<PAGE>
THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON SEPTEMBER 15, 2000 PURSUANT TO
A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
================================================================================
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, 2000 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)
California 95-2623879
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1800 Century Park East, Suite 900, Los Angeles, California 90067
(Address of principal executive offices) (zip code)
(310) 556-8503
(Registrant's telephone number, including area code)
________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the Company's Common Stock as of
September 13, 2000 was 37,726,268.
================================================================================
<PAGE>
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 2000 (unaudited)
and April 30, 2000.......................................... 3
Unaudited Consolidated Statements of Operations for the
three months ended July 31, 2000 and July 31, 1999.......... 5
Unaudited Consolidated Statements of Cash Flows for the
three months ended July 31, 2000 and July 31, 1999.......... 6
Unaudited Notes to Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 17
SIGNATURE............................................................... 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
--------- ---------
As of As of
July 31, April 30,
2000 2000
--------- ---------
(unaudited)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents $ 66,665 $ 86,975
Marketable securities 59,978
Receivables due from clients, net of allowance for doubtful accounts of $14,611 and $12,538 128,039 101,506
Other receivables 8,819 8,112
Deferred income taxes 4,086 3,814
Prepaid expenses 10,124 7,453
--------- ---------
Total current assets 217,733 267,838
--------- ---------
Property and equipment:
Computer equipment and software 34,892 32,532
Furniture and fixtures 21,164 18,175
Leasehold improvements 16,297 15,304
Automobiles 1,943 1,793
--------- ---------
74,296 67,804
Less - Accumulated depreciation and amortization (35,575) (31,992)
--------- ---------
Property and equipment, net 38,721 35,812
--------- ---------
Cash surrender value of company owned life insurance policies, net of loans 53,544 50,632
Marketable securities 1,129
Deferred income taxes 25,918 17,790
Goodwill and other intangibles, net of accumulated amortization of $11,347 and $8,709 135,028 96,643
Other 8,621 6,150
--------- ---------
Total assets $ 479,565 $ 475,994
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands)
<TABLE>
<CAPTION>
As of As of
July 31, 2000 April 30, 2000
------------- --------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes payable and current maturities of long-term debt $ 46,259 $ 16,147
Accounts payable 11,804 11,896
Income taxes payable 1,935 407
Accrued liabilities:
Compensation 43,219 75,866
Payroll taxes 23,580 41,393
Other 38,535 39,081
------------- --------------
Total current liabilities 165,332 184,790
Deferred compensation 40,111 37,483
Long-term debt 18,109 16,916
Other 2,580 2,361
------------- --------------
Total liabilities 226,132 241,550
------------- --------------
Non-controlling shareholders' interest 3,102 3,220
------------- --------------
Shareholders' equity
Common stock, no par value-authorized 150,000 shares, 37,190 and
36,748 shares outstanding 290,040 283,277
Deficit (25,608) (35,615)
Accumulated other comprehensive loss (6,484) (7,300)
------------- --------------
Shareholders' equity 257,948 240,362
Less: Notes receivable from shareholders (7,617) (9,138)
------------- --------------
Total shareholders' equity 250,331 231,224
------------- --------------
Total liabilities and shareholders' equity $ 479,565 $ 475,994
============= ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended July 31,
---------------------------
2000 1999
---------- ----------
(unaudited)
<S> <C> <C>
Revenue $ 173,623 $ 104,780
Compensation and benefits 106,559 64,733
General and administrative expenses 48,524 29,802
Interest income and other income, net 1,725 1,508
Interest expense 1,681 820
---------- ----------
Income before provision for income taxes and
non-controlling shareholders' interest 18,584 10,933
Provision for income taxes 7,806 4,591
Non-controlling shareholders' interest 771 738
---------- ----------
Net income $ 10,007 $ 5,604
========== ==========
Basic earnings per common share $ 0.27 $ 0.16
========== ==========
Basic weighted average common shares outstanding 36,890 35,755
========== ==========
Diluted earnings per common share $ 0.26 $ 0.15
========== ==========
Diluted weighted average common shares outstanding 38,285 36,268
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended July 31,
--------------------------
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Cash from operating activities:
Net Income $ 10,007 $ 5,604
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation 3,230 2,161
Amortization 2,638 202
Provision for doubtful accounts 4,816 2,625
Cash surrender value and benefits in excess of premiums paid (983) (52)
Deferred income tax benefit (2,349) (2,768)
Tax benefit from exercise of stock options 829
Change in other assets and liabilities, net of acquisitions:
Deferred compensation 2,628 1,617
Receivables (31,404) (16,434)
Prepaid expenses (2,671) (1,885)
Income taxes 1,256 6,222
Accounts payable and accrued liabilities (50,580) (24,761)
Non-controlling shareholders' interest and other, net (1,391) 34
--------- ---------
Net cash used in operating activities (63,974) (27,435)
--------- ---------
Cash from investing activities:
Purchases of property and equipment (4,977) (3,621)
Sales of marketable securities 61,107 7,761
Business acquisitions, net of cash acquired (42,160) (1,825)
Premiums on life insurance, net of benefits received (2,706) (2,908)
--------- ---------
Net cash provided by (used in) investing activities 11,264 (593)
--------- ---------
Cash from financing activities:
Increase in bank borrowings 28,070
Payment of debt (735) (274)
Borrowings under life insurance policies 777 983
Purchase of common and preferred stock and payments on related notes 23 (139)
Issuance of common stock and receipts on shareholders' notes 3,449 1,654
--------- ---------
Net cash provided by financing activities 31,584 2,224
--------- ---------
Effects of exchange rate changes on cash flows 816 249
--------- ---------
Net decrease in cash and cash equivalents (20,310) (25,555)
Cash and cash equivalents at beginning of the period 86,975 113,741
--------- ---------
Cash and cash equivalents at end of the period $ 66,665 $ 88,186
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements for the three month periods ended
July 31, 2000 and 1999 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 fiscal year 2000 Annual Report on Form 10-K
for the fiscal year ended April, 2000 ("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
During fiscal 2000, the Company adopted the American Institute of Certified
Public Accountants Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use", and in the
quarter ended July 31, 2000, the Company adopted the related Emerging Issues Tax
Force Issue No: 00-2 ("EITF 00-2"), "Accounting for Web Site Development Costs."
The adoption of SOP 98-1 and EITF 00-2 did not have a material effect on the
consolidated financial statements or the Company's capitalization policy.
7
<PAGE>
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
2. Basic and Diluted Earnings Per Share
Basic earnings per common share ("basic EPS") was computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per common and common equivalent share ("diluted EPS")
reflects the potential dilution that would occur if the outstanding options or
other contracts to issue common stock were exercised or converted and was
computed by dividing the net income by the weighted average number of shares of
common stock outstanding and dilutive common equivalent shares. Following is a
reconciliation of the numerator (income) and denominator (shares in thousands)
used in the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
Three months ended July 31,
------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------
Weighted Per Weighted Per
Average Share Average Share
Income Shares Amount Income Shares Amount
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to common
shareholders...................................... $10,007 36,890 $0.27 $5,604 35,755 $0.16
===== =====
Effect of dilutive securities
Shareholder common stock
purchase commitments.............................. 328 374
Stock options...................................... 1,067 139
------- ------ ------ ------
Diluted EPS
Income available to common shareholders
plus assumed conversions.......................... $10,007 38,285 $0.26 $5,604 36,268 $0.15
======= ====== ===== ====== ====== =====
</TABLE>
3. Comprehensive income
Comprehensive income is comprised of net income and all changes to
stockholders' equity, except those changes resulting from investments by owners
(changes in paid in capital) and distributions to owners (dividends).
Total comprehensive income is as follows:
<TABLE>
<CAPTION>
Three months ended July 31,
------------------------------------
2000 1999
--------------- -----------------
<S> <C> <C>
Net income...................................................... $10,007 $5,604
Foreign currency translation adjustment......................... 816 249
--------------- -----------------
Comprehensive income............................................ $10,823 $5,853
=============== =================
</TABLE>
4. Business segments
The Company operates in two global business segments in the retained
executive recruitment industry. These business segments, executive recruitment
and Futurestep, 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.
For purposes of the geographic information below, Mexico's operating results are
included in Latin America.
8
<PAGE>
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
A summary of the Company's operations by business segment follows:
Three months ended July 31,
---------------------------
2000 1999
-------- --------
Revenue:
Executive recruitment:
North America (1)............................. $ 96,131 $ 57,227
Europe........................................ 33,893 25,151
Asia/Pacific.................................. 13,182 11,139
Latin America................................. 8,836 7,288
Futurestep..................................... 21,581 3,975
-------- --------
Total revenue............................... $173,623 $104,780
======== ========
Three months ended July 31,
---------------------------
2000 1999
-------- --------
Operating profit (loss):
Executive recruitment:
North America (1)............................. $ 18,176 $ 10,046
Europe........................................ 4,857 3,169
Asia/Pacific.................................. 1,774 1,055
Latin America................................. 2,247 1,636
Futurestep..................................... (8,514) (5,661)
-------- --------
Total operating profit $ 18,540 $ 10,245
======== ========
-------- --------
As of As of
July 31, April 30,
2000 2000
-------- --------
Identifiable assets:
Executive recruitment:
North America (1)............................. $287,748 $285,474
Europe........................................ 86,724 91,790
Asia/Pacific.................................. 31,898 33,376
Latin America................................. 19,048 18,631
Futurestep..................................... 54,147 46,723
-------- --------
Total identifiable assets $479,565 $475,994
======== ========
(1) The Corporate office identifiable assets of $80,434 and $144,739 as of July
31, 2000 and April 30, 2000, respectively, and JobDirect.com
identifiable assets of $38,655 as of July 31, 2000 are included in North
America. JobDirect.com revenue and operating loss included in North
America for the three months ended July 31, 2000, were $0.2 million
$0.4 million, respectively.
9
<PAGE>
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
5. Acquisitions
The Company completed two acquisitions during the three months ended July
31, 2000: Westgate Group, a leading executive recruitment firm, specializing in
financial services in the eastern United States and JobDirect.com, an online
recruiting service focused on college graduates and entry level professionals.
The purchase price was payable in cash of $38.4 million, 154,923 shares of the
Company's common stock, and notes payable of $5.0 million. These acquisitions
were accounted for under the purchase method and resulted in $42.5 million of
goodwill. Operating results of these businesses have been included in the
consolidated financial statements from their acquisition dates.
The following summarized unaudited proforma information is provided to
present a summary of the combined results of the Company if these acquisitions
had occurred at the beginning of each period. The proforma data is presented for
informational purposes only and may not necessarily reflect the results of
operations of the Company had these acquisitions operated as part of the Company
for each of the periods presented, nor are they necessarily indicative of the
results of future operations.
Three months ended July 31,
---------------------------
2000 1999
---------- ----------
Revenue................................... $ 176,585 $ 105,385
Net income................................ 7,912 5,167
Earnings per share........................
Basic.................................. 0.21 0.14
Diluted................................ 0.21 0.14
In June 1999, the Company completed the acquisition of Amrop
International's Australian business for approximately $3.2 million in cash
payable over a four-year period and $0.6 million in shares of the Company's
common stock. Of the total purchase price of $3.8 million, $2.0 million
represents deferred compensation. The acquisition has been accounted for as a
purchase and $1.6 million has been recorded as goodwill.
10
<PAGE>
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking Statements
This Form 10-Q may contain statements that we believe are, or may be
considered to be, "forward-looking" statements, within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements generally can be identified by use of
statements that include phrases such as "believe", "expect", "anticipate",
"intend", "plan", "foresee", "may", "will", "estimates", "potential", "continue"
or other similar words or phrases. Similarly, statements that describe our
objectives, plans or goals also are forward-looking statements. All of these
forward-looking statements are subject to risks and uncertainties that could
cause our actual results to differ materially from those contemplated by the
relevant forward-looking statement. The principal risk factors that could cause
actual performance and future actions to differ materially from the forward-
looking statements include, but are not limited to, dependence on attracting and
retaining qualified executive recruitment consultants, portability of client
relationships, local political or economic developments in or affecting
countries where we have operations, ability to manage growth, restrictions
imposed by off-limits agreements, competition, implementation of an acquisition
strategy, integration of acquired businesses, risks related to the development
and growth of Futurestep, reliance on information processing systems, and
employment liability risk. Readers are urged to consider these factors carefully
in evaluating the forward-looking statements. The forward-looking statements
included in this Form 10-Q are made only as of the date of this report and we
undertake no obligation to publicly update these forward-looking statements to
reflect subsequent events or circumstances.
The following presentation of management's discussion and analysis of our
financial condition and results of operations should be read together with our
consolidated financial statements included in this Form 10-Q.
Overview
We are the world's leading executive recruitment firm and have the broadest
global presence in the industry with approximately 500 executive recruitment
consultants and over 100 Futurestep consultants based in over 100 offices across
41 countries at April 30, 2000. 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. Almost half
of the executive recruitment searches we performed in fiscal 2000 were for board
level, chief executive and other senior executive officer positions and nearly
half of our 4,946 clients were Fortune 500 companies. We have established strong
client loyalty; more than 82% of the executive recruitment assignments we
performed in fiscal 2000 were on behalf of clients for whom we had conducted
multiple assignments over the last three fiscal years.
In May 1998, we introduced our middle-management recruitment service,
Futurestep. Futurestep combines our recruitment expertise with exclusive
candidate assessment tools and the reach of the Internet to accelerate
recruitment of candidates for middle-management positions. As of July 31, 2000,
approximately 760,000 candidates worldwide had completed a detailed on-line
profile.
In March 1999, we completed the United States roll-out of Futurestep. The
international roll-out of Futurestep was launched in the United Kingdom and
Canada in the first fiscal quarter of the prior year. As of April 30, 2000, we
had opened 15 additional international offices and completed the integration of
the acquired executive search and selection business of PA Consulting Group with
17 offices in Europe and Asia/Pacific.
In July 2000, we completed the acquisition of JobDirect.com, a leading
online college recruitment company exclusively serving clients' requirements for
entry-level college graduates. In August 2000, we closed a 16% equity investment
in Webhire, Inc., the leading business services provider in the Internet
recruitment marketplace. Through executive recruitment, Futurestep and
JobDirect.com, supported by our strategic investment in Webhire, Inc., we are
well positioned to execute our strategy to provide clients with end-to-end human
capital management solutions.
11
<PAGE>
Results of Operations
The following table summarizes the results of our operations for the three
months ended July 31, 2000 and 1999 as a percentage of revenue:
<TABLE>
<CAPTION>
Three Months Ended July 31,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
Revenue.......................................... 100% 100%
Compensation and benefits........................ 61 62
General and administrative expenses ............. 28 28
Operating profit (1)............................. 11 10
Net income....................................... 6 5
</TABLE>
_________
(1) For the three months ended July 31, 2000 and 1999, operating profit as a
percentage of revenue excluding Futurestep losses of $8.5 million and $5.7
million is 18% and 16%, respectively.
We experienced strong growth in executive recruitment revenue and operating
profit in all geographic regions for the three months ended July 31, 2000. We
include executive recruitment revenue generated from our operations in Mexico
with Latin America.
<TABLE>
<CAPTION>
Three Months Ended July 31,
--------------------------------------------------------
2000 1999
----------------------- --------------------------
Dollars % Dollars %
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Revenue
Executive recruitment:
North America...................... $ 96,131 55% $ 57,227 55%
Europe............................. 33,893 20 25,151 24
Asia/Pacific....................... 13,182 8 11,139 10
Latin America...................... 8,836 5 7,288 7
Futurestep.......................... 21,581 12 3,975 4
--------- -------- --------- ----------
Total Revenue....................... $173,623 100% $104,780 100%
========= ======== ========= ==========
<CAPTION>
Three Months Ended July 31,
--------------------------------------------------------
2000 1999
----------------------- --------------------------
Dollars % Dollars %
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Operating Profit
Executive recruitment:
North America...................... $ 18,176 18.9% $ 10,046 17.6%
Europe............................. 4,857 14.3 3,169 12.6
Asia/Pacific....................... 1,774 13.5 1,055 9.5
Latin America...................... 2,247 25.4 1,636 22.4
Futurestep.......................... (8,514) (5,661)
--------- -------- --------- ----------
Total Operating Profit.............. $ 18,540 10.7% $ 10,245 9.8%
========= ======== ========= ==========
</TABLE>
In the following comparative analysis, all percentages are calculated based on
dollars in thousands.
Three Months Ended July 31, 2000 Compared to Three Months Ended July 31, 1999
Revenue
Revenue increased $68.8 million, or 66%, to $173.6 million for the three
months ended July 31, 2000 from $104.8 million for the three months ended July
31, 1999. The increase in revenue was primarily the result of an increase in
the number of engagements with a corresponding increase in the number of
consultants, an increase in the average fee per engagement and revenue from
Futurestep in the current three month period.
12
<PAGE>
In North America, revenue increased $38.9 million, or 68%, to $96.1 million
for the three months ended July 31, 2000 from $57.2 million for the comparable
period in fiscal 2000. This revenue growth is due mainly to an increase in both
the number of engagements and the average fee per engagement compared to the
prior fiscal year and includes revenue of approximately $10.7 million related to
businesses acquired in the prior fiscal year. The Advanced Technology, Financial
Services and Industrial specialty practices delivered particularly strong
performances. In Europe, revenue increased $8.7 million, or 35%, to $33.9
million for the three months ended July 31, 2000 from $25.2 million for the
three months ended July 31, 1999. Excluding the negative effects of foreign
currency translation into the U.S. dollar, revenue would have increased
approximately 48% on a constant dollar basis. This revenue growth is due mainly
to particular strength in France and United Kingdom in the current three month
period and revenue related to the business in Germany acquired in the prior year
third quarter. Revenue in Asia/Pacific increased $2.0 million, or 18%, to $13.2
million for the three months ended July 31, 2000 from $11.1 million for the
comparable period in the prior year primarily due to an increase in average fee
per engagement. The increase in revenue in Latin America of $1.5 million, or
21%, to $8.8 million for the three months ended July 31, 2000 from $7.3 million
for the comparable three month period in fiscal 2000 is attributable primarily
to continued strong performance in Mexico and the improvement in the Brazilian
economy compared to the prior year three month period. The effect of foreign
currency translation into the U.S. dollar was not material to reported revenue
in Asia/Pacific or Latin America.
Futurestep revenue of $21.6 million for the three months ended July 31,
2000 is primarily attributable to an increase in new engagements and reflects
substantial completion of the worldwide roll-out of the business and the
acquisition of the ESS business of PA Consulting in fiscal 2000.
Compensation and Benefits
Compensation and benefits expense increased $41.9 million, or 65%, to
$106.6 million for the three months ended July 31, 2000 from $64.7 million for
the comparable period ended July 31, 1999 due primarily to an increase in the
number of employees from the prior year. Excluding the increase in Futurestep
expenses of $14.5 million, compensation and benefits as a percentage of revenue
decreased slightly to 60.6% in the most recent three month period from 61.2% in
the three months ended July 31, 1999.
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
increased $18.7 million, or 63%, to $48.5 million for the three months ended
July 31, 2000 from $29.8 million for the three months ended July 31, 1999. As a
percentage of revenue, general and administrative expenses, excluding Futurestep
related expenses, declined to 21.6% for the three months ended July 31, 2000
from 23.0% for the comparable period in 1999. The decrease primarily reflects
the higher percentage increase in revenue in the current three month period.
Operating Profit
Operating profit increased $8.3 million in the three months ended July 31,
2000, to $18.5 million, or 10.7% of revenue from $10.2 million, or 9.8% of
revenue in the prior year three month period. Excluding the Futurestep loss of
$8.5 million, operating profit for the three months ended July 31, 2000
increased $11.1 million, or 70% to $27.1 million compared to the three months
ended July 31, 1999. Operating profit, excluding Futurestep, as a percentage
of revenue was 17.8% and 15.8% for the three months ended July 31, 2000 and
1999, respectively. For the current three month period, operating margins, on
this same basis, increased in all regions compared to the prior year three month
period due primarily to the increase in revenue in all regions and a decline in
general and administrative expense as a percentage of revenue in all regions
except Latin America.
Interest expense
Interest expense increased $0.9 million in the three months ended July 31,
2000, to $1.7 million from $0.8 million in the prior year, primarily due to an
increase in notes payable to shareholders resulting from acquisitions in the
fourth quarter of fiscal 2000.
Provision for Income Taxes
The provision for income taxes increased $3.2 million to $7.8 million for
the three months ended July 31, 2000 from $4.6 million for the comparable period
ended July 31, 1999. The effective tax rate was 42% for the current and the
prior year three month periods.
13
<PAGE>
Non-controlling Shareholders' Interest
Non-controlling shareholders' interest is comprised of the non-controlling
shareholders' majority interest in our Mexico subsidiaries. Non-controlling
shareholders' interests remained relatively flat at $0.8 million in the current
three month period and $0.7 million in the comparable prior year period.
Liquidity and Capital Resources
We maintained cash and cash equivalents of $66.7 million at July 31, 2000
and $110.5 million at July 31, 1999. During the three months ended July 31, 2000
and 1999, cash used in operating activities was $64.0 million and $27.4 million,
respectively, primarily for payment of bonuses accrued at each prior fiscal year
end and an increase in accounts receivable reflecting the 66% increase in
revenue in the current three month period.
Cash provided by investing activities was $11.3 million for the current
three month period and cash used in investing activities was $0.6 million for
the three months ended July 31, 1999. In the current three month period, the
increase in cash provided is due mainly to proceeds from the sale of marketable
securities in excess of cash used in business acquisitions in the current year.
We invest in marketable securities to manage short-term cash flow requirements.
Proceeds from the sale of marketable securities were $61.1 million and $7.8
million for the current and prior year three month periods, respectively. We do
not have any investments in marketable securities at July 31, 2000, but intend
to continue to invest in these securities as cash from operations accumulates
during the year. In the first quarter of fiscal 2001, we acquired the assets and
liabilities of Westgate Group and JobDirect.com resulting in a net cash outflow
of $36.8 million. In addition we paid $5.4 million related to two acquisitions
in Canada in April 2000. In the first quarter of fiscal 2000, we acquired the
assets and liabilities of the Australian business of Amrop International
resulting in a net cash outflow of $1.8 million.
Cash flows from investing activities also includes premiums paid on
corporate-owned life insurance ("COLI") contracts. We purchase COLI contracts to
provide a funding vehicle for anticipated payments due under our deferred
executive compensation programs. Premiums on these COLI contracts were $2.7
million and $2.9 million for the three months ended July 31, 2000 and 1999,
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.
Capital expenditures totaled $5.0 million and $3.6 million for the three
months ended July 31, 2000 and 1999, respectively. These expenditures consisted
primarily of systems hardware and software costs, upgrades to information
systems and leasehold improvements. The $1.4 million increase in capital
expenditures in the three months ended July 31, 2000 compared to the prior year
period, primarily relates to increased fixed asset spending at Futurestep to
support its worldwide infrastructure.
Cash provided by financing activities during the three month period ended
July 31, 2000 was $31.6 million, comprised primarily of borrowings under our
line of credit of $28.0 million, proceeds from stock options exercised of $1.9
million and receipts on shareholder notes of $1.5 million. Cash provided by
financing activities during the three month period ended July 31, 1999 was $2.2
million which included borrowings from COLI contracts of $1.0 million and
proceeds from sales of common stock of the Company to newly hired and promoted
consultants and payments on the related promissory notes of $1.7 million.
Total outstanding borrowings under life insurance policies were $45.7
million and $43.6 million for the three months ended July 31, 2000 and 1999,
respectively. These borrowings are secured by the cash surrender value of the
life insurance policies, do not require principal payments and bear interest at
various variable rates.
We believe that cash on hand, funds from operations and available
borrowings under our credit facilities 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.
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During the transition period, cashless payments can be made in the Euro,
and parties can elect to pay for goods and services and transact business using
either the Euro or a legacy currency. Between January 1, 2002 and July 1, 2002,
the participating countries will introduce Euro notes and coins and withdraw all
legacy currencies so that they will no longer be available.
We have assessed our information technology systems and determined that
they allow for transactions to take place in both the legacy currencies and the
Euro and accommodate the eventual elimination of the legacy currencies. We will
continue to evaluate and upgrade our systems during the conversion period. Our
currency risk may be affected as the legacy currencies are converted to the
Euro. Accounting, tax and governmental legal and regulatory guidance generally
has not been provided in final form and we will continue to evaluate issues
involving introduction of the Euro throughout the transition period. The
conversion to the Euro has not had a significant impact on our operations to
date.
Recent Events
In August 2000, we invested $8.0 million for a 16% equity investment in
Webhire, Inc., the leading business services provider in the internet
recruitment marketplace.
Recently Issued Accounting Standards
During 1998, FASB issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes new standards for reporting derivative and hedging information. The
standard is effective for periods beginning after June 15, 2000 and will be
adopted by us as of May 1, 2001. We do not expect that the adoption of this
standard will have an impact on our consolidated financial statements or require
additional disclosure since we do not currently utilize derivative instruments
or participate in structured hedging activities.
During fiscal 2000, we adopted the American Institute of Certified Public
Accountants Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." and in the quarter
ended July 31, 2000, we adopted the related Emerging Issues Tax Force Issue No:
00-2 ("EITF 00-2"), "Accounting for Web Site Development Costs." The adoption
of SOP 98-1 and EITF 00-2 did not have a material effect on the consolidated
financial statements or our capitalization policy.
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 changes in foreign currency fluctuations, fluctuations in
interest rate 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.
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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. 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, 2000, we had outstanding borrowings of
$28.0 million on our revolving line of credit bearing interest at the bank's
prime lending rate, $45.7 million of borrowings against the cash surrender value
of COLI contracts bearing interest at variable rates payable at least annually
and $34.9 million of long-term notes payable to former shareholders through
fiscal 2004 at variable market rates.
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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 Fourth Amendment to Credit Agreement by and among
Korn/Ferry International (as borrower) and Lenders
(the lenders), the Issuing Banks, and Mellon Bank,
N.A. (as agent for the lenders) dated July 28, 2000.
27.1 Financial Data Schedule for the three months ended
July 31, 2000
____________
(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, 2000 By: /s/ Elizabeth S.C.S. Murray
---------------------------
Elizabeth S.C.S. Murray
Chief Financial Officer and
Executive Vice President
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