1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30. 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
------------------------------
COMMISSION FILE NUMBER 0-26058
KFORCE INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3264661
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
120 WEST HYDE PARK PLACE
SUITE 150
TAMPA, FLORIDA 33606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP-CODE)
Registrant's telephone number, including area code: (813) 251-1700
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) had been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
As of August 8, 2001 the registrant had 31,389,983 shares of common stock, $.01
par value per share, issued and outstanding.
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2
ITEM 1. FINANCIAL STATEMENTS
KFORCE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
Assets:
Current Assets:
Cash and cash equivalents $ 854 $ 1,865
Trade receivables, net of allowance for doubtful accounts of $6,298 and
$6,649, respectively 103,776 125,931
Deferred tax asset, current 4,872 4,872
Prepaid expenses and other current assets 10,614 3,682
--------- ---------
Total current assets 120,116 136,350
Receivables from officers and related parties 1,058 1,058
Furniture and equipment, net 19,586 23,115
Deferred tax asset, non-current 1,292 1,250
Other assets, net 24,078 23,481
Goodwill, net of accumulated amortization of $15,186 and $13,135 respectively 90,713 92,764
--------- ---------
Total assets $ 256,843 $ 278,018
========= =========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable and other accrued liabilities $ 18,812 $ 17,464
Accrued payroll costs 31,045 37,778
Bank overdrafts 1,680 8,083
Income taxes payable 660 2,140
--------- ---------
Total current liabilities 52,197 65,465
Long term debt 38,000
45,000
Other long-term liabilities 12,066 12,516
--------- ---------
Total liabilities 102,263 122,981
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $.01; 15,000 shares authorized, none issued and outstanding -- --
Common stock, par value $.01; 250,000 shares authorized,
46,982 and 46,959 issued and outstanding, respectively 470 470
Additional paid-in-capital 188,775 191,007
Accumulated other comprehensive loss (344) (267)
Retained earnings 51,015 46,363
Less reacquired stock at cost; 15,492 and 14,802 shares, respectively (85,336) (82,536)
--------- ---------
Total stockholders' equity 154,580 155,037
--------- ---------
Total liabilities and stockholders' equity $ 256,843 $ 278,018
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
KFORCE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Net service revenues $ 172,937 $ 197,661 $ 364,557 $ 392,724
Direct costs of services 103,862 106,043 215,382 212,905
--------- --------- --------- ---------
Gross profit 69,075 91,618 149,175 179,819
Selling, general and administrative expenses 61,362 85,381 130,321 174,691
Depreciation and amortization expense 4,602 3,744 8,592 7,448
Other (income) expense, net (411) (586) 1,730 (1,269)
--------- --------- --------- ---------
Income (loss) before income taxes 3,522 3,079 8,532 (1,051)
Provision for (benefit from) income taxes 1,713 1,272 3,880 (463)
--------- --------- --------- ---------
Net income (loss) 1,809 1,807 4,652 (588)
Other comprehensive loss:
Foreign currency translation (15) (61) (15) (66)
Change in fair value of cash flow
hedges, net of taxes of $41 (62) -- (62) --
--------- --------- --------- ---------
Comprehensive income (loss) $ 1,732 $ 1,746 $ 4,575 $ (654)
========= ========= ========= =========
Net income (loss) per share- Basic $ 0.06 $ 0.04 $ 0.14 $ (.01)
========= ========= ========= =========
Weighted average shares outstanding- Basic 31,928 44,267 32,321 44,225
========= ========= ========= =========
Net income (loss) per share- Diluted $ 0.06 $ 0.04 $ 0.14 $ (.01)
========= ========= ========= =========
Weighted average shares outstanding- Diluted 32,739 44,969 32,714 44,225
========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
KFORCE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ 4,652 $ (588)
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 8,592 7,448
(Recovery of) provision for fallouts and bad
debts on accounts receivable (351) 2,482
Loss on asset sales/disposals 81 68
Increase in cash surrender value of life insurance (503) (3,018)
(Increase) decrease in operating assets:
Trade receivables 22,506 (18,004)
Prepaid expenses and other current assets (6,932) (1,498)
Other assets, net 309 649
Increase (decrease) in operating liabilities:
Accounts payable and other accrued liabilities 1,348 (7,778)
Accrued payroll costs (3,790) 3,680
Bank overdrafts (6,403) (1,454)
Income tax (payable) refund (1,475) 10,524
Other long-term liabilities (553) 660
-------- --------
Cash provided by (used in) operating activities 17,481 (6,829)
-------- --------
Cash flows from investing activities:
Capital expenditures, net (3,503) (2,351)
Payment on earnout settlements -- (1,221)
Proceeds from sale of furniture and equipment 5 84
-------- --------
Cash used in investing activities (3,498) (3,488)
-------- --------
Cash flows from financing activities:
(Payments on) proceeds from bank line of credit (7,000) 5,537
Payments on capital lease obligations -- (481)
Payments on notes payable to related parties -- (2,000)
Proceeds from exercise of stock options 79 2,501
Repurchase of common stock (8,058) (1,884)
-------- --------
Cash (used in) provided by financing activities (14,979) 3,673
-------- --------
Decrease in cash and cash equivalents (996) (6,644)
Cumulative translation adjustment (15) (66)
Cash and cash equivalents at December 31, 2000 1,865 7,919
-------- --------
Cash and cash equivalents at June 30, 2001 $ 854 $ 1,209
======== ========
Supplemental Cash Flows Information
Cash paid (refunded) during the period for:
Income taxes $ 5,348 $(10,987)
Interest 1,249 448
Supplemental Non Cash Flow Information
401(k) matching contribution 847 886
Deferred compensation plan contribution 1,017 --
Employee stock purchase plan contribution 1,079 --
Change in the fair value of cash flow hedges (62) --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
KFORCE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
COMMON ADDITIONAL OTHER RETAINED REACQUIRED TOTAL
STOCK PAID-IN COMPREHENSIVE EARNINGS STOCK STOCKHOLDERS'
CAPITAL INCOME EQUITY
Shares Amounts Shares Amounts
Balance at December 31, 2000 46,959 $ 470 $ 191,007 $ (267) $ 46,363 14,802 $(82,536) $ 155,037
Exercise of stock options 23 0 79 79
Disqualifying dispositions 4 4
401(k) matching contributions (502) (242) 1,349 847
Deferred compensation plan contribution (578) (328) 1,595 1,017
Employee stock purchase plan contribution (1,235) (415) 2,314 1,079
Foreign currency translation adjustment (15) (15)
Change in fair value of cash flow hedges (62) (62)
Net income 4,652 4,652
Repurchase of common stock 1,675 (8,058) (8,058)
------ ------- --------- ------- -------- ------ -------- ---------
Balance at June 30, 2001 46,982 $ 470 $ 188,775 $ (344) $ 51,015 15,492 $(85,336) $ 154,580
====== ======= ========= ======= ======== ====== ======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
KFORCE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The condensed consolidated financial statements
include the accounts of Kforce Inc. and its subsidiaries (the "Company"). All
material transactions and balances have been eliminated in consolidation.
Interim Financial Information. The condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in management's opinion, include all
adjustments necessary for a fair presentation of results for such interim
periods. Certain information and note disclosures normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted as permitted by applicable SEC rules and regulations; however, the
Company believes that the disclosures made are adequate to make the information
presented not misleading.
Reclassification. Certain amounts reported for prior periods have been
reclassified to be consistent with the current period presentation.
Revenue Recognition. Net service revenues consist of sales, net of credits,
discounts and fallout reserve. The Company recognizes flexible billings based on
hours worked by assigned personnel on a weekly basis. Search fees are recognized
in contingency search engagements upon the successful completion of the
assignment. Revenue from search fees is shown on the accompanying Condensed
Consolidated Statements of Operations and Other Comprehensive Income (Loss) net
of amounts written off for adjustments due to placed candidates not remaining in
employment for the guarantee period.
Cash and Cash Equivalents. The Company classifies all highly-liquid investments
with an initial maturity of three months or less as cash equivalents.
Self-insurance. The Company offers an employee benefit program for all eligible
employees for which it 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.
Income Taxes. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standard ("SFAS") 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 carrying amounts and the tax bases of
other assets and liabilities. The tax effects of deductions attributable to
employees' disqualifying dispositions of shares obtained from incentive stock
options are reflected in additional paid-in capital.
Earnings Per Share. Options to purchase 4,765 and 5,286 shares of common stock
were not included in the computation of diluted earnings per share during the
three and six month periods ended June 30, 2001, respectively, as compared to
3,509 and 3,032 shares for the same periods in 2000, because these options were
anti-dilutive. Options to purchase 2,383 and 2,176 shares of common stock were
included in the computation of diluted earnings per share during the three and
six month periods ended June 30, 2001, as compared to 2,847 shares for the three
month period ended June 30, 2000. As the result of a net loss for the six month
period ended June 30, 2000, options outstanding had no dilutive effect.
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.
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 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.
7
Accounting for Derivatives. In June 1998, SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", was issued. SFAS 133, as amended by SFAS
137 and 138, 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 June 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. 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 $62,000 net of income taxes, in other liabilities and
accumulated other comprehensive income (loss) as of June 30, 2001.
Recent 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 are completed after June
30, 2001. SFAS 142 is effective for fiscal years beginning after December 15,
2001 to all goodwill and other intangible assets recognized in an entity's
statement of financial position at that date, regardless of when the assets were
initially recognized. Beginning January 1, 2002, management anticipates the
Company will no longer amortize goodwill. At June 30, 2001, goodwill, net of
accumulated amortization, was approximately $90.7 million. Goodwill
amortization expense was $1.0 million and $2.1 million during the three and
six months ended June 30, 2001, respectively. The Company is currently
assessing the impact that SFAS 141 and SFAS 142 will have on its financial
position and results of operations.
8
NOTE B -- 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 Specialities. In January 2001, the Company reorganized its
management and reporting to include the results of Human Resources within the
Information Technology organizational structure. All prior period information
has been adjusted to reflect the effects of this change.
Historically, and through June 30, 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.
For the three months ended June 30,
Information Finance & Operating
Technology Accounting Specialties TOTAL
----------- ---------- ----------- ---------
2001
Sales $ 88,148 $ 50,450 $ 34,339 $ 172,937
Gross Profit 29,914 26,134 13,027 69,075
2000
Sales 117,874 55,829 23,958 197,661
Gross Profit 49,728 33,022 8,868 91,618
For the six months ended June 30,
Information Finance & Operating
Technology Accounting Specialties TOTAL
----------- ---------- ----------- ---------
2001
Sales $ 191,353 $ 106,576 $ 66,628 $ 364,557
Gross Profit 67,530 56,710 24,935 149,175
2000
Sales 231,966 113,098 47,660 392,724
Gross Profit 95,658 66,068 18,093 179,819
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements,
particularly with respect to the Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Additional written or oral forward-looking statements may be made by
the Company from time to time, in filings with the SEC or otherwise. Such
forward-looking statements are within the meaning of that term in Section 27A of
the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of
1934. Such statements may include, but may not be limited to, projections of
revenue, income, losses, cash flows, capital expenditures, plans for future
operations, the effects of interest rate variations, financing needs or plans,
plans relating to products or services of the Company, estimates concerning the
effects of litigation or other disputes, as well as assumptions to any of the
foregoing. In addition, when used in this discussion the words "anticipate",
"estimates", "expects", "intends", "plans", and variations thereof and similar
expressions are intended to identify forward looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which can not be predicted. Future events and actual results could
differ materially from those set forth in or underlying the forward looking
statements. Readers are cautioned not to place undue reliance on any forward
looking statements contained in this report which speak only as of the date of
this report. The Company undertakes no obligation to publicly publish the
results of any adjustments to these forward looking statements that may be made
to reflect events on or after the date of this report or to reflect the
occurrence of unexpected events.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's consolidated
statements of operations, as a percentage of net service revenues, for the
indicated periods:
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
Flexible billings 85.2% 76.0% 83.9% 76.4%
Search Fees 14.8 24.0 16.1 23.6
Net service revenues 100.0 100.0 100.0 100.0
Gross profit 39.9 46.4 40.9 45.8
Selling, general, and administrative expenses 35.5 43.2 35.7 44.5
Income (loss) before taxes 2.0 1.6 2.4 (0.3)
Net income (loss) 1.1 0.9 1.3 (0.1)
Results of Operations for Each of the Three and Six Months Ended June 30, 2001
and 2000
Net service revenues. Net service revenues decreased 12.5% and 7.2%,
respectively, to $172.9 million and $364.6 million for the three and six month
periods ending June 30, 2001 as compared $197.7 million and $392.7 million for
the same periods in 2000. The change is primarily comprised of a $3.0 million
decrease and $6.0 million increase in Flexible Billings and a decrease of $21.8
million and $34.2 million in Search Services for the three and six month periods
ending June 30, 2001, as described below.
Flexible Billings decreased 1.9% to $147.3 million and increased 2.0% to $305.9
million for the three and six month periods ending June 30, 2001, respectively,
as compared to $150.3 million and $299.9 million for the same periods in 2000.
The decrease in Flexible Billings for the three months ended June 30, 2001 is
attributable to a decrease in the number of hours billed of approximately 1.3%,
a decrease in the average bill rate of approximately 2.0% and the absence of
revenues from the Company's solutions business, kforce Consulting, which was
wound down in the first quarter of 2001. The increase in flexible billings for
the six months, as compared to the same period in 2000, is primarily
attributable to an increase in the number of hours billed of approximately 1.8%
partially offset by a slight decrease in the average bill rate and the closing
of kforce Consulting in the first quarter of 2001.
Search Fees decreased 46.0% and 36.8%, respectively to $25.6 million and $58.6
million for the three and six month periods ended June 30, 2001 as compared to
$47.4 and $92.8 million for the same periods in 2000. The decrease in revenue
for both the three and six month periods ended June 30, 2001 is primarily the
result of decreases in both the number of placements made of 45.0% and 37.2%,
respectively and the average fee for these placements of approximately 2.6% and
1.6%, respectively.
Gross profit. Gross profit decreased 24.6% and 17.0%, to $69.1 million and
$149.2 million during the three and six month periods ended June 30, 2001,
respectively, as compared to $91.6 million and $179.8 million for the same
periods in 2000. Gross
10
profit as a percentage of net service revenues decreased to 39.9% and 40.9%, for
the three and six month periods ending June 30, 2001, respectively, as compared
to 46.4% and 45.8% for the three and six month periods in 2000. The decrease in
the gross profit percentage for both the three and six month periods in 2001 is
primarily attributable to a change in revenue mix, with Search Services, which
has a higher gross profit margin, comprising 14.8% and 16.1% of total revenue
for the three and six month periods ended June 30, 2001 as compared to 24.0% and
23.6% for the same periods in 2000. Gross profit margin on Flexible Billings was
essentially flat for the three and six month periods, compared to the prior
year.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 28.1% and 25.4%, to $61.4 million and $130.3
million for the three and six month periods ended June 30, 2001, respectively,
as compared to $85.4 million and $174.7 million for the same periods in 2000.
Selling, general and administrative expenses as a percentage of net service
revenues decreased to 35.5% and 35.7%, for the three and six month periods ended
June 30, 2001, respectively, compared to 43.2% and 44.5% for the same periods in
2000. The decrease in selling, general and administrative expense as a
percentage of net service revenues in the three and six month periods ended June
30, 2001 resulted primarily from the benefits obtained from initiatives taken by
management to re-engineer and streamline back-office operations as well as
reductions in other selling, general and administrative expenses to better align
expenses with revenue.
Depreciation and amortization expense. Depreciation and amortization expense
increased 24.3% and 16.2%, to $4.6 million and $8.6 million for the three and
six month periods ended June 30, 2001, respectively, compared to $3.7 million
and $7.4 million for the same periods in 2000. Depreciation and amortization
expense as a percentage of net service revenues increased to 2.7% and 2.4%, for
the three and six month periods ended June 30, 2001, respectively, as compared
to 1.9% for both of the periods in 2000. The increase as a percentage of net
service revenues for both periods in 2001 as compared to the same periods in
2000 is due primarily to increased amortization of computer software utilized to
increase back office efficiency.
Other (income) expense, net. Other (income) expense, net, decreased 29.9% and
236.3% for the three and six months ended June 30, 2001 compared to the same
periods in 2000. The decrease in other income during both periods in 2001 as
compared to 2000 was due primarily to a decrease in interest income and an
increase in interest expense resulting from the increased borrowings and use of
available funds to repurchase $55.0 million of common stock in a modified Dutch
Auction Self Tender Offer completed in December 2000.
Income Before Taxes. Income before taxes increased for the three and six months
ended June 30, 2001 to $3.5 million and a $8.5 million, respectively, as
compared to income of $3.1 million and a $1.1 million loss for the same periods
in 2000, primarily as a result of the factors discussed above regarding revenues
and selling, general and administrative expenses.
Provision for income taxes. The provision for income taxes increased to $1.7
million and $3.9 million for the three and six month periods ended June 30, 2001
compared to $1.3 million and ($0.5) million for the same periods in 2000. The
effective tax rate was 45.5% for the six months ended June 30, 2001 compared to
44.1% for the same period in 2000. The increase in the effective tax rate in
2001 as compared to 2000 is primarily due to the effect of a slight increase in
the amount of non-deductible expenses from 2000 to 2001.
Net Income (Loss). Net income (Loss) increased to $1.8 million in the three
months ended June 30, 2001 and $4.7 million for the six months ended
June 30, 2001 as compared to the $1.8 million and ($0.6) million for the same
periods in 2000 primarily as a result of the factors discussed above related to
reductions in selling, general and administrative expense, partially offset by
the decrease in gross profit attributable to the decline in search fees.
Beginning in the first quarter of 2001, the Company incorporated the results of
its Human Resources business unit into the results of the Information Technology
business segment for reporting purposes. Results for the same time periods in
2000 have been adjusted for comparability.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, the Company's sources of liquidity included $0.8 million in
cash and cash equivalents, and $67.1 million in additional net working capital.
In addition, as of June 30, 2001, there was $38 million outstanding on the
Company's $90 million Amended and Restated Credit Facility Bank of America, N.A.
(the "Credit Facility"). This Credit Facility, which was entered into on
November 3, 2000, has a term of three years. The Credit Facility provides for a
maximum revolving credit facility of $90 million (not to exceed 85% of the
Company's "Eligible Receivables" as such term is defined in the Credit
Facility).
The Credit Facility contains a provision that limits the dollar amount of its
common stock the Company may repurchase subsequent to November 30, 2000 to $55
million. On February 12, 2001, the Credit Facility was amended to increase the
maximum amount of common stock the Company may repurchase to $72 million.
11
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. 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 $62,000 net of income taxes, in other liabilities and
accumulated other comprehensive income (loss) as of June 30, 2001.
During the six months ended June 30, 2001, cash flow provided by operations was
$17.5 million, excluding non-cash adjustments. Such amount resulted primarily
from a decrease in accounts receivable, which is partially offset by a decrease
in accrued liabilities and an increase in prepaid expenses and other current
assets. The decrease in accounts receivable reflects the decreased volume of
business during the first six months of 2001. The decrease in accrued
liabilities and the increase in prepaid expenses and other current assets are
primarily due to the timing of payments as well as prepayments and deposits of
$2.6 million relating to the construction of the new corporate headquarters.
For the six months ended June 30, 2001, cash flow used in investing activities
was $3.5 million, resulting primarily from capital expenditures.
During the six months ended June 30, 2001, cash flow used by financing
activities was $15.0 million primarily from the repayment of $7.0 million of
borrowings under the Company's Credit Facility and the repurchase of 1.7 million
shares of common stock for $8.1 million.
On March 11, 1999, the Company announced that its board of directors had
authorized the repurchase of up to $100 million of its common stock on the open
market, from time to time, depending on market conditions. As of June 30 and
August 8, 2001, respectively, the Company had repurchased approximately 16.1
million shares and 16.5 million shares under this plan. Approximately $7.2
million was available under current board authorization and $6.0 million was
available under the current Credit Facility limitations as of August 8, 2001.
Additional stock repurchases may have a material impact on the Company's cash
flow requirements for the next twelve months.
The Company believes that cash flow from operations and borrowings under its
Credit Facility, or other credit facilities that may become available to the
Company in the future, will be adequate to meet the working capital requirements
of current operations for at least the next twelve months. However, there is no
assurance (i) that the Company will be able to obtain financing in amounts
sufficient to meet its operating requirements or at terms which are satisfactory
and which allow the Company to remain competitive, or (ii) that the Company will
be able to meet the financial covenants contained in the Credit Facility. The
Company's expectation that existing resources will fund its 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates on its borrowings. The effect of a 1%
change in interest rates would currently have an annual impact of $160,000. The
Company does not engage in trading market risk sensitive instruments for
speculative purposes. The Company is managing its exposure to changes in
interest rates from its Credit Facility by entering into interest rate swap
agreements which allow it to convert $22 million of its debt from variable to
fixed interest rates. The Company believes that effects of changes in interest
rates or foreign currency are limited and would not have a material impact to
its operations.
12
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held June 18,
2001.
a) To amend the Company's Articles of Incorporation changing the
name of the Company from kforce.com, Inc. to Kforce Inc.
For 26,110,340: Against 86,846: Abstain 946.
b) To elect three Class I directors
The Election of Richard M. Cocchiaro as a Class I director.
For 25,764,125: Against 0: Abstain 438,007.
The Election of Ralph E. Struzziero as a Class I director.
For 25,631,779: Against 0: Abstain 566,353.
The Election of Howard W. Sutter as a Class I director.
For 25,827,339: Against 0: Abstain 370,793.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports:
The Company filed no reports on Form 8-K during the quarter
ended June 30, 2001.
13
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.
(Registrant)
By: /s/ William L. Sanders
------------------------------------------
William L. Sanders, Senior Vice President,
Chief Financial Officer
By: /s/ David M. Kelly
------------------------------------------
David M. Kelly, Vice President
Chief Accounting Officer
Date: August 9, 2001