================================================================================
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, 1999 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 the Company's Common Stock as of December
10, 1999 was 36,046,794.
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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 October 31, 1999 (unaudited) and
April 30, 1999............................................................. 3
Unaudited Consolidated Statement of Operations for the three months
and six months ended October 31, 1999 and October 31, 1998................. 5
Unaudited Consolidated Statement of Cash Flows for the six months
ended October 31, 1999 and October 31, 1998................................ 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.................... 19
PART II. FINANCIAL INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........................... 19
Item 5. Other Information............................................................. 20
Item 6. Exhibits and Reports on Form 8-K............................................... 21
SIGNATURE..................................................................................... 22
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
------------------- ------------------
As of As of
October 31, 1999 April 30, 1999
------------------- ------------------
(unaudited)
ASSETS
------
Cash and cash equivalents $ 92,475 $113,741
Marketable securities 32,602 21,839
Receivables due from clients, net of allowance for doubtful accounts of
$11,976 and $7,847 86,938 63,139
Other receivables 2,499 3,337
Prepaid expenses 9,342 5,736
--------------- ---------------
Total current assets 223,856 207,792
--------------- ---------------
Property and equipment:
Computer equipment and software 24,692 17,554
Furniture and fixtures 15,162 14,646
Leasehold improvements 12,908 11,785
Automobiles 1,721 1,716
--------------- ---------------
54,483 45,701
Less - Accumulated depreciation and amortization (28,466) (24,591)
--------------- ---------------
Property and equipment, net 26,017 21,110
--------------- ---------------
Cash surrender value of company owned life insurance policies, net of loans 44,490 41,973
Marketable securities, guaranteed investment contracts and notes receivable 3,300 8,218
Deferred income taxes 18,327 18,182
Goodwill and other intangibles, net of accumulated amortization of $6,072
and $5,351 17,583 3,639
Other 3,809 3,210
--------------- ---------------
Total assets $337,382 $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
October 31, 1999 April 30, 1999
------------------- --------------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes payable and current maturities of long-term debt $ 3,818 $ 1,356
Accounts payable 11,046 10,384
Income taxes payable 4,778 2,323
Accrued liabilities:
Compensation 33,572 35,212
Payroll taxes 18,316 20,546
Other accruals 29,479 21,910
------------------- -------------------
Total current liabilities 101,009 91,731
Deferred compensation 36,061 33,531
Long-term debt 3,532 2,360
Other 1,728 1,775
------------------- -------------------
Total liabilities 142,330 129,397
------------------- -------------------
Non-controlling shareholders' interests 2,406 2,041
------------------- -------------------
Shareholders' equity
Common stock, authorized 150,000 shares, 36,016 and
35,633 shares outstanding 259,229 253,021
Retained deficit (54,320) (66,426)
Accumulated other comprehensive loss (2,912) (2,360)
------------------- -------------------
Shareholders' equity 201,997 184,235
Less: Notes receivable from shareholders (9,351) (11,549)
------------------- -------------------
Total shareholders' equity 192,646 172,686
------------------- ------------------
Total liabilities and shareholders' equity $ 337,382 $ 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)
Three Months Ended October 31, Six Months Ended October 31,
----------------------------------- ---------------------------------
Proforma Proforma
1999 1998 1998 (1) 1999 1998 1998 (1)
-------- --------- ----------- -------- --------- -----------
(unaudited) (unaudited)
Revenues, net $116,322 $ 91,175 $ 91,175 $221,103 $ 175,921 $ 175,921
Compensation and benefits 68,725 60,297 55,049 133,459 116,381 106,195
General and administrative expenses 36,080 28,622 28,622 65,882 53,642 53,642
Interest and other income (expense) 793 (637) (637) 1,481 (1,133) (1,133)
-------- --------- ----------- -------- --------- -----------
Income before provision for income
taxes and non-controlling
shareholders' interests 12,310 1,619 6,867 23,243 4,765 14,951
Provision for income taxes 5,171 709 2,997 9,762 2,069 6,493
Non-controlling shareholders' interests 637 1,057 1,057 1,375 1,323 1,323
-------- --------- ----------- -------- --------- -----------
Net income (loss) $ 6,502 $ (147) $ 2,813 $ 12,106 $ 1,373 $ 7,135
======== ========= =========== ======== ========= ===========
Basic earnings (loss) per common share $ 0.18 $ (0.01) $ 0.11 $ 0.34 $ 0.05 $ 0.27
======== ========= =========== ======== ========= ===========
Basic weighted average common shares
outstanding 35,941 26,168 26,168 35,834 26,007 26,007
======== ========= =========== ======== ========= ===========
Diluted earnings (loss) per common
share $ 0.17 $ (0.01) $ 0.11 $ 0.33 $ 0.05 $ 0.26
======== ========= =========== ======== ========= ===========
Diluted weighted average common
shares outstanding 37,277 26,868 26,868 36,710 27,242 27,242
======== ========= =========== ======== ========= ===========
(1) The proforma results for the three months and six months ended October 31,
1998 take into account a $5.3 million and $10.2 million reduction in
accrued bonus expense to reflect the revised compensation program effective
May 1, 1998 upon completion of the initial public offering in February 1999
and the related $2.3 million and $4.4 million, respectively, increase in
the provision for income taxes.
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)
Six Months Ended October 31,
-----------------------------------------
Proforma
1999 1998 1998 (1)
-------- -------- --------
(unaudited)
Cash from operating activities:
Net Income $ 12,106 $ 1,373 $ 7,135
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation 4,260 3,989 3,989
Amortization 721 544 544
Provision for doubtful accounts 5,694 3,307 3,307
Cash surrender value in excess of premiums paid (686) (256) (256)
Change in other assets and liabilities, net of acquisitions:
Deferred compensation 2,911 3,859 3,859
Receivables (27,945) (11,603) (11,603)
Prepaid expenses (3,546) (682) (682)
Income taxes payable 2,310 (6,396) (1,972)
Accounts payable and accrued liabilities 3,607 7,872 (2,314)
Non-controlling shareholders' interests and other, net (550) (3,676) (3,676)
-------- -------- --------
Net cash used in operating activities (1,118) (1,669) (1,669)
-------- -------- --------
Cash from investing activities:
Purchases of property and equipment (8,894) (4,898) (4,898)
Purchases of marketable securities (5,845) - -
Business acquisitions, net of cash acquired (4,304) (1,323) (1,323)
Premiums on life insurance (2,840) (3,816) (3,816)
-------- -------- --------
Net cash used in investing activities (21,883) (10,037) (10,037)
-------- -------- --------
Cash from financing activities:
Payment of debt (611) (750) (750)
Borrowings under life insurance policies 1,010 2,200 2,200
Purchase of common and preferred stock and payments on related notes (471) (2,160) (2,160)
Issuance of common stock and receipts on shareholders' notes 2,359 3,654 3,654
-------- -------- --------
Net cash provided by financing activities 2,287 2,944 2,944
-------- -------- --------
Effect of exchange rate changes on cash flows (552) (319) (319)
-------- -------- --------
Net decrease in cash and cash equivalents (21,266) (9,081) (9,081)
Cash and cash equivalents at beginning of the period 113,741 32,358 32,358
-------- -------- --------
Cash and cash equivalents at the end of the period $ 92,475 $ 23,277 $ 23,277
======== ======== ========
(1) The proforma results for the six months ended October 31, 1998 take into
account a $10.2 million reduction in accrued bonus to reflect the revised
compensation program effective May 1, 1998 upon completion of the initial
public offering in February 1999 and the related $4.4 million increase in
the provision for income taxes.
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, 1999 and 1998 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 ("SEC") on July 28, 1999
and should be read in conjunction with this Quarterly Report on Form 10-Q.
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.
Proforma October 31, 1998 Results
The Company implemented a revised compensation program, effective for the
fiscal year commencing May 1, 1998, upon completion of its initial public
offering in February 1999. The revised compensation program is intended to
reduce the amount of consultants' annual cash performance bonus payments and
provides for the issuance of options to purchase up to 7.0 million shares of
common stock at the market value at the grant date. The proforma results for the
three months and six months ended October 31, 1998 give effect to the revised
compensation program, resulting in a reduction in accrued bonus expense of $5.3
million and $10.2 million, respectively, and an increase in the provision for
income taxes of $2.3 million and $4.4 million, respectively.
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.
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:
7
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
Three months ended October 31,
--------------------------------------------------------------------------------------
1999 1998 Proforma 1998
--------------------------- --------------------------- ------------------------
Per Per Per Per
Income Share Income Share Income Share
(Loss) Shares Amount (Loss) Shares Amount (Loss) Shares Amount
------- ------ ------ ------ ------ ------ ------ ------ ------
Basic EPS
Income (loss) available to common
shareholders........................... $ 6,502 35,941 $0.18 $ (147) 26,168 $(0.01) $2,813 26,168 $0.11
===== ======= =====
Effect of Dilutive Securities
Shareholder common stock
purchase commitments................... 374 700 700
Stock options............................. 962
------- ----- ------ ------ ------ ------
Diluted EPS
Income (loss) available to common
shareholders plus assumed conversions.. $ 6,502 37,277 $0.17 $ (147) 26,868 $(0.01) $2,813 26,868 $0.11
======= ====== ===== ======= ====== ====== ====== ====== =====
Six months ended October 31,
--------------------------------------------------------------------------------------
1999 1998 Proforma 1998
--------------------------- ---------------------------- ------------------------
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------
Basic EPS
Income available to common shareholders... $12,106 35,834 $0.34 $1,373 26,007 $0.05 $7,135 26,007 $0.27
===== ===== =====
Effect of Dilutive Securities
Shareholder common stock
purchase commitments................... 374 700 700
Stock options............................. 502
Phantom stock units....................... 383 383
Stock appreciation rights................. 152 152
------- ------ ------ ------- ------ ------
Diluted EPS
Income available to common shareholders
plus assumed conversions............... $12,106 36,710 $0.33 $1,373 27,242 $0.05 $7,135 27,242 $0.26
======= ====== ===== ====== ====== ===== ====== ====== =====
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 October 31, 1999 and
April 30, 1999 is $0.01 and no par, respectively.
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.
8
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(in thousands, except per share amounts)
Total comprehensive income is as follows:
Three months ended October 31, Six months ended October 31,
----------------------------- ----------------------------
1999 1998 1999 1998
-------------- ----------- ------------ -------------
Net income (loss)........................................ $ 6,502 $ (147) $ 12,106 $ 1,373
Foreign currency translation adjustment.................. (1,380) 530 (952) (564)
Related income tax benefit (provision)................... 579 (228) 400 245
-------------- ----------- ------------ ------------
Comprehensive income..................................... $ 5,701 $ 155 $ 11,554 $ 1,054
============== =========== ============ ============
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 search 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 October 31, Six months ended October 31,
------------------------------ ----------------------------
1999 1998 1999 1998
----------- ---------- ------------ ------------
Revenues:
Executive Search:
North America....................................... $ 64,135 $ 47,751 $ 121,362 $ 91,549
Europe.............................................. 25,761 26,091 50,912 50,514
Asia/Pacific........................................ 12,727 8,420 23,866 16,642
Latin America....................................... 7,381 8,209 14,670 16,469
Futurestep........................................... 6,318 704 10,293 747
----------- ---------- ----------- -----------
Total revenues...................................... $ 116,322 $ 91,175 $ 221,103 $ 175,921
=========== ========== =========== ===========
Three months ended October 31, Six months ended October 31,
------------------------------ ----------------------------
1999 1998 1999 1998
----------- ---------- ---------- -----------
Operating Profit:
Executive Search:
North America...................................... $ 12,036 $ 3,106 $ 22,082 $ 6,423
Europe............................................. 2,918 1,104 6,087 1,785
Asia/Pacific....................................... 1,381 458 2,436 721
Latin America...................................... 1,966 2,167 3,602 4,031
Futurestep.......................................... (6,784) (4,579) (12,445) (7,062)
--------- --------- ---------- ---------
Total operating profit............................. $ 11,517 $ 2,256 $ 21,762 $ 5,898
========= ========= ========== =========
As of As of
October 31, 1999 April 30, 1999
---------------- --------------
Identifiable assets(1):
Executive Search:
North America...................................... $ 223,677 $ 208,627
Europe............................................. 58,662 54,910
Asia/Pacific....................................... 27,057 20,209
Latin America...................................... 17,947 17,104
Futurestep........................................... 10,039 3,274
--------------- --------------
Total identifiable assets.......................... $ 337,382 $ 304,124
=============== ==============
(1) Corporate identifiable assets of $129,125 and $144,771 as of October 31,
1999 and April 30, 1999, 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
On June 11, 1999, the Company completed the acquisition of Amrop
International's Australian business for approximately $3.2 million in cash
payable over a four-year period and $0.6 million in common stock. The
acquisition has been accounted for as a purchase. Of the total purchase price of
$3.8 million, $2.0 million represents deferred compensation. The fair market
value of the net assets acquired was approximately $0.2 million and $1.6 million
has been recorded as goodwill.
On September 15, 1999, the Company completed the acquisition of Levy-Kerson, a
New York-based search firm specializing in the retail fashion industry with
revenues of approximately $6.0 million for the year ended December 31, 1998. The
purchase price was $7.3 million, of which $5.6 million was paid in common stock,
$0.7 million in cash and $1.0 million in notes payable through May 1, 2002. The
acquisition has been accounted for as a purchase and substantially all of the
cost has been recorded as goodwill.
On October 1, 1999, the Company completed the acquisition of Pearson, Caldwell
and Farnsworth, a California-based search firm focused on senior-level
assignments for the financial services industry, with estimated revenues of
approximately $4.0 million for the year ending December 31, 1999. The purchase
price was $4.3 million, of which $0.6 million was paid in common stock, $1.2
million in cash, and the balance of $2.5 million in notes payable over three
years. The acquisition has been accounted for as a purchase and the excess of
the consideration over the fair market value of the assets acquired and deferred
compensation, if any, will be recorded as goodwill.
In November 1999, the Company signed a revised letter of intent to acquire the
search and selection recruitment business of PA Consulting Group, a leading
management, systems and technology consulting firm based in London for $19.0
million denominated in U.S. dollars, payable in cash or substantially all in
cash. The acquisition is expected to close in the third quarter of fiscal 2000
subject to completion of the Company's due diligence, negotiation and execution
of definitive acquisition agreements, receipt of applicable regulatory approvals
and absence of adverse changes in the financial condition of this business. The
acquisition will be accounted for as a purchase and the fair market value of the
net assets acquired in excess of the consideration, if any, will be recorded as
goodwill.
On December 10, 1999, the Company completed the acquisition of Helstrom,
Turner & Associates, a California-based search firm focused on senior-level
assignments for the retail industry, with estimated revenues of approximately
$3.0 million for the year ending December 31, 1999. The purchase price was $3.0
million, of which $0.7 million was paid in cash, $1.5 million in common stock
and the balance in notes payable in equal annual installments over three years.
The acquisition will be accounted for as a purchase and substantially all of the
purchase price will be allocated to goodwill.
On December 13, 1999, the Company completed the acquisition of Crist Partners,
a Chicago-based search firm specializing in senior executive assignments for
Fortune 500 companies, for $15.0 million of which $8.0 million was paid in cash,
$2.0 million in common stock and the balance in notes payable. The acquisition
will be accounted for as a purchase and the fair market value of the net assets
acquired in excess of the consideration, if any, will be recorded as goodwill.
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 search firm and has
the broadest global presence in the industry with 432 consultants based in 72
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.
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 certain
selling shareholders of the Company. Net proceeds received by the Company from
the offering were approximately $124.3 million.
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 $12.4 million, $12.6 million and $0.8 million for the six months
ended October 31, 1999 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 will generate net operating losses through the spring of
2000.
In March 1999, the Company completed its United States roll-out of Futurestep
expanding into the Midwest and Southwest regions. Futurestep launched its
international roll-out in the United Kingdom in May 1999, Canada in June 1999
and in 10 additional European countries, New Zealand and Australia in the
current fiscal quarter. The Company plans to expand in other selected foreign
markets through the remainder of the fiscal year. As of October 31, 1999,
approximately 450,000 candidates worldwide had completed a detailed on-line
profile. In July 1999, Futurestep entered into its first global management
recruitment agreement with Ernst & Young, LLP to provide a range of services in
addition to middle-management recruitment including managing on-line job
postings and campus recruitment programs. In the three months ending October 31,
1999, Futurestep established five additional preferred provider relationships to
provide a minmum number of annual search assignments and a variety of other
recruitment service alternatives.
As the world's largest global executive search 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 current 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 search assignments
for Fortune 500 companies. The Company has also signed a revised letter of
intent to acquire PA Consulting Group, a leading management, systems and
technology consulting firm based in London. See "Recent Events."
11
Results of Operations
The following table summarizes the results of the Company's operations
for the three months and six months ended October 31, 1999 and 1998 as a
percentage of revenues.
Three months ended October 31, Six months ended October 31,
----------------------------------- ---------------------------------
Proforma Proforma
1999 1998 1998(1) 1999 1998 1998(1)
------- ----- --------- ------- ------ ---------
Revenues, net.................................. 100% 100% 100% 100% 100% 100%
Compensation and benefits...................... 59 66 60 60 66 60
General and administrative expenses ........... 31 31 31 30 31 31
Operating profit............................... 10 3 8 10 3 9
Net income..................................... 6 0 3 6 1 4
_________
(1) The proforma results for the three months and six months ended October 31,
1998 take into account a $5.3 million and $10.2 million reduction in accrued
bonus expense to reflect the revised compensation program effective May 1,
1998 upon completion of the initial public offering in February 1999 and the
resulting $2.3 million and $4.4 million increase in the provision for income
taxes.
The Company experienced strong growth in executive search revenues in
both the North America and Asia/Pacific geographic regions for the three months
ended October 31, 1999. The Europe and Latin America regions experienced
declines in the current three month period compared to the prior year quarter;
however, both regions reported positive growth over current year first quarter
results. For the six months ended October 31, 1999 the Company experienced
growth in all geographic regions, except for Latin America. The Company includes
revenues generated from its Mexican operations with its operations in Latin
America.
Three Months Ended October 31, Six Months Ended October 31,
------------------------------------------------ ----------------------------------------------
1999 1998 1999 1998
------------------------------------------------ ----------------------------------------------
Dollars % Dollars % Dollars % Dollars %
----------- --------- -------------- -------- ---------- -------- ------------- -------
Executive Search:
North America.............. $ 64,135 55% $47,751 53% $121,362 55% $ 91,549 52%
Europe..................... 25,761 22 26,091 29 50,912 23 50,514 29
Asia/Pacific............... 12,727 11 8,420 9 23,866 11 16,642 10
Latin America.............. 7,381 6 8,209 9 14,670 7 16,469 9
Futurestep.................... 6,318 5 704 1 10,293 5 747 -
----------- --------- -------------- -------- ---------- -------- ------------- -------
Revenues................. $116,322 100% $91,175 100% $221,103 100% $175,921 100%
----------- --------- -------------- -------- ---------- -------- ------------- -------
In the following comparative analysis, all percentages are calculated based on
dollars in thousands.
Three Months Ended October 31, 1999 Compared to Three Months Ended October 31,
1998
Revenues
Revenues increased $25.1 million, or 27.6%, to $116.3 million for the
three months ended October 31, 1999 from $91.2 million for the three months
ended October 31, 1998. The increase in revenues was primarily the result of a
7% increase in the number of executive search engagements, a 14% increase in the
average fee per executive search engagement and revenues from Futurestep in the
current three month period.
In North America revenues increased $16.4 million, or 34%, to $64.1
million for the three months ended October 31, 1999 from $47.8 million for the
comparable period in the prior year. In Asia/Pacific, revenues increased $4.3
million, or 51%, to $12.7 million for the three months ended October 31, 1999
from $8.4 million for the three months ended October 31, 1998. Revenue growth
in North America and Asia/Pacific was attributable mainly to a 9% and 50%
increase, respectively, in the number of engagements supported by an increase of
10% and 16%, respectively, in the average number of consultants. In North
America this revenue growth was also driven by an increase in the average
12
fee per engagement of 23% while Asia/Pacific realized an increase in consultant
productivity of over 30%. Revenues in Europe decreased $0.3 million, or 1%, to
$25.8 million for the three months ended October 31, 1999 from $26.1 million for
the comparable period in the prior year due to the negative effects of foreign
currency translation into the U.S. dollar which more than offset revenue
increases on a constant dollar basis. The decline in revenues in Latin America
of $0.8 million, or 10%, to $7.4 million for the three months ended October 31,
1999 from $8.2 million for the comparable three month period in fiscal 1998 is
attributable to continued economic uncertainty in that region. Revenues are in
line with current year first quarter results and the Company believes the
continued uncertainty in Latin America will not have a significant impact on
revenues in the third quarter of fiscal 2000.
Futurestep revenue of $6.3 million for the three months ended October
31, 1999 is primarily attributable to 224 additional engagements opened during
the current fiscal quarter and reflects completion of the roll-out of the United
States operations at the end of prior fiscal year and the U.K. and Canada in the
current year first quarter.
Compensation and Benefits
Compensation and benefits expense increased $8.4 million, or 14%, to
$68.7 million for the three months ended October 31, 1999 from $60.3 million for
the comparable period ended October 31, 1998 due primarily to an increase in the
number of consultants offset by a $5.4 million decrease in bonus expense in the
most recent fiscal quarter under the revised compensation plan. On a proforma
basis, compensation and benefits expense for the three months ended October 31,
1998 reflects a $5.3 million reduction in bonus expense under the revised
compensation program. The $13.7 million increase for the three months ended
October 31, 1999, including Futurestep expenses of $3.6 million, versus the
proforma three months ended October 31, 1998, reflects a 15% and 6% increase in
the average number of consultants to 444 from 387 and average total employees to
1,554 from 1,471 for the three months ended October 31, 1999 over the comparable
period in 1998. 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 59.2% in the most
recent three month period from 59.6% in the proforma three months ended October
31, 1998.
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 $7.5 million, or 26%, to $36.1 million for
the three months ended October 31, 1999 from $28.6 million for the comparable
period ended October 31, 1998. This increase was attributable to an increase in
Futurestep expenses of $5.3 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, declined to 24% for the three months ended October 31, 1999 from 27%
for the comparable period in 1998. The decrease primarily reflects the higher
percentage increase in revenues and the elimination of excess costs in the
current three month period resulting from office rationalization in late fiscal
1999.
Operating Profit
Operating profit increased $9.3 million in the three months ended
October 31, 1999, to $11.5 million, or 9.9% of revenues from $2.3 million, or
2.5% of revenues in the prior year three month period. On a comparable basis,
excluding the Futurestep loss of $6.8 million and assuming the favorable impact
of the new compensation plan in the three months ended October 31, 1998,
operating profit for the three months ended October 31, 1999 increased $6.2
million, or 52% to $18.3 million compared to the three months ended October 31,
1998. Operating profit, on a comparable basis, as a percentage of revenues was
16.6% and 13.4% for the three months ended October 31, 1999 and 1998,
respectively. For the current three month period, operating margins, on this
same basis, increased in all regions except in Latin America compared to the
prior year three month period due primarily to increased revenues in North
America and Asia/Pacific and a decline in general and administrative expense as
a percentage of revenues.
The percentage of the Company's executive search operating profit
contributed by North America increased to 66% for the current three month period
from 52% for the proforma three months ended October 31, 1998, driven primarily
by both an increase in volume and average fees. The Latin American region
contribution decreased to 11% for the three months ended October 31, 1999 from
23% 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 region decreased to
approximately 16% and the Asia/Pacific region increased to approximately 8%, in
the three months ended October 31, 1999 from 19% and 7%, respectively, in the
proforma three months ended October 31, 1998,
13
primarily reflecting the decrease in revenues in the European region and the
elimination of excess costs in late fiscal 1999 resulting from office
rationalization in both the European and Asia/Pacific regions.
Interest and Other Income (Expense)
Interest and other income (expense) includes interest income of $1.4 million
and $0.6 million and interest expense of $0.8 million and $1.3 million for the
three months ended October 31, 1999 and 1998, respectively. The increase in
interest income of $0.8 million and decrease in interest expense of $0.5 million
is due primarily to interest income from the investment of proceeds received in
the initial public offering and a decrease in interest expense resulting from
payment of the outstanding balance on bank borrowings upon consummation of the
public offering.
Provision for Income Taxes
The provision for income taxes increased $4.5 million to $5.2 million for the
three months ended October 31, 1999 from $0.7 million for the comparable period
ended October 31, 1998. The effective tax rate was 42% for the current year
three month period as compared to 44% 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 decreased $0.4 million to
$0.6 million in the current three month period from $1.1 million in the
comparable prior year period. In the three months ended October 31, 1998, the
Company ceased recording minority shareholders' interests in Futurestep losses
and reversed $0.3 million recorded in the three months ended July 31, 1998. The
decrease in non-controlling shareholder' interests from the prior year six month
period reflects this reversal.
Six Months Ended October 31, 1999 Compared to Six Months Ended October 31, 1998
Revenues
Revenues increased $45.2 million, or 26%, to $221.1 million for the six
months ended October 31, 1999 from $175.9 million for the six months ended
October 31, 1998. The increase in revenues was primarily the result of a 10%
increase in the number of executive search engagements supported by a 9%
increase in the average number of consultants, a 9% increase in the average fee
per executive search engagement and revenues from Futurestep in the current six
month period.
In North America, revenues increased $29.8 million, or 33%, to $121.4
million for the six months ended October 31, 1999 from $91.5 million for the
comparable period in the prior year. In Asia/Pacific, revenues increased $7.2
million, or 43%, to $23.9 million for the six months ended October 31, 1999 from
$16.6 million for the six months ended October 31, 1998. Revenue growth in
North America and Asia/Pacific was attributable mainly to a 13% and 48%
increase, respectively, in the average number of engagements and an increase of
11% and 14%, respectively, in the average number of consultants. In North
America this revenue growth was also driven by an increase in the average fee
per engagement of 17% over the year ago six month period. Revenues in Europe
remained relatively flat at $50.9 million for the six months ended October 31,
1999 compared to $50.5 million for the comparable period in the prior year due
primarily to the negative effects of foreign currency translation into the U.S.
dollar, which substantially offset revenue increases on a constant dollar basis.
The decline in revenues in Latin America of $1.8 million, or 11%, to $14.7
million for the six months ended October 31, 1999 from $16.5 million for the
comparable six month period in fiscal 1998 is attributable to continued economic
uncertainty in that region. The Company believes the continued uncertainty in
Latin America will not have a significant impact on revenues in the third
quarter of fiscal 2000.
Futurestep revenue of $10.3 million for the six months ended October 31,
1999 is primarily attributable to 344 additional engagements in the current six
month period and reflects completion of the roll-out of the North American
operations at the end of prior fiscal year and the U.K. in the current year
first fiscal quarter.
Compensation and Benefits
Compensation and benefits expense increased $17.1 million, or 15%, to
$133.5 million for the six months ended October 31, 1999 from $116.4 million for
the comparable period ended October 31, 1998 due primarily to an increase in the
number of consultants offset by a $11.1 million decrease in bonus expense in the
current six month period under the revised compensation plan. On a proforma
basis, compensation and benefits expense for the six months ended October 31,
1998 reflects a $10.2 million reduction in bonus expense under the revised
compensation program. The $27.3 million increase for the six months ended
October 31, 1999, including Futurestep expenses of $6.6 million, versus
14
the proforma six months ended October 31, 1998, reflects a 13% and 15% increase
in the average number of consultants to 436 from 387 and average total employees
to 1,648 from 1,429, respectively, for the six months ended October 31, 1999
over the comparable period in 1998. On a comparable basis, excluding Futurestep
and reflecting the prior year six month period on a proforma basis, compensation
and benefits expense as a percentage of revenues increased slightly to 60.2% in
the most recent six month period from 59.6 % in the proforma six months ended
October 31, 1998.
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 $12.2 million, or 23%, to $65.9 million
for the six months ended October 31, 1999 from $53.6 million for the comparable
period ended October 31, 1998. This increase was attributable primarily to an
increase in Futurestep expenses of $10.1 million, primarily related to
advertising and business development in the current six month period. As a
percentage of revenues, general and administrative expenses, excluding
Futurestep related expenses, declined to 24% for the six months ended October
31, 1999 from 27% for the comparable period in 1998. The decrease primarily
reflects the higher percentage increase in revenues and the elimination of
excess costs in the current six month period resulting from office
rationalization in late fiscal 1999.
Operating Profit
Operating profit increased $15.9 million in the six months ended October
31, 1999, to $21.8 million, or 10% of revenues from $5.9 million, or 3% of
revenues in the prior year six month period. On a comparable basis, excluding
the Futurestep loss of $12.4 million and assuming the favorable impact of the
new compensation plan in the six months ended October 31, 1998, operating profit
for the six months ended October 31, 1999 increased $11.1 million, or 48% to
$34.2 million compared to the six months ended October 31, 1998. Operating
profit, on a comparable basis, as a percentage of revenues was 16% and 13% for
the six months ended October 31, 1999 and 1998, respectively. For the current
six month period, operating margins, on this same basis, increased in all
regions except in Latin America compared to the prior year six month period due
primarily to the increase in revenues and decline in general and administrative
expense as a percentage of revenues.
The percentage of the Company's operating profit, excluding Futurestep,
contributed by North America increased to 65% for the current six month period
from 56% for the proforma six months ended October 31, 1998, driven primarily by
an increase in both volume and fees. The Latin American region contribution
decreased to 11% for the six months ended October 31, 1999 from 22% 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 increased
to approximately 18% and 7%, respectively, in the six months ended October 31,
1999 from 17% and 6%, respectively, in the proforma six months ended October 31,
1998, primarily reflecting the elimination of excess costs in late fiscal 1999
resulting from office rationalization and in Asia/Pacific increases in both
revenues and consultant productivity.
Interest and Other Income (Expense)
Interest and other income (expense) includes interest income of $2.8 million
and $1.3 million and interest expense of $1.6 million and $2.6 million for the
six months ended October 31, 1999 and 1998, respectively. The increase in
interest income of $1.5 million and decrease in interest expense of $1.0 million
is due primarily to interest income from the investment of proceeds received in
the initial public offering and a decrease in interest expense resulting from
payment of the outstanding balance on bank borrowings upon consummation of the
public offering.
Provision for Income Taxes
The provision for income taxes increased $7.7 million to $9.8 million for the
six months ended October 31, 1999 from $2.1 million for the comparable period
ended October 31, 1998. The effective tax rate was 42% for the current year six
month period as compared to 43% for the prior year six 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 remained relatively flat
in the current six month period at $1.4 million compared to $1.3 million in the
comparable prior year period and reflects the relatively constant net income
generated by the Mexico subsidiaries during both of these periods.
15
Liquidity and Capital Resources
The Company maintained cash and cash equivalents of $92.5 million as of
October 31, 1999. During the six months ended October 31, 1999 and 1998, cash
used in operating activities was $1.1 million and $1.7 million, respectively.
Included in the operating cash flows for the six months ended October 31, 1999,
was approximately $1.1 million of cash used 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 $8.9 million and $4.9 million for the six months
ended October 31, 1999 and 1998, respectively. These expenditures consisted
primarily of systems development costs, upgrades to information systems and
leasehold improvements. The $4.0 million increase in capital expenditures in
the six months ended October 31, 1999 compared to the prior year six month
period, primarily relates to installation of a new financial system. For the six
months ended October 31, 1999, the new financial system expenditures of
approximately $3.8 million have been capitalized. The new financial system has
an expected aggregate installation cost of approximately $11.0 million over
fiscal 2000 and 2001.
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
$2.8 million and $3.8 million for the six months ended October 31, 1999 and
1998, respectively. 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. The Company also purchased $5.8 million of marketable securities in
the six months ended October 31, 1999.
On May 1, 1998, the Company acquired the assets and liabilities of Didier
Vuchot & Associates in France for approximately $6.0 million in cash, notes and
mandatorily redeemable stock of a subsidiary of the Company. On June 1, 1998,
the Company acquired all of the outstanding shares of Ray and Berndtson SA in
Switzerland for $3.6 million payable in cash, notes and mandatorily redeemable
common stock of the Company. 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.
During the six months ending October 31, 1999, the Company completed three
acquisitions resulting in a total cash outflow of $4.3 million. On June 11,
1999, the Company acquired the assets and liabilities of the Australian business
of Amrop International for $3.8 million, offset by deferred compensation of $2.0
million, resulting in a net cash outflow of $1.8 million. On September 15,
1999, the Company acquired Levy-Kerson in New York for $7.3 million, of which
$5.6 million was paid in common stock and $1.0 million in notes payable
resulting in an initial cash outflow of $0.7 million. On October 1, 1999, the
Company acquired Pearson, Caldwell and Farnsworth, in California for $4.3
million, of which $0.6 million was paid in common stock and $2.5 million in
notes payable resulting in an initial cash outflow of $1.2 million. The company
incurred $0.6 million of additional costs related to these acquisitions.
Cash provided by financing activities was approximately $2.3 million and $2.9
million during the six months ended October 31, 1999 and 1998, respectively,
which included borrowings under COLI contracts of $1.0 million and $2.2 million
in the six months ended October 31, 1999 and 1998, respectively, and proceeds
from sales of common stock of the Company to newly hired and promoted
consultants and payments on the related promissory notes of $2.2 million and
$3.7 million, respectively. Additionally, the Company paid $0.5 million and $2.2
million related to repurchases of common stock of the Company in the six months
ended October 31, 1999 and 1998, respectively.
Total outstanding borrowings under life insurance policies were $43.7 million
and $39.8 million for the six months ended October 31, 1999 and 1998,
respectively. Such 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 its
credit facilities will be sufficient to meet its anticipated working capital,
capital expenditures, and general corporate requirements for the foreseeable
future.
Recent Events
In November 1999, the Company modified a letter of intent signed on
September 12, 1999 to acquire the search and selection recruitment business of
PA Consulting Group, a leading management, systems and technology consulting
firm based in London for $19.0 million.
16
This acquisition is expected to close in the third quarter of fiscal 2000
subject to completion of the Company's due diligence, negotiation and execution
of definitive acquisition agreements, receipt of applicable regulatory approvals
and absence of adverse changes in the financial condition of these businesses.
The acquisitions will be accounted for as a purchase and the fair market value
of the net assets acquired in excess of the consideration, if any, will be
recorded as goodwill.
On December 10, 1999, the Company completed the acquisition of Helstrom,
Turner & Associates, a California-based search firm focused on senior-level
assignments for the retail industry for $3.0 million, of which $0.7 million was
paid in cash, $1.5 million in stock and the balance in notes payable.
On December 13, 1999, the Company completed the acquisition of Crist Partners,
a Chicago-based search firm specializing in senior executive assignments for
Fortune 500 companies, for $15.0 million of which $8.0 million was paid in cash,
$2.0 million in stock and the balance in notes payable.
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. The statements contained in this
section are "Year 2000 Readiness Disclosures" as provided for in the Year 2000
Information and Readiness Disclosure Act.
The following scenarios with respect to the Company's systems could occur: (i)
its software may not be Year 2000 compliant, (ii) integration of upgrades may
not be complete by the year 2000 and (iii) replacement of its non-compliant
systems may be complete by the year 2000 but not fully tested or monitored prior
to the year 2000 such that testing and monitoring will uncover problems that the
Company cannot remedy in a timely manner.
Failure of search-related systems to be Year 2000 compliant might force the
Company to use different Year 2000 compliant systems to conduct searches and
might decrease productivity. Any failure of the Company's financial systems to
be Year 2000 compliant could hinder timely reporting of financial data and
processing of financial information as these functions would have to be
performed manually using non-networked computers. If any non-information
technology systems is not Year 2000 compliant, the Company will need to repair
or replace such systems. The Company believes that failure to be Year 2000
compliant will not have a significant impact on its human resource systems. The
Company's interruption or loss of information processing capabilities due to
Year 2000 issues could have a material adverse effect on the Company's business,
results of operations and financial condition.
In fiscal 1999, the Company completed an inventory and Year 2000 assessment of
its principal computer systems, network elements, software applications and
other business systems. The Company incurred costs of approximately $0.4 million
through October 31, 1999 to resolve Year 2000 issues and expects to incur
approximately $0.1 million of additional costs in fiscal 2000. Expenses incurred
on the Year 2000 issues are being funded through operating cash flows. The
Company estimates full compliance by December 31, 1999. The costs relating to
the Year 2000 issues and the date on which the Company believes it will complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. Actual results could differ materially from those anticipated.
The Company's primary business does not depend on material relationships with
third party vendors but utilizes third party vendors for a number of functions,
including its automated payroll functions, insurance and investment of pension
funds. The Company has initiated formal communications with third party
providers to determine the extent to which these third parties are moving toward
Year 2000 compliance and believes these third parties will be Year 2000
compliant by December 31, 1999. The Company also utilizes third party on-line
information services and the Internet to communicate and to retrieve information
about potential candidates and clients. Failure of these third parties to have
their systems Year 2000 compliant may have a material adverse effect on the
Company's operations.
The Company has fully implemented and tested a disaster recovery plan that
includes the implementation of alternative services in the event of a business
disruption. The plan addresses critical resources for the Company and key
resources for its remote offices, including interruptions that are the result of
problems arising from the Year 2000
17
issue. During and after any disaster, these back-up solutions are intended to
serve as temporary replacements for the Company's e-mail, Internet access and
proprietary applications, which are integral to the Company's business.
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.
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. Such statements
include those regarding general economic and executive search industry trends.
Because such 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 such forward-looking statements, and the
Company's future results, performance or achievements could differ materially
from those expressed in, or implied by, any such 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 search 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 impact
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 SEC on July 28, 1999 and
should be read in conjunction with this Quarterly Report on Form 10-Q.
18
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 and revolving line of credit. As of October 31, 1999, 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 $98.9 million in interest bearing securities at
market rates with original maturities ranging from November 1999 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) Changes in Securities
Effective September 22, 1999, the Company changed its state of
incorporation from California to Delaware. The reincorporation was
accomplished through a merger (the "Merger") of Korn/Ferry
International, a California corporation ("KFY California"), into its
wholly owned Delaware subsidiary of the same name ("KFY Delaware"). As
a result of the Merger, each outstanding share of KFY California
Common Stock, no par value per share, was automatically converted into
one share of KFY Delaware Common Stock, par value $0.01 per share. The
reincorporation proposal was approved by the Company's shareholders at
the Company's annual meeting of shareholders on September 22, 1999.
(b) Use of Proceeds
From May 1, 1999 until October 31, 1999, approximately $21.2
million of the net proceeds to the Company from the Company's February
1999 initial public offering was used primarily for Futurestep working
capital, three acquisitions aggregating $4.3 million, and capital
expenditures of $3.8 million relating to installation of a new
financial system.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on September 22, 1999.
The business at the meeting was (i) to elect thirteen directors to
serve on the board, (ii) to approve the reincorporation of the Company
in Delaware from California, and (iii) to ratify the selection of
Arthur Andersen LLP as the Company's independent auditors for fiscal
2000. Each of the proposals was adopted.
19
(i) The number of votes for and withheld for each director were as follows:
For Withheld
---------- ---------
For terms expiring in the year 2000:
Paul Buchanan Barrow 25,369,243 2,714,567
Manuel A. Papayanopulos 26,068,690 2,015,120
Windle B. Priem 27,364,386 719,424
Michael A. Wellman 26,217,324 1,866,486
For terms expiring in the year 2001:
James E. Bartlett 27,280,566 803,244
Richard M. Ferry 27,321,110 762,700
Timothy K. Friar 26,570,084 1,513,726
Sakie Fukushima 26,364,664 1,719,146
Scott E. Kingdom 26,723,628 1,360,182
For terms expiring in the year 2002:
Frank V. Cahouet 27,023,750 1,060,060
Peter L. Dunn 26,897,480 1,186,330
Charles D. Miller 27,114,282 969,528
Gerhard Schulmeyer 27,380,706 703,104
(ii) The number of votes for, against, abstaining, and broker non-vote for
the approval of the reincorporation of the Company in Delaware from
California were as follows:
For Against Abstaining Broker Non-Vote
---------- --------- ---------- ---------------
23,223,008 3,664,460 365,840 830,502
(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
---------- --------- ---------- ---------------
27,874,506 96,740 112,560 0
Item 5. Other Information
On September 12, 1999, the Company signed a letter of intent to
acquire the search and selection recruitment business of PA Consulting Group,
a leading management, systems and technology consulting firm based in London,
for an amount in cash or substantially all in cash equal to 1.05 times
trailing twelve months revenue, estimated to be approximately $35.0 million in
pounds sterling, subject to finalization of financial statements. In November
1999, the Company revised this letter of intent to reduce the purchase price
to $19.0 million U.S. dollars. The Company intends to fund the acquisition
with currently available cash. Consummation of the proposed transaction is
subject to completion of the Company's due diligence, negotiation and
execution of a definitive acquisition agreement, receipt of applicable
regulatory approvals and absence of adverse changes in the financial condition
of the search and selection recruitment business.
20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
3.1 Certificate of Incorporation
3.2 Bylaws
27.1 Financial Data Schedule for the six months ended
October 31, 1999
(b) Reports on Form 8-K
Current report event date September 22, 1999 (Item 5 and Item 7) was
filed with the SEC on September 22, 1999.
21
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, 1999 By: /s/ Elizabeth S.C.S. Murray
-------------------------------
Elizabeth S.C.S. Murray
Chief Financial Officer and
Executive Vice President
22
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1 Certificate of Incorporation
3.2 Bylaws
27.1 Financial Data Schedule for the six months ended October 31,
1999
23