| KFORCE INC ITEM 1A RISK FACTORS Kforce may not be able to recruit and retain qualified personnel |
| Kforce depends upon the abilities of its staff to attract and retain personnel, particularly technical and professional personnel, who possess the skills and experience necessary to meet the staffing requirements of our clients |
| We must continually evaluate and upgrade our base of available qualified personnel to keep pace with changing client needs and emerging technologies |
| We expect competition for individuals with proven technical or professional skills for the foreseeable future |
| If qualified personnel are not available to us in sufficient numbers and upon economic terms acceptable to us, it could have a material detrimental effect on our business |
| Kforce’s current market share may decrease as a result of limited barriers to entry for new competitors and discontinuation of clients outsourcing of their staffing needs |
| Kforce faces significant competition in the markets we serve, and there are limited barriers to entry for new competitors |
| The competition among staffing services firms is intense |
| Kforce competes for potential clients with providers of outsourcing services, systems integrators, computer systems consultants, temporary personnel agencies, search firms and other providers of staffing services |
| A number of our competitors possess substantially greater resources than we do |
| From time to time we experience significant pressure from our clients to reduce price levels |
| During these periods, we may face increased competitive pricing pressures and may not be able to recruit the personnel necessary to fill our clients’ needs |
| We also face the risk that certain of our current and prospective clients will decide to provide similar services internally |
| There can be no assurance that we will continue to successfully compete |
| We rely on short-term contracts with most of our clients |
| Because long-term contracts are not a significant part of our business, future results cannot be reliably predicted by considering past trends or extrapolating past results |
| Further, our reliance on short-term contracts exerts continued pressure on us when we try to renew contracts with existing clients who may seek better terms at each renewal |
| Our “offshore” outsourcing solutions are limited |
| Many staffing customers are now seeking an “offshore” solution to support their technology and business process function and, as a result, a significant amount of technology and financial staffing may be replaced by “offshore” resources |
| Prior to January 31, 2006, we did not provide an “offshore” program |
| Subsequent to the acquisition of PCCI on January 31, 2006, we do provide a limited technology staffing solution through a location in the Philippines to certain clients of PCCI whose contracts were acquired in conjunction with the acquisition |
| There can be no assurance that we will be able to compete successfully against other “offshore” solution providers or that we will not lose significant market share and revenue |
| While our Technology staffing revenue increased throughout 2004 and 2005, and we believe that the long-term business catalyst of technology remain in place, there can be no assurance that spending in the sector will return to the levels seen over the last decade |
| We do not provide a Vendor Management System (“VMS”) solution |
| Many staffing customers are seeking to consolidate their use of staffing services through the use of VMS solutions |
| Kforce provides consultants to these clients through other staffing companies who utilize a VMS solution, but does not currently provide this service directly to its clients |
| There can be no assurance that we can continue to effectively compete with those companies that provide a VMS solution |
| 9 ______________________________________________________________________ [30]Table of Contents Currently, Kforce is unable to recruit enough nurses to meet our clients’ demands for nurse staffing services, limiting the potential growth of our healthcare staffing business |
| Kforce relies on its ability to attract, develop, and retain nurses and other healthcare personnel who possess the skills, experience and licensure necessary to meet the specified requirements of our healthcare staffing clients |
| We compete for healthcare staffing personnel with other temporary healthcare staffing companies, as well as actual and potential clients |
| Currently, there is a shortage of qualified nurses in most areas of the United States and competition for nursing personnel is increasing |
| At this time, we do not have enough nurses to meet our clients’ demands for our nurse staffing services |
| This shortage of nurses limits Kforce’s ability to grow our healthcare staffing business |
| Furthermore, we believe that the aging of the existing nurse population and declining enrollments in nursing schools will result in further competition for qualified nursing personnel |
| Decreases in patient occupancy at healthcare clients’ facilities may adversely affect the profitability of Kforce’s business |
| Demand for temporary healthcare staffing services is significantly affected by the general level of patient occupancy at healthcare clients’ facilities |
| As occupancy decreases, clients may reduce their use of temporary employees before undertaking layoffs of their regular employees |
| Kforce may also experience more competitive pricing pressure during periods of occupancy downturn |
| This reduction in occupancy could adversely affect the demand for services and Kforce’s profitability |
| There has been a significantly lessened demand for our healthcare staffing services in recent years |
| Although demand has improved for our healthcare staffing services during 2004 and 2005 there can be no assurance that such demand will remain at current levels |
| Significant legal actions, particularly relating to our healthcare staffing services, could subject Kforce to substantial uninsured liabilities |
| In recent years, healthcare providers have become subject to an increasing number of legal actions alleging malpractice, product liability or related legal theories |
| Many of these actions involve large claims and significant defense costs |
| In addition, we may be subject to claims related to torts or crimes committed by our employees or temporary staffing personnel |
| In some instances, we are required to indemnify clients against some or all of these risks |
| A failure of any of our employees or personnel to observe our policies and guidelines intended to reduce these risks, relevant client policies and guidelines or applicable federal, state or local laws, rules and regulations could result in negative publicity, payment of fines or other damages |
| To protect ourselves from the cost of these claims, we maintain professional malpractice liability insurance, fidelity insurance and general liability insurance coverage in amounts and with deductibles that we believe are appropriate for our operations |
| Our insurance coverage, however, may not cover all claims against us or continue to be available to us at a reasonable cost |
| If we are unable to maintain adequate insurance coverage, we may be exposed to substantial liabilities |
| The addition of offices and entry into new geographic markets may not occur on a timely basis or achieve anticipated financial results |
| Kforce’s growth depends in part on our ability to enter new vertical or geographic markets successfully |
| This expansion is dependent on a number of factors, including our ability to: • develop, recruit and maintain a base of qualified professionals within a new geographic market; • initiate, develop and sustain corporate client relationships in each new vertical or geographic market; • attract, hire, integrate and retain qualified sales and sales support employees; and • accurately assess the demand of a new market |
| The addition of new offices and entry into new vertical or geographic markets typically result in increases in operating expenses, primarily due to increased employee headcount |
| Expenses are incurred in advance of forecasted revenue, and there is typically a delay before our new employees reach full productivity |
| Additionally, demand for our services in new markets that we enter might also be less than we anticipate |
| If we are unable to enter new vertical or geographic markets in a cost-effective manner or if demand for our services in new markets does not meet or exceed our forecasts, our business, operating results and financial condition could be negatively impacted |
| In 2003, 2004 and 2005, we closed and consolidated offices to improve efficiency, and further closures or consolidation may occur depending on market and competitive conditions |
| 10 ______________________________________________________________________ [31]Table of Contents Competition for acquisition opportunities may restrict Kforce’s future growth by limiting our ability to make acquisitions at reasonable valuations |
| Kforce’s business strategy includes increasing market share and presence in the staffing industry through strategic acquisitions of companies that complement or enhance our business |
| We have historically faced competition for acquisitions |
| In the future, this could limit our ability to grow through acquisitions or could raise the prices of acquisitions and make them less accretive or possibly non-accretive to us |
| In addition, Kforce may be limited by its ability to obtain financing to consummate desirable acquisitions |
| Kforce may face difficulties integrating acquisitions into existing operations and acquisitions may be unsuccessful, involve significant cash expenditures or expose Kforce to unforeseen liabilities |
| Kforce continually evaluates opportunities to acquire staffing companies that complement or enhance our business and frequently has preliminary acquisition discussions with some of these companies |
| These acquisitions involve numerous risks, including: • potential loss of key employees or clients of acquired companies; • difficulties integrating acquired personnel and distinct cultures into a single business; • diversion of management attention from existing operations; and • assumption of liabilities and exposure to unforeseen liabilities of acquired companies |
| These acquisitions may also involve significant cash expenditures, debt incurrence, integration expenses and exposure to unforeseen liabilities that could have a material adverse effect on our financial condition and results of operations |
| Any acquisition may ultimately have a negative impact on our business and financial condition |
| Kforce faces significant employment liability risk |
| Kforce employs and places people in the workplaces of other businesses |
| An inherent risk of such activity includes possible claims of errors and omissions, misuse of client proprietary information, misappropriation of funds, discrimination and harassment, employment of illegal aliens, theft of client property, other criminal activity, torts or other claims |
| We have policies and guidelines in place to reduce our exposure to such risks |
| However, failure of any employee or personnel to follow these policies and guidelines may result in negative publicity, injunctive relief, payment by Kforce of monetary damages or fines or other material adverse effects upon our business |
| Moreover, we could be held responsible for the actions at a workplace of persons not under our immediate control |
| To reduce our exposure, we maintain insurance covering general liability, workers compensation claims, errors and omissions, and employee theft |
| Due to the nature of our assignments, in particular, access to client information systems and confidential information, and the potential liability with respect thereto, we may not be able to obtain insurance coverage in amounts adequate to cover any such liability on acceptable terms |
| In addition, we face various employment-related risks not covered by insurance, such as wage and hour laws and employment tax responsibility |
| Kforce may be adversely affected by government regulation of the staffing business |
| While we have had no material difficulty complying with regulations in the past, there can be no assurance that we will be able to continue to obtain all necessary licenses or approvals or that the cost of compliance will not prove to be material |
| If we fail to comply, such failure could materially adversely affect Kforce’s financial results |
| There are proposed changes in government visa rules that may materially impact our ability to bring foreign-born nurses to the United States |
| Our ability to bring nurses into the United States in the future may be severely impacted, which would affect our nurse staffing revenue |
| Kforce relies partially on foreign-born nurses in order to provide nurse staffing services to our healthcare customers |
| Kforce may be adversely affected by government regulation of the workplace |
| Part of our business entails employing individuals on a temporary basis and placing such individuals in clients’ workplaces |
| Increased government regulation of the workplace or of the employer-employee relationship could have a material adverse affect on Kforce |
| 11 ______________________________________________________________________ [32]Table of Contents If Kforce becomes subject to material liabilities under our self-insured programs, our financial results may be adversely affected |
| Kforce provides workers compensation coverage through a program that is partially self-insured |
| In addition, we provide medical coverage to our employees through a partially self-insured preferred provider organization |
| If we become subject to substantial uninsured workers compensation or medical coverage liabilities, our financial results may be adversely affected |
| Future changes in reimbursement trends could hamper our clients’ ability to pay Kforce |
| Many of Kforce’s healthcare clients are reimbursed under the federal Medicare program and state Medicaid programs for the services they provide |
| In recent years, federal and state governments have made significant changes in these programs that have reduced government rates |
| In addition, insurance companies and managed care organizations seek to control costs by requiring that healthcare providers, such as hospitals, discount their services in exchange for exclusive or preferred participation in their benefit plans |
| Future federal and state legislation or evolving commercial reimbursement trends may further reduce, or change conditions for, our clients’ reimbursement |
| Limitations on reimbursement could reduce our clients’ cash flow, hampering their ability to pay us |
| This situation could have a significant impact on our cash flow |
| Significant increases in payroll-related costs could adversely affect Kforce’s business |
| Kforce is required to pay a number of federal, state, and local payroll and related costs, including unemployment taxes, workers compensation and insurance, FICA, and Medicare, among others, for our employees |
| Significant increases in the effective rates of any payroll-related costs likely would have a material adverse effect upon Kforce |
| Costs could also increase as a result of health care reforms or the possible imposition of additional requirements and restrictions related to the placement of personnel |
| Recent federal and state legislative proposals have included provisions extending health insurance benefits to personnel who currently do not receive such benefits |
| We may not be able to increase the fees charged to our clients in a timely manner and in a sufficient amount to cover increased costs, if any such proposals are adopted |
| Kforce depends on the proper functioning of our information systems |
| Kforce is dependent on the proper functioning of information systems in operating its business |
| Critical information systems are used in every aspect of Kforce’s daily operations, most significantly, in the identification and matching of staffing resources to client assignments and in the customer billing and consultant payment functions |
| Kforce’s information systems are protected through physical and software safeguards including the use of a third party data processing center |
| However, Kforce and its systems are still vulnerable to natural disasters (we are headquartered in a hurricane prone area), fire, terrorist acts, power loss, telecommunications failures, physical or software break-ins, computer viruses and similar events |
| If our critical information systems fail or are otherwise unavailable, we would have to accomplish these functions manually, which could temporarily impact our ability to identify business opportunities quickly, to maintain billing and clinical records reliably, and to bill for services efficiently |
| In addition, we depend on third-party vendors for certain functions whose future performance and reliability we can not warranty |
| Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors and fraud, or in making all material information known in a timely manner to management |
| Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls will prevent all error and all fraud |
| A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met |
| Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs |
| Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Kforce have been detected |
| These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake |
| Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control |
| The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate |
| 12 ______________________________________________________________________ [33]Table of Contents Kforce may not be able to maintain sufficient cash flow or borrowing capacity to support operations |
| Kforce’s liquidity may be adversely impacted by covenants in our Credit Facility |
| On October 28, 2005, Kforce entered into a Seventh Amendment to the Credit Facility (the “Extended Credit Facility”) with a syndicate led by Bank of America |
| Under the Extended Credit Facility, Kforce’s maximum borrowings are limited to dlra100 million |
| In addition, Kforce has the right under the Extended Credit Facility to increase the maximum borrowings available to dlra140 million under an accordion feature |
| Borrowings under the Extended Credit Facility are limited to 85prca of eligible accounts receivable |
| Under the Extended Credit Facility, Kforce is required to meet certain minimum availability and fixed charge coverage ratio requirements |
| The Extended Credit Facility expires on November 3, 2010 |
| At no time during the existence of the Extended Credit Facility have we ever failed to meet the minimum availability and fixed charge coverage ratio requirements |
| If we did not comply with these financial covenants, such a breach of the Extended Credit Facility could materially adversely affect our liquidity and financial condition |
| Such lack of compliance could result, among other things, in the acceleration of all amounts borrowed under the Extended Credit Facility |
| See the Liquidity and Capital Resources section of Item 7 |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| Adverse results in tax audits could result in significant cash expenditures or exposure to unforeseen liabilities |
| Kforce is subject to periodic federal, state and local tax audits for various tax years |
| Although Kforce attempts to comply with all taxing authority regulations, adverse findings or assessments made by the taxing authorities as the result of an audit could have a material adverse affect on Kforce |
| Kforce’s success depends upon retaining the services of its management team |
| Kforce is highly dependent on its management team and expects that continued success will depend largely upon their efforts and abilities |
| The loss of the services of any key executive for any reason could have a material adverse effect upon Kforce |
| Success also depends upon our ability to identify, develop, and retain qualified operating employees; particularly management, client servicing, and candidate recruiting employees |
| Kforce expends significant resources in the recruiting and training of its employees, as the pool of available applicants for these positions is limited |
| The loss of some of our key operating employees could have an adverse effect on our operations, including our ability to establish and maintain client and candidate, professional and technical relationships |
| Kforce’s stock price may be volatile |
| Kforce’s common stock is traded on The NASDAQ Stock Market under the symbol “KFRC” |
| The market price of our stock has fluctuated substantially in the past and could fluctuate substantially in the future, based on a variety of factors, including our operating results, changes in general conditions in the economy, the financial markets, the employment services industry, or other developments affecting us, our clients, or our competitors, some of which may be unrelated to our performance |
| In addition, the stock market in general, especially the NASDAQ National Market tier, along with market prices for staffing companies, has experienced volatility that has often been unrelated to the operating performance of these companies |
| These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating results |
| Among other things, volatility in our stock price could mean that investors will not be able to sell their shares at or above the prices that they pay |
| The volatility also could impair our ability in the future to offer common stock as a source of additional capital or as consideration in the acquisition of other businesses |
| Provisions in Kforce’s articles and bylaws and under Florida law may have certain anti-takeover effects |
| Kforce’s articles of incorporation and bylaws and Florida law contain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination |
| In particular, our articles of incorporation provide for a staggered board of directors and permit the removal of directors only for cause |
| Additionally, management may issue up to 15 million shares of preferred stock, and fix the rights and preferences thereof, without a further vote of the shareholders |
| In addition, certain of our officers and managers have employment agreements containing certain provisions that call for substantial payments to be made to such employees in certain circumstances upon a change in control |
| Certain of these provisions may discourage a future acquisition of Kforce, including an acquisition in which shareholders might otherwise receive a premium for their shares |
| As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so |
| Moreover, the existence of these provisions may have a depressive effect on the market price of our common stock |