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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
_______________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
________________________
COMMISSION FILE NUMBER 0-22869
HALL, KINION & ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0337705
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19925 Stevens Creek Boulevard 95014
Suite 180 (zip code)
Cupertino, California
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 863-5720
______________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) had been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of October 19, 1998:
9,506,037 shares of common stock.
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HALL, KINION & ASSOCIATES, INC.
FORM 10-Q
INDEX
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<S> <C> <C>
PAGE
----
PART I. FINANCIAL INFORMATION........................................................................ 3
Item 1. Financial Statements......................................................................... 3
Condensed Consolidated Balance Sheets at September 27, 1998 and
December 28, 1997............................................................................ 3
Condensed Consolidated Statements of Income for the three and nine months
Ended September 27, 1998 and September 28, 1997.............................................. 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 27, 1998 and September 28, 1997.................................................... 5
Notes to Condensed Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 7
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13
Item 5. Shareholder Proposals........................................................................ 14
Item 6. Exhibits and Reports on Form 8-K............................................................. 14
SIGNATURES ............................................................................................. 15
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS
SEPTEMBER 27, DECEMBER 28,
1998 1997
--------------- ---------------
(UNAUDITED)
Current Assets:
Cash and equivalents................................................. $ 4,133 $ 4,310
Investments.......................................................... 2,347 9,120
Accounts receivable, net of allowance for doubtful accounts of
$652 at September 27, 1998 and $344 at December 28, 1997........... 17,510 12,774
Prepaid expenses and other current assets............................ 578 326
Prepaid income taxes................................................. - 407
Deferred income taxes................................................ 1, 948 612
------- -------
Total current assets............................................. 26,516 27,549
Property and equipment, net............................................ 5,233 5,404
Goodwill, net.......................................................... 17,278 9,016
Other assets........................................................... 347 471
------- -------
Total assets..................................................... $49,374 $42,440
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit...................................................... $ - $ 1,250
Accounts payable.................................................... 2,521 1,835
Accrued salaries, commissions, and related payroll taxes............ 4,267 2,794
Accrued liabilities................................................. 2,350 1,280
Income taxes payable................................................ 1,526 -
Current portion of long-term debt................................... 8 1,000
------- -------
Total current liabilities.............................................. 10,672 8,159
Long-term obligations.................................................. 1,180 2,549
Deferred income taxes.................................................. 1,117 202
------- -------
Total liabilities...................................................... 12,969 10,910
------- -------
Stockholders' Equity:
Common stock, (par value $0.001 per share; 100,000,000 shares
authorized; outstanding: 9,491,000 shares at September 27,
1998 and 9,025,000 shares at December 28, 1997)................... 34,115 32,312
Stockholder note receivable......................................... - (6)
Accumulated translation adjustment.................................. 5 2
Retained earnings (deficit)......................................... 2,285 (778)
------- -------
Total stockholders' equity.......................................... 36,405 31,530
------- -------
Total liabilities and stockholders' equity.......................... $49,374 $42,440
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
3
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HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
------------- ------------- ------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Net Revenues:
Contract services.................. $29,573 $21,357 $76,575 $58,779
Permanent placement................ 4,492 3,251 12,874 8,520
------- ------- ------- -------
Total net revenues...................... 34,065 24,608 89,449 67,299
Cost of contract services............... 19,343 14,487 49,799 40,420
------- ------- ------- -------
Gross profit............................ 14,722 10,121 39,650 26,879
Operating expenses...................... 12,632 8,615 34,252 24,211
------- ------- ------- -------
Income from operations.................. 2,090 1,506 5,398 2,668
Other expense, net...................... 9 17 24 214
------- ------- ------- -------
Income before income taxes.............. 2,081 1,489 5,374 2,454
Income taxes............................ 895 596 2,311 1,006
------- ------- ------- -------
Net income.............................. $ 1,186 $ 893 $ 3,063 $ 1,448
======= ======= ======= =======
Net income per share:
Basic................................. $ 0.13 $ 0.11 $ 0.33 $ 0.21
Diluted............................... $ 0.12 $ 0.09 $ 0.29 $ 0.15
Shares used in per share computation:
Basic................................. 9,481,000 7,910,000 9,411,000 6,832,000
Diluted............................... 10,057,000 10,120,000 10,399,000 9,725,000
</TABLE>
See notes to condensed consolidated financial statements.
4
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HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 27, 1998 SEPTEMBER 28, 1997
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $3,063 $1,448
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization............................................ 1,421 933
Deferred income taxes.................................................... (571) (272)
Interest on stockholder notes receivable................................. - (202)
Other.................................................................... 17 -
Changes in assets and liabilities:
Accounts receivable................................................... (3,378) (4,630)
Prepaid expense and other assets...................................... (42) (242)
Prepaid income taxes.................................................. 407 641
Accounts payable and accrued expenses................................. 1,364 1,530
Income taxes payable.................................................. 1,477 -
------- -------
Net cash provided by (used for) operating activities.............. 3,758 (794)
------- -------
Cash flows from investing activities:
Purchase of property and equipment........................................... (696) (1,328)
Investments.................................................................. 6,861 (3,953)
Cash paid for business acquisitions......................................... (6,388) -
------- -------
Net cash used for investing activities............................ (223) (5,281)
------- -------
Cash flows from financing activities:
Cash overdraft, net.......................................................... - (824)
Line of credit, net.......................................................... (1,451) (418)
Notes payable repayments..................................................... (2,744) (4,244)
Proceeds from sale of common stock........................................... - 21,482
Proceeds from exercise of options............................................ 477 308
Proceeds from repayment of stockholder note receivable....................... 6 -
------- -------
Net cash provided by (used for) financing activities.............. (3,712) 16,304
------- -------
Net increase (decrease) in cash and equivalents............................... (177) 10,229
Cash and equivalents, beginning of period..................................... 4,310 56
------- -------
Cash and equivalents, end of period........................................... $4,133 $10,285
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes.............................................................. $ - $ 637
Interest.................................................................. $ 187 $ 507
Noncash investing and financing activities -
Issuance of stock for acquisition of IPEX................................. $ 914 $ -
</TABLE>
See notes to condensed consolidated financial statements.
5
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HALL, KINION & ASSOCIATES, INC.
NOTES TO CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION. The Condensed Consolidated Financial Statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in management's opinion, include all
adjustments necessary for a fair statement of results for such interim
periods. Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules
or regulations; however, the Company believes that the disclosures made are
adequate to make the information presented not misleading.
The interim results for the three and nine months ended September 27,
1998 are not necessarily indicative of results for the full year. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's 10-K dated
December 28, 1997.
The unaudited interim financial information as of September 27, 1998 and
for the three and nine months ended September 27, 1998, and September 28,
1997, have been prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring accruals) as
necessary for a fair presentation of information. Operating results for the
three months and nine months ended September 28, 1998 are not indicative of
the results that may be expected for the year ending December 27, 1998.
2. COMPREHENSIVE INCOME. In January 1998, the Company adopted Statement of
Financial Accounting Standards 130, Reporting Comprehensive Income, which
requires reporting by major components and as a single total, the change in
its net assets during the period from nonowner sources. For the nine months
ended September 27, 1998 and September 28, 1997, the change in net assets
from nonowner sources was $3,000 and $12,000, respectively, for the change
in the accumulated translation adjustment, and comprehensive income for the
nine months ended September 27, 1998 and September 28, 1997 was $3,066,000
and $1,460,000, respectively.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The statements contained in this Form 10-Q that are not purely historical
are forward looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, including statements regarding the Company's
expectations, beliefs, hopes, intentions and strategies regarding the future.
All forward looking statements in this Form 10-Q are based upon information
available to the Company as of the date hereof, and the Company assumes no
obligation to update any such forward looking statements. Actual results could
differ materially from the Company's current expectations. Factors that could
cause or contribute to such differences include, but are not limited to, the
ability of the Company to obtain additional financing, regulatory changes,
uncertainty relating to the performance of the United States economy,
competition, demand for the Company's services, litigation or other claims
against the Company, the hiring, training, and retention of key employees and
other factors and risks discussed in "Risk Factors" as well as those discussed
elsewhere in this Form 10-Q and the risks discussed in the Company's filings
with the Securities and Exchange Commission.
OVERVIEW
Hall, Kinion & Associates, Inc. is a leading provider of specialized
information technology ("IT") professionals on a contract or permanent basis and
has 21 offices in 12 states and in one foreign country. To meet the specialized
needs of its clients, the Company provides its services through distinct
technology practice groups ("Practice Groups") organized around specific
technology (such as Windows, Unix, or CAD). The Company is organized into two
divisions: Contract Services, which has historically provided supplemental IT
professionals to R&D departments of high technology companies, and Permanent
Placement, which places IT professionals in permanent positions. In April 1994,
the Stellar Group, Inc. and Kinion Hall, companies under common ownership, were
merged with the Company, and in December 1996, the Company acquired certain
assets of TeamAlliance Technology Partners, L.P. (TeamAlliance). With the
acquisition of TeamAlliance, the Company expanded its Contract Services Division
to provide professionals to IS departments of corporate clients through a new IS
Practice Group. In January 1998, the Company acquired 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.
For the three and nine months ended September 27, 1998, the Contract
Services Division represented 87% and 86% of the Company's net revenues
respectively compared to 87% for the three and nine months ended September 28,
1997, respectively. For the three and nine months ended September 27, 1998 the
Permanent Placement Division represented 13% and 14% of the Company's net
revenues, respectively, compared to 13% for the same periods in 1997,
respectively.
The Company's net revenues are derived from hourly billings of IT
professionals performing contact 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 revenue 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 addition of sales and recruiting
employees, developing new Practice Groups, acquisitions and entering into new
regional markets. As of September 28, 1997, the Company had 375 employees and
45 Practice Groups in 13 domestic markets and in London, England. As of
September 27, 1998, the Company had 530 employees and 78 Practice Groups in 13
domestic markets and London, England. For the nine months ended September 27,
1998, net revenues increased to $89.4 million, or 33%, from $67.3 million for
the nine months ended September 28, 1997. Overall headcount for the comparable
period increased by 41%. Although contributing to the increase in net revenues,
the addition of new Practice Groups 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.
7
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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 27, 1998 AND
SEPTEMBER 28, 1997
Contract Services revenues were $29.6 million and $21.4 million for the
three months ended September 27, 1998 and September 28, 1997, respectively,
increasing by 38% during the three months ended September 27, 1998 compared to
the same period in 1997. Contract Services revenues were $76.6 million and $58.8
million for the nine months ended September 27, 1998 and September 28, 1997,
respectively, increasing by 30% during the nine months ended September 28, 1998
compared to the same period in 1997. Permanent placement revenues were $4.5
million and $3.3 million for the three months ended September 27, 1998 and
September 28, 1997, respectively, increasing by 36% during the three months
ended September 27, 1998 compared to the same period in 1997. Permanent
placement revenues were $12.9 million and $8.5 million for the nine months ended
September 27, 1998 and September 28, 1997, respectively, increasing by 52%
during the nine months ended September 27, 1998 compared to the same period in
1997. Overall revenue increases were due to the addition of new practice groups
and to a lesser extent increased bill rates. The increase in revenues was
partially offset due to the delay of new employees reaching full productivity.
GROSS PROFIT
Gross profit dollars from the Company's Contract Services represent
revenues less direct costs of services, which consists of payroll, payroll taxes
and insurance costs for contract employees. Gross profit dollars from the
Company's Permanent Placement Services are equal to revenues, as there are no
direct costs associated with such revenues. Gross profit dollars for the
Company's Contract Services were $10.2 million and $26.8 million for the three
and nine months ended September 27 , 1998, respectively, compared to $6.9
million and $18.4 million for the comparable periods in 1997, increasing by 48%
and 46% for the three and nine months ended September 27, 1998, respectively.
The Company believes this increase was 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 was $4.5 million and $12.9 million for
the three and nine months ended September 27, 1998, respectively, compared to
$3.3 million and $8.5 million for the comparable periods in 1997, increasing by
36% and 52% for the three and nine months ended September 27, 1998,
respectively. This increase was primarily due to an increase in demand for the
Company's Permanent Placement services.
OPERATING EXPENSES
Operating expenses were $12.6 million and $34.3 million for the three and
nine months ended September 27, 1998, compared to $8.6 million and $24.2
million, for the three and nine months ended September 28, 1997, respectively.
Operating expenses as a percentage of net revenues were 37% and 38% for the
three and nine months ended September 27, 1988, compared to 35% and 36%,
respectively, for the same periods in 1997. Operating expenses consist primarily
of staff compensation, training, occupancy, telephone, advertising and public
company costs, most of which generally follow changes in revenue. This increase
was primarily due to increased headcount and training costs for existing
Practice Groups.
OTHER INCOME (EXPENSE), NET
Interest income for the three months ended September 27, 1998 and September
28, 1997 was $35,000 and $135,000 respectively, while interest expense for the
three months ended September 27, 1998 and September 28, 1997 was $29,000 and
$142,000 respectively. Interest income for the nine months ended September 27,
1998 and September 28, 1997 was $197,000 and $308,000 respectively, while
interest expense for the nine months ended September 27, 1998 and September 28,
1997 was $222,000 and $488,000, respectively. The changes reflect an increase
in cash and cash equivalents and a decrease in outstanding indebtedness. Also
included is a nominal amount relating to rental income and expenses and various
nonrecurring charges which amounts to expense of $16,000 and income of $1,000
for the three and nine months ended September 27, 1998 and expense of $10,000
and $34,000 for the same periods in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The change in the Company's liquidity during the nine months ended
September 27, 1998 is the net effect of funds generated by operations and the
funds used for the personnel services acquisitions, capital expenditures and
principal payments on outstanding liabilities. For the nine months ended
September 27, 1998, the Company generated $3.8 million from operations, used
$223,000 for investing activities and used $3.7 million for financing
activities. The changes were primarily attributed to net income, acquisitions,
repayment of the line of credit, and the repayment of certain notes payable.
8
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The Company's working capital at September 27, 1998 included $4.1 million
in cash and equivalents. The Company has a revolving line of credit facility
enabling the Company to borrow a stated percentage of eligible accounts
receivable up to a maximum of $15.0 million. There were no amounts outstanding
under the line of credit facility at September 27, 1998. While there can be no
assurances in this regard, the Company expects that internally generated cash
plus the bank revolving line of credit will be sufficient to support the working
capital needs of the Company, the fixed payments and other obligations for the
next year. As of September 27, 1998, the Company had no material capital
commitments.
In August 1998, the Company acquired TKO Personnel, Inc., for $913,000,
consisting of a cash payment of $228,000 and assumed net liabilities of
$685,000. TKO Personnel, Inc. based in San Jose, California, is an
international permanent placement recruiting organization for IT research and
development professionals focusing on recruiting primarily from Japan, but also
from China and Korea.
In January 1998, the Company acquired Group-IPEX for $7.3 million
consisting of a cash payment of $6.2 million, the issuance of 46,000 shares of
Company's common stock valued at $914,000 and $300,000 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.
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 $1.3 million in October 31, 1997. The Company paid
the remaining amounts during the three months ended June 28, 1998.
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 costs 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 effect on the
Company's 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 conditions or results of operations.
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 Windows, Unix, CAD and
other technology environments for which the Company provides services, is
intense, and the Company expects that competition for IT professionals will
increase in the future. Furthermore, IT professionals typically provide services
on an assignment-by-assignment basis and can terminate an assignment with the
Company at any time. The Company competes for such individuals with other
providers of technical staffing services, system integrators, providers of
outsourcing services, computer consultants and temporary personnel agencies.
Many of the IT professionals who work for the Company also work with the
Company's competitors, and there can be no assurance that IT professionals
currently working on projects for the Company will not choose to work for
competitors in future assignments. There also can be no assurance that the
Company will be able to attract and retain qualified IT professionals in
sufficient numbers in the future. The Company's net revenues in any period are
related, among other factors, to the number of IT professionals it has on staff
and engaged on assignments. If the Company is unable to hire or retain such
personnel, the
9
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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 April
1998 the Company consolidated its Orlando and Tampa offices because revenue in
these offices was lower than management's expectations. The addition of new
Practice Groups and entrance into new regional markets typically results in
increased 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 can 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; VOLATILITY OF STOCK PRICE
The Company's quarterly operating results have in the past and may in the
future fluctuate significantly depending on a number of factors, including but
not limited to: the rate of hiring and the productivity of revenue-generating
personnel; the availability of qualified IT professionals; changes in the
relative mix between the Company's contract services and permanent placement
services; changes in the pricing of the Company's services; the timing and rate
of entrance into new regional markets and the addition of Practice Groups;
departures or temporary absences of key revenue-generating personnel; the
structure and timing of acquisitions; changes in the demand for IT
professionals; and general economic factors. 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. Accordingly, 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. In addition,
although the impact of seasonal factors will vary, the Company experiences a
certain amount of seasonality in its first quarter due primarily to the number
of holidays and the number of internal training and incentive programs in the
first quarter, which may reduce the number of days worked by IT professionals
and revenue-generating employees during such quarter. For these reasons, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as any indication
of future performance. In the event the Company's operating results fall below
the expectations of public market analysts and investors, the price of the
Company's Common Stock would likely be materially adversely affected.
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 are 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 class action litigation has often been instituted against such
company. Such litigation if instituted, could result in substantial cost and
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.
10
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MANAGEMENT OF GROWTH
The Company has recently experienced a period of rapid growth that has
placed and will continue to place significant demands upon its management and
other resources. The Company's ability to effectively manage future growth will
require the Company to expand its operational, financial and other internal
systems. Implementing a new or expanded financial and management information
system can be time-consuming and expensive and require significant management
resources. There can be no assurance that the Company's current personnel,
systems, procedures and controls will be adequate to support the Company's
future operations or that any new system can be implemented effectively. Any
failure to manage its growth effectively could have a material adverse effect on
the Company's business, operating results and financial condition. 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 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 of 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 significant amounts 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 1997
and 1996, substantially all of the Company's net revenues were derived by
providing services to clients in the high technology industry. In addition,
approximately 73% 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, and 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.
11
<PAGE>
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 relative 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 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 a material adverse
effect on the Company's business, operating results and financial conditions.
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 during 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 a material adverse effect on business, operating results
and financial condition.
CONCENTRATION OF OWNERSHIP BY PRINCIPAL STOCKHOLDERS
The Company's principal stockholders, Brenda C. Hall and Todd Kinion
beneficially owned approximately 34% of the Company's outstanding shares of
Common Stock at September 27, 1998. 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 of IT professionals to client
information systems and confidential information, and the potential liability
with respect thereto, there can be no assurance that such insurance coverage
will continue to be available on reasonable terms or that it will be adequate to
cover such liability. The Company may be exposed to 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 PROVISION; ANTI-TAKEOVER EFFECTS OR CERTIFICATE OF
INCORPORATION, BYLAWS, DELAWARE LAW
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and Bylaws and Delaware law contains 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 meeting of stockholders, that only the Board of
Directors may call special meeting 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 September 27, 1998, 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 right of
any Preferred Stock that may be issued in the future.
12
<PAGE>
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.
IMPACT OF THE 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, 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,
equipment and operations 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 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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the registration statement for the Company's initial
public offering, filed on Form S-1 under the Securities Act of 1933 (File No.
333-28365), was August 4, 1997 (the "IPO Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on August 5,
1997. The managing underwriters for the offering were Montgomery Securities,
Robert W. Baird & Co. Incorporated and the Robinson-Humphrey Company, Inc.
Pursuant to the IPO Registration Statement, the Company sold 1,666,667
shares of its Common Stock for an aggregate offering price of $25.0 million.
Also pursuant to the Registration Statement, certain selling stockholders sold
1,225,883 shares of Common Stock of the Company for an aggregate offering price
of $18.4 million.
The Company incurred expenses of approximately $3.5 million, of which
approximately $1.75 million represented underwriting discounts and commissions
and approximately $1.75 million represented other expenses related to the
offering. The net offering proceeds to the Company and the selling stockholders
after total expenses was $21.5 million and $11.8 million, respectively.
The Company used approximately $8.3 million of the net proceeds to repay
short-term an long-term indebtedness and approximately $1.5 million for general
working capital purposes. In addition, the Company used approximately $6.2
million in connection with the acquisition of Group-IPEX, Inc. in January 1998.
The remaining net proceeds have been invested in cash and cash equivalents. The
use of the proceeds from the offering does not represent a material change in
the use of the proceeds described in the prospectus.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE>
ITEM 5. SHAREHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the Company's 1999
annual meeting of stockholders must be received at the Company's principal
executive offices not later than December 15, 1998 in order to be included in
the Company's proxy statement and form of proxy relating to the 1999 annual
meeting. Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange
Act of 1934, as amended , if a stockholder who intends to present a proposal at
the 1999 annual meeting of stockholders does not notify the Company of such
proposal on or prior to March 9, 1999, then management proxies would be allowed
to use their discretionary voting authority to vote discussion of the proposal
is raised at the annual meeting, even though there is no discussion of the
proposal in the 1999 proxy statement. The Company currently believes that the
1999 annual meeting of stockholders will be held in May of 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed on the accompanying Exhibit Index are
filed as part hereof and are incorporated by reference.
(b) Reports on Form 8-K
The registrant filed a report on Form 8-K on January 13, 1998,
concerning the acquisition of all outstanding Capital stock of
Group-IPEX, Inc. ("IPEX") pursuant to certain Stock Purchase
Agreement dated December 20, 1997 by and among the Registrant, IPRX,
and Lalit M. Kapoor and Satindra Kapoor.
14
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
HALL, KINION & ASSOCIATES, INC.
Date: November 4, 1998
----------------
BY: /S/ MARTIN A. KROPELNICKI
---------------------------------
MARTIN A. KROPELNICKI
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
15
<PAGE>
HALL, KINION & ASSOCIATES, INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit
Number Exhibit Description Page
- ------ ------------------- ----
21.1 List of Subsidiaries............................................ 16
27.1 Financial Data Schedule......................................... 17
16
<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.
GROUP-IPEX, INC., a wholly owned subsidiary of the Registrant, organized under
the laws of the State of California.
TKO, Personnel, Inc., a wholly owned subsidiary of the Registrant, organized
under the laws of the State of California.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-27-1998 DEC-28-1997
<PERIOD-START> DEC-29-1997 DEC-30-1996
<PERIOD-END> SEP-27-1998 DEC-28-1997
<CASH> 4,133,000 4,310,000
<SECURITIES> 2,347,000 9,120,000
<RECEIVABLES> 18,162,000 13,118,000
<ALLOWANCES> (652,000) (344,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 26,516,000 27,549,000
<PP&E> 8,191,000 7,126,000
<DEPRECIATION> (2,958,000) (1,722,000)
<TOTAL-ASSETS> 49,374,000 42,440,000
<CURRENT-LIABILITIES> 10,672,000 8,159,000
<BONDS> 1,180,000 2,549,000
0 0
0 0
<COMMON> 34,115,000 32,312,000
<OTHER-SE> 2,290,000 (782,000)
<TOTAL-LIABILITY-AND-EQUITY> 49,374,000 42,440,000
<SALES> 89,449,000 92,831,000
<TOTAL-REVENUES> 89,449,000 92,831,000
<CGS> 49,799,000 54,769,000
<TOTAL-COSTS> 49,799,000 54,769,000
<OTHER-EXPENSES> 34,252,000 33,689,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 222,000 581,000
<INCOME-PRETAX> 5,374,000 4,246,000
<INCOME-TAX> 2,311,000 1,737,000
<INCOME-CONTINUING> 3,063,000 2,509,000
<DISCONTINUED> 0 0
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<NET-INCOME> 3,063,000 2,509,000
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