<PAGE>
Pursuant to Rule 424(b)(4)
Registration No. 333-28365
2,515,000 SHARES
[LOGO OF HALL KINION]
COMMON STOCK
Of the 2,515,000 shares of Common Stock offered hereby, 1,666,667 shares are
being sold by Hall, Kinion & Associates, Inc. ("Hall Kinion" or the "Company")
and 848,333 shares are being sold by the Selling Stockholders. The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. The
Common Stock has been approved for quotation on the Nasdaq National Market
under the symbol "HAKI."
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share. $15.00 $1.05 $13.95 $13.95
Total (3). $37,725,000 $2,640,750 $23,250,005 $11,834,245
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $900,000.
(3) Certain Selling Stockholders have granted to the Underwriters a 30-day
option to purchase up to 377,250 additional shares of Common Stock solely
to cover over-allotments, if any. If the Underwriters exercise this option
in full, the Price to Public will total $43,383,750, the Underwriting
Discount will total $3,036,863 and the Proceeds to Selling Stockholders
will total $17,096,882. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and their right to reject
any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about August 8, 1997.
----------------
MONTGOMERY SECURITIES
ROBERT W. BAIRD & CO.
Incorporated
THE ROBINSON-HUMPHREY COMPANY, INC.
August 4, 1997
<PAGE>
HALL KINION:
IT PROFESSIONALS FOR THE NEXT
GENERATION OF TECHNOLOGY
[LOGO OF HALL KINION]
The Staffing Solutions People
[COLLAGE OF FOUR DIFFERENT ABSTRACT IMAGES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION
IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus, including information under "Risk Factors." Except as
otherwise specified, all information contained in this Prospectus: (i) assumes
no exercise of the Underwriters' over-allotment option; (ii) assumes the
retirement of 800,000 shares of the Company's Common Stock in satisfaction of
certain promissory notes; and (iii) except in the Consolidated Financial
Statements, assumes that each outstanding share of Series A Preferred Stock of
the Company will be converted into one share of Common Stock upon the closing
of this Offering at an offering price of $15.00 per share. See "Description of
Capital Stock" and "Underwriting." References to the "TeamAlliance Acquisition"
refer to the acquisition by the Company of certain assets of TeamAlliance
Technology Partners L.P. and certain limited liability and management companies
(collectively,"TeamAlliance").
THE COMPANY
Hall, Kinion & Associates, Inc. is a leading provider of specialized
information technology ("IT") professionals on a contract and permanent basis
in 14 major technology centers located throughout the United States and in
London. The Company provides its services primarily to high technology
companies, such as software developers, computer systems manufacturers and
telecommunications suppliers, primarily for use in their development of next
generation products. These companies require highly skilled technical personnel
in their engineering, product development and quality assurance functional
areas (collectively, "R&D departments"). To meet the specialized needs of these
clients, the Company provides its services through distinct technology practice
groups ("Practice Groups") organized around specific technologies (such as
Windows, Unix or CAD) frequently used by such clients. The Company believes
that this specialization enables it to respond rapidly to its clients and
provide leading-edge technology assignments for its IT professionals. In 1996,
the Company placed contract and permanent IT professionals with an extensive
group of high technology clients, including Borland, Cisco Systems, Microsoft,
Oracle and numerous emerging growth technology clients, with no single client
representing more than 5.0% of net revenues. With the Company's acquisition of
TeamAlliance in December 1996, the Company expanded its service offerings to
include traditional IT professional services for information systems ("IS")
departments of corporate clients. The Company believes that the IS business
complements its core R&D business and allows the Company to further leverage
its specialized Practice Groups and its national presence.
The high technology industry continues to experience substantial growth and
rapid rates of innovation. These trends, combined with intense competition,
have placed pressure on high technology companies to shorten product life
cycles and the time-to-market of new products. The development of next
generation products, however, often requires significant and highly specialized
technical talent which may not be available internally. As a result, high
technology companies are frequently turning to supplemental sources of IT
professionals with expertise in current technologies. Furthermore, as new
technologies and systems are introduced, businesses which rely on them for
mission-critical functions must implement these systems within their already
complex computing environments. Consequently, IS departments are faced with the
challenge of finding qualified IT professionals to design, develop, deploy and
maintain their systems. To address these demands for contract and permanent IT
professionals, both R&D departments of high technology companies and IS
departments of large corporations are turning to IT professional service
companies to augment their existing operations. In July 1996, Dataquest
estimated that the size of the IT professional services market in the United
States in 1995 was approximately $44.3 billion. Dataquest estimates that this
market will grow at a compound annual rate of approximately 15.0%, reaching
approximately $89.2 billion by the year 2000.
The Company's objective is to provide efficient and high quality contract and
permanent IT professionals to R&D departments of high technology clients and IS
departments of corporate clients and to become the "agent
3
<PAGE>
of choice" for IT professionals. To achieve this objective, the Company: (i)
focuses on technology-driven clients that typically require IT professionals
with more highly specialized skill sets than traditional supplemental IT
personnel; (ii) provides specialized IT services through distinct Practice
Groups that are focused on specific technologies and that operate relatively
autonomously with their own sales forces and recruiting personnel; (iii)
pursues cross-selling opportunities between permanent placement and contract
services; (iv) seeks to attract and retain qualified IT professionals; and (v)
provides strong corporate support to its 14 regional markets.
In late 1994, the Company implemented a growth strategy intended to create a
network of offices in regional markets, each comprised of multiple Practice
Groups. Key elements of this growth strategy are to:
. ADD PRACTICE GROUPS TO EXISTING REGIONAL MARKETS. The Company currently
has 11 different types of Practice Groups. However, only one of the
Company's 14 regional markets has more than four types of Practice
Groups currently operating. As a result, the Company believes that there
is a substantial opportunity to increase the number of Practice Groups
within each of its existing regional markets. The Company has begun to
add permanent and R&D contract services Practice Groups to selected
regional markets entered through the TeamAlliance Acquisition.
. HIRE ADDITIONAL REVENUE-GENERATING EMPLOYEES FOR EXISTING PRACTICE
GROUPS. The Company believes there is potential for revenue growth from
the addition of technical recruiting agents and account managers in
existing Practice Groups. The addition of these employees represents
increased opportunities to generate revenues by servicing a greater
number of current and prospective clients and IT professionals.
. OPEN ADDITIONAL LOCATIONS IN NEW REGIONAL TECHNOLOGY MARKETS. A key
element of the Company's growth strategy is to continue to enter new
regional markets with a concentration of high technology companies. The
Company currently has Practice Groups in 14 regional markets, including
Silicon Valley, the Research Triangle and certain other high technology
markets. The Company is currently considering entering other technology
markets, such as Atlanta, Boston and Dallas, and may in the future
consider further international expansion beyond London.
. ACQUIRE COMPLEMENTARY BUSINESSES. The Company intends to explore the
potential acquisition of businesses that would provide it with: (i) new
technology practices; (ii) strategically complementary businesses; (iii)
new geographical presences; or (iv) international recruiting
capabilities. For example, as a result of the TeamAlliance Acquisition,
the Company expanded its Practice Groups to include traditional IS
contract services and entered five new regional markets.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company....... 1,666,667 shares
Common Stock offered by the Selling
Stockholders............................. 848,333 shares
Common Stock to be outstanding after the
Offering................................. 8,866,955 shares (1)
Use of proceeds........................... To repay outstanding indebtedness and for
working capital and other general
corporate purposes, including possible
acquisitions. See "Use of Proceeds."
Nasdaq National Market symbol............. HAKI
</TABLE>
- --------
(1) Assumes the conversion of each outstanding share of Series A Preferred
Stock of the Company into one share of Common Stock upon the closing of
this Offering at an initial public offering price of $15.00 per share. See
"Description of Capital Stock." Also assumes the retirement of 800,000
shares of the Company's Common Stock in satisfaction of certain promissory
notes. See "Certain Transactions." Excludes 2,438,186 shares of Common
Stock issuable upon exercise of outstanding stock options as of June 30,
1997 at a weighted average exercise price of $4.33 per share, and 250,000
shares of Common Stock issuable upon exercise of outstanding warrants at an
exercise price of $0.01 per share. Using the treasury stock method, the
outstanding options and warrants represent 1,648,644 shares of Common Stock
equivalents at an initial public offering price of $15.00 per share. Also
excludes: (i) 300,000 shares of Common Stock reserved for future grant
under the Company's 1997 Stock Option Plan; (ii) 350,000 shares of Common
Stock reserved for future grant under the Company's IT Professional Plan;
and (iii) 150,000 shares of Common Stock reserved for future issuance under
the Company's Employee Stock Purchase Plan. See "Management--1997 Stock
Option Plan," "--Employee Stock Purchase Plan," "--IT Professional Plan"
and Note 8 of Notes to Consolidated Financial Statements.
5
<PAGE>
SUMMARY CONSOLIDATED AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------- PRO FORMA ---------------
1992 1993 1994 1995 1996 1996 (1) 1996 1997
------ ------ ------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues............ $4,361 $9,780 $15,968 $29,385 $50,571 $65,091 $22,740 $42,691
Gross profit............ 2,058 3,394 5,240 10,176 20,229 24,237 9,101 16,758
Income (loss) from
operations............. (27) 125 262 1,307 1,996 1,697 1,532 1,162
Net income (loss)....... (107) 28 33 682 1,361 475 1,028 555
Net income (loss) per
share (2).............. $(0.01) $ -- $ -- $ 0.09 $ 0.14 $ 0.05 $ 0.11 $ 0.06
Shares used in per share
computations........... 7,356 7,356 7,356 7,401 9,480 9,480 9,070 9,632
SELECTED OPERATING DATA
(AT PERIOD END):
Regional markets........ 1 1 3 5 14 14 6 14
Total employees (3)..... 40 58 64 141 327 327 181 348
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------
ACTUAL PRO FORMA (4) AS ADJUSTED (5)
------- ------------- ---------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................ $ (850) $ (850) $19,000
Total assets............................. 26,826 26,826 40,661
Long-term debt........................... 5,998 5,998 3,498
Redeemable convertible preferred stock... 9,900 -- --
Total stockholders' equity (deficit)..... (2,190) 7,710 30,060
</TABLE>
- --------
(1) The pro forma consolidated statement of operations data reflects the
combined operations of the Company and TeamAlliance as if the acquisition,
which was completed on December 2, 1996, had been completed as of January
1, 1996. See "Unaudited Pro Forma Condensed Combining Statement of Income."
(2) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(3) Total employees excludes IT professionals performing contract assignments
for clients.
(4) Adjusted to reflect the conversion of all outstanding shares of Preferred
Stock into Common Stock.
(5) Adjusted to reflect the sale of 1,666,667 shares of Common Stock by the
Company hereby and the application of the estimated net proceeds therefrom.
Also reflects the tender of 800,000 shares of the Company's Common Stock in
payment of certain outstanding promissory notes. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Prospectus before purchasing the shares of
Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those projected in the forward-looking statements.
Factors that may cause such a difference include, but are not limited to,
those set forth in Risk Factors below and elsewhere in this Prospectus.
ABILITY TO ATTRACT AND RETAIN QUALIFIED IT 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 the 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, systems integrators, providers of
outsourcing services, computer consultants and temporary personnel agencies.
Many of the IT professionals who work with 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 on 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. See "Business--Business
Strategy," "--IT Professionals" and "--Competition."
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 its 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Growth Strategy."
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
7
<PAGE>
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. See "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's future business and operating results depend in significant
part upon the continued contributions 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, 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 and financial
condition. See "Management."
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 net revenues increased 72.1% from $29.4 million
in 1995 to $50.6 million in 1996, while headcount increased from 141 employees
to 327 employees in the same period. 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. See "Business--Growth Strategy."
8
<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 of
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 of 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. See "Business--Growth Strategy."
INDUSTRY AND GEOGRAPHIC CONCENTRATION
The Company's business is dependent on the trends prevalent in, and the
continued 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. In addition,
approximately 73.2% of the Company's net revenues in 1996 were derived from
services provided to clients located in Silicon Valley (56.9% on a pro forma
basis for the TeamAlliance Acquisition). A substantial deterioration in
general economic conditions in Silicon Valley or in the high technology
industry as a whole would materially and adversely affect the Company's
business, financial condition and operating results. See "Business--Clients."
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 reductions, 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 that competitive pressures faced by the
Company will not have a material adverse effect on its business, operating
results and financial condition. See "Business--Competition."
CONCENTRATION OF OWNERSHIP BY PRINCIPAL STOCKHOLDERS
Upon completion of this Offering, the Company's principal stockholders,
Brenda C. Hall, Todd J. Kinion and entities affiliated with the Sprout Group,
will beneficially own approximately 70.6% of the Company's outstanding shares
of Common Stock (approximately 66.5% if the over-allotment option is exercised
in full). 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 the
9
<PAGE>
Company and may discourage third parties from attempting to do so. See
"Management" and "Principal and Selling Stockholders."
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 any 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. See "Business--Employees."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial numbers of shares of Common Stock in the public market
after the Offering could adversely affect the market price of the Common
Stock. Upon completion of the Offering, the Company will have outstanding
8,866,955 shares of Common Stock. All of the 2,515,000 shares sold in this
Offering will be freely transferable as of the date of this Prospectus by
persons other than "affiliates" of the Company without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act") and an additional 28,550 shares held by an existing shareholder will be
eligible for sale in the public market in reliance on Rule 144(k) of the
Securities Act. The remaining 6,323,405 shares of Common Stock that will be
outstanding upon completion of this Offering (the "Restricted Shares") will be
held by officers, directors, employees, IT professionals and other
stockholders of the Company. The Restricted Shares were sold by the Company in
reliance upon exemptions from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act") and are "restricted securities"
under the Securities Act. Beginning 90 days after the date of this Prospectus,
46,048 shares will be eligible for sale in the public market subject to Rule
144 and Rule 701 under the Securities Act. Certain holders of Restricted
Shares have agreed not to sell their shares without the prior written consent
of Montgomery Securities for a period of 180 days from the date of this
Prospectus. Beginning 180 days after commencement of the Offering unless
earlier released, in whole or in part, by Montgomery Securities, 6,277,357
Restricted Shares that are subject to lock-up agreements will become eligible
for sale in the public market subject to Rule 144 and Rule 701 under the
Securities Act. As of June 30, 1997, 2,438,186 shares were issuable upon
exercise of currently outstanding options. Certain holders of such options
have agreed pursuant to existing agreements with the Company not to sell or
otherwise transfer or dispose of any Common Stock for a period of 180 days
from the date of this Prospectus. In addition, certain holders of such options
have additionally agreed not to sell any Common Stock acquired without the
prior written consent of Montgomery Securities for a period of 180 days from
the date of this Prospectus. As of June 30, 1997, 250,000 shares were issuable
upon exercise of currently outstanding warrants, all of which are also subject
to the lock-up agreements described above and will become eligible for sale in
the public markets subject to Rule 144 beginning 180 days after commencement
of this Offering unless earlier released, in whole or in part, by Montgomery
Securities. Upon completion of this Offering, certain holders of 5,886,221
shares of Common Stock and securities convertible into or exercisable for
shares of Common Stock have certain registration rights under a registration
rights agreement among such holders and the Company and certain other
agreements. In addition, following completion of the Offering, the Company
intends to register under the Securities Act approximately 3,238,186 shares of
Common Stock subject to outstanding stock options or reserved for issuance
under the Company's 1997 Stock Option Plan, IT Professional Stock Option Plan
and Employee Stock Purchase Plan (the "Stock Plans") as well as stock options
granted outside the Stock Plans. See "Management--1997 Stock Option Plan," "--
IT Professional Plan," "--Employee Stock Purchase Plan," "Principal and
Selling Stockholders," "Description of Capital Stock--Registration Rights,"
"Shares Eligible for Future Sale" and "Underwriting."
10
<PAGE>
NO PRIOR TRADING MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active trading market will
develop or be sustained after this Offering or that the market price of the
Company's Common Stock will not fall below the offering price. The initial
public offering price was determined through negotiations among the Company,
the Selling Stockholders and the Representatives of the Underwriters based on
several factors and may not be indicative of the market price of the Common
Stock after this Offering. The market price of the shares of Common Stock is
likely to be 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 securities analysts, general market
conditions and other factors. 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 following this Offering. See "--
Industry and Geographic Concentration" and "Underwriting."
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS, DELAWARE LAW
Upon completion of this Offering, the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") and Bylaws and Delaware law
contain 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 into 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 will be outstanding upon the
closing of this Offering and the Company has no present plans to issue any
shares of Preferred Stock, the rights of the holders of 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. See "Description of Capital Stock--Preferred
Stock" and "--Anti-Takeover Effects of Provisions of the Certificate of
Incorporation, Bylaws and Delaware Law."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors participating in this Offering will incur immediate, substantial
dilution in net tangible book value per share of $12.67 from the initial
public offering price per share. To the extent outstanding options or warrants
to purchase the Company's Common Stock are exercised, there will be further
dilution. See "Dilution."
11
<PAGE>
THE COMPANY
Hall Kinion was incorporated in December 1991 and reincorporated in Delaware
in July 1997. The Company's operations were located in the Silicon Valley from
inception and began expanding to additional regional markets in late 1994. The
Company currently provides specialized IT professionals on a contract and
permanent basis through 21 offices located in 14 major technology centers in
the United States and London.
In January 1996, entities affiliated with the Sprout Group ("Sprout")
purchased 1,600,000 shares of Series A Preferred Stock and warrants to
purchase an aggregate of up to 250,000 shares of Common Stock for an aggregate
purchase price of $10.0 million. In connection with this transaction, Brenda
C. Hall, the Company's Chief Executive Officer and a director of the Company,
and Todd J. Kinion, a former officer and a current director of the Company,
borrowed from the Company $3.0 million and $2.0 million, respectively,
pursuant to certain secured promissory notes. Ms. Hall and Mr. Kinion may pay
their respective promissory notes by tendering to the Company 480,000 and
320,000 shares of Common Stock, respectively. Ms. Hall and Mr. Kinion have
agreed to tender such shares in payment of the promissory notes upon
completion of this Offering. See "Certain Transactions."
The Company is organized into two divisions: Contract Services, which has
historically provided supplemental staffing to R&D departments of high
technology companies, and Permanent Placement, which provides IT professionals
for placement on a permanent basis. In December 1996, the Company completed
the TeamAlliance Acquisition for a cash payment of $4.2 million at the date of
acquisition and the issuance of 52,000 shares of the Company's Common Stock.
In addition, the Company has agreed to pay the principals an aggregate of an
additional $4.2 million in installments over a three-year period and to make
additional monthly installments during 1997 aggregating approximately $500,000
to certain management companies and their shareholders. With the TeamAlliance
Acquisition, the Company expanded its Contract Services Division to provide
supplemental IT professionals to IS departments of corporate clients. As a
result of the TeamAlliance Acquisition, the Company commenced operations in
five regional markets not previously served.
The Company's principal office is located at 19925 Stevens Creek Boulevard,
Cupertino, California 95014, and its telephone number is (408) 863-5600. The
Company's web site is located at www.hallkinion.com.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,666,667 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$22.4 million (at an initial public offering price of $15.00 per share) and
after deducting the underwriting discount and estimated offering expenses. The
Company expects to use approximately $7.3 million of the net proceeds to repay
outstanding indebtedness under its loan agreements with Comerica Bank--
California ("Comerica"), of which $4.4 million was incurred in connection with
the TeamAlliance Acquisition and the balance of such indebtedness was incurred
for working capital purposes. The Company also intends to repay a cash
overdraft in the amount of approximately $1.2 million. The Company intends to
use the remaining net proceeds for working capital and other corporate
purposes, including the possible acquisition of complementary businesses. The
Company has no current plans, agreements or commitments and is not currently
engaged in any negotiations with respect to any such acquisitions. Pending
such uses, the Company plans to invest the net proceeds in investment grade
interest-bearing securities.
Under its loan agreements with Comerica, the Company has outstanding
revolving loans, which bear interest at the bank's prime rate (8.5% as of June
30, 1997) plus 0.5%, and term loans, which bear interest at the bank's prime
rate plus 1.0% and become due and payable on November 15, 1998. As of June 30,
1997, borrowings under these loan agreements were $7.3 million, consisting of
$3.8 million under the revolving credit facility and $3.5 million under the
term loan facility.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
In addition, the Company's revolving line of credit agreement currently
restricts the Company's ability to pay cash dividends without the bank's
consent.
13
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of June 30, 1997: (i) on an actual basis; (ii) on a pro forma basis
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock; and (iii) as adjusted to reflect the receipt and the
application of the estimated net proceeds from this Offering of $22.4 million
at an initial public offering price of $15.00 per share after deducting the
estimated underwriting discount and offering expenses, and the tender of
800,000 shares of the Company's Common Stock in payment of certain outstanding
stockholder notes receivable.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
PRO AS
ACTUAL FORMA ADJUSTED
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt (1)................................. $ 7,400 $ 7,400 $ 1,385
======= ======= =======
Long-term debt (2).................................. $ 5,998 $ 5,998 $ 3,498
------- ------- -------
Redeemable convertible preferred stock: 1,600,000
shares, $0.001 par value, authorized, actual;
10,000,000 shares, authorized, pro forma and as
adjusted; 1,600,000 shares outstanding, actual; and
no shares outstanding, pro forma and as adjusted
(3)................................................ 9,900 -- --
------- ------- -------
Stockholders' equity (deficit):
Common stock; 10,000,000 shares, $0.001 par value,
authorized, actual; 100,000,000 shares, authorized,
pro forma and as adjusted; 6,400,288 shares
outstanding, actual; 8,000,288 shares outstanding,
pro forma; and 8,866,955 shares outstanding, as
adjusted (4)....................................... 521 10,421 32,761
Stockholder notes receivable........................ (5,496) (5,496) (6)
Accumulated translation adjustment.................. 9 9 9
Retained earnings (deficit)......................... 2,776 2,776 (2,704)
------- ------- -------
Total stockholders' equity (deficit).............. (2,190) 7,710 30,060
------- ------- -------
Total capitalization................................ $13,708 $13,708 $33,558
======= ======= =======
</TABLE>
- --------
(1) Short-term debt includes current portion of long-term debt, cash overdraft
and the line of credit.
(2) See Note 4 of Notes to Consolidated Financial Statements.
(3) See Note 7 of Notes to Consolidated Financial Statements.
(4) See Note 8 of Notes to Consolidated Financial Statements.
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
June 30, 1997 was $(1.7) million, or approximately $(0.21) per share. Pro
forma net tangible book value per share represents the amount of the Company's
stockholders' equity, less intangible assets, divided by the pro forma number
of shares of Common Stock outstanding after giving effect to the conversion of
all outstanding shares of Preferred Stock into shares of Common Stock upon
completion of this Offering.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in this
Offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of this Offering. After giving
effect to the sale of 1,666,667 shares of Common Stock in this Offering at an
initial public offering price of $15.00 per share and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company as of June 30, 1997 would have been $20.7 million, or $2.33 per share.
This represents an immediate increase in net tangible book value of $2.54 per
share to existing stockholders and an immediate dilution in net tangible book
value of $12.67 per share to purchasers of Common Stock in this Offering.
Investors participating in this Offering will incur immediate, substantial
dilution. This is illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $15.00
Pro forma net tangible book value per share as of June 30,
1997...................................................... $(0.21)
Increase per share attributable to new investors........... 2.54
------
Pro forma net tangible book value per share after the
Offering.................................................... 2.33
------
Net tangible book value dilution per share to new investors.. $12.67
======
</TABLE>
The following table sets forth as of June 30, 1997, after giving effect to
the conversion of all outstanding shares of Preferred Stock into Common Stock
upon completion of this Offering, the difference between the existing
stockholders and the purchasers of shares in the Offering with respect to the
number of shares purchased from the Company, the total consideration paid and
the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1)(2).................... 7,200,288 81.2% $10,421,000 29.4% $ 1.45
New stockholders........... 1,666,667 18.8 25,000,000 70.6 $15.00
--------- ----- ----------- -----
Totals (2)............... 8,866,955 100.0% $35,421,000 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) After giving effect to the tender of 800,000 shares of the Company's
Common Stock in payment of certain outstanding stockholder notes
receivable.
(2) The sale of shares by the Selling Stockholders in the Offering will cause
the number of shares held by the existing stockholders to be reduced to
6,351,955 or approximately 71.6% of the total number of shares, and will
increase the number of shares to be purchased by new stockholders to
2,515,000 or 28.4% of the total number of shares.
As of June 30, 1997, there were options outstanding to purchase a total of
2,438,186 shares of Common Stock at a weighted average exercise price of $4.33
per share and warrants to purchase 250,000 shares of Common Stock at an
exercise price of $0.01 per share. To the extent outstanding options or
warrants are exercised, there will be further dilution to new investors. See
"Management--1997 Stock Option Plan," "Certain Transactions" and Note 8 of
Notes to Consolidated Financial Statements.
15
<PAGE>
SELECTED CONSOLIDATED AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated and pro forma consolidated financial
data should be read in conjunction with the Company's consolidated and pro
forma consolidated financial statements and related notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this Prospectus. The consolidated statement
of operations data for the years ended December 31, 1994, 1995 and 1996, and
the consolidated balance sheet data at December 31, 1995 and 1996 are derived
from audited consolidated financial statements included elsewhere in this
Prospectus. The pro forma consolidated statement of operations data for the
year ended December 31, 1996 is derived from the unaudited pro forma condensed
combining statement of income included elsewhere in this Prospectus. The
consolidated balance sheet data at December 31, 1992 and 1993 and the
consolidated statement of operations data for the years ended December 31,
1992 and 1993 are derived from unaudited consolidated financial statements not
included in this Prospectus. The consolidated balance sheet data at December
31, 1994 is derived from audited consolidated financial statements not
included in this Prospectus. The consolidated balance sheet data at June 30,
1997 and the consolidated statement of operations data for the six months
ended June 30, 1996 and 1997 are derived from unaudited financial statements
included elsewhere in this Prospectus. The unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, contain all
adjustments, consisting of only normal recurring adjustments, necessary for
the fair presentation of the results of operations for such period.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, PRO FORMA JUNE 30,
----------------------------------------- --------- ---------------
1992 1993 1994 1995 1996 1996 (1) 1996 1997
------ ------ ------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues:
Contract services...... $3,070 $8,376 $14,222 $25,660 $42,254 $56,774 $19,039 $37,422
Permanent placement.... 1,291 1,404 1,746 3,725 8,317 8,317 3,701 5,269
------ ------ ------- ------- ------- ------- ------- -------
Total net revenues..... 4,361 9,780 15,968 29,385 50,571 65,091 22,740 42,691
Cost of contract
services............... 2,303 6,386 10,728 19,209 30,342 40,854 13,639 25,933
------ ------ ------- ------- ------- ------- ------- -------
Gross profit............ 2,058 3,394 5,240 10,176 20,229 24,237 9,101 16,758
Operating expenses:
Selling, general and
administrative
expenses.............. 2,085 3,269 4,978 8,869 17,412 21,719 7,569 15,596
Other operating
expenses.............. -- -- -- -- 821 821 -- --
------ ------ ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 2,085 3,269 4,978 8,869 18,233 22,540 7,569 15,596
------ ------ ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (27) 125 262 1,307 1,996 1,697 1,532 1,162
Other income (expense),
net.................... (20) (44) (203) (156) 369 (778) 183 (197)
------ ------ ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... (47) 81 59 1,151 2,365 919 1,715 965
Income taxes............ 60 53 26 469 1,004 444 687 410
------ ------ ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (107) $ 28 $ 33 $ 682 $ 1,361 $ 475 $ 1,028 $ 555
====== ====== ======= ======= ======= ======= ======= =======
Net income (loss) per
share (2).............. $(0.01) $ -- $ -- $ 0.09 $ 0.14 $ 0.05 $ 0.11 $ 0.06
====== ====== ======= ======= ======= ======= ======= =======
Shares used in per share
computation............ 7,356 7,356 7,356 7,401 9,480 9,480 9,070 9,632
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
---- ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)........ $135 $ 251 $ (209) $ (114) $ 189 $ (850)
Total assets..................... 780 1,700 2,572 5,680 22,994 26,826
Long-term debt................... 71 244 -- -- 6,738 5,998
Redeemable convertible preferred
stock........................... -- -- -- -- 9,900 9,900
Total stockholders' equity
(deficit)....................... 198 226 259 941 (2,748) (2,190)
</TABLE>
- -------
(1) The pro forma consolidated statement of operations data reflects the
combined operations of the Company and TeamAlliance as if the acquisition,
which was completed on December 2, 1996, had been completed on January 1,
1996. See "Unaudited Pro Forma Condensed Combining Statement of Income."
(2) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Hall, Kinion & Associates, Inc. provides specialized IT professionals in 14
major technology centers located throughout the United States and in London.
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 professionals
in permanent positions. With the acquisition of TeamAlliance in December 1996,
the Company expanded its Contract Services Division to provide IT
professionals to IS departments of corporate clients through a new IS Practice
Group.
During 1996, revenues from the Contract Services and Permanent Placement
Divisions accounted for 83.6% and 16.4% of net revenues, respectively. If the
TeamAlliance Acquisition had occurred on January 1, 1996, net revenues on a
pro forma basis for the Contract Services and Permanent Placement Divisions
would have accounted for 87.2% and 12.8% of 1996 net revenues, respectively.
During the six months ended June 30, 1997, revenues from the Contract
Services and Permanent Placement Divisions accounted for 87.7% and 12.3% of
net revenues, respectively.
The Company's net revenues are derived from hourly billings of IT
professionals performing contract assignments and fees received for permanent
placements. For contract services, assignments generally last from three to
nine months and revenues are recognized as services are provided. For its
permanent placement IT professionals, the Company receives a fee upon
placement of the candidate that is usually structured as a percentage of the
placed IT professional's first-year annual compensation. Permanent placement
revenues from these fees are recognized when the IT professional commences
employment.
Since late 1994, the Company has experienced rapid growth by adding
additional sales and recruiting employees, developing new Practice Groups and
entering new regional markets. As of December 31, 1994, the Company had 64
employees and seven Practice Groups in three regional markets. As of December
31, 1996, the Company had 327 employees and 42 Practice Groups in 14 regional
markets. During this two-year period, net revenues increased from $16.0
million to $50.6 million. Although contributing to the increase in net
revenues, the addition of new Practice Groups and the entry into new regional
markets resulted in substantial increases in operating expenses, primarily due
to increased headcount. These expenses are incurred in advance of any
recognized revenue and there is often a delay before the Company's new
recruiting personnel and sales employees reach full productivity.
The Company's gross profit margins are affected by changes in the mix of
services provided between Contract Services and Permanent Placement.
Consistent with industry practice, the Company recognizes all costs related to
permanent placement revenues as operating expenses. Accordingly, all costs of
revenues, which include compensation, statutory and other benefits, including
vacation days of IT professionals, and other direct costs of providing
services to clients, are associated with contract services. Because the
Company reports 100% gross margin for permanent placement revenues, changes in
the mix between permanent placement and contract services revenues can have a
significant effect on the Company's gross margins and operating expenses.
In December 1996, the Company completed the TeamAlliance Acquisition for a
cash payment of $4.2 million at the date of acquisition and the issuance of
52,000 shares of the Company's Common Stock. In addition, the Company has
agreed to pay the principals an aggregate of an additional $4.2 million in
installments over a three-year period and to make additional monthly
installments aggregating $500,000 to certain management companies and their
shareholders during 1997. With the acquisition of TeamAlliance, the Company
entered five new regional markets. The acquisition was accounted for under the
purchase method of accounting and, accordingly, the purchase price in excess
of the net tangible book value was allocated to goodwill. Such goodwill is
being amortized over 30 years. See Notes 1 and 2 of Notes to Consolidated
Financial Statements.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth as a percentage of net revenues, except as
otherwise noted, the Company's results of operations for the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ----------------
1994 1995 1996 1996 1997
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues:
Contract services............... 89.1 % 87.3 % 83.6% 83.7% 87.7 %
Permanent placement............. 10.9 12.7 16.4 16.3 12.3
----- ----- ----- ------- -------
Total net revenues............ 100.0 100.0 100.0 100.0 100.0
Cost of contract services......... 67.2 65.4 60.0 60.0 60.7
----- ----- ----- ------- -------
Gross profit(1)................... 32.8 34.6 40.0 40.0 39.3
Selling, general administrative
expenses......................... 31.2 30.2 34.4 33.3 36.5
Other operating expenses.......... -- -- 1.6 -- --
----- ----- ----- ------- -------
Income from operations............ 1.6 4.4 4.0 6.7 2.8
Other income (expense), net....... (1.3) (0.5) 0.7 0.8 (0.5)
----- ----- ----- ------- -------
Income before income taxes........ 0.3 % 3.9 % 4.7% 7.5% 2.3 %
===== ===== ===== ======= =======
</TABLE>
- --------
(1) Gross profit for contract services excluding permanent placement revenues
(as a percentage of net contract services revenues) was 24.6%, 25.1% and
28.2% for years ended December 31, 1994, 1995 and 1996, respectively, and
28.4% and 30.7% for the six months ended June 30, 1996 and 1997,
respectively.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net revenues. Net revenues increased $19.9 million, or 87.7%, from $22.7
million for the six months ended June 30, 1996, to $42.7 million for the six
months ended June 30, 1997. The Company's net revenues from contract services
increased by $18.4 million, or 96.6%, and net revenues from permanent
placements increased by $1.6 million, or 42.4%, in the first half of 1997 from
the first half of 1996. The increase in revenue from contract services was
primarily due to revenues associated with the TeamAlliance Acquisition, growth
in existing regional markets including the addition of new Practice Groups,
and to a lesser extent, an increase in average hourly billing rates charged
for the Company's IT professionals. The Company also realized an increase in
revenues from permanent placements due primarily to the addition of revenues
from regional markets entered in 1996 and growth in sales within existing
regional markets.
Gross profit. Gross profit increased $7.7 million, or 84.1%, from $9.1
million for the first six months of 1996 to $16.8 million for the first six
months of 1997. As a percentage of net revenues, gross profits decreased to
39.3% in the first half of 1997 from 40.0% in the first half of 1996. This
decrease was primarily due to a change in the mix between contract services
and permanent placements. Contract services revenues increased as a percentage
of net revenues from 83.7% in the first six months of 1996 to 87.7% in the
first six months of 1997, while permanent placement revenues decreased as a
percentage of net revenues from 16.3% in the first half of 1996 to 12.3% in
the first half of 1997. Permanent placement revenues decreased as a percentage
of net revenues due primarily to the addition of the TeamAlliance operations.
Gross profit for contract services excluding permanent placement revenues
(as a percentage of net contract services revenues) increased to 30.7% in the
first six months of 1997 from 28.4% in the first six months of 1996. This
increase was primarily due to an increase in average hourly billing rates
charged for the Company's IT professionals.
Operating expenses. Operating expenses increased $8.0 million, or 106.1%,
from $7.6 million for the six months ended June 30, 1996 to $15.6 million for
the six months ended June 30, 1997. As a percentage of net revenues, operating
expenses increased to 36.5% in the first half of 1997 from 33.3% in the first
half of 1996.
18
<PAGE>
This increase was primarily due to increased headcount and operating expenses
from the integration of the TeamAlliance operations, including training costs
and office relocation costs incurred in the Houston, Tampa and Chicago
regional markets and in connection with relocating the Company's corporate
headquarters to Cupertino, California. To a lesser extent, operating expenses
increased due to expenses incurred from the addition of a permanent placement
Practice Group in Houston and the opening of a new office in Foster City,
California.
Other income (expense), net. Other expense was $197,000 for the first six
months of 1997 compared to other income of $183,000 for the first six months
of 1996. This decrease in other income was primarily due to an increase in
interest expense to $345,000 for the first six months of 1997 compared to
$29,000 in the first six months of 1996. This expense primarily reflects
indebtedness incurred in connection with the TeamAlliance Acquisition and for
additional working capital purposes. The Company's interest expense is
partially offset by interest income from certain secured promissory notes of
Ms. Hall and Mr. Kinion.
Income Taxes. Income taxes as a percentage of income before taxes were 42.5%
and 40.1% for the six month periods ending June 30, 1997 and June 30, 1996,
respectively. The Company's income taxes as a percentage of income before
taxes varies somewhat from period to period due primarily to changes in
nondeductible expenses.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues. Net revenues increased $21.2 million, or 72.1%, to $50.6
million in 1996 from $29.4 million in 1995. The Company's net revenues from
contract services increased by $16.6 million, or 64.7%, and net revenues from
permanent placements increased by $4.6 million, or 123.3%, in 1996 from 1995.
The increase in revenues was primarily due to growth in sales within existing
regional markets, including a full year of revenue from the Portland and
Denver regional markets which the Company entered in 1995. To a lesser extent,
revenues increased due to expansion into additional regional markets,
including, with respect to contract services, one month of net revenues from
the TeamAlliance operations. During 1996, the Company expanded into Austin
(April), Phoenix (July), Raleigh (September) and London (November). Due to the
delay typically experienced by the Company before new employees reach full
productivity, the Company did not recognize significant revenues from these
regional markets in 1996. As a result, the number of Company employees
(excluding IT professionals) increased by 132.0% in 1996, while net revenues
increased by only 72.1%. In addition, in December 1996 the Company entered the
New York City, Chicago, Houston, Orlando and Tampa regional markets, as a
result of the TeamAlliance Acquisition.
Gross profit. Gross profit increased $10.0 million, or 98.8%, to $20.2
million in 1996 from $10.2 million in 1995. As a percentage of net revenues,
gross profit increased to 40.0% in 1996 from 34.6% in 1995. This increase as a
percentage of net revenues was primarily due to a change in the mix between
contract services and permanent placements. Contract services decreased as a
percentage of net revenues from 87.3% in 1995 to 83.6% in 1996, while
permanent placement increased as a percentage of net revenues from 12.7% in
1995 to 16.4% in 1996.
Gross profit for contract services excluding permanent placement revenues
(as a percentage of net contract services revenues) increased to 28.2% in 1996
from 25.1% in 1995. This increase was due to an increase in average hourly
billing rates charged for the Company's IT professionals beginning in late
1995.
Operating expenses. Operating expenses increased $9.4 million, or 105.6%, to
$18.2 million in 1996 from $8.9 million in 1995. As a percentage of net
revenues, operating expenses increased to 36.0% in 1996 from 30.2% in 1995.
This increase was primarily due to an increase in permanent placement revenues
as a percentage of total net revenues, as all expenses associated with
permanent placement revenues are recognized as operating expenses. In
addition, the increase was the result of a substantial increase in new sales
employees, who are typically less productive in their first year, and the
Company's opening of Practice Groups in four additional regional markets in
1996.
19
<PAGE>
Other operating expenses. In 1996, the Company incurred other operating
expenses of $821,000. Of this amount, approximately $370,000 was associated
with reserves for pending litigation and approximately $270,000 was associated
with severance obligations to former executive officers of the Company.
Other income (expense), net. During 1996, the Company reported interest
income net of expense of $369,000 as compared to interest expense of $156,000
in 1995. This income reflects the investment of proceeds received from the
Company's sale of redeemable convertible preferred stock in January 1996 and
the repayment of the outstanding balance on the Company's credit line.
Income taxes. Income taxes as a percentage of income before taxes increased
to 42.5% in 1996 from 40.7% in 1995. This increase was primarily due to
certain nondeductible expenses incurred by the Company in the fourth quarter
of 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net revenues. Net revenues increased $13.4 million, or 84.0%, to $29.4
million in 1995 from $16.0 million in 1994. The Company's net revenues from
contract services increased by $11.4 million, or 80.4%, and net revenues from
permanent placements increased by $2.0 million, or 113.3%, in 1995 from 1994.
This increase resulted primarily from internal growth attributable to the
addition of new specialized Practice Groups, the Company's initial expansion
outside of California and increased net revenues for permanent placement
services. During 1995, the Company expanded its operations into Denver
(November) and Portland (July). During November 1994, the Company entered the
Seattle regional market. Due to the delay typically experienced by the Company
before new employees reach full productivity, the Company did not recognize
significant revenues from those regional markets in 1995. As a result, the
number of Company employees (excluding IT professionals) increased by 120.0%
in 1995, while net revenues increased by only 84.0%.
Gross profit. Gross profit increased $4.9 million, or 94.2%, to $10.2
million in 1995 from $5.2 million for 1994. As a percentage of net revenues,
gross profit increased to 34.6% in 1995 from 32.8% in 1994. This increase was
primarily due to a change in the mix between contract services and permanent
placements. Contract services decreased as a percent of net revenues from
89.1% in 1994 to 87.3% in 1995, while permanent placements increased as a
percent of net revenues from 10.9% in 1994 to 12.7% in 1995.
Gross profit for contract services excluding permanent placement revenues
(as a percentage of net contract services revenues) increased to 25.1% in 1995
from 24.6% in 1994.
Operating expenses. Operating expenses increased $3.9 million, or 78.2%, to
$8.9 million in 1995 from $5.0 million in 1994. As a percentage of net
revenues, operating expenses decreased to 30.2% in 1995 from 31.2% in 1994.
This decline was primarily attributable to the Company's ability to allocate
its costs over a much greater revenue base. However, this operating leverage
was partially offset by a significant increase in new employees, and the costs
associated with the Company's entrance into the Denver and Portland regional
markets during 1995.
Income taxes. Income taxes as a percentage of income before taxes decreased
to 40.7% in 1995 from 44.1% in 1994. This decrease was attributable to the
effect of nondeductible expenses which had a greater proportional impact on
the tax provision in 1994 than in 1995.
20
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly consolidated
statement of operations data, both in dollar amount and as a percentage of
total net revenues, for each of the ten quarters ended June 30, 1997. In the
opinion of management, this information has been presented on the same basis
as the audited consolidated financial statements appearing elsewhere in this
Prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results when read in conjunction with the audited
consolidated financial statements of the Company and related notes thereto.
The operating results for any quarter should not be relied upon as any
indication of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Contract services...... $4,364 $5,491 $7,169 $8,636 $8,628 $10,411 $10,275 $12,940 $17,037 $20,385
Permanent placement.... 637 769 1,076 1,243 1,668 2,033 2,109 2,507 2,156 3,113
------ ------ ------ ------ ------ ------- ------- ------- ------- -------
Total net revenues.... 5,001 6,260 8,245 9,879 10,296 12,444 12,384 15,447 19,193 23,498
Cost of contract
services............... 3,359 4,227 5,299 6,324 6,213 7,426 7,399 9,304 12,020 13,913
------ ------ ------ ------ ------ ------- ------- ------- ------- -------
Gross profit............ 1,642 2,033 2,946 3,555 4,083 5,018 4,985 6,143 7,173 9,585
Selling, general and
administrative
expenses............... 1,638 1,900 2,369 2,962 3,450 4,119 4,220 5,623 7,064 8,532
Other operating
expenses............... -- -- -- -- -- -- 721 100 -- --
------ ------ ------ ------ ------ ------- ------- ------- ------- -------
Income from operations.. 4 133 577 593 633 899 44 420 109 1,053
Net income (loss)....... $ (22) $ 64 $ 326 $ 314 $ 416 $ 612 $ 100 $ 233 $ 20 $ 535
====== ====== ====== ====== ====== ======= ======= ======= ======= =======
Net income (loss) per
share (1).............. $ -- $ 0.01 $ 0.04 $ 0.04 $ 0.05 $ 0.06 $ 0.01 $ 0.02 $ -- $ 0.06
====== ====== ====== ====== ====== ======= ======= ======= ======= =======
Shares used in per share
computation............ 7,356 7,356 7,356 7,541 8,576 9,549 9,652 9,652 9,635 9,638
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Contract services...... 87.3 % 87.7% 86.9% 87.4% 83.8% 83.7% 83.0% 83.8% 88.8% 86.8%
Permanent placement.... 12.7 12.3 13.1 12.6 16.2 16.3 17.0 16.2 11.2 13.2
------ ------ ------ ------ ------ ------- ------- ------- ------- -------
Total net revenues...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of contract
services............... 67.2 67.5 64.3 64.0 60.3 59.7 59.7 60.2 62.6 59.2
------ ------ ------ ------ ------ ------- ------- ------- ------- -------
Gross profit............ 32.8 32.5 35.7 36.0 39.7 40.3 40.3 39.8 37.4 40.8
Operating expenses...... 32.7 30.4 28.7 30.0 33.5 33.1 34.1 36.4 36.8 36.3
Other operating expenses -- -- -- -- -- -- 5.8 0.6 -- --
------ ------ ------ ------ ------ ------- ------- ------- ------- -------
Income from operations.. 0.1 2.1 7.0 6.0 6.2 7.2 0.4 2.8 0.6 4.5
Net income (loss)....... (0.4)% 1.0% 4.0% 3.2% 4.0% 4.9% 0.8% 1.5% 0.1% 2.3%
====== ====== ====== ====== ====== ======= ======= ======= ======= =======
Gross profit: contract
services (2)........... 23.0 % 23.0% 26.1% 26.8% 28.0% 28.7% 28.0% 28.1% 29.4% 31.7%
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) Represents gross profit for contract services (excluding permanent
placement revenues) as a percentage of net contract services revenues.
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 additional revenue-
generating personnel; the availability of qualified IT professionals; changes
in the relative mix
21
<PAGE>
between the Company's contract and permanent services; changes in the pricing
of the Company's services; the timing and rate of entrance into new regional
markets and addition of Practice Groups; temporary absences of key revenue-
generating personnel; the structure and timing of acquisitions; changes in the
demand for IT professionals; and general economic factors, among others. See
"Risk Factors--Fluctuations in Quarterly Results; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund working capital. The
Company has utilized various sources to fund this working capital including
cash flow from internal operations, bank credit lines and the sale of
preferred stock.
During 1996, 1995 and 1994, the Company used cash in operations of
approximately $1.6 million, $193,000 and $180,000, respectively, and $1.2
million for the six months ended June 30, 1997. The principal use of cash
during each of these periods was to support growth in accounts receivable
resulting from the Company's growth in net revenues and to fund operating
expenses associated with entering new markets and adding Practice Groups. In
the first six months of 1997, the Company experienced an increase in accounts
receivable in part from TeamAlliance, which was purchased in December 1996. In
connection with this acquisition, the Company did not purchase the existing
accounts receivable balances. This growth was financed using external sources,
such as bank financing and the sale of preferred stock and internal sources,
including net income and accrued expenses. The Company pays its IT
professionals on a weekly basis, while corporate clients are generally billed
at the end of the applicable pay period. Corporate clients typically remit
payments 30 to 40 days after invoice date. These working capital requirements
are somewhat mitigated by permanent placement revenues as the sales
commissions associated with such revenues are not paid until fees are
collected from the Company's client.
During 1996, 1995 and 1994, the Company made capital expenditures of $2.6
million, $634,000 and $332,000, respectively, and $963,000 during the six
months ended June 30, 1997. In October 1996, the Company purchased a corporate
training facility in Park City, Utah. The purchase price consisted of $1.0
million in cash plus a note payable to the seller in the amount of $1.1
million. The note bears interest at 8.75% per annum, matures in the year 2026
and requires installments of principal and interest totaling $9,023 each
month. The note is fully secured by a deed of trust against the property. See
Note 3 of Notes to Consolidated Financial Statements.
In December 1996, the Company completed the TeamAlliance Acquisition for a
cash payment of $4.2 million at the date of acquisition and the issuance of
52,000 shares of the Company's Common Stock. In addition, the Company has
agreed to pay the principals an aggregate of an additional $4.2 million in
installments over a three-year period and to make additional monthly
installments aggregating approximately $500,000 to certain management
companies and their shareholders during 1997. The Company financed the cash
portion of the purchase price with available borrowings under the term loan
facility. See Note 2 of Notes to Consolidated Financial Statements.
In January 1996, entities affiliated with the Sprout Group ("Sprout")
purchased 1,600,000 shares of Series A Preferred Stock and warrants to
purchase an aggregate of up to 250,000 shares of Common Stock. In connection
with this transaction, Brenda C. Hall, the Company's Chief Executive Officer
and a director of the Company, and Todd J. Kinion, a former officer and a
current director of the Company, borrowed from the Company $3.0 million and
$2.0 million, respectively, pursuant to secured promissory notes. Each of
these promissory notes becomes due and payable in January 2001 or upon the
occurrence of certain events, including the closing of this Offering. Ms. Hall
and Mr. Kinion may pay their respective promissory notes by tendering to the
Company 480,000 and 320,000 shares of Common Stock, respectively. Ms. Hall and
Mr. Kinion have agreed to tender such shares in payment of the promissory
notes upon completion of this Offering. See "Certain Transactions."
At June 30, 1997, the Company had $161,000 in cash and cash equivalents and
$850,000 of negative working capital. The Company has a term loan and
revolving line of credit facility enabling the Company to
22
<PAGE>
borrow a stated percentage of eligible accounts receivable up to a maximum of
$12.0 million. As of June 30, 1997, borrowings under these loan agreements
were $7.3 million, consisting of $3.8 million under the revolving credit
facility and $3.5 million under the term loan. All borrowings under these loan
agreements are secured by the assets of the Company. The term loan bears
interest at the bank's prime rate plus 1.0% (9.5% in total at June 30, 1997),
and the revolving line of credit bears interest at the bank's prime rate plus
0.5%. As of June 30, 1997, the Company also had a cash overdraft of $1.2
million. The Company intends to repay all borrowings under these facilities
and the cash overdraft using the proceeds from this Offering. See Note 4 of
Notes to Consolidated Financial Statements.
The Company believes that the proceeds from this Offering together with cash
flow from operations and borrowings under the Company's credit facility, or
other credit facilities that may become available to the Company in the
future, will be adequate to meet the Company's presently anticipated working
capital requirements for at least the next 18 months. The Company's estimate
of the period of time the proceeds of this Offering 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 proceeds to fund the
acquisition of complementary businesses. The Company has no current plans,
agreements or commitments and is not currently engaged in any negotiations
with respect to any acquisitions. See "Use of Proceeds."
23
<PAGE>
BUSINESS
Hall, Kinion & Associates, Inc. is a leading provider of specialized IT
professionals on a contract and permanent basis in 14 technology centers
located throughout the United States and in London. The Company provides its
services primarily to high technology companies, such as software developers,
computer systems manufacturers and telecommunications suppliers, primarily for
use in their development of next generation products. These companies require
highly skilled technical personnel in their engineering, product development
and quality assurance functional areas (collectively, "R&D departments"). To
meet the specialized needs of these clients, the Company provides its services
through distinct Practice Groups organized around specific technologies (such
as Windows, Unix or CAD) frequently used by such clients. The Company believes
that this specialization enables it to respond rapidly to its clients and
provide leading-edge technology assignments for its IT professionals. In 1996,
the Company placed contract and permanent professionals with a broad range of
high technology clients, including Borland, Cisco Systems, Microsoft, Oracle
and numerous emerging growth technology clients, with no single client
representing more than 5.0% of net revenues. With the TeamAlliance Acquisition
in December 1996, the Company expanded its client base and service offerings
to include traditional IT professional services to IS departments for
corporate clients. The Company believes that the IS business complements its
core R&D business and allows the Company to further leverage its specialized
service offerings and its national presence.
INDUSTRY BACKGROUND
The high technology industry continues to experience substantial growth as
constant innovation, such as open and distributed computing, client/server
technology, the Internet, relational databases and object-oriented
programming, shortens product lifecycles and accelerates the demand for
computer-related products. These trends, combined with the intense competition
faced by high technology companies, have put considerable pressure on such
companies to shorten the time-to-market of their products. The development of
these next generation products often requires highly specialized technical
talent which may not be available internally. This need for IT professionals
is particularly critical during the months or year before release of a new
software or hardware product. As a result, these high technology companies are
frequently utilizing supplemental sources of IT professionals with expertise
in current technologies.
As high technology companies continue to develop and introduce new
technologies and systems, businesses are attempting to integrate and implement
these systems into their already complex computing environments. As these
systems are being deployed on an enterprise-wide basis and on multiple
hardware and software platforms, the process of systems design and
implementation has become more complex. As a result, IS departments are faced
with a similar challenge of finding qualified IT professionals to design,
develop, deploy and maintain their systems. Frequently, however, qualified IT
professionals do not exist in-house or it may be impractical to redeploy and
retrain in-house personnel. Consequently, IS departments, like high technology
companies, are increasingly seeking to augment their staffs with IT
professionals skilled in the management and operation of such systems.
Despite increased demand for IT professionals, there continues to be a
shortage of IT professionals proficient in the most current computer languages
and applications. For example, according to the U.S. Department of Education,
the number of students graduating annually from United States universities
with bachelor degrees in computer and information sciences has decreased
approximately 43% from 42,000 in 1986 to 24,000 in 1994. Due to the high
demand for their services, many IT professionals have a variety of
opportunities in the job market. While the majority choose to pursue full-time
employment, an increasing number are attracted to the benefits of working on a
contract basis. Such benefits include more flexible work schedules,
accelerating cash compensation and the opportunity to work with emerging and
challenging technologies in a variety of industries.
To address their increasing demand for contract and permanent IT
professionals, both R&D departments of technology companies and IS departments
of large corporations are turning to IT professional services companies
24
<PAGE>
to augment their existing operations. In July 1996, Dataquest estimated that
the size of the IT professional services market in the United States in 1995
was $44.3 billion. Dataquest estimated that this market will grow at a
compound annual rate of approximately 15.0%, reaching approximately $89.2
billion by the year 2000. Technology-dependent companies are increasingly
utilizing outside consultants to: (i) meet critical product deadlines;
(ii) focus on their core businesses; (iii) access specialized technical
skills; (iv) better match staffing levels to current needs; and (v) reduce the
costs of recruiting, training and terminating employees.
BUSINESS STRATEGY
The Company's objective is to (i) provide efficient and high quality
contract and permanent IT professional services to R&D departments of high
technology clients and IS departments of corporate clients and (ii) become the
"agent of choice" for IT professionals. To achieve this objective, the Company
focuses on the following key elements of its business strategy:
. FOCUS ON TECHNOLOGY-DRIVEN CLIENTS. Historically, the Company has focused
on providing its services primarily to R&D departments of high technology
companies. As a result, the Company frequently provides services for critical
projects such as the development of next generation software and hardware
products. These projects require IT professionals with more highly specialized
skill sets than traditional supplemental IT personnel, enabling the Company to
realize higher margins for its services. In addition, because many technology
companies are concentrated in certain regional markets across the United
States, such as Silicon Valley, the Research Triangle and Austin, Texas, the
Company is able to effectively market its services nationally through a
limited network of regional markets. To complement its core R&D business, the
Company recently acquired TeamAlliance which has broadened its service
offerings to include providing IT professionals to IS departments of corporate
clients. This acquisition enables the Company both to cross-recruit IT
professionals and to facilitate the introduction of its R&D service offerings
to new regional markets.
. PROVIDE SPECIALIZED IT SERVICES THROUGH DISTINCT PRACTICE GROUPS. The core
of the Company's operating model is the "Practice Group." The Company has
organized its Contract Services Division into Practice Groups focused on
specialized technologies (such as Windows, Unix and CAD) frequently used by
its clients. To a more limited extent, the Company has begun to focus its
Permanent Placement Division and revenue generating employees within the IS
Practice Group in a similarly specialized manner. While the Company has
multiple Practice Groups in many of its regional markets, each Practice Group
operates relatively autonomously and compensates its revenue generating
employees based on the performance of the particular Practice Group. These
Practice Groups enable account managers and technical recruiting agents to
focus on and develop a better understanding of client requirements and the
different skill levels of the Company's IT professionals. This organization is
also designed to allow for quicker and more efficient placement, to require
fewer interviews of IT professionals and ultimately to result in the provision
of better qualified candidates.
. LEVERAGE PERMANENT PLACEMENT BUSINESS. While a significant percentage of
the Company's net revenues in 1996 were generated by its contract services,
permanent placements remain an important component of the Company's overall
business strategy. By offering both contract services and permanent
placements, the Company is able to provide more comprehensive personnel
services to its clients and pursue cross-selling opportunities. In 1996, the
Company provided contract services to approximately 250 of its clients for
whom it also provided permanent placements. In addition, the permanent
placement business is typically a more expedient means to achieve
profitability in the opening of new regional markets than contract services.
Of the Company's nine regional markets existing prior to the TeamAlliance
Acquisition, eight were initially developed with permanent placement services
prior to adding contract services to such regional markets.
. ATTRACT AND RETAIN QUALIFIED IT PROFESSIONALS. A key element of the
Company's success has been its ability to attract and retain qualified IT
professionals. The Company believes that it has developed a reputation among
IT professionals for efficient and high quality placements by: (i) focusing on
an IT professional's particular field of technical specialization; (ii)
identifying and delivering high quality assignments involving leading-edge
technologies; and (iii) providing access for IT professionals to cash
compensation levels
25
<PAGE>
comparable to or higher than that of similarly skilled, full-time employees.
The Company's goal is to become the "agent of choice" for IT professionals and
the Company has developed programs to increase the retention of IT
professionals, such as its Star Campaign and the granting of stock options
under the Company's IT Professional Plan.
. PROVIDE STRONG CORPORATE SUPPORT TO REGIONAL MARKETS. The Company commits
significant resources in support of its regional markets while allowing them
to operate with minimal centralized management. Practice groups in each
regional market are responsible for their own profitability and management. In
support of these Practice Groups, the Company provides centralized training,
information systems and financial and accounting services. Managers from the
corporate office regularly visit each regional market, monitor results of each
Practice Group and oversee the addition of new employees. The Company also
provides communication links through an extensive video conferencing system,
allowing its corporate office to communicate with many of its regional markets
on a frequent and more personal basis. Management and sales training is
provided throughout the year on a weekly basis at its corporate headquarters
in San Jose, California and at its training facility in Park City, Utah.
GROWTH STRATEGY
In late 1994, the Company implemented a growth strategy intended to create a
network of offices in regional markets, each comprised of multiple Practice
Groups. Key elements of this strategy are to:
. ADD PRACTICE GROUPS TO EXISTING REGIONAL MARKETS. The Company currently
has 11 different types of Practice Groups and only one of the Company's 14
regional markets has more than four types of Practice Groups. As a result, the
Company believes that there is a substantial opportunity to increase the
number of Practice Groups within its existing regional markets. Historically,
the Company has entered a new market with the Permanent Placement Division and
then added additional Practice Groups to leverage that office's reputation and
relationships and to take advantage of cross-selling opportunities. The
Company will continue to implement a focused expansion of its Practice Groups
in existing regional markets in order to meet the needs of new and existing
clients.
26
<PAGE>
The following table illustrates the Practice Groups currently located in
each of the Company's existing regional markets. Although the Company does not
expect to add every Practice Group to each regional market, the Company
believes that there are opportunities to add Practice Groups in each regional
market, particularly those that have been recently entered.
PRACTICE GROUPS BY REGIONAL MARKET
<TABLE>
<CAPTION>
SILICON SALT LAKE NEW YORK
VALLEY SEATTLE PORTLAND PHOENIX CITY DENVER AUSTIN HOUSTON CHICAGO TAMPA ORLANDO RALEIGH CITY LONDON
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONTRACT
SERVICES
--------------------------------------------------------------------------------------------------------------
HK WINDOWS . . . . . .
--------------------------------------------------------------------------------------------------------------
HK UNIX .
--------------------------------------------------------------------------------------------------------------
HK QA .
--------------------------------------------------------------------------------------------------------------
HK CAD . . . . .
--------------------------------------------------------------------------------------------------------------
HK WRITERS .
--------------------------------------------------------------------------------------------------------------
HK INTERNET .
--------------------------------------------------------------------------------------------------------------
HK TECH SUPPORT .
--------------------------------------------------------------------------------------------------------------
HK NET . . . . .
--------------------------------------------------------------------------------------------------------------
HK IS . . . . . . . .
--------------------------------------------------------------------------------------------------------------
PERMANENT
PLACEMENT
SERVICES
--------------------------------------------------------------------------------------------------------------
HK SOFTWARE . . . . . . . . . . .
--------------------------------------------------------------------------------------------------------------
HK HARDWARE . .
--------------------------------------------------------------------------------------------------------------
</TABLE>
. HIRE ADDITIONAL REVENUE-GENERATING EMPLOYEES FOR EXISTING PRACTICE
GROUPS. The Company believes that there is potential for revenue growth from
the addition of technical recruiting agents and account managers in existing
Practice Groups. The addition of these employees represents increased
opportunities to generate revenues by servicing a greater number of current
and prospective clients and IT professionals. During 1996 and the first six
months of 1997, the Company increased the number of revenue-generating
employees from 123 to 275 employees. In large part, this internal expansion
has been implemented according to a growth model based on the Company's
experience expanding in regional markets with substantially similar
characteristics. By using its growth model, decisions to make additional
investments, such as increasing headcount, advertising expense and the number
and type of Practice Groups, are determined based on objective performance
criteria. The Company believes that its growth model provides its managers
with an effective tool for executing and monitoring an expansion strategy and
schedule.
. OPEN ADDITIONAL LOCATIONS IN NEW REGIONAL TECHNOLOGY MARKETS. A key
element of the Company's growth strategy is to continue to enter new regional
high technology markets. The Company currently has Practice Groups in 14
regional markets, including Silicon Valley, the Research Triangle and certain
other high technology markets. The Company is currently considering entering
other technology markets, such as Atlanta, Boston and Dallas, and may in the
future consider further international expansion beyond London.
. ACQUIRE COMPLEMENTARY BUSINESSES. The Company intends to explore the
potential acquisition of businesses that would provide it with: (i) new
technology practices; (ii) strategically complementary businesses; (iii) new
geographical presences; or (iv) international recruiting capabilities. For
example, as a result of the TeamAlliance Acquisition, the Company expanded its
Practice Groups to include traditional IS contract services and entered five
new regional markets.
27
<PAGE>
HALL KINION'S SERVICES
The Company provides contract and permanent placement services for the
critical needs of R&D departments of high technology companies and IS
departments of corporate clients. In 1996, on a pro forma basis for the
TeamAlliance Acquisition, approximately 87.2% and 12.8% of the Company's net
revenues were derived from its Contract Services Division and Permanent
Placement Division, respectively. In the first six months of 1997,
approximately 87.7% and 12.3% of the Company's net revenues were derived from
its Contract Services Division and Permanent Placement Division, respectively.
CONTRACT SERVICES
The Company's Contract Services Division provides supplemental IT
professionals. In a typical R&D contract, an IT professional is contracted to
a high technology client, usually in connection with a specific application or
project. In a typical IS contract, an IT professional is contracted to an IS
department for the implementation and maintenance of corporate computer
systems. The Company's IT professionals usually work on assignments with a
maturity of approximately three to nine months, with all work billed on an
hourly basis and performed at the direction of the client.
The Company has organized its Contract Services Division into seven types of
Practice Groups focused on those technologies widely used by its high
technology clients in the development of their products (HK Windows, HK QA, HK
CAD, HK Unix, HK NET, HK Writers and HK Internet). In addition, through its HK
Technology Support Practice Group, the Company offers its high technology
clients access to IT professionals providing administrative support, data
entry, help desk and customer support. The Company expects this Practice Group
to represent a declining percentage of the Company's net revenues as the
Company focuses on more specialized, higher margin Practice Groups. In
conjunction with its TeamAlliance Acquisition in December 1996, the Company
has also added an HK IS Practice Group, which provides IT professionals,
programmers and analysts to corporate clients' IS departments.
28
<PAGE>
Set forth below is a table which describes the typical technology skill sets
provided by the Company's IT professionals, as well as an example of a
representative client assignment completed by such IT professionals.
- --------------------------------------------------------------------------------
PRACTICE TYPES OF IT REPRESENTATIVE HALL KINION
GROUP PROFESSIONAL CLIENT ASSIGNMENT
- --------------------------------------------------------------------------------
HK Windows Developers of Microsoft IT professional developed a
Windows 3.1, Windows NT, portion of a GUI for database
Windows 95 and Macintosh software using Windows NT,
providing services related C++, OLE, DLL and DDE
to: GUI, applications, device
drivers, BIOS, RDBMS/CS, test
development and diagnostics
- --------------------------------------------------------------------------------
HK Unix Developers and engineers for IT professional participated
the many types of Unix in the development of a
providing services related system verification program
to: GUI, application, device utilizing C, C++, Perl,
driver, kernal, RDBMS/CS, diagnostics and device driver
test development, diagnostics experience
and Realtime
- --------------------------------------------------------------------------------
HK QA Software testers and test IT professional was assigned
engineers for quality as a software test engineer
assurance, including leading the project to
application testers, develop QA scripts for fault
compatibility testers, black tolerance data transaction
and white box testers, system using C and C++ in a
network testers, test Windows environment
automation, test developers
and web application testers
- --------------------------------------------------------------------------------
HK CAD All levels of design and IT professional with
support for computer-aided mechanical engineering
design systems, including background helped design a
engineers, designers, handheld medical device using
drafters, engineering the 3D solid modeling tool
technicians, digital/analog Pro-E
hardware designers and ASIC
designers
- --------------------------------------------------------------------------------
HK Writers Technical writers of IT professional documented
software, computer and online software installation
networking systems and user manuals for new
documentation product release using
RoboHelp, FrameViewer,
Hyperhelp and Framemaker
documentation tools
- --------------------------------------------------------------------------------
HK Net Engineers providing services IT professional serviced a
with respect to network client's software/hardware
design, engineering, support migration from a Windows 95
and administration, such as to a Windows NT environment
Unix system administrators, utilizing Windows 95
PC support engineers, PC troubleshooting and
system administrators, NT configuration skills to
system administrators, configure workstations and
Macintosh system provide connectivity
administrators, LAN/WAN
analysts, CNE/CAN and DBA
analysts
- --------------------------------------------------------------------------------
HK Tech Support Windows and Macintosh IT professional provided
administrative support, data Macintosh support to a
entry, help desk, customer client's engineering
service, graphic designers, department and developed
desktop publishers, multimedia presentations for
illustrators, technicians and software developer relations
multimedia experts using PowerPoint, MS Word and
Excel
- --------------------------------------------------------------------------------
HK IS Consultants, programmers and IT professional with
analysts for the MIS extensive relational database
environment, including system skills delivered a mission-
analysts, legacy systems, critical project for systems
mainframe applications, integrity
Oracle services, relational
databases, Powerbuilder
programmers, database
administrators and client
server analysts
- -------------------------------------------------------------------------------
HK Internet Engineers providing services A team of IT professionals
with respect to Java, CGI constructed a web site,
(Common Gateway Interface), facilitating delivery of
HTML, Netscape server, information to the general
Microsoft server, Oracle public
server, Sybase server, Unix-
based server software,
Shockwave, VRML and ActiveX
- -------------------------------------------------------------------------------
29
<PAGE>
PERMANENT PLACEMENT SERVICES
The Company provides IT professionals for permanent placement with its
corporate clients. The Company currently delivers such services in 11 of the
Company's 14 regional markets. The Company recognizes revenue when the IT
professional commences employment. The Company typically guarantees this
placement for a period of 90 days. This placement fee is usually structured as
a percentage of the IT professional's first-year annual compensation. While
the Permanent Placement Division has historically offered its services to R&D
departments of high technology firms, the Company has begun to leverage the
client relationships from TeamAlliance to offer permanent placement services
to IS departments. The Permanent Placement Division currently markets its
services to the same client base as the Contract Services Division. The
Company plans to develop distinct hardware and software Practice Groups within
its Permanent Placement Division in certain regional markets.
HALL KINION'S OPERATING AND SALES APPROACH
CONTRACT SERVICES DIVISION
Within the Contract Services Division, Technical Recruiting Agents ("TRAs")
and Account Managers are typically organized and work in teams of four or more
individuals within a Practice Group. This specialization enables TRAs and
Account Managers to focus on and develop a better understanding of client
requirements and the different skill levels of the Company's IT professionals.
Each team is managed by one of its members who reports to the director of the
Practice Group to which the team belongs. At each of the Company's offices,
sales teams work together in an open environment. In general, TRAs and Account
Managers are compensated through a combination of base salary and bonus
incentives based on overall Practice Group performance and gross profit. The
Company's team approach is designed to develop a culture that encourages
teamwork and cross-selling among Practice Groups.
Technical Recruiting Agents
TRAs are responsible for recruiting and assessing the Company's IT
professionals, understanding their preferences and capabilities and monitoring
their availability, progress and job satisfaction. The Company's goal is for
its TRAs to build long-term relationship with IT Professionals in their
particular fields of specialization. Each experienced TRA is responsible for
up to approximately 20 IT professionals under contract at any time and
monitors the job status and availability of approximately 40 additional IT
professionals. TRAs operate only within a particular division or Practice
Group and are required to attend Company training programs to keep current on
the latest technologies within their particular specialization. As of June 30,
1997, the Company employed 81 TRAs located throughout its regional markets.
Account Managers
Account Managers are responsible for relationships with the Company's
clients. The Company's Account Managers do not form exclusive relationships
with the Company's clients, but rather operate within a particular technical
specialization. If an Account Manager learns of an opportunity at one of the
Company's clients in a specialization outside his or her own, the Account
Manager refers the lead to an Account Manager in the appropriate technological
specialization. The Company believes that its organization based on
specialization rather than client accounts enables Account Managers to develop
relationships in different departments of clients and at different levels and
to the transfer job requisitions to Account Managers familiar with the
appropriate specialization, leading to quicker, more accurate placements. As
of June 30, 1997, the Company employed approximately 78 Account Managers
throughout its regional markets.
IT Professionals
A major challenge facing IT services companies is the identification and
retention of highly qualified software engineers, computer programmers,
technical writers and designers. The Company believes that it has
30
<PAGE>
developed a reputation among IT professionals for efficient and high quality
placements by: (i) focusing on an IT professional's particular field of
technical specialization; (ii) identifying and delivering high quality
assignments involving leading-edge technologies; and (iii) providing access
for IT professionals to cash compensation levels comparable to or higher than
that of similarly skilled, full-time employees. The Company's goal is to
become the "agent of choice" for IT professionals and is developing programs
to increase the retention of IT professionals such as the Star Campaign and
the granting of stock options. The Star Campaign is designed to enable the
Company to attract and retain the highest quality IT professionals available
by providing these selected professionals with, among other things, advance
notice of state-of-the-art assignments and perquisites, including
participation in the Company's 401(k) plan, access to medical and dental
benefits and Company stock options under the IT Professional Plan. See "--
Business Strategy," "--Competition" and "Management--IT Professional Plan."
PERMANENT PLACEMENT DIVISION
Recruiters
Recruiters are primarily responsible for establishing relationships with
clients needing permanent IT professional services and matching the needs of
the Company's clients with the preferences and skills of the Company's
permanent placement job candidates. Recruiters frequently engage in other
activities to enhance their knowledge of the IT industry and issues that are
relevant to clients. Many Recruiters are members of industry trade
organizations and participate with clients in Company-sponsored seminars. In
addition, from time to time Recruiters will bring clients together to discuss
mutual technical issues or challenges. The Company believes these types of
activities strengthen client relationships and help to build alliances or
partnerships. The Company employed a total of approximately 116 Recruiters as
of June 30, 1997.
Recruiters are paid primarily on a commission basis. The Company's
compensation for Recruiters encourages communication and cooperation among
Recruiters by sharing compensation among Recruiters involved in an individual
placement. The Company establishes performance standards based on revenue
generation and other factors, such as the number of sales calls completed by
Recruiters.
CORPORATE SUPPORT SERVICES
In support of its Practice Groups, the Company provides centralized
training, information systems and financial and accounting services. Managers
from the corporate office regularly visit each regional market, monitor
results of each Practice Group and oversee the addition of new employees.
Performance is measured at the division and Practice Group level and not at
the office or regional market level. The Company believes that this management
structure fosters synergy among divisions and Practice Groups, as well as
cooperation and cross-referrals from regional market to regional market.
In addition to administrative support functions, the Company makes
substantial annual investments in training for its Vice Presidents, Directors,
TRAs, Account Managers and Recruiters. The Company provides management and
sales training throughout the year at its corporate headquarters in San Jose,
California and at its training facility in Park City, Utah.
The Company has developed a business growth model and related best practices
training program. Developed from in-house historical data, the model consists
of a set of detailed guidelines for use by the Company's divisions and
Practice Groups to expand within the Company's regional markets. By using the
growth model, decisions to make additional investments, such as increasing
headcount, advertising expense and the number and type of Practice Groups, are
determined based on objective performance criteria. The Company believes that
the growth model provides its managers with an effective tool for executing
and monitoring an expansion strategy and schedule. The Company applied the
growth model to its entrance into the Austin, Denver and Phoenix regional
markets during 1996.
31
<PAGE>
CLIENTS
The Company's R&D Contract Services and Permanent Placement clients are
predominantly high technology companies and include software developers,
computer systems manufacturers and telecommunications suppliers. In addition to
technology companies, the Company's IS Practice Group provides services to
financial services, pharmaceutical and industrial companies. In the last 12
months, the Company has provided services to approximately 1,600 clients in a
variety of industries, including those listed below. The Company's largest
client represented no more than 5.0% of the Company's net revenues in 1996. See
"Risk Factors--Industry and Geographic Concentration."
SOFTWARE COMPUTER SYSTEMS
Adobe Systems, Inc. 3Com Corporation
Borland International, Inc. Apple Computer, Inc.
Cable-Sat Systems, Inc. Creative Labs, Inc.
cc:Mail Credence Systems Corporation
Claris Corporation Diba, Inc.
ENlighten Software Solutions, Inc. Evans & Sutherland Computer
Filoli Information Systems Corporation
GT Interactive Software Corporation HAL Computer Systems, Inc.
Informix Corporation Net Frame Systems, Inc.
IPC Software Oliver Design, Inc.
Lotus Development Corp. Silicon Graphics, Inc.
McAfee Associates, Inc. Sun Microsystems, Inc.
Microsoft Corp. Tandem(R) Computers Incorporated
Network Computing Devices, Inc. Unisys Corporation
Oracle Corporation Wyse Technology, Inc.
The Perkin-Elmer Corporation
Presidio
Remedy Corporation TELECOMMUNICATIONS
Resumix, Inc.
Sybase, Inc. Aspect Telecommunications Corporation
Wall Data Incorporated AT&T Wireless Services
Cisco Systems, Inc.
GTE Wireless Data Services; GTE
Mobilnet
SOFTWARE INTERNET International Tapetronics Corporation
Jones Cyber Solutions, Ltd.
Enterprise Integration Technologies Magellan Communications, Inc.
Exodus Communication, Inc. NEC America, Inc.
ITOCHU Corporation Nextel Communications, Inc.
Knight Ridder, Inc. On Command Video
ON Technology Corporation P-Com, Inc.
Web TV Network TCI
Worlds Inc. Verifone, Inc.
SEMICONDUCTOR
MEDICAL TECHNOLOGIES
Hitachi America, Ltd.
Hitachi Computer Products Abbott Diagnostics Division, Abbott
Kevex X-Ray Division of Kevex Laboratories
Instruments, Inc. Abbott Laboratories
KLA Instruments Corporation ADAC Laboratories
Motorola, Inc. Cemax-Icon, Inc.
OZ Technologies, Inc. Genentech, Inc.
Pioneer Technical Horizon Systems, Inc.
Silicon Systems, Inc. Immunex Corporation
Pfizer, Inc.
MISCELLANEOUS
Comerica, Inc.
Hughes Aerospace & Electronics Company
Minolta Co, Ltd.
Raytek Corporation
Trimble Navigation Ltd.
32
<PAGE>
COMPETITION
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 reductions, 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 that competitive pressures faced by the
Company will not have a material adverse effect on its business, operating
results and financial condition. The Company believes that the principal
factors relevant to competition in the IT staffing services industry are the
recruitment and retention of highly qualified IT professionals, rapid and
accurate response to client requirements and, to a lesser extent, price. The
Company believes that it competes favorably with respect to these factors. See
"Risk Factors--Highly Competitive Market."
EMPLOYEES
As of June 30, 1997, approximately 1,100 IT professionals placed by the
Company were providing contract services to the Company's clients. The
Company's corporate staff at June 30, 1997 consisted of 348 full-time
employees, of whom 81 are TRAs, 78 are Account Managers, 116 are Recruiters
and 73 serve in various administrative and accounting capabilities. The
Company is not a party to any collective bargaining agreements covering any of
its employees, has never experienced any material labor disruption and is
unaware of any current efforts or plans to organize its employees. The Company
considers its relationships with its employees to be good. See "Risk Factors--
Ability to Attract and Retain Qualified IT Professionals."
PROPERTIES
The Company's principal executive offices are currently located in
Cupertino, California and occupy an aggregate of approximately 16,375 square
feet of office space pursuant to a sublease that expires in August 2000. The
Company also leases or subleases offices for its operations in Austin, Texas;
Capitola, Foster City, Fremont and Mountain View, California; Chicago,
Illinois; Denver, Colorado; Houston, Texas; London, England; New York, New
York; Orlando, Florida; Phoenix, Arizona; Portland, Oregon; Raleigh, North
Carolina; Sandy, Utah; Seattle, Washington; and Tampa, Florida. In addition,
the Company owns a training facility located in Park City, Utah.
33
<PAGE>
The table below indicates as of June 30, 1997, the location of the Company's
offices and the month and years in which they were opened by the Company or
TeamAlliance:
<TABLE>
<CAPTION>
OFFICES OPENED
----------------------------------------------------------- --------------
<S> <C>
Cupertino (San Jose), California........................... July 1987
Capitola................................................. January 1993
Fremont.................................................. January 1994
Mountain View............................................ August 1996
Foster City.............................................. January 1997
Salt Lake City, Utah....................................... August 1993
Seattle, Washington........................................ November 1994
Chicago, Illinois.......................................... January 1995
Tampa, Florida............................................. March 1995
Portland, Oregon........................................... July 1995
Orlando, Florida........................................... August 1995
Denver, Colorado........................................... November 1995
New York, New York......................................... February 1996
Austin, Texas.............................................. April 1996
Phoenix, Arizona........................................... July 1996
Raleigh, North Carolina.................................... September 1996
London, England............................................ November 1996
Houston, Texas............................................. December 1996
</TABLE>
LEGAL PROCEEDINGS
The Company is from time to time engaged in or threatened with litigation in
the ordinary course of its business. The Company is not currently a party to
any material litigation.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of the date of this Prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ --- -----------------------------------------------------
<S> <C> <C>
Brenda C. Hall***....... 44 Chief Executive Officer and Director
Paul H. Bartlett**...... 36 President and Director
Martin A. Kropelnicki... 31 Vice President, Chief Financial Officer and Secretary
Rita S. Hazell.......... 31 Vice President, R&D Contract Services
Craig J. Silverman...... 36 Vice President, Permanent Placement
Mordecai Levine......... 38 Vice President, IS Contract Services
Todd J. Kinion (2)**.... 35 Director
Kathleen D. LaPorte
(1)*................... 35 Director
Jon H. Rowberry
(1)(2)***.............. 50 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
*Class I Director
**Class II Director
***Class III Director
BRENDA C. HALL co-founded the Company and has been a director since the
Company's incorporation in 1991. From December 1992 to the present, Ms. Hall
has served as Chief Executive Officer of the Company. Ms. Hall served as
President and Assistant Secretary of the Company from December 1991 to October
1996 and from December 1991 to September 1996, respectively. From August 1981
to June 1987, Ms. Hall was general manager of a Snelling & Snelling franchise,
a personnel services company.
PAUL H. BARTLETT joined the Company in October 1996 as President. Mr.
Bartlett has served as a director of the Company since January 1996. Prior to
joining the Company, Mr. Bartlett was affiliated with the Sprout Group, a
venture capital firm, from February 1991 until October 1996, having served as
a general partner before joining the Company. Mr. Bartlett received an A.B.
degree in economics from Princeton University and an M.B.A. degree from the
Stanford Graduate School of Business.
MARTIN A. KROPELNICKI joined the Company in February 1997 as Vice President,
Chief Financial Officer and Secretary. Prior to joining the Company, Mr.
Kropelnicki was a Director at Deloitte & Touche Consulting Group-ICS, a
consulting firm, from February 1996 to February 1997. From June 1989 to
February 1996, Mr. Kropelnicki held various positions, most recently as a
Director in the financial organization at Pacific Gas & Electric Company, a
natural gas and electric utility. Mr. Kropelnicki holds a B.A. degree and an
M.A. degree in business economics from San Jose State University.
RITA S. HAZELL has served as Vice President, R&D Contract Services since
April 1996. Prior to assuming her current position, Ms. Hazell served in a
variety of positions, including Director, R&D Contract Services and Manager,
R&D Contract Services, since joining the Company in September 1993. From
November 1987 to September 1993, Ms. Hazell served as a manager for Oxford &
Associates, Inc., a technical contract services firm.
CRAIG J. SILVERMAN joined the Company in April 1996 as Vice President,
Permanent Placement. Prior to joining the Company, Mr. Silverman served as
Vice President, Sales at Strategic Mapping, Inc., a software development
company, from September 1989 to February 1996.
MORDECAI LEVINE joined the Company in December 1996 as Vice President, IS
Contract Services. Since March 1994, Mr. Levine has served as Chief Operating
Officer of TeamAlliance. From January 1991 to February 1994, Mr. Levine served
as President of Berkeley Software, Inc., a software development company. Mr.
Levine received a B.A. degree in economics from Brandeis University and an
M.B.A. degree from the University of Chicago Graduate School of Business.
35
<PAGE>
TODD J. KINION co-founded the Company and has served as a director of the
Company since the Company's incorporation in 1991. Since August 1996, Mr.
Kinion has been a private investor. Mr. Kinion served as Vice President,
Recruitment Services of the Company from December 1995 to August 1996. Prior
to that time, Mr. Kinion served as Chief Financial Officer and Treasurer of
the Company from December 1991 to December 1995. Mr. Kinion also served as
Secretary from December 1991 to February 1997. Mr. Kinion holds a B.A. degree
in political science from the University of California at Santa Barbara.
KATHLEEN D. LAPORTE has served as a director of the Company since November
1996. From January 1993 to the present, Ms. LaPorte has been affiliated with
the Sprout Group, a venture capital firm, and has served as a general partner
since December 1993. From September 1987 to December 1992, Ms. LaPorte was a
principal of Asset Management Company, a venture capital firm. Ms. LaPorte
currently serves on the Board of Directors of Onyx Pharmaceuticals, Inc.,
FemRx, Inc., Lynx Therapeutics, Inc. and a number of privately held companies.
Ms. LaPorte holds a B.S. degree in biology from Yale University and an M.B.A.
degree from the Stanford Graduate School of Business.
JON H. ROWBERRY has served as a director of the Company since August 1996.
Mr. Rowberry currently serves as President and Chief Operating Officer of the
Franklin Covey ("Franklin"), a provider of time management products and
training. Prior to assuming his current positions, Mr. Rowberry was Chief
Financial Officer of Franklin from August 1995 to August 1996. From 1985 to
1995, Mr. Rowberry was employed in several executive positions with Adia S.A.
and Adia Services, Inc., providers of personnel services. Mr. Rowberry
currently serves on the Board of Directors of Franklin. Mr. Rowberry holds a
B.S. degree in accounting from Brigham Young University.
The Company's Board of Directors will be divided into three classes upon the
closing of this Offering. The initial term of the Class I directors expires at
the Company's annual meeting of stockholders in 1998; the initial term of the
Class II directors expires at the Company's annual meeting of stockholders in
1999; and the initial term of the Class III directors expires at the Company's
annual meeting of stockholders in 2000. Thereafter, the term of each class of
directors shall be three years. All directors hold office until the annual
meeting of stockholders at which their respective class is subject to
reelection and until their successors are duly elected and qualified, or until
their earlier resignation or removal. Except for grants of stock options,
directors of the Company generally do not receive any compensation for their
services as directors. See "--1997 Stock Option Plan."
Under the employment agreement between the Company and Paul H. Bartlett, the
Company will nominate Mr. Bartlett for election as a member of its Board of
Directors as long as he remains employed, and Brenda C. Hall has agreed to
cause her shares of the Company's stock to be voted in favor of Mr. Bartlett's
election. See "--Employment Agreements; Termination of Employment and Change
in Control Arrangements."
Officers serve at the discretion of the Board and are elected annually.
There are no family relationships among the directors or officers of the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
On May 23, 1997, the Board of Directors established a Compensation Committee
and an Audit Committee. The Compensation Committee makes recommendations
concerning the salaries and incentive compensation of employees of, and IT
professionals to, the Company and will administer the IT Professional Stock
Option Plan, and the 1997 Stock Option Plan. See "--IT Professional Plan" and
"--1997 Stock Option Plan." The Audit Committee is responsible for reviewing
the results and scope of audits and other services provided by the Company's
independent auditors.
36
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation awarded to, earned by, or paid for services rendered to the
Company in all capacities during 1996 by: (i) the Company's Chief Executive
Officer; (ii) the Company's next two most highly compensated executive
officers whose salary and bonus for such year exceeded $100,000 and who served
as executive officers of the Company at December 31, 1996; and (iii) two
additional individuals for whom disclosure would have been provided pursuant
to (ii) above but for the fact that such individuals were not serving as
executive officers of the Company on December 31, 1996 (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (2) AWARDS
------------------------- ---------------------
NAME AND SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY (3) BONUS OPTIONS (#) COMPENSATION
(1)
- ------------------ ------------------------- --------------------- ------------
<S> <C> <C> <C> <C>
Brenda C. Hall.... $ 313,231 $ 60,000 0 0
Chief Executive
Officer
Keith Corbin (4).. 163,077 106,000 0 0
Former Chief
Financial Officer
and Assistant
Secretary
Todd J. Kinion
(5).............. 108,820 7,989 0 36,132 (6)
Former Vice
President and
Secretary
Rita S. Hazell
(7).............. 85,500 109,229 0 0
Vice President,
R&D Contract
Services
Craig J. Silverman
(8).............. 63,750 71,412 50,000 0
Vice President,
Permanent
Placement
</TABLE>
- --------
(1) Paul H. Bartlett joined the Company as President in October 1996. His
annual base salary is currently set at $240,000.
Mordecai Levine joined the Company as Vice President, IS Contract Services
in December 1996 and his annual base salary is currently set at $125,000.
Martin A. Kropelnicki joined the Company as Vice President, Chief Financial
Officer and Secretary in February 1997 and his annual base salary is
currently set at $150,000.
(2) The aggregate amount of all other compensation in the form of perquisites
and other personal benefits does not exceed the lesser of either $50,000
or 10% of the total annual salary and bonus for each officer.
(3) Salary includes amounts deferred under the Company's 401(k) Plan.
(4) Mr. Corbin was Chief Financial Officer and Assistant Secretary of the
Company through December 1996 and currently provides consulting services
to the Company.
(5) Mr. Kinion was Vice President and Secretary of the Company until August
1996 and February 1997, respectively.
(6) Represents monthly payments of $9,033 paid to Mr. Kinion commencing
September 1996 pursuant to the terms and conditions of a settlement
agreement between Mr. Kinion and the Company. See "Certain Transactions."
(7) Ms. Hazell joined the Company in September 1993 and has served as Vice
President, R&D Contract Services since April 1996. Her annual base salary
is currently set at $125,000.
(8) Mr. Silverman joined the Company as Vice President, Permanent Placement in
April 1996. His annual base salary is currently set at $100,000.
37
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during 1996
to each of the Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
---------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------
NAME (1) GRANTED FISCAL YEAR SHARE (2) DATE 5% 10%
- ---------------- ---------- ------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Brenda C. Hall.. 0 -- -- -- -- --
Keith Corbin.... 0 -- -- -- -- --
Todd J. Kinion.. 0 -- -- -- -- --
Rita S. Hazell.. 0 -- -- -- -- --
Craig J.
Silverman (4).. 50,000 2.7% $1.50 05/02/06 $47,167 $119,531
</TABLE>
- --------
(1) Except for Mr. Silverman, no other Named Executive Officer received an
option grant in 1996. In October 1996, the Company granted an option to
Paul H. Bartlett to purchase 974,000 shares of Common Stock at $4.00 per
share. Mr. Bartlett is 50% vested in such shares and will vest in the
balance of the shares in a series of 24 monthly installments commencing on
January 1, 1998. In December 1996, the Company granted options to Mordecai
Levine to purchase 92,000 shares of Common Stock at $5.10 per share.
Mr. Levine is vested in 52,000 shares, vests in 8,000 shares upon the
completion of one year of service from the date of grant and vests in the
balance of the shares in equal monthly installments over the 48 months of
service beginning December 2, 1997. In February 1997, the Company granted
an option to Martin A. Kropelnicki to purchase 175,000 shares at $10.00
per share. Mr. Kropelnicki's option vests with respect to 20% of the
shares upon the completion of one year of service from the grant date and
vests with respect to the balance of the shares in a series of 48 monthly
installments thereafter. See "--Employment Agreements; Termination of
Employment and Change in Control Arrangements."
(2) The option was granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by the Board of Directors on
the date of grant. The exercise price may be paid in cash, in shares of
the Company's Common Stock valued at fair market value on the exercise
date or through a cashless exercise procedure involving a same-day sale of
the purchased shares. The Company may also finance the option exercise by
loaning the optionee sufficient funds to pay the exercise price for the
purchased shares, together with any federal and state income tax liability
incurred by the optionee in connection with such exercise.
(3) The 5% and 10% assumed rates of appreciation are mandated by rules of the
Securities and Exchange Commission. The potential realizable value is
calculated based on the term of the option at its time of grant (10 years)
and is calculated by assuming that the stock price on the date of grant as
determined by the Board of Directors appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the
option is sold on the last day of its term for the appreciated price.
There can be no assurance provided to any Named Executive Officer or any
other holder of the Company's securities that the actual stock price
appreciation over the 10-year term will be at the assumed 5% and 10%
levels or at any other defined level.
(4) Mr. Silverman's option was granted on May 2, 1996 and is immediately
exercisable. The shares purchasable thereunder are subject to repurchase
by the Company at the original exercise price paid per share upon the
optionee's cessation of service prior to vesting in such shares. The
repurchase right lapses and the optionee vests as to 25% of the option
shares upon completion of one year of service from the date of grant and
the balance in a series of equal monthly installments over the next 36
months of service thereafter. The option shares will vest upon an
acquisition of the Company by merger or asset sale, unless the Company's
repurchase right with respect to the unvested option shares is transferred
to the acquiring entity. The option has a maximum term of 10 years,
subject to earlier termination in the event of the optionee's cessation of
employment or service with the Company.
38
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information with respect to the value of
stock options held as of December 31, 1996 by each of the Named Executive
Officers. There were no stock option exercises by such individuals during
1996.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END (1)
--------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Brenda C. Hall............ 0 0 0 0
Keith Corbin.............. 46,048 92,096 $221,030 $442,061
Todd J. Kinion............ 0 0 0 0
Rita S. Hazell............ 24,000 36,000 115,200 172,800
Craig J. Silverman........ 50,000 (2) 0 180,000 0
</TABLE>
- --------
(1) Based on the estimated fair market value of the Company's Common Stock as
of December 31, 1996 of $5.10 per share, less the exercise price payable
upon exercise of such options.
(2) The option is immediately exercisable. The shares purchasable thereunder
are subject to repurchase by the Company at the original exercise price
paid per share upon the optionee's cessation of service prior to vesting
in such shares. The repurchase right lapses and the optionee vests as to
25% of the option shares upon completion of one year of service from the
date of grant and the balance in a series of equal monthly installments
over the next 36 months of service thereafter. None of the shares issuable
upon exercise of such option were vested as of December 31, 1996.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of the Compensation Committee in January 1997, the
Company's Board of Directors ("Board") established levels of compensation for
the Company's executive officers. Brenda C. Hall, Paul H. Bartlett and Keith
Corbin participated in deliberations of the Board regarding executive
compensation during 1996. The Company's Compensation Committee currently
consists of Todd J. Kinion and Jon H. Rowberry. Mr. Rowberry was not at any
time during 1996 or at any other time an officer or employee of the Company.
Mr. Kinion served as Vice President and Secretary of the Company until August
1996 and February 1997, respectively. See "Management--Executive Officers and
Directors."
1997 STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "1997 Plan") was adopted by the
Board of Directors on May 23, 1997, subject to stockholder approval, as the
successor to the Company's 1996 Stock Option Plan (the "1996 Plan"). The total
number of shares of Common Stock authorized for issuance under the 1997 Plan
consists of (i) the 1,464,186 shares subject to outstanding options under the
1996 Plan as of June 30, 1997, (ii) an additional 300,000 shares of Common
Stock and (iii) an additional number of shares of Common Stock equal to 3% of
the number of shares of Common Stock outstanding on the first day of 1998,
1999 and 2000. As of June 30, 1997, no shares had been issued under the 1997
Plan. Shares of Common Stock subject to outstanding options, including options
granted under the 1996 Plan, which expire or terminate prior to exercise will
be available for future issuance under the 1997 Plan.
Under the 1997 Plan, employees, officers, directors and independent
consultants may, at the discretion of the plan administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
85% of the fair market value of such shares on the grant date. Non-employee
members of the Board will also be eligible for automatic option grants under
the 1997 Plan.
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<PAGE>
The 1997 Plan will be administered by the Board or the Compensation
Committee of the Board after this Offering. The plan administrator has
complete discretion to determine which eligible individuals are to receive
option grants, the number of shares subject to each such grant, the status of
any granted option as either an incentive option or a non-statutory option
under the federal tax laws, the vesting schedule to be in effect for each
option grant and the maximum term for which each granted option is to remain
outstanding. In no event, however, may any one participant in the 1997 Plan
acquire shares of Common Stock under the 1997 Plan in excess of 500,000 shares
each calendar year over the term of the Plan.
The exercise price for options granted under the 1997 Plan may be paid in
cash or in outstanding shares of Common Stock. Options may also be exercised
on a cashless basis through the same-day sale of the purchased shares. The
plan administrator may also permit the optionee to pay the exercise price
through a promissory note payable in installments over a period of years. The
amount financed may include any federal or state income and employment taxes
incurred by reason of the option exercise.
The plan administrator has the authority to effect, from time to time, the
cancellation of outstanding options under the 1997 Plan in return for the
grant of new options for the same or different number of option shares with an
exercise price per share based upon the fair market value of the Common Stock
on the new grant date.
In the event the Company is acquired by merger, consolidation or asset sale,
each option outstanding at the time under the 1997 Plan will terminate to the
extent not assumed by the acquiring entity. In addition, the plan
administrator generally has the discretion to accelerate the vesting of
options.
Under the automatic grant program, each individual who first joins the Board
as a non-employee director after the date of this Offering will receive at
that time, an automatic option grant for 20,000 shares of Common Stock. The
optionee will vest in the automatic option grant in a series of four annual
installments over the optionee's period of Board service, beginning one year
from the grant date. Each option will have an exercise price equal to the fair
market value of the Common Stock on the automatic grant date and a maximum
term of ten years, subject to earlier termination following the optionee's
cessation of Board service.
The Board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate on May 22, 2007, unless sooner terminated by the Board.
IT PROFESSIONAL PLAN
The Company's IT Professional Stock Option Plan (the "IT Professional Plan")
was adopted by the Board of Directors on May 23, 1997. The Company has
reserved 350,000 shares of Common Stock for issuance under the IT Professional
Plan, plus an additional number of shares equal to 1.5% of the number of
shares of Common Stock outstanding on the first day of each calendar year
beginning January 1, 1998. As of June 30, 1997, no shares had been issued
under the IT Professional Plan and no options were outstanding. Shares of
Common Stock subject to outstanding options which expire or terminate prior to
exercise will be available for future issuance under the IT Professional Plan.
Under the IT Professional Plan, independent consultants may, at the
discretion of the plan administrator, be granted options to purchase shares of
Common Stock at an exercise price not less than 85% of the fair market value
of such shares on the grant date.
The IT Professional Plan will be administered by the Board or the
Compensation Committee of the Board after this Offering. The plan
administrator has complete discretion to determine which eligible individuals
are to receive option grants, the number of shares subject to each such grant,
the vesting schedule to be in effect for each option grant and the maximum
term for which each granted option is to remain outstanding. The plan
administrator has the authority to effect, from time to time, the cancellation
of outstanding options under the IT Professional Plan in return for the grant
of new options for the same or different number of option shares with an
exercise price per share based upon the fair market value of the Common Stock
on the new grant date.
40
<PAGE>
The exercise price for options granted under the IT Professional Plan may be
paid in cash or in outstanding shares of Common Stock. Options may also be
exercised on a cashless basis through the same-day sale of the purchased
shares.
In the event the Company is acquired by merger, consolidation or asset sale,
each option outstanding at the time under the IT Professional Plan will
terminate to the extent not assumed by the acquiring entity. In addition, the
plan administrator generally has the discretion to accelerate the vesting of
options.
The Board may amend or modify the IT Professional Plan at any time. The IT
Professional Plan will terminate on May 22, 2007, unless sooner terminated by
the Board.
EMPLOYEE STOCK PURCHASE PLAN
The Company expects to adopt before this Offering an Employee Stock Purchase
Plan (the "Purchase Plan"), subject to approval by the stockholders. A total
of 150,000 shares of Common Stock will be reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section
423 of the Internal Revenue Code, will be implemented by six-month offerings
commencing after the closing of this Offering. The Purchase Plan will be
administered by the Compensation Committee of the Board. Employees will be
eligible to participate if they are employed by the Company for more than 20
hours per week and have been employed by the Company for at least ninety days.
The Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 10% of an employee's cash
compensation, nor more than 1,000 shares per participant on any purchase date.
The price of stock purchased under the Purchase Plan will be 85% of the lower
of the fair market value of the Common Stock at the beginning of the six-month
offering period or on the purchase date. Employees may end their participation
in the offering at any time during the offering period, and participation ends
automatically on termination of employment with the Company. Each outstanding
purchase right will be exercised immediately prior to a merger or
consolidation. The Board may amend or terminate the Purchase Plan immediately
after the close of any purchase date. However, the Board may not, without
stockholder approval, materially increase the number of shares of Common Stock
available for issuance. The Purchase Plan will in all events terminate in May
2007.
EMPLOYMENT AGREEMENTS; TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
In October 1996, the Company entered into an employment agreement with Paul
H. Bartlett. The employment agreement is for an unspecified term and
terminates when all obligations of the parties thereto have been satisfied.
Under the agreement, Mr. Bartlett will be employed as the Company's President,
reporting to its Chief Executive Officer. The agreement provides for an annual
base salary of $240,000. Mr. Bartlett is also eligible for an annual bonus,
subject to a maximum limitation of 75% of his annual base salary. In addition,
the Company granted to Mr. Bartlett an immediately exercisable stock option to
purchase 974,000 shares of Common Stock at an exercise price of $4.00 per
share, subject to certain repurchase rights of the Company. Mr. Bartlett is
50% vested in such shares and will vest in the balance of the shares in a
series of 24 monthly installments commencing January 1, 1998. In addition, all
unvested option shares automatically vest upon the occurrence of certain
events, including a merger of the Company after which 50% or less of the
surviving corporation's voting securities are owned by the Company's
stockholders, a sale by the Company of all or substantially all of its assets,
or a constructive discharge of Mr. Bartlett. Either the Company or Mr.
Bartlett may terminate Mr. Bartlett's employment with the Company at any time
by giving the other party 30 days prior written notice. If Mr. Bartlett is
terminated other than for cause or disability, or if Mr. Bartlett is
constructively discharged, Mr. Bartlett will receive his salary for an
additional 12 months from the date of termination, provided he does not engage
in certain competitive activities. Under the employment agreement, the Company
will nominate Mr. Bartlett for election as a member of its Board of Directors
as long as he remains employed, and Brenda C. Hall has agreed to cause her
shares of the Company's stock to be voted in favor of Mr. Bartlett's election.
41
<PAGE>
In December 1996, the Company entered into an employment agreement with
Mordecai Levine in connection with the TeamAlliance Acquisition which provides
for a base salary of $125,000. For the period ending on the first, second and
third anniversary of Mr. Levine's employment with the Company, he is eligible
to receive a monthly bonus based upon gross margin dollars generated by the IS
Contract Services, which bonus aggregated $46,000 for the first six months of
1997. In addition, the Company granted to Mr. Levine stock options to purchase
92,000 shares of Common Stock of the Company at an exercise price of $5.10 per
share subject to certain repurchase rights of the Company. Mr. Levine is
currently vested in 52,000 of such shares, and he will vest in an additional
8,000 shares on December 2, 1997, with the balance of the shares vesting in a
series of 48 equal monthly installments commencing December 2, 1997. Upon Mr.
Levine's exercise of such options, the Company has agreed to pay to him an
amount equal to the aggregate exercise price of such options. Either the
Company or Mr. Levine may terminate Mr. Levine's employment with the Company
at any time and for any reason by giving the other party written notice. If
Mr. Levine voluntarily terminates employment with the Company for good cause
or is terminated other than for cause, he will receive his salary and bonus
for an additional six months from the date of termination. The employment
agreement terminates upon the earlier of the satisfaction of all of the
obligations thereunder or December 2, 2000.
In March 1997, the Company entered into an employment agreement with Brenda
C. Hall, which provides for a base salary of $260,000. Ms. Hall is also
eligible for an annual bonus subject to a maximum limitation of 75% of her
annual base salary. Either the Company or Ms. Hall may terminate Ms. Hall's
employment with the Company at any time by giving the other party 30 days
prior written notice. If Ms. Hall is terminated other than for cause or is
constructively discharged, and provided that she does not engage in certain
competitive activities, Ms. Hall will receive her base salary for an
additional 24 months from the date of termination, and the Company will pay
for her COBRA continuation coverage until the date that is the earlier of 12
months after her termination or the date on which her COBRA eligibility
ceases. The employment agreement is for an unspecified term and terminates
when all obligations of the parties thereto have been satisfied.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Pursuant to the Company's Certificate of Incorporation and under Delaware
law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for dividend payments or stock repurchase illegal
under Delaware law or any transaction in which a director has derived an
improper personal benefit.
The Company intends to enter into indemnification agreements with its
directors and executive officers.
42
<PAGE>
CERTAIN TRANSACTIONS
In January 1996, Brenda C. Hall, the Company's Chief Executive Officer and a
director of the Company, and Todd J. Kinion, a former officer and a current
director of the Company, borrowed from the Company $3.0 million and $2.0
million, respectively, pursuant to certain secured promissory notes. Each of
these promissory notes bears interest at an annual rate of the lesser of 6.91%
or the maximum amount permitted by law and become due and payable in January
2001 or upon the occurrence of certain events. The promissory notes were
initially secured by an aggregate of 2,000,000 shares of Common Stock owned by
Ms. Hall and Mr. Kinion. Pursuant to the terms of certain pledge agreements,
on each of July 30, 1996 and January 30, 1997, an aggregate of 400,000 such
shares were released. The promissory notes are currently secured by an
aggregate of 1,200,000 shares of Common stock (720,000 shares owned by Ms.
Hall and 480,000 shares owned by Mr. Kinion). Ms. Hall and Mr. Kinion may pay
their promissory notes by tendering to the Company 480,000 and 320,000 shares
of Common Stock, respectively. Ms. Hall and Mr. Kinion have agreed to tender
such shares in payment of their respective promissory notes upon completion of
this Offering.
In January 1996, the Company sold an aggregate of 1,600,000 shares of Series
A Preferred Stock, at a price of $6.25 per share, and in connection therewith
warrants to purchase an aggregate of up to 250,000 shares of Common Stock, at
an exercise price of $0.01 per share, to three entities affiliated with the
Sprout Group ("Sprout"). In connection with the purchase of the Series A
Preferred Stock, Brenda C. Hall, Todd J. Kinion and Sprout were granted
certain registration rights with regard to the shares of Common Stock held by
Ms. Hall and Mr. Kinion, the shares of Common Stock issuable upon conversion
of the shares of Series A Preferred Stock and the shares of Common Stock
issuable upon exercise of the warrants. The Company also sold warrants to
purchase an aggregate of up to 242,215 shares of Common Stock, at an exercise
price of $0.01 per share, to Sprout, which warrants are exercisable only in
the event that (i) Ms. Hall does not tender at least 480,000 shares of the
Company's Common Stock held by her in full payment of the secured promissory
note issued by her or (ii) Mr. Kinion does not tender at least 320,000 shares
of the Company's Common Stock held by him in full payment of the secured
promissory note issued by him. In connection with this transaction, Paul H.
Bartlett, a general partner of Sprout at the time, was appointed a director of
the Company in January 1996 and was subsequently succeeded by Kathleen D.
LaPorte, a general partner of Sprout, when Mr. Bartlett joined the Company as
President in October 1996. In addition, Ms. Hall and Mr. Kinion entered into a
Voting Trust Agreement with the Company, which has been subsequently amended
in connection with the settlement agreement and general release entered into
between the Company and Mr. Kinion and which terminates upon the occurrence of
certain events, including the consummation of the sale of the shares offered
hereby. See "Management--Employment Agreements; Termination of Employment and
Change in Control Arrangements."
In July 1996, the Company granted Jon H. Rowberry, a non-employee member of
the Board of Directors, an option to acquire 25,000 of shares of Common Stock
of the Company at an exercise price of $4.00 per share. This option vests over
five years.
In August 1996, the Company granted to Rita S. Hazell, Vice President, R&D
Contract Services, a loan in the principal amount of $100,000 plus interest.
Such loan is secured by a deed of trust in favor of the Company on the real
property purchased partially with such borrowed funds. The principal amount of
the loan and any accrued interest thereon will be forgiven by the Company
ratably over four years so long as Ms. Hazell remains employed by the Company.
In October 1996, the Company entered into a settlement agreement and general
release with Todd J. Kinion, a former officer and a current director of the
Company, which obligates the Company to make monthly payments of $9,033 to him
until the earlier of February 29, 1998 or the occurrence of certain events. A
lump sum payment of $11,239, representing full payment of all unpaid bonus
obligations and business expense reimbursements, was made to Mr. Kinion in
connection with the settlement agreement. In addition, as part of the terms of
the settlement agreement, Mr. Kinion agreed to deposit 1,795,100 of the shares
of Common Stock he holds with Ms. Hall, as trustee of the voting trust (the
"Voting Trust") created pursuant to that certain Voting Trust Agreement dated
January 30, 1996 among the Company, Brenda C. Hall, and Mr. Kinion and agreed
to amend
43
<PAGE>
the Voting Trust to grant Ms. Hall as voting trustee, the right to vote such
shares in all matters with certain exceptions. The Voting Trust Agreement and
the Voting Trust created thereby terminate upon the occurrence of certain
events including the consummation of the sale of the shares offered hereby.
Keith Corbin resigned from the Company as Chief Financial Officer effective
December 31, 1996, pursuant to a consulting and settlement agreement, which
obligates the Company to make monthly payments to
Mr. Corbin of $13,333 per month through May 1997 and $3,333 per week from May
1997 through August 1997 provided that he continues to provide services to the
Company and is not terminated for cause. In addition, as part of the terms of
the consulting and settlement agreement, Mr. Corbin's incentive stock option
will continue to vest through August 1997 provided that he continues to
provide services to the Company and is not terminated for cause.
In December 1996, a wholly owned subsidiary of the Company acquired certain
assets of TeamAlliance Technology Partners, L.P. ("TA") and related entities
for a total purchase price of approximately $8.6 million pursuant to an Asset
Purchase Agreement dated as of November 26, 1996 by and among the Company, TA
Acquisition Company, TA, TeamAlliance Technology Partners, Inc., Team Visions,
Inc., certain limited liability companies affiliated with TA, Richard F.
Harmon, Mordecai Levine and Frederick Lenz. Messrs. Harmon and Levine are
officers and directors of TeamAlliance Technology Partners, Inc., the General
Partner of TA. In connection with the TeamAlliance Acquisition, Messrs. Harmon
and Levine each entered into an Employment Agreement with the Company and were
granted options to acquire shares of Common Stock of the Company. See
"Management--Employment Agreements, Termination of Employment and Change in
Control Arrangements."
The Company entered into employment agreements with each of Paul H. Bartlett
and Brenda C. Hall in October 1996 and March 1997, respectively. See
"Management--Employment Agreements, Termination of Employment and Change in
Control Arrangements."
In June 1997, Richard Harmon terminated his employment with the Company. Mr.
Harmon served as Vice President, Internet Services of the Company from
December 1996. Pursuant to the terms of the employment agreement entered into
between the Company and Mr. Harmon in December 1996 in connection with the
TeamAlliance Acquisition, the Company is obligated to continue to pay Mr.
Harmon his base annual salary of $125,000 and annual bonus of not less than
$75,000 for 180 days following his termination. In addition, pursuant to the
terms of the employment agreement, the Company paid to Mr. Harmon $265,200,
the amount equal to the aggregate exercise price of the 52,000 stock options
he exercised in July 1997.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been otherwise
obtained from unaffiliated third parties. All future transactions, including
loans (if any), between the Company and its officers, directors and principal
stockholders and their affiliates will be approved by a majority of the Board
of Directors, including a majority of the independent and disinterested
outside directors of the Board of Directors, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties.
44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by:
(i) each person (or group of affiliated persons) who is known by the Company
to own beneficially more than 5% of the Company's Common Stock; (ii) each of
the Company's directors; (iii) each of the Named Executive Officers; (iv) all
current executive officers and directors as a group; and (v) each Selling
Stockholder. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, subject to community property laws
where applicable. Except as otherwise provided below, the address of each
person listed below is c/o Hall, Kinion & Associates, Inc., 19925 Stevens
Creek Boulevard, Cupertino, CA 95014.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE NUMBER OF AFTER THE OFFERING
OFFERING (1) SHARES TO BE (1)
NAME AND ADDRESS OF -------------------- SOLD IN THE --------------------
BENEFICIAL OWNER SHARES PERCENTAGE OFFERING SHARES PERCENTAGE
- ----------------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Brenda C. Hall (2)..... 3,432,800 47.7% 210,000 3,182,800 35.9%
Todd J. Kinion (3)..... 1,994,100 27.7% 131,666 1,827,434 20.6%
36 Playa Boulevard
La Selva Beach, CA
95076
Entities Affiliated
with the Sprout Group
(4) 1,845,200 24.8% 416,667 1,428,533 15.7%
3000 Sand Hill Road
Bldg. 4, Suite 270
Menlo Park, CA 94025-
7114
Kathleen D. LaPorte
(5)................... 1,845,200 24.8% 416,667 1,428,533 15.7%
3000 Sand Hill Road
Bldg. 4, Suite 270
Menlo Park, CA 94025-
7114
Paul H. Bartlett (6)... 974,000 11.9% 974,000 9.9%
Keith Corbin (7)....... 92,096 1.3% 92,096 1.0%
Craig J. Silverman (8). 50,000 * 50,000 *
Rita S. Hazell (9)..... 24,000 * 24,000 *
Jon H. Rowberry (10)... 25,000 * 25,000 *
All executive officers
and directors as a
group (9 persons)
(11).................. 8,606,100 97.7% 7,772,767 74.6%
Other Selling
Stockholders
- -------------
Dean Call Voting Trust
(12).................. 399,996 5.6% 40,000 359,996 4.1%
Kinion Voting Trust
(13).................. 199,000 2.8% 35,000 164,000 1.8%
Richard Swanson........ 10,000 * 10,000 0 0
c/o Camerlengo & John-
son
500 Airport Blvd.,
Suite 230
Burlingame, CA 94010
Camerlengo & Johnson... 5,000 * 5,000 0 0
500 Airport Blvd.,
Suite 230
Burlingame, CA 94010
</TABLE>
- --------
* Less than 1%.
(1) Percentage of beneficial ownership is calculated assuming 7,200,288
shares of Common Stock were outstanding on June 30, 1997. This percentage
also includes Common Stock of which such individual or entity has the
right to acquire beneficial ownership within 60 days of June 30, 1997,
including but not limited to the exercise of an option; however, such
Common Stock shall not be deemed outstanding for the purpose of computing
the percentage owned by any other individual or entity. The number of
shares outstanding after this Offering includes the 1,666,667 shares of
Common Stock being offered for sale by
45
<PAGE>
the Company in this Offering, and assumes no exercise of the Underwriters'
over-allotment option. See "Underwriting."
(2) Includes 399,996 shares held by the Dean Call Voting Trust and 28,500
shares held by Virgil Hall. Ms. Hall is co-trustee of the Dean Call
Voting Trust and Virgil Hall is Ms. Hall's spouse. Excludes 1,795,100
shares held by Todd J. Kinion and deposited into the Voting Trust over
which Ms. Hall has voting power pursuant to the terms of the settlement
agreement between the Company and Mr. Kinion; such Voting Trust
terminates upon the occurrence of certain events, including the
consummation of the sale of shares offered hereby. Also excludes 480,000
shares pledged in connection with a secured promissory note executed by
Ms. Hall. See "Certain Transactions." If the over-allotment is exercised
in full, Ms. Hall will sell an additional 113,175 shares.
(3) Includes 199,000 shares held by the Kinion Voting Trust, but excludes
320,000 shares pledged in connection with a secured promissory note
executed by Mr. Kinion. If the overallotment is exercised in full, Mr.
Kinion will sell an additional 75,450 shares. See "Certain Transactions."
(4) Includes 1,429,327, 145,560 and 20,313 shares of Common Stock held by
Sprout Growth II, L.P. ("Sprout II"), DLJ Capital Corporation ("DLJ") and
Sprout CEO Fund, L.P. ("Sprout CEO"), respectively. Also includes
warrants to purchase 224,004, 22,812 and 3,184 shares of Common Stock
held by Sprout II, DLJ and Sprout CEO, respectively. Excludes warrants to
purchase an aggregate of up to 242,215 shares of Common Stock, which are
exercisable only in the event that Ms. Hall does not tender at least
480,000 shares or Mr. Kinion does not tender at least 320,000 shares in
full payment of their respective promissory notes. See "Certain
Transactions." DLJ is the general partner of Sprout CEO. Ms. LaPorte, a
director of the Company, is a general partner of the Sprout Group. Ms.
LaPorte disclaims beneficial ownership of the shares held by such
entities, except to the extent of her pecuniary interest therein. Ms.
LaPorte may be deemed to exercise voting and investment power over the
shares held by affiliates of the Sprout Group. If the overallotment is
exercised in full, Sprout II, DLJ and Sprout CEO will sell an additional
188,625 shares.
(5) Includes shares described in Note 4 above. Ms. LaPorte, a director of the
Company, disclaims beneficial ownership of the shares held by such
entities, except to the extent of her pecuniary interest therein.
(6) Represents shares in the form of stock options exercisable within 60 days
of June 30, 1997.
(7) Includes 46,048 shares in the form of stock options exercisable within 60
days of June 30, 1997.
(8) Represents shares in the form of stock options exercisable within 60 days
of June 30, 1997.
(9) Ms. Hazell holds an option to purchase an aggregate of 60,000 shares of
Common Stock, of which 24,000 shares are exercisable within 60 days of
June 30, 1997.
(10) Represents shares in the form of stock options exercisable within 60 days
of June 30, 1997. Mr. Rowberry's mailing address is c/o Franklin Covey,
2200 West Parkway Boulevard, Salt Lake City, Utah 84119.
(11) Includes warrants to purchase 250,000 shares of Common Stock and
1,308,000 shares in the form of stock options exercisable within 60 days
of June 30, 1997.
(12) See Note 2 above.
(13) See Note 3 above.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 100,000,000
shares of Common Stock, par value $0.001 per share, and 10,000,000 shares of
Preferred Stock, par value $0.001 per share, after giving effect to the
amendment of the Company's Certificate of Incorporation to delete references
to Series A Preferred Stock which will occur upon conversion of such Preferred
Stock into Common Stock upon the closing of this Offering and the subsequent
authorization of shares of undesignated Preferred Stock as described below.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Amended and
Restated Certificate of Incorporation, which is included as an exhibit to the
Registration Statement of which this Prospectus is a part, and by the
provisions of applicable law.
COMMON STOCK
As of June 30, 1997, there were 6,400,288 shares of Common Stock outstanding
that were held of record by approximately 16 stockholders, as well as options
and warrants to purchase an aggregate of approximately 2,688,186 shares of
Common Stock. The holders of Common Stock are entitled to one vote per share
on all matters to be voted upon by the stockholders. Subject to preferences
that may be applicable to outstanding shares of Preferred Stock, if any, the
holders of Common Stock are entitled to receive ratably such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior
liquidation rights of Preferred Stock, if any then outstanding. The Common
Stock has no preemptive conversion rights or other subscription rights. There
are not redemption or sinking funds provisions applicable to the Common Stock.
All outstanding shares of Common Stock are fully paid and non-assessable, and
the shares of Common Stock to be outstanding upon completion of this Offering
will be fully paid and non-assessable.
PREFERRED STOCK
As of June 30, 1997, there were 1,600,000 shares of Series A Preferred Stock
of the Company outstanding. Such shares of Series A Preferred Stock will be
converted into Common Stock upon the closing of this Offering, with a
conversion rate that adjusts based on the per share price of the Common Stock
in this Offering. At the initial public offering price of $15.00 per share,
each share of Series A Preferred Stock will convert into one share of Common
Stock.
Effective upon the closing of this Offering and the conversion of
outstanding Series A Preferred Stock into Common Stock, the Company's
Certificate of Incorporation will authorize 10,000,000 shares of Preferred
Stock. The Board of Directors has the authority to issue the Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the
stockholders. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. The
Company has no present plan to issue Preferred Stock.
47
<PAGE>
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW
Certificate of Incorporation and Bylaws
Upon completion of this Offering, the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") and Bylaws will contain
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 into 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 stockholder
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 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.
See "Risk Factors--Effect of Certain Charter Provisions; Anti-Takeover Effects
of Certificate of Incorporation, Bylaws and Delaware Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
REGISTRATION RIGHTS
After this Offering, the holders of 5,636,221 shares of Common Stock
(5,258,971 if the over-allotment is exercised in full) and the holders of
warrants to purchase 250,000 shares of Common Stock will be entitled upon
expiration of lock-up agreements with the Underwriters to certain rights with
respect to the registration of such
48
<PAGE>
shares under the Securities Act. Under the terms of the agreement between the
Company and the holders of such registrable securities, if the Company
proposes to register any of its securities under the Securities Act, either
for its own account or for the account of other security holders exercising
registration rights, such holders are entitled to notice of such registration
and are entitled to include shares of such Common Stock therein. Certain of
such stockholders benefiting from these rights may also require the Company to
file a registration statement under the Securities Act at the Company's
expense with respect to their shares of Common Stock, and the Company is
required to use its diligent reasonable efforts to effect such registration.
Further, holders may require the Company to file additional registration
statements on Form S-3 at the Company's expense. These rights are subject to
certain conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in such registration in
certain circumstances.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation. Its telephone number is (818) 502-1404.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 8,866,955 shares of
Common Stock outstanding (assuming no exercise of the Underwriters' over-
allotment option, of options or of warrants). Of these shares, the 2,515,000
shares sold in this Offering will be freely tradeable without restriction or
further registration under the Securities Act, except that any shares
purchased by "affiliates" of the Company, as that term is defined under the
Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
Upon completion of this Offering, the remaining 6,351,955 shares of Common
Stock are deemed "restricted securities" under Rule 144. Of these shares,
28,550 shares will be eligible for sale in the public market upon the
effective date of the registration statement filed in connection with this
Offering in reliance on Rule 144(k) of the Securities Act. Beginning 90 days
after the date of this Prospectus, 46,048 shares will be eligible for sale
pursuant to Rule 144 or Rule 701 promulgated under the Securities Act, subject
to the volume and other resale limitations of Rule 144. Beginning 180 days
after the date of this Prospectus (or earlier with the consent of Montgomery
Securities), upon the expiration of transfer restrictions specified in
existing agreements with the Company or lock-up agreements with the
representatives of the underwriters, approximately 6,277,357 shares will be
eligible for sale in reliance upon Rule 144 or Rule 701 promulgated under the
Securities Act, some of which will be subject to the volume and other resale
limitations of Rule 144, other than the one year holding period. The remaining
shares are eligible for sale in the public market more than 180 days after the
date of this Prospectus.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this Offering, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year
(including the holding period of any prior owner other than an Affiliate),
including a person who may be deemed an Affiliate of the Company, is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of the Company's Common
Stock or (ii) the average weekly trading volume of the Company's Common Stock
in the over the counter market during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission. Sales under Rule 144 are also subject to certain manner of sales
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who owns shares within the
definition of "restricted securities" under Rule 144 that were purchased from
the Company (or any affiliate) at least two years, would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitations, manner
of sale provision, public information requirements or notice requirements.
However, the transfer agent may require an opinion of counsel that a proposed
sale of shares comes within the terms of Rule 144 of the Securities Act prior
to effecting a transfer of such shares. Rule 701 under the Securities Act
provides that shares of Common Stock acquired on the exercise of outstanding
options may be resold by persons other than Affiliates, beginning 90 days
after the date of this Prospectus, subject only to the manner of sale
provisions of Rule 144, and by Affiliates, beginning 90 days after the date of
this Prospectus, subject to all provisions of Rule 144 except its one year
minimum holding period.
Prior to this Offering, there has been no public market for the Common Stock
of the Company and no predictions can be made of the effect, if any, that the
sale or availability for sale of shares of additional Common Stock will have
on the market price of the Common Stock. Nevertheless, sales of substantial
amounts of such shares in the public market, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
OPTIONS
As of June 30, 1997, options to purchase a total of 2,438,186 shares of
Common Stock were outstanding. See "--Lock-up Agreements." In addition,
300,000 shares were available for future grant under the 1997 Plan
50
<PAGE>
as of June 30, 1997. Shares of Common Stock subject to outstanding options,
including options granted under the 1996 Plan, which expire or terminate prior
to exercise will be available or future issuance under the 1997 Plan. An
additional number of shares of Common Stock equal to 3% of the number of
shares of Common Stock outstanding on the first day of 1998, 1999 and 2000
will also become available for future grant under the 1997 Plan. Furthermore,
150,000 shares have been reserved for issuance under the Purchase Plan and
350,000 shares have been reserved for issuance under the IT Professional Plan.
"Management--1997 Stock Option Plan," "IT Professional Plan" "--Employee Stock
Purchase Plan," and Note 8 to Consolidated Financial Statements.
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than Affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates,
beginning 90 days after the date of this Prospectus, subject to all provisions
of Rule 144 except its one year minimum holding period. The Company intends to
file one or more registration statements on Form S-8 under the Securities Act
to register all shares of Common Stock subject to outstanding stock options
and Common Stock issued or issuable pursuant to the Company's 1997 Plan. The
Company expects to file the registration statement on or shortly after the
effectiveness of this Offering covering 3,238,186 shares of Common Stock
subject to outstanding stock options or reserved for issuance under the 1997
Plan, IT Professional Plan and Employee Stock Purchase Plan as well as stock
options granted outside such plans. Such registration statements are expected
to become effective upon filing. Shares covered by these registration
statements will thereupon be eligible for sale in the public markets, subject
to the lock-up agreements, if applicable.
LOCK-UP AGREEMENTS
All officers and directors and certain holders of Common Stock and holders
of options and warrants to purchase Common Stock have agreed pursuant to
certain "lock-up" agreements that they will not offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible or exercisable or exchangeable for Common Stock, or
enter into any swap or similar agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock for a period 180 days after
the transfer or date of this Prospectus without the prior written consent of
Montgomery Securities. Certain other holders of Common Stock and options to
purchase Common Stock have agreed pursuant to existing agreements with the
Company not to sell or otherwise transfer or dispose of any Common Stock for a
period of 180 days after the effective date of this Offering.
51
<PAGE>
UNDERWRITING
Montgomery Securities, Robert W. Baird & Co. Incorporated and The Robinson-
Humphrey Company, Inc. (the "Underwriters"), have severally agreed, subject to
the terms and conditions set forth in the underwriting agreement (the
"Underwriting Agreement"), by and between the Company and the Underwriters to
purchase from the Company and the Selling Stockholders the aggregate number of
shares of Common Stock indicated below opposite their respective names, at the
initial public offering price less the underwriting discount set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of the shares of Common
Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Montgomery Securities.............................................. 1,131,750
Robert W. Baird & Co. Incorporated................................. 691,625
The Robinson-Humphrey Company, Inc. ............................... 691,625
---------
Total............................................................ 2,515,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Stockholders that
the Underwriters initially propose to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow selected dealers a concession of not more than $0.60 per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $0.10 per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Underwriters. The Common Stock is offered subject to receipt and acceptance by
the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part.
The Selling Stockholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 377,250 additional shares of Common Stock,
respectively, to cover over-allotments, if any, at the same price per share as
the initial shares to be purchased by the Underwriters. To the extent that the
Underwriters exercise such option, the Underwriters will be committed, subject
to certain conditions, to purchase such additional shares in approximately the
same proportion as set forth in the above table. The Underwriters may purchase
such shares only to cover over-allotments made in connection with this
Offering.
The Company, the Selling Stockholders and the Company's executive officers
and directors have agreed that for a period of 180 days after the date of this
Prospectus they will not, without the prior written consent of Montgomery
Securities, directly or indirectly offer for sale, sell, solicit an offer to
sell, contract or grant an option to sell, pledge, transfer, establish an open
put equivalent position or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities
exchangeable or exercisable for or convertible into shares of Common Stock. The
Company has also agreed not to issue, offer, sell, grant options to purchase or
otherwise dispose of any of the Company's equity securities for a period of 180
days after the effective date of this Offering without the prior written
consent of Montgomery Securities, other than pursuant to the 1997 Stock Option
Plan, IT Professional Plan and the Employee Stock Purchase Plan and certain
issuances in connection with acquisitions of businesses. In evaluating any
request for a waiver of the 180-day lock-up period, Montgomery Securities will
consider, in accordance with their customary practice, all relevant facts and
circumstances at the time of the request, including, without limitation, the
recent trading market for the Common Stock, the size of the request and, with
respect to a request by the Company to issue additional equity securities, the
purpose of such an issuance. See "Shares Eligible for Future Sale."
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities and Exchange Act of 1934,
pursuant to which such persons may bid for or
52
<PAGE>
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and, in such case, may
purchase Common Stock in the open market following completion of the Offering
to cover all or a portion of such short position. The Underwriters may also
cover all or a portion of such short position, up to 377,250 shares of Common
Stock, by exercising the Underwriters' over-allotment option referred to
above. In addition, Montgomery Securities, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the offering) for the account of the
other Underwriters, the selling concession with respect to Common Stock that
is distributed in the Offering but subsequently purchased for the account of
the Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Underwriters have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of Common Stock offered hereby.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
was determined by negotiations between the Company and the Underwriters. Among
the factors considered in such negotiations were prevailing market conditions,
the results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies that the Company
and the Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant. See "Risk Factors--No Prior
Trading Market for Common Stock; Potential Volatility of Stock Price."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California. Certain legal matters in connection with this Offering
will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
53
<PAGE>
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and for each of the three years in the period ended December 31, 1996, and the
consolidated financial statements of TeamAlliance as of December 1, 1996 and
for the eleven-month period then ended appearing in this Prospectus and the
related financial statement schedule included elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
set forth in their reports appearing herein and elsewhere in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of TeamAlliance as of December 31,
1994 and 1995, and for the period from inception (May 1, 1994) through
December 31, 1994 and for the year ended December 31, 1995 included in this
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement. For further information with respect to the Company and such Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this Prospectus concerning the contents of any
contract or any other document referred to are not necessarily complete.
Although all material features of such contracts and other documents required
to be disclosed in this Prospectus are so disclosed in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement of which this Prospectus forms a part,
each such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any
part of such materials may be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's web site
is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent public accountants and
with quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited financial information.
54
<PAGE>
INDEX TO CONSOLIDATED AND PRO FORMA COMBINING
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES:
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 and June 30,
1997 (Unaudited)....................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and 1996 and the Six Months Ended June 30, 1996 and 1997
(Unaudited)............................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1994, 1995 and 1996 and the Six Months Ended June
30, 1997 (Unaudited)................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and the Six Months Ended June 30, 1996 and 1997
(Unaudited)............................................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES:
Report of Independent Public Accountants................................ F-16
Independent Auditors' Report............................................ F-17
Consolidated Balance Sheets at December 31, 1994 and 1995 and December
1, 1996................................................................ F-18
Consolidated Statements of Income for the Period from Inception (May 1,
1994) through December 31, 1994 and for the Year Ended December 31,
1995 and for the Period from January 1, 1996 through December 1, 1996.. F-19
Consolidated Statement of Changes in Partners' Capital for the Period
from Inception (May 1, 1994) through December 31, 1994 and for the Year
Ended December 31, 1995 and for the Period from January 1, 1996 through
December 1, 1996....................................................... F-20
Consolidated Statements of Cash Flows for the Period from Inception (May
1, 1994) through December 31, 1994, for the Year Ended December 31,
1995 and for the Period from January 1, 1996 through December 1, 1996.. F-21
Notes to Consolidated Financial Statements.............................. F-22
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME:
Pro Forma Condensed Combining Statement of Income for the Year Ended
December 31, 1996 (Unaudited).......................................... F-27
Notes to Unaudited Pro Forma Condensed Combining Statement of Income for
the Year Ended December 31, 1996....................................... F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Hall, Kinion & Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Hall, Kinion
& Associates, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Hall, Kinion & Associates, Inc. and
Subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
May 16, 1997
F-2
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- JUNE 30, 1997
1995 1996 1997 PRO FORMA
---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 1)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents....... $ 4,000 $ 56,000 $ 161,000
Accounts receivable, net of
allowance for doubtful
accounts of $296,000 in
1995, and $403,000 in 1996
and $354,000 in 1997...... 4,270,000 7,621,000 10,814,000
Prepaid expenses and other
current assets............ 72,000 490,000 491,000
Prepaid income taxes....... -- 786,000 190,000
Deferred income taxes...... 279,000 340,000 612,000
---------- ----------- -----------
Total current assets..... 4,625,000 9,293,000 12,268,000
Property and equipment, net.. 834,000 4,431,000 4,959,000
Goodwill, net................ -- 9,054,000 8,903,000
Deferred IPO costs........... -- -- 403,000
Other assets................. 221,000 216,000 293,000
---------- ----------- -----------
Total assets............. $5,680,000 $22,994,000 $26,826,000
========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft............. $ 338,000 $ 1,229,000 $ 1,187,000
Line of credit............. 1,734,000 418,000 3,828,000
Accounts payable........... 957,000 1,516,000 1,969,000
Accrued salaries,
commissions and related
payroll taxes............. 1,550,000 2,255,000 3,093,000
Accrued liabilities........ 15,000 1,301,000 656,000
Income taxes payable....... 145,000 -- --
Current portion of long-
term debt................. -- 2,385,000 2,385,000
---------- ----------- -----------
Total current
liabilities............. 4,739,000 9,104,000 13,118,000
Long-term debt............... -- 6,738,000 5,998,000
---------- ----------- -----------
Total liabilities........ 4,739,000 15,842,000 19,116,000
---------- ----------- -----------
Commitments and contingencies
(Notes 6 and 10)
Redeemable convertible
preferred stock; 1,600,000
shares authorized, issued,
and outstanding (liquidation
preference $20,000,000, Note
7).......................... -- 9,900,000 9,900,000 $ --
---------- ----------- ----------- -----------
Stockholders' Equity
(deficit):
Common stock; 10,000,000
shares authorized; shares
outstanding: 1995--
6,282,000; 1996--
6,339,000; 1997--6,400,000
(8,000,000 pro forma)..... 81,000 357,000 521,000 10,421,000
Stockholder notes
receivable................ -- (5,323,000) (5,496,000) (5,496,000)
Accumulated translation
adjustment................ -- (3,000) 9,000 9,000
Retained earnings.......... 860,000 2,221,000 2,776,000 2,776,000
---------- ----------- ----------- -----------
Total stockholders'
equity (deficit)........ 941,000 (2,748,000) (2,190,000) 7,710,000
---------- ----------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit)................... $5,680,000 $22,994,000 $26,826,000 $26,826,000
========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Contract services..... $14,222,000 $25,660,000 $42,254,000 $19,039,000 $37,422,000
Permanent placement... 1,746,000 3,725,000 8,317,000 3,701,000 5,269,000
----------- ----------- ----------- ----------- -----------
Net revenues........ 15,968,000 29,385,000 50,571,000 22,740,000 42,691,000
Cost of contract
services............... 10,728,000 19,209,000 30,342,000 13,639,000 25,933,000
----------- ----------- ----------- ----------- -----------
Gross profit............ 5,240,000 10,176,000 20,229,000 9,101,000 16,758,000
Selling, general and
administrative
expenses............... 4,978,000 8,869,000 17,412,000 7,569,000 15,596,000
Other operating
expenses............... -- -- 821,000 -- --
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 4,978,000 8,869,000 18,233,000 7,569,000 15,596,000
----------- ----------- ----------- ----------- -----------
Income from operations.. 262,000 1,307,000 1,996,000 1,532,000 1,162,000
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income....... -- -- 434,000 207,000 172,000
Interest expense...... (122,000) (122,000) (65,000) (29,000) (345,000)
Other expenses, net... (81,000) (34,000) -- 5,000 (24,000)
----------- ----------- ----------- ----------- -----------
Total other income
(expenses), net.... (203,000) (156,000) 369,000 183,000 (197,000)
----------- ----------- ----------- ----------- -----------
Income before income
taxes.................. 59,000 1,151,000 2,365,000 1,715,000 965,000
Income taxes............ 26,000 469,000 1,004,000 687,000 410,000
----------- ----------- ----------- ----------- -----------
Net income.............. $ 33,000 $ 682,000 $ 1,361,000 $ 1,028,000 $ 555,000
=========== =========== =========== =========== ===========
Net income per share.... $ -- $ 0.09 $ 0.14 $ 0.11 $ 0.06
=========== =========== =========== =========== ===========
Shares used in per share
computation............ 7,356,000 7,401,000 9,480,000 9,070,000 9,632,000
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK STOCKHOLDER ACCUMULATED
------------------ NOTES TRANSLATION RETAINED
SHARES AMOUNT RECEIVABLE ADJUSTMENT EARNINGS TOTAL
--------- -------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1,
1994................... 6,282,000 $ 81,000 $ -- $ -- $ 145,000 $ 226,000
Net income.............. -- -- -- -- 33,000 33,000
--------- -------- ----------- ------- ---------- -----------
BALANCE, December 31,
1994................... 6,282,000 81,000 -- -- 178,000 259,000
Net income.............. -- -- -- -- 682,000 682,000
--------- -------- ----------- ------- ---------- -----------
BALANCE, December 31,
1995................... 6,282,000 81,000 -- -- 860,000 941,000
Notes to stockholders
secured by stock....... -- -- (5,000,000) -- -- (5,000,000)
Interest on stockholder
notes receivable....... -- -- (317,000) -- -- (317,000)
Issuance of common stock
in connection with
acquisition............ 52,000 260,000 -- -- -- 260,000
Exercise of stock
options................ 5,000 6,000 (6,000) -- -- --
Compensation charge for
acceleration of the
vesting of stock
options................ -- 10,000 -- -- -- 10,000
Accumulated translation
adjustment............. -- -- -- (3,000) -- (3,000)
Net income.............. -- -- -- -- 1,361,000 1,361,000
--------- -------- ----------- ------- ---------- -----------
BALANCES, December 31,
1996................... 6,339,000 357,000 (5,323,000) (3,000) 2,221,000 (2,748,000)
Exercise of stock
options (Unaudited).... 61,000 164,000 -- -- -- 164,000
Interest on stockholder
notes receivable
(Unaudited)............ -- -- (173,000) -- -- (173,000)
Accumulated translation
adjustment (Unaudited). -- -- -- 12,000 -- 12,000
Net income (Unaudited).. -- -- -- -- 555,000 555,000
--------- -------- ----------- ------- ---------- -----------
BALANCES, June 30, 1997
(Unaudited)............ 6,400,000 $521,000 $(5,496,000) $ 9,000 $2,776,000 $(2,190,000)
========= ======== =========== ======= ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 33,000 $ 682,000 $ 1,361,000 $ 1,028,000 $ 555,000
Adjustments to
reconcile net income
to net cash provided
by (used for)
operating activities:
Depreciation and
amortization......... 86,000 208,000 448,000 160,000 570,000
Deferred income taxes. (103,000) (173,000) (61,000) -- (272,000)
Compensation expense
on stock options..... -- -- 10,000 -- --
Interest on
stockholder notes
receivable........... -- -- (317,000) (144,000) (173,000)
Changes in assets and
liabilities:
Accounts receivable.. (639,000) (2,410,000) (3,352,000) (695,000) (3,193,000)
Prepaid expenses and
other assets........ 114,000 25,000 (482,000) (28,000) (61,000)
Prepaid income taxes. -- -- (786,000) -- 596,000
Accounts payable and
accrued expenses.... 265,000 1,411,000 1,754,000 621,000 807,000
Income taxes payable. 64,000 64,000 (145,000) (45,000) --
--------- ----------- ----------- ----------- -----------
Net cash provided by
(used for)
operating
activities......... (180,000) (193,000) (1,570,000) 897,000 (1,171,000)
--------- ----------- ----------- ----------- -----------
Cash flows from
investing activities:
Purchase of property
and equipment......... (332,000) (634,000) (2,581,000) (414,000) (963,000)
Deposits for property
and equipment......... -- (192,000) 122,000 (93,000) --
Cash paid for business
acquisition........... -- -- (4,323,000) -- --
--------- ----------- ----------- ----------- -----------
Net cash used for
investing
activities......... (332,000) (826,000) (6,782,000) (507,000) (963,000)
--------- ----------- ----------- ----------- -----------
Cash flows from
financing activities:
Cash overdraft, net.... (155,000) 272,000 891,000 (332,000) (42,000)
Line of credit, net.... 768,000 801,000 (1,316,000) (1,735,000) 3,410,000
Note payable
repayments............ (122,000) (122,000) -- -- --
Borrowings on debt..... -- -- 4,000,000 -- --
Repayments of debt..... -- -- (71,000) -- (740,000)
Proceeds from sale of
common stock.......... -- -- -- -- 14,000
Proceeds from sale of
preferred stock, net
of issuance costs..... -- -- 9,900,000 9,900,000 --
Stockholder notes
receivable............ -- -- (5,000,000) (5,000,000) --
Deferred IPO Costs..... -- -- -- -- (403,000)
--------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 491,000 951,000 8,404,000 2,833,000 2,239,000
--------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and
equivalents............ (21,000) (68,000) 52,000 3,223,000 105,000
Cash and equivalents,
beginning of period.... 93,000 72,000 4,000 4,000 56,000
--------- ----------- ----------- ----------- -----------
Cash and equivalents,
end of period.......... $ 72,000 $ 4,000 $ 56,000 $ 3,227,000 $ 161,000
========= =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30,
1996 AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business--Hall, Kinion & Associates, Inc. ("the Company") is an information
technology staffing company specializing in placing high technology personnel
on both a contract and permanent basis. In April 1994, The Stellar Group, Inc.
and Kinion Hall, companies under common ownership, were merged into the
Company in a transaction treated similarly to a pooling-of-interests. The
accompanying financial statements include the results of the combined
companies from January 1, 1994. In December 1996, the Company acquired certain
assets of TeamAlliance Technology Partners, L.P. (Note 2).
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Certain Significant Risks and Uncertainties--The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Such management
estimates include the allowance for doubtful accounts receivable and certain
accruals. Actual results could differ from those estimates.
The Company operates in a dynamic industry, and accordingly, can be affected
by a variety of factors. For example, management of the Company believes that
changes in any of the following areas could have a negative effect on the
Company in terms of its future financial position and results of operations:
ability to obtain additional financing, regulatory changes, uncertainty
relating to the performance of the U.S. economy, competition, demand for the
Company's services, litigation or other claims against the Company, and the
hiring, training and retention of key employees.
The Company's financial instruments that are exposed to credit risk are
primarily cash and equivalents and accounts receivable. The Company places its
cash with what it believes are high credit quality financial institutions. In
granting credit, the Company routinely evaluates the financial strength of its
customers.
Cash and Equivalents--The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
equivalents, consisting primarily of money market funds and bank accounts, are
stated at cost which approximates fair value.
Property and Equipment--Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets, generally three to twenty-five years. Leasehold improvements are
amortized over the shorter of the estimated life of the asset or the lease
term.
Goodwill--Goodwill representing the cost in excess of the fair value of net
assets acquired related to the acquisition of TeamAlliance (Note 2) is being
amortized on a straight-line basis over a thirty-year period. Accumulated
amortization equaled $25,000 at December 31, 1996. The Company calculates the
recoverability of goodwill on a quarterly basis based upon estimated
undiscounted future cash flows.
Revenue Recognition--Revenue from contract placements is recognized as
services are performed. Revenue from permanent placements is recognized upon
commencement of employment.
Other Operating Expenses--Other operating expenses include certain non-
recurring charges including litigation settlement and related costs and
severance costs.
F-7
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30, 1996
AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which requires an asset and liability approach of accounting for income
taxes. The Company's tax filing year ends on June 30.
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees.
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 shares of common stock granted by the Company
at a price less than the initial filing price during the twelve months
preceding the initial public offering date (using the treasury stock method
and an 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. Pro forma net income per share is not presented for 1996 as
it does not differ from historical net income per share.
Unaudited Interim Financial Information--The unaudited interim financial
information as of June 30, 1997 and for the six months ended June 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 interim information. Operating results for the six
months ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997.
Unaudited Pro Forma Information--Unaudited pro forma information in the
accompanying consolidated balance sheet reflects the conversion of each of the
outstanding shares of Series A redeemable preferred stock into one share of
common stock at an initial public offering price of $15.00 per share, and the
related decrease in the number of shares of authorized preferred stock, upon
the closing of the initial public offering (see Notes 7 and 8).
Fiscal Year--The Company's fiscal year ends on the Sunday closest to
December 31. For convenience, the fiscal year-end is referred to herein as
December 31. Fiscal years 1994, 1995 and 1996 all consisted of 52 weeks.
RECENTLY ISSUED ACCOUNTING STANDARD
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 public offering, as stated
above, are still applicable and such amounts are included in both basic and
diluted EPS.
F-8
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30, 1996
AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
Pro forma amounts for basic and diluted EPS assuming SFAS 128 had been in
effect for the periods presented are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DEC. 31, ENDED JUNE 30,
-------------------- ---------------
1994 1995 1996 1996 1997
------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Basic EPS............................... $ -- $0.09 $0.15 $0.12 $0.06
Diluted EPS............................. $ -- $0.09 $0.14 $0.11 $0.06
</TABLE>
2. ACQUISITION
In December 1996, the Company completed the acquisition of certain assets of
TeamAlliance Technology Partners, L.P. and its related limited liability
companies ("TeamAlliance"), a provider of staffing services to information
technology companies. The acquisition was accounted for as a purchase. The
consolidated financial statements of the Company include the results of
operations of TeamAlliance for the month of December 1996. The total
consideration for this purchase was $9,424,000 including $949,000 of costs
attributable to the acquisition. Terms of the acquisition included a cash
payment of $4,168,000 at the date of acquisition and the issuance of 52,000
shares of Company common stock valued at $260,000. In addition, the Company
has agreed to pay the sellers an aggregate of $4,200,000 in three future
annual installments as follows: October 31, 1997--$1,250,000; October 31,
1998--$1,250,000; and October 31, 1999--$1,700,000. In addition, payments for
the limited liability companies are being made in twelve monthly installments
aggregating $502,000 and are included in accrued liabilities.
Had the acquisition of TeamAlliance been completed at the beginning of 1996,
the Company's pro forma revenues, net income and earnings per share for 1996
would have been approximately $65,091,000, $475,000, and $0.05. Had the
acquisition of TeamAlliance been completed at the beginning of 1995, the
Company's pro forma revenues, net loss and loss per share for 1995 would have
been approximately $39,574,000, $(95,000), and $(0.01). Pro forma adjustments
reflect the elimination of TeamAlliance revenues for offices not acquired by
the Company, the interest on the cash paid in the acquisition and the
amortization of goodwill as well as the dilution attributable to the shares
issued and stock options granted.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- ----------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Property and equipment.................. $1,206,000 $3,071,000 $3,986,000
Land and building....................... -- 2,047,000 2,047,000
Leasehold improvements.................. 38,000 99,000 137,000
---------- ---------- ----------
1,244,000 5,217,000 6,170,000
Accumulated depreciation and
amortization........................... (410,000) (786,000) (1,211,000)
---------- ---------- ----------
$ 834,000 $4,431,000 $4,959,000
========== ========== ==========
</TABLE>
In October 1996, the Company purchased land, building and furniture in Park
City, Utah to serve as a training facility. The purchase price consisted of
cash of $1,000,000 and a seller-financed mortgage note payable
F-9
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30, 1996
AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
in the amount of $1,147,000. The note bears interest at a fixed rate of 8.75%
per annum and is payable in monthly installments of principal and interest
through 2026.
4. DEBT
The Company has a term loan and revolving line of credit facility enabling
the Company to borrow a stated percentage of eligible accounts receivable up
to a maximum of $12,000,000. Borrowings under this facility in the form of the
term loan bear interest at the bank's prime rate (8.25% at December 31, 1996)
plus one percent, and borrowings under the revolving line of credit bear
interest at the bank's prime rate plus one-half percent. All borrowings under
this facility are collateralized by substantially all of the assets of the
Company. During the period from June 30, 1997 to June 30, 1998, the Company is
required to maintain an interest-bearing deposit at the bank averaging
$3,000,000. If the average balance falls below this amount in any of the four
quarters covered by this period, the Company has agreed to pay the bank $5,000
for such quarter. At December 31, 1996, in connection with the acquisition of
TeamAlliance, the Company borrowed $4,000,000 under the term loan facility and
$418,000 under the revolving line of credit. Commencing in January 1997, the
term loan requires monthly installments of $83,000 plus interest; the
revolving line of credit requires monthly payments of interest only. At June
30, 1997, the Company had $3,828,000 outstanding under the revolving line of
credit.
The facility contains certain covenants requiring the Company to maintain a
minimum level of profitability and net worth and maintain specific ratios of
working capital and current portion of debt to operating cash flow. The
Company was not in compliance with all covenants as of December 31, 1996;
however, such noncompliance at that date has been waived by the bank.
Debt consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Bank term loan, due 1998.................................... $ 4,000,000
Present value of installments due in connection with
acquisition of TeamAlliance (discounted at 8.34%) (Note 2). 3,977,000
Mortgage note payable (Note 3).............................. 1,146,000
-----------
9,123,000
Current portion of debt..................................... (2,385,000)
-----------
Long-term debt.............................................. $ 6,738,000
===========
</TABLE>
Future payment requirements in connection with debt are: 1997, $2,385,000;
1998, $2,037,000; 1999, $2,583,000; 2000, $1,011,000; 2001, $12,000;
thereafter, $1,095,000.
5. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan covering substantially all
employees with at least 90 days of continuous service. Employees may
contribute up to 15% of their eligible compensation to a maximum amount as
provided under the Internal Revenue Code. At the discretion of the Board of
Directors, the Company may match employee contributions. For 1994 and 1995,
the Company contributed approximately $9,000 and $37,000, respectively. The
Company has accrued $55,000 for a matching contribution in 1996.
F-10
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30, 1996
AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
6. LEASE COMMITMENTS
The Company leases its office facilities under various noncancellable
operating leases which expire through 2002. Rent expense included in operating
expenses for 1994, 1995 and 1996 was approximately $170,000, $295,000 and
$802,000, respectively. Future minimum payments under all operating leases at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1997.............................................................. $1,387,000
1998.............................................................. 1,311,000
1999.............................................................. 1,148,000
2000.............................................................. 784,000
2001.............................................................. 504,000
Thereafter........................................................ 190,000
----------
Total.......................................................... $5,324,000
==========
</TABLE>
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 1996, the Company completed the sale of 1,600,000 shares of
Series A redeemable preferred stock for an aggregate price of $10,000,000 less
costs of approximately $100,000 associated with the issuance.
Significant terms of the redeemable preferred stock are as follows:
Conversion--Each share of preferred stock may be converted into common
stock at any time at the option of the preferred stockholder or
automatically upon consummation of a public offering of common stock with
an offering price of at least $12.50 per share and $20,000,000 in the
aggregate. Each preferred share may be converted to one share of common
stock subject to adjustments as defined in the agreement.
Dividends--Noncumulative cash dividends at the rate of $0.56 per share
per annum payable in preference to any declaration or payment of any
dividend on common stock if and when declared by the Board of Directors.
Liquidation Preference--In the event of any liquidation, dissolution or
winding up of the Company, the holders of the preferred shares are entitled
to receive, prior and in preference to any distributions to holders of
common stock, an amount per share equal to the greater of:
. $12.50 per preferred share plus any and all declared but unpaid
dividends,
. $6.25 per preferred share plus $1.56 per share for each 12 months
that have passed since January 26, 1996, compounded annually, plus
any and all declared but unpaid dividends, or
. The amount that would be distributable to each share of common stock
assuming the conversion of all such Series A preferred stock on a
one-for-one basis plus any and all declared but unpaid dividends.
Redemption--Beginning on January 26, 2000, the preferred shares may be
redeemed at the liquidation preference amount. The Company may elect to
redeem the preferred stock in three equal annual installments.
F-11
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30, 1996
AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
8. STOCKHOLDERS' EQUITY
CAPITAL STOCK--The Company is authorized to issue 11,600,000 shares of
capital stock consisting of 10,000,000 shares of common stock and 1,600,000
shares of preferred stock.
STOCKHOLDER NOTES RECEIVABLE--On January 30, 1996, the Company loaned to its
two principal common stockholders, an aggregate of $5,000,000 under non-
recourse promissory notes collateralized by a total of 1,600,000 shares of the
Company's common stock. Each promissory note bears interest at 6.91% per annum
and principal and interest are due and payable on January 30, 2001 or earlier
in the event, among other things, the Company were sold or merged resulting in
a change in control, the Company were to consummate a public offering of its
common stock, or the respective stockholder voluntarily terminates employment
with the Company. At maturity, or earlier in the event of acceleration, the
two principal common stockholders may tender at least an aggregate of 800,000
shares of Common Stock (the number of shares to be based upon the then fair
market value) as full payment of the principal and interest due on the
promissory notes.
STOCK OPTIONS--The Company's 1996 Stock Option Plan (the Plan), as amended
authorizes the issuance of up to 2,300,000 shares of common stock for the
grant of incentive or nonqualified stock options to key employees,
nonemployees, directors and consultants who provide services to the Company.
Under the Plan, options are generally granted at fair market value at the date
of grant as determined by the Board of Directors. Such options are immediately
exercisable and vest over periods ranging from two to five years and expire up
to ten years from the grant date. Prior to the adoption of the Plan, the
Company was authorized to grant options to purchase 625,000 shares of common
stock. These options become exercisable over periods ranging from three to
five years and expire up to ten years from the grant date. In 1996, the
Company issued 974,000 options outside of the Plan to an employee of which 50%
were vested at year ended December 31, 1996 and 50% will vest ratably over 24
months commencing January 1998 with acceleration clauses. Option activity is
as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance, January 1, 1995.......................... -- $ --
Granted (weighted average fair value of $26,000).. 454,000 $ 0.30
Canceled.......................................... (13,000) $ 0.30
---------
Balance, December 31, 1995 (none exercisable)..... 441,000 $ 0.30
Granted (weighted average fair value of
$1,054,000)...................................... 1,828,000 $ 4.07
Canceled.......................................... (63,000) $ 3.00
Exercised......................................... (5,000) $ 1.26
---------
Balance, December 31, 1996........................ 2,201,000 $ 3.35
Granted........................................... 342,000 $10.00
Canceled.......................................... (59,000) $ 4.10
Exercised......................................... (46,000) $ 0.30
---------
Balance, June 30, 1997............................ 2,438,000 $ 4.33
=========
</TABLE>
F-12
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30, 1996
AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
Additional information regarding options outstanding as of December 31, 1996
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------
OPTIONS EXERCISABLE
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.30................. 418,000 8.63 $0.30 140,000 $0.30
$1.50................. 94,000 9.35 $1.50 94,000 $1.50
$4.00................. 1,366,000 9.74 $4.00 1,366,000 $4.00
$5.10................. 323,000 9.92 $5.10 323,000 $5.10
--------- ---------
2,201,000 9.54 $3.35 1,923,000 $3.79
========= =========
</TABLE>
At December 31, 1996 and June 30, 1997, 1,068,000 and 785,000 options,
respectively, were available for future grant.
ADDITIONAL STOCK PLAN INFORMATION--As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value
method in accordance with APB 25, Accounting for Stock Issued to Employees and
its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models, even
though models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 12 months following
vesting; volatility, zero in 1995 and 1996; risk free interest rates, 6.5% in
1995 and 1996; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the 1995 and 1996
awards had been amortized to expense over the vesting period of the awards,
pro forma net income and pro forma net income per share would have been
$678,000, $0.09 per share, and $1,087,000, $0.12 per share, in 1995 and 1996,
respectively.
COMMON STOCK WARRANTS--Common stock warrants have been issued in conjunction
with the issuance of the preferred stock in January 1996. At December 31,
1996, the Company had outstanding warrants to purchase 250,000 shares of
common stock at $0.01 per share. In addition, the Company has outstanding
warrants held by the preferred stockholder to purchase up to 242,000 shares of
common stock at $0.01 per share in the event the Company's two principal
stockholders tender less than an aggregate of 800,000 common shares as full
satisfaction of their outstanding notes.
F-13
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30, 1996
AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1997 IS UNAUDITED)
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Current:
Federal.................................. $ 96,000 $ 494,000 $ 808,000
State.................................... 33,000 148,000 257,000
--------- --------- ----------
129,000 642,000 1,065,000
--------- --------- ----------
Deferred:
Federal.................................. (76,000) (134,000) (41,000)
State.................................... (27,000) (39,000) (20,000)
--------- --------- ----------
(103,000) (173,000) (61,000)
--------- --------- ----------
$ 26,000 $ 469,000 $1,004,000
========= ========= ==========
</TABLE>
The Company's effective tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Income tax expense at statutory rate....................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit................. 6.8 6.3 6.5
Other items, net........................................... 3.3 0.4 2.0
----- ----- -----
44.1% 40.7% 42.5%
===== ===== =====
</TABLE>
The components of net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets--
Accruals and reserves recognized in different periods... $350,000 $364,000
Deferred tax liabilities--accrual to cash conversion..... (71,000) (24,000)
-------- --------
Net deferred tax assets.................................. $279,000 $340,000
======== ========
</TABLE>
10. CONTINGENCIES
The Company is party to various legal actions in the normal course of
business. Although the ultimate outcome of these matters is not presently
determinable, management believes that the resolution of all such pending
matters will not have a material adverse effect on the Company's financial
position or results of operations.
F-14
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND SIX MONTHS ENDED JUNE 30, 1996
AND 1997
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
1997 IS UNAUDITED)
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following provides additional information concerning supplemental
disclosures of cash flow activities:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -----------------
1994 1995 1996 1996 1997
-------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash paid during the
period for:
Income taxes............ $ 49,000 $577,000 $ 1,956,000 $431,000 $ 86,000
Interest ............... 115,000 117,000 46,000 29,000 345,000
Noncash investing and
financing activities:
Purchase of land,
building and furniture
for note payable....... -- -- 1,147,000 -- --
Exercise of stock
options................ -- -- 6,000 -- --
Common Stock issued..... -- -- -- -- 150,000
Effect of business
acquisition:
Intangible assets and
equipment acquired... -- -- $ 9,424,000 -- --
Installment
obligations issued... -- -- (4,047,000) -- --
Common stock issued... -- -- (260,000) -- --
Accrued expenses in
connection with
acquisition.......... -- -- (794,000) -- --
-----------
Cash paid for
business
acquisition........ $ 4,323,000
===========
</TABLE>
F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TeamAlliance Technology Partners, L.P.:
We have audited the accompanying consolidated balance sheets of TeamAlliance
Technology Partners, L.P. and Subsidiaries as of December 31, 1994 and 1995,
and the related statements of income, changes in partners' capital and cash
flows for the period from inception (May 1, 1994) through December 31, 1994
and for the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TeamAlliance Technology
Partners, L.P. and Subsidiaries as of December 31, 1994 and 1995, and the
results of its operations and its cash flows for the period from inception
(May 1, 1994) through December 31, 1994 and for the year ended December 31,
1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
October 30, 1996 (except with
respect to Note 10, as to which the
date is December 4, 1996)
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To TeamAlliance Technology Partners, L.P. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of TeamAlliance
Technology Partners, L.P. and Subsidiaries as of December 1, 1996, and the
related consolidated statements of income, changes in partners' capital and
cash flows for the period from January 1, 1996 through December 1, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of TeamAlliance Technology
Partners, L.P. and Subsidiaries, as of December 1, 1996 and the results of
their operations and their cash flows for the above-stated period then ended
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
May 20, 1997
F-17
<PAGE>
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
DECEMBER 1,
1994 1995 1996
-------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.......................................... $ 67,155 $ 86,296 $ 224,822
Accounts receivable, net of allowance for
doubtful accounts of $0, $84,529 and
$165,903, respectively....................... 581,585 3,031,537 2,687,122
Prepaid expenses and other.................... 14,373 134,998 22,900
-------- ---------- ----------
Total current assets..................... 663,113 3,252,831 2,934,844
Fixed assets, net.............................. 18,489 199,326 240,722
Organization costs, net of accumulated amorti-
zation of $1,110 and $12,120 and $103,938, re-
spectively.................................... 10,491 91,788 --
Other assets................................... 9,250 28,130 24,380
-------- ---------- ----------
Total assets............................. $701,343 $3,572,075 $3,199,946
======== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Short term borrowings......................... $ -- $2,227,963 $2,148,958
Accounts payable and accrued expenses......... 528,088 803,891 1,043,885
Related party loans payable and advances...... 18,525 120,000 39,940
Obligation under capital lease................ -- 95,904 --
-------- ---------- ----------
Total current liabilities................ 546,613 3,247,758 3,232,783
Related party loans payable and advances--long
term.......................................... -- 29,941 --
Partners' Capital:
General Partner............................... 77,365 128,354 (16,418)
Limited Partner............................... 77,365 166,022 (16,419)
-------- ---------- ----------
Total partners' capital.................. 154,730 294,376 (32,837)
-------- ---------- ----------
Total liabilities and partners' capital.. $701,343 $3,572,075 $3,199,946
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION PERIOD FROM
(MAY 1, 1994) JANUARY 1, 1996
THROUGH YEAR ENDED THROUGH
DECEMBER 31, DECEMBER DECEMBER 1,
1994 31, 1995 1996
------------- ----------- ---------------
<S> <C> <C> <C>
Revenues............................. $1,674,949 $14,191,153 $19,198,731
Expenses:
Direct costs of revenues............ 969,560 9,090,526 13,775,073
Selling, general and administrative
expenses........................... 473,857 3,426,972 4,346,927
Legal fees related to sale (see Note
9)................................. -- -- 151,657
Interest and financing costs........ 248 311,786 505,983
Write-off of organization costs..... -- 54,900 91,788
---------- ----------- -----------
Income before provision for income
taxes............................... 231,284 1,306,969 327,303
Provision for income taxes........... 10,554 27,323 22,830
---------- ----------- -----------
Net income........................... $ 220,730 $ 1,279,646 $ 304,473
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNER TOTAL
-------- -------- ----------
<S> <C> <C> <C>
Initial Contribution, May 1, 1994.............. $ 15,000 $ 15,000 $ 30,000
Net Income..................................... 110,365 110,365 220,730
Distributions.................................. (48,000) (48,000) (96,000)
-------- -------- ----------
Balances, December 31, 1994................. 77,365 77,365 154,730
Net Income..................................... 540,989 738,657 1,279,646
Distributions.................................. (490,000) (650,000) (1,140,000)
-------- -------- ----------
Balances, December 31, 1995................. 128,354 166,022 294,376
Net Income .................................... 213,914 90,559 304,473
Distributions ................................. (358,686) (273,000) (631,686)
-------- -------- ----------
Balances, December 1, 1996 ................. $(16,418) $(16,419) $ (32,837)
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION (MAY 1, JANUARY 1, 1996
1994) THROUGH YEAR ENDED THROUGH
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 1, 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net Income............... $ 220,730 $ 1,279,646 $ 304,473
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Depreciation and
amortization........... 6,117 44,396 82,759
Write-off of
organization costs..... -- 54,900 91,788
(Increase) decrease in
accounts receivable.... (581,585) (2,449,952) 344,415
(Increase) decrease in
prepaid expenses and
other.................. (14,373) (120,625) 112,098
(Increase) decrease in
other assets........... (9,250) (18,880) 3,750
Increase in accounts
payable and accrued
expenses............... 528,088 275,803 239,994
--------- ----------- ---------
Net cash provided
(used) by operating
activities........... 149,727 (934,712) 1,179,277
--------- ----------- ---------
Cash flows from investing
activities:
Acquisition of fixed
assets.................. (23,496) (129,673) (124,155)
Increase in organization
costs................... (11,601) (153,305) --
--------- ----------- ---------
Net cash used by in-
vesting activities... (35,097) (282,978) (124,155)
--------- ----------- ---------
Cash flows from financing
activities:
Increase (decrease) in
short term borrowings,
net..................... -- 2,227,963 (79,005)
Proceeds from related
party loans and
advances................ 18,525 256,079 --
Repayments of related
party loans and
advances................ -- (70,595) (110,001)
Repayments of obligation
under capital leases.... -- (36,616) (95,904)
Initial contribution..... 30,000 -- --
Distributions to
partners................ (96,000) (1,140,000) (631,686)
--------- ----------- ---------
Net cash provided
(used) by financing
activities........... (47,475) 1,236,831 (916,596)
--------- ----------- ---------
Increase in cash.......... 67,155 19,141 138,526
Cash--Beginning of period. -- 67,155 86,296
--------- ----------- ---------
Cash--End of period....... $ 67,155 $ 86,296 $ 224,822
========= =========== =========
SUPPLEMENTAL INFORMATION
Interest and other
financing costs paid..... $ -- $ 309,949 $ 491,204
Income taxes paid......... -- 7,712 22,830
Non-cash investing and
financing activities
Capital lease
obligations............. -- 132,521 --
Payment of debt with
fixed assets............ -- 54,069 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION
(MAY 1, 1994) THROUGH DECEMBER 31, 1994, FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 THROUGH DECEMBER 1, 1996
1. ORGANIZATION AND NATURE OF BUSINESS
TeamAlliance Technology Partners, L.P. (the "Partnership") was formed on May
1, 1994 by TeamAlliance Technology Partners, Inc. (the "General Partner") and
Team Visions, Inc. (the "Limited Partner") for the purpose of providing
temporary and permanent personnel in the high technology industries.
TeamAlliance Technology Partners, L.P. and its general partner formed numerous
limited liability companies throughout the United States in which their
respective ownership interest is 99% and 1% and whose period of duration is
thirty years. (The Partnership and limited liability companies collectively
are herein referred to as the "Company.")
Pursuant to the terms of the Partnership Agreement between TeamAlliance
Technology Partners, Inc. and Team Visions, Inc., the Partnership shall
continue until December 31, 2006 unless terminated prior to that date.
The consolidated financial statements included herein do not reflect a
reduction to income nor a liability to the minority owner (TeamAlliance
Technology Partners, Inc.) of the limited liability companies as such amount
has been deemed to be immaterial.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation--The consolidated financial statements include
the accounts of TeamAlliance Technology Partners, L.P. and its majority owned
and controlled limited liability companies (subsidiaries). All material
intercompany transactions have been eliminated (see Note 1 relating to
minority interest).
Revenue recognition--Revenue relating to the placement of temporary
personnel is recognized upon performance of the service. Revenue relating to
the placement of permanent personnel is recognized when the individual
commences employment.
Fixed Assets--Fixed assets are recorded at cost and primarily consists of
computer equipment. Depreciation is provided for under the double declining
method over an expected useful life of 5 years. Assets under the capital lease
obligation are capitalized and depreciated using the straight line method over
3 years.
Fixed Assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 1,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Computer Equipment.................... $23,496 $225,120 $353,893
Furniture & Fixtures.................. -- 6,500 6,500
------- -------- --------
23,496 231,620 360,393
Less: Accumulated depreciation......... (5,007) (32,294) (119,671)
------- -------- --------
$18,489 $199,326 $240,722
======= ======== ========
</TABLE>
The gross and net book value of assets under the capital lease obligation
was $132,521 and $126,999 at December 31, 1995 and nil at December 1, 1996.
Organization costs--Organization costs are amortized under the straight-line
method over a period of five years.
Advertising and promotion expenses--The cost of advertising and promotion is
expensed when incurred.
Software--The cost to develop internally used software is expensed as
incurred.
F-22
<PAGE>
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION
(MAY 1, 1994) THROUGH DECEMBER 31, 1994, FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 THROUGH DECEMBER 1, 1996--(CONTINUED)
Direct cost of revenues--Direct cost of revenues consist of payroll and the
related benefits costs for the placement of temporary personnel.
Income Taxes--The Partnership and limited liabilities companies are not
taxable entities for federal and state income tax purposes. Accordingly, for
financial reporting purposes, no recognition has been given to income taxes
related to such operations. The tax on company's income is borne by the
individual partners and members through the allocation of taxable income or
loss. Such taxable income or loss may vary substantially from net income or
net loss reported in the consolidated statements of income. Income taxes
reflected in the accompanying financial statements consist predominantly of
unincorporated business taxes. The Company has adopted the cash basis of
accounting for income tax purposes. A deferred tax liability results from
timing differences in the recognition of income and expenses between financial
statement income and taxable income, which was not material.
Concentration of credit risks--The Company operates throughout the United
States, with approximately one half of its revenues generated from companies
in the New York Metropolitan area. The Company grants credit to its customers,
who are principally in the financial services and technology industries.
Use of estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
3. ACCOUNTS RECEIVABLE FINANCING
On March 7, 1995 the Company entered into an agreement to sell, on a
revolving basis, an undivided interest in a designated pool of accounts
receivable relating to its temporary placement business. The factoring charge
(administration fee) amounts to 2% of the receivables sold. In addition,
interest is charged (financing fee) at 0.4% of the total receivables sold
which remain unpaid by the customer for 1 day but less than 31 days plus an
additional 0.5% of the receivables which remain unpaid for 31 days but not
more than 60 days. After 60 days, the Company is obligated to repurchase the
unpaid receivables. The rights, title and interest in receivables sold remain
with the lender until the termination of the agreement. Upon termination of
this agreement, amounts of receivables not yet paid by the Company's customers
are returned to the Company for payment. The amount of accounts receivables
outstanding under this agreement has been reflected as short term borrowings
in the accompanying financial statements. The average amount of borrowings and
average interest rate for the year while this agreement was in effect was
approximately $1,850,000 and 16%, respectively, for 1995 and $3,268,000 and
15%, respectively, for the period from January 1, 1996 through December 1,
1996.
In connection with this agreement, the Company has agreed to maintain a
certain level of positive tangible net worth as defined by the agreement. At
December 31, 1995 the Company was not in compliance with this covenant. In
October 1996, the Company obtained a waiver regarding compliance with this
covenant through December 31, 1996, and amended the covenant, commencing
January 1, 1997, to make it less restrictive and to include a net worth
covenant based upon financial statements prepared in accordance with generally
accepted accounting principles.
4. LOANS AND ADVANCES PAYABLE
The Company is indebted to the limited partner in the amount of
approximately $39,940 relating to borrowings from the partner and from
payments made by the partner on behalf of the Company relating to the purchase
of computer equipment. The loan bears interest at 8% per annum and is due
through January 1, 1997.
F-23
<PAGE>
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION
(MAY 1, 1994) THROUGH DECEMBER 31, 1994, FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 THROUGH DECEMBER 1, 1996--(CONTINUED)
5. OBLIGATION UNDER CAPITAL LEASE
During 1995 the Company leased certain computer equipment and software under
a capital lease agreement at an interest rate of approximately 15%. The lease
was paid in 1996. The debt was secured by the assets underlying the agreement.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company leases office space under operating leases and
subleases expiring through January 2001. Future minimal rental payments under
these agreements are as follows:
<TABLE>
<S> <C>
1997................................................................ $139,000
1998................................................................ 139,000
1999................................................................ 139,000
2000................................................................ 139,000
2001................................................................ 12,000
--------
$568,000
========
</TABLE>
Rent expense, net of subrental income of $76,500 in 1995, was approximately
$41,000, $180,000 and $155,000 in 1994, 1995 and 1996, respectively.
Letter of Credit--The Company issued an irrevocable standby letter of credit
in the amount of $420,000, which expired on March 7, 1997 as security of its
liability resulting from the Accounts Receivable Financing (see Note 3). The
letter of credit is guaranteed by an individual who is the sole stockholder of
the limited partner. The Company has agreed to indemnify and hold harmless the
guarantor in connection with his guarantee.
7. RELATED PARTY TRANSACTIONS
The Company leased space to a company affiliated with the limited partner at
the rate of $8,500 per month which commenced in March 1995 and terminated in
February 1996. In addition, companies affiliated with the limited partner
conduct educational seminars for the training and support of Company
employees, which amounted to approximately $78,000, $173,000 and $7,000 in
1994, 1995 and 1996, respectively and has been reflected in selling, general
and administrative expenses in the accompanying statements of income.
Companies either wholly or partially owned by stockholders of the general
partner performed services in connection with the placement of temporary
personnel. These amounts totaled approximately $37,000, $69,000 and nil in
1994, 1995 and 1996, respectively.
The Company incurred approximately $40,000 in 1995 and $42,000 in 1996 of
legal fees relating to the general partner. These amounts were treated as
distributions to the general partner.
F-24
<PAGE>
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION
(MAY 1, 1994) THROUGH DECEMBER 31, 1994, FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE PERIOD FROM JANUARY 1, 1996 TO DECEMBER 1, 1996--(CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- DECEMBER 1,
1994 1995 1996
-------- -------- -----------
<S> <C> <C> <C>
Accrued payroll and benefits................ $402,625 $488,616 $ 411,524
Accrued taxes other than income............. 10,554 30,165 15,818
Accrued commissions......................... 48,466 22,959 60,644
Accrued professional services............... 16,430 105,522 242,837
Sales tax payable........................... 18,902 49,696 55,881
Other....................................... 31,111 106,933 257,181
-------- -------- ----------
$528,088 $803,891 $1,043,885
======== ======== ==========
</TABLE>
9. MAJOR CUSTOMERS
During 1994 one customer accounted for 15% of revenues.
10. SUBSEQUENT EVENT
On November 26, 1996, the Partnership and six of its majority-owned limited
liability companies entered into an Asset Purchase Agreement whereby they sold
to TA Acquisition Corporation, a wholly owned subsidiary of Hall, Kinion and
Associates, Inc. ("Hall Kinion"), the assets and the business of the
Partnership and a majority of its limited liability companies. The
consideration received by the Partnership includes $4,168,000 in cash and
52,000 shares of common stock of Hall Kinion upon closing, $1,250,000 on
October 31, 1997, $1,250,000 on October 31, 1998 and $1,700,000 on October 31,
1999. Payments to be received after closing are conditioned upon the continued
employment of shareholders of the General Partner. Upon completion of this
transaction, the operating activities of the Partnership will be significantly
less than that reflected in the accompanying financial statements.
F-25
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES AND
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
On December 2, 1996, Hall, Kinion & Associates, Inc. (the "Company" or "HK")
acquired certain assets of TeamAlliance Technology Partners, L.P. and
Subsidiaries ("TA") including the assets of related regional limited liability
corporations (the LLC's) of which TA was a majority owner. The following
unaudited pro forma condensed combining financial information reflects this
business combination which has been accounted for under the purchase method of
accounting.
The unaudited pro forma condensed combining financial information should be
read in conjunction with the accompanying notes to the pro forma condensed
combining financial information and in conjunction with the historical
consolidated financial statements and the related notes thereto of the Company
and the historical financial statements and related notes thereto of TA
included herein.
The unaudited pro forma condensed combining statement of income combines the
Company's results of operations for the year ended December 31, 1996 with the
operating results of TA for the comparable periods and have been prepared as
if the merger was completed as of January 1, 1996. The unaudited pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the operating results that would have occurred had the merger
been consummated at the beginning of the period prescribed, nor is it
necessarily indicative of future operating results.
F-26
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES AND
TEAMALLIANCE TECHNOLOGY PARTNERS, L.P. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINING STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
PRO FORMA PRO FORMA
HK TA ADJUSTMENTS COMBINED
------- ------- ----------- ---------
(A) (B)
<S> <C> <C> <C> <C>
Net revenues......................... $50,571 $19,199 $(4,679)(c) $65,091
Cost of revenues..................... 30,342 13,775 (3,263)(d) 40,854
------- ------- ------- -------
Gross profit......................... 20,229 5,424 (1,416) 24,237
Operating expenses................... 18,233 4,499 (192)(e) 22,540
------- ------- ------- -------
Income from operations............... 1,996 925 (1,224) 1,697
Other income (expense):
Interest income.................... 434 -- -- 434
Interest expense................... (65) (506) (563)(f) (1,134)
Other expenses, net................ -- (92) 14 (g) (78)
------- ------- ------- -------
Total other income (expense),
net............................. 369 (598) (549) (778)
------- ------- ------- -------
Income before income taxes........... 2,365 327 (1,773) 919
Income taxes......................... 1,004 23 (583)(h) 444
------- ------- ------- -------
Net income........................... $ 1,361 $ 304 $(1,190) $ 475
======= ======= ======= =======
Net income per share:
Primary............................ $ 0.14 $ 0.05
======= =======
Fully diluted...................... $ 0.14 $ 0.05
======= =======
Shares used in per share computation:
Primary............................ 9,480 9,480
======= =======
Fully diluted...................... 9,500 9,500
======= =======
</TABLE>
See notes to unaudited pro forma condensed combining statement of income.
F-27
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(a) The amounts for HK are derived from audited financial statements and
include the activity of TA from December 2, 1996 (date of acquisition).
(b) The amounts for TA are derived from audited financial statements and
include activity from January 1, 1996 through December 1, 1996.
(c) Elimination of revenues related to the regional LLC's that were not
acquired by HK on December 2, 1996.
(d) Elimination of cost of revenues related to the regional LLC's that were
not acquired by HK on December 2, 1996.
(e) Adjustments to operating expenses:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Expenses associated with regional LLC's not acquired......... $(721,000)
Compensation and bonuses of former TA General Partners in
lieu of distributions....................................... 424,000
Amortization of acquired goodwill, over 30 years............. 256,000
Legal fees associated with purchase of TA.................... (151,000)
---------
$(192,000)
=========
</TABLE>
(f) Additional interest expense associated with the use of cash or
additional borrowings for the purchase of TA.
(g) The elimination of other expenses related to the regional LLC's that
were not acquired by HK on December 2, 1996.
(h) Additional corporate income taxes at a rate of 48% net of state tax
deductions, as TA was a partnership taxed at the individual partner's
level prior to acquisition, netted with tax benefits realized from
amortization of acquired goodwill.
F-28
<PAGE>
[PHOTOGRAPH OF GLOBE]
SAN JOSE
AUSTIN
CHICAGO
DENVER
HOUSTON
LONDON
NEW YORK
ORLANDO
PHOENIX
PORTLAND
RALEIGH
SALT LAKE CITY
SEATTLE
TAMPA
HALL KINION:
Hall Kinion is a leading provider of IT Professionals for the next generation of
technology with offices in 14 major technology centers located throughout the
United States and London. Our practice groups provide services in specialized
areas of technical expertise.
CONTRACT SERVICES
Our team of account managers and technical recruiting agents focuses on the
specialized needs of our customers to better ensure that only the most qualified
personnel are matched to contract positions.
CAD
MIS
INTERNET
NET
QA
UNIX
WINDOWS
WRITERS
RECRUITING SERVICES
Our network of specialized IT professionals and knowledge of the industry enable
us to more quickly and efficiently place direct hires for our clients.
<PAGE>
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No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with the
Offering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company, any of the Selling Stockholders or any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy the securities offered hereby to any person
or by anyone in any jurisdiction in which it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date
hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 12
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Consolidated and Pro Forma Consolidated Financial Data........... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 24
Management................................................................ 35
Certain Transactions...................................................... 43
Principal and Selling Stockholders........................................ 45
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 50
Underwriting.............................................................. 52
Legal Matters............................................................. 53
Experts................................................................... 54
Additional Information.................................................... 54
Index to Consolidated Financial Statements................................ F-1
</TABLE>
Until August 29, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
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2,515,000 SHARES
[LOGO OF HALL KINION]
COMMON STOCK
----------------
PROSPECTUS
----------------
MONTGOMERY SECURITIES
ROBERT W. BAIRD & CO.
INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, INC.
August 4, 1997
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