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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(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,
1997
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 0-22869
HALL, KINION & ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0337705
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19925 Stevens Creek Boulevard 95014
Suite 180 (zip code)
CUPERTINO, CALIFORNIA
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 863-5720
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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
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of November 6, 1997:
8,990,688 shares of common stock.
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HALL, KINION & ASSOCIATES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION.......................................................... 3
Item 1. Financial Statements........................................................... 3
Condensed Consolidated Balance Sheets at September 30, 1997 and December 31,
1996........................................................................... 3
Condensed Consolidated Statements of Income for the three and nine months ended
September 30, 1997 and 1996.................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996.................................................... 5
Notes to Condensed Consolidated Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 7
PART II. OTHER INFORMATION.............................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............................ 11
Item 6. Exhibits and Reports on Form 8-K............................................... 11
SIGNATURES ............................................................................... 12
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
Current Assets: (UNAUDITED)
<S> <C> <C>
Cash and equivalents................................................. $10,285 $ 56
Investments.......................................................... 3,953 -
Accounts receivable, net of allowance for doubtful accounts of $439
at September 30, 1997 and $403 at December 31, 1996................. 12,251 7,621
Prepaid expenses and other current assets............................ 661 490
Prepaid income taxes................................................. 145 786
Deferred income taxes................................................ 612 340
------- -------
Total current assets............................................ 27,907 9,293
Property and equipment, net............................................ 5,078 4,431
Goodwill, net.......................................................... 8,827 9,054
Other assets........................................................... 264 216
------- -------
Total assets..................................................... $42,076 $22,994
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft...................................................... $ 405 $ 1,229
Line of credit...................................................... - 418
Accounts payable.................................................... 1,865 1,516
Accrued salaries, commissions, and related payroll taxes............ 3,240 2,255
Accrued liabilities................................................. 1,342 1,301
Current portion of long-term debt................................... 1,337 2,385
------- -------
Total current liabilities....................................... 8,189 9,104
Long-term debt......................................................... 3,542 6,738
------- -------
Total liabilities............................................... 11,731 15,842
------- -------
Redeemable convertible preferred stock................................. - 9,900
------- -------
Stockholders' Equity (Deficit):
Common stock, (par value $.001 per share; 100,000,000 shares
authorized; outstanding: 8,891,000 shares at September 30, 1997 and
6,339,000 shares at December 31, 1996)............................. 32,188 357
Stockholder notes receivable........................................... (6) (5,323)
Accumulated translation adjustment..................................... 1 (3)
Retained earnings (deficit)............................................ (1,838) 2,221
------- -------
Total stockholders' equity (deficit)............................. 30,345 (2,748)
------- -------
Total liabilities and stockholders' equity (deficit)................... $42,076 $22,994
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 1997 1996
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net Revenues:
Contract services................................. $ 21,357 $ 10,275 $ 58,779 $ 29,314
Permanent placement............................... 3,251 2,109 8,520 5,810
----------- ---------- ----------- ----------
Net revenues....................................... 24,608 12,384 67,299 35,124
Cost of contract services........................... 14,487 7,399 40,420 21,038
----------- ---------- ----------- ----------
Gross profit........................................ 10,121 4,985 26,879 14,086
Selling, general and administrative expenses........ 8,615 4,220 24,211 11,789
Other operating expenses............................ - 721 - 721
----------- ---------- ----------- ----------
Income from operations.............................. 1,506 44 2,668 1,576
Other income (expense).............................. (17) 123 (214) 305
----------- ---------- ----------- ----------
Income before income taxes.......................... 1,489 167 2,454 1,881
Income taxes........................................ 596 67 1,006 753
----------- ---------- ----------- ----------
Net income.......................................... $ 893 $ 100 $ 1,448 $ 1,128
=========== ========== =========== ==========
Net income per share................................ $0.09 $0.01 $0.15 $0.12
=========== ========== =========== ==========
Shares used in per share computation................ 10,258,000 9,652,000 9,856,000 9,417,000
=========== ========== =========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
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HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
-------------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 1,448 $ 1,128
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization................................. 933 248
Deferred income taxes......................................... (272) (4)
Interest on stockholder notes receivable...................... (202) (230)
Changes in assets and liabilities:
Accounts receivable.................................... (4,630) (1,164)
Prepaid expenses and other assets...................... (242) (375)
Prepaid income taxes................................... 641 (479)
Accounts payable and accrued expenses.................. 1,530 1,120
Income taxes payable................................... - (145)
------- -------
Net cash provided by (used for) operating activities (794) 99
------- -------
Cash flows from investing activities:
Purchase of property and equipment................................... (1,328) (981)
Investments.......................................................... (3,953) -
------- -------
Net cash used for investing activities..................... (5,281) (981)
------- -------
Cash flows from financing activities:
Cash overdraft, net.................................................. (824) 714
Line of credit, net.................................................. (418) (1,734)
Notes payable repayments............................................. (4,244) -
Proceeds from issuance of common stock, net of issuance costs........ 21,482 -
Proceeds from sale of preferred stock, net of issuance costs......... - 9,900
Proceeds from exercise of options.................................... 308 -
Stockholder notes receivable......................................... - (5,000)
------- -------
Net cash provided by financing activities............ 16,304 3,880
------- -------
Net increase in cash and equivalents....................................... 10,229 2,998
Cash and equivalents, beginning of period.................................. 56 4
------- -------
Cash and equivalents, end of period........................................ $10,285 $ 3,002
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest...................................................... $ 507 $ 29
Income taxes.................................................. $ 637 $ 500
Noncash transactions:
Payment of stockholder loans by stock......................... $ 5,518 -
Conversion of preferred stock to common stock................. $ 9,900 -
</TABLE>
See notes to condensed consolidated financial statements.
5
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HALL, KINION & ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION. The 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 statement of results for such interim periods. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules or regulations; however,
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
The interim results for the three and nine months ended September 30, 1997,
and 1996 are not necessarily indicative of results for the full year. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Prospectus
dated August 4, 1997.
The unaudited interim financial information as of September 30, 1997 and for
the nine months ended September 30, 1996 and 1997 has been prepared on the same
basis as the audited financial statements. In the opinion of management, such
unaudited information includes all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of this information.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
2. INITIAL PUBLIC OFFERING. In August 1997, the Company completed its initial
public offering of its common stock. Of the 2,892,250 shares of common stock
offered, 1,666,667 shares were sold by the Company and 1,225,583 shares were
sold by selling shareholders. The Company received approximately $23.2 million
of cash, net of underwriting discounts and commissions, and other expenses.
Simultaneously, all outstanding preferred stock were automatically converted
into an equal number of shares of common stock.
3. INVESTMENTS. Investments consist of high quality money market instruments
with original maturities greater than 90 days, but less than one year, and are
stated at fair value. At September 30, 1997, the Company's investments are all
classified as available for sale. Unrealized gains and losses on securities
classified as available-for-sale were not significant.
4. NET INCOME PER SHARE. Net income per share is based on the weighted average
number of common and dilutive common equivalent shares (common stock options
using the treasury stock method) during the periods presented. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, all stock
issued and options to purchase of common stock granted by the Company at a price
less that the initial public offering price of $15.00 per share) have been
included in the computation of common and common equivalent shares outstanding
for all periods presented.
5. EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards NO. 128, "Earnings per
Share" (SFAS 128). The Company is required to adopt SFAS 128 in the fourth
quarter of fiscal 1997 and will restate at that time earnings per share (EPS)
data for prior periods to conform with SFAS 128. Earlier application is not
permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
However, the SEC rules regarding share issuances and option and other rights
granted to acquire shares prior to an initial offering, as stated above, are
still applicable and such amounts are included in both basic and diluted EPS.
Pro forma amounts for basic and diluted EPS assuming SFAS 128 had been in
effect for the periods presented are as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic EPS...... $0.01 $0.10 $0.15 $0.18
Diluted EPS.... $0.01 $0.09 $0.12 $0.15
</TABLE>
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The statements contained in this Form 10-Q that are not purely historical are
forward looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's expectations,
beliefs, hopes, intentions or strategies regarding the future. All forward
looking statements in this Form 10-Q are based upon information available to the
Company as of the date hereof, and the Company assumes no obligation to update
any such forward looking statements. Actual results could differ materially
from the Company's current expectations. Factors that could cause or contribute
to such differences include, but are not limited to, the ability of the Company
to obtain additional financing, regulatory changes, uncertainty relating to the
performance of the United States economy, competition, demand for the Company's
services, litigation or other claims against the Company, the hiring, training
and retention of key employees and other factors and risks discussed in "Risk
Factors That May Affect Future Results" as well as those discussed elsewhere in
this Form 10-Q, and the risks discussed in the "Risk Factors" section of the
Company's Registration Statement on Form S-1, as amended, filed with the
Securities and Exchange Commission (Registration No. 333-28365).
OVERVIEW
Hall, Kinion & Associates, Inc. is a leading provider of specialized
information technology ("IT") professionals on a contract and permanent basis
and has more than 21 offices in 11 states and in one foreign country. To meet
the specialized needs of its clients, the Company provides its services through
distinct technology practice groups ("Practice Groups") organized around
specific technology (such as Windows, Unix, or CAD). The Company is organized
into two divisions: Contract Services, which has historically provided
supplemental IT professionals to R&D departments of high technology companies,
and Permanent Placement, which places IT professions in permanent positions. In
April 1994, the Stellar Group, Inc. and Kinion Hall companies under common
ownership, were merged with the Company and in December 1996, the Company
acquired certain assets of TeamAlliance Technology Partners, L.P.
(TeamAlliance). With the acquisition of TeamAlliance, the Company expanded its
Contract Services Division to provide professionals to IS departments of
corporate clients through a new IS Practice Group.
RESULTS OF OPERATIONS FOR EACH OF THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996
Contract services revenues were $21 million and $10 million for the three
months ended September 30, 1997 and 1996, respectively, increasing by 108%
during the three months ended September 30, 1997 compared to the same period in
1996. Contract services revenues were $59 million and $29 million for the nine
months ended September 30, 1997 and 1996, respectively, increasing by 101%
during the nine months ended September 30, 1997 compared to the same period in
1996. Permanent placement revenues were $3 million and $2 million for the three
months ended September 30, 1997 and 1996, respectively, increasing by 54% during
the three months ended September 30, 1997 compared to the same period in 1996.
Permanent placement revenues were $9 million and $6 million for the nine months
ended September 30, 1997 and 1996, respectively, increasing by 47% during the
nine months ended September 30, 1997 compared to the same period in 1996.
Overall revenue increases reflect continued improvement in demand for the
Company's services, which the Company believes is a result of increased
acceptance in the use of professional staffing services, growth in existing
regional markets, and the effect of the TeamAlliance acquisition.
Gross profit dollars from the Company's contract services represent revenues
less direct costs of services, which consists of payroll, payroll taxes and
insurance costs for contract employees. Gross profit dollars from permanent
placement services are equal to revenues, as there are no direct costs
associated with such revenues. Gross profit dollars for the Company's contract
services were $7 million and $18 million for the three and nine months ended
September 30, 1997, respectively, compared to $3 million and $8 million for the
comparable periods in 1996, increasing by 139% and 122% for the three and nine
months ended September 30, 1997, respectively. Gross profit amounts equaled 32%
and 31% of revenues for contract services for both the three and nine months
ended September 30, 1997, compared to 28% of contract service revenues for the
three and nine months ended September 30, 1996, which the Company believes
reflects its ability to adjust billing rates and wage rates to underlying market
conditions. Gross profit dollars for the Company's permanent placement division
were $3 million and $9 million for the three and nine months ended September 30,
1997, respectively, compared to $2 million and $6 million for the comparable
periods in 1996, increasing by 54% and 47% for the three and nine months ended
September 30, 1997, respectively. This increase was primarily due to an
increase in demand for the Company's permanent placement services.
7
<PAGE>
RESULTS OF OPERATIONS FOR EACH OF THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND 1996 (CONT'D)
Selling, general and administrative expenses were $9 million and $24 million
for the three and nine months ended September 30, 1997, respectively, compared
to $4 million and $12 million during the three an nine months ended September
30, 1996, respectively. Selling, general and administrative expenses as a
percentage of revenues were 35% and 36% for the three and nine months ended
September 30, 1997, respectively, compared to 34% for the same periods in 1996.
Selling, general and administrative expenses consist primarily of staff
compensation, advertising and occupancy costs, most of which generally follow
changes in revenues. This increase was primarily due to increased headcount and
operating expenses from integration of TeamAlliance and start up of new practice
groups in existing regional markets.
Interest income for the three months ended September 30, 1997 and 1996 was
$135,000 and $123,000 respectively, while interest expense for the three months
ended September 30, 1997 and 1996 was $152,000 and $1,000, respectively.
Interest income for the nine months ended September 30, 1997 and 1996 was
$308,000 and $330,000, respectively, while interest expense for the nine months
ended September 30, 1997 and 1996 was $507,000 and $29,000, respectively. These
changes reflect an increase in cash and equivalents and a decrease in
outstanding indebtedness due to cash proceeds received from the Company's
initial public offering.
The provision for income taxes for the three months ended September 30, 1997
was 40% and 41% for the nine months ended September 30,1997, compared to 40% for
both the three and nine months ended September 30, 1966. The increase for the
nine months ended September 30, 1997 compared to the nine months ended September
30, 1996 is due to changes in nondeductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
The change in Company's liquidity during the nine months ended September 30,
1997 is the net effect of funds generated by operations and the funds used for
the personnel services acquisitions, capital expenditures and principal payments
on outstanding notes payable. For the nine months ended September 30, 1997, the
Company used $.8 million from operations, used $5 million in investing
activities and provided $16 million by financing activities.
The Company's working capital at September 30, 1997 included $10.3 million in
cash and equivalents. The Company has a revolving line of credit facility
enabling the Company to borrow a stated percentage of eligible accounts
receivable up to a maximum of $12 million. While there can be no assurances in
this regard, the Company expects that internally generated cash plus the bank
revolving line of credit will be sufficient to support the working capital needs
of the Company, the Company's fixed payments and other obligations for the next
year. As of September 30, 1997, the Company had no material capital
commitments.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a number
of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form S-1, as amended, filed with the Securities and
Exchange Commission (Registration No. 333-28365).
ABILITY TO ATTRACT AND RETAIN QUALIFIED PROFESSIONALS. The Company's success
depends on its ability to attract and retain qualified IT professionals with the
technical skills and experience necessary to meet its clients' requirements for
technical personnel. Competition for individuals with proven technical skills,
particularly in Windows, Unix, CAD and other technology environments for which
the Company provides services, is intense, and the Company expects that
competition for IT professionals will increase in the future. Furthermore, IT
professionals typically provide services on an assignment-by-assignment basis
and can terminate an assignment with the Company at any time. The Company
competes for such individuals with other providers of technical staffing
services, system integrators, providers of outsourcing services, computer
consultants and temporary personnel agencies. Many of the IT professionals who
work for the Company also work with the Company's competitors, and there can be
no assurance that IT professionals currently working on projects for the Company
will not choose to work for competitors in future assignments. There also can
be no assurance that the Company will be able to attract and retain qualified IT
professionals in sufficient numbers in the future. The Company's net revenues
in any period are related, among other factors, to the number of IT
professionals it has on staff and engaged on assignments. If the Company is
unable to hire or retain such personnel, the Company's business, operating
results and financial condition would be materially adversely affected.
8
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RISKS INHERENT IN ADDITION OF PRACTICE GROUPS AND EXPANSION INTO NEW MARKETS.
The Company's growth depends on its ability to successfully expand existing
practice groups, add additional practice groups within it existing regional
markets and enter new regional markets. This expansion is dependent on a number
of factors, including the Company's ability to: attract, hire, integrate and
retain qualified revenue generating employees; develop, recruit and maintain a
base of qualified IT professionals within a regional market; accurately assess
the demand of a new market; and initiate, develop and sustain corporate client
relationships in each new regional market. There can be no assurance that the
addition of practice groups and entrance into new regional markets will occur on
a timely basis or achieve anticipated financial results. The addition of new
practice groups and entrance into new regional markets typically results in
increases in operating expenses, primarily due to increased headcount.
Expenses are incurred in advance of forecasted revenue, and there is typically a
delay before the Company's new recruiting personnel and sales employees reach
full productivity. If the Company is unable to add practice groups or enter
new regional markets in a cost-effective manner or if those practice groups and
regional markets do not achieve anticipated financial results, the Company's
business, operating results and financial condition could be materially
adversely affected.
FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY. The Company's quarterly
operating results have in the past and may in the future fluctuate significantly
depending on a number of factors, including but not limited to: the rate of
hiring and the productivity of revenue-generating personnel; the availability of
qualified IT professionals; changes in the relative mix between the Company's
contract services and permanent placement services; changes in the pricing of
the Company's services; the timing and rate of entrance into new regional
markets and the addition of practice groups; departures or temporary absences of
key revenue-generating personnel; the structure and timing of acquisitions;
changes in the demand for IT professionals; and general economic factors. In
addition, because the Company provides services on an assignment-by-assignment
basis, which clients can terminate at any time, there can be no assurance that
existing clients will continue to use the Company's services at historical
levels. Although the impact of seasonal factors will vary, the Company
experiences a certain amount of seasonality in its first quarter due primarily
to the number of holidays and the number of internal training and incentive
programs in the first quarter, which may reduce the number of days worked by IT
professionals and revenue-generating employees during such quarter. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as any
indication of future performance. In the event the Company's operating results
fall below the expectations of public market analysts and investors, the price
of the Company's Common Stock would likely be materially adversely affected.
Although the Company has experienced substantial revenue growth in recent years,
there can be no assurance that, in the future, the Company will sustain revenue
growth or profitability on a quarterly or annual basis at historical levels.
INTEGRATION OF TEAMALLIANCE. In December 1996, the Company acquired certain
assets of TeamAlliance, which was comprised of six affiliated but separate
entities that were located in five states. These management companies now
operate as a separate practice group within the Company's Contract Services
Division. The integration of TeamAlliance, its clients, IT professionals and
employees has required a significant amount of management time and attention,
and has resulted in significant integration-related expenses, including expenses
associated with training TeamAlliance employees and relocating certain
TeamAlliance offices. The Company expects that it may incur additional
integration related expenses in future periods, and there can be no assurance
that the integration of TeamAlliance will not involve disruptions or
difficulties, such as departures of clients, IT professionals or employees,
resulting in a material adverse impact on the Company's business, operating and
financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future business and operating
results depend in significant part upon the continued contribution of its key
employees and senior management personnel, many of whom would be difficult to
replace. The loss or temporary absence of any of the Company's senior
management, significant revenue generating employees, or other key personnel
and, in particular Brenda C. Hall, its Chief Executive Officer, or the inability
to attract and retain key employees or management personnel in the future, could
have a material adverse effect on the Company's business, operating results or
financial condition.
MANAGEMENT OF GROWTH. The Company has recently experienced a period of rapid
growth that has placed and will continue to place significant demands upon its
management and other resources. The Company's ability to effectively manage
future growth will require the Company to expand its operational, financial and
other internal systems. Implementing a new or expanded financial and management
information system can be time-consuming and expensive and require significant
management resources. There can be no assurance that the Company's current
personnel, systems, procedures and controls will be adequate to support the
Company's future operations or that any new system can be implemented
effectively. Any failure to manage its growth effectively could have a material
adverse effect on the Company's business, operating results and financial
condition.
9
<PAGE>
RISKS OF ACQUISITIONS. A component of the Company's growth strategy is the
acquisition of complementary businesses. The successful implementation of this
strategy is dependent upon the Company's ability to identify suitable
acquisition candidates, obtain requisite financing, acquire such companies on
suitable terms and integrate their operations successfully with those of the
Company. To date, the Company has completed one acquisition and there can be no
assurance that the Company will be able to identify additional suitable
acquisition candidates or that the Company will be able to acquire such
candidates on favorable terms.
Moreover, other providers of IT professional services are also competing for
acquisition candidates, which could result in an increase in the price of
acquisition targets and a diminished pool of companies available for
acquisition. Acquisitions also involve a number or other risks, including
adverse effects on the Company's reported operating results from increases in
amortized goodwill and interest expense, the diversion of management attention
and the subsequent integration of acquired businesses. To the extent the
Company seeks to acquire complementary businesses for cash, the Company may be
required to obtain additional financing and there can be no assurance such
financing will be available on favorable terms, if at all. Due to all the
foregoing, acquisitions may have a material adverse effect on the Company's
business, operating results and financial condition. In addition, if the
Company issues stock to complete any future acquisitions, existing stockholders
will experience further ownership dilution.
INDUSTRY AND GEOGRAPHIC CONCENTRATION. The Company's business is dependent on
the trends prevalent in, and the continue growth and rate of change of, the high
technology industry. In 1996, substantially all of the Company's net revenues
were derived by providing services to clients in the high technology industry.
A substantial deterioration in general economic conditions in Silicon Valley or
in the high technology industry as a whole would materially adversely affect the
Company's business, financial condition and operating results.
HIGHLY COMPETITIVE MARKET. The IT staffing industry is highly competitive and
fragmented and has low barriers to entry. The Company competes for potential
clients with providers of outsourcing services, systems integrators, computer
systems consultants, other providers of IT staffing services and temporary
personnel agencies. Many of the Company's current and potential competitors
have longer operating histories, significantly greater financial and marketing
resources, greater name recognition and a larger installed base of IT
professionals and clients than the Company. In addition, many of these
competitors, including numerous smaller privately held companies, may be able to
respond more quickly to customer requirements and to devote greater resources to
the marketing of services than the Company. Because there are relatively low
barriers to entry, the Company expects that competition will increase in the
future. Increased competition could result in price deductions, reduced margins
or loss of market share, any of which could materially and adversely affect the
Company's business, operating results and financial condition. Further, there
can be no assurance that the Company will be able to compete successfully
against current and future competitors or the competitive pressures faced by the
Company will not have a material adverse effect on its business, operating
results and financial condition.
CONCENTRATION OF OWNERSHIP BY PRINCIPAL STOCKHOLDERS. As of September 30,
1997, the Company's principal stockholders, Brenda C. Hall, Todd J. Kinion and
entities affiliated with the Sprout Group, beneficially owned approximately 67%
of the Company's outstanding shares of Common Stock. As a result, these
stockholders as a group will be able to exercise control over almost all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership could
have the effect of making it difficult for a third party to acquire control of
Company and may discourage third parties from attempting to do so.
LIABILITY RISKS. The Company is exposed to liability with respect to actions
taken by its IT professionals while on assignment, such as damages caused by
errors of IT professionals, misuse of client proprietary information or theft of
client property. The Company often indemnifies its clients from the foregoing.
Although the Company maintains insurance coverage, due to the nature of the
Company's assignments, and in particular the access by IT professionals to
client information systems and confidential information, and the potential
liability with respect thereto, there can be no assurance that such insurance
coverage will continue to be available on reasonable terms or that it will be
adequate to cover such liability. The Company may be exposed to claims of
discrimination and harassment and other similar claims as a result of
inappropriate actions allegedly taken against IT professionals by corporate
clients. As an employer, the Company is also exposed to possible claims of
wrongful discharge and violations of immigration laws. Employment related
claims may result in negative publicity, litigation and liability for money
damages and fines.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the shares of the
Company's Common Stock is highly volatile and may be significantly affected by
factors such as actual or anticipated fluctuations in the Company's operating
results, announcements of acquisitions by the Company or its competitors,
conditions or trends in the IT staffing industry or in technology stocks
generally, adoption of new tax and accounting standards affecting the IT
staffing industry, changes in financial estimates by security analysts, general
market conditions and other factors.
10
<PAGE>
POTENTIAL VOLATILITY OF STOCK PRICE (Cont'd.)
In addition, the technology sector of the stock market has experienced in recent
years significant price and volume fluctuations. Because the Company's business
is dependent on the trends prevalent in, and the continued growth and rate of
change of, the high technology industry, these broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
In the past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been brought
against that company. There can be no assurance that such litigation will not
occur in the future with respect to the Company. Such litigation could result
in substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS, DELAWARE LAW. The Company's Amended and Restated
Certification of Incorporation (the "Certificate") and Bylaws and Delaware law
contain certain provisions that could have the effect of delaying, deferring or
preventing an unsolicited change in control of the Company, which may adversely
affect the market price of the Common Stock or the ability of shareholders to
participate in a transaction in which they might otherwise receive a premium for
their shares over the then-current market price. Such provisions also may have
the effect of preventing changes in the management of the Company.
These provisions provide that all stockholder action must be taken at an annual
or special meeting of the stockholders, that only the Board of Directors may
call special meetings of the stockholders and that the Board of Directors be
divided in to three classes to serve for staggered three-year terms. In
addition, the Certificate authorizes the Board of Directors to issue up to
10,000,000 shares of preferred stock ("Preferred Stock") without shareholder
approval and on such terms as the Board of Directors may determine. Although no
shares of Preferred Stock are currently outstanding and the Company has no
present plans to issue any shares of Preferred Stock, the rights of the holders
of any Common Stock will be subject to, and may be adversely affected by, the
rights of holders of any Preferred Stock that may be issued in the future. In
addition the Company is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law, which could have the effect of delaying
or preventing a change of control of the Company.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 9, 1997, stockholders of the Company holding 7,936,704 shares of the
Company's capital stock, or approximately 99% of the then outstanding voting
stock of the Company, approved the following matters by written consent:
(i) a reorganization pursuant to which the Company would change its state
of incorporation from California to Delaware;
(ii) an amendment and restatement of the Certificate of Incorporation of
Company filed in connection with the closing of the Company's initial public
offering to, among other things, increase the authorized number of shares of
capital stock of the Company and divide the members of the Company's Board of
Directors into three separate classes and prove that the member or members of
each such class serve staggered three-year terms;
(iii) the form of indemnification agreements for the officers and
directors of the Company; and
(iv) the 1997 Stock Option Plan, Employee Stock Purchase Plan and IT
Professional Stock Option Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) The exhibits listed on the accompanying Exhibit Index are filed as part
hereof and are incorporated by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1997.
11
<PAGE>
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 thereunto duly authorized.
HALL, KINION & ASSOCIATES, INC.
Date: November 12 , 1997
By: /s/ Martin A. Kropelnicki
----------------------------
Martin A. Kropelnicki
Vice President, Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial
Officer)
12
<PAGE>
HALL, KINION & ASSOCIATES, INC
FORM 10-Q
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
- ------ ------------------- ----
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant,
which is incorporated herein by reference to Exhibit 3.4 to the
Registrant's Registration Statement on Form S-1, as amended
(Registration No. 333-28365), declared effective by the Securities and
Exchange Commission on August 4, 1997 (the "Registration Statement").
3.2 Bylaws of the Registrant, which is incorporated herein by reference to
Exhibit 3.3 to the Registrant's Registration Statement.
4.1 Investors' Rights Agreement, dated January 26, 1996, among the
Registrant, certain stockholders and investors named therein, which is
incorporated herein by reference to Exhibit 4.2 to the Registrant's
Registration Statement.
11.1 Computation of Net Income Per Share.......................................... 14
27.1 Financial Data Schedule...................................................... 15
</TABLE>
13
<PAGE>
EXHIBIT 11.1
HALL, KINION & ASSOCIATES, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Nine
Months Ended September 30, Months Ended September 30,
----------------------------- ----------------------------
1997 1996 1997 1996
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net income............................................. $ 893 $ 100 $1,448 $1,128
======= ====== ====== ======
Weighted average common shares outstanding (1)......... 8,542 7,882 8,110 7,707
Weighted average common share equivalents related to
stock options and warrants......................... 1,342 825 991 765
Common shares issued and stock options granted
(using the treasury stock method assuming an initial
public offering price of $15.00) between March 1996
and the initial public offering to Securities and
Exchange Commission rules........................... 374 945 755 945
------- ------ ------ ------
Shares used in per share computation................... 10,258 9,652 9,856 9,417
======= ====== ====== ======
Net income per share................................... $ 0.09 $0.01 $0.15 $0.12
======= ====== ====== ======
</TABLE>
(1) Including the effect of the conversion of mandatorily redeemable preferred
stock to common stock.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 10,285,000 56,000
<SECURITIES> 3,953,000 0
<RECEIVABLES> 12,251,000 7,621,000
<ALLOWANCES> (439,000) (403,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 27,907,000 9,293,000
<PP&E> 6,545,000 5,217,000
<DEPRECIATION> (1,467,000) (786,000)
<TOTAL-ASSETS> 42,076,000 22,994,000
<CURRENT-LIABILITIES> 8,189,000 9,104,000
<BONDS> 0 0
0 0
0 9,900,000
<COMMON> 32,188,000 357,000
<OTHER-SE> (6,000) (5,323,000)
<TOTAL-LIABILITY-AND-EQUITY> 42,076,000 22,994,000
<SALES> 67,299,000 50,571,000
<TOTAL-REVENUES> 67,299,000 50,571,000
<CGS> 40,420,000 30,342,000
<TOTAL-COSTS> 40,420,000 30,342,000
<OTHER-EXPENSES> 24,211,000 18,233,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 507,000 65,000
<INCOME-PRETAX> 2,454,000 2,365,000
<INCOME-TAX> 1,006,000 1,004,000
<INCOME-CONTINUING> 1,448,000 1,361,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,448,000 1,361,000
<EPS-PRIMARY> 0.15 0.14
<EPS-DILUTED> 0.15 0.14
</TABLE>
