10-Q 1 0001.txt FORM 10-Q (PERIOD ENDED OCTOBER 31, 2000) ================================================================================ 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 October 31, 2000 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- ------------- Commission File Number 001-14505 ---------------- KORN/FERRY INTERNATIONAL (Exact name of registrant as specified in its charter) 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 December 11, 2000 was 37,454,643. ================================================================================ KORN/FERRY INTERNATIONAL AND SUBSIDIARIES Table of Contents
PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheets as of October 31, 2000 (unaudited) and April 30, 2000........................................................... 3 Unaudited Consolidated Statements of Operations for the three months and six months ended October 31, 2000 and October 31, 1999............... 5 Unaudited Consolidated Statements of Cash Flows for the six months ended October 31, 2000 and October 31, 1999.............................. 6 Unaudited Notes to Consolidated Financial Statements....................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 16 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders........................ 17 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 October 31, 2000 April 30, 2000 ---------------- -------------- (unaudited) ASSETS ------ Cash and cash equivalents $ 66,824 $ 86,975 Marketable securities 59,978 Receivables due from clients, net of allowance for doubtful accounts of $15,627 and 131,975 101,506 $12,538 Other receivables 5,471 8,112 Deferred income taxes 4,405 3,814 Prepaid expenses 10,651 7,453 -------- -------- Total current assets 219,326 267,838 -------- -------- Property and equipment: Computer equipment and software 37,809 32,532 Furniture and fixtures 23,694 18,175 Leasehold improvements 17,779 15,304 Automobiles 1,904 1,793 -------- -------- 81,186 67,804 Less - Accumulated depreciation and amortization (38,852) (31,992) -------- -------- Property and equipment, net 42,334 35,812 -------- -------- Cash surrender value of company owned life insurance policies, net of loans 55,605 50,632 Marketable securities 5,532 1,129 Deferred income taxes 30,074 17,790 Goodwill and other intangibles, net of accumulated amortization of $14,563 and $8,709 130,793 96,643 Other 7,438 6,150 -------- -------- Total assets $491,102 $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)
---------------- -------------- As of As of October 31, 2000 April 30, 2000 ---------------- -------------- (unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Notes payable and current maturities of long-term debt $ 32,644 $ 16,147 Accounts payable 14,665 11,896 Income taxes payable 144 407 Accrued liabilities: Compensation 52,900 75,866 Payroll taxes 28,862 41,393 Other 38,964 39,081 -------- -------- Total current liabilities 168,179 184,790 Deferred compensation 40,494 37,483 Long-term debt 19,565 16,916 Other 2,529 2,361 -------- -------- Total liabilities 230,767 241,550 -------- -------- Non-controlling shareholders' interest 3,685 3,220 -------- -------- Shareholders' equity Common stock: $0.01 par value, 150,000 shares authorized, 37,407 and 36,748 shares outstanding 294,796 283,277 Deficit (19,500) (35,615) Accumulated other comprehensive loss (12,463) (7,300) -------- -------- Shareholders' equity 262,833 240,362 Less: Notes receivable from shareholders (6,183) (9,138) -------- -------- Total shareholders' equity 256,650 231,224 -------- -------- Total liabilities and shareholders' equity $491,102 $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 October 31, Six Months Ended October 31, ------------------------------ ---------------------------- 2000 1999 2000 1999 ----------- ------------ ---------- ------------ (unaudited) (unaudited) Revenue $173,621 $116,322 $347,244 $221,103 Compensation and benefits 102,780 68,725 209,339 133,459 General and administrative expenses 57,253 36,080 105,777 65,882 Interest income and other income, net 592 1,569 2,317 3,077 Interest expense 2,094 776 3,775 1,596 -------- -------- -------- -------- Income before provision for income taxes and non-controlling shareholders' interest 12,086 12,310 30,670 23,243 Provision for income taxes 4,879 5,171 12,685 9,762 Non-controlling shareholders' interest 1,099 637 1,870 1,375 -------- -------- -------- -------- Net income $ 6,108 $ 6,502 $ 16,115 $ 12,106 ======== ======== ======== ======== Basic earnings per common share $0.16 $0.18 $0.43 $0.34 ======== ======== ======== ======== Basic weighted average common shares outstanding 37,271 35,941 37,081 35,834 ======== ======== ======== ======== Diluted earnings per common share $0.16 $0.17 $0.42 $0.33 ======== ======== ======== ======== Diluted weighted average common shares outstanding 39,146 37,277 38,656 36,710 ======== ======== ======== ========
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)
Six Months Ended October 31, ---------------------------- 2000 1999 ---------- ----------- (unaudited) Cash from operating activities: Net income $ 16,115 $ 12,106 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 6,881 4,260 Amortization 5,854 721 Loss on disposition of property and equipment 534 Provision for doubtful accounts 10,138 5,694 Cash surrender value, benefits, and gain in excess of premiums paid (2,473) (686) Deferred income tax benefit (5,468) (610) Tax benefit from exercise of stock options 2,597 Change in other assets and liabilities, net of acquisitions: Deferred compensation 3,011 2,911 Receivables (35,542) (27,945) Prepaid expenses (3,198) (3,546) Income taxes (854) 2,920 Accounts payable and accrued liabilities (30,175) 3,607 Non-controlling shareholders' interest and other, net 1,828 (550) -------- -------- Net cash used in operating activities (30,752) (1,118) -------- -------- Cash from investing activities: Purchases of property and equipment (12,803) (8,894) Purchases of marketable securities (8,000) (5,845) Sales of marketable securities 61,107 Business acquisitions, net of cash acquired (44,257) (4,304) Premiums on life insurance, net of benefits received (3,365) (2,840) Purchase of investments (2,570) -------- -------- Net cash used in investing activities (9,888) (21,883) -------- -------- Cash from financing activities: Increase in bank borrowings 28,000 Payment of debt (13,000) Borrowings under life insurance policies 395 1,010 Purchase of common and preferred stock and payments on related notes (1,097) (1,082) Issuance of common stock and receipts on shareholders' notes 7,721 2,359 -------- -------- Net cash provided by financing activities 22,019 2,287 -------- -------- Effect of exchange rate changes on cash flows (1,530) (552) -------- -------- Net decrease in cash and cash equivalents (20,151) (21,266) Cash and cash equivalents at beginning of the period 86,975 113,741 -------- -------- Cash and cash equivalents at end of the period $ 66,824 $ 92,475 ======== ========
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 six months ended October 31, 2000 and 1999 include the accounts of Korn/Ferry International ("KFY"), all of its wholly and majority owned domestic and international subsidiaries, and affiliated companies in which KFY has effective control (collectively, the "Company") and are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair presentation of the results for these periods. These financial statements have been prepared consistently with the accounting policies described in the Company's 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 October 31, ------------------------------------------------------------------------ 2000 1999 --------------------------------- --------------------------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount ------ -------- ------ ------ -------- ------ Basic EPS Income available to common shareholders $ 6,108 37,271 $0.16 $ 6,502 35,941 $0.18 ===== ===== Effect of dilutive securities Shareholder common stock purchase commitments 267 374 Stock options 1,608 962 ------- ------ ------- ------ Diluted EPS Income available to common shareholders plus assumed conversions $ 6,108 39,146 $0.16 $ 6,502 37,277 $0.17 ======= ====== ===== ======= ====== ===== Six months ended October 31, ------------------------------------------------------------------------ 2000 1999 --------------------------------- --------------------------------- Weighted Per Weighted Per Average Share Average Share Income Shares Amount Income Shares Amount ------ -------- ------ ------ -------- ------ Basic EPS Income available to common shareholders $16,115 37,081 $0.43 $12,106 35,834 $0.34 ===== ===== Effect of dilutive securities Shareholder common stock purchase commitments 297 374 Stock options 1,278 502 ------- ------ ------- ------ Diluted EPS Income available to common shareholders plus assumed conversions $16,115 38,656 $0.42 $12,106 36,710 $0.33 ======= ====== ===== ======= ====== =====
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 October 31, Six months ended October 31, ------------------------------ ---------------------------- 2000 1999 2000 1999 ----------- ---------- ---------- ----------- Net income $ 6,108 $6,502 $16,115 $12,106 Foreign currency translation adjustment (4,548) (801) (3,732) (552) Unrealized loss on investment (2,468) (2,468) Tax benefit related to unrealized loss on investment 1,037 1,037 ------- ------ ------- ------- Comprehensive income $ 129 $5,701 $10,952 $11,554 ======= ====== ======= =======
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 October 31, Six months ended October 31, ------------------------------ ---------------------------- 2000 1999 2000 1999 ----------- ------------ ---------- ------------ Revenue: Executive recruitment: North America $ 93,474 $ 64,135 $189,450 $121,362 Europe 34,409 25,761 68,302 50,912 Asia/Pacific 13,468 12,727 26,650 23,866 Latin America 9,501 7,381 18,337 14,670 Futurestep 21,100 6,318 42,681 10,293 JobDirect 1,669 1,824 -------- -------- -------- -------- Total revenue $173,621 $116,322 $347,244 $221,103 ======== ======== ======== ======== Three months ended October 31, Six months ended October 31, ------------------------------ ---------------------------- 2000 1999 2000 1999 ----------- ------------ ---------- ------------ Operating profit (loss): Executive recruitment: North America $ 18,239 $ 12,036 $ 36,775 $ 22,082 Europe 4,992 2,918 9,849 6,087 Asia/Pacific 1,810 1,381 3,584 2,436 Latin America 2,618 1,966 4,865 3,602 Futurestep (10,033) (6,784) (18,547) (12,445) JobDirect (4,038) (4,398) -------- -------- -------- -------- Total operating profit $ 13,588 $ 11,517 $ 32,128 $ 21,762 ======== ======== ======== ========
As of As of October 31, 2000 April 30, 2000 ---------------- -------------- Identifiable assets: Executive recruitment: North America (1) $261,884 $285,474 Europe 83,717 91,790 Asia/Pacific 35,543 33,376 Latin America 21,492 18,631 Futurestep 49,563 46,723 JobDirect 38,903 -------- -------- Total identifiable assets $491,102 $475,994 ======== ========
(1) The corporate office identifiable assets of $78,825 and $144,739 as of October 31, 2000 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, 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 October 31, 2000, over 840,000 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 closed 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 six months ended October 31, 2000 and 1999 as a percentage of revenue.
Three months ended October 31, Six months ended October 31, ------------------------------ ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Revenue 100% 100% 100% 100% Compensation and benefits 59 59 60 60 General and administrative expenses 33 31 30 30 Operating profit (1) 8 10 9 10 Net income 4 6 5 6
__________ (1) For the three months ended October 31, 2000 and 1999, operating profit as a percentage of revenue, excluding Futurestep losses of $10.0 million and $6.8 million , respectively, and JobDirect losses of $4.0 million in the current year, is 18% and 17%. For the six months ended October 31, 2000 and 1999, operating profit as a percentage of revenue, excluding Futurestep losses of $18.5 million and $12.4 million, respectively, and JobDirect losses of $4.4 million in the current year, is 18% and 16%. We experienced strong growth in executive recruitment revenue and operating profit in all geographic regions for the three months and six months ended October 31, 2000. We include executive recruitment revenue generated from our operations in Mexico with Latin America.
Three Months Ended October 31, Six Months Ended October 31, ------------------------------------------------ ------------------------------------------------- 2000 1999 2000 1999 ---------------------- ---------------------- ----------- -------- ----------- -------- Dollars % Dollars % Dollars % Dollars % ----------- -------- ----------- -------- ----------- -------- ----------- -------- Revenue Executive recruitment: North America $ 93,474 54% $ 64,135 55% $ 189,450 55% $ 121,362 55% Europe 34,409 20 25,761 22 68,302 20 50,912 23 Asia/Pacific 13,468 8 12,727 11 26,650 8 23,866 11 Latin America 9,501 5 7,381 6 18,337 5 14,670 7 Futurestep 21,100 12 6,318 5 42,681 12 10,293 5 JobDirect 1,669 1 1,824 1 ----------- -------- ----------- -------- ----------- -------- ----------- -------- Total revenue $ 173,621 100% $ 116,322 100% $ 347,244 100% $ 221,103 100% =========== ======== =========== ======== =========== ======== =========== ======== Three Months Ended October 31, Six Months Ended October 31, ------------------------------------------------ ------------------------------------------------ 2000 1999 2000 1999 ---------------------- ---------------------- ----------- -------- ----------- -------- Dollars % Dollars % Dollars % Dollars % ----------- -------- ----------- -------- ----------- --------- ----------- -------- Operating Profit (Loss) Executive recruitment: North America $ 18,239 19.5% $ 12,036 18.8% $ 36,775 19.4% $ 22,082 18.2% Europe 4,992 14.5 2,918 11.3 9,849 14.4 6,087 12.0 Asia/Pacific 1,810 13.4 1,381 10.9 3,584 13.4 2,436 10.2 Latin America 2,618 27.6 1,966 26.6 4,865 26.5 3,602 24.6 Futurestep (10,033) (6,784) (18,547) (12,445) JobDirect (4,038) (4,398) ----------- -------- ----------- -------- ----------- -------- ----------- -------- Total operating profit $ 13,588 7.8% $ 11,517 9.9% $ 32,128 9.3% $ 21,762 9.8% =========== ======== =========== ======== =========== ======== =========== ========
In the following comparative analysis, all percentages are calculated based on dollars in thousands. Three Months Ended October 31, 2000 Compared to Three Months Ended October 31, 1999 Revenue. Revenue increased $57.3 million, or 49%, to $173.6 million for the three months ended October 31, 2000 from $116.3 million for the three months ended October 31, 1999. This increase in revenue was primarily the result of an increase in the number of engagements with a corresponding increase in the number of consultants, and an increase 12 in the average fee per engagement in executive recruitment; and an increase in revenue from Futurestep and the acquisition of JobDirect in the current fiscal year. In North America, revenue increased $29.4 million, or 46%, to $93.5 million for the three months ended October 31, 2000 from $64.1 million for the comparable period in the prior year. This revenue growth is due mainly to an increase in the number of engagements supported by an increase in the number of consultants. The advanced technology, financial services and industrial specialty practices delivered particularly strong performance. Revenue in Europe increased $8.6 million, or 34%, to $34.4 million for the three months ended October 31, 2000 from $25.8 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 52%. This increase is mainly due to an increase in the number of engagements supported by an increase in the number of consultants and approximately $6.1 million in incremental revenue related to the acquisition in Germany in the prior year third quarter. In Asia/Pacific, revenue increased $0.8 million, or 6%, to $13.5 million for the three months ended October 31, 2000 from $12.7 million for the three months ended October 31, 1999 primarily due to an increase in the average fee per engagement partially offset by a decrease in the number of engagements. The negative effective of foreign currency translation into the U.S. dollar resulted in a decline of approximately 4% in reported revenue compared to the same three month period last year. The increase in revenue in Latin America of $2.1 million, or 29%, to $9.5 million for the three months ended October 31, 2000 from $7.4 million for the comparable three month period in fiscal 2000 is due primarily to continued strong performance in Mexico and the improvement in the Brazilian economy compared to the prior year three month period. The effect of foreign currency translation was negligible to reported revenue in Latin America. Futurestep revenue of $21.1 million for the three months ended October 31, 2000 is primarily attributable to an increase in the number of engagements in North America during the current fiscal quarter and reflects the worldwide roll- out of the business and the acquisition of the ESS business of PA Consulting in late fiscal 2000. JobDirect revenue of $1.7 million for the three months ended October 31, 2000 reflects approximately 580 corporate clients and 380 college career offices using our service. As of October 31, 2000, over 1.2 million students had registered on the database. Compensation and Benefits. Compensation and benefits expense increased $34.1 million, or 50%, to $102.8 million for the three months ended October 31, 2000 from $68.7 million for the comparable period ended October 31, 1999 due primarily to an increase in the number of employees from the prior year. Excluding Futurestep expenses of $13.7 million and JobDirect expenses of $2.2 million in the current three month period and Futurestep expenses of $3.6 million in the same period last year, compensation and benefits as a percentage of revenue decreased to 57.6% in the most recent three month period from 59.2% in the three months ended October 31, 1999. This decrease follows the exceptional performance and related higher bonus accrual in the current year first quarter. 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 $21.2 million, or 59%, to $57.3 million for the three months ended October 31, 2000 from $36.1 million for the comparable period ended October 31, 1999. As a percentage of revenue, general and administrative expenses, excluding Futurestep and JobDirect related expenses, remained constant at 24.1% of revenue in each period. Operating Profit. Operating profit increased $2.1 million in the three months ended October 31, 2000, to $13.6 million, or 7.8% of revenue, from $11.5 million, or 9.9% of revenue, in the prior year three month period. Excluding the Futurestep losses of $10.0 million and JobDirect losses of $4.0 million in the current year and Futurestep losses of $6.8 million in the prior year, operating profit for the three months ended October 31, 2000 increased $9.4 million, or 51%, to $27.7 million compared to the three months ended October 31, 1999. Operating profit as a percentage of revenue, excluding Futurestep and JobDirect, was 18.3% and 16.6% for the three months ended October 31, 2000 and 1999. This margin increase reflects an increase in all regions compared to the prior year three month period due primarily to the decrease in compensation and benefits as a percentage of revenue in the current three month period. Interest Income and Other Income, Net. Interest income and other income, net, includes interest income of $0.8 million and $1.4 million for the three months ended October 31, 2000 and 1999, respectively. 13 Interest Expense. Interest expense increased $1.3 million in the three months ended October 31, 2000, to $2.1 million from $0.8 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 $0.3 million to $4.9 million for the three months ended October 31, 2000 from $5.2 million for the comparable period ended October 31, 1999. The effective tax rates were 40% and 42% for the current and the prior year three month periods. The decrease in the effective tax rate in the current three month period is due to a non-taxable gain on corporate-owned life insurance included as a reduction in deferred compensation expense. 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 $0.5 million to $1.1 million in the current three month period compared to $0.6 million in the prior year period and reflects the increase in net income generated by the Mexico subsidiaries during the current fiscal three month period. Six Months Ended October 31, 2000 Compared to Six Months Ended October 31, 1999 Revenue. Revenue increased $126.1 million, or 57%, to $347.2 million for the six months ended October 31, 2000 from $221.1 million for the six months ended October 31, 1999, including an increase in revenue from Futurestep of $32.4 million compared to the same period in the prior year and revenue of $1.8 million from JobDirect in the current six month period. The increase in executive recruitment revenue of $91.9 million, or 44%, 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 $68.1 million, or 56%, to $189.5 million for the six months ended October 31, 2000 from $121.4 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. In Europe, revenue increased $17.4 million, or 34%, to $68.3 million for the six months ended October 31, 2000 from $50.9 million for the six months ended October 31, 1999. Excluding the negative effects of foreign currency translation into the U.S. dollar and including incremental revenue of $11.4 million related to the acquisition in Germany in the prior year third quarter, revenue increased 49% 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, and an increase in the average fee per engagement. Revenue in Asia/Pacific increased $2.8 million, or 12%, from $26.7 million for the six months ended October 31, 2000 compared to $23.9 million for the comparable period in the prior year due primarily to an increase in the average fee per engagement. The negative effect of foreign currency translation into the U.S. dollar resulted in a decline of approximately 3% in reported revenue compared to the same six month period last year. The increase in revenue in Latin America of $3.6 million, or 25%, to $18.3 million for the six months ended October 31, 2000 from $14.7 million for the comparable six month period in fiscal 2000 is attributable mainly to continued strong performance by Mexico and improvement in the economy in Brazil compared to the same period last year. Futurestep revenue of $42.7 million for the six months ended October 31, 2000 increased $32.4 million from the same period last year. This increase is primarily attributable to additional engagements in North America in the current six 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 $75.8 million, or 57%, to $209.3 million for the six months ended October 31, 2000 from $133.5 million for the comparable period ended October 31, 1999 due primarily to an increase in the number of executive recruitment consultants and Futurestep employees and the acquisition of JobDirect in the current year. The $52.0 million increase for the six months ended October 31, 2000, excluding Futurestep expenses of $28.2 million and JobDirect expenses of $2.3 million, reflects a 30% increase in the average number of consultants for the six months ended October 31, 2000 over the comparable period in 1999. On a comparable basis, excluding Futurestep and JobDirect, compensation and benefits expense as a percentage of revenue decreased to 59.1% in the most recent six month period from 60.2% in the six months ended October 31, 1999. 14 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 $39.9 million, or 61%, to $105.8 million for the six months ended October 31, 2000 from $65.9 million for the comparable period ended October 31, 1999. As a percentage of revenue, general and administrative expenses, excluding Futurestep and JobDirect related expenses, declined to 22.7% for the six months ended October 31, 2000 from 23.6% for the comparable period in 1999. The decrease primarily reflects the higher percentage increase in revenue. Operating Profit. Operating profit increased $10.3 million in the six months ended October 31, 2000, to $32.1 million, or 9.3% of revenue, from $21.8 million, or 9.8% of revenue, in the prior year six month period. Excluding the Futurestep losses of $18.5 million and JobDirect losses of $4.4 million in the current six month period and Futurestep losses of $12.4 million in the same period in the prior year, operating profit for the six months ended October 31, 2000 increased $20.9 million, or 61%, to $55.1 million compared to the six months ended October 31, 1999. Operating profit, excluding Futurestep and JobDirect, as a percentage of revenue was 18.2% and 16.2% for the six months ended October 31, 2000 and 1999, respectively. The increased margin reflects improvement in all regions compared to the prior year six month period due primarily to the increase in revenue and 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. Income interest and other income, net, includes interest income of $2.4 million and $2.8 million for the six months ended October 31, 2000 and 1999, respectively. Interest Expense. Interest expense increased $2.2 million in the six months ended October 31, 2000, to $3.8 million from $1.6 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 $2.9 million to $12.7 million for the six months ended October 31, 2000 from $9.8 million for the comparable period ended October 31, 1999. The effective tax rate was 41% and 42% for the current and prior year six month periods, respectively. 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 $0.5 million in the current six month period to $1.9 million, compared to $1.4 million in the comparable prior year period and reflects the increase in net income generated by the Mexico subsidiaries during the current fiscal six month period. Liquidity and Capital Resources We maintained cash and cash equivalents of $66.8 million at October 31, 2000 and $92.5 million at October 31, 1999. During the six months ended October 31, 2000 and 1999, cash used in operating activities was $30.8 million and $1.1 million, respectively. Operating cash used in the current six month period is primarily due to a decrease in accounts payable and accrued liabilities mainly related to fiscal 2000 bonuses paid in fiscal 2001. Cash used in investing activities was $9.9 million for the current six month period and $21.9 million for the six months ended October 31, 1999. In the current six month period, cash flows used in investing activities included $44.3 million for business acquisitions, $10.6 million primarily for the purchase of equity interests in Jungle Interactive and Webhire, offset by proceeds from the sale of marketable securities of $61.1 million. In the six months ended October 31, 1999, we completed three acquisitions resulting in a total cash outflow of $4.3 million and we purchased marketable securities of $5.8 million. Excluded from cash flows is the non-cash charge to other comprehensive income of $1.4 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 $1.63 at October 31, 2000. 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 $3.4 million and $2.8 million for the six months ended October 31, 2000 and 1999, respectively. Generally, we borrow against the cash surrender value of the COLI contracts to fund the COLI premium payments to the extent interest expense on the borrowings is deductible for U.S. income tax purposes. 15 Capital expenditures totaled $12.8 million and $8.9 million for the six months ended October 31, 2000 and 1999, respectively. These expenditures consisted primarily of systems hardware and software costs, upgrades to information systems and leasehold improvements. The $3.9 million increase in capital expenditures in the six months ended October 31, 2000 compared to the prior year six month period relates primarily to increased fixed asset spending at Futurestep to support its worldwide infrastructure. Cash provided by financing activities was approximately $22.0 million and $2.3 million during the six months ended October 31, 2000 and 1999, respectively. The current six month period included borrowings of $28.0 million under our line of credit offset by payments of $13.0 million. Proceeds from stock options exercised were $4.8 million in the current six month period. Receipts on shareholder notes were $2.9 million and $2.4 million in the current and prior year six month periods and repurchases of common stock and payments on related notes were $1.1 million in both the six months ended October 31, 2000 and 1999. Total outstanding borrowings under life insurance policies were $45.3 million and $43.7 million at October 31, 2000 and 1999, respectively. These borrowings are secured by the cash surrender value of the life insurance policies, do not require principal payments and bear interest at various variable rates. To provide additional liquidity, we replaced our existing 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 .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, 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 16 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. 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 six months ended October 31, 2000, we recognized a foreign currency loss of $1.1 million after tax 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 October 31, 2000, we had outstanding borrowings of $15.0 million on our revolving line of credit bearing interest at the bank's prime lending rate, $45.3 million of borrowings against the cash surrender value of COLI contracts bearing interest at variable rates payable at least annually and $35.9 million of long-term notes payable to shareholders resulting from business acquisitions in the fourth quarter of fiscal 2000, payable through fiscal 2004 at variable market rates. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders was held on September 26, 2000. The business at the meeting was (i) to elect three directors to serve on the board, (ii) to amend our Performance Award Plan to increase the number of shares which may be issued thereunder and to approve the limits on the maximum number of awards that may be granted to individuals as currently set forth in the Plan, and (iii) to ratify the appointment of Arthur Andersen LLP as our independent auditors for fiscal 2001. Each of the proposals was adopted. (i) The number of votes for and withheld for each director were as follows:
For Withheld --- -------- The election of Class 2003 Directors of the Company: Patti S. Hart 27,427,103 440,911 Windle B. Priem 27,136,909 731,105 Mark C. Thompson 27,441,683 426,331
(ii) The number of votes for, against, abstaining, and broker non- vote for the approval of the amendment of the Performance Award Plan to increase the number of shares which may be issued thereunder and to approve the limits on the maximum number of awards that may be granted to individuals as currently set forth in the Plan were as follows:
For Against Abstaining Broker Non-Vote --- ------- ---------- --------------- 19,383,036 6,923,069 606,998 954,911
(iii) The number of votes for, against, abstaining, and broker non-vote for the ratification of Arthur Andersen LLP were as follows:
For Against Abstaining Broker Non-Vote --- ------- ---------- --------------- 27,764,697 48,574 54,743 0
17 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description of Exhibit ------ ---------------------- 10.1 Loan Agreement, dated as of October 31, 2000, among Korn/Ferry International, Bank of America, N.A. and the other lenders referred to therein 27.1 Financial Data Schedule for the six months ended October 31, 2000 (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: December 14, 2000 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 Loan Agreement, dated as of October 31, 2000, among Korn/Ferry International, Bank of America, N.A. and the other lenders referred to therein 27.1 Financial Data Schedule for the six months ended October 31, 2000 --------------- 20