,908 of facilities restructuring costs. The severance accrual includes amounts to be
paid monthly and is expected to be paid in full by October 31, 2002. The accrued liability for facilities costs primarily relates to lease payments, net of sublease income, that will be paid over the next two to ten years.
At this time, we see no indications of improving trends and anticipate revenue for the fourth fiscal quarter of 2002 to be in line with the third fiscal
quarter of 2002. We also expect that our operating costs for the fourth fiscal quarter of 2002 will be higher than the third fiscal quarter, primarily due to additional restructuring costs expected to be incurred in Europe, estimated to be
approximately $5.0 million.
Results of Operations
The following table summarizes the results of our operations for the three months and nine months ended January 31, 2002 and 2001 as a percentage of revenue:
15
| Three months ended January 31, |
Nine months ended January 31, |
|||||||||||
| 2002 |
2001 |
2002 |
2001 |
|||||||||
| Revenue |
100 |
% |
100 |
% |
100 |
% |
100 |
% | ||||
| Compensation and benefits(1) |
69 |
|
61 |
|
67 |
|
60 |
| ||||
| General and administrative expenses |
33 |
|
30 |
|
34 |
|
30 |
| ||||
| Asset impairment and restructuring charges |
27 |
|
||||||||||
| Operating profit (loss)(2) |
(3 |
) |
10 |
|
(28 |
) |
9 |
| ||||
| Net income (loss)(3) |
(8 |
) |
4 |
|
(27 |
) |
5 |
| ||||
(1) |
Includes a credit of $3.4 million in the nine months ended January 31, 2002 resulting from the reversal of substantially all of our contribution to the 401(k) plan accrued in
fiscal year 2001 that was not 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 (3%) and 11% for the three month periods ending January 31, 2002 and 2001, respectively, and (2%) and 11% for the nine month periods ending January 31, 2002 and 2001, 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 (8%) and 6% for the three month periods ending January 31, 2002 and 2001, respectively, and (4%) and 6% for the nine month periods ending January 31, 2002 and 2001, respectively. |
The continued 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 three and nine month periods last year.
For the three months and nine months ended January 31, 2002, 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 three and nine month periods last year. The decline is due
primarily to the slowdown of the United States economy that contributed to a $115.8 million or 43% decline in executive recruitment revenue in North America for the nine months ended January 31, 2002 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
54% and 43% for the three and nine months ended January 31, 2002, respectively, compared to the same periods 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 percentage decline compared to the same periods last year primarily due to a decline in the number of engagements.
The following table summarizes the results of our operations by business segment for the three months and nine months ended January 31, 2002 and 2001:
| Three Months Ended January 31, |
Nine Months Ended January 31, |
|||||||||||||||||||||||
| 2002 |
2001 |
2002 |
2001 |
|||||||||||||||||||||
| Dollars |
% |
Dollars |
% |
Dollars |
% |
Dollars |
% |
|||||||||||||||||
| Revenue |
||||||||||||||||||||||||
| Executive recruitment: |
||||||||||||||||||||||||
| North America |
$ |
47,944 |
51 |
% |
$ |
80,078 |
51 |
% |
$ |
153,682 |
49 |
% |
$ |
269,528 |
53 |
% | ||||||||
| Europe |
|
20,891 |
22 |
|
|
32,975 |
21 |
|
|
73,823 |
23 |
|
|
101,277 |
20 |
| ||||||||
| Asia/Pacific |
|
8,959 |
10 |
|
|
13,335 |
9 |
|
|
30,274 |
10 |
|
|
39,985 |
8 |
| ||||||||
| Latin America |
|
5,824 |
6 |
|
|
8,183 |
5 |
|
|
21,181 |
7 |
|
|
26,520 |
5 |
| ||||||||
| Futurestep |
|
9,650 |
10 |
|
|
21,119 |
13 |
|
|
36,314 |
11 |
|
|
63,800 |
13 |
| ||||||||
| JobDirect |
|
1,481 |
1 |
|
|
1,386 |
|
3,305 |
1 |
| ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Total revenue |
$ |
93,268 |
100 |
% |
$ |
157,171 |
100 |
% |
$ |
316,660 |
100 |
% |
$ |
504,415 |
100 |
% | ||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
16
| Three Months Ended January 31, |
Nine Months Ended January 31, |
|||||||||||||||||||||||||||
| 2002 |
2001 |
2002 |
2001 |
|||||||||||||||||||||||||
| Dollars |
% |
Dollars |
% |
Dollars |
% |
Dollars |
% |
|||||||||||||||||||||
| Operating profit (loss) |
||||||||||||||||||||||||||||
| Executive recruitment: |
||||||||||||||||||||||||||||
| North America |
$ |
5,551 |
|
12 |
% |
$ |
14,774 |
|
18 |
% |
$ |
(14,858 |
) |
(10 |
)% |
$ |
51,549 |
|
19 |
% | ||||||||
| Europe |
|
(4,081 |
) |
(20 |
) |
|
4,961 |
|
15 |
|
|
(10,042 |
) |
(14 |
) |
|
14,810 |
|
15 |
| ||||||||
| Asia/Pacific |
|
146 |
|
2 |
|
|
1,423 |
|
11 |
|
|
(1,966 |
) |
(6 |
) |
|
5,007 |
|
13 |
| ||||||||
| Latin America |
|
(105 |
) |
(2 |
) |
|
1,789 |
|
22 |
|
|
3,232 |
|
15 |
|
|
6,654 |
|
25 |
| ||||||||
| Futurestep |
|
(3,072 |
) |
(32 |
) |
|
(4,591 |
) |
(22 |
) |
|
(27,654 |
) |
(76 |
) |
|
(23,138 |
) |
(36 |
) | ||||||||
| JobDirect |
|
(888 |
) |
|
(3,404 |
) |
|
(38,176 |
) |
|
(7,802 |
) |
||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Total operating profit (loss) |
$ |
(2,449 |
) |
(3 |
)% |
$ |
14,952 |
|
10 |
% |
$ |
(89,464 |
) |
(28 |
)% |
$ |
47,080 |
|
9 |
% | ||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Three Months Ended January 31, |
Nine Months Ended January 31, |
|||||||||||||||||||||||||||
| 2002 |
2001 |
2002 |
2001 |
|||||||||||||||||||||||||
| Dollars (1) |
% |
Dollars (2) |
% |
Dollars (1) |
% |
Dollars (2) |
% |
|||||||||||||||||||||
| Pro forma operating profit (loss)(1)(2) |
||||||||||||||||||||||||||||
| Executive recruitment: |
||||||||||||||||||||||||||||
| North America |
$ |
5,551 |
|
12 |
% |
$ |
16,028 |
|
20 |
% |
$ |
14,091 |
|
9 |
% |
$ |
55,750 |
|
21 |
% | ||||||||
| Europe |
|
(4,081 |
) |
(20 |
) |
|
5,474 |
|
17 |
|
|
(5,689 |
) |
(8 |
) |
|
16,477 |
|
16 |
| ||||||||
| Asia/Pacific |
|
146 |
|
2 |
|
|
1,493 |
|
11 |
|
|
(120 |
) |
|
5,226 |
|
13 |
| ||||||||||
| Latin America |
|
(105 |
) |
(2 |
) |
|
1,789 |
|
22 |
|
|
3,232 |
|
15 |
|
|
6,654 |
|
25 |
| ||||||||
| Futurestep |
|
(3,072 |
) |
(32 |
) |
|
(3,946 |
) |
(19 |
) |
|
(10,871 |
) |
(30 |
) |
|
(21,667 |
) |
(34 |
) | ||||||||
| JobDirect |
|
(888 |
) |
|
(2,894 |
) |
|
(5,840 |
) |
|
(6,729 |
) |
||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
| Total pro forma operating profit (loss)(1)(2) |
$ |
(2,449 |
) |
(3 |
)% |
$ |
17,944 |
|
11 |
% |
$ |
(5,197 |
) |
2 |
% |
$ |
55,711 |
|
11 |
% | ||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
(1) Fiscal 2002: Pro forma operating profit for the nine months ended January 31, 2002 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 January 31, 2001 excludes goodwill amortization of $1,254 in North America, $513 in Europe, $70 in Asia/Pacific,
$645 in Futurestep and $510 in JobDirect. Pro forma operating profit for the nine months ended January 31, 2001 excludes goodwill amortization of $4,201 in North America, $1,667 in Europe, $219 in Asia/Pacific, $1,471 in Futurestep and $1,073 in
JobDirect.
In the following comparative analysis, all percentages are calculated based on dollars in thousands.
Three Months Ended January 31, 2002 Compared to Three Months Ended January 31, 2001
Revenue. Revenue decreased $63.9 million, or 41%, to $93.3 million for the three months ended January 31, 2002 from $157.2 million for the three months
ended January 31, 2001. This decrease in revenue was primarily the result of a decrease in 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 $32.1 million, or 40%, to $47.9 million for the three months ended January 31, 2002
from $80.1 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. 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.
Revenue in Europe decreased $12.1 million, or 37%, to $20.9 million for the three months ended January 31, 2002 from $33.0 million for the comparable period in the prior year. The effect
of foreign currency translation into U.S. dollars was not material. A decrease in revenue was reported by all of our European offices and is mainly due to the softening of the global economy resulting in a decrease in the number of engagements
partially offset by an increase in the average fee per engagement.
17
In Asia/Pacific, revenue decreased across all of our offices resulting in a decline of $4.4
million, or 33%, for the region to $8.9 million for the three months ended January 31, 2002 from $13.3 million for the three months ended January 31, 2001 primarily due to a decrease in both the number of engagements and the average fee per
engagement and includes a decline of four percent due to the negative effects of translation into the U.S. dollar.
The decrease
in revenue in Latin America of $2.4 million, or 29%, to $5.8 million for the three months ended January 31, 2002 from $8.2 million for the comparable three month period in fiscal 2001 is due primarily to a decline in the number of engagements. Every
country reported a decline in revenue with the largest reported revenue decrease in Mexico.
Futurestep revenue declined $11.5
million, or 54%, to $9.7 million for the three months ended January 31, 2002. The decline is primarily attributable to the global economic downturn resulting in a decrease in both the number of engagements in all geographic regions and the
average fee per engagement in Europe and Asia/Pacific. Europe reported a decline of $5.7 million, or 45%, compared to the prior year three month period but only $0.7 million, or 9%, compared to the quarter ending October 31, 2001. North America and
Asia/Pacific reported declines in revenue of 70% and 67%, respectively, compared to the same period last year. Compared to the second quarter of fiscal 2002, revenue declined 40% and 49% for North America and Asia/Pacific, respectively.
As a result of our decision to exit the college recruitment market in October 2001, JobDirect reported no revenue for the three
months ended January 31, 2002 compared to $1.5 million in 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 estimated fair value less costs to sell. In the three months ended January 31, 2002, we incurred operating costs of $0.9 million to
wind down JobDirect operations.
Compensation and Benefits. Compensation and benefits expense
decreased $31.0 million, or 32%, to $64.6 million for the three months ended January 31, 2002 from $95.7 million for the comparable period ended January 31, 2001. This decline is due primarily to a decline in executive recruitment of $22.4 million,
largely reflecting a lower bonus expense and a decline in salaries and benefits expense due to a decline in the number of consultants. In addition, Futurestep and JobDirect expenses declined $6.6 million and $2.0 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 69% in the most recent three month period from 61% in the three months ended January 31, 2001,
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 $15.5 million, or 33%, to $31.1 million for the three months ended January 31, 2002 from $46.6 million for the comparable period ended January 31, 2001. The decrease includes $3.0 million of
amortization expense in fiscal 2001 not recorded in the current fiscal quarter based on the implementation of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets and a decrease of $6.4 million at
Futurestep, largely due to a reduction in advertising expense. As a percentage of revenue, general and administrative expenses, excluding Futurestep and JobDirect related expenses and amortization expense in fiscal 2001, increased to 31% in the
third quarter of fiscal 2002 compared to 22% 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 $2.4 million in the three months ended January 31, 2002 represents a decrease of $17.4 million from operating
profit of $15.0 million in the prior year three month period. Excluding Futurestep and JobDirect losses and goodwill amortization in the prior year three month period, operating profit decreased $23.3 million. Operating profit as a percentage of
revenue, on this same basis, decreased to 1.8% in the current three month period from 18.4% in the 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. Futurestep losses decreased $1.5 million to $3.1 million for the three months ended January 31, 2002 from $4.6 million in the prior year three month period. This decrease
is due to the
18
decline in advertising expense and compensation and benefits expense substantially offset by the decrease in revenue.
Interest Income and Other Income, Net. Interest income and other income, net, includes interest income of $0.7 million and $1.0 million for the three months
ended January 31, 2002 and 2001, respectively. Other income, net includes an unrealized holding loss on investments of $0.5 million in 2002 and a loss on the sale of property and equipment of $0.3 million in 2001.
Interest Expense. Interest expense decreased slightly in the three months ended January 31, 2002, to $2.2 million
from $2.3 million in the prior year, primarily due to an increase in average outstanding borrowings and interest rate on our line of credit offset by a decrease in the effective interest rate on our COLI loans.
(Benefit from) Provision for Income Taxes. In the current three month period, the net loss resulted in a provision for
income taxes of $2.6 million compared to a provision for income taxes of $5.6 million in the prior year three month period. The effective tax rate was 42% for January 31, 2001. The income tax expense in the current period is due primarily to taxable
income in North America and certain non-deductible charges in Europe.
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 $0.3 million
to $0.6 million in the current three month period compared to $0.9 million in the same prior year period and reflects a decrease in net income generated by the Mexico subsidiaries during the current fiscal three month period.
Nine Months Ended January 31, 2002 Compared to Nine Months Ended January 31, 2001
Revenue. Revenue decreased $187.7 million, or 37%, to $316.7 million for the nine months ended January 31, 2002 from $504.4 million for the nine months
ended January 31, 2001, including a decrease in revenue from Futurestep of $27.5 million compared to the same period in the prior year. The decrease in executive recruitment revenue of $158.3 million, or 36%, was primarily the result of a decrease
in the number of executive recruitment engagements.
In North America, revenue decreased $115.8 million, or 43%, to
$153.7 million for the nine months ended January 31, 2002 from $269.5 million for the comparable period in the prior year due mainly to a decrease in the number of engagements. Largely as a result of the restructuring initiatives in the first and
second quarters, the average number of consultants decreased 11% for the three months ended January 31, 2002 compared to the same period last year; however, due to the larger percentage decline in revenue, the average number of engagements per
consultant and the average fee per consultant decreased approximately 35%.
In Europe, revenue decreased $27.5 million, or 27%,
to $73.8 million for the nine months ended January 31, 2002 from $101.3 million for the nine months ended January 31, 2001. The negative effect of foreign currency translation into the U.S. dollar was approximately 2% compared to the same period in
the prior year. The 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 average number of consultants decreased by approximately 5%
compared to the same period last year and the average number of engagements per consultant and average fee per consultant decreased approximately 30% and 20%, respectively.
Revenue in Asia/Pacific decreased $9.7 million, or 24%, to $30.3 million for the nine months ended January 31, 2002 compared to $40.0 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 19% due primarily to a decrease in both the number of engagements and the average fee per engagement compared to the same
nine month period last year. The average number of consultants was relatively flat in each of those nine month periods and as a result, the average number of engagements and the constant dollar average fee per engagement declined by approximately
10% compared to the same period last year.
The decrease in revenue in Latin America of $5.3 million, or
20%, to $21.2 million for the nine months ended January 31, 2002 from $26.5 million for the comparable nine month period in fiscal 2001 includes a 5% decline due to the negative effect of translation into the U.S. dollar. The constant dollar decline
of 15% reflects declines in all countries in the region with the most significant impact in Brazil, compared to the same period last year.
Futurestep revenue of $36.3 million for the nine months ended January 31, 2002 decreased $27.5 million, or 43%, from the same period last year. This decrease is primarily attributable to the weak global economy
resulting in a
19
a decline in the number of engagements in all geographic regions and a decrease in the average fee per engagement in Europe and Asia/Pacific in the current nine
month period with the largest dollar and percentage decline reported by North America.
Compensation and
Benefits. Compensation and benefits expense decreased $91.5 million, or 30%, to $213.5 million for the nine months ended January 31, 2002 from $305.0 million for the comparable period ended January 31, 2001 due primarily
to a decrease in the number of executive recruitment and Futurestep employees resulting from our restructuring initiatives in the first and second quarters of fiscal 2002 and a credit in the current year nine 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. In executive recruitment and Futurestep, compensation and benefits expense as a percentage of revenue increased to 65.4% and 76.2%,
respectively, in the most recent nine month period from 58.9% and 67.2%, respectively, in the nine months ended January 31, 2001 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 $44.0 million, or 29%, to $108.3 million for the nine months ended January 31, 2002 from $152.3 million for the comparable period
ended January 31, 2001. The decrease is primarily due to a decline in advertising expense at Futurestep, a decline in engagement related expenses in executive recruitment and $8.6 million of amortization expense in fiscal 2001 not recorded in the
current nine month period with the 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
nine months ended January 31, 2002 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 $136.6 million in the nine months ended January 31, 2002, to a loss of $89.5 million from a
profit of $47.1 million in the prior year nine 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 nine months ended
January 31, 2002 decreased $72.6 million, or 86%, to $11.5 million compared to $84.1 million for the nine months ended January 31, 2001. Operating profit as a percentage of revenue, on this same basis, was 4% and 19% for the nine months ended
January 31, 2002 and 2001, respectively. The lower margin in the current nine month period reflects a decline in all regions compared to the prior year nine 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 $2.3 million and $3.4 million for the nine months ended January 31, 2002 and 2001, respectively. The decrease in interest
income is due to decrease in interest bearing investments in the current nine month period. Other income, net includes an unrealized holding loss on investments of $0.7 million in 2002 and a loss on the sale of property and equipment of $0.9 million
in 2001.
Interest Expense. Interest expense was $5.9 million in the nine months ended January 31,
2002 compared to $6.1 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 $11.0 million for the nine months ended January 31, 2002 compared to an
expense of $18.3 million for the comparable period ended January 31, 2001. The effective tax rate was 11.7% and 41.5% for the current and prior year nine month periods, respectively. The decrease in the effective tax rates in these periods is due
primarily to certain non-deductible asset impairment charges and losses 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 slightly to
$2.5 million in the nine months ended January 31, 2002 from $2.7 million in the prior year comparable nine month period and reflects the small decline net income generated by the Mexico subsidiaries during these nine month periods.
Liquidity and Capital Resources
We
have been in default under our credit agreement with Bank of America since July 31, 2001. We reached an agreement with Bank of America on March 7, 2002 to amend our credit facility from $100.0 million to $45.0 million, to
20
waive prior defaults, to secure it by certain assets and to amend our financial covenants to make compliance more achievable going forward. The financial
covenants include a minimum fixed charge coverage ratio, a maximum leverage ratio, a quick ratio and other customary events of default. The amended agreement requires payment of a fee of $1.0 million at inception. Additional fees of $1.5 million may
be payable in three installments of $500.0 million through October 2002 if additional financing is not obtained prior to the installment due date. In addition, we paid Bank of America $8.7 million in March 2002 to reduce our outstanding balance from
$48.0 million at January 31, 2002 to $39.3 million, which combined with our letters of credit utilized the $45.0 million facility. Outstanding credit facility borrowings bear interest at Prime plus 3.75% under the amended agreement compared to the
default rate of Prime plus 4%.
If we are unable to refinance this facility, we may be unable to meet this obligation with our
cash flow from operations. We are actively working and considering alternatives to resolve these issues. In addition, we may need to reduce working capital or capital expenditures or take other actions with respect to our business in order to
conserve cash in the meantime.
We believe that cash on hand, funds from operations and borrowings under our credit facility and
against COLI contracts will be sufficient to meet our anticipated working capital, capital expenditures and general corporate requirements prior to the maturity of our credit facility with Bank of America. Our actual liquidity will be affected by
our operating results going forward.
We maintained cash and cash equivalents of $57.7 million at January 31, 2002 and $65.2
million at January 31, 2001. During the nine months ended January 31, 2002 and 2001, cash used in operating activities was $76.6 million and cash provided by operating activities was $11.9 million, respectively. Operating cash used in the current
nine month period is primarily due to net income of $3.1 million, excluding the non-cash asset impairment and restructuring charges of $68.6 million and other non-cash charges of $19.4 million, and a decrease in accounts payable and accrued
liabilities of $84.9 million.
Cash used in investing activities during the nine months ended January 31, 2002 and 2001 was $2.3
million and $33.3 million, respectively. The decrease in cash used in investing activities in the current nine month period is due primarily to business acquisitions and investments in the prior fiscal year that required cash of $54.8 million offset
by a decrease in net sales of marketable securities of $37.6 million compared to the same period last year resulting in a net cash savings of $17.2 million in the current nine month period. In addition, cash used to purchase fixed assets declined
$13.5 million for the nine months ended January 31, 2002 compared to the same prior year period.
Cash provided by financing
activities was $52.5 million and $1.6 million during the nine months ended January 31, 2002 and 2001, respectively. The increase is primarily due to net borrowings under our line of credit of $48.0 million compared to $3.0 million in the prior year.
In addition, in the current nine month period, proceeds from stock options exercised were $1.0 million and receipts on shareholders notes related to stock were $1.9 million. Last year, proceeds from stock options exercised were $5.4 million
and receipts on shareholders notes related to stock were $3.5 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 $10.5 million and $1.7 million for the nine months ended January 31, 2002 and 2001, 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; however, additional cash surrender value may be borrowed on certain
COLI contracts at our discretion. Total outstanding borrowings under life insurance policies were $58.4 million and $46.6 million at January 31, 2002 and 2001, 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.
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 traded on currency exchanges and the legacy currencies remained legal tender in the participating countries for a transition period which expired January 1, 2002.
21
At January 1, 2002, the participating countries introduced Euro notes and coins and withdrew
all legacy currencies. Our information technology systems allow for the recording of transactions in the Euro. Our conversion to the Euro was successful and did not have a material impact on our business or financial condition to date.
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 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 fair value exceeded the book value of each reporting unit or component and accordingly, there was no
impairment charge. The impact on net income and earnings per share for the three months and nine months ended January 31, 2001 as if SFAS No. 142 had been implemented as of the beginning of fiscal 2001 is disclosed in Notes to Financial
Statements.
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 for 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.
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 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.
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Historically, we have not realized any significant translation gains or losses on transactions
involving U.S. dollars and other currencies. This is primarily due to natural hedges of revenue and expenses in the functional currencies of the countries in which our offices are located and investment of excess cash balances in U.S. dollar
denominated accounts. During the nine months ended January 31, 2002 and 2001, we recognized foreign currency losses, after income taxes, of $0.1 million and $0.3 million, respectively, 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 January 31, 2002, we had outstanding borrowings of $48.0 million on our revolving line of credit bearing interest at Prime plus 4.0%, $58.4 million of borrowings against the cash surrender value of
COLI contracts bearing interest at primarily variable rates payable at least annually and $15.7 million of notes payable, of which $15.4 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 $10.4 million matures in 2002 and $5.0 million matures in 2003. Currently, we have all of our investments in interest bearing money market accounts at market rates.
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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 reached an agreement with Bank of America on March 7, 2002 to amend our credit facility from $100 million to $45 million, to waive prior defaults, to secure it by certain assets and to amend our financial covenants to make compliance more
achievable going forward. See Managements Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.
Item 6. Exhibits and Reports on Form 8-K
(a) |
Exhibits |
| Exihibit Number |
Description of Exhibit | |
| 10.1 |
Amendment No. 3 to Loan Agreement, dated as of March 7, 2002. |
(b) |
Reports on Form 8-K |
None.
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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.
| Date: March 15, 2002 |
KORN/FERRY INTERNATIONAL | |||||||
| By: |
/S/ DONALD E. JORDAN | |||||||
| Donald E. Jordan Interim Chief Financial Officer
and Senior Vice President | ||||||||
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EXHIBIT INDEX
| Exhibit Number |
Description of Exhibit | |
| 10.1 |
Amendment No. 3 to Loan Agreement, dated as of March 7, 2002. |
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