10-Q 1 d10q.htm FORM 10-Q Prepared by R.R. Donnelley Financial -- Form 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended January 31, 2002
 
or
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                 to                                 
 
Commission File Number 001-14505
 
 
KORN/FERRY INTERNATIONAL
(Exact name of registrant as specified in its charter)
 
Delaware
  
95-2623879
(State of other jurisdiction
  
(I.R.S. Employer
of incorporation or organization)
  
Identification Number)
 
1800 Century Park East, Suite 900, Los Angeles, California 90067
(Address of principal executive offices) (zip code)
 
(310) 552-1834
(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 14, 2002 was 37,767,027.
 

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
         
Page
PART I.    FINANCIAL INFORMATION
Item 1.
   
Financial Statements
     
       
3
       
5
       
6
       
7
Item 2.
      
14
Item 3.
      
22
PART II.    OTHER INFORMATION
Item 3.
      
24
Item 6.
      
24
  
25

2

 
PART I.    FINANCIAL INFORMATION
 
Item 1.    Financial Statements
 
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(in thousands)
 
      
As of January 31, 2002
     
As of April 30, 2001
  
      
(unaudited)
         
ASSETS
                    
Cash and cash equivalents
     
$
57,749
 
   
$
88,463
 
Marketable securities
     
 
545
 
   
 
16,397
 
Receivables due from clients, net of allowance for doubtful accounts of $10,375 and $13,319
     
 
59,726
 
   
 
91,513
 
Income tax and other receivables
     
 
31,678
 
   
 
11,299
 
Deferred income taxes
     
 
6,354
 
   
 
8,821
 
Prepaid expenses
     
 
12,308
 
   
 
9,909
 
      
  
Total current assets
     
 
168,360
 
   
 
226,402
 
      
  
Property and equipment:
                    
Computer equipment and software
     
 
49,923
 
   
 
48,715
 
Furniture and fixtures
     
 
22,127
 
   
 
24,223
 
Leasehold improvements
     
 
23,373
 
   
 
23,814
 
Automobiles
     
 
1,016
 
   
 
1,889
 
      
  
      
 
96,439
 
   
 
98,641
 
Less—Accumulated depreciation and amortization
     
 
(52,143
)
   
 
(43,652
)
      
  
Property and equipment, net
     
 
44,296
 
   
 
54,989
 
      
  
Cash surrender value of company owned life insurance policies, net of loans
     
 
53,524
 
   
 
54,361
 
Marketable securities and other investments
     
 
5,008
 
   
 
6,894
 
Deferred income taxes
     
 
27,927
 
   
 
24,942
 
Goodwill, net of accumulated amortization of $15,101 and $17,718
     
 
83,336
 
   
 
126,006
 
Intangibles, net of accumulated amortization of $3,693 and $3,154
     
 
875
 
   
 
2,060
 
Other
     
 
2,847
 
   
 
4,675
 
      
  
Total assets
     
$
386,173
 
   
$
500,329
 
      
  
 
The accompanying notes are an integral part of these consolidated financial statements.

3

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS—(Continued)
(in thousands, except per share amounts)
 
      
    
 
      
As of January 31, 2002
     
As of April 30, 2001
  
      
(unaudited)
         
LIABILITIES AND SHAREHOLDERS’ EQUITY
                    
Notes payable and current maturities of long-term debt
     
$
58,578
 
   
$
11,881
 
Accounts payable
     
 
7,278
 
   
 
13,360
 
Income taxes payable
     
 
535
 
   
 
2,728
 
Compensation and related taxes
     
 
36,210
 
   
 
110,702
 
Other accrued liabilities
     
 
40,925
 
   
 
32,523
 
      
  
Total current liabilities
     
 
143,526
 
   
 
171,194
 
Deferred compensation
     
 
43,764
 
   
 
41,522
 
Long-term debt
     
 
5,084
 
   
 
11,842
 
Other
     
 
2,098
 
   
 
2,319
 
      
  
Total liabilities
     
 
194,472
 
   
 
226,877
 
      
  
Non-controlling shareholders’ interest
     
 
4,453
 
   
 
3,286
 
      
  
Shareholders’ equity
                    
Common stock: $0.01 par value, 150,000 shares authorized, 38,481 and 38,082 shares issued and 37,767 and 37,516 shares outstanding
     
 
301,219
 
   
 
296,069
 
Deficit
     
 
(89,581
)
   
 
(4,602
)
Unearned restricted stock compensation
     
 
(3,556
)
         
Accumulated other comprehensive loss
     
 
(17,984
)
   
 
(16,598
)
      
  
Shareholders’ equity
     
 
190,098
 
   
 
274,869
 
Less: Notes receivable from shareholders
     
 
(2,850
)
   
 
(4,703
)
      
  
Total shareholders’ equity
     
 
187,248
 
   
 
270,166
 
      
  
Total liabilities and shareholders’ equity
     
$
386,173
 
   
$
500,329
 
      
  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

4

 
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,
    
2002
     
2001
   
2002
     
2001
    
(unaudited)
   
(unaudited)
Revenue
   
$
93,268
 
   
$
157,171
   
$
316,660
 
   
$
504,415
Compensation and benefits
   
 
64,633
 
   
 
95,651
   
 
213,535
 
   
 
304,990
General and administrative expenses
   
 
31,084
 
   
 
46,568
   
 
108,322
 
   
 
152,345
Asset impairment and restructuring charges
                   
 
41,341
 
       
Goodwill impairment charges
                   
 
42,926
 
       
Interest income and other income, net
   
 
630
 
   
 
734
   
 
1,997
 
   
 
3,051
Interest expense
   
 
2,235
 
   
 
2,300
   
 
5,949
 
   
 
6,075
    
  
  
  
Income (loss) before provision for income taxes and non-controlling shareholders’ interest
   
 
(4,054
)
   
 
13,386
   
 
(93,416
)
   
 
44,056
(Benefit from) provision for income taxes
   
 
2,572
 
   
 
5,622
   
 
(10,974
)
   
 
18,307
Non-controlling shareholders’ interest
   
 
627
 
   
 
861
   
 
2,537
 
   
 
2,731
    
  
  
  
Net income (loss)
   
$
(7,253
)
   
$
6,903
   
$
(84,979
)
   
$
23,018
    
  
  
  
Basic earnings (loss) per common share
   
$
(0.19
)
   
$
0.18
   
$
(2.26
)
   
$
0.62
    
  
  
  
Basic weighted average common shares outstanding
   
 
37,536
 
   
 
37,443
   
 
37,538
 
   
 
37,201
    
  
  
  
Diluted earnings (loss) per common share
   
$
(0.19
)
   
$
0.18
   
$
(2.26
)
   
$
0.60
    
  
  
  
Diluted weighted average common shares outstanding
   
 
37,536
 
   
 
38,705
   
 
37,538
 
   
 
38,661
    
  
  
  
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.

5

 
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
    
Nine Months Ended January 31,
  
    
2002
     
2001
  
    
(unaudited)
  
Cash from operating activities:
                  
Net income (loss)
   
$
(84,979
)
   
$
23,018
 
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
                  
Depreciation
   
 
12,702
 
   
 
10,708
 
Amortization of goodwill
            
 
8,631
 
Amortization of intangible assets
   
 
539
 
   
 
317
 
Amortization of note payable discount
   
 
367
 
   
 
585
 
Loss on disposition of property and equipment
   
 
75
 
   
 
879
 
Unrealized loss on marketable securities and other assets
   
 
846
 
         
Provision for doubtful accounts
   
 
9,509
 
   
 
14,612
 
Cash surrender value gains and benefits in excess of premiums paid
   
 
(306
)
   
 
(404
)
Deferred income tax benefit
   
 
(5,130
)
   
 
(2,405
)
Tax benefit from exercise of stock options
   
 
188
 
   
 
2,733
 
Asset impairment charge
   
 
53,730
 
         
Restructuring charge, including $12,889 in accrued liabilities
   
 
14,902
 
         
Restricted stock compensation
   
 
609
 
         
Change in other assets and liabilities, net of acquisitions:
                  
Deferred compensation
   
 
2,242
 
   
 
2,534
 
Receivables
   
 
1,868
 
   
 
(30,354
)
Prepaid expenses
   
 
(2,033
)
   
 
(4,729
)
Income taxes
   
 
275
 
   
 
(594
)
Accounts payable and accrued liabilities
   
 
(84,896
)
   
 
(13,566
)
Non-controlling shareholders’ interest and other, net
   
 
2,916
 
   
 
(55
)
    
  
Net cash (used in) provided by operating activities
   
 
(76,576
)
   
 
11,910
 
    
  
Cash from investing activities:
                  
Purchase of property and equipment
   
 
(8,332
)
   
 
(21,808
)
Purchases of marketable securities
            
 
(7,646
)
Sale of marketable securities
   
 
15,852
 
   
 
61,107
 
Business acquisitions, net of cash acquired
   
 
(513
)
   
 
(44,238
)
Premiums on life insurance, net of benefits received
   
 
(9,308
)
   
 
(10,102
)
Purchase of investments
            
 
(10,570
)
    
  
Net cash used in investing activities
   
 
(2,301
)
   
 
(33,257
)
    
  
Cash from financing activities:
                  
Net borrowings on credit line
   
 
48,000
 
   
 
1,635
 
Payment of shareholder acquisition notes
   
 
(8,270
)
   
 
(10,343
)
Net borrowings under life insurance policies
   
 
10,451
 
   
 
1,668
 
Purchase of common stock and payment on related notes
   
 
(532
)
   
 
(308
)
Issuance of common stock and receipts on shareholders’ notes
   
 
2,862
 
   
 
8,927
 
    
  
Net cash provided by financing activities
   
 
52,511
 
   
 
1,579
 
    
  
Effect of exchange rate changes on cash flows
   
 
(4,348
)
   
 
(1,969
)
    
  
Net decrease in cash and cash equivalents
   
 
(30,714
)
   
 
(21,737
)
Cash and cash equivalents at beginning of the period
   
 
88,463
 
   
 
86,975
 
    
  
Cash and cash equivalents at end of the period
   
$
57,749
 
   
$
65,238
 
    
  
 
The accompanying notes are an integral part of the concolidated financial statements.

6

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, 2002 and 2001 include the accounts of Korn/Ferry International (“KFY”), all of its wholly and majority owned domestic and international subsidiaries, and affiliated companies in which KFY has effective control (collectively, the “Company”) and are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair presentation of the results for these periods. These financial statements have been prepared consistently with the accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended April 2001 (“Annual Report”) and should be read together with the Annual Report.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from these estimates.
 
Reclassifications
 
Certain prior year reported amounts have been reclassified in order to conform to the current year consolidated financial statement presentation.
 
New Accounting Pronouncements
 
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. In conjunction with these new accounting standards the FASB has issued “Transition Provisions for New Business Combination Accounting Rules” (“Provisions”) that allow non-calendar year-end companies to cease amortization of goodwill and adopt the new impairment approach as of the beginning of their fiscal year that starts during either 2001 or 2002. The Company elected to implement SFAS No. 141 and No. 142 in the first quarter of fiscal 2002.
 
The Provisions provide for a six month period from the date of implementation of SFAS No. 142 to record impairment under the new method. The impairment charge, if any, would be recorded as a cumulative effect of a change in accounting principle. The Company completed this impairment analysis in the second fiscal quarter of 2002. The fair value exceeded the book value of each reporting unit or component and accordingly, there was no impairment charge. The impact on net income and earnings per share for the three months and nine months ended January 31, 2001 as if SFAS No. 142 had been implemented as of the beginning of fiscal 2001 is disclosed in Note 2.
 
The asset impairment charges recognized in the first and second fiscal quarters of 2002 are unrelated to the implementation of SFAS No. 142. “See Note 4”.
 
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The purpose of this statement is to develop consistent accounting for asset retirement obligations and related costs in the financial statements and provide more information about future cash outflows, leverage and liquidity regarding retirement obligations and the gross investment in long-lived assets. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not believe that the adoption of this statement will have a significant impact on the Company’s financial position or results of operations.

7

 
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except per share amounts)

 
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” This statement establishes a number of rules which govern accounting for the impairment of long-lived assets, eliminates inconsistencies from having two accounting models for long-lived assets to be disposed of by sale and expands the definition of a discontinued operation to a component of an entity for which identifiable cash flows exist. The statement is effective for fiscal years beginning after December 15, 2002. The Company does not believe that the adoption of this statement will have a significant impact on the Company’s financial position or results of operations.
 
2.    Basic and Diluted Earnings (Loss) Per Share
 
Basic earnings (loss) per common share (“basic EPS”) was computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common and common equivalent share (“diluted EPS”) reflects the potential dilution that would occur if the outstanding options or other contracts to issue common stock were exercised or converted and was computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding and dilutive common equivalent shares. Following is a reconciliation of the numerator (income or loss) and denominator (shares in thousands) used in the computation of basic and diluted EPS:
 
    
Three months ended January 31,
    
2002
     
2001
    
(Loss)
     
Weighted Average Shares
   
Per Share Amount
     
Income
   
Weighted Average Shares
   
Per Share Amount
Basic EPS
                                          
Income (loss) available to common shareholders
   
$
(7,253
)
   
37,536
   
$
(0.19
)
   
$
6,903
   
37,443
   
$
0.18
                  
              
Effect of dilutive securities
                                          
Shareholder common stock purchase commitments
                                 
267
       
Stock options
                                 
995
       
    
  
           
  
      
Diluted EPS
                                          
Income (loss) available to common shareholders plus assumed conversions
   
$
(7,253
)
   
37,536
   
$
(0.19
)
   
$
6,903
   
38,705
   
$
0.18
    
  
  
  
  
  
 
    
Nine months ended January 31,
    
2002
     
2001
    
(Loss)
     
Weighted Average Shares
   
Per Share Amount
     
Income
   
Weighted Average Shares
   
Per Share Amount
Basic EPS
                                          
Income (loss) available to common shareholders
   
$
(84,979
)
   
37,538
   
$
(2.26
)
   
$
23,018
   
37,201
   
$
0.62
                  
              
Effect of dilutive securities
                                          
Shareholder common stock purchase commitments
                                 
288
       
Stock options
                                 
1,172
       
    
  
           
  
      
Diluted EPS
                                          
Income (loss) available to common shareholders plus assumed conversions
   
$
(84,979
)
   
37,538
   
$
(2.26
)
   
$
23,018
   
38,661
   
$
0.60
    
  
  
  
  
  

8

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Assumed exercises or conversions have been excluded in computing the diluted earnings per share when there is a net loss for the period because their inclusion would reduce the loss per share or be anti-dilutive. If the assumed exercises or conversions had been used, the fully diluted shares outstanding for the three months and nine months ended January 31, 2002 would have been 37,668 and 37,674, respectively.
 
The following table adjusts net income (loss) and earnings (loss) per share for the impact of the implementation of SFAS No. 142 in the current year:
 
    
Three months ended January 31,
   
Nine months ended January 31,
    
2002
       
2001
   
2002
       
2001
Net income (loss)
                                    
Reported net income (loss)
   
$
(7,253
)
     
$
6,903
   
$
(84,979
)
     
$
23,018
Add back: goodwill amortization
              
 
2,992
              
 
8,631
    
    
  
    
Adjusted net income (loss)
   
$
(7,253
)
     
$
9,895
   
$
(84,979
)
     
$
31,649
    
    
  
    
Basic earnings (loss) per share
                                    
Reported net income (loss)
   
$
(0.19
)
     
$
0.18
   
$
(2.26
)
     
$
0.62
Goodwill amortization
              
 
0.08
              
 
0.23
    
    
  
    
Adjusted net income (loss)
   
$
(0.19
)
     
$
0.26
   
$
(2.26
)
     
$
0.85
    
    
  
    
Diluted earnings (loss) per share
                                    
Reported net income (loss)
   
$
(0.19
)
     
$
0.18
   
$
(2.26
)
     
$
0.60
Goodwill amortization
              
 
0.08
              
 
0.22
    
    
  
    
Adjusted net income (loss)
   
$
(0.19
)
     
$
0.26
   
$
(2.26
)
     
$
0.82
    
    
  
    
 
3.    Comprehensive income (loss)
 
Comprehensive income (loss) is comprised of net income (loss) and all changes to shareholders’ equity, except those changes resulting from investments by owners (changes in paid in capital) and distributions to owners (dividends).
 
Total comprehensive income (loss) is as follows:
 
    
Three months ended January 31,
   
Nine months ended January 31,
  
    
2002
       
2001
   
2002
       
2001
  
Net income (loss)
   
$
(7,253
)
     
$
6,903
   
$
(84,979
)
     
$
23,018
 
Foreign currency translation adjustment
   
 
(2,740
)
     
 
3,032
   
 
(4,348
)
     
 
(700
)
Unrealized gain (loss) on investment, net of tax provision of $90 and tax benefit of $947, respectively
              
 
123
              
 
(1,308
)
Reclassification adjustment for losses realized in net income (loss), net of tax benefit of $2,145
                     
 
2,962
 
           
    
    
  
    
Comprehensive income (loss)
   
$
(9,993
)
     
$
10,058
   
$
(86,365
)
     
$
21,010
 
    
    
  
    
Accumulated other comprehensive loss is comprised of:
 
    
Foreign Currency
     
Loss on Securities
     
Accumulated
Other
Comprehensive
Loss
  
Beginning balance at May 1, 2001
   
$
(13,636
)
   
$
(2,962
)
   
$
(16,598
)
Activity through January 31, 2002
   
 
(4,348
)
   
 
2,962
 
   
 
(1,386
)
    
  
  
Ending balance at January 31, 2002
   
$
(17,984
)
   
$
—  
 
   
$
(17,984
)
    
  
  

9

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Due to certain restructuring activities taken by the Company, as discussed in Note 4, the extended decline in the stock market and other factors, the Company believes that the loss in value related to certain equity securities is no longer temporary in nature and reclassified the loss of $2,962, net of a tax benefit of $2,145, included in other comprehensive income (loss) at April 30, 2001 to net income (loss) in the three months ended July 31, 2001 resulting in a pretax charge of $5,107. In addition, the Company recognized a holding loss on these securities of $1,157 arising in the three months ended July 31, 2001. The total pretax charge related to the recognized loss on this investment of $6,264 was included in the asset impairment charge for the three months ended July 31, 2001.
 
In the three months and nine months ended January 31, 2002, the Company recognized an unrealized holding loss related to this investment of $472 and $729, respectively, included in other income.
 
4.    Asset Impairment and Restructuring Charges
 
Based on deteriorating economic conditions encountered in the first fiscal quarter of 2002, the Company began developing a series of restructuring initiatives to address the cost structure and to reposition the enterprise to gain market share and take full advantage of any economic uptrend. The immediate goals of these restructuring initiatives are to reduce losses, preserve top employees and maintain high standards of client service. In the first quarter, certain business units took actions approved by senior management, that did not require Board approval, in response to a decline in revenue in the first two months of that quarter resulting in a restructuring charge for severance of $3.0 million.
 
In August 2001, the Company announced a series of business realignment initiatives. The Company estimated that these initiatives would result in a total charge against earnings in fiscal 2002, including the $3.0 million of severance in the first quarter, of approximately $86 million. The charge reflects costs associated with a decision to reduce the work force by nearly 25%, or over 600 employees; consolidate all back-office functions for Futurestep and Korn/Ferry; discontinue the operations of JobDirect and write-down other related assets and goodwill. Based upon these initiatives, the projection of undiscounted cashflows indicated that the goodwill related to JobDirect was impaired. As a result, the Company recognized an asset impairment charge related to JobDirect goodwill of $28,951 in the first quarter.
 
During the three months ended October 31, 2001, the Company finalized the realignment initiatives approved by the Board in August 2001 and recognized an additional asset impairment charge of $7.5 million and an additional restructuring charge of $27.3 million. There were no additional restructuring or asset impairment charges in the three months ended January 31, 2002.
 
Operating results for the nine months ended January 31, 2002 include asset impairment and restructuring charges recorded in the first and second quarter of fiscal 2002 related to the following business segments:
 
    
    
Asset Impairment
   
Restructuring
     
    
Goodwill
   
Other
   
Severance
   
Facilities
   
Total
Executive recruitment
                                   
North America
   
$
13,975
   
$
711
   
$
8,773
   
$
5,490
   
$
28,949
Europe
                 
 
3,488
   
 
865
   
 
4,353
Asia/Pacific
          
 
15
   
 
1,761
   
 
70
   
 
1,846
Futurestep
          
 
8,958
   
 
1,681
   
 
6,144
   
 
16,783
JobDirect
   
 
28,951
   
 
1,369
   
 
843
   
 
1,173
   
 
32,336
    
  
  
  
  
Total
   
$
42,926
   
$
11,053
   
$
16,546
   
$
13,742
   
$
84,267
    
  
  
  
  
 
        The asset impairment charge related to goodwill was based on an analysis of future undiscounted cashflows that indicated that goodwill was impaired. The charge represents the excess of the carrying value over fair value, based on a discounted cashflow method. The other asset impairment charge is primarily related to property and equipment and other investments. The facilities restructuring charge reflects lease costs net of estimated sublease income and includes the write-off of related leasehold improvements.

10

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
In executive recruitment, the impaired goodwill related to the acquisition in July 2000 of the Westgate Group, an executive recruitment firm specializing in financial services in the eastern United States, and Webb Johnson, a New York subsidiary of Pratzer and Partners in Toronto, acquired in April 2000. All of the consultants of the acquired Westgate Group had terminated employment by August 2001 and the impairment charge of $11,230 was recognized in the three months ended July 31, 2001. The former shareholders of Webb Johnson re-acquired the shares of this entity in November 2001 and the impairment charge of $2,745 was recognized in the three months ended October 31, 2001. The other asset impairment charge of $726 resulted from the write-down of furniture, fixtures and equipment to be disposed of as part of the restructuring to estimated fair value less costs to sell. The restructuring charge for executive recruitment severance of $14,022 is comprised of $2,819 and $11,203 recognized in the three months ended July 31, 2001 and October 31, 2001, respectively, and included 74 and 147 employees in North America, 58 and 167 employees in Europe, and 4 and 37 employees in Asia/Pacific, respectively. The facilities restructuring charge for executive recruitment recognized in the three months ended October 31, 2001 of $6,425 relates primarily to lease termination costs, net of estimated sublease income, for excess space in ten executive recruitment offices due to the reduction in workforce. The charge also includes $330 related to unamortized leasehold improvements.
 
The Futurestep asset impairment and restructuring charges result from the restructuring of operations to streamline the business. The asset impairment charge includes a recognized loss of $6,264 in the three months ended July 31, 2001 on an investment in a strategic relationship that will not be developed with the integration of Futurestep and executive recruitment support services (see Note 3). The asset impairment charge in the three months ended October 31, 2001 of $2,694 includes $801 for the write-down of excess furniture, fixtures and equipment to estimated fair value less costs to sell and the write-off of capitalized software costs of $1,893 due to the integration of Futurestep and executive recruitment information technology support services. The Futurestep restructuring charge of $1,681 for severance is comprised of $164 for 8 employees and $1,517 for 76 employees severed in the three months ended July 31, 2001 and October 31, 2001, respectively. The facilities restructuring charge of $6,144 recognized in the three months ended October 31, 2001 relates to five Futurestep offices that were closed as employees were co-located with executive recruitment in North America. The charge also includes $1,622 related to the write-off of unamortized leasehold improvements.
 
JobDirect, an online recruiting service focused on college graduates and entry level professionals, was acquired in July 2000. Although the college market is very large and attractive, this market was severely impacted by the recent economic downturn. Given the loss profile and cash requirements of JobDirect based on operating results in the first quarter of fiscal 2002, the Company needed to make choices of resource allocation among the various business operations. As a result, the Company decided to pursue a more conservative approach towards the college market in August 2001 and scaled back the operations of JobDirect to reduce the loss profile and cash requirements. Based upon this revised outlook, the projection of undiscounted cashflow indicated that the goodwill for JobDirect was impaired. The asset impairment charge related to JobDirect goodwill of $28,951 was recorded in the three months ended July 31, 2001. In the three months ended October 31, 2001, the Company decided to exit the college market and completely discontinue the operations of JobDirect. As a result, the Company recognized an other asset impairment charge of $1,369, primarily comprised of the write-down of furniture, fixtures and equipment at facilities that were closed to estimated fair value less costs to sell. The Company also recognized a restructuring charge comprised of severance of $843 for 70 employees and $1,173, including the write-off of leasehold improvements of $61, for lease termination costs in excess of estimated sublease income for its three offices.
 
Included in accrued liabilities at January 31, 2002 is $2,981 of severance restructuring costs and $9,908 of facilities restructuring costs. The severance accrual includes amounts paid monthly and are expected to be paid in full by October 31, 2002. The accrued liability for facilities costs primarily relates to lease payments, net of sublease income, that will be paid over the next two to ten years.

11

KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except per share amounts)

 
A summary of the components of the restructuring liability by business segment at January 31, 2002 follows:
 
    
Charged to Expense
   
Non-Cash Items
   
Payments
     
Liability at January 31, 2002
Executive recruitment
                              
North America
   
$
14,263
   
$
330
   
$
7,635
     
$
6,298
Europe
   
 
4,353
          
 
3,163
     
 
1,190
Asia/Pacific
   
 
1,831
          
 
1,516
     
 
315
Futurestep
   
 
7,825
   
 
1,622
   
 
2,230
     
 
3,973
JobDirect
   
 
2,016
   
 
61
   
 
842
     
 
1,113
    
  
  
    
Total
   
$
30,288
   
$
2,013
   
$
15,386
     
$
12,889
    
  
  
    
 
5.    Business segments
 
The Company operates in two global business segments in the retained recruitment industry, executive recruitment and Futurestep. These segments are distinguished primarily by the method used to identify candidates and the candidates’ level of compensation. The executive recruitment business segment is managed by geographic regions led by a regional president. Futurestep’s worldwide operations are managed by an operating group comprised of a president of operations for North America and Asia and a president of operations for Europe. The regional presidents and this operating group report directly to the Chief Executive Officer of the Company.
 
With the acquisition of JobDirect in fiscal 2001, the Company expanded into the college recruitment market. The Company decided to exit this business segment in the fiscal quarter ended October 31, 2001 and ceased operations in the fiscal quarter ending January 31, 2002. (See Note 4). For purposes of the geographic information below, 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,
    
2002
     
2001
     
2002
     
2001
Revenue:
                                  
Executive recruitment:
                                  
North America
   
$
47,944
     
$
80,078
     
$
153,682
     
$
269,528
Europe
   
 
20,891
     
 
32,975
     
 
73,823
     
 
101,277
Asia/Pacific
   
 
8,959
     
 
13,335
     
 
30,274
     
 
39,985
Latin America
   
 
5,824
     
 
8,183
     
 
21,181
     
 
26,520
Futurestep
   
 
9,650
     
 
21,119
     
 
36,314
     
 
63,800
JobDirect
            
 
1,481
     
 
1,386
     
 
3,305
    
    
    
    
Total revenue
   
$
93,268
     
$
157,171
     
$
316,660
     
$
504,415
    
    
    
    

12

 
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(in thousands, except per share amounts)

 
    
Three months ended January 31,
     
Nine months ended January 31,
  
    
2002
     
2001
     
2002
     
2001
  
Operating profit (loss) before asset impairment and restructuring charges
                                    
Executive recruitment:
                                    
North America
   
$
5,551
 
   
$
14,774
 
   
$
14,091
 
   
$
51,549
 
Europe
   
 
(4,081
)
   
 
4,961
 
   
 
(5,689
)
   
 
14,810
 
Asia/Pacific
   
 
146
 
   
 
1,423
 
   
 
(120
)
   
 
5,007
 
Latin America
   
 
(105
)
   
 
1,789
 
   
 
3,232
 
   
 
6,654
 
Futurestep
   
 
(3,072
)
   
 
(4,591
)
   
 
(10,871
)
   
 
(23,138
)
JobDirect
   
 
(888
)
   
 
(3,404
)
   
 
(5,840
)
   
 
(7,802
)
    
  
  
  
Subtotal operating profit (loss) before asset impairment and restructuring charges
   
$
(2,449
)
   
$
14,952
 
   
$
(5,197
)
   
$
47,080
 
Asset impairment and restructuring charge
(Note 4)
                     
 
84,267
 
         
    
  
  
  
Total operating profit (loss)
   
$
(2,449
)
   
$
14,952
 
   
$
(89,464
)
   
$
47,080
 
    
  
  
  
 
6.    Subsequent Event
 
At January 31, 2002, the Company was not in compliance with the fixed charge coverage and leverage ratios under the credit agreement with Bank of America. The Company reached an agreement with Bank of America in March 2002 to amend the credit facility from $100.0 million to $45.0 million, to waive prior defaults, to secure it with certain assets and to amend the financial covenants to make compliance more achievable through maturity in November 2002. The amended agreement requires payment of a $1.0 million fee at inception. Additional fees of up to $1.5 million may be payable in three installments of $500.0 million through October 2002 if additional financing is not obtained prior to the installment due date. In addition, the Company paid $8.7 million in March 2002 to reduce the outstanding balance from $48.0 million at January 31, 2002 to $39.3 million, which combined with outstanding letters of credit, utilized the $45.0 million facility. Outstanding credit facility borrowings bear interest at Prime plus 3.75% under the amended agreement compared to the default rate of Prime plus 4% at January 31, 2002.

13

 
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, access to capital, dependence on attracting and retaining qualified and experienced consultants, portability of client relationships, local political or economic developments in or affecting countries where we have operations, ability to manage growth, restrictions imposed by off-limits agreements, competition, risks related to the development and growth of Futurestep, reliance on information processing systems, and employment liability risk. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Form 10-Q are made only as of the date of this report and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.
 
The following presentation of management’s discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements included in this Form 10-Q.
 
Overview
 
We are the world’s preeminent recruitment firm with the broadest global presence in the recruitment industry. Our services include executive recruitment, middle-management recruitment (through Futurestep) and other related services including management assessment. Our clients are many of the world’s largest and most prestigious public and private companies, middle-market and emerging growth companies as well as governmental and not-for-profit organizations. Over half of the executive recruitment searches we performed in fiscal 2001 were for board level, chief executive and other senior executive officer positions and our 5,236 clients included nearly half of the Fortune 500 companies. We have established strong client loyalty; more than 81% of the executive recruitment assignments we performed in fiscal 2001 were on behalf of clients for whom we had conducted multiple assignments over the last three fiscal years.
 
Based on deteriorating economic conditions, in the quarter ended July 31, 2001, we began developing a series of restructuring initiatives to address our cost structure and to reposition the enterprise to gain market share and take full advantage of the eventual economic recovery. Our immediate goals were to reduce losses, preserve our top producers and maintain our high standards of client service.
 
In August 2001, we announced a series of these business realignment initiatives designed to reduce expenses in response to the current economic environment and to reposition our company to take advantage of the increase in the demand for recruitment services when the economy improves. These initiatives resulted in a total charge against earnings in the first six months of fiscal 2002 of approximately $84 million. The charge reflects costs associated with a decision to reduce the workforce by approximately 25%, or over 600 employees; consolidate all back-office functions for Futurestep and Korn/Ferry; exit the college recruitment market and write-down related assets and goodwill.

14

 
The following table summarizes the asset impairment and restructuring charge recorded in the first and second quarters of fiscal 2002:
 
    
    
Asset Impairment
   
Restructuring
     
    
Goodwill
   
Other
   
Severance
   
Facilities
   
Total
Executive recruitment
   
$
13,975
   
$
726
   
$
14,022
   
$
6,425
   
$
35,148
Futurestep
          
 
8,958
   
 
1,681
   
 
6,144
   
 
16,783
JobDirect
   
 
28,951
   
 
1,369
   
 
843
   
 
1,173
   
 
32,336
    
  
  
  
  
Total
   
$
42,926
   
$
11,053
   
$
16,546
   
$
13,742
   
$
84,267
    
  
  
  
  
 
See “Note 4 to Consolidated Financial Statements” for a complete description of the components of this charge.
 
In the first quarter of fiscal 2002, we recognized a charge of $49.4 million comprised of $46.4 million related to asset impairments, primarily goodwill, and $3.0 million related to severance and benefits for 144 employees terminated primarily in July 2001.
 
In the second quarter of fiscal 2002, we recognized a charge of $34.8 million comprised of $7.5 million related to asset impairments, primarily impairment of property and equipment at downsized or closed offices; $13.6 million related to severance and benefits for 497 employees notified of termination or terminated in the second quarter; and $13.7 million related to facilities rationalization, primarily lease costs, net of sublease income and impairment of related leasehold improvements.
 
The largest component of this $84.3 million charge is related to our investment in JobDirect, acquired in July 2000. Although the college market is very large and attractive, this market was severely impacted by the recent economic downturn. Given the loss profile and cash requirements at the current level of operations, we needed to make choices of resource allocation among the various business operations. As a result, in August 2001, we decided to pursue a more conservative approach towards the college market and scale back the operations of JobDirect to reduce its prospective loss profile and cash requirements. Based upon this revised outlook, the projection of undiscounted cashflow indicated that the goodwill for JobDirect was impaired. The asset impairment charge related to JobDirect goodwill of $29.0 million was recorded in the three months ended July 31, 2001. In October 2001, we decided to exit the college recruitment market and recognized an asset impairment and restructuring charge of $3.4 million comprised of severance costs for 70 employees; lease termination costs, net of estimated sublease income; and the write-down of related property and equipment to estimated fair value less costs to sell.
 
Included in accrued liabilities at January 31, 2002 is $2,981 of severance restructuring costs and $9,908 of facilities restructuring costs. The severance accrual includes amounts to be paid monthly and is expected to be paid in full by October 31, 2002. The accrued liability for facilities costs primarily relates to lease payments, net of sublease income, that will be paid over the next two to ten years.
 
At this time, we see no indications of improving trends and anticipate revenue for the fourth fiscal quarter of 2002 to be in line with the third fiscal quarter of 2002. We also expect that our operating costs for the fourth fiscal quarter of 2002 will be higher than the third fiscal quarter, primarily due to additional restructuring costs expected to be incurred in Europe, estimated to be approximately $5.0 million.
 
Results of Operations
 
The following table summarizes the results of our operations for the three months and nine months ended January 31, 2002 and 2001 as a percentage of revenue:

15

 
      
Three months ended January 31,
       
Nine months ended January 31,
  
      
2002
       
2001
       
2002
       
2001
  
Revenue
     
100
%
     
100
%
     
100
%
     
100
%
Compensation and benefits(1)
     
69
 
     
61
 
     
67
 
     
60
 
General and administrative expenses
     
33
 
     
30
 
     
34
 
     
30
 
Asset impairment and restructuring charges
                       
27
 
         
Operating profit (loss)(2)
     
(3
)
     
10
 
     
(28
)
     
9
 
Net income (loss)(3)
     
(8
)
     
4
 
     
(27
)
     
5
 
(1)
 
Includes a credit of $3.4 million in the nine months ended January 31, 2002 resulting from the reversal of substantially all of our contribution to the 401(k) plan accrued in fiscal year 2001 that was not paid.
(2)
 
Excluding the asset impairment and restructuring charges in fiscal 2002 and, for comparability (under SFAS No. 142), goodwill amortization in fiscal 2001, operating profit (loss) as a percentage of revenue is (3%) and 11% for the three month periods ending January 31, 2002 and 2001, respectively, and (2%) and 11% for the nine month periods ending January 31, 2002 and 2001, respectively.
(3)
 
Excluding the asset impairment and restructuring charges in fiscal 2002 and, for comparability (under SFAS No. 142), goodwill amortization in fiscal 2001, net income (loss) as a percentage of revenue is (8%) and 6% for the three month periods ending January 31, 2002 and 2001, respectively, and (4%) and 6% for the nine month periods ending January 31, 2002 and 2001, respectively.
 
The continued weakness in the global economy this period has resulted in decreases in revenue in all of our business lines and geographic regions compared to the same three and nine month periods last year.
 
For the three months and nine months ended January 31, 2002, we experienced a decline in executive recruitment revenue and in operating profit (loss), excluding asset impairment and restructuring charges, in all geographic regions compared to the same three and nine month periods last year. The decline is due primarily to the slowdown of the United States economy that contributed to a $115.8 million or 43% decline in executive recruitment revenue in North America for the nine months ended January 31, 2002 compared to the same period last year. We include executive recruitment revenue generated from our operations in Mexico with Latin America.
 
The decline in Futurestep revenue of 54% and 43% for the three and nine months ended January 31, 2002, respectively, compared to the same periods last year reflects a decline in all geographic regions attributable to the weakness in the global economy. Futurestep operations in North America experienced the largest percentage decline compared to the same periods last year primarily due to a decline in the number of engagements.
 
The following table summarizes the results of our operations by business segment for the three months and nine months ended January 31, 2002 and 2001:
 
    
Three Months Ended January 31,
     
Nine Months Ended January 31,
  
    
2002
     
2001
     
2002
     
2001
  
    
Dollars
   
%
     
Dollars
   
%
     
Dollars
   
%
     
Dollars
   
%
  
Revenue
                                                        
Executive recruitment:
                                                        
North America
   
$
47,944
   
51
%
   
$
80,078
   
51
%
   
$
153,682
   
49
%
   
$
269,528
   
53
%
Europe
   
 
20,891
   
22
 
   
 
32,975
   
21
 
   
 
73,823
   
23
 
   
 
101,277
   
20
 
Asia/Pacific
   
 
8,959
   
10
 
   
 
13,335
   
9
 
   
 
30,274
   
10
 
   
 
39,985
   
8
 
Latin America
   
 
5,824
   
6
 
   
 
8,183
   
5
 
   
 
21,181
   
7
 
   
 
26,520
   
5
 
Futurestep
   
 
9,650
   
10
 
   
 
21,119
   
13
 
   
 
36,314
   
11
 
   
 
63,800
   
13
 
JobDirect
                 
 
1,481
   
1
 
   
 
1,386
          
 
3,305
   
1
 
    
  
  
  
  
  
  
  
Total revenue
   
$
93,268
   
100
%
   
$
157,171
   
100
%
   
$
316,660
   
100
%
   
$
504,415
   
100
%
    
  
  
  
  
  
  
  

16

 
    
Three Months Ended January 31,
       
Nine Months Ended January 31,
  
    
2002
       
2001
       
2002
       
2001
  
    
Dollars
     
%
       
Dollars
     
%
       
Dollars
     
%
       
Dollars
     
%
  
Operating profit (loss)
                                                                      
Executive recruitment:
                                                                      
North America
   
$
5,551
 
   
12
%
     
$
14,774
 
   
18
%
     
$
(14,858
)
   
(10
)%
     
$
51,549
 
   
19 
%
Europe
   
 
(4,081
)
   
(20
)
     
 
4,961
 
   
15
 
     
 
(10,042
)
   
(14
)
     
 
14,810
 
   
15
 
Asia/Pacific
   
 
146
 
   
2
 
     
 
1,423
 
   
11
 
     
 
(1,966
)
   
(6
)
     
 
5,007
 
   
13
 
Latin America
   
 
(105
)
   
(2
)
     
 
1,789
 
   
22
 
     
 
3,232
 
   
15
 
     
 
6,654
 
   
25
 
Futurestep
   
 
(3,072
)
   
(32
)
     
 
(4,591
)
   
(22
)
     
 
(27,654
)
   
(76
)
     
 
(23,138
)
   
(36
)
JobDirect
   
 
(888
)
            
 
(3,404
)
            
 
(38,176
)
            
 
(7,802
)
       
    
  
    
  
    
  
    
  
Total operating profit (loss)
   
$
(2,449
)
   
(3
)%
     
$
14,952
 
   
10
%
     
$
(89,464
)
   
(28
)%
     
$
47,080
 
   
9 
%
    
  
    
  
    
  
    
  
 
    
Three Months Ended January 31,
     
Nine Months Ended January 31,
  
    
2002
     
2001
     
2002
     
2001
  
    
Dollars (1)
     
%
     
Dollars (2)
     
%
     
Dollars (1)
     
%
     
Dollars (2)
     
%
  
Pro forma operating profit (loss)(1)(2)
                                                                
Executive recruitment:
                                                                
North America
   
$
5,551
 
   
12
%
   
$
16,028
 
   
20
%
   
$
14,091
 
   
9
%
   
$
55,750
 
   
21
%
Europe
   
 
(4,081
)
   
(20
)
   
 
5,474
 
   
17
 
   
 
(5,689
)
   
(8
)
   
 
16,477
 
   
16
 
Asia/Pacific
   
 
146
 
   
2
 
   
 
1,493
 
   
11
 
   
 
(120
)
          
 
5,226
 
   
13
 
Latin America
   
 
(105
)
   
(2
)
   
 
1,789
 
   
22
 
   
 
3,232
 
   
15
 
   
 
6,654
 
   
25
 
Futurestep
   
 
(3,072
)
   
(32
)
   
 
(3,946
)
   
(19
)
   
 
(10,871
)
   
(30
)
   
 
(21,667
)
   
(34
)
JobDirect
   
 
(888
)
          
 
(2,894
)
          
 
(5,840
)
          
 
(6,729
)
       
    
  
  
  
  
  
  
  
Total pro forma operating profit (loss)(1)(2)
   
$
(2,449
)
   
(3
)%
   
$
17,944
 
   
11
%
   
$
(5,197
)
   
2
%
   
$
55,711
 
   
11
%
    
  
  
  
  
  
  
  
(1) Fiscal 2002: Pro forma operating profit for the nine months ended January 31, 2002 excludes asset impairment and restructuring charges of $28,949 in North America, $4,353 in Europe, $1,846 in Asia/Pacific, $16,783 in Futurestep and $32,336 in JobDirect.
(2) Fiscal 2001: We adopted SFAS No. 142 “Goodwill and Other Intangible Assets” as of the beginning of the current fiscal year. For comparability, pro forma operating profit for the three months ended January 31, 2001 excludes goodwill amortization of $1,254 in North America, $513 in Europe, $70 in Asia/Pacific, $645 in Futurestep and $510 in JobDirect. Pro forma operating profit for the nine months ended January 31, 2001 excludes goodwill amortization of $4,201 in North America, $1,667 in Europe, $219 in Asia/Pacific, $1,471 in Futurestep and $1,073 in JobDirect.
 
In the following comparative analysis, all percentages are calculated based on dollars in thousands.
 
Three Months Ended January 31, 2002 Compared to Three Months Ended January 31, 2001
 
Revenue.    Revenue decreased $63.9 million, or 41%, to $93.3 million for the three months ended January 31, 2002 from $157.2 million for the three months ended January 31, 2001. This decrease in revenue was primarily the result of a decrease in the number of engagements in executive recruitment and a decrease in both the number of engagements and the average fee per engagement at Futurestep.
 
In North America, revenue decreased $32.1 million, or 40%, to $47.9 million for the three months ended January 31, 2002 from $80.1 million for the comparable period in the prior year. This revenue decline is due mainly to the downturn in the U.S. economy resulting in a decrease in the number of engagements. The decrease in revenue is reflected in all specialties, with the largest declines in advanced technology and financial services and the smallest percentage decline in healthcare.
 
        Revenue in Europe decreased $12.1 million, or 37%, to $20.9 million for the three months ended January 31, 2002 from $33.0 million for the comparable period in the prior year. The effect of foreign currency translation into U.S. dollars was not material. A decrease in revenue was reported by all of our European offices and is mainly due to the softening of the global economy resulting in a decrease in the number of engagements partially offset by an increase in the average fee per engagement.

17

 
In Asia/Pacific, revenue decreased across all of our offices resulting in a decline of $4.4 million, or 33%, for the region to $8.9 million for the three months ended January 31, 2002 from $13.3 million for the three months ended January 31, 2001 primarily due to a decrease in both the number of engagements and the average fee per engagement and includes a decline of four percent due to the negative effects of translation into the U.S. dollar.
 
The decrease in revenue in Latin America of $2.4 million, or 29%, to $5.8 million for the three months ended January 31, 2002 from $8.2 million for the comparable three month period in fiscal 2001 is due primarily to a decline in the number of engagements. Every country reported a decline in revenue with the largest reported revenue decrease in Mexico.
 
Futurestep revenue declined $11.5 million, or 54%, to $9.7 million for the three months ended January 31, 2002. The decline is primarily attributable to the global economic downturn resulting in a decrease in both the number of engagements in all geographic regions and the average fee per engagement in Europe and Asia/Pacific. Europe reported a decline of $5.7 million, or 45%, compared to the prior year three month period but only $0.7 million, or 9%, compared to the quarter ending October 31, 2001. North America and Asia/Pacific reported declines in revenue of 70% and 67%, respectively, compared to the same period last year. Compared to the second quarter of fiscal 2002, revenue declined 40% and 49% for North America and Asia/Pacific, respectively.
 
As a result of our decision to exit the college recruitment market in October 2001, JobDirect reported no revenue for the three months ended January 31, 2002 compared to $1.5 million in the same period last year. In the first quarter of this year, we recognized an asset impairment charge of $29.0 million, representing the unamortized goodwill resulting from our acquisition of JobDirect in July 2000. This charge reflected a decrease in our planned level of cash support for this business as well as a decrease in demand for these services due to the current economic environment in North America and was based on our initial restructuring plan announced in August 2001. In October 2001, we decided to exit the college recruitment market and recognized a restructuring charge comprised of $0.8 million for severance and $1.2 million for lease related costs and an asset impairment charge of $1.4 million, primarily related to the write-down of furniture, fixtures and equipment to estimated fair value less costs to sell. In the three months ended January 31, 2002, we incurred operating costs of $0.9 million to wind down JobDirect operations.
 
Compensation and Benefits.    Compensation and benefits expense decreased $31.0 million, or 32%, to $64.6 million for the three months ended January 31, 2002 from $95.7 million for the comparable period ended January 31, 2001. This decline is due primarily to a decline in executive recruitment of $22.4 million, largely reflecting a lower bonus expense and a decline in salaries and benefits expense due to a decline in the number of consultants. In addition, Futurestep and JobDirect expenses declined $6.6 million and $2.0 million, respectively, due primarily to a decrease in the number of employees. Although compensation and benefits expense declined in dollars, it increased as a percentage of revenue to 69% in the most recent three month period from 61% in the three months ended January 31, 2001, primarily due to the larger percentage decrease in revenue.
 
General and Administrative Expenses.    General and administrative expenses consist of occupancy expense associated with our leased premises, information and technology infrastructure, marketing and other general office expenses. General and administrative expenses decreased $15.5 million, or 33%, to $31.1 million for the three months ended January 31, 2002 from $46.6 million for the comparable period ended January 31, 2001. The decrease includes $3.0 million of amortization expense in fiscal 2001 not recorded in the current fiscal quarter based on the implementation of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and a decrease of $6.4 million at Futurestep, largely due to a reduction in advertising expense. As a percentage of revenue, general and administrative expenses, excluding Futurestep and JobDirect related expenses and amortization expense in fiscal 2001, increased to 31% in the third quarter of fiscal 2002 compared to 22% in the same three month period in the prior year due primarily to the larger percentage decrease in revenue.
 
        Operating Profit (Loss).    The operating loss of $2.4 million in the three months ended January 31, 2002 represents a decrease of $17.4 million from operating profit of $15.0 million in the prior year three month period. Excluding Futurestep and JobDirect losses and goodwill amortization in the prior year three month period, operating profit decreased $23.3 million. Operating profit as a percentage of revenue, on this same basis, decreased to 1.8% in the current three month period from 18.4% in the same prior year three month period. This decrease was due to the decline in revenue and the increase in compensation and benefits and general and administrative expenses as a percentage of revenue in the current period. Futurestep losses decreased $1.5 million to $3.1 million for the three months ended January 31, 2002 from $4.6 million in the prior year three month period. This decrease is due to the

18

decline in advertising expense and compensation and benefits expense substantially offset by the decrease in revenue.
 
Interest Income and Other Income, Net.    Interest income and other income, net, includes interest income of $0.7 million and $1.0 million for the three months ended January 31, 2002 and 2001, respectively. Other income, net includes an unrealized holding loss on investments of $0.5 million in 2002 and a loss on the sale of property and equipment of $0.3 million in 2001.
 
Interest Expense.    Interest expense decreased slightly in the three months ended January 31, 2002, to $2.2 million from $2.3 million in the prior year, primarily due to an increase in average outstanding borrowings and interest rate on our line of credit offset by a decrease in the effective interest rate on our COLI loans.
 
(Benefit from) Provision for Income Taxes.    In the current three month period, the net loss resulted in a provision for income taxes of $2.6 million compared to a provision for income taxes of $5.6 million in the prior year three month period. The effective tax rate was 42% for January 31, 2001. The income tax expense in the current period is due primarily to taxable income in North America and certain non-deductible charges in Europe.
 
Non-controlling Shareholders’ Interest.    Non-controlling shareholders’ interest is comprised of the non-controlling shareholders’ majority interest in our Mexico subsidiaries. Non-controlling shareholders’ interest decreased $0.3 million to $0.6 million in the current three month period compared to $0.9 million in the same prior year period and reflects a decrease in net income generated by the Mexico subsidiaries during the current fiscal three month period.
 
Nine Months Ended January 31, 2002 Compared to Nine Months Ended January 31, 2001
 
Revenue.    Revenue decreased $187.7 million, or 37%, to $316.7 million for the nine months ended January 31, 2002 from $504.4 million for the nine months ended January 31, 2001, including a decrease in revenue from Futurestep of $27.5 million compared to the same period in the prior year. The decrease in executive recruitment revenue of $158.3 million, or 36%, was primarily the result of a decrease in the number of executive recruitment engagements.
 
In North America, revenue decreased $115.8 million, or 43%, to $153.7 million for the nine months ended January 31, 2002 from $269.5 million for the comparable period in the prior year due mainly to a decrease in the number of engagements. Largely as a result of the restructuring initiatives in the first and second quarters, the average number of consultants decreased 11% for the three months ended January 31, 2002 compared to the same period last year; however, due to the larger percentage decline in revenue, the average number of engagements per consultant and the average fee per consultant decreased approximately 35%.
 
In Europe, revenue decreased $27.5 million, or 27%, to $73.8 million for the nine months ended January 31, 2002 from $101.3 million for the nine months ended January 31, 2001. The negative effect of foreign currency translation into the U.S. dollar was approximately 2% compared to the same period in the prior year. The decrease is primarily due to a decrease in the number of engagements, partially offset by an increase in the average fee per engagement compared to the prior year. The average number of consultants decreased by approximately 5% compared to the same period last year and the average number of engagements per consultant and average fee per consultant decreased approximately 30% and 20%, respectively.
 
Revenue in Asia/Pacific decreased $9.7 million, or 24%, to $30.3 million for the nine months ended January 31, 2002 compared to $40.0 million for the comparable period in the prior year. Excluding the negative effect of foreign currency translation into the U.S. dollar, revenue on a constant dollar basis declined 19% due primarily to a decrease in both the number of engagements and the average fee per engagement compared to the same nine month period last year. The average number of consultants was relatively flat in each of those nine month periods and as a result, the average number of engagements and the constant dollar average fee per engagement declined by approximately 10% compared to the same period last year.
 
        The decrease in revenue in Latin America of $5.3 million, or 20%, to $21.2 million for the nine months ended January 31, 2002 from $26.5 million for the comparable nine month period in fiscal 2001 includes a 5% decline due to the negative effect of translation into the U.S. dollar. The constant dollar decline of 15% reflects declines in all countries in the region with the most significant impact in Brazil, compared to the same period last year.
 
Futurestep revenue of $36.3 million for the nine months ended January 31, 2002 decreased $27.5 million, or 43%, from the same period last year. This decrease is primarily attributable to the weak global economy resulting in a

19

a decline in the number of engagements in all geographic regions and a decrease in the average fee per engagement in Europe and Asia/Pacific in the current nine month period with the largest dollar and percentage decline reported by North America.
 
Compensation and Benefits.    Compensation and benefits expense decreased $91.5 million, or 30%, to $213.5 million for the nine months ended January 31, 2002 from $305.0 million for the comparable period ended January 31, 2001 due primarily to a decrease in the number of executive recruitment and Futurestep employees resulting from our restructuring initiatives in the first and second quarters of fiscal 2002 and a credit in the current year nine month period of $3.4 million from the reversal of substantially all of our contribution to the 401(k) plan accrued in fiscal 2001 that will not be paid. In executive recruitment and Futurestep, compensation and benefits expense as a percentage of revenue increased to 65.4% and 76.2%, respectively, in the most recent nine month period from 58.9% and 67.2%, respectively, in the nine months ended January 31, 2001 due primarily to the larger percentage decrease in revenue.
 
General and Administrative Expenses.    General and administrative expenses consist of occupancy expense associated with our leased premises, information and technology infrastructure, marketing and other general office expenses. General and administrative expenses decreased $44.0 million, or 29%, to $108.3 million for the nine months ended January 31, 2002 from $152.3 million for the comparable period ended January 31, 2001. The decrease is primarily due to a decline in advertising expense at Futurestep, a decline in engagement related expenses in executive recruitment and $8.6 million of amortization expense in fiscal 2001 not recorded in the current nine month period with the implementation of SFAS No. 142. As a percentage of revenue, general and administrative expenses, excluding Futurestep and JobDirect related expenses and amortization expense in fiscal 2001, increased to 30% for the nine months ended January 31, 2002 from 21% for the comparable period in fiscal 2001. The increase as a percent of revenue primarily reflects the higher percentage decrease in revenue.
 
Operating Profit (Loss).    Operating profit (loss) decreased $136.6 million in the nine months ended January 31, 2002, to a loss of $89.5 million from a profit of $47.1 million in the prior year nine month period. Excluding Futurestep and JobDirect losses, goodwill amortization in fiscal 2001 and the $84.3 million restructuring charge in fiscal 2002, operating profit for the nine months ended January 31, 2002 decreased $72.6 million, or 86%, to $11.5 million compared to $84.1 million for the nine months ended January 31, 2001. Operating profit as a percentage of revenue, on this same basis, was 4% and 19% for the nine months ended January 31, 2002 and 2001, respectively. The lower margin in the current nine month period reflects a decline in all regions compared to the prior year nine month period due primarily to the decrease in revenue and increase in compensation and benefits and general and administrative expense as a percentage of revenue relative to the same period last year.
 
Interest Income and Other Income, Net.    Income interest and other income, net, includes interest income of $2.3 million and $3.4 million for the nine months ended January 31, 2002 and 2001, respectively. The decrease in interest income is due to decrease in interest bearing investments in the current nine month period. Other income, net includes an unrealized holding loss on investments of $0.7 million in 2002 and a loss on the sale of property and equipment of $0.9 million in 2001.
 
Interest Expense.    Interest expense was $5.9 million in the nine months ended January 31, 2002 compared to $6.1 million in the prior year, primarily due to an increase in average borrowings on our line of credit offset by a decrease in the effective interest rate.
 
(Benefit from) Provision for Income Taxes.    Income taxes resulted in a benefit of $11.0 million for the nine months ended January 31, 2002 compared to an expense of $18.3 million for the comparable period ended January 31, 2001. The effective tax rate was 11.7% and 41.5% for the current and prior year nine month periods, respectively. The decrease in the effective tax rates in these periods is due primarily to certain non-deductible asset impairment charges and losses in fiscal 2002.
 
Non-controlling Shareholders’ Interest.    Non-controlling shareholders’ interest is comprised of the non-controlling shareholders’ majority interest in our Mexico subsidiaries. Non-controlling shareholders’ interest decreased slightly to $2.5 million in the nine months ended January 31, 2002 from $2.7 million in the prior year comparable nine month period and reflects the small decline net income generated by the Mexico subsidiaries during these nine month periods.
 
Liquidity and Capital Resources
 
We have been in default under our credit agreement with Bank of America since July 31, 2001. We reached an agreement with Bank of America on March 7, 2002 to amend our credit facility from $100.0 million to $45.0 million, to

20

waive prior defaults, to secure it by certain assets and to amend our financial covenants to make compliance more achievable going forward. The financial covenants include a minimum fixed charge coverage ratio, a maximum leverage ratio, a quick ratio and other customary events of default. The amended agreement requires payment of a fee of $1.0 million at inception. Additional fees of $1.5 million may be payable in three installments of $500.0 million through October 2002 if additional financing is not obtained prior to the installment due date. In addition, we paid Bank of America $8.7 million in March 2002 to reduce our outstanding balance from $48.0 million at January 31, 2002 to $39.3 million, which combined with our letters of credit utilized the $45.0 million facility. Outstanding credit facility borrowings bear interest at Prime plus 3.75% under the amended agreement compared to the default rate of Prime plus 4%.
 
If we are unable to refinance this facility, we may be unable to meet this obligation with our cash flow from operations. We are actively working and considering alternatives to resolve these issues. In addition, we may need to reduce working capital or capital expenditures or take other actions with respect to our business in order to conserve cash in the meantime.
 
We believe that cash on hand, funds from operations and borrowings under our credit facility and against COLI contracts will be sufficient to meet our anticipated working capital, capital expenditures and general corporate requirements prior to the maturity of our credit facility with Bank of America. Our actual liquidity will be affected by our operating results going forward.
 
We maintained cash and cash equivalents of $57.7 million at January 31, 2002 and $65.2 million at January 31, 2001. During the nine months ended January 31, 2002 and 2001, cash used in operating activities was $76.6 million and cash provided by operating activities was $11.9 million, respectively. Operating cash used in the current nine month period is primarily due to net income of $3.1 million, excluding the non-cash asset impairment and restructuring charges of $68.6 million and other non-cash charges of $19.4 million, and a decrease in accounts payable and accrued liabilities of $84.9 million.
 
Cash used in investing activities during the nine months ended January 31, 2002 and 2001 was $2.3 million and $33.3 million, respectively. The decrease in cash used in investing activities in the current nine month period is due primarily to business acquisitions and investments in the prior fiscal year that required cash of $54.8 million offset by a decrease in net sales of marketable securities of $37.6 million compared to the same period last year resulting in a net cash savings of $17.2 million in the current nine month period. In addition, cash used to purchase fixed assets declined $13.5 million for the nine months ended January 31, 2002 compared to the same prior year period.
 
Cash provided by financing activities was $52.5 million and $1.6 million during the nine months ended January 31, 2002 and 2001, respectively. The increase is primarily due to net borrowings under our line of credit of $48.0 million compared to $3.0 million in the prior year. In addition, in the current nine month period, proceeds from stock options exercised were $1.0 million and receipts on shareholders’ notes related to stock were $1.9 million. Last year, proceeds from stock options exercised were $5.4 million and receipts on shareholders’ notes related to stock were $3.5 million.
 
We purchase COLI contracts to provide a funding vehicle for anticipated payments due under our deferred executive compensation programs. Borrowings on these COLI contracts were $10.5 million and $1.7 million for the nine months ended January 31, 2002 and 2001, respectively. Generally, we borrow against the cash surrender value of the COLI contracts to fund the COLI premium payments to the extent interest expense on the borrowings is deductible for U.S. income tax purposes; however, additional cash surrender value may be borrowed on certain COLI contracts at our discretion. Total outstanding borrowings under life insurance policies were $58.4 million and $46.6 million at January 31, 2002 and 2001, respectively. These borrowings, which are secured by the cash surrender value of the life insurance policies, do not require principal payments and bear interest at various variable rates.
 
Euro Conversion
 
As of January 1, 1999, several member countries of the European Union established fixed conversion rates among their existing local currencies and adopted the Euro as their new common legal currency. The Euro traded on currency exchanges and the legacy currencies remained legal tender in the participating countries for a transition period which expired January 1, 2002.

21

 
At January 1, 2002, the participating countries introduced Euro notes and coins and withdrew all legacy currencies. Our information technology systems allow for the recording of transactions in the Euro. Our conversion to the Euro was successful and did not have a material impact on our business or financial condition to date.
 
Recently Issued Accounting Standards
 
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. In conjunction with these new accounting standards the FASB has issued “Transition Provisions for New Business Combination Accounting Rules” (“Provisions”) that allow non-calendar year-end companies to cease amortization of goodwill and adopt the new impairment approach as of the beginning of their fiscal year that starts during either 2001 or 2002. We elected to implement SFAS No. 141 and 142 in the first quarter of fiscal 2002.
 
The Provisions provide for a six month period from the date of implementation of SFAS No. 142 to record impairment under the new method. The impairment charge, if any, would be recorded as a cumulative effect of a change in accounting principle. We completed our impairment analysis in the second fiscal quarter of 2002. The fair value exceeded the book value of each reporting unit or component and accordingly, there was no impairment charge. The impact on net income and earnings per share for the three months and nine months ended January 31, 2001 as if SFAS No. 142 had been implemented as of the beginning of fiscal 2001 is disclosed in “Notes to Financial Statements”.
 
The asset impairment charge recognized in the first and second fiscal quarters of 2002 are unrelated to the implementation of SFAS No. 142. “See Notes to Financial Statements.”
 
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The purpose of this statement is to develop consistent accounting for asset retirement obligations and related costs in the financial statements and provide more information about future cash outflows, leverage and liquidity regarding retirement obligations and the gross investment in long-lived assets. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. We do not believe that the adoption of this statement will have a significant impact on our financial position or results of operations.
 
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” This statement establishes a number of rules which govern accounting for the impairment of long-lived assets, eliminates inconsistencies from having two accounting models for long-lived assets to be disposed of by sale and expands the definition of a discontinued operation to a component of an entity for which identifiable cash flows exist. The statement is effective for fiscal years beginning after December 15, 2002. We do not believe that the adoption of this statement will have a significant impact on our financial position or results of operations.
 
Item 3.    QUANTIT ATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Currency Market Risk
 
As a result of our global operating activities, we are exposed to certain market risks including foreign currency exchange fluctuations, fluctuations in interest rates and variability in interest rate spread relationships. We manage our exposure to these risks in the normal course of our business as described below. We have not utilized financial instruments for trading or other speculative purposes nor do we trade in derivative financial instruments.
 
Foreign Currency Risk.    Generally, financial results of our foreign subsidiaries are measured in their local currencies. Assets and liabilities are translated into U.S. dollars at the rates of exchange in effect at the end of each period and 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.

22

 
Historically, we have not realized any significant translation gains or losses on transactions involving U.S. dollars and other currencies. This is primarily due to natural hedges of revenue and expenses in the functional currencies of the countries in which our offices are located and investment of excess cash balances in U.S. dollar denominated accounts. During the nine months ended January 31, 2002 and 2001, we recognized foreign currency losses, after income taxes, of $0.1 million and $0.3 million, respectively, primarily related to our European operations. Realization of translation gains or losses due to the translation of intercompany payables denominated in U.S. dollars is mitigated through the timing of repayment of these intercompany borrowings.
 
Interest Rate Risk.    We primarily manage our exposure to fluctuations in interest rates through our regular financing activities that generally are short term and provide for variable market rates. As of January 31, 2002, we had outstanding borrowings of $48.0 million on our revolving line of credit bearing interest at Prime plus 4.0%, $58.4 million of borrowings against the cash surrender value of COLI contracts bearing interest at primarily variable rates payable at least annually and $15.7 million of notes payable, of which $15.4 million is due to shareholders resulting from business acquisitions in fiscal 2000 and 2001, at rates ranging from 5.5% to 7.0%, of which $10.4 million matures in 2002 and $5.0 million matures in 2003. Currently, we have all of our investments in interest bearing money market accounts at market rates.

23

 
PART II.    OTHER INFORMATION
 
Item 3.     Defaults Upon Senior Securities
 
Under our credit agreement with Bank of America, we breached our fixed charge coverage ratio covenant for the period ended July 31, 2001 and our fixed charge coverage and leverage ratio covenants for the period ended October 31, 2001, each of which constitutes an event of default. We are not in default in the payment of any principal or interest thereunder. We reached an agreement with Bank of America on March 7, 2002 to amend our credit facility from $100 million to $45 million, to waive prior defaults, to secure it by certain assets and to amend our financial covenants to make compliance more achievable going forward. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources”.
 
Item 6.     Exhibits and Reports on Form 8-K
 
 
(a)
 
Exhibits
 
Exihibit Number
   
Description of Exhibit
10.1
   
Amendment No. 3 to Loan Agreement, dated as of March 7, 2002.
 
 
(b)
 
Reports on Form 8-K
 
None.

24

SIGNATURE
 
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:  March 15, 2002
      
KORN/FERRY INTERNATIONAL
           
By:
  
/S/    DONALD E. JORDAN
               
Donald E. Jordan
Interim Chief Financial Officer and
Senior Vice President

25

EXHIBIT INDEX            
 
Exhibit Number
   
Description of Exhibit
10.1
   
Amendment No. 3 to Loan Agreement, dated as of March 7, 2002.

26