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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the fiscal year ended December 28, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission file number 0-22869
HALL, KINION & ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 77-0337705
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
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19925 STEVENS CREEK BOULEVARD, SUITE 180, CUPERTINO, CALIFORNIA 95014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 863-5720
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) had been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 16, 1998, there were outstanding 9,361,885 shares of the
registrant's Common Stock. The aggregate market value of the common stock held
by non-affiliates of the registrant, based on the closing price of the common
stock as reported on the Nasdaq Stock Market (National Market System) on March
16, 1998, was approximately $149,790,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be mailed to stockholders in
connection with the registrant's annual meeting of stockholders, scheduled to
be held on May 15, 1998 are incorporated by reference in Part III of this
report. Except as expressly incorporated by reference, the registrant's Proxy
Statement shall not be deemed to be part of this report.
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
The discussion in this Report contains forward looking statements that
involve risks and uncertainties. The statements contained in this release that
are not purely historical are forward looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934, including statements
regarding the Company's "expectations," "beliefs," "hopes," "intentions" or
"strategies," or the like, regarding the future. All forward looking
statements included in this release are based upon information available to
the Company as of the date hereof, and the Company assumes no obligation to
update any such forward looking statement. Actual results could differ
materially from those indicated by the forward looking statements made herein
or presented elsewhere by the Company's management from time to time. Factors
that could cause or contribute to such differences include, but are not
limited to, the rate of hiring and productivity of revenue generating
personnel; the availability of qualified IT professionals; changes in the
relative mix between contract services and permanent placement services;
changes in the pricing of the Company's services; the timing and rate of
entrance into new regional markets and the addition of Practice Groups; the
structure and timing of acquisitions; changes in demand for IT professionals;
general economic factors; and other factors discussed under the caption "Risk
Factors," elsewhere in this Report, and in the Company's Securities and
Exchange Commission Filings.
INTRODUCTORY NOTE
On January 13, 1998, the Company completed the acquisition of Group-IPEX,
Inc. ("Group-IPEX"). Based in Lafayette, California, Group-IPEX is an
international recruiting organization for IT research and development
professionals focusing on recruiting primarily from India, but also from
Russia and China. Notwithstanding the fact that the acquisition of Group-IPEX
occurred after the end of the Company's fiscal year, this Report describes
certain aspects of the business of Group-IPEX relevant to an understanding of
the business of the Company. The Consolidated Financial Statements for the
Company contained in Item 8 do not, however, reflect the result of operations
for Group-IPEX for any of the periods presented therein.
THE COMPANY
Hall, Kinion & Associates, Inc. (the "Company" or "Hall Kinion") is a
leading provider of specialized information technology ("IT") professionals on
a contract and permanent basis, with more than 21 offices in 13 domestic
markets and London, England. To meet the specialized needs of its 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 its clients. The Company is organized into two
divisions: Contract Services and Permanent Placement. Contract Services
provides supplemental IT professionals to research and development ("R&D")
departments of high technology companies and to information systems ("IS")
departments of corporate clients. In 1997, 1996 and 1995, Contract Services
represented 86.5%, 83.6% and 87.3% of the Company's net revenues,
respectively. Permanent Placement places IT professionals in permanent
positions with high technology companies and other corporate clients. In 1997,
1996 and 1995, Permanent Placement represented 13.5%, 16.4% and 12.7% of the
Company's net revenues, respectively. The Company's customers include an
extensive group of global high technology companies, including Borland, Cisco
Systems, IBM, Microsoft, Motorola, Oracle and numerous emerging growth
technology companies, such as Magellan Communications, Inc., Net Frame
Systems, Exodus Communications, Inc., Resumix and Remedy Corporation. No
single client represented more than 5% of the Company's net revenues in 1997,
1996 or 1995. With the acquisition of Group-IPEX in January 1998, the Company
expanded its service offerings to include international recruiting for IT
research and development professionals, focusing primarily on individuals from
India, but also on individuals from Russia and China.
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
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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.
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 the R&D departments
of high technology companies and IS departments of large corporations turn to
IT professional service companies to augment their existing operations.
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 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 (including London.)
The Company was incorporated in California in 1991. In 1994, the Stellar
Group, Inc. and Kinion Hall, affiliated companies under common ownership, were
merged with the Company and in December 1996 the Company acquired certain
assets of TeamAlliance Technology Partners, L.P. and certain of its affiliated
regional operating companies ("TeamAlliance" or the "TeamAlliance
Acquisition"). The Company was reincorporated in Delaware in July 1997 and
completed an initial public offering of shares of its Common Stock, $0.001 par
value, on August 4, 1997. In January 1998, the Company acquired all of the
outstanding capital stock of Group-IPEX, which is currently a wholly owned
subsidiary of the Company.
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 the Company has recently entered.
PRACTICE GROUPS BY REGIONAL MARKET
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SALT NEW
SILICON LAKE YORK
VALLEY SEATTLE PORTLAND PHOENIX CITY DENVER AUSTIN HOUSTON CHICAGO TAMPA ORLANDO RALEIGH CITY LONDON
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contract
Services
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Windows . . . . . . .
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Unix .
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QA .
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CAD . . . . . . .
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Writers . .
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Internet .
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Tech. Sup. .
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NET . . . . .
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IS . . . . . . . .
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Permanent
Placement
Services
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Software . . . . . . . . . . . . .
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Hardware . .
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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 growth strategy are to:
HIRE ADDITIONAL REVENUE-GENERATING EMPLOYEES FOR EXISTING PRACTICE GROUPS.
The Company believes that there is a potential for revenue growth from the
addition of technical recruiting agents (TRAs) 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. The Company increased the number
of revenue-generating employees from 123 employees in 1995 to 273 employees in
1996 to 348 employees in 1997. 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, the decisions to make additional investments such as
increasing headcount, advertising expense and the number and type of Practice
Groups, is determined based on objective performance criteria. The Company
believes that its growth model provides its managers an effective tool for
executing and monitoring an expansion strategy and schedule.
ADD PRACTICE GROUPS TO EXISTING REGIONAL MARKETS. The Company has 11
different types of Practice Groups and only three of the Company's 14 regional
markets (including London) have 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 intends to implement a focused expansion of its
Practice Groups in existing regional markets in order to meet the needs of new
and existing clients.
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 13 domestic markets, including Silicon Valley, Seattle, the
Research Triangle, certain other high technology markets and in 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 recently completed acquisition of Group-IPEX, the
Company's Practice Groups will utilize the new international IT research and
development professionals to fill existing and future job orders.
HALL KINION SERVICES
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 lasting
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 (Windows, Unix, QA,
CAD, Writers, Internet, Tech. Sup., NET and IS.) In addition, through its
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,
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higher margin Practice Groups. In conjunction with its TeamAlliance
Acquisition in December 1996, the Company has also added an IS Practice Group,
which provides IT professionals, programmers and analysts to corporate
clients' IS department.
Permanent Placement Services
The Company provides IT professionals for permanent placement with its
corporate clients. The Company currently delivers such services in 13 of the
Company's 14 regional markets, including London, England. 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 of corporate clients. The
Company plans to develop distinct hardware and software Practice Groups within
its Permanent Placement Division in certain regional markets.
Group-IPEX
Group-IPEX focuses on recruiting international IT research and development
professionals to work on short term R&D contracts at leading technology
vendors. In a typical R&D contract, international IT research and development
professionals are brokered to companies similar to Hall Kinion who then
contract them out to high technology clients. The majority of the work is
billed on an hourly basis.
HALL KINION'S OPERATING AND SALES APPROACH
CONTRACT SERVICES DIVISION
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 relationships 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 December
28, 1997, the Company employed 100 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 technical
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 transfer the job requisitions to Account Managers familiar with the
appropriate specialization, leading to quicker, more accurate placements. As
of December 28, 1997, the Company employed approximately 108 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
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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.
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 140 Recruiters as
of December 28, 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 Cupertino,
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 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. The growth model was also used for all new Practice
Groups added during 1997.
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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 devote greater resources to the marketing 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 ad 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 industry 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.
EMPLOYEES
As of December 28, 1997, approximately 1,040 IT professionals placed by the
Company were providing contract services to the Company's clients. The
Company's corporate staff at December 28, 1997, consisted of 425 full-time
employees, of whom 100 are TRAs, 108 are Account Managers, 140 are Recruiters,
and 77 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 relationship with its employees to be good.
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RISK FACTORS
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, system 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 were unable to hire or retain
such personnel, the Company's business, operating results and financial
condition would be materially adversely affected.
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. For example, in 1997 the Company closed the Raleigh Windows Practice
Group because its revenue growth was lower than management's expectations. The
addition of new Practice Groups and entrance into new regional markets
typically results in increases in operating expenses, primarily due to
increased headcount. Expenses are incurred in advance of forecasted revenue,
and there is typically a delay before the Company's new recruiting personnel
and sales employees reach full productivity. If the Company is unable to add
Practice Groups or enter new regional markets in a cost-effective manner or if
those Practice Groups and regional markets do not achieve anticipated
financial results, the Company's business, operating results and financial
condition could be materially adversely affected.
FLUCTUATIONS IN QUARTERLY RESULTS, SEASONALITY
The Company's quarterly operating results have in the past and may in the
future fluctuate significantly depending on a number or factors, including,
but not limited to: the rate of hiring and the productivity of revenue-
generating personnel; the availability of IT professionals; changes in the
relative mix between the Company's contract services and permanent placement
services; changes in the pricing of the Company's services; the timing and
rate of entrance into new regional markets and the addition of practice
groups; departures or temporary absences of key revenue-generating personnel;
the structure and timing of acquisitions; changes in the demand for IT
professionals; and general economic factors.
In addition, because the Company provides services on an assignment-by-
assignment basis, which clients can terminate at any time, there can be no
assurance that existing clients will continue to use the Company's services at
historical levels. Although the impact of seasonal factors will vary, the
Company experiences a certain amount of seasonality in its first quarter due
primarily to the number of holidays and the number of internal training and
incentive programs in the first quarter, which may reduce the number of days
worked by IT
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professionals and revenue-generating employees during such quarter. As a
result, the Company believes that period-to-period comparisons of its result
of operations are not necessarily meaningful and should not be relied upon as
any indication of future performance. In the event the Company's operations
should 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.
The market price of the shares of Common Stock may be volatile and could be
subject to wide fluctuations. The stock markets, and in particular the Nasdaq
National Market, have experienced extreme price and volume fluctuations that
often have been unrelated or disproportionate to the operating performance of
the companies whose shares are traded in such market. Accordingly, broad
market factors may adversely affect the market price of the Company's Common
Stock. These market fluctuations, as well as general economic, political and
market conditions such as recessions, interest rates or international currency
fluctuations, may adversely affect the market price of the Common Stock. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such company. Such litigation, if instituted, could result in
substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business, results
of operations and financial condition.
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 and Paul H. Bartlett, its President, or
the inability to attract and retain key employees or management personnel in
the future, could have a material adverse effect of the Company's business,
operating results and financial condition.
MANAGEMENT OF GROWTH
The Company has recently experienced a period of rapid growth that has
placed and will continue to place significant demands upon its management and
other resources. The Company's net revenues increased 72% from $29.4 million
in 1995 to $50.6 million in 1996, and increased 83.6% from $50.6 million in
1996 to $92.8 million in 1997, while headcount increased from 141 employees in
1995 to 327 employees in 1996 and to 425 employees in 1997. In the same period
general and administrative expenses increased from 30.2% of net revenues in
1995 to 36.3% of net revenues in 1997. 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 growth effectively could have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company believes that its future success
will depend upon its ability to identify, attract, hire, train, motivate and
retain other revenue-generating personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be successful in
attracting, assimilating or retaining the necessary personnel, and the failure
to do so could have a material adverse effect on the Company's business,
results of operations and financial condition.
RISKS OF ACQUISITION
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
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operations successfully with those of the Company. There can be no assurance
that the Company will be able to identify 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
goodwill amortization 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 ownership dilution.
For example, 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.
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
and 1997, substantially all of the Company's net revenues were derived by
providing services to clients in the high technology industry. In addition,
approximately 73% and 47% of the Company's net revenues in 1996 and 1997
respectively, were derived from services provided to clients in Silicon
Valley. 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.
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, system integrators, computer systems consultants,
other providers of IT 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.
GOVERNMENTAL REGULATION OF IMMIGRATION
Certain of the Company's IT professionals are foreign nationals working in
the United States under H-1B permits. Accordingly, both the Company and these
foreign nationals must comply with the United States immigration laws. The
inability of the Company to obtain H-1B permits for certain of its employees
in sufficient quantities or at a sufficient rate could have an adverse effect
on the Company's business, operating results and
10
<PAGE>
financial condition. Furthermore, Congress and administrative agencies with
jurisdiction over immigration matters have periodically expressed concerns
over the levels of legal and illegal immigration into the U.S. These concerns
have often resulted in proposed legislation, rules and regulations aimed at
reducing the number of work permits that may be issued. For example, in 1997
the maximum number of permitted H-1B permits available for 1997 were issued by
the third quarter of 1997, resulting in an inability of applicants to obtain
additional permits for the balance of the year. Any changes in such laws
making it more difficult to hire foreign nationals or limiting the ability of
the Company to obtain foreign employees could require the Company to incur
additional unexpected labor costs and expense. Further, any such restrictions
or limitations on hiring practices could have an adverse effect on business,
operating results and financial condition.
CONCENTRATION OF OWNERSHIP BY PRINCIPAL STOCKHOLDERS
The Company's principal stockholders, Brenda C. Hall, Todd J. Kinion and
entities affiliated with the Sprout Group beneficially owned approximately 63%
of the Company's outstanding shares of Common Stock at December 28, 1997. As a
result, these stockholders as a group will be able to exercise control over
almost all matters requiring a 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 Company and may discourage third parties
from attempting to do so.
LIABILITY RISKS
The Company is exposed to liability with respect to actions taken by its IT
professionals while on assignment, such as damages caused by errors of IT
professionals, misuse of client proprietary information or theft of client
property. The Company often indemnifies its clients from the foregoing.
Although the Company maintains insurance coverage, due to the nature of the
Company's assignments, and in particular the access by IT professionals to
client information systems and confidential information, and the potential
liability with respect thereto, there can be no assurance that such insurance
coverage will continue to be available on reasonable terms or that it will be
adequate to cover any such liability. The Company may be exposed to
discrimination and harassment claims or 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 might result in negative publicity, litigation and liability for
monetary damages and fines.
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OR CERTIFICATE
INCORPORATION, BYLAWS, DELAWARE LAW
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 stockholders 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 special meeting of 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 outstanding
as of December 28, 1997, and the Company has no plans to issue any shares of
Preferred Stock, the holders of Common Stock will be subject to, and may be
adversely affected by, the rights 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.
11
<PAGE>
IMPACT OF YEAR 2000 ISSUE
The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company is in the process of conducting assessments of its computer
information systems and is beginning to take the necessary steps to determine
the nature and extent of the work required to make its systems Year 2000
compliant, where necessary. These steps will require the Company to modify,
upgrade or replace some of its internal financial and operational systems. The
Company continues to evaluate the estimated cost of bringing all internal
systems, equipment and operations into Year 2000 compliance, but has not
finished determining the total cost of these compliance efforts. While these
efforts may involve additional costs, the Company believes, based upon
currently available information, that these costs will not have a material
adverse effect on the business, financial condition or results of operations
of the Company. However, if these efforts are not completed on time, or if the
cost of updating or replacing the Company's information systems, if necessary,
exceeds the current estimates, the Year 2000 issue could have a material
adverse impact on the business, financial condition or results of operations
of the Company.
The Company also intends to determine the extent to which the Company may be
vulnerable to any failures by its major partners and service providers to
remedy their own Year 2000 issues, and is in the process of initiating formal
communications with these parties. At this time the Company is unable to
estimate the nature or extent of any potential adverse impact resulting from
the failure of third parties to achieve Year 2000 compliance, however, there
can be no assurance that these third parties will not experience Year 2000
problems or that any problems would not have a material effect on the
Company's business, financial condition or results of operations.
ITEM 2. 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 office space for its operations in Austin and
Houston, Texas; Capitola, Foster City, Fremont and Mountain View, California;
Chicago and Schaumburg, Illinois; Denver, Colorado; London, England; New York,
New York; Orlando and Tampa, Florida; Phoenix, Arizona; Portland, Oregon;
Raleigh, North Carolina; Salt Lake City, Utah; and Seattle, Washington. In
addition, the Company owns a training facility located in Park City, Utah.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings other
than routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year covered by this report.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed for trading on the NASDAQ under the
symbol "HAKI". On December 28, 1997, there were approximately 38 holders of
record of the Common Stock.
The table below sets forth the high and low sales prices per share as
reported on the NASDAQ National Market System since the Company's initial
public offering on August 4, 1997. The Company's initial public offering price
was $15.00 per share.
<TABLE>
<CAPTION>
SALES PRICE
-------------
FISCAL YEAR ENDED DECEMBER 28, 1997 HIGH LOW
----------------------------------- ------ ------
<S> <C> <C>
4th quarter ended December 28, 1997........................... $21.13 $15.00
3rd quarter ended September 28, 1997(1)....................... $22.50 $17.87
</TABLE>
- --------
(1) Trading of the Company's Common Stock commenced on August 4, 1997.
No cash dividends were paid in 1997 or 1996. The Company, as it deems
appropriate, may continue to retain all earnings for use in its business or
may consider paying a dividend in the future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and the Consolidated Financial Statements and
related notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- ------
CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS, EXCEPT PER SHARE
DATA: AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net revenues........................ $92,831 $50,571 $29,385 $15,968 $9,780
Cost of contract services........... 54,769 30,342 19,209 10,728 6,386
------- ------- ------- ------- ------
Gross profit........................ 38,062 20,229 10,176 5,240 3,394
Selling, general and administrative
expenses........................... 33,689 18,233 8,869 4,978 3,269
------- ------- ------- ------- ------
Income from operations.............. 4,373 1,996 1,307 262 125
Other income (expense), net......... (127) 369 (156) (203) (44)
------- ------- ------- ------- ------
Income before income taxes.......... 4,246 2,365 1,151 59 81
Income taxes........................ 1,737 1,004 469 26 53
------- ------- ------- ------- ------
Net income.......................... $ 2,509 $ 1,361 $ 682 $ 33 $ 28
======= ======= ======= ======= ======
Net income per share:
Basic............................. $ 0.34 $ 0.22 $ 0.11 $ 0.01 $ 0.00
======= ======= ======= ======= ======
Diluted........................... $ 0.25 $ 0.16 $ 0.11 $ 0.01 $ 0.00
======= ======= ======= ======= ======
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)........... $19,503 $ 189 $ (114) $ (209) $ 251
Total assets........................ 42,440 22,994 5,680 2,572 1,700
Long-term debt...................... 2,549 6,738 -- -- 244
Redeemable convertible preferred
stock.............................. -- 9,900 -- -- --
Stockholders' equity (deficit)...... 31,350 (2,748) 941 259 226
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this Report contains forward looking statements that
involve risks and uncertainties. The statements contained in this release that
are not purely historical are forward looking statements within the meaning of
Section 21E of the Securities Act of 1934, including statements regarding the
Company's "expectations," "beliefs," "hopes," "intentions" or "strategies," or
the like, regarding the future. All forward looking statements included in
this release are based upon information available to the Company as of the
date hereof, and the Company assumes no obligation to update any such forward
looking statement. Actual results could differ materially from those indicated
by the forward looking statements made herein or presented elsewhere by the
Company's management from time to time. Factors that could cause or contribute
to such differences include, but are not limited to, the rate of hiring and
productivity of revenue generating personnel; the availability of qualified IT
professionals; changes in the relative mix between contract services and
permanent placement services; changes in the pricing of the Company's
services; the timing and rate of entrance into new regional markets and the
addition of Practice Groups; the structure and timing of acquisitions; changes
in demand for IT professionals; general economic factors; and other factors as
discussed under the caption "Risk Factors," elsewhere in this Report, and in
the Company's Securities and Exchange Commission Filings.
OVERVIEW
Hall Kinion provides specialized IT professionals to corporate clients
through 21 offices located in 11 states and in London, England. 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.
In 1997, 1996 and 1995, the Contract Services Division represented 86.5%,
83.6% and 87.3% of the Company's net revenues, respectively. For the same
periods, the Permanent Placement Division represented 13.5%, 16.4% and 12.7%
of the Company's net revenues, respectively. If the TeamAlliance Acquisition
had occurred in January 1996, net revenues on a pro forma basis for the
Contract Services Division and the Permanent Placement Division would have
accounted for 87.2% and 12.8% of the Company's 1996 revenues, respectively.
The Company's net revenues are derived from hourly billings of IT
professionals performing contract assignments and from fees received for
permanent placements. For contract services, assignments generally last from
three to nine months and revenues are recognized as services are provided.
Because the Company only derives revenues when its consultants are actually
working, its operating results may be adversely affected when client
facilities are closed due to holidays or inclement weather. In particular, the
Company experiences a certain amount of seasonality in its first fiscal
quarter. For its Permanent Placement of IT professionals, the Company receives
a fee upon placement of the candidate. The fee is typically structured as a
percentage of the placed IT professional's first-year annual compensation.
Permanent Placement revenues from fees are recognized when the IT professional
commences employment.
The Company has experienced growth by the additions of sales and recruiting
employees, developing new Practice Groups, acquisitions and entering into new
regional markets. As of December 1995, the Company had 141 employees and 17
Practice Groups in 5 regional markets. As of December 1996, the Company had
327 employees and 42 Practice Groups in 14 regional markets. As of December
1997, the Company had 425 employees and 59 Practice Groups in 14 regional
markets. During this period, net revenues increased from $29.4 million to
$92.8 million, or 215.9%. Overall headcount for the comparable period
increased from 141 to 425, or 201.4%. Although contributing to the increase in
net revenues, the addition of new Practice Groups and the entry into new
regional markets has 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
personnel and sales employees reach full productivity.
14
<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>
FISCAL YEAR
-------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net revenues:
Contract services........................................ 86.5% 83.6% 87.3%
Permanent placement...................................... 13.5 16.4 12.7
----- ----- -----
Total net revenues..................................... 100.0 100.0 100.0
Cost of contract services.................................. 59.0 60.0 65.4
----- ----- -----
Gross profit (1)........................................... 41.0 40.0 34.6
Selling, general administrative expenses................... 36.3 34.4 30.2
Other operating expenses................................... -- 1.6 --
----- ----- -----
Income from operations..................................... 4.7 4.0 4.4
Other income (expenses), net............................... (0.1) 0.7 (0.5)
----- ----- -----
Income before taxes........................................ 4.6% 4.7% 3.9%
===== ===== =====
</TABLE>
- --------
(1) Gross profit for Contract Services excluding Permanent Placement revenues
(as a percentage of net Contract Service revenues) was 31.8%, 28.2% and
25.1% for years 1997, 1996 and 1995, respectively. The Company's fiscal
year ends on the last Sunday of December.
YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 30, 1995
Net revenues. Net revenues were $92.8 million, $50.6 million, and $29.4
million for the years 1997, 1996 and 1995, respectively, increasing by 83.6%
during 1997 and 72.1% during 1996. The Company's net revenues from Contract
Services were $80.3 million, $42.3 million and $25.7 million for the years
1997, 1996 and 1995, respectively, increasing by 89.9% during 1997 and 64.7%
during 1996. The Company's net revenues from Permanent Placements were $12.6
million, $8.3 million and $3.7 million for the years 1997, 1996 and 1995,
respectively, increasing by 51.1% during 1997 and 123.3% during 1996. The
increase in net revenues in 1997 was primarily due to a full year of revenue
from the TeamAlliance operations, the opening of 20 new Practice Groups within
existing regional markets, as well as a full year of revenue from the Austin,
Phoenix, Raleigh and London offices and to a lesser extent increased bill
rates. In 1997 the Company's revenue producing headcount increased from 273 to
348 or 27.5%, with much of the increase occurring in the third and fourth
quarters. As a result, the increase in net revenue in 1997 was partially
offset due to the delay experienced by the Company before new employees reach
full productivity. The increase in net revenues in 1996 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. 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 revenue producing
headcount increased from 123 to 273 or 122.0% in 1996, while net revenues
increased only by 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 from the Company's Contract Services represent
revenues less direct cost of services, which consists of direct payroll,
payroll taxes and insurance costs for contract employees. Gross profit dollars
from permanent placement services are equal to revenues, as there are no
direct costs associated with such revenues. Gross profit for the Company's
Contract Services were $25.5 million, $11.9 million, and $6.5 million for the
years 1997, 1996 and 1995, respectively, increasing by 114.0% and 84.7% in
1997 and 1996,
15
<PAGE>
respectively. The Company believes these increases were due to increased
demand for the Company's services and to a lesser extent increased bill rates.
Gross profit for the Company's Permanent Placement division were $12.6
million, $8.3 million and $3.7 million for the years 1997, 1996 and 1995,
respectively, increasing by 51.1% and 123.3% in 1997 and 1996, respectively.
These increases were primarily due to increases in demand for the Company's
Permanent Placement services.
Operating Expenses. Operating expenses were $33.7 million in 1997 compared
to $18.2 million in 1996 and $8.9 million in 1995. Operating expenses as a
percentage of net revenues were 36.3% in 1997 and 36.0% in 1996 and 30.2% in
1995. Selling, general and administrative expenses consist primarily of staff
compensation, occupancy, telephone, advertising and public company costs. The
increase in 1997 was primarily due to increased headcount and operating
expenses from new Practice Groups, the integration of 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 headquarters to Cupertino, California. To a lesser extent, operating
expenses also increased due to the expenses incurred from the addition of
Permanent Placement Practice Groups in Houston, Austin, Chicago, Tampa,
Phoenix and San Mateo. The increase in 1996 was primarily due to the opening
of Practice Groups in four additional regional markets in 1996, and one month
of integration costs for the TeamAlliance operations.
Other Income (Expense), Net. Interest income for the years 1997, 1996 and
1995 was $485,000, $434,000 and $0, respectively. Interest expense for the
years 1997, 1996 and 1995 was $581,000, $65,000 and $122,000 respectively. The
increase in interest income resulted from increased cash balances from the
Company's initial public offering on August 4, 1997. The increase in interest
expense primarily reflects indebtedness incurred in connection with the
TeamAlliance acquisition and expansion costs associated with new Practice
Groups.
Income Taxes. The provision for income taxes was 40.9%, 42.5%, and 40.8% for
the years 1997, 1996 and 1995. 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.
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, the Company completed its initial public offering of its
common stock. Of the 2,892,250 shares of common stock offered, 1,666,667
shares were sold by the Company and 1,225,583 shares were sold by selling
stockholders. The Company received approximately $21.5 million of cash, net of
underwriting discounts and commissions, and other expenses. Approximately $7.0
million of the net proceeds were used to repay all outstanding indebtedness
under the Company's credit facility and approximately $1.0 million was used to
finance the addition of new Practice Groups during the fourth quarter. An
additional $1.3 million was used to pay a note outstanding to certain
shareholders affiliated with the TeamAlliance operations. The remaining net
proceeds were invested in short term securities. In connection with the
initial public offering, all of the Company's outstanding shares of preferred
stock were automatically converted into an equal number of shares of common
stock.
During 1997, 1996 and 1995, the Company used cash in operations of
approximately $517,000, $1.6 million, and $193,000, respectively. 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 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 in accounts receivable was primarily
financed by the initial public offering in August 1997. Historically, the
Company has utilized various sources of financing to fund its working capital
requirements, including cash flow from internal operations, bank credit lines
and the sale of its capital stock.
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.
The Company's 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 clients.
16
<PAGE>
During 1997, 1996 and 1995, the Company made capital expenditures of $1.9
million, $2.6 million and $634,000, respectively. 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.
In December 1996, the Company completed the TeamAlliance Acquisition for a
cash payment of $4.3 million at the date of acquisition and the issuance of
52,000 shares of the Company's Common Stock. In addition, the Company agreed
to pay the principals an aggregate of an additional $4.2 million in three
installments in October 1997, 1998 and 1999. Pursuant to this obligation, the
Company made a payment of $1.25 million on October 31, 1997. In addition, the
Company made additional payments aggregating approximately $502,000 to certain
management companies associated with TeamAlliance and their shareholders
during 1997. The Company financed the initial cash portion of the purchase
price with available borrowings under the term loan facility. The subsequent
payments in 1997 were made from the net proceeds of the initial public
offering.
In January 1996, entities affiliated with the Sprout Group ("Sprout")
purchased 1,600,000 shares of Series A Preferred Stock and warrants to
purchase and 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. Upon closing
of the initial public offering in August 1997, Ms. Hall and Mr. Kinion paid
their respective promissory notes by tendering to the Company 480,000 and
320,000 shares of Common Stock, respectively.
YEAR 2000 ISSUES
The Company is in the process of conducting assessments of its computer
information systems and is beginning to take the necessary steps to determine
the nature and extent of the work required to make its systems Year 2000
compliant, where necessary. These steps will require the Company to modify,
upgrade or replace some of its internal financial and operational systems. The
Company continues to evaluate the estimated cost of bringing all internal
systems, equipment and operations into Year 2000 compliance, but has not
finished determining the total cost of these compliance efforts. While these
efforts may involve additional costs, the Company believes, based upon
currently available information, that these costs will not have a material
adverse effect on the business, financial condition or results of operations
of the Company. However, if these efforts are not completed on time, or if the
cost of updating or replacing the Company's information systems, if necessary,
exceeds the current estimates, the Year 2000 issue could have a material
adverse impact on the business, financial condition or results of operations
of the Company.
The Company also intends to determine the extent to which it may be
vulnerable to any failures by its major partners and service providers to
remedy their own Year 2000 issues, and is in the process of initiating formal
communications with these parties. At this time the Company is unable to
estimate the nature or extent of any potential adverse impact resulting from
the failure of third parties to achieve Year 2000 compliance; however, there
can be no assurance that these third parties will not experience Year 2000
problems or that any problems would not have a material effect on the
Company's business, financial condition or results of operations.
SUBSEQUENT EVENTS
In January 1998, the Company acquired Group-IPEX for $7,339,000 consisting
of a cash payment of $6,175,000, the issuance of 46,000 shares of Company
common stock valued at $914,000, and $250,000 of costs related to the
acquisition. Group-IPEX, based in Lafayette, California, is an international
recruiting organization for IT research and development professionals focusing
on recruiting primarily from India, but also from Russia and China.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents............................... $ 4,310,000 $ 56,000
Investments........................................ 9,120,000 --
Accounts receivable, net of allowance for doubtful
accounts of $344,000 in 1997 and $403,000 in 1996. 12,774,000 7,621,000
Prepaid expenses and other current assets.......... 326,000 490,000
Prepaid income taxes............................... 407,000 786,000
Deferred income taxes.............................. 612,000 340,000
----------- -----------
Total current assets.............................. 27,549,000 9,293,000
Property and equipment, net.......................... 5,404,000 4,431,000
Goodwill, net........................................ 9,016,000 9,054,000
Other assets......................................... 471,000 216,000
----------- -----------
Total assets......................................... $42,440,000 $22,994,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Cash overdraft..................................... $ -- $ 1,229,000
Line of credit..................................... 1,250,000 418,000
Accounts payable................................... 1,835,000 1,516,000
Accrued salaries, commissions and related payroll
taxes............................................. 2,794,000 2,255,000
Accrued liabilities................................ 1,280,000 1,301,000
Current portion of long term debt.................. 1,000,000 2,385,000
----------- -----------
Total current liabilities......................... 8,159,000 9,104,000
Long term debt....................................... 2,549,000 6,738,000
Deferred income taxes................................ 202,000 --
----------- -----------
Total liabilities................................. 10,910,000 15,842,000
----------- -----------
Commitments and contingencies (see Notes 2, 6 and 10)
Redeemable convertible preferred stock (Note 7)...... -- 9,900,000
----------- -----------
Stockholders' Equity (Deficit):
Common stock; $0.001 par value; 100,000,000 shares
authorized:
shares outstanding: 1997-9,025,000; 1996-
6,339,000....................................... 32,312,000 357,000
Stockholders notes receivable...................... (6,000) (5,323,000)
Accumulated translation adjustment................. 2,000 (3,000)
Retained earnings (deficit)........................ (778,000) 2,221,000
----------- -----------
Total stockholders' equity (deficit)............. 31,530,000 (2,748,000)
----------- -----------
Total liabilities and stockholders' equity (deficit). $42,440,000 $22,994,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
DECEMBER DECEMBER DECEMBER
28, 29, 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues:
Contract services..................... $80,260,000 $42,254,000 $25,660,000
Permanent placement................... 12,571,000 8,317,000 3,725,000
----------- ----------- -----------
Total net revenues...................... 92,831,000 50,571,000 29,385,000
Cost of contract services............... 54,769,000 30,342,000 19,209,000
----------- ----------- -----------
Gross profit............................ 38,062,000 20,229,000 10,176,000
----------- ----------- -----------
Selling, general and administrative
expenses............................... 33,689,000 17,412,000 8,869,000
Other operating expenses................ -- 821,000 --
----------- ----------- -----------
Total operating expenses............ 33,689,000 18,233,000 8,869,000
----------- ----------- -----------
Income from operations.................. 4,373,000 1,996,000 1,307,000
----------- ----------- -----------
Other income (expenses):
Interest income....................... 485,000 434,000 --
Interest expense...................... (581,000) (65,000) (122,000)
Other expense, net.................... (31,000) -- (34,000)
----------- ----------- -----------
Total other income (expense), net... (127,000) 369,000 (156,000)
----------- ----------- -----------
Income before income taxes.............. 4,246,000 2,365,000 1,151,000
Income taxes............................ 1,737,000 1,004,000 469,000
----------- ----------- -----------
Net income.............................. $ 2,509,000 $ 1,361,000 $ 682,000
=========== =========== ===========
Net income per share:
Basic................................. $ 0.34 $ 0.22 $ 0.11
Diluted............................... $ 0.25 $ 0.16 $ 0.11
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK SHAREHOLDER ACCUMULATED
---------------------- NOTES TRANSLATION RETAINED
SHARES AMOUNT RECEIVABLE ADJUSTMENT EARNINGS TOTAL
--------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1,
1995................... 6,282,000 $ 81,000 $ -- $ -- $ 178,000 $ 259,000
Net income............ -- -- -- -- 682,000 682,000
--------- ----------- ---------- ------ ---------- -----------
BALANCES, December 30,
1995................... 6,282,000 81,000 -- -- 860,000 941,000
Notes to stockholders
secured by stock..... -- -- (5,000,000) -- -- (5,000,000)
Interest on
stockholders 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 29,
1996................... 6,339,000 357,000 (5,323,000) (3,000) 2,221,000 (2,748,000)
Issuance of common
stock upon initial
public offering, net
of issuance costs of
$1,767,000........... 1,667,000 21,458,000 -- -- -- 21,458,000
Conversion of
redeemable
convertible preferred
stock to common
stock................ 1,600,000 9,900,000 -- -- -- 9,900,000
Repayment of
stockholder notes
receivable........... (800,000) (10,000) 5,518,000 -- (5,508,000) --
Interest on
stockholder notes
receivable........... -- -- (201,000) -- -- (201,000)
Exercise of stock
options.............. 204,000 457,000 -- -- -- 457,000
Issuance of common
stock................ 15,000 150,000 -- -- -- 150,000
Accumulated
translation
adjustment........... -- -- -- 5,000 -- 5,000
Net income............ -- -- -- -- 2,509,000 2,509,000
--------- ----------- ---------- ------ ---------- -----------
BALANCES, December 28,
1997................... 9,025,000 $32,312,000 $ (6,000) $2,000 ($ 778,000) $31,530,000
========= =========== ========== ====== ========== ===========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
DECEMBER DECEMBER 29, DECEMBER 30,
28, 1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 2,509,000 $1,361,000 $ 682,000
Adjustments to reconcile net income to
net cash used for operating
activities:
Depreciation and amortization....... 1,289,000 448,000 208,000
Deferred income taxes............... (70,000) (61,000) (173,000)
Compensation expense on stock
options............................ -- 10,000 --
Interest on stockholder notes
receivable......................... (201,000) (317,000) --
Loss on sale of fixed assets........ 10,000 -- --
Changes in assets and liabilities:
Accounts receivable............... (5,153,000) (3,352,000) (2,410,000)
Prepaid expenses and other assets. (124,000) (482,000) 25,000
Prepaid income taxes.............. 379,000 (786,000) --
Accounts payable and accrued
expenses......................... 844,000 1,754,000 1,411,000
Income taxes payable.............. -- (145,000) 64,000
----------- ---------- ----------
Net cash used for operating
activities..................... (517,000) (1,570,000) (193,000)
----------- ---------- ----------
Cash flows from investing activities:
Purchases of investments.............. (9,120,000) -- --
Purchase of property and equipment.... (1,936,000) (2,581,000) (634,000)
Deposits for property and equipment... -- 122,000 (192,000)
Cash paid for business acquisition.... -- (4,323,000) --
----------- ---------- ----------
Net cash used for investing
activities..................... (11,056,000) (6,782,000) (826,000)
----------- ---------- ----------
Cash flows from financing activities:
Cash overdraft, net................... (1,229,000) 891,000 272,000
Line of credit, net................... 832,000 (1,316,000) 801,000
Note payable repayments............... (5,691,000) -- (122,000)
Borrowing on debt..................... -- 4,000,000 --
Repayments of debt.................... -- (71,000) --
Proceeds from sale of common stock,
net of issuance costs................ 21,458,000 -- --
Proceeds from sale of preferred stock,
net of issuance costs................ -- 9,900,000 --
Proceeds from exercise of options....... 457,000 -- --
Stockholder notes receivable............ -- (5,000,000) --
----------- ---------- ----------
Net cash provided by financing
activities..................... 15,827,000 8,404,000 951,000
----------- ---------- ----------
Net increase (decrease) in cash and
equivalents............................ 4,254,000 52,000 (68,000)
Cash and equivalents, beginning of
period................................. 56,000 4,000 72,000
----------- ---------- ----------
Cash and equivalents, end of period..... $ 4,310,000 $ 56,000 $ 4,000
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996 AND DECEMBER 30, 1995
NOTE 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 December 1996, the Company acquired
certain assets of TeamAlliance Technology Partners, L.P. (Note 2).
Initial Public Offering. In August 1997, the Company completed its initial
public offering of its common stock. Of the 2,892,250 shares of common stock
offered, 1,666,667 shares were sold by the Company and 1,225,583 shares were
sold by selling shareholders. The Company received approximately $21.5 million
of cash, net of underwriting discounts and commissions, and other expenses.
Simultaneously, all outstanding shares of preferred stock were automatically
converted into an equal number of shares of common stock.
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 certain 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 statement 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, investments 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 investment
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 a cost which approximates fair value.
Investments. Investments consist of high quality money market instruments
with original maturities greater than 90 days, but less than one year, and are
stated at fair value. At December 28, 1997, the Company's investments are all
classified as available for sale. Unrealized gains and losses on securities
classified as available-for-sale were not significant.
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. For the years
ended December 28, 1997 and December 29, 1996 amortization expense was
$304,000 and $25,000
22
<PAGE>
respectively. The Company evaluates the recoverability of goodwill on a
quarterly basis based upon estimated 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.
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.
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, Accounting for Stock Issued to Employees (APB
25).
Net Income Per Share. In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, Earnings Per
Share (SFAS 128). The Company has adopted SFAS 128 in the fourth quarter of
fiscal 1997 and restated earnings per share (EPS) for prior periods to conform
with SFAS 128.
SFAS 128 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.
A reconciliation of basic weighted average common stock shares to diluted
weighted average common shares follows:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Basic weighted average common shares
outstanding........................ 7,339,000 6,282,000 6,282,000
Preferred stock..................... 958,000 1,469,000 --
Warrants............................ 250,000 230,000 --
Stock options....................... 1,360,000 369,000 29,000
--------- --------- ---------
Diluted weighted average shares
outstanding........................ 9,907,000 8,350,000 6,311,000
========= ========= =========
</TABLE>
Fiscal Year. The Company's fiscal year ends on the Sunday closest to
December 31. Fiscal years 1997, 1996, and 1995 all consisted of 52 weeks.
New Accounting Pronouncement. In June 1997, the Financial Accounting
Standards Board adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for a company's business segments. It also establishes
standards for related disclosures about products, services, geographic areas
and major customers. Adoption of SFAS No. 131 will not impact the Company's
consolidated financial position, results of operations or cash flows. The
statement is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted.
NOTE 2. ACQUISITIONS
In January 1998, the Company completed the acquisition of Group-IPEX an
international recruiting organization for information technology (IT) research
and development professionals. Group IPEX focuses on
23
<PAGE>
recruiting international IT professionals primarily from India but also from
Russia and China. The acquisition was accounted for as a purchase. Total
consideration for this purchase was $7,339,000 including approximately
$250,000 of costs attributable to the acquisition. Terms of the acquisition
included a cash payment of $6,175,000 at the date of acquisition and the
issuance of 46,000 shares of Company common stock valued at $914,000. In
addition, if certain revenue targets as defined, are achieved, the Company has
agreed to pay the sellers an aggregate of $3,375,000 in three future annual
installments as follows: January 31, 1999-$1,125,000; January 31, 2000-
$1,125,000; and January 31, 2001-$1,125,000.
Had the acquisition of Group IPEX been completed at the beginning of 1997,
the Company's unaudited pro forma revenues, net income and basic and diluted
earnings per share for 1997 would have been approximately $100,077,000,
$2,388,000, $0.32, and $0.24. Pro forma adjustments reflect interest on the
cash paid in the acquisition and the amortization of goodwill as well as the
dilution attributable to the shares issued.
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 IT companies.
The acquisition was accounted for as a purchase. The 1996 consolidated
financial statements of the Company include only 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 1997, the Company paid the sellers $1,250,000 and
$502,000 for the limited liability companies. Additional payments to the
sellers total $2,950,000 due in two future annual installments as follows:
October 31, 1998-$1,250,000 and October 31, 1999-$1,700,000.
Had the acquisition of TeamAlliance been completed at the beginning of 1996,
the Company's unaudited pro forma revenues, net income and basic and diluted
earnings per share for 1996 could have been approximately $65,091,000,
$475,000 and $0.08 and $0.06. Had the acquisition of TeamAlliance been
completed at the beginning of 1995, the Company's unaudited pro forma
revenues, net loss and basic and diluted net loss per share for 1995 would
have been approximately $39,574,000 $(95,000), $(0.02) and $(0.02). 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.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
Property and equipment............................. $4,564,000 $3,071,000
Land and building.................................. 2,047,000 2,047,000
Leasehold improvements............................. 516,000 99,000
---------- ----------
7,127,000 5,217,000
Accumulated depreciation and amortization.......... (1,723,000) (786,000)
---------- ----------
$5,404,000 $4,431,000
========== ==========
</TABLE>
NOTE 4. DEBT
The Company has a revolving line of credit facility enabling the Company to
borrow a stated percentage of eligible accounts receivable up to a maximum of
$15,000,000. Borrowings under this facility bear interest at the bank's prime
rate (8.5% at December 28, 1997). Borrowing under this facility are
collaterized by substantially all of the assets of the Company. At December
28, 1997, the Company had $1,250,000 outstanding under the revolving line of
credit. The bank term note was paid in full during 1997.
24
<PAGE>
The facility contains certain covenants requiring the Company to maintain a
minimum level of profitability and net worth and to maintain specific ratios
of working capital and current portion of debt to operating cash flow. The
Company was in compliance with all of these covenants as of December 28, 1997.
Debt consists of:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
Present value of installments due in connection
with the acquisition of
TeamAlliance (discounted at 8.3%) (Note 2)....... $2,414,000 $3,977,000
Mortgage note payable............................. 1,137,000 1,146,000
Bank term loan.................................... -- 4,000,000
---------- ----------
3,549,000 9,123,000
Current portion of debt........................... (1,000,000) (2,385,000)
---------- ----------
Long term debt.................................... $2,549,000 $6,738,000
========== ==========
</TABLE>
Future payment requirements in connection with debt are: 1998, $1,000,000;
1999, $1,430,000; 2000, $11,000; 2001, $12,000; 2002, $13,000; thereafter,
$1,083,000.
NOTE 5. EMPLOYEE BENEFIT PLANS
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 by the Internal Revenue Code. At the discretion of the Board of
Directors, the Company may match employee contributions. The Company has not
contributed any matching contributions as of December 28, 1997. In February
1998, the Board of Directors approved a nonqualified deferred compensation
plan for officers and key employees.
NOTE 6. LEASE COMMITMENTS
The Company leases its office facilities under various noncancellable
operating leases which expire through 2002. Rent expense include in operating
expenses for 1997, 1996 and 1995 was approximately $1,797,000, $802,000 and
$295,000 respectively. Future minimum payments under all operating leases are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER
---------------------
<S> <C>
1998............................................................ $2,130,000
1999............................................................ 2,117,000
2000............................................................ 1,563,000
2001............................................................ 715,000
2002............................................................ 296,000
Thereafter...................................................... 20,000
----------
Total......................................................... $6,841,000
==========
</TABLE>
NOTE 7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In January 1996, the Company sold 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. In August 1997, all
Series A redeemable preferred stock was converted to 1,600,000 shares of
common stock.
25
<PAGE>
NOTE 8. STOCKHOLDERS' EQUITY
CAPITAL STOCK--The Company is authorized to issue 110,000,000 shares of
capital stock consisting of 100,000,000 shares of common stock and 10,000,000
shares of preferred stock.
STOCKHOLDER NOTES RECEIVABLE--In January 1996, the Company loaned to its two
principal common stockholders an aggregate of $5,000,000 under nonrecourse
promissory notes collateralized by a total of 1,600,000 shares of the
Company's common stock. Each promissory note bore interest at 6.9% per annum.
In August 1997, in connection with the initial public offering, the two
principal common stockholders tendered an aggregate of 800,000 shares of
Common Stock as full payment of the principal and interest due on the
promissory notes.
STOCK OPTIONS--The Company's 1997 Stock Option Plan (the Plan), as amended,
authorizes the issuance of up to 2,492,000 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 grants as determined by the Board of Directors. Such options vest over
periods ranging from two 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 29, 1996 and 50%
will vest ratably over 24 months commencing January 1998 with acceleration
clauses.
The Company's IT Professional Stock Plan (the "IT Professional Plan") was
adopted by the Board of Directors in May 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. 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 no less than 85% of the fair
market value of such shares on the grant date. Options under the IT
Professional Plan are generally vested when granted and expire ten years from
grant date. During 1997, the Board of Directors granted 98,000 options to
purchase common stock to employees which vested upon commencement of their
next assignment and are priced at the fair market value of that date. At
December 28, 1997, 97,000 options remain outstanding and are not included in
the option activity until the employees commence their next assignment.
Option activity under all plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES 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 30, 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 29, 1996............................... 2,201,000 $ 3.35
Granted (weighted average fair value of $2,081,000)...... 596,000 $12.42
Canceled................................................. (238,000) $ 4.43
Exercised................................................ (210,000) $ 2.28
---------
Balance, December 28, 1997............................... 2,349,000 $ 5.63
=========
</TABLE>
26
<PAGE>
Additional information regarding options outstanding as of December 28, 1997
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
------------------------ ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.30--$ 1.50.......... 326,000 7.74 $ 0.61 208,000 $ 0.79
$ 4.00.................. 1,269,000 8.76 $ 4.00 1,269,000 $ 4.00
$ 5.10--$10.00.......... 518,000 9.07 $ 8.11 518,000 $ 8.11
$10.50--$19.25.......... 183,000 9.69 $14.13 97,000 $10.56
$21.88.................. 53,000 9.71 $21.88 -- --
--------- --------- ------
$ 0.30--$21.88.......... 2,349,000 8.78 $ 5.63 2,092,000 $ 5.00
========= ========= ======
</TABLE>
At December 28, 1997, 1,156,000 options 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 price models, even though
these 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 average assumptions: expected life, 12 months
following vesting; volatility, 37.2% after the initial public offering on
August 4, 1997 and zero before that date; risk free interest rates, 6.2% in
1997 and 6.5% in 1996 and 1995; 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 1997, 1996 and 1995 awards had been amortized to expense over the vesting
period of the awards, pro forma net income and pro forma diluted net income
per share would have been $1,764,000, $0.18 per share, $1,087,000, $0.12 per
share and $678,000, $0.09 per share, in 1997, 1996 and 1995, respectively.
COMMON STOCK WARRANTS--Common stock warrants have been issued in conjunction
with the issuance of preferred stock in January 1996. At December 28, 1997,
the Company had outstanding warrants to purchase 250,000 shares of common
stock at $0.01 per share. In January 1998, these warrants were converted to
250,000 shares of common stock.
27
<PAGE>
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................. $1,391,000 $ 808,000 $494,000
State............................... 416,000 257,000 148,000
---------- ---------- --------
1,807,000 1,065,000 642,000
---------- ---------- --------
Deferred:
Federal............................. (94,000) (41,000) (134,000)
State............................... 24,000 (20,000) (39,000)
---------- ---------- --------
(70,000) (61,000) (173,000)
---------- ---------- --------
$1,737,000 $1,004,000 $469,000
========== ========== ========
</TABLE>
The Company's effective tax rate differs from the federal statutory rate as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax expense at statutory rate....................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit................. 6.7 6.5 6.3
Other items, net........................................... 0.2 2.0 0.4
---- ---- ----
40.9% 42.5% 40.7%
==== ==== ====
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.................. $137,000 $161,000
Accrued expenses................................. 475,000 179,000
-------- --------
Total deferred tax assets...................... 612,000 340,000
======== ========
Deferred tax liabilities:
Depreciation and amortization.................... (207,000) --
Goodwill and intangible assets................... 409,000 --
-------- --------
Total deferred tax liabilities................. 202,000
--------
Net deferred income taxes.................... $410,000 $340,000
======== ========
</TABLE>
NOTE 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.
28
<PAGE>
NOTE 11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following provides additional information concerning supplemental
disclosures of cash flow activities:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the period for:
Income taxes....................... $1,531,000 $1,956,000 $ 577,000
Interest........................... 536,000 46,000 117,000
Noncash investing and financing
activities:
Conversion of preferred stock to
common stock...................... 9,900,000 -- --
Payment of stockholder loan by
stock............................. 5,518,000 -- --
Common stock issued in settlement
agreement......................... 150,000 -- --
Imputed interest on installment
note.............................. 116,000 -- --
Purchase of land, building and
furniture for a note payable...... -- 1,147,000 --
Exercise of stock options for a
note receivable from stockholder.. -- 6,000 --
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>
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tabulation shows certain quarterly financial data for 1997 and
1996:
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------
1997 FIRST SECOND THIRD FOURTH
---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total net revenues.......... $19,193,000 $23,498,000 $24,608,000 $25,532,000
Gross profit................ 7,173,000 9,585,000 10,121,000 11,183,000
Income before income taxes.. 73,000 892,000 1,489,000 1,792,000
Net income.................. 20,000 535,000 893,000 1,061,000
Net income per share-Basic.. -- 0.09 0.11 0.12
Net income per share-
Diluted.................... -- 0.06 0.09 0.10
</TABLE>
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------
1996 FIRST SECOND THIRD FOURTH
---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total net revenues.......... $10,296,000 $12,444,000 $12,384,000 $15,447,000
Gross profit................ 4,083,000 5,018,000 4,985,000 6,143,000
Income before income taxes.. 694,000 1,021,000 166,000 484,000
Net income.................. 416,000 612,000 100,000 233,000
Net income per share-Basic.. 0.07 0.10 0.02 0.04
Net income per share-
Diluted.................... 0.05 0.07 0.01 0.03
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Hall, Kinion & Associates, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hall, Kinion
& Associates, Inc. and Subsidiaries as of December 28, 1997 and December 29,
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 28, 1997. These financial statements are the responsibility of
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 out 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 28, 1997 and December 29, 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 28, 1997 in conformity with general accepted accounting
principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 24, 1998
30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The information required by Items 10 through 13 of Part III is incorporated
by reference from the registrant's Proxy Statement, under the captions
"Nomination and Election of Directors," "Beneficial Stock Ownership,"
"Compensation of Directors," "Compensation of Executive Officers" and
"Compensation Committee Interlocks and Insider Participation of Insider
Participation and Certain Transactions," which Proxy Statement will be mailed
to stockholders in connection with the registrant's annual meeting of
stockholders which is to be scheduled in May 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE
(A) (1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
its subsidiaries are included in Item 8 of this report:
Consolidated balance sheets at December 28, 1997 and December 29,
1996. 18
Consolidated statements of income for this years ended December 28,
1997, December 29, 1996 and December 30, 1995. 19
Consolidated statements of stockholders' equity for the years ended
December 28, 1997, December 29, 1996 and December 30, 1995. 20
Consolidated statements of cash flows for the years ended December 28,
1997, December 29, 1996 and December 30, 1995. 21
Notes to consolidated financial statements. 22
Reports of independent public accountants. 30
(A) (2) FINANCIAL STATEMENT SCHEDULES
II--Valuation and Qualifying Accounts 35
Additional schedules have been omitted as they are not applicable.
(A) (3) EXHIBITS
<TABLE>
<C> <C> <S>
2.1 (1) Agreement and Plan of Merger dated July 9, 1997, for the merger
of Hall, Kinion & Associates, Inc., a California corporation,
into Hall, Kinion & Associates, Inc., a Delaware corporation
(the "Registrant").
2.2 (1) Asset Purchase Agreement dated November 26, 1996, among the
Registrant and the other parties named therein.
2.3 (2) Stock Purchase Agreement dated December 20, 1997 by and among
the Registrant, Group-Ipex, Inc., and Lalit M. Kapoor and
Satindra Kapoor.
3.1 (1) Certificate of Incorporation of the Registrant.
3.3 (1) Bylaws of the Registrant.
</TABLE>
31
<PAGE>
<TABLE>
<C> <C> <S>
3.4 (1) Amended and Restated Certificate of Incorporation of the
Registrant filed August 8, 1997.
4.1 Reference is made to Exhibits 3.1, 3.3 and 3.4.
4.2 (1) Investors' Rights Agreement, dated January 26, 1996, among
the Registrant, certain stockholders and investors named
therein.
4.4 (1) Specimen Common Stock certificate.
9.2 (1) Kinion Voting Trust Agreement, dated January 17, 1996, among
Todd Kinion and the stockholders of the Registrant named
therein.
9.3 (1) Amended and Restated Voting Trust Agreement, dated October
29, 1996, among the Registrant, Brenda C. Hall and Todd J.
Kinion.
10.1 (1) Form of Indemnification Agreement entered into between the
Registrant and each of its directors and certain officers.
10.2 (1) The Registrant's 1997 Stock Option Plan.
10.3 (1) The Registrant's Employee Stock Purchase Plan.
10.11 (1) Form of Employment Agreement, dated October 18, 1996, among
the Registrant, Paul Bartlett and Brenda C. Hall as amended.
10.12 (1) Form of Stock Option Agreement, dated October 18, 1996,
between the Registrant and Paul Bartlett as amended.
10.13 (1) Settlement Agreement and General Release, dated October 29,
1996 among the Registrant, Brenda Hall, as Voting Trustee of
the Voting Trust, and Todd Kinion.
10.14 (1) Employment Agreement, dated December 2, 1996, between the
Registrant and Mordecai Levine.
10.15 (1) Employment Agreement, dated December 2, 1996, between the
Registrant and Richard Harmon.
10.16 (1) Consulting and Settlement Agreement, dated February 28, 1997,
between the Registrant and Keith Corbin.
10.17 (1) Loan & Security Agreement (Accounts and Inventory), dated
April 26, 1995, between the Registrant and Comerica Bank-
California (the "Loan & Security Agreement"); Addendum to
Loan & Security Agreement; Second Addendum to Loan & Security
Agreement; Modification to Loan & Security Agreement, dated
December 20, 1995; Second Modification to Loan & Security
Agreement, dated October 21, 1996; Borrower's Authorization
dated October 16, 1996; Borrowers Authorization dated October
21, 1996; and Guaranty, dated April 26, 1995.
10.18 (1) Assumption and Assignment of Sublease, dated December 2,
1996, between the Registrant and TeamAlliance Technology
Partners, L.P.
10.19 (1) Standard Sublease, dated March 1, 1997, between the
Registrant and Seagate Technology, Inc.
10.20 (1) Employment Agreement, dated May 23, 1997, between the
Registrant and Brenda C. Hall.
10.21 (1) Agreement to Tender Shares dated May 23, 1997, between the
Registrant and Brenda C. Hall.
10.22 (1) Agreement to Tender Shares, dated May 23, 1997, between the
Registrant and Todd J. Kinion.
10.23 (1) Promissory Note Secured by Deed of Trust, dated August 5,
1996, made by Rita S. Hazell and Quentin D. Hazell in favor
of the Registrant.
</TABLE>
32
<PAGE>
<TABLE>
<C> <C> <S>
10.24 (1) Settlement Agreement with Mutual Release, dated May, 1997,
between Richard E. Swanson and the Registrant, Brenda C. Hall
and Todd J. Kinion.
10.25 (1) The Registrant's IT Professional Plan.
10.26 Reference is made to Exhibit 2.3.
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors Consent.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, as amended, declared effective by the Securities and Exchange
Commission on August 4, 1997 (File No. 333-28365).
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed January 13, 1998 (File No. 000-22869).
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the
fourth quarter of the fiscal year ended December 28, 1997. The
Registrant did file a report on Form 8-K on January 13, 1998,
concerning the acquisition of all of the outstanding capital stock
of Group-Ipex, Inc. ("Ipex") pursuant to that certain Stock Purchase
Agreement dated December 20, 1997 by and among the Registrant, Ipex,
and Lalit M. Kapoor and Satindra Kapoor.
(C) EXHIBITS
See (a)(3) above.
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Hall, Kinion & Associates, Inc.:
We have audited the consolidated financial statements of Hall, Kinion &
Associates, Inc. and Subsidiaries as of December 28, 1997 and December 29,
1996, and for each of the three years in the period ended December 28, 1997,
and have issued our report thereon dated January 24, 1998 included elsewhere
in this Registration Statement. Our audits also included the financial
statement schedule of Hall, Kinion & Associates, Inc. listed in Item 14(a)(2)
of this Registration Statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects that information set
forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 24, 1998
34
<PAGE>
SCHEDULE II
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
--------------------------- ---------------------
BALANCE CHARGED BALANCE
AT TO COSTS CHARGED WRITE-OFF OF AT END
BEGINNING AND TO OTHER UNCOLLECTIBLE OF
Allowance for Doubtful OF PERIOD EXPENSES ACCOUNTS ACCOUNTS PERIOD
Accounts: --------- -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 30,
1995....................... $121 $175 $-- $ -- $296
Year ended December 29,
1996....................... 296 145 31 (69) 403
Year ended December 28,
1997....................... 403 120 -- (179) 344
</TABLE>
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HALL, KINION & ASSOCIATES, INC.
By: /s/ Martin A. Kropelnicki
-----------------------------------
Martin A. Kropelnicki
Vice President and Chief Financial
Officer and Corporate Secretary
(Principal Financial Officer)
Date: March 27, 1998
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
Date: March 27, 1998 By: /s/ BRENDA C. HALL
-----------------------------------
Chairman of the Board, Chief
Executive Officer, And a Director
(Principal Executive Officer)
Date: March 23, 1998 By: /s/ PAUL H. BARTLETT
-----------------------------------
President and Director
Date: March 27, 1998 By: /s/ JON H. ROWBERRY
-----------------------------------
Director
Date: March 23, 1998 By: /s/ TODD J. KINION
-----------------------------------
Director
Date: March 27, 1998 By: /s/ MARTIN A. KROPELNICKI
-----------------------------------
Vice President, Chief Financial
Officer and Secretary (Principal
Financial Officer)
36
<PAGE>
EXHIBIT 21.1
HALL, KINION & ASSOCIATES, INC.
LIST OF SUBSIDIARIES
HALL KINION AND ASSOCIATES, UK LIMITED, a wholly-owned subsidiary of the
Registrant, organized under the laws of the United Kingdom.
TA ACQUISITION CORPORATION, a wholly-owned subsidiary of the Registrant,
organized under the laws of the State of Delaware.
GROUP-IPEX, a wholly-owned subsidiary of the Registrant, organized under the
laws of the State of California.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-38635 of Hall, Kinion & Associates, Inc. and Subsidiaries on Form S-8 of
our reports dated January 24, 1998, appearing in this Annual Report on Form
10-K of Hall, Kinion & Associates, Inc. and Subsidiaries for the year ended
December 29, 1997.
DELOITTE & TOUCHE LLP
San Jose, California
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS NAD IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-28-1997 DEC-29-1996
<PERIOD-START> DEC-30-1996 DEC-31-1995
<PERIOD-END> DEC-28-1997 DEC-29-1996
<CASH> 4,310,000 56,000
<SECURITIES> 9,120,000 0
<RECEIVABLES> 13,118,000 8,024,000
<ALLOWANCES> (344,000) (403,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 27,549,000 9,293,000
<PP&E> 7,126,000 5,217,000
<DEPRECIATION> (1,722,000) (786,000)
<TOTAL-ASSETS> 42,440,000 22,994,000
<CURRENT-LIABILITIES> 8,159,000 9,104,000
<BONDS> 2,549,000 6,738,000
0 0
0 0
<COMMON> 32,312,000 357,000
<OTHER-SE> (782,000) (3,105,000)
<TOTAL-LIABILITY-AND-EQUITY> 42,440,000 22,994,000
<SALES> 92,831,000 50,571,000
<TOTAL-REVENUES> 92,831,000 50,571,000
<CGS> 54,769,000 30,342,000
<TOTAL-COSTS> 54,769,000 30,342,000
<OTHER-EXPENSES> 33,689,000 18,233,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 581,000 65,000
<INCOME-PRETAX> 4,246,000 2,365,000
<INCOME-TAX> 1,737,000 1,004,000
<INCOME-CONTINUING> 2,509,000 1,361,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,509,000 1,361,000
<EPS-PRIMARY> .34 .22
<EPS-DILUTED> .25 .16
</TABLE>
