SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 24, 2002
KFORCE INC.
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FLORIDA 000-26058 59-3264661
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
1001 EAST PALM AVENUE, TAMPA, FLORIDA 33605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 552-5000
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(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
Kforce Inc. ("Kforce") is amending its audited financial statements and
related items (see below) as originally reported in its 2001 Annual Report on
Form 10-K to reflect the following additional disclosures in connection with the
following accounting standards adopted effective January 1, 2002:
- Transitional proforma disclosures in Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible
Assets"; and
- Application of the Emerging Issues Task Force Issue No. 01-14,
"Income Statement Characterization of Reimbursements Received
for Out of Pocket Expenses Incurred".
Items reported in Kforce's 2001 Annual Report on Form 10-K are amended
and restated herein in their entirety as indicated as follows within this
current report on Form 8-K:
Page
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 4-11
Item 14(a). Index to Consolidated Financial Statements and
Schedule 12-40
2
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 of this current report on
Form 8-K.
YEARS ENDED DECEMBER 31,
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2001 2000 1999 1998 1997
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net service revenues ............ $ 658,417 $ 805,020 $ 754,710 $ 685,704 $ 481,824
Direct costs of services ........ 406,017 443,464 432,079 394,123 256,213
--------- --------- --------- --------- ---------
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)
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(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
DECEMBER 31,
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2001 2000 1999 1998 1997
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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
Effective January 1, 2002, the Company reclassified reimbursable billable
expenses to revenue based on the issuance of an abstract from the Emerging
Issues Task Force, Issue No. 01-14, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred". Historically the
reimbursements were classified as a reduction of direct costs of services. The
Statement of Operations Data above has been adjusted to reflect the effects of
this reclassification. Billable expenses were $12.4 million, $10.0 million, $8.1
million, $5.6 million and $2.1 million for the years ended December 31, 2001,
2000, 1999, 1998 and 1997, respectively.
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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 included in this current
report on Form 8-K.
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 inclusive of
reimbursable billable expenses and 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 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.
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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 our
2001 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,
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2001 2000 1999
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Revenue by Segment:
Information Technology ........................ 50.3% 58.4% 62.5%
Finance & Accounting .......................... 27.8 28.2 27.3
Health & Life Sciences ........................ 21.9 13.4 10.2
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Net service revenues ............................. 100.0 100.0 100.0
Revenue by Time:
Flexible billings ............................. 86.6% 77.8% 80.8%
Search fees ................................... 13.4 22.2 19.2
----- ----- -----
Net service revenues ............................. 100.0 100.0 100.0
Gross profit ..................................... 38.3 44.9 42.7
Selling, general, and administrative expenses .... 37.2 42.5 45.9
(Loss) income before income taxes ................ (2.2) 0.1 (5.0)
Net loss ......................................... (1.8)% (0.0)% (3.1)%
NET SERVICE REVENUES. Net service revenues were $658.4 million, $805.0 million
and $754.7 million for the years ended December 31, 2001, 2000, and 1999,
respectively, decreasing by 18.2% during 2001 and increasing by 6.7% during
2000. The reasons for these changes are set forth below.
Effective January 1, 2002, the Company reclassified reimbursable billable
expenses to revenue based on the issuance of an abstract from the Emerging
Issues Task Force, Issue No. 01-14, "Income Statement Characterization of
Reimbursements Received for
5
Out-of-Pocket Expenses Incurred". Historically the reimbursements were
classified as a reduction of direct costs of services. The Consolidated
Statements of Operations and Comprehensive Income (Loss) have been adjusted to
reflect the effects of this reclassification. Billable expenses were $12.4
million, $10.0 million and $8.1 million for the years ended December 31, 2001,
2000, and 1999, respectively. The billable expenses are reflected entirely
within Flexible Billings.
FLEXIBLE BILLINGS. Flexible billings decreased 9.0% to $569.9 million in 2001
and increased 2.7% to $626.1 million in 2000 compared to $609.6 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. In addition, billable
expenses grew 23.7% in 2001 to $12.4 million and 24.1% in 2000 to $10.0 million
from $8.1 million in 1999. This increase is primarily attributable to the growth
in the Health and Life Sciences segment which typically has a higher proportion
of billable expenses than the other segments. 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 38.3% in 2001
compared to 44.9% in 2000 and 42.7% 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 37.2% in 2001 and 42.5% in 2000 compared to 45.9%
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
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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 2.6% in 2001, 2.3% for 2000 and 1.9% for 1999. The
increase in expense in 2001 and 2000 as compared to 1999 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
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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 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
8
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.
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 our 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.
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INCOME TAX AUDITS
We are currently undergoing a U.S. Internal Revenue Service audit for our 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 of our
2001 Annual Report on Form 10-K. These items could have a material adverse
effect on our operating results, borrowing capacity and cash position.
GOODWILL
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. Effective January 1,
2002, the Company discontinued the amortization of goodwill. At December 31,
2001, goodwill, net of accumulated amortization, was approximately $95.8
million. 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,
if any, could range from a nominal amount to an amount exceeding the majority of
existing goodwill.
A reconciliation of net loss and loss per share reported in the Consolidated
Statements of Operations to the proforma amounts adjusted for the exclusion of
goodwill amortization, net of the related tax effect is presented below. For
purposes of the calculation of the tax effect, the Company assumed a 38%
effective tax rate applied to the deductible goodwill. The proforma results
reflecting the exclusion of goodwill amortization have been prepared only to
demonstrate the impact of goodwill amortization on net income (loss) and
earnings (loss) per share and are for comparative purposes only. Amortization
of intangible assets, exclusive ofgoodwill, was immaterial for all periods
presented.
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YEARS ENDED
December 31, December 31, December 31,
2001 2000 1999
----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net loss $ (12,088) $ (283) $ (23,516)
Add: Goodwill amortization,
net of income tax 2,956 3,003 2,771
--------- --------- ---------
Adjusted net income (loss) $ (9,132) $ 2,720 $ (20,745)
========= ========= =========
Net loss per share - Basic
and Diluted $ (.38) $ (.01) $ (.53)
Add: Goodwill amortization
net of income tax .09 .07 .07
--------- --------- ---------
Adjusted net income (loss)
Per share - Basic and
Diluted $ (.29) $ .06 $ (.46)
========= ========= =========
NEW ACCOUNTING PRONOUNCEMENTS
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 our 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, which includes
discontinued operations, 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.
11
KFORCE INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
----
Independent Auditors' Reports.................................................. 13
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2001 and 2000..................... 15
Consolidated Statements of Operations and Comprehensive Income (Loss)-
Years ended December 31, 2001, 2000 and 1999............................... 16
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999........................................... 17
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2001, 2000 and 1999........................................... 19
Notes to Consolidated Financial Statements................................... 21
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts.............................. 40
12
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
(except for Note 18, as to which the date is May 24, 2002)
13
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
14
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.
15
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 ............................. $ 658,417 $ 805,020 $ 754,710
Direct costs of services ......................... 406,017 443,464 432,079
--------- --------- ---------
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.
16
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)
-------- -------- --------
17
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.
18
KFORCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 and 1999
(IN THOUSANDS)
ACCUMULATED OTHER
ADDITIONAL COMPREHENSIVE
PAID-IN INCOME(LOSS)
COMMON STOCK CAPITAL
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.
19
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.
20
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
21
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 inclusive of reimbursable billable
expenses and 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
22
earned upon the successful completion of the assignment. The Company'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. 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.
Effective January 1, 2002, the Company reclassified reimbursable billable
expenses to revenue based on the issuance of an abstract from the Emerging
Issues Task Force, Issue No. 01-14, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred". Historically the
reimbursements were classified as a reduction of direct costs of services. The
Consolidated Statements of Operations and Comprehensive Income (Loss) have been
adjusted to reflect the effects of this reclassification. Billable expenses
were $12,394, $10,023 and $8,078 for the years ended December 31, 2001, 2000
and 1999, respectively.
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
23
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.
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 (see Note 18 for proforma information excluding such goodwill
amortization).
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
24
------- -------
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.
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.
25
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 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
26
Current Assets $ 46
Intangible Assets 1,021
Goodwill 3,695
-------
Total assets acquired 4,762
Current Liabilities (701)
-------
Net assets acquired $ 4,061
=======
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 ...................................... $689,450 $840,763
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
27
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 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
28
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.
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 --
29
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.
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.
30
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.
31
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.
32
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.
33
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.
34
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.
35
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.
In January 2002, the Company reclassified billable expenses to revenue based on
the issuance of an abstract from the Emerging Issues Task Force, "Income
Statement Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred". Historically the reimbursements were classified as a
reduction of direct costs of services in the Consolidated Statements of
Operations and Comprehensive Income (Loss). All prior period information has
been adjusted to comparably reflect the effects of these changes.
36
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 LIFE
TECHNOLOGY ACCOUNTING SCIENCES TOTAL
----------- ---------- --------------- --------
2001
Sales ................... $331,160 $182,890 $144,367 $658,417
Gross Profit ............ 109,687 93,198 49,515 252,400
2000
Sales .................. $470,186 $227,004 $107,830 $805,020
Gross Profit ........... 190,693 132,023 38,840 361,556
1999
Sales .................. $472,006 $206,085 $ 76,619 $754,710
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 ...................... $195,290 $176,910 $152,691 $133,526
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 ...................... $196,976 $200,010 $204,863 $203,171
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 ...................... $185,870 $190,828 $194,046 $183,966
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.
37
18. GOODWILL AMORTIZATION
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective January 1, 2002. A reconciliation of net loss and loss per
share reported in the accompanying Consolidated Statements of Operations and
Comprehensive Income (Loss) to the proforma amounts adjusted for the exclusion
of goodwill amortization, net of the related tax effect follows. For
purposes of the calculation of the tax effect, the Company assumed a 38%
effective tax rate applied to the deductible goodwill. The proforma
results reflecting the exclusion of goodwill amortization have been prepared
only to demonstrate the impact of goodwill amortization on net income (loss)
and earnings (loss) per share and are for comparative purposes only.
Amortization of intangible assets, exclusive of goodwill, was immaterial for
all periods presented.
YEARS ENDED
-------------------------------------------
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
Reported net loss $(12,088) $ (283) $(23,516)
Add: Goodwill amortization,
net of income tax 2,956 3,003 2,771
-------- ------ --------
Adjusted net income (loss) $ (9,132) $2,720 $(20,745)
======== ====== ========
Net loss per share - Basic
and Diluted $ (.38) $ (.01) $ (.53)
Add: Goodwill amortization
net of income tax .09 .07 .07
-------- ------ --------
Adjusted net income (loss)
Per share - Basic and
Diluted $ (.29) $ .06 $ (.46)
======== ====== ========
38
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 8-K of Kforce Inc. (fka Romac
International, Inc.) also included an audit of the Financial Statement Schedule
listed in Item 14 of this Form 8-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
39
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 FROM 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
40
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
23.1 Consent of PricewaterhouseCoopers LLP independent certified public
accountants.
23.2 Consent of Deloitte & Touche LLP, independent auditors.
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KFORCE INC.
By: /s/ David L. Dunkel
-----------------------
David L. Dunkel
Chief Executive Officer
Date: May 23, 2002
42