<PAGE>
As filed with the Securities and Exchange Commission on March 7, 2000
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
HALL, KINION & ASSOCIATES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 77-0337705
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
</TABLE>
185 Berry Street, China Basin Landing, Suite 6440, San Francisco, California
94107
(415) 974-1300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Brenda C. Rhodes
Chief Executive Officer
Hall, Kinion & Associates, Inc.
185 Berry Street, China Basin Landing, Suite 6440, San Francisco, California
94107
(415) 974-1300
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Copies to:
<TABLE>
<S> <C>
Lawrence Calof, Esq. Patrick G. Quick, Esq.
Stan Sze, Esq. Thomas E. Hartman, Esq.
Brian Gin, Esq. Paul J. Jones, Esq.
Gibson, Dunn & Crutcher LLP Foley & Lardner
1530 Page Mill Road Firstar Center
Palo Alto, California 94304 777 East Wisconsin Avenue
(650) 849-5300 Milwaukee, Wisconsin 53202-5367
(414) 271-2400
</TABLE>
----------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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- -----------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Title of Each Class of Maximum Aggregate Amount of
Securities Amount to be Offering Price Offering Registration
to be Registered Registered Per Share(1) Price(1) Fee(1)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share....... 4,140,000 $20.94 $86,691,600 $22,887
- -----------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rules 457(c) and 457(g) of the Securities Act of 1933, and
based on the average of the high and low sales prices of the common stock,
as reported on the Nasdaq National Market on March 3, 2000.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus
SUBJECT TO COMPLETION, DATED MARCH 7, 2000
[LOGO OF HALL KINION]
Hall, Kinion & Associates, Inc.
3,600,000 Shares of Common Stock
-----------
We are offering 1,800,000 shares and the selling stockholders identified in
this prospectus are offering 1,800,000 shares. We will not receive any proceeds
from the sale of shares by the selling stockholders.
Our common stock is listed on the Nasdaq National Market under the symbol
"HAKI." On March , 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $ per share
This investment involves risks. See "Risk Factors" beginning on page 5.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................. $ $
Underwriting discount.............................
Proceeds to Hall, Kinion & Associates, Inc........
Proceeds to the selling stockholders..............
</TABLE>
The underwriters have a 30-day option from the selling stockholders and us to
purchase up to 540,000 additional shares of common stock on the same terms set
forth above to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
-----------
Robert W. Baird & Co.
First Union Securities, Inc.
Legg Mason Wood Walker
Incorporated
The Robinson-Humphrey Company
George K. Baum & Company
, 2000
<PAGE>
[INSERT ARTWORK]
At the top of the page is the following sentence: Hall Kinion--the talent
source for the Internet economyTM; uniting the Silicon Valleys of the world.
In the middle of the page are the following quotes:
"I called Hall Kinion, and not only did they understand what Sequel server
was, surprisingly they understood what Cold Fusion was as well. When I
provided them with my requirements, they filled them quickly. Cold Fusion
talent is kind of hard to find these days." Rich Talaber, Technical Recruiting
Manager, Vertical Net
"I've relied on Hall Kinion to assist us with technical staffing since the
days when we worked from our homes all the way until now when we have 100
employees. They know our company well and they sell our positions and company
with enthusiasm and clarity. We know our candidates are screened and prepared
before we even see a resume. Our ratio of interview to hire is very high with
Hall Kinion's candidates. They are our primary source of technical talent."
Peg English, Strategic Recruiting Manager, Po!nt.com
"With ITC (a Hall Kinion subsidiary) contracting services, Rare Medium, Inc.
has been able to quickly complement its existing technical staff and create
qualified development teams that support our growing Internet Development
business. ITC's staff has filled difficult positions in the shortest time
possible." Michael Flickman, Vice President Technology, Rare Medium, Inc.
"Hall Kinion knows how to deliver the right people to help us build the best
Internet businesses for our customers. When we entered new markets, Hall
Kinion helped us quickly get our bearings and successfully recruit staff. Hall
Kinion is truly a partner in finding the best recruits to work within our
unique culture." Jill Salter Plump, Chief People Officer, Event Zero.
"The recruiters at Hall Kinion understand the importance of doing it right.
They pay attention to detail, always prepare the candidate, and sell the
opportunity. This is invaluable to me as an internal recruiter. Other agencies
just don't seem to get it. Hall Kinion gets it!" Carrie Law, Technical
Recruiter, Evite.com
Beside the quotes are two standing persons. Across the bottom of the page are
a computer keyboard and a series of shopping carts.
<PAGE>
TABLE OF CONTENTS
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Page
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<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 5
Special Note Regarding Forward-
Looking Statements................. 12
Use of Proceeds..................... 13
Dividend Policy..................... 13
Selected Consolidated Financial
Data............................... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 15
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Business........................... 20
Principal and Selling
Stockholders...................... 30
Underwriting....................... 32
Legal Matters...................... 34
Experts............................ 34
Where You Can Find More Information
About Hall, Kinion................ 34
Documents Incorporated By
Reference......................... 35
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. You should assume that the information in this prospectus is
accurate only as of the date of this prospectus.
As used in this prospectus, the terms "we," "us," "our" and "Hall, Kinion"
mean Hall, Kinion & Associates, Inc. and its subsidiaries (unless the context
indicates another meaning), and the term "common stock" means our common
stock, par value $0.001 per share.
Our principal executive offices are located at 185 Berry Street, China
Basin Landing, Suite 6440, San Francisco, California 94107. Our telephone
number is (415) 974-1300.
Unless otherwise stated herein, all information contained in this
prospectus assumes no exercise of the over-allotment option granted by the
selling stockholders and us.
The underwriters are offering the shares subject to various conditions and
may reject all or part of any order. The shares should be ready for delivery
on or about , 2000 against payment in immediately available funds.
We have applied for United States federal trademark registration of the
following trademarks: HALL KINION, THE TALENT SOURCE FOR THE INTERNET ECONOMY
and our ball design. We have also applied for trademark registration of HALL
KINION in Canada, India, Japan, the United Kingdom and the European Community.
All other trademarks, servicemarks or tradenames referred to in this
prospectus are the property of their respective owners.
<PAGE>
SUMMARY
You should read the following summary together with the more detailed
information appearing elsewhere in this prospectus, including in our
consolidated financial statements and related notes.
HALL, KINION & ASSOCIATES, INC.
Hall, Kinion sources and delivers the most critical component of the
Internet economy--human capital. As a leading talent source for the growing
Internet economy, we provide specialized IT professionals on a short-term
contract and permanent basis primarily to vendors of Internet technologies and,
to a lesser extent, to users of intranets and extranets. We believe that our
key competitive advantage is our ability to successfully recruit the best and
brightest IT professionals for placement with our clients. We feel our
recruiting success is due, in large part, to our reputation as a premier
supplier of talent to the most innovative technology companies. We have been
successful at marketing to developers of next generation Internet technologies.
We believe our success is the result of our scalable business model, which is
aimed at building relationships with our clients and rapidly providing them
with IT professionals skilled in leading edge technologies. Our clients include
industry leaders such as IBM, Cisco Systems and Netscape Communications as well
as innovative start-ups such as E*Trade, Priceline.com and E-Stamp.
The explosive growth of the Internet has transformed the high technology
industry with unprecedented speed. Established technology companies such as Sun
Microsystems, Cisco Systems and Hewlett Packard are focusing substantial
resources on developing products that target the Internet economy. Relatively
new companies such as Netscape and Excite have built their businesses around
the Internet, and numerous start-up Internet companies are benefiting from an
influx of venture capital financing.
A strong demand for highly skilled IT professionals has developed in
response to the growth of the Internet economy. Talented professionals with
skills in leading edge technologies are in particularly high demand. To meet
their need for leading edge IT professionals, organizations are turning to
third party providers of technology talent to support their existing IT
resources. To succeed in this market, providers of IT professionals must
deliver leading edge IT talent at a speed commensurate with the demands of a
rapidly changing technology environment.
Our objective is to provide efficient, high quality contract and permanent
IT professional services to our target market and to become the agent of choice
for IT professionals. We plan to meet this objective by:
. Marketing our services to the vendors of Internet technologies. We believe
that we will stay at the forefront of technology and further build our
reputation as a provider of IT professionals with leading edge technology
skills by focusing our marketing efforts on innovative companies that are
vendors of Internet technologies.
. Providing rapid fulfillment to our time-sensitive clients. Vendors of
Internet technologies place foremost importance on speed of response because
they must compete to bring products and services to market ahead of their
rivals. We have designed our operating model with a focus on aggressively
recruiting IT professionals and building relationships with client companies
to meet their time-sensitive needs.
1
<PAGE>
. Attracting and retaining IT professionals. The shortage of available talent
has made attracting and retaining qualified IT professionals critical to our
success. We believe our advantage in recruiting IT professionals is that we
provide leading edge technology assignments, a flexible lifestyle and
attractive compensation.
. Building brand recognition. We have implemented a strong brand recognition
campaign promoting our company as The Talent Source for the Internet
Economy(TM). We believe our strong brand identity, combined with our record
of placements with leading edge vendors of Internet technologies, gives us a
competitive advantage in soliciting technology clients and recruiting IT
talent and sales and sales support employees.
. Creating a corporate culture that attracts and retains sales and sales
support employees. We expend a great deal of time, energy and money on
building a high energy culture that celebrates our successes. We believe
that our corporate culture has provided us success in retaining our sales
and sales support employees, the backbone of our growth.
. Delivering solid corporate support to our branch offices. We deliver
extensive training, detailed performance reporting and IT support to each of
our offices in order to promote a high level of service quality and
consistency among our offices.
We have followed a growth strategy focused on strong internal growth,
including new office openings, augmented by strategic acquisitions. Key
elements of our strategy include:
. Hiring, training and developing additional sales and sales support
employees. Our sales and sales support employees, who are our key contacts
with clients and IT professionals, directly impact our ability to generate
revenues.
. Opening additional offices in our current geographic markets. New offices in
existing geographic markets substantially increase our opportunities for
successful placement of IT professionals, so that both new offices and
existing offices benefit from our in-market growth.
. Opening additional offices in the Silicon Valleys of the world. We have 35
offices in 21 geographic markets. We plan to enter additional geographic
markets that have a high concentration of technology-oriented businesses.
. Expanding international recruiting capabilities. We have successfully placed
a significant number of international recruits with our domestic clients and
plan to continue expanding our international recruiting capabilities.
. Acquiring complementary businesses. We continue to explore acquisition
opportunities, particularly those that provide us with new technology
practices, new geographic markets, additional international recruiting
capabilities or executive retained search businesses.
OUR OFFICES
Our executive offices are located at 185 Berry Street, China Basin Landing,
Suite 6440, San Francisco, CA 94107, and our telephone number is (415) 974-
1300. Our Web site can be located at www.hallkinion.com. Information contained
on our Web site should not be considered a part of this prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Hall,
Kinion........................... 1,800,000 shares
Common stock offered by the
selling stockholders............. 1,800,000 shares
----------------
Total common stock offered........ 3,600,000 shares
================
Common stock to be outstanding
after this offering.............. 12,645,989 shares
Use of proceeds................... To repay outstanding indebtedness under our
revolving credit facility and for working
capital and other corporate purposes,
including the expansion of our business,
continued investment in our infrastructure
and the possible acquisition of
complementary businesses.
We will not receive any proceeds from the
sale of shares of common stock by the
selling stockholders. However, we expect
that a portion of the proceeds received by
some of the selling stockholders will be
used to repay indebtedness of these
stockholders to us.
Nasdaq National Market symbol..... HAKI
</TABLE>
Except as otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
Except as otherwise indicated, the total number of shares to be outstanding
after this offering includes 369,600 shares to be issued in connection with the
exercise of options and sold by the selling shareholders in this offering and
excludes:
. 2,111,968 shares of common stock issuable upon the exercise of stock options
outstanding at February 8, 2000 at a weighted average exercise price of
$8.42 per share;
. 1,174,314 shares of common stock currently reserved for future grants under
our stock option plans; and
. 150,000 shares of common stock reserved for future issuances under our
employee stock purchase plan.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Net revenues................... $29,385 $50,571 $92,831 $124,132 $180,749
Cost of contract services...... 19,209 30,342 54,769 69,066 96,502
------- ------- ------- -------- --------
Gross profit................... 10,176 20,229 38,062 55,066 84,247
Operating expenses............. 8,869 18,233 33,689 47,284 70,732
------- ------- ------- -------- --------
Income from operations......... 1,307 1,996 4,373 7,782 13,515
Other income (expense), net.... (156) 369 (127) (51) (477)
------- ------- ------- -------- --------
Income before income taxes..... 1,151 2,365 4,246 7,731 13,038
Income taxes................... 469 1,004 1,737 3,325 5,382
------- ------- ------- -------- --------
Net income..................... $ 682 $ 1,361 $ 2,509 $ 4,406 $ 7,656
======= ======= ======= ======== ========
Income per share:
Basic........................ $ 0.11 $ 0.22 $ 0.34 $ 0.47 $ 0.75
Diluted...................... $ 0.11 $ 0.16 $ 0.25 $ 0.43 $ 0.71
Weighted Average Common Shares
Outstanding:
Basic........................ 6,282 6,282 7,339 9,439 10,155
Diluted...................... 6,311 8,350 9,907 10,342 10,716
Consolidated Balance Sheet
Data:
Working capital (deficit)...... $ (114) $ 189 $19,390 $ 7,808 $ 15,560
Total assets................... 5,680 22,994 42,440 55,976 76,554
Long term debt and other
obligations................... -- 6,738 2,549 1,083 14,161
Redeemable convertible
preferred stock............... -- 9,900 -- -- --
Stockholders' equity
(deficit)..................... 941 (2,748) 31,530 37,902 43,969
</TABLE>
4
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should consider that making such
an investment involves various risks. You should carefully consider these risk
factors as well as all of the other information contained or incorporated by
reference in this prospectus before you decide to purchase shares of our common
stock. You should also consider these risk factors when you read "forward-
looking" statements elsewhere in this prospectus. You can identify forward-
looking statements by terms such as "may," "hope," "will," "should," "expect,"
"plan," "anticipate," "intend," "believe," "estimate," "predict," "potential"
or "continue," the negative of these terms or other comparable terminology.
These forward-looking statements are only predictions. They are subject to a
number of risks and uncertainties, including the risks described in this
section and those described in "Special Note Regarding Forward-Looking
Statements."
An inability to hire and retain a sufficient number of IT professionals with
the extensive knowledge of Internet, computer and networking technologies
required by our clients would negatively impact our business, operating results
and financial condition.
Our future success depends on our ability to attract and retain qualified IT
professionals with the technical skills and experience necessary to meet our
clients' requirements for technical personnel. Competition for individuals with
proven technical expertise, particularly in the Internet, computer and
networking and other technology environments for which we provide services, is
intense, and we expect that competition for IT professionals will increase in
the future. We may not be able to attract and retain qualified IT professionals
in sufficient numbers in the future. Furthermore, IT professionals typically
provide services on an assignment-by-assignment basis and can terminate an
assignment with us at any time. We compete for these individuals with other
providers of technical staffing services, system integrators, providers of
outsourcing services, computer consultants, temporary personnel agencies and
our clients. Many of the IT professionals who work with us also work with our
competitors from time to time. IT professionals currently working on projects
for us may choose to work for competitors on future assignments. Our net
revenues in any period are related, among other factors, to the number of IT
professionals we have on staff and engaged on assignments. If we were unable to
hire or retain a sufficient number of such personnel, our business, operating
results and financial condition would be materially adversely affected.
Any decrease in demand for our services would have a material negative impact
on our business, operating results and financial condition.
We have derived most of our revenues from projects involving the Internet,
computer and networking industries. These industries are experiencing rapid
rates of change and innovation which have resulted in an intense demand for the
IT professionals that we offer. Any slowdown in the rate of innovation in these
industries or any general reduction in demand for personnel with expertise in
leading Internet, computer or networking technologies could reduce the demand
for our services. Reduction in demand for our services could have a material
negative impact on our business, operating results and financial condition. Our
expenses for salaried IT professionals are relatively fixed in the short term,
and we generally cannot reduce expenses quickly in response to decreased demand
for our services.
5
<PAGE>
Our clients may also start to hire permanent employees rather than use our
contract services if they believe that hiring permanent employees could be more
effective than using our contract services. If that were to happen, revenues
from our Contract Services group could decline materially. A material revenue
decline in our Contract Services group would negatively impact our business,
operating results and financial condition.
Persons with expertise in Internet, computer and networking technologies
that would otherwise use our services may increasingly contract directly with
technology companies. The proliferation of job sites on the Internet may allow
these individuals to find employment opportunities without using our services.
Demand for our services may not increase or remain at historical levels. Any
decrease in demand for our services would have a material negative impact on
our business, operating results and financial condition.
Our business, operating results and financial condition could be negatively
impacted if demand for our services in any new geographic markets we enter is
less than we anticipate, if our new offices are not profitable in a timely
manner or if we fail to hire qualified employees.
Our growth depends in part on our ability to enter new geographic markets
successfully. This expansion is dependent on a number of factors, including our
ability to:
. develop, recruit and maintain a base of qualified IT professionals within a
new geographic market;
. initiate, develop and sustain corporate client relationships in each new
geographic market;
. attract, hire, integrate and retain qualified sales and sales support
employees; and
. accurately assess the demand of a new geographic market.
The addition of offices and entry into new geographic markets may not occur
on a timely basis or achieve anticipated financial results. The addition of new
offices and entry into new geographic markets typically result in increases in
operating expenses, primarily due to increased employee headcount. Expenses are
incurred in advance of forecasted revenue, and there is typically a delay
before our new employees reach full productivity. Additionally, demand for our
services in new markets that we enter might be less than we anticipate. If we
are unable to enter new geographic markets in a cost-effective manner or if
demand for our services in new markets does not meet or exceed our forecasts,
our business, operating results and financial condition could be negatively
impacted.
Our quarterly operating results may fluctuate, which could cause the price of
our stock to decline.
Our 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 availability of IT professionals;
. changes in the demand for IT professionals;
. the hiring rate and the productivity of our sales and sales support
personnel;
6
<PAGE>
. departures or temporary absences of key sales and sales support personnel;
. the availability of H-1B work permits for foreign national IT professionals
who wish to work in the United States;
. changes in the relative mix between our contract services revenues and our
permanent placement services revenues;
. changes in the prices we are able to charge for our services;
. the timing and rate of entry into new geographic markets and the addition of
offices in existing geographic markets;
. the structure and timing of acquisitions of complementary businesses; and
. general economic factors.
In addition, because we provide contract services on an assignment-by-
assignment basis, which clients can terminate at any time, existing clients may
not continue to use our services at historical levels. We also experience some
seasonality in our first quarter primarily due to the number of holidays and
inclement weather in that quarter, which may reduce the number of days worked
by IT professionals and sales and sales support employees. As a result, we
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance. In the event our operations should fall below the expectations of
public market analysts and investors, the price of our common stock would
likely decline.
Failure to manage growth properly could negatively affect our business and
financial condition.
We have recently experienced a period of rapid growth that has placed and
will continue to place significant demands upon our management and other
resources. Our net revenues increased 45.6% to $180.7 million in 1999 from
$124.1 million in 1998, and increased 33.7% from $92.8 million in 1997 while
headcount increased to 678 employees in 1999 from 471 employees in 1998. Our
ability to manage future growth effectively will require us to hire additional
management personnel and expand our operational, financial and other internal
systems. We may not be able to hire additional qualified management personnel.
Furthermore, implementing a new or expanded financial and management
information system can be time-consuming and expensive and require significant
management resources. Our current personnel, systems, procedures and controls
may not be adequate to support our future operations, and we may not be able to
implement any new systems effectively. A failure to manage our growth
effectively could have a material negative effect on our business, operating
results and financial condition.
Our permanent placement business is difficult to forecast and is cyclical, and
a decline in our permanent placement business would cause a decline in our net
revenues, gross profit and net income.
Our permanent placement business has fluctuated significantly in the past
and can be expected to continue to fluctuate significantly in the future. We
provide permanent placement services on an assignment-by-assignment basis,
which clients can terminate at any time, and existing clients may not continue
to use our services at historical levels. A decline in our permanent placement
business will result
7
<PAGE>
in a decrease in our net revenues. More importantly, gross profit for our
permanent placement services group is essentially equal to permanent placement
net revenues as there are no direct costs associated with such revenues.
Therefore, a decline in our permanent placement business would result in a
decrease in our gross profit margins and net income.
Failure to manage and integrate acquisitions properly could adversely affect
our business, operating results and financial condition.
A component of our growth strategy is the acquisition of complementary
businesses. In order to implement this strategy successfully, we have to:
. identify suitable acquisition candidates;
. obtain requisite financing;
. acquire the candidates on suitable terms; and
. integrate their operations successfully with ours.
We may not be able to identify suitable acquisition candidates, and we may
not be able to acquire candidates on suitable 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 candidates and a
diminished pool of candidates available for acquisition. Acquisitions also
involve a number of other risks, including:
. negative effects on our reported operating results from increases in
goodwill amortization and interest and other acquisition-related expenses;
. diversion of management's attention;
. the integration of any acquired business, which may result in significant
integration-related expenses;
. the departure of key personnel at the acquired business; and
. uncertainty that an acquired business will achieve anticipated revenues and
earnings.
To the extent we seek to acquire complementary businesses for cash, we may
be required to obtain additional financing. However, required financing with
acceptable terms may not be available, which would prevent us from making cash
acquisitions. Due to all of the foregoing, acquisitions may have a material
negative effect on our business, operating results and financial condition. In
addition, if we issue stock to complete any future acquisitions, existing
stockholders will experience ownership dilution.
We are dependent on our sales and sales support personnel to maintain and
increase our revenue growth.
We generate our net revenues when our sales and sales support personnel
successfully match our IT professionals with our clients' needs. The qualified
sales and sales support personnel we require are in
8
<PAGE>
high demand and are likely to remain a limited resource for the foreseeable
future. Experienced sales and sales support personnel have left our company in
the past. In the future, we expect departures of experienced sales and sales
support personnel from time to time. We will need to hire additional,
productive sales and sales support personnel in order to maintain our revenue
growth. We may not be able to attract or retain productive sales and sales
support personnel. If we are unable to attract and retain productive sales and
sales support personnel in a cost-effective manner, it could negatively impact
our net revenues and profitability.
We could lose market share or suffer declining profit margins due to intense
competition.
The IT staffing industry is highly competitive and fragmented and has low
barriers to entry. In our Contract Services group, we compete for potential
clients with providers of IT staffing services and, to a lesser extent,
computer systems consultants, providers of outsourcing services, systems
integrators and temporary personnel agencies. In our Permanent Placement
Services group, we compete primarily against local and regional recruiting
companies. Many of our 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 our company. Our competitors that are smaller companies may be able to
respond more quickly to customer requirements. Our competitors that are larger
companies may be able to devote greater resources to marketing their services.
In addition, recently a number of job sites have been established on the
Internet. These sites allow IT professionals to find employment opportunities
without using our services, and therefore, demand for our services may
decrease. Because there are relatively low barriers to entry, we expect that
competition will increase in the future. Increased competition could result in
price reductions, reduced margins or loss of market share, any of which could
materially and negatively affect our business, operating results and financial
condition. We may not be able to compete successfully against current and
future competitors, and competitive pressures that we face may have a material
negative effect on our business, operating results and financial condition.
We may be unable to obtain a sufficient number of government permits to place
employees from foreign countries in the United States.
Some of our IT professionals are foreign nationals working in the United
States under H-1B work permits. Accordingly, both we and these foreign
nationals must comply with the United States immigration laws. Our inability to
obtain H-1B permits for these employees in sufficient quantities or at a
sufficient rate could have a material negative effect on our business,
operating results and financial condition. Furthermore, Congress and
administrative agencies with jurisdiction over immigration matters have
periodically expressed concerns over the levels of immigration into the United
States. These concerns have often resulted in proposed legislation, rules and
regulations aimed at reducing the number of work permits that may be issued. In
recent years, the maximum number of H-1B permits allocated for a given year has
been reached very soon after permits became available. Therefore, we attempt to
hire our anticipated annual requirement of foreign national IT professionals
whenever H-1Bs are available, in anticipation of a shortage of H-1Bs permits
later in the year. If we are not able to place these IT professionals in a
timely manner, we will have incurred costs and expenses that we may not be able
to offset with revenues. Any changes in laws making it more difficult to hire
foreign nationals or limiting our ability to obtain foreign employees could
require us to incur additional unexpected labor costs and
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expenses. Further, restrictions or limitations on hiring practices could have a
material adverse effect on our business, operating results and financial
condition.
We are dependent upon the services of our key personnel.
Our future business and operating results depend in significant part upon
the continued contributions of our key employees and senior management
personnel, many of whom would be difficult to replace. The loss or temporary
absence of any of our senior management, significant sales and sales support
employees, other key personnel and, in particular, Brenda C. Rhodes, our Chief
Executive Officer, could have a material negative effect on our business,
operating results and financial condition.
We could become involved in litigation with our clients and IT professionals
regarding intellectual property ownership or performance of our services.
We are exposed to liability with respect to the services our IT
professionals perform while on assignment, such as damages caused by errors of
IT professionals, misuse of client proprietary information or theft of client
property. We agree to indemnify our clients from these damages. We have
purchased insurance coverage to protect us from this liability. However, due to
the nature of our assignments, and in particular the access by our IT
professionals to client information systems and confidential information, our
insurance coverage may not be adequate to cover our potential liability.
Additionally, we may not be able to renew our existing insurance on reasonable
terms or at adequate levels. We 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, we are
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. Finally, we engage
subcontractors in our business and are therefore exposed to potential claims by
the Internal Revenue Service alleging that these subcontractors were our
employees.
We generally assign intellectual property ownership to our clients. Issues
relating to ownership of and rights to use intellectual property can be
complicated. We may become involved in disputes where we could incur
substantial costs and diversion of management resources.
An unfavorable judgment in our pending class action lawsuit could negatively
impact our business, operating results and financial condition.
In June 1999, we and certain of our directors and officers were named as
defendants in three putative class actions filed in the United States District
Court for the Northern District of California, alleging violations of Section
10(b) of the Securities and Exchange Act of 1934. Pursuant to court order,
those cases have been consolidated, and a consolidated amended complaint was
filed on January 24, 2000. The action arises out of our announcement that
revenues and earnings for the quarter ending June 1998 would fall below
analysts' expectations. The action purports to be brought on behalf of all
purchasers of our common stock between August 5, 1997, the date of our initial
public offering, and June 18, 1998, when we pre-announced this shortfall. The
complaint generally alleges that we misstated our future prospects in various
press releases and communications with analysts, and failed to disclose alleged
internal problems with the integration of certain acquired businesses. The
complaint also alleges that insiders sold material amounts of stock while in
possession of material nonpublic information. While we believe that the claims
are without merit, and that our directors and officers liability insurance
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will adequately cover the pending claims, an unfavorable judgment in the matter
could have a material negative impact on our business, operating results and
financial condition.
A small number of our stockholders can exercise substantial influence over our
company.
Our principal stockholders, Brenda C. Rhodes, Todd J. Kinion and Paul H.
Bartlett beneficially owned a total of approximately 39.9% of our outstanding
shares of common stock at February 8, 2000. We expect that they will continue
to beneficially own approximately 20.3% upon completion of the offering. As a
result, these stockholders as a group will be able to exercise substantial
control over matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. This
concentration of ownership could have the effect of making it difficult for a
third party to acquire control of our company and may discourage third parties
from attempting to do so.
Our charter and bylaws may delay or prevent a transaction that our stockholders
would view as favorable.
Our charter and bylaws, and Delaware law, contain provisions that could have
the effect of delaying, deferring or preventing an unsolicited change in
control of our company, which may negatively 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. These provisions also may have the effect of preventing
changes in our management. These provisions provide that all stockholder action
must be taken at an annual meeting of stockholders, that only our board of
directors may call special meetings of the stockholders and that our board of
directors be divided into three classes to serve for staggered three-year
terms. In addition, our charter authorizes our board of directors to issue up
to 10,000,000 shares of preferred stock without stockholder approval on such
terms as our board of directors may determine. Although no shares of our
preferred stock are outstanding, and we have no plans to issue any shares of
preferred stock, the holders of common stock will be subject to, and may be
negatively affected by, the right of any preferred stock that may be issued in
the future. In addition, we are 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 our company.
"Year 2000" problems could involve us in litigation.
Many existing computer systems worldwide are programmed to process dates
using only two digits for the year of the date rather than four digits (e.g.,
"99" for 1999). Computer systems which process dates in this manner began
recording transactions on and after January 1, 2000 with the year "00." These
systems may encounter significant processing inaccuracies and potentially
system failure. We rely on numerous computer systems for our day-to-day
operations and may be adversely affected by the year 2000 situation.
Substantially all of our clients are similarly dependent on computer systems
and they also may be adversely affected by the year 2000 situation. Although
neither we nor any client known to us has experienced any material year 2000
problems to date, some experts have warned of the possibility of lingering year
2000 problems that may not become apparent until later in the year 2000 or
beyond.
We continue to believe that the year 2000 problem will not pose significant
problems for our business and operations on a going forward basis. However, the
year 2000 problem could pose significant operational problems or have a
material adverse effect on our business, financial condition and results of
operations in the future.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere in this prospectus constitute forward-
looking statements that involve substantial uncertainties. These statements
include, among others, statements concerning the following:
. our business and growth strategies;
. the markets we serve;
. liquidity;
. use of proceeds; and
. our efforts to increase brand awareness.
We have based these forward-looking statements on our current expectations
and projections about future events. In some cases, you can identify forward-
looking statements by terms such as "may," "hope," "will," "should," "expect,"
"plan," "anticipate," "intend," "believe," "estimate," "predict," "potential"
or "continue," the negative of these terms or other comparable terminology. The
forward-looking statements contained in this prospectus involve known and
unknown risks, uncertainties and other factors that may cause industry trends
or our actual results, performance or achievements to be materially different
from any future trends, results, performance or achievements expressed or
implied by these statements. These factors include, among others, the rate of
hiring and productivity of sales and sales support personnel, the availability
of qualified IT professionals, changes in the relative mix between contract
services and permanent placement services, changes in the pricing of our
services, the timing and rate of entrance into new geographic markets and the
addition of offices, the structure and timing of acquisitions, changes in
demand for IT professionals, general economic factors, and others listed under
"Risk Factors," elsewhere in this prospectus, and in our Securities and
Exchange Commission filings.
In addition, this prospectus includes data relating to the number of
worldwide users of the Internet, e-commerce, venture capital funding and the
Internet services industry. Some of these data were obtained from industry
publications and reports, such as reports by Forrester Research, Dataquest and
PricewaterhouseCoopers. These reports assume certain events, trends and
activities will occur and they project information based on those assumptions.
We have not independently verified these data or the underlying assumptions.
We cannot guarantee future results, performance or achievements. We do not
intend to update this prospectus to conform any forward-looking statements to
actual results. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.
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USE OF PROCEEDS
The net proceeds to us from the sale of the 1,800,000 shares of common stock
offered by us are estimated to be approximately $ million after deducting
the underwriting discount and estimated offering expenses payable by us. We
expect to use approximately $ million of the net proceeds to repay
outstanding indebtedness under our revolving credit facility. Outstanding
indebtedness on the revolving credit facility bears interest at the lower of
the bank's prime interest rate (8.75% at February 15, 2000) or LIBOR.
Approximately $16.4 million was outstanding under our revolving credit facility
as of February 15, 2000. We intend to use the remaining net proceeds for
working capital and other corporate purposes, including the expansion of our
business domestically and internationally, continued investment in our
infrastructure and the possible acquisition of complementary businesses.
Pending such uses, we plan to invest the net proceeds in investment grade
interest-bearing securities.
We will not receive any proceeds from the sale of shares of common stock by
the selling stockholders. However, we expect that a portion of the proceeds
received by two of the selling stockholders will be used to repay indebtedness
of these stockholders to us.
DIVIDEND POLICY
We have never declared or paid a cash dividend on our common stock. We
currently intend to retain all available funds for use in our business and do
not anticipate paying cash dividends in the foreseeable future. Any future
determination relating to dividend policy will be made at the discretion of our
board of directors and will depend on a number of factors, including any future
earnings, capital requirements, financial conditions and future prospects and
other factors the board of directors may deem relevant. In addition, our credit
agreement currently restricts our ability to pay cash dividends without the
bank's consent.
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data, which
should be read in conjunction with our consolidated financial statements and
notes thereto included elsewhere in this prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated statement of income data for the years ended December 28,
1997, December 27, 1998 and December 26, 1999 and the consolidated balance
sheet data as of December 27, 1998 and December 26, 1999 are derived from our
consolidated financial statements included in this prospectus, which have been
audited by Deloitte & Touche LLP, independent auditors. The selected
consolidated statement of income data for the years ended December 30, 1995 and
December 29, 1996 and the consolidated balance sheet data as of December 30,
1995, December 29, 1996 and December 28, 1997 are derived from our audited
financial statements which are not included in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Net revenues................... $29,385 $50,571 $92,831 $124,132 $180,749
Cost of contract services...... 19,209 30,342 54,769 69,066 96,502
------- ------- ------- -------- --------
Gross profit................... 10,176 20,229 38,062 55,066 84,247
Operating expenses............. 8,869 18,233 33,689 47,284 70,732
------- ------- ------- -------- --------
Income from operations......... 1,307 1,996 4,373 7,782 13,515
Other income (expense), net.... (156) 369 (127) (51) (477)
------- ------- ------- -------- --------
Income before income taxes..... 1,151 2,365 4,246 7,731 13,038
Income taxes................... 469 1,004 1,737 3,325 5,382
------- ------- ------- -------- --------
Net income..................... $ 682 $ 1,361 $ 2,509 $ 4,406 $ 7,656
======= ======= ======= ======== ========
Income per share:
Basic........................ $ 0.11 $ 0.22 $ 0.34 $ 0.47 $ 0.75
Diluted...................... $ 0.11 $ 0.16 $ 0.25 $ 0.43 $ 0.71
Weighted Average Common Shares
Outstanding:
Basic........................ 6,282 6,282 7,339 9,439 10,155
Diluted...................... 6,311 8,350 9,907 10,342 10,716
Consolidated Balance Sheet
Data:
Working capital (deficit)...... $ (114) $ 189 $19,390 $ 7,808 $ 15,560
Total assets................... 5,680 22,994 42,440 55,976 76,554
Long term debt and other
obligations................... -- 6,738 2,549 1,083 14,161
Redeemable convertible
preferred stock............... -- 9,900 -- -- --
Stockholders' equity
(deficit)..................... 941 (2,748) 31,530 37,902 43,969
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus. The
discussion in this section contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed in the forward-looking statements. Additional information relating to
forward-looking statements is included in this prospectus under the caption
"Special Note Regarding Forward-Looking Statements."
Overview
We source and deliver the most critical component of the Internet economy--
human capital. As a leading talent source for the growing Internet economy, we
provide specialized IT professionals on a short-term contract and permanent
basis primarily to vendors of Internet technologies and, to a lesser extent, to
users of intranets and extranets. We have 35 offices located in 21 geographic
markets. Our Contract Services group provides specialized IT professionals on a
short-term contract basis and accounted for 80.5% of our net revenues in 1999,
85.5% in 1998 and 86.5% in 1997. Our Permanent Placement Services group
provides specialized IT professionals on a permanent basis and accounted for
19.5% of our net revenues in 1999, 14.5% in 1998 and 13.5% in 1997.
Our net revenues are derived principally from the hourly billings of our IT
professionals on contract assignments and from fees received for permanent
placements. Contract services assignments typically last four to six months,
and revenues are recognized as services are provided. We derive contract
services revenues when our consultants are working, and therefore our operating
results may be adversely affected when client facilities are closed due to
holidays or inclement weather. As a result, we typically experience relatively
lower net revenues in our first fiscal quarter compared to our other fiscal
quarters. We derive permanent placement revenues upon permanent placement of
each IT professional candidate. The fee is typically structured as a percentage
of the placed IT professional's first-year annual compensation. Permanent
placement revenues are recognized when an IT professional commences employment
or, in the case of retained searches, upon completion of our contractual
obligations.
We have experienced growth by:
. expanding our pool of IT professionals;
. entering new geographic markets;
. adding sales and recruiting employees;
. opening new offices in existing geographic markets; and
. acquiring complementary businesses.
Net revenues increased to $180.7 million in 1999 from $124.1 million in
1998, representing a 45.6% increase. Over this same period, we increased our
number of sales, sales support and administrative employees to 678 individuals
in 21 geographic markets from 471 individuals in 16 geographic markets,
representing a 43.9% increase in headcount. The number of revenue producing
sales and sales support employees included in the overall headcount increased
to 558 in 1999 from 397 in 1998, a 40.6% increase. The addition of new offices,
strategic acquisitions, and the entry into new
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geographic markets have resulted in substantial increases in our operating
expenses, primarily due to increased headcount. These expenses are incurred in
advance of expected revenues because there is typically a delay before our
sales and sales support personnel reach full productivity. As a result, in
periods when we significantly increase our number of offices or acquisitions,
our gross profit and net income may be negatively impacted.
Results of Operations
The following table sets forth our results of operations as a percentage of
net revenues for the periods shown:
<TABLE>
<CAPTION>
Fiscal year ended
(1)
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net revenues:
Contract services........................................ 86.5% 85.5% 80.5%
Permanent placement services............................. 13.5 14.5 19.5
----- ----- -----
Total net revenues..................................... 100.0 100.0 100.0
Cost of contract services.................................. 59.0 55.6 53.4
----- ----- -----
Gross profit (2)........................................... 41.0 44.4 46.6
Operating expenses......................................... 36.3 38.1 39.1
----- ----- -----
Income from operations..................................... 4.7 6.3 7.5
Other expenses, net........................................ 0.1 0.1 0.3
----- ----- -----
Income before taxes........................................ 4.6 6.2 7.2
Income taxes............................................... 1.9 2.7 3.0
----- ----- -----
Net income................................................. 2.7% 3.5% 4.2%
===== ===== =====
</TABLE>
- --------
(1) Our fiscal year ends on the last Sunday of December.
(2) Gross profit for contract services as a percentage of net contract service
revenues was 33.6% in 1999, 34.9% in 1998 and 31.8% in 1997.
Fiscal Year Ended December 26, 1999 Compared to Fiscal Year Ended December 27,
1998
Net Revenues. Net revenues increased 45.6% to $180.7 million in 1999 from
$124.1 million in 1998. Net revenues from our Contract Services group increased
37.0% to $145.4 million in 1999 from $106.1 million in 1998. Net revenues from
our Permanent Placement Services group were $35.3 million in 1999 and $18.0
million in 1998, representing an increase of 96.2%. The increase in net
revenues in 1999 was primarily due to growth in existing offices, addition of
new offices and, to a lesser extent, acquisitions of complementary businesses.
Our revenue producing sales and sales support employee headcount increased
throughout the year reaching 558 as of the end of 1999 from 397 as of the end
of 1998, a 40.6% increase. Our IT professional headcount increased to 1,427 at
the end of 1999 from 1,159 at the end of 1998, an increase of 23.1%.
Gross Profit. Gross profit for our Contract Services group represents
revenues less direct costs of services, which consist of direct payroll,
payroll taxes, and insurance and benefit costs for IT professionals. Gross
profit for our Permanent Placement Services group is essentially equal to
revenues as there are no direct costs associated with such revenues. Gross
profit increased by 53.0% to $84.2 million for 1999 from $55.1 million for
1998. This increase was primarily attributable to an increase in the
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number of assignments, an increase in average billing rates, and an increase in
demand for services from our Permanent Placement Services group. The increase
in average billing rates was primarily attributable to an increase in higher
rate contract services assignments. Gross profit as a percentage of net
revenues increased to 46.6% for 1999 from 44.4% for 1998. This increase was
primarily due to an increase in the percentage of revenues from our Permanent
Placement Services group. Gross profit as a percentage of net revenues from the
Contract Services group, while within our historical range, decreased slightly
to 33.6% for 1999 from 34.9% for 1998. This decrease was primarily attributable
to our customers' Y2K concerns. During the latter half of 1999, many companies
chose not to make system changes due to Y2K concerns. Therefore, we experienced
an increase in non-billable time in some of our Contract Services group
offices.
Operating Expenses. Operating expenses primarily consist of employee costs,
recruiting expenses, marketing expenses and amortization of intangible assets
related to acquisitions. Operating expenses increased by 49.6% to $70.7 million
for 1999 compared to $47.3 million for 1998. Operating expenses as a percentage
of net revenues increased to 39.1% for 1999 from 38.1% for 1998. The increases
resulted primarily from expenses associated with increased sales, sales support
and administrative employee costs, facility costs, amortization and
depreciation expense and costs for a new marketing campaign.
Other Expense. Interest income increased to $263,000 for 1999 from $215,000
for 1998. The increase in interest income resulted from interest related to
loans made to some executive officers in 1999. Interest expense increased to
$723,000 for 1999 compared to $255,000 for 1998. The increase in interest
expense primarily reflected debt incurred in connection with acquisitions and
an overall increase in interest rates.
Income Taxes. Our effective income tax rate was 41.3% for 1999 compared to
43.0% for 1998. Our income tax rate varies from period to period primarily due
to changes in nondeductible expenses.
Net Income. Net income increased 73.8% to $7.7 million for 1999 from $4.4
million for 1998. Net income as a percentage of net revenues was 4.2% for 1999
compared to 3.5% for 1998.
Fiscal Year Ended December 27, 1998 Compared to Fiscal Year Ended December 28,
1997
Net Revenues. Net revenues increased 33.7% to $124.1 million in 1998 from
$92.8 million in 1997. Net revenues from our Contract Services group increased
32.2% to $106.1 million in 1998 from $80.3 million in 1997. Net revenues from
our Permanent Placement Services group were $18.0 million in 1998 and $12.6
million in 1997, representing an increase of 43.2%. The increase in net
revenues in 1998 was due primarily to growth in existing offices, addition of
new offices and, to a lesser extent, acquisitions of complementary businesses.
Our revenue producing sales and sales support employee headcount increased to
397 as of the end of 1998 from 348 as of the end of 1997, representing a 14.1%
increase, with increases occurring throughout the year. Our IT professional
headcount increased to 1,159 at the end of 1998 from 1,040 at the end of 1997,
an increase of 11.4%.
Gross Profit. Gross profit increased by 44.7% to $55.1 million for 1998 from
$38.1 million for 1997. This increase was primarily attributable to an increase
in the IT professional headcount, an
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<PAGE>
increase in average billing rates, and an increase in demand for services from
our Permanent Placement Services group. The increase in average billing rates
was primarily attributable to an increase in higher rate leading edge
technology contract services assignments. Gross profit as a percentage of net
revenues increased to 44.4% for 1998 from 41.0% for 1997. The increase was
primarily due to an increase in the percentage of revenues from our Permanent
Placement Services group. Gross profit as a percentage of net revenues from the
Contract Services group increased to 34.9% in 1998 from 31.8% in 1997. This
increase was primarily attributable to acquisitions of complementary
businesses, an emphasis on expansion of higher margin business in existing
markets and cross selling of higher margin services.
Operating Expenses. Operating expenses increased by 40.4% to $47.3 million
for 1998 compared to $33.7 million for 1997. The increase resulted primarily
from increased sales, sales support and administrative employee costs, facility
costs, and increased amortization and depreciation costs. Operating expenses as
a percentage of net revenues increased to 38.1% for 1998 from 36.3% for 1997,
as we continued to increase our sales and administrative employee headcount and
enhance our infrastructure. Operating expenses were incurred in advance of
associated revenue because there was a delay before our revenue generating
personnel reached full productivity.
Other Expense. Interest income decreased to $215,000 for 1998 from $485,000
for 1997. The decrease in interest income resulted from repayment in 1997 of
loans made to some directors and executive officers. Interest expense decreased
to $255,000 in 1998 from $581,000 in 1997. The decrease in interest expense
primarily reflected the partial repayment of debt in connection with our
initial public offering in August 1997 and an overall decrease in interest
rates.
Income Taxes. Our effective income tax rate was 43.0% for 1998 compared to
40.9% for 1997. Our income taxes as a percentage of income before taxes varies
from period to period primarily due to changes in nondeductible expenses.
Net Income. Net income increased 75.6% to $4.4 million for 1998 from $2.5
million for 1997. Net income as a percentage of net revenues was 3.5% for 1998
compared to 2.7% for 1997.
Liquidity and Capital Resources
We generally fund our operations and working capital needs through cash
generated from operations, periodically supplemented by borrowings under our
revolving line of credit with a commercial bank. Our operating activities
generated cash of approximately $5.3 million in 1999 and $5.1 million in 1998,
and used cash of approximately $0.5 million in 1997. Cash provided from our
operating activities for 1999 increased primarily due to improved operating
margins, partially offset by an increase in accounts receivable.
The principal uses of cash for investing activities for 1999 were for a
business acquisition and the purchase of property and equipment. Purchases of
property and equipment included the implementation of a new enterprise resource
system and upgrading our network and other technology systems.
In November 1999, we refinanced our $20 million revolving credit facility
with a new $30 million credit facility. The new $30 million credit facility is
comprised of a $20 million revolving credit facility and a $10 million term
loan facility. As of December 26, 1999, borrowings under the revolving credit
facility were $14 million. There were no borrowings under the term loan
facility. The interest rate on
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both facilities is the lower of the lender's prime rate or LIBOR. Both
facilities terminate in July 2002. Borrowings under both facilities are secured
by substantially all of our assets. The facilities contain covenants requiring
us to maintain minimum levels of profitability and net worth and specific
ratios of working capital and debt to operating cash flow. We are in compliance
with all of these covenants.
Net cash provided by financing activities for 1999 was $6.4 million,
primarily due to borrowings under our revolving credit facility. Net cash used
in financing activities during 1999 was attributable to the lending of $5.3
million to some executive officers of our company which was partially offset by
$3.3 million provided by the exercise of stock options from an executive
officer and $0.2 million from other employees.
We believe that our cash flow from operations and amounts available under
our credit facility will be sufficient to meet our cash requirements for at
least twelve months.
Recently Issued Financial Accounting Standard
In June 1998, the Financial Accounting Standard Board adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The statement is effective for our company's
fiscal year ending in December 2001, and will not be applied retroactively to
the financial statements of prior periods. We are currently evaluating the
impact of SFAS No. 133 on our financial statements and related disclosures.
Year 2000
Many existing computer systems worldwide are programmed to process dates
using only two digits for the year of the date rather than four digits (e.g.,
"99" for 1999). Computer systems which process dates in this manner began
recording transactions on and after January 1, 2000 with the year "00". These
systems may encounter significant processing inaccuracies and potentially even
system failure. We rely on numerous computer systems for our day-to-day
operations and may be adversely affected by the year 2000 situation. Our costs
in connection with year 2000 remediation and preparations totaled approximately
$0.2 million, with substantially all of such costs occurring in 1999.
Substantially all of our clients are similarly dependent on computer systems
and they also may be adversely affected by the year 2000 situation. Although
neither we have nor any clients known to us have experienced any material year
2000 problems to date, some experts have warned of the possibility of lingering
year 2000 problems that may not become apparent until later in the year 2000 or
beyond. We continue to believe that the year 2000 problem will not pose
significant operational problems for our business and operations on a going
forward basis.
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BUSINESS
Overview
We source and deliver the most critical component of the Internet economy--
human capital. As a leading talent source for the growing Internet economy, we
provide specialized IT professionals on a short-term contract and permanent
basis primarily to vendors of Internet technologies and, to a lesser extent, to
users of intranets and extranets. We believe we are well qualified to identify,
screen and deliver the specific IT talent demanded by our clients because we
have built thorough, long-term relationships with the vendors of Internet
technologies and because we are successful at recruiting IT professionals with
skills in leading edge technologies. Our clients include industry leaders such
as IBM, Cisco Systems and Netscape Communications as well as innovative start-
ups such as E*Trade, Priceline.com and E-Stamp.
We believe that our key competitive advantage is our ability to recruit the
best and brightest IT professionals. We have developed this advantage by
building client relationships with technology industry leaders and
communicating these relationships to the IT professional community. Our clients
offer our IT professionals what we believe is their primary career objective:
the opportunity to work on leading edge assignments in the Internet world. We
have leveraged our competitive advantage to expand our business geographically.
We began our company in Silicon Valley and have expanded our offices to
additional markets with high concentrations of technology companies--the
Silicon Valleys of the world.
We have developed a scalable business model which helps us expand into new
geographic markets. The cornerstone of our model is the rapid delivery of
talent to our clients. We recognize that our clients operate in a time-
sensitive environment in which their success is directly tied to their ability
to bring their technology products and services to market ahead of their
competition. We build strong, direct relationships with our clients'
engineering managers in order to identify quickly their technology needs. We
then actively network with the IT professional community and thoroughly search
the Internet in order to identify and recruit the appropriate IT talent
quickly.
Industry Background
The explosive growth of the Internet has transformed the high technology
industry with unprecedented speed. Established technology companies such as Sun
Microsystems, Cisco Systems and Hewlett Packard have responded to Internet
growth by redirecting their resources to develop products to meet the demands
of the Internet economy. Additionally, relatively new companies such as
Netscape Communications and Excite have built their businesses around and
continue to focus on providing the building blocks of the Internet. The
technology industry has evolved in response to the growth trends of the
Internet economy. Forrester Research projects that the market for business-to-
consumer e-commerce will grow from $39 billion in 2000 to $185 billion in 2004,
and the market for business-to-business e-commerce will grow from $406 billion
in 2000 to $2.7 trillion in 2004.
A significant influx of capital has become available to fund the development
of new technologies for the Internet. According to PricewaterhouseCoopers, over
4,000 technology companies received venture capital funding during the first
three quarters of 1998, and this number increased to over 13,000 during
20
<PAGE>
the same period in 1999. PricewaterhouseCoopers also reported that the total
amount of venture capital invested for this period rose from $3.8 billion in
1998 to $9.0 billion in 1999.
We believe that the large sums of venture capital currently available in the
high technology sector, combined with the significant resources of existing
high technology companies, have created a great demand for highly skilled IT
professionals needed to support the velocity of change in the technology
marketplace. We find that talented professionals with skills in leading edge
technologies are in particularly high demand as established developers of next-
generation technologies compete with Internet technology start-ups for the
human capital that is critical to their businesses.
To help meet their need for leading edge IT professionals, organizations are
turning to third party providers of technology talent to support their existing
IT resources. Dataquest estimates that the size of the global IT services
market in 1997 was $326.8 billion, and that this market will grow to
approximately $630.4 billion by 2002. In order to succeed in this market,
providers of IT professionals must deliver leading edge IT talent at a speed
commensurate with the demands of a rapidly changing technology environment.
21
<PAGE>
Our Solution
Our objective is to provide efficient, high quality contract and permanent
IT professional services to our target market and to become the agent of choice
for IT professionals. To meet this objective we:
. Target market our services to the vendors of Internet technologies. We
believe that we will stay at the forefront of technological change, and that
we can continue to build on our already established reputation as a provider
of leading edge technology assignments by directing our efforts toward
serving Internet technology providers and vendors of software and hardware
for Internet applications. We recognize that providing leading edge
technology talent is critical to serving our target market, and that our
best means of attracting talented IT professionals is to offer assignments
that use their state-of-the-art talents at leading technology companies.
As a result, we focus our marketing efforts on clients that have the highest
sensitivity to product lifecycle and use leading edge technologies, which
provides us with the opportunity for the greatest gross profit margins. To
assist us in directing our marketing efforts, we have segmented the market
for Internet technology talent into four categories:
<TABLE>
<CAPTION>
Our Focus on
Segment Description Critical Drivers this Segment
------- ----------- ---------------- ------------
<C> <S> <C> <C>
Core Companies who develop . Leading edge . Very high.
technology technologies and technology Strategically
providers services specifically important, but
aimed at increasing the a limited
effectiveness of the number of
Internet. These potential
technologies are clients
intended to change the
way the Internet
functions
. Highest sensitivity to . Approximately
timing of product 3% of our
release fourth quarter
1999
assignments
Hardware and Companies, such as Cisco . High sensitivity to . High. This is
software Systems, IBM and Hewlett timing of product our
vendors Packard, which develop release. Short product traditional
products that enable lifecycles market
users of the Internet to
extract value
. Leading edge research . Approximately
and development 43% of our
fourth quarter
1999
assignments
Intranet and Fortune 1000 companies . Largest demand for . This is not
extranet that use the Internet to talent our primary
companies conduct internal and market
external business
processes
. One step removed from . Less than 1%
leading edge of our fourth
assignments quarter 1999
assignment
. Less sensitivity to
timing of product
releases
E-commerce and Any company developing . Moderate technology . Our fastest
mass media web e-commerce and requirements growing
companies communication with segment
customers via the
Internet
. Client stock option . Approximately
awards make this 21% of our
segment a desirable fourth quarter
sector for permanent 1999
employees assignments
. Heavily venture
capital funded
</TABLE>
. Provide rapid fulfillment to our delivery-sensitive clients. We have
designed our operating model to meet the time-sensitive needs of our
clients. We develop strong relationships directly with
22
<PAGE>
engineering managers at our clients and build aggressive IT recruiting
capabilities through the use of modern technologies such as Internet
search, proprietary IT talent databases and cross-office intranet based
communication. As a result, we believe we have developed an advantage in
meeting the needs of our target market: clients that place importance on
speed of response and quality of talent but who are not particularly price-
sensitive.
. Capitalize on our client base to attract and retain IT professionals. The
shortage of available talent has made attracting and retaining qualified IT
professionals critical to our success. We believe that the most important
motivators of IT professionals are: working on leading edge technology
assignments, flexible lifestyles and compensation. We have developed
advantages in addressing the motivations of our professionals. The most
important motivator is the opportunity for rewarding and challenging
assignments. We provide leading edge technology assignments that match our
IT professionals' abilities, because we have focused on serving the vendors
and users of Internet technologies. Conversely, we are able to meet the
technology requirements of these companies, in great part, because we are
able to attract the best and brightest IT talent. We cater to the
individual and family lifestyle demands of IT professionals by providing
assignments that may allow flexible working hours and telecommuting
opportunities. We offer our IT professional employees an attractive
compensation program that includes stock options and the opportunity to
participate in benefit plans equivalent to those available to their full
time counterparts.
. Build brand recognition. We have implemented a strong brand recognition
campaign as The talent source for the Internet economy(TM) with marketing
promotions designed to convey an Internet image. This campaign is directed
toward the Generation X market that includes a large segment of our IT
professionals. Branding efforts have included a new corporate logo that
conveys an Internet theme and use of the slogan "The place where speed and
talent come together on the Internet." Promotions have included live web
casts and an auto racing sponsorship. We believe that our branding campaign
gives us a competitive advantage in soliciting technology clients and
recruiting IT talent and sales and sales support employees.
. Create a corporate culture that attracts and retains sales and sales
support employees. We spend a great deal of time, energy and money
recruiting our sales and sales support employees. We have created a
performance-based culture, with an attitude of "celebration" that our
employees find appealing and energizing. Our culture is embodied in our
ongoing performance-rewarding traditions as well as our annual business
planning convention and national awards trip, the highlight of the sales
year at Hall, Kinion. We believe that our culture has played a significant
role in our ability to recruit and retain sales and sales support
employees.
. Deliver solid corporate support to our offices. We deliver extensive
training, detailed performance reporting and IT support to each of our
offices in order to promote a high level of service and consistency among
our offices. Our support reaches every sales and sales support professional
and provides them with the tools they need to increase productivity by
communicating with, and understanding and meeting the requirements of, both
our clients and IT professionals.
23
<PAGE>
Our Growth Strategy
We have followed a growth strategy focused on strong internal growth,
including new office openings, augmented by strategic acquisitions. Key
elements of our strategy include:
. Hiring, training and developing additional sales and sales support
employees. Our sales and sales support employees, who are our key contacts
with our clients and IT professionals, directly impact our ability to
generate revenues. We have been successful recruiting and retaining sales
and sales support personnel and have grown to 558 sales and sales support
employees at the end of 1999 from 348 at the end of 1997. Sales and sales
support professionals receive extensive sales training and targeted
technology training during their initial orientation and throughout their
careers with Hall, Kinion. As our employees are promoted, they receive
additional training in these areas, as well as in management and budgeting.
. Opening additional offices in our current geographic markets. We believe
that by growing our presence in current geographic markets we substantially
increase our opportunities for successful pairing of our IT talent with our
clients' technology needs. As a result, new offices in existing geographic
markets typically reach profitability earlier than the initial office we
build in new markets. We also believe that the addition of new offices
enhances the growth of existing offices in the same geographic market. We
believe that there are opportunities for additional growth in each of our
existing geographic markets.
. Opening additional offices in the Silicon Valleys of the world. Our
geographic growth is focused on markets where there is a large concentration
of high technology companies and skilled IT professionals. Over the last six
years, we have added 34 offices in 20 geographic markets, including Silicon
Valley, Austin, Texas and Tysons Corner, Virginia. We believe that by
focusing our geographic growth on the Silicon Valleys of the world, we are
able to rapidly build our new offices to the "critical mass" required to
achieve profitability in a new market. We intend to open offices in Atlanta,
Georgia, and Tokyo, Japan during the first half of 2000 and plan to enter
additional geographic markets with a high concentration of technology
oriented businesses.
. Expanding international recruiting capabilities. We have successfully placed
a significant number of international recruits with our domestic clients and
plan to continue expanding our international recruiting capabilities. In
1998, we acquired Group-IPEX and its expertise in using the H-1B visa system
to bring foreign national IT professionals into the United States in order
to meet our need for highly skilled IT professionals.
. Acquiring complementary businesses. We also have grown our business through
selected acquisitions of complementary businesses. We grew in size and
gained a national presence with our acquisition of Team Alliance. We
acquired Group-IPEX and TKO Personnel to provide us with an international
presence for recruiting, to expand our permanent placement presence and to
give us a foothold for future international expansion. We developed our
executive retained search operations and strengthened our contract services
offerings with the simultaneous acquisition of Huntington Group and ITC.
Finally, through our most recent acquisition, TKI Consulting, we acquired
project-based software development and integration capabilities. We continue
to explore additional acquisition opportunities, particularly those that
provide us with new technology practices, new geographic markets, additional
international recruiting capabilities or executive retained search
businesses.
24
<PAGE>
Our Operating and Sales Model
We provide IT talent to our clients through our Contract Services group,
which delivers IT professionals on a short-term contract basis, and through our
Permanent Placement Services group, which sources, qualifies, and delivers IT
professionals for direct hire by our clients.
Contract Services Group
Our Contract Services group employs two types of sales and sales support
employees that have complementary roles in the rapid and high quality delivery
of our contract services: account managers and technical recruiting agents. As
of December 26, 1999, we employed 277 sales and sales support employees,
including branch managers and directors, in the Contract Services group.
Account Managers. Our account managers are responsible for marketing our
contract services. Account managers build and manage relationships with our
clients. We provide them with training in the latest technologies so that they
can understand our clients' rapidly changing technology needs and identify
opportunities for assignments that utilize the expertise of our IT
professionals. We believe that there are opportunities for additional growth in
all of our geographic markets, and anticipate continued hiring of qualified
account managers to target additional leading edge technology companies.
Technical Recruiting Agents. Our technical recruiting agents are responsible
for sourcing, qualifying, and representing our IT professionals. Our technical
recruiting agents build relationships with our IT professionals and understand
their technical expertise. A technical recruiting agent's success depends upon
his or her ability to source qualified IT professionals quickly as client
assignments arise. By participating in technology user groups, continually
searching the Internet for qualified IT professionals, and building a database
of IT professionals, our technical recruiting agents can match IT professionals
to leading edge technology assignments for our clients. By acting as the
advocate for the IT professional, our technical recruiting agents are
continually assisting us in growing and maintaining a high quality talent pool
of technical candidates.
Permanent Placement Services Group
Our Permanent Placement Services group employs sales and sales support
personnel whose primary role is the rapid and high quality delivery of
permanent placement IT professionals. As of December 26, 1999, we employed 281
sales and sales support employees, including branch managers and directors, in
the Permanent Placement Services group.
Recruiters. Our recruiters are responsible for marketing our permanent
placement services to our target market, and sourcing, qualifying and placing
IT professionals for direct hire by our clients. Our recruiters also build and
manage relationships with our clients and receive training to provide them with
the skills necessary to assess our clients' rapidly changing technology needs.
We task our recruiters with sourcing IT professionals and matching their skills
and career objectives with employment opportunities at leading edge technology
companies.
Branch Managers and Director Level Management
We employ branch managers and director level managers in both our Contract
Services and Permanent Placement Services groups. Our branch managers are
responsible for managing daily
25
<PAGE>
production, coordinating the account manager/technical recruiting agent
partnerships and recruiter relationships, as well as hiring and developing
sales teams. Branch managers are incentivized to meet revenue and gross profit
objectives within pricing guidelines determined at the executive level. Branch
managers also solicit and develop client opportunities, such as pursuing
regional and national accounts. We primarily promote our branch managers from
within the company, providing an established career path for our sales and
sales support employees.
Our directors manage all branch managers in their geographic territory. They
implement and actively support our corporate culture of performance,
achievement and the celebration of individual and team successes. Branch
managers and directors rely on sales budgets that are developed at the office
level, and consolidated at the director and service group levels. Directors are
incentivized to provide year-over-year and sequential quarterly revenue growth,
and to perform to their budget at the revenue, gross profit and earnings before
interest and income taxes levels. Our budget provides statistical metrics that
help our branch managers and directors make decisions regarding the timing of
expansion within their existing geographic markets and into new geographic
markets.
Our Corporate Support Services
We provide sales training, accounting and financial services, and
information technology services at the corporate level to support our offices.
Corporate Training
We provide regularly scheduled training courses to our sales and sales
support personnel and their managers to foster a strong sales environment and
to promote successful sales and management practices. Training includes
curricula in sales and marketing, management, evolving technologies and
budgeting and financial planning. In addition, periodic courses in best
practice theories are presented at each office.
Accounting and Financial Services
Our financial operations are primarily supported by a new PeopleSoft ERP
package implemented in 1999. We use ten modules of PeopleSoft to track weekly,
monthly, and quarterly performance at every level of operations. Our sales and
sales support professionals, branch managers and directors use information
provided by PeopleSoft to assist in decisions on fine tuning operations and
adding employees and offices. We believe that our decentralized business model
coupled with these performance metrics provides a sound framework for making
daily operating decisions. We also regularly produce market analyses
highlighting trends in our performance and our market place to help guide our
company-wide strategic decision making.
Information Technology Services
We provide the tools necessary for our employees to deliver our services
with the speed demanded by the Internet economy. IT talent sourcing and
communication with clients and among offices via the Internet are critical to
our business model. In addition, we utilize several other Internet-related
tools and encourage employees to use the latest Internet applications, such as
Monster.com and Dice.com, to better serve our clients. At the core of our
connectivity strategy is independent Internet access for all employees, a
corporate wide intranet and shared access to our proprietary database of IT
talent.
26
<PAGE>
Clients
In the fourth quarter of 1999, 67% of our overall assignments were with
technology companies working on Internet-related projects. We divide our
Internet-related clients into four segments, as depicted in the following
graphic:
[GRAPHIC] Picture of four concentric circles that are labeled, starting with
the innermost circle and moving outward, as follows: (1) Core Technology
Providers, (2) Hardware and Software Vendors, (3) Internet and Extranet
Companies, and (4) E-Commerce and Mass Media Web Companies. Under the heading
for each circle is a list of representative companies.
Although our target market is vendors of Internet technologies, a
significant portion of our assignments comes from services provided to clients
in high technology product research and development industries whose products
are not directly Internet-related. In the fourth quarter of 1999, these
services accounted for 33% of our overall assignments and remain an important
component of our business.
We focus on companies requiring IT professionals for leading edge technology
applications. Our assignments typically place an individual or a small group of
skilled professionals and, as a result, we have minimal client concentration.
In 1999, no client accounted for more than 5% of our net revenues and our top
ten clients accounted for less than 15% of our net revenues. Our top ten
clients in 1999 were:
<TABLE>
<S> <C>
. IBM Corporation . Oracle
. Motorola . The Gap
. AT&T Wireless . McKinsey & Co.
. ISP Channel . Network Associates
. Apex PC Solutions . Regence Blue Shield/Blue Cross
</TABLE>
27
<PAGE>
Technologies Served
We traditionally have supplied a significant percentage of our talent to
help our clients develop next generation technology services and products. As a
result, we have kept abreast of the latest technology trends and have been able
to evolve the skill set of our IT professionals to meet the demands of our
leading edge technology clients. The following technologies are a
representative sample of the e-commerce and software development skills that
our IT professionals currently use in client assignments:
<TABLE>
<S> <C>
. Java . Broadvision
. Cold Fusion . COM and DCOM
. XML . EJB
. Corba . ERWin
. ASP . UML
</TABLE>
Employees
As of December 26, 1999, 1,427 of our IT professionals were providing
contract services to our clients. This number included 1,112 employees and 315
subcontractors. Our corporate staff at December 26, 1999, consisted of 678
full-time employees, of whom 558 were sales and sales support personnel and 120
were administrative and accounting personnel. We are not a party to any
collective bargaining agreements covering any employees, have never experienced
any material labor disruption and are unaware of any current efforts or plans
to organize our employees. We consider our relationship with our employees to
be good.
Competition
The IT staffing industry is highly competitive and fragmented and has low
barriers to entry. In our Contract Services group, we compete for potential
clients with providers of IT staffing services and, to a lesser extent,
computer systems consultants, providers of outsourcing services, systems
integrators and temporary personnel agencies. In our Permanent Placement
Services group, we compete primarily against local and regional recruiting
companies. Many of our 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 our company. In addition, many of these competitors may have certain
distinct advantages. Our competitors that are smaller companies may be able to
respond more quickly to customer requirements. Our competitors that are larger
companies may be able to devote greater resources to marketing their services.
Because there are relatively low barriers to entry, we expect that competition
will increase in the future. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could
materially and adversely affect our business, operating results and financial
condition. We may not be able to compete successfully against current and
future competitors, and competitive pressures we face may have a material
adverse effect on our business, operating results and financial condition. We
believe that the principal factors relevant to competition in the IT staffing
services industry are the recruitment and retention of highly qualified IT
professionals, rapid and accurate response to client requirements and, to a
lesser extent, price. We believe that we compete favorably with respect to
these factors.
The recruitment of IT professionals also is highly competitive. We compete
for IT professionals with other providers of technical staffing services,
system integrators, providers of outsourcing services, computer consultants,
temporary personnel agencies and our clients. We may not be able to recruit and
retain sufficient numbers of IT professionals successfully.
28
<PAGE>
Facilities
Our principal executive offices are currently located in San Francisco,
California and occupy an aggregate of approximately 9,000 square feet of office
space pursuant to a lease that expires in December 2003. We also lease or
sublease office space for our operations in Austin, Dallas and Houston, Texas;
Capitola, Fremont, Mountain View, San Mateo, Lafayette, San Jose, Sacramento
and Cupertino, California; Boston, Massachusetts; Chicago and Schaumburg,
Illinois; Denver and Boulder, Colorado; London, England; New York, New York;
Trumbull, Connecticut; Tampa and Orlando, Florida; Phoenix, Arizona; Portland,
Oregon; Raleigh, North Carolina; Salt Lake City, Utah; Iselin, New Jersey;
McLean, Virginia; Minneapolis, Minnesota; Bellevue and Seattle, Washington; and
New Delhi, India. In addition, we own a training facility located in Park City,
Utah.
Corporate History
We were incorporated in California in 1991. During 1994, we began to expand
our West Coast presence, and in 1996, we developed a national presence by
acquiring Team Alliance, Inc. We reincorporated in Delaware in June 1997 and
completed the initial public offering of our common stock in August 1997. We
have grown from a single office in 1993 to 35 offices in 21 geographic markets,
as of December 26, 1999.
29
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information, as of February 8, 2000 except
where noted, with respect to the beneficial ownership of our Common Stock by:
. each selling stockholder;
. each person known to Hall, Kinion to beneficially own more than 5% of the
outstanding shares of our Common Stock;
. each director of Hall, Kinion and each executive officer named in the
Summary Compensation Table of our proxy statement for our 1999 Annual
Meeting of Stockholders; and
. all directors and executive officers as a group.
Under the rules of the Securities and Exchange Commission, a person is
deemed to beneficially own any shares that he or she has the power to vote or
the power to sell. In addition, under these rules a person is deemed to
beneficially own any shares that he or she has the right to acquire within 60
days. As a result, the percentage of outstanding shares of any person shown in
the following table does not necessarily reflect the person's actual voting
power at any particular date.
Unless otherwise indicated, to our knowledge each stockholder has sole
voting and investment power with respect to his or her securities and each
stockholder has the same address as Hall, Kinion.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After
Offering Number of Offering
-------------------- Shares Being --------------------
Name and Address Number Percent(1) Offered Number Percent(1)
- ---------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Brenda C. Rhodes (2).... 1,574,453 15.0% 394,900 1,179,553 9.3%
Chief Executive Officer
and Chairman of the
Board
Todd J. Kinion (3)...... 1,632,984 15.6% 1,000,000 632,984 5.0%
Director
Paul H. Bartlett (4).... 974,209 9.3% 224,000 750,209 5.9%
President and Director
Martin A. Kropelnicki
(5).................... 182,291 1.7% 99,000 83,291 *
Vice President, Chief
Financial Officer and
Secretary
Rita S. Hazell (6)...... 87,831 * 24,000 63,831 *
Senior Vice President
of Contract Services
Craig J. Silverman (7).. 66,167 * 20,000 46,167 *
Senior Vice President
of Recruiting
Jon H. Rowberry (8)..... 27,500 * -- 27,500 *
Director
Will Herman (5)......... 12,500 * -- 12,500 *
Director
Other selling
stockholders (9)....... 69,241 * 38,100 31,141 *
Executive officers and
directors as a group (8
persons) (10).......... 4,557,935 43.5% -- 2,796,035 22.1%
SAFECO Corp. (11)....... 1,612,300 15.4% 1,612,300 12.7%
SAFECO Plaza
Seattle, WA 98185
</TABLE>
- --------
* Less than 1%
30
<PAGE>
(1) Percentage calculations assume no exercise of the underwriters'
overallotment option and are based on 10,476,389 shares of common stock
outstanding on February 8, 2000.
(2) Includes 78,612 shares held by Ms. Rhodes' and her spouse's children.
(3) Includes 102,900 shares held by Mr. Kinion's children.
(4) Includes 224,000 shares subject to stock options. Mr. Bartlett has
resigned his positions as President and Director effective March 15, 2000.
(5) Represents shares subject to stock options.
(6) Includes 63,331 shares subject to stock options.
(7) Includes 54,167 shares subject to stock options.
(8) Includes 25,000 shares subject to stock options.
(9) Represents shares subject to stock options that are currently exercisable
by employees, who are non-executive officers of Hall, Kinion.
(10) Includes 561,289 shares subject to stock options.
(11) Includes shares beneficially owned by SAFECO Asset Management Company and
SAFECO Common Stock Trust, which are affiliates. This information is
derived from SAFECO's Amendment No. 3 to Schedule 13G, filed with the
Securities and Exchange Commission on February 1, 2000.
31
<PAGE>
UNDERWRITING
Under an underwriting agreement dated , 2000, we and the
selling stockholders have agreed to sell to the underwriters named below, the
indicated number of shares of our common stock:
<TABLE>
<CAPTION>
Number
Underwriters of shares
------------ ---------
<S> <C>
Robert W. Baird & Co. Incorporated.................................
First Union Securities, Inc........................................
Legg Mason Wood Walker, Incorporated...............................
The Robinson-Humphrey Company, LLC.................................
George K. Baum & Company...........................................
Total............................................................
===
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of our common stock offered in this offering if any
are purchased, other than those shares covered by the over-allotment option we
describe below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or this offering of our common stock may be terminated.
Hall, Kinion and one of the selling stockholders have granted to the
underwriters a 30-day option to purchase up to 540,000 shares at the public
offering price less the underwriting discounts and commissions. This option may
be exercised only to cover over-allotments of our common stock.
The underwriters propose to offer our common stock initially at the public
offering price on the cover page of this prospectus and to the selling group
members at that price less a selling concession of $ per share. The
underwriters and the selling group members may allow a discount of $ per
share on sales to other broker/dealers. After the offering, the public offering
price and selling concession and discount to dealers may be changed by the
representatives. As used in this section,
. Underwriters are securities broker/dealers that are parties to the
underwriting agreement and will have a contractual commitment to purchase
shares of our common stock from us, and the representatives are the five
firms acting on behalf of the underwriters.
. Selling group members are securities broker/dealers to whom the underwriters
may sell shares of common stock at the public offering price less the
selling concession above, but who do not have a contractual commitment to
purchase shares from us.
. Broker/dealers are firms registered under applicable securities laws to sell
securities to the public.
. The syndicate consists of the underwriters and the selling group members.
The following table summarizes the compensation and estimated expenses that
we will pay. The compensation we will pay to the underwriters will consist
solely of the underwriting discount, which is equal to the public offering
price per share of common stock less the amount the underwriters pay to us per
share of common stock. The underwriters have not received and will not receive
from us any other item of compensation or expense in connection with this
offering considered by the National Association of Securities Dealers, Inc. to
be underwriting compensation under its rules of fair practice.
32
<PAGE>
<TABLE>
<CAPTION>
Per share Total
----------------------------- -----------------------------
Without With Without With
over-allotment over-allotment over-allotment over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us in cash............. $ $ $ $
Estimated expenses
payable by us.......... $ $ $ $
Underwriting discounts
and commissions paid by
the selling
stockholders........... $ $ $ $
</TABLE>
We have agreed to pay all of the expenses in connection with this offering,
except the underwriting discounts and commissions on the shares sold by the
selling stockholders and costs incurred directly by any selling stockholder.
The principal components of the offering expenses payable by us will include
the fees and expenses of our accountants and attorneys, the fees of our
registrar and transfer agent, the cost of printing this prospectus, The Nasdaq
Stock Market listing fees and filing fees paid to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
We, our officers, our directors, and the selling stockholders have agreed
not to offer or transfer, or file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to any additional
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock without the prior written
consent of Robert W. Baird & Co. Incorporated for a period of 90 days after the
date of this prospectus, except in our case for grants of employee stock
options under our stock incentive plans in effect on the date hereof and
issuances of securities as a result of the exercise of any options outstanding
on the date hereof.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
The shares of our common stock are traded on The Nasdaq Stock Market's
National Market under the symbol "HAKI."
The representatives may engage in over-allotment, stabilizing transactions
and syndicate covering transactions in accordance with Regulation M under the
Securities Exchange Act of 1934. Over-allotment involves syndicate sales in
excess of the size of this offering, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the shares of our common stock
so long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of our common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. The representatives may, at their discretion, reclaim a selling
concession from any syndicate member that appears to have permitted its
customers to purchase shares in the public offering and then promptly resell
all or a portion of such shares to such syndicate member. However, the
underwriters do not have any agreements with any potential purchasers of shares
of common stock in this offering that would restrict their transfer of such
shares following this offering.
Such stabilizing transactions and syndicate covering transactions may cause
the price of our common stock to be higher than it would otherwise be in the
absence of such transactions. These transactions may be effected on The Nasdaq
Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
33
<PAGE>
LEGAL MATTERS
The validity of the shares of Hall, Kinion Common Stock covered by this
Prospectus will be passed upon by Gibson, Dunn & Crutcher LLP, Palo Alto,
California. The underwriters have been represented by Foley & Lardner,
Milwaukee, Wisconsin.
EXPERTS
The financial statements included in this prospectus and incorporated in
this prospectus by reference from our Annual Report on Form 10-K for the year
ended December 26, 1999, and the related financial statement schedule included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
incorporated by reference herein and elsewhere in the registration statement,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
ABOUT HALL, KINION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-3 under the Securities Act that registers the securities
covered by this prospectus. The registration statement, including the attached
exhibits and schedules, contains additional relevant information about us and
our common stock. The rules and regulations of the SEC allow us to omit certain
information included in the registration statement from this prospectus and
this prospectus does not contain all of the information set forth in the
registration statement. You should read the registration statement for further
information about us and our common stock.
In addition, we file reports, proxy statements and other information with
the SEC under the Securities Exchange Act of 1934. You may read and copy this
information at the following locations of the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates.
The SEC also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, like us, who
file electronically with the SEC. The address of that site is
http://www.sec.gov.
34
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this
prospectus, except for any information that is superseded by information that
is included directly in this document.
This prospectus incorporates by reference the documents listed below that we
have previously filed with the SEC. They contain important information about us
and our financial results.
<TABLE>
<CAPTION>
Our SEC Filings Period
- --------------- ------
<S> <C>
Annual Report on Form 10-K....................... Year ended December 26, 1999
The description of our common stock set forth in
our Registration Statement on Form 8-A.......... Filed: July 22, 1997
</TABLE>
We also incorporate by reference any documents that we may file with the SEC
after the date of this prospectus until such time as all the shares of common
stock covered by this prospectus have been sold. These documents could include
periodic reports, such as Quarterly Reports on Form 10-Q, and Current Reports
on Form 8-K, as well as proxy statements.
You can obtain any of the documents incorporated by reference in this
document through us or from the SEC through the SEC's web site at the address
described above. Documents incorporated by reference are available from us
without charge, excluding any exhibits to those documents unless the exhibit is
specifically incorporated by reference as an exhibit in this prospectus. You
can obtain documents incorporated by reference in this prospectus by requesting
them from us in writing or by telephone at the following address:
Hall, Kinion & Associates, Inc.
Investor Relations
185 Berry Street, China Basin Landing, Suite 6440
San Francisco, California 94107
Telephone: (415) 974-1300
If you request any incorporated documents from us, we will mail them to you
by first class mail, or another equally prompt means, within one business day
after we receive your request.
We have not authorized anyone to give any information or make any
representation about Hall, Kinion that is different from, or in addition to,
that contained in this prospectus or in any of the materials that we've
incorporated into this document. Therefore, if anyone does give you information
of this sort, you should not rely on it. If you are in a jurisdiction where
offers to sell, or solicitations of offers to purchase, the securities offered
by this document or the solicitation of proxies is unlawful, or if you are a
person to whom it is unlawful to direct these types of activities, then the
offer presented in this document does not extend to you. The information
contained in this document speaks only as of the date of this document unless
the information specifically indicates that another date applies.
35
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets--December 26, 1999 and December 27, 1998...... F-3
Consolidated Statements of Income--Years Ended December 26, 1999,
December 27, 1998 and December 28, 1997.................................. F-4
Consolidated Statements of Comprehensive Income--Years Ended December 26,
1999,
December 27, 1998 and December 28, 1997.................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)--Years Ended
December 26, 1999, December 27, 1998 and December 28, 1997............... F-5
Consolidated Statements of Cash Flows--Years Ended December 26, 1999,
December 27, 1998 and December 28, 1997.................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Hall, Kinion & Associates, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hall, Kinion
& Associates, Inc. and Subsidiaries as of December 26, 1999 and December 27,
1998, and the related consolidated statements of income, comprehensive income,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 26, 1999. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Hall, Kinion & Associates,
Inc. and Subsidiaries as of December 26, 1999 and December 27, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 26, 1999 in conformity with general accepted
accounting principles.
Deloitte & Touche LLP
San Jose, California
January 24, 2000
F-2
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents............................... $ 1,191 $ 3,082
Accounts receivable, net of allowance for doubtful
accounts of $1,500 in 1999 and $1,083 in 1998..... 27,987 18,158
Prepaid expenses and other current assets.......... 1,437 628
Deferred income taxes.............................. 1,814 1,726
------- -------
Total current assets............................. 32,429 23,594
Property and equipment, net.......................... 9,789 5,909
Goodwill, net........................................ 33,917 25,982
Other assets......................................... 419 491
------- -------
Total assets..................................... $76,554 $55,976
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit..................................... $ -- $ 1,000
Accounts payable................................... 5,145 3,547
Accrued salaries, commissions and related payroll
taxes............................................. 7,322 4,935
Accrued liabilities................................ 1,714 2,662
Income taxes payable............................... 2,688 514
Current portion of long term debt.................. -- 3,128
------- -------
Total current liabilities........................ 16,869 15,786
Long term debt and other obligations................. 14,161 1,083
Deferred income taxes................................ 1,555 1,205
------- -------
Total liabilities................................ 32,585 18,074
------- -------
Stockholders' Equity:
Common stock; $0.001 par value; 100,000 shares
authorized; issued and outstanding: 1999--10,466;
1998--9,536 ...................................... 38,183 34,269
Stockholders' notes receivable..................... (5,499) --
Accumulated translation adjustment................. 1 5
Retained earnings.................................. 11,284 3,628
------- -------
Total stockholders' equity....................... 43,969 37,902
------- -------
Total liabilities and stockholders' equity........... $76,554 $55,976
======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Contract services.................... $145,425 $106,127 $80,260
Permanent placement.................. 35,324 18,005 12,571
-------- -------- -------
Total net revenues................. 180,749 124,132 92,831
Cost of contract services.............. 96,502 69,066 54,769
-------- -------- -------
Gross profit........................... 84,247 55,066 38,062
Operating expenses..................... 70,732 47,284 33,689
-------- -------- -------
Income from operations................. 13,515 7,782 4,373
-------- -------- -------
Other income (expense):
Interest income...................... 263 215 485
Interest expense..................... (723) (255) (581)
Other expense, net................... (17) (11) (31)
-------- -------- -------
Total other expense, net........... (477) (51) (127)
-------- -------- -------
Income before income taxes............. 13,038 7,731 4,246
Income taxes........................... 5,382 3,325 1,737
-------- -------- -------
Net income............................. $ 7,656 $ 4,406 $ 2,509
======== ======== =======
Net income per share:
Basic................................ $ 0.75 $ 0.47 $ 0.34
Diluted.............................. $ 0.71 $ 0.43 $ 0.25
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income............................. $ 7,656 $ 4,406 $ 2,509
Change in accumulated translation
adjustment............................ (4) 3 5
-------- -------- -------
Net comprehensive income............... $ 7,652 $ 4,409 $ 2,514
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Common Stock Stockholder Accumulated
--------------- Notes Translation Retained
Shares Amount Receivable Adjustment Earnings Total
------ ------- ----------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES as of December
29, 1996............... 6,339 $ 357 $(5,323) $(3) $ 2,221 $(2,748)
Issuance of common
stock, upon initial
public offering, net of
issuance costs of
$1,767................. 1,667 21,458 -- -- -- 21,458
Conversion of redeemable
convertible preferred
stock to common stock.. 1,600 9,900 -- -- -- 9,900
Repayment of stockholder
notes receivable....... (800) (10) 5,518 -- (5,508) --
Interest on stockholder
notes receivable....... -- -- (201) -- -- (201)
Exercise of stock
options................ 204 457 -- -- -- 457
Issuance of common
stock.................. 15 150 -- -- -- 150
Accumulated translation
adjustment............. -- -- -- 5 -- 5
Net income.............. -- -- -- -- 2,509 2,509
------ ------- ------- --- ------- -------
BALANCES as of December
28, 1997............... 9,025 32,312 (6) 2 (778) 31,530
Net exercise of warrants
into common stock...... 250 -- -- -- -- --
Exercise of stock
options................ 215 639 -- -- -- 639
Tax benefit related to
stock options.......... -- 404 -- -- -- 404
Issuance of common
stock.................. 46 914 -- -- -- 914
Repayment of stockholder
note receivable........ -- -- 6 -- -- 6
Accumulated translation
adjustment............. -- -- -- 3 -- 3
Net income.............. -- -- -- -- 4,406 4,406
------ ------- ------- --- ------- -------
BALANCES as of December
27, 1998............... 9,536 34,269 -- 5 3,628 37,902
Exercise of stock
options................ 930 3,457 -- -- -- 3,457
Tax benefit related to
stock options.......... -- 457 -- -- -- 457
Notes to stockholders... -- -- (5,274) -- -- (5,274)
Interest on stockholder
notes receivable....... -- -- (225) -- -- (225)
Accumulated translation
adjustment............. -- -- -- (4) -- (4)
Net income.............. -- -- -- -- 7,656 7,656
------ ------- ------- --- ------- -------
BALANCES as of December
26, 1999............... 10,466 $38,183 $(5,499) $ 1 $11,284 $43,969
====== ======= ======= === ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 7,656 $ 4,406 $ 2,509
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization......... 2,905 1,945 1,289
Deferred income taxes................. 262 (666) (70)
Interest on stockholder notes
receivable........................... (225) -- (201)
Loss on sale of fixed assets.......... 42 5 10
Discount on early repayment of debt... -- 13 --
Changes in assets and liabilities:
Accounts receivable.................. (9,425) (3,113) (5,153)
Prepaid expenses and other assets.... (509) (211) (124)
Prepaid income taxes................. -- 407 379
Accounts payable and accrued
expenses............................ 2,133 1,863 844
Income taxes payable................. 2,451 485 --
-------- -------- --------
Net cash provided by (used for)
operating activities............... 5,290 5,134 (517)
-------- -------- --------
Cash flows from investing activities:
Sales (purchases) of investments....... -- 9,578 (9,120)
Purchase of property and equipment..... (5,641) (1,705) (1,936)
Cash paid for business acquisitions.... (7,190) (14,074) --
Earnout payments related to business
acquisitions.......................... (753) -- --
-------- -------- --------
Net cash used for investing
activities......................... (13,584) (6,201) (11,056)
-------- -------- --------
Cash flows from financing activities:
Cash overdraft, net.................... -- -- (1,229)
Line of credit, net.................... (1,000) (810) 832
Borrowing on debt...................... 18,349 3,000 --
Repayments of debt..................... (9,129) (2,996) (5,691)
Proceeds from sale of common stock, net
of issuance costs..................... -- -- 21,458
Proceeds from exercise of options...... 3,457 639 457
Stockholder notes receivable........... (5,274) 6 --
-------- -------- --------
Net cash provided by (used for)
financing activities............... 6,403 (161) 15,827
-------- -------- --------
Net increase (decrease) in cash and
equivalents........................... (1,891) (1,228) 4,254
Cash and equivalents, beginning of
period................................ 3,082 4,310 56
-------- -------- --------
Cash and equivalents, end of period.... $ 1,191 $ 3,082 $ 4,310
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 28, 1997
Note 1. Business and Significant Accounting Policies
Business. Hall, Kinion & Associates, Inc. ("the Company") is an information
technology staffing company specializing in placing high technology personnel
on both a contract and permanent basis. In August 1999, the Company acquired
substantially all of the assets of TKI Consulting, Inc. ("TKI"). During 1998,
the Company acquired all of the outstanding capital stock of Group-IPEX, Inc.
and TKO Personnel, Inc. ("TKO"), and substantially of the assets from
Alexander, Bohemer & Tomasco, dba, The Huntington Group, ("Huntington") and
Interactive Technology Consultants, LLC, ("ITC").
Initial Public Offering. In August 1997, the Company completed its initial
public offering of its common stock. Of the 2,892,250 shares of common stock
offered, 1,666,667 shares were sold by the Company and 1,225,583 shares were
sold by selling stockholders. The Company received proceeds of approximately
$21.5 million of cash, net of underwriting discounts and commissions, and other
expenses. Simultaneously with the initial public offering, all outstanding
shares of preferred stock were automatically converted in the accordance with
their terms into an equal number of shares of common stock.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Certain Significant Risks and Uncertainties. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such management estimates
include the allowance for doubtful accounts receivable and certain accruals.
Actual results could differ from those estimates.
The Company operates in a dynamic industry, and accordingly, can be affected
by a variety of factors. For example, management of the Company believes that
changes in any of the following areas could have a negative effect on the
Company in terms of its future financial position and results of operations:
ability to obtain additional financing, regulatory changes, uncertainty
relating to the performance of the U.S. economy, competition, demand for the
Company's services, litigation or other claims against the Company, and the
hiring, training and retention of key employees.
The Company's financial instruments that are exposed to credit risk are
primarily cash and equivalents and accounts receivable. The Company places its
cash with what it believes are high credit quality financial institutions. In
granting credit, the Company routinely evaluates the financial strength of its
customers.
Cash and Equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
equivalents, consisting primarily of money market funds and bank accounts, are
stated at a cost which approximates fair value.
F-7
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment. Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets, generally three to twenty-five years. Leasehold improvements are
amortized over the shorter of the estimated life of the asset or the lease
term.
Goodwill. Goodwill, representing the cost in excess of the fair value of net
assets acquired in acquisitions, is being amortized on a straight-line basis
over 30 to 40 years. For the years ended December 26, 1999, December 27, 1998,
and December 28, 1997 amortization expense was $930,000, $561,000, and $304,000
respectively. The Company evaluates the recoverability of goodwill on a
quarterly basis based upon estimated future cash flows.
Revenue Recognition. Revenue from contract placements is recognized as
services are performed. Revenue from permanent placement contracts is
recognized either upon commencement of employment or upon completion of
services rendered based on contractual obligation.
Income Taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which requires an asset and liability approach of accounting for income
taxes.
Stock-Based Compensation. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees.
Net Income Per Share. Basic net income per share excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted net
income per share reflects the potential dilution that could occur if
convertible securities and contracts to issue common stock were converted or
exercised into common stock.
A reconciliation of basic weighted average common stock shares to diluted
weighted average common shares follows:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Basic weighted average common
shares outstanding................ 10,155 9,439 7,339
Preferred stock.................... -- -- 958
Warrants........................... -- 10 250
Stock options...................... 561 893 1,360
------ ------ -----
Diluted weighted average shares
outstanding....................... 10,716 10,342 9,907
====== ====== =====
</TABLE>
Fiscal Year. The Company's fiscal year ends on the Sunday closest to
December 31. Fiscal years 1999, 1998, and 1997 all consisted of 52 weeks.
F-8
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recently Issued Financial Accounting Standard
In June 1998, the Financial Accounting Standard Board adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The statement is effective for the Company's
fiscal year ending in December 2001, and will not be applied retroactively to
the financial statements of prior period. The Company is currently evaluating
the impact of SFAS No. 133 on its financial statements and related disclosures.
Note 2. Acquisitions
In August 1999, the Company acquired substantially all of the assets of TKI
Consulting Inc., ("TKI") for $7.2 million in cash. The acquisition was
accounted for as a purchase. TKI is an IT consulting and training firm,
specializing in client/server, e-commerce and internet-based consulting
applications. TKI delivers full project consulting services that solve business
issues and saves companies time and money. TKI is based in Minneapolis,
Minnesota. The purchase price exceeded the fair value of the net liabilities
assumed by $8.1 million which was recorded as goodwill and is being amortized
over 40 years. If certain revenue targets set forth in the agreement providing
for such acquisition are achieved, the Company has agreed to pay the seller an
aggregate of $2.5 million that will be recorded as additional purchase price.
The payments will be made in four future installments of $625,000 each over the
next four years payable by March 15 of the following year.
In November 1998, the Company acquired substantially all of the assets of
Alexander, Boehmer, Tomasco, LLC, doing business as Huntington Group (HG) and
Interactive Technologies Consultants (ITC), for $8.1 million in cash. The
acquisitions were accounted for as a purchase. The Huntington Group is a
retained search firm, while ITC is a provider of IT professionals on a contract
basis. Both companies are located in Trumbull, Connecticut. The purchase price
exceeded the fair value of the net liabilities assumed by $8.9 million which
was recorded as goodwill and is being amortized over 30 to 40 years. If certain
revenue and earnings targets as set forth in the agreement providing for such
acquisition are achieved, the Company has agreed to pay the sellers an
aggregate of $3.6 million which will be recorded as additional purchase price.
The payments will be made in installments of $600,000, $1,800,000 and
$1,200,000, over the next three years. These payments are payable by January
31, of the following year. The 1999 targets were substantially met and a
$600,000 payment was made in January 2000.
In August 1998, the Company purchased all of the outstanding capital stock
of TKO Personnel, Inc. for $228,000 in cash. The acquisition was accounted for
as a purchase. TKO Personnel is 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. The purchase price exceeded the fair value of the net
liabilities assumed by $912,000 which was recorded as goodwill and is being
amortized over 40 years. If certain revenue targets as set forth in the
agreement
F-9
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
providing for such acquisition are achieved, the Company has agreed to pay the
sellers an aggregate of $350,000 that will be recorded as additional purchase
price. The payments will be made semi-annually in installments of $58,833 over
the next three years. The first target was substantially met and the
corresponding payment of $53,000 was paid in September 1999. The second target
was substantially met and the corresponding payment will be due in February
2000.
In January 1998, the Company purchased all of the outstanding capital stock
of Group-IPEX, Inc. (Group-IPEX). Group-IPEX is an international recruiting
organization for information technology IT research and development
professionals. Group IPEX focuses on recruiting international IT professionals
primarily from India but also from Russia and China. The acquisition was
accounted for as a purchase. Total consideration for this purchase was $7.3
million including approximately $250,000 of costs attributable to the
acquisition. The consideration was paid in the form of a cash payment of $6.2
million at the date of acquisition and the issuance of 46,000 shares of the
Company's Common stock valued at $914,000. The purchase price exceeded the fair
value of the net liabilities assumed by $7.7 million which was recorded as
goodwill and is being amortized over 40 years. In addition, if certain earnings
targets set forth in the agreement providing for such acquisition are achieved,
the Company has agreed to pay the seller an aggregate up to $3,375,000 that
will be recorded as additional purchase price. These payments will be made over
the next three years payable by February 10 of the following year. The 1998
targets were substantially met and the corresponding payment of $700,000 was
paid in 1999. The 1999 targets have been substantially met and the
corresponding payment of $1,550,000 will be made on February 10, 2000.
The following summarized unaudited pro forma financial information assumes
that each acquisition disclosed above had occurred as of the first day of the
fiscal year of the acquisition and of the preceding fiscal year (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro Forma Information (unaudited):
Total net revenues............................... $185,188 $137,428 $106,057
Net income....................................... 7,281 3,789 2,227
Net income per share:
Basis.......................................... 0.72 0.40 0.30
Diluted........................................ 0.68 0.37 0.22
</TABLE>
The pro forma information is for information purposes only and may not
necessarily reflect the results of operations of the Company had the acquired
businesses operated as a part of the Company for the fiscal years presented.
The pro forma adjustments consist primarily of goodwill amortization and
additional interest for debt incurred in connection with the acquisitions.
F-10
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Property and Equipment
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------ ------------
<S> <C> <C>
Property and equipment............................. $11,716 $ 6,510
Land and building.................................. 2,100 2,047
Leasehold improvements............................. 1,121 586
------- -------
14,937 9,143
Accumulated depreciation and amortization.......... (5,148) (3,234)
------- -------
$ 9,789 $ 5,909
======= =======
</TABLE>
Note 4. Debt
The Company has a $30 million credit facility. The credit facility is
comprised of a $20 million long term revolving credit facility and a $10
million term loan facility. The interest rate on both facilities is the lower
of the lender's prime rate (8.5% at December 26, 1999), or LIBOR. Both these
facilities terminate July 15, 2002. Borrowings under both facilities are
secured by substantially all of the Company's assets. The facilities contain
covenants requiring the Company to maintain minimum levels of profitability and
net worth and specific ratios of working capital and debt to operating cash
flow. The Company is also required to obtain the bank's consent prior to paying
cash dividends. The Company was in compliance with all of those ratios as of
December 26, 1999.
Debt consists of (in thousands):
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------ ------------
<S> <C> <C>
Long term revolving credit facility................ $14,000 $ 3,000
Mortgage note payable.............................. -- 1,128
Deferred rent...................................... 161 83
------- -------
14,161 4,211
Current portion of debt............................ -- (3,128)
------- -------
Long term debt and other obligations............... $14,161 $ 1,083
======= =======
</TABLE>
A future principal payment of $14,000,000 is due July 15, 2002.
Note 5. Employee Benefit Plans
The Company has a 401(k) profit-sharing plan covering substantially all
employees with at least 90 days of continuous service. Employees may contribute
up to 15% of their eligible compensation to the maximum amount allowed by the
Internal Revenue Code. At the discretion of the Board of Directors, the Company
may match employee contributions. In February 1998, the Board of Directors
approved a nonqualified deferred compensation plan for officers and key
employees. At the discretion of the Board of Directors, the Company may match
contributions. The Company did not make any matching contributions in 1999,
1998 and 1997.
F-11
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Lease Commitments
The Company leases its office facilities under various noncancellable
operating leases which expire through 2005. Rent expense included in operating
expenses for 1999, 1998 and 1997 was approximately $3,089,000, $2,385,000 and
$1,797,000 respectively. Future minimum payments under all operating leases are
as follows:
<TABLE>
<CAPTION>
Years Ending
------------
(in thousands)
<S> <C>
2000.......................................................... $3,307
2001.......................................................... 2,500
2002.......................................................... 1,923
2003.......................................................... 1,149
2004.......................................................... 481
Thereafter.................................................... 52
------
Total....................................................... $9,412
======
</TABLE>
Note 7. Redeemable Convertible Preferred Stock
In August 1997, all of the outstanding shares of Series A redeemable
preferred stock were converted in accordance with their terms into 1,600,000
shares of common stock.
Note 8. Stockholders' Equity
Capital Stock--The Company is authorized to issue 110,000,000 shares of
capital stock consisting of 100,000,000 shares of common stock and 10,000,000
shares of preferred stock.
Stockholder Notes Receivable--In January 1999, the Company loaned Brenda C.
Rhodes, Chief Executive Officer, $2,000,000, which bears interest at the
Company's incremental rate of borrowing plus 1/8% per annum, compounded
monthly. This loan is secured by 1,000,000 shares of the Company's Common Stock
pledged by Ms. Rhodes. The principal balance of this note, together with
accrued interest is due and payable January 25, 2002. The rate of interest for
the fiscal year ended December 26, 1999 was 6.70%.
On April 15, 1999, the Company made two loans for an aggregate of $3,274,000
to Paul H. Bartlett, President, to enable Mr. Bartlett to pay the exercise
price and income taxes associated with his exercise of an option to purchase
750,000 shares of common stock at an exercise price of $4.00 per share. The
first loan has a principal amount of $1,781,000, and is secured by 750,000
shares of the Company's Common Stock, and the second loan has a principal
amount of $1,493,000, and is secured by Mr. Bartlett's personal assets,
including a second deed of trust on his principal residence. Both loans bear
interest at the Company's incremental rate of borrowing plus 1/8% per annum,
compounded monthly. The principal balance of these notes, together with
interest accrued is due and payable June 26, 2002. The rate of interest for the
fiscal year ended December 26, 1999 was 5.88%.
F-12
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 1997, in connection with the initial public offering, the two
principal common stockholders tendered an aggregate of 800,000 shares of Common
Stock as full payment of principal and interest due on the promissory notes
that were executed in 1996 for an aggregate amount of $5,000,000.
Stock Options--The Company's 1997 Stock Option Plan (the Plan), as amended,
authorizes the issuance of up to 3,049,000 shares of common stock pursuant to
incentive or nonqualified stock options granted under the Plan to key
employees, nonemployees, directors and consultants who provide services to the
Company. The Plan also allows for an additional number of shares equal to 3.0%
of the number of shares of Common Stock outstanding on the first day of each
calendar year is automatically added to this authorization each year pursuant
to the terms of the 1997 Stock Options Plan. Under the Plan, options generally
are granted at fair market value at the date of grant as determined by the
Board of Directors. Such options vest over periods ranging from two to five
years and expire up to ten years from the grant date.
In 1996, the Company issued an option to purchase 974,000 shares of common
stock outside of the Plan to an officer, of which was 50% vested at year ended
December 29, 1996 with the remaining 50% vesting ratably over 24 months
commencing January 1998 with acceleration clauses. These options fully vested
in January 2000.
The Company's IT Professional Stock Plan (the "IT Professional Plan") was
adopted by the Board of Directors in May 1997. The Company has authorized
628,000 shares of Common Stock for issuance under the IT Professional Plan, and
an additional number of shares equal to 1.5% of the number of shares of Common
Stock outstanding on the first day of each calendar year is automatically added
to this authorization each year pursuant to the terms of the IT Professional
Plan. At December 26, 1999, 535,000 shares of Common Stock were available for
issuance under the IT Professional Plan. Under the IT Professional Plan,
independent consultants may, at the discretion of the plan administrator, be
granted options to purchase shares of Common Stock at an exercise price no less
than 85% of the fair market value of such shares on the grant date. Options
under the IT Professional Plan are generally vested when granted and expire ten
years from grant date.
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors in May 23, 1997. A total of 150,000 shares of Common
Stock have been reserved for issuance under the Purchase Plan. Employees will
be eligible to participate if they are employed by the Company for more than 20
hours per week and have been employed for at least ninety days. The Purchase
Plan permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 10% of an employee's cash compensation, nor
more than 1,000 shares per participant on any purchase date. The purchase price
of stock under the Purchase Plan will be 85% of the lower of the fair market
value of the Common Stock at the beginning of the six-month offering period or
on the purchase date. The Board may amend or terminate the Purchase Plan
immediately after the close of any purchase date. As of December 26, 1999, the
Company has not implemented the Purchase Plan.
Common Stock Warrants--Common stock warrants to purchase 250,000 shares at
$0.01 per share were issued in conjunction with the issuance of preferred stock
in January 1996. In January 1998, these warrants were exercised.
F-13
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity under all stock option plans is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance, December 29, 1996....................... 2,201,000 $ 3.35
Granted (weighted average fair value* of $3.49
per share)...................................... 596,000 $12.42
Canceled......................................... (238,000) $ 4.43
Exercised........................................ (210,000) $ 2.28
---------
Balanced, December 28, 1997...................... 2,349,000 $ 5.63
Granted (weighted average fair value* of $1.92
per share)...................................... 550,000 $10.50
Canceled......................................... (272,000) $ 9.47
Exercised........................................ (209,000) $ 2.95
---------
Balance, December 27, 1998....................... 2,418,000 $ 6.54
Granted (weighted average fair value* of $4.22
per share)...................................... 868,000 $ 8.21
Canceled......................................... (252,000) $ 9.35
Exercised........................................ (930,000) $ 3.71
---------
Balance, December 26, 1999....................... 2,104,000 $ 8.12
=========
</TABLE>
- --------
* As computed under SFAS No. 123
Additional information regarding options outstanding as of December 26, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighed
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.300 54,000 5.64 $ 0.30 34,000 $ 0.30
$ 1.500--$ 4.000 398,000 6.69 $ 3.76 398,000 $ 3.76
$ 5.100--$10.000 1,271,000 8.66 $ 7.53 416,000 $ 8.32
$10.500--$19.250 289,000 8.69 $14.11 109,000 $12.80
$19.375--$21.875 92,000 7.86 $20.92 41,000 $20.97
--------- -------
$ 0.300--$21.875 2,104,000 8.18 $ 8.12 998,000 $ 7.24
========= =======
</TABLE>
At December 26, 1999, 1,193,000 shares of common stock were available for
future option grants. As of December 27, 1998 and December 28, 1997 the number
of shares of common stock underlying exercisable options were 1,366,000 and
2,092,000, respectively with a weighted average exercise price of $5.28 and
$5.00 per share, respectively.
Additional Stock Plan Information--As discussed in Note 1, the Company
continues to account for all its stock-based awards using the intrinsic value
method in accordance with APB 25, Accounting for Stock Issued to Employees and
its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements, as the
options exercise price is not less than the fair market value of the underlying
common stock at date of grant.
F-14
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option price models, even though
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which affect the calculated values.
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life following
vesting, 16 months in 1999 and 12 months in 1998 and 1997; volatility, 61.9% in
1999, 37.2% from the initial public offering on August 4, 1997 through December
27, 1998 and zero before that date; risk free interest rates, 5.5% in 1999,
6.5% in 1998 and 6.2% in 1997; and no dividends during the expected term.
The Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. If the computed fair value of the
1999, 1998 and 1997 awards had been amortized to expense over the vesting
period of the awards, pro forma not income and pro forma diluted net income per
share would have been $6,421,000, $0.62 per share, $3,278,000, $0.32 per share
and $1,764,000, $0.18 per share, in 1999, 1998 and 1997, respectively.
Note 9. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal......................... $4,230 $3,124 $1,391
State........................... 890 867 416
------ ------ ------
5,120 3,991 1,807
------ ------ ------
Deferred:
Federal......................... 200 (533) (94)
State........................... 62 (133) 24
------ ------ ------
262 (666) (70)
------ ------ ------
$5,382 $3,325 $1,737
====== ====== ======
The Company's effective tax rate differs from the federal statutory rate as
follows:
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income tax expense at statutory
rate............................. 35.0% 35.0% 35.0%
State income tax taxes, net of
federal benefit.................. 6.1 6.1 5.7
Other items, net.................. 0.2 1.9 0.2
------ ------ ------
41.3% 43.0% 40.9%
====== ====== ======
</TABLE>
F-15
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................ $ 664 $ 469
Accrued expenses............................... 1,150 1,257
------ ------
Total deferred tax assets.................... 1,814 1,726
------ ------
Deferred tax liabilities:
Depreciation and amortization.................. 887 611
Other accrued liabilities...................... 668 594
------ ------
Total deferred tax liabilities............... 1,555 1,205
------ ------
Net deferred income taxes.................. $ 259 $ 521
====== ======
</TABLE>
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable by $457,000, $404,000 and $0 for 1999, 1998,
and 1997, respectively.
Note 10. Contingencies
The Company is party to various legal actions in the course of business. The
Company and certain of its directors and officers were named as defendants in a
putative class actions filed in the United States District Court for Northern
California, alleging violations of Section 10(b) of the Securities and Exchange
Act of 1934. Although the ultimate outcome of these matters is not presently
determinable, management believes that the resolution of all such pending
matters will not have a material adverse effect on the Company's financial
position or results of operations.
F-16
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Supplemental Disclosure of Cash Flow Information
The following provides additional information concerning supplemental
disclosures of cash flow activities:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Cash paid during the period for:
Income taxes...................... $ 2,083 $ 3,097 $ 1,531
Interest.......................... 689 320 536
Noncash investing and financing
activities:
Conversion of preferred stock to
common stock..................... -- -- 9,900
Tax benefit related to stock
options.......................... 457 404 --
Payment of stockholder loan by
stock............................ -- -- 5,518
Common stock issued in settlement
agreement........................ -- -- 150
Accrued interest on debt.......... 723 -- 116
</TABLE>
<TABLE>
<CAPTION>
Years Ended
-------------------------
December 26, December 27,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Effect of business acquisitions:
Current assets acquired........................ $ 690 $ 2,933
Intangible assets and equipment acquired....... 8,361 17,700
Liabilities assumed............................ (1,647) (5,045)
Common stock issued............................ -- (914)
Accrued expenses in connection with
acquisitions.................................. (214) (600)
------- -------
Cash paid for business acquisitions.......... $ 7,190 $14,074
======= =======
</TABLE>
Note 12. Business Segment Reporting
In 1998, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. The statement requires that an enterprise's
operating segments be determined in the manner in which management operates the
business. Specifically, financial information is to be reported on the basis
that is used internally by the chief operating decision maker in making
decisions related to resource allocation and segment performance. The Company's
reportable segments are operated and managed as strategic business units and
are organized based on types of services performed.
Under SFAS 131, the Company's operations were divided into two industry
segments, Contract Services and Permanent Placement Services. Operations in the
Contract Services segment provides supplemental IT professionals on a contract
basis. In a typical R&D contract, an IT professional is contracted to a high
technology client, usually in connection with a specific application or
project. The Permanent Placement segment provides professionals for permanent
placement with its corporate clients.
F-17
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management evaluates segment performance based primarily on segment
revenues, cost of revenues, and gross profit. Continuing operations by business
segment are as follows:
<TABLE>
<CAPTION>
Net Revenues Cost of Revenues Gross Profit
------------ ---------------- ------------
(in thousands)
<S> <C> <C> <C>
Year ended December 26,
1999.......................
Contract Services......... $145,425 $96,502 $48,923
Permanent Placement....... 35,324 -- 35,324
-------- -------- -------
Total................... $180,749 $96,502 $84,247
======== ======== =======
Year ended December 27,
1998.......................
Contract Services......... $106,127 $69,066 $37,061
Permanent Placement....... 18,005 -- 18,005
-------- -------- -------
Total................... $124,132 $69,066 $55,066
======== ======== =======
Year ended December 28,
1997.......................
Contract Services......... $ 80,260 $54,769 $25,491
Permanent Placement....... 12,571 -- 12,571
-------- -------- -------
Total................... $ 92,831 $54,769 $38,062
======== ======== =======
Net revenues to unaffiliated customers by geographic area are as follows:
<CAPTION>
Years Ended
------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ---------------- ------------
(in thousands)
<S> <C> <C> <C>
United States............... $178,791 $122,953 $91,910
Europe...................... 1,958 1,179 921
-------- -------- -------
Total..................... $180,749 $124,132 $92,831
======== ======== =======
</TABLE>
The Company currently does not segregate the operations of its business
segments by assets.
F-18
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13. Quarterly Financial Data (Unaudited)
The following tabulation shows certain quarterly financial data for 1999 and
1998:
<TABLE>
<CAPTION>
Quarter
-------------------------------------------
1999 1 2 3 4
---- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total net revenues........... $35,860 $42,884 $49,324 $52,681
Gross profit................. 15,393 20,129 23,647 25,078
Income before income taxes... 2,232 2,915 3,629 4,262
Net income................... 1,317 1,720 2,123 2,496
Net income per share--Basic.. 0.14 0.17 0.20 0.24
Net income per share--
Diluted..................... 0.13 0.16 0.20 0.22
<CAPTION>
Quarter
-------------------------------------------
1998 1 2 3 4
---- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total net revenues........... $26,834 $28,549 $34,065 $34,684
Gross profit................. 12,091 12,837 14,722 15,416
Income before income taxes... 1,656 1,637 2,081 2,357
Net income................... 944 933 1,186 1,343
Net income per share--Basic.. 0.10 0.10 0.13 0.14
Net income per share--
Diluted..................... 0.09 0.09 0.12 0.13
</TABLE>
F-19
<PAGE>
DESCRIPTION OF ARTWORK
Picture of four concentric circles that are labeled, starting with the innermost
circle and moving outward, as follows: (1) Core Technology Providers, (2)
Hardware and Software Vendors, (3) Internet and Extranet Companies, and (4) E-
Commerce and Mass Media Web Companies. Across the middle of the page is the
following sentence: Hall Kinion supplies technical talent for these segments of
the Internet economy. Across the bottom of the page are four standing persons.
<PAGE>
[LOGO OF HALL KINION]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses payable in connection
with the sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are
estimates, except for the SEC registration fee and Nasdaq filing fee:
<TABLE>
<CAPTION>
AMOUNT
TO BE
ITEM PAID
---- --------
<S> <C>
SEC Registration fee............................................... $ 22,887
Nasdaq filing fee.................................................. 23,062
NASD filing fee.................................................... 9,170
Accounting fees and expenses....................................... 150,000
Legal fees and expenses............................................ 125,000
Printing and engraving expenses.................................... 150,000
Blue Sky fees and expenses......................................... 10,000
Miscellaneous...................................................... 34,881
--------
Total............................................................ $525,000
========
</TABLE>
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
indemnification of officers, directors and other agents under certain
circumstances and subject to certain limitations. The Registrant's Certificate
of Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by the
DGCL, including in circumstances in which indemnification is otherwise
discretionary under such law. In addition, with the approval of the Board of
Directors and the stockholders, the Registrant has entered into separate
indemnification agreements with its directors and certain officers which
require the Registrant, among other things, to indemnify them against certain
liabilities which may arise by reason of their status or service (other than
liabilities arising from willful misconduct of a culpable nature) and to
obtain directors' and officers' insurance, if available on reasonable terms.
These indemnification provisions may be sufficiently broad to permit
indemnification of the Registrant's officers, directors and other corporate
agents for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act of 1933.
In June 1999, the Registrant and certain of its directors and officers were
named as defendants in three putative class actions filed in the United States
District Court for the Northern District of California, alleging violations of
Section 10(b) of the Securities and Exchange Act of 1934. Pursuant to court
order, those cases have been consolidated, and a consolidated amended
complaint was filed on January 24, 2000. The action arises out of the
Registrant's announcement that revenues and earnings for the quarter ending
June 1998 would fall below analysts' expectations. The action purports to be
brought on behalf of all purchasers of the Registrant's common stock between
August 5, 1997, the date of the Registrant's initial public offering, and June
18, 1998, when the Registrant pre-announced the earnings shortfall. The
complaint generally alleges that the Registrant misstated its future prospects
in various press releases and communications with analysts, and failed to
disclose alleged internal problems with the integration of certain acquired
business, while allegedly selling material amounts of stock held by insiders.
At present, there is no other pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
The Registrant has obtained liability insurance for the benefits of its
directors and officers.
II-1
<PAGE>
Item 16. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
5.01 Opinion of Gibson, Dunn & Crutcher LLP.
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of Gibson, Dunn & Crutcher LLP (included in its opinion filed
as Exhibit 5.01).
24.01 Power of Attorney (see signature page of this Registration Statement).
</TABLE>
Item 17. Undertakings.
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; PROVIDED, HOWEVER, that paragraphs (A)(1)(i) and (A)(1)(ii)
do not apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
II-2
<PAGE>
D. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
E. The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Francisco, State of California on March 6, 2000.
Hall, Kinion & Associates, Inc.
/s/ Brenda C. Rhodes
By: _________________________________
Brenda C. Rhodes
Title: Chief Executive Officer and
Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brenda C. Rhodes and Martin A.
Kropelnicki, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement on Form S-3, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-facts and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- -------------------------------- ----------------
<S> <C> <C>
/s/ Brenda C. Rhodes Chairman of the Board, Chief 3/6/2000
_____________________________________ Executive Officer and Director
Brenda C. Rhodes (Principal Executive Officer)
/s/ Martin A. Kropelnicki Vice President, Chief Financial 3/6/2000
_____________________________________ Officer and Secretary
Martin A. Kropelnicki (Principal Financial Officer)
/s/ Jon H. Rowberry Director 3/6/2000
_____________________________________
Jon H. Rowberry
/s/ Will Herman Director 3/6/2000
_____________________________________
Will Herman
/s/ Todd J. Kinion Director 3/6/2000
_____________________________________
Todd J. Kinion
/s/ Paul H. Bartlett Director 3/6/2000
_____________________________________
Paul H. Bartlett
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.01 Form of Underwriting Agreement.
5.01 Opinion of Gibson, Dunn & Crutcher LLP.
23.01 Consent of Deloitte & Touche LLP.
23.02 Consent of Gibson, Dunn & Crutcher LLP (included in its opinion filed
as Exhibit 5.01).
24.01 Power of Attorney (see signature page of this Registration Statement).
</TABLE>
<PAGE>
EXHIBIT 1.1
HALL, KINION & ASSOCIATES, INC.
[__________] Shares of Common Stock/*/
FORM OF UNDERWRITING AGREEMENT
------------------------------
_______________, 2000
ROBERT W. BAIRD & CO. INCORPORATED
[Name(s) of Other Representatives]
As Representatives of the Several Underwriters
Identified in Schedule II Annexed Hereto
c/o Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Ladies and Gentlemen:
SECTION 1. Introductory. Hall, Kinion & Associates, Inc., a Delaware
------------
corporation (the "Company"), and the several shareholders of the Company
identified in Schedule I annexed hereto (the "Selling Shareholders") propose to
sell [_________] shares (the "Firm Shares") of common stock, $.001 par value per
share (the "Common Stock"), to the several underwriters identified in Schedule
II annexed hereto (the "Underwriters"), who are acting severally and not
jointly. In addition, the Company and the Selling Shareholders have agreed to
grant to the Underwriters an option to purchase up to [_______] additional
shares of Common Stock (the "Optional Shares") as provided in Section 6 hereof.
The Firm Shares and, to the extent such option is exercised, the Optional Shares
are hereinafter collectively referred to as the "Shares."
You, as representatives of the Underwriters (the "Representatives"),
have advised the Company and the Selling Shareholders that the Underwriters
propose to make a public offering of their respective portions of the Shares as
soon hereafter as in your judgment is advisable and that the public offering
price of the Shares initially will be [$_____] per share.
The Company and the Selling Shareholders hereby confirm their
respective agreements with the Underwriters and each other as follows:
SECTION 2. Representations and Warranties of the Company. The
---------------------------------------------
Company represents and warrants to, and agrees with, the several Underwriters,
and shall be deemed to represent and warrant to the several Underwriters on each
Closing Date (as hereinafter defined), that:
(a) Each of the Company and the subsidiaries of the Company that are
listed on Exhibit 21.1 of the Company's most recent Annual Report on Form
10-K incorporated by
_____________
/*/ Plus an option to acquire up to [_________] additional shares of Common
Stock from the Company and the Selling Shareholders to cover over-
allotments.
<PAGE>
reference into the Registration Statement (as hereinafter defined)
(individually, a "Subsidiary" and collectively, the "Subsidiaries") has
been duly incorporated and is validly existing as a corporation and in good
standing under the laws of its jurisdiction of incorporation, with full
corporate power and authority to own, lease and operate its properties and
to conduct its business as presently conducted and described in the
Prospectus (as hereinafter defined) and the Registration Statement; each of
the Company and the Subsidiaries is duly registered and qualified to do
business as a foreign corporation under the laws of, and is in good
standing as such in, each jurisdiction in which such registration or
qualification is required, except where the failure to so register or
qualify would not have a material adverse effect on the condition
(financial or other), business, property, net worth, results of operations
or prospects of the Company and the Subsidiaries, taken as a whole
("Material Adverse Effect"); and no proceeding has been instituted in any
such jurisdiction revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification. Complete and
correct copies of the certificate of incorporation and by-laws, as amended
or restated ("Certificate of Incorporation" and "By-laws," respectively),
of the Company and each of the Subsidiaries as in effect on the date hereof
have been delivered to the Representatives, and no changes thereto will be
made on or subsequent to the date hereof and prior to each Closing Date.
(b) The shares of Common Stock issued and outstanding immediately
prior to the issuance and sale of the Shares as set forth in the Prospectus
have been duly authorized and validly issued, are fully paid and
nonassessable and conform to the description thereof contained in the
Prospectus and the Registration Statement. There are no preemptive,
preferential or, except as described in the Prospectus, other rights to
subscribe for or purchase any shares of Common Stock (including the
Shares), and no shares of Common Stock have been issued in violation of
such rights. The Shares to be issued and sold to the Underwriters have been
duly authorized and, when issued, delivered and paid for pursuant to this
Agreement, will be validly issued, fully paid and nonassessable and will
conform to the description thereof contained in the Prospectus and the
Registration Statement. The delivery of certificates for the Shares to be
issued and sold hereunder and payment therefor pursuant to the terms of
this Agreement will pass valid title to such Shares to the Underwriters,
free and clear of any lien, claim, encumbrance or defect in title. Except
as described in the Prospectus, there are no outstanding options, warrants
or other rights of any description, contractual or otherwise, entitling any
person to be issued any class of security by the Company or any Subsidiary,
and there are no holders of Common Stock or other securities of the Company
or any Subsidiary, or of securities that are convertible or exchangeable
into Common Stock or other securities of the Company or any Subsidiary,
that have rights to the registration of such Common Stock or securities
under the Securities Act of 1933, as amended, and the regulations
thereunder (together, the "Act") or the securities laws or regulations of
any of the states (the "Blue Sky Laws").
(c) Except for the Subsidiaries, and as otherwise set forth in the
Prospectus, the Company has no subsidiaries and does not own any equity
interest of five percent (5%) or more in or control, directly or
indirectly, any other corporation, limited liability company, partnership,
joint venture, association, trust or other business organization. Except
for director qualifying shares in the case of foreign Subsidiaries, the
Company owns directly all of the issued and outstanding capital stock of
each Subsidiary, free and clear of any and all liens, claims, encumbrances
or security interests. The outstanding capital stock of each Subsidiary
has been duly authorized and validly issued and is fully paid and
nonassessable. There are no
-2-
<PAGE>
outstanding options, warrants or other rights of any description,
contractual or otherwise, entitling any person to subscribe for or purchase
any shares of capital stock of any Subsidiary.
(d) The Company has full corporate power and authority to enter into
and perform this Agreement, and the execution and delivery by the Company
of this Agreement and the performance by the Company of its obligations
hereunder and the consummation of the transactions described herein, have
been duly authorized with respect to the Company by all necessary corporate
action and will not: (i) violate any provisions of the Certificate of
Incorporation or By-laws of the Company or any Subsidiary; (ii) violate any
provisions of, or result in the breach, modification or termination of, or
constitute a default under, any provision of any agreement, lease,
franchise, license, indenture, permit, mortgage, deed of trust, evidence of
indebtedness or other instrument to which the Company or any Subsidiary is
a party or by which the Company or any Subsidiary, or any property owned or
leased by the Company or any Subsidiary, may be bound or affected; (iii)
violate any statute, ordinance, rule or regulation applicable to the
Company or any Subsidiary, or order or decree of any court, regulatory or
governmental body, arbitrator, administrative agency or instrumentality of
the United States or other country or jurisdiction having jurisdiction over
the Company or any Subsidiary; or (iv) result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any Subsidiary. No consent, approval, authorization or other
order of any court, regulatory or governmental body, arbitrator,
administrative agency or instrumentality of the United States or other
country or jurisdiction is required for the execution and delivery of this
Agreement by the Company, the performance of its obligations hereunder or
the consummation of the transactions contemplated hereby, except for
compliance with the Act, the Securities Exchange Act of 1934, as amended,
and the regulations thereunder (together, the "Exchange Act"), the Blue Sky
Laws applicable to the public offering of the Shares by the several
Underwriters and the clearance of such offering and the underwriting
arrangements evidenced hereby with the National Association of Securities
Dealers, Inc. (the "NASD"). This Agreement has been duly executed and
delivered by and on behalf of the Company and is a valid and binding
agreement of the Company enforceable against the Company in accordance with
its terms.
(e) A registration statement on Form S-3 (Reg. No. 333-______) with
respect to the Shares, including a preliminary form of prospectus (the
"Initial Registration Statement"), has been prepared by the Company in
conformity with the requirements of the Act and has been filed with the
Securities and Exchange Commission (the "Commission"). The conditions for
use of Form S-3, set forth in the General Instructions thereto, have been
satisfied. If an additional registration statement relating to the Shares
(the "Additional Registration Statement") has been or will be filed with
the Commission pursuant to Rule 462(b) under the Act ("Rule 462(b)"), such
Additional Registration Statement became or will become effective upon
filing pursuant to Rule 462(b). The Initial Registration Statement,
together with any Additional Registration Statement, as finally amended and
revised at the time such registration statements, were or are declared
effective by the Commission (including the information contained in the
form of final prospectus, if any, filed with the Commission pursuant to
Rule 424(b) and Rule 430A under the Act and deemed to be part of the
registration statements if the registration statements have been declared
effective pursuant to Rule 430A(b)) and as thereafter amended by post-
effective amendment, if any, is herein referred to as the "Registration
Statement." The related final prospectus in the form first filed with the
Commission pursuant to Rule 424(b) or, if no such filing is required, as
included in the Registration Statement, or any supplement thereto, is
herein referred to as the "Prospectus." The prospectus subject to
completion in the
-3-
<PAGE>
form included in the Registration Statement at the time of the initial
filing of the Registration Statement with the Commission, and each such
prospectus as amended from time to time until the date of the Prospectus,
is referred to herein as the "Preliminary Prospectus." Reference made
herein to each Preliminary Prospectus or the Prospectus, as amended or
supplemented, shall include all documents and information incorporated by
reference therein and shall be deemed to refer to and include any documents
filed after the date of such Preliminary Prospectus or Prospectus, as the
case may be, and so incorporated by reference, under the Exchange Act. The
Company has prepared and filed such amendments to the Registration
Statement since its initial filing with the Commission, if any, as may have
been required to the date hereof, and will file such additional amendments
thereto as may hereafter be required. There have been delivered to the
Representatives two signed copies of the Registration Statement and each
amendment thereto, if any, including any document filed under the Exchange
Act and deemed to be incorporated by reference into the Registration
Statement, together with two copies of each exhibit filed therewith or
incorporated by reference therein, and such number of conformed copies for
each of the Underwriters of the Registration Statement and each amendment
thereto, if any (but without exhibits), and of each Preliminary Prospectus
and of the Prospectus as the Representatives have requested.
(f) Neither the Commission nor any state securities commission has
issued any order preventing or suspending the use of any Preliminary
Prospectus, nor, to the knowledge of the Company, have any proceedings for
that purpose been initiated or threatened, and each Preliminary Prospectus
filed with the Commission as part of the Registration Statement as
originally filed or as part of any amendment or supplement thereto complied
when so filed with the requirements of the Act and, as of its date, did not
include any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading. As of the effective date of the Registration
Statement, and at all times subsequent thereto up to each Closing Date, the
Registration Statement and the Prospectus contained or will contain all
statements that are required to be stated therein in accordance with the
Act and conformed or will conform in all respects to the requirements of
the Act, and neither the Registration Statement nor the Prospectus included
or will include any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. Neither the Company, nor any
person that controls, is controlled by (including the Subsidiaries) or is
under common control with the Company, has distributed or will distribute
prior to each Closing Date any offering material in connection with the
offering and sale of the Shares other than a Preliminary Prospectus, the
Prospectus, the Registration Statement or other materials permitted by the
Act and provided to the Representatives.
(g) The documents that are incorporated by reference in each
Preliminary Prospectus, the Prospectus or the Registration Statement or
from which information is so incorporated by reference, when they became
effective or were filed with the Commission, as the case may be, complied
with the requirements of the Act or the Exchange Act, as applicable, and
any document so filed and incorporated by reference subsequent to the
effective date of the Registration Statement shall, when it is filed with
the Commission, comply with the requirements of the Act and the Exchange
Act, as applicable, and when read together with the other information
included in such Preliminary Prospectus, the Prospectus or the Registration
Statement, as the case may be, do not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
-4-
<PAGE>
(h) Deloitte & Touche LLP, which has expressed its opinion with
respect to the financial statements and schedules filed with the Commission
or incorporated by reference and included as a part of each Preliminary
Prospectus, the Prospectus or the Registration Statement are independent
accountants as required by the Act.
(i) The consolidated financial statements and the related notes
thereto included or incorporated by reference in each Preliminary
Prospectus, the Prospectus and the Registration Statement present fairly
the financial position, results of operations and cash flows of the Company
as of their respective dates or for the respective periods covered thereby,
all in conformity with generally accepted accounting principles
consistently applied throughout the periods involved. The financial
statement schedules, if any, included in the Registration Statement present
fairly the information required to be stated therein on a basis consistent
with the consolidated financial statements of the Company contained
therein. The Company had an outstanding capitalization as set forth in the
Registration Statement and the Prospectus as of the date indicated therein,
and there has been no material change thereto since such date except as
disclosed in the Prospectus. The financial and statistical information and
data relating to the Company in each Preliminary Prospectus, the Prospectus
and the Registration Statement are accurately presented and prepared on a
basis consistent with the audited consolidated financial statements and
books and records of the Company. The consolidated financial statements and
schedules and the related notes thereto included or incorporated by
reference in each Preliminary Prospectus, the Prospectus or the
Registration Statement are the only such financial statements and schedules
required under the Act to be set forth therein.
(j) Neither the Company nor any Subsidiary is, nor with the giving of
notice or passage of time or both, would be, in violation or in breach of:
(i) its respective Certificate of Incorporation or By-laws; (ii) any
statute, ordinance, order, rule or regulation applicable to the Company or
such Subsidiary; (iii) any order or decree of any court, regulatory body,
arbitrator, administrative agency or other instrumentality of the United
States or other country or jurisdiction having jurisdiction over the
Company or such Subsidiary; or (iv) any provision of any material
agreement, lease, franchise, license, indenture, permit, mortgage, deed of
trust, evidence of indebtedness or other instrument to which the Company or
such Subsidiary is a party or by which any property owned or leased by the
Company or such Subsidiary is bound or affected. Neither the Company nor
any Subsidiary has received notice of any violation of any applicable
statute, ordinance, order, rule or regulation applicable to the Company or
any Subsidiary which could reasonably be expected to have a Material
Adverse Effect. The Company and each Subsidiary have obtained and hold,
and are in compliance with, all permits, certificates, licenses, approvals,
registrations, franchises, consents and authorizations of governmental or
regulatory authorities required under all laws, rules and regulations in
connection with their businesses (hereinafter "permit" or "permits"), and
all of such permits are in full force and effect; and the Company and each
Subsidiary have fulfilled and performed all of their respective obligations
with respect to each such permit and no event has occurred which would
result in, or after notice or lapse of time would result in, revocation or
termination of any such permit or result in any other impairment of the
rights of the holder of such permit which could reasonably be expected to
have a Material Adverse Effect. Neither the Company nor any Subsidiary is
or has been (by virtue of any action, omission to act, contract to which it
is a party or other occurrence) in violation of any applicable foreign,
federal, state, municipal or local statutes, laws, ordinances, rules,
regulations or orders (including those relating to environmental
protection, occupational safety and health and equal
-5-
<PAGE>
employment practices) heretofore or currently in effect which could
reasonably be expected to have a Material Adverse Effect.
(k) There are no legal or governmental proceedings or investigations
pending or, to the knowledge of the Company or the Selling Shareholders,
threatened to which the Company or any Subsidiary is or may be a party or
to which any property owned or leased by the Company or any Subsidiary is
or may be subject, including, without limitation, any such proceedings that
are related to environmental or employment discrimination matters, which
are required to be described in the Registration Statement or the
Prospectus which are not so described, or which question the validity of
this Agreement or any action taken or to be taken pursuant hereto. Except
as described in the Registration Statement or the Prospectus, neither the
Company nor any Subsidiary: (i) is in violation of any statute, ordinance,
rule or regulation, or any decision, order or decree of any court,
regulatory body, arbitrator, administrative agency or other instrumentality
of the United States or other country or jurisdiction having jurisdiction
over the Company or such Subsidiary relating to the use, disposal or
release of hazardous or toxic substances or relating to the protection or
restoration of the environmental or human exposure to hazardous or toxic
substances (collectively, "environmental laws"); (ii) owns or operates any
real property contaminated with any substance that is subject to any
environmental laws; (iii) is liable for any off-site disposal or
contamination pursuant to any environmental laws; or (iv) is subject to any
claim relating to any environmental laws, which violation, contamination,
liability or claim could have a Material Adverse Effect.
(l) There is no transaction, relationship, obligation, agreement or
other document required to be described in the Registration Statement or
the Prospectus or to be filed or deemed to be filed as an exhibit to the
Registration Statement by the Act, which has not been described or filed as
required. All such contracts or agreements to which the Company or any
Subsidiary is a party have been duly authorized, executed and delivered by
the Company or such Subsidiary, constitute valid and binding agreements of
the Company or such Subsidiary, and are enforceable by and against the
Company or such Subsidiary, in accordance with the respective terms
thereof.
(m) The Company or a Subsidiary has good and valid title to all
property and assets reflected as owned by the Company or such Subsidiary in
the Company's consolidated financial statements included or incorporated by
reference in the Registration Statement (or elsewhere in the Registration
Statement or the Prospectus), free and clear of all liens, claims,
mortgages, security interests or other encumbrance of any kind or nature
whatsoever except those, if any, reflected in such financial statements (or
elsewhere in the Registration Statement or the Prospectus). All property
(real and personal) held or used by the Company or a Subsidiary under
leases, licenses, franchises or other agreements is held by the Company or
such Subsidiary under valid, subsisting, binding and enforceable leases,
franchises, licenses or other agreements.
(n) Neither the Company nor any person that controls, is controlled by
(including the Subsidiaries) or is under common control with the Company
has taken or will take, directly or indirectly, any action designed to
cause or result in, or which constituted, or which could cause or result
in, stabilization or manipulation, under the Exchange Act or otherwise, of
the price of any security of the Company to facilitate the sale or resale
of the Common Stock.
-6-
<PAGE>
(o) Except as described in the Registration Statement or the
Prospectus, since the respective dates as of which information is given in
the Registration Statement or the Prospectus and prior to each Closing
Date: (i) neither the Company nor any Subsidiary has or will have incurred
any liability or obligation, direct or contingent, or entered into any
transaction, that is material to the Company, except as in the ordinary
course of business; (ii) the Company has not and will not have paid or
declared any dividend or other distribution with respect to its capital
stock and neither the Company nor any Subsidiary is or will be delinquent
in the payment of principal or interest on any outstanding debt obligation;
and (iii) there has not been and will not have been any change in the
capital stock, any material change in the indebtedness of the Company or
any Subsidiary, or any change or development involving or which could be
expected to involve, a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business.
(p) Neither the Company nor any person that controls, is controlled by
(including the Subsidiaries) or is under common control with the Company
has, directly or indirectly: (i) made any unlawful contribution to any
candidate for political office, or failed to disclose fully any
contribution in violation of law; or (ii) made any payment to any federal,
state or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof or
applicable foreign jurisdictions.
(q) The Company or a Subsidiary owns or possesses adequate rights to
use all patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights and
licenses presently used in or necessary for the conduct of its business or
ownership of its properties, and neither the Company nor any Subsidiary has
violated or infringed upon the rights of others, or received any notice of
conflict with the asserted rights of others, in respect thereof.
(r) The Company or a Subsidiary has in place and effective such
policies of insurance, with limits of liability in such amounts, as are
normal and prudent in the ordinary course of the business of the Company
and its Subsidiaries.
(s) No labor dispute with the employees of the Company or any
Subsidiary exists or, to the knowledge of the Company and the Selling
Shareholders, is imminent, and neither the Company nor any Subsidiary is a
party to any collective bargaining agreement and, to the knowledge of the
Company and the Selling Shareholders, no union organizational attempts have
occurred or are pending. There has been no change in the relationship of
the Company or any Subsidiary with any of its principal suppliers,
manufacturers, contractors or customers resulting in or that could result
in a Material Adverse Effect.
(t) Neither the Company nor any Subsidiary is an "investment company",
an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company", as such terms are defined in the Investment Company
Act of 1940, as amended.
(u) All federal, state and local tax returns required to be filed by
or on behalf of the Company or any Subsidiary have been filed (or are the
subject of valid extension) with the appropriate federal, state and local
authorities, and all such tax returns, as filed, are accurate in all
material respects; all federal, state and local taxes (including estimated
tax payments) required to be shown on all such tax returns or claimed to be
due from or with respect to the
-7-
<PAGE>
business of the Company or such Subsidiary have been paid or reflected as a
liability on the financial statements of the Company or such Subsidiary for
appropriate periods; all deficiencies asserted as a result of any federal,
state or local tax audits have been paid or finally settled, and no issue
has been raised in any such audit which, by application of the same or
similar principles, reasonably could be expected to result in a proposed
deficiency for any other period not so audited; no state of facts exist or
has existed which would constitute grounds for the assessment of any tax
liability with respect to the periods which have not been audited by
appropriate federal, state or local authorities; there are no outstanding
agreements or waivers extending the statutory period of limitation
applicable to any federal, state or local tax return of any period; and
neither the Company nor any Subsidiary has ever been a member of an
affiliated group of corporations filing consolidated federal income tax
returns, other than a group of which the Company is and has been the common
parent.
(v) Except for the employee benefits plans listed on Schedule III
(collectively, the "Plans"), neither the Company nor any Subsidiary is a
participating employer or plan sponsor with respect to any employee pension
benefit plan as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or any employee welfare benefit
plan as defined in Section 3(1) of ERISA, including, without limitation,
any multiemployer welfare or pension plan. With respect to the Plans, the
Company is in substantial compliance with all applicable regulations,
including ERISA and the Code. With respect to each defined benefit
retirement plan, such plan does not have benefit liabilities (as defined in
Section 4001(a)(16) of ERISA) exceeding the assets of the plan. The Company
or the administrator of each of the Plans, as the case may be, has timely
filed the reports required to be filed by ERISA and the Code in connection
with the maintenance of the Plans, and no facts, including, without
limitation, any "reportable event" as defined by ERISA and the regulations
thereunder, exist in connection with the Plans which, under applicable law,
would constitute grounds for the termination of any of the Plans by the
Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer any of
the Plans.
(w) The Company and each Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurances that: (i)
transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of consolidated financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorizations; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(x) None of the Company, any Subsidiary, any officer or director of
the Company or any Subsidiary is: (i) an officer, director or partner of
any brokerage firm, broker or dealer that is a member of the NASD ("NASD
Member"); or (ii) directly or indirectly, a "person associated with" an
NASD Member or an "affiliate" of an NASD Member, as such terms are used in
the NASD Rules or By-Laws. In addition, neither the Company nor any
Subsidiary has issued or transferred any Common Stock, warrants, options or
other securities, or any other items of value, to any of the Underwriters
or any "related person" of any Underwriter, as such term is used in the
NASD Rules, except as provided in this Agreement.
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<PAGE>
(y) The Common Stock has been registered pursuant to Section 12(g) of
the Exchange Act. The Common Stock has been approved for designation upon
notice of issuance as a Nasdaq National Market security on The Nasdaq Stock
Market ("Nasdaq").
(z) Neither the Company, any Subsidiary nor any affiliate of the
Company or such Subsidiary does business with the government of Cuba or
with any person or affiliate located in Cuba within the meaning of Section
517.075 of the Florida Statutes, and the Company agrees to comply with such
Section if, prior to the completion of the distribution of the Shares, the
Company, any Subsidiary or any affiliate of the Company or such Subsidiary
commences doing such business.
(aa) All offers and sales of the securities of the Company and each
Subsidiary prior to the date hereof were made in compliance with the Act
and all other applicable state and federal laws or regulations.
(bb) The Company has obtained for the benefit of the Underwriters the
agreement, enforceable by Robert W. Baird & Co. Incorporated ("Baird"), of
each of the officers and directors of the Company, that for a period of 90
days after the date of the Prospectus, such persons will not, without the
prior written consent of Baird, directly or indirectly, offer, sell,
transfer, or pledge, contract to sell, transfer or pledge, or cause or in
any way permit to be sold, transferred, pledged, or otherwise disposed of,
any: (i) shares of Common Stock; (ii) rights to purchase shares of Common
Stock (including, without limitation, shares of Common Stock that may be
deemed to be beneficially owned by any such shareholder in accordance with
the applicable regulations of the Commission and shares of Common Stock
that may be issued upon the exercise of a stock option, warrant or other
convertible security); or (iii) securities that are convertible or
exchangeable into shares of Common Stock.
(cc) A copy of the Durable Power of Attorney and Custody Agreement
executed by each Selling Shareholder and a copy of each Selling
Shareholder's Selling Shareholder's Questionnaire has been furnished to
counsel for the Underwriters prior to the date hereof, along with such
other information as such counsel may reasonably request in connection with
their review thereof.
A certificate signed by any officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company and the Selling Shareholders to the
Underwriters as to the matters covered thereby. A certificate delivered by the
Company to its counsel for purposes of enabling such counsel to render the
opinion referred to in section 10(d) will also be furnished to the
Representatives and counsel for the Underwriters and shall be deemed to be
additional representations and warranties to the Underwriters by the Company as
to the matters covered thereby.
SECTION 3. Representations and Warranties of the Selling
---------------------------------------------
Shareholders. Each Selling Shareholder, severally and not jointly, represents
- ------------
and warrants to and agrees with the several Underwriters and the Company, and
shall be deemed to represent and warrant to the several Underwriters and the
Company on each Closing Date, that:
(a) Such Selling Shareholder has duly executed a durable power of
attorney and custody agreement ("Durable Power of Attorney and Custody
Agreement") naming Brenda C. Rhodes and Todd J. Kinion, or either of them,
as such Selling Shareholder's attorney(s)-in-fact
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<PAGE>
("Attorneys-in-Fact") for the purpose of entering into and carrying out
this Agreement and naming U.S. Stock Transfer Corporation as custodian
("Custodian") of the Shares of such Selling Shareholder for the purpose of
selling such Shares to the Underwriters on each Closing Date and receiving
payment therefor.
(b) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Shareholder of this Agreement
and the Durable Power of Attorney and Custody Agreement, and for the sale
and delivery of the Shares to be sold by such Selling Shareholder
hereunder, as set forth on Schedule I annexed hereto, have been obtained.
Such Selling Shareholder either (i) has, and at the time of delivery
thereof hereunder such Selling Shareholder will have, good and valid title
to the Shares proposed to be sold by such Selling Shareholder hereunder,
free and clear of all voting trust arrangements, liens, encumbrances,
security interests, equities, claims and community or marital property
rights (collectively, "Encumbrances"), other than any created by the
Durable Power of Attorney and Custody Agreement or this Agreement for the
benefit of the Underwriters, (ii) has delivered to the Company an
irrevocable conditional notice of exercise (a "Notice of Exercise")
relating to the exercise of one or more options to purchase shares of
Common Stock equal to or greater than the number of Shares proposed to be
sold by such Selling Shareholder hereunder, or (iii) has delivered a Notice
of Exercise relating to such number of shares of Common Stock that,
together with the Shares of Common Stock to which such Selling Shareholder
has good and valid title, free and clear of all Encumbrances, other than
any created by the Durable Power of Attorney and Custody Agreement or this
Agreement for the benefit of the Underwriters, is equal to or greater than
the number of Shares proposed to be sold by such Selling Shareholder
hereunder. Such Selling Shareholder has full right, power and authority to
enter into this Agreement and the Durable Power of Attorney and Custody
Agreement and to sell, assign, transfer and deliver the Shares to be sold
by such Selling Shareholder hereunder, free and clear of all voting trust
arrangements, liens, encumbrances, security interests, equities, claims and
community or marital property rights, other than any created by the Durable
Power of Attorney and Custody Agreement or this Agreement for the benefit
of the Underwriters. Upon delivery of and payment for such Shares
hereunder, the Underwriters will acquire good and valid title thereto, free
and clear of all voting trust arrangements, liens, encumbrances, security
interests, equities, claims and community or marital property rights.
(c) Such Selling Shareholder has not distributed and will not
distribute any Preliminary Prospectus, the Prospectus or any other material
in connection with the offering and sale of the Shares. Such Selling
Shareholder has not taken and will not take, directly or indirectly, any
action designed to or which could cause or result in, under the Exchange
Act or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Common
Stock.
(d) The execution, delivery and performance by such Selling
Shareholder of this Agreement and the Durable Power of Attorney and Custody
Agreement will not, if applicable, result in the violation of any
provisions of the Certificate of Incorporation, By-laws or other governing
documents of such Selling Shareholder, or constitute a breach, or be in
contravention, of any provision of any agreement, franchise, license,
indenture, mortgage, deed of trust or other instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder or such
Selling Shareholder's property may be bound or affected, or any statute,
rule or regulation applicable to such Selling Shareholder, or violate any
order or decree of any court, regulatory body, administrative agency or
other governmental body having
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<PAGE>
jurisdiction over such Selling Shareholder or any of such Selling
Shareholder's property. No consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental
body is required for the execution and delivery of, and performance under,
this Agreement by such Selling Shareholder or the consummation by such
Selling Shareholder of the transactions contemplated by this Agreement,
except for compliance with the Act, the Exchange Act, the Blue Sky Laws
applicable to the public offering of the Shares by the Underwriters and the
clearance of such offering with the NASD. Such Selling Shareholder hereby
represents and warrants that each Attorney-in-Fact has been duly appointed
as attorney-in-fact by such Selling Shareholder for the purpose of entering
into and carrying out this Agreement, and the Durable Power of Attorney and
Custody Agreement has been duly executed and delivered by or on behalf of
such Selling Shareholder to the Representatives.
(e) This Agreement and the Durable Power of Attorney and Custody
Agreement are each valid and binding agreements of such Selling Shareholder
enforceable in accordance with their respective terms.
(f) Except with respect to any Shares subject to issuance upon the
exercise of options pursuant to a Notice of Exercise, such Selling
Shareholder has deposited in custody, under the Durable Power of Attorney
and Custody Agreement, certificates in negotiable form for the Shares to be
sold hereunder by such Selling Shareholder as set forth opposite such
Selling Shareholder's name on Schedule I annexed hereto (including the
maximum number of Optional Shares set forth on Schedule I) for the purpose
of further delivery pursuant to this Agreement. Such Selling Shareholder
agrees that any Shares of such Selling Shareholder on deposit with the
Custodian are subject to the interests of the Company, the Underwriters and
the other Selling Shareholders, that the arrangements made for such
custody, the election to exercise an option pursuant to any Notice of
Exercise, and the appointment of the Attorneys-in-Fact pursuant to the
Durable Power of Attorney and Custody Agreement, are irrevocable to the
extent provided therein, and that the obligations of such Selling
Shareholder hereunder and under the Durable Power of Attorney and Custody
Agreement shall not be terminated, except as provided in this Agreement and
the Durable Power of Attorney and Custody Agreement, by any act of such
Selling Shareholder, by operation of law, whether in the case of an
individual Selling Shareholder, by the death or incapacity of such Selling
Shareholder or, in the case of a trust or estate, by the death of the
trustee or trustees or the executor or executors or the termination of such
trust or estate, or, in the case of a partnership or corporation, by the
dissolution, winding up or other event affecting the legal life of such
entity, or by the occurrence of any other event. If any individual Selling
Shareholder, trustee or executor should die or become incapacitated, or any
such trust, estate, partnership or corporation should be terminated, or if
any other event should occur before the delivery of the Shares hereunder,
the certificates for Shares then on deposit with the Custodian shall, to
the extent such Shares are purchased by the Underwriters, be delivered by
the Custodian in accordance with the terms and conditions of this Agreement
and the Durable Power of Attorney and Custody Agreement as if such death,
incapacity, termination or other event had not occurred, regardless of
whether or not the Custodian shall have received notice thereof. Such
Selling Shareholder represents that each Attorney-in-Fact has been
authorized by such Selling Shareholder to execute and deliver this
Agreement and the Custodian has been authorized to receive and acknowledge
receipt of the proceeds of sale of the Shares sold by such Selling
Shareholder against delivery thereof and otherwise to act on behalf of such
Selling Shareholder.
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<PAGE>
(g) Insofar as it relates to such Selling Shareholder, each
Preliminary Prospectus, as of its date, has conformed in all material
respects with the requirements of the Act and, as of its date, has not
included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not misleading; and
on the effective date of the Registration Statement and at all times
subsequent thereto up to each Closing Date, (i) the Registration Statement
and the Prospectus, as they relate to such Selling Shareholder, did or will
conform to the requirements of the Act, and (ii) neither the Registration
Statement nor the Prospectus as it relates to such Selling Shareholder did
or will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(h) To the knowledge of each Selling Shareholder, the representations
and warranties of the Company set forth in section 2 hereof are true and
correct.
(i) The information contained in such Selling Shareholder's Selling
Shareholders' Questionnaire completed in connection with the Company's
public offering and delivered to the Representatives was, as of the date of
such questionnaire, and is, as of the date of this Agreement, true and
correct.
A certificate signed by or on behalf of any Selling Shareholder as
such and delivered to the Representatives or to counsel for the Underwriters
shall be deemed a representation and warranty by such Selling Shareholder to the
Underwriters as to the matters covered thereby. A certificate delivered by or
on behalf of any Selling Shareholder to counsel for the Selling Shareholders for
purposes of enabling such counsel to render the opinion referred in Section
10(e) will also be furnished to the Representatives and counsel for the
Underwriters and shall be deemed to be additional representations and warranties
to the Underwriters by such Selling Shareholder as to the matters covered
thereby.
SECTION 4. Representation of Underwriters. The Representatives will
------------------------------
act as the representatives for the several Underwriters in connection with the
public offering of the Shares, and any action under or in respect of this
Agreement taken by the Representatives will be binding upon all of the
Underwriters.
SECTION 5. Information Furnished by the Underwriters. The
-----------------------------------------
information set forth in the penultimate paragraph on the "Table of Contents"
page of the Prospectus concerning the terms of the offering by the Underwriters
and the concession and reallowance amounts appearing under the caption
"Underwriting" in the Prospectus constitute all of the information furnished to
the Company by and on behalf of the Underwriters for use in connection with the
preparation of the Registration Statement and the Prospectus, as such
information is referred to in this Agreement.
SECTION 6. Purchase, Sale and Delivery of Shares.
-------------------------------------
(a) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions herein set forth,
the Company agrees to sell to the Underwriters identified in Schedule II
annexed hereto _________ Firm Shares, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company the number of Firm
Shares as hereinafter set forth at the price per share of $__________. The
obligation of each Underwriter to the Company shall be to purchase from the
Company that number of full Firm Shares which (as nearly as practicable in
full shares as determined by the
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<PAGE>
Representatives) bears the same proportion to the number of Firm Shares to
be sold by the Company as the number of shares set forth opposite the name
of such Underwriter in Schedule II annexed hereto bears to the total number
of Firm Shares to be purchased by all of the Underwriters under this
Agreement.
(b) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions herein set forth,
each Selling Shareholder agrees, severally and not jointly, to sell to the
Underwriters that number of full Firm Shares set forth opposite the name of
such Selling Shareholder in Schedule I annexed hereto (a total of ________
shares from all of the Selling Shareholders), and each of the Underwriters
agrees, severally and not jointly, to purchase from each Selling
Shareholder the number of Firm Shares as hereinafter set forth at the same
purchase price per share as stated in the preceding paragraph. The
obligation of each Underwriter to each Selling Shareholder shall be to
purchase from that Selling Shareholder that number of full Firm Shares
which (as nearly as practicable in full shares as determined by the
Representatives) bears the same proportion to the number of Firm Shares to
be sold by such Selling Shareholder as the number of shares set forth
opposite the name of such Underwriter in Schedule II annexed hereto bears
to the total number of Firm Shares to be purchased by all of the
Underwriters under this Agreement.
(c) On the First Closing Date (as hereinafter defined), the Company
and the Custodian on behalf of the Selling Shareholders will deliver to the
Representatives, at the offices of Robert W. Baird & Co. Incorporated, 777
East Wisconsin Avenue, Milwaukee, Wisconsin 53202, or through the
facilities of The Depository Trust Company, for the accounts of the several
Underwriters, certificates representing the Firm Shares to be sold by them
against payment of the purchase price therefor by wire transfer of
immediately available funds to a bank account designated not less than two
days prior to the First Closing Date by the Company with respect to the
Firm Shares being sold by the Company and to a bank account designated not
less than two days prior to the First Closing Date by the Custodian with
respect to the Firm Shares being sold by the Selling Shareholders. As
referred to in this Agreement, the "First Closing Date" shall be on the
third full business day after the date of the Prospectus, at 9:00 a.m.,
Milwaukee, Wisconsin time, or at such other date or time not later than ten
full business days after the date of the Prospectus as the Representatives,
the Company and the Attorneys-in-Fact (or either of them) may agree. The
certificates for the Firm Shares to be so delivered will be in
denominations and registered in such names as the Representatives request
by notice to the Company and the Attorneys-in-Fact, or either of them,
prior to the First Closing Date, and such certificates will be made
available for checking and packaging at 9:00 a.m., Milwaukee, Wisconsin
time on the first full business day preceding the First Closing Date at a
location to be designated by the Representatives.
(d) In addition, on the basis of the representations, warranties and
agreements herein contained, and subject to the terms and conditions herein
set forth, the Company and Selling Shareholders hereby agree to sell to the
Underwriters, and the Underwriters, severally and not jointly, shall have
the right at any time within thirty days after the date of the Prospectus
to purchase up to ________ Optional Shares from the Company and up to
__________ Optional Shares from the Selling Shareholders at the purchase
price per share to be paid for the Firm Shares, for use solely in covering
any over-allotments made by the Underwriters in the sale and distribution
of the Firm Shares. The option granted hereunder may be exercised upon
notice by the Representatives to the Company and the Attorneys-in-Fact, or
either of them, within thirty days after the date of the Prospectus setting
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<PAGE>
forth the aggregate number of Optional Shares to be purchased by the
Underwriters and sold by the Company and the Selling Shareholders, the
names and denominations in which the certificates for such shares are to be
registered and the date and place at which such certificates will be
delivered. Such date of delivery (the "Second Closing Date") shall be
determined by the Representatives, provided that the Second Closing Date,
which may be the same as the First Closing Date, shall not be earlier than
the First Closing Date and, if after the First Closing Date, shall not be
earlier than three nor later than ten full business days after delivery of
such notice to exercise. The number of Optional Shares to be sold by each
Selling Shareholder pursuant to such notice shall equal that number of full
Optional Shares which (as nearly as practicable in full shares as
determined by the Representatives) bears the same proportion to the number
of Optional Shares to be purchased by the Underwriters as the maximum
number of Optional Shares to be sold by such Selling Shareholder bears to
the maximum number of Optional Shares to be sold by all the Selling
Shareholders, in each case as set forth on Schedule I hereof. Certificates
for the Optional Shares will be made available for checking and packaging
at 9:00 a.m., Milwaukee, Wisconsin time, on the first full business day
preceding the Second Closing Date at a location to be designated by the
Representatives. The manner of payment for and delivery of (including the
denominations of and the names in which certificates are to be registered)
the Optional Shares shall be the same as for the Firm Shares.
(e) The Representatives have advised the Company and the Attorneys-in-
Fact that each Underwriter has authorized the Representatives to accept
delivery of the Shares and to make payment therefor. It is understood that
the Representatives, individually and not as Representatives of the
Underwriters, may (but shall not be obligated to) make payment for any
Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but
any such payment shall not relieve such Underwriter from any obligation
under this Agreement. As referred to in this Agreement, "Closing Date"
shall mean either the First Closing Date or the Second Closing Date.
SECTION 7. Covenants of the Company. The Company covenants and
------------------------
agrees with the several Underwriters that:
(a) If the effective time of the Registration Statement is not prior
to the execution and delivery of this Agreement, the Company will use its
best efforts to cause the Registration Statement to become effective at the
earliest possible time and, upon notification from the Commission that the
Registration Statement has become effective, will so advise the
Representatives and counsel to the Underwriters promptly. If the effective
time of the Registration Statement is prior to the execution and delivery
of this Agreement and any information shall have been omitted therefrom in
reliance upon Rule 430A, the Company, at the earliest possible time, will
furnish the Representatives with a copy of the Prospectus to be filed by
the Company with the Commission to comply with Rule 424(b) and Rule 430A
under the Act and, if the Representatives do not object to the contents
thereof, will comply with such Rules. Upon compliance with such Rules, the
Company will so advise the Representatives promptly. The Company will
advise the Representatives and counsel to the Underwriters and the
Attorneys-in-Fact promptly of the issuance by the Commission or any state
securities commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose, or of any notification of the suspension of qualification of the
Shares for sale in any jurisdiction or the initiation or threatening of any
proceedings for that purpose, and will also advise the Representatives and
counsel to the
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<PAGE>
Underwriters and the Attorneys-in-Fact promptly of any request of the
Commission for amendment or supplement of the Registration Statement, of
any Preliminary Prospectus or of the Prospectus, or for additional
information, and the Company will not file any amendment or supplement to
the Registration Statement (either before or after it becomes effective),
to any Preliminary Prospectus or to the Prospectus (including a prospectus
filed pursuant to Rule 424(b)), or file any document under the Exchange Act
before the termination of the public offering of the Shares by the
Underwriters if such document would be deemed to be incorporated by
reference in the Registration Statement, if the Representatives have not
been furnished with a copy prior to such filing (with a reasonable
opportunity to review such amendment or supplement) or if the
Representatives object to such filing.
(b) If, at any time when a prospectus relating to the Shares is
required by law to be delivered in connection with sales by an Underwriter
or dealer, any event occurs as a result of which the Prospectus would
include an untrue statement of a material fact, or would omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to supplement the
Prospectus to comply with the Act or to file under the Exchange Act any
document which would be deemed to be incorporated by reference in the
Registration Statement to comply with the Act or the Exchange Act, the
Company promptly will advise the Representatives and counsel to the
Underwriters and the Attorneys-in-Fact thereof and will promptly prepare
and file with the Commission, at its expense, an amendment to the
Registration Statement or such document which will correct such statement
or omission or an amendment which will effect such compliance; and, if any
Underwriter is required to deliver a prospectus after the effective date of
the Registration Statement, the Company, upon request of the
Representatives, will prepare promptly such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section
10(a)(3) of the Act. The Company consents to the use, in accordance with
the provisions of the Act and with the Blue Sky Laws of the jurisdictions
in which the Shares are offered by the several Underwriters and by dealers,
of each Preliminary Prospectus.
(c) Neither the Company nor any Subsidiary will, prior to the Second
Closing Date, if any, incur any liability or obligation, direct or
contingent, or enter into any material transaction, other than in the
ordinary course of business, or enter into any transaction with an
"affiliate," as defined in Rule 405 under the Act, which is required to be
described in the Prospectus pursuant to Item 404 of Regulation S-K under
the Act, except as described in the Prospectus.
(d) Neither the Company nor any Subsidiary will, prior to the Second
Closing Date, if any, acquire any of the Common Stock nor will the Company
declare or pay any dividend or make any other distribution upon its Common
Stock payable to shareholders of record on a date prior to such earlier
date, except as described in the Prospectus.
(e) The Company will make generally available to its security holders
and the Representatives an earnings statement as soon as practicable, but
in no event later than sixty days after the end of its fiscal quarter in
which the first anniversary of the effective date of the Registration
Statement occurs, covering a period of twelve consecutive calendar months
beginning after the effective date of the Registration Statement, which
will satisfy the provisions of the last paragraph of Section 11(a) of the
Act and Rule 158 promulgated thereunder.
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<PAGE>
(f) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company
will furnish to the Representatives, at the expense of the Company, copies
of the Registration Statement, the Prospectus, any Preliminary Prospectus
and all amendments and supplements to any such documents, including any
document filed under the Exchange Act and deemed to be incorporated by
reference in the Registration Statement, in each case as soon as available
and in such quantities as the Representatives may reasonably request.
(g) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder for the purposes set forth in the
Prospectus, and will timely comply with Rule 463 under the Act with respect
to the disclosure of the use of such net proceeds.
(h) The Company will cooperate with the Representatives and counsel to
the Underwriters in qualifying or registering the Shares for sale under the
Blue Sky Laws of such jurisdictions as the Representatives designate, and
will continue such qualifications or registrations in effect so long as
reasonably requested by the Representatives to effect the distribution of
the Shares. The Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any such
jurisdiction where it is not presently qualified. In each jurisdiction
where any of the Shares shall have been qualified as provided above, the
Company will file such reports and statements as may be required to
continue such qualification for a period of not less than one year from the
date of the Prospectus. The Company shall promptly prepare and file with
the Commission, from time to time, such reports as may be required to be
filed by the Act and the Exchange Act, and the Company shall comply in all
respects with the undertakings given by the Company in connection with the
qualification or registration of the Shares for offering and sale under the
Blue Sky Laws.
(i) During the period of three years from the date of the Prospectus,
the Company will furnish to each of the Representatives and to each of the
other Underwriters who may so request, as soon as available, each report,
statement or other document of the Company or its Board of Directors mailed
to its shareholders or filed with the Commission, and such other
information concerning the Company as the Representatives may reasonably
request.
(j) The Company shall deliver the requisite notice of issuance to
Nasdaq and shall take all necessary or appropriate action within its power
to maintain the authorization for trading of the Common Stock as a Nasdaq
National Market security, or take such action to authorize the Common Stock
for listing on the New York Stock Exchange or the American Stock Exchange,
for a period of at least thirty-six months after the date of the
Prospectus.
(k) The Company shall not, for a period of 90 days after the date of
the Prospectus, without the prior written consent of Baird, directly or
indirectly, offer, sell or otherwise dispose of, contract to sell or
otherwise dispose of, or cause or in any way permit to be sold or otherwise
disposed of, any shares of Common Stock, rights to purchase shares of
Common Stock, or securities that are convertible or exchangeable into
shares of Common Stock, except for (i) the issuance and sale by the Company
of Common Stock upon exercise of presently existing outstanding stock
options, (ii) the sale of the Shares to be sold by the Company pursuant to
this Agreement, (iii) the grant of employee stock options pursuant to the
Company's 1997 Stock Option Plan, a copy of which is filed as an exhibit to
the Company's Annual Report on Form 10-K for the fiscal year ended December
26, 1999, provided that none
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<PAGE>
of such options shall be exercisable during the 90-day period herein
described, and (iv) issuance of securities in connection with the strategic
acquisitions or alliances so long as the recipients of such securities
enter into written agreement with Baird providing for restrictions on the
disposition of such securities similar to those set forth in this Section
7(k) for the remainder of the 90-day period herein described.
(l) The Company will maintain a transfer agent and, if required by law
or the rules of The Nasdaq Stock Market or any national securities exchange
on which the Common Stock is listed, a registrar (which, if permitted by
applicable laws and rules, may be the same entity as the transfer agent)
for its Common Stock.
(m) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act, any rumor, publication or event
relating to of affecting the Company shall occur as a result of which, in
the opinion of Baird, the market price of the Common Stock has been or is
likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to the Prospectus), the
Company will, after written notice from Baird advising the Company of any
of the matters set forth above, promptly consult with Baird concerning the
advisability and substance of, and, if the Company and Baird determine that
it is appropriate, disseminate, a press release or other public statement
responding to or commenting on, such rumor, publication or event.
(n) If the sale to the Underwriters of the Shares is not consummated
for any reason other than termination of this Agreement pursuant to section
13 hereof, without limiting any other rights the Underwriters may have, the
Company agrees to reimburse the Underwriters upon demand for all out-of-
pocket expenses (including reasonable fees and expenses of counsel for the
Underwriters), that shall have been incurred by the Underwriters in
connection with the proposed purchase and sale of the Shares, and the
provisions of sections 9 and 12 hereof shall at all times be effective and
apply.
(o) The Company will comply or cause to be complied with the
conditions to the obligations of the Underwriters in section 10 hereof.
SECTION 8. Covenants of the Selling Shareholders. Each Selling
-------------------------------------
Shareholder, severally and not jointly, covenants and agrees with the several
Underwriters and the Company as follows:
(a) If the effective time of the Registration Statement is not prior
to the execution and delivery of this Agreement, such Selling Shareholder
will cooperate to the extent necessary to cause the Registration Statement
to become effective at the earliest possible time; and such Selling
Shareholder will do and perform all things to be done and performed by such
Selling Shareholder prior to each Closing Date, pursuant to this Agreement
or the Durable Power of Attorney and Custody Agreement.
(b) Such Selling Shareholder agrees to deliver to the Custodian on or
prior to the First Closing Date a properly completed and executed United
States Treasury Department Form W-9 (or other applicable substitute form or
statement specified by Treasury Department regulations in lieu thereof).
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(c) Such Selling Shareholder will pay all federal and other taxes, if
any, on the transfer or sale of the Shares being sold by such Selling
Shareholder to the Underwriters.
(d) For a period of 90 days after the date of the Prospectus, such
Selling Shareholder will not, without the prior written consent of Baird,
directly or indirectly, offer, sell, transfer, or pledge, contract to sell,
transfer or pledge or cause or in any way permit to be sold, transferred,
pledged or otherwise disposed of any: (i) shares of Common Stock; (ii)
rights to purchase shares of Common Stock (including, without limitation,
shares of Common Stock that may be deemed to be beneficially owned by such
Selling Shareholder in accordance with the rules and regulations of the
Commission and shares of Common Stock that may be issued upon exercise of a
stock option, warrant or other convertible security); or (iii) securities
that are convertible or exchangeable into shares of Common Stock.
(e) Such Selling Shareholder will furnish any documents, instruments
or other information which the Representatives may reasonably request in
connection with the sale and transfer of the Shares to the Underwriters.
SECTION 9. Payment of Expenses. Whether or not the transactions
-------------------
contemplated hereunder are consummated or this Agreement becomes effective, or
if this Agreement is terminated for any reason, the Company will pay the costs,
fees and expenses incurred in connection with the public offering of the Shares.
Such costs, fees and expenses to be paid by the Company include, without
limitation:
(a) All costs, fees and expenses (excluding the expenses incurred by
the Underwriters and the legal fees and disbursements of counsel for the
Underwriters, but including such fees and disbursements described in
subsection (b) of this section 9) incurred in connection with the
performance of the Company's obligations hereunder, including without
limiting the generality of the foregoing: the registration fees related to
the filing of the Registration Statement with the Commission; the fees and
expenses related to the quotation of the Shares on Nasdaq; the fees and
expenses of the Company's counsel, accountants, transfer agent and
registrar and one counsel for the Selling Shareholders; the costs and
expenses incurred in connection with the preparation, printing, shipping
and delivery of the Registration Statement, each Preliminary Prospectus and
the Prospectus (including all exhibits and financial statements) and all
agreements and supplements provided for herein, this Agreement, the
Preliminary and Supplemental Blue Sky Memoranda and the Durable Power of
Attorney and Custody Agreement, including, without limitation, shipping
expenses via overnight delivery and/or courier service to comply with
applicable prospectus delivery requirements; and the costs and expenses
associated with the production of materials related to, and travel expenses
incurred by the management of the Company in connection with, the various
meetings to be held between the Company's management and prospective
investors.
(b) All registration fees and expenses, including legal fees and
disbursements of counsel for the Underwriters incurred in connection with
qualifying or registering all or any part of the Shares for offer and sale
under the Blue Sky Laws and the clearing of the public offering and the
underwriting arrangements evidenced hereby with the NASD.
(c) All fees and expenses related to printing of the certificates for
the Shares, and all transfer taxes, if any, with respect to the sale and
delivery of the Shares.
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Notwithstanding the foregoing, each Selling Shareholder shall be solely
responsible for any transfer or sales tax imposed upon the transfer and sale of
such Selling Shareholder's Shares to the Underwriters. All costs and expenses
incident to the performance of any Selling Shareholder's obligations hereunder
which are not otherwise specifically provided for in this section will be borne
and paid solely by each such Selling Shareholder.
SECTION 10. Conditions to the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the several Underwriters under this Agreement shall be subject to
the accuracy of the representations and warranties on the part of the Company
and the Selling Shareholders herein set forth as of the date hereof and as of
each Closing Date, to the accuracy of the statements of the Company's officers,
the Selling Shareholders and the Attorneys-in-Fact on behalf of the Selling
Shareholders made pursuant to the provisions hereof, to the performance by the
Company and the Selling Shareholders of their respective obligations hereunder,
and to the following additional conditions, unless waived in writing by the
Representatives:
(a) The Registration Statement shall have been declared effective by
the Commission not later than [5:30 p.m.,] Washington, D. C. time, prior to
the date [on the date] of this Agreement, or such later time as shall have
been consented to by the Representatives; all filings required by Rules
424(b) and 430A under the Act shall have been timely made; no stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the Commission or any state securities commission nor, to the
knowledge of the Company or the Selling Shareholders, shall any proceedings
for that purpose have been initiated or threatened; and any request of the
Commission or any state securities commission for inclusion of additional
information in the Registration Statement, or otherwise, shall have been
complied with to the satisfaction of the Representatives.
(b) Since the dates as of which information is given in the
Registration Statement:
(i) there shall not have occurred any change or development
involving, or which could be expected to involve, a Material Adverse
Effect, whether or not arising from transactions in the ordinary
course of business; and
(ii) the Company shall not have sustained any loss or
interference from any labor dispute, strike, fire, flood, windstorm,
accident or other calamity (whether or not insured) or from any court
or governmental action, order or decree,
the effect of which on the Company, in any such case described in clause
(i) or (ii) above, is in the opinion of the Representatives so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares on the terms and in the
manner contemplated in the Registration Statement and the Prospectus.
(c) The Representatives shall not have advised the Company that the
Registration Statement or the Prospectus contains an untrue statement of
fact that, in the opinion of the Representatives or counsel for the
Underwriters, is material, or omits to state a fact that, in the opinion of
the Representatives or such counsel, is material and is required to be
stated therein or necessary to make the statements therein not misleading.
(d) The Representatives shall have received an opinion of Gibson, Dunn
& Crutcher LLP, counsel for the Company addressed to the Representatives,
as the
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Representatives of the Underwriters, and dated the First Closing Date or
the Second Closing Date, as the case may be, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation and in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and authority
to own, lease and operate its properties and conduct its business as
presently conducted and as described in the Prospectus and the
Registration Statement; the Company is duly registered and qualified
to do business as a foreign corporation under the laws of, and is in
good standing as such in, each jurisdiction in which such registration
or qualification is required, except where the failure to so register
or qualify would not have a Material Adverse Effect;
(ii) The authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, par value $.001 per share, and
10,000,000 shares of Preferred Stock, par value $.001 per share, and
all such stock conforms as to legal matters to the descriptions
thereof in the Prospectus and the Registration Statement;
(iii) The issued and outstanding shares of capital stock of the
Company immediately prior to the issuance and sale of the Shares to be
sold by the Company hereunder have been duly authorized and validly
issued, are fully paid and nonassessable, and there are no preemptive,
preferential or, except as described in the Prospectus, other rights
to subscribe for or purchase any shares of capital stock of the
Company, and to such counsel's knowledge, no shares of capital stock
of the Company have been issued in violation of such rights;
(iv) Except for the Subsidiaries, the Company has no
subsidiaries, and the Company does not own any equity interest of five
percent (5%) or more in or control, directly or indirectly, any other
corporation, limited liability company, partnership, joint venture,
association, trust or other business organization except as described
in the Prospectus and the Registration Statement; each domestic
Subsidiary has been duly incorporated and is validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation, with full corporate power and authority to own, lease
and operate its properties and to conduct its business as presently
conducted and as described in the Prospectus and the Registration
Statement; each Subsidiary is duly registered or qualified to do
business as a foreign corporation under the laws of, and is in good
standing as such in, each jurisdiction in which such registration or
qualification is required, except where the failure to so register or
qualify would not have a Material Adverse Effect; the issued and
outstanding shares of the capital stock of each Subsidiary have been
duly authorized and validly issued, are fully paid and nonassessable
and there are no preemptive, preferential or, to such counsel's
knowledge, other rights to subscribe for or purchase any shares of
capital stock of any Subsidiary, and to such counsel's knowledge, no
shares of capital stock of any Subsidiary have been issued in
violation of such rights; the Company owns directly and, to such
counsel's knowledge, beneficially all of the issued and outstanding
capital stock of each Subsidiary, free and clear of any and all liens,
claims, encumbrances and security interests;
(v) The certificates for the Shares to be delivered hereunder
are in due and proper form and conform to the requirements of
applicable law; and when duly
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countersigned by the Company's transfer agent, and delivered to the
Representatives or upon the order of the Representatives against
payment of the agreed consideration therefor in accordance with the
provisions of this Agreement, the Shares to be sold by the Company
represented thereby will be duly authorized and validly issued, fully
paid and nonassessable, and free of any preemptive, preferential or
other rights to subscribe for or purchase shares of Common Stock;
(vi) The Registration Statement has become effective under the
Act, and to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been initiated or are threatened
under the Act or any Blue Sky Laws; the Registration Statement and the
Prospectus and any amendment or supplement thereto, including any
document incorporated by reference in the Registration Statement,
(except for the financial statements and other statistical or
financial data included therein as to which such counsel need express
no opinion) comply as to form in all material respects with the
requirements of the Act; the conditions for use of Form S-3, set forth
in the General Instructions thereto, have been satisfied; no facts
have come to the attention of such counsel which lead it to believe
that either the Registration Statement or the Prospectus or any
amendment or supplement thereto, including any document incorporated
by reference in the Registration Statement, contains any untrue
statement of a material fact or omitted or will omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of the
First Closing Date or the Second Closing Date, as the case may be,
contained any untrue statement of a material fact or omitted or will
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of
the circumstances under which they were made (except for the financial
statements and other financial data included therein as to which such
counsel need express no opinion); to such counsel's knowledge, there
are no legal or governmental proceedings pending or threatened,
including, without limitation, any such proceedings that are related
to environmental or employment discrimination matters, required to be
described in the Registration Statement or the Prospectus which are
not so described or which question the validity of this Agreement or
any action taken or to be taken pursuant thereto, nor is there any
transaction, relationship, agreement, contract or other document of a
character required to be described in the Registration Statement or
the Prospectus, or required to be filed under the Exchange Act if upon
such filing they would be incorporated, in whole or in part, by
reference therein, or to be filed as an exhibit to or incorporated by
reference in the Registration Statement by the Act, which is not
described, filed or incorporated by reference as required;
(vii) The Company has full corporate power and authority to
enter into and perform this Agreement; the performance of the
Company's obligations hereunder and the consummation of the
transactions described herein have been duly authorized by the Company
by all necessary corporate action and this Agreement has been duly
executed and delivered by and on behalf of the Company, and is a
legal, valid and binding agreement of the Company enforceable against
the Company in accordance with its terms, except that rights to
indemnity or contribution may be limited by applicable law and except
as enforceability of this Agreement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally, and by equitable principles limiting the
right to specific performance or other
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equitable relief; no consent, approval, authorization or other order
or decree of any court, regulatory or governmental body, arbitrator,
administrative agency or other instrumentality of the United States or
other country or jurisdiction having jurisdiction over the Company is
required for the execution and delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement
(except for compliance with the Act, the Exchange Act, applicable Blue
Sky Laws and the clearance of the underwriting arrangements by the
NASD);
(viii) The execution, delivery and performance of this Agreement
by the Company will not: (A) violate any provisions of the Certificate
of Incorporation or By-laws of the Company or any Subsidiary; (B)
violate any provisions of, or result in the breach, modification or
termination of, or constitute a default under, any agreement, lease,
franchise, license, indenture, permit, mortgage, deed of trust, other
evidence of indebtedness or other instrument to which the Company or
any Subsidiary is a party or by which the Company or such Subsidiary,
or any of their respective owned or leased property is bound, and
which is filed or incorporated by reference as an exhibit to the
Registration Statement; or (C) violate any statute, ordinance, order,
rule, decree or regulation of any court, regulatory or governmental
body, arbitrator, administrative agency or other instrumentality of
the United States having jurisdiction over the Company or any
Subsidiary (assuming compliance with all applicable federal and state
securities laws);
(ix) To such counsel's knowledge, except as described in the
Prospectus, there are no holders of Common Stock or other securities
of the Company, or securities that are convertible or exchangeable
into Common Stock or other securities of the Company, that have rights
to the registration of such securities under the Act or any Blue Sky
Laws;
(x) The Common Stock is a National Market security on The
Nasdaq Stock Market and is registered under the Exchange Act;
(xi) Neither the Company nor any Subsidiary is, nor with the
giving of notice or passage of time or both would be, in violation of
its respective Certificate of Incorporation or By-laws or, to such
counsel's knowledge, in default in any material respect in the
performance of any agreement, lease, franchise, license, permit,
mortgage, deed of trust, evidence of indebtedness or other instrument,
or any other document that is filed as an exhibit to or incorporated
by reference in the Registration Statement, to which the Company or
any Subsidiary is subject or bound;
(xii) Neither the Company nor any Subsidiary is an "investment
company", an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company", as such terms are defined
in the Investment Company Act of 1940, as amended, and, upon its
receipt of any proceeds from the sale of the Shares, the Company will
not become or be deemed to be an "investment company" thereunder;
(xiii) The description or incorporation by reference in the
Registration Statement and the Prospectus of statutes, law,
regulations, legal and governmental proceedings, and contracts and
other legal documents described or incorporated by
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reference therein fairly and correctly present, in all material
respects, the information required to be included therein by the Act;
and
(xiv) All offers and sales by the Company of its capital stock
before the date hereof were at all relevant times duly registered
under or exempt from the registration requirements of the Act, and
were duly registered under or the subject of an available exemption
from the registration requirements of any applicable Blue Sky Laws.
In rendering such opinion, counsel for the Company may rely, to the extent
counsel deems such reliance proper, as to matters of fact upon certificates of
officers of the Company and of governmental officials, and with respect to the
matter addressed in Section 10(d)(xiv) only, the opinion of Gunderson Dettmer
Stough Villeneuve Franklin & Hachigian, LLP, the Company's general outside
counsel. Copies of all such certificates and opinions shall be furnished to the
Representatives and for the Underwriters on or before each Closing Date.
(e) The Representatives shall have received an opinion from Gibson,
Dunn & Crutcher LLP, counsel for the Selling Shareholders, dated the First
Closing Date or the Second Closing Date, as the case may be, to the effect
that:
(i) Each of this Agreement and the Durable Power of Attorney
and Custody Agreement has been duly authorized, executed and delivered
by or on behalf of each Selling Shareholder and such agreement
constitutes the valid and binding agreement of such Selling
Shareholder, enforceable in accordance with its respective terms,
except that rights to indemnity or contribution thereunder may be
limited by applicable law and except as enforceability of such
agreement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws generally affecting the rights of creditors
and by equitable principles limiting the right to specific performance
or other equitable relief;
(ii) The execution and delivery of this Agreement and the
Durable Power of Attorney and Custody Agreement and the consummation
of the transactions herein and therein contemplated will not, if
applicable, result in the violation of any provisions of the
Certificate of Incorporation, By-laws or other governing documents of
such Selling Shareholder, or constitute a breach, or be in
contravention, of any provision of any agreement, franchise, license,
indenture, mortgage, deed of trust or other instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder or
such Selling Shareholder's property may be bound or affected, or any
statute, rule or regulation applicable to such Selling Shareholder, or
violate any order or decree of any court, regulatory or governmental
body, administrative body or instrumentality of the United States or
other jurisdiction having jurisdiction over such Selling Shareholder
or any of such Selling Shareholder's property, which violation would
reasonably be expected to have a material adverse effect on the
ability of such Selling Shareholder to perform his or her obligations
under this Agreement, the Durable Power of Attorney or the Custody
Agreement;
(iii) Such Selling Shareholder has full legal right, power and
authority, and has secured any consent, approval, authorization and
order required to enter into and perform this Agreement and the
Durable Power of Attorney and Custody Agreement and to sell, assign,
transfer and deliver title to the Shares to be sold by such Selling
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Shareholder as provided herein; and upon delivery to the Underwriters
or upon the order of the Representatives against payment of the agreed
consideration therefor in accordance with the provisions of this
Agreement, the Underwriters will acquire good and marketable title to
the Shares to be sold hereunder by such Selling Shareholder, free and
clear of all voting trust arrangements, liens, encumbrances, security
interests, equities, claims and community or marital property rights;
and
(iv) To such counsel's knowledge, the information concerning the
Selling Shareholders contained in the Prospectus under the caption
"Selling Shareholders" complies in all material respects with the Act.
In rendering such opinion, counsel for the Selling Shareholders may rely,
to the extent counsel deems such reliance proper, as to matters of fact upon
certificates of the Selling Shareholders, and copies of all such certificates
shall be furnished to the Representatives and counsel for the Underwriters on or
before each Closing Date.
(f) The Representatives shall have received an opinion of Foley &
Lardner, counsel for the Underwriters, dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the issuance and
sale of the Shares by the Company, the Registration Statement and other
related matters as the Representatives may require, and the Company shall
have furnished to such counsel such documents and shall have exhibited to
them such papers and records as they request for the purpose of enabling
them to pass upon such matters.
(g) The Representatives shall have received on each Closing Date, a
certificate of Brenda C. Rhodes, Chief Executive Officer, and Martin A.
Kropelnicki, Vice President, Chief Financial Officer and Secretary, of the
Company, to the effect that:
(i) The representations and warranties of the Company set forth
in section 2 hereof are true and correct as of the date of this
Agreement and as of the date of such certificate, and the Company has
complied with all the agreements and satisfied all the conditions to
be performed or satisfied by it at or prior to the date of such
certificate;
(ii) The Commission has not issued an order preventing or
suspending the use of the Prospectus or any Preliminary Prospectus or
any amendment or supplement thereto; no stop order suspending the
effectiveness of the Registration Statement has been issued; and to
the knowledge of the respective signatories, no proceedings for that
purpose have been initiated or are pending or contemplated under the
Act or under the Blue Sky Laws of any jurisdiction;
(iii) Each of the respective signatories has carefully examined
the Registration Statement and the Prospectus, and any amendment or
supplement thereto, including any documents filed under the Exchange
Act and deemed to be incorporated by reference in the Registration
Statement, and such documents contain all statements required to be
stated therein, and do not include any untrue statement of a material
fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and since
the date on which the Registration Statement was initially filed, no
event has occurred that was required to be set forth in an amended or
supplemented prospectus or in an amendment to the Registration
Statement that has not
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been so set forth, and there has been no document required to be filed
under the Exchange Act that upon such filing would be deemed to be
incorporated by reference in the Registration Statement that has not
been so filed; and
(iv) Since the date on which the Registration Statement was
initially filed with the Commission, there shall not have occurred any
change or development involving, or which could be expected to
involve, a Material Adverse Effect, whether or not arising from
transactions in the ordinary course of business, except as disclosed
in the Prospectus and the Registration Statement as heretofore amended
or (but only if the Representatives expressly consent thereto in
writing) as disclosed in an amendment or supplement thereto filed with
the Commission and delivered to the Representatives after the
execution of this Agreement; since such date and except as so
disclosed or in the ordinary course of business, the Company has not
incurred any liability or obligation, direct or indirect, or entered
into any transaction which is material to the Company; since such date
and except as so disclosed, there has not been any change in the
outstanding capital stock of the Company except for issuances of
Common Stock in connection with the exercise of stock options
outstanding on such date, or any change that is material to the
Company in the short-term debt or long-term debt of the Company; since
such date and except as so disclosed, the Company has not acquired any
of the Common Stock or other capital stock of the Company nor has the
Company declared or paid any dividend, or made any other distribution,
upon its outstanding Common Stock payable to shareholders of record on
a date prior to such Closing Date; since such date and except as so
disclosed, the Company has not incurred any material contingent
obligations, and no material litigation is pending or threatened
against the Company; and, since such date and except as so disclosed,
the Company has not sustained any material loss or interference from
any strike, fire, flood, windstorm, accident or other calamity
(whether or not insured) or from any court or governmental action,
order or decree.
The delivery of the certificate provided for in this subsection (g)
shall be and constitute a representation and warranty of the Company as to
the facts required in the immediately foregoing clauses (i), (ii), (iii)
and (iv) to be set forth in said certificate.
(h) The Representatives shall have received a certificate from each
Selling Shareholder (which may be signed by such Selling Shareholder's
Attorneys-in-Fact, or either of them), dated the First Closing Date or the
Second Closing Date, as the case may be, to the effect that: (i) the
representations and warranties of such Selling Shareholder in Section 3 of
this Agreement are true and correct as of the date of this Agreement and as
of the date of such certificate, as if again made on and as of such Closing
Date, and such Selling Shareholder has complied with all of the agreements
and satisfied all of the conditions to be performed or satisfied by such
Selling Shareholder at or prior to such Closing Date; and (ii) such Selling
Shareholder has no reason to believe that the Registration Statement or any
amendment thereto, including any documents filed under the Exchange Act and
deemed to be incorporated by reference in the Registration Statement, at
the time it was declared effective by the Commission contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, or that the Prospectus, as amended or supplemented, including
any documents filed under the Exchange Act and deemed to be incorporated by
reference in the Registration Statement, contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
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statements therein, in the light of the circumstances under which they were
made, not misleading.
(i) At the time this Agreement is executed and also on each Closing
Date, there shall be delivered to the Representatives a letter addressed to
the Representatives, as the representatives of the Underwriters, from
Deloitte & Touche LLP, the Company's independent accountants, the first
letter to be dated the date of this Agreement, the second letter to be
dated the First Closing Date and the third letter (if applicable) to be
dated the Second Closing Date, which shall be in form and substance
satisfactory to the Representatives and shall contain information as of a
date within five days of the date of such letter. There shall not have been
any change or decrease set forth in any of the letters referred to in this
subsection (i) which makes it impracticable or inadvisable in the judgment
of the Representatives to proceed with the public offering or purchase of
the Shares as contemplated hereby.
(j) The Shares shall have been qualified or registered for sale under
the Blue Sky Laws of such jurisdictions as shall have been specified by the
Representatives, the underwriting terms and arrangements for the offering
shall have been cleared by the NASD, and the Common Stock shall have been
designated for inclusion as a Nasdaq National Market security on the Nasdaq
Stock Market and shall have been registered under the Exchange Act.
(k) Such further certificates and documents as the Representatives
may reasonably request (including certificates of officers of the Company).
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to the
Representatives and to Foley & Lardner, counsel for the Underwriters. The
Company and the Selling Shareholders shall furnish the Representatives with such
manually signed or conformed copies of such opinions, certificates, letters and
documents as the Representatives may reasonably request.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at either Closing Date is not so satisfied, this Agreement
at the election of the Representatives will terminate upon notification to the
Company and the Attorneys-in-Fact, or any one of them, for the Selling
Shareholders without liability on the part of any Underwriter, including the
Representatives, the Company or the Selling Shareholders except for the
provisions of section 7(n) hereof, the expenses to be paid by the Company and
the Selling Shareholders pursuant to section 9 hereof and except to the extent
provided in section 12 hereof.
SECTION 11. Maintain Effectiveness of Registration Statement. The
------------------------------------------------
Company will use its best efforts and the Selling Shareholders will use their
best efforts to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement, and, if such stop order is issued,
to obtain as soon as possible the lifting thereof.
SECTION 12. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act or the Exchange Act, from and against any losses,
claims, damages, expenses, liabilities or actions in respect thereof
("Claims"), joint or several, to which such Underwriter or each such
controlling person may become subject under the Act, the Exchange Act, Blue
Sky Laws or
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other federal or state statutory laws or regulations, at common law or
otherwise (including payments made in settlement of any litigation),
insofar as such Claims arise out of or are based upon any breach of any
representation, warranty or covenant made by the Company in this Agreement,
or any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or in any application
filed under any Blue Sky Law or other document executed by the Company for
that purpose or based upon written information furnished by the Company and
filed in any state or other jurisdiction to qualify any or all of the
Shares under the securities laws thereof (any such document, application or
information being hereinafter called a "Blue Sky Application") or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Company agrees to reimburse each
Underwriter and each such controlling person for any reasonable legal fees
or other expenses incurred by such Underwriter or any such controlling
person in connection with investigating or defending any such Claim;
provided, however, that the Company and the Selling Shareholders will not
be liable in any such case to the extent that any such Claim arises out of
or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or supplement thereto or in any Blue
Sky Application in reliance upon and in conformity with the written
information furnished to the Company pursuant to section 5 of this
Agreement. The indemnification obligations of the Company as provided above
are in addition to and in no way limit any liabilities the Company may
otherwise have.
(b) Each of the Selling Shareholders, severally and not jointly,
agrees to indemnify and hold harmless each Underwriter and each controlling
person from and against any Claims to which such Underwriter or each such
controlling person may become subject under the Act, the Exchange Act, Blue
Sky Laws or other federal or state statutory laws or regulations, at common
law or otherwise (including payments made in settlement of any litigation),
insofar as such Claims arise out of or are based upon any breach of any
representations, warranty or covenant made by such Selling Shareholder in
this Agreement.
(c) Each Underwriter, severally and not jointly, will indemnify and
hold harmless the Company, each of its directors and each of its officers
who signs the Registration Statement, and each person, if any, who controls
the Company within the meaning of the Act or the Exchange Act and each
Selling Shareholder against any Claim to which the Company, or any such
director, officer, controlling person or Selling Shareholder may become
subject under the Act, the Exchange Act, Blue Sky Laws or other federal or
state statutory laws or regulations, at common law or otherwise (including
payments made in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter and Baird), insofar
as such Claim arises out of or is based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, or in any Blue Sky Application, or arises out of or is based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or in
any Blue Sky Application, in reliance solely upon and in conformity with
the written information furnished by the Representatives to the Company
pursuant to section 5 of
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<PAGE>
this Agreement. Each Underwriter will severally reimburse any reasonable
legal fees or other expenses incurred by the Company, or any such director,
officer, controlling person, or Selling Shareholder in connection with
investigating or defending any such Claim, and from any and all Claims
solely resulting from failure of an Underwriter to deliver a Prospectus, if
the person asserting such Claim purchased Shares from such Underwriter and
a copy of the Prospectus (as then amended if the Company shall have
furnished any amendments thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the
Shares to such person, and if the Prospectus (as so amended) would have
cured the defect giving rise to such Claim. The indemnification obligations
of each Underwriter as provided above are in addition to any liabilities
any such Underwriter may otherwise have. Notwithstanding the provisions of
this section, no Underwriter shall be required to indemnify or reimburse
the Company, or any officer, director, controlling person, or Selling
Shareholder in an aggregate amount in excess of the total price at which
the Shares purchased by any such Underwriter hereunder were offered to the
public, less the amount of any damages such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission.
(d) Each Selling Shareholder, severally and not jointly, agrees to
indemnify and hold harmless the Company, each of its directors and each of
its officers who signs the Registration Statement, and each person, if any,
controlling the Company within the meaning of the Act or the Exchange Act
to the same extent as the foregoing indemnity from the Company to each
Underwriter set forth in subsection (a) of this section. In case any Claim
shall be brought or asserted against the Company, its directors, such
officers or any such controlling person, in respect of which indemnity may
be sought against any Selling Shareholder, such Selling Shareholder shall
have the rights and duties given to the Company, and the Company, such
directors or officers and any such controlling person shall have the rights
and duties given to the Underwriters by subsection (a) of this section.
(e) Promptly after receipt by an indemnified party under this section
of notice of the commencement of any action in respect of a Claim, such
indemnified party will, if a Claim in respect thereof is to be made against
an indemnifying party under this section, notify the indemnifying party in
writing of the commencement thereof, but the omission so to notify the
indemnifying party will not relieve an indemnifying party from any
liability it may have to any indemnified party under this section or
otherwise. In case any such action is brought against any indemnified
party, and such indemnified party notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate in and, to the extent that he, she or it may wish, jointly with
all other indemnifying parties, similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party;
provided, however, if the defendants in any such action include both the
indemnified party and any indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses available
to the indemnified party and/or other indemnified parties which are
different from or additional to those available to any indemnifying party,
the indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties.
(f) Upon receipt of notice from the indemnifying party to such
indemnified party of the indemnifying party's election to assume the
defense of such action and upon approval by
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<PAGE>
the indemnified party of counsel selected by the indemnifying party, the
indemnifying party will not be liable to such indemnified party under this
section for any legal fees or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof, unless:
(i) the indemnified party shall have employed separate counsel
in connection with the assumption of legal defenses in accordance with
the proviso to the last sentence of subsection (e) of this section (it
being understood, however, that the indemnifying party shall not be
liable for the reasonable legal fees and expenses of more than one
separate counsel, approved by Baird, if one or more of the
Underwriters or their controlling persons are the indemnified
parties);
(ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after the indemnified
party's notice to the indemnifying party of commencement of the
action; or
(iii) the indemnifying party has authorized the employment of
counsel at the expense of the indemnifying party.
(g) If the indemnification provided for in this section is
unavailable to an indemnified party under subsection (a), (b), (c) or (d)
hereof in respect of any Claim referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall, subject to
the limitations hereinafter set forth, contribute to the amount paid or
payable by such indemnified party as a result of such Claim:
(i) in such proportion as is appropriate to reflect the
relative benefits received by the Company, each Selling Shareholder
and the Underwriters from the offering of the Shares; or
(ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i)
above, but also the relative fault of the Company, each Selling
Shareholder and the Underwriters in connection with the statements or
omissions which resulted in such Claim, as well as any other relevant
equitable considerations.
The relative benefits received by each of the Company, each
Selling Shareholder and the Underwriters shall be deemed to be in such
proportion so that the Underwriters are responsible for that portion
represented by the percentage that the amount of the underwriting discounts
and commissions per share appearing on the cover page of the Prospectus
bears to the public offering price per share appearing thereon, and the
Company (including its officers and directors and controlling persons), and
each of the Selling Shareholders, are responsible for the remaining
portion. The relative fault of the Company, each Selling Shareholder and
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company, such Selling Shareholder, or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the Claims
referred to above shall be deemed
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<PAGE>
to include, subject to the limitations set forth in subsections (e) and (f)
of this section, any legal or other fees or expenses reasonably incurred by
such party in connection with investigating or defending any action or
claim.
(h) The Company, the Selling Shareholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
section were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method or allocation which does not take into account the equitable
considerations referred to in subsection (f) of this section.
Notwithstanding the other provisions of this section, no Underwriter shall
be required to contribute any amount that is greater than the amount by
which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this section are
several in proportion to their respective underwriting commitments and not
joint.
(i) The aggregate liability of each Selling Shareholder under this
Agreement, including with respect to the indemnification and contribution
provisions contained in this Section 12, shall be limited to the net
proceeds received by such Selling Shareholder from the Underwriters for the
sale of the Shares sold by such Selling Shareholder hereunder.
SECTION 13. Default of Underwriters. It shall be a condition to the
-----------------------
obligations of each Underwriter to purchase the Shares in the manner as
described herein, that, except as hereinafter provided in this section, each of
the Underwriters shall purchase and pay for all the Shares agreed to be
purchased by such Underwriter hereunder upon tender to the Representatives of
all such Shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Shares hereunder on either
the First Closing Date or the Second Closing Date and the aggregate number of
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed ten percent (10%) of the total number of Shares which
the Underwriters are obligated to purchase on such Closing Date, the
Representatives may make arrangements for the purchase of such Shares by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date the nondefaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Shares which such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of Shares with respect to which such default or defaults occur
is greater than ten percent (10%) of the total number of Shares which the
Underwriters are obligated to purchase on such Closing Date, and arrangements
satisfactory to the Representatives for the purchase of such Shares by other
persons are not made within thirty-six hours after such default, this Agreement
will terminate without liability on the part of any nondefaulting Underwriter,
the Company or any Selling Shareholder except for the expenses to be paid by the
Company and the Selling Shareholders pursuant to section 9 hereof and except to
the extent provided in section 12 hereof.
In the event that Shares to which a default relates are to be
purchased by the nondefaulting Underwriters or by another party or parties, the
Representatives shall have the right to postpone the First Closing Date or the
Second Closing Date, as the case may be, for not more than
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<PAGE>
seven business days in order that the necessary changes in the Registration
Statement, Prospectus and any other documents, as well as any other
arrangements, may be effected. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section. Nothing
herein will relieve a defaulting Underwriter from liability for its default.
SECTION 14. Effective Date. This Agreement shall become effective
--------------
upon the execution and delivery of this Agreement by the parties hereto. Such
execution and delivery shall include an executed copy of this Agreement sent by
telecopier, facsimile transmission or other means of transmitting written
documents.
SECTION 15. Termination. Without limiting the right to terminate
-----------
this Agreement pursuant to any other provision hereof, this Agreement may be
terminated by the Representatives prior to or on the First Closing Date and the
over-allotment option from the Company and the Selling Shareholders referred to
in section 6 hereof, if exercised, may be cancelled by the Representatives at
any time prior to or on the Second Closing Date, if in the judgment of the
Representatives, payment for and delivery of the Shares is rendered
impracticable or inadvisable because:
(a) additional governmental restrictions, not in force and effect on
the date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or the American Stock Exchange,
or trading in securities generally shall have been suspended or materially
limited on either such exchange or on The Nasdaq Stock Market or a general
banking moratorium shall have been established by either federal or state
authorities in New York, California or Wisconsin;
(b) any event shall have occurred or shall exist which makes untrue
or incorrect in any material respect any statement or information contained
in the Registration Statement or which is not reflected in the Registration
Statement but should be reflected therein to make the statements or
information contained therein not misleading in any material respect; or
(c) an outbreak or escalation of hostilities or other national or
international calamity or any substantial change in political, financial or
economic conditions shall have occurred or shall have accelerated to such
extent, in the judgment of the Representatives, as to have a material
adverse effect on the financial markets of the United States, or to make it
impracticable or inadvisable to proceed with completion of the sale of and
payment for the Shares as provided in this Agreement.
Any termination pursuant to this Section shall be without liability on
the part of any Underwriter to the Company or any Selling Shareholder, or on the
part of the Company or any Selling Shareholder to any Underwriter, except for
expenses to be paid by the Company and the Selling Shareholders pursuant to
section 9 hereof or reimbursed by the Company pursuant to section 7(n) hereof
and except as to indemnification to the extent provided in section 12 hereof.
SECTION 16. Representations and Indemnities to Survive Delivery.
---------------------------------------------------
The respective indemnities, agreements, representations, warranties, covenants
and other statements of the Company, of its officers or directors, of the
Selling Shareholders, and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, Selling Shareholder
or the Company or any of
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<PAGE>
its or their partners, officers, directors or any controlling person, as the
case may be, and will survive delivery of and payment for the Shares sold
hereunder.
SECTION 17. Notices. All communications hereunder will be in
-------
writing and, if sent to the Representatives, will be mailed, delivered,
telecopied (with receipt confirmed) or telegraphed and confirmed to Robert W.
Baird & Co. Incorporated at 777 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, Attention: Peter S. Kies, Managing Director, with a copy to Thomas E.
Hartman, Esq., Foley & Lardner, 777 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, and if sent to the Company, will be mailed, delivered, telecopied (with
receipt confirmed) or telegraphed and confirmed to the Company at 185 Berry
Street, China Basin Landing, Suite 6440, San Francisco, CA 94107, with a copy to
Lawrence Calof, Esq., Gibson, Dunn & Crutcher LLP, 1530 Page Mill Road, Palo
Alto, CA 94304-1125, and, if sent to the Selling Shareholders, will be mailed,
delivered, telecopied (with receipt confirmed) or telegraphed and confirmed to
the Attorneys-in-Fact, or either of them, in care of the Company, with copies to
Lawrence Calof, Esq., Gibson, Dunn & Crutcher LLP, 1530 Page Mill Road, Palo
Alto, CA 94304-1125.
SECTION 18. Successors. This Agreement will inure to the benefit of
----------
and be binding upon the parties hereto and their respective successors, personal
representatives and assigns, and to the benefit of the officers and directors
and controlling persons referred to in section 12 hereof and no other person
will have any right or obligation hereunder. The term "successors" shall not
include any purchaser of the Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 19. Partial Unenforceability. If any section, paragraph,
------------------------
clause or provision of this Agreement is for any reason determined to be
invalid or unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph clause or provision hereof.
SECTION 20. Applicable Law; Counterparts. This Agreement shall be
----------------------------
governed by and construed in accordance with the internal laws of the State of
Wisconsin without reference to conflict of law principles thereunder. This
Agreement may be signed in various counterparts which together shall constitute
one and the same instrument, and shall be effective when at least one
counterpart hereof shall have been executed by or on behalf of each party
hereto.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company, each of the
Selling Shareholders and the several Underwriters, including the
Representatives, all in accordance with its terms.
Very truly yours,
HALL, KINION & ASSOCIATES, INC.
By: ___________________________________________________
Brenda C. Rhodes, Chief Executive Officer
THE SELLING SHAREHOLDERS:
By: ___________________________________________________
Attorney-in-Fact
By: ___________________________________________________
Attorney-in-Fact
The foregoing Underwriting
Agreement is hereby confirmed
and accepted as of the date
first above written.
ROBERT W. BAIRD & CO. INCORPORATED
[___________________________]
By: ROBERT W. BAIRD & CO. INCORPORATED
Acting as Representatives of the several
Underwriters (including themselves) identified
in Schedule II annexed hereto.
By:_________________________________________________
Authorized Representative
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<PAGE>
HALL, KINION & ASSOCIATES, INC.
Schedule I
Number of Firm Number of Optional
Shares Shares
------ ------
The Company
_________ _________
The Selling Shareholders:.
<PAGE>
HALL, KINION & ASSOCIATES, INC.
Schedule II
<TABLE>
<CAPTION>
Name of Underwriter Number of Firm
--------------------
Shares to
be Purchased
------------
<S> <C>
Robert W. Baird & Co. Incorporated........................
</TABLE>
<PAGE>
HALL, KINION & ASSOCIATES, INC.
Schedule III
Hall Kinion (for internal employees)
- ------------------------------------
Hall Kinion & Associates, Inc Dental Plan I
Hall Kinion Flexible Benefit Plan 501
Hall Kinion & Associates, Inc 401(k) Profit Sharing Plan
Hall Kinion's Employees Benefit Plan 504, Cigna Medical Plan
Hall Kinion's Employees Benefit Plan 503, Lifeguard Medical Plan
Hall Kinion's Employees Benefit Plan 502, UNUM Life and AD&D Plan I
Hall Kinion (for contractors)
- -----------------------------
Hall Kinion & Associates, Inc 401(k) Profit Sharing Plan
Hall Kinion & Associates Contractor Benefit Plan, CEBA Medical Plan
Hall Kinion & Associates Contractor Benefit Plan, CEBA Dental Plan
Hall Kinion & Associates Contractor Benefit Plan, CEBA Life Plan
IPEX
- ----
Hall Kinion & Associates, Inc Dental Plan II
Hall Kinion Flexible Benefit Plan 501
Hall Kinion & Associates, Inc 401(k) Profit Sharing Plan
Hall Kinion's Employees Benefit Plan 502, UNUM Life and AD&D Plan II
Hall Kinion - IPEX Benefit Plan 35336-000, Kaiser Medical Plan
Group IPEX, Inc. Benefit Plan C53Bx7, Blue Cross Medical and Dental Plan
HG/ITC
- ------
Interactive Acquisition Corp. Employees Benefit Plan, Oxford Health Plans
Interactive Acquisition Corp. Employees Benefit Plan, Fortis Benefits Insurance
Co
Interactive Acquisition Corp. Employees Benefit Plan, Metropolitan Life
Insurance Co.
Interactive Acquisition Corp, Dental Plan
Huntington Acquisition Corp. Employee Benefit Plan, ConnectiCare Inc.
Huntington Acquisition Corp. Employee Benefit Plan, Metlife
Huntington Acquisition Corp. Employee Benefit Plan, Provident
Huntington Acquisition Corp. Employee Benefit Plan, Fort Dearborn
Hall Kinion & Associates, Inc 401(k) Profit Sharing Plan
TKI Consulting
- --------------
TKI Acquisition Corp. d.b.a. TKI Consulting Employees Benefit Plan,
Medica Health Plans
TKI Acquisition Corp. d.b.a. TKI Consulting Employees Benefit Plan,
Dental Plan
TKI Consulting Long Term Disability Insurance Plan, Phoenix Insurance
Company
<PAGE>
Exhibit 5.01
March 6, 2000
(650) 849-5300 41503-00005
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Hall, Kinion & Associates, Inc.
Registration Statement on Form S-3
Ladies and Gentlemen:
As legal counsel for Hall, Kinion & Associates, Inc., a Delaware
corporation (the "Company"), we are rendering this opinion in connection with
the preparation and filing of a registration statement on Form S-3 (the
"Registration Statement") relating to the registration under the Securities
Act of 1933, as amended, of up to 3,600,000 shares of Common Stock, including
1,800,000 shares to be issued and sold by the Company (the "Company Shares"),
540,000 shares for which the Underwriters have been granted an over-allotment
option, and 1,800,000 shares to be sold by certain selling stockholders (the
"Selling Stockholder Shares" and together with the Company Shares, the
"Shares").
We have examined such instruments, documents and records as we deemed
relevant and necessary for the basis of our opinion herein after expressed. In
such examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity
to the originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that the Selling
Stockholder Shares are, and the Company Shares, when sold and issued in
accordance with the terms of the Registration Statement and related
Prospectus, will be, duly authorized, validly issued, fully paid, and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above and the use of our name whenever it
appears in said Registration Statement.
This opinion is to be used only in connection with the issuance of the
Shares while the Registration Statement is in effect.
Respectfully submitted,
GIBSON, DUNN & CRUTCHER LLP
<PAGE>
Exhibit 23.01
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Hall, Kinion & Associates, Inc. on Form S-3 of our reports dated January 24,
2000, appearing in the Annual Report on Form 10-K of Hall, Kinion & Associates,
Inc. for the year ended December 26, 1999 and the use of our report dated
January 24, 2000, appearing in this registration statement. We also consent to
the reference to us under the heading "Selected Consolidated Financial Data"
and "Experts" in the Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
San Jose, California
March 3, 2000
