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Business Context and Reporting Period

Company: Korn/Ferry International
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2002
Business Overview: Korn/Ferry is a global recruitment firm operating in executive recruitment and middle-management recruitment (Futurestep). The company serves public and private companies, government, and non-profits. As of April 30, 2002, it operated nearly 90 offices in 36 countries.

Key Financial Metrics

Note: Debt figures include $7.9 million in notes payable/current maturities, $39.0 million in credit facility borrowings, and $40.8 million in long-term debt as of July 31, 2002.

Material Changes vs. Prior Period

• Revenue Decline: Fee revenue decreased 20% ($21.6 million) year-over-year due to global economic weakness. North America executive recruitment revenue fell 15%, while Europe fell 19%.
• Profitability Improvement: Despite revenue declines, the company moved from a significant operating loss of $54.8 million in the prior year to an operating profit of $1.3 million. This improvement is primarily due to the absence of massive impairment charges in the current quarter compared to the prior year.
• Restructuring Impact: The prior year period included $49.4 million in asset impairment and restructuring charges (including a $29.0 million write-down of JobDirect goodwill). The current period had no such charges.
• Cost Reduction: Compensation and benefits expenses dropped 21% ($15.6 million) and General & Administrative expenses dropped 42% ($13.3 million), reflecting a 30% workforce reduction and facility consolidations implemented in fiscal 2002.
• Accounting Changes: The company adopted EITF No. 01-14, reclassifying reimbursed out-of-pocket expenses from net revenue to gross revenue and expense. Additionally, Mexico subsidiaries are now reported under the equity method rather than consolidation.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the revenue decline to the global economic slowdown but notes that cost-saving initiatives have successfully reduced the operating loss. The company aims to preserve top talent and maintain service standards while positioning for an eventual economic recovery.

Liquidity and Capital Resources:

• In June 2002, the company completed a $50.0 million private placement (convertible notes and preferred stock) to improve liquidity.
• The company amended its credit facility with Bank of America, reducing the commitment to $31.2 million and waiving prior defaults. There were no outstanding borrowings under this facility as of July 31, 2002.
• Management believes cash on hand and funds from operations are sufficient for foreseeable requirements.

Risks and Contingencies:

• Market Risk: Exposure to foreign currency fluctuations and interest rate variability.
• Operational Risk: Dependence on retaining qualified consultants and client relationships.
• Debt Covenants: The company must adhere to amended financial covenants (fixed charge coverage, leverage ratio, quick ratio) under its credit facility.

Investor Verification Checklist

• Debt Structure: Verify the terms and redemption dates of the $40 million convertible notes and $10 million preferred stock issued in June 2002.
• Credit Facility Status: Confirm the company's compliance with the amended Bank of America credit facility covenants and the status of refinancing efforts before the November 2002 maturity.
• Restructuring Accruals: Review the $9.9 million in accrued restructuring liabilities (severance and facilities) and the timeline for cash outflows.
• Segment Performance: Monitor the continued performance of the Futurestep segment, which remains in an operating loss position despite cost cuts.
• Accounting Restatements: Ensure comparability of historical data by accounting for the change in Mexico subsidiary reporting (equity method) and the gross-up of out-of-pocket expenses.