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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-26058
KFORCE INC.
(Exact name of Registrant as specified in its charter)
FLORIDA 59-3264661
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1001 EAST PALM AVENUE, TAMPA, FLORIDA 33605
(address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 552-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.01 par value
(Title of Class)
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of Registrant's voting and non-voting stock
held by nonaffiliates of Registrant, as of March 27, 2002, was $167,153,952.
The number of shares outstanding of Registrant's Common Stock as of March
27, 2002, was 31,818,848.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts of the Company's definitive proxy statement for the Annual Meeting
of the Company's Shareholders to be held on June 18, 2002, are incorporated by
reference into Part III of this Form.
TABLE OF CONTENTS
ITEM PAGE
---- ----
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 11
Item 3. Legal Proceedings............................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............. 11
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters......................................................... 11
Item 6. Selected Financial Data......................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 13
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...... 19
Item 8. Financial Statements and Supplementary Data..................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 19
Item 10. Directors and Executive Officers of the Registrant.............. 20
Item 11. Executive Compensation.......................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................... 20
Item 13. Certain Relationships and Related Transactions.................. 20
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
10-K............................................................ 21
Index to Consolidated Financial Statements (Pages 23-47).................. 22
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PART I
ITEM 1. BUSINESS
References in this document to "the Company," "Kforce," "we," "our" or "us"
refer to Kforce or its subsidiaries, except where the context otherwise
requires. This document contains certain forward-looking statements regarding
future financial condition and results of operations and Kforce's business
operations. The words "expect," "estimate," "anticipate," "predict," "believe,"
"plans" and similar expressions are intended to identify forward-looking
statements. Such statements involve risks, uncertainties and assumptions,
including industry and economic conditions, customer actions and other factors
discussed in this and Kforce's other filings with the Securities and Exchange
Commission (the "Commission"). Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially from those indicated.
GENERAL
Headquartered in Tampa, Florida, Kforce was formed in August 1994 as a result of
the combination of Romac & Associates, Inc. and three of its largest franchises.
Following an Initial Public Offering in 1995, Kforce grew to 31 offices in 18
major markets. On April 20, 1998, Kforce consummated a merger whereby Source
Services Corporation ("Source"), was merged into Kforce pursuant to an Agreement
and Plan of Merger ("the Merger Agreement") dated February 1, 1998, as amended
on February 11, 1998 and April 17, 1998. The acquisition was accounted for using
the pooling of interests method of accounting; accordingly, all historical
results have been restated to reflect the merger. This merger combined the
strength of two organizations that shared common visions, strategies and
business practices. Both Romac International, Inc. ("Romac") and Source,
originally founded in 1966 and 1962, respectively, had been active in the
placement of information technology and financial personnel. Kforce now operates
through 86 locations in 45 markets and serves clients from Fortune 1000 as well
as local and regional small to mid-size companies with our top ten clients
representing approximately 9% of revenue in 2001.
On May 5, 2000, the Company's shareholders approved a name change from Romac to
kforce.com, Inc. On June 18, 2001, the company's shareholders approved the name
change to Kforce Inc.
INDUSTRY OVERVIEW
The temporary staffing industry has evolved over the past several decades as
companies have utilized temporary employees to manage personnel costs, while
meeting specialized or fluctuating staffing requirements. The National
Association of Temporary and Staffing Services has estimated that more than 80%
of all U.S. businesses utilize temporary staffing services. Selected industry
reports indicate the United States temporary staffing industry grew from an
estimated $76.8 billion in revenue in 1999 to $85.9 billion in 2000 to $87.9
billion in 2001. However, revenues were significantly impacted by the economic
slowdown in 2001. The information technology and finance/accounting sectors, as
well as permanent placements were particularly affected. In addition, in
response to increasing competition due to lower demand, in the future pricing
pressure may result in lower profitability as gross margins compress. There can
be no assurance that customer demand for Kforce's specialty staffing sectors
will return or that pricing will be maintained at historical levels. We believe
that professional and technical staffing within the temporary staffing industry
requires longer-term, more highly-skilled personnel services and offers the
opportunity for higher profitability than the clerical and light industrial
staffing segments, because of the value-added nature of professional and
technical personnel. In particular, the Health and Life Sciences division
experienced growth in 2001. However, many competitors are entering the
healthcare, pharmaceutical and scientific staffing sectors. There can be no
assurance that the Kforce Health and Life Science division will be able to
access a sufficient candidate pool to service client needs. In addition, a
number of national staffing companies are attempting to introduce a lower-priced
staffing preferred-vendor model. These factors may impact the future growth and
profitability of the Health and Life Sciences division.
BUSINESS STRATEGY
Kforce is a national provider of professional specialty staffing services. Key
elements of our business strategy include the following:
- FOCUS ON VALUE-ADDED SERVICES. We focus exclusively on providing
specialty staffing services to our clients, specifically in the
areas of information technology,
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finance and accounting and health and life sciences (formerly
operating specialties). We believe, based upon data published by the
U.S. Bureau of Labor Statistics and other sources, that future
employment growth may be significant in these sectors. The placement
of highly skilled personnel requires an operational and technical
knowledge to effectively recruit and screen personnel, match them to
client needs, and develop and manage the resulting relationships. We
believe our historical focus in this market, combined with our
staff's operating expertise, provides us with a competitive
advantage.
- BUILD LONG-TERM, CONSULTATIVE RELATIONSHIPS. We believe we have
developed long-term relationships with our clients by providing
integrated solutions to their specialty staffing requirements. We
strive to differentiate ourselves by working closely with our
clients to maximize their return on human assets. In addition,
Kforce's ability to offer flexible staffing services, coupled with
its permanent placement capability, offers the client a
single-source provider of specialty staffing services. This ability
enables Kforce to emphasize consultative rather than just
transactional client relationships.
- ACHIEVE EXTENSIVE CLIENT PENETRATION. Our client development process
focuses on repeated contacts with client employees responsible for
staffing decisions. Contacts are made within numerous functional
departments and at many different organizational levels within the
client. Our operating employees are trained to develop a thorough
understanding of each client's total staffing requirements. In
addition, for its combined Finance and Accounting and Information
Technology business units, Kforce has reorganized its field
operations centered on major and emerging markets. Kforce believes
this major/emerging market operational alignment will develop a more
customer centric organization, leverage our best leaders, leverage
client relationships across functional offerings and streamline the
organization by placing senior management closer to the customer as
well as achieve greater cost-efficiency.
- RECRUIT HIGH-QUALITY PROFESSIONALS. We place great emphasis on
recruiting qualified personnel. We believe we have a recruiting
advantage over those of our competitors that lack the ability to
offer candidates flexible and permanent opportunities. We frequently
place candidates seeking permanent employment in flexible
assignments until a permanent position becomes available.
- ENCOURAGE OPERATING EMPLOYEE ACHIEVEMENT. We promote a
quality-focused, results-oriented culture. All operating employees
are given incentives to encourage the achievement of corporate
goals.
FUNCTIONAL SERVICE LINES
Field operations for Finance and Accounting and Information Technology are now
managed by major and emerging markets. The information technology business
segment includes our human resources staffing business. The Health and Life
Sciences segment is managed by specialty across the country. (See Note 14 to the
Notes to Consolidated Financial Statements.)
The functional areas are defined as:
- INFORMATION TECHNOLOGY. Computer and Data Processing Services were
among the Bureau of Labor Statistics' list of the fastest growing
industries over the last decade. The shortage of technical expertise
to operate the advanced systems that businesses have acquired over
the last decade is a major catalyst contributing to the growth of
this segment. Our Information Technology services focus on more
sophisticated areas of information technologies (i.e.,
systems/applications programmers, systems analysts, and e-business
and networking technicians). The economic slowdown in 2001
significantly affected the willingness and ability of companies to
commit capital resources to their technology systems/infrastructure.
While we believe that the long term business catalysts of technology
remain in place, there can be no assurance that spending in the
sector will return to the levels seen over the last decade.
- FINANCE & ACCOUNTING. We believe we have built a reputation for
providing qualified finance and accounting professionals to
businesses. Our Finance & Accounting personnel are experienced in
areas such as taxation, budget preparation and analysis, financial
reporting, cost analysis, and audit services. Finance & Accounting
also offers its Executive Solutions service line, which provides
chief financial officers, controllers and other higher-level
financial professionals on a
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contract basis for assignment lengths generally ranging from three
to six months. Our accounting support group provides placement of
entry level accounting positions such as bookkeepers.
- HEALTH AND LIFE SCIENCES. This segment consists of professionals
skilled in the pharmaceutical, health care and scientific functions.
Examples of the types of positions that would be classified in these
categories are: Clinical trial professionals (CRAs) for
pharmaceutical, health care information management professionals and
nurses for hospitals and other healthcare companies. The Scientific
Group works with lab professionals, research and development,
quality assurance and quality control professionals.
In February 2001, Kforce modified its operating structure by consolidating
kforce Consulting, our e-services project driven solutions practice, into our
existing Information Technology division. In 2000, kforce Consulting lost $9.1
million on $17.6 million in revenue and, in 2001, lost $4.3 million loss on
revenue of $3.1 million. In December, 2001, Kforce sold its Education Services
unit resulting in a loss of $4.6 million. Also in December 2001, we sold our
legal staffing unit as part of the consideration in acquiring Scientific
Staffing, Inc. The legal unit had revenues of $4.8 million in 2001. Kforce also
acquired Emergency Response Inc., a healthcare nurse staffing company with two
locations in Phoenix, Arizona and San Diego, California, in December, 2001. In
realigning consulting groups and divesting the legal and education services
units, we believe we have strengthened our focus on our core specialty staffing
business.
STAFFING SERVICES
Once the functional challenges of the client have been identified, we consult
with the client to determine its staffing and time duration requirements. We
offer our staffing services in two categories: Flexible Staffing Services
("Flexible Staffing Services") or Search Services ("Search Services"). In 2001,
flexible staffing and search services accounted for 86.3% and 13.7% of revenue,
respectively.
FLEXIBLE STAFFING
We offer Flexible Staffing Services which provides personnel in the fields of
information technology, finance and accounting, and health and life sciences.
Flexible Staffing Services entail placing skilled workers in the client
environment on a contractual basis. Assignments typically run from three months
to one year in duration. We currently offer Flexible Staffing Services in most
large metropolitan market areas.
SEARCH SERVICES
We provide Search Services (permanent placement) for professional and technical
personnel. The placement opportunities are in the areas of information
technology, finance and accounting, financial services, pharmaceutical research,
health care and scientific.
We perform both contingency and retained searches. A contingency search results
in payment to us only when personnel are actually hired by a client. Our
strategy is to perform contingency searches only for skills we target as our
core businesses. Client searches that are outside a core-business area typically
are at a management or executive level and require a targeted research and
recruiting effort. We typically perform these searches as retained searches
where the client pays a part of the search fee in advance and the remainder upon
completion of the search. Our fee is typically structured as a percentage of the
placed individual's first-year annual compensation. The vast majority of our
search work is done on a contingency basis.
An active database of candidates is maintained as the result of our continuous
recruiting efforts and reputation in the industry. In addition, operating
employees locate many potential personnel as the result of referrals from the
Flexible Staffing Services activities.
We believe that we have developed a reputation for quality search work and that
we are recognized as one of the leaders in our search specialties. To minimize
the risk of changes in skill demand, our marketing plan incorporates a continual
review of client recruitment plans for future periods to allow for rapid changes
to "in-demand" skills. The quality of the relationship with client personnel is
a key component of the strategy, and we seek to use consultative relationships
to obtain insight into emerging growth areas. The clients targeted by the Search
Services are typically the same as those targeted by the
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Flexible Staffing Services. This common focus is intended to contribute to our
objective of providing integrated solutions to our clients' personnel needs.
TECHNOLOGY
Kforce's nationwide computer, telephony and data communications infrastructure
was further upgraded in 2001 to take advantage of faster and lower cost devices
and services. These projects improved internal communications and reduced
associated costs.
Also in 2001, we:
- Updated our front office to a single software to improve performance
and reduce costs
- Installed new asset management and support call tracking software to
improve efficiency
- Closed web hosting centers and consolidated our web hosting platform
to reduce operating costs; and
- Updated our enterprise resource planning software to keep current
with regulatory changes and improve integration with other software
COMPETITION
The specialty staffing services industry is very competitive and fragmented.
There are relatively few barriers to entry and new competitors frequently enter
the market. A number of our competitors have substantially greater resources
than those we possess. We face substantial competition from large national firms
and local specialty staffing firms. The local firms are typically
operator-owned, and each market generally has one or more significant
competitors. We also face competition from national clerical and light
industrial staffing firms and national and regional accounting firms that also
offer certain specialty staffing services. Additionally, there are a number of
"born on the web" job boards that are offering traditional staffing services as
well as traditional staffing companies developing a significant web component.
We believe that the availability and quality of personnel, the level of service,
the effective monitoring of job performance, the scope of geographic service and
the price of service are the principal elements of competition in our industry.
We believe that availability of quality personnel is an especially important
facet of competition. In order to attract candidates, we place emphasis upon our
ability to provide permanent placement opportunities, competitive compensation
and benefits, quality and varied assignments and scheduling flexibility. Because
personnel pursue other employment opportunities on a regular basis, it is
important that we respond to market conditions affecting these individuals.
Additionally, in certain markets and in response to economic softening, we have
experienced significant pricing pressure from some of our competitors. Although
we believe we compete favorably with respect to these factors, we expect
competition and pricing pressure to increase, and there can be no assurance that
we will remain competitive.
INSURANCE
We maintain a fidelity bond and a number of insurance policies including general
liability and automobile liability, (each with excess liability coverage),
professional liability, errors and omissions, employment practices liability,
workers' compensation and employers' liability. Each of these policies, with
aggregate coverage of up to $5.0 million, covers certain liabilities that may
arise from the actions or omissions of its operating employees and personnel.
There can be no assurance that any of the above coverages will be adequate for
our needs.
OPERATING EMPLOYEES AND PERSONNEL
As of December 31, 2001, Kforce, including its subsidiaries, employed
approximately 1,600 operating employees. Additionally, as of that date, we had
approximately 7,100 personnel on assignment providing flexible staffing services
to our clients. As the employer, we are responsible for the operating employees'
and personnel payrolls and employer's share of social security taxes (FICA),
federal and state unemployment taxes, workers' compensation insurance, and other
direct labor costs relating to our operating employees and personnel. We offer
access to various health, life and disability insurance programs and other
benefits for our operating employees and personnel. We have no collective
bargaining agreements covering any of our operating employees or personnel, have
never experienced any
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material labor disruption, and are unaware of any current efforts or plans to
organize our operating employees or personnel.
RISK FACTORS
THE CURRENT ECONOMIC DOWNTURN AND FUTURE ECONOMIC DOWNTURNS MAY ADVERSELY EFFECT
THE DEMAND FOR OUR SERVICES.
Historically, the general level of economic activity has significantly affected
the demand for employment services. As economic activity has slowed, the use of
temporary and contract personnel often has been curtailed before permanent
employees have been laid off. The current economic downturn has adversely
affected the demand for temporary and contract personnel, which in turn has had
an adverse effect on our results of operations and our financial condition.
Additionally, the use of search firms for permanent hires has declined
significantly. We expect that future economic downturns will cause similar
results.
OUR LIQUIDITY MAY BE ADVERSELY IMPACTED BY COVENANTS IN OUR LINE OF CREDIT.
We have a $90 million Credit Facility with Bank of America. We had approximately
$28.2 million outstanding under this Credit Facility as of December 31, 2001. If
the amount borrowed under this Credit Facility exceeds certain amounts, then a
number of financial covenants become applicable. As of December 31, 2001, we had
an additional $7.5 million of borrowing available without triggering these
financial covenants. At no time during the existence of the Credit Facility have
we ever triggered such covenants. However, we currently would not be in
compliance with such covenants if they were applicable and at certain times we
have borrowed amounts that put us within approximately $1.0 million of
triggering these covenants. If we were to trigger such financial covenants in
the future and if we do not comply with them, such a breach of the Credit
Facility covenants could materially and adversely effect our liquidity and
financial condition. Suck lack of compliance could result, among other things,
in the acceleration of all amounts borrowed under the Credit Facility. See the
Liquidity and Capital Resources section of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN QUALIFIED PERSONNEL.
We depend upon our ability to attract and retain personnel, particularly
technical and professional personnel, who possess the skills and experience
necessary to meet the staffing requirements of our clients. We must continually
evaluate and upgrade our base of available qualified personnel to keep pace with
changing client needs and emerging technologies. We expect competition for
individuals with proven technical or professional skills in the foreseeable
future. If qualified personnel do not continue to be available to us in
sufficient numbers and upon economic terms acceptable to us, it could have a
detrimental effect on our business.
OUR CURRENT MARKET SHARE MAY DECREASE AS A RESULT OF LIMITED BARRIERS TO ENTRY
BY NEW COMPETITORS AND OUR CLIENTS' DISCONTINUATION OF OUTSOURCING THEIR
STAFFING NEEDS.
We face significant competition in the markets we serve and there are limited
barriers to entry by new competitors. We compete for potential clients with
providers of outsourcing services, systems integrators, computer systems
consultants, other providers of staffing services, temporary personnel agencies,
and search firms. A number of our competitors possess substantially greater
resources than we do. From time to time we have experienced significant pressure
from our clients to reduce price levels. The competition among staffing services
firms is intense. During these periods, we may face increased competitive
pricing pressures and may not be able to recruit the personnel necessary to fill
our clients' needs. We also face the risk that certain of our current and
prospective clients will decide to provide similar services internally.
Additionally, we face significant competition for candidates in many
professional and technical specialties.
WE RELY ON SHORT-TERM CONTRACTS WITH MOST OF OUR CLIENTS.
Because long-term contracts are not a significant part of our business, future
results cannot be reliably predicted by considering past trends or extrapolating
past results.
DECREASES IN PATIENT OCCUPANCY AT OUR HEALTHCARE CLIENTS' FACILITIES MAY
ADVERSELY AFFECT THE PROFITABILITY OF OUR BUSINESS.
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Demand for our temporary healthcare staffing services is significantly affected
by the general level of patient occupancy at our healthcare clients' facilities.
When a hospital's occupancy increases, temporary employees are often added
before full-time employees are hired. As occupancy decreases, clients may reduce
their use of temporary employees before undertaking layoffs of their regular
employees. We also may experience more competitive pricing pressure during
periods of occupancy downturn. This reduction in occupancy could adversely
affect the demand for our services and our profitability.
COMPETITION FOR ACQUISITION OPPORTUNITIES MAY RESTRICT OUR FUTURE GROWTH BY
LIMITING OUR ABILITY TO MAKE ACQUISITIONS AT REASONABLE VALUATIONS.
Our business strategy includes increasing our market share and presence in the
staffing industry through strategic acquisitions of companies that complement or
enhance our business. We have historically faced competition for acquisitions.
In the future, this could limit our ability to grow by acquisitions or could
raise the prices of acquisitions and make them less accretive to us. In
addition, if we are unable to secure necessary financing to consummate an
acquisition, we may be unable to complete desirable acquisitions.
WE MAY FACE DIFFICULTIES INTEGRATING OUR ACQUISITIONS INTO OUR OPERATIONS AND
OUR ACQUISITIONS MAY BE UNSUCCESSFUL, INVOLVE SIGNIFICANT CASH EXPENDITURES OR
EXPOSE US TO UNFORESEEN LIABILITIES.
We continually evaluate opportunities to acquire staffing companies that
complement or enhance our business and frequently have preliminary acquisition
discussions with some of these companies.
These acquisitions involve numerous risks, including:
- potential loss of key employees or clients of acquired companies;
- difficulties integrating acquired personnel and distinct cultures
into our business;
- diversion of management attention from existing operations; and
- assumption of liabilities and exposure to unforeseen liabilities of
acquired companies.
These acquisitions may also involve significant cash expenditures, debt
incurrence and integration expenses that could have a material adverse effect on
our financial condition and results of operations. Any acquisition may
ultimately have a negative impact on our business and financial condition.
WE DEPEND ON THE PROPER FUNCTIONING OF OUR INFORMATION SYSTEMS.
We are dependent on the proper functioning of our information systems in
operating our business. Our critical information systems used in our daily
operations identify and match staffing resources and client assignments and
perform billing and accounts receivable functions. Our information systems are
protected through physical and software safeguards and we have backup remote
processing capabilities. They are still vulnerable, however, to hurricanes,
other storms, flood, fire, earthquakes, power loss, telecommunications failures,
physical or software break-ins and similar events. If our critical information
systems fail or are otherwise unavailable, we would have to accomplish these
functions manually, which could temporarily impact our ability to identify
business opportunities quickly, to maintain billing and clinical records
reliably, and to bill for services efficiently.
OUR SUCCESS DEPENDS UPON RETAINING THE SERVICES OF OUR MANAGEMENT TEAM.
We are highly dependent on our management team. We expect that our continued
success will largely depend upon the efforts and abilities of members of our
management team. The loss of services of any key executive for any reason could
have a material adverse effect upon us. Our success also depends upon our
ability to identify, develop, and retain qualified operating employees,
particularly management, client servicing, and candidate recruiting employees.
We expend significant resources in recruiting and training our employees, and
the pool of available applicants for these positions is limited. The loss of
some of our operating management and client servicing and candidate recruiting
employees could have an adverse effect on our operations, including our ability
to establish and maintain client, candidate and professional and technical
personnel relationships.
WE FACE SIGNIFICANT EMPLOYMENT LIABILITY RISK BECAUSE WE PLACE PEOPLE IN THE
WORKPLACES OF OTHER BUSINESSES.
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We employ and place people in the workplaces of other businesses. An inherent
risk of such activity includes possible claims of errors and omissions, misuse
of client proprietary information, misappropriation of funds, discrimination and
harassment, employment of illegal aliens, theft of client property, other
criminal activity, or torts and other claims. We have policies and guidelines in
place to reduce our exposure to these risks. However, failure of any employee or
personnel to follow these policies and guidelines may result in negative
publicity, injunctive relief, and the payment by us of monetary damages or
fines, or have other material adverse effects upon our business. Moreover, we
could be held responsible for the actions at a workplace of persons not under
our direct control. To reduce our exposure, we maintain insurance and fidelity
bonds covering general liability, workers' compensation claims, errors and
omissions, and employee theft. Due to the nature of our assignments, in
particular, access to client information systems and confidential information,
and the potential liability with respect thereto, we might not be able to obtain
insurance coverage in amounts adequate to cover any such liability on acceptable
terms.
SIGNIFICANT LEGAL ACTIONS, PARTICULARLY RELATING TO OUR HEALTHCARE STAFFING
SERVICES, COULD SUBJECT US TO SUBSTANTIAL UNINSURED LIABILITIES.
In recent years, healthcare providers have become subject to an increasing
number of legal actions alleging malpractice, product liability or related legal
theories. Many of these actions involve large claims and significant defense
costs. In addition, we may be subject to claims related to torts or crimes
committed by our employees or temporary staffing personnel. In some instances,
we are required to indemnify clients against some or all of these risks. A
failure of any of our employees or personnel to observe our policies and
guidelines intended to reduce these risks, relevant client policies and
guidelines or applicable federal, state or local laws, rules and regulations
could result in negative publicity, payment of fines or other damages. To
protect ourselves from the cost of these claims, we maintain professional
malpractice liability insurance and general liability insurance coverage in
amounts and with deductibles that we believe are appropriate for our operations.
Our insurance coverage, however, may not cover all claims against us or continue
to be available to us at a reasonable cost. If we are unable to maintain
adequate insurance coverage, we may be exposed to substantial liabilities.
IF WE BECOME SUBJECT TO MATERIAL LIABILITIES UNDER OUR SELF-INSURED PROGRAMS,
OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.
We provide workers compensation coverage through a program that is partially
self-insured. In addition, we provide medical coverage to our employees through
a partially self-insured preferred provider organization. If we become subject
to substantial uninsured workers compensation or medical coverage liabilities,
our financial results may be adversely affected.
CURRENTLY WE ARE UNABLE TO RECRUIT ENOUGH NURSES TO MEET OUR CLIENTS' DEMANDS
FOR OUR NURSE STAFFING SERVICES, LIMITING THE POTENTIAL GROWTH OF OUR HEALTHCARE
STAFFING BUSINESS.
We rely on our ability to attract, develop, and retain nurses and other
healthcare personnel who possess the skills, experience and, as required,
licensure necessary to meet the specified requirements of our healthcare
staffing clients. We compete for healthcare staffing personnel with other
temporary healthcare staffing companies, as well as actual and potential
clients, some of which seek to fill positions with either regular or temporary
employees. Currently, there is a shortage of qualified nurses in most areas of
the United States and competition for nursing personnel is increasing. At this
time we do not have enough nurses to meet our clients' demands for our nurse
staffing services. This shortage of nurses limits our ability to grow our
healthcare staffing business. Furthermore, we believe that the aging of the
existing nurse population and declining enrollments in nursing schools will
result in further competition for qualified nursing personnel.
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WE MAY BE ADVERSELY AFFECTED BY GOVERNMENT REGULATION OF THE STAFFING BUSINESS.
Our business is subject to regulation and licensing in many states. While we
have had no material difficulty complying with regulations in the past, there an
be no assurance that we will be able to continue to obtain all necessary
licenses or approvals or that the cost of compliance will not prove to be
material. If we fail to comply such failure could materially adversely affect
Kforce.
WE MAY BE ADVERSELY AFFECTED BY GOVERNMENT REGULATION OF THE WORKPLACE.
Part of our business entails employing individuals on a temporary basis and
placing such individuals in client's workplaces. Increase government regulation
of the workplace or of the employer-employee relationship could materially
adversely affect us.
FUTURE CHANGES IN REIMBURSEMENT TRENDS COULD HAMPER OUR CLIENTS' ABILITY TO PAY
US.
Many of our healthcare clients are reimbursed under the federal Medicare program
and state Medicaid programs for the services they provide. In recent years,
federal and state governments have made significant changes in these programs
that have reduced government rates. In addition, insurance companies and managed
care organizations seek to control costs by requiring that healthcare providers,
such as hospitals, discount their services in exchange for exclusive or
preferred participation in their benefit plans. Future federal and state
legislation or evolving commercial reimbursement trends may further reduce, or
change conditions for, our clients' reimbursement. Limitations on reimbursement
could reduce our clients' cash flow, hampering their ability to pay us. This
situation could have a significant impact on our cash flow.
OUR STOCK PRICE MAY BE VOLATILE.
Our common stock is traded on The Nasdaq Stock Market under the symbol "KFRC".
The market price of our stock has fluctuated substantially in the past and could
fluctuate substantially in the future, based on a variety of factors, including
our operating results, changes in general conditions in the economy, the
financial markets, the employment services industry, or other developments
affecting us, our clients, or our competitors, some of which may be unrelated to
our performance. Those fluctuations and demand for our services may adversely
affect the price of our stock.
In addition, the stock market in general, and especially the Nasdaq National
Market tier along with market prices for staffing companies, have experienced
volatility that has often been unrelated to the operating performance of these
companies. These broad market and industry fluctuations may adversely affect the
market price of our common stock, regardless of our operating results.
Among other things, volatility in our stock price could mean that investors will
not be able to sell their shares at or above the prices which they pay. The
volatility also could impair our ability in the future to offer common stock as
a source of additional capital or as consideration in the acquisition of other
businesses.
SIGNIFICANT INCREASES IN PAYROLL-RELATED COSTS COULD ADVERSELY AFFECT OUR
BUSINESS.
We are required to pay a number of federal, state, and local payroll and related
costs, including unemployment taxes, workers' compensation and insurance, FICA,
and Medicare, among others, for our employees and personnel. Significant
increases in the effective rates of any payroll-related costs likely would have
a material adverse effect upon us. Our costs could also increase as a result of
health care reforms or the possible imposition of additional requirements and
restrictions related to the placement of personnel. Recent federal and state
legislative proposals have included provisions extending health insurance
benefits to personnel who currently do not receive such benefits. We may not be
able to increase the fees charged to our clients in a timely manner and in a
sufficient amount to cover increased costs, if any such proposals are adopted.
PROVISIONS IN OUR ARTICLES, BYLAWS, AND UNDER FLORIDA LAW MAY HAVE CERTAIN
ANTI-TAKEOVER EFFECTS.
Our articles of incorporation and bylaws and Florida law contain provisions that
may have the effect of inhibiting a non-negotiated merger or other business
combination. In particular, our articles of incorporation provide for a
staggered board of directors and permit the removal of directors only for cause.
Additionally, management may issue up to 15,000,000 shares of preferred stock,
and fix the rights and preferences thereof, without a
10
further vote of the shareholders. In addition, certain of our officers have
employment agreements containing certain provisions that call for substantial
payments to be made to such officers upon any change in control. Certain of
these provisions may discourage a future acquisition of Kforce, including an
acquisition in which shareholders might otherwise receive a premium for their
shares. As a result, shareholders who might desire to participate in such a
transaction may not have the opportunity to do so. Moreover, the existence of
these provisions may have a depressive effect on the market price of our common
stock.
ITEM 2. PROPERTIES
We lease our corporate headquarters in Tampa, Florida, as well as space for our
other locations. The aggregate area of office space under leases for locations
is approximately 586,615 square feet. Field office leases generally run from
month-to-month to five years. In September 2001, we relocated our corporate
offices and local branches into a new headquarters in Tampa, Florida, which we
have leased for 15 years. The aggregate annual rent expense in 2001 was
approximately $14.4 million. We believe that our facilities will be adequate for
our current needs. We own a parcel of vacant land adjacent to the site of our
new corporate headquarters for which we have no current plans to develop.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, we are, from time to time, threatened
with or named as a defendant in various lawsuits, including discrimination,
harassment and other similar claims. We maintain insurance in such amounts and
with such coverages and deductibles as management believes are reasonable. The
principal risks that we insure against are workers' compensation, personal
injury, bodily injury, property damage, professional malpractice, errors and
omissions, employment practices liability and fidelity losses. We are not aware
of any litigation that would reasonably be expected to have a material adverse
effect on our results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Common Stock trades on the Nasdaq National Market tier of The Nasdaq Stock
Market(SM), formerly under the symbol "ROMC" and now under the symbol "KFRC".
The following table sets forth, for the periods indicated, the range of high and
low closing sale prices for our common stock, as reported on the Nasdaq National
Market.
CALENDAR YEAR HIGH LOW
---- ---
2000:
First Quarter..................... $18.250 $8.875
Second quarter.................... $13.250 $4.438
Third Quarter..................... $ 7.563 $3.500
Fourth Quarter.................... $ 5.063 $2.063
2001:
First Quarter..................... $ 5.313 $2.281
Second Quarter.................... $ 7.250 $3.930
Third Quarter..................... $ 7.450 $4.030
Fourth Quarter.................... $ 6.400 $3.150
2002:
First Quarter (through March 26) $ 6.400 $4.050
11
On March 26, 2002, the last reported sale for our common stock was at $5.25. On
March 27, 2002 there were 195 holders of record.
KFORCE/ERS AGREEMENT AND PLAN OF MERGER
On December 3, 2001, Kforce issued an aggregate of 1,242,718 shares of its
common stock (the "Merger Shares"), pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") between Kforce and Emergency Response Staffing Inc.
("ERS") and certain shareholders of ERS. Pursuant to the Merger Agreement, ERS
merged with and into a wholly owned subsidiary of Kforce. The Merger Shares were
issued in consideration for all of the issued and outstanding shares of ERS
which at the time of the merger were valued at approximately $6.4 million in the
aggregate. The Merger Shares were issued to eight accredited investors. The
Merger Shares were issued in reliance on the exemptions provided by Rule 506 of
Regulation D of the Securities Act of 1933, as amended (the "1933 Act") and
Section 4(2) of the 1933 Act. Furthermore, pursuant to the Merger Agreement,
Kforce may be required to issue additional shares of common stock to the
shareholders of ERS if the average price of Kforce's common stock during the 30
day period immediately preceding the one year anniversary of the Merger
Agreement is below $4.15 per share and, alternatively, the Principal
Shareholders may be required to return a portion of the Merger Shares to Kforce
if the average price of Kforce's Common Stock during the 30 day period
immediately preceding the one year anniversary of the Merger Agreement is above
$6.15 per share.
Since our initial public offering, we have not paid any cash dividends on our
common stock. We are currently prohibited from making such dividend
distributions under the terms of our Credit Facility.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with our Consolidated
Financial Statements and the related Notes thereto incorporated into Item 8 of
this report.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net service revenues ....... $ 646,023 $ 794,997 $ 746,632 $ 680,086 $ 479,743
Direct costs of services ... 393,623 433,441 424,001 388,505 254,132
--------- --------- --------- --------- ---------
Gross profit ............... 252,400 361,556 322,631 291,581 225,611
Selling, general and
administrative expenses .. 244,792 341,812 346,452 224,790 184,876
Depreciation and
amortization ............. 17,325 18,440 14,514 9,507 5,794
Merger, restructuring, and
integration expense ...... -- -- -- 26,122 --
Other (income) expense, net 4,460 113 (942) (4,985) (2,675)
--------- --------- --------- --------- ---------
(Loss) income before income
taxes .................... (14,177) 1,191 (37,393) 36,147 37,616
(Provision) benefit for
income taxes ............. 2,089 (1,474) 13,877 (20,708) (15,545)
--------- --------- --------- --------- ---------
Net (loss) income .......... $ (12,088) $ (283) $ (23,516) $ 15,439 $ 22,071
========= ========= ========= ========= =========
Net (loss) income per
share-basic .............. $ (0.38) $ (.01) $ (.53) $ .34 $ .55
========= ========= ========= ========= =========
Weighted average shares
outstanding-basic ........ 31,711 42,886 44,781 45,410 40,471
Net (loss) income per
share-diluted ............ $ (0.38) $ (.01) $ (.53) $ .33 $ .52
========= ========= ========= ========= =========
Weighted average shares
outstanding-diluted ...... 31,711 42,886 44,781 47,318 42,264
12
DECEMBER 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital ............ $ 43,083 $ 70,885 $ 86,310 $ 135,348 $ 149,459
Total assets ............... $ 222,772 $ 278,018 $ 296,187 $ 333,812 $ 283,098
Total long-term debt ....... $ 28,185 $ 45,000 $ -- $ 461 $ 1,260
Stockholders' equity ....... $ 138,809 $ 155,037 $ 218,205 $ 255,022 $ 232,704
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in connection with Kforce's Consolidated
Financial Statements and the related Notes thereto incorporated into Item 8 of
this report.
OVERVIEW
We are a provider of professional and technical specialty staffing services in
45 markets in the United States. We provide our customers staffing services in
the following specialties: Information Technology, Finance and Accounting, and
Health and Life Sciences. We believe our broad range of highly specialized
services provides clients with integrated solutions to their staffing needs,
allowing us to develop long-term, consultative relationships. This range of
services includes search services and flexible staffing services. We believe our
functional focus and range of service offerings generate increased placement
opportunities and enhance our ability to identify, attract, retain, develop and
motivate consultants and sales associates. We serve Fortune 1000 clients as well
as small to mid-size local and regional companies with our top ten clients
representing approximately 9% of our revenue for 2001.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants list their most
"critical accounting policies" in MD&A. The SEC indicated that a "critical
accounting policy" is one which is both important to the portrayal of the
Company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. We
believe that our following accounting policies fit this definition:
REVENUE RECOGNITION
Net service revenues consist of search fees and flexible billings, net of
credits, discounts and fallouts. Flexible Billings are recognized based on hours
worked by assigned personnel on a weekly basis. Search Fees are recognized when
earned upon the successful completion of the placement assignment. Kforce's
policy is to replace individuals who fail to continue employment (fallouts) for
the period of time specified in the agreements for search placements, generally
thirty to ninety days. We have attempted to estimate credits, discounts and
fallouts based on our analysis of current data and historical experience.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND FALLOUTS
We have attempted to reserve for expected credit losses and fallouts (placed
search employee candidates who do not remain in their placed position for a
stated, contractual period) based on our past experience with similar accounts
receivable and believe our reserves to be adequate. It is possible, however,
that the accuracy of our estimation
13
process could be materially impacted as the composition of this pool of accounts
receivable changes over time. We continually review and refine the estimation
process to make it as reactive to these changes as possible. We cannot, however,
guarantee that we will be able to accurately estimate credit losses on these
accounts receivable.
INCOME TAXES
The Company's losses have resulted in net operating loss carryforwards for which
the Company has recorded a deferred tax asset. Generally accepted accounting
principles require that we record a valuation allowance against the deferred tax
asset associated with this NOL if it is "more likely than not" that we will not
be able to utilize it to offset future taxes. We have not recorded a valuation
allowance against our deferred tax asset because we believe it is more likely
than not that we will be able to utilize our net operating loss carryforwards to
offset future taxes.
ACCRUED COMMISSIONS
The Company pays commissions to its associates for successful placement of
personnel. Commissions vary based on the expected annual production achieved by
placement specialists and on the actual cash collections from the customer. We
have estimated accrued commissions based on our analysis of actual data and
historical experience of cash collections.
IMPAIRMENT
In accordance with accounting principles generally accepted in the United States
of America, the Company periodically reviews the carrying value of goodwill and
other long-lived assets to determine if impairment has occurred. Impairment
losses, if any, are recorded in the period identified. When it has been
determined that an impairment has occurred, significant judgment is required to
determine the amount of the impairment by evaluating expected future cash flows
or the anticipated recoverability of costs incurred. During 2001, Kforce
identified impairment losses of approximately $1.2 million relating to the write
off of capitalized software due to a change in the extent to which a portion of
the software is being used.
The above listing is not intended to be a comprehensive list of all of our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. See our audited
consolidated financial statements and notes thereto included in Item 8 of this
Annual Report on Form 10-K which contain accounting policies and other
disclosures required by generally accepted accounting principles.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net service revenues, certain
items in our consolidated statements of operations for the indicated periods:
YEAR ENDED DECEMBER 31,
----------------------------------
2001 2000 1999
---- ---- ----
Revenue by Segment:
Information Technology ............................. 50.7% 58.6% 62.6%
Finance & Accounting ............................... 28.2 28.5 27.5
Health & Life Sciences ............................. 21.1 12.9 9.9
----- ----- -----
Net service revenues .................................. 100.0 100.0 100.0
Revenue by Time:
Flexible billings .................................. 86.3% 77.5% 80.6%
Search fees ........................................ 13.7 22.5 19.4
----- ----- -----
Net service revenues .................................. 100.0 100.0 100.0
Gross profit .......................................... 39.1 45.5 43.2
Selling, general, and administrative expenses ......... 37.9 43.0 46.4
(Loss) income before income taxes ..................... (2.2) 0.1 (5.0)
Net loss .............................................. (1.9)% 0.0% (3.1)%
14
NET SERVICE REVENUES. Net service revenues were $646.0 million, $795.0 million
and $746.6 million for the years ended December 31, 2001, 2000, and 1999,
respectively, decreasing by 18.7% during 2001 and increasing by 6.5% during
2000. The reasons for these changes are set forth below.
FLEXIBLE BILLINGS. Flexible billings decreased 9.5% to $557.5 million in 2001
and increased 2.4% to $616.0 million in 2000 compared to $601.5 million for the
same period in 1999. Total hours billed decreased from 2000 to 2001 by 5.8% and
from 1999 to 2000 by 1.8%. The average bill rate decreased by 4.5% from 2000 to
2001 offsetting the 2% increase from 1999 to 2000. Health and Life Sciences
flexible billings grew at an annual rate exceeding 30% in both 2000 and 2001.
This increase in 2001 is offset by a decrease in flexible billings in the
Finance and Accounting segment and Information Technology segment, which
includes the closure of our solutions business in the first quarter of 2001.
These results are primarily attributable to the generally prevailing unfavorable
economic conditions. Flexible billings in 2000 for both the Finance and
Accounting and Information Technology segments were relatively consistent with
1999 billings.
SEARCH FEES. Search fees decreased 50.5% in 2001 to $88.5 million from $178.9
million in 2000, which was a 23.3% increase from $145.1 million for the same
period in 1999. Search placements decreased 49.0% in 2001 as compared to an
11.1% increase in 2000. Average fees decreased 2.3% in 2001 as compared to a
10.6% increase in 2000. The decrease from 2000 to 2001 was attributable to a
39.7% decrease in Finance and Accounting search fees versus a 24.0% increase
from 1999 to 2000 and a 63.8% decrease in Information Technology search fees
versus a 17.6% increase from 1999 to 2000. These results are primarily
attributable to the generally prevailing unfavorable economic conditions.
GROSS PROFIT. Gross profit on Flexible Billings is determined by deducting the
direct cost of services (primarily flexible personnel payroll wages, payroll
taxes, payroll-related insurance, and subcontract costs) from net service
revenues. Consistent with industry practices, gross profit dollars from Search
Fees are equal to revenues, as there are no direct costs associated with such
revenues. Gross profit decreased 30.2% to $252.4 million in 2001 and increased
12.1% to $361.6 million in 2000 as compared to $322.6 million in 1999. Gross
profit as a percentage of net service revenues decreased to 39.1% in 2001
compared to 45.5% in 2000 and 43.2% for 1999. The decrease in gross profit
percentage in 2001 as compared to 2000, was primarily the result of a shift in
business mix away from search fees in 2001 as compared with 2000. In addition to
the shift away from search fees as a percent of revenue, bill rates,
particularly in the Information Technology segment, have declined at a faster
rate than pay rates thus negatively impacting gross profit percentage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $244.8 million, $341.8 million, and $346.5 million
in 2001, 2000 and 1999, respectively, decreasing by 28.4% during 2001 and 1.4%
during 2000. Selling, general and administrative expenses as a percentage of net
service revenues decreased to 37.9% in 2001 and 43.0% in 2000 compared to 46.4%
for the same period in 1999. The decrease in selling, general and administrative
expense as compared to prior year is primarily due to a decrease in commissions
and other compensation relating to the decrease in revenue, the benefits
obtained from initiatives taken by management to re-engineer and streamline
back-office operations and reductions in other selling, general and
administrative expenses to better align expenses with revenue.
In particular, impacting selling, general and administrative expense in the
fourth quarter of 2001, were expenses incurred to realign the field organization
for greater customer focus as well as align operating costs and balance sheet
accounts with the Company's declining revenue base. These costs included i) $2.3
million for severance costs associated with the planned reduction in field
associates and management as well as corporate and administrative personnel, ii)
$1.3 million for impairment losses on capitalized software, iii) $2.1 million of
costs for consolidation of offices and iv) a $4.6 million loss on the sale of
our training business.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were $17.3
million, $18.4 million and $14.5 million in 2001, 2000 and 1999, respectively,
representing a 6.0% decrease and 26.9% increase during 2001 and 2000,
respectively. Depreciation and amortization expense as a percentage of net
service revenue increased to 2.7% in 2001, 2.3% for 2000 and 1.9% for 1999. The
increase in expense in 2001 and 2000 as compared to 1999
15
was primarily due to increased amortization of computer software utilized to
increase back office efficiency.
OTHER INCOME (EXPENSE). Other income (expense) was $(4.5) million in 2001,
$(0.1) million in 2000 and $0.9 million in 1999. The increase in 2001 versus
2000 and 1999 was primarily the result of an increase in interest expense from
borrowings under our credit facility used for the repurchase of $55.0 million in
stock in December 2000 in a modified Dutch Auction tender offer, as well as an
increase in the loss on disposal of certain assets in the fourth quarter related
to the alignment of operating costs and balance sheet accounts to the declining
revenue base.
(LOSS) INCOME BEFORE INCOME TAXES. The (loss) income before income taxes of
$(14.2) million in 2001, $1.2 million in 2000 and $(37.4) million in 1999, is
primarily the result of changes in net service revenues and gross margin and
reduced selling, general, and administrative expenses discussed above.
(BENEFIT) PROVISION FOR INCOME TAXES. The income tax benefit for 2001 was $(2.1)
million, compared to a provision of $1.5 million for 2000 and a benefit of
$(13.9) million for 1999. The effective tax benefit rate was 14.7% in 2001,
compared to an effective tax rate of 123.8% in 2000 and an effective tax benefit
rate of 37.1% in 1999. The income tax benefit in 2001 and 1999 is due to the net
loss in operating activities for those years. The effective tax rate in 2000 was
high primarily due to non-deductibility of amortization of goodwill and 50% of
meals and entertainment expenses.
NET LOSS. The net loss was $12.1 million in 2001, $0.3 million for 2000 and
$23.5 million for 1999. The losses were the result of those items discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of liquidity include approximately $255,000 in cash and cash
equivalents and approximately $42.8 million in additional net working capital.
In addition, we have approximately $28.2 million outstanding under the $90
million Amended and Restated Credit Facility with Bank of America ("the Credit
Facility"). This Credit Facility, which was entered into on November 3, 2000,
has an initial term of three years. The Credit Facility provides for a maximum
revolving credit facility of $90 million (not to exceed 85% of our "Eligible
Receivables" as such term is defined in the Credit Facility). Borrowings under
the Credit Facility are secured by all of the assets of Kforce and its
subsidiaries. Amounts borrowed under the Credit Facility bear interest at rates
ranging from Prime to Prime plus 0.75% or LIBOR plus 1.75% to LIBOR plus 3.25%,
pursuant to certain financial performance targets as set forth in the Credit
Facility. As of December 31, 2001, one-month LIBOR was 1.88%. Pricing is changed
quarterly based on the previous four quarters' performance. Under the terms of
the Credit Facility, we are prohibited from making any dividend distributions.
The terms of the Credit Facility also include certain financial covenants should
the total amount borrowed under the Credit Facility exceed specified amounts.
These financial covenants include measurement of quarterly EBITDA as compared to
our EBITDA projections. Our borrowings as of March 27, 2002 and December 31,
2001 do not exceed the specified amounts at which these financial covenants
apply and at no time during the history of the Credit Facility have we triggered
such covenants. However, we currently would not be in compliance with such
financial covenants if such covenants were applicable and at certain times we
have borrowed amounts that put us within approximately $1.0 million of
triggering these covenants. If we were subject to such financial covenants, we
fail to comply with such covenants, and a default is declared under the Credit
Facility, such default could result, among other things, in the acceleration of
amounts borrowed under the Credit Facility. The Credit Facility also contains
certain limitations on investments and acquisitions, and repurchases of our
stock.
The Credit Facility contains a provision that limits the dollar amount of common
stock that Kforce may repurchase subsequent to November 3, 2000 to $72 million.
As of March 27, 2002 and December 31, 2001, $2.5 million was available under
this authorization.
The Credit Facility also contains a provision that limits the amount of capital
expenditures that Kforce may make in any fiscal year. On January 23, 2002, this
provision was amended effective November 30, 2001 to increase the allowable
amount of capital expenditures from $6 million to $10 million. Total capital
expenditures in 2001 were $6.4 million.
In April 2001, we entered into two fixed interest rate swap contracts in
relation to a portion of the Credit Facility for a total notional amount of $22
million with terms expiring no later than May 2003. Effective October 24, 2001
we obtained a lower interest
16
rate and extended the expiration date to October 2003 on $12 million of the
swaps contracts. The contracts, which have been classified as cash flow hedges,
effectively convert a portion of our outstanding debt under the Credit Facility
to a fixed rate basis, thus reducing the impact of interest rate changes on
future income. The differential between floating rate receipts and fixed rate
payments is accrued as market rates fluctuate and recognized as an adjustment to
interest expense. Consistent with SFAS 133, we recorded the fair value of the
interest rate swap contracts, approximately $373,000 net of income taxes, in
other liabilities and accumulated other comprehensive loss as of December 31,
2001.
We continuously evaluate our financing needs to ensure that our debt
arrangements are structured most effectively. If we were to elect to restructure
our debt arrangements, at December 31, 2001 it could result in the recognition
of $1.2 million of unamortized origination fees under our current Credit
Facility as well as cash outlays for origination fees on any new arrangement.
During the year ended December 31, 2001, cash flow provided by operations was
approximately $40.9 million, resulting primarily from non-cash adjustments for
depreciation and amortization and the loss on sale of certain assets and our
training business, and a decrease in accounts receivable as a result of the
reduction in revenues. These items are partially offset by an increase in income
tax receivables as a result of the current year loss and a decrease in accounts
payable and accrued payroll costs. The decrease in accounts payable and accrued
payroll costs reflect the decreased revenues in 2001 versus 2000.
During 2001, cash flow used in investing activities was approximately $9.8
million, resulting from approximately $6.4 million in capital expenditures, and
cash outlays of approximately $3.5 million related to the Scientific Staffing
acquisition in our Health and Life Sciences business segment.
For the year 2001, cash flow used in financing activities was approximately
$32.7 million, resulting primarily from the use of $14.6 million for the
repurchase of 2.95 million shares of outstanding stock through open market
purchases, repayments on the Credit Facility of approximately $16.8 million and
repayment of debt of $1.5 million relating to the ERS acquisition. No additional
shares of common stock have been repurchased subsequent to December 31, 2001.
On March 11, 1999, we announced that the Board of Directors had authorized the
repurchase of up to $50 million of our common stock on the open market, from
time to time, depending on market conditions. On October 24, 2000, the Board of
Directors authorized an increase to up to $100 million for stock repurchases. On
October 19, 2001 the Board of Directors authorized the repurchase of an
additional $15 million of our common stock. As of December 31, 2001, we had
repurchased approximately 17.4 million shares under this plan. Approximately
$17.7 million was available under current board authorization and $2.5 million
was available under the current Credit Facility limitations as of December 31,
2001. Additional stock repurchases may have a material impact on the cash flow
requirements for the next twelve months.
We are currently considering the filing of a registration statement that would
allow the issuance of common stock and other equity and financial instruments
for the financing of various corporate activities to potentially include funding
for acquisitions and other business expansion opportunities as well as
compensation arrangements.
We believe that cash flow from operations and borrowings under our credit
facility will be adequate to meet the working capital requirements of current
operations for at least the next twelve months. However, further deterioration
in the business environment and market conditions could negatively impact
operating results and liquidity. There is no assurance (i) that we will be able
to obtain financing in amounts sufficient to meet operating requirements or at
terms which are satisfactory and which allow us to remain competitive, or (ii)
that we will be able to meet the financial covenants contained in the Credit
Facility. If we currently had borrowed sufficient funds to trigger the financial
covenants in the Credit Facility, we would not be in compliance with such
covenants. Our expectation that existing resources will fund working capital
requirements is a forward-looking statement that is subject to risks and
uncertainties. Actual results could differ from those indicated as a result of a
number of factors, including the use of such resources for possible acquisitions
and the announced stock repurchase plan.
17
NOTE PAYABLE GUARANTEE
In June 2001, we purchased from a bank a note receivable from a former officer
that it had previously guaranteed. We are currently pursuing collection of this
receivable. At December 31, 2001, the balance, including accrued interest
receivable, was approximately $2.0 million and is reflected in prepaid expenses
and other current assets net of a reserve of $2.0 million.
RESTRICTED STOCK ISSUANCES
In 2001, we granted approximately 194,000 shares of non-vested restricted stock
to certain members of senior management, not including the Chief Executive
Officer, in lieu of a cash bonus. These shares vest in February 2003.
Subsequent to December 31, 2001, we announced that executive management, inside
directors and certain other employees are voluntarily reducing their salary and
cash bonus potential in 2002 in exchange for restricted stock. Approximately
224,000 shares were issued under this program. The shares vest over a five year
period with an acceleration clause if certain Kforce common stock price
thresholds are met.
ACQUISITIONS AND DIVESTITURES
In December 2001, we purchased two companies, Emergency Response Staffing Inc.
("ERS") and Scientific Staffing Inc. ("SSI"), whose results subsequent to the
acquisitions are incorporated within the Health and Life Sciences business
segment. ERS provides nurses on a permanent and temporary basis to its customers
in the United States. SSI provides scientific personnel on a permanent and
temporary basis to its customers in the United States. Both acquisitions expand
our presence in the fast growing areas of the Health and Life Sciences business
segment.
As consideration for the purchase of SSI, we sold certain assets of our legal
staffing business, which was part of the Health and Life Sciences business
segment. A gain of $537,000 was recorded on the sale of the legal staffing
operations.
In the first quarter of 2001, we closed the unprofitable solutions business,
kforce Consulting. This business contributed revenues of $3.1 million to the
Information Technology segment in 2001 versus $17.6 million in 2000.
In December 2001, we sold our training business to a member of its management.
This individual is no longer employed by us. The training business had revenues
of $2.5 million and $5.0 million in 2001 and 2000, respectively. Operating
losses for this business were $1.8 million and $0.3 million in 2001 and 2000,
respectively. As a result of the sale of this business, we recorded a loss of
$4.6 million, which included a net write-off of $2.7 million of goodwill as well
as a write-off of other assets specifically related to this business not
included in the sale.
INCOME TAX AUDITS
We are currently undergoing a U.S. Internal Revenue Service audit for its tax
years ending December 31, 1999 and 1998. As of the issuance of this report, no
final determinations have been made relating to any issues raised during the
examination.
We are also periodically subject to state and other local income tax audits for
various tax years. Ongoing audits for which no final determinations have been
made include those for the states of New York, Minnesota, Connecticut and
Massachusetts.
RISK FACTORS
In addition to those items described in this section we are also exposed to
additional issues as discussed in the Risk Factors section of Item 1. Business.
These items could have a material adverse effect on our operating results,
borrowing capacity and cash position.
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board unanimously approved
the issuance of two statements, SFAS 141, "Business Combinations", and SFAS 142,
"Goodwill and Other Intangible Assets". SFAS 141 prohibits the use of
pooling-of-interest method for
18
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that were completed
after June 30, 2001. SFAS 142 is effective for fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized in an
entity's statement of financial position at that date, regardless of when the
assets were initially recognized. Beginning January 1, 2002, management
anticipates that we will no longer amortize goodwill. At December 31, 2001,
goodwill, net of accumulated amortization, was approximately $95.8 million.
Goodwill amortization expense was $4.2 million during the year ended December
31, 2001. We are currently assessing the impact that SFAS 141 and SFAS 142 will
have on the financial position and results of operations. Though no final
determinations have been reached, the potential impairment of existing goodwill
could range from a nominal amount to an amount exceeding the majority of
existing goodwill.
In August 2001, the Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligations". SFAS 143 requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it occurred. The standard is effective for fiscal years
beginning after June 15, 2002. We have not yet determined the impact that SFAS
143 will have on the financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which replaces
SFAS 121. The accounting model for long lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, "Reporting
Results of Operations - Reporting the effects of Disposal of a Segment of a
Business", for the disposal of segments of business. SFAS 144 requires that
those long-lived assets be measured at the lower of the carrying amount or fair
value less cost to sell, whether reported in continuing operations or
discontinued operations. SFAS 144 also broadens the reporting of discontinued
operations to include all components of an entity with the operations that can
be distinguished from the rest of the entity and that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The provisions
in SFAS 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, are to be applied
prospectively. We have not yet determined the impact that SFAS 144 will have on
the financial statements.
We are reviewing the amounts and classification of reimbursements received
from customers for out-of-pocket expenses incurred as the result of the issuance
of a proposed abstract from the Emerging Issues Task Force, "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred. These reimbursements are currently classified in Direct costs of
services in the Consolidated Statements of Operations and Comprehensive Income
(Loss). We have not yet determined the impact on any reclassification of these
reimbursements will have on the financial statements.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Kforce is exposed to a variety of risks, including changes in interest rates on
borrowings. The effect of a 1% change in interest rates would currently have an
annual interest expense impact of $62,000. We do not engage in trading market
risk sensitive instruments for speculative purposes. We are managing our
exposure to changes in interest rates from the Credit Facility by entering into
interest rate swap agreements which allow us to convert $22 million of debt from
variable to fixed interest rates. We believe that effects of changes in interest
rates are limited and would not have a material impact on operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and notes thereto and the reports of
Deloitte & Touche LLP and PricewaterhouseCoopers LLP, our independent auditors,
are set forth on the pages indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 3, 2000, we replaced Pricewaterhouse Coopers LLP ("PWC") with Deloitte
& Touche LLP ("D&T") as our independent auditors. The change was the result of a
formal proposal process conducted by the Company's Audit Committee and
management with several accounting firms. The change was approved by both the
Audit Committee and the Board of Directors.
19
The report of PWC on our consolidated balance sheet as of December 31, 1999 and
the related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for the year ended December 31, 1999, did
not contain an adverse opinion or disclaimers of opinion and was not qualified
or modified as to uncertainty, audit scope, or accounting principles.
There were no disagreements between Kforce and PWC as to any matter of
accounting principles or practices, financial statement disclosure, or audit
scope or procedure, which disagreements, if not resolved to the satisfaction of
PWC, would have caused it to make a reference to the subsequent matter of the
disagreement in connection with its reports on the financial statements for such
periods within the meaning of Item 304 (a)(1)(iv) of Regulation S-K.
For the 1999 fiscal year or any subsequent interim periods in 2000 prior to the
engagement of D&T, neither Kforce nor anyone on our behalf consulted with D&T
concerning: (i) the application of accounting principles to any transaction or
the type of audit opinion that might be rendered on the financial statements; or
(ii) any matter that was either the subject of a disagreement or an event
required to be reported pursuant to Item 304(a)(1)(iv) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 relating to executive officers and directors
of the registrant is incorporated herein by reference to the registrant's
definitive proxy statement for the Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 relating to executive compensation is
incorporated herein by reference to the registrant's definitive proxy statement
for the Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 relating to security ownership of certain
beneficial owners and management is incorporated herein by reference to the
registrant's definitive proxy statement for the Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 relating to certain relationships and
related transactions is incorporated herein by reference to the registrant's
definitive proxy statement for the Annual Meeting of Shareholders.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. FINANCIAL STATEMENTS. The consolidated financial statements, and
related notes thereto, of Kforce with the independent auditors'
reports thereon are included in Part IV of this report on the pages
indicated by the Index to Consolidated Financial Statements and
Schedule as presented on page 22 of this report.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE. The consolidated
financial statement schedule of Kforce is included in Part IV of
this report on the page indicated by the Index to Consolidated
Financial Statements and Schedule as presented on page 22 of this
report. The independent auditors' reports as presented on pages 23,
24 and 48 of this report apply to the consolidated financial
statement schedule. This financial statement schedule should be read
in conjunction with the consolidated financial statements, and
related notes thereto of Kforce.
Schedules not listed in the Index to Consolidated Financial
Statements and Schedule have been omitted because they are not
applicable, not required, or the information required to be set
forth therein is included in the consolidated financial statements
or notes thereto.
3. EXHIBITS. See Item 14(c) below.
(b) REPORTS ON FORM 8-K.
None.
(c) EXHIBITS. The exhibits listed on the Exhibits Index are filed as
part of, or incorporated by reference into, this report.
(d) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. See Item 14(a) above.
21
KFORCE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Independent Auditors' Reports............................................. 23
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2001 and 2000................ 25
Consolidated Statements of Operations and Comprehensive Income (Loss)-
Years ended December 31, 2001, 2000 and 1999.......................... 26
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999...................................... 27
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2001, 2000 and 1999...................................... 29
Notes to Consolidated Financial Statements.............................. 31
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................... 49
22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Kforce Inc.:
We have audited the accompanying consolidated balance sheets of Kforce Inc. and
subsidiaries (the "Company"), formerly known as kforce.com, Inc., as of December
31, 2001 and 2000, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows for the years
then ended. Our audits also included the accompanying consolidated financial
statement schedule. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2001
and 2000, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As disclosed in Note 1 to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivatives.
Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
January 23, 2002
23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Romac International, Inc.
In our opinion, the accompanying consolidated statements of operations and
comprehensive income (loss), of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Romac International,
Inc. and its subsidiaries ("the Company") at December 31, 1999, and the results
of their operations and their cash flows for the year ended December 31, 1999,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tampa, Florida
February 8, 2000
24
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
------------------------
2001 2000
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents ................................ $ 255 $ 1,865
Trade receivables, net of allowance for doubtful accounts
of $5,470 and $6,649, respectively .................... 71,133 125,931
Income tax refund receivables ............................ 5,233 --
Deferred tax asset ....................................... 4,037 4,872
Prepaid expenses and other current assets ................ 4,956 3,682
--------- ---------
Total current assets ............................. 85,614 136,350
Receivables from officers and related parties, net of
allowance of $300 in 2001 ............................. 726 1,058
Fixed assets, net .......................................... 15,367 23,115
Deferred tax asset, non-current ............................ 1,847 1,250
Other assets, net .......................................... 23,414 23,481
Goodwill net of accumulated amortization of $16,955 and
$13,135, respectively ................................. 95,804 92,764
--------- ---------
Total assets ..................................... $ 222,772 $ 278,018
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and other accrued liabilities ........... $ 14,231 $ 17,464
Accrued payroll costs .................................... 21,326 37,778
Bank overdrafts .......................................... 6,974 8,083
Income taxes payable ..................................... -- 2,140
--------- ---------
Total current liabilities ........................ 42,531 65,465
Long term debt ............................................. 28,185 45,000
Other long-term liabilities ................................ 13,247 12,516
--------- ---------
Total liabilities ................................ 83,963 122,981
--------- ---------
Commitments and contingencies (Note 13)
Stockholders' Equity:
Preferred stock, $0.01 par; 15,000 shares authorized, none
issued and outstanding ................................ -- --
Common stock, $0.01 par; 250,000 shares authorized, 48,264
and 46,959 issued, respectively ....................... 483 470
Additional paid-in capital ............................... 195,177 191,007
Accumulated other comprehensive loss ..................... (596) (267)
Retained earnings ........................................ 34,275 46,363
Less reacquired shares at cost; 16,524 and 14,802 shares,
respectively .......................................... (90,530) (82,536)
--------- ---------
Total stockholders' equity ....................... 138,809 155,037
--------- ---------
Total liabilities and stockholders' equity ....... $ 222,772 $ 278,018
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
25
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------------
2001 2000 1999
--------- --------- ---------
Net service revenues ................................. $ 646,023 $ 794,997 $ 746,632
Direct costs of services ............................. 393,623 433,441 424,001
--------- --------- ---------
Gross profit ......................................... 252,400 361,556 322,631
Selling, general and administrative expenses ......... 244,792 341,812 346,452
Depreciation and amortization ........................ 17,325 18,440 14,514
--------- --------- ---------
(Loss) income from operations ........................ (9,717) 1,304 (38,335)
Other expense (income):
Dividend and interest income ....................... (296) (288) (1,639)
Interest expense ................................... 3,577 734 423
Other expense (income), net ........................ 1,179 (333) 274
--------- --------- ---------
(Loss) income before income taxes .................... (14,177) 1,191 (37,393)
(Provision) benefit for income taxes ................. 2,089 (1,474) 13,877
--------- --------- ---------
Net loss ............................................. (12,088) (283) (23,516)
Other comprehensive income (loss):
Foreign currency translation ....................... 44 (97) (191)
Cash flow hedges, net of taxes of $248 ............. (373) -- --
--------- --------- ---------
Comprehensive loss ................................... $ (12,417) $ (380) $ (23,707)
========= ========= =========
Net loss per share:
Basic and Diluted ............................... $ (0.38) $ (.01) $ (.53)
========= ========= =========
Weighted average shares:
Basic and Diluted ............................... 31,711 42,886 44,781
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
26
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net loss ................................................................ $(12,088) $ (283) $(23,516)
Adjustments to reconcile net loss to
cash provided by (used in) operating activities:
Depreciation and amortization ........................................ 17,325 18,440 14,514
Provision for fallouts and bad debts on accounts
and notes receivable ............................................... 10,059 7,106 9,768
Deferred income tax benefit (provision) .............................. 488 (865) 347
Restricted stock grant charges ....................................... 823 -- --
Loss on asset sales/disposals ........................................ 1,442 830 419
Loss on asset impairment ............................................. 1,273 -- --
Loss on sale of training business .................................... 4,608 -- --
Gain on sale of legal staffing business .............................. (537) -- --
Increase (decrease) in cash surrender value of
life insurance policies ............................................ 1,057 (3,213) (391)
(Increase) decrease in operating assets:
Trade and notes receivables, net ..................................... 46,388 (20,491) (8,169)
Prepaid expenses and other current assets ............................ (2,017) (13) (43)
Income tax receivable ................................................ (5,233) -- --
Other assets, net .................................................... (1,702) (5,088) (7,281)
Increase (decrease) in operating liabilities:
Accounts payable and other accrued liabilities ....................... (4,356) (6,716) 14,920
Accrued payroll costs ................................................ (14,100) 8,016 (9,148)
Bank overdrafts ...................................................... (1,109) 2,260 5,824
Accrued merger, restructuring, and
integration expense ................................................ -- -- (4,931)
Income tax refund or payable ......................................... (2,136) 26,174 (26,129)
Other long-term liabilities .......................................... 714 (1,059) 6,703
-------- -------- --------
Cash provided by (used in) operating
Activities .................................................... 40,899 25,098 (27,113)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures, net ............................................ (6,372) (6,408) (16,603)
Acquisitions, net of cash acquired and
including payment on earnout provisions ............................ -- (1,221) (6,039)
Scientific Staffing acquisition ...................................... (3,524) -- --
Payments on notes receivable from related parties .................... 54 -- 1,143
Proceeds from the sale of short-term investments ..................... -- -- 12,000
-------- -------- --------
Cash used in investing activities ............................... (9,842) (7,629) (9,499)
-------- -------- --------
27
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) CONTINUED
Cash flows from financing activities:
Proceeds from bank line of credit .................................... -- 55,000 --
Repayments on bank line of credit .................................... (16,815) (10,000) --
Repayment of notes acquired in acquisition, net of
cash acquired ...................................................... (1,517) -- --
Payments on capital lease obligations ................................ -- (481) (723)
Payments on notes payable to related parties ......................... -- (2,000) (10,144)
Proceeds from exercise of stock options .............................. 206 2,513 1,843
Repurchases of common stock .......................................... (14,585) (12,699) (15,075)
Repurchase of common stock in tender offer ........................... -- (55,759) --
-------- -------- --------
Cash used in financing activities ............................... (32,711) (23,426) (24,099)
-------- -------- --------
Decrease in cash and cash equivalents ..................................... (1,654) (5,957) (60,711)
Currency translation adjustment ........................................... 44 (97) (191)
Cash and cash equivalents at beginning of year ............................ 1,865 7,919 68,821
-------- -------- --------
Cash and cash equivalents at end of year .................................. $ 255 $ 1,865 $ 7,919
======== ======== ========
Supplemental Cash Flow Information
Cash paid (received) during the period for:
Income taxes ......................................................... $ 5,488 $(23,083) $ 12,027
Interest ............................................................. 3,406 508 423
Supplemental Non-Cash Transaction Information:
401(k) matching contribution ......................................... 847 885 --
Deferred compensation plan contribution .............................. 789 -- --
Employee stock purchase plan contribution ............................ 1,805 1,277 --
Cash flow hedges, net of taxes ....................................... (373) -- --
Acquisition of Emergency Response Staffing............................ 6,300 -- --
Restricted stock issued in lieu of cash bonuses ...................... 823 -- --
Sale of training business in exchange for note
receivable ......................................................... 300 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
28
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
(IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE
COMMON STOCK CAPITAL INCOME(LOSS)
Shares Amounts
STOCKHOLDERS' EQUITY:
Balance at December 31, 1998 ............ 46,408 $ 464 $ 185,300 $ 21
Exercise of stock options ............... 279 3 1,840 --
Tax benefit of employee stock options ... -- -- 122 --
Foreign currency translation adjustment . -- -- -- (191)
Net loss ................................ -- -- -- --
Repurchase of common stock .............. -- -- -- --
--------- --------- --------- ---------
Balance at December 31, 1999 ............ 46,687 467 187,262 (170)
Exercise of stock options ............... 272 3 2,510 --
Tax benefit of employee stock options ... -- -- 995 --
401(k) matching contribution ............ -- -- 406 --
Employee stock purchase plan contribution -- -- (166) --
Foreign currency translation adjustment . -- -- -- (97)
Net loss ................................ -- -- -- --
Repurchase of common stock .............. -- -- -- --
--------- --------- --------- ---------
Balance at December 31, 2000 ............ 46,959 470 191,007 (267)
Exercise of stock options ............... 63 1 205 --
Tax benefit of employee stock options ... -- -- 4 --
401(k) matching contribution ............ -- -- (502) --
Deferred Compensation matching .......... -- -- (572) --
Employee stock purchase plan contribution -- -- (2,076) --
Stock issued for business acquired ...... 1,242 12 6,288 --
Foreign currency translation adjustment . -- -- -- 44
Cash flow hedges, net of taxes of $248 .. -- -- -- (373)
Restricted stock issuance ............... -- -- 823 --
Net loss ................................ -- -- -- --
Repurchase of common stock .............. -- -- -- --
--------- --------- --------- ---------
Balance at December 31, 2001 ............ 48,264 $ 483 $ 195,177 $ (596)
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
29
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
(IN THOUSANDS) CONTINUED
RETAINED
EARNINGS REACQUIRED STOCK TOTAL
Shares Amounts
STOCKHOLDERS' EQUITY:
Balance at December 31, 1998 ............ $ 70,162 677 $ (925) $ 255,022
Exercise of stock options ............... -- -- -- 1,843
Tax benefit of employee stock options ... -- -- -- 122
Foreign currency translation adjustment . -- -- -- (191)
Net loss ................................ (23,516) -- -- (23,516)
Repurchase of common stock .............. -- 1,936 (15,075) (15,075)
--------- --------- --------- ---------
Balance at December 31, 1999 ............ 46,646 2,613 (16,000) 218,205
Exercise of stock options ............... -- -- -- 2,513
Tax benefit of employee stock options ... -- -- -- 995
401(k) matching contribution ............ -- (72) 479 885
Employee stock purchase plan contribution -- (217) 1,443 1,277
Foreign currency translation adjustment . -- -- -- (97)
Net loss ................................ (283) -- -- (283)
Repurchase of common stock .............. -- 12,478 (68,458) (68,458)
--------- --------- --------- ---------
Balance at December 31, 2000 ............ 46,363 14,802 (82,536) 155,037
Exercise of stock options ............... -- -- -- 206
Tax benefit of employee stock options ... -- -- -- 4
401(k) matching contribution ............ -- (242) 1,349 847
Deferred Compensation matching .......... -- (286) 1,361 789
Employee stock purchase plan contribution -- (699) 3,881 1,805
Stock issued for business acquired ...... -- -- -- 6,300
Foreign currency translation adjustment . -- -- -- 44
Cash flow hedges ........................ -- -- -- (373)
Restricted stock issuance ............... -- -- -- 823
Net loss ................................ (12,088) -- -- (12,088)
Repurchase of common stock .............. -- 2,949 (14,585) (14,585)
--------- --------- --------- ---------
Balance at December 31, 2001 ............ $ 34,275 16,524 $ (90,530) $ 138,809
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
30
KFORCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Kforce Inc. and subsidiaries (the "Company"), formerly known as kforce.com,
Inc., is a provider of professional and technical specialty staffing services in
86 locations in 45 markets in the United States. The Company provides its
customers staffing services in the following specialties: Information
Technology, Finance and Accounting, and Health and Life Sciences. The Company
provides flexible staffing services on both a temporary and contract basis and
provides search services on both a contingency and retained basis. The Company
serves clients from the Fortune 1000 as well as local and regional, small to
mid-size companies.
On June 18, 2001 the Stockholders approved a name change from kforce.com, Inc.
to Kforce Inc.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Kforce Inc. and
its subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation.
RECLASSIFICATION
Certain amounts reported for prior periods have been reclassified to be
consistent with the current period presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments with an initial maturity of
three months or less as cash equivalents.
FIXED ASSETS
Fixed assets are carried at cost, less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets. The cost of leasehold improvements is amortized using the straight-line
method over the terms of the related leases, which range from three to fifteen
years.
INCOME TAXES
The Company accounts for income taxes under the principles of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability approach to the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
differences between the financial statement carrying amounts and the tax bases
of other assets and liabilities. The tax benefits of deductions attributable to
employees' disqualifying dispositions of shares obtained from incentive stock
options are reflected in additional paid-in capital.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company, using available market information and appropriate valuation
methodologies, has determined the estimated fair value of financial instruments.
However, considerable judgment is required in interpreting data to develop the
estimates of fair value. The fair values of the Company's financial instruments
are estimated based on current market rates and instruments with the same risk
and maturities. The fair values of cash and cash
31
equivalents, trade receivables, accounts payable, long term debt and receivables
from and payables to related parties approximate the carrying values of these
financial instruments.
GOODWILL
Goodwill, net of accumulated amortization, totaled $95,804 and $92,764 at
December 31, 2001 and 2000, respectively. Goodwill is amortized on a
straight-line basis over a fifteen to thirty year period. Goodwill amortization
expense was $4,155, $4,231, and $3,857 for the years ended December 31, 2001,
2000, and 1999, respectively. Pursuant to the adoption of SFAS 142 "Goodwill and
Other Intangible Assets", beginning January 1, 2002, the amortization of
goodwill will no longer be permitted.
IMPAIRMENT OF LONG-LIVED ASSETS
Management periodically reviews the carrying value of goodwill and other
long-lived assets to determine if impairment has occurred. Any impairment loss
would have been recorded in the period identified. Losses of $1,273 relating to
the write off of capitalized software due to a change in the extent to which a
portion of the software is being used were recorded in Selling general and
administrative expenses in the accompanying Consolidated Statements of
Operations and Comprehensive Income (Loss) for the year ended December 31, 2001.
The Company compared the value of the those aspects of the capitalized software
still in use to its carrying value to determine the recoverable cost and the
resulting degree of impairment.
CAPITALIZED SOFTWARE
The Company develops and implements new computer software to enhance the
performance of its accounting and operating systems. The Company accounts for
direct internal and external costs subsequent to the preliminary stage of the
projects under the principles of SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". Software development costs are
being capitalized and classified as other assets and amortized over the
estimated useful life of the software (typically three years) using the
straight-line method. Direct internal costs, such as payroll and payroll-related
costs, and external costs during the development stage of each of these projects
have been capitalized and classified as capitalized software.
DEFERRED LOAN COSTS
Costs incurred to secure the Company's Credit Facilities have been capitalized
and are being amortized over the terms of the related agreements using the
straight-line method, which approximates the interest method.
NON-COMPETE AGREEMENTS
Payments made to enter into non-compete agreements have been capitalized and are
being amortized on a straight-line basis over the terms of the related
agreements.
STOCK BASED COMPENSATION
The Company has elected to continue accounting for stock based compensation
under the intrinsic value method of accounting for stock based compensation as
provided under APB No. 25 and has disclosed pro forma net income and earnings
(loss) per share amounts using the fair value based method prescribed by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123").
SELF-INSURANCE
The Company offers an employee benefit program for all eligible employees for
which the Company is self-insured for a portion of the cost. The Company is
liable for claims up to $150 per claim and aggregate claims up to a defined
yearly payment limit. All full-time employees and salaried consultants are
eligible to participate in the program. Self-insurance costs are accrued using
estimates to approximate the liability for reported claims and claims incurred
but not reported.
REVENUE RECOGNITION
Net service revenues consist of sales, net of credits, discounts and fallouts.
The Company recognizes Flexible Billings based on hours worked by assigned
personnel on a weekly basis. Search Fees are recognized when earned upon the
successful completion of the assignment. The Company's policy is to replace
individuals who fail to continue
32
employment (fallouts) for the period of time specified in the agreements for
search placements, generally thirty to ninety days. Revenue from Search Fees is
shown on the Consolidated Statements of Operations and Comprehensive Income
(Loss) net of a reserve for candidates not fulfilling the contract requirements.
OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) is comprised of foreign currency translation
adjustments, which arise primarily from activities of the Company's Canadian
operations, and unrealized gains and losses from changes in the fair value of
certain derivative instruments that qualify for hedge accounting under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities".
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Results of operations from the Company's Canadian operations are translated
using the weighted average exchange rates during the period, while assets and
liabilities are translated into U.S. dollars using current or historical rates
at the end of the period depending upon the related assets. Resulting foreign
currency translation adjustments are recorded in Other Comprehensive Income
(Loss). In June 2001, the Company sold its Canadian operation, consisting of its
Toronto office, and continues to collect on receivables not sold in the
transaction.
ACCOUNTING FOR DERIVATIVES
SFAS 133 was issued in September 1998. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It also requires that all derivatives
and hedging activities be recognized as either assets or liabilities in the
balance sheet and be measured at fair value. Gains or losses resulting from the
changes in fair value of derivatives are recognized in net income (loss) or
recorded in other comprehensive income (loss), and recognized in the statement
of operations when the hedged item affects earnings, depending upon the purpose
of the derivatives and whether they qualify for hedge accounting treatment. The
Company's policy is to designate at a derivative's inception the specific
assets, liabilities, or future commitments being hedged and monitor the
derivative to determine if it remains an effective hedge. SFAS 133, as amended,
was effective for all fiscal quarters of fiscal years beginning after September
15, 2000. The Company adopted SFAS 133, as amended, on January 1, 2001. The
Company does not enter into or hold derivatives for trading or speculative
purposes.
In April 2001, the Company entered into two fixed interest rate swap contracts
in relation to a portion of its Credit Facility for a total notional amount of
$22 million with terms expiring no later than May 2003. Effective October 24,
2001, the Company obtained a lower interest rate and extended the expiration
date to October 2003 on $12 million of the swaps contracts. The contracts, which
have been classified as cash flow hedges, effectively convert a portion of the
Company's outstanding debt under its Credit Facility to a fixed rate basis, thus
reducing the impact of interest rate changes on future income. The differential
between floating rate receipts and fixed rate payments is accrued as market
rates fluctuate and recognized as an adjustment to interest expense. Consistent
with SFAS 133, the Company recorded the fair value of the interest rate swap
contracts, approximately $373 net of income taxes of $248, in other liabilities
and accumulated other comprehensive income (loss) as of December 31, 2001.
EARNINGS PER SHARE
Under Financial Accounting Standards No. 128, "Earnings Per Share", basic
earnings (loss) per share is computed as earnings divided by weighted average
shares outstanding. Diluted earnings (loss) per share includes the dilutive
effects of stock options and other potentially dilutive securities such as
non-vested stock grants.
Options that were outstanding, but were anti-dilutive, and therefore were
excluded from the computation of diluted shares, totaled 6,375, 5,751, and
5,289, shares of common stock, for 2001, 2000, and 1999, respectively.
Outstanding option prices per share range from $0.980 to $28.125 in 2001 and
2000, and $0.980 to $30.063 in 1999. The options, which expire on various dates
ranging from January 2005 to December 2011 were still outstanding at December
31, 2001.
33
As of December 31, 2001, 194 non-vested restricted shares of stock were
outstanding but were anti-dilutive because of the net loss position of the
Company. These shares vest in February 2003 based upon an employee's continued
employment with the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board unanimously approved
the issuance of two statements, SFAS 141, "Business Combinations", and SFAS 142,
"Goodwill and Other Intangible Assets". SFAS 141 prohibits the use of
pooling-of-interest method for business combinations initiated after June 30,
2001 and also applies to all business combinations accounted for by the purchase
method that were completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001 to all goodwill and other intangible
assets recognized in an entity's statement of financial position at that date,
regardless of when the assets were initially recognized. Beginning January 1,
2002, the amortization of goodwill will no longer be permitted. At
December 31, 2001, goodwill, net of accumulated amortization, was $95,804.
Goodwill amortization expense was $4,155 during the year ended December 31,
2001. The Company is currently assessing the impact that SFAS 141 and SFAS 142
will have on its financial position and results of operations. Though no final
determinations have been reached, the potential impairment of existing goodwill
could range from a nominal amount to an amount exceeding the majority of
existing goodwill.
In August 2001, the Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligations". SFAS 143 requires entities to
record the fair value of a liability for an asset retirement obligation in the
period in which it occurred. The standard is effective for fiscal years
beginning after June 15, 2002. The Company has not yet determined the impact
that SFAS 143 will have on its financial statements.
In October 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which replaces
SFAS 121. The accounting model for long-lived assets to be disposed of by sale
applies to all long-lived assets, including discontinued operations, and
replaces the provisions of APB Opinion No. 30, "Reporting Results of Operations
- - Reporting the effects of Disposal of a Segment of a Business", for the
disposal of segments of business. SFAS 144 requires that those long-lived assets
be measured at the lower of the carrying amount or fair value less cost to sell,
whether reported in continuing operations or discontinued operations. SFAS 144
also broadens the reporting of discontinued operations to include all components
of an entity with the operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the entity in
a disposal transaction. The provisions in SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, are to be applied prospectively. The Company has not yet determined
the impact that SFAS 144 will have on its financial statements.
2. FIXED ASSETS
Major classifications of fixed assets and related asset lives are summarized as
follows:
DECEMBER 31,
----------------------
USEFUL LIFE 2001 2000
----------- ------- -------
Land................................. $ 1,310 $ 1,310
Furniture and equipment.............. 5-7 years 16,066 17,679
Computer equipment................... 3-5 years 17,882 20,834
Airplane............................. 5 years -- 1,889
Leasehold improvements............... 3-15 years 5,507 4,997
------- -------
40,765 46,709
Less accumulated depreciation........ 25,398 23,594
------- -------
$15,367 $23,115
======= =======
Depreciation expense during 2001, 2000 and 1999 was $8,768, $10,220 and 8,294,
respectively.
34
The Company airplane was decommissioned in 2001 and portions were sold to
outside parties. The remainder was determined valueless and written off as
scrap. The net loss on disposal of $812 is recorded in other expense (income).
In 2000, the Company purchased land in Tampa, Florida. The Company subsequently
sold the portion of this land on which its new headquarters facility was built
to a real estate developer. Beginning September 14, 2001, the Company executed
an agreement for the lease of its new headquarters and consolidation of its
Tampa operations. Leasehold improvements include approximately $2,135 in
improvements related to the headquarters facility. Land consists of $1,310 for
the remaining parcel of property not sold to the developer.
3. OTHER ASSETS
DECEMBER 31,
--------------------
2001 2000
------- -------
Cash surrender value of life insurance policies ............. $12,591 $13,648
Capitalized software, net of amortization ................... 5,805 7,914
Prepaid rent - Ybor headquarters, net of amortization ....... 1,989 --
Intangible assets from acquisitions (Note 4) ................ 1,677 --
Deferred loan cost, net of amortization ..................... 1,222 1,431
Other ....................................................... 130 488
------- -------
$23,414 $23,481
======= =======
Cash surrender value of life insurance policies relates to policies maintained
by the Company that will be used to fund obligations in the Deferred
Compensation Plan (Note 10) with cash surrender values of $12,591 and $13,648 at
December 31, 2001 and 2000, respectively.
Accumulated amortization expense on capitalized software was $5,023 and $3,331,
as of December 31, 2001 and 2000 respectively. Amortization expense on
capitalized software during 2001, 2000 and 1999, was $4,203, $5,834, and $2,362,
respectively.
As part of the agreement with the landlord of the new headquarters, the Company
was required to prepay lease costs relating to building upgrades above a base
amount. This amount is being amortized over the 15 year life of the lease.
Amortization expense of deferred loan costs was $214 and $659 in December 31,
2001 and 2000, respectively. Additional deferred costs of $5 were incurred in
2001.
The Company has included the value of non-compete agreements totaling $125 and
$187 at December 31, 2001 and 2000, respectively, in Other. The non-compete
agreements are being amortized on a straight-line basis over the lives of the
related employment agreements. Amortization expense of non-compete agreements
was $63 for the year ended December 31, 2001 and was $83 for each of the years
ended December 31, 2000 and 1999. In addition, Other includes $223 of prepaid
software license costs for 2000.
4. ACQUISITIONS AND DIVESTITURES
FOR THE YEAR ENDED DECEMBER 31, 2001
EMERGENCY RESPONSE STAFFING INC.
On December 2, 2001, the Company acquired 100% of the outstanding common stock
of Emergency Response Staffing Inc. ("ERS"). This transaction was accounted for
in accordance with SFAS 141, "Business Combinations", using the purchase method.
The results of ERS's operations have been included in the consolidated financial
statements since that date. ERS provides nurses on a permanent and temporary
basis to its customers in the United States. As a result of this acquisition,
the Company expanded its presence on the west coast as a provider of services in
the growing area of healthcare-nursing staffing.
As consideration for the purchase of the common stock, the Company issued 1,242
shares of Kforce stock. Of this issuance, $500 in value of shares (97 shares)
will be held in escrow to cover any possible future warranty claims. There are
certain contingencies related to
35
the number of shares due the sellers based upon the market performance of Kforce
stock over the next year. There are also restrictions on the ability of the
sellers to liquidate their Kforce shares within the next year.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
At December 2, 2001
Current Assets $ 1,500
Furniture and Equipment 42
Intangible Assets 656
Goodwill 6,163
-------
Total assets acquired 8,361
-------
Current Liabilities (1,570)
Long-term debt, net of cash
Acquired (491)
-------
Total liabilities assumed (2,061)
-------
Net assets acquired $ 6,300
=======
The excess purchase price of $6,819 was allocated to acquired intangible assets
Of that amount, $527 was assigned to customer lists and contracts that have a
weighted average useful life of approximately 4 years. Employee non-compete
agreements that have a useful life of 4 years were assigned a value of $129.
The $6,163 of remaining excess purchase price was assigned to goodwill. This
goodwill will be allocated to the Health and Life Sciences business segment.
This goodwill is not anticipated to be deductible for tax purposes.
SCIENTIFIC STAFFING INC.
On December 2, 2001, the Company acquired certain assets of Scientific Staffing
Inc. ("SSI"). This transaction was accounted for in accordance with SFAS 141,
"Business Combinations", using the purchase method. The results of SSI's
operations have been included in the consolidated financial statements since
that date. SSI provides scientific personnel on a permanent and temporary basis
to its customers in the United States. As a result of this acquisition, the
Company expands its presence as a provider of services in the growing area of
scientific staffing.
As consideration for the purchase of these assets, the Company has paid SSI
$3,524 in cash as well as certain assets used primarily in connection with its
Legal staffing operations. A gain of $537 was recorded on the sale of the
Company's Legal staffing operations based upon the estimated fair value of the
assets sold.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
At December 2, 2001
Current Assets $ 46
Intangible Assets 1,021
Goodwill 3,695
-------
Total assets acquired 4,762
Current Liabilities (701)
-------
Net assets acquired $ 4,061
=======
36
The excess purchase price of $4,716 was allocated to acquired intangible assets.
Of that amount, $777 was assigned to customer lists and contracts that have a
weighted average useful life of approximately 4 years. Employee non-compete
agreements that have a useful life of 4 years were assigned a value of $244.
The $3,695 remaining excess purchase price was assigned to goodwill. This
goodwill will be allocated to the Health and Life Sciences business segment.
The following unaudited proforma consolidated financial information for the
Company gives effect to the acquisitions of Emergency Response Staffing Inc. and
Scientific Staffing Inc. as if they had occurred on January 1, 2000. These
unaudited proforma results have been prepared for comparative purposes only and
do not purport to be indicative of the results of operations that actually would
have resulted had the acquisitions occurred on the date indicated, or that may
result in the future.
2001 2000
--------- ---------
Revenues $ 677,056 $ 830,740
Net Income (loss) (11,659) 1,699
Basic income (loss) per share (0.35) 0.04
Basic shares outstanding 32,953 44,128
TRAINING BUSINESS UNIT
In December 2001, the Company sold its training business unit for $300 to a
member of its management. This individual is no longer an employee of the
Company. The training business had revenues of $2,493 and $5,017 in 2001 and
2000, respectively. Operating losses for this business were $1,847 and $344 in
2001 and 2000, respectively. As a result of the sale of this business, the
Company recorded a loss of $4,608, which included a net write-off of $2,725 of
goodwill as well as a write-off of other assets specifically related to this
business not included in the sale. The loss is reported in Selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations and Comprehensive Income (Loss).
FOR THE YEAR ENDED DECEMBER 31, 2000
During 2000, the Company had no acquisitions. During 2000, the Company settled
earnout provisions on certain prior acquisitions for approximately $1,221. These
amounts have been recorded as purchase price consideration and are included in
goodwill.
FOR THE YEAR ENDED DECEMBER 31, 1999
In January 1999, the Company acquired substantially all of the assets of Network
Training Solutions, Science Solutions, Inc. and Technology Consulting Group for
an aggregate purchase price of approximately $5,100. During 1999, the Company
also settled earnout provisions on certain prior acquisitions for approximately
$1,300. These amounts have been recorded as purchase price consideration and are
included in goodwill.
5. RELATED PARTIES
RECEIVABLES FROM RELATED PARTIES
Receivables from officers and stockholders include non-interest bearing
receivables for premiums paid on split dollar life insurance policies and other
notes receivable. Repayment terms on the other notes receivables range from one
to two years at rates of 6% to 8%. The balances on the receivables for premium
paid were $458 (net of a reserve of $300) and $758 and for the other receivables
was $268 and $300 as of December 31, 2001 and 2000, respectively.
SPLIT DOLLAR LIFE INSURANCE
In 1995, the Company entered into split dollar and cross-purchase split dollar
life insurance agreements with several officers and their estates whereby the
Company pays a portion of the life insurance premiums on behalf of the officers
and their estates. The Company has been granted a security interest in the cash
value and death benefit of each policy equal to the amount of the cumulative
premium payments made by the Company. The intent of these agreements was to, in
the event of an officer's death, provide liquidity to
37
pay estate taxes and to provide surviving officers with the ability to purchase
shares from a deceased officer's estate, minimizing the possibility of a large
block of the Company's common shares being put on the open market to the
potential detriment of the Company's market price and to allow the Company to
maintain a concentration of voting power among its officers. These insurance
policies were substantially restructured in 1999, such that all related party
receivables owed to the Company related to these policies could be satisfied by
the redemption of cash value in the policies that would accumulate over a period
of time.
Based upon current market conditions and the time anticipated to allow the cash
value of the policies to appreciate sufficiently to satisfy the receivable
balance, the Company plans to review its options for restructuring these
policies and has recorded a reserve of $300 in 2001 to satisfy the difference
between the cash surrender value of the policies and the receivable balance as
of December 31, 2001. This amount is reflected as a reduction in receivables
from officers and related parties.
RELATED PARTY TRANSACTIONS
Consulting services totaling $371 and $595 for 2000 and 1999, respectively, were
provided to the Company by a company owned by the spouse of the Chief Executive
Officer. This contract terminated in 2000. In addition, an aircraft charter
company owned 100% by the Chief Executive Officer provided charter services to
the Company in the amount of $21, $125 and $125 in 2001, 2000 and 1999,
respectively. The Company billed the aircraft charter company $22 and $35 for
the use of the Company's airplane in 2000 and 1999, respectively. The Company
had operating leases with related parties in 2000 and 1999 for office space the
Company previously used as its headquarters. This property was sold to
independent investors in 2000. Rent in the amount of $121 and $312 was paid to
the related party in 2000 and 1999, respectively.
6. NOTE PAYABLE GUARANTEE
In June 2001, the Company purchased from a bank a note receivable from one of
its former officers that it had previously guaranteed. The Company is currently
pursuing collection of this receivable. At December 31, 2001, the balance, plus
accrued interest, was approximately $1,976 and is reflected in prepaid expenses
and other current assets net of a reserve of $1,976.
7. LINE OF CREDIT
DECEMBER 31,
---------------------
2001 2000
------- -------
Bank line of credit ...................... $28,185 $45,000
------- -------
28,185 45,000
Less current maturities .................. -- --
------- -------
$28,185 $45,000
======= =======
On May 4, 2000, the Company entered into a $35 million Revolving Line of Credit
Agreement (the "Line of Credit"). The Line of Credit provided for a maximum
revolving credit facility of $35 million (based on the Company's eligible
receivables). Under its terms, prepayments on the Line of Credit were allowed at
any time, with any remaining unpaid balance due two years from closing.
Borrowings under the Line of Credit are secured by all of the assets of the
Company and its subsidiaries. Interest rates on the outstanding balance are to
be calculated based on: (i) the London Interbank Offered Rate ("LIBOR") plus
(ii) from 1.75% to 3.00% based on certain financial ratios of the Company. Fees
payable by the Company in connection with the Line of Credit also varied with
these financial ratios. The terms of the Line of Credit also included certain
financial covenants related to quarterly minimum requirements for EBITDA, fixed
charge coverage ratio and tangible net worth and maximum requirements for
leverage ratio. There were also certain limitations on investments and
acquisitions, dividends and repurchases of the Company's stock.
38
The Company entered into an Amended and Restated Credit Agreement (the "Credit
Facility") on November 3, 2000. As of December 31, 2001, there was $28,185
outstanding on the Credit Facility. The Credit Facility provides for a maximum
revolving credit facility of $90 million (not to exceed 85% of the Company's
Eligible Receivables, as defined in the New Credit Facility). Under its terms,
prepayments on the Credit Facility are allowed at any time, with any remaining
unpaid balance due November 3, 2003. Borrowings under the Credit Facility are
secured by all of the assets of the Company and its subsidiaries. Amounts
borrowed under the Credit Facility bear interest at rates ranging from Prime to
Prime plus 0.75% or LIBOR plus 1.75% to LIBOR plus 3.25%, pursuant to certain
financial performance targets as set forth in the Credit Facility. As of
December 31, 2001, one-month LIBOR was 1.88%. Pricing is changed quarterly based
on the previous four quarters' performance. Under the terms of the Credit
Facility, we are prohibited from making any dividend distributions. The terms of
the Credit Facility also include certain financial covenants should the total
amount borrowed under the Credit Facility exceed specified amounts. These
financial covenants include measurement of quarterly EBITDA as compared to the
Company's EBITDA projections. Our borrowings as of December 31, 2001 do not
exceed the specified amounts at which these financial covenants apply and at no
time during the history of the Credit Facility have we triggered such covenants.
However, we currently would not be in compliance with such covenants if such
covenants were applicable. If we were subject to such covenants, we fail to
comply with such covenants, and a default is declared under the Credit Facility,
such default could result, among other things, in the acceleration of amounts
borrowed under the Credit Facility. The Credit Facility also contains certain
limitations on investments and acquisitions, and repurchases of the Company's
stock.
The Credit Facility contains a provision that limits the dollar amount of common
stock that Kforce may repurchase subsequent to November 3, 2000 to $55 million.
In February 2001, the Credit Facility was amended to increase the maximum amount
of common stock the Company may repurchase to $72 million. As of December 31,
2001 $2.5 million was available under this authorization.
The Credit Facility also contains a provision that limits the amount of capital
expenditures that Kforce may make in any fiscal year. On January 23, 2002, this
provision was amended effective November 30, 2001 to increase the allowable
amount of capital expenditures from $6,000 to $10,000. Total capital
expenditures in 2001 were $6,372.
In April 2001, the Company entered into two fixed interest rate swap contracts
in relation to a portion of its Credit Facility for a total notional amount of
$22 million with terms expiring no later than May 2003. Effective October 24,
2001 the Company obtained a lower interest rate and extended the expiration date
to October 2003 on $12 million of the swaps contracts. The contracts, which have
been classified as cash flow hedges, effectively convert a portion of the
Company's outstanding debt under its Credit Facility to a fixed rate basis, thus
reducing the impact of interest rate changes on future income. The differential
between floating rate receipts and fixed rate payments is accrued as market
rates fluctuate and recognized as an adjustment to interest expense. Consistent
with SFAS 133, the Company recorded the fair value of the interest rate swap
contracts, approximately $373, net of income taxes of $248, in other liabilities
and accumulated other comprehensive loss as of December 31, 2001.
8. OTHER LONG-TERM LIABILITIES
DECEMBER 31,
---------------------
2001 2000
------- -------
Deferred compensation plan liability (Note 10) ..... $11,222 $12,516
Rent payable, long term ............................ 1,404 --
Cash flow hedge liability .......................... 621 --
------- -------
$13,247 $12,516
======= =======
The Company has a non-qualified deferred compensation plan pursuant to which
eligible officers and highly compensated key employees may elect to defer part
of their compensation to later years. These amounts, which are classified as
other long-term liabilities, are payable upon retirement or termination of
employment.
39
The Company has recorded a liability for the minimum required lease payments on
those vacant properties that it has determined it will be unable to sub-lease
for the foreseeable future as the result of current market conditions. In
addition to the non-current amount of $1,404 reflected above, lease payments
scheduled within the next 12 months of $735 have been included in accounts
payable and other current liabilities. A total of $2,139 was expensed during
2001 related to these leases. This expense is included in Selling, general and
administrative expenses.
Consistent with SFAS 133, the Company has recorded a liability for outstanding
cash flow hedges based upon the fair value as determined at December 31, 2001
(see Note 7).
9. INCOME TAXES
The benefit (provision) for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
-------- -------- --------
Current:
Federal ................................. $ 2,733 $ (2,025) $ 13,252
State ................................... (405) (314) 972
Deferred .................................. (239) 865 (347)
-------- -------- --------
$ 2,089 $ (1,474) $ 13,877
======== ======== ========
The benefit (provision) for income taxes shown above varied from the statutory
federal income tax rates for those periods as follows:
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
-------- -------- --------
% % %
Federal income tax rate ................... 35.0 (34.0) 35.0
State income taxes, net of federal
tax benefit ............................ 2.9 (3.3) 5.0
Non-deductible items ...................... (20.8) (56.6) (1.8)
Goodwill amortization ..................... (2.4) (30.4) (1.0)
Other ..................................... -- .6 (.1)
-------- -------- --------
Effective tax rate ........................ 14.7 (123.7) 37.1
======== ======== ========
Nondeductible items consist primarily of fees and the portion of meals and
entertainment expenses not deductible.
40
Deferred income tax assets and liabilities shown on the balance sheet are
comprised of the following:
YEARS ENDED DECEMBER 31,
------------------------
2001 2000
------- -------
Deferred taxes, current:
Assets
Allowance for bad debts ................... $ 2,456 $ 2,261
Accrued liabilities ....................... 1,613 2,612
Charitable contribution deduction
carryforward ......................... -- 32
------- -------
4,069 4,905
Liabilities
Accrued liabilities ....................... (32) (33)
------- -------
Net deferred tax asset .................... $ 4,037 $ 4,872
======= =======
Deferred taxes, non-current:
Assets
Deferred compensation ..................... $ 4,217 $ 5,057
Federal net operating loss carry-
forward .............................. 697 --
State net operating loss carry-
forward .............................. 1,205 718
------- -------
6,119 5,775
Liabilities
Depreciation and amortization ............. (4,272) (4,525)
------- -------
Net deferred tax asset .................... $ 1,847 $ 1,250
======= =======
At December 31, 2001, the Company had a federal net operating loss of
approximately $16,000. It is expected that $5,100 of the net operating loss will
be carried back to the December 31, 2000 year for a refund of income taxes paid
in that year and approximately $11,000 will be carried forward to be offset
against future federal taxable income. Further, the Company had approximately a
$23,100 state tax net operating loss, which will be carried forward to be offset
against future state taxable income. The amount of the state tax net operating
loss carryforward expires in varying amounts through 2014.
The Company is currently undergoing a U.S. Internal Revenue Service audit for
its tax years ending December 31, 1999 and 1998. As of the issuance of this
report, no final determinations have been made relating to any issues raised
during the examination.
We are also periodically subject to state and other local income tax audits for
various tax years. Ongoing audits for which no final determinations have been
made include those for the states of New York, Minnesota, Connecticut and
Massachusetts.
41
10. EMPLOYEE BENEFIT PLANS
401(k) SAVINGS PLAN
The Company has a qualified defined contribution 401(k) plan covering
substantially all full-time employees. The plan offers a savings feature and
Company matching contributions. Employer matching contributions are
discretionary and are funded annually as approved by the Board of Directors. The
match was made in the Company's stock for 2000. No match was made by the Company
in 2001. Assets of this plan are held in trust for the sole benefit of
employees.
At December 31, 2001, 2000, and 1999, the Plan held 1,483, 1,615, and 1,772
shares, respectively, of the Company's stock, representing approximately 4.77%,
5.0% and 4.0%, respectively, of the Company's outstanding shares. Employer
contributions to the 401(k) plans totaled $1,165 and $892 in 2000 and 1999,
respectively. There were no contributions made to the plan during 2001.
EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 2000, the Company placed into effect an Employee Stock
Purchase Plan which had been approved during 1999 and which allows all employees
to purchase stock at a 15% discount from market prices and without commissions
on the purchases. Employees are eligible to participate in the plan as of the
next plan enrollment date following their date of hire. For the years ended
December 31, 2001 and 2000, respectively, the Company issued 385 and 632 shares
of common stock, at an average purchase price of $3.28 and $3.73 per share,
pursuant to the Employee Stock Purchase Plan. These shares were transferred to
the plan from the Company's treasury stock. Of the 385 shares issued for the
plan year 2001, the Company issued 284 of the shares at an average price of
$2.55 during the year and 101 shares at an average price of $5.34 subsequent to
year-end. Of the 632 shares issued for plan year 2000, the Company issued 217 of
the shares at an average price of $5.90 during the year and 415 shares at an
average price of $2.60 subsequent to year-end. The shares issued subsequent to
year-end are related to employee contributions made during the year.
DEFERRED COMPENSATION PLAN
The Company has a non-qualified deferred compensation plan pursuant to which
eligible officers and highly compensated key employees may elect to defer part
of their compensation to later years. These amounts, which are classified as
other long-term liabilities, are payable upon retirement or termination of
employment, and at December 31, 2001 and 2000, aggregated $11,222 and $12,516,
respectively. The Company has insured the lives of the participants in the
deferred compensation plan to assist in the funding of the deferred compensation
liability. The cash surrender value of these Company-owned life insurance
policies, $12,591 and $13,648 at December 31, 2001 and 2000, respectively, is
included in other assets. Compensation expense of $1,096, $439, and $1,938 was
recognized for the plan for the years ended December 31, 2001, 2000, and 1999,
respectively. The Company accrues discretionary Company matching contributions.
No match was made by the Company in 2001.
11. STOCK OPTION PLANS
In 1994, the Company established an employee incentive stock option plan that
allows the issuance of Incentive Stock Options. The plan was subsequently
amended in 1996 to allow for the issuance of Nonqualified Stock Options, Stock
Appreciation Rights and Restricted Stock. The number of shares of common stock
that may be issued under the plan was increased from 6,000 at inception to
12,000 in 1997.
During 1995, the Company established a non-employee director stock option plan
which authorized the issuance to non-employee directors of options to purchase
common stock. The maximum number of shares of common stock that can be issued
under this plan is 400.
42
A summary of the Company's stock option and restricted stock activity is as
follows:
NON- WEIGHTED WEIGHTED
EMPLOYEE EMPLOYEE AVERAGE AVERAGE
INCENTIVE DIRECTOR EXERCISE FAIR VALUE
STOCK OPTION STOCK OPTION PRICE PER OF OPTIONS
(000s) PLAN PLAN TOTAL SHARE GRANTED
------------ ------------ --------- --------- ----------
Outstanding as of
December 31, 1998 ..... 4,575 292 4,867 $15.84
Granted ............... 2,353 60 2,413 $ 7.68 $ 7.73
Exercised ............. (342) -- (342) $ 5.26
Forfeited ............. (1,522) (127) (1,649) $19.19
------ ------ ------ ------
Outstanding as of
December 31, 1999 ..... 5,064 225 5,289 $11.76
Granted ............... 2,204 94 2,298 $10.77 $ 4.89
Exercised ............. (283) -- (283) $ 8.93
Forfeited ............. (1,528) (25) (1,553) $12.75
------ ------ ------ ------
Outstanding as of
December 31, 2000 ..... 5,457 294 5,751 $11.04
Granted ............... 1,924 25 1,949 $ 3.97 $ 2.11
Exercised ............. (56) -- (56) $ 3.48
Forfeited ............. (1,269) -- (1,269) $ 8.65
------ ------ ------ ------
Outstanding as of
December 31, 2001 ..... 6,056 319 6,375 $ 9.41
====== ====== ====== ======
Exercisable at
December 31:
1999 ............... 1,535 127 1,662
2000 ............... 1,797 213 2,010
2001 ............... 2,477 275 2,752
Options granted during each of the three years ended December 31, 2001 have a
vesting period of three years. Options expire at the end of ten years from the
date of grant.
As of December 31, 2001, the total number of available shares to grant was 2,922
and 4 under the Employee Incentive Stock Option Plan and Non-Employee
Director Stock Option Plan, respectively.
43
The following table summarizes information about employee and director stock
options:
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED
OUTSTANDING AT REMAINING AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 2001 (SHARES) LIFE (YEARS) PRICE ($)
------------------------ -------------- ------------ ---------
$ 0.980 - $ 1.460 ............ 20 3.70 $ 0.98
$ 1.461 - $ 2.176 ............ 23 3.00 $ 1.49
$ 2.177 - $ 3.242 ............ 62 8.80 $ 2.41
$ 3.243 - $ 4.831 ............ 1,981 8.68 $ 3.81
$ 4.832 - $ 7.198 ............ 284 9.12 $ 6.18
$ 7.199 - $10.726 ............ 1,733 7.22 $ 7.51
$10.727 - $15.981 ............ 1,615 7.11 $ 13.64
$15.982 - $23.812 ............ 415 5.94 $ 21.01
$23.813 - $31.500 ............ 242 6.37 $ 27.75
-----
6,375 7.60 $ 9.41
=====
OPTIONS EXERCISABLE
---------------------------------
NUMBER WEIGHTED
EXERCISABLE AT AVERAGE
DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2001 (SHARES) PRICE ($)
------------------------ -------------- ---------
$ 0.980 - $ 1.460 ............ 20 $ 0.98
$ 1.461 - $ 2.176 ............ 23 $ 1.49
$ 2.177 - $ 3.242 ............ 19 $ 2.41
$ 3.243 - $ 4.831 ............ 228 $ 4.41
$ 4.832 - $ 7.198 ............ 30 $ 6.27
$ 7.199 - $10.726 ............ 1,004 $ 7.62
$10.727 - $15.981 ............ 770 $ 12.81
$15.982 - $23.812 ............ 415 $ 21.01
$23.813 - $31.500 ............ 243 $ 27.75
-----
2,752 $ 12.45
=====
Included in the above tables are 194 shares of non-vested restricted stock
grants issued in October 2001. These shares were issued in lieu of 2001 cash
bonuses to certain members of management. These shares fully vest in February
2003 subject to continued employment at Kforce.
44
Had compensation cost for the Company's option plans been determined based on
the fair value at the grant dates, as prescribed by SFAS 123, the Company's net
loss and net loss per share would have been as follows:
Pro Forma EPS
YEARS ENDED
DECEMBER 31,
-------------------------------------------
2001 2000 1999
---------- ---------- ----------
Net loss:
As Reported ................................ $ (12,088) $ (283) $ (23,516)
Compensation expense per SFAS 123 ....... (11,984) (19,715) (11,113)
Tax benefit, pro forma .................. 1,724 363 890
---------- ---------- ----------
Pro forma net loss ......................... $ (22,348) $ (19,635) $ (33,739)
========== ========== ==========
Net loss per share:
Basic:
As Reported ............................. (0.38) (0.01) (0.53)
Pro forma ............................... (0.71) (0.46) (0.75)
Diluted:
As reported ............................. (0.38) (0.01) (0.53)
Pro forma ............................... (0.71) (0.46) (0.75)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period: Dividend yield of 0.0% for all three
periods; risk-free interest rates of 5.05% for options granted during the year
ended December 31, 2001, 5.66%-6.75% for options granted during the year ended
December 31, 2000, and 4.95%-5.74% for options granted during the year ended
December 31, 1999; a weighted average expected option term of 5.8 years for
2001, 4-7 years for 2000, and 5-6 years for 1999; and a volatility factor of 50%
for 2001 and 2000, and 45.59% for 1999.
Tax benefits resulting from disqualifying dispositions of shares acquired under
the Company's employee incentive stock option plan reduced taxes currently
payable by $4, $995 and $122 in 2001, 2000 and 1999, respectively. These tax
benefits are credited to additional paid-in-capital.
12. TENDER OFFER - STOCK REPURCHASE
On November 6, 2000, the Company announced a modified Dutch Auction tender
offer, consisting of an offer to purchase up to 10,000 shares of its common
stock at a purchase price between $5.50 and $4.75 per share net to the seller in
cash, without interest. The tender offer concluded on December 5, 2000, whereby
the Company purchased approximately 10,000 shares at $5.50 per share. This
repurchase was funded by cash and approximately $55,000 of debt from existing
bank lines of which $10,000 was repaid as of December 31, 2000. Costs incurred
to effect the transaction were $759.
45
13. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases space and various equipment under operating leases expiring
at various dates with some leases cancelable upon 30 to 90 days notice. The
leases require payment of taxes, insurance and maintenance costs in addition to
rental payments.
Future minimum lease payments under noncancelable operating leases are
summarized as follows: 2002, $12,495; 2003, $10,820; 2004, $7,582; 2005, $4,024;
2006, $3,137; $27,056 thereafter. Included in future minimum lease payments are
lease payments which have been accelerated (see Note 8). The accelerated lease
payments represent cash flow obligations for future periods as follows: 2002,
$1,137; 2003, $889; 2004 $597; 2005, $164; 2006, $14.
Rental expense under all operating leases was $14,368, $11,415, and $12,187 for
2001, 2000, and 1999, respectively.
On September 14, 2001, the Company executed an agreement for lease of its new
headquarters and consolidation of its Tampa operations. The Company has
classified the lease as an operating lease. Significant terms included the
prepayment of rent in the amount of $2.2 million. The prepayment is being
amortized over the 15 year term of the lease. The Company is required to make
minimum annual lease payments beginning September 14, 2001 of approximately $2.5
million for each of the 15 years. These lease payments are included in the above
future minimum lease payments under noncancellable operating leases.
LITIGATION
In the ordinary course of its business, the Company is, from time to time,
threatened with or named as a defendant in various lawsuits, including
discrimination, harassment and other similar claims. The Company maintains
insurance in such amounts and with such coverages and deductibles as management
believes are reasonable. The principal risks that the Company insures against
are workers' compensation, personal injury, bodily injury, property damage,
professional malpractice, errors and omissions, employment practices liability
and fidelity losses. The Company is not aware of any litigation that would
reasonably be expected to have a material adverse effect on its results of
operation or financial condition.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain executive
officers that provide for minimum compensation, salary and continuation of
certain benefits for a one to three year period under certain circumstances. The
agreements also provide for a payment of one to three times their annual salary
and average annual bonus if a change in control (as defined by the agreements)
of the Company occurs and include a covenant against competition with the
Company that extends for one year after termination for any reason. In addition,
the Company has entered into employment agreements with certain key employees
which provide for a payment of one to two times their annual salary and average
annual bonus if a change in control (as defined) of the Company occurs and
include a covenant against competition with the Company that extends for one
year after termination for any reason. The Company's liability at December 31,
2001, would have been approximately $7,055 in the event of a change in control
or $4,345 if all of the employees under contract were to be terminated by the
Company without good cause (as defined) under these contracts.
14. SEGMENT ANALYSIS
The Company reports segment information in accordance with SFAS 131,
"Disclosures about Segments of Enterprise and Related Information". SFAS 131
requires a management approach in determining reportable segments of an
organization. The management approach designates the internal organization that
is used by management for making operation decisions and addressing performance
as the source of determining the Company's reportable segments. Historically,
the Company's internal reporting followed its four functional service offerings,
which included: Information Technology, Finance and Accounting, Human Resources
and Operating Specialties. In January 2001, the Company reorganized its
management and reporting to include the results of Human Resources within the
Information Technology organizational structure. As of December 31, 2001, the
Company will refer to its Operating Specialties segment as Health and Life
Sciences to better reflect the mix of business in that segment. All prior period
information has been adjusted to reflect the effects of these changes.
46
Historically, and through December 31, 2001, the Company has generated only
sales and gross profit information on a functional basis. As such, asset
information by segment is not disclosed. Substantially all operations and
long-lived assets are located in the U.S.
Information concerning operations in these segments of business is as follows:
INFORMATION FINANCE & HEALTH AND
TECHNOLOGY ACCOUNTING LIFE SCIENCES TOTAL
----------- ---------- ------------- --------
2001
Sales............. $ 327,516 $182,459 $136,048 $646,023
Gross Profit...... 109,687 93,198 49,515 252,400
2000
Sales............. $ 465,545 $226,737 $102,715 $794,997
Gross Profit...... 190,693 132,023 38,840 361,556
1999
Sales............. $ 466,957 $205,646 $ 74,029 $746,632
Gross Profit...... 181,308 114,321 27,002 322,631
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
--------------------------------------------------------
MAR 31 JUN 30 SEPT 30 DEC 31
--------- --------- --------- ---------
Fiscal 2001
Net service revenues ................... $ 191,620 $ 172,937 $ 150,183 $ 131,283
Gross profit ........................... 80,100 69,075 57,401 45,824
Net income (loss) ...................... 2,843 1,809 40 (16,780)
Net income (loss) per share-basic ...... $ .09 $ .06 $ .00 $ (.53)
Net income (loss) per share-diluted .... $ .09 $ .06 $ .00 $ (.53)
Fiscal 2000
Net service revenues ................... $ 195,063 $ 197,661 $ 202,193 $ 200,080
Gross profit ........................... 88,201 91,618 93,627 88,110
Net income (loss) ...................... (2,395) 1,807 295 10
Net income (loss) per share-basic ...... $ (.05) $ .04 $ .01 $ .00
Net income (loss) per share-diluted .... $ (.05) $ .04 $ .01 $ .00
Fiscal 1999
Net service revenues ................... $ 184,095 $ 189,390 $ 191,707 $ 181,440
Gross profit ........................... 78,832 81,208 82,215 80,376
Net income (loss) ...................... 9,128 332 904 (33,880)
Net income (loss) per share-basic ...... $ .20 $ .01 $ .02 $ (.76)
Net income (loss) per share-diluted .... $ .20 $ .01 $ .02 $ (.76)
16. SEVERANCE COSTS
In the fourth quarter of 2001, the Company incurred expense of $2,299 for
severance costs pursuant to a plan communicated during the fourth quarter
relating to the termination of 69 corporate and field management and
administrative employees to align operating costs with its declining revenue
base. Of the total expense incurred, the total balance of $2,299 remained unpaid
and is reflected in Accrued payroll costs as of December 31, 2001.
17. SUBSEQUENT EVENT
Subsequent to December 31, 2001, the Company announced that executive
management, inside directors and certain other employees are voluntarily
reducing their salary and cash bonus potential in 2002 in exchange for
restricted stock. Approximately 224 shares were issued under this program. The
shares vest over a five year period with an acceleration clause if certain
Kforce common stock price thresholds are met.
47
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Romac International, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 8, 2000 appearing in this Form 10-K of Romac International, Inc.
also included an audit of the Financial Statement Schedule listed in Item 14 of
this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tampa, Florida
February 8, 2000
48
SCHEDULE II
KFORCE INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
SUPPLEMENTAL SCHEDULE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------- ------------ ------------------------- ---------- ----------
CHARGED TO ACQUIRED BALANCE AT
BALANCE AT COSTS AND RESERVE END OF
DESCRIPTION BEGINNING OF EXPENSES FROM ERS DEDUCTIONS PERIOD
----------- ------------ ---------- -------- ---------- ----------
Allowance Reserve
Trade Receivables ................ 1999 $ 5,762 $ 9,768 $ -- $11,113 $ 4,417
2000 4,417 7,106 4,874 6,649
2001 6,649 8,083 100 9,362 5,470
Notes Receivable ................. 2001 -- 1,976 -- 1,976
Receivables from officers
and related parties ............ 2001 -- 300 -- 300
49
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KFORCE INC
By: /s/ DAVID L. DUNKEL
Date: March 27, 2002 --------------------------
David L. Dunkel
Chairman of the Board,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 27, 2002 By: /s/ DAVID L. DUNKEL
-------------------------------------------
David L. Dunkel
Director and Chief Executive Officer
(Principal Executive Officer)
Date: March 27, 2002 By: /s/ WILLIAM L. SANDERS
-------------------------------------------
William L. Sanders
Sr. Vice President, Chief Financial Officer
and Secretary
(Principal Financial Officer)
Date: March 27, 2002 By: /s/ DAVID M. KELLY
-------------------------------------------
David M. Kelly
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
Date: March 27, 2002 By: /s/ JOHN N. ALLRED
-------------------------------------------
John N. Allred
Director
Date: March 27, 2002 By: /s/ W.R. CAREY, JR.
-------------------------------------------
W.R. Carey, Jr.
Director
Date: March 27, 2002 By: /s/ RICHARD M. COCCHIARO
-------------------------------------------
Richard M. Cocchiaro
Director
Date: March 27, 2002 By: /s/ TODD MANSFIELD
-------------------------------------------
Todd Mansfield
Director
Date: March 27, 2002 By: /s/ RALPH STRUZZIERO
-------------------------------------------
Ralph Struzziero
Director
Date: March 27, 2002 By: /s/ HOWARD W. SUTTER
-------------------------------------------
Howard W. Sutter
Vice President and Director
Date: March 27, 2002 By: /s/ GORDON TUNSTALL
-------------------------------------------
Gordon Tunstall
Director
Date: March 27, 2002 By: /s/ KARL VOGELER
-------------------------------------------
Karl Vogeler
Director
Date: March 27, 2002 By: /s/ MARK FURLONG
-------------------------------------------
Mark Furlong
Director
50
EXHIBIT INDEX
SEQUENTIAL
EXHIBIT NO. DESCRIPTION
3.1 Amended and Restated Articles of Incorporation(1)
3.1a Articles of Amendment to Articles of Incorporation
3.2 Amended and Restated Bylaws(1)
4.1 Rights Agreement, dated October 28, 1998, between Romac
International, Inc. and State Street Bank and Trust Company as
Rights Agent(2)
4.2 Amendment to Rights Agreement dated as of October 24, 2000(3)
4.3 Amended and Restated Credit Agreement among Certain Financial
Institutions, Bank of America NA (as the Administrative Agent)
and kforce.com, Inc. dated November 3, 2000(5)
4.4 First Amendment to Amended and Restated Credit Agreement dated
as of December 10, 2000
4.5 Second Amendment to Amended and Restated Credit Agreement
dated as of February 12, 2001(5)
4.6 Third Amendment to Amended and Restated Credit Agreement dated
as of January 1, 2002
10.1 Employment Agreement, dated as of March 1, 2000, between the
Registrant and David L. Dunkel(4)
10.2 Employment Agreement, dated as of March 1, 2000, between the
Registrant and William L. Sanders(4)
10.3 Employment Agreement, dated as of March 1, 2000, between the
Registrant and Joseph J. Liberatore(5)
10.4 Employment Agreement, dated as of March 1, 2000, between the
Registrant and Ken W. Pierce(5)
10.5 Employment Agreement, dated as of March 1, 2000, between the
Registrant and Lawrence J. Stanczak(5)
10.6 Romac International, Inc. Non-Employee Director Stock Option
Plan(6)
10.7 Source Services Corporation 401(k) and Profit Sharing
Retirement Savings Plan(7)
10.8 kforce.com Executive Investment Plan(8)
10.9 kforce.com, Inc. Stock Incentive Plan (as of April 1, 2001)(9)
10.10 Kforce Inc. 1999 Employee Stock Purchase Plan (as of August
2001)(10)
10.11 See Exhibits 4.4 through 4.6 for additional material contracts
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-91738) filed May 9, 1996.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
(File No. 000-26058), filed October 29, 1998.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
(File No. 000-26058), filed on November 3, 2000.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 000-26058) filed March 29, 2000.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 333-26058) filed March 29, 2001.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 333-50539) filed April 21, 1998.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 333-50543) filed April 21, 1998.
51
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 333-94563) filed January 13, 2000.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 333-60302) filed May 4, 2001.
(10) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (File No. 333-68212) filed August 23, 2001.
52