10-Q 1 d10q.txt KORN/FERRY - 10-Q - 01/31/2001 ================================================================================ 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, 2001 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _________________ Commission File Number 001-14505 ________________ KORN/FERRY INTERNATIONAL (Exact name of registrant as specified in its charter) Delaware 95-2623879 (State of other jurisdiction) (I.R.S. Employer of incorporation or organization) Identification Number) 1800 Century Park East, Suite 900, Los Angeles, California 90067 (Address of principal executive offices) (zip code) (310) 556-8503 (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 our common stock as of March 13, 2001 was 37,446,652. ================================================================================ KORN/FERRY INTERNATIONAL AND SUBSIDIARIES Table of Contents
PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheets as of January 31, 2001 (unaudited) and April 30, 2000......................................................... 3 Unaudited Consolidated Statements of Operations for the three months and nine months ended January 31, 2001 and January 31, 2000............ 5 Unaudited Consolidated Statements of Cash Flows for the nine months ended January 31, 2001 and January 31, 2000............................ 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............... 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................................... 18 SIGNATURE.............................................................................. 19
2 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS KORN/FERRY INTERNATIONAL AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
As of As of January 31, 2001 April 30, 2000 ---------------- -------------- (unaudited) ASSETS ------ Cash and cash equivalents $ 65,238 $ 86,975 Marketable securities 7,646 59,978 Receivables due from clients, net of allowance for doubtful accounts of $15,793 and 116,829 101,506 $12,538 Other receivables 10,485 8,112 Deferred income taxes 4,084 3,814 Prepaid expenses 12,182 7,453 ---------------- -------------- Total current assets 216,464 267,838 ---------------- -------------- Property and equipment: Computer equipment and software 44,639 32,532 Furniture and fixtures 24,577 18,175 Leasehold improvements 19,587 15,304 Automobiles 2,014 1,793 ---------------- -------------- 90,817 67,804 Less - Accumulated depreciation and amortization (43,464) (31,992) ---------------- -------------- Property and equipment, net 47,353 35,812 ---------------- -------------- Cash surrender value of company owned life insurance policies, net of loans 59,470 50,632 Marketable securities 1,129 Deferred income taxes 26,921 17,790 Goodwill and other intangibles, net of accumulated amortization of $17,657 and $8,709 131,900 96,643 Other 13,492 6,150 ---------------- -------------- Total assets $ 495,600 $ 475,994 ================ ==============
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 As of January 31, 2001 April 30, 2000 ---------------- -------------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Notes payable and current maturities of long-term debt $ 14,527 $ 16,147 Accounts payable 12,691 11,896 Income taxes payable 83 407 Accrued liabilities: Compensation 67,180 75,866 Payroll taxes 36,653 41,393 Other 35,600 39,081 ---------------- -------------- Total current liabilities 166,734 184,790 Deferred compensation 40,017 37,483 Long-term debt 15,679 16,916 Other 2,319 2,361 ---------------- -------------- Total liabilities 224,749 241,550 ---------------- -------------- Non-controlling shareholders' interest 2,880 3,220 ---------------- -------------- Shareholders' equity Common stock: $0.01 par value, 150,000 shares authorized, 37,430 and 36,748 shares outstanding 295,534 283,277 Deficit (12,597) (35,615) Accumulated other comprehensive loss (9,308) (7,300) ---------------- -------------- Shareholders' equity 273,629 240,362 Less: Notes receivable from shareholders (5,658) (9,138) ---------------- -------------- Total shareholders' equity 267,971 231,224 ---------------- -------------- Total liabilities and shareholders' equity $ 495,600 $ 475,994 ================ ==============
The accompanying notes are an integral part of these consolidated financial statements. 4 KORN/FERRY INTERNATIONAL AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Three Months Ended January 31, Nine Months Ended January 31, ------------------------------ ----------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ----------- (unaudited) (unaudited) Revenue $ 157,171 $ 122,075 $ 504,415 $ 343,178 Compensation and benefits 95,651 72,119 304,990 205,578 General and administrative expenses 46,568 35,345 152,345 101,227 Interest income and other income, net 734 2,253 3,051 5,330 Interest expense 2,300 1,437 6,075 3,033 ------------ ------------ ------------ ----------- Income before provision for income taxes and non-controlling shareholders' interest 13,386 15,427 44,056 38,670 Provision for income taxes 5,622 6,479 18,307 16,241 Non-controlling shareholders' interest 861 663 2,731 2,038 ------------ ------------ ------------ ----------- Net income $ 6,903 $ 8,285 $ 23,018 $ 20,391 ============ ============ ============ =========== Basic earnings per common share $ 0.18 $ 0.23 $ 0.62 $ 0.57 ============ ============ ============ =========== Basic weighted average common shares outstanding 37,443 36,117 37,201 35,929 ============ ============ ============ =========== Diluted earnings per common share $ 0.18 $ 0.22 $ 0.60 $ 0.55 ============ ============ ============ =========== Diluted weighted average common shares outstanding 38,705 37,539 38,661 37,000 ============ ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 5 KORN/FERRY INTERNATIONAL AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Nine Months Ended January 31, ----------------------------- 2001 2000 --------- --------- (unaudited) Cash from operating activities: Net income $ 23,018 $ 20,391 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 10,708 7,000 Amortization 8,948 1,800 Loss on disposition of property and equipment 879 Provision for doubtful accounts 14,612 9,812 Cash surrender value, benefits, and gains in excess of premiums paid (404) 91 Deferred income tax benefit (2,405) (1,853) Tax benefit from exercise of stock options 2,733 Change in other assets and liabilities, net of acquisitions: Deferred compensation 2,534 4,635 Receivables (30,354) (38,320) Prepaid expenses (4,729) (4,331) Income taxes (594) 6,064 Accounts payable and accrued liabilities (13,566) 29,003 Non-controlling shareholders' interest and other, net 530 (694) -------- -------- Net cash provided by operating activities 11,910 33,598 -------- -------- Cash from investing activities: Purchase of property and equipment (21,808) (14,087) Purchase of marketable securities (7,646) Sale of marketable securities 61,107 21,965 Business acquisitions, net of cash acquired (44,238) (35,617) Premiums on life insurance, net of benefits received (10,102) (8,554) Investment in businesses (10,570) -------- -------- Net cash used in investing activities (33,257) (36,293) -------- -------- Cash from financing activities: Net borrowings on credit line 3,000 Payment of bank debt (1,365) Payment of shareholder acquisition notes (10,343) (571) Borrowings under life insurance policies 1,668 1,043 Purchase of common stock and payment of related notes (308) (994) Issuance of common stock and receipts on shareholders' notes 8,927 2,580 -------- -------- Net cash provided by financing activities 1,579 2,058 -------- -------- Effect of foreign currency exchange rate changes on cash flows (1,969) (2,156) -------- -------- Net decrease in cash and cash equivalents (21,737) (2,793) Cash and cash equivalents at beginning of the period 86,975 113,741 -------- -------- Cash and cash equivalents at end of the period $ 65,238 $110,948 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 6 KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements for the three months and nine months ended January 31, 2001 and 2000 include the accounts of Korn/Ferry International ("KFY"), all of its wholly and majority owned domestic and international subsidiaries, and affiliated companies in which KFY has effective control (collectively, the "Company") and are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair presentation of the results for these periods. These financial statements have been prepared consistently with the accounting policies described in the Company's Annual Report on Form 10-K for the fiscal year ended April 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 during fiscal 2001, 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. 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: 7 KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except per share amounts)
Three months ended January 31, ------------------------------------------------------------------------- 2001 2000 ---------------------------------- --------------------------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount -------- -------- ------ ------- -------- ------ Basic EPS Income available to common shareholders $ 6,903 37,443 $ 0.18 $ 8,285 36,117 $ 0.23 ====== ====== Effect of dilutive securities: Shareholder common stock purchase commitments 267 374 Stock options 995 1,048 -------- -------- ------- ------ Diluted EPS Income available to common shareholders plus assumed conversions $ 6,903 38,705 $ 0.18 $ 8,285 37,539 $ 0.22 ======== ======== ====== ======= ====== ======
Nine months ended January 31, ------------------------------------------------------------------------- 2001 2000 ---------------------------------- --------------------------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount -------- -------- ------ ------- -------- ------ Basic EPS Income available to common shareholders $ 23,018 37,201 $ 0.62 $20,391 35,929 $ 0.57 ====== ====== Effect of dilutive securities: Shareholder common stock purchase commitments 288 374 Stock options 1,172 697 -------- -------- ------- ------ Diluted EPS Income available to common shareholders plus assumed conversions $ 23,018 38,661 $ 0.60 $20,391 37,000 $ 0.55 ======== ======== ====== ======= ====== ======
3. Comprehensive income Comprehensive income is comprised of net income 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 is as follows:
Three months ended January 31, Nine months ended January 31, -------------------------------- ------------------------------- 2001 2000 2001 2000 ------------- ------------ ------------- ------------ Net income $ 6,903 $ 8,285 $ 23,018 $ 20,391 Foreign currency translation adjustment 3,032 (1,830) (700) (2,382) Unrealized gain (loss) on investment 213 (2,255) Tax (provision) benefit related to unrealized gain (loss) on investment (90) 947 ------------- ----------- ------------ ----------- Comprehensive income $ 10,058 $ 6,455 $ 21,010 $ 18,009 ============= =========== ============ ===========
8 KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except per share amounts) 4. Business segments The Company operates in two global business segments in the retained 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. With the acquisition of JobDirect in fiscal 2001, the Company expanded into the related college recruitment market. JobDirect has operations throughout the United States and is managed by a chief executive officer. For purposes of the geographic information below, Mexico's operating results are included in Latin America. A summary of the Company's operations (excluding interest income and other income, and interest expense) by business segment follows:
Three months ended January 31, Nine months ended January 31, ------------------------------------ ------------------------------- 2001 2000 2001 2000 ---------------- ---------------- ------------- ------------ Revenue: Executive recruitment: North America $ 80,078 $ 65,765 $ 269,528 $ 187,127 Europe 32,975 27,587 101,277 78,499 Asia/Pacific 13,335 11,772 39,985 35,638 Latin America 8,183 7,387 26,520 22,057 Futurestep 21,119 9,564 63,800 19,857 JobDirect 1,481 3,305 -------------- -------------- ------------ ----------- Total revenue $ 157,171 $ 122,075 $ 504,415 $ 343,178 ============== ============== ============ =========== Three months ended January 31, Nine months ended January 31, ------------------------------------ ------------------------------- 2001 2000 2001 2000 ---------------- --------------- ------------- ------------ Operating profit (loss): Executive recruitment: North America $ 14,774 $ 13,154 $ 51,549 $ 35,236 Europe 4,961 3,138 14,810 9,225 Asia/Pacific 1,423 1,303 5,007 3,739 Latin America 1,789 1,933 6,654 5,535 Futurestep (4,591) (4,917) (23,138) (17,362) JobDirect (3,404) (7,802) ------------- ------------- ------------ ----------- Total operating profit $ 14,952 $ 14,611 $ 47,080 $ 36,373 ============= ============= ============ =========== As of As of January 31, 2001 April 30, 2000 ---------------- -------------- Identifiable assets: Executive recruitment: North America (1) $ 258,021 $ 285,474 Europe 90,448 91,790 Asia/Pacific 35,651 33,376 Latin America 20,825 18,631 Futurestep 51,671 46,723 JobDirect 38,984 ------------ ------------- Total identifiable assets $ 495,600 $ 475,994 ============ =============
(1) The corporate office identifiable assets of $94,826 and $144,739 as of January 31, 2001 and April 30, 2000, respectively, are included in North America. 9 KORN/FERRY INTERNATIONAL AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (in thousands, except per share amounts) 5. Acquisitions In July 2000, the Company completed two acquisitions: Westgate Group, a leading executive recruitment firm, specializing in financial services in the eastern United States and JobDirect, 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. 10 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 and experienced consultants, portability of client relationships, local political or economic developments in or affecting countries where we have operations, ability to manage growth, restrictions imposed by off-limits agreements, competition, implementation of an acquisition strategy, integration of acquired businesses, risks related to the development and growth of Futurestep and JobDirect, reliance on information processing systems, and employment liability risk. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward- looking statements included in this Form 10-Q are made only as of the date of this report and we undertake no obligation to publicly update these forward- looking statements to reflect subsequent events or circumstances. The following presentation of management's discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements included in this Form 10-Q. Overview We are the world's preeminent recruitment firm with the broadest global presence in the recruitment industry. We lead the industry with approximately 500 executive recruitment consultants and over 100 Futurestep consultants based in over 77 cities 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 or their subsidiaries. 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 and assess cultural compatibility. 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 offices in 17 countries in Europe and Asia/Pacific. As of January 31, 2001, over 904,000 candidates worldwide had completed a detailed on- line profile. In May 2000, we acquired a 9.2% interest in Jungle Interactive Media, Inc., a company providing internet based information, entertainment, products and services to targeted groups within higher education. In July 2000, we completed the acquisition of JobDirect.com, Inc., a leading online college recruitment company exclusively serving clients' requirements for entry-level college graduates. In August 2000, we purchased a 16% equity investment in Webhire, Inc., the leading business services and technology solutions provider in the Internet recruitment marketplace. Through executive recruitment, Futurestep and JobDirect, supported by our strategic investments in Webhire and Jungle Interactive, we are well positioned to execute our strategy to provide clients with end-to-end human capital management solutions. 11 Results of Operations The following table summarizes the results of our operations for the three months and nine months ended January 31, 2001 and 2000 as a percentage of revenue.
Three months ended January 31, Nine months ended January 31, ---------------------------------- ------------------------------- 2001 2000 2001 2000 --------------- ------------- ------------- ------------ Revenue 100% 100% 100% 100% Compensation and benefits 61 59 60 60 General and administrative expenses 30 29 30 29 Operating profit (1) 10 12 9 11 Net income 4 7 5 6
__________ (1) For the three months ended January 31, 2001 and 2000, operating profit as a percentage of revenue, excluding Futurestep losses of $4.6 million and $4.9 million , respectively, and JobDirect losses of $3.4 million in the current year, is 17% in both periods. For the nine months ended January 31, 2001 and 2000, operating profit as a percentage of revenue, excluding Futurestep losses of $23.1 million and $17.4 million, respectively, and JobDirect losses of $7.8 million in the current year, is 18% and 17%, respectively. For the three months ended January 31, 2001, we experienced solid growth in executive recruitment revenue in all geographic regions and in operating profit in all geographic regions, except Latin America compared to the same period last year. However, in the current three month period, executive recruitment revenue declined 11% compared to the previous three month period. The decline is due primarily to the slowdown of the United States economy in the current three month period that contributed to a 14% decline in executive recruitment revenue in North America. We currently expect our fourth quarter revenue to be in line with our third quarter results. We experienced strong growth in executive recruitment revenue and operating profit in all geographic regions for the nine months ended January 31, 2001. We include executive recruitment revenue generated from our operations in Mexico with Latin America.
Three Months Ended January 31, Nine Months Ended January 31, -------------------------------------------- ---------------------------------------------- 2001 2000 2001 2000 ------------------- ------------------- -------------------- -------------------- Dollars % Dollars % Dollars % Dollars % -------- ----- -------- ----- -------- ----- -------- ----- Revenue Executive recruitment: North America $ 80,078 51% $ 65,765 54% $269,528 53% $187,127 55% Europe 32,975 21 27,587 23 101,277 20 78,499 23 Asia/Pacific 13,335 8 11,772 10 39,985 8 35,638 10 Latin America 8,183 5 7,387 6 26,520 5 22,057 6 Futurestep 21,119 13 9,564 8 63,800 13 19,857 6 JobDirect 1,481 1 3,305 1 -------- --- -------- --- -------- --- --------- --- Total revenue $157,171 100% $122,075 100% $504,415 100% $343,178 100% ======== === ======== === ======== === ========= ===
Three Months Ended January 31, Nine Months Ended January 31, -------------------------------------------- ---------------------------------------------- 2001 2000 2001 2000 ------------------- ------------------- -------------------- -------------------- Dollars % Dollars % Dollars % Dollars % -------- ----- -------- ----- -------- ----- -------- ----- Operating Profit (Loss) and Margin (%) Executive recruitment: North America $14,774 18.4% $13,154 20.0% $ 51,549 19.1% $ 35,236 18.8% Europe 4,961 15.0 3,138 11.4 14,810 14.6 9,225 11.8 Asia/Pacific 1,423 10.7 1,303 11.1 5,007 12.5 3,739 10.5 Latin America 1,789 21.9 1,933 26.2 6,654 25.1 5,535 25.1 Futurestep (4,591) (4,917) (23,138) (17,362) JobDirect (3,404) (7,802) ------- ---- ------- ---- -------- ---- -------- ---- Total operating profit $14,952 9.5% $14,611 12.0% $ 47,080 9.3% $ 36,373 10.6% ======= ==== ======= ==== ======== ==== ======== ====
12 In the following comparative analysis, all percentages are calculated based on dollars in thousands. Three Months Ended January 31, 2001 Compared to Three Months Ended January 31, 2000 Revenue. Revenue increased $35.1 million, or 29% to $157.2 million for the three months ended January 31, 2001 from $122.1 million for the three months ended January 31, 2000. This increase in revenue was primarily the result of an increase in the number of engagements and an increase in the average fee per engagement in executive recruitment, an increase in revenue from Futurestep, and the acquisition of JobDirect in the current fiscal year. In North America, revenue increased $14.3 million, or 22%, to $80.1 million for the three months ended January 31, 2001 from $65.8 million for the comparable period in the prior year. This revenue growth is due mainly to an increase in the number of engagements and an increase in the average fee per engagement. The financial services, healthcare, industrial and general specialty practices delivered particularly strong performance, while the retail, entertainment and consumer goods specialty practices declined. Revenue in Europe increased $5.4 million, or 20%, to $33.0 million for the three months ended January 31, 2001 from $27.6 million for the comparable period in the prior year. Excluding the negative effects of foreign currency translation into the U.S. dollar, revenue would have increased approximately 31% compared to the same three month period last year. This increase is mainly due to an increase in the number of engagements, revenue related to the acquisition in Germany in the prior year third quarter, and an increase in the average fee per engagement. In Asia/Pacific, revenue increased $1.5 million, or 13%, to $13.3 million for the three months ended January 31, 2001 from $11.8 million for the three months ended January 31, 2000 primarily due to an increase in the average fee per engagement partially offset by a decrease in the number of engagements. Excluding the negative effects of foreign currency translation into the U.S. dollar, revenue would have increased approximately 22% compared to the same three month period last year. The increase in revenue in Latin America of $0.8 million, or 11%, to $8.2 million for the three months ended January 31, 2001 from $7.4 million for the comparable three month period in fiscal 2000 is due primarily to continued strong performance in Mexico offset by a decrease in Argentina due to the reorganization of that office in the current fiscal year. Excluding the negative effects of foreign currency translation into the U.S. dollar, revenue would have increased approximately 14% compared to the same three month period last year. Futurestep revenue of $21.1 million for the three months ended January 31, 2001 is primarily attributable to the worldwide roll-out of the business and the acquisition of the ESS business of PA Consulting in January 2000, resulting in an increase in the number of engagements in both Europe and Asia/Pacific during the current fiscal quarter, while the number of engagements declined slightly in North America. In the current three month period, Futurestep revenue remained constant compared to the previous three month period due to an increase in international revenue offset by a decrease in revenue in North America. In the current three month period, approximately 60% of revenue in North America and 22% of worldwide revenue is the result of referrals from the executive recruitment business. JobDirect revenue of $1.5 million for the three months ended January 31, 2001 reflects approximately 480 corporate clients and 414 college career offices using our service. Compared to the current year second fiscal quarter, the number of corporate clients decreased 17% and the number of college career offices increased 9% while revenue declined $0.2 million. As of January 31, 2001, over 1.3 million students had registered on the database. Compensation and Benefits. Compensation and benefits expense increased $23.6 million, or 32%, to $95.7 million for the three months ended January 31, 2001 from $72.1 million for the comparable period ended January 31, 2000 due primarily to an increase in the number of executive recruitment consultants and Futurestep employees and the acquisition of JobDirect in the current fiscal year. Excluding Futurestep expenses of $14.7 million and JobDirect expenses of $2.3 million in the current three month period and Futurestep expenses of $6.0 million in the same period last year, compensation and benefits as a percentage of revenue decreased slightly to 58.5% in the most recent three month period from 58.8% in the three months ended January 31, 2000. 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 $11.3 million, or 32%, to $46.6 million for the three months ended January 31, 2001 from $35.3 million for the comparable period ended January 31, 2000. As a percentage of revenue, general and administrative expenses, excluding Futurestep and JobDirect related expenses, remained relatively constant at 24% in the most recent and in the prior year three month period. 13 Operating Profit. Operating profit increased $0.4 million in the three months ended January 31, 2001, to $15.0 million, or 9.5% of revenue, from $14.6 million, or 12.0% of revenue, in the prior year three month period. Excluding the Futurestep losses of $4.6 million and JobDirect losses of $3.4 million in the current year and Futurestep losses of $4.9 million in the prior year, operating profit for the three months ended January 31, 2001 increased $3.4 million, or 18%, to $22.9 million compared to the three months ended January 31, 2000. Operating profit as a percentage of revenue, excluding Futurestep and JobDirect, remained relatively constant at 17% for both the three months ended January 31, 2001 and 2000. Interest Income and Other Income, Net. Interest income and other income, net, includes interest income of $1.0 million and $2.0 million for the three months ended January 31, 2001 and 2000, respectively. The decrease in interest income is due primarily to lower average cash and marketable securities balances compared to the prior year. Other income, net is comprised primarily of gains and losses on disposals of property and equipment and dividend income resulting in expense of $0.2 million for the current year three month period and income of $0.2 million in the prior year. Interest Expense. Interest expense increased $0.9 million in the three months ended January 31, 2001, to $2.3 million from $1.4 million in the prior year, primarily due to borrowings under the line of credit associated with acquisitions during the first quarter of fiscal 2001 and 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 decreased $0.9 million to $5.6 million for the three months ended January 31, 2001 from $6.5 million for the comparable period ended January 31, 2000. The effective tax rate was 42% for both the current and the prior year three month periods. Non-controlling Shareholders' Interest. Non-controlling shareholders' interest is comprised of the non-controlling shareholders' majority interest in our Mexico subsidiaries. Non-controlling shareholders' interest increased $0.2 million to $0.9 million in the current three month period compared to $0.7 million in the prior year period. Nine Months Ended January 31, 2001 Compared to Nine Months Ended January 31, 2000 Revenue. Revenue increased $161.2 million, or 47%, to $504.4 million for the nine months ended January 31, 2001 from $343.2 million for the nine months ended January 31, 2000, including an increase in revenue from Futurestep of $43.9 million compared to the same period in the prior year and revenue of $3.3 million from JobDirect in the current nine month period. The increase in executive recruitment revenue of $114.0 million, or 35%, was primarily the result of an increase in the number of executive recruitment engagements supported by an increase in the average number of consultants and an increase in the average fee per engagement. In North America, revenue increased $82.4 million, or 44% to $269.5 million for the nine months ended January 31, 2001 from $187.1 million for the comparable period in the prior year due mainly to an increase in the number of engagements supported by an increase in the number of consultants and an increase in the average fee per engagement. The advanced technology, financial services, industrial, healthcare and general specialty practices performed strongly in the current year compared to the same nine month period last year. In Europe, revenue increased $22.8 million, or 29%, to $101.3 million for the nine months ended January 31, 2001 from $78.5 million for the nine months ended January 31, 2000. Excluding the negative effects of foreign currency translation into the U.S. dollar, revenue would have increased approximately 42% compared to the same period in the prior year. This increase is primarily due to an increase in the number of engagements, supported by an increase in the number of consultants, an increase in the average fee per engagement and the acquisition in Germany in the prior year third fiscal quarter. Revenue in Asia/Pacific increased $4.4 million, or 12%, to $40.0 million for the nine months ended January 31, 2001 from $35.6 million for the comparable period in the prior year due primarily to an increase in the average fee per engagement partially offset by a decline in the number of engagements. Excluding the negative effects of foreign currency translation into the U.S. dollar, revenue would have increased approximately 17% compared to the same nine month period last year. The increase in revenue in Latin America of $4.4 million, or 20%, to $26.5 million for the nine months ended January 31, 2001 from $22.1 million for the comparable nine month period in fiscal 2000 is attributable mainly to continued strong performance by Mexico and improvement in the economy in Brazil offset by a decrease in Argentina due to a reorganization of that office in the current year. Excluding the 14 negative effects of foreign currency translation into the U.S. dollar, revenue would have increased approximately 23% compared to the same nine month period last year. Futurestep revenue of $63.8 million for the nine months ended January 31, 2001 increased $43.9 million from the same period last year. This increase is primarily attributable to additional engagements in North America in the current nine month period, the acquisition of the ESS business of PA Consulting in January 2000, and reflects the worldwide roll-out of the business in late fiscal 2000. Compensation and Benefits. Compensation and benefits expense increased $99.4 million, or 48%, to $305.0 million for the nine months ended January 31, 2001 from $205.6 million for the comparable period ended January 31, 2000 due primarily to an increase in the number of executive recruitment consultants and Futurestep employees and the acquisition of JobDirect in the current fiscal year. The $64.6 million increase for the nine months ended January 31, 2001, excluding Futurestep expenses of $42.8 million and JobDirect expenses of $4.6 million in the current nine month period and Futurestep expenses of $12.6 million in the same period last year, reflects a 31% increase in the average number of consultants for the nine months ended January 31, 2001 over the comparable period in 2000. On a comparable basis, excluding Futurestep and JobDirect, compensation and benefits expense as a percentage of revenue decreased to 58.9% in the most recent nine month period from 59.7% in the nine months ended January 31, 2000. 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 $51.1 million, or 50%, to $152.3 million for the nine months ended January 31, 2001 from $101.2 million for the comparable period ended January 31, 2000. As a percentage of revenue, general and administrative expenses, excluding Futurestep and JobDirect related expenses, remained relatively constant at 23% for both the nine months ended January 31, 2001 and 2000. Operating Profit. Operating profit increased $10.7 million in the nine months ended January 31, 2001, to $47.1 million, or 9.3% of revenue, from $36.4 million, or 10.6% of revenue, in the prior year nine month period. Excluding the Futurestep losses of $23.1 million and JobDirect losses of $7.8 million in the current nine month period and Futurestep losses of $17.4 million in the same period in the prior year, operating profit for the nine months ended January 31, 2001 increased $24.3 million, or 45%, to $78.0 million compared to the nine months ended January 31, 2000. Operating profit, excluding Futurestep and JobDirect, as a percentage of revenue was 18% and 17% for the nine months ended January 31, 2001 and 2000, respectively. The increased margin reflects improvement in North America, Europe and Asia/Pacific, while Latin America remained constant compared to the prior year nine month period. The increase is driven primarily by our European operations and reflects the increase in revenue and a decline 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. Interest income and other income, net, includes interest income of $3.4 million and $4.8 million for the nine months ended January 31, 2001 and 2000, respectively. The decrease in interest income is due primarily to lower average cash and marketable securities balances compared to the prior year. Other income consists primarily of gains and losses on the sale of property and equipment and dividend income resulting in expense of $0.3 million in the current period and income of $0.5 million in the prior year period. Interest Expense. Interest expense increased $3.1 million in the nine months ended January 31, 2001, to $6.1 million from $3.0 million in the prior year, primarily due to borrowings under the line of credit associated with acquisitions during the first quarter of fiscal 2001 and 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 $2.1 million to $18.3 million for the nine months ended January 31, 2001 from $16.2 million for the comparable period ended January 31, 2000. The effective tax rate was 42% for both the current and prior year nine month periods. Non-controlling Shareholders' Interest. Non-controlling shareholders' interest is comprised of the non-controlling shareholders' majority interest in our Mexico subsidiaries. Non-controlling shareholders' interest increased $0.7 million in the current nine month period to $2.7 million, compared to $2.0 million in the comparable prior year period and reflects the increase in net income generated by the Mexico subsidiaries during the current fiscal nine month period. 15 Liquidity and Capital Resources We maintained cash and cash equivalents of $65.2 million at January 31, 2001 and $110.9 million at January 31, 2000. During the nine months ended January 31, 2001 and 2000, cash provided by operating activities was $11.9 million and $33.6 million, respectively. Operating cash generated in the current nine month period decreased primarily due to a decrease in accounts payable and accrued liabilities mainly related to fiscal 2000 bonuses paid in fiscal 2001. Excluded from cash flows is the non-cash charge to other comprehensive income of $1.3 million, representing the unrealized loss, net of tax, on our investment in Webhire. This unrealized loss was due to a decline in the market price per share from the $2.35 acquisition price to $1.69 at January 31, 2001. Cash used in investing activities was $33.3 million for the current nine month period and $36.3 million for the nine months ended January 31, 2000. In the current nine month period, cash flows used in investing activities included $44.2 million for business acquisitions and $10.6 million for the purchase of equity interests in Jungle Interactive and Webhire compared to $35.6 for business acquisitions in the prior year. In addition, net sales of marketable securities were $53.5 million in the current nine month period compared to $22.0 million in the prior year. Cash flows from investing activities also includes premiums paid on corporate- owned life insurance, or 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 $10.1 million and $8.6 million for the nine months ended January 31, 2001 and 2000, respectively. Generally, we borrow against the cash surrender value of the COLI contracts to fund the COLI premium payments to the extent interest expense on the borrowings is deductible for U.S. income tax purposes. Capital expenditures totaled $21.8 million and $14.1 million for the nine months ended January 31, 2001 and 2000, respectively. These expenditures consisted primarily of systems hardware and software costs, upgrades to information systems and leasehold improvements. The $7.7 million increase in capital expenditures in the nine months ended January 31, 2001 compared to the prior year nine month period relates primarily to increased fixed asset spending at Futurestep to support its worldwide infrastructure. Cash provided by financing activities was $1.6 million and $2.1 million during the nine months ended January 31, 2001 and 2000, respectively. In the current nine month period, borrowings of $28.0 million under our line of credit were offset by payments of $25.0 million. In addition, we made payments of $10.3 million on shareholder acquisition notes in the current nine month period compared to $0.6 million in the same period last year. In the current nine month period, proceeds from the issuance of common stock were $8.9 million, including proceeds from stock options exercised of $5.4 million, compared to $2.6 million in the prior year nine month period. Total outstanding borrowings under life insurance policies were $46.6 million and $43.7 million at January 31, 2001 and 2000, respectively. These borrowings, which are secured by the cash surrender value of the life insurance policies, do not require principal payments and bear interest at various variable rates. To provide additional liquidity, we replaced our prior credit line with a $100 million credit facility with Bank of America effective October 31, 2000. The credit facility is a revolving facility that matures on November 2, 2002 and includes a standby letter of credit subfacility. Borrowings under the line of credit bear interest on a sliding scale based on a leverage ratio. We have the option of borrowing using either LIBOR or the higher of the bank's prime lending rate or the Federal Funds rate plus 0.5%. The financial covenants include a fixed charge coverage ratio, a maximum leverage ratio, a minimum quick ratio and other customary events of default. 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. 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, 16 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 to determine 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. 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. Recently Issued Accounting Standards 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 Development or Obtained for Internal Use" and during fiscal 2001, we adopted the related Emerging Issues Task 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 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 currently 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. 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, 2001 and 2000, we recognized foreign currency losses, after income taxes, of $0.3 million and $0.4 million, respectively, primarily related to our Europe and Asia/Pacific operations. Realization of translation gains or losses due to the translation of intercompany payables denominated in U.S. dollars is mitigated through the timing of repayment of these intercompany borrowings. Interest Rate Risk. We primarily manage our exposure to fluctuations in interest rates through our regular financing activities that generally are short term and provide for variable market rates. As of January 31, 2001, we had outstanding borrowings of $3.0 million on our revolving line of credit bearing interest at LIBOR plus 1.25%, $46.6 million of borrowings against the cash surrender value of COLI contracts bearing interest at primarily variable rates payable at least annually and $27.2 million of notes payable to shareholders resulting from business acquisitions in fiscal 2000, payable through fiscal 2004 at rates ranging from 5.5% to 7%. 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description of Exhibit ------ ---------------------- 10.1 Employment Agreement between Korn/Ferry International and Michael D. Bekins 10.2 Korn/Ferry International Special Severance Pay Policy 10.3 Employment Agreement between Korn/Ferry International and Richard M. Ferry 10.4 Amendment I, dated as of January 30, 2001, to Loan Agreement, dated as of October 31, 2000, among Korn/Ferry International, Bank of America, N.A. and the other Lenders referred to therein (b) Reports on Form 8-K None. 18 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: March 16, 2001 By: /s/ Elizabeth S.C.S. Murray --------------------------- Elizabeth S.C.S. Murray Chief Financial Officer and Executive Vice President 19 EXHIBIT INDEX Exhibit Number Description of Exhibit ------ ---------------------- 10.1 Employment Agreement between Korn/Ferry International and Michael D. Bekins 10.2 Korn/Ferry International Special Severance Pay Policy 10.3 Employment Agreement between Korn/Ferry International and Richard M. Ferry 10.4 Amendment I, dated as of January 30 2001, to Loan Agreement, dated as of October 31, 2000, among Korn/Ferry International, Bank of America, N.A. and the other Lenders referred to therein --------------- 20