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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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
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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 the Company's Common Stock as of March
15, 2000 was 36,845,635.
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KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheet as of January 31, 2000 (unaudited) and
April 30, 1999........................................................ 3
Unaudited Consolidated Statement of Operations for the three months
and nine months ended January 31, 2000 and January 31, 1999........... 5
Unaudited Consolidated Statement of Cash Flows for the nine months
ended January 31, 2000 and January 31, 1999........................... 6
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............... 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................ 18
Item 5. Other Information........................................................ 18
Item 6. Exhibits................................................................. 19
SIGNATURE................................................................................ 20
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
------------------ -----------------
As of As of
January 31, 2000 April 30, 1999
------------------ -----------------
(unaudited)
ASSETS
------
Cash and cash equivalents $ 110,948 $ 113,741
Marketable securities 6,183 21,839
Receivables due from clients, net of allowance for
doubtful accounts of $14,338 and $7,847 92,913 63,139
Other receivables 2,780 3,337
Prepaid expenses 10,127 5,736
------------------ -----------------
Total current assets 222,951 207,792
------------------ -----------------
Property and equipment:
Computer equipment and software 28,185 17,554
Furniture and fixtures 17,098 14,646
Leasehold improvements 13,399 11,785
Automobiles 1,677 1,716
------------------ -----------------
60,359 45,701
Less - Accumulated depreciation and amortization (30,584) (24,591)
------------------ -----------------
Property and equipment, net 29,775 21,110
------------------ -----------------
Cash surrender value of company owned life insurance
policies, net of loans 49,393 41,973
Marketable securities and notes receivable 1,909 8,218
Deferred income taxes 19,605 18,182
Goodwill and other intangibles, net of accumulated
amortization of $7,151 and $5,351 74,600 3,639
Other 5,026 3,210
------------------ -----------------
Total assets $ 403,259 $ 304,124
================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
3
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - (Continued)
(in thousands)
------------------ -----------------
As of As of
January 31, 2000 April 30, 1999
------------------ ----------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes payable and current maturities of long-term debt $ 9,843 $ 1,356
Accounts payable 16,887 10,384
Income taxes payable 7,956 2,323
Accrued liabilities:
Compensation 48,488 35,212
Payroll taxes 26,454 20,546
Other accruals 26,802 21,910
------------------ -----------------
Total current liabilities 136,430 91,731
Deferred compensation 37,199 33,531
Long-term debt 16,035 2,360
Other 1,700 1,775
------------------ -----------------
Total liabilities 191,364 129,397
------------------ -----------------
Non-controlling shareholders' interests 2,837 2,041
------------------ -----------------
Shareholders' equity
Common stock, authorized 150,000 shares, 36,277 and
35,633 shares outstanding 268,709 253,021
Retained deficit (46,035) (66,426)
Accumulated other comprehensive loss (4,742) (2,360)
------------------ -----------------
Shareholders' equity 217,932 184,235
Less: Notes receivable from shareholders (8,874) (11,549)
------------------ -----------------
Total shareholders' equity 209,058 172,686
------------------ -----------------
Total liabilities and shareholders' equity $ 403,259 $ 304,124
================== =================
The accompanying notes are an integral part of these consolidated financial
statements.
4
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended January 31, Nine Months Ended January 31,
--------------------------------- ----------------------------------
2000 1999 (1) 2000 1999 (1)
---------------- ---------------- ----------------- ----------------
Revenues, net $ 122,075 $ 88,466 $ 343,178 $ 264,387
Compensation and benefits 72,333 51,310 205,792 167,690
General and administrative expenses 35,345 26,928 101,227 80,571
Interest and other income (expense) 1,030 (487) 2,511 (1,620)
---------------- ---------------- ---------------- ---------------
Income before provision for income taxes
and non-controlling shareholders' interests 15,427 9,741 38,670 14,506
Provision for income taxes 6,479 4,033 16,241 6,102
Non-controlling shareholders' interests 663 603 2,038 1,926
---------------- ---------------- ---------------- ----------------
Net income $ 8,285 $ 5,105 $ 20,391 $ 6,478
================ ================ ================ ================
Basic earnings per common share $ 0.23 $ 0.19 $ 0.57 $ 0.25
================ ================ ================ ================
Basic weighted average common shares
outstanding 36,117 26,498 35,929 26,171
================ ================ ================ ================
Diluted earnings per common share $ 0.22 $ 0.19 $ 0.55 $ 0.24
================ ================ ================ ================
Diluted weighted average common shares
outstanding 37,539 27,023 37,000 27,041
================ ================ ================ ================
(1)The results for the three months and nine months ended January 31, 1999
include the non-recurring charges of $8.4 million. The three months results
also includes a $10.2 million credit to earnings to reduce accrued bonus
expense at October 31, 1998 resulting from implementation of the Company's
revised compensation program effective May 1, 1998 upon completion of the
initial public offering in February 1999. Excluding these items for the three
months ended January 31, 1999, net income would be $4.2 million and basic and
fully diluted earnings per common share would be $0.16. Excluding these items
for the nine months ended January 31, 1999, net income would be $11.4 million
and basic and fully diluted earnings per common share would be $0.43 and
$0.42, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
5
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended January 31,
------------------------------------
2000 1999
--------------- ------------------
(unaudited)
Cash from operating activities:
Net Income $ 20,391 $ 6,478
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 7,000 5,842
Amortization 1,800 1,186
Provision for doubtful accounts 9,812 5,559
Cash surrender value, net of benefits, in excess of premiums paid 91 (1,931)
Other non-recurring non-cash charges - 7,470
Change in other assets and liabilities, net of acquisitions:
Deferred compensation 4,635 6,061
Receivables (38,320) (18,092)
Prepaid expenses (4,331) (646)
Income taxes payable 4,211 (5,417)
Accounts payable and accrued liabilities 29,003 8,945
Non-controlling shareholders' interests and other, net (694) (1,734)
-------------- ---------------
Net cash provided by operating activities 33,598 13,721
--------------- ---------------
Cash from investing activities:
Purchases of property and equipment (14,087) (6,248)
Sale of marketable securities 21,965 -
Business acquisitions, net of cash acquired (35,617) (1,323)
Premiums on life insurance, net of benefits received (8,554) (12,585)
Redemption of guaranteed investment contracts - 1,746
Sale of interest in affiliates - 2,308
-------------- -------------
Net cash used in investing activities (36,293) (16,102)
--------------- -------------
Cash from financing activities:
Increase in bank borrowings - 3,000
Payment of debt (823) (1,779)
Borrowings under life insurance policies 1,043 3,522
Purchase of common and preferred stock and payments on related notes (742) (6,139)
Issuance of common stock and receipts on shareholders' notes 2,580 2,592
--------------- --------------
Net cash provided by financing activities 2,058 1,196
--------------- --------------
Effect of exchange rate changes on cash flows (2,156) (1,210)
--------------- --------------
Net decrease in cash and cash equivalents (2,793) (2,395)
Cash and cash equivalents at beginning of the period 113,741 32,358
--------------- --------------
Cash and cash equivalents at end of the period $ 110,948 $ 29,963
=============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
6
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements for the three months and nine months ended
January 31, 2000 and 1999 include the accounts of Korn/Ferry International, all
of its wholly owned domestic and international subsidiaries, and affiliated
companies in which the Company has effective control (collectively, the
"Company") and are unaudited but include all adjustments, consisting of normal
recurring accruals and any other adjustments, which management considers
necessary for a fair presentation of the results for these periods. These
financial statements have been prepared consistently with the accounting
policies described in the Company's fiscal year 1999 Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on July 28, 1999 and should
be read in conjunction therewith.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues 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 the first quarter ended July 31, 1999, the Company adopted
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use," ("SOP 98-1"). The adoption of SOP 98-1
did not materially change the Company's capitalization policy for software
costs.
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") which establishes
new standards for reporting derivative and hedging information. FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -Deferral
of the Effective Date of FASB No. 133," in 1999, which deferred the effective
date of SFAS 133 for one year. The standard is effective for periods beginning
after June 15, 2000 and will be adopted by the Company as of May 1, 2001. It is
not expected that the adoption of this standard will have any impact on the
consolidated financial statements nor require additional footnote disclosure
since the Company does not currently utilize derivative instruments or
participate in structured hedging activities.
7
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
(unaudited)
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) used in the
computation of Basic and Diluted EPS:
Three months ended January 31,
---------------------------- ----------------------------
2000 1999
--------------------------- ---------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
-------- ------- -------- --------- -------- --------
Basic EPS
Income available to common
shareholders.......................... $8,285 36,117 $0.23 $5,105 26,498 $0.19
======== ========
Effect of Dilutive Securities
Shareholder common stock
purchase commitments.................. 374 525
Stock options............................ 1,048 -
------ ------ ------- -------
Diluted EPS
Income available to common
shareholders plus assumed conversions.... $8,285 37,539 $0.22 $5,105 27,023 $0.19
====== ====== ======== ======= ======= =======
Nine months ended January 31,
----------------------------------------------------------
2000 1999
--------------------------- ---------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
-------- ------- --------- --------- -------- --------
Basic EPS
Income available to common
shareholders......................... $20,391 35,929 $0.57 $ 6,478 26,171 $0.25
======== =======
Effect of Dilutive Securities
Shareholder common stock
purchase commitments.................. 374 514
Stock options ........................... 697 -
Phantom stock units...................... - 255
Stock appreciation rights................ - 101
-------- ------- -------- -------
Diluted EPS
Income available to common
shareholders plus assumed conversions... $20,391 37,000 $0.55 $ 6,478 27,041 $0.24
======== ======= ======== ========= ======== =======
The share amounts in the table above reflect a four-to-one stock split
approved by the Board of Directors on July 24, 1998. The Company filed an
amendment to the existing Articles of Incorporation to increase the authorized
capital stock and effect the four-to-one split of the Common Stock on February
10, 1999. The financial statements have been retroactively restated for the
effects of this split.
The par value of common stock outstanding as of January 31, 2000 and April 30,
1999 is $0.01 and no par, respectively.
8
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
(unaudited)
3. Comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," during its fiscal year ended
April 30, 1998. Comprehensive income is comprised of net income and all changes
to stockholders' equity, except those changes resulting from investments by
owners (changes in paid in capital) and distributions to owners (dividends).
SFAS 130 requires disclosure of the components of comprehensive income in
interim periods.
Total comprehensive income is as follows:
------------------------------- ------------------------------
Three months ended January 31, Nine months ended January 31,
------------------------------- -------------------------------
2000 1999 2000 1999
---------------- -------------- ---------------- -------------
Net income................................. $ 8,285 $ 5,105 $ 20,391 $ 6,478
Foreign currency translation adjustment.... (3,155) (1,527) ( 4,107) (2,091)
Related income tax benefit................. 1,325 634 1,725 879
---------------- -------------- ---------------- -------------
Comprehensive income....................... $ 6,455 $ 4,212 $ 18,009 $ 5,266
================ ============== ================ =============
4. Business segments
The Company operates in one industry segment, retained executive
recruitment, on a global basis. Management views the operations by line of
business, executive recruitment and Futurestep, and geography. For purposes of
the geographic information below, Mexico's operating results are included in
Latin America. In January 1998, the Company formed Futurestep, a 93 percent
owned subsidiary, to provide Internet-based retained recruitment services for
middle-management positions.
A summary of the Company's operations by business segment follows:
Three months ended January 31, Nine months ended January 31,
------------------------------ -----------------------------
2000 1999 2000 1999
------------- -------------- ------------- -------------
Revenues:
Executive recruitment:
North America......................... $ 65,765 $ 45,782 $ 187,127 $ 137,331
Europe................................ 27,587 25,400 78,499 75,914
Asia/Pacific.......................... 11,772 9,291 35,638 25,933
Latin America......................... 7,387 6,436 22,057 22,905
Futurestep:
United States......................... 5,683 1,557 14,090 2,304
International......................... 3,881 - 5,767 -
------------- -------------- ------------- -------------
Total revenues......................... $ 122,075 $ 88,466 $ 343,178 $ 264,387
============= ============== ============= =============
Three months ended January 31, Nine months ended January 31,
------------------------------ -----------------------------
2000 1999 2000 1999
------------- -------------- ------------- -------------
Operating Profit:
Executive recruitment:
North America........................ $ 12,940 $ 9,205 $ 35,022 $ 15,628
Europe............................... 3,138 557 9,225 2,341
Asia/Pacific......................... 1,303 1,389 3,739 2,111
Latin America........................ 1,933 2,488 5,535 6,519
Futurestep:
United States......................... (2,978) (3,411) (11,274) (10,473)
International......................... (1,939) - (6,088) -
------------- -------------- ------------- -------------
Total operating profit $ 14,397 $ 10,228 $ 36,159 $ 16,126
============= ============== ============= =============
9
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
(unaudited)
----------------- ------------------
As of As of
January 31, 2000 April 30, 1999
----------------- -----------------
Identifiable assets (1):
Executive recruitment:
North America..................... $ 239,626 $ 208,627
Europe............................ 87,339 54,910
Asia/Pacific...................... 28,128 20,209
Latin America..................... 21,162 17,104
Futurestep 27,004 3,274
----------------- --------------
Total identifiable assets.................... $ 403,259 $ 304,124
================= ==============
(1) Corporate identifiable assets of $120,962 and $144,771 as of January 31,
2000 and April 30, 1999, respectively, are included in North America.
5. Acquisitions
During the nine months ended January 31, 2000, the Company completed the
acquisition of four executive recruitment firms in North America, one in Europe
and one in Asia/Pacific. The aggregate purchase price of these acquisitions was
$76.6 million. In addition, Futurestep completed the acquisition of the
Executive Search and Selection business of PA Consulting Group with operations
in Europe and Asia/Pacific in January 2000 for $17.3 million payable in cash and
$1.9 million payable as deferred compensation over a three year period.
These acquisitions resulted in $72.8 million of intangible assets,
primarily goodwill. The operating results of these entities, including executive
recruitment and Futurestep revenues of $4.7 million and $1.5 million,
respectively, 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
Overview
Korn/Ferry International is the world's largest executive recruitment firm
and has the broadest global presence in the industry with 440 consultants based
in over 70 offices across 40 countries. The Company's 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.
In May 1998, the Company introduced its Internet-based service,
Futurestep. Futurestep combines the Company's search expertise with exclusive
candidate assessment tools and the reach of the Internet to accelerate
recruitment of candidates for middle-management positions. Futurestep's
operating losses approximated $17.4 million, $12.6 million and $0.8 million for
the nine months ended January 31, 2000 and the fiscal years ended April 30, 1999
and 1998, respectively, and are primarily related to compensation expense,
start-up costs and advertising expense to promote and expand the business roll-
out. The Company believes Futurestep may generate net operating profits in
fiscal 2001.
In March 1999, the Company completed its United States roll-out of
Futurestep by expanding into the Midwest and Southwest regions. Futurestep
launched its international roll-out in the United Kingdom (U.K.) and Canada in
the current year first fiscal quarter, in ten additional European countries, New
Zealand and Australia in the current year second fiscal quarter and in Japan,
Hong Kong and Singapore in the current fiscal quarter. The Company plans to
complete the integration of the acquired Executive Search and Selection business
of PA Consulting Group (ESS business of PA) in the fourth quarter of fiscal 2000
and may expand in other selected foreign markets in fiscal 2001. As of January
31, 2000, approximately 549,000 candidates worldwide had completed a detailed
on-line profile.
On February 17, 1999, the Company completed the public offering of 11.8
million shares of its common stock at $14.00 per share, approximately 10.0
million of which were sold by the Company, with the balance sold by selling
shareholders of the Company. Net proceeds received by the Company from the
offering were approximately $124.3 million.
As the world's largest global executive recruitment firm, the Company
believes it has the resources to play a leading role in consolidating the
highly-fragmented search industry. The Company frequently evaluates
opportunities to expand its business through acquisitions, and from time to
time, the Company engages in discussions with potential targets. The Company
views strategic acquisitions as a key component of its long term growth strategy
and intends to pursue future acquisition opportunities.
In the first quarter of fiscal 2000, the Company completed the acquisition
of the Australian business of Amrop International. In the second fiscal quarter,
the Company completed two North American acquisitions: Levy-Kerson, a leading
search firm specializing in the retail/fashion industry, and Pearson, Caldwell
and Farnsworth, a leading search firm focused on senior-level assignments for
the financial services industry. In December 1999, the Company completed two
additional acquisitions in North America: Helstrom Turner & Associates,
specializing in retail and e-commerce clients, and Crist Partners, specializing
in senior executive recruitment assignments for Fortune 500 companies. In
January 2000, the Company completed the acquisition of the ESS business of PA, a
leading management, systems and technology consulting firm based in London
primarily to provide a European and Asia/Pacific footprint for Futurestep's
international expansion and Hoffman Herbold & Partner, a leading German firm
based in Frankfurt specializing in high end executive recruitment, management
audits and board consultancy.
11
Results of Operations
The following table summarizes the results of the Company's operations
for the three months and nine months ended January 31, 2000 and 1999 as a
percentage of revenues.
Three months ended January 31, Nine months ended January 31,
------------------------------------- -----------------------------------
Proforma Proforma
2000 1999 1999 (1) 2000 1999 1999 (1)
--------- ---------- ------------- ---------- ---------- ----------
Revenues, net.......................... 100% 100% 100% 100% 100% 100%
Compensation and benefits.............. 59 58 61 60 63 61
General and administrative expenses.... 29 30 30 30 30 30
Operating profit....................... 12 12 10 11 6 9
Net income............................. 7 6 5 6 2 4
- -----------
(1) The proforma results for the three months and nine months ended January
31, 1999 exclude the non-recurring charges of $8.4 million, consisting
of severance and benefit costs of $7.9 million and office
rationalization costs of $0.5 million. The proforma three months
results also excludes a $10.2 million credit to income to reduce
accrued bonus expense at October 31, 1998 resulting from implementation
of the Company's revised compensation program effective May 1, 1998
upon completion of the initial public offering in February 1999.
The Company experienced strong growth in executive recruitment revenues
in all four geographic regions for the three months ended January 31, 2000. For
the nine months ended January 31, 2000, the Company experienced growth in all
geographic regions, except for Latin America, due primarily to the devaluation
of the Brazilian Real in fiscal 1999. The Company includes executive recruitment
revenues generated from its Mexican operations with its operations in Latin
America.
Three Months Ended January 31, Nine Months Ended January 31,
------------------------------------------- ------------------------------------------------
2000 1999 2000 1999
----------------- ------------------------ ----------------------- ------------------------
Dollars % Dollars % Dollars % Dollars %
-------- -------- ------------- ---------- ------------ ---------- ------------ ----------
Executive Recruitment:
North America............ $65,765 54% $45,782 52% $187,127 55% $137,331 52%
Europe................... 27,587 23 25,400 29 78,499 23 75,914 29
Asia/Pacific............. 11,772 10 9,291 10 35,638 10 25,933 10
Latin America............ 7,387 6 6,436 7 22,057 6 22,905 9
Futurestep:
United States............ 5,683 5 1,557 2 14,090 4 2,304 1
International............ 3,881 3 - - 5,767 2 - -
-------- -------- ------------- ---------- ------------ ---------- ------------ ----------
Revenues............... $122,075 100% $88,466 100% $343,178 100% $264,387 100%
======== ======== ============= ========== ============ ========== ============ ==========
In the following comparative analysis, all percentages are calculated based on
dollars in thousands.
Three Months Ended January 31, 2000 Compared to Three Months Ended January 31,
1999
Revenues
Revenues increased $33.6 million, or 38%, to $122.1 million for the
three months ended January 31, 2000 from $88.5 million for the three months
ended January 31, 1999. The increase in revenues was primarily the result of a
20% increase in the number of executive recruitment engagements, supported by an
8% and 12% increase in the average number of consultants and average engagements
per consultant, respectively, and a 7% increase in the average fee per executive
recruitment engagement, and revenues from Futurestep in the current three month
period.
In North America, revenues increased $20 million, or 44%, to $65.8
million for the three months ended January 31, 2000 from $45.8 million for the
comparable period in the prior year. In Asia/Pacific, revenues increased $2.5
million, or 27%, to $11.8 million for the three months ended January 31, 2000
from $9.3 million for the three months ended January 31, 1999. Revenue growth in
North America and Asia/Pacific was attributable mainly to an increase in the
number of engagements. In North America, this revenue growth was also driven by
an increase in the average fee per engagement of 15%, while Asia/Pacific
realized an increase in consultant productivity of over 31%. Revenues in Europe
increased $2.2 million, or 8.6%, to $27.6 million for the three months ended
January 31, 2000 from $25.4 million for the comparable period in the prior year.
Excluding the negative effects of foreign currency translation into the U.S.
dollar and the acquisition in Germany in the current fiscal quarter, revenue
increased approximately 13% on a constant dollar basis.
12
The increase in revenues in Latin America of $1.0 million, or 15%, to $7.4
million for the three months ended January 31, 2000 from $6.4 million for the
comparable three month period in fiscal 1999 is attributable to strong
performance in Mexico and Brazil as these economies continue to strengthen.
Futurestep revenues of $9.6 million for the three months ended January
31, 2000 are primarily attributable to an increase in the number of engagements
opened during the current fiscal quarter and reflect completion of the roll-out
of the United States operations at the end of prior fiscal year and the
international roll-out beginning in the current year first fiscal quarter,
primarily the U.K., Canada, and Australia. Revenues also include $1.5 million
related to the acquisition of the ESS business of PA in January 2000.
Compensation and Benefits
Compensation and benefits expense increased $21.0 million, or 41% to
$72.3 million for the three months ended January 31, 2000 from $51.3 million for
the comparable period ended January 31, 1999 due primarily to an increase in the
number of consultants and an increase in Futurestep expenses of $4.1 million. On
a proforma basis, compensation and benefits expense for the three months ended
January 31, 1999 excludes a $10.2 million reduction in bonus expense under the
revised compensation program and $7.9 million of one time non-recurring charges.
Excluding the increase in Futurestep expenses, the $14.6 million, or 28%,
increase for the three months ended January 31, 2000, versus the proforma three
months ended January 31, 1999, reflects an 8% increase in both the average
number of consultants and the average number of employees for the three months
ended January 31, 2000 over the comparable period in 1999. On a comparable
basis, excluding Futurestep and reflecting the prior year three month period on
a proforma basis, compensation and benefits expense as a percentage of revenues
decreased slightly to 59% in the most recent three month period from 60% in the
proforma three months ended January 31, 1999.
General and Administrative Expenses
General and administrative expenses consist of occupancy expense
associated with the Company's leased premises, investments in information and
technology infrastructure, marketing and other general office expenses. General
and administrative expenses increased $8.4 million, or 31%, to $35.3 million for
the three months ended January 31, 2000 from $26.9 million for the comparable
period ended January 31, 1999. This increase was attributable largely to an
increase in Futurestep expenses of $5.4 million, primarily related to
advertising and business development in the current three month period. As a
percentage of revenues, general and administrative expenses, excluding
Futurestep related expenses and one time non-recurring items of $0.5 million
related to office rationalization in the prior year three month period, declined
to 24% for the three months ended January 31, 2000 from 27% for the same period
in 1999. The decrease primarily reflects the higher percentage increase in
revenues and the elimination of excess costs in the current three month period
resulting from the office rationalization in late fiscal 1999.
Operating Profit
Operating profit increased $4.2 million in the three months ended
January 31, 2000, to $14.4 million, from $10.2 million in the prior year three
month period. On a comparable basis, excluding the Futurestep loss of $4.9
million, the $10.2 million credit to reduce bonus expense accrued during the
first six months of the current fiscal year and non-recurring charges of $8.4
million, operating profit for the three months ended January 31, 2000 increased
$7.4 million, or 62% to $19.3 million compared to the three months ended January
31, 1999. Operating profit, on a comparable basis, as a percentage of revenues
was 17% and 14% for the three months ended January 31, 2000 and 1999,
respectively. For the current three month period, operating margins, on this
same basis, increased in all regions except in Asia/Pacific compared to the
prior year three month period due primarily to increased revenues in North
America and a decline in general and administrative expense as a percentage of
revenues throughout the regions.
The percentage of the Company's operating profit for executive
recruitment contributed by North America increased to 67% for the current three
month period from 60% for the proforma three months ended January 31, 1999,
driven primarily by both an increase in volume and average fees. The percentage
of the Company's operating profit contributed by Europe and Asia/Pacific
decreased to approximately 16% and 7%, respectively, in the three months ended
January 31, 2000 from 18% and 9%, respectively, in the proforma three months
ended January 31, 1999, primarily due to the higher percentage increases in
North America revenues and operating profit, respectively. The Latin America
region contribution decreased to 10% for the three months ended January 31, 2000
from 13% on a proforma basis for the comparable prior year period, mainly due to
the cost savings realized in the other regions related to non-recurring
compensation and other office rationalization costs incurred in late 1999.
Interest and Other Income (Expense)
Interest and other income (expense) includes interest income of $2.0
million and $0.7 million and interest expense of $1.4 million and $1.3 million
for the three months ended January 31, 2000 and 1999, respectively. The increase
in
13
interest income of $1.3 million is due primarily to interest income from the
investment of proceeds received in the initial public offering, while interest
expense reflects the relatively comparable average debt balances outstanding in
each of these periods.
Provision for Income Taxes
The provision for income taxes increased $2.4 million to $6.4 million for
the three months ended January 31, 2000 from $4.0 million for the comparable
period ended January 31, 1999. The effective tax rate was 42% for the current
year three month period as compared to 41% for the prior year three month
period.
Non-controlling Shareholders' Interests
Non-controlling shareholders' interests are comprised of the non-
controlling shareholders' majority interests in the Company's Mexico
subsidiaries. Non-controlling shareholders' interests increased slightly to $0.7
million in the current three month period from $0.6 million in the comparable
prior year period.
Nine Months Ended January 31, 2000 Compared to Nine Months Ended January 31,
1999
Revenues
Revenues increased $78.8 million, or 30%, to $343.2 million for the
nine months ended January 31, 2000 from $264.4 million for the nine months ended
January 31, 1999. The increase in revenues was primarily the result of a 14%
increase in the number of executive recruitment engagements, supported by a 9%
increase in the average number of consultants, and increases in both the average
fee per executive recruitment engagement and per average consultant.
In North America, revenues increased $49.8 million, or 36%, to $187.1
million for the nine months ended January 31, 2000 from $137.3 million for the
comparable period in the prior year. In Asia/Pacific, revenues increased $9.7
million, or 37%, to $35.6 million for the nine months ended January 31, 2000
from $25.9 million for the nine months ended January 31, 1999. Revenue growth in
North America and Asia/Pacific was attributable mainly to an increase in the
average number of engagements and the average number of consultants. In North
America this revenue growth was also driven by an increase in the average fee
per engagement over the year ago nine month period. Revenues in Europe increased
$2.6 million to $78.5 million for the nine months ended January 31, 2000 from
$75.9 million for the same period in 1999. Excluding the negative effects of
foreign currency translation into the U.S. dollar, and the acquisition in
Germany in January 2000, revenue increased approximately 11% on a constant
dollar basis. The decline in revenues in Latin America of $0.8 million, or 4%,
to $22.1 million for the nine months ended January 31, 2000 from $22.9 million
for the comparable nine month period in fiscal 1999 is attributable to continued
economic uncertainty in that region during the first six months of the current
year. Revenues showed improvement in the current quarter and the Company
believes the continued uncertainty in other Latin American countries will not
have a significant impact on revenues in the fourth quarter of fiscal 2000.
Futurestep revenues of $19.9 million for the nine months ended January 31,
2000, are primarily attributable to an increase in the number of engagements in
the current nine month period and reflect completion of the roll-out of the
North American operations at the end of prior fiscal year and the international
roll-out beginning in the current year first fiscal quarter, primarily the U.K.,
Canada and Australia. Revenues also include $1.5 million related to the
acquisition of the ESS business of PA in January 2000.
Compensation and Benefits
Compensation and benefits expense increased $38.1 million, or 23%, to
$205.8 million for the nine months ended January 31, 2000 from $167.7 million
for the same period in 1999 due primarily to an increase in the number of
employees, and the non-recurring charge to earnings of $7.9 million. The $37.1
million increase for the nine months ended January 31, 2000, excluding the
increase in Futurestep expenses of $8.9 million, versus the proforma nine months
ended January 31, 1999, reflects a 9% increase in the average number of
consultants and an 8% increase in the average number of employees for the nine
months ended January 31, 2000 over the comparable period in 1999. On a
comparable basis, excluding Futurestep and reflecting the prior year nine month
period on a proforma basis, compensation and benefits expense as a percentage of
revenues remained relatively flat in the most recent nine month period compared
to the proforma nine months ended January 31, 1999.
General and Administrative Expenses
General and administrative expenses consist of occupancy expenses
associated with the Company's leased premises, investments in information and
technology infrastructure, marketing and other general office expenses. General
and administrative expenses increased $20.7 million, or 26%, to $101.2 million
for the nine months ended
14
January 31, 2000 from $80.6 million for the same period in 1999. This increase
was attributable largely to an increase in Futurestep expenses of $15.5 million,
primarily related to advertising and business development in the current nine
month period. As a percentage of revenues, general and administrative expenses,
excluding Futurestep related expenses and one-time non-recurring items of $0.5
million, declined to 24% for the nine months ended January 31, 2000 from 27% for
the comparable period in 1999. The decrease primarily reflects the higher
percentage increase in revenues and the elimination of excess costs in the
current nine month period resulting from office rationalization in late fiscal
1999.
Operating Profit
Operating profit increased $20.0 million in the nine months ended
January 31, 2000, to $36.2 million, or 11% of revenues from $16.1 million, or 6%
of revenues in the prior year nine month period. On a comparable basis,
excluding the Futurestep loss of $17.4 million and the one-time non-recurring
items of $8.4 million in the nine months ended January 31, 1999, operating
profit for the nine months ended January 31, 2000 increased $18.5 million, or
53% to $53.5 million compared to the nine months ended January 31, 1999.
Operating profit, on a comparable basis, as a percentage of revenues was 17% for
the nine months ended January 31, 2000 and 13% for the same period in 1999. For
the current nine month period, operating margins, on this same basis, increased
in all regions except in Latin America compared to the prior year nine month
period due primarily to the increase in revenues in North America and decline in
general and administrative expense as a percentage of revenues in North America
and Europe.
The percentage of the Company's operating profit, excluding Futurestep and
one time non-recurring items in the prior year nine month period (comparable
basis), contributed by North America increased to 65% for the current nine month
period from 57% for the proforma nine months ended January 31, 1999, driven
primarily by the increase in revenues. The Latin American region contribution
decreased to 10% for the nine months ended January 31, 2000 from 19% on a
proforma basis for the comparable prior year period mainly due to the percentage
decline in revenues commencing in the third quarter of fiscal 1999 while
operating costs remained relatively constant. The percentage of the Company's
operating profit contributed by the European and Asia/Pacific regions remained
unchanged at 17% and 7%, respectively, in the nine months ended January 31, 2000
and 1999.
Interest and Other Income (Expense)
Interest and other income (expense) includes interest income of $4.8
million and $2.0 million and interest expense of $3.0 million and $3.9 million
for the nine months ended January 31, 2000 and 1999, respectively. The increase
in interest income of $2.8 million is due primarily to interest income from the
investment of proceeds received in the initial public offering. The decrease in
interest expense reflects the payoff of outstanding bank debt in the prior year
fourth quarter upon completion of the IPO.
Provision for Income Taxes
The provision for income taxes increased $10.1 million to $16.2 million
for the nine months ended January 31, 2000 from $6.1 million for the comparable
period ended January 31, 1999. The effective tax rate was 42% for both the
current and prior year nine month periods.
Non-controlling Shareholders' Interests
Non-controlling shareholders' interests are comprised of the non-
controlling shareholders' majority interests in the Company's Mexico
subsidiaries. Non-controlling shareholders' interests remained relatively flat
in the current nine month period at $2.0 million compared to $1.9 million in the
comparable prior year period and reflects the relatively constant net income
generated by the Mexico subsidiaries during both of these periods.
Liquidity and Capital Resources
The Company maintained cash and cash equivalents of $110.9 million as of
January 31, 2000. During the nine months ended January 31, 2000, cash generated
by operating activities was $33.6 million compared to $13.7 million for the same
period in 1999. Included in the operating cash flows for the nine months ended
January 31, 2000 and 1999, was approximately $0.9 million of cash used in each
of these periods for non-recurring items consisting of severance and benefit
payments related to staff downsizing, modification to existing stock repurchase
agreements and office rationalization.
Capital expenditures totaled $14.1 million for the nine months ended
January 31, 2000 and $6.2 million for the same period in 1999. These
expenditures consisted primarily of systems development costs, upgrades to
information systems and leasehold improvements. The $7.9 million increase in
capital expenditures in the nine months ended January 31, 2000 compared to the
prior year nine month period, primarily relates to installation of a new
financial
15
system. The new financial system has an expected installation cost of
approximately $13.0 million over fiscal 2000 and 2001. For the nine months ended
January 31, 2000, expenditures for the new financial system were approximately
$6.7 million of which $6.2 million have been capitalized.
Included in cash flows from investing activities are premiums paid on
corporate-owned life insurance ("COLI") contracts. The Company purchases COLI
contracts to provide a funding vehicle for anticipated payments due under its
deferred executive compensation programs. Premiums on these COLI contracts were
$8.6 million for the nine months ended January 31, 2000 and $12.6 million for
the same period in 1999. Generally, the Company borrows against the available
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. The decrease in premium payments is attributable to the timing of
payments. Marketable securities of $22.0 million matured in the nine months
ended January 31, 2000 and were not renewed.
During the nine months ending January 31, 2000, the Company completed six
acquisitions of executive recruitment businesses: one in Asia/Pacific, one in
Europe and four in North America. And Futurestep completed one acquisition with
operations in Europe and Asia/Pacific. These acquisitions resulted in cash
outflows of $35.6 million. In the prior year nine months, the Company purchased
two executive recruitment firms in the first fiscal quarter, one in France and
one in Switzerland, for $9.6 million. The acquisitions resulted in a net cash
outflow of $1.3 million, comprised of an initial $2.5 million cash payment
offset by $1.2 million of cash acquired.
Cash provided by financing activities was approximately $2.1 million
during the nine months ended January 31, 2000 and $1.2 million for the same
period in 1999, which included borrowings under COLI contracts of $1.0 million
in the nine months ended January 31, 2000 and $3.5 million for the same period
in 1999. Proceeds from sales of common stock of the Company to newly hired and
promoted consultants and payments on the related promissory notes were $2.6
million in each of the nine months periods. Additionally, the Company paid $0.7
million related to repurchases of common stock of the Company under the amended
and restated stock repurchase agreements in the nine months ended January 31,
2000. In the same period in 1999, the Company paid $6.1 million to repurchase
common stock at book value under the pre-IPO stock repurchase agreements.
Total outstanding borrowings under life insurance policies were $43.7
million at January 31, 2000 and $41.2 million at January 31, 1999. 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.
The Company believes that cash on hand, funds from operations and
available borrowings under its credit facilities will be sufficient to meet its
anticipated working capital, capital expenditures, and general corporate
requirements for the foreseeable future.
Recent Events
On March 7, 2000, the Board of Directors approved the issuance of a
Futurestep tracking stock. The proceeds from this offering will be used to
expand the range of services provided by Futurestep in recruitment and the
internet. The Company is currently finalizing the size and timing of this
offering. The underwriters for this offering have not been selected.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written to
use two digits to define year dates. Computer programs running date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This defect could result in systems failure or miscalculations causing
disruptions of operations.
The Company utilizes information technology to facilitate (i) its internal
search processes and inter-office communications, (ii) communications with
candidates and clients and (iii) its financial management systems and other
support systems. All company systems are year 2000 compliant and all third party
services have been provided without interruption since January 1, 2000.
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
16
period which expires January 1, 2002. The conversion to the Euro has not had a
significant impact on the Company's operations to date.
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 October 1,
2002, the participating countries will introduce Euro notes and coins and
withdraw all legacy currencies so that they will no longer be available.
The Company is currently assessing its information technology systems to
determine whether they allow for transactions to take place in both the legacy
currencies and the Euro and accommodate the eventual elimination of the legacy
currencies. The Company's currency risk may be reduced 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 the Company 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 the Company's operations to date.
Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") which establishes
new standards for reporting derivative and hedging information. FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB No. 133," in 1999, which deferred the
effective date of SFAS 133 for one year. The standard is effective for periods
beginning after June 15, 2000 and will be adopted by the Company as of May 1,
2001. It is not expected that the adoption of this standard will have any impact
on the consolidated financial statements nor require additional footnote
disclosure since the Company does not currently utilize derivative instruments
or participate in structured hedging activities.
Forward-looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Quarterly Report on Form 10-Q
contain forward looking statements that are based on the current beliefs and
expectations of the Company's management, as well as assumptions made by, and
information currently available to, the Company's management. These statements
include those regarding general economic and executive recruitment industry
trends. Because these statements involve risks and uncertainties, actual actions
and strategies and the timing and expected results thereof may differ materially
from those expressed or implied by the forward-looking statements, and the
Company's future results, performance or achievements could differ materially
from those expressed in, or implied by, any forward-looking statements. Future
events and actual results could differ materially from those set forth in or
underlying the forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted. These potential risks and
uncertainties include, but are not limited to, dependence on attracting and
retaining qualified executive recruitment consultants, portability of client
relationships, risks associated with global operations, ability to manage
growth, restrictions imposed by off-limits agreements, competition,
implementation of an acquisition strategy, risks related to the development and
growth of Futurestep, reliance on information processing systems and the
resolution of Year 2000 issues, and employment liability risk. In addition to
the factors noted above, other risks, uncertainties, assumptions, and factors
that could affect the Company's financial results are referenced in the
Company's fiscal year 1999 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on July 28, 1999 and should be read in
conjunction with this Quarterly Report on Form 10-Q.
17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currency Market Risk
As a result of its global operating activities, the Company is exposed to
certain market risks including changes in foreign currency fluctuations,
fluctuations in interest rate and variability in interest rate spread
relationships. The Company manages its exposure to these risks in the normal
course of its business as described below. The Company has not utilized
financial instruments for trading or other speculative purposes nor does it
trade in derivative financial instruments.
Foreign Currency Risk
Historically, the Company has not experienced any significant net
translation gains or losses on transactions involving U.S. dollars and other
currencies. This is primarily due to natural hedges of revenues and expenses in
the functional currencies of the countries in which its offices are located and
investment of excess cash balances in U.S. dollar denominated accounts.
Interest Rate Risk
The Company primarily manages its exposure to fluctuations in interest
rates through its regular financing activities that generally are short term and
provide for variable market rates. The Company has no outstanding balance on
either its term loan or its revolving line of credit. As of January 31, 2000,
the Company had outstanding borrowings of $43.7 million against the cash
surrender value of COLI contracts bearing interest at various variable rates
payable at least annually and $0.6 million of long-term notes payable to former
shareholders payable through fiscal 2004 at variable market rates. The Company
has investments of approximately $8.1 million in interest bearing securities at
market rates with original maturities ranging from May 2000 to October 2001.
The Company has not experienced a material change in its primary market
risk exposures or how those exposures are managed compared to what was in effect
in fiscal 1999.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Sales of Equity Securities
The Company issued 675,276 shares of common stock from May 1,
1999 to January 31, 2000 in connection with the acquisitions of
businesses for consideration, with an aggregate value of $16.0 million.
These sales were issued pursuant to Regulation D to accredited
investors in the United States or Regulation S to investors outside the
United States.
(b) Use of Proceeds
From May 1, 1999 until January 31, 2000, approximately $56.6 million
of the net proceeds to the Company from the Company's February 1999
initial public offering was used primarily for Futurestep working
capital and the acquisition of the ESS business of PA for $15.2
million; six executive recruitment acquisitions aggregating $20.4
million; and expenditures of $6.7 million relating to installation of a
new financial system of which $6.2 million have been capitalized.
Item 5. Other Information
On March 7, 2000, the Board of Directors approved the issuance of a
Futurestep tracking stock. The proceeds from this offering will be used
to expand the range of services provided by Futurestep in recruitment
and the internet. The Company is currently finalizing the size and
timing of this offering. The underwriters for this offering have not
been selected. This disclosure does not constitute an offering of these
securities for sale.
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
27.1 Financial Data Schedule for the nine months ended January 31,
2000
(b) Reports on Form 8-K
None
19
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KORN/FERRY INTERNATIONAL
Date: March 15, 2000 By: /s/ Elizabeth S.C.S. Murray
---------------------------
Elizabeth S.C.S. Murray
Chief Financial Officer and
Executive Vice President
20
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
----------------------
27.1 Financial Data Schedule for the nine months ended January 31, 2000
- ---------
21