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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the fiscal year ended December 26, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-22869
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HALL, KINION & ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0337705
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
185 Berry Street, China Basin Landing, Suite 6440, San Francisco, CA 94107
(Address of principal executive offices)
(415) 974-1300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.001 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) had been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 8, 2000, there were outstanding 10,476,389 shares of the
Registrant's Common Stock. The aggregate market value of the common stock held
by non-affiliates of the registrant, based on the closing price of the common
stock as reported on the Nasdaq Stock Market (National Market System) on
February 24, 2000, was approximately $207,563,457.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be mailed to stockholders
in connection with the registrant's annual meeting of stockholders, scheduled
to be held on May 17, 2000, are incorporated by reference in Part III of this
report. Except as expressly incorporated by reference, the registrant's Proxy
Statement shall not be deemed to be part of this report.
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FORWARD LOOKING STATEMENTS
Some of the statements under "Business", "Risk Factors", "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Quantitative and Qualificative Disclosures about Market Risk" and elsewhere
in this report 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; 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 report 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 report, and in our other Securities and
Exchange Commission filings.
We cannot guarantee future results, performance or achievements. We do not
intend to update this report 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 report.
PART I
Item 1. Business
Overview of the Company
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 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
successfully 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.
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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 the appropriate IT talent quickly.
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:
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<TABLE>
<CAPTION>
Our Focus on
Segment Description Critical Drivers this Segment
------- ----------- ---------------- ------------
<S> <C> <C> <C>
Core technology Companies who develop . Leading edge . Very high.
providers technologies and services technology
specifically aimed at
increasing the effectiveness
of the Internet. These
technologies are intended to
change the way the Internet . Highest sensitivity Strategically
functions to timing of product important, but
release a limited
number of
potential
clients in this
segment
. Approximately
3% of our
fourth quarter
1999
assignments
Hardware and Companies, such as Cisco . High sensitivity to . High. This is
software vendors Systems, IBM and Hewlett timing of product our traditional
Packard, which develop release. Short market
products product lifecycles
that enable users of the . Leading edge research . Approximately
Internet to extract value and development 43% of our
fourth quarter
1999
assignments
Intranet and Fortune 1000 companies that . Largest demand for . This is not
extranet use the Internet to conduct talent our primary
companies internal and external market
business processes
. One step removed from . Less than 1%
leading edge of our fourth
assignments quarter 1999
assignments
. Less sensitivity to
timing of product
releases
E-commerce and Any company developing . Moderate technology . Our fastest
mass media web e-commerce and communication requirements growing segment
companies with 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
. Heavy 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 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
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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 also
cater to the individual and family lifestyle demands of IT professionals
by providing work 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.
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 from 348
sales and sales support employees at the end of 1997 to 558 at the end
of 1999. 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.
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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 presences, additional international recruiting
capabilities or executive retained search businesses.
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.
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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 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 manager 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.
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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.
Clients
In the fourth quarter of 1999, 67% of our overall assignments were with
technology companies working on Internet-related projects. 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 industry whose products are not directly Internet-
related. In the fourth quarter of 1999, these services accounted for 33% of
our overall asignments 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:
. IBM Corporation . Oracle
. Motorola . The Gap
. AT&T Wireless . McKinsey & Co.
. ISP Channel . Network Associates
. Apex PC Solutions . Regence Blue
Shield/Blue Cross
Technologies Served
We traditionally have supplied a significant percentage of our talent to
help our clients develop the next generation of 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:
. Java . Broadvision
. Cold Fusion . COM and DCOM
. XML . EJB
. Corba . ERWin
. ASP . UML
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,
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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 that 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 is also 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.
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.
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RISK FACTORS
You should also consider these risk factors when you read "forward-looking"
statements elsewhere in this report. 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.
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.
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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 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 also
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;
. 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.
10
<PAGE>
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 33.7% from $92.8 million in 1997 to
$124.1 million in 1998 and 45.6% to $180.7 million in 1999 while headcount
increased from 471 employees in 1998 to 678 employees in 1999. 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 system 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
revenue, 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 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;
. the 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
11
<PAGE>
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 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 us 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 expense. Further, restrictions or limitations on hiring practices could
have a material adverse effect on our business, operating results and
financial condition.
12
<PAGE>
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 held
while in possession of material nonpublic information. While we believe that
the claims are without merit, and that our directors and officers liability
insurance 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. 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.
13
<PAGE>
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.
Item 2. Properties
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 its 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, the Company owns a training
facility located in Park City, Utah.
Item 3. Legal Proceedings
In June 1999, the Company and certain of its directors and officers were
named as defendants in three 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. 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 Company's announcement that
our revenues and earnings for the quarter ending June 1998 would fall below
14
<PAGE>
analysts' expectations. The action purports to be brought on behalf of all
purchasers of the Company's Common Stock between August 5, 1997, the date of
the Company's initial public offering, and June 18, 1998, when the Company
pre-announce this shortfall. The complaint generally alleges that the Company
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 businesses. The complaint also alleges that
insiders sold material amounts of stock held while in the position of material
nonpublic information. The Company will be moving to dismiss all claims in the
action, and a decision is not expected before April 2000. While the Company
believes that the claims are without merit, and that its Directors & Officers
liability insurance will adequately cover the pending claims, no assurance can
be given that an adverse judgment in the matter would not have a material
adverse impact on the Company's business and financial condition
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year covered by this report.
15
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is listed for trading on the NASDAQ under the symbol
"HAKI". On December 26, 1999, there were approximately 63 holders of record of
the Common Stock.
The table below sets forth the high and low sales prices per share as
reported on the NASDAQ National Market System for the fiscal years ended
December 26, 1999 and December 27, 1998.
<TABLE>
<CAPTION>
Sales Price
-------------
Fiscal year ended December 26, 1999 High Low
----------------------------------- ------ ------
<S> <C> <C>
4th quarter ended December 26, 1999......................... $19.50 $10.00
3rd quarter ended September 26, 1999........................ $11.50 $ 6.38
2nd quarter ended June 27, 1999............................. $ 8.50 $ 5.38
1st quarter ended March 28, 1999............................ $10.00 $ 4.75
<CAPTION>
Fiscal year ended December 27, 1998 High Low
----------------------------------- ------ ------
<S> <C> <C>
4th quarter ended December 27, 1998......................... $ 8.88 $ 5.88
3rd quarter ended September 30, 1998........................ $ 9.25 $ 5.94
2nd quarter ended June 28, 1998............................. $19.25 $ 6.38
1st quarter ended March 29, 1998............................ $21.88 $13.00
</TABLE>
No cash dividends were paid in 1999, 1998, or 1997. The Company, as it
deems appropriate, may continue to retain all earnings for use in its business
or may consider paying a dividend in the future. The Company cannot currently
issue dividends without acquiring bank consent prior to issuance.
16
<PAGE>
Item 6. Selected Financial Data
The following selected financial data has been derived from the audited
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in
conjunction with "Management's Discussion and Analysis of Financial Conditions
and Result of Operations" and the Consolidated Financial Statements and
related notes thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Net revenues................... $180,749 $124,132 $92,831 $50,571 $29,385
Cost of contract services...... 96,502 69,066 54,769 30,342 19,209
-------- -------- ------- ------- -------
Gross profit................... 84,247 55,066 38,062 20,229 10,176
Selling, general and
administrative expenses....... 70,732 47,284 33,689 18,233 8,869
-------- -------- ------- ------- -------
Income from operations......... 13,515 7,782 4,373 1,996 1,307
Other income (expense), net.... (477) (51) (127) 369 (156)
-------- -------- ------- ------- -------
Income before income taxes..... 13,038 7,731 4,246 2,365 1,151
Income taxes................... 5,382 3,325 1,737 1,004 469
-------- -------- ------- ------- -------
Net Income..................... $ 7,656 $ 4,406 $ 2,509 $ 1,361 $ 682
======== ======== ======= ======= =======
Income per share:
Basic........................ $ 0.75 $ 0.47 $ 0.34 $ 0.22 $ 0.11
======== ======== ======= ======= =======
Diluted...................... $ 0.71 $ 0.43 $ 0.25 $ 0.16 $ 0.11
======== ======== ======= ======= =======
Weighted Average Common Shares
Outstanding:
Basic........................ 10,155 9,439 7,339 6,282 6,282
Diluted...................... 10,716 10,342 9,907 8,350 6,311
Consolidated Balance Sheet
Data:
Working capital (deficit)...... $ 15,560 $ 7,808 $19,390 $ 189 $ (114)
Total assets................... 76,554 55,976 42,440 22,994 5,680
Long term debt and other
obligations................... 14,161 1,083 2,549 6,738 --
Redeemable convertible
preferred stock............... -- -- -- 9,900 --
Stockholders' equity
(deficit)..................... 43,969 37,902 31,530 (2,748) 941
</TABLE>
17
<PAGE>
Item 7. 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 report. 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 report 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 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.
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<PAGE>
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)
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net revenues:
Contract services........................................ 80.5% 85.5% 86.5%
Permanent placement services............................. 19.5 14.5 13.5
----- ----- -----
Total net revenues..................................... 100.0 100.0 100.0
Cost of contract services.................................. 53.4 55.6 59.0
----- ----- -----
Gross profit(2)............................................ 46.6 44.4 41.0
Operating expenses......................................... 39.1 38.1 36.3
----- ----- -----
Income from operations..................................... 7.5 6.3 4.7
Other expenses, net........................................ 0.3 0.1 0.1
----- ----- -----
Income before taxes........................................ 7.2 6.2 4.6
Income taxes............................................... 3.0 2.7 1.9
----- ----- -----
Net income................................................. 4.2% 3.5% 2.7%
===== ===== =====
</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 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 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 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
leading edge technology 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 due primarily 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 attributable primarily 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 increased non-billable time in some of our
Contract Services group offices.
Operating Expenses. Operating expenses consist primarily of employee costs,
recruiting expenses, marketing expenses and amortization of intangible assets
related to acquisitions. Operating expenses increased
19
<PAGE>
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 due primarily
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 attributable primarily to an
increase in the IT professional headcount, 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 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 due primarily 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 is
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 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.
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<PAGE>
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 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 as of December 26,
1999.
Net cash provided by financing activities for 1999 was $6.4 million, due
primarily 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 flows 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 the 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 its 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 day-to-day operations
and may be adversely affected by the year 2000 situation. Our costs in
21
<PAGE>
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 nor any client 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.
Item 7.a. Quantitative and Qualificative Disclosures about Market Risk
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We
do not use derivative financial instruments for speculative purposes.
Interest Rate Risk. As of December 26, 1999, we had fixed rate long-term
debt of approximately $14 million under a $20 million revolving line of
credit. If short-term interest rates were to increase 10 percent, the
increased interest expense associated with these arrangements would not have a
material impact on our net income or cash flows. We do not hedge any interest
rate exposures. Historically, borrowings and repayments under our revolving
line of credit facilities represented the most significant components of cash
provided by or used for financing activities. Under an arrangement with a
commercial bank, we may borrow an amount not to exceed $30 million with
interest at the bank's prime interest rate, or LIBOR, whichever is lower. The
borrowings under the line of credit facility are due in full on July 15, 2002
or on demand if the terms of the agreement are not met. The borrowings are
collaterized by substantially all of our assets.
Foreign Currency Exchange Rate Risk. The United Kingdom pound is the
financial currency in the Company's subsidiary in the United Kingdom. We do
not currently enter into foreign exchange forward looking contracts to hedge
the balance sheet exposures and intercompany balances against future movements
in foreign exchange rates. However, we do maintain cash balances denominated
in the United Kingdom pound. If foreign exchange rates were to weaken against
the U.S. dollar immediately and uniformly by 10 percent from the exchange rate
at December 26, 1999, the fair value of these foreign currency amounts would
decline by an immaterial amount.
22
<PAGE>
Item 8. Financial Statements and Supplementary Data
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.
23
<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.
24
<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.
25
<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.
26
<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.
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
27
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
28
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
29
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
30
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
31
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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%.
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.
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.
32
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
33
<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.
34
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
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
35
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
36
<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.
37
<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>
38
<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
39
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
The information required by Items 10 through 13 of Part III is incorporated
by reference from the registrant's Proxy Statement, under the captions
"Nomination and Election of Directors," "Beneficial Stock Ownership,"
"Compensation of Directors," "Compensation of Executive Officers" and
"Compensation Committee Interlocks and Insider Participation of Insider
Participation and Certain Transactions," which Proxy Statement will be mailed
to stockholders in connection with the registrant's annual meeting of
stockholders which is scheduled to be held in May 17, 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following consolidated financial statements of the Registrant and its
subsidiaries are included in Item 8 of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated balance sheets at December 26, 1999 and December 27,
1998................................................................. 23
Consolidated statements of income for the years ended December 26,
1999, December 27, 1998 and December 28, 1997........................ 24
Consolidated statements of comprehensive income for the years ended
December 26, 1999, December 27, 1998, and December 28, 1997.......... 24
Consolidated statements of stockholders' equity (deficit) for the
years ended December 26, 1999, December 27, 1998 and December 28,
1997................................................................. 25
Consolidated statements of cash flows for the years ended December 26,
1999, December 27, 1998 and December 28, 1997........................ 26
Notes to consolidated financial statements............................ 27
Independent Auditors Report........................................... 39
Selected quarterly financial data for the years ended December 26,
1999 and December 27, 1998 are set forth in Note 14--Quarterly
Financial Data (Unaudited) included in Item 8 of this report......... 40
</TABLE>
(b) 2. Financial Statement Schedules
Independent Auditors Report on Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
40
<PAGE>
(c) 3. Exhibits
<TABLE>
<C> <S>
2.1 (1) Agreement and Plan Merger dated July 9, 1997, for the Merger of Hall,
Kinion & Associates, Inc. a California Corporation, into Hall, Kinion
& Associates, Inc., a Delaware corporation ( the "Registrant").
2.2 (1) Asset Purchase Agreement dated November 26, 1996, among the
Registrant and the other parties named therein.
2.3 (1) Stock Purchase Agreement dated December 20, 1997 by and among the
Registrant, Group-Ipex, Inc., and Lalit M. Kapoor and Satindra
Kapoor.
2.4 (3) Huntington Asset Purchase Agreement between Hall, Kinion &
Associates, Inc., Huntington, Acquisition Corporation, Alexander
Bohemer and Tomasco, LLC, Raymond Tomasco and Karen Vacheron
Alexander, dated November 18, 1998.
2.5 (3) ITC Asset Purchase Agreement between Hall, Kinion & Associates, Inc.,
Interactive Acquisition Corporation, Interactive Technology
Consultants, LLC, Raymond Tomasco, Karen Vacheron Alexander, and Gary
Malbin, dated November 18, 1998.
2.6 Amendment No.1 to Stock Purchase Agreement, among the Registrant,
Group-IPEX, Inc., Lalit M. Kapoor and Satindra Kapoor.
2.7 Amendment No.1 of Stock Purchase Agreement, among the Registrant, TKO
Personnel, Inc., and Kenneth D. Reed, as Trustee of the Reed Family
Trust under trust agreement dated November 4, 1988.
2.8 Amendment No. 2 to ITC and Huntington Group Asset Purchase Agreement,
among the Registrant, Interactive Acquisition Corporation, Huntington
Acquisition Corporation, Interactive Technology Consultants, LLC,
Huntington Group LLC, Raymond Tomasco and Karen Vacheron Alexander.
3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant.
3.2 (1) Bylaws of the Registrant
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 (1) Investors' Rights Agreement, dated January 26, 1996, among the
Registrant, certain stockholders and investors named therein.
4.4 (1) Specimen Common Stock certificate.
9.2 (1) Kinion Voting Trust Agreement, dated January 17, 1996, among Todd
Kinion and the stockholders of the Registrant named therein.
9.3 (1) Amended and Restated Voting Trust Agreement, dated October 29, 1996,
among the Registrant, Brenda C. Hall and Todd J. Kinion.
10.1 (1) Form of Indemnification Agreement entered into between the Registrant
and each of its directors and certain officers.
10.2 (1) The Registrant's 1997 Stock Option Plan.
10.3 (1) The Registrant's Employee Stock Purchase Plan.
10.11(1) Form of Employment Agreement, dated October 18, 1996, among the
Registrant and Paul Bartlett.
10.12(1) Form of Stock Option Agreement, dated October 18, 1996, between the
Registrant and Paul Bartlett as amended.
10.13(1) Settlement Agreement and General Release, dated October 29, 1996
among the Registrant, Brenda Hall, as Voting Trustee of the Voting
Trust, and Todd Kinion.
10.14 Credit Agreement, dated as of August 11, 1999, by and between the
Registrant and Wells Fargo Bank, National Association; Term Note,
dated as of August 11, 1999, made by the Registrant in favor of Wells
Fargo Bank, National Association; Revolving Line of Credit Note,
dated as of August 11, 1999, made by the Registrant in favor of Wells
Fargo Bank, National Association.
</TABLE>
41
<PAGE>
<TABLE>
<C> <S>
10.15(1) Employment Agreement, dated May 23, 1997, between the Registrant and
Brenda C. Hall.
10.16 Form of Employment Agreement for Martin A. Kropelnicki, Craig J.
Silverman, Rita S. Hazell and David Healey.
10.17(1) Agreement to Tender Shares dated May 23, 1997 between the Registrant
and Brenda C. Hall.
10.18(1) Agreement to Tender Shares, dated May 23, 1997, between the
Registrant and Todd J. Kinion.
10.19(1) Promissory Note Secured by Deed of Trust, dated August 5, 1996, made
by Rita S. Hazell and Quentin D. Hazell in favor of the Registrant.
10.20 Promissory Note, dated April 15, 1999, made by Paul H. Bartlett in
favor of the Registrant.
10.21 Promissory Note, dated April 15, 1999, made by Paul H. Bartlett in
favor of the Registrant; Stock Pledge Agreement, dated April 15,
1999, between the Registrant and Paul H. Bartlett.
10.22 Promissory Note, dated January 25, 1999, made by Brenda Rhodes in
favor of the Registrant; Stock Pledge Agreement, dated April 15,
1999, between the Registrant and Brenda Rhodes; Letter, dated January
25, 1999, from Brenda Rhodes to the Registrant.
10.23 Promissory Note, dated September 26, 1998, made by Craig Silverman in
favor of the Registrant.
10.24(1) Settlement Agreement with Mutual Release, dated May, 1997, between
Richard Swanson and the Registrant, Brenda C. Hall and Todd J.
Kinion.
10.25(1) The Registrant's IT Professional Plan.
10.26 Trust Agreement, dated April 17, 1998, between the Registrant and
First American Trust Company.
21.1 Subsidiaries of Registrant.
23.1 Independent Auditors Consent.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, as amended (File No. 333-28365).
(2) Incorporated by Reference to the Registrant's Current Report on Form 8-K,
filed January 13, 1998 (File No. 000-22869).
(3) Incorporated by Reference to the Registrant's Current Report on Form 8-K,
filed December 2, 1998 (File No. 000-22869).
(b) Reports on Form 8-K.
None.
(c) Exhibits
See (a)(3) above.
42
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Hall, Kinion & Associates, Inc and Subsidiaries:
We have audited the consolidated financial statements of Hall, Kinion &
Associates, Inc. and Subsidiaries as of December 26, 1999 and December 27,
1998, and for each of the three years in the period ended December 26, 1999,
and have issued our report thereon dated January 24, 2000 included elsewhere
in this Annual Report on Form 10-K. Our audits also included the financial
statement schedule of Hall, Kinion & Associates, Inc. and Subsidiaries listed
in Item 14(a)(2) of this Annual Report on Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 24, 2000
43
<PAGE>
SCHEDULE II
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions Deductions
------------------------------ -----------------------
Balance at Charged to Charged Write-off of Balance
Beginning Costs and to Other Uncollectible at End of
of Period Expenses Accounts Accounts Period
---------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts:
Year ended December 28,
1997................... $ 403 $ 120 $ -- $ (179) $ 344
Year ended December 27,
1998................... 344 1,012 -- (273) 1,083
Year ended December 26,
1999................... 1,083 1,106 -- (689) 1,500
</TABLE>
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, therunto duly authorized.
HALL, KINION & ASSOCIATES, INC.
By: /s/ Martin A. Kropelnicki
-----------------------------------
Martin A. Kropelnicki
Vice President and Chief Financial
Officer and Corporate Secretary
(Principal Financial Officer)
Date: February 25,
2000
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
Date: February
25, 2000
By: /s/ BRENDA C. RHODES
-----------------------------------
Chairman of the Board, Chief
Executive Officer,And a Director
(Principal Executive Officer)
Date: February By: /s/ PAUL H. BARTLETT
25, 2000 -----------------------------------
President and Director
Date: February
25, 2000
By: /s/ JON H. ROWBERRY
-----------------------------------
Director
Date: February By: /s/ WILLIAM HERMAN
25, 2000 -----------------------------------
Director
Date: February By: /s/ TODD J. KINION
25, 2000 -----------------------------------
Date: February By: /s/ MARTIN A. KROPELNICKI
25, 2000 -----------------------------------
Vice President, Chief Financial
Officer and Secretary(Principal
Financial Officer)
45
<PAGE>
Exhibit 2.6
AMENDMENT NO. 1 TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT NO. 1 TO THE STOCK PURCHASE AGREEMENT ("Agreement") is
made as of __________, 2000, by and among Hall, Kinion & Associates, Inc., a
Delaware corporation ("Hall Kinion"), Group-IPEX, Inc. ("IPEX"), Lalit M. Kapoor
and Satindra Kapoor (the "Shareholders").
R E C I T A L S
---------------
WHEREAS, the Company, IPEX, and the Shareholders entered into that
certain Stock Purchase Agreement, dated as of December 20, 1997 (the
"Agreement");
WHEREAS, pursuant to Section 10.1 of the Agreement, the Agreement may
not be amended except by a writing executed by the parties thereto; and
WHEREAS, each of the parties thereto desire to amend the Agreement to
provide for a modification to the earn-out provision.
NOW, THEREFORE, in consideration of the promises and conditions
contained herein, the parties hereby agree as follows:
1. Section 1.6 of the Agreement be, and it hereby is, amended and
restated to read in full as follows:
1.6 Subsequent Payments. Subject to offset pursuant to Section
-------------------
1.4 and 1.6(f) hereof and pursuant to the indemnification provisions set forth
in Article VIII hereof, Purchaser shall pay to the Shareholders up to an
aggregate amount of Three Million Three Hundred Seventy-Five Thousand Dollars
($3,375,000) in cash, payable by check or wire transfer in three (3) payments
(collectively, the "Subsequent Payments"), based upon the achievement of
certain milestones over a three (3) year period ending December 31, 2000 (the
"Earnout Period") as follows:
(a) The subsequent payment corresponding to the twelve
(12) month period ending December 31, 1998, the first year of the Earnout
Period, shall be calculated by multiplying the Maximum Earnout Payment Per
Year by the First Year Factor (the "First Subsequent Payment"). If the First
Year Factor is greater than one (1), the First Subsequent Payment shall equal
the Maximum Earnout Payment Per Year. However, if the First Year Factor is
less than one (1), then the First Subsequent Payment shall be calculated on a
pro-rata basis. In addition, if the First Year Factor is less than one (1),
then the difference between the Maximum Earnout Payment and the product that
results from multiplying the Maximum Earnout Payment Per Year by the First
Year Factor shall be added to the amount of the Second Subsequent Payment, if
any. The date of the First Subsequent Payment, if any, shall be not later than
August 31, 1999.
<PAGE>
(b) The subsequent payment corresponding to the twelve
(12) month period ending December 31, 1999, the second year of the Earnout
Period, shall be calculated by multiplying the Maximum Earnout Payment by the
Second Year Factor (the "Second Subsequent Payment"). If the Second Year
Factor is greater than one (1), the Second Subsequent Payment shall equal the
Maximum Earnout Payment Per Year plus any additional amounts as set forth in
Section 1.6(a) above. However, if the Second Year Factor is less than one (1),
then the Second Subsequent Payment shall be calculated on a pro-rata basis and
shall include any additional amounts as set forth in Section 1.6(a) above. In
addition, if the Second Year Factor is less than one (1), then the difference
between the Maximum Earnout Payment and the product that results from
multiplying the Maximum Earnout Payment Per Year by the Second Year Factor
shall be added to the amount of the Third Subsequent Payment, if any. The date
of the Second Subsequent Payment, if any, shall be not later than February 10,
2000, subject to adjustment as set forth in Section 1.6(e) herein.
(c) The subsequent payment corresponding to twelve (12)
month period ending December 31, 2000, the third and final year of the Earnout
Period, shall be calculated by multiplying the Maximum Earnout Payment by the
Third Year Factor (the "Third Subsequent Payment"). If the Third Year Factor
is greater than one (1), the Third Subsequent Payment shall equal the Maximum
Earnout Payment Per Year, plus any additional amounts as set forth in Section
1.6(b) above. If the Third Year Factor is less than one (1), then the Third
Subsequent Payment shall be calculated on a pro-rata basis and shall include
any additional amounts as set forth in Section 1.6(b) above. The date of the
Third Subsequent Payment, if any, shall be not later than February 10, 2001,
subject to adjustment as set forth in Section 1.6(e) herein.
(d) By way of example, if (i) Base Revenue equals
$7,000,000; (ii) First Year Achieved Revenue equals $9,500,000; (iv) Second
Year Achieved Revenue equals $13,000,000; and (v) Third Year Achieved Revenue
equals $18,500,000, then the amount of the First Subsequent Payment payable to
the Shareholders would be $1,071,428.57, the amount of the Second Subsequent
Payment would be $1,102,040.82 and the amount of the Third Subsequent Payment
would be $1,201,530.61. The calculations that support this example are as set
forth on Exhibit A, attached hereto.
---------
(e) For purposes of calculating the Subsequent Payments,
revenue from contractors placed through Purchaser (including any subsidiary or
parent thereof or any affiliate thereof), those placed through other entities
and those placed directly by the Company shall be included. If such
contractors are placed through an entity other than Purchaser (including any
subsidiary or parent thereof or any affiliate thereof), then the Company's
bill rate shall be included. For placements made through Purchaser (including
any subsidiary or parent thereof or any affiliate thereof), a thirty percent
(30%) discount to Purchaser's bill rate shall be assumed in determining First
Year Achieved Revenue, Second Year Achieved Revenue and Third Year Achieved
Revenue. Only revenue which is actually collected will be included in the
calculation of the Subsequent Payments. With respect to the first year of the
Earnout Period, only revenue earned during the twelve (12) month period ending
December 31, 1998 and collected through August 31, 1999 shall be included in
the First Subsequent Payment calculation. With respect to the second year of
the Earnout Period, the Second Subsequent Payment calculation shall include
(i) revenue earned during the twelve (12) month period ending
2
<PAGE>
December 31, 1999 and collected through January 31, 2000 and (ii) revenue
earned during the twelve (12) month period ending December 31, 1998 and
collected from September 1, 1999 through January 31, 2000. Any A/R over 90
days as of January 31, 2000 shall not be included for purposes of the Second
Subsequent Payment calculation, provided however, that on April 30, 2000
Purchaser will recalculate the Second Subsequent Payment by including any
revenue collected from February 1, 2000 through April 30, 2000 and shall make
a corresponding "settlement payment" to the Shareholders for the difference.
Such settlement payment shall be made no later than May 10, 2000. With respect
to the third year of the Earnout Period, the Third Subsequent Payment
calculation shall include (i) revenue earned during the twelve (12) month
period ending December 31, 2000 and collected through January 31, 2001 and
(ii) revenue earned during the twenty-four (24) month period ending December
31, 1999 and collected from May 1, 2000 through January 31, 2001. Any A/R over
90 days as of January 31, 2001 shall not be included for purposes of the Third
Subsequent Payment calculation, provided however, that on June 30, 2001
Purchaser will recalculate the Third Subsequent Payment by including any
revenue collected from February 1, 2001 through June 30, 2001 and shall make a
corresponding "settlement payment" to the Shareholders for the difference.
Such settlement payment shall be made no later than July 31, 2001.
(f) In the event the Company has not collected the
accounts receivable reflected on the Closing Date Balance Sheet within one (1)
year from the Closing Date, Purchaser shall be entitled to offset any or all
Subsequent Payments by an amount equal to such uncollected accounts
receivable.
(g) In the event that the Shareholder Agent disagrees with
the amount of the First Subsequent Payment, the Second Subsequent Payment or
Third Subsequent Payment, the Shareholder Agent shall notify Purchaser in
writing of such disagreement within fifteen (15) days after the Shareholders'
receipt of the First Subsequent Payment, Second Subsequent Payment or Third
Subsequent Payment, as the case may be, and such notice shall set forth the
basis for such disagreement in reasonable detail. If Purchaser and the
Shareholder Agent fail to resolve any such disagreement within thirty (30)
days after written notice from the Shareholder Agent, then all such items as
to which there is a disagreement shall be determined within sixty (60) days
thereafter by a nationally recognized independent accounting firm (the
"Earnout Accounting Firm") (whose determination shall be final and binding
upon the parties) selected by mutual agreement of Purchaser and the
Shareholder Agent (the costs of the Earnout Accounting Firm shall be borne
equally by Purchaser and the Shareholders), and the First Year Subsequent
Payment, Second Subsequent Payment or Third Subsequent Payment, as the case
may be, shall be calculated in accordance therewith.
(h) Notwithstanding anything to the contrary, it shall
hereby be agreed that "Base Revenue" shall equal $7,150,000; "First Year
Target Revenue" shall equal $9,831,250 (a number that represents Base Revenue
multiplied by 1.375); "Second Year Target Revenue" shall equal $13,517,968.75
(a number that represents First Year Target Revenue multiplied by 1.375); and
"Third Year Target Revenue" shall equal $18,587,207.03 (a number that
represents Second Year Target Revenue multiplied by 1.375).
3
<PAGE>
2. Miscellaneous.
-------------
2.1 Successors and Assigns. Except as otherwise provided
----------------------
herein, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns of the parties.
2.2 Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
2.3 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2.4 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of each of the parties hereto.
Except as explicitly stated in this Agreement, all terms, conditions and
provisions of the Agreement remain unchanged by this Agreement.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HALL, KINION & ASSOCIATES, INC.
By:
----------------------------------
Paul H. Bartlett
President
Address: China Basin Landing
185 Berry Street, Suite 6440
San Francisco, CA 94107
SIGNATURE PAGE TO AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
<PAGE>
PURCHASER:
HALL, KINION & ASSOCIATES, INC.
By:
----------------------------------
Paul H. Bartlett
President
THE COMPANY:
GROUP-IPEX INC.
By:
----------------------------------
Lalit M. Kapoor
President
SHAREHOLDERS:
LALIT AND SATINDRA KAPOOR,
AS COMMUNITY PROPERTY
-------------------------------------
Lalit Kapoor
-------------------------------------
Satindra Kapoor
SIGNATURE PAGE TO AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
<PAGE>
EXHIBIT A
---------
Base Rev. = 7,000,000
Year -1 Target Revenue = 7,000,000 x 1.375 = 9,625,000
Year-2 Target Revenue = 9,625,000 x 1.375 = 13,234,375
Year-3 Target Revenue = 13,234,375 x 1.375 = 18,197,265.63
Year-1 Factor = 9,500,000 - 7,000,000 = 0.952380952
---------------------
9,625,000 - 7,000,000
Year-1 Payment = 0.952380952 x 1,125,000 = 1,071,428.57
Shortfall = 53,571.43
Year-2 Factor = 13,000,000 - 9,625,000 = 3,375,000 = .935064
---------------------- ---------
13,234,375 - 9,625,000 3,609,375
Year-2 Payment = 1,102,040.82 = .935064 x (1,125,000 = 53,571.43)
Shortfall = 76,530.61 = 1,178,571.43 - 1,102,040.82
Year-3 Factor = 18,500,000.00 - 13,234,375 = 5,265,625.00 = 1.060999605
-------------------------- ------------
18,197,265.63 - 13,234,375 4,962,890.63
Year-3 Payment = 1,201,530.61 = (1,125,000 = 76,530.61) x 1.00
TOTAL PAYMENT = 3,375,000
<PAGE>
Exhibit 2.7
AMENDMENT NO. 1 OF
STOCK PURCHASE AGREEMENT
THIS AMENDMENT NO.1 OF STOCK PURCHASE AGREEMENT (the "Amendment") is
entered into as of June __, 1999, by and between Hall, Kinion & Associates,
Inc., a Delaware corporation (the "Purchaser"), TKO Personnel, Inc., a
California corporation (the "Company") and Mr. Kenneth D. Reed and Kenneth D.
Reed, as Trustee of the Reed Family Trust under trust agreement dated November
4, 1988 (collectively, the "Shareholder"). Capitalized terms not otherwise
defined in this Amendment have the meaning given them in that certain Stock
Purchase Agreement by and between the Purchaser, the Company and the Shareholder
dated as of August 4, 1998 (the "Agreement").
RECITALS
A. Pursuant to Section 10.1 of the Agreement, the Agreement may only
be amended by an instrument in writing signed on behalf of each of the parties
to the Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Purchaser, Company and the Shareholder, on behalf of
themselves and each future holder of the Shares (as such term is defined in the
Agreement), hereby agree as follows:
1. Pursuant to Section 10.1 of the Agreement, Section 1.3(f) through
Section 1.3(k) of the Agreement shall be amended and restated in their entirety
to read as follows:
(f) `First Period Achieved Revenue' shall mean the Accrued Revenue for
the six (6) month period ending on July 31, 1999.
(g) `Second Period Achieved Revenue' shall mean the Accrued Revenue for
the six (6) month period ending on January 31, 2000.
(h) `Third Period Achieved Revenue' shall mean the Accrued Revenue for the
six (6) month period ending on July 31, 2000.
(i) `Fourth Period Achieved Revenue' shall mean the Accrued Revenue for
the six (6) month period ending on January 31, 2001.
(j) `Fifth Period Achieved Revenue' shall mean the Accrued Revenue for the
six (6) month period ending on July 31, 2001.
(k) `Sixth Period Achieved Revenue' shall mean the Accrued Revenue for the
six (6) month period ending on January 31, 2002."
<PAGE>
2. This Amendment shall be governed in all respects, including
validity, interpretation and effect, by the laws of the State of California
(without giving effect to its choice of law principles).
3. This Amendment may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
4. This Amendment when executed by the Purchaser, the Company and the
Shareholder as of the date hereof shall have been effected in accordance with
Section 10.1 of the Agreement and accordingly shall be binding upon each holder
of any securities purchased under the Agreement as of the date of this Amendment
(including securities into which such securities are convertible), each future
holder of all such securities and the Company.
5. The Agreement and this Amendment and the documents referred to
therein and herein constitute the entire agreement between the parties hereto
pertaining to the subject matter thereof and hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
No. 1 of Stock Purchase Agreement as of the day and year first above written.
PURCHASER:
HALL, KINION & ASSOCIATES, INC.
By:_____________________________________
Paul H. Bartlett
President
THE COMPANY:
TKO PERSONNEL, INC.
By:_____________________________________
Mr. Kenneth Reed
President
SHAREHOLDER:
KENNETH D. REED, as Trustee of the Reed Family
Trust uta dated 11/4/88
By:_____________________________________
Kenneth D. Reed, Trustee
KENNETH D. REED
________________________________________
SIGNATURE PAGE TO HALL, KINION % ASSOCIATES, INC.
AMENDMENT NO. 1 OF STOCK PURCHASE AGREEMENT
<PAGE>
Exhibit 2.8
AMENDMENT NO. 2 TO
ITC AND HUNTINGTON GROUP ASSET PURCHASE AGREEMENT
THIS AMENDMENT NO. 2 TO THE ITC and HUNTINGTON ASSET PURCHASE
AGREEMENT ("Amendment No 2") is made as of __________, 2000, by and among Hall,
Kinion & Associates, Inc., a Delaware corporation ("Hall Kinion"), Interactive
Acquisition Corporation and Huntington Acquisition Corporation, each a Delaware
Corporation and wholly-owned subsidiary of Hall Kinion (the "Purchasers"),
Interactive Technology Consultants, LLC, and Huntington Group LLC, Connecticut
limited liability companies ("ITC" "HG" or the "Sellers"), and Raymond Tomasco
and Karen Vacheron Alexander, individuals (each, a Member, and collectively, the
"Members").
R E C I T A L S
---------------
WHEREAS, Hall Kinion, the Purchasers, the Sellers and the Members (
and in the case of ITC Gary Malbin who is no longer a member of ITC and is not
Party to this Amendment 2) entered into those certain ITC and HG Asset Purchase
Agreements, each dated as of November 18, 1998, and each respectively amended as
of September 15, 1999 (the "Existing Agreements");
WHEREAS, pursuant to Section 9.6 of the Existing Agreements, the
Agreement may not be amended except by a writing executed by the parties
thereto; and
WHEREAS, each of the parties thereto desires to amend the Existing
Agreements in this global second amendment to provide for a modification to the
earn-out provision.
NOW, THEREFORE, in consideration of the promises and conditions
contained herein, the parties hereby agree as follows:
1. Section 3.5 of the Agreement be, and it hereby is, amended and
restated to read in full as follows:
3.5 Earn-Out Payments.
--- -----------------
(a) Subject to offset pursuant to the indemnification provisions
set forth in Article 8 hereof, Purchaser shall pay to ITC and Huntington up
to an aggregate amount of Three Million Six Hundred Thousand Dollars
($3,600,000) in cash, payable by check or wire transfer in three (3)
payments (collectively, the "Earnout Payments"), based upon the achievement
of certain milestones over a three (3) year period ending October 31, 2001
(the "Earnout Period") as follows:
(i) The subsequent payment corresponding to the First Year
Period (the "First Earnout Payment"), shall be equal to six hundred
thousand dollars ($600,000). The date of the First Earnout Payment
shall not be later than
<PAGE>
January 31, 2000, or within ten (10) days after any dispute under
Section 3.7 is finally resolved, whichever is later.
(ii) The subsequent payment corresponding to the Second Year
Period (the "Second Earnout Payment"), shall be the Maximum Earnout
Payment for the Second Year Period (i.e. $1,600,000), provided that
the Second Year Achieved Revenue is greater than or equal to the
Second Year Target Revenue. If the Second Year Achieved Revenue is
less than the sum of First Year Achieved Revenue plus the product that
results from multiplying First Year Achieved Revenue by .20, then the
Second Earnout Payment shall be equal to zero. However, if the Second
Year Achieved Revenue is greater than or equal to the sum of First
Year Achieved Revenue plus the product that results from multiplying
First Year Achieved Revenue by .20, but less than the Second Year
Target Revenue, then the Second Earnout Payment shall be calculated by
multiplying the Maximum Earnout Payment for the Second Year Period by
the Second Year Factor. In addition, if Second Year Achieved EBIT for
ITC is greater than or equal to $950,000 (the Second Year Target EBIT
for ITC), then an additional one hundred thousand dollars ($100,000)
shall be payable to ITC. If Second Year Achieved EBIT for ITC is less
than $855,000 (which number represents an amount that is equal to .90
multiplied by the Second Year Target EBIT for ITC), then ITC will not
be entitled to any additional amounts. However, if Second Year
Achieved EBIT for ITC is greater than or equal to $855,000 (which
number represents an amount that is equal to .90 multiplied by the
Second Year Target EBIT), but less than $950,000 (the Second Year
Target EBIT for ITC), then the amount ITC will be entitled to receive
shall be a pro-rata amount, calculated by multiplying (A) the product
that results from dividing Second Year Achieved EBIT for ITC by
$950,000 (Second Year Target EBIT for ITC) by, (B) $100,000. If Second
Year Achieved EBIT for Huntington is greater than or equal to $675,000
(the Second Year Target EBIT for Huntington) an additional one hundred
thousand dollars ($100,000) shall be made payable to Huntington. If
Second Year Achieved EBIT for Huntington is less than $607,500 (which
number represents an amount that is equal to .90 multiplied by the
Second Year Target EBIT for Huntington), then Huntington will not be
entitled to any additional amounts. However, if Second Year Achieved
EBIT for Huntington is greater than or equal to $607,500 (which number
represents an amount that is equal to .90 multiplied by the Second
Year Target EBIT for Huntington), but less than $607,500 (the Second
Year Target EBIT for Huntington), then the amount Huntington will be
entitled to receive shall be a pro-rata amount, calculated by
multiplying (A) the product that results from dividing Second Year
Achieved EBIT for Huntington by $675,000 (Second Year Target EBIT for
Huntington) by, (B) $100,000. For purposes of this Amendment, EBIT
shall mean earnings before interest and taxes, less Bad Debt or
refunds. EBIT shall not include any costs incurred by Hall Kinion in
support of either ITC or Huntington, unless they are incurred at ITC
or Huntington's request. Bad Debt shall mean any account receivable
that has not been collected within 120 days after it is due and that
Hall Kinion has deemed to be uncollectible and/or any customer revenue
adjustment. The date of the Second Earnout Payment, if any, shall not
be later than
2
<PAGE>
January 31, 2001, or within ten (10) days after any dispute under
Section 3.7 is finally resolved, whichever is later.
(iii) The subsequent payment corresponding to the Third
Year Period (the "Third Earnout Payment"), shall be the Maximum
Earnout Payment for the Third Year Period (i.e. $400,000), provided
that the Third Year Achieved Revenue is greater than or equal to the
Third Year Target Revenue. If the Third Year Achieved Revenue is less
than the sum of Second Year Achieved Revenue plus the product that
results from multiplying Second Year Achieved Revenue by .15, then the
Third Earnout Payment shall be equal to zero. However, if the Third
Year Achieved Revenue is greater than or equal to the sum of Second
Year Achieved Revenue plus the product that results from multiplying
Second Year Achieved Revenue by .15, but less than the Third Year
Target Revenue, then the Third Earnout Payment shall be calculated by
multiplying the Maximum Earnout Payment for the Third Year Period by
the Third Year Factor. In addition, if Third Year Achieved EBIT for
ITC is greater than or equal to $1,550,000 (the Third Year Target EBIT
for ITC), then an additional four hundred thousand dollars ($400,000)
shall be made payable to ITC. If Third Year Achieved EBIT for ITC is
less than $1,395,000 (which number represents an amount that is equal
to .90 multiplied by the Third Year Target EBIT for ITC), then ITC
will not be entitled to any additional amounts. However, if Third Year
Achieved EBIT for ITC is greater than or equal to $1,395,000 (which
number represents an amount that is equal to .90 multiplied by the
Third Year Target EBIT for ITC), but less than $1,550,000 (the Third
Year Target EBIT for ITC), then the amount ITC will be entitled to
receive shall be a pro-rata amount, calculated by multiplying (A) the
product that results from dividing Third Year Achieved EBIT for ITC by
$1,550,000 (Third Year Target EBIT for ITC) by, (B) $400,000. If Third
Year Achieved EBIT for Huntington is greater than or equal to
$1,050,000 (the Third Year Target EBIT for Huntington) an additional
four hundred thousand dollars ($400,000) shall be made payable to
Huntington. If Third Year Achieved EBIT for Huntington is less than
$945,000 (which number represents an amount that is equal to .90
multiplied by the Third Year Target EBIT for Huntington), then
Huntington will not be entitled to any additional amounts. However, if
Third Year Achieved EBIT for Huntington is greater than or equal to
$1,050,000 (which number represents an amount that is equal to .90
multiplied by the Third Year Target EBIT for Huntington), but less
than $1,050,000 (the Third Year Target EBIT for Huntington), then the
amount Huntington will be entitled to receive shall be a pro-rata
amount, calculated by multiplying (A) the product that results from
dividing Third Year Achieved EBIT for Huntington by $1,050,000 (Third
Year Target EBIT for Huntington) by, (B) $400,000. The date of the
Third Earnout Payment, if any, shall not be later than January 31,
2002, or within ten (10) days after any dispute under Section 3.7 is
finally resolved, whichever is later.
(b) Earn-Out Payment. Except otherwise set forth herein, 75.56% of
----------------
any Earn Out Payment made hereunder shall be made payable to ITC and the
remaining 24.44% shall be made payable to Huntington.
3
<PAGE>
2. Miscellaneous.
2.1 Successors and Assigns. Except as otherwise provided herein,
----------------------
the terms and conditions of this Amendment shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties.
2.2 Governing Law. This Amendment shall be governed by and
-------------
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.
2.3 Counterparts. This Amendment may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
2.4 Amendments and Waivers. Any term of this Amendment may be
----------------------
amended and the observance of any term of this Amendment may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of each of the parties hereto.
Except as explicitly stated in this Amendment all terms, conditions and
provisions of the existing Amendment remain unchanged by this Amendment.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
HALL, KINION & ASSOCIATES, INC.
By:________________________________________
Paul H. Bartlett
President
Address: China Basin Landing
185 Berry Street, Suite 6440
San Francisco, CA 94107
<PAGE>
INTERACTIVE ACQUISITION
CORPORATION
By:_______________________________________
Paul H. Bartlett
President
Address: China Basin Landing
185 Berry Street, Suite 6440
San Francisco, CA 94107
HUNTINGTON ACQUISITION CORPORATION
By:______________________________________
Name:____________________________________
Title:___________________________________
Address: _______________________________
_______________________________
HUNTINGTON GROUP, LLC
By:______________________________________
Name:____________________________________
Title:___________________________________
Address: _______________________________
_______________________________
INTERACTIVE TECHNOLOGY
CONSULTANTS, LLC
By:______________________________________
Name:____________________________________
Title:___________________________________
Address: 6527 Main Street
Trumbull, CT 06611
SIGNATURE PAGE TO AMENDMENT NO. 2 TO ITC AND HUNTINGTON ASSET PURCHASE AGREEMENT
<PAGE>
___________________________________________
Raymond Tomasco
___________________________________________
Karen Vacheron Alexander
SIGNATURE PAGE TO AMENDMENT NO. 2 TO ITC AND HUNTINGTON ASSET PURCHASE AGREEMENT
<PAGE>
EXHIBIT 10.14
CREDIT AGREEMENT
THIS AGREEMENT is entered into as of August 11, 1999, by and between HALL,
KINION & ASSOCIATES, INC., a Delaware corporation ("Borrower"), and WELLS FARGO
BANK, NATIONAL ASSOCIATION ("Bank").
Borrower has requested from Bank the credit accommodations described below
(each, a "Credit' and collectively, the "Credits"), and Bank has agreed to
provide the Credits to Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE 1
THE CREDITS
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and, conditions of this Agreement,
--------------
Bank hereby agrees to make advances to Borrower from time to time up to and
including July 15, 2002, not to exceed at any time the aggregate principal
amount of Twenty Million Dollars ($20,000,000.00) ("Line of Credit"), the
proceeds of which shall be used to finance working capital requirements and
acquisitions permitted in this Agreement. Borrower's obligation to repay
advances under the Line of Credit shall be evidenced by a promissory note
substantially in the form of Exhibit A attached hereto ("Line of Credit Note"),
all terms of which are incorporated herein by this reference.
(b) Borrowing and Repayment. Borrower may from time to time during the term
-----------------------
of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note; provided however,
that the total outstanding borrowings under the Line of Credit shall not at any
time exceed the maximum principal amount available thereunder, as set forth
above.
SECTION 1.2. TERM LOAN.
(a) Term Loan. Subject to the terms and conditions of this Agreement, Bank
---------
hereby agrees to make a loan to Borrower in the principal amount of Ten Million
Dollars ($10,000,000.00) ("Term Loan"), the proceeds of which shall be used to
refinance previous acquisition loans and to finance the acquisition by Borrower
of TKI Consulting, Inc.. Borrower's obligation to repay the Term Loan shall be
evidenced by a promissory note substantially in the form of Exhibit B attached
hereto ("Term Note"), all terms of which are incorporated herein by this
reference. Bank's commitment to grant the Term Loan shall terminate on September
11, 1999.
(b) Repayment. The principal amount of the Term Loan shall be repaid in
---------
accordance with the provisions of the Term Note.
<PAGE>
(c) Prepayment. Borrower may prepay principal on the Term Loan solely in
----------
accordance with the provisions of the Term Note.
SECTION 1.3. INTEREST/FEES.
(a) Interest. The outstanding principal balance of the Line of Credit and
--------
Term Loan shall bear interest at the rate(s) of interest set forth in the Line
of Credit Note and Term Note.
(b) Computation. and Payment. Interest shall be computed on the basis of a
------------------------
360--day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Line of Credit Note and Term Note (collectively, the
"Notes").
(c) unused Commitment Fee. Borrower shall pay to Bank a fee equal to-
---------------------
fifteen--hundredths of one percent (0.15%) per annum (computed on the basis of a
360-day year, actual days elapsed) on the average daily unused amount of the
Line of Credit, which fee shall be calculated on a fiscal quarter basis by Bank
and shall be due and payable by Borrower in arrears within 30 days following the
end of each fiscal quarter. Bank shall adjust said percentage on a quarterly
basis, commencing with Borrower's fiscal quarter ending September 30, 1999, if
required to reflect a change in Borrower's Leverage Ratio (as defined in this
Agreement) in accordance with the following grid:
Leverage Ratio
--------------
2.0 to 1.0 or greater 0.20%
less than 2.00 to 1.00 but
greater than 1.0 to 1.0 0.15%
equal to or less than
1.0 to 1.0 0.10%
Each such adjustment shall be effective on the first day of Borrower's
fiscal quarter. following the quarter during which Bank receives and reviews
Borrower's most current fiscal quarter--end financial statements in accordance
with any requirements established by Bank for the preparation and delivery
thereof.
SECTION 1.4. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect
all principal, interest and fees due under each Credit by charging Borrower's
demand deposit account number 4296--908 650 with Bank, or any other demand
deposit account maintained by Borrower with Bank, for the full amount thereof.
Should there be insufficient funds in any such demand deposit account to pay all
such sums when due, the full amount of such deficiency shall be immediately due
and payable by Borrower.
SECTION 1.5. COLLATERAL.
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As security for all indebtedness of Borrower to Bank subject hereto, (i)
Borrower hereby grants to Bank, and (ii) shall cause each of its subsidiaries
listed on Schedule I hereto (collectively, "Subsidiaries"), to grant to Bank,
security interests of first priority in all Borrower's and Subsidiaries'
accounts receivable, general intangibles, other rights: to payment, equipment
and proceeds of the foregoing.
All of the foregoing shall be evidenced by and subject to the terms of such
security agreements, financing statements, deeds of trust and other documents as
Bank shall, reasonably require, all in form and substance satisfactory to Bank.
Borrower shall reimburse Bank immediately upon demand for all costs and expenses
incurred by Bank in connection with any of the foregoing security, including
without limitation, filing and recording fees and costs of appraisals, audits
and title insurance.
SECTION 1.6. GUARANTIES. All indebtedness of Borrower to Bank under the
Credits shall be guaranteed by Subsidiaries in the principal amount of Thirty
Million Dollars ($30,000,000.00) each, as evidenced by and subject to the terms
of guaranties in form and substance satisfactory to Bank.
3
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank which
representations and warranties shall survive the execution of this Agreement and
shall continue in full force and effect until the full and final payment, and
satisfaction and discharge, of all obligations of Borrower to Bank subject to
this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the state of Delaware, and is
qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and
each other document, contract and instrument required hereby or at any time
hereafter delivered to Bank in connection herewith (collectively, the "Loan
Documents") have been duly authorized, and upon their execution and delivery in
accordance with the provisions hereof will constitute legal, valid and binding
agreements and obligations of Borrower or the party which executes the same,
enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By--Laws of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the -best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of
Borrower dated June 30, 1999, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date of
such financial statement there has been no material adverse change in the
financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.
4
<PAGE>
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract
or instrument to which Borrower is a party or by which Borrower may be bound
that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, -franchises and licenses required and
rights to all trademarks, trade names, patents, and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects with
all applicable provisions of the Employee Retirement Income Security Act of
l9~74, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations as they come due in accordance with the Plan
documents and under generally accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease,- commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable federal or state environmental, hazardous
waste, health and safety statutes, and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, and the Federal Toxic Substances Control Act, as any of the same may be
amended, modified or supplemented from time to tine. None of the operations of
Borrower is the subject of any federal or state investigation evaluating whether
any remedial action involving a material expenditure is needed to respond to a
release of any toxic or hazardous waste or substance into the environment.
Borrower has no material contingent liability in connection with any release of
any toxic or hazardous waste or substance into the environment.
ARTICLE III
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT.
The obligation of Bank to grant any of the Credits is subject to the
fulfillment to Bank's satisfaction of all of-the following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the granting
------------------------
of each of the Credits shall be satisfactory to Bank's counsel.
5
<PAGE>
(b) Documentation. Bank shall have received, in form and substance
-------------
satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Notes.
(ii) Corporate Resolution: Borrowing. (iii) Certificates of Incumbency.--
(iv) Continuing Guaranties
(v) Corporate Resolutions: Continuing Guaranty.
(vi) Corporate Resolutions: Third Party Collateral. -(vii) Security
Agreement: Equipment.
(viii) Continuing Security Agreement: Rights to Payment (ix) Third Party
Security Agreements
(x) UCC Financing Statements. -
(xi) Such other documents as Bank may require under any other Section of-
this Agreement.
(c) Financial Condition. There shall have been no material adverse change,
-------------------
as determined by Bank, in the financial condition or business of Borrower, nor
any material decline, as determined by Bank, in the market value of any
collateral required hereunder or a substantial or material portion of the assets
of Borrower.
(d) Borrower shall have delivered to Bank evidence of insurance coverage on
all Borrower's property, in form, substance, amounts, covering risks and issued
by companies satisfactory to Bank, and where required by Bank, with loss payable
endorsements in favor of Bank.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank
to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
(a) Compliance. The representations and warranties contained herein and in
----------
each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.
(b) Documentation. Bank shall have received all additional documents which
-------------
may be required in connection with such extension of credit.
6
<PAGE>
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend credit
to Borrower pursuant hereto, or any liabilities (whether direct or contingent,
liquidated or unliquidated) of Borrower to Bank under any of--the Loan Documents
remain outstanding, and until payment in full of all obligations of Borrower
subject hereto, Borrower shall, unless Bank otherwise consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in
form and detail satisfactory to Bank:
(a) not later than 90 days after and as of the end of each fiscal year, a
copy of the 10--K filed as of such fiscal year end, to include a consolidated
financial statement of Borrower and unqualified opinion prepared by a certified
public accountant acceptable to Bank, with the financial statements to include
balance sheet, income statement, retained earnings and cash flow statements;
(b) not later than 45 days after and as of the end of each fiscal quarter,
a copy of the l0--Q -filed as of such fiscal quarter end to include a
consolidated, financial statement of Borrower, prepared by Borrower, with the
financial statement to include balance sheet, income statement, retained
earnings and cash flow statements,;
(c) contemporaneously with each annual and quarterly financial statement of
Borrower required hereby, a certificate of the president or chief financial
officer of Borrower that said financial statements are accurate and that there
exists no Event of Default nor any condition, act or event which with the giving
of notice or the passage of time or both would constitute an Event of Default,
together with supporting calculations reflecting compliance with the financial
covenants;
(d) not later than 30 days before the end of each fiscal year, Borrower's
projections of its consolidated financial statement for the next fiscal year;
and
(e) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower is organized and/or which govern Borrower's continued
existence and with the requirements of all
7
<PAGE>
laws, rules, regulations and orders of any governmental authority applicable to
Borrower and/or its business.
SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types
and in amounts customarily carried in lines of business similar to that of
Borrower, including but not limited to fire, extended coverage, public
liability, flood, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth all
insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any
and all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Bank's satisfaction, for eventual payment thereof in the
event Borrower is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrowers s consolidated
financial condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to the
extent modified by the definitions herein):
(a) Current Ratio not less than 1.0 to 1.0, determined as of the end of
each fiscal quarter, with "Current. Ratio" defined as the ratio of (i) total
current assets (excluding prepaid expenses other than prepaid taxes) plus,
without duplication, the outstanding principal balance of the Line of Credit, to
(ii) total current liabilities.--
(b) Working Capital net less than $6,000,000.00, determined as of the end
of each fiscal quarter, with "Working Capital" defined as total current assets
minus total current liabilities.
(c) Net Worth not less than (i) $35,000,000.00, (ii) plus, on ~ cumulative
basis, 80% of net income in the trailing four (4) fiscal quarter period (with no
deduction for losses), plus (iii) on a cumulative basis, 100% of the proceeds of
the issuance of stock after the date hereof, minus (iv) on a cumulative basis,
the value of Borrower's stock used as consideration for acquisitions after the
date hereof, determined as of the end of each fiscal quarter, with "Net Worth"
defined as total stockholders' equity.
(d) EBITDA not less than $9,500,000.00, determined as of the end of each
fiscal quarter on a trailing four (4) fiscal quarter basis, with "EBITDA"
defined as net profit before tax plus interest expense (net of capitalized
interest expense), depreciation expense and amortization expense.
8
<PAGE>
(e) Leverage Ratio not greater than 3.0 to 1.0 up to and including December
31, 2001, not greater than 2.5 to 1.0 up to and including December 31, 2002, and
not greater than 2.0 to 1.0 thereafter, determined as of the end of each fiscal
quarter, with "Leverage Ratio" defined as the ratio of Funded Debt to EBITDA in
the trailing four (4) fiscal quarter period; with "Funded Debt" defined as the
sum of (i) all obligations of the Borrower and Subsidiaries for borrowed money
including but not limited to senior bank debt, senior notes, and subordinated
debt; (ii) capital leases; (iii) issued and outstanding letters of credit; and
(iv) contingent obligations); and with "EBITDA" as defined in 4.9(d) above
(f) Fixed Charge Coverage Ratio not less than 1.4 to 1.0 up to and
including December 31, 1999, not less than 1.5 to 1.0 up to and including
December 31, 2001 and not less than 2.0 to 1.0 thereafter, determined as of the
end of each fiscal quarter, with Fixed Charge Coverage Ratio" defined as the
ratio of (i) the aggregate of EBITDA in the trailing four (4) fiscal quarter
period, plus lease expenditures and taxes paid in such period minus capital
expenditures (which shall not include acquisition expense) in such period, to
(ii) the aggregate of interest, scheduled lease and scheduled principal payments
or scheduled reductions in availability under principal under Funded Debt during
such period.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5)
days after the occurrence of each such event or matter) give written notice to
Bank in reasonable detail of:
(a) the occurrence of any Event of Default, or any condition, event or act
which with the giving of notice or the passage of time or both would constitute
an Event of Default; (b) any change in the name or the organizational structure
of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited
Transaction, each as defined in ERISA, or any funding deficiency with respect to
any Plan; or (d) any termination or cancellation of any insurance policy which
Borrower is required to maintain, or any uninsured or partially uninsured loss
through liability or property damage, or through fire, theft or any other cause
affecting Borrower's property.
SECTION 4.11. YEAR 2000 COMPLIANCE. Perform all acts reasonably necessary
to ensure that (a) Borrower and any business in which Borrower holds a
substantial interest, and (b) all customers, suppliers and vendors that are
material to Borrower's business, become Year 2000 Compliant in a timely manner.
Such acts shall include, without limitation, performing a comprehensive review
and assessment of all of Borrower's systems and adopting a detailed plan, with
itemized budget, for the remediation, monitoring and testing of such systems. As
used herein, "Year 2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity, will
properly perform date sensitive functions before, during and after the year
2000. Borrower shall, immediately upon request, provide to Bank such
certifications or other evidence of Borrower' s compliance with the terms hereof
as Bank may from time to tine require.
9
<PAGE>
ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits
except for the purposes stated in Article I hereof.
SECTION 5.2. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower to Bank, (bi any other
liabilities of Borrower existing as of, and disclosed to Bank prior to, the date
hereof, and (c) unsecured liabilities incurred by Borrower to sellers of equity
acquired by Borrower subject to the terms of Section 5.3 hereof.
SECTION 5.3. MERGER, CONSOLIDATION, TRANSFER OF ASSETS.
Merge into, consolidate with or acquire any or all of the equity of any
other entity, except as set forth at the end of this Section 5.3; make any
substantial change in the nature of Borrower's business as conducted as of the
date hereof; acquire all or substantially all of the assets of any other entity;
nor sell, lease, transfer or otherwise dispose of all or a substantial or
material portion of Borrower's assets except in the ordinary course of its
business; provided, however, that Borrower may merge into, consolidate with
and/or acquire all or substantially all, of the equity of any other entity, so
long as
(i) no such single transaction, or series of related transactions, requires
total consideration (inclusive of cash, the incurring of indebtedness and the
assumption of liabilities, but exclusive of consideration paid or payable in the
form of stock in Borrower--hereafter "Non-Stock Consideration") on the part of
Borrower and/or Subsidiaries to exceed $10,000,000.00, (ii) all such
transactions in each fiscal year do not require total Non--Stock Consideration
on the part of Borrower and/or Subsidiaries to exceed $20,000,000.00; (iii) in
the case of a merger or consolidation, Borrower is the surviving entity, (iv) in
the case of an acquisition of all or substantially all of the equity of any
other entity, such other entity shall promptly execute and deliver to Bank Third
Party Security Agreements, a UCC-1 Financing Statement and a Continuing
Guaranties in the form executed by Subsidiaries, (v) prior to each such
transaction, Borrower shall deliver to Bank a certificate showing the source of
funds for such transaction, provided that no more than an aggregate of
$10,000,000.00 in proceeds of the Line of Credit shall be used as Non-Stock
Consideration during the term of the Line of Credit, and (vi) Borrower is in
compliance with the terms and covenants of this Agreement at the time of and
following the closing of each such transaction.;
SECTION 5.4. GUARANTIES. Guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the
10
<PAGE>
ordinary course of business), accommodation endorser or otherwise for, nor
pledge or hypothecate any assets of Borrower as security for, any liabilities or
obligations of any other person or entity, except any of the foregoing in favor
o-f Bank.
SECTION 5.5. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or
investments in any person or entity, except any of the foregoing existing as of,
and disclosed to Bank prior to, the date hereof and except investments expressly
permitted under Section 5.3 hereof.
SECTION 5.6. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding.
SECTION 5.7. PLEDGE OF ASSETS. Mortgage, pledge, grant 'or permit to exist
a security interest in, or lien upon, all or any portion of Borrower's assets
now owned or hereafter acquired, except any of the foregoing in favor of Bank or
which is existing as of, and disclosed to Bank in writing prior to, the date
hereof.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
a) Borrower shall fail to pay when due any principal, interest, fees or
other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in connection
with, or any representation or warranty made by Borrower or any other party
under this Agreement or any other Loan Document shall prove to be incorrect,
false or misleading in any material, respect when furnished or made. - -
(c) Any default in the performance of or compliance with any obligation,
agreement or other provision contained herein or in any other Loan Document
(other than those referred to in subsections (a) and (b) above), and with
respect to any such default which by its nature can be cured, such default shall
continue for a period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower has incurred any debt
or other liability to any person or entity, including Bank.
(e) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like-'process, against the
assets of Borrower; or the entry of a judgment against Borrower.
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<PAGE>
(f) Borrower shall become insolvent, or shall suffer or consent to or apply
for the appointment of a receiver, trustee, custodian or liquidator of itself or
any of its property, or shall generally fail to pay its debts as they become
due, or shall, make a general assignment for the benefit of creditors; Borrower
shall file a voluntary petition in bankruptcy, or seeking reorganization, in
order to effect a plan or other arrangement with creditors or any other relief
under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended
or recodified from time to time ("Bankruptcy Code"), or under any state or
federal law granting relief to debtors, whether now or hereafter in effect; or
any involuntary petition or proceeding pursuant to the Bankruptcy Code or any
other applicable state or federal law relating to bankruptcy, reorganization or
other relief for debtors is filed or commenced against Borrower, or Borrower
shall file an answer admitting the jurisdiction of the court and the material
allegations of any involuntary petition; or Borrower shall be adjudicated a
bankrupt, or an order for relief shall be entered against Borrower by any court
of competent jurisdiction under the Bankruptcy Code or any other applicable
state or federal law relating to bankruptcy, reorganization or other relief for
debtors.
(g) There shall exist or occur any event or condition which Bank in good
faith believes impairs, or is substantially likely to impair, the prospect of
payment or performance by Borrower of its obligations under any of the Loan
Documents.
(h) The dissolution or liquidation of Borrower; or Borrower, or any of its
directors, stockholders or members, shall take action seeking to effect the
dissolution or liquidation of Borrower.
(i) Any change in ownership during the term of this Agreement of an
aggregate of twenty-five percent (25%) or more of~-~. the common stock of
Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a)
all indebtedness of Borrower-under each of the Loan Documents, any term thereof
to the contrary notwithstanding, shall at Bank's option and without notice
become immediately due and payable without presentment, demand, protest or
notice of dishonor, all of which are hereby expressly waived by each Borrower;
(b) the obligation, if any, of Bank to extend any further credit under any of
the Loan Documents shall immediately cease and terminate; and (c) Bank shall
have all rights, powers and remedies available under each of the Loan Documents,
or accorded by law, including without limitation the right to resort to any or
all security for any of the Credits and to exercise any or all of the rights of
a beneficiary or secured party pursuant to applicable law. All rights, powers
and remedies of Bank may be exercised at any time by Bank and from time to time
after the occurrence of an Event of Default, are cumulative and not exclusive,
and shall be in addition to any other rights, powers or remedies provided by law
or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the
12
<PAGE>
exercise of any other right, power or remedy. Any waiver, permit, consent or
approval of any kind by Bank of any breach of or default under any of the Loan
Documents must be in writing and shall be effective only to the extent set forth
in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party is
required or may-desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: HALL, KINION & ASSOCIATES, INC.
185 Berry Street
China Basin Landing, Suite 6440
San Francisco, CA 94107
BANK: WELLS FARGO 'BANK, NATIONAL ASSOCIATION
San Francisco
420 Montgomery Street, 9th Floor
San Francisco, CA- 94104
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt. -
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES.
Borrower shall pay to Bank immediately upon demand the full amount of all
payments, advances, charges, costs and expenses, including reasonable attorneys'
fees (to include outside counsel fees and all allocated costs of Bank's in--
house counsel), expended or incurred by Bank in connection with (a) the
negotiation and preparation of this Agreement and the other Loan Documents,
Bank's continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights
and/or the collection of any amounts which become due to Bank under any of the
Loan Documents, and (c) the prosecution or defense of any action in any way
related to any of the Loan Documents, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in, Bank's rights
and benefits under each of the Loan Documents. In connection-therewith, Bank may
disclose all documents
13
<PAGE>
and information which Bank now has or may hereafter acquire relating to any of
the Credits, Borrower or its business, or any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan
Documents constitute the entire agreement between Borrower and Bank with respect
to the Credits and supersede all prior negotiations, communications, discussions
and correspondence concerning the subject matter hereof. This Agreement may be
amended or modified only in writing signed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.--SECTION 7.7. TIME. Time is of the essence of each
and every provision of this Agreement and each other of the Loan Documents.
SECTION 7.9. SEVERABILITY OF PROVISIONS. If any provision of this Agreement
shall be prohibited by or- invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
Agreement -
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, and all of which when taken together shall constitute one and the same
Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
SECTION 7.11. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
-----------
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of' the foregoing arising in
connection with the exercise of any self--help, ancillary or other remedies
pursuant to any of the Loan Documents. Any party may by summary proceedings
bring an action in court to compel arbitration of a Dispute. Any party who fails
or refuses to submit to arbitration following a lawful demand by any other
,party shall bear all costs and expenses incurred by such other party in-
compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by the
---------------
American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
14
<PAGE>
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute shall
apply to any arbitration proceeding. All discovery activities shall be expressly
limited to matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. (S) 91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies Self-Help and Foreclosure. No
---------------------------------------------------------
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
--------------------------------------------
active members of the California State Bar or retired judges of the state or
federal judiciary of California with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motion.~ filed prior to the
final arbitration hearing. Arbitrators (I) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however,, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicia1 Review. Notwithstanding anything herein to the contrary, in
---------------
any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (I) the arbitrators shall 'not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the substantive law of the state of
California, and (iii) the parties shall have in addition to the grounds referred
to in the Federal Arbitration Act for vacating, modifying or correcting an award
the right to judicial review of (A) whether the findings of fact rendered by the
arbitrators are supported by substantial evidence, and (B) whether the
conclusions of law are erroneous under the substantive law of the state of
California. Judgment confirming an award in such a proceeding may be entered
only if a court determines the award is
15
<PAGE>
supported by substantial evidence and based on legal error under the substantive
law of the state of California.
(f) Real Property Collateral: Judicial Reference. Notwithstanding anything
---------------------------------------------
herein to the contrary, no Dispute shall be submitted to arbitration if the
Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and 'obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered i~ the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
-------------
arbitrators and the parties shall take all action required ~to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or 'the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK, NATIONAL ASSOCIATION
By: ________________________
Title: ______________________
HALL, KINION & ASSOCIATES, INC.
By: ________________________
Title: ______________________
17
<PAGE>
TERM NOTE
$10,000,000.00 San Francisco, California
August 11, 1999
FOR VALUE RECEIVED, the undersigned HALL, KINION & ASSOCIATES, INC.
("'Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at 420 Montgomery Street, 9th Floor,
California, or at such other place as the holder hereof may designate, in lawful
money of the United States of America and in immediately available funds, the
principal sum of Ten Million Dollars ($10,000,000.00), with interest thereon as
set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each, and any other term defined in this Note shall have the meaning set forth
at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other day
on which commercial banks in California are authorized or required by law to
close.
(b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2) or three (3) months, as designated by Borrower,
during which all or a portion of the outstanding principal balance of this Note
bears interest determined in relation to LIBOR; provided however, that no Fixed
Rate Term may be selected for a principal amount less than One Million Dollars
($1,000,000.00) and multiples of Five Hundred Thousand Dollars ($500,000.00),
thereafter; and provided further, that no Fixed Rate Term shall extend beyond
the scheduled maturity date hereof. If any Fixed Rate Term would end on a day
which is not a Business Day, then such . . .Fixed Rate Term shall be extended to
the next succeeding Business Day.
(c) "LIBOR" means the- rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) and determined pursuant to the following formula:
LIBOR Base LIBOR
---------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans making reference thereto, on the first day
of a Fixed Rate Term for delivery of funds on said date for a period of time
approximately equal to the number of days in such Fixed Rate Term and in an
amount approximately equal to the principal amount to which such Fixed Rate Term
applies. Borrower understands and agrees that Bank may base its quotation of the
Inter--Bank Market Offered Rate upon such offers or other market indicators of
the Inter-Bank Market as Bank in its discretion deems appropriate including, but
not limited to, the rate offered for U.S. dollar deposits on the London Inter-
Bank Market.
18
<PAGE>
(ii) "LIBOR Reserve Percentage" means the reserve percentage
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the
Federal Reserve Board, as amended), adjusted by Bank for expected changes in
such reserve percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of interest. most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
--------
interest (computed on the basis of a 360--day year, actual days elapsed) either
(i) at a fluctuating rate per annum one-quarter percent (0.25%) above the grime
Rate in effect from time to time, or (ii) at a fixed rate per annum determined
by Bank to be one and one--half percent (-1.50%) above LIBOR in effect on the
first day of the applicable Fixed Rate Term. When interest is determined in
relation to the Prime Rate, each change in the rate of interest hereunder shall-
become effective on the date each Prime Rate change is announced within Bank.
With respect to each LIBOR selection hereunder, Bank is hereby authorized to
note the date, principal amount, interest rate and Fixed Rate Term applicable
thereto and any payments made thereon on Bank's books and records (either
manually or by electronic entry) and/or on any schedule attached to this Note,
which notations shall be prima facie evidence of the accuracy of the information
noted.
(b) Selection of Interest Rate Options. At any time any portion of this
----------------------------------
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end the Fixed Rate Term applicable thereto So that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At the time this
Note is disbursed or Borrower wishes to select a LIBOR option for all or a
portion of the outstanding principal balance hereof, and at the end of each
Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest
rate option selected by Borrower; (ii) the principal amount subject thereto; and
(iii) for each LIBOR selection, the length of the applicable Fixed Rate Term.
Any such notice may be given by telephone so long as, with respect to each LIBOR
selection, (A) Bank receives written confirmation from Borrower not later than
three (3) Business Days after such telephone notice is given, and (B) such
notice is given to Bank prior to 10:00 a.m., California time, on the first day
of the Fixed Rate Term. For each LIBOR option requested hereunder, Bank will
quote the applicable fixed rate to Borrower at approximately 10:00 a.m.,
California time, on the first day of the Fixed Rate Term. If Borrower does not
immediately accept the rate quoted by Bank, any subsequent acceptance by
Borrower shall be subject to a redetermination by Bank of the applicable fixed
rate; provided however, that if Borrower fails to accept any such rate by 11:00
a.m., California time, on the Business Day such quotation is given, then the
quoted rate shall expire and Bank shall have no obligation to permit a LIBOR
option to be selected on such day. If
19
<PAGE>
no specific designation of interest is made at the time this Note is disbursed
or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a
Prime Rate interest selection for this Note or the principal amount to which
such Fixed Rate Term applied.
(c) Additional LlBOR Provisions.
---------------------------
(i) If Bank at any time shall determine that for any reason adequate
and reasonable means do not exist for ascertaining LIBOR, then Bank shall
promptly give notice thereof to Borrower. If such notice is given and until
such notice has been withdrawn by Bank, then (A) no new LIBOR option may be
selected by Borrower, and (B) any portion of the outstanding principal balance
hereof which bears interest determined in relation to LIBOR, subsequent to the
end of the Fixed Rate Term applicable thereto, shall bear interest determined in
relation to the Prime Rate.
(ii) If any law, treaty, rule, regulation or determination of a court
or governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for Bank
(A) to make LIBOR options available hereunder, or (B) to maintain interest rates
based on LIBOR, then in the former event, any obligation of Bank to make
available such unlawful LIBOR options shall immediately be cancelled, and in the
latter event, any such unlawful LIBOR-based interest rates then outstanding
shall be converted, at Bank's option, so that interest on the portion of the
outstanding principal balance subject thereto is determined in relation to the
Prime Rate; provided however, that if any such Change in Law shall permit any
LIBOR-based interest rates to remain in effect until the expiration of the Fixed
rate Term applicable thereto, then such permitted LIBOR-based interest rates
shall continue in effect until the expiration of such Fixed Rate Term. Upon the
occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank for
any fines, fees, charges, penalties or other costs incurred or payable by Bank
as a result thereof and which are attributable to any LIBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and .binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law)' from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to any
LIBOR options, or change the basis of taxation of payments to
Bank of principal, interest, fees or any other amount payable
hereunder (except for changes in the rate of tax on the overall
net income of Bank); or
(B) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances
or loans by, or any other acquisition of funds by any office of
Bank; or
(C) impose on Bank any other condition;
20
<PAGE>
arid the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available to
Borrower hereunder, any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrower.
(d) Payment of Interest. Interest accrued on this Note shall be payable on
-------------------
the 15th day of each month, commencing September 15, 1999.
(e) Default Interest. From and after the maturity date of this Note, or
----------------
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.
REPAYMENT AND PREPAYMENT:
(a) Repayment. Principal shall be payable on the 15th day of each month in
---------
installments of One Hundred Sixty-six Thousand Six Hundred Sixty--six and 67/100
Dollars ($166;666.67) each, commencing September 15, 1999, and continuing up to
and including June 15, 2004, with a final installment consisting of all
remaining unpaid principal due and payable in full on July 15, 2004.
(b) Application of Payments. Each payment made on this Note shall be
-----------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, td~ the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.
(c) Prepayment.
----------
Prime Rate. Borrower may prepay principal on any portion of this Note
----------
which bears interest determined in relation to the Prime Rate at any time, in
any amount and without penalty.
LIBOR. Borrower may prepay principal on any portion of this Note which
-----
bears interest determined in relation to LIBOR at any time and in the minimum
amount of One Hundred Thousand Dollars ($100,000.00); provided however, that if
the outstanding principal balance of such portion of this Note is less than said
amount, the minimum prepayment amount shall be the entire outstanding principal
balance thereof. In consideration 'of Bank providing this prepayment option to
Borrower, or if any such portion of this Note shall become due and payable at
any time prior to the last day of the Fixed Rate Term applicable thereto by
acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a
fee which is the sum of the discounted
21
<PAGE>
monthly differences for each month from the month of prepayment through the
month in which such Fixed Rate Term matures, calculated as follows for each such
month:
(i) Determine the amount of interest which would have accrued each
---------
month on the amount prepaid at the interest rate applicable to
such amount had it remained outstanding until the last day of
the Fixed Rate Term applicable thereto.
(ii) Subtract from the amount determined in (i) above the amount of
--------
interest which would have accrued for the same month on the
amount prepaid for the remaining term of such Fixed Rate Term at
LIBOR in effect on the date of prepayment for new loans made for
such term and in a principal amount equal to. the amount
prepaid.
(iii) If the result obtained in (ii) for any -month is greater than
zero, discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above--described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to
pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum two percent (2.0%) above
the Prime Rate in effect from time to time (computed on the basis of a 36Q--day
year, actual days elapsed).
All prepayments of principal shall be applied on the most remote principal
installment or installments then unpaid.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of
that certain Credit Agreement between Borrower and Bank dated as of August 11,
1999, as amended from time to time (the "Credit Agreement"). Any default in the
payment or -performance of any obligation under this Note, or any defined. event
of default under the Credit Agreement, shall constitute an "Event of Default"
under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder of
--------
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower. Each
Borrower shall pay to the holder immediately upon demand the full amount of all
payments, advances, charges, costs and expenses, including reasonable attorneys'
fees (to include outside counsel fees and all allocated costs of the holder's
in-house counsel), expended or incurred by the holder in connection with the
enforcement of the holder's rights and/or the collection of any amounts which
become due to the holder under this Note, and the prosecution or defense of any
22
<PAGE>
action in any way related to this Note, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity
-----------------------------
sign this Note as a Borrower, the obligations of-. each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
HALL, KINION & ASSOCIATES, INC.
By:___________________________
Brenda Rhodes
Chief Executive Officer
By:___________________________
Martin Kopelnicki
Chief Financial Officer
23
<PAGE>
REVOLVING LINE OF CREDIT NOTE
<TABLE>
<C> <S>
- ------------------------------------------------------------------------------------------------------------------------------------
$20,000,000.00 San Francisco, California
August 11, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FOR VALUE RECEIVED, the undersigned HALL, KINION & ASSOCIATES, INC.
("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL
ASSOCIATION ("Bank") at its office at 420 Montgomery Street, 9th Floor, San
Francisco, California, or at such other place as the holder hereof may
designate, in lawful money of the United States of America and in immediately
available funds, the principal sum of Twenty Million Dollars ($20,000,000.00),
or so much thereof as may be advanced and be outstanding, with interest thereon,
to be computed on each advance from the date of its disbursement as set forth
herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after
each, and any other term defined in this Note shall have the meaning set forth
at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any other day
on which commercial banks in California are authorized or. required by law to
close.
(b) "Fixed Rate Term" means a period commencing on a-Business Day and
continuing for one (1), two (2) or three (3) months, as designated by Borrower,
during which all or a portion. of the .Outstanding principal balance of this
Note bears interest determined in relation to LIBOR; provided however, that no
Fixed Rate Term may be selected for a principal amount less than One Million
Dollars ($1,000,000.00) and multiples of Five Hundred Thousand Dollars
($500,000.00), thereafter; and provided further, that no Fixed Rate Term shall
extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would
end on a day which is not a Business Day, then such Fixed Rate Term shall be
extended to the next succeeding Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if necessary, to the
nearest whole 1/8 of 1%) and determined pursuant to the following formula:
LIBOR = Base LIBOR
----------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the rate per annum for United States dollar deposits
quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding
that such rate is quoted by Bank for the purpose of calculating effective rates
of interest for loans making reference thereto, on .the first day of a Fixed
Rate Term for delivery of funds on said date for a period of time approximately
equal to the number of days in such Fixed Rate Term and in an amount
approximately equal to the principal amount to which such Fixed Rate Term
applies. Borrower understands and agrees that Bank may base its quotation of
the Inter-Bank Market Offered Rate upon such offers or other market indicators
of the Inter-Bank Market as Bank in its discretion
24
<PAGE>
deems appropriate including, but not limited to, the rate offered for U.S.
dollar deposits on the London Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by
the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
INTEREST:
(a) The outstanding principal balance of this Note shall bear interest
(computed on the basis of a 360--day year, actual days elapsed) either (i) at a
fluctuating rate per annum one-quarter percent (0.25%) above the Prime Rate in
effect from time to time, or (ii) at a fixed rate per annum determined by Bank
to be one and one-half percent (1.50%) above LIBOR in effect on the first day of
the applicable Fixed Rate Term. When interest is determined in relation to the
Prime Rate, each change in the rate of interest hereunder shall become effective
on the date each Prime Rate change is announced within Bank. With respect to
each LIBOR selection hereunder, Bank is hereby authorized to note the date,
principal amount, interest rate and Fixed Rate Term applicable thereto and any
payments made thereon on Bank's books and records (either-manually or by
electronic entry) and/or on any schedule attached to this Note, which notations
shall be prima facie evidence of the accuracy of the information noted.
(b) Selection of interest Rate Options. At any time any portion of this
----------------------------------
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the
interest rate option selected by Borrower; (ii) the principal amount subject
thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed
Rate Term. Any such notice may be given by telephone so long as, with respect
to each LIBOR selection, (A) Bank receives written confirmation from Borrower
not later than three (3) Business Days after such telephone. notice is given,
and (B) such notice is given to Bank prior to 10:00 a.m., California time, on
the first day of the Fixed Rate Term. For each LIBOR option requested
hereunder, Bank will quote the applicable fixed rate to Borrower at
approximately 10:00 am., California time, on the first day of the Fixed Rate
Term. If Borrower does not immediately accept the rate quoted by Bank, any
subsequent acceptance by Borrower shall be subject to a redetermination by Bank
of the applicable fixed rate; provided however, that if Borrower fails to
25
<PAGE>
accept any such rate by 11:00 a.m., California time, on the Business Day such
quotation is given, then the quoted rate shall expire and Bank shall have no
obligation to permit a LIBOR option to be selected on such day.. If no specific
designation of interest is made at the time any advance is requested hereunder
or at the end of .any Fixed Rate Term, Borrower shall be deemed to have made a
Prime Rate interest selection for such advance or the principal-amount to which
such Fixed Rate Term applied.
(c) Additional LIBOR Provisions.
---------------------------
(i) If Bank at any time shall determine that for any reason adequate and
reasonable means do not exist for ascertaining LIBOR, then Bank shall promptly
give notice thereof to Borrower. If such notice is given and until such notice
has been withdrawn by Bank, then (A) no new LIBOR option may be selected by
Borrower, and (B) any portion of the outstanding principal balance hereof which
bears interest determined in relation to LIBOR, subsequent to the end of the
Fixed Rate Term applicable thereto, shall bear interest determined in relation
to the Prime Rate.
(ii) If any law, treaty, rule, regulation or determination of a court or
governmental authority or any change therein or in the interpretation or
application thereof (each, a "Change in Law") shall make it unlawful for Bank
(A) to make LIBOR options available hereunder, or (B) to maintain interest rates
based on LIBOR, then in the former event, any obligation of Bank to make
available such unlawful LIBOR options shall immediately be cancelled, and in the
latter event, any such unlawful LIBOR-based interest rates then outstanding
shall be converted, at Bank's option, so that interest on the portion of the
outstanding principal balance subject thereto is determined in relation to the
Prime Rate; provided however, that if any such Change in Law shall permit any
LIBOR-based interest rates to remain in effect until the expiration of the Fixed
Rate Term applicable thereto, then such permitted LIBOR--based interest rates
shall continue in effect until the expiration of such Fixed Rate Term, Upon the
occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate Bank for
any fines, fees, charges, penalties or other costs incurred or payable by Bank
as a result thereof and which are attributable to any LIBOR options made
available to Borrower hereunder, and any reasonable allocation made by Bank
among its operations shall be conclusive and binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any request or
directive (whether or not having the force of law) from any central bank or
other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with respect to any LIBOR
options, or change the basis of taxation of payments to Bank of principal,
interest, fees or any other amount payable hereunder (except for changes in the
rate of tax on the overall net income of Bank); or
(B) impose, modify or hold applicable any reserve, special deposit,
compulsory loan or similar requirement against assets held by, deposits or other
liabilities in or for the account of, advances or loans by, or any other
acquisition of funds by any office of Bank; or
26
<PAGE>
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce any
amount receivable by Bank in connection- therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available to
Borrower hereunder, any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrower.
(d) Payment of Interest. Interest accrued on this Note shall be payable on
-------------------
the 15th day of each month, commencing September 15, 1999.
(e) Default Interest. From and after the maturity date of this Note, or
----------------
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to four percent (4%) above
the rate of interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the
-----------------------
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for any Borrower, which balance may be endorsed hereon from time to-time
by the holder. The outstanding principal balance of this Note shall be due and
payable in full on July 15, 2002.
(b) Advances hereunder, to the total amount of the principal sum stated
above, may be made by the holder at the oral or written request of (i) Brenda
Rhodes, Martin A. Kropelnicki, David B. Healey or Paul H. Bartlett, any one
acting alone, who are authorized to request advances and direct the disposition
of any advances until written notice of the revocation of such authority is
received by the holder at the office designated above, or (ii) any person, with
respect to advances deposited to the credit of any account of any Borrower with
the holder, which advances, when so deposited, shall be conclusively presumed to
have been made to or for the benefit of each Borrower regardless of the fact
that persons other than those authorized to request advances may have authority
to draw against such account. The holder shall have no obligation to determine
whether any person requesting an advance is or has been authorized by any
Borrower.
(c) Application of Payments. Each payment made on this Note shall be
-----------------------
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments
27
<PAGE>
credited to principal shall be applied first, to the outstanding principal
balance of this Note which bears interest determined in relation to the Prime
Rate, if any, and second, to the outstanding principal balance of this Note
which bears interest determined in relation to LIBOR, with such payments applied
to the oldest Fixed Rate Term first.
PREPAYMENT:
(a) Prime Rate. Borrower may prepay principal on any portion of this Note
----------
which bears interest determined in relation to the prime Rate at any time, in
any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note which
-----
bears interest determined in relation to LIBOR at any time and in the minimum
amount of One Hundred Thousand Dollars ($100,000.00); provided however, that if
the outstanding principal balance of such portion of this Note is less than said
amount, the minimum prepayment amount shall be the entire outstanding principal
balance thereof. In consideration of Bank providing this prepayment option to
Borrower, or if any such portion of this Note shall become due and payable at
any time prior to the last day of the Fixed Rate Term applicable thereto by
acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a
fee which is the sum of the discounted monthly differences for each month from
the month of prepayment through the month in which such Fixed Rate Term matures,
calculated as follows for each such month:
(i) Determine the amount of interest which would have accrued each month
---------
on the amount prepaid at the interest rate applicable to such amount
had it remained outstanding until the last day of the Fixed Rate Term
applicable thereto.
(ii) Subtract from the amount determined in (i) above the amount of
--------
interest which would have accrued for the same month on the amount
prepaid for the remaining term of such Fixed Rate Term at LIBOR in
effect on the date of prepayment for new loans made for such term and
in a principal amount equal to the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater than zero,
discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in
Bank incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to
pay any prepayment fee when due, the amount of such prepayment fee shall
thereafter bear interest until paid at a rate per annum two percent (2.00%)
above the Prime Rate in effect from time to time (computed on the basis of a
360-day year, actual days elapsed). Each change in the rate of interest on any
such past due prepayment fee shall become effective on the date each Prime Rate
change is announced within Bank.
28
<PAGE>
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms. and conditions
of that certain Credit Agreement between Borrower and Bank dated as of
August 11, 1999, as amended from time to time (the "Credit Agreement") - Any
default in the payment or performance of any obligation under this Note, or any
defined event of default under the Credit Agreement, shall constitute an "Event
of Default" under this Note.
MISCELLANEOUS:
(a) Remedies, Upon the occurrence of any Event of Default, the holder of
--------
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holder's in-house counsel), expended
or incurred by the holder in connection with the enforcement of the holder's
rights and/or the collection of any amounts which become due to the holder under
this Note, and the prosecution or defense of any action in any way related to
this Note, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or entity
-----------------------------
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.
(c) Governing Law. This Note shall be governed by and construed in
-------------
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first written above.
HALL, KINION & ASSOCIATES, INC.
By:__________________________
Brenda Rhodes
Chief Executive Officer
By:__________________________
Martin A. Kropelnicki
Chief Financial Officer
29
<PAGE>
Exhibit 10.16
Hall, Kinion & Associates, Inc.
China Basin Landing
185 Berry Street, Suite 6440
San Francisco, CA 94107
_______ __, ____
[Employee Name]
[Employee Address]
Dear [Employee Name]:
Hall, Kinion & Associates, Inc. (the "Company") is pleased to
[make/amend] the offer letter ("Offer Letter") [that you executed with the
Company] on _________ __, ____ on the following terms:
1. Accelerated Vesting. Subject to Section 3 below, upon a Change
-- -------------------
in Control (as defined in Section 5 below), to the extent that your options
covering shares of the Company's Common Stock do not otherwise provide for full
vesting acceleration, you shall be entitled to the accelerated vesting of stock
options, as described below.
(a) All options to purchase shares of the Company's Common Stock held
by you at the time of the Change in Control shall immediately become exercisable
and vested in full, whether such options were granted before or after the date
of this letter agreement.
(b) All shares of the Company's Common Stock held by you at the time
of the Change in Control shall immediately vest in full and the Company's right
to repurchase such shares shall lapse, whether such shares were issued before or
after the date of this letter agreement.
To the extent provided in this Section 1, this letter agreement shall
be deemed to be an amendment of the exercisability and vesting provisions of all
stock option agreements, stock purchase agreements and similar instruments
executed by you and the Company that did not otherwise provide for full vesting
acceleration upon a Change in Control.
2. Salary Continuation and Other Benefits. In the event that the
-- --------------------------------------
Company terminates your employment without your consent for any reason other
than Cause (as defined in Section 7 below), or you experience a Constructive
Discharge (as defined in Section 6 below) within 12 months following a Change in
Control, then the Company shall pay to you each of the following or you will be
entitled to receive the following, subject to the terms of Section 3 below:
(a) Your most recent base salary (at the annual rate then in effect)
for 12 months following the termination of your employment, in accordance with
the Company's standard payroll procedures;
<PAGE>
Rita Hazell OCTOBER 21, 1999
Page 2
(b) An amount equal to the annual bonus that was paid to you for the
most recent 12-month period preceding your termination;
(c) Your Company car that is leased by the Company on your behalf,
without any additional payments from you;
(d) [Forgiveness of any outstanding principal and accrued and unpaid
interest under the promissory note, dated _________ ____, between you and the
Company; ]and
(e) Continued coverage at the Company's expense under all medical
plans in which you and your dependents have participated through date of
termination, provided you are eligible for and elect COBRA coverage, for a
period extending through the earlier of 12 months after your termination of
employment and the date that your (or, with respect to a dependent, such
dependent's) COBRA eligibility ceases.
3. Pooling of Interests. If the Company and the other party to the
-- --------------------
transaction constituting a Change in Control agree that such transaction is to
be treated as a "pooling of interests" for financial reporting purposes, and if
such transaction in fact is so treated, then the accelerated vesting of stock
options and shares described in Section 1 and the cash payment and other
benefits described in Section 2 shall not occur to the extent that the Company's
independent public accountants and such other party's independent public
accountants separately determine in good faith that such cash payment, benefits
or acceleration would preclude the use of "pooling of interests" accounting.
4. Release of Claims. Any other provision of this letter agreement
-- -----------------
notwithstanding, the vesting acceleration, salary continuation and other
benefits described in Sections 1 and 2 shall not apply unless you (a) have
executed a general release (in a form prescribed by the Company) of all known
and unknown claims that you may then have against the Company or persons
affiliated with the Company and (b) have agreed not to prosecute any legal
action or other proceeding based upon any of such claims.
5. Definition of Change in Control. For all purposes under this
-- -------------------------------
letter agreement, "Change in Control" shall mean the occurrence of any of the
following events after the date of this letter agreement:
(a) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the Company's
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction; or
(b) the sale, transfer or other disposition of all or substantially
all of the Company's assets in complete liquidation or dissolution of the
Company.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially
<PAGE>
Rita Hazell OCTOBER 21, 1999
Page 3
the same proportions by the persons who held the Company's securities
immediately before such transaction.
6. Definition of Constructive Discharge. For all purposes under this
-- ------------------------------------
letter agreement, "Constructive Discharge" shall mean that following one of the
following events, you resign from the Company:
(a) Your responsibilities are materially diminished, you are assigned
duties that are inconsistent with your position under the Offer Letter or your
title is changed without your consent; or
(b) Your most recent base salary is reduced.
7. Definition of Cause. For all purposes under this letter agreement,
-- -------------------
"Cause" shall mean:
(a) Your failure to perform your material duties which continues for
more than 30 days after receipt of a written warning from the Company specifying
the act or omission that constitutes Cause, other than a failure resulting from
your complete or partial incapacity due to physical or mental illness or
impairment;
(b) Conviction of, or a plea of "guilty" or "no contest" to, a felony
under the laws of the United States or any state thereof; or
(c) Gross misconduct or fraud.
The foregoing, however, shall not be
deemed an exclusive list of all acts or omissions that the Company (or a
subsidiary of the Company) may consider as grounds for your discharge.
8. Golden Parachute Excise Tax.
-- ---------------------------
(a) Application of Limitation. This Section 8 shall apply only if
--- -------------------------
you, on an after-tax basis, would receive more value under this letter agreement
after the application of this Section 8 than before the application of this
Section 8. For this purpose, "after-tax basis" shall mean a calculation taking
into account all federal and state income and excise taxes imposed on you,
including (without limitation) the excise tax described in section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"). If this Section 8 is
applicable, it shall supersede any conflicting provision of this letter
agreement. The rules set forth in this Section 8 supersede all other agreements
between you and the Company with respect to whether the Company shall make a
payment or property transfer to, or for the benefit of, you that would subject
you to the excise tax described in section 4999 of the Code, and Section 8 of
this letter agreement shall be deemed to be an amendment of such agreements.
(b) Basic Rule. Unless the Company and the Executive otherwise agree
--- ----------
in writing, the determination of Executive's excise tax liability and the amount
required to be paid under this Section 8 shall be made in writing by the
independent public accountants of the Company. For purposes of making
calculations required by this Section 8, the accountants may
<PAGE>
Rita Hazell OCTOBER 21, 1999
Page 4
make reasonable assumptions and approximations concerning applicable taxes and
may rely on reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. The Company and the Executive shall furnish
to the accountants such information and documents as the accountants may
reasonably request in order to make a determination under this Section 8. The
Company shall bear all costs and expenses of the accountants in connection with
any work performed pursuant to the provisions of this Section 8.
(c) Gross-Up. In the event that the benefits provided for in this
--- --------
Agreement or otherwise payable to Executive constitute "parachute payments"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code") and will be subject to the excise tax imposed by Section
4999 of the Code, then Executive shall receive (i) a payment from the Company
sufficient to pay such excise tax, and (ii) an additional payment from the
Company sufficient to pay the excise tax and federal and state income taxes
arising from the payments made by the Company to Executive pursuant to this
Section 8.
(d) Uncertainty of the calculation. As a result of uncertainty in the
--- ------------------------------
application of section 4999 of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that a payment will have been made by
the Company that should not have been made (an "Overpayment") or that an
additional payment that will not have been made by the Company could have been
made (an "Underpayment"). In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against you that the
Auditors believe has a high probability of success, determine that an
Underpayment has occurred, such Underpayment shall promptly be paid or
transferred by the Company to, or for the benefit of, you, together with
interest at the applicable federal rate specified in section 7872(f)(2) of the
Code. In the event that the Auditors determine that an Overpayment has been
made, such Overpayment shall be treated for all purposes as a loan to you that
you shall repay to the Company, together with interest at the applicable federal
rate specified in section 7872(f)(2) of the Code; provided, however, that no
amount shall be payable by you to the Company if and to the extent that such
payment would not reduce the amount that is subject to an excise tax under
section 4999 of the Code. The Executive and the Company shall each reasonably
cooperate with the other in connection with any administrative or judicial
proceedings concerning the existence or amount of liability for Excise Tax with
respect to the "parachute payments".
9. Successors.
-- ----------
(a) Company's Successors. The Company shall require any successor
--- --------------------
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets, by an agreement in substance and form
satisfactory to you, to assume this letter agreement and to agree expressly to
perform this letter agreement in the same manner and to the same extent as the
Company would be required to perform it in the absence of a succession. For all
purposes under this letter agreement, the term "Company" shall include any
successor to the Company's business and/or assets which executes and delivers
the assumption agreement described in this Subsection (a) or which becomes bound
by this letter agreement by operation of law.
<PAGE>
Rita Hazell OCTOBER 21, 1999
Page 5
(b) Employee's Successors. This letter agreement and all your rights
--- ---------------------
hereunder shall inure to the benefit of, and be enforceable by, your personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
10. Miscellaneous Provisions.
--- ------------------------
(a) Notice. Notices and all other communications contemplated by
--- ------
this letter agreement shall be in writing and shall be deemed to have been duly
given when personally delivered or when mailed by U.S. registered or certified
mail, return receipt requested and postage prepaid. In your case, mailed notices
shall be addressed to you at the home address which you most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Waiver. No provision of this letter agreement shall be modified,
--- ------
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by you and by an authorized officer of the Company (other
than yourself). No waiver by either party of any breach of, or of compliance
with, any condition or provision of this letter agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Severability. The invalidity or unenforceability of any
--- ------------
provision or provisions of this letter agreement shall not affect the validity
or enforceability of any other provision hereof, which shall remain in full
force and effect.
(d) No Retention Rights. Nothing in this letter agreement shall
--- -------------------
confer upon you any right to continue in service for any period of specific
duration or interfere with or otherwise restrict in any way your rights or the
rights of the Company or any subsidiary of the Company, which rights are hereby
expressly reserved by each, to terminate your service at any time and for any
reason, with or without Cause.
(e) Choice of Law. The validity, interpretation, construction and
--- -------------
performance of this letter agreement shall be governed by the laws of the State
of California (other than their choice-of-law provisions).
(f) Entire Agreement. This letter and the Offer Letter contain all
--- ----------------
of the terms of your employment with the Company and supersede any prior
understandings or agreements, whether oral or written, between you and the
Company.
11. Withholding Taxes. All forms of compensation referred to in this
--- -----------------
letter agreement are subject to reduction to reflect applicable withholding and
payroll taxes.
<PAGE>
Rita Hazell OCTOBER 21, 1999
Page 6
We hope that you find the foregoing terms acceptable. You may indicate
your agreement with these terms and accept this amendment to your Offer Letter
by signing and dating the enclosed duplicate original of this letter agreement
and returning them to me.
Very truly yours,
Hall, Kinion & Associates, Inc.
By:____________________________
Title:_________________________
I have read and accept this [amendment to the] Offer Letter:
- ----------------------------------
Signature of [Employee Name]
Dated: __________ __, ____
<PAGE> EXHIBIT 10.20
PROMISSORY NOTE
---------------
$1,493,000 April 15, 1999
Cupertino, California
FOR VALUE RECEIVED, the undersigned, Paul Bartlett ("Borrower"), promises
to pay to Hall, Kinion & Associates, Inc. (the "Company"), at its principal
offices at 19925 Stevens Creek Blvd., Suite 180, Cupertino, California 95014,
the principal sum of $1,493,000, together with interest from the date of this
Note on the unpaid principal balance upon the terms and conditions specified
below.
1. Principal and Interest. The principal balance of this Note together
----------------------
with interest accrued and unpaid to date shall be due and payable three (3)
years from the date of this Note. The parties mutually agree that they may
extend the tern, of the Note at a later point in time.
2. Rate of Interest. Interest shall accrue under the Note on any unpaid
----------------
principal balance at the rate of the Company's cost of borrowing plus 1/18% per
annum, compounded monthly.
3. Prepayment. Prepayment of principal and interest may be made at any
----------
time without penalty.
4. Events of Acceleration. The entire unpaid principal sum and unpaid
--------- ------------
interest of this Note shall become immediately due and payable upon one or more
of the following events:
A. the failure of the Borrower to pay when due the principal balance
and accrued interest on this Note and the continuation of such default for more
than thirty (30) days; or
B. the insolvency of the Borrower, the commission of an act of
bankruptcy by the Borrower, the execution by the Borrower of a general
assignment for the benefit of creditors, the filing by or against the Borrower
of a petition in bankruptcy or a petition for relief under the provisions of the
federal bankruptcy act or another state or federal law for the relief of debtors
and the continuation of such petition without dismissal for a period of ninety
(90) days or more; or
C. the failure of the Borrower to execute a deed of trust (attached
as Exhibit A and known as Deed of Trust") on his principal residence in
California within five (5) days of a request from the Company; or
D. the sale, transfer, mortgage, assignment, encumbrance or lease,
whether voluntarily or involuntarily or by operation of law or otherwise of the
property covered by any such Deed of Trust, or any portion thereof or interest
therein without the prior written consent of the Company; or
E. the occurrence of a material event of default under any such Deed
of Trust securing this Note or any obligation secured thereby; or
<PAGE>
F. the failure of the Borrower to execute all documents necessary to
establish two brokerage accounts in the name of the Company with an aggregate
value of $____________ (collectively. "Brokerage Accounts") and to perfect the
Company's security interest in such Brokerage Accounts; or
G. the occurrence of a material event of default under any such
document executed to establish the Brokerage Accounts and to perfect the
Company's security interest in such Brokerage Accounts.
5. Security. Borrower agrees to execute a Deed of Trust conveying to the
--------
Company a security interest in Borrower's principal residence described on
Exhibit A. Borrower agrees to execute documents to establish the Brokerage
Accounts, and Borrower agrees to grant to the Company a security interest in
such Brokerage Accounts. Borrower shall also execute any document necessary to
perfect the Company's security interest in these Brokerage Accounts. All
documents related to the establishment of the Brokerage Accounts and the
perfection of the Company's security interest in such Brokerage Accounts shall
be called Brokerage Account Documents, attached as Exhibit B. Borrower, however,
shall remain personally liable for payment of this Note, and assets of the
Borrower, in addition to the collateral under the Deed of. Trust and Brokerage
Accounts, may be applied to the satisfaction of the Borrower's obligations
hereunder.
6. Collection. If action is instituted to collect this Note, the Borrower
----------
promises to pay all reasonable costs and expenses (including reasonable attorney
fees) incurred in connection with such action.
7. Waiver. No previous waiver and no failure or delay by the Company or
------
Borrower in acting with respect to the terms of this Note, the Deed of Trust or
the Brokerage Account Documents shall constitute a waiver of any breach,
default, or failure of condition under this Note, the Deed of Trust or the
Brokerage Account Documents, or the obligations secured thereby. A waiver of any
term of this Note, the Deed of Trust, or the Brokerage Account Documents or of
any of the obligations secured thereby must be made in writing and signed by a
duly authorized officer of the Company and shall be limited to the express terms
of such waiver.
Borrower hereby expressly waives presentment and demand for payment at such
time as any payments are due under this Note.
8. Conflicting Agreements. In the event of any inconsistencies between
----------------------
the terms of this Note and the terms of any other document related to the loan
evidenced by the Note, the terms of this Note shall prevail.
9. Governing Law. This Note shall be construed in accordance with the
-------------
laws of the State of California.
-----------------------------------------
Signature of Borrower--Paul Bartlett
Address:
2
<PAGE>
EXHIBIT A
DEED OF TRUST
-------------
3
<PAGE>
ADDENDUM A TO DEED OF TRUST
The following are additional terms and provisions of the Deed of Trust to
which this Addendum is attached:
In the event the property described in this Deed of Trust or any part
thereof, or any interest therein is sold, agreed to be sold, conveyed or
alienated by Trustor, or by the operation of law or otherwise, all obligations
secured by this instrument, irrespective of the maturity dates expressed
therein, at the option of the holder thereof and without demand or notice, shall
immediately become due and payable.
4
<PAGE>
Exhibit 10.21
PROMISSORY NOTE
---------------
$1,781,250 April 15, 1999
Cupertino, California
FOR VALUE RECEIVED, the undersigned, Paul Bartlett ("Borrower"), promises
to pay to Hall, Kinion & Associates, Inc. (the "Company"), at its principal
offices at 19925 Stevens Creek Blvd., Suite 180, Cupertino, California 95014,
the principal sum of $1,781,250, together with interest from the date of this
Note on the unpaid principal balance upon the terms and conditions specified
below.
1. Principal and Interest. The principal balance of this Note together
----------------------
with interest accrued and unpaid to date shall be due and payable three (3)
years from the date of this Note. The parties mutually agree that they may
extend the term of the Note at a later point in time.
2. Rate of Interest. Interest shall accrue under the Note on any unpaid
----------------
principal balance at the rate of the Company's cost of borrowing plus 1.8% per
annum, compounded monthly.
3. Prepayment. Prepayment of principal and interest may be made at any
----------
time without penalty.
4. Events of Acceleration. The entire unpaid principal sum and unpaid
----------------------
interest of this Note shall become immediately due and payable upon one or more
of the following events:
A. the failure of the Borrower to pay when due the principal balance
and accrued interest on this Note and the continuation of such default for more
than thirty (30) days; or
B. the insolvency of the Borrower, the commission of an act of
bankruptcy by the Borrower, the execution by the Borrower of a general
assignment for the benefit of creditors, the filing by or against the Borrower
of a petition in bankruptcy or a petition for relief under the provisions of the
federal bankruptcy act or another state or federal law for the relief of debtors
and the continuation of such petition without dismissal for a period of ninety
(90) days or more; or
C. the occurrence of an event of default under the Stock Pledge
Agreement securing this Note or any obligation secured thereby.
5. Security. Payment of this Note shall be secured by a Stock Pledge
--------
Agreement to be executed by Borrower and covering shares of Company common
stock. Borrower, however, shall remain personally liable for payment of this
Note, and assets of the Borrower, in addition to the collateral under the Stock
Pledge Agreement, may be applied to the satisfaction of the Borrower's
obligations hereunder.
<PAGE>
6. Collection. If action is instituted to collect this Note, the Borrower
----------
promises to pay all reasonable costs and expenses (including reasonable attorney
fees) incurred in connection with such action.
7. Waiver. No previous waiver and no failure or delay by the Company or
------
Borrower in acting with respect to the terms of this Note or the Stock Pledge
Agreement shall constitute a waiver of any breach, default, or failure of
condition under this Note, the Stock Pledge Agreement, or the obligations
secured thereby. A waiver of any term of this Note, the Stock Pledge Agreement,
or of any of the obligations secured thereby must be made in writing and signed
by a duly authorized officer of the Company and shall be limited to the express
terms of such waiver.
Borrower hereby expressly waives presentment and demand for payment at such
time as any payments are due under this Note.
8. Conflicting Agreements. In the event of any inconsistencies between
----------------------
the terms of this Note and the terms of any other document related to the loan
evidenced by the Note, the terms of this Note shall prevail.
9. Governing Law. This Note shall be construed in accordance with the
-------------
Laws of the State of California.
Signature of Borrower: Paul Bartlett
Address:
2
<PAGE>
STOCK PLEDGE AGREEMENT
----------------------
In order to secure payment of that certain April 15, 1999 promissory note
(the "Note") payable to Hall, Kinion & Associates, Inc., a Delaware corporation
(the "Company") having its corporate offices at 19925 Stevens Creek Blvd.. Suite
IBO, Cupertino, California 95014, in the principal amount of 51,781.250, which
Note the Borrower delivered in connection with Borrower's exercise of an option
granted to him by the Company. the Borrower hereby grants the Company a security
interest in and assigns, transfers to and pledges with the Company, the
following securities and other property:
(i) the 750,000 shares of Company common stock ("Common Stock")
delivered to and deposited with the Company as collateral for the Note; and
(ii) any and all new, additional or different securities or other
property subsequently distributed with respect to the shares identified in
subparagraph (i) that are to be delivered to and deposited with the Company
pursuant to the requirements of paragraph 3 of this Agreement, and
(iii) any and all other property and money that is delivered to or
comes into the possession of the Company pursuant to the remaining provisions of
this Agreement; and
(iv) the proceeds of any sale, exchange or disposition of the
property and securities described in subparagraphs (i), (ii) or (iii) above,
less any taxes paid by the Borrower as a result of such sale, exchange or
disposition.
All securities, property and money to be assigned to, transferred to and
pledged with the Company shall be herein referred to as the "Collateral" and
shall be accompanied by one or more stock power assignments properly endorsed by
the Borrower. The Company shall hold the Collateral in accordance with the
following terms and provisions:
1. Warranties. The Borrower hereby warrants that the Borrower is the
----------
owner of the Collateral and has the right to pledge the Collateral and that the
Collateral is free from all liens, advance claims and other security interests
(other than those created hereby).
2. Rights and Powers. The Company's Compensation Committee or Board of
-----------------
Directors may, without obligation to do so, exercise one or more of the
following rights and powers with respect to the Collateral:
(a) accept in its discretion, but subject to the applicable limitations
of paragraphs 7(a). (c) and (d), other property of the Borrower in exchange for
all or part of the Collateral and release Collateral to the Borrower to the
extent necessary to effect such exchange, and in such event the money, property
or securities received in the exchange shall be held by the Company as
substitute security for the Note and all other indebtedness secured hereunder;
(b) perform such acts as are necessary to preserve and protect the
Collateral and the rights, powers and remedies granted with respect to such
Collateral by this Agreement; and
3
<PAGE>
(c) transfer record ownership of the Collateral to the Company or its
nominee and receive, endorse and give receipt for, or collect by legal
proceedings or otherwise, dividends or other distributions made or paid with
respect to the Collateral, provided and only if there exists at the time an
--------------------
outstanding event of default under paragraph S of this Agreement.
Any action by the Company pursuant to the provisions of this paragraph 2
may be taken without notice to the Borrower. Expenses reasonably incurred in
connection with such action shall be payable by the Borrower and form part of
the indebtedness secured hereunder as provided in paragraph 10.
So long as there exists no event of default under paragraph 8 of this
Agreement, the Borrower may exercise all shareholder voting rights and be
entitled to receive any and all regular cash dividends paid on the Collateral.
Accordingly, until such time as an event of default occurs under this Agreement,
all proxy statements and other shareholder materials pertaining to the
Collateral shall be delivered to the Borrower at the address indicated below.
Any cash sums that the Company may receive in the exercise of its rights
and powers under paragraph 2(b) above shall be applied to the payment of the
Note and any other indebtedness secured hereunder, in such order of application
as the Company deems appropriate. Any remaining cash shall be paid over to the
Borrower.
3. Duty to Deliver. Any new, additional or different securities that may
---------------
now or hereafter become distributable with respect to the Collateral by reason
of (i) any stocks dividend, stock split or reclassification of the capital stock
of the Company, or (ii) any merger, consolidation or other reorganization
affecting the capital structure of the Company, shall, upon receipt by the
borrower, be promptly delivered to and deposited with the Company as part of the
Collateral hereunder. Such securities shall be accompanied by one or more
properly-endorsed stock power assignments.
4. Care of Collateral. The Company shall exercise reasonable care in the
------------------
custody and preservation of the Collateral, but shall have no obligation to
initiate any action with respect to, or otherwise inform the Borrower of; any
conversion, call, exchange right, preemptive right, subscription right, purchase
offer or other Tight or privilege relating to or affecting the Collateral;
provided, however, that the Company will notify the Borrower of any such rights
of the Borrower to protect against adverse claims or to protect the Collateral
against the possibility of a decline in market value. The Company shall not be
obligated to take any action with respect to the Collateral requested by the
Borrower unless the request is made in writing and the Company determines that
the requested action will not unreasonably jeopardize the value of the
Collateral as security for the Note and other indebtedness secured hereunder.
The Company may at any time release and deliver all or part of the
Collateral to the Borrower, and the receipt thereof by the Borrower shall
constitute a complete and full acquittance for the Collateral so released and
delivered. The Company shall accordingly be discharged from any further
liability or responsibility for the Collateral, and the released Collateral
shall no longer be subject to the provisions of this Agreement. However, any
and all releases of the Collateral shall be effected in compliance with the
applicable limitations of paragraphs 7(a) and 7(c).
4
<PAGE>
5. Payment of Taxes and Other Charges. The Borrower shall pay, prior to
----------------------------------
the delinquency date, all taxes, liens, assessments and other charges against
the Collateral, and in the event of the Borrower's failure to do so, the Company
may at its election pay any or all of such taxes and charges without contesting
the validity or legality thereof. The payments so made shall become part of the
indebtedness secured hereunder and until paid shall bear interest at the per
annum rate, compounded monthly, as set forth in the Note.
6. Transfer of Collateral. In connection with the transfer or assignment
----------------------
of the Note (whether by negotiation, discount or otherwise), the Company may
transfer all or any part of the Collateral, and the transferee shall thereupon
succeed to all the rights, powers and remedies granted the Company hereunder
with respect to the Collateral so transferred. Upon such transfer, the Company
shall be fully discharged from all liability and responsibility for the
transferred Collateral. The Company may only transfer or assign the Note to a
successor entity or its parent in connection with a corporate transaction.
7. Release of Collateral. Provided (i) all indebtedness secured hereunder
---------------------
shall at the time have been paid in full or cancelled and (ii) there does not
otherwise exist any event of default under paragraph 8, the pledged shares of
Common Stock, together with any additional Collateral that may hereafter be
pledged and deposited hereunder, shall be released from pledge and returned to
the Borrower in accordance with the following provisions:
(a) Upon payment or prepayment of principal under the Note, together
with payment of all accrued interest to date, one or more shares of Common Stock
held as Collateral hereunder shall (subject to the applicable limitations of
paragraphs 7(e) and (d) below) be released to the borrower within three (3) days
after such payment or prepayment. The number of shares to be so released shall
be equal to the number obtained by multiplying (i) the total number of shares of
Common Stock held under this Agreement at the time of the payment or prepayment,
by (ii) a fraction of the numerator of which shall be the amount of the
principal paid or prepaid and the denominator of which shall be the unpaid
principal balance of the Note immediately prior to such payment or prepayment.
In no event, however, shall any fractional shares be released, in addition, one
or more shares of Common Stock held as Collateral hereunder may (subject to the
applicable limitations of paragraphs '7(c) and (d) below) be released to a stock
broker designated in writing by the Borrower and acceptable go the Company for
the sole purpose of effecting an immediate sale of the released shares and
provided that such stock broker agrees to forward any proceeds (up to the
balance of principal and interest due under the Now) directly to the Company to
be used to satisfy the Note.
(b) Any additional Collateral that may hereafter be pledged and
deposited with the Company (pursuant to the requirements of paragraph 3) with
respect to the shares of Common Stock pledged hereunder shall be released at the
same time the particular shares of Common Stock to which the additional
Collateral relates are to be released in accordance with the applicable
provisions of paragraph 7(a). Under no circumstances, however, shall any shares
of Common Stock or any other Collateral be released if previously applied to the
payment of any indebtedness secured hereunder,
(c) In no event, however, shall any shares of Common Stock be released
pursuant to the provisions of paragraphs 7(a) or 7(b) if and to the extent, the
fair market value of
5
<PAGE>
the Common Stock and all other Collateral that would otherwise remain in pledge
hereunder after such release were affected would be less than 150% of the unpaid
balance of the Note (principal and accrued interest).
(d) In the event the securities constituting the Collateral constitute
"margin securities" (within the meaning of Section 207.2(i) of Regulation G of
the Federal Reserve Board), then the value of the Collateral securing the note
shall not be less than fifty percent (50%) of the current market value of such
securities. Accordingly, the number of shares to be released pursuant to
paragraph 7(a) or (b) shall be reduced to the extent necessary to comply with
Regulation G.
2. The occurrence of one or more of the following event. shall constitute
an event of default under this Agreement:
(a) the failure of the Borrower to pay the principal and accrued
interest when due under the Note;
(b) the failure of the Borrower to perform a material obligation
imposed upon the Borrower by reason of this Agreement;
(c) the fair market value of the securities constituting the Collateral
decreases to a value that is less than an amount equal to 150% of the
outstanding principal and accrued and unpaid interest under the Note, provided
that the Company's Compensation Committee of the Board of Directors, in its sole
discretion, may deem that this does not constitute a default; or
(d) the breach of any warranty of the Borrower contained in this
Agreement.
Upon the occurrence of any such event of default, the Company may, at its
election, declare the Note and all other indebtedness secured hereunder to
become immediately due and payable and may exercise any or all of the rights and
remedies granted to a secured party under the provisions of the California
Uniform Commercial Code (as now or hereafter in effect), including (without
limitation) the power to dispose of the Collateral by public or private sale or
to accept the Collateral in full payment of the Note and all other indebtedness
secured hereunder.
Any proceeds realized from the disposition of the Collateral pursuant to
the foregoing power of sale shall be applied first to the payment of reasonable
expenses incurred by the Company in connection with the disposition, then to the
payment of the Note and finally to any other indebtedness secured hereunder. Any
surplus proceeds shall be paid over to the Borrower. However, in the event such
proceeds prove insufficient to satisfy all obligations of the Borrower under the
Note, than the Borrower shall remain personally liable for the resulting
deficiency.
8. Other Remedies. The rights, powers and remedies grunted to the Company
--------------
and Borrower pursuant to the provisions of this Agreement shall be in addition
to all rights, powers and remedies granted to the Company and Borrower under any
statute or rule of law. Any forbearance, failure or delay by the Company or
Borrower in exercising any right, power or remedy under this Agreement shall not
be deemed to be a waiver of such right, power or remedy. Any single or partial
exercise of any right, power or remedy under this Agreement shall not preclude
the further exercise thereof, and every right, power and remedy of the Company
and
6
<PAGE>
Borrower under this Agreement shall continue in full force and effect unless
such right, power or remedy is specifically waived by an instrument executed by
the Company or Borrower, as the case may be.
9. Costs and Expenses. All reasonable costs and expenses (including
------------------
reasonable attorneys fees) incurred by the Company in the exercise or
enforcement of any right, power or remedy granted it under this Agreement shall
become part of the indebtedness secured hereunder and shall constitute a
personal liability of the Borrower payable immediately upon demand and bearing
interest until paid ax the Company's bank interest rate then being earned by the
Company on its deposits.
10. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of California and shall be binding upon
the executors, administrators, heirs ~d assigns of the Borrower.
11. Arbitration. Any controversy between the parties hereto involving the
-----------
construction or application of any terms, covenants or conditions of this
Agreement or the Note, or any claims arising our of or relating to this
Agreement or the Note, or the breach hereof or thereof; will be submitted to and
settled by final and binding arbitration in San Francisco, California, in
accordance with the nibs of the American Arbitration then in effect, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. in the event of any arbitration under this
Agreement or the Note, the prevailing party shall be entitled to recover from
the losing party reasonable expenses, attorneys' fees, and costs incurred
therein or in the enforcement or collection of any judgment or award rendered
therein. The "prevailing party" means the party determined by the arbitrator to
have most nearly prevailed, even if such parry did not prevail in all matters,
not necessarily the one in whose favor a judgment is rendered.
12. Severability. If any provision of this Agreement is held to be
------------
invalid under applicable law, then such provision shall be ineffective only to
the extent of such invalidity, and neither the remainder of such provision nor
any other provisions of this Agreement shall be affected thereby.
IN WITNESS WHEREOF, this Agreement has been executed by the Borrower on
this 15th day of April, 1999.
Signature of Borrower: Paul Bartlett
Address:
Agreed to and Accepted by:
HALL, KINION & ASSOCIATES, INC.
By:
Title:
Dated: April, 1999
7
<PAGE>
Exhibit 10.22
PROMISSORY NOTE
---------------
$2,000,000 January 25, 1999
Cupertino, California
FOR VALUE RECEIVED, the undersigned, Brenda Rhodes ("Borrower"), promises
to pay to Hall, Kinion & Associates, Inc. (the "Company"), at its principal
offices at 19925 Stevens Creek Blvd., Suite 180, Cupertino, California 95014,
the principal sum of $2,000,000, together with interest from the date of this
Note on the unpaid principal balance upon the terms and conditions specified
below.
1. Principal and Interest, The principal balance of this Note together
----------------------
with interest accrued and unpaid to date shall be due and payable three (3)
years from the date of this Note.
2. Rate of Interest. Interest shall accrue under the Note on any unpaid
----------------
principal balance at the rate of the Company's cost of borrowing plus 1/8% per
annum, compounded monthly.
3. Prepayment. Prepayment of principal and interest may be made at any
----------
rime without penalty.
4. Events of Acceleration. The entire unpaid principal sum and unpaid
----------------------
interest of this Note shall become immediately due and payable upon one or more
of the following events:
A. the failure of the Borrower to pay when due the principal balance
and accrued interest on this Note and the continuation of such default for more
than thirty (30) days; or
B. the insolvency of the Borrower, the commission of an act of
bankruptcy by the Borrower, the execution by the Borrower of a general
assignment for the benefit of creditors, the filing by or against the Borrower
of a petition in bankruptcy or a petition for relief under the provisions of the
federal bankruptcy act or another state or federal law for the relief of debtors
and the continuation of such petition without dismissal for a period of ninety
(90) days or more; or
C. the occurrence of an event of default under the Stock Pledge
Agreement securing this Note or any obligation secured thereby.
Borrower, in addition to the collateral under the Stock Pledge Agreement, may be
applied to the satisfaction of the Borrower's obligations hereunder.
5. Collection. If action is instituted to collect this Note, the Borrower
----------
promises to pay all reasonable costs and expenses (including reasonable attorney
fees) incurred in connection with such action
6. Waiver. No previous waiver and no failure or delay by the Company or
------
Borrower in acting with respect to the terms of this Note or the Stock Pledge
Agreement shall constitute a
<PAGE>
waiver of any breach, default, or failure of condition under this Note, the
Stock Pledge Agreement, or the obligations secured thereby. A waiver of any
term of this Note, the Stock Pledge Agreement, or of any of the obligations
secured thereby must be made in writing and signed by a duly authorized
officer of the Company and shall be limited to the express terms of such
waiver.
Borrower hereby expressly waives presentment and demand for payment at such
time as any payments are due under this Note.
7. Conflicting Agreements. In the event of any inconsistencies between
----------------------
the terms of this Note and the terms of any other document related to the loan
evidenced by the Note, the terms of this Note shall prevail.
8. Governing Law. This Note shall be construed in accordance with the
-------------
laws of the State of California.
Signature of Borrower: Brenda Rhodes
Address:
2
<PAGE>
STOCK PLEDGE AGREEMENT
----------------------
In order to secure payment of that certain January 25, 1999 promissory note
(the "Note") payable to Hall, Kinion & Associates, Inc., a Delaware corporation
(the "Company") having its corporate offices at 19925 Stevens Creek Blvd., Suite
180, Cupertino, California 95014. in the principal amount of $2,000,000, which
Note the Borrower delivered in connection with a loan extended to the Borrower
by the Company, the Borrower hereby grants the Company a security interest in,
and assigns, transfers to and pledges with the Company, the following securities
and other property:
(i) the 1,000,000 shares of Company common stock ("Common Stock")
delivered to and deposited with the Company as collateral for the Note; and
(ii) any and all new, additional or different securities or other
property subsequently distributed with respect to the shares identified in
subparagraph (i) that are to be delivered to and deposited with the Company
pursuant to the requirements of paragraph 3 of this Agreement; and
(iii) any and all other property and money that is delivered to or
comes into the possession of the Company pursuant to the terms and provisions of
this Agreement; and
(iv) the proceeds of any sale, exchange or disposition of the
property and securities described in subparagraphs (i), (ii) or (iii) above.
All securities, property and money to be assigned to, transferred to and
pledged with the Company shall be herein referred to as the "Collateral" and
shall be accompanied by one or more stock power assignments properly endorsed by
the Borrower. The Company shall hold the Collateral in accordance with the
following terms and provisions:
1. Warranties. The Borrower hereby warrants that the Borrower is the
----------
owner of the Collateral and has the right to pledge the Collateral and that the
Collateral is free from all liens, advance claims and other security interests
(other than those created hereby).
2. Rights and Powers. The Company's Compensation Committee or Board of
-----------------
Directors may, without obligation to do so, exercise one or more of the
following rights and powers with respect to the Collateral:
(a) accept in its discretion, but subject to the applicable
limitations of paragraphs 7(a), (c) and (d), other property of the Borrower in
exchange for all or part of the Collateral and release Collateral to the
Borrower to the extent necessary to effect such exchange, and, in such event
the money, property or securities received in the exchange shall be held by
the Company as substitute security for the Note and all other indebtedness
secured hereunder;
(b) perform such acts as are necessary to preserve and protect the
Collateral and the rights, powers and remedies ranted with respect to such
Collateral by this Agreement; and
3
<PAGE>
(c) transfer record ownership of the Collateral to the Company or its
nominee and receive, endorse and give receipt for, or collect by legal
proceedings or otherwise, dividends or other distributions made or paid with
respect to the Collateral, provided arid only if there exists at the time an
---------------------
outstanding event of default under paragraph 8 of this Agreement.
Any action by the Company pursuant to the provisions of this paragraph 2
may be taken without notice to the Borrower. Expenses reasonably incurred in
connection with such action shall be payable by the Borrower and form part of
the indebtedness secured hereunder as provided in paragraph 10.
So long as there exists no event of default under paragraph 8 of this
Agreement, the Borrower may exercise all shareholder voting rights and be
entitled to receive any and all regular cash dividends paid on the Collateral.
Accordingly, until such time as an event of default occurs under this Agreement,
all proxy statements and other shareholder materials pertaining to the
Collateral shall be delivered to the Borrower at the address indicated below.
Any cash sums that the Company may receive in the exercise of its rights
and powers under paragraph 2(b) above shall be applied to the payment of the
Note and any other indebtedness secured hereunder, in such order of application
as the Company deems appropriate. Any remaining cash shall be paid over to the
Borrower.
3. Duty to Deliver. Any new, additional or different securities that may
---------------
now or hereafter become distributable with respect to the Collateral by reason
of (i) any stock dividend, stock split or reclassification of the capital stock
of the Company, or (ii) any merger, consolidation or other reorganization
affecting the capital structure of the Company, shall, upon receipt by the
Borrower, be promptly delivered to and deposited with the Company as part of the
Collateral hereunder. Such securities shall be accompanied by one or more
properly-endorsed stock power assignments.
4. Care of Collateral. The Company shall exercise reasonable care in the
------------------
custody and preservation of the Collateral, but shall have no obligation to
initiate any action with respect to, or otherwise inform the Borrower of, any
conversion, call, exchange right, preemptive right, subscription right, purchase
offer or other right or privilege relating to or affecting the Collateral;
provided, however, that the Company will notify the Borrower of any such rights
of the Borrower to protect against adverse claims or to protect the Collateral
against the possibility of a decline in market value. The Company shall not be
obligated to take any action with respect to the Collateral requested by the
Borrower unless the request is made in writing and the Company determines that
the requested action will not unreasonably jeopardize the value of the
Collateral as security for the Note and other indebtedness secured hereunder.
The Company may at any time release and deliver all or part of the
Collateral to the Borrower, and the receipt thereof by the Borrower shall
constitute a complete and full acquittance for the Collateral so released and
delivered. The Company shall accordingly be discharged from any further
liability or responsibility for the Collateral, and the released Collateral
shall no longer be subject to the provisions of this Agreement. However, any
and all releases of the Collateral shall be effected in compliance with the
applicable limitations of paragraphs 7(a) and 7(c).
4
<PAGE>
5. Payment of Taxes and Other Charges. The Borrower shall pay, prior to
----------------------------------
the delinquency date, all taxes, liens, assessments and other charges against
the Collateral, and in the event of the Borrower's failure to do so, the Company
may at its election pay any or all of such taxes and charges without contesting
the validity or legality thereof. The payments so made shall become part of the
indebtedness secured hereunder and until paid shall bear interest at the per
annum rate, compounded monthly, as set fourth in the note.
6. Transfer of Collateral. In connection with the transfer or assignment
----------------------
of the note (whether by negotiation, discount or otherwise), the Company may
transfer all or any part of the Collateral, and the transferee shall thereupon
succeed to all the rights, powers and remedies granted the Company hereunder
with respect to the Collateral so transferred. Upon such transfer, the Company
shall be fully discharged from all liability and responsibility for the
transferred Collateral.
7. Release of Collateral. Provided (i) all indebtedness secured hereunder
---------------------
shall at the time have been paid in full or canceled and (ii) there does not
otherwise exist any event of default under paragraph 8, the pledged shares of
Common Stock, together with any additional Collateral that may hereafter be
pledged and deposited hereunder, shall be released from pledge and returned to
the Borrower in accordance with the following provisions:
(a) Upon payment or prepayment of principal under the Note, together
with payment of all accrued interest to date, one or more shares of Common Stock
held as Collateral hereunder shall (subject to the applicable limitations of
paragraphs 7(c) and (d) below) be released to the Borrower within three (3) days
after such payment or prepayment. The number of shares to be so released shall
be equal to the number obtained by multiplying (i) the total number of shares of
Common Stock held under this Agreement at the time of the payment or prepayment,
by (ii) a fraction of the numerator of which shall be the amount of the
principal paid or prepaid and the denominator of which shall be the unpaid
principal balance of the Note immediately prior to such payment or prepayment.
In no event, however, shall any fractional shares be released. In addition, one
or more shares of Common Stock held as Collateral hereunder may (subject to the
applicable limitations of paragraphs 7(c) and (d) below) be released to a stock
broker designated in writing by the Borrower and acceptable to the Company for
the sole purpose of effecting an immediate sale of the released shares and
provided that such stock broker agrees to forward any proceeds (up to the
balance of principal and interest due under the Note) directly to the Company to
be used to satisfy the Note.
(b) Any additional Collateral that may hereafter be pledged and
deposited with the Company (pursuant to the requirements of paragraph 3) with
respect to the shares of Common Stock pledged hereunder shall be released at the
same time the particular shares of Common Stock to which the additional
Collateral relates are to be released in accordance with the applicable
provisions of paragraph 7(a). Under no circumstances, however, shall any shares
of Common Stock or any other Collateral be released if previously applied to the
payment of any indebtedness secured hereunder.
(c) In no event, however, shall any shares of Common Stock be released
pursuant to the provisions of paragraphs 7(a) or 7(b) if, and to the extent, the
fair market value of the Common Stock and all other Collateral that would
otherwise remain in pledge hereunder
5
<PAGE>
after such release were affected would be less than 150% of the unpaid balance
of the Note (principal and accrued interest).
(d) In the event the securities constituting the Collateral constitute
"margin securities" (within the meaning of Section 207.2(i) of Regulation G of
the Federal Reserve Board), then the value of the Collateral securing the note
shall not be less than fifty percent (50%) of the current market value of such
securities. Accordingly, the number of shares to be released pursuant to
paragraph 7(a) or (b) shall be reduced to the extent necessary to comply with
Regulation 0.
8. Events of Default. The occurrence of one or more of the following
-----------------
events shall constitute an event of default under this Agreement:
(a) the failure of the Borrower to pay the principal and accrued
interest when due under the Note;
(b) the failure of the Borrower to perform a material obligation
imposed upon the Borrower by reason of this Agreement,
(c) the fair market value of the securities constituting the
Collateral decreases to a value that is less than an amount equal to 150% of the
outstanding principal and accrued and unpaid interest under the Note; or
(d) the breach of any warranty of the Borrower contained in this
Agreement.
Upon the occurrence of any such event of default, the Company may, at its
election, declare the Note and all other indebtedness secured hereunder to
become immediately due and payable and may exercise any or all of the rights and
remedies granted to a secured party under the provisions of the California
Uniform Commercial Code (as now or hereafter in effect), including (without
limitation) the power to dispose of the Collateral by public or private sale or
to accept the Collateral in full payment of the Note and all other indebtedness
secured hereunder.
Any proceeds realized from the disposition of the Collateral pursuant to
the foregoing power of sale shall be applied first to the payment of reasonable
expenses incurred by the Company in connection with the disposition, then to the
payment of the Note and finally to any other indebtedness secured hereunder.
Any surplus proceeds shall be paid over to the Borrower. However, in the event
such proceeds prove insufficient to satisfy all obligations of the Borrower
under the Note, than the Borrower shall remain personally liable for the
resulting deficiency.
9. Other Remedies. The rights, powers and remedies granted to the Company
--------------
and Borrower pursuant to the provisions of this Agreement shall be in addition
to all rights, powers and remedies granted to the Company and Borrower under any
statute or rule of law. Any forbearance, failure or delay by the Company or
Borrower in exercising any right, power or remedy under this Agreement shall not
be deemed to be a waiver of such right, power or remedy. Any single or partial
exercise of any right, power or remedy under this Agreement shall not preclude
the further exercise thereof, and every right, power and remedy of the Company
and Borrower under this Agreement shall continue in full force and effect unless
such right, power or
6
<PAGE>
remedy is specifically waived by an instrument executed by the Company or
Borrower, as the case may be.
10. Costs and Expenses. All reasonable costs and expenses (including
------------------
reasonable attorneys fees) incurred by the Company in the exercise or
enforcement of any right, power or remedy granted it under this Agreement shall
become part of the indebtedness secured hereunder and shall constitute a
personal liability of the Borrower payable immediately upon demand and bearing
interest until paid at the Company's bank interest rate then being earned by the
Company on its deposits.
11. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of California and shall be binding upon
the executors, administrators, heirs and assigns of the Borrower.
12. Arbitration. Any controversy between the parties hereto involving the
-----------
construction or application of any terms, covenants or conditions of this
Agreement or the Note, or any claims arising out of or relating to this
Agreement or the Note, or the breach hereof or thereof, will be submitted to and
settled by final and binding arbitration in San Francisco, California, in
accordance with the rules of the American Arbitration then in effect, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. In the event of any arbitration under this
Agreement or the Note, the prevailing party shall be entitled to recover from
the losing party reasonable expenses, attorneys' fees, and costs incurred
therein or in the enforcement or collection of any judgment or award rendered
therein. The "prevailing party" means the party determined by the arbitrator to
have most nearly prevailed, even if such party did not prevail in all matters,
not necessarily the one in whose favor a judgment is rendered.
13. Severability. If any provision of this Agreement is held to be
------------
invalid under applicable law, then such provision shall be ineffective only to
the extent of such invalidity, and neither the remainder of such provision nor
any other provisions of this Agreement shall be affected thereby.
IN WITNESS WHEREOF, this Agreement has been executed by the Borrower on
this day 25th day of January, 1999.
Signature of Borrower: Brenda Rhodes
Address:
Agreed to and Accepted by:
HALL, KINION & ASSOCIATES, INC.
7
<PAGE>
By:
Title:
- -----
Dated: January 25, 1999
8
<PAGE>
Dear Jon & Todd, January 25, 1999
Pursuant to the loan agreement between Hall Kinion and myself dated January
25, 1999, 1 am pledging that the personal shares of Hall Kinion stock that I
hold in my account will be used for gifting purposes. In the event any shares
are sold for personal gain, all proceeds from the sale will be applied toward
my debt obligation to Hall Kinion, without written consent to the contrary.
Brenda Rhodes
9
<PAGE>
Exhibit 10.23
PROMISSORY NOTE
$100,000 Cupertino, California
- -------- September 26, 1998
For value received, the undersigned (the "Borrower") promises to pay
to the order of Hall, Kinion & Associates, Inc., a Delaware corporation (the
"Holder"), at its principal offices at 19925 Stevens Creek Blvd., Suite 180,
Cupertino, California 95014 the sum of $100,000, with interest compounded
annually from the date hereof on unpaid principal at the rate of 6.74% per
annum. Principal and interest shall be due and payable in monthly installments
of $__________ on the 1st day of each month, beginning on the 1st day of
October, 1998, and continuing each consecutive month thereafter until all
principal and accrued but unpaid interest has been paid in full, with any unpaid
principal and all accrued but unpaid interest due and payable on the 1st day of
October, 2002. Each payment shall be credited first on interest then due and
the remainder on principal. Immediately thereafter, interest shall cease on the
principal so credited. Principal and interest are payable in lawful money of
the United States.
1. Loan Forgiveness: Each monthly payment corning due under the
----------------
terms above shall be fully and unconditionally waived by the Holder. PROVIDED
THAT, the Borrower is employed by the Holder at the time such payment comes due.
If at any point in time an outstanding balance remains payable under this Note,
and the Holder terminates the Borrower's employment, with or without cause,
(each, a "Termination Event") then after such Termination Event, all sums
becoming due and payable hereunder after the occurrence of any such Termination
Event, shall be paid in cash by the Borrower in accordance with the payment
terms set forth in the first paragraph hereof; and such payments shall not be
forgiven or waived by the Holder pursuant to this paragraph. If at the end of
the term of this Note the Borrower continues to be employed by the Holder, the
entire debt evidenced by this Note shall be fully-and unconditionally forgiven
by the Holder and the Holder shall return the original Note to the Borrower.
2. Events of Default. It shall be an "Event of Default" under this
-----------------
Note if (i) the Borrower terminates his employment with the Holder for any
reason (ii) any payment of principal, interest or any other sum required to be
paid by the Borrower to the Holder under this Note is not received by the Holder
on the date due and such default is not cured within five (5) business days
slier notice thereof from the Holder to the Borrower; (iii) the Borrower fails
to perform or observe any other covenant, condition, agreement or obligation on
the part of Borrower to be performed or observed hereunder and such non-monetary
default is not readily susceptible of being cured within thirty (30) days; (iv)
the Borrower fails to execute a Stock Pledge Agreement covering shares of Hall,
Kinion & Associates, Inc. Common Stock that he may acquire from time to time
pursuant to options granted him by the Holder within thirty (30) days of a
request from the Holder; (v) the Borrower becomes insolvent. commits any act of
bankruptcy, executes a general assignment for the benefit of creditors, files or
has filed against him any petition of bankruptcy or any petition for relief
under the provisions of the federal bankruptcy act or any other state or federal
law for the relief of debtors which petition is continued without dismissal for
a period of 30 days or more; or a receiver or trustee is appointed to take
possession of any property or assets of the Borrower, or an attachment of or
execution
<PAGE>
against any property of the Borrower occurs; or (vi) an event of default occurs
under any Stock Pledge Agreement executed by the Borrower.
3. Acceleration. Upon the occurrence of an Event of Default
------------
hereunder, the unpaid principal balance of this Note, all accrued, unpaid
interest. fees, costs and charges due hereunder, shall at the option of the
Holder become immediately due and payable, notwithstanding anything to the
contrary contained herein. The failure to exercise such option shall not
constitute a waiver on the part of the Holder of the right to exercise such
option at any other time.
4. Application of Proceeds. In the event of the acceleration of
-----------------------
payment of this Note as a result of an Event of Default under this Note, the
proceeds of any sale of any property securing the indebtedness evidenced hereby,
including, but not limited to. shares of Hall, Kinion & Associates, Inc. Common
Stock purchased by the Borrower pursuant to options granted him by the Holder,
to the extent applied to the payment of the Borrower's obligations under this
Note, shall be applied in the following order: (i) FIRST, to any unpaid late
charges, fees, costs and the like; (ii) SECOND, to any accrued and unpaid
interest; (iii) THIRD, to any principal.
5. Attorney's Fees. Whether or not suit is filed, the Borrower
---------------
agrees to pay all reasonable attorneys' fees, costs of collection, costs, and
expenses incurred by the Holder in connection with the enforcement or collection
of this Note. The Borrower further agrees to pay all costs of suit and the sum
adjudged as attorneys' fees in any action to enforce payment of this Note or any
part of it.
6. Security. Payment of this Note shall be secured by one or more
--------
Stock Pledge Agreements to be executed by the Borrower covering any shares of
Hall, Kinion & Associates, Inc. Common Stock the Borrower may acquire upon the
exercise of stock options granted him by the Holder. The Borrower shall,
however, remain personally liable for payment of this Note and assets of the
Borrower, in addition to the collateral under any Stock Pledge Agreement(s), may
be applied to the satisfaction of the Borrower's obligations hereunder.
7. Law Governing. This Note shall be construed and enforced in
-------------
accordance with, and governed by, the internal laws of the State of California,
excluding that body of law applicable to conflicts of law.
BORROWER
___________________________________________
Craig J. Silverman
2
<PAGE>
ACKNOWLEDGMENT
State of California )
) ss
County of ____________ )
On September 16, 1998, before me, Marty A. Kropelnicki, personally
appeared Craig J. Silverman personally known to me or proved to me on the basis
of satisfactory evidence to be the person whose name is subscribed to the within
instrument and acknowledged to me that he executed the same, and that by his
signature on the instrument. that person executed the instrument.
WITNESS my hand and official seal.
Signature__________________________
3
<PAGE>
Exhibit 10.26
TRUST AGREEMENT
This Trust Agreement made as of April 17, 1998, by and between Hall, Kinion
& Associates, Inc., a Delaware corporation (hereinafter called "Company"), and
First American Trust Company, a financial institution organized and existing
under the laws of the State of California (hereinafter called "Trustee").
WITNESSETH:
WHEREAS, certain executives of the Company participate in the Hall, Kinion
& Associates, Inc. Deferred Compensation Plan (the "Plan") pursuant to which
such individuals (the "Participants") have the opportunity to defer payment of
their salary and bonuses each year.
WHEREAS, it is anticipated that substantial amounts of compensation will be
deferred under the Plan and the accumulation of such deferred compensation will
represent a significant liability of the Company.
WHEREAS, the Company will establish an account or accounts for each
Participant on its books and records to which there will be credited the amount
of compensation such individual defers under the Plan plus any special
contributions made by the Company under the Plan, together with the investment
return to which such individual is entitled on the deferred sum.
WHEREAS, the deferred amounts plus any special contributions made by the
Company under the Plan and any investment return on such amounts are to be paid
to the Participant at such time or times (the "Deferred Payments") as the
Participant has specified in his or her election forms under the Plan.
WHEREAS, the Company deems it advisable to establish an irrevocable trust
to which the Company shall transfer assets from time to time in order to
accumulate resources from which the Deferred Payments shall be made as they
become due under the Plan.
RESOLVED, that the parties hereby establish this Trust to which the Company
shall transfer assets from time to time for the purpose of accumulating
resources to satisfy, in whole or in part, its liability for the Deferred
Payments under the Plan. The assets so transferred, together with all income
and earnings thereon and all increments thereto, shall constitute the Trust
Fund, and the Trustee shall hold the Trust Fund for the uses and purposes and
upon the terms and conditions of this Trust Agreement.
ARTICLE I
THE TRUST FUND
1.1 The Company hereby deposits in trust with the Trustee the principal
sum of Five Hundred Dollars ($500.00) to comprise the initial Trust Fund. Such
Trust Fund shall be held, administered, managed and distributed by the Trustee
in accordance with the provisions of this Trust Agreement. From time to time
during the term of the Trust, the Company shall deposit additional sums with the
Trustee to be held as part of the Trust Fund hereunder for the uses and
<PAGE>
purposes specified herein. Such additional deposits shall be made at such
times and in such amounts as the Company's Board of Directors (the "Board")
shall deem appropriate in its sole discretion, and the Trustee shall have no
responsibility or obligation to compute or collect any contributions or other
deposits to be made by the Company to the Trust Fund.
1.2 Any and all contributions made by the Company to the Trust Fund shall
be paid over to the Trustee in cash or in any other form of property acceptable
to the Trustee. All contributions so received, together with all income and
earnings thereon and all increments thereto, shall constitute the Trust Fund.
1.3 The Trustee shall have the exclusive authority to control and manage
the assets of the Trust Fund in accordance with the provisions of Article IV and
shall manage and administer the Trust Fund without distinction between principal
and income and without liability for the payment of interest thereon. The
Trustee shall not be responsible in any way for the operation and administration
of the Plan. All responsibility and authority for the operation and
administration of the Plan shall be vested exclusively with a committee (the
"Plan Administrator") appointed by, and serving at the pleasure of, the Board.
1.4 The Trust hereby established shall be irrevocable and shall be
administered as a grantor trust of the Company pursuant to the provisions of
Sections 671 and 677 of the Internal Revenue Code of 1986, as amended (the
"Code").
1.5 The Trust Fund shall at all times be held by the Trustee as property
separate and apart from all other assets and funds of the Company. The Trust
Fund shall be used exclusively for the purpose of effecting the Deferred
Payments in accordance with the provisions of this Trust Agreement and in
defraying the reasonable expenses and costs incurred by the Trustee in the
administration of the Trust Fund, until all the Deferred Payments which are to
be effected pursuant to this Trust Agreement shall have been made; provided,
--------
however, that the Trust Fund shall at all times be subject to the claims of the
Company's general creditors pursuant to the provisions of Article III. The
Company, however, shall be reduced only to the extent one or more Deferred
Payments are actually made from the Trust Fund.
1.6 The Company's obligation to make the Deferred Payments pursuant to the
Plan shall at all times remain an unfunded and unsecured contractual obligation,
and no Participant shall have any preferred or senior claim or beneficial
ownership interest in or to any assets of the Trust Fund. Any right the
Participant may have to receive one or more Deferred Payments shall be that of
an unsecured creditor of the Company.
ARTICLE II
DEFERRED PAYMENTS
2.1 Provided the Company is not at the time Insolvent (within the meaning
of Section 4.1), the Trustee shall from time to time, upon the written
directives of the Plan Administrator, distribute from the Trust Fund one or more
Deferred Payments due under the Plan to such individuals, in such amounts and at
such times as may be specified in the directives. Each distribution so made
shall be deducted from and charged against the Trust Account of the Participant
to whom the Deferred Payment is distributed.
2
<PAGE>
2.2 The Trustee shall be obligated to make the Deferred Payments out of
the Trust Fund in accordance with the most recent payment schedule in effect for
each Participant, provided the Company is not otherwise at the time Insolvent.
Each such Deferred Payment shall be adjusted for additional investment earnings
to which the Participant may become entitled under the Plan for the period prior
to payment, and the amount of such Deferred Payment shall, upon distribution by
the Trustee, be deducted from and charged against the Participant's Trust
Account.
2.3 The Trustee shall incur no liability for making any distribution in
accordance with directives received pursuant to the provisions of Section 3.1 or
Section 3.2 and shall be under no duty to make inquiry as to whether any
distribution effected in accordance with such directives is made pursuant to the
provisions of the Plan. The Trustee shall not be liable for the proper
application of any part of the Trust Fund to the extent distributions are made
in accordance with Section 3.1 or Section 3.2, nor shall the Trustee be
responsible for the adequacy of the Trust Fund to meet and discharge the
obligations and liabilities of the Company under the Plan.
2.4 The Trustee shall be responsible for the collection of all federal and
state income tax withholding requirements applicable to each distribution,
provided the Plan Administrator furnishes the Trustee with information about
each Participant that is necessary for calculating the amount of the withholding
taxes.
2.5 The Trustee may make any distributions required to be made hereunder
by mailing a check for the amount thereof to the person to whom such
distribution is to be made at such address as may have last been furnished to
the Trustee, or if no such address shall have been so furnished, to such person
in care of the Company at its principal office.
2.6 Should the Trustee determine that the individual Trust Accounts
maintained for one or more Participants do not at the time have a sufficient
balance to make all the Deferred Payments then due and payable to such
Participants, then the Trustee shall nevertheless make the Deferred Payments to
one or more of such participants to the extent there are sufficient assets in
each of their individual Trust Accounts and shall promptly notify the Plan
Administrator of any existing deficiency. The Company shall correct the
specified deficiency by making payments out of its general assets to each
affected Participant.
2.7 Should it be determined, whether by final decision of a court of
competent jurisdiction or by closing agreement under Code Section 7121 between
the Internal Revenue Service and the Participant, that the Participant will, by
reason of his or her interest in the Plan, recognize taxable income under the
federal tax laws before the date the corresponding Deferred Payment or Payments
would otherwise be made to such Participant pursuant to the Plan, the Plan
Administrator shall thereupon provide written directives to the Trustee to
distribute out of the Trust Account maintained for such Participant, as soon as
administratively feasible, whichever of the following amounts the Plan
Administrator in its sole discretion deems appropriate under the circumstances:
(i) an amount equal to the federal, state and local income tax
liability incurred by the Participant with respect to such taxable income, or
3
<PAGE>
(ii) one or more Deferred Payments equal to the full amount of such
taxable income.
2.8 Should the Company receive an opinion of counsel, in form and
substance satisfactory to the Plan Administrator, that:
(i) on the basis of a published regulation, ruling or other general
announcement of the Internal Revenue Service, the existence of the Trust Fund
will result in the immediate recognition of taxable income by the individuals
for whom the Trust Accounts are maintained hereunder, or
(ii) on the basis of a published regulation or other general
announcement or advisory opinion of the U.S. Department of Labor, the existence
of the Trust Fund will result in the characterization of the Plan as a funded
employee pension plan under Title I of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"),
then the Trust shall immediately terminate and the Plan Administrator
shall thereupon provide written directives to the Trustee to liquidate the
assets of the Trust Fund to the extent necessary to distribute to each
Participant, as soon as administratively feasible, sufficient cash proceeds to
effect payment of whichever of the following amounts the Plan Administrator in
its sole discretion deems appropriate under the circumstances:
(A) the amount necessary to satisfy the federal, state and local
income tax liability incurred by the Participant with respect to his or her
Trust Account, or
(B) the amount necessary to pay off the entire balance then
outstanding in such Participant's Trust Account.
Such distribution shall be made notwithstanding any payment elections to
the contrary that the Participants may otherwise have outstanding under the
Plan. Any remaining proceeds of the Trust Fund shall then be paid to the
Company.
ARTICLE III
COMPANY INSOLVENCY
3.1 The Company shall be considered "Insolvent" for purposes of this Trust
Agreement if:
(i) The Company shall (A) admit in writing its inability to pay its
debts generally as they become due, (B) commence voluntary proceedings under any
applicable bankruptcy, insolvency or other debtor-relief law now or hereafter in
effect, (C) make a general assignment of its assets for the benefit of its
creditors, (D) consent to the appointment of a receiver for itself or any
substantial part of its property, (E) consent to the relief sought in any
involuntary proceedings under any applicable bankruptcy, insolvency or other
debtor-relief law now or hereafter in effect or (F) take corporate action in
furtherance of any of the aforesaid purposes; or
4
<PAGE>
(ii) There shall be entered by a court of competent jurisdiction any
order, decree or other for relief with respect to the Company: (A) in any
involuntary proceedings against the Company under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or (B) appointing,
without the consent of the Company, a receiver for the Company or any
substantial portion of its property, or (C) approving the commencement of
involuntary proceedings filed against the Company under any applicable law now
or hereafter in effect seeking the winding-up or liquidation of the Company, and
in any such instance the order or decree so entered shall not be vacated or set
aside or stayed within sixty (60) days after the date of entry thereof.
3.2 At all times during the term of this Trust, the Trust Fund shall be
subject to claims of the general creditors of the Company as hereinafter set
forth. At any time the Trustee has actual knowledge (or otherwise determines)
that the Company is Insolvent, the Trustee shall cease all further Deferred
Payments to Participants and shall thereafter hold the Trust Fund solely and
exclusively for distribution in payment and satisfaction of any and all claims
of the Company's creditors as a court of competent jurisdiction may direct.
3.3 The Company's Chief Financial Officer and the Board shall each have
the affirmative duty to provide immediate written notice to the Trustee in the
event the Company should become Insolvent. Should the Chief Financial Officer
or the Board provide such written notice to the Trustee, or should one or more
creditors of the Company allege in writing to the Trustee that the Company has
become Insolvent, then the Trustee shall, within thirty (30) days after receipt
of such notice or allegation, make an independent determination as to whether
the Company is in fact Insolvent. Pending such determination, the Trustee (i)
shall make no further Deferred Payments to Participants under the Plan, (ii)
shall hold the Trust Fund for the benefit of the Company's creditors and (iii)
shall not resume Deferred Payments to Participants in accordance with Article II
of this Trust Agreement until such time (if ever) as (A) the Trustee determines
that the Company is not Insolvent (or that the Company is no longer Insolvent,
if the Trustee initially determines the Company to be Insolvent) or (B) the
Trustee is ordered to make the Deferred Payments by a court of competent
jurisdiction.
3.4 Unless the Trustee has actual knowledge that the Company is Insolvent,
the Trustee shall have no duty to inquire whether the Company is Insolvent or to
make any independent investigation thereof. The Trustee may in all events rely
on such available evidence concerning the Company's solvency and financial
condition as may provide the Trustee with a reasonable basis for determining the
Company's solvency.
3.5 Nothing in this Trust Agreement shall adversely affect or in any
manner diminish the rights of any Participant to pursue his or her rights as a
general creditor of the Company with respect to all amounts credited to his or
her book account or accounts under the Plan.
3.6 Should the Trustee discontinue the distribution of Deferred Payments
out of the Trust Fund to one or more Participants pursuant to Section 4.3 and
subsequently determine, upon a finding that the company is not (or is no longer)
Insolvent, that Deferred Payments should subsequently be resumed, then the first
Deferred Payment to each of the affected Participants that is made out of the
Trust Fund after such period of discontinuance shall be an amount equal to the
difference between (i) the aggregate Deferred Payments that would have otherwise
been
5
<PAGE>
distributed out of the Trust Fund to such Participant (together with any
investment return on the unpaid amount to which the Participant is entitled
under the Plan) had there been no such discontinuance and (ii) the aggregate
Deferred Payments (if any) paid to the Participant out of the Company's
general assets during such period of discontinuance in lieu of the
distributions provided for hereunder. The Trustee shall be entitled to assume
that no such payments were made by the Company unless, prior to making the
payment hereunder, the Trustee receives a written certification from the Plan
Administrator, in which there is specified the amount of Deferred Payments
made to each Participant by the Company during the period of discontinuance.
ARTICLE IV
TRUSTEE POWERS
4.1 Except to the extent the Plan Administrator provides written
directives to the Trustee to purchase or sell specific investment assets that
are to serve as the measure of the investment return on one or more Trust
Accounts, the Trustee shall have the exclusive authority and responsibility to
invest and reinvest the assets of the Trust Fund in accordance with the general
investment guidelines provided from time to time in writing by the Plan
Administrator (the "Investment Guidelines").
4.2 To the extent the Plan Administrator provides specific directives for
the purchase or sale of Trust assets, the Trustee shall effect the directed
transactions and shall not incur any liability as a result of its compliance
with such directives. The Trustee may invest and reinvest all remaining Trust
assets in accordance with the Investment Guidelines and may rely on such
guidelines until written notice to the contrary is provided by the Plan
Administrator.
4.3 Upon receipt of any cash contributions from the Company that are to be
invested in specific investment assets in accordance with the Plan
Administrator's directives, the Trustee may, for a reasonable period, hold such
contributions in interest-bearing accounts until sufficient amounts are
accumulated to purchase one or more full units of the particular asset or
security designated by the Plan Administrator in its investment directives.
4.4 With respect to Trust assets that are to be invested in accordance
with the Investment Guidelines, the Trustee may invest or reinvest all or any
specified portion thereof in any Trustee-administered commingled or collective
trust fund with the same general investment objectives, and the instruments
under which any such commingled or collective fund has been established shall be
incorporated into this Trust Agreement and made a part hereof. In no event,
however, may any assets of the Trust Fund be invested or reinvested in stocks,
securities or debt instruments issued by the Company or any parent or subsidiary
company (as determined pursuant to the provisions of Code Section 424).
4.5 Subject to (i) the express obligations of the Trustee under this Trust
Agreement and (ii) any specific investment directives provided by the Plan
Administrator, the Trustee shall have all the rights, powers and privileges of
an absolute owner when dealing with the assets of the Trust Fund, including
(without limitation) full power and authority:
6
<PAGE>
(i) to hold, manage, improve, repair and control all property of
the Trust Fund, real or personal; and to sell, convey, transfer, exchange,
partition, lease, or otherwise dispose of the same from time to time in such
manner, for such consideration and upon such terms and conditions, including
credit, as the Trustee shall determine in its discretion;
(ii) to purchase (or subscribe for) and retain any securities or
other property, including life insurance policies, and to establish margin
accounts in connection therewith to the extent applicable;
(iii) to exercise any option, conversion privilege or subscription
right given the Trustee as the owner of any security held in the Trust Fund; to
exercise any and all voting rights upon any stocks, bonds or other securities;
to give general or special proxies or powers of attorney with or without power
of substitution; to oppose, or to consent to, or otherwise participate in,
corporate reorganizations or other changes affecting corporate securities, and
to delegate discretionary powers, and to pay any assessments or charges in
connection therewith; and generally to exercise any of the powers of an owner
with respect to stocks, bonds, securities or other property comprising the Trust
Fund;
(iv) to commence or defend legal or administrative proceedings,
and to compromise, arbitrate, or settle claims, debts or damages in favor of
or against the Trust and to deliver or accept, in either total or partial
satisfaction of any indebtedness or other obligation, any property, and to
continue to hold for such period of time as the Trustee may deem appropriate
any property so received, and to pay all costs and reasonable attorney fees in
connection therewith out of the assets of the Trust Fund;
(v) to foreclose any obligation by judicial proceeding or
otherwise;
(vi) to deposit any securities held in the Trust Fund with a
securities depository;
(vii) to invest assets of the Trust Fund in time deposits or savings
accounts bearing a reasonable rate of interest; to invest in Treasury Bills and
other forms of United States government obligations; to deposit monies in
federally insured savings accounts or certificates of deposit in banks or
savings and loan associations;
(viii) to sell, purchase or acquire put or call options that are
traded on and purchased through a national securities exchange registered under
the Securities Exchange Act of 1934, as amended, or, if not so traded, that are
guaranteed by a member firm of the New York Stock Exchange;
(ix) to cause any securities to be registered - whether or not
required by federal or California state statute - and to carry any such
securities in the name of a nominee or nominees; and
(x) to make, execute, acknowledge and deliver any and all
documents of transfer and conveyance and any and all other instruments that
may be necessary or appropriate to carry out the powers herein granted.
7
<PAGE>
4.6 The Trustee shall at all times act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims.
4.7 The Trustee shall not incur liability to any person for any action
taken pursuant to a direction, request or approval given by the Company which is
contemplated by, and in conformity with, the terms of the Plan or this Trust
Agreement and is given in writing by the Company. In the event of a dispute
between the Company and a party, the Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
4.8 The Trustee shall be fully protected in acting upon any instruction,
directive or document believed by the Trustee to be genuine and to be presented
or signed by the person or persons duly authorized to do so, and the Trustee
shall be under no duty to make any investigation or inquiry as to the
authenticity of such instruction or document.
4.9 The Trustee may consult with legal counsel of the Trustee's choice,
including counsel for the Company, upon any question or matter arising hereunder
and shall be fully protected in acting in good faith upon the advice of such
counsel.
4.10 If the Trustee has knowledge that any directive of the Company or the
Plan Administrator constitutes a breach of the Company's or the Plan
Administrator's obligations under the provisions of the Plan or this Trust
Agreement, then the Trustee shall not be obligated to follow such directive and
shall have full power and authority to take such remedial action as the Trustee
deems necessary.
4.11 The Trustee shall be responsible solely for its own acts, or
omissions and shall not incur any liability for a breach of duty by the Company
or the Plan Administrator under the Plan or this Trust Agreement, unless the
Trustee participates knowingly in such breach, knowingly undertakes to conceal
such breach, has actual knowledge of such breach and fails to take reasonable
action to remedy such breach or, through its own negligence in performing its
fiduciary responsibilities with respect to the Trust Fund, has enabled the
Company or the Plan Administrator to commit a breach of the latter's duties or
responsibilities under the Plan or this Trust Agreement.
4.12 To the extent the Plan Administrator fails to furnish investment or
reinvestment directives or other investment guidelines after the Trustee has
requested instruction, then the Trustee may, in the absence of such directives
or guidelines, either (i) take such affirmative action as the Trustee deems
appropriate and proper for the Trust Fund or (ii) refuse to take any action with
respect to the investment or reinvestment of the Trust Fund. In such latter
event, the Trustee shall not incur any liability for its inaction, unless the
conduct of the Trustee in the matter otherwise renders the Trustee liable under
Section 5.10 for any breach of duty by the Company or the Plan Administrator.
4.13 The Trustee shall have no obligation to institute legal proceedings,
or to defend against any claim or action, arising from or relating to the Trust
Fund or any transactions or distributions effected thereunder, unless the
Trustee is provided with adequate assurances of indemnification from the Company
against any and all loss, cost, liability or expense associated
8
<PAGE>
therewith, and the Company hereby agrees to provide such indemnification as
and when such expenses are incurred; provided, however, that such
--------
indemnification shall not extend to any settlement agreement entered into by
the Trustee without the prior written consent of the Plan Administrator.
4.14 The Trustee may hire agents, accountants, actuaries and financial
consultants for purposes of obtaining assistance in the performance of its
duties and responsibilities hereunder, including (without limitation) any
determination of the Company's Insolvency, and may pay the reasonable
compensation and expenses of such individuals out of the assets of the Trust
Fund, unless paid by the Company within forty-five (45) days after receipt of
the written bill.
ARTICLE V
REACQUISITION/REVERSION
5.1 The Company shall have no right, power or authority to direct the
Trustee to return to the Company (or otherwise divert to third parties other
than general creditors of the Company who become entitled to payments hereunder
in accordance with Article III) any assets of the Trust Fund prior to the
distribution of all Deferred Payments due Participants under the Plan. Should
the Trustee determine, on the basis of written documentation provided by the
Plan Administrator, that the assets of the Trust Fund exceed the Company's
aggregate liability for all Deferred Payments due participants under the Plan,
such excess assets shall, upon the Company's written request, be returned to the
Company. In no event, however, will any such determination of excess assets be
made, nor any portion of the Trust Fund be returned to the Company, at a time
when Participants are still permitted to make deferral elections under the Plan
with respect to future salary or bonus payments.
ARTICLE VI
ACCOUNTING
6.1 The Trustee shall maintain accurate records and detailed accounts of
all investments, receipts, distributions, disbursements and other transactions
hereunder upon a calendar year basis, and such records shall be available at all
reasonable times for inspection by the Plan Administrator, the Company's Chief
Financial Officer or any other authorized representative of the Company.
6.2 The Trustee shall, at the direction of the Plan Administrator, submit
to the Plan Administrator such valuations, reports or other information as the
Plan Administrator may reasonably require. The Trust Fund shall be valued by
the Trustee at least quarterly at fair market value as of the close of business
on the last business day of each calendar quarter. In the absence of fraud or
bad faith, the valuation of the Trust Fund by the Trustee shall be conclusive.
In connection with each such periodic valuation, the Trustee shall, as of
the close of such period, render to the Plan Administrator a separate account
and report of the individual assets and liabilities of the Trust Fund and the
income, gain, losses and expenses of each investment asset maintained from time
to time as part of the Trust Fund. Such report shall also include all expenses
and charges incurred by the Trustee in acquiring each investment asset directed
by the
9
<PAGE>
Plan Administrator (including purchase price, brokerage fees, commissions and
other front-end charges) and all proceeds realized by the Trustee in
liquidating each investment asset as directed by the Plan Administrator,
together with all taxes, costs and expenses incurred in connection with such
liquidation.
6.3 Within sixty (60) days following the close of each calendar year or
following the close of any other period as may be agreed upon by the Trustee and
the Plan Administrator, the Trustee shall file with the Plan Administrator a
written account setting forth a description of all securities and other property
purchased and sold (including the purchase price or sale proceeds and related
fees and expenses), all receipts, distributions, disbursements and other
transactions effected by the Trustee during such calendar year or other
designated period, and listing the individual securities and other assets held
by the Trustee at the end of such calendar year or other designated period,
together with the then fair market value thereof.
The Plan Administrator may approve such account by written notice of
approval delivered to the Trustee, or by failure to deliver to the Trustee
express written objections to such account, within sixty (60) days from the date
on which the account is delivered to the Plan Administrator.
Upon the Trustee's receipt of written approval of the account or upon the
Plan Administrator's failure to deliver to the Trustee written objections to the
account prior to the expiration of the sixty (60) day period within which such
objections may be filed, such account shall be deemed to be approved, and the
Trustee shall be released and discharged from liability and accountability to
the Company with respect to all items, matters and transactions set forth in
such account, as if such account had been settled and allowed by a decree of a
court of competent jurisdiction to which the Trustee and the Company were
parties.
6.4 Should the Trustee determine that the Trust Fund consists in whole or
in part of property not traded freely on a recognized market or that information
necessary to ascertain the fair market value thereof is not readily available to
the Trustee, then the Trustee shall request the Plan Administrator to instruct
the Trustee as to the value of such property for purposes of this Trust
Agreement, and the Plan Administrator shall promptly comply with such request.
The Trustee shall be entitled to rely upon the value placed upon such property
by the Plan Administrator in its instructions to the Trustee. Should the Plan
Administrator fail or refuse to instruct the Trustee as to the value of such
property within a reasonable time after receipt of the request of the Trustee to
do so, the Trustee may in its sole discretion engage a competent appraiser to
determine the fair market value of such property for all purposes hereunder.
The valuation determined by such appraiser shall be binding on all parties who
have an interest in the Trust Fund, and the cost of such appraisal shall be paid
by the Trustee out of the Trust Fund, unless paid by the Company within forty-
five (45) days after receipt of the written bill.
10
<PAGE>
ARTICLE VII
COMPENSATION AND EXPENSES
7.1 The Trustee shall pay from the Trust Fund all costs and fees incurred
in the acquisition of Trust Fund investments (including the purchase price,
fees, commissions and other front-end charges). The Trustee shall, upon the
written direction of the Company's Chief Financial Officer, pay all federal,
state and local income taxes incurred by the Company in connection with the
income and earnings of the assets held in the Trust Fund, and such taxes shall
accordingly be deducted from and charged against the Trust Fund. To the extent
such costs, fees and taxes relate to specific investment assets that measure the
investment return on one or more Trust Accounts, such charges against the Trust
Fund shall be deducted specifically from such Trust Accounts.
7.2 Reasonable expenses incurred in the administration of the Trust
(including counsel, appraisal and accounting fees) may be paid out of the Trust
Fund, unless paid by the Company within forty-five (45) days after receipt of
the written bill.
7.3 Brokerage commissions, transfer taxes and other charges and expenses
realized or incurred in connection with the sale or other liquidation of stocks,
securities and other property by the Trust shall be paid out of the Trust Fund.
The Trustee shall, upon the written direction of the Company's Chief Financial
Officer, pay all federal, state and local income taxes incurred by the Company
in connection with any gain recognized upon the liquidation or sale of Trust
Fund assets, and such taxes shall accordingly be deducted from and charged
against the Trust Fund. To the extent such charges, expenses and taxes relate
to specific investment assets that measure the investment return on one or more
Trust Accounts, such charges against the Trust Fund shall be deducted
specifically from such Trust Accounts.
7.4 The Trustee shall be entitled to reasonable fees for services
rendered. Any fees to which the Trustee may become entitled hereunder shall be
paid out of the Trust Fund, unless paid by the Company within forty-five (45)
days after receipt of the written bill.
ARTICLE VIII
RESIGNATION OR REMOVAL
8.1 The Trustee may resign as Trustee hereunder or may be removed by the
Plan Administrator. Such resignation or removal may be accomplished at any time
upon the giving of thirty (30) days advance written notice, unless waived. The
Plan Administrator may appoint a successor Trustee at any time, and such Trustee
shall thereupon succeed to all the powers and duties given to the Trustee by
this Trust Agreement, and there shall be transferred to such successor Trustee
all right, title and interest in and to the property then held in the Trust
Fund. However, a reasonable sum of money may be reserved for payment of the
expenses incurred in connection with the settlement of accounts upon the
resignation or removal of the Trustee, and any balance of such reserve remaining
after the payment of such expenses shall be paid over to the successor Trustee
as part of the Trust fund.
11
<PAGE>
8.2 Within sixty (60) days after the resignation or removal of the
Trustee, the resigning or removed Trustee shall render to the Plan Administrator
an account in the form and manner prescribed for the annual account in
accordance with Section 7.3 hereof. Unless the Plan Administrator shall, within
sixty (60) days after the rendition of such account, file with the Trustee
written objections thereto, the account shall be deemed to have been approved,
and the resigning or removed Trustee shall be released and discharged from
liability and accountability to the Company with respect to all items, matters
and transactions set forth in such account, as if such account had been settled
and allowed by a decree of a court of competent jurisdiction to which the
Trustee and the Company were parties.
8.3 Any successor Trustee appointed under this Trust shall not incur any
liability by reason of, or have any duty or responsibility tot inquire into or
undertake any action with respect tot, any acts performed or omitted to be
performed under this Trust by any predecessor Trustee.
ARTICLE IX
AMENDMENT AND TERMINATION
9.1 This Trust Agreement may be amended at any time and to any extent by a
written instrument executed by the Trustee and the Company; provided, however,
that no such amendment shall make this Trust revocable by the Company.
9.2 The Trust shall terminate at such time as all existing assets of the
Trust Fund shall have been applied to the payment and satisfaction of (i) the
claims of the Company's creditors pursuant to the provisions of Section 4.2 and
(ii) all compensation and expense reimbursements to which the Trustee is
entitled hereunder.
9.3 Unless sooner terminated under Section 10.2, the Trust shall in all
events terminate at such time as (i) all deferrals of compensation under the
Plan shall have ceased and (ii) all Deferred Payments due Participants under the
---
Plan shall have been paid in full, with the result that there shall not at such
time be any outstanding balance in the deferred compensation accounts maintained
on the books of the Company for Participants in the Plan.
9.4 Upon termination of the Trust as provided in Section 10.3, any assets
remaining in the Trust Fund shall be returned to the Company.
ARTICLE X
MISCELLANEOUS
10.1 The Trust shall be administered in the State of California, and its
validity, construction and all rights hereunder shall be governed by the laws of
California, except to the extent preempted by ERISA. If the provisions of this
Trust Agreement and the Plan shall be inconsistent or otherwise in conflict
regarding the rights, duties or obligations of the Trustee, the provisions of
the Trust Agreement shall control. If any provisions of this Trust Agreement
shall be invalid or unenforceable, the remaining provisions thereof shall
continue to be fully effective.
12
<PAGE>
10.2 No Participant entitled to any benefit or distribution from the Trust
Fund shall have any right to assign, alienate, hypothecate or encumber his or
her interest in such benefit or distribution, and such benefit or distribution
shall not, to the full extent permitted by law, be subject to the claims of his
or her creditors or liable to attachment, execution or other process of law.
ARTICLE XI
INDEMNIFICATION
11.1 The Company shall indemnify the Trustee against, and hold the Trustee
harmless from, all liabilities and claims (including reasonable attorney fees
and expenses in defending against such liabilities and claims) against the
Trustee arising out of (a) any breach of duty by the Company or the Plan
Administrator under the Plan or this Trust Agreement, unless such Trustee
participates knowingly in such breach, knowingly undertakes to conceal such
breach, has actual knowledge of such breach and fails to take reasonable
remedial action to remedy such breach or, through its negligence in performing
its own specific fiduciary responsibilities, has enabled the Company or the Plan
Administrator to commit a breach of the latter's duties or responsibilities
under the Plan or this Trust Agreement, or (b) any breach by such Trustee in the
performance of its fiduciary duties under this Trust Agreement, unless such
latter breach arises in whole or in part from the gross negligence or willful
misconduct of such Trustee. The Trustee shall be entitled to collect on the
indemnity under this Article XI from the assets of the Trust Fund, unless the
Company provides such indemnification from its general assets within forty-five
(45) days after written demand from the Trustee.
IN WITNESS WHEREOF, the Company and the Trustee have executed this Trust
Agreement as of the date first above written.
HALL, KINION & ASSOCIATES, INC.
By:
---------------------------------------
Title: Vice President and Chief Financial Officer
FIRST AMERICAN TRUST COMPANY, TRUSTEE
By:
---------------------------------------
Title: Vice President
13
<PAGE>
EXHIBIT 21.1
HALL, KINION & ASSOCIATES, INC.
LIST OF SUBSIDIARIES
HALL KINION AND ASSOCIATES, UK LIMITED, a wholly owned subsidiary of the
Registrant organized under the laws of the United Kingdom.
GROUP-IPEX, INC., a wholly owned subsidiary of the Registrant, organized under
the laws of the State of California.
TKO, Personnel, Inc., a wholly owned subsidiary of the Registrant, organized
under the laws of the State of California.
Interactive Acquisition Corporation, a wholly owned subsidiary of the
Registrant, organized under the laws of the State of Delaware.
Huntington Acquisition Corporation, a wholly owned subsidiary of the Registrant,
organized under the laws of the State of Delaware.
TKI Acquisition Corporation, a wholly owned subsidiary of the Registrant,
organized under the laws of the State of Delaware.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-93663, 333-68229 and 333-38635 of Hall, Kinion & Associates, Inc. and
Subsidiaries on Form S-8 of our reports dated January 24, 2000, appearing in
this Annual Report on Form 10-K of Hall, Kinion & Associates, Inc. and
Subsidiaries for the year ended December 26, 1999.
Deloitte & Touche LLP
San Jose, California
February 24, 2000
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<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-26-1999 DEC-27-1998
<PERIOD-START> DEC-28-1998 DEC-29-1997
<PERIOD-END> DEC-26-1999 DEC-27-1998
<CASH> 1,191 3,082
<SECURITIES> 0 0
<RECEIVABLES> 29,487 19,241
<ALLOWANCES> (1,500) (1,083)
<INVENTORY> 0 0
<CURRENT-ASSETS> 32,429 23,594
<PP&E> 12,878 9,143
<DEPRECIATION> (3,089) (3,234)
<TOTAL-ASSETS> 76,554 55,976
<CURRENT-LIABILITIES> 16,869 15,786
<BONDS> 0 0
0 0
0 0
<COMMON> 38,183 34,269
<OTHER-SE> 5,786 3,633
<TOTAL-LIABILITY-AND-EQUITY> 76,554 55,976
<SALES> 180,749 124,132
<TOTAL-REVENUES> 180,749 124,132
<CGS> 96,502 69,066
<TOTAL-COSTS> 96,502 69,066
<OTHER-EXPENSES> 70,732 47,284
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 723 255
<INCOME-PRETAX> 13,038 7,731
<INCOME-TAX> 5,382 3,325
<INCOME-CONTINUING> 7,656 4,406
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,656 4,406
<EPS-BASIC> 0.75 0.47
<EPS-DILUTED> 0.71 0.43
</TABLE>
