Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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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, 2009
OR
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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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o 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. (Check one):
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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 |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The number of shares outstanding of our common
stock as of September 8, 2009 was 45,662,796 shares.
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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July 31, |
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April 30, |
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2009 |
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2009 |
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(unaudited) |
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(in thousands, except per share data) |
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ASSETS |
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Cash and cash equivalents |
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$ |
187,569 |
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$ |
255,000 |
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Marketable securities |
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4,425 |
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4,263 |
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Receivables due from clients, net of allowance for doubtful accounts of
$9,466 and $11,197, respectively |
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86,287 |
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67,308 |
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Income taxes and other receivables |
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8,776 |
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9,001 |
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Deferred income taxes |
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18,487 |
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14,583 |
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Prepaid expenses and other assets |
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28,043 |
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21,442 |
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Total current assets |
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333,587 |
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371,597 |
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Marketable securities, noncurrent |
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73,858 |
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70,992 |
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Property and equipment, net |
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28,553 |
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27,970 |
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Cash surrender value of company owned life insurance policies, net of loans |
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63,816 |
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63,108 |
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Deferred income taxes |
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44,277 |
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45,141 |
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Goodwill |
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160,901 |
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133,331 |
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Intangible assets, net |
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18,667 |
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16,928 |
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Investments and other assets |
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14,926 |
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11,812 |
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Total assets |
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$ |
738,585 |
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$ |
740,879 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Accounts payable |
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$ |
11,816 |
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$ |
10,282 |
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Income taxes payable |
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5,617 |
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2,059 |
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Compensation and benefits payable |
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77,362 |
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116,705 |
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Other accrued liabilities |
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52,762 |
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44,301 |
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Total current liabilities |
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147,557 |
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173,347 |
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Deferred compensation and other retirement plans |
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113,088 |
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99,238 |
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Other liabilities |
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15,526 |
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9,195 |
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Total liabilities |
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276,171 |
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281,780 |
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Stockholders equity: |
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Common stock: $0.01 par value, 150,000 shares authorized, 57,348 and 56,185
shares issued and 45,659 and 44,729 shares outstanding, respectively |
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373,732 |
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368,430 |
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Retained earnings |
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70,649 |
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84,922 |
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Accumulated other comprehensive income, net |
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18,569 |
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6,285 |
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Stockholders equity |
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462,950 |
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459,637 |
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Less: notes receivable from stockholders |
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(536 |
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(538 |
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Total stockholders equity |
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462,414 |
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459,099 |
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Total liabilities and stockholders equity |
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$ |
738,585 |
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$ |
740,879 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended |
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July 31, |
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2009 |
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2008 |
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(in thousands, except per share data) |
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Fee revenue |
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$ |
116,803 |
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$ |
205,733 |
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Reimbursed out-of-pocket engagement expenses |
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6,485 |
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11,739 |
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Total revenue |
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123,288 |
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217,472 |
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Compensation and benefits |
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90,385 |
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142,123 |
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General and administrative expenses |
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28,054 |
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34,030 |
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Out-of-pocket engagement expenses |
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8,789 |
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14,733 |
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Depreciation and amortization |
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2,829 |
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2,832 |
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Restructuring charges |
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18,183 |
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Total operating expenses |
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148,240 |
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193,718 |
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Operating (loss) income |
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(24,952 |
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23,754 |
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Interest and other income, net |
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4,733 |
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1,604 |
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Interest expense |
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1,442 |
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1,224 |
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(Loss) income before (benefit) provision for
income taxes and equity in earnings of
unconsolidated subsidiaries |
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(21,661 |
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24,134 |
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(Benefit) provision for income taxes |
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(7,365 |
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9,293 |
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Equity in earnings of unconsolidated subsidiaries, net |
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23 |
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1,063 |
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Net (loss) income |
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$ |
(14,273 |
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$ |
15,904 |
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(Loss) earnings per common share: |
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Basic |
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$ |
(0.33 |
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$ |
0.37 |
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Diluted |
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$ |
(0.33 |
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$ |
0.36 |
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Weighted-average common shares outstanding: |
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Basic |
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43,776 |
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43,432 |
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Diluted |
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43,776 |
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44,549 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Three Months Ended |
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July 31, |
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2009 |
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2008 |
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(in thousands) |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
(14,273 |
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$ |
15,904 |
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Adjustments to reconcile net (loss) income to net cash used in operating activities: |
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Depreciation and amortization |
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2,829 |
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2,832 |
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Stock-based compensation expense |
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4,496 |
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4,211 |
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Loss on disposition of property and equipment |
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515 |
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21 |
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Provision for doubtful accounts |
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656 |
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1,639 |
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(Gain) loss on cash surrender value of life insurance policies |
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(3,379 |
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202 |
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Gain on marketable securities classified as trading |
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(4,100 |
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Realized gain on available-for sale marketable securities |
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(237 |
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Deferred income taxes |
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(3,040 |
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4,374 |
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Change in other assets and liabilities: |
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Deferred compensation |
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13,850 |
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5,434 |
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Receivables |
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(12,733 |
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(19,848 |
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Prepaid expenses |
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(3,488 |
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(2,556 |
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Investment in unconsolidated subsidiaries |
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(23 |
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(1,316 |
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Income taxes payable |
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1,625 |
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(2,220 |
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Accounts payable and accrued liabilities |
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(48,243 |
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(97,240 |
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Other |
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(1,066 |
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(71 |
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Net cash used in operating activities |
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(66,374 |
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(88,871 |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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(1,185 |
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(2,895 |
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Proceeds from (purchase of) marketable securities, net |
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1,083 |
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(7,659 |
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Cash paid for acquisitions, net of cash acquired |
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(10,251 |
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Premiums on life insurance policies |
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(425 |
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(425 |
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Dividends received from unconsolidated subsidiaries |
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157 |
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341 |
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Net cash used in investing activities |
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(10,621 |
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(10,638 |
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Cash flows 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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3,098 |
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412 |
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Purchase of common stock |
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(1,230 |
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(2,136 |
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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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3,619 |
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1,761 |
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Tax benefit from exercise of stock options |
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(1,450 |
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36 |
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Net cash provided by (used in) financing activities |
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4,037 |
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(294 |
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Effect of exchange rate changes on cash and cash equivalents |
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5,527 |
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456 |
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Net decrease in cash and cash equivalents |
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(67,431 |
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(99,347 |
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Cash and cash equivalents at beginning of period |
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255,000 |
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305,296 |
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Cash and cash equivalents at end of period |
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$ |
187,569 |
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$ |
205,949 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009
1. Organization and Summary of Significant Accounting Policies
Nature of Business
Korn/Ferry International, a Delaware corporation (the Company), and its subsidiaries are
engaged in the business of providing executive search, outsourced recruiting and leadership and
talent consulting on a retained basis. The Companys worldwide network of over 78 offices in 37
countries enables it to meet the needs of its clients in all industries.
Basis of Consolidation and Presentation
The condensed consolidated financial statements for the three months ended July 31, 2009 and
2008 include the accounts of the Company and its wholly and majority owned/controlled domestic and
international subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation. The preparation of the condensed consolidated financial statements conform with
United States (U.S.) generally accepted accounting principles (GAAP) and prevailing practice
within the industry. The condensed consolidated financial statements 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, 2009 (the Annual Report) and should be read
together with the Annual Report.
Investments in affiliated companies which are 50% or less owned and where the Company
exercises significant influence over operations are accounted for using the equity method.
Dividends and other distributions of earnings from cost-method investments are included in other
income when declared.
Use of Estimates and Uncertainties
The preparation of the consolidated financial statements in conformity with 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. Actual
results could differ from these estimates. The most significant areas that require management
judgment are revenue recognition, deferred compensation, marketable securities, evaluation of the
carrying value of receivables, goodwill and other intangible assets and deferred income taxes.
Revenue Recognition
Substantially all professional fee revenue is derived from fees for professional services
related to executive recruitment, middle-management recruitment and related services performed on a
retained basis. Fee revenue from recruitment activities is generally one-third of the estimated
first year compensation plus a percentage of the fee to cover indirect expenses. Fee revenue is
recognized as earned. The Company generally bills clients in three monthly installments commencing
the month of client acceptance. Fees earned in excess of the initial contract amount are billed
upon completion of the engagement. Any services that are provided on a contingent basis are
recognized once the contingency is fulfilled.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
4
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
Marketable Securities
The Company classifies its marketable securities as either trading securities or
available-for-sale as defined in Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). These investments
are recorded at fair value and are classified as marketable securities in the accompanying
consolidated balance sheets as of July 31, 2009 and April 30, 2009. Certain investments, which the
Company intends to sell within the next twelve months, are carried as current. Investments are
made based on the Companys investment policy which restricts the types of investments that can be
made.
Trading securities consist of the Companys investments, which are held in trust to satisfy
obligations under the Companys deferred compensation plans (see Note 5). The changes in fair
values on trading securities are recorded as a component of net (loss) income in interest and other
income, net.
Available-for-sale securities consist of time deposits. The changes in fair values, net of
applicable taxes, on available-for-sale marketable securities are recorded as unrealized gains
(losses) as a component of accumulated other comprehensive income (loss) in stockholders equity.
When, in the opinion of management, a decline in the fair value of an investment below its cost or
amortized cost is considered to be other-than-temporary, the investments cost or amortized cost
is written-down to its fair value and the amount written-down is recorded in the statement of
operations in interest and other income (loss), net. The determination of other-than-temporary
decline includes, in addition to other relevant factors, a presumption that if the market value is
below cost by a significant amount for a period of time, a write-down may be necessary. The amount
of any write-down is determined by the difference between cost or amortized cost of the investment
and its fair value at the time the other-than-temporary decline is identified. During the three
months ended July 31, 2009 and 2008, no other-than-temporary impairment was recognized.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired.
Purchased intangible assets primarily consist of customer lists, non-compete agreements,
proprietary databases, intellectual property and trademarks, and are recorded at the estimated fair
value at the date of acquisition and are amortized using the straight-line method over their
estimated useful lives of five to 24 years.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), the
Companys annual goodwill impairment test was performed as of January 31, 2009. The goodwill
impairment test compares the fair value of a reporting unit with its carrying amount, including
goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the
reporting unit would be considered impaired. To measure the amount of the impairment loss, the
implied fair value of a reporting units goodwill is compared to the carrying amount of that
goodwill. The implied fair value of goodwill shall be determined in the same manner as the amount
of goodwill recognized in a business combination. If the carrying amount of a reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in
an amount equal to that excess. For each of these tests, the fair value of each of the Companys
reporting units was determined using a combination of valuation techniques, including a discounted
cash flow methodology. These impairment tests indicated that the fair value of each reporting unit
exceeded its carrying amount. As a result, no impairment charge was recognized. There was also no
indication of impairment as of July 31, 2009 and April 30, 2009.
As of July 31, 2009 and April 30 2009, there were no indicators of impairment with respect to
the Companys intangible assets.
5
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
Stock-Based Compensation
The Company has employee compensation plans under which various types of stock-based
instruments are granted. These instruments, 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 Payments
(SFAS 123(R)). In addition to recognizing compensation expense related to restricted stock and
SARs, SFAS 123(R) also requires the Company to recognize compensation expense related to the
estimated fair value of stock options and stock purchases under the ESPP.
Restructuring Charges
The Company accounts for its restructuring charges in accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). Under SFAS 146, a
liability is recognized when the costs are incurred and are recorded at fair value.
Fair Value of Financial Instruments
Effective May 1, 2008, the Company adopted SFAS 157, Fair Value Measurements (SFAS 157) for
financial assets and liabilities, which defines fair value, provides guidance for measuring fair
value and requires certain disclosures. SFAS 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:
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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. |
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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. |
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Level 3: Unobservable inputs that reflect the reporting entitys own assumptions. |
As of July 31 2009 and April 30, 2009, the Company held certain assets that are required to be
measured at fair value on a recurring basis. These included cash equivalents, marketable securities
and a put option. The carrying amount of cash, cash equivalents and accounts receivable
approximates fair value due to the short maturity of these instruments. The fair values of
marketable securities, other than auction rate securities, are obtained from quoted market prices.
The fair value of the auction rate securities and put option are determined by the use of pricing
models (see Note 5).
Recently Adopted Accounting Standards
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS
141R). SFAS 141R expands the definition of transactions and events that qualify as business
combinations; requires that the acquired assets and liabilities including contingencies and any
noncontrolling interests in the acquiree, be recorded at the fair value determined on the
acquisition date and changes thereafter be reflected in earnings, rather than goodwill; changes the
recognition timing for restructuring costs; and requires acquisition costs to be expensed as
incurred. SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R
will have an impact on accounting for business combinations but the effect is dependent upon
acquisitions at that time. For acquisitions completed prior to May 1, 2009, the new standard
requires that changes in deferred tax valuation allowances and acquired income tax uncertainties
after the measurement period must be recognized in earnings rather than as an adjustment to the
cost of the acquisition. The impact of the adoption of SFAS 141R on the Companys consolidated
financial position and results of operations will largely be dependent on the size and nature of
the business combinations completed after the adoption of this statement.
6
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements An Amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes new accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financial statements and separate from the
parents equity. The amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. SFAS 160 clarifies that
changes in a parents ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial interest. In addition, this
statement requires that a parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, earlier adoption is not permitted. The Company currently does not have
significant minority interests in its consolidated subsidiaries and as such did not have an impact
on the Companys condensed consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP 157-4). FSP 157-4 provides guidance on (1)
estimating the fair value of an asset or liability when the volume and level of activity for the
asset or liability have significantly decreased and (2) identifying transactions that are not
orderly. FSP 157-4 was effective for interim and annual periods ending after June 15, 2009. The
adoption of FSP 157-4 did not have a material impact on the Companys condensed consolidated
financial statements.
In April 2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1, Interim Disclosures
about Fair Value of Financial Instruments (FSP 107-1). FSP 107-1 requires disclosures about the
fair value of financial instruments in interim reporting periods of publicly traded companies as
well as in annual financial statements. FSP 107-1 was effective for interim periods ending after
June 15, 2009. The adoption of FSP 107-1 did not have a material impact on the Companys condensed
consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 provides
guidance to establish general standards of accounting for and disclosures of events that occur
after the balance sheet date but before financial statements are issued or are available to be
issued. SFAS 165 also requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. SFAS 165 is effective for
interim and annual periods ending after June 15, 2009, and accordingly, the Company adopted this
standard during the three months ended July 31, 2009. The implementation of this standard did not
have any impact on the financial statements of the Company. Subsequent events through the filing
date of this Form 10-Q have been evaluated for disclosure and recognition and the Company concluded
that no subsequent events have occurred that would require recognition in the condensed
consolidated financial statements.
Recently Issued Accounting Standards
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162
(SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification (the Codification)
as the source of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP,
except for rules and interpretive releases of the Securities and Exchange Commission (SEC), which
are sources of authoritative GAAP for SEC registrants. The Codification does not change current
U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all
the authoritative literature related to a particular topic in one place. The Codification is
effective for interim and annual periods ending after September 15, 2009. The Company will begin
to use the new guidelines and numbering system in its Quarterly Report on Form 10-Q for the quarter
ending October 31, 2009 and all subsequent public filings will reference the Codification as the
sole source of authoritative literature. As the Codification was not intended to change or alter
existing GAAP, it will not have any impact on our condensed consolidated financial statements.
7
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
2. Basic and Diluted (Loss) Earnings Per Share
Basic (loss) earnings per common share was computed by dividing net (loss) earnings by the
weighted-average number of common shares outstanding. Diluted earnings per common share 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 net (loss) earnings
attributable to common stockholders, after assumed conversion of subordinated notes and preferred
stock, by the weighted-average number of common shares outstanding plus dilutive common equivalent
shares. Due to the loss attributable to common stockholders during the three months ended July 31,
2009, no potentially dilutive shares are included in the loss per share calculation as including
such shares in the calculation would be anti-dilutive. During the three months ended July 31,
2008, SARs and options to purchase 1.9 million shares, were outstanding but not included in the
computation of diluted earnings per share because they were anti-dilutive.
The following table summarizes basic and diluted (loss) earnings per share calculations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings attributable to common stockholders: |
|
$ |
(14,273 |
) |
|
$ |
15,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic weighted-average number of common shares outstanding |
|
|
43,776 |
|
|
|
43,432 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Warrants |
|
|
|
|
|
|
80 |
|
Restricted stock |
|
|
|
|
|
|
278 |
|
Stock options |
|
|
|
|
|
|
748 |
|
ESPP |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
Diluted weighted-average number of common shares outstanding |
|
|
43,776 |
|
|
|
44,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per common share: |
|
|
|
|
|
|
|
|
Basic (loss) earnings per share |
|
$ |
(0.33 |
) |
|
$ |
0.37 |
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share |
|
$ |
(0.33 |
) |
|
$ |
0.36 |
|
|
|
|
|
|
|
|
3. Comprehensive (Loss) Income
Comprehensive (loss) income is comprised of net (loss) income and all changes to stockholders
equity, except those changes resulting from investments by stockholders (changes in paid in
capital) and distributions to stockholders (dividends).
Total comprehensive (loss) income is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Net (loss) income |
|
$ |
(14,273 |
) |
|
$ |
15,904 |
|
Foreign currency translation adjustments |
|
|
12,284 |
|
|
|
(1,385 |
) |
Unrealized loss on marketable securities, net of taxes |
|
|
|
|
|
|
(1,430 |
) |
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(1,989 |
) |
|
$ |
13,089 |
|
|
|
|
|
|
|
|
8
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
The components of accumulated other comprehensive income were as follows:
|
|
|
|
|
|
|
|
|
|
|
July 31, |
|
|
April 30, |
|
|
|
2009 |
|
|
2009 |
|
|
|
(in thousands) |
|
Foreign currency translation adjustments |
|
$ |
15,807 |
|
|
$ |
3,523 |
|
SFAS 158 adjustments, net of taxes |
|
|
2,762 |
|
|
|
2,762 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
18,569 |
|
|
$ |
6,285 |
|
|
|
|
|
|
|
|
4. Employee Stock Plans
Stock-Based Compensation
The following table summarizes the components of stock-based compensation expense recognized
in the Companys condensed consolidated statements of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Stock options and SARs |
|
$ |
236 |
|
|
$ |
288 |
|
Restricted stock |
|
|
4,147 |
|
|
|
3,790 |
|
ESPP |
|
|
113 |
|
|
|
133 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense, pre-tax |
|
|
4,496 |
|
|
|
4,211 |
|
Tax benefit from stock-based compensation expense |
|
|
(1,641 |
) |
|
|
(1,537 |
) |
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax |
|
$ |
2,855 |
|
|
$ |
2,674 |
|
|
|
|
|
|
|
|
The Company uses the Black-Scholes option valuation model to estimate the grant date fair
value of employee stock options. 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 weighted-average assumptions used to estimate the fair value of each employee stock option
and SARs were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2009 |
|
|
2008 |
|
Expected volatility |
|
|
48.91 |
% |
|
|
44.11 |
% |
Risk-free interest rate |
|
|
2.53 |
% |
|
|
3.27 |
% |
Expected option life (in years) |
|
|
5.00 |
|
|
|
4.25 |
|
Expected dividend yield |
|
|
0.00 |
% |
|
|
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.
9
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
Stock Incentive Plans
The Korn/Ferry International 2008 Stock Incentive Plan (the 2008 Plan) was adopted by the
Companys stockholders on September 23, 2008, at the 2008 Annual Stockholder Meeting, and replaced
the Companys former stock incentive plan, the Performance Award Plan, which expired on August 8,
2008. The Performance Award Plan provided for, and the 2008 Plan provides for, the grant of awards
to eligible participants, designated as either nonqualified or incentive stock options, SARs,
restricted stock and restricted stock units, any of which may be performance-based, and incentive
bonuses, which may be paid in cash or a combination thereof.
Stock Options and SARs
Stock options and SARs transactions under the Companys stock incentive plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Life (In Years) |
|
|
Value |
|
|
|
(in thousands, except per share data) |
|
Outstanding, April 30, 2009 |
|
|
3,113 |
|
|
$ |
14.83 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
552 |
|
|
$ |
10.38 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(291 |
) |
|
$ |
8.03 |
|
|
|
|
|
|
|
|
|
Forfeited/expired |
|
|
(280 |
) |
|
$ |
17.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, July 31, 2009 |
|
|
3,094 |
|
|
$ |
14.48 |
|
|
|
4.15 |
|
|
$ |
7,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, July 31, 2009 |
|
|
2,482 |
|
|
$ |
15.30 |
|
|
|
3.61 |
|
|
$ |
5,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the table above are 58,899 SARs outstanding and exercisable as of July 31, 2009
with a weighted-average exercise price of $12.26. As of July 31, 2009, there was $2.6 million of
total unrecognized compensation cost related to non-vested awards of stock options and SARs. That
cost is expected to be recognized over a weighted-average period of 2.1 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.
Additional information pertaining to stock options and SARs:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Weighted-average fair value of stock options granted |
|
$ |
4.66 |
|
|
$ |
6.75 |
|
Total fair value of stock options and SARs vested |
|
$ |
88 |
|
|
$ |
1,692 |
|
Total intrinsic value of stock options exercised |
|
$ |
718 |
|
|
$ |
99 |
|
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 upon commencement of
employment. The fair value of restricted stock is determined based on the closing price of the
Companys common stock on the date of grant.
10
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
Restricted stock activity is summarized below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average Grant |
|
|
|
|
|
|
|
Date Fair |
|
|
|
Shares |
|
|
Value |
|
|
|
(in thousands, except per share data) |
|
Non-vested, April 30, 2009 |
|
|
2,387 |
|
|
$ |
15.50 |
|
Granted |
|
|
898 |
|
|
$ |
9.81 |
|
Vested |
|
|
(618 |
) |
|
$ |
20.59 |
|
Forfeited/expired |
|
|
(17 |
) |
|
$ |
18.06 |
|
|
|
|
|
|
|
|
|
Non-vested, July 31, 2009 |
|
|
2,650 |
|
|
$ |
14.24 |
|
|
|
|
|
|
|
|
|
As of July 31, 2009, there was $37.7 million of total unrecognized compensation cost related
to non-vested awards of restricted stock, which is expected to be recognized over a
weighted-average period of 2.6 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. During the three months ended July 31, 2009 and 2008, 119,917 shares and 118,407
shares of restricted stock totaling $1.2 million and $2.0 million, respectively, were repurchased
by the Company at the option of the employee to pay for taxes related to vesting of restricted
stock.
Common Stock
In the three months ended July 31, 2009, the Company issued 290,830 shares of common stock as
a result of the exercise of stock options and 141,923 shares of common stock in conjunction with
the Companys ESPP. In the three months ended July 31, 2008, the Company issued approximately
16,500 shares of common stock as a result of the exercise of stock options and 118,615 shares of
common stock in conjunction with the Companys ESPP.
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 1.5 million shares, subject to adjustment for certain changes
in the Companys capital structure and other extraordinary events. During the three months ended
July 31, 2009 and 2008, employees purchased 141,923 shares at $9.04 per share and 118,615 shares at
$13.37 per share, respectively.
11
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
5. Marketable Securities
As of July 31, 2009 marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009 |
|
|
|
|
|
|
|
Available-for- |
|
|
|
|
|
|
Trading |
|
|
Sale(1) |
|
|
Total |
|
|
|
(in thousands) |
|
Auction rate securities |
|
$ |
11,007 |
|
|
$ |
|
|
|
$ |
11,007 |
|
Auction rate securities put option |
|
|
1,218 |
|
|
|
|
|
|
|
1,218 |
|
Equity securities (2) |
|
|
26,709 |
|
|
|
|
|
|
|
26,709 |
|
Fixed income mutual fund (2) |
|
|
15,201 |
|
|
|
|
|
|
|
15,201 |
|
Non-current money market (2) |
|
|
23,424 |
|
|
|
|
|
|
|
23,424 |
|
Time deposits |
|
|
|
|
|
|
724 |
|
|
|
724 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
77,559 |
|
|
|
724 |
|
|
|
78,283 |
|
Less: current portion of marketable securities |
|
|
(3,701 |
) |
|
|
(724 |
) |
|
|
(4,425 |
) |
|
|
|
|
|
|
|
|
|
|
Long-term marketable securities |
|
$ |
73,858 |
|
|
$ |
|
|
|
$ |
73,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Due to the short maturities for these instruments fair value approximates amortized cost. |
|
(2) |
|
These investments are held in trust for settlement of the Companys obligations under certain
of its deferred compensation plans with $3.7 million classified as current assets. |
As of April 30, 2009 marketable securities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2009 |
|
|
|
|
|
|
|
Available-for- |
|
|
|
|
|
|
Trading |
|
|
Sale(1) |
|
|
Total |
|
|
|
(in thousands) |
|
Auction rate securities |
|
$ |
11,329 |
|
|
$ |
|
|
|
$ |
11,329 |
|
Auction rate securities put option |
|
|
1,096 |
|
|
|
|
|
|
|
1,096 |
|
Equity securities (2) |
|
|
23,816 |
|
|
|
|
|
|
|
23,816 |
|
Fixed income mutual fund (2) |
|
|
14,320 |
|
|
|
|
|
|
|
14,320 |
|
Non-current money market (2) |
|
|
22,692 |
|
|
|
|
|
|
|
22,692 |
|
Time deposits |
|
|
|
|
|
|
2,002 |
|
|
|
2,002 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
73,253 |
|
|
|
2,002 |
|
|
|
75,255 |
|
Less: current portion of marketable securities |
|
|
(2,261 |
) |
|
|
(2,002 |
) |
|
|
(4,263 |
) |
|
|
|
|
|
|
|
|
|
|
Long-term marketable securities |
|
$ |
70,992 |
|
|
$ |
|
|
|
$ |
70,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Due to the short maturities for these instruments fair value approximates amortized cost. |
|
(2) |
|
These investments are held in trust for settlement of the Companys obligations under certain
of its deferred compensation plans with $2.3 million classified as current assets. |
Investments in marketable securities are made based on the Companys investment policy which
restricts the types of investments that can be made. 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. The
Companys investments in marketable securities also include student loan portfolios (ARS), which
are classified as noncurrent marketable securities and reflected at fair value.
As of July 31, 2009 and April 30, 2009, the Companys marketable securities included $65.3
million (net of unrealized losses of $5.2 million) and $60.8 million (net of unrealized losses of
$10.0 million) respectively, held in trust for settlement of the Companys obligations under
certain of its deferred compensation plans, of which $61.6 million and $58.5 million are classified
as noncurrent. The Companys obligations for which these assets were held in trust totaled $65.2
million and $60.7 million as of July 31, 2009 and April 30, 2009, respectively.
12
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
As of July 31, 2009, $12.2 million par value (with a fair value of $11.0 million) of the
Companys marketable securities consisted of ARS, of which all were securities collateralized by
student loan portfolios, which are guaranteed by the United States government. The Company
continues to earn interest on all of its ARS as of July 31, 2009. Due to events in credit markets,
the ARS held by the Company experienced failed auctions during calendar year 2008 and in 2009. As
such, quoted prices in active markets are not readily available at this time. A third-party
investment institution provided an estimate of the fair value of the ARS held by the Company as of
July 31, 2009 and April 30, 2009. 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 ARS as of July 31, 2009 and April 30, 2009.
In August 2008, the Company received notification from one of its investment securities firms
(Investment Firm) announcing a proposed settlement to repurchase all of the Companys ARS
holdings at par value. The Company formally accepted the settlement agreement and entered into a
repurchase agreement (Agreement) with the Investment Firm on October 28, 2008 (Acceptance
Date). By accepting the Agreement, the Company (1) received the right (Put Option) to sell its
ARS at par value to the Investment Firm between June 30, 2010 and July 2, 2012 and (2) gave the
Investment Firm the right to purchase the ARS from the Company any time after the Acceptance Date
as long as the Company receives the par value. The Agreement covers $12.2 million par value (fair
value of $11.0 million) of the Companys ARS as of July 31, 2009. The Company has accounted for the
Put Option as a freestanding financial instrument and elected to record the value under the fair
value option of SFAS 159.
The following table represents the Companys fair value hierarchy for financial assets
measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
(in thousands) |
|
Cash equivalents |
|
$ |
115,090 |
|
|
$ |
115,090 |
|
|
$ |
|
|
|
$ |
|
|
Auction rate securities |
|
|
11,007 |
|
|
|
|
|
|
|
|
|
|
|
11,007 |
|
Auction rate securities put option |
|
|
1,218 |
|
|
|
|
|
|
|
|
|
|
|
1,218 |
|
Equity securities |
|
|
26,709 |
|
|
|
26,709 |
|
|
|
|
|
|
|
|
|
Fixed income mutual fund |
|
|
15,201 |
|
|
|
15,201 |
|
|
|
|
|
|
|
|
|
Noncurrent money market mutual funds |
|
|
23,424 |
|
|
|
23,424 |
|
|
|
|
|
|
|
|
|
Time deposits |
|
|
724 |
|
|
|
724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
193,373 |
|
|
$ |
181,148 |
|
|
$ |
|
|
|
$ |
12,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 157 during the three months
ended July 31, 2009:
|
|
|
|
|
|
|
Auction Rate
Securities |
|
|
|
(in thousands) |
|
Balance, April 30, 2009 |
|
$ |
12,425 |
|
Auction rate securities put option |
|
|
122 |
|
Unrealized loss included in income |
|
|
(122 |
) |
Sale of securities |
|
|
(200 |
) |
|
|
|
|
Balance, July 31, 2009 |
|
$ |
12,225 |
|
|
|
|
|
13
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
6. Restructuring Charges
During the three months ended July 31, 2009, the Company implemented a restructuring plan to
eliminate redundancies as a result of the recent acquisition of Whitehead Mann. These initiatives
resulted in a total charge of $18.2 million against operations during the three months ended July
31, 2009, of which $8.4 million and $9.8 million related to severance costs and the consolidation
of premises, respectively. As of July 31, 2009, $2.5 million of the restructuring charge recorded
in the three months ended July 31, 2009, relating to severance was paid in cash.
Changes in the restructuring liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Facilities |
|
|
Total |
|
|
|
(in thousands) |
|
Liability as of April 30, 2009 |
|
$ |
10,554 |
|
|
$ |
12,807 |
|
|
$ |
23,361 |
|
Additions charged to expense |
|
|
8,348 |
|
|
|
9,835 |
|
|
|
18,183 |
|
Non-cash items |
|
|
(370 |
) |
|
|
(69 |
) |
|
|
(439 |
) |
Reductions for cash payments |
|
|
(7,413 |
) |
|
|
(2,034 |
) |
|
|
(9,447 |
) |
Exchange rate fluctuations |
|
|
411 |
|
|
|
606 |
|
|
|
1,017 |
|
|
|
|
|
|
|
|
|
|
|
Liability as of July 31, 2009 |
|
$ |
11,530 |
|
|
$ |
21,145 |
|
|
$ |
32,675 |
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2009 and April 30, 2009, the restructuring liability is included in current
portion of other accrued liabilities on the consolidated balance sheet, except for $7.7 million and
$5.4 million, respectively of facilities costs which primarily relate to commitments under
operating leases, net of sublease income, which are included in other long-term liabilities and
will be paid over the next eight years.
The restructuring liability by segment is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009 |
|
|
|
Severance |
|
|
Facilities |
|
|
Total |
|
|
|
(in thousands) |
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
2,017 |
|
|
$ |
2,641 |
|
|
$ |
4,658 |
|
Europe, Middle East and Africa (EMEA) |
|
|
7,671 |
|
|
|
12,242 |
|
|
|
19,913 |
|
Asia Pacific |
|
|
38 |
|
|
|
1,049 |
|
|
|
1,087 |
|
South America |
|
|
787 |
|
|
|
310 |
|
|
|
1,097 |
|
|
|
|
|
|
|
|
|
|
|
Total Executive Recruitment |
|
|
10,513 |
|
|
|
16,242 |
|
|
|
26,755 |
|
Futurestep |
|
|
1,017 |
|
|
|
4,903 |
|
|
|
5,920 |
|
|
|
|
|
|
|
|
|
|
|
Liability as of July 31, 2009 |
|
$ |
11,530 |
|
|
$ |
21,145 |
|
|
$ |
32,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2009 |
|
|
|
Severance |
|
|
Facilities |
|
|
Total |
|
|
|
(in thousands) |
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
3,052 |
|
|
$ |
3,187 |
|
|
$ |
6,239 |
|
EMEA |
|
|
4,714 |
|
|
|
2,514 |
|
|
|
7,228 |
|
Asia Pacific |
|
|
48 |
|
|
|
1,243 |
|
|
|
1,291 |
|
South America |
|
|
787 |
|
|
|
334 |
|
|
|
1,121 |
|
|
|
|
|
|
|
|
|
|
|
Total Executive Recruitment |
|
|
8,601 |
|
|
|
7,278 |
|
|
|
15,879 |
|
Futurestep |
|
|
1,953 |
|
|
|
5,529 |
|
|
|
7,482 |
|
|
|
|
|
|
|
|
|
|
|
Liability as of April 30, 2009 |
|
$ |
10,554 |
|
|
$ |
12,807 |
|
|
$ |
23,361 |
|
|
|
|
|
|
|
|
|
|
|
14
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
7. Deferred Compensation and Retirement Plans
The Company has several deferred compensation and retirement plans for vice-presidents that
provide defined benefits to participants based on the deferral of current compensation subject to
vesting and retirement or termination provisions.
The components of net periodic benefit costs are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Service cost |
|
$ |
85 |
|
|
$ |
174 |
|
Interest cost |
|
|
945 |
|
|
|
910 |
|
Amortization of actuarial gain |
|
|
(20 |
) |
|
|
(21 |
) |
Amortization of net transition obligation |
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
Net periodic benefit costs |
|
$ |
1,010 |
|
|
$ |
1,116 |
|
|
|
|
|
|
|
|
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 contributions to the ECAP during the three months ended
July 31, 2009 and 2008, of $0.4 million and $15.9 million, respectively. Participants generally
vest in Company contributions over a three to four year period. The ECAP is accounted for in
accordance with EITF 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned
Are Held in a Rabbi Trust and Invested (EITF 97-14), whereby the changes in the fair value of the
vested amounts owed to the participants are adjusted with a corresponding charge (or credit) to
compensation and benefits costs. During the three months ended July 31, 2009, deferred compensation
liability increased, therefore the Company recognized a loss of $2.6 million. The reduction in the
deferred compensation liability recognized in income during the three months ended July 31, 2008
was $0.8 million.
15
KORN/FERRY INTERNATIONAL AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
July 31, 2009
8. Business Segments
The Company operates in two global business segments; executive recruitment and Futurestep.
The executive recruitment segment focuses on recruiting board-level, chief executive and other
senior executive positions for clients predominantly in the consumer, financial services,
industrial, life sciences and technology industries. Futurestep creates customized, flexible
talent acquisition solutions to meet specific workforce needs of organizations around the world.
Their portfolio of services include recruitment process outsourcing, talent acquisition and
management consulting services, project-based recruitment, mid-level recruitment and interim
professionals. The executive recruitment business segment is managed by geographic regional
leaders. 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.
Financial highlights by business segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2009 |
|
|
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
South |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
Asia Pacific |
|
|
America |
|
|
Subtotal |
|
|
Futurestep |
|
|
Corporate(1) |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Fee revenue |
|
$ |
55,292 |
|
|
$ |
29,221 |
|
|
$ |
12,371 |
|
|
$ |
4,445 |
|
|
$ |
101,329 |
|
|
$ |
15,474 |
|
|
$ |
|
|
|
$ |
116,803 |
|
Total revenue |
|
$ |
59,053 |
|
|
$ |
30,407 |
|
|
$ |
12,633 |
|
|
$ |
4,541 |
|
|
$ |
106,634 |
|
|
$ |
16,654 |
|
|
$ |
|
|
|
$ |
123,288 |
|
Operating (loss) income |
|
$ |
4,207 |
|
|
$ |
(17,620 |
) |
|
$ |
975 |
|
|
$ |
(686 |
) |
|
$ |
(13,124 |
) |
|
$ |
(815 |
) |
|
$ |
(11,013 |
) |
|
$ |
(24,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2008 |
|
|
|
Executive Recruitment |
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
|
|
|
|
South |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
America |
|
|
EMEA |
|
|
Asia Pacific |
|
|
America |
|
|
Subtotal |
|
|
Futurestep |
|
|
Corporate(1) |
|
|
Consolidated |
|
|
|
(in thousands) |
|
Fee revenue |
|
$ |
93,974 |
|
|
$ |
51,590 |
|
|
$ |
21,403 |
|
|
$ |
7,585 |
|
|
$ |
174,552 |
|
|
$ |
31,181 |
|
|
$ |
|
|
|
$ |
205,733 |
|
Total revenue |
|
$ |
99,844 |
|
|
$ |
53,480 |
|
|
$ |
21,855 |
|
|
$ |
7,693 |
|
|
$ |
182,872 |
|
|
$ |
34,600 |
|
|
$ |
|
|
|
$ |
217,472 |
|
Operating income (loss) |
|
$ |
18,637 |
|
|
$ |
8,486 |
|
|
$ |
3,476 |
|
|
$ |
1,080 |
|
|
$ |
31,679 |
|
|
$ |
2,855 |
|
|
$ |
(10,780 |
) |
|
$ |
23,754 |
|
|
|
|
(1) |
|
Increase in operating loss primarily due to $3.3 million in expenses related to a change in
amounts due under a benefit plan with obligations determined by an increase (or decrease) in
market values. |
9. Acquisition
On June 11, 2009, the Company acquired all of the outstanding share capital of Whitehead Mann
Limited and Whitehead Mann SAS, together referred to Whitehead Mann (WHM). WHM is engaged in
providing executive recruitment and other related recruiting services in the United Kingdom, Dubai,
France and Germany. Actual results of operations of WHM are included in the Companys consolidated
financial statements from June 11, 2009, the effective date of the acquisition, and include $5.8
million in fee revenue from this acquisition during the three months ended July 31, 2009.
16
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 also are forward-looking statements. All of these forward-looking
statements are subject to risks and uncertainties that could cause our actual results to differ
materially from those contemplated by the relevant forward-looking statement. The principal risk
factors that could cause actual performance and future actions to differ materially from the
forward-looking statements include, but are not limited to, dependence on attracting and retaining
qualified and experienced consultants, portability of client relationships, global, local political
or economic developments in or affecting countries where we have operations, currency fluctuations
in our international operations, ability to manage growth, competition, reliance on information
processing systems, risks related to the growth and results of Futurestep, restrictions imposed by
off-limits agreements, employment liability risk, an impairment in the carrying value of goodwill
and other intangible assets, deferred tax assets that we may not be able to use and alignment of
our cost structure to our revenue level, and also includes risks related to the successful
integration of recently acquired businesses as well as the matters disclosed under the heading
Risk Factors in Item 1A of the Companys Annual Report of Form 10-K for the fiscal year ended
April 30, 2009 (Form 10-K). Readers are urged to consider these factors carefully in evaluating
the forward-looking statements. The forward-looking statements included in this Quarterly Report on
Form 10-Q are made only as of the date of this Quarterly Report on Form 10-Q 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 consolidated financial statements and
related notes included in this Quarterly Report on 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 global provider of talent management solutions
that helps clients to attract, develop, retain and sustain their talent. We are the largest
provider of executive recruitment, leadership and talent consulting and talent acquisition
solutions, with the broadest global presence in the recruitment industry. Our services include
executive recruitment, middle-management recruitment (through Futurestep), recruitment process
outsourcing (RPO), leadership and talent consulting (LTC) and executive coaching. Over half of
the executive recruitment searches we performed in fiscal 2009 were for board level, chief
executive and other senior executive and general management positions. Our 4,238 clients in fiscal
2009 included many of the worlds largest and most prestigious public and private companies, middle
market and emerging growth companies, as well as government and nonprofit organizations, including
approximately 45% of the FORTUNE 500 companies. We have built strong client loyalty with 75% of the
executive recruitment assignments we performed during fiscal 2009 being 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
search, middle-management recruitment, recruitment process outsourcing, leadership and talent
consulting and executive coaching, our strategic focus for fiscal 2010 will center upon enhancing
the cross-selling of our multi-service strategy. We plan to continue to address areas of increasing
client demand, including RPO and LTC. 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.
Although global economic conditions and demand for our services appeared to stabilize during
the three months ended July 31, 2009, the demand for executive searches has significantly declined
as compared to the year-ago period, which caused declines in our results of operations. Fee revenue
decreased 43% in the three months ended July 31, 2009 to $116.8 million compared to $205.7 million
in the year-ago period, with decreases in fee revenue in all regions. The North America and Europe
regions in executive recruitment experienced the largest dollar decreases in fee revenue. During
the three months
ended July 31, 2009, we incurred an operating loss of $25.0 million with an operating loss
from executive recruitment of $13.1 million, an operating loss of $0.8 million from Futurestep and
corporate expenses of $11.1 million. This represents a decrease of 205% from operating income of
$23.8 million in the three months ended July 31, 2008.
17
In an effort to eliminate redundancy attributed to our recent acquisition of Whitehead Mann,
we incurred restructuring charges in the three months ended July 31, 2009 to reduce our combined
work force and to consolidate premises. As a result, in the three months ended July 31, 2009, we
recorded $18.2 million in restructuring charges comprising $8.4 million of severance costs related
to a reduction in our work force and $9.8 million relating to the consolidation of premises.
Our cash, cash equivalents and marketable securities decreased $64.4 million, or 19% to $265.9
million at July 31, 2009 compared to $330.3 million at April 30, 2009, primarily due to the payment
of annual bonuses. As of July 31, 2009, we held marketable securities, to settle obligations under
our ECAP with a cost value of $70.5 million and a fair value of $65.3 million. Our working capital
decreased $12.2 million in the three months ended July 31, 2009, to $186.0 million at July 31,
2009. We believe that cash on hand and funds from operations will be sufficient to meet our
anticipated working capital, capital expenditures and general corporate requirements. We had no
long-term debt nor any outstanding balance under our credit facility at July 31, 2009.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations 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 amount of revenues and expenses during the reporting period.
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 the notes to our 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 obtain 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 as a percentage of fee revenue:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
July 31, |
|
|
|
2009 |
|
|
2008 |
|
Fee revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Reimbursed out-of-pocket engagement expenses |
|
|
5.6 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
105.6 |
|
|
|
105.7 |
|
Compensation and benefits |
|
|
77.4 |
|
|
|
69.1 |
|
General and administrative expenses |
|
|
24.0 |
|
|
|
16.5 |
|
Out-of-pocket engagement expenses |
|
|
7.5 |
|
|
|
7.2 |
|
Depreciation and amortization |
|
|
2.5 |
|
|
|
1.4 |
|
Restructuring charges |
|
|
15.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(21.4 |
) |
|
|
11.5 |
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(12.2 |
)% |
|
|
7.7 |
% |
|
|
|
|
|
|
|
18
The following tables summarize the results of our operations by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Dollars |
|
|
% |
|
|
Dollars |
|
|
% |
|
|
|
(dollars in thousands) |
|
Fee revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive recruitment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
55,292 |
|
|
|
47.4 |
% |
|
$ |
93,974 |
|
|
|
45.7 |
% |
EMEA |
|
|
29,221 |
|
|
|
25.0 |
|
|
|
51,590 |
|
|
|
25.1 |
|
Asia Pacific |
|
|
12,371 |
|
|
|
10.6 |
|
|
|
21,403 |
|
|
|
10.4 |
|
South America |
|
|
4,445 |
|
|
|
3.8 |
|
|
|
7,585 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total executive recruitment |
|
|
101,329 |
|
|
|
86.8 |
|
|
|
174,552 |
|
|
|
84.9 |
|
Futurestep |
|
|
15,474 |
|
|
|
13.2 |
|
|
|
31,181 |
|
|
|
15.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee revenue |
|
|
116,803 |
|
|
|
100.0 |
% |
|
|
205,733 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reimbursed out-of-pocket engagement expense |
|
|
6,485 |
|
|
|
|
|
|
|
11,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
123,288 |
|
|
|
|
|
|
$ |
217,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Dollars |
|
|
Margin(1) |
|
|
Dollars |
|
|
Margin(1) |
|
|
|
(dollars in thousands) |
|
Operating (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive recruitment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
4,207 |
|
|
|
7.6 |
% |
|
$ |
18,637 |
|
|
|
19.8 |
% |
EMEA |
|
|
(17,620 |
) |
|
|
(60.3 |
) |
|
|
8,486 |
|
|
|
16.4 |
|
Asia Pacific |
|
|
975 |
|
|
|
7.9 |
|
|
|
3,476 |
|
|
|
16.2 |
|
South America |
|
|
(686 |
) |
|
|
(15.4 |
) |
|
|
1,080 |
|
|
|
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total executive recruitment |
|
|
(13,124 |
) |
|
|
(13.0 |
) |
|
|
31,679 |
|
|
|
18.1 |
|
Futurestep |
|
|
(815 |
) |
|
|
(5.3 |
) |
|
|
2,855 |
|
|
|
9.2 |
|
Corporate(2) |
|
|
(11,013 |
) |
|
|
|
|
|
|
(10,780 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating (loss) income |
|
$ |
(24,952 |
) |
|
|
(21.4 |
)% |
|
$ |
23,754 |
|
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Margin calculated as a percentage of fee revenue by business segment. |
|
(2) |
|
Increase in operating loss primarily due to $3.3 million in expenses related to a change in
amounts due under a benefit plan with obligations determined by an increase (or decrease) in
market values. |
Three Months Ended July 31, 2009 Compared to Three Months Ended July 31, 2008
Fee Revenue
Fee Revenue. Fee revenue decreased $88.9 million, or 43%, to $116.8 million in the three
months ended July 31, 2009 compared to $205.7 million in the three months ended July 31, 2008. The
decline in fee revenue was primarily attributable to a 33% decrease in the number of engagements
billed during the three months ended July 31, 2009 as compared to the three months ended July 31,
2008 and a 16% decrease in average fees billed per engagement (a decrease of 9% excluding the
impact of exchange rates) during the same period, both of which were driven by the depressed global
economic conditions, which continues to have a significant impact on many of our clients people
initiatives. Exchange rates unfavorably impacted fee revenues by $8.7 million in three months ended
July 31, 2009.
Executive Recruitment. Executive recruitment reported fee revenue of $101.3 million, a
decrease of $73.2 million, or 42%, in three months ended July 31, 2009 compared to $174.5 million
in the three months ended July 31, 2008 due to a 31% decrease in the number of engagements billed
in the three months ended July 31, 2009 as compared to the year-ago period and to a 15% decrease in
the average fees billed per engagement during the same period. Exchange rates unfavorably impacted
fee revenues by $7.2 million in the three months ended July 31, 2009.
19
North America reported fee revenue of $55.3 million, a decrease of $38.6 million, or 41%, in
the three months ended July 31, 2009 compared to $93.9 million in the three months ended July 31,
2008 primarily due to a 34% decrease in the number
of engagements billed during the three months ended July 31, 2009 as compared to the three
months ended July 31, 2008 and an 11% decrease in the average fees billed per engagement in the
region during the same period. The overall decline in fee revenue was driven by significant
declines in fee revenue in the industrial, technology, financial services and consumer goods
sectors. Exchange rates unfavorably impacted North America fee revenue by $0.7 million in the three
months ended July 31, 2009.
EMEA reported fee revenue of $29.2 million, a decrease of $22.4 million, or 43%, in the three
months ended July 31, 2009 compared to $51.6 million in the three months ended July 31, 2008.
EMEAs decrease in fee revenue was driven by a 33% decrease in the number of engagements billed in
the three months ended July 31, 2009 as compared to the three months ended July 31, 2008 and a 15%
decrease in average fees billed per engagement during the same period. The decrease in fee revenue
was partially offset by $5.8 million in fee revenue from the acquisition of Whitehead Mann during
the three months ended July 31, 2009. The performance in existing offices in the United Kingdom,
Germany, Italy, United Arab Emirates, Switzerland, and the Netherlands were the primary
contributors to the decrease in fee revenue, although fee revenue in all offices in the region
declined in the three months ended July 31, 2009 in comparison to the year-ago period. The
industrial, financial services and consumer goods sectors experienced the largest decrease in fee
revenue in the three months ended July 31, 2009 as compared to the three months ended July 31,
2008. Exchange rates unfavorably impacted EMEA fee revenue by $5.0 million in the three months
ended July 31, 2009.
Asia Pacific reported fee revenue of $12.4 million, a decrease of $9.0 million, or 42%, in the
three months ended July 31, 2009 compared to $21.4 million in the three months ended July 31, 2008
due to a decrease of 24% in average fees billed per engagement and a 25% decline in the number of
engagements billed in the three months ended July 31, 2009 compared to the three months ended July
31, 2008. The decline in performance in Australia, Singapore, Hong Kong and Japan were the primary
contributors to the decrease in fee revenue in the three months ended July 31, 2009 over the
year-ago period. The largest decrease in fee revenue was experienced in the financial services and
industrial sectors. Exchange rates unfavorably impacted fee revenue for Asia Pacific by $0.8
million in the three months ended July 31, 2009.
South America reported fee revenue of $4.4 million, a decrease of $3.2 million, or 42%, in the
three months ended July 31, 2009 compared to $7.6 million in the three months ended July 31, 2008.
Average fees billed per engagement and the number of engagements billed decreased 27% and 19%,
respectively within the region in three months ended July 31, 2009 compared to the three months
ended July 31, 2008. The decline in performance in the industrial and consumer goods sectors was
the primary contributor to the decrease in fee revenue in the three months ended July 31, 2009
compared to the three months ended July 31, 2008. Exchange rates unfavorably impacted fee revenue
for South America by $0.7 million in the three months ended July 31, 2009.
Futurestep. Futurestep reported fee revenue of $15.5 million, a decrease of $15.7 million, or
50%, in the three months ended July 31, 2009 compared to $31.2 million in the three months ended
July 31, 2008. The decline in Futuresteps fee revenue is due to a 36% decrease in the number of
engagements billed in the three months ended July 31, 2009 as compared to the three months ended
July 31, 2008 and a 23% decrease in average fees billed per engagement during the same period. Of
the total decrease in fee revenue in the three months ended July 31, 2009 compared to the three
months ended July 31, 2008, North America experienced the largest dollar decline, with a decrease
in fee revenue of $6.6 million, or 55%, to $5.4 million; Europe fee revenue decreased by $6.1
million, or 58%, to $4.4 million and Asia fee revenue decreased $3.0 million, or 34%, to $5.7
million. All regions reflect decreased revenue from search engagements. Exchange rates unfavorably
impacted fee revenue by $1.5 million in the three months ended July 31, 2009.
Compensation and Benefits
Compensation and benefits expense decreased $51.7 million, or 36%, to $90.4 million in the
three months ended July 31, 2009 from $142.1 million in the three months ended July 31, 2008. The
decrease in compensation and benefits expenses is primarily due to a decrease in global headcount,
coupled with a $29.7 million decrease in variable compensation in the three months ended July 31,
2009 as compared to the three months ended July 31, 2008. Global headcount as of July 31, 2009
declined overall by a net of approximately 380 employees, or 14% from July 31, 2008. As discussed
below in Restructuring Charges, due to our recent acquisition of Whitehead Mann, we implemented a
restructuring in the three months ended July 31, 2009 which was in addition to our previous fiscal
2009 restructurings and further reduced our workforce. Exchange rates favorably impacted
compensation and benefits expenses by $6.3 million during the three months ended July 31, 2009.
20
Executive recruitment compensation and benefits costs decreased $41.8 million, or 37%, to
$72.2 million in the three months ended July 31, 2009 compared to $114.0 million in the three
months ended July 31, 2008 primarily due to a 8% decrease in average consultant headcount and a
$27.7 million decrease in variable compensation. Exchange rates impacted executive recruitment
compensation and benefits expense favorably by $5.2 million. Executive recruitment compensation and
benefits expenses, as a percentage of fee revenue, was 71% in the three months ended July 31, 2009
compared to 65% in the three months ended July 31, 2008.
Futurestep compensation and benefits expense decreased $8.8 million, or 42%, to $12.4 million
in the three months ended July 31, 2009 from $21.2 million in the three months ended July 31, 2008
due to a 13% decrease in average consultant headcount and a $1.7 million decline in variable
compensation in the three months ended July 31, 2009 as compared to the three months ended July 31,
2008. Exchange rates favorably impacted Futurestep compensation and benefits expense by $1.1
million. Futurestep compensation and benefits expense, as a percentage of fee revenue, increased to
80% in the three months ended July 31, 2009 from 68% in the three months ended July 31, 2008.
Corporate compensation and benefits expense decreased $1.1 million, or 16%, to $5.8 million in
the three months ended July 31, 2009 compared to $6.9 million in the three months ended July 31,
2008 primarily due to a reduction in salaries offset by a $3.4 million increase in certain other
deferred compensation liabilities during the three months ended July 31, 2009. We hold marketable
securities in a trust for settlement of certain of these deferred compensation obligations as
discussed in Note 5 Marketable Securities, in the notes to our condensed consolidated financial
statements. These decreases were offset by a $3.6 million decrease in certain other deferred
compensation retirement plan liabilities due to an increase in cash surrender value of company
owned life insurance policies (COLI).
General and Administrative Expenses
General and administrative expenses decreased $5.9 million, or 17%, to $28.1 million in the
three months ended July 31, 2009 compared to $34.0 million in the three months ended July 31, 2008.
Exchange rates favorably impacted general and administrative expenses by $2.2 million in the three
months ended July 31, 2009.
Executive recruitment general and administrative expenses decreased $4.5 million, or 18%, to
$20.1 million in the three months ended July 31, 2009 from $24.6 million in the three months ended
July 31, 2008. The decrease in general and administrative expenses was driven by a decrease in
business development expense of $1.3 million, premises and office expense of $1.3 million, meeting
and travel expenses of $0.9 million and $0.6 million in bad debt expense. General expenses
decreased primarily due to the decline in our overall business activities as a result of the global
economic crisis, including lower premises and office expense due to the closure of offices in the
second half of fiscal 2009. Executive recruitment general and administrative expenses, as a
percentage of fee revenue, was 20% in the three months ended July 31, 2009 compared to 14% in the
three months ended July 31, 2008.
Futurestep general and administrative expenses decreased $2.5 million, or 42%, to $3.4 million
in the three months ended July 31, 2009 compared to $5.9 million in the three months ended July 31,
2008 primarily due to decreases of $0.9 million in premises and office expense, $0.8 million in
miscellaneous expenses including travel and meetings, $0.4 million in business development expense
and $0.4 million in bad debt expenses. General expenses decreased primarily due to the decline in
our overall business activities. Bad debt expense decreased due to an overall lower accounts
receivable balance contributing to fewer bad debt write-offs during the three months ended July 31,
2009 as compared to the year-ago period. Futurestep general and administrative expenses, as a
percentage of fee revenue, was 22% in the three months ended July 31, 2009 compared to 19% in the
three months ended July 31, 2008.
Corporate general and administrative expenses increased $1.1 million, or 31%, to $4.6 million
in the three months ended July 31, 2009 compared to $3.5 million in the three months ended July 31,
2008 due to an increase in legal and professional fees primarily incurred in connection with the
acquisition of Whitehead Mann.
21
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. Out-of-pocket engagement expenses decreased $5.9
million, or 40%, to $8.8 million in the three months ended July 31, 2009, compared to $14.7 million
in the three months ended July 31, 2008. Out-of-pocket engagement expenses as a percentage of fee
revenue, was 7% in both the three months ended July 31, 2009 and 2008.
Depreciation and Amortization Expenses
Depreciation and amortization expenses were $2.8 million in the three months ended July 31,
2009 and 2008. This expense relates mainly to computer equipment, software, furniture and fixtures
and leasehold improvements.
Restructuring Charges
In an effort to eliminate redundancy attributed to our recent acquisition of Whitehead Mann,
we incurred additional restructuring charges in the three months ended July 31, 2009 to reduce our
combined work force and to consolidate premises. During the three months ended July 31, 2009, we
recorded $18.2 million in restructuring charges comprising $8.4 million of severance costs related
to a reduction in our work force and $9.8 million relating to the consolidation of premises.
Operating (Loss) Income
Operating income decreased $48.8 million, to an operating loss of $25.0 million in the three
months ended July 31, 2009 compared to operating income of $23.8 million in the three months ended
July 31, 2008. This decrease in operating income resulted from an $88.9 million decrease in fee
revenue during the three months ended July 31, 2009 as compared to the three months ended July 31,
2008, which was partially offset by a decrease in operating expenses of $45.5 million during the
same period. The decrease in operating expenses is primarily attributable to a decrease in
compensation and benefits, offset by an increase in restructuring charges of $18.2 million, of
which $2.5 million was paid in cash as of July 31, 2009.
Executive recruitment operating income decreased $44.8 million, or 141%, to an operating loss
of $13.1 million in the three months ended July 31, 2009 compared to operating income of $31.7
million in the three months ended July 31, 2008. The decline in executive recruitment operating
income is attributable to a decrease in revenues offset by a reduction in compensation expenses
relating to a decrease in headcount and variable compensation, as well as a decrease in general and
administrative expenses. These decreases were partially offset by an increase in restructuring
charges of $18.2 million recorded in the three months ended July 31, 2009. Executive recruitment
operating loss during the three months ended July 31, 2009, as a percentage of fee revenue, was 13%
compared to operating income as a percentage of fee revenue of 18% in the three months ended July
31, 2008.
Futurestep operating income decreased by $3.7 million, to an operating loss of $0.8 million in
the three months ended July 31, 2009 as compared to operating income of $2.9 million in the three
months ended July 31, 2008. The change in Futurestep operating loss is primarily due to a decrease
in fee revenue of $15.7 million due to a decrease in the number of engagements billed during the
three months ended July 31, 2009 compared to the three months ended July 31, 2008. Futurestep
operating loss, as a percentage of fee revenue, was 5% in the three months ended July 31, 2009,
compared to operating income, as a percentage of fee revenue of 9% in the three months ended July
31, 2008.
Interest Income and Other Income, Net
Interest income and other income, net increased by $3.1 million, to $4.7 million in the three
months ended July 31, 2009 from $1.6 million in the three months ended July 31, 2008. The increase
in interest and other income, net was due to net trading gains on marketable securities of $3.8
million, offset by a $0.8 million decrease in interest and dividend income. Interest and dividend
income decreased primarily as a result of lower average United States cash balances, and lower
overall interest rates compared to the three months ended July 31, 2008.
22
Interest Expense
Interest expense, primarily related to borrowings under COLI, was $1.4 million in the three
months ended July 31, 2009 compared to $1.2 million in the three months ended July 31, 2008.
(Benefit) Provision for Income Taxes
The benefit for income taxes was $7.4 million in the three months ended July 31, 2009 compared
to a provision for income taxes of $9.3 million in the three months ended July 31, 2008. The
benefit for income taxes in the three months ended July 31, 2009 reflects a 34% effective tax rate,
compared to a 39% effective tax rate for the three months ended July 31, 2008. The effective
income tax rate in the three months ended July 31, 2009 is lower when compared to the effective
income tax rate in three months ended July 31, 2008, as we did not recognize tax benefits
associated with net operating losses from the restructurings during fiscal 2009 or the three months
ended July 31, 2009.
Equity in Earnings of Unconsolidated Subsidiary
Equity in earnings of unconsolidated subsidiary is comprised of our less than 50% interest in
our Mexican subsidiary. We report our interest in earnings or loss of our Mexican subsidiary on the
equity basis as a one-line adjustment to net (loss) income, net of taxes. Equity in earnings was
$0.02 million in the three months ended July 31, 2009 compared to $1.1 million in the three months
ended July 31, 2008.
Liquidity and Capital Resources
Although global economic conditions and demand for our services appeared to stabilize during
the three months ended July 31, 2009, the demand for executive searches has significantly declined
as compared to a year-ago. In response to the uncertain economic environment and labor markets, we
have taken steps to align our cost structure with anticipated revenue levels, in an effort to
retain positive cash flow and to address redundancy attributed to our recent acquisition of
Whitehead Mann. Continued adverse changes in our revenue, however, could require us to institute
additional cost cutting measures. To the extent our efforts are insufficient, we may continue to
incur negative cash flows and if such a condition were to persist, it would require us to obtain
additional financing to meet our needs. We believe that the cash on hand and funds from operations
will be sufficient to meet anticipated working capital, capital expenditures and general corporate
requirements during the next twelve months.
Our performance is subject to the general level of economic activity in the geographic regions
and industries in which we operate. The economic activity in those regions and industries have
deteriorated significantly and may remain depressed for the foreseeable future. If the national or
global economy or credit market conditions in general were to deteriorate further in the future, it
is possible that such changes could put additional negative pressure on demand for our services and
affect our cash flows.
As of July 31, 2009 and April 30, 2009, our marketable securities included $65.3 million (net
of unrealized losses of $5.2 million) and $60.8 million (net of unrealized losses of $10.0 million)
respectively, held in trust for settlement of our obligations under certain deferred compensation
plans, of which $61.6 million and $58.5 million are classified as noncurrent. Our obligations for
which these assets were held in trust totaled $65.2 million and $60.7 million as of July 31, 2009
and April 30, 2009, respectively.
As of July 31, 2009, we held approximately $12.2 million par value (with a fair value of $11.0
million) of marketable securities investments, classified as noncurrent assets, with an auction
reset feature whose underlying assets are generally student loans which are substantially backed by
the federal government (such auction rate securities being referred to herein as ARS). Continued
liquidity issues in the global credit markets caused auctions for all of our ARS to fail because
the amount of securities offered for sale exceeded the amount of bids. As a result, the liquidity
of our remaining ARS 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 ARS 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 a different form of financing to replace these
securities, or the maturing of the securities.
23
In August 2008, we received notification from one of our investment securities firms
(Investment Firm) announcing a proposed settlement to repurchase all of our ARS holdings at par
value. We formally accepted the settlement agreement and entered into a repurchase agreement
(Agreement) with the Investment Firm on October 28, 2008 (Acceptance Date). By accepting the
Agreement, we (1) received the right (Put Option) to sell our ARS at par value to the Investment
Firm between June 30, 2010 and July 2, 2012 and (2) gave the Investment Firm the right to purchase
the ARS from us any time after the Acceptance Date as long as we receive the par value. The
Agreement covers $12.2 million par value (fair value of $11.0 million) of our ARS as of July 31,
2009 and we expect to receive the entire par value upon the future liquidation of the securities.
The net decrease in our working capital of $12.2 million as of July 31, 2009 compared to April
30, 2009 is primarily attributable to a net decrease in accrued compensation and benefits payable
and cash and cash equivalents, offset to some extent by an increase in accounts receivable.
Compensation and benefits payable decreased due to a reduction in worldwide headcount and a
reduction in variable compensation while cash and cash equivalents decreased due to the payment of
annual bonuses. Accounts receivable increased due to an increase in the number of engagements
billed during the three months ended July 31, 2009 compared to the three months ended April 30,
2009.
Cash and cash equivalents and marketable securities were approximately $265.9 million and
$330.3 million as of July 31, 2009 and April 30, 2009, respectively. Cash and cash equivalents
consisted of cash and highly liquid investments purchased with original maturities of three months
or less. Marketable securities consist of auction rate municipal securities, equity securities and
fixed income mutual funds. The primary objectives for these investments are liquidity or to meet
the obligations under certain of our deferred compensation plans.
Cash used in operating activities was $66.4 million in the three months ended July 31, 2009, a
decrease of $22.5 million, from cash used in operating activities of $88.9 million in the three
months ended July 31, 2008. The decrease in cash used in operating activities is primarily due to a
$49.0 million decrease in accounts payable and accrued liabilities offset by a $30.2 million
decrease in net income. The decrease in accounts payable and accrued liabilities is attributable
mainly to a reduction in worldwide headcount and variable compensation. The decrease in net income
is due to a decrease in revenues, partially offset by a decrease in operating expenses.
Cash used in investing activities was $10.6 million in the three months ended July 31, 2009
and 2008. In the three months ended July 31, 2009, cash used in investing activities was primarily
attributable to $10.3 million in cash used to acquire Whitehead Mann. In the three months ended
July 31, 2008, we used $7.7 million to purchase marketable securities and $2.9 million to purchase
property and equipment.
Cash provided by financing activities was $4.0 million in the three months ended July 31,
2009, a $4.3 million increase from the three months ended July 31, 2008. In the three months ended
July 31, 2009 and 2008, proceeds received from the exercise of stock options were $3.6 million and
$1.8 million, respectively. The increase was due in part to an increase in the number of stock
options exercised and an increase in the number of shares purchased through our employee stock
purchase plan. In addition borrowings under life insurance policies increased $2.7 million in the
three months ended July 31, 2009 as compared to the three months ended July 31, 2008. These
increases were offset by cash used to repurchase $1.2 million and $2.1 million, of common stock,
during the three months ended July 31, 2009 and 2008, respectively. As of July 31, 2009, $36.4
million remained available for repurchase under our repurchase program, which was approved by the
Board of Directors.
Long-Term Debt
Total outstanding borrowings under our COLI policies were $64.6 million and $61.6 million as
of July 31, 2009 and April 30, 2009, respectively. Generally, we borrow under our COLI policies to
pay related premiums. Such borrowings do not require annual principal repayments, bear interest
primarily at variable rates and are secured by the cash surrender value of the life insurance
policies of $128.4 million and $124.7 million as of July 31, 2009 and April 30, 2009, respectively.
24
In March 2008, we amended our Senior Secured Revolving Credit Facility (the Facility) with
Wells Fargo Bank. The Facility has a $50.0 million borrowing capacity with no borrowing base
restrictions, expiring March 2011. We had no outstanding borrowings under our Facility at July 31,
2009; however, at July 31, 2009 there was $5.9 million of standby letters of credit issued under
this Facility. We are negotiating an amendment to certain covenants of our Facility with Wells
Fargo Bank and expect to complete the negotiations in the second quarter of fiscal 2010. Although,
we have sufficient liquidity to meet our operating cash flow requirements and do not anticipate
accessing the Facility prior to the completion of negotiations, until the negotiations are
completed, we do not have access to this Facility.
We are not aware of any other trends, demand 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 rates. 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. During the
quarter ended July 31, 2009, we recognized foreign currency losses, after income taxes, of
$0.9 million primarily related to our 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 $4.6 million, $7.6 million and $10.6 million, respectively, based on outstanding balances
at July 31, 2009. 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
$4.6 million, $7.6 million and $10.6 million, respectively, based on outstanding balances at July
31, 2009.
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, 2009, we had no outstanding balance under our Facility. We have $64.6 million of
borrowings against the cash surrender value of COLI contracts as of July 31, 2009 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, 2009, we held approximately $12.2 million par value (fair valued of $11.0
million) of ARS. Continued liquidity issues in the global credit markets caused auctions for all of
our ARS to fail. As a result of the current situation in the auction markets, our ability to
liquidate our investment in ARS in the near term may be limited or impossible. An auction failure
means that the parties wishing to sell securities cannot. 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.
25
Item 4.Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Based on their evaluation of our disclosure controls and procedures conducted as of the end
of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended)
are effective.
(b) Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting during the three
months ended July 31, 2009, that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
26
PART II.
Item 1. Legal Proceedings
From time to time, we are involved in litigation both as a plaintiff and a defendant, relating
to claims arising out of our operations. 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 our 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, except with respect to the risk factor amended and
restated as set forth below, there have been no material changes to risk factors described in our
Form 10-K.
Global economic developments and the conditions in the geographic regions and the industries from
which we derive a significant portion of our fee revenue could negatively affect our business,
financial condition and results of operations.
Demand for our services is affected by global economic conditions and the general level of
economic activity in the geographic regions and industries in which we operate. When conditions in
the global economy, including the credit markets, deteriorate, or economic activity slows, many
companies hire fewer permanent employees and some companies, as a cost-saving measure, choose to
rely on their own human resources departments rather than third-party search firms to find talent.
The geographic regions and industries in which we operate have recently deteriorated significantly
and may remain depressed for the foreseeable future. If the national or global economy or credit
market conditions in general do not improve or deteriorate further in the future, the demand for
our services could continue to weaken, resulting in lower cash flows and a negative effect on our
business, financial condition and results of operations.
Item 2. Unregistered Sale of Equity Securities, Use of Proceeds and Issuers Purchases of Equity
Securities
Issuer Purchases of Equity Securities
The following table summarizes common stock repurchased by us during quarter ended July 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
Value of Shares |
|
|
|
|
|
|
|
Average |
|
|
as Part of Publicly- |
|
|
That May Yet be |
|
|
|
Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Purchased under the |
|
|
|
Purchased (1) |
|
|
Per Share |
|
|
Programs (2) |
|
|
Programs (2) |
|
|
May 1, 2009 May 31, 2009 |
|
|
334 |
|
|
$ |
10.28 |
|
|
|
|
|
|
$36.4 million |
June 1,
2009 June 30, 2009 |
|
|
50,139 |
|
|
$ |
10.86 |
|
|
|
|
|
|
$36.4 million |
July 1,
2009 July 31, 2009 |
|
|
69,444 |
|
|
$ |
9.81 |
|
|
|
|
|
|
$36.4 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
119,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents withholding of a portion of restricted shares to cover taxes on vested restricted
shares. |
|
(2) |
|
On November 2, 2007, the Board of Directors approved the repurchase of $50 million of our
common stock in a common stock repurchase program. The shares can be repurchased in open
market transactions or privately negotiated transactions at our discretion. |
Item 5. Other Information
Restructuring Charges
In an effort to eliminate redundancy as a result of the Whitehead Mann acquisition, we
incurred additional restructuring charges during the quarter ended July 31, 2009, designed to
reduce the combined work force and to consolidate premises. This initiative resulted in a total
charge of $18.2 million against operations in the three months ended July 31, 2009 of which
$8.4 million and $9.8 million related to severance costs (of which approximately $2.5 million
was paid in cash during the three months ended July 31, 2009) and the consolidation of premises,
respectively.
27
Item 6. Exhibits
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|
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
|
|
10.1 |
*+ |
|
Form of Restricted Stock Award Agreement to Employees and Non-Employee Directors Under the
Korn/Ferry International 2008 Stock Incentive Plan, filed as Exhibit 10.2 to the Companys Current
Report on Form 8-K, filed June 12, 2009. |
|
|
|
|
|
|
10.2 |
*+ |
|
Form of Stock Option Agreement to Employees and Non-Employee Directors Under the Korn/Ferry
International 2008 Stock Incentive Plan, filed as Exhibit 10.3 to the Companys Current Report on
Form 8-K, filed June 12, 2009. |
|
|
|
|
|
|
31.1 |
|
|
Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
|
|
|
|
31.2 |
|
|
Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
|
|
|
|
32.1 |
|
|
Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
|
|
|
* |
|
Management contract, compensatory plan or arrangement. |
|
+ |
|
Incorporated herein by reference. |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
Korn/Ferry International
|
|
|
By: |
/s/ Michael A. DiGregorio
|
|
|
|
Michael A. DiGregorio |
|
|
|
Executive Vice President and Chief Financial Officer |
|
Date: September 9, 2009
29
EXHIBIT INDEX
|
|
|
|
|
|
Exhibit |
|
|
|
Number |
|
|
Description |
|
|
|
|
|
|
|
10.1 |
*+ |
|
|
Form of Restricted Stock Award Agreement to Employees and Non-Employee Directors Under the
Korn/Ferry International 2008 Stock Incentive Plan, filed as Exhibit 10.2 to the Companys Current
Report on Form 8-K, filed June 12, 2009. |
|
|
|
|
|
|
|
10.2 |
*+ |
|
|
Form of Stock Option Agreement to Employees and Non-Employee Directors Under the Korn/Ferry
International 2008 Stock Incentive Plan, filed as Exhibit 10.3 to the Companys Current Report on
Form 8-K, filed June 12, 2009. |
|
|
|
|
|
|
|
31.1 |
|
|
|
Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
|
|
|
|
|
31.2 |
|
|
|
Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Exchange Act. |
|
|
|
|
|
|
|
32.1 |
|
|
|
Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350. |
|
|
|
* |
|
Management contract, compensatory plan or arrangement. |
|
+ |
|
Incorporated herein by reference. |