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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 JUNE 28, 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 July 23, 1998:
9,471,919 shares of common stock.
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HALL, KINION & ASSOCIATES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION....................................................................... 3
Item 1. Financial Statements........................................................................ 3
Condensed Consolidated Balance Sheets at June 28, 1998 and
December 28, 1997........................................................................... 3
Condensed Consolidated Statements of Income for the three and six months
ended June 28, 1998 and June 29, 1997....................................................... 4
Condensed Consolidated Statements of Cash Flows for the six months ended June 28,
1998 and June 29, 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 4. Submission of Matters to a Vote of Security Holders......................................... 13
Item 6. Exhibits and Reports on Form 8-K............................................................ 13
SIGNATURES............................................................................................. 14
</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>
JUNE 28, DECEMBER 28,
1998 1997
-------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents......................................................... $ 1,720 $ 4,310
Investments.................................................................. 3,407 9,120
Accounts receivable, net of allowance for doubtful accounts of
$607 at June 28, 1998 and $344 at December 28, 1997........................ 14,180 12,774
Prepaid expenses and other current assets.................................... 434 326
Prepaid income taxes......................................................... 13 407
Deferred income taxes........................................................ 1,060 612
------- --------
Total current assets...................................................... 20,814 27,549
Property and equipment net.................................................... 5,409 5,404
Goodwill, net................................................................. 16,496 9,016
Other assets.................................................................. 357 471
------- --------
Total assets.............................................................. $43,076 $ 42,440
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit............................................................... $ - $ 1,250
Accounts payable............................................................. 1,397 1,835
Accrued salaries, commissions, and related payroll taxes..................... 3,587 2,794
Accrued liabilities.......................................................... 799 1,280
Current portion of long-term debt............................................ 8 1,000
------- --------
Total current liabilities................................................. 5,791 8,159
Long-term obligations......................................................... 1,169 2,549
Deferred income taxes......................................................... 1,004 202
------- --------
Total liabilities......................................................... 7,964 10,910
------- --------
Stockholders' Equity:
Common stock, (par value $0.001 per share; 100,000,000 shares
authorized; outstanding: 9,465,000 shares at June 28, 1998 and
9,025,000 shares at December 28, 1997)................................... 34,007 32,312
Stockholder note receivable................................................ - (6)
Accumulated translation adjustment......................................... 5 2
Retained earnings (deficit)................................................ 1,100 (778)
------- --------
Total stockholders' equity................................................. 35,112 31,530
------- --------
Total liabilities and stockholders' equity................................. $43,076 $ 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>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ---------------
JUNE 28, 1998 JUNE 29,1997 JUNE 28, 1998 JUNE 29, 1997
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net Revenues:
Contract services......................................... $ 24,287 $ 20,385 $ 47,002 $ 37,422
Permanent placement....................................... 4,262 3,113 8,382 5,269
----------- ---------- ----------- ----------
Net revenues................................................ 28,549 23,498 55,384 42,691
Cost of contract services................................... 15,712 13,913 30,456 25,933
----------- ---------- ----------- ----------
Gross profit................................................ 12,837 9,585 24,928 16,758
Operating expenses.......................................... 11,185 8,532 21,620 15,596
----------- ---------- ----------- ----------
Income from operations...................................... 1,652 1,053 3,308 1,162
Other income (expense)...................................... (15) (161) (15) (197)
----------- ---------- ----------- ----------
Income before income taxes.................................. 1,637 892 3,293 965
Income taxes................................................ 704 357 1,416 410
----------- ---------- ----------- ----------
Net income.................................................. $ 933 $ 535 $ 1,877 $ 555
=========== ========== =========== ==========
Net income per share
Basic..................................................... $ 0.10 $ 0.09 $ 0.20 $ 0.09
Diluted................................................... $ 0.09 $ 0.06 $ 0.18 $ 0.06
Shares used in per share computation:
Basic..................................................... 9,443,000 6,286,000 9,376,000 6,284,000
Diluted................................................... 10,407,000 9,248,000 10,437,000 9,269,000
</TABLE>
See notes to condensed consolidated financial statements.
4
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HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 28, 1998 JUNE 29, 1997
-----------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................... $ 1,877 $ 555
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization............................................ 934 570
Deferred income taxes.................................................... 254 (272)
Interest on stockholder notes receivable................................. - (173)
Other.................................................................... 17 -
Changes in assets and liabilities:
Accounts receivable.................................................. (202) (3,193)
Prepaid expense and other assets..................................... 235 (61)
Prepaid income taxes................................................. 394 596
Accounts payable and accrued expenses................................ (1,499) 807
Income taxes payable................................................. (69) -
------- -------
Net cash provided by (used for) operating activities............... 1,941 (1,171)
------- -------
Cash flows from investing activities:
Purchase of property and equipment........................................... (552) (963)
Investments.................................................................. 5,800 -
Acquisition of IPEX.......................................................... (6,160) -
------- -------
Net cash used for investing activities............................. (912) (963)
------- -------
Cash flows from financing activities:
Cash overdraft, net.......................................................... - (42)
Line of credit, net.......................................................... (1,451) 3,410
Notes payable repayments..................................................... (2,591) -
Repayments of debt........................................................... - (740)
Proceeds from sale of common stock........................................... - 14
Proceeds from exercise of options............................................ 417 -
Proceeds from repayment of stockholder note receivable....................... 6 -
Deferred IPO costs........................................................... - (403)
------- -------
Net cash provided by (used for) financing activities............... (3,619) 2,239
------- -------
Net increase (decrease) in cash and equivalents................................ (2,590) 105
Cash and equivalents, beginning of period...................................... 4,310 56
------- -------
Cash and equivalents, end of period............................................ $ 1,720 $ 161
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes............................................................. $ 1,062 $ 86
Interest................................................................. $ 149 $ 345
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 six months ended June 28, 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 June 28, 1998 and for
the three and six months ended June 28, 1998, and June 29, 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 six
months ended June 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 six months
ended June 28, 1998 and June 29, 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 six
months ended June 28, 1998 and June 29, 1997 was $1,880,000 and $567,000,
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's 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 six months ended June 28, 1998, the Contract Services
Division represented 85% of the Company's net revenues respectively compared to
87% and 88% for the three and six months ended June 29, 1997, respectively. For
the three and six months ended June 28, 1998 the Permanent Placement Division
represented 15% of the Company's net revenues, respectively, compared to 13% and
12% 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 June 29, 1997, the Company had 348 employees and 45
Practice Groups in 13 domestic markets and in London, England. As of June 28,
1998, the Company had 518 employees and 78 Practice Groups in 13 domestic
markets and London, England. For the six months ended June 28, 1998, net
revenues increased to $55.4 million or 30% from $42.7 million for the six months
ended June 27, 1997, respectively. Overall headcount for the comparable period
increased by 49%. 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 SIX MONTHS ENDED JUNE 28, 1998 AND JUNE
29, 1997
Contract Services revenues were $24.3 million and $20.4 million for the three
months ended June 28, 1998 and June 29, 1997, respectively, increasing by 19%
during the three months ended June 28, 1998 compared to the same period in 1997.
Contract Services were $47.0 million and $37.4 million for the six months ended
June 28, 1998 and June 29, 1997, respectively, increasing by 26% during the six
months ended June 28, 1998 compared to the same period in 1997. Permanent
placement revenues were $4.3 million and $3.1 million for the three months ended
June 28, 1998 and June 29, 1997, respectively, increasing by 37% during the
three months ended June 28, 1998 compared to the same period in 1997. Permanent
placement revenues were $8.4 million and $5.3 million for the six months ended
June 28, 1988 and June 29, 1997, respectively, increasing by 59% during the six
months ended June 28, 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. Revenue from Group-IPEX
during the three and six months ended June 28, 1998 was not significant.
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 $12.8 million and $24.9 million for the three and six months ended
June 28, 1998, respectively, compared to $9.6 million and $16.8 for the
comparable periods in 1997, increasing by 34% and 49% for the three and six
months ended June 28, 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 $4.3 million and $8.4 million for the three and six months ended
June 28, 1998, respectively, compared to $3.1 million and $5.3 million for the
comparable periods in 1997, increasing by 37% and 59% for the three and six
months ended June 28, 1998, respectively. This increase was primarily due to an
increase in demand for the Company's Permanent Placement services.
OPERATING EXPENSES
Operating expenses were $11.2 million and $21.6 million for the three and six
months ended June 28, 1998, compared to $8.5 million and $15.6 million, for the
three and six months ended June 29, 1997, respectively. Operating expenses as a
percentage of revenues were 39% for the three and six months ended June 28,
1988, respectively, compared to 36% and 37%, 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 and new Practice Groups.
OTHER INCOME (EXPENSE), NET
Interest income for the three months ended June 28, 1998 and June 29, 1997 was
$74,000 and $85,000 respectively, while interest expense for the three months
ended June 28, 1998 and June 29, 1997 was $75,000 and $210,000 respectively.
Interest income for the six months ended June 28, 1998 and June 29, 1997 was
$162,00 and $172,000 respectively, while interest expense for the six months
ended June 28, 1998 and June 29, 1997 was $193,000 and $345,000, 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
$14,000 and income of $16,000 for the three and six months ended June 28, 1998
and expense of $36,000 and $24,000 for the same periods in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The change in the Company's liquidity during the six months ended June 28,
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 six months ended June 28, 1998, the Company
generated $1.9 million from operations, used $0.9 million for investing
activities and used $3.6 million for financing activities. The changes were
primarily attributed to net income, the acquisition of Group-IPEX, repayment of
the line of credit, and the repayment of certain notes payable.
The Company's working capital at June 28, 1998 included $1.7 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 June 28, 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 June 28, 1998, the Company had no material capital commitments.
8
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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 result 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
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
9
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these offices was lower than management's expectations. The addition of new
Practice Groups and entrance into new regional markets typically results in
increased 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 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 par
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 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.
10
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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 affects 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 business.
To the extent the Company seeks to acquire complementary business 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 affiliate 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. 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.
11
<PAGE>
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 June 28, 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 special 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 June 28, 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. 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.
12
<PAGE>
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 an 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 operation.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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.
SIGNATURES
13
<PAGE>
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: August 4, 1998
--------------
BY: /S/ MARTIN A. KROPELNICKI
---------------------------------
MARTIN A. KROPELNICKI
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND PRINCIPAL
FINANCIAL OFFICER)
HALL, KINION & ASSOCIATES, INC.
FORM 10-Q
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Page
------ ------------------- ----
<S> <C>
21.1 List of Subsidiaries..................................... 16
27.1 Financial Data Schedule.................................. 17
</TABLE>
15
<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.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-28-1998 DEC-28-1997
<PERIOD-START> DEC-29-1997 DEC-30-1996
<PERIOD-END> JUN-28-1998 DEC-28-1997
<CASH> 1,720 4,310
<SECURITIES> 3,407 9,120
<RECEIVABLES> 14,715 13,118
<ALLOWANCES> (607) (344)
<INVENTORY> 0 0
<CURRENT-ASSETS> 20,814 27,549
<PP&E> 7,891 7,126
<DEPRECIATION> (2,482) (1,772)
<TOTAL-ASSETS> 43,076 42,440
<CURRENT-LIABILITIES> 5,791 8,159
<BONDS> 1,169 2,549
0 0
0 0
<COMMON> 34,007 32,312
<OTHER-SE> 1,105 (782)
<TOTAL-LIABILITY-AND-EQUITY> 43,076 42,440
<SALES> 55,384 92,831
<TOTAL-REVENUES> 55,384 92,831
<CGS> 30,456 54,769
<TOTAL-COSTS> 30,456 54,769
<OTHER-EXPENSES> (15) 33,689
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (193) (581)
<INCOME-PRETAX> 3,293 4,246
<INCOME-TAX> 1,416 1,737
<INCOME-CONTINUING> 1,877 2,509
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,877 2,509
<EPS-PRIMARY> .20 .34
<EPS-DILUTED> .18 .25
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