Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2008
or
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o |
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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)
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Delaware
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95-2623879 |
(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification Number) |
1900 Avenue of the Stars, Suite 2600, Los Angeles, California 90067
(Address of principal executive offices) (Zip code)
(310) 552-1834
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The
number of shares outstanding of our common stock as of
September 4, 2008 was 47,635,535.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
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As of |
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As of |
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July 31, |
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April 30, |
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2008 |
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2008 |
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(unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
205,949 |
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$ |
305,296 |
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Marketable securities |
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2,865 |
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5,940 |
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Receivables due from clients, net of allowance for doubtful accounts of $12,558 and $11,504,
respectively |
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138,716 |
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119,952 |
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Income tax and other receivables |
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6,516 |
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7,071 |
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Deferred income taxes |
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9,817 |
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10,401 |
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Prepaid expenses |
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22,613 |
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20,057 |
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Total current assets |
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386,476 |
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468,717 |
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Marketable securities, noncurrent |
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86,215 |
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78,026 |
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Property and equipment, net |
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32,631 |
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32,462 |
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Cash surrender value of company owned life insurance policies, net of loans |
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81,556 |
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81,377 |
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Deferred income taxes |
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43,338 |
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47,128 |
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Goodwill |
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142,126 |
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142,699 |
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Intangible assets, net |
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15,399 |
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15,519 |
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Investments and other |
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15,046 |
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14,286 |
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Total assets |
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$ |
802,787 |
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$ |
880,214 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Accounts payable |
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$ |
11,796 |
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$ |
15,309 |
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Income taxes payable |
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18,755 |
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20,948 |
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Compensation and benefits payable |
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106,463 |
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199,081 |
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Other accrued liabilities |
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35,953 |
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37,120 |
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Total current liabilities |
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172,967 |
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272,458 |
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Deferred compensation and other retirement plans |
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111,153 |
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105,719 |
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Other liabilities |
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5,660 |
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5,903 |
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Total liabilities |
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289,780 |
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384,080 |
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Stockholders equity: |
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Common stock: $0.01 par value, 150,000 shares authorized, 55,945 and 54,786 shares issued
and 45,028 and 44,593 shares outstanding, respectively |
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362,351 |
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358,568 |
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Retained earnings |
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110,918 |
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95,014 |
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Accumulated other comprehensive income |
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40,282 |
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43,097 |
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Stockholders equity |
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513,551 |
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496,679 |
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Less: Notes receivable from stockholders |
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(544 |
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(545 |
) |
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Total stockholders equity |
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513,007 |
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496,134 |
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Total liabilities and stockholders equity |
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$ |
802,787 |
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$ |
880,214 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
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Three Months Ended |
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July 31, |
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2008 |
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2007 |
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Fee revenue |
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$ |
205,733 |
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$ |
185,353 |
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Reimbursed out-of-pocket engagement expenses |
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11,739 |
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10,924 |
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Total revenue |
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217,472 |
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196,277 |
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Compensation and benefits |
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142,123 |
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122,986 |
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General and administrative expenses |
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34,030 |
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31,701 |
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Out-of-pocket engagement expenses |
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14,733 |
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14,127 |
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Depreciation and amortization |
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2,832 |
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2,350 |
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Total operating expenses |
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193,718 |
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171,164 |
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Operating income |
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23,754 |
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25,113 |
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Interest and other income, net |
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1,604 |
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2,730 |
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Interest expense |
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1,224 |
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1,232 |
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Income before provision for income taxes and equity in earnings of unconsolidated subsidiaries |
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24,134 |
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26,611 |
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Provision for income taxes |
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9,293 |
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10,434 |
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Equity in earnings of unconsolidated subsidiaries, net |
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1,063 |
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923 |
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Net income |
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$ |
15,904 |
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$ |
17,100 |
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Basic earnings per common share |
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$ |
0.37 |
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$ |
0.38 |
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Basic weighted average common shares outstanding |
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43,432 |
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45,041 |
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Diluted earnings per common share |
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$ |
0.36 |
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$ |
0.36 |
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Diluted weighted average common shares outstanding |
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44,549 |
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47,063 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended |
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July 31, |
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2008 |
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2007 |
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Cash from operating activities: |
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Net income |
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$ |
15,904 |
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$ |
17,100 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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2,832 |
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2,350 |
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Stock compensation expense |
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4,211 |
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3,904 |
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Loss on disposition of property and equipment |
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21 |
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161 |
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Provision for doubtful accounts |
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1,639 |
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3,056 |
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Loss (gain) on cash surrender value of life insurance policies |
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202 |
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(863 |
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Realized gains on marketable securities |
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(237 |
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(17 |
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Deferred income taxes |
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4,374 |
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(4,244 |
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Change in other assets and liabilities, net of effect of acquisitions: |
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Deferred compensation |
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5,434 |
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8,343 |
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Receivables |
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(19,848 |
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(25,768 |
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Prepaid expenses |
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(2,556 |
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(580 |
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Investment in unconsolidated subsidiaries |
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(1,316 |
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(1,146 |
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Income taxes payable |
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(2,220 |
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16,982 |
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Accounts payable and accrued liabilities |
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(97,240 |
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(92,743 |
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Other |
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(71 |
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79 |
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Net cash used in operating activities |
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(88,871 |
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(73,386 |
) |
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Cash from investing activities: |
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Purchase of property and equipment |
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(2,895 |
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(3,075 |
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(Purchase of) proceeds from marketable securities, net |
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(7,659 |
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10,474 |
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Cash paid for acquisitions, net of cash acquired |
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(2,800 |
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Premiums on life insurance policies |
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(425 |
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(428 |
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Dividends received from unconsolidated subsidiaries |
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341 |
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888 |
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Net cash (used in) provided by investing activities |
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(10,638 |
) |
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5,059 |
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Cash from financing activities: |
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Payments on life insurance policy loans |
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(367 |
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Borrowings under life insurance policies |
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411 |
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412 |
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Purchase of common stock |
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(2,136 |
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(17,851 |
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Proceeds from issuance of common stock upon exercise of employee stock
options and in connection with an employee stock purchase plan |
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1,761 |
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14,077 |
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Tax benefit from exercise of stock options |
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36 |
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2,896 |
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Receipts on stockholders notes |
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1 |
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2 |
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Net cash used in financing activities |
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(294 |
) |
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(464 |
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Effect of exchange rates on cash and cash equivalents |
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456 |
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757 |
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Net decrease in cash and cash equivalents during the period |
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(99,347 |
) |
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(68,034 |
) |
Cash and cash equivalents at beginning of the period |
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305,296 |
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226,137 |
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Cash and cash equivalents at end of the period |
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$ |
205,949 |
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$ |
158,103 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements for the three months ended July 31, 2008 and
2007 include the accounts of Korn/Ferry International and all of its wholly and majority
owned/controlled domestic and international subsidiaries (collectively, the Company). The
condensed consolidated financial statements are unaudited, but include all adjustments, consisting
of normal recurring accruals and any other adjustments that 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 Companys Annual Report on Form 10-K for
the fiscal year ended April 30, 2008 (the Annual Report) and should be read together with the
Annual Report.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses during the reporting
period. As a result, actual results could differ from these estimates. The most significant areas
that require management judgment are revenue recognition, deferred compensation and the carrying
values of goodwill, other intangible assets and deferred income taxes.
Cash and Cash Equivalents
The Company considers cash equivalents to be only those investments which are highly liquid,
readily convertible and mature within three months from the date of purchase.
Available-for-Sale Securities
The Company considers its marketable securities as available-for-sale as defined in Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS No. 115). These investments are recorded at fair value and are
classified as marketable securities in the accompanying consolidated balance sheets as of July 31,
2008 and April 30, 2008. Certain investments, which the Company intends to sell within the next
twelve months, are carried as current. Additionally, certain of the Companys investments, which
are held in trust to satisfy obligations under the Companys deferred compensation plans, are
classified as noncurrent (see Note 5). The changes in fair values, net of applicable taxes, are
recorded as unrealized gains (losses) as a component of accumulated other comprehensive income in
stockholders equity. Investments are made based on the Companys investment policy which restricts
the types of investments that can be made.
Stock-Based Compensation
The Company has employee compensation plans under which various types of stock-based
instruments are granted. These instruments, as more fully described below, principally include
stock options, stock appreciation rights (SARs), restricted stock, and an Employee Stock Purchase
Plan (ESPP). The Company accounts for stock-based instruments in accordance with SFAS No. 123(R),
Share-Based Payment (SFAS No. 123(R)).
6
The following table reflects the components of stock-based compensation expense recognized in
the Companys condensed consolidated statements of income for the three months ended July 31, 2008
and 2007:
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Three Months Ended |
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July 31, |
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2008 |
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2007 |
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Stock options and SARs |
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$ |
288 |
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$ |
719 |
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Restricted stock |
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3,790 |
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3,025 |
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Employee Stock Purchase Plan |
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133 |
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141 |
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Total stock-based compensation expense, pre-tax |
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4,211 |
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3,885 |
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Tax benefit from stock-based compensation expense |
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(1,537 |
) |
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(1,418 |
) |
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Total stock-based compensation expense, net of tax |
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$ |
2,674 |
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$ |
2,467 |
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The Company uses the Black-Scholes option valuation model to estimate the grant date fair
value of each employee stock option. The expected volatility reflects the consideration of the
historical volatility in the Companys publicly traded instruments during the period the option is
granted. The Company believes historical volatility in these instruments is more indicative of
expected future volatility than the implied volatility in the price of the Companys common stock.
The expected life of each option is estimated using historical data. The risk-free interest rate is
based on the U.S. Treasury zero-coupon issue with a remaining term approximating the expected term
of the option. The Company uses historical data to estimate forfeiture rates applied to the gross
amount of expense determined using the option valuation model. The assumptions used to estimate the
fair value of each employee stock option using the Black-Scholes option valuation model were as
follows for the three months ended July 31, 2008 and 2007:
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Three Months Ended |
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July 31, |
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2008 |
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2007 |
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Expected volatility |
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44.11 |
% |
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44.42 |
% |
Risk-free interest rate |
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3.27 |
% |
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4.60 |
% |
Expected option life (in years) |
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4.25 |
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|
4.00 |
|
Expected dividend yield |
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|
0.00 |
% |
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|
0.00 |
% |
The Black-Scholes option pricing model was developed for use in estimating the fair value of
traded options. The assumptions used in option valuation models are highly subjective, particularly
the expected stock price volatility of the underlying stock.
Common Stock
In
the three months ended July 31, 2008, and 2007, the Company
issued approximately (i) 17 and
884 shares of common stock as a result of the exercise of stock
options, and (ii) 118 and 73 shares
of common stock in conjunction with the Companys ESPP
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period
presentation (see Note 5).
New Accounting Standards
In September 2006, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) ratified EITF Issue No. 06-4, Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF
06-4). The scope of EITF 06-4 is limited to the recognition of a liability and related
compensation costs for endorsement split-dollar life insurance policies that provide a benefit to
an employee that extends to postretirement periods. Therefore, EITF 06-4 does not apply to a
split-dollar life insurance arrangement that provides a specified benefit to an employee that is
limited to the employees active service period with an employer. EITF 06-4 is effective for fiscal
years beginning after December 15, 2007, with earlier adoption permitted. The Company adopted
EITF 06-4 effective May 1, 2008 and it did not have a material impact on its financial position or
results of operations.
7
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
The statement defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The statement emphasizes that fair value is a
market-based measurement, not an entity-specific measurement and establishes a fair value
hierarchy. This statement also clarifies how the assumptions of risk and the effect of restrictions
on sales or use of an asset effect the valuation. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years, however, the FASB staff has approved a one year deferral for the implementation
of SFAS No. 157 for other non-financial assets and liabilities. The Company adopted this statement
effective May 1, 2008 and it did not have a material impact on its financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS No. 159) including an amendment of SFAS No. 115. This statement
provides companies with an option to report selected financial assets and liabilities at fair
value. This statement is effective for fiscal years beginning after November 15, 2007 with early
adoption permitted. The Company adopted this statement effective May 1, 2008 and it did not have a
material impact on its financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No.162). SFAS No. 162 identifies the sources of accounting principles and the
framework, or hierarchy, for selecting the accounting principles used in preparing financial
statements that are presented in conformity with U.S. GAAP by nongovernmental entities. This
statement is effective 60 days following the Securities and Exchange Commissions (SEC) approval
of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company
has not completed its evaluation of the potential impact, if any, of the adoption of SFAS No. 162
on its consolidated financial position, results of operations and cash flows.
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. Diluted earnings per common share (diluted
EPS) reflects the potential dilution that would occur if all in-the-money outstanding options or
other contracts to issue common stock were exercised or converted and was computed by dividing
adjusted net income, after assumed conversion of subordinated notes and preferred stock, by the
weighted average number of common shares outstanding plus dilutive common equivalent shares. The
following is a reconciliation of the numerator and denominator used in the computation of basic EPS
and diluted EPS:
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Three Months Ended |
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|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income (Numerator): |
|
|
|
|
|
|
|
|
Net income for basic EPS |
|
$ |
15,904 |
|
|
$ |
17,100 |
|
Interest expense on convertible securities, net of related tax effects |
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
Net income for diluted EPS |
|
$ |
15,904 |
|
|
$ |
17,138 |
|
|
|
|
|
|
|
|
Shares (Denominator): |
|
|
|
|
|
|
|
|
Weighted average shares for basic EPS |
|
|
43,432 |
|
|
|
45,041 |
|
Effect of: |
|
|
|
|
|
|
|
|
Warrants |
|
|
80 |
|
|
|
146 |
|
Restricted stock |
|
|
278 |
|
|
|
310 |
|
Stock options |
|
|
748 |
|
|
|
1,562 |
|
Employee stock purchase plan |
|
|
11 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Adjusted weighted average shares for diluted EPS |
|
|
44,549 |
|
|
|
47,063 |
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
0.37 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
Assumed exercises or conversions have been excluded in computing the diluted EPS when their
inclusion would be anti-dilutive.
8
3. Comprehensive Income
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).
Total comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
15,904 |
|
|
$ |
17,100 |
|
Foreign currency translation adjustment |
|
|
(1,385 |
) |
|
|
3,085 |
|
Unrealized loss on marketable securities, net of taxes |
|
|
(1,430 |
) |
|
|
(277 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
13,089 |
|
|
$ |
19,908 |
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Foreign currency translation adjustments |
|
$ |
42,823 |
|
|
$ |
22,399 |
|
Unrealized (losses) gains on marketable securities, net of taxes |
|
|
(3,320 |
) |
|
|
1,349 |
|
SFAS No. 158 adjustments, net of taxes |
|
|
779 |
|
|
|
(335 |
) |
|
|
|
|
|
|
|
Accumulated
other comprehensive income |
|
$ |
40,282 |
|
|
$ |
23,413 |
|
|
|
|
|
|
|
|
4. Employee Stock Plans
Stock Option Plans
The Companys employee stock option plan, the Performance Award Plan, which expired on August
8, 2008, provided for option grants designated as either nonqualified, incentive stock options or
SARs. Options granted to officers, non-employee directors and other key employees under the
Performance Award Plan generally vest over a three to five year period, and generally expire ten
years from the date of grant. Key employees are eligible to receive a grant of stock options
annually with the number of options determined by the employees performance level. In addition,
the Company has the discretion to grant certain key management members stock options or restricted
stock grants upon commencement of employment.
Stock option and SARs information during the three months ended July 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
remaining |
|
|
Aggregate |
|
|
|
Options |
|
|
average |
|
|
contractual |
|
|
intrinsic |
|
|
|
(in thousands) |
|
|
exercise price |
|
|
life (Yrs) |
|
|
value |
|
Outstanding at April 30, 2008 |
|
|
3,564 |
|
|
$ |
14.79 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1 |
|
|
|
16.69 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(17 |
) |
|
|
10.59 |
|
|
|
|
|
|
|
|
|
Forfeited/expired |
|
|
(23 |
) |
|
|
19.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2008 |
|
|
3,525 |
|
|
$ |
14.78 |
|
|
|
4.5 |
|
|
$ |
14,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 31, 2008 |
|
|
3,413 |
|
|
$ |
14.61 |
|
|
|
4.4 |
|
|
$ |
14,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the table above are 59 SARs outstanding and exercisable at July 31, 2008 with a
weighted-average exercise price of $12.26. As of July 31, 2008, there was $511 of total
unrecognized compensation cost related to nonvested awards of stock options and SARs. That cost is
expected to be recognized over a weighted-average period of 1.3 years. For stock option awards
subject to graded vesting, the Company recognizes the total compensation cost on a straight-line
basis over the service period for the entire award.
9
Additional information pertaining to stock options:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Weighted average fair value of stock options granted |
|
$ |
6.75 |
|
|
$ |
10.30 |
|
Total fair value of stock options and SARs vested |
|
|
1,692 |
|
|
|
3,605 |
|
Total intrinsic value of stock options exercised |
|
|
99 |
|
|
|
10,693 |
|
Total intrinsic value of SARs paid |
|
|
|
|
|
|
|
|
Restricted Stock
The Company grants restricted stock to executive officers and other senior employees generally
vesting over a three to four year period. Restricted stock is granted at a price equal to the fair
market value of the Companys common stock on the date of grant. Employees may receive restricted
stock annually in conjunction with the Companys performance review as well as throughout the year
upon commencement of employment. The fair values of restricted stock are determined based on the
closing price of the Companys common stock on the grant dates.
Information regarding the Companys restricted stock during the three months ended July 31,
2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
average |
|
|
|
Shares |
|
|
grant date |
|
Nonvested shares |
|
(in thousands) |
|
|
fair value |
|
Nonvested at April 30, 2008 |
|
|
1,952 |
|
|
$ |
22.01 |
|
Granted |
|
|
1,182 |
|
|
|
17.60 |
|
Vested |
|
|
(510 |
) |
|
|
21.66 |
|
Forfeited |
|
|
(31 |
) |
|
|
17.79 |
|
|
|
|
|
|
|
|
Nonvested at July 31, 2008 |
|
|
2,593 |
|
|
$ |
18.42 |
|
|
|
|
|
|
|
|
As of July 31, 2008, there was $47,733 of total unrecognized compensation cost related to
nonvested awards of restricted stock. That cost is expected to be recognized over a
weighted-average period of three years. For restricted stock awards subject to graded vesting, the
Company recognizes the total compensation cost on a straight-line basis over the service period for
the entire award. In the three months ended July 31, 2008 and 2007, 118 and 154 shares of
restricted stock totaling $1,989 and $4,085, respectively, were repurchased by the Company at the
option of the employee to pay for taxes related to the vesting of restricted stock.
Employee Stock Purchase Plan
In October 2003, the Company implemented an ESPP that, in accordance with Section 423 of the
Internal Revenue Code, allows eligible employees to authorize payroll deductions of up to 15% of
their salary to purchase shares of the Companys common stock at 85% of the fair market price of
the common stock on the last day of the enrollment period. The maximum number of shares of common
stock reserved for ESPP issuance is 1,500, subject to adjustment for certain changes in the
Companys capital structure and other extraordinary events. During the three months ended July 31,
2008 and 2007, employees purchased 119 shares at $13.37 per share, and 73 shares at $22.32 per
share, respectively.
10
5. Marketable Securities
Effective May 1, 2008, the Company adopted SFAS No. 157 for financial assets and liabilities.
The statement defines fair value, provides guidance for measuring fair value and requires certain
disclosures.
SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flow) and the cost approach
(cost to replace the service capacity of an asset or replacement cost). The statement establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
into three broad levels. The following is a brief description of those three levels:
|
|
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets that are
accessible at the measurement date for identical, unrestricted assets or liabilities. |
|
|
|
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar assets or liabilities
in active markets and quoted prices for identical or similar assets or liabilities in
markets that are not active. |
|
|
|
|
Level 3: Unobservable inputs that reflect the reporting entitys own assumptions. |
As of July 31, 2008, the Company held certain assets that are required to be measured at fair
value on a recurring basis. These included cash equivalents and marketable securities.
The Companys investments associated with cash equivalents and marketable securities consist
of money market funds, United States government and government agency bonds and equity securities
for which market prices are readily available. Our investments in marketable securities also
consist of municipal notes (auction rate securities), which are classified as noncurrent
marketable securities and reflected at fair value.
As of July 31, 2008 and April 30, 2008, the Companys marketable securities included $71,297
and $63,491, respectively, held in trust for settlement of the Companys obligations under certain
of its deferred compensation plans.
As of July 31, 2008, $18,900 (with a fair value of $17,783) of the Companys marketable
securities consisted of auction rate securities, of which nearly all were securities collateralized
by student loan portfolios, which are guaranteed by the United States government. As the Company
believes that the anticipated liquidation of these investments may take longer than twelve months
and given its intent and ability to hold these securities, they have been classified as noncurrent
marketable securities on the Condensed Consolidated Balance Sheet as of July 31, 2008. The Company
continues to earn interest on all of its auction rate securities as of July 31, 2008. Any future
fluctuation in fair value related to these investments that it deems to be temporary would be
recorded to accumulated other comprehensive income. If the Company determines that any future
valuation adjustment is other than temporary, it will record an impairment charge to earnings as
appropriate.
Due to recent events in credit markets, the auction rate securities held by the Company have
experienced failed auctions during calendar year 2008. As such, quoted prices in active markets are
not readily available at this time. The Companys third-party investment institution provided an
estimate of the fair value of the auction rate securities held as of July 31, 2008 and April 30,
2008. Therefore, in order to validate the fair value estimate of these securities for reporting,
the Company considered the institutions pricing model which included factors such as tax status,
credit quality, duration, insurance wraps, portfolio composition, assumptions about future cash
flows and likelihood of redemption. The Company concluded that the pricing model, given the lack of
market available pricing, provided a reasonable basis for determining fair value of the auction
rate securities as of July 31, 2008 and April 30, 2008. From this model it was determined that
there was a decline in fair value of the auction rate securities. Therefore, an additional $259 has
been recorded as an unrealized loss within accumulated other comprehensive income for the three
months ended July 31, 2008, as the Company believes the decline in fair value of the auction rate
securities is temporary (see Note 8).
The Companys gross unrealized losses of $5,337 related to its auction rate securities and
equity securities as of July 31, 2008 have been in a loss position for less than twelve months.
Based on review of its securities included in the tables below, the Company determined that the
unrealized losses were primarily a result of the liquidity issues in the global credit markets.
Therefore, as of July 31, 2008, none of the Companys auction rate securities or marketable
securities whose fair value was less than amortized cost or cost were considered to be
other-than-temporarily impaired given the severity and duration of the impairment, the credit
quality of the issuers, and the Companys intent and ability to hold the securities until fair
value recovers above cost, or to maturity.
11
The following table represents our fair value hierarchy for financial assets (cash equivalents
and marketable securities) measured at fair value on a recurring basis as of July 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Cash equivalents |
|
$ |
74,021 |
|
|
$ |
74,021 |
|
|
$ |
|
|
|
$ |
|
|
Auction rate securities |
|
|
17,783 |
|
|
|
|
|
|
|
|
|
|
|
17,783 |
|
Equity securities (1) |
|
|
37,520 |
|
|
|
37,520 |
|
|
|
|
|
|
|
|
|
Fixed income mutual fund (1) |
|
|
8,291 |
|
|
|
8,291 |
|
|
|
|
|
|
|
|
|
Noncurrent money market mutual funds (1) |
|
|
25,486 |
|
|
|
25,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
163,101 |
|
|
$ |
145,318 |
|
|
$ |
|
|
|
$ |
17,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These investments are held in trust for settlement of the Companys
obligations under certain of its deferred compensation plans. |
The following table presents the Companys assets measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) as defined in SFAS No. 157 at July 31, 2008:
|
|
|
|
|
|
|
Auction |
|
|
|
Rate |
|
|
|
Securities |
|
Balance at April 30, 2008 |
|
$ |
20,475 |
|
Unrealized loss included in other comprehensive income |
|
|
(259 |
) |
Sales of securities |
|
|
(2,550 |
) |
Reversal of unrealized loss associated with sales of securities at par |
|
|
117 |
|
|
|
|
|
Ending balance at July 31, 2008 |
|
$ |
17,783 |
|
|
|
|
|
As of July 31, 2008, the Company concluded that it was appropriate to classify certain of its
investments previously classified as cash and cash equivalents or marketable securities as
noncurrent marketable securities to better reflect the Companys intent to hold these investments
long-term. To conform to the current period presentation, the Company has reclassified $13,622 of
money market mutual funds from cash and cash equivalents and $43,929 from marketable securities,
respectively, to noncurrent marketable securities as of April 30, 2008.
6. Deferred Compensation and Retirement Plans
The Company has several deferred compensation and retirement plans for vice-presidents that
provide defined benefit payments to participants based on the deferral of current compensation
subject to vesting and retirement or termination provisions. The components of net periodic benefit
cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
Components of net periodic benefit costs: |
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
174 |
|
|
$ |
267 |
|
Interest cost |
|
|
910 |
|
|
|
835 |
|
Amortization of actuarial gain |
|
|
(21 |
) |
|
|
(18 |
) |
Amortization of net transition obligation |
|
|
53 |
|
|
|
53 |
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,116 |
|
|
$ |
1,137 |
|
|
|
|
|
|
|
|
The Company also has an Executive Capital Accumulation Plan (ECAP) which is intended to
provide certain employees an opportunity to defer salary and/or bonus on a pre-tax basis, or make
an after-tax contribution. The Company made $15,900 in ECAP contributions in the three months ended
July 31, 2008. The Company contributions vest and are generally expensed ratably over a four year
period.
12
7. Business Segments
The Company operates in two global business segments: executive recruitment and Futurestep.
These segments are distinguished primarily by the candidates level of compensation. The executive
recruitment business segment is managed by geographic regional leaders. Revenue from leadership
development solutions and other consulting engagements is included in executive recruitment.
Futuresteps worldwide operations are managed by the Chief Executive Officer of Futurestep. The
executive recruitment geographic regional leaders and the Chief Executive Officer of Futurestep
report directly to the Chief Executive Officer of the Company. The Company also operates a
Corporate segment to record global expenses of the Company.
A summary of the Companys results of operations by business segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Fee revenue: |
|
|
|
|
|
|
|
|
Executive recruitment: |
|
|
|
|
|
|
|
|
North America |
|
$ |
93,974 |
|
|
$ |
87,314 |
|
EMEA |
|
|
51,590 |
|
|
|
44,722 |
|
Asia Pacific |
|
|
21,403 |
|
|
|
22,661 |
|
South America |
|
|
7,585 |
|
|
|
5,070 |
|
|
|
|
|
|
|
|
Total executive recruitment |
|
|
174,552 |
|
|
|
159,767 |
|
Futurestep |
|
|
31,181 |
|
|
|
25,586 |
|
|
|
|
|
|
|
|
Total fee revenue |
|
$ |
205,733 |
|
|
$ |
185,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Total revenue: |
|
|
|
|
|
|
|
|
Executive Recruitment: |
|
|
|
|
|
|
|
|
North America |
|
$ |
99,844 |
|
|
$ |
92,230 |
|
EMEA |
|
|
53,480 |
|
|
|
46,033 |
|
Asia Pacific |
|
|
21,855 |
|
|
|
23,242 |
|
South America |
|
|
7,693 |
|
|
|
5,186 |
|
|
|
|
|
|
|
|
Total executive recruitment |
|
|
182,872 |
|
|
|
166,691 |
|
Futurestep |
|
|
34,600 |
|
|
|
29,586 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
217,472 |
|
|
$ |
196,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Executive recruitment: |
|
|
|
|
|
|
|
|
North America |
|
$ |
18,637 |
|
|
$ |
19,791 |
|
EMEA |
|
|
8,486 |
|
|
|
7,691 |
|
Asia Pacific |
|
|
3,476 |
|
|
|
4,537 |
|
South America |
|
|
1,080 |
|
|
|
661 |
|
|
|
|
|
|
|
|
Total executive recruitment |
|
|
31,679 |
|
|
|
32,680 |
|
Futurestep |
|
|
2,855 |
|
|
|
2,084 |
|
Corporate |
|
|
(10,780 |
) |
|
|
(9,651 |
) |
|
|
|
|
|
|
|
Total operating income |
|
$ |
23,754 |
|
|
$ |
25,113 |
|
|
|
|
|
|
|
|
13
8. Subsequent Events
As discussed in Note 5, the Companys marketable securities include auction rate securities.
As of August 8, 2008 the Company received notification from one of its third-party investment
institutions announcing a proposed settlement, in principle, with various federal and state
regulators to commit to purchase client auction rate security holdings at par value of their
holdings. Under the proposal, the Companys auction rate securities would be repurchased, if still
outstanding, between June 2010 through 2012. The proposal covers $13,600 (fair value of $12,796) of
the Companys $18,900 (fair value of $17,783) auction rate securities held as July 31, 2008. Upon
the execution of the final settlement with the third-party investment institution, the Company will
reverse any unrealized losses recorded in accumulated other comprehensive income on these
securities, which was $804, as of July 31, 2008.
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
This quarterly report on Form 10-Q may contain certain statements that we believe are, or may
be considered to be, forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements generally can be identified by use of statements that include phrases
such as believe, expect, anticipate, intend, plan, foresee, may, will, estimates,
potential, continue or other similar words or phrases. Similarly, statements that describe our
objectives, plans or goals are also forward-looking statements. All of these forward-looking
statements are subject to risks and uncertainties that could cause our actual results to differ
materially from those contemplated by the relevant forward-looking statement. The principal risk
factors that could cause actual performance and future actions to differ materially from the
forward-looking statements include, but are not limited to, dependence on attracting and retaining
qualified and experienced consultants, portability of client relationships, local political or
economic developments in or affecting countries where we have operations, currency fluctuations in
our international operations, ability to manage growth, restrictions imposed by off-limits
agreements, competition, risks related to the growth and results of Futurestep, reliance on
information processing systems, and employment liability risk as well as the matters disclosed
under the heading Risk Factors in Item 1A of the Companys annual report on Form 10-K for fiscal
2008 (Form 10-K). Readers are urged to consider these factors carefully in evaluating the
forward-looking statements. The forward-looking statements included in this Form 10-Q are made only
as of the date of this report and we undertake no obligation to publicly update these
forward-looking statements to reflect subsequent events or circumstances.
The following presentation of managements discussion and analysis of our financial condition
and results of operations should be read together with our condensed consolidated financial
statements included in this Form 10-Q.
Executive Summary
Korn/Ferry International (referred to herein as the Company, Korn/Ferry, or in the first
person notations we, our, and us) is a premier provider of talent management solutions that
help clients to attract, deploy, retain and reward their talent. Our services include executive
recruitment, middle-management recruitment and outsourced recruitment (through Futurestep),
leadership development solutions and executive coaching. Over half of the executive recruitment
engagements we performed in the last fiscal year were for board level, chief executive or other
senior executive and general management positions. Our 5,120 clients in the last fiscal year
included approximately 49% of the FORTUNE 500 companies. We have established strong client loyalty.
74% of the executive recruitment assignments we performed during the previous fiscal year were on
behalf of clients for whom we had conducted assignments in the previous three fiscal years.
In an effort to maintain our long-term strategy of being the leading provider of executive
recruitment, middle-management recruitment, outsourced recruiting, leadership development solutions
and executive coaching, our strategic focus for fiscal 2009 will center upon increasing market
share and further enhancing the cross-selling of our multi-product strategy. We plan to continue to
address areas of increasing client demand, including Recruitment Process Outsourcing (RPO) and
Leadership Development Solutions (LDS). We plan to explore new products and services, continue to
pursue a disciplined acquisition strategy, enhance our technology and processes and aggressively
leverage our brand through thought leadership and intellectual capital projects as a means of
delivering world-class service to our clients.
Fee revenue increased 11% in the first quarter of fiscal 2009 to $205.7 million compared to
the prior years first quarter of $185.4 million, with
increases in all regions except for Asia Pacific.
The Europe and South America regions experienced the largest dollar increases in fee revenue. In
the first quarter of fiscal 2009, we earned an operating profit of $23.8 million with operating
income from executive recruitment of $31.7 million and $2.9 million from Futurestep, offset by
corporate expenses of $10.8 million. This represents a decrease of 5.2% over the prior years first
quarter operating income of $25.1 million.
We had no long-term debt nor an outstanding balance under our credit facility at July 31,
2008. Our working capital increased $17.2 million in the first three months of fiscal 2009 to
$213.5 million at July 31, 2008.
15
Critical Accounting Policies
The following discussion and analysis of our financial condition and operating results are
based on our unaudited condensed consolidated financial statements. Preparation of this quarterly
report on Form 10-Q requires us to make estimates and assumptions that affect the reported amount
of assets and liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during the reporting
periods. Actual results may differ from those estimates and assumptions. In preparing our interim
financial statements and accounting for the underlying transactions and balances, we apply our
accounting policies as disclosed in our Notes to Unaudited Condensed Consolidated Financial
Statements. We consider the policies related to revenue recognition, deferred compensation and the
carrying values of goodwill, intangible assets and deferred income taxes as critical to an
understanding of our interim consolidated financial statements because their application places the
most significant demands on managements judgment. Specific risks for these critical accounting
policies are described in our Form 10-K.
Results of Operations
The following table summarizes the results of our operations for the three months ended July
31, 2008 and 2007 as a percentage of fee revenue:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2008 |
|
|
2007 |
|
Fee revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Reimbursed out-of-pocket engagement expenses |
|
|
5.7 |
|
|
|
5.9 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
105.7 |
|
|
|
105.9 |
|
Compensation and benefits |
|
|
69.1 |
|
|
|
66.4 |
|
General and administrative expenses |
|
|
16.5 |
|
|
|
17.1 |
|
Out-of-pocket engagement expenses |
|
|
7.2 |
|
|
|
7.6 |
|
Depreciation and amortization |
|
|
1.4 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
Operating income |
|
|
11.5 |
|
|
|
13.5 |
|
|
|
|
|
|
|
|
Net income |
|
|
7.7 |
% |
|
|
9.2 |
% |
|
|
|
|
|
|
|
The following tables summarize the results of our operations by business segment. Operating
income (loss) is calculated as a percentage of fee revenue of the respective segment (dollars in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
Fee revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive recruitment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
93,974 |
|
|
|
45.7 |
% |
|
$ |
87,314 |
|
|
|
47.1 |
% |
EMEA |
|
|
51,590 |
|
|
|
25.1 |
|
|
|
44,722 |
|
|
|
24.1 |
|
Asia Pacific |
|
|
21,403 |
|
|
|
10.4 |
|
|
|
22,661 |
|
|
|
12.2 |
|
South America |
|
|
7,585 |
|
|
|
3.7 |
|
|
|
5,070 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total executive recruitment |
|
|
174,552 |
|
|
|
84.9 |
|
|
|
159,767 |
|
|
|
86.1 |
|
Futurestep |
|
|
31,181 |
|
|
|
15.1 |
|
|
|
25,586 |
|
|
|
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue |
|
|
205,733 |
|
|
|
100.0 |
% |
|
|
185,353 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursed out-of-pocket engagement expenses |
|
|
11,739 |
|
|
|
|
|
|
|
10,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
217,472 |
|
|
|
|
|
|
$ |
196,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive recruitment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
18,637 |
|
|
|
19.8 |
% |
|
$ |
19,791 |
|
|
|
22.7 |
% |
EMEA |
|
|
8,486 |
|
|
|
16.4 |
|
|
|
7,691 |
|
|
|
17.2 |
|
Asia Pacific |
|
|
3,476 |
|
|
|
16.2 |
|
|
|
4,537 |
|
|
|
20.0 |
|
South America |
|
|
1,080 |
|
|
|
14.2 |
|
|
|
661 |
|
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total executive recruitment |
|
|
31,679 |
|
|
|
18.1 |
|
|
|
32,680 |
|
|
|
20.5 |
|
Futurestep |
|
|
2,855 |
|
|
|
9.2 |
|
|
|
2,084 |
|
|
|
8.1 |
|
Corporate |
|
|
(10,780 |
) |
|
|
|
|
|
|
(9,651 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
23,754 |
|
|
|
11.5 |
% |
|
$ |
25,113 |
|
|
|
13.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2008 Compared to Three Months Ended July 31, 2007
Fee Revenue. Fee revenue increased $20.3 million, or 11%, to $205.7 million in the three
months ended July 31, 2008 compared to $185.4 million in the three months ended July 31, 2007. The
improvement in fee revenue is attributable mainly to a 9% increase in the number of engagements
billed and an increase in average fees from executive recruitment. Exchange rates favorably
impacted fee revenues by $9.4 million in the first quarter of fiscal 2009.
Executive Recruitment. Executive recruitment fee revenue increased $14.7 million, or 9.2%, to
$174.5 million in the three months ended July 31, 2008 compared to $159.8 million in the three
months ended July 31, 2007 due to an increase in average fees for the segment. The number of
engagements billed in the first quarter of fiscal 2009 were comparable to that of the first quarter
of fiscal 2008.
North America fee revenue increased $6.6 million, or 7.6%, to $93.9 million in the three
months ended July 31, 2008 compared to $87.3 million in the three months ended July 31, 2007
primarily due to an 3% increase in the number of engagements billed as well as a 4% increase in
average fees in the region as compared to the first quarter of fiscal 2008. Overall revenue growth
was driven by more significant increases in the industrial and healthcare sectors offset by
declines in the financial services and technology sectors. Exchange rates favorably impacted North
America fee revenue by $0.6 million in the first quarter of fiscal 2009.
EMEA reported fee revenue of $51.6 million, an increase of $6.9 million, or 15.4%, in the
three months ended July 31, 2008 compared to $44.7 million in the three months ended July 31, 2007.
EMEAs increase in fee revenue was driven by a 6% increase in the number of engagements billed and
a 9% increase in average fees. The improved performance in existing offices in Switzerland,
Germany, and Norway were the primary contributors to the increase in fee revenue. The industrial
and financial services sectors experienced the largest increase in fee revenue offset by a decline
in the life sciences sector compared to the first quarter of fiscal 2008. Exchange rates favorably
impacted EMEA fee revenue by $4.9 million in the first quarter of fiscal 2009.
Asia Pacific fee revenue decreased $1.3 million, or 5.7%, to $21.4 million, in the three
months ended July 31, 2008 compared to $22.7 million in the three months ended July 31, 2007 as an
increase of 6% in average fees billed per engagement was offset by an overall 11% decline in the
number of engagements billed. An increase in fee revenue in Singapore was offset by decreases in
fee revenue in Australia, India, Hong Kong and Japan. Exchange rates favorably impacted fee revenue
for Asia Pacific by $0.9 million in the first quarter of fiscal 2009.
South America reported fee revenue of $7.6 million, an increase of $2.5 million, or 49.0%, in
the three months ended July 31, 2008 compared to the three months ended July 31, 2007. Of the
increase in fee revenue, $0.9 million is attributable to the favorable impact of exchange rates.
Engagements billed declined 5% while average fees increased 58% within the region compared to the
first quarter of fiscal 2008. The improved performance in Brazil was the primary contributor to the
increase in fee revenue in the first quarter of fiscal 2009 over the first quarter of fiscal 2008.
Futurestep. Futuresteps fee revenue increased $5.6 million, or 21.9%, to $31.2 million in the
three months ended July 31, 2008 compared to $25.6 million in the three months ended July 31, 2007.
The improvement in Futuresteps fee revenue is due to an increase in the number of engagements
billed offset by a slight decrease in average fee per engagement billed. Of the total increase in
fee
revenue, North America experienced the largest increase in fee revenue of $2.7 million, or
29.0%, to $12.0 million related to growth from Canada and the United States. Asia fee revenue
increased $2.1 million, or 32.3%, to $8.6 million reflecting increased revenue from areas including
RPO and individual searches. Europe fee revenue increased $0.7 million, or 7.1%, to $10.5 million,
arising from increased business in Spain, France and Germany offset by a decrease in the
Netherlands. Exchange rates favorably impacted fee revenue by $2.1 million in the first quarter of
fiscal 2009.
17
Compensation and Benefits. Compensation and benefits expense increased $19.1 million, or
15.5%, to $142.1 million in the three months ended July 31, 2008 from $123.0 million in the three
months ended July 31, 2007. The increase in compensation and benefits expenses is primarily due to
a 6% increase in global headcount, compared to the first quarter of fiscal 2008, including a 16%
increase in the average number of consultants, coupled with increased profitability-based awards.
Exchange rates unfavorably impacted compensation and benefits expenses by $6.0 million during the
first quarter of fiscal 2009.
Executive recruitment compensation and benefits costs increased $13.8 million, or 13.8%, to
$114.0 million in the three months ended July 31, 2008 compared to $100.2 million in the three
months ended July 31, 2007 primarily due to an increase in the number of consultants. In the first
quarter of fiscal 2009, the average number of consultants increased by 35, or 7%, compared to the
first quarter of fiscal 2008. Exchange rates impacted executive recruitment compensation and
benefits expense unfavorably by $4.6 million. Executive recruitment compensation and benefits
expenses in the three months ended July 31, 2008 increased to 65% as a percentage of fee revenue,
compared to 63% in the first quarter of fiscal 2008.
Futurestep compensation and benefits expense increased $4.1 million, or 24.0%, to $21.2
million in the three months ended July 31, 2008 from $17.1 million in the three months ended July
31, 2007 due to investments in our employees which increased Futurestep average consultant
headcount by 59% during the three months ended July 31, 2008 compared to the three months ended
July 31, 2007. Exchange rates unfavorably impacted Futurestep compensation and benefits expense by
$1.4 million. Futurestep compensation and benefits expense, as a percentage of fee revenue,
increased to 68% in the first quarter of fiscal 2009 from 67% in the first quarter of fiscal 2008.
Corporate compensation and benefits expense increased $1.2 million, or 21.1%, in the three
months ended July 31, 2008 to $6.9 million primarily from increases in recognition of unearned
deferred compensation balances in the first quarter of fiscal 2009 compared to the first quarter of
fiscal 2008.
General and Administrative Expenses. General and administrative expenses increased $2.3
million, or 7.3%, to $34.0 million in the three months ended July 31, 2008 compared to $31.7
million in the three months ended July 31, 2007. Exchange rates unfavorably impacted general and
administrative expenses by $1.8 million in the first quarter of fiscal 2009.
Executive recruitment general and administrative expenses increased $2.2 million, or 9.8%,
from $22.4 million in the three months ended July 31, 2007 to $24.6 million in the three months
ended July 31, 2008. This increase was driven by increases in premise and office expenses of $1.7
million, business development expenses of $0.3 million, $0.6 million in other types of general
expenses including meeting and travel expenses, and $0.8 million in realized foreign exchange
losses. Offsetting the overall increase in executive recruitment general and administrative
expenses is a decrease in bad debt expense of $1.2 million. Increased premise and office expenses
is attributable to all regions due to increased rent expenses and associated utility costs.
Business development increased primarily due to the growth in the business. Bad debt expense
decreased due to an overall improvement in the aging of accounts receivable. Executive recruitment
general and administrative expenses, as a percentage of fee revenue, was 14% in the first quarter
of fiscal 2009 and fiscal 2008.
Futurestep general and administrative expenses increased $0.3 million, or 5.4%, to $5.9
million in the three months ended July 31, 2008 compared to the three months ended July 31, 2007
primarily due to an increase in premise and office expenses of $0.5 million and business
development expenses of $0.4 million which were offset by a decrease in Futurstep general and
administrative expenses of $0.3 million in meetings and travel expenses and $0.2 million in bad
debt expense. Increases in premise and office expenses resulted from increase in rent expenses
noted across all regions and the opening of new offices in Europe and Asia. Futurestep general and
administrative expenses, as a percentage of fee revenue, decreased to 19% in the first quarter of
fiscal 2009 from 22% in the first quarter of fiscal 2008.
Corporate general and administrative expenses decreased $0.2 million, or 5.4%, to $3.5 million
in the three months ended July 31, 2008 compared to the three months ended July 31, 2007 primarily
due to decreased professional fees, travel and meetings and premise and office expenses.
Out-of-Pocket Engagement Expenses. Out-of-pocket engagement expenses consist of expenses
incurred by candidates and our consultants that are generally billed to clients. In the three
months ended July 31, 2008, out-of-pocket engagement expenses increased
$0.6 million, or 4.3%, to $14.7 million compared to the three months ended July 31, 2007.
Out-of-pocket engagement expenses as a percentage of fee revenue decreased to 7% in the first
quarter of fiscal 2009 from 8% in the first quarter of fiscal 2008.
18
Depreciation and Amortization Expenses. Depreciation and amortization expenses of $2.8 million
in the three months ended July 31, 2008 increased $0.4 million, or 16.7%, compared to the three
months ended July 31, 2007. This expense relates mainly to computer equipment, software, furniture
and leasehold improvements. The increase in depreciation and amortization expenses is attributable
to an increase in fixed asset balances primarily associated with furniture and fixtures and
leasehold improvements related to business expansion, office build out and amortization of software
costs that added new functionality in our corporate and executive search segments.
Operating Income. Operating income decreased $1.3 million, or 5.2%, to $23.8 million in the
three months ended July 31, 2008 compared to $25.1 million in the three months ended July 31, 2007.
This decrease in operating income resulted from a $22.5 million increase in operating expenses
which was offset by an increase in total revenue of $21.2 million. The increase in operating
expenses is primarily attributable to an increase in compensation and benefits, general and
administrative expenses, including a modest amount of expenses aimed at maintaining consultant
productivity.
Executive recruitment operating income decreased $1.0 million, or 3.1%, to $31.7 million in
the three months ended July 31, 2008 compared to $32.7 million in the three months ended July 31,
2007. The decline in executive recruitment operating income is attributable to increased revenues
offset by additional compensation expense relating to increased
headcount and variable payouts, as
discussed above, as well as increased premise and other general administrative expenses. The
Lominger Entities contributed $0.3 million of the operating income increase in the first quarter of
fiscal 2009. Executive recruitment operating income during the first quarter of fiscal 2009, as a
percentage of fee revenue, was 18% compared to 20% in the first quarter of fiscal 2008.
Futurestep operating income increased by $0.8 million to $2.9 million in the three months
ended July 31, 2008 as compared to operating income of $2.1 million in the three months ended July
31, 2007. The change in Futurestep operating income is primarily due to an increase in total
revenue while realizing a lesser increase in operating expenses during the three months ended July
31, 2008 compared to the three months ended July 31, 2007. Futurestep operating income, as a
percentage of fee revenue, increased to 9% in the first quarter of fiscal 2009 from 8% in the first
quarter of fiscal 2008.
Interest Income and Other Income, Net. Interest income and other income, net decreased by $1.1
million in the three months ended July 31, 2008 from $2.7 million in the three months ended July
31, 2007. Interest and dividend income decreased primarily as a
result of lower average United States cash balances and lower overall
interest rates compared
to the first quarter of fiscal 2008.
Interest Expense. Interest expense, primarily related to borrowings under Company Owned Life
Insurance Policies (COLI), was $1.2 million in the three months ended July 31, 2008 and the three
months ended July 31, 2007.
Provision for Income Taxes. The provision for income taxes was $9.3 million in the three
months ended July 31, 2008, compared to $10.4 million in the three months ended July 31, 2007. The
provision for income taxes in the first quarter of fiscal 2009 reflects a 38.5% effective tax rate,
which is comparable to the effective tax rate for the first quarter of fiscal 2008.
Equity in Earnings of Unconsolidated Subsidiaries. Equity in earnings of unconsolidated
subsidiaries is comprised of our less than 50% interest in our Mexican subsidiaries. We report our
interest in earnings or loss of our Mexican subsidiaries on the equity basis as a one-line
adjustment to net income, net of taxes. Equity in earnings was $1.1 million in the three months
ended July 31, 2008 compared to $0.9 million in the three months ended July 31, 2007.
Liquidity and Capital Resources
We believe that cash on hand, borrowings available under our credit facility and funds from
operations will be sufficient to meet our anticipated working capital, capital expenditures and
general corporate requirements. However, adverse changes in our revenue could require us to cut
costs and/or obtain additional financing to meet our cash needs.
As of July 31, 2008 we held approximately $18.9 million (with a fair value of $17.8 million)
of marketable securities investments, classified as noncurrent assets, with an auction reset
feature (auction rate securities) whose underlying assets are generally municipal notes or
student loans which are substantially backed by the federal government. Continued liquidity issues
in the global credit markets caused auctions for all of our auction rate securities to fail because
the amount of securities offered for sale exceeded the amount of bids. As a result, the liquidity
of our remaining auction rate securities has diminished. We expect this decreased liquidity will
continue for as long as the present depressed global credit market environment persists, or until
issuers refinance and
replace these securities with other instruments. Despite the current auction market, we
believe the credit quality of our auction rate securities remains high due to the creditworthiness
of the issuers. We continue to collect interest when due and at this time we expect to continue to
do so going forward. Additionally, we expect we will receive the principal balance through either
future successful auctions, sales of these securities outside the auction process, the issuers
establishment of different form of financing to replace these securities, or the maturing of the
securities.
19
As of August 8, 2008 the Company received notification from one of its third-party investment
institutions announcing a proposed settlement, in principle, with various federal and state
regulators to commit to purchase client auction rate security holdings at par value of their
holdings. Under the proposal, the Companys auction rate securities would be repurchased, if still
outstanding, between June 2010 through 2012. The proposal covers $13.6 million (fair value of $12.8
million) of the Companys $18.9 million (fair value of $17.8 million) auction rate securities held
as of July 31, 2008. Upon the execution of the final settlement with the third-party investment
institution, the Company will reverse any unrealized losses recorded in accumulated other
comprehensive income on these securities, which was $0.8 million, as of July 31, 2008.
We are not aware of any trends, demands or commitments that would materially affect liquidity
or those that relate to our resources.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements and have not entered into any transactions involving
unconsolidated, limited purpose entities.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a result of our global operating activities, we are exposed to certain market risks,
including foreign currency exchange fluctuations and fluctuations in interest. We manage our
exposure to these risks in the normal course of our business as described below. We have not
utilized financial instruments for trading, hedging or other speculative purposes nor do we trade
in derivative financial instruments.
Foreign
Currency Risk
Substantially all our foreign subsidiaries operations are measured in their local currencies.
Assets and liabilities are translated into U.S. dollars at the rates of exchange in effect at the
end of each reporting period and revenue and expenses are translated at average rates of exchange
during the reporting period. Resulting translation adjustments are reported as a component of
comprehensive income on our consolidated Statement of Stockholders Equity and accumulated other
comprehensive income on our consolidated Balance Sheets.
Transactions denominated in a currency other than the reporting entitys functional currency
may give rise to transaction gains and losses that impact our results of operations. Historically,
we have not realized significant foreign currency gains or losses on such transactions. In the
three months ended July 31, 2008, we recognized foreign currency losses, after income taxes, of
$0.8 million primarily related to our North America, EMEA and
Asia Pacific operations.
Our primary exposure to exchange losses is based on outstanding intercompany loan balances
denominated in U.S. dollars. If the U.S. dollar strengthened 15%, 25% and 35% against the Pound
Sterling, the Euro, the Canadian dollar, the Australian dollar and the Yen, our exchange loss would
have been $4.1 million, $6.8 million and $9.5 million, respectively, based on outstanding balances
at July 31, 2008. If the U.S. dollar weakened by the same increments against the Pound Sterling,
the Euro, the Canadian dollar, the Australian dollar and the Yen, our exchange gain would have been
$4.1 million, $6.8 million and $9.5 million, respectively, based on outstanding balances at July
31, 2008.
20
Interest
Rate Risk
We primarily manage our exposure to fluctuations in interest rates through our regular
financing activities, which generally are short-term and provide for variable market rates. As of
July 31, 2008, we had no outstanding balance on our credit facility. We have $60.7 million of
borrowings against the cash surrender value of COLI contracts as of July 31, 2008 bearing interest
primarily at variable rates. The risk of fluctuations in these variable rates is minimized by the
fact that we receive a corresponding adjustment to our borrowed funds crediting rate on the cash
surrender value on our COLI contracts.
As of July 31, 2008, we held approximately $18.9 million (fair valued of $17.8 million) of
auction rate securities. Continued liquidity issues in the global credit markets caused auctions
for all of our auction rate securities to fail, and there is no assurance that currently successful
auctions on the other auction rate securities in our investment portfolio will continue to succeed.
As a result of the current situation in the auction markets, our ability to liquidate our
investment in auction rate securities and fully recover the carrying value of our investment in the
near term may be limited or impossible. An auction failure means that the parties wishing to sell
securities cannot. If in the future the issuers are unable to successfully close future auctions
and their credit ratings deteriorate, we may be required to record an impairment charge on these
investments. We believe we will be able to liquidate our investment without significant loss within
the next year, however, it could take until the final maturity of the underlying notes (up to 30
years) to realize our investments recorded value. Based on our expected operating cash flows, and
our other sources of cash, we do not anticipate the potential lack of liquidity on these
investments will affect our ability to execute our current business plan.
Item 4. Controls and Procedures
(a) Evaluation
of Disclosure Controls and Procedures.
As of the end of the period covered by this report, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange
Act)) under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. Based upon such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are
effective.
(b) Changes in Internal Control over Financial Reporting.
During the fiscal quarter ended July 31, 2008, there were no changes in our internal control
over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation both as plaintiff and defendant, relating to
claims arising out of our operations that is ordinary, routine litigation incidental to the
business. As of the date of this report, we are not engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on our business,
financial condition or results of operations.
Item 1A. Risk Factors
In our Form 10-K, we described material risk factors facing the business. Additional risks not
presently known to us or that we currently deem immaterial may also impair our business operations.
As of the date of this report, there have been no material changes to risk factors described in our
Form 10-K.
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Item 2. |
Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity
Securities |
During the three months ended July 31, 2008, the Company repurchased shares of its common
stock under the common stock repurchase program approved by the Board of Directors in November
2007. Pursuant to this program, shares can be repurchased in open market transactions or privately
negotiated transactions at the Companys discretion.
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Approximate |
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Shares |
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Dollar Value of |
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Purchased |
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Shares that |
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Average |
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as Part of a |
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May Yet Be |
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Price |
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Publicly- |
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Purchased |
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Paid |
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Announced |
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Under the |
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Shares |
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Per |
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Program |
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Program |
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Purchased |
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Share |
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(1) |
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(1) |
|
May 1, 2008 May 31, 2008 |
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334 |
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$ |
16.80 |
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$ |
43.7 million |
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June 1, 2008 June 30, 2008 |
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47,126 |
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$ |
16.80 |
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$ |
43.7 million |
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July 1, 2008 July 31, 2008 |
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80,147 |
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$ |
16.70 |
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9,200 |
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$ |
43.6 million |
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Balance as of July 31, 2008 |
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127,607 |
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9,200 |
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(1) |
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On November 2, 2007, the Board of Directors approved the repurchase of
up to $50 million of the Companys common stock in a common stock
repurchase program. The shares can be repurchased in open market
transactions or privately negotiated transactions at the Companys
discretion. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the first quarter of fiscal
year 2009.
Item 5. Other Information
Not applicable.
22
Item 6. Exhibits
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Exhibit |
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Number |
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Description of Exhibit |
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3.1 |
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Certificate of Incorporation of the Company, filed as Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q, dated December 15, 1999, and incorporated herein by reference. |
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3.2 |
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Certificate of Designations of 7.5% Convertible Preferred Stock, filed as Exhibit 3.1 to the Companys
Current Report on Form 8-K, dated June 18, 2002, and incorporated herein by reference. |
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3.3 |
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Amended and Restated Bylaws of the Company, filed as Exhibit 3.3 to the Companys Annual Report on Form
10-K, dated July 29, 2002, and incorporated herein by reference. |
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10.1 |
* |
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Offer of Employment Letter
between the Company and Paul C. Reilly dated June 26, 2008. |
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10.2 |
* |
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Reimbursement Letter
Agreement between the Company and Paul C. Reilly dated as of
March 1, 2008. |
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31.1 |
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Certification by Chief Executive Office pursuant to Rule 13a-14(a) under the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1 |
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|
Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
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* |
|
Management contract, compensatory plan or arrangement. |
23
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant has caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
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KORN/FERRY INTERNATIONAL
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Date: September 9, 2008 |
By: |
/s/ STEPHEN J. GIUSTO
|
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Stephen J. Giusto |
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Executive Vice President and
Chief Financial Officer |
24
EXHIBIT INDEX
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Exhibit |
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Number |
|
Description of Exhibit |
|
10.1 |
* |
|
Offer of Employment Letter
between the Company and Paul C. Reilly dated June 26, 2008. |
|
|
|
|
|
|
10.2 |
* |
|
Reimbursement Letter
Agreement between the Company and Paul C. Reilly dated as of
March 1, 2008. |
|
|
|
|
|
|
31.1 |
|
|
Certification by Chief Executive Office pursuant to Rule 13a-14(a) under the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
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31.2 |
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|
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
|
|
Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
|
|
|
* |
|
Management contract, compensatory plan or arrangement. |
25