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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 SEPTEMBER 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 __________
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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.)
1001 EAST PALM AVENUE
TAMPA, FLORIDA 33605
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP-CODE)
Registrant's telephone number, including area code: (813) 552-5000
------------------------------
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 November 13, 2001 the registrant had 30,523,885 shares of common stock,
$.01 par value per share, issued and outstanding.
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ITEM 1. FINANCIAL STATEMENTS
KFORCE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Assets:
Current Assets:
Cash and cash equivalents $ 120 $ 1,865
Trade receivables, net of allowance for doubtful accounts of $6,464 and
$6,649, respectively 92,922 125,931
Deferred tax asset, current 4,872 4,872
Prepaid expenses and other current assets 8,440 3,682
--------- ---------
Total current assets 106,354 136,350
Receivables from officers and related parties 1,058 1,058
Furniture and equipment, net 17,924 23,115
Deferred tax asset, non-current 1,472 1,250
Other assets, net 22,722 23,481
Goodwill, net of accumulated amortization of $16,211 and $13,135 respectively 89,688 92,764
--------- ---------
Total assets $ 239,218 $ 278,018
========= =========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts payable and other accrued liabilities $ 13,976 $ 17,464
Accrued payroll costs 25,051 37,778
Bank overdrafts 4,350 8,083
Income taxes payable 640 2,140
--------- ---------
Total current liabilities 44,017 65,465
Long term debt 36,603 45,000
Other long-term liabilities 9,988 12,516
--------- ---------
Total liabilities 90,608 122,981
--------- ---------
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,
46,998 and 46,959 issued and outstanding, respectively 470 470
Additional paid-in-capital 187,997 191,007
Accumulated other comprehensive loss (614) (267)
Retained earnings 51,054 46,363
Less reacquired stock at cost; 16,514 and 14,802 shares, respectively (90,297) (82,536)
--------- ---------
Total stockholders' equity 148,610 155,037
--------- ---------
Total liabilities and stockholders' equity $ 239,218 $ 278,018
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
KFORCE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net service revenues $ 150,183 $202,193 $ 514,740 $ 594,917
Direct costs of services 92,782 108,566 308,164 321,471
--------- -------- --------- ---------
Gross profit 57,401 93,627 206,576 273,446
Selling, general and administrative expenses 52,021 88,744 182,343 263,435
Depreciation and amortization expense 4,645 4,032 13,237 11,480
Other expense (income), net 660 464 2,390 (805)
--------- -------- --------- ---------
Income (loss) before income taxes 75 387 8,606 (664)
Provision for (benefit from) income taxes 35 92 3,915 (371)
--------- -------- --------- ---------
Net income (loss) 40 295 4,691 (293)
Other comprehensive income (loss):
Foreign currency translation -- 4 (15) (62)
Change in fair value of cash flow
hedges, net of taxes of $180 and $221 (270) -- (332) --
--------- -------- --------- ---------
Comprehensive income (loss) $ (230) $ 299 $ 4,344 $ (355)
========= ======== ========= =========
Net income (loss) per share - Basic $ 0.00 $ 0.01 $ 0.15 $ (0.01)
========= ======== ========= =========
Weighted average shares outstanding - Basic 31,635 43,284 31,992 43,860
========= ======== ========= =========
Net income (loss) per share- Diluted $ 0.00 $ 0.01 $ 0.14 $ (0.01)
========= ======== ========= =========
Weighted average shares outstanding - Diluted 32,397 43,376 32,518 43,860
========= ======== ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
KFORCE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 4,691 $ (293)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization 13,237 11,480
(Recovery of) provision for fallouts and bad debts
on accounts receivable (185) 3,791
Loss on asset sales/disposals 7 503
Decrease (increase) in cash surrender value of life insurance 2,523 (4,449)
(Increase) decrease in operating assets:
Trade receivables 33,194 (26,371)
Prepaid expenses and other current assets (4,758) (3,457)
Other assets, net (1,716) (231)
(Decrease) increase in operating liabilities:
Accounts payable and other accrued liabilities (3,487) (5,728)
Accrued payroll costs (10,077) 16,147
Bank overdrafts (3,734) (4,083)
Income tax (payable) refund (1,496) 21,912
Other long-term liabilities (2,293) 654
-------- --------
Cash provided by operating activities 25,906 9,875
-------- --------
Cash flows from investing activities:
Capital expenditures, net (5,070) (2,611)
Payment on earnout settlements -- (1,283)
Proceeds from sale of furniture and equipment 45 38
-------- --------
Cash used in investing activities (5,025) (3,856)
-------- --------
Cash flows from financing activities:
Payments on bank line of credit (8,397) --
Payments on capital lease obligations -- (481)
Payments on notes payable to related parties -- (2,000)
Proceeds from exercise of stock options 135 2,511
Repurchase of common stock (14,350) (11,633)
-------- --------
Cash used in financing activities (22,611) (11,603)
-------- --------
Decrease in cash and cash equivalents (1,730) (5,584)
Effect of foreign currency translation on cash (15) (62)
Cash and cash equivalents at December 31, 2000 1,865 7,919
-------- --------
Cash and cash equivalents at September 30, 2001 $ 120 $ 2,273
======== ========
Supplemental Cash Flows Information
Cash paid (refunded) during the period for:
Income taxes $ 5,405 $(21,920)
Interest 1,991 656
Supplemental Non Cash Flow Information
401(k) matching contribution 847 --
Deferred compensation plan contribution 788 --
Employee stock purchase plan contribution 1,805 --
Change in the fair value of cash flow hedges (332) --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
KFORCE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
COMMON ADDITIONAL OTHER
STOCK PAID-IN COMPREHENSIVE RETAINED
Shares Amounts CAPITAL LOSS EARNINGS
------- -------- --------- ------------- --------
Balance at December 31, 2000 46,959 $ 470 $ 191,007 $ (267) $46,363
Exercise of stock options 39 135
Disqualifying dispositions 4
401(k) matching contributions (502)
Deferred compensation plan contribution (571)
Employee stock purchase plan contribution (2,076)
Foreign currency translation adjustment (15)
Change in fair value of cash flow hedges (332)
Net income 4,691
Repurchase of common stock
------- -------- --------- ------- -------
Balance at September 30, 2001 46,998 $ 470 $ 187,997 $ (614) $51,054
======= ======== ========= ======= =======
REACQUIRED TOTAL
STOCK STOCKHOLDERS'
Shares Amounts EQUITY
------- -------- ------------
Balance at December 31, 2000 14,802 $(82,536) $155,037
Exercise of stock options 135
Disqualifying dispositions 4
401(k) matching contributions (242) 1,349 847
Deferred compensation plan contribution (246) 1,359 788
Employee stock purchase plan contribution (699) 3,881 1,805
Foreign currency translation adjustment 15)
Change in fair value of cash flow hedges (332)
Net income 4,691
Repurchase of common stock 2,899 (14,350) (14,350)
------ -------- --------
Balance at September 30, 2001 16,514 ($90,297) $148,610
====== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
KFORCE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The unaudited 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 unaudited 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 fallouts. 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 estimated
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 4,510 and 5,218 shares of common stock
were not included in the computation of diluted earnings per share during the
three and nine month periods ended September 30, 2001, respectively, as compared
to 5,481 and 7,253 shares for the same periods in 2000, because these options
were anti-dilutive. Options to purchase 2,224 and 2,281 shares of common stock
were included in the computation of diluted earnings per share during the three
and nine month periods ended September 30, 2001, as compared to 1,013 shares for
the three month period ended September 30, 2000. As the result of a net loss for
the nine month period ended September 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,"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 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 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 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 $332,000 net of income taxes, in other liabilities and
accumulated other comprehensive income (loss) as of September 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
September 30, 2001, goodwill, net of accumulated amortization, was approximately
$89.7 million. Goodwill amortization expense was $1.0 million and $3.1 million
during the three and nine months ended September 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.
In August 2001, the Financial Accounting Standards Board issued SFAS 143,
"Accounting for Asset Retirement Obligation". 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, 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.
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 September 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 September 30,
Information Finance & Operating
Technology Accounting Specialties TOTAL
----------- ----------- ----------- -----
2001
Sales $74,170 $41,321 $34,692 $150,183
Gross Profit 23,998 20,680 12,723 57,401
2000
Sales 117,962 57,553 26,678 202,193
Gross Profit 50,589 33,614 9,424 93,627
For the nine months ended September 30,
Information Finance & Operating
Technology Accounting Specialties TOTAL
----------- ----------- ----------- -----
2001
Sales $265,524 $147,896 $101,320 $514,740
Gross Profit 91,528 77,390 37,658 206,576
2000
Sales 349,928 170,651 74,338 594,917
Gross Profit 146,247 99,682 27,517 273,446
NOTE C - COMMITMENTS AND CONTINGENCIES
In June 2001, the Company purchased from a bank a $1.8 Million note receivable
from one of its former officers that it had previously guaranteed. This note is
classified in prepaid expenses and other current assets. The Company is
currently pursuing collection of this receivable.
On September 14, 2001, the Company executed an agreement for the lease of the
Company's 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
will be amortized over the 15 year term of the lease. In addition, the Company
capitalized $2.2 million of leasehold improvements that are being amortized over
the lease term, which approximates the estimated useful life of the assets. The
Company is required to make annual minimum lease payments beginning September
14, 2001 of approximately $2.0 million for each of the 15 years.
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 condensed
consolidated statements of operations, as a percentage of net service revenues,
for the indicated periods:
Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
Flexible billings 88.0% 77.2% 85.1% 76.7%
Search Fees 12.0 22.8 14.9 23.3
Net service revenues 100.0 100.0 100.0 100.0
Gross profit 38.2 46.3 40.1 46.0
Selling, general, and administrative expenses 34.6 43.9 35.4 44.3
Income (loss) before taxes 0.1 0.2 1.7 (0.1)
Net income (loss) 0.0 0.1 0.9 (0.1)
Results of Operations for Each of the Three and Nine Months Ended September 30,
2001 and 2000
Net service revenues. Net service revenues decreased 25.7% and 13.5%,
respectively, to $150.2 million and $514.7 million for the three and nine month
periods ending September 30, 2001 as compared $202.2 million and $594.9 million
for the same periods in 2000. The change is primarily comprised of a decrease of
$24.0 million and $18.0 million in Flexible Billings and a decrease of $28.0
million and $62.2 million in Search Services for the three and nine month
periods ended September 30, 2001, as described below.
Flexible Billings decreased 15.4% to $132.2 million and 3.9% to $438.1 million
for the three and nine month periods ending September 30, 2001, respectively, as
compared to $156.2 million and $456.1 million for the same periods in 2000. The
decrease in Flexible Billings for the three months ended September 30, 2001 is
attributable to a decrease in the number of hours billed of approximately 7.2%,
a decrease in the average bill rate of approximately 3.3% and the absence of
revenues from the Company's solutions business, kforce Consulting, which was
wound down in the first quarter of 2001. The decrease in flexible billings for
the nine months, as compared to the same period in 2000, is primarily
attributable to a decrease in the number of hours billed of approximately 9.9%,
a decrease in the average bill rate of approximately 6.3% and the closing of
kforce Consulting in the first quarter of 2001.
Search Fees decreased 60.9% and 44.8%, respectively to $18.0 million and $76.6
million for the three and nine month periods ended September 30, 2001 as
compared to $46.0 and $138.8 million for the same periods in 2000. The decrease
in revenue for both the three and nine month periods ended September 30, 2001 is
primarily the result of decreases in both the number of placements made of 58.9%
and 44.3%, respectively, and the average fee for these placements of
approximately 4.7% and 2.1%, respectively.
Gross profit. Gross profit decreased 38.7% and 24.4%, to $57.4 million and
$206.6 million during the three and nine month periods ended September 30, 2001,
respectively, as compared to $93.6 million and $273.4 million for the same
periods in 2000 as a result of the decline in net service revenue. Gross profit
as a percentage of net service revenues decreased to 38.2% and 40.1%, for the
three and nine month periods ending September 30, 2001, respectively, as
compared to 46.3% and 46.0% for the three and nine month periods in 2000. The
decrease in the gross profit percentage for both the three and nine month
periods in 2001 is primarily attributable to a change in revenue mix, with
Search Services, which has a higher gross profit margin, comprising 12.0% and
14.9% of total revenue for the three and nine month periods ended September 30,
2001, respectively, as compared to 22.8% and 23.3% for the same periods in 2000.
The gross profit percentage on Flexible Billings was essentially flat for the
three and nine month periods, compared to the prior year.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 41.4% and 30.8%, to $52.0 million and $182.3
million for the three and nine month periods ended September 30, 2001,
respectively, as compared to $88.7 million and $263.4 million for the same
periods in 2000. Selling, general and administrative expenses as a percentage of
net service revenues decreased to 34.6% and 35.4%, for the three and nine month
periods ended September 30, 2001, respectively, compared to 43.9% and 44.3% for
the same periods in 2000. 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 decrease in
selling, general and administrative expense as a percentage of net service
revenues in the three and nine month periods ended September 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 15.2% and 15.3%, to $4.6 million and $13.2 million for the three and
nine month periods ended September 30, 2001, respectively, compared to $4.0
million and $11.5 million for the same periods in 2000. Depreciation and
amortization expense as a percentage of net service revenues increased to 3.1%
and 2.6% for the three and nine month periods ended September 30, 2001,
respectively, as compared to 2.0% and 1.9%, for the same 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 and the decline in net service revenue.
Other expense (income), net. Other expense (income), net, increased 42.2% and
396.9% for the three and nine months ended September 30, 2001 compared to the
same periods in 2000. The increase in other expense 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 (loss) before income taxes. Income (loss) before income taxes decreased
for the three months ended September 30, 2001, to $0.01 million and increased
for the nine months ended September 30, 2001, to $8.6 million as compared to
income of $0.4 million and a loss of $0.6 million 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 (benefit from) income taxes. The provision for (benefit from)
income taxes decreased to $0.04 million and increased to $3.9 million for the
three and nine month periods ended September 30, 2001, compared to $0.1 million
and ($0.4) million for the same periods in 2000. The effective tax rate was
45.5% for the nine months ended September 30, 2001 compared to 55.9% for the
same period in 2000. The decrease in the effective tax rate in 2001, as compared
to 2000, is primarily due to the effect of non-deductible expenses in 2000.
Net income (loss). Net income (loss) decreased to $0.04 million in the three
months ended September 30, 2001 and increased to $4.7 million for the nine
months ended September 30, 2001 as compared to income of $0.3 million and a $0.3
million loss 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.
The Company continues to evaluate its operating costs and balance sheet accounts
to the extent its revenue base declines. Costs for consolidation of offices,
streamlining of operations, impairment of goodwill and other issues could
negatively affect net income for both the fourth quarter and the year by
significant amounts.
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 September 30, 2001, the Company's sources of liquidity included $0.1
million in cash and cash equivalents, and $62.2 million in additional net
working capital. In addition, as of September 30, 2001, there was $36.6 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 to $72 million. The Company is
finalizing arrangements with its bank for a $15 million increase in this
provision of the Credit Facility.
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 $332,000 net of income taxes, in other liabilities and
accumulated other comprehensive loss as of September 30, 2001.
During the nine months ended September 30, 2001, cash flow provided by
operations was $25.9 million. This 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 nine 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 $2.9 million relating
to the construction of the new corporate headquarters. The Company consolidated
its Tampa operations into its new corporate headquarters in September 2001.
For the nine months ended September 30, 2001, cash flow used in investing
activities was $5.0 million, resulting primarily from capital expenditures.
During the nine months ended September 30, 2001, cash flow used by financing
activities was $22.6 million primarily from the repayment of $8.4 million of
borrowings under the Company's Credit Facility and the repurchase of 2.9 million
shares of common stock for $14.4 million.
On March 11, 1999, the Company announced that its board of directors had
authorized the repurchase of up to $50 million of its 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 its common stock. As of September 30
and November 13, 2001, respectively, the Company had repurchased approximately
17.4 million shares and 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 November 13, 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. The Company does not
expect any costs or write-downs associated with the review of its operating
structure or balance sheet during the fourth quarter to have a material impact
on its ability to meet its working capital requirements. 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 changes in interest
rates on its borrowings. The effect of a 1% change in interest rates would
currently have an annual impact of $146,000. 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 on its operations.
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
None
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
September 30, 2001.
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: November 14, 2001