<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-31866
Prospectus
[LOGO OF HALL KINION]
Hall, Kinion & Associates, Inc.
3,600,000 Shares of Common Stock
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We are offering 1,800,000 shares and the selling stockholders identified in
this prospectus are offering 1,800,000 shares. We will not receive any proceeds
from the sale of shares by the selling stockholders.
Our common stock is listed on the Nasdaq National Market under the symbol
"HAKI." On April 3, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $22.0625 per share.
This investment involves risks. See "Risk Factors" beginning on page 5.
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<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price............................. $21.00 $75,600,000
Underwriting discount............................. 1.05 3,780,000
Proceeds to Hall, Kinion & Associates, Inc........ 19.95 35,910,000
Proceeds to the selling stockholders.............. 19.95 35,910,000
</TABLE>
The underwriters have a 30-day option from the selling stockholders and us
to purchase up to 540,000 additional shares of common stock on the same terms
set forth above to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
----------------
Robert W. Baird & Co.
First Union Securities, Inc.
Legg Mason Wood Walker
Incorporated
The Robinson-Humphrey Company
George K. Baum & Company
April 3, 2000
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[INSERT ARTWORK]
At the top of the page is the following sentence: Hall Kinion--the talent
source for the Internet economyTM; uniting the Silicon Valleys of the world.
In the middle of the page are the following quotes:
"I called Hall Kinion, and not only did they understand what Sequel server
was, surprisingly they understood what Cold Fusion was as well. When I
provided them with my requirements, they filled them quickly. Cold Fusion
talent is kind of hard to find these days." Rich Talaber, Technical Recruiting
Manager, Vertical Net
"I've relied on Hall Kinion to assist us with technical staffing since the
days when we worked from our homes all the way until now when we have 100
employees. They know our company well and they sell our positions and company
with enthusiasm and clarity. We know our candidates are screened and prepared
before we even see a resume. Our ratio of interview to hire is very high with
Hall Kinion's candidates. They are our primary source of technical talent."
Peg English, Strategic Recruiting Manager, Po!nt.com
"With ITC (a Hall Kinion subsidiary) contracting services, Rare Medium, Inc.
has been able to quickly complement its existing technical staff and create
qualified development teams that support our growing Internet Development
business. ITC's staff has filled difficult positions in the shortest time
possible." Michael Flickman, Vice President Technology, Rare Medium, Inc.
"Hall Kinion knows how to deliver the right people to help us build the best
Internet businesses for our customers. When we entered new markets, Hall
Kinion helped us quickly get our bearings and successfully recruit staff. Hall
Kinion is truly a partner in finding the best recruits to work within our
unique culture." Jill Salter Plump, Chief People Officer, Event Zero.
"The recruiters at Hall Kinion understand the importance of doing it right.
They pay attention to detail, always prepare the candidate, and sell the
opportunity. This is invaluable to me as an internal recruiter. Other agencies
just don't seem to get it. Hall Kinion gets it!" Carrie Law, Technical
Recruiter, Evite.com
Beside the quotes are two standing persons. Across the bottom of the page are
a computer keyboard and a series of shopping carts.
<PAGE>
TABLE OF CONTENTS
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Page
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Summary............................. 1
Risk Factors........................ 5
Special Note Regarding Forward-
Looking Statements................. 12
Use of Proceeds..................... 13
Dividend Policy..................... 13
Selected Consolidated Financial
Data............................... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 15
</TABLE>
<TABLE>
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Page
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Business........................... 20
Principal and Selling
Stockholders...................... 30
Underwriting....................... 32
Legal Matters...................... 34
Experts............................ 34
Where You Can Find More Information
About Hall, Kinion................ 34
Documents Incorporated By
Reference......................... 35
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. You should assume that the information in this prospectus is
accurate only as of the date of this prospectus.
As used in this prospectus, the terms "we," "us," "our" and "Hall, Kinion"
mean Hall, Kinion & Associates, Inc. and its subsidiaries (unless the context
indicates another meaning), and the term "common stock" means our common
stock, par value $0.001 per share.
Our principal executive offices are located at 185 Berry Street, China
Basin Landing, Suite 6440, San Francisco, California 94107. Our telephone
number is (415) 974-1300.
Unless otherwise stated herein, all information contained in this
prospectus assumes no exercise of the over-allotment option granted by the
selling stockholders and us.
The underwriters are offering the shares subject to various conditions and
may reject all or part of any order. The shares should be ready for delivery
on or about April 7, 2000 against payment in immediately available funds.
We have applied for United States federal trademark registration of the
following trademarks: HALL KINION, THE TALENT SOURCE FOR THE INTERNET ECONOMY
and our ball design. We have also applied for trademark registration of HALL
KINION in Canada, India, Japan, the United Kingdom and the European Community.
All other trademarks, servicemarks or tradenames referred to in this
prospectus are the property of their respective owners.
<PAGE>
SUMMARY
You should read the following summary together with the more detailed
information appearing elsewhere in this prospectus, including in our
consolidated financial statements and related notes.
Hall, Kinion & Associates, Inc.
Hall, Kinion sources and delivers the most critical component of the
Internet economy--human capital. As a leading talent source for the growing
Internet economy, we provide specialized IT professionals on a short-term
contract and permanent basis primarily to vendors of Internet technologies and,
to a lesser extent, to users of intranets and extranets. We believe that our
key competitive advantage is our ability to successfully recruit the best and
brightest IT professionals for placement with our clients. We feel our
recruiting success is due, in large part, to our reputation as a premier
supplier of talent to the most innovative technology companies. We have been
successful at marketing to developers of next generation Internet technologies.
We believe our success is the result of our scalable business model, which is
aimed at building relationships with our clients and rapidly providing them
with IT professionals skilled in leading edge technologies. Our clients include
industry leaders such as IBM, Cisco Systems and Netscape Communications as well
as innovative start-ups such as E*Trade, Priceline.com and E-Stamp.
The explosive growth of the Internet has transformed the high technology
industry with unprecedented speed. Established technology companies such as Sun
Microsystems, Cisco Systems and Hewlett Packard are focusing substantial
resources on developing products that target the Internet economy. Relatively
new companies such as Netscape and Excite have built their businesses around
the Internet, and numerous start-up Internet companies are benefiting from an
influx of venture capital financing.
A strong demand for highly skilled IT professionals has developed in
response to the growth of the Internet economy. Talented professionals with
skills in leading edge technologies are in particularly high demand. To meet
their need for leading edge IT professionals, organizations are turning to
third party providers of technology talent to support their existing IT
resources. To succeed in this market, providers of IT professionals must
deliver leading edge IT talent at a speed commensurate with the demands of a
rapidly changing technology environment.
Our objective is to provide efficient, high quality contract and permanent
IT professional services to our target market and to become the agent of choice
for IT professionals. We plan to meet this objective by:
. Marketing our services to the vendors of Internet technologies. We believe
that we will stay at the forefront of technology and further build our
reputation as a provider of IT professionals with leading edge technology
skills by focusing our marketing efforts on innovative companies that are
vendors of Internet technologies.
. Providing rapid fulfillment to our time-sensitive clients. Vendors of
Internet technologies place foremost importance on speed of response because
they must compete to bring products and services to market ahead of their
rivals. We have designed our operating model with a focus on aggressively
recruiting IT professionals and building relationships with client companies
to meet their time-sensitive needs.
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. Attracting and retaining IT professionals. The shortage of available talent
has made attracting and retaining qualified IT professionals critical to our
success. We believe our advantage in recruiting IT professionals is that we
provide leading edge technology assignments, a flexible lifestyle and
attractive compensation.
. Building brand recognition. We have implemented a strong brand recognition
campaign promoting our company as The Talent Source for the Internet
Economy(TM). We believe our strong brand identity, combined with our record
of placements with leading edge vendors of Internet technologies, gives us a
competitive advantage in soliciting technology clients and recruiting IT
talent and sales and sales support employees.
. Creating a corporate culture that attracts and retains sales and sales
support employees. We expend a great deal of time, energy and money on
building a high energy culture that celebrates our successes. We believe
that our corporate culture has provided us success in retaining our sales
and sales support employees, the backbone of our growth.
. Delivering solid corporate support to our branch offices. We deliver
extensive training, detailed performance reporting and IT support to each of
our offices in order to promote a high level of service quality and
consistency among our offices.
We have followed a growth strategy focused on strong internal growth,
including new office openings, augmented by strategic acquisitions. Key
elements of our strategy include:
. Hiring, training and developing additional sales and sales support
employees. Our sales and sales support employees, who are our key contacts
with clients and IT professionals, directly impact our ability to generate
revenues.
. Opening additional offices in our current geographic markets. New offices in
existing geographic markets substantially increase our opportunities for
successful placement of IT professionals, so that both new offices and
existing offices benefit from our in-market growth.
. Opening additional offices in the Silicon Valleys of the world. We have 35
offices in 21 geographic markets. We plan to enter additional geographic
markets that have a high concentration of technology-oriented businesses.
. Expanding international recruiting capabilities. We have successfully placed
a significant number of international recruits with our domestic clients and
plan to continue expanding our international recruiting capabilities.
. Acquiring complementary businesses. We continue to explore acquisition
opportunities, particularly those that provide us with new technology
practices, new geographic markets, additional international recruiting
capabilities or executive retained search businesses.
Our Offices
Our executive offices are located at 185 Berry Street, China Basin Landing,
Suite 6440, San Francisco, CA 94107, and our telephone number is (415) 974-
1300. Our Web site can be located at www.hallkinion.com. Information contained
on our Web site should not be considered a part of this prospectus.
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The Offering
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Common stock offered by Hall,
Kinion........................... 1,800,000 shares
Common stock offered by the
selling stockholders............. 1,800,000 shares
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Total common stock offered........ 3,600,000 shares
================
Common stock to be outstanding
after this offering.............. 12,670,050 shares
Use of proceeds................... To repay outstanding indebtedness under our
revolving credit facility and for working
capital and other corporate purposes,
including the expansion of our business,
continued investment in our infrastructure
and the possible acquisition of
complementary businesses.
We will not receive any proceeds from the
sale of shares of common stock by the
selling stockholders. However, we expect
that a portion of the proceeds received by
some of the selling stockholders will be
used to repay indebtedness of these
stockholders to us.
Nasdaq National Market symbol..... HAKI
</TABLE>
Except as otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
Except as otherwise indicated, the total number of shares to be outstanding
after this offering includes 369,100 shares to be issued in connection with the
exercise of options and sold by the selling shareholders in this offering and
excludes at March 24, 2000:
. 2,036,343 shares of common stock issuable upon the exercise of stock options
outstanding at a weighted average exercise price of $8.98 per share;
. 1,226,119 shares of common stock currently reserved for future grants under
our stock option plans; and
. 150,000 shares of common stock reserved for future issuances under our
employee stock purchase plan.
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Summary Consolidated Financial Data
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<CAPTION>
Fiscal Year Ended
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1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Net revenues................... $29,385 $50,571 $92,831 $124,132 $180,749
Cost of contract services...... 19,209 30,342 54,769 69,066 96,502
------- ------- ------- -------- --------
Gross profit................... 10,176 20,229 38,062 55,066 84,247
Operating expenses............. 8,869 18,233 33,689 47,284 70,732
------- ------- ------- -------- --------
Income from operations......... 1,307 1,996 4,373 7,782 13,515
Other income (expense), net.... (156) 369 (127) (51) (477)
------- ------- ------- -------- --------
Income before income taxes..... 1,151 2,365 4,246 7,731 13,038
Income taxes................... 469 1,004 1,737 3,325 5,382
------- ------- ------- -------- --------
Net income..................... $ 682 $ 1,361 $ 2,509 $ 4,406 $ 7,656
======= ======= ======= ======== ========
Income per share:
Basic........................ $ 0.11 $ 0.22 $ 0.34 $ 0.47 $ 0.75
Diluted...................... $ 0.11 $ 0.16 $ 0.25 $ 0.43 $ 0.71
Weighted Average Common Shares
Outstanding:
Basic........................ 6,282 6,282 7,339 9,439 10,155
Diluted...................... 6,311 8,350 9,907 10,342 10,716
Consolidated Balance Sheet
Data:
Working capital (deficit)...... $ (114) $ 189 $19,390 $ 7,808 $ 15,560
Total assets................... 5,680 22,994 42,440 55,976 76,554
Long term debt and other
obligations................... -- 6,738 2,549 1,083 14,161
Redeemable convertible
preferred stock............... -- 9,900 -- -- --
Stockholders' equity
(deficit)..................... 941 (2,748) 31,530 37,902 43,969
</TABLE>
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RISK FACTORS
Before you invest in our common stock, you should consider that making such
an investment involves various risks. You should carefully consider these risk
factors as well as all of the other information contained or incorporated by
reference in this prospectus before you decide to purchase shares of our common
stock. You should also consider these risk factors when you read "forward-
looking" statements elsewhere in this prospectus. You can identify forward-
looking statements by terms such as "may," "hope," "will," "should," "expect,"
"plan," "anticipate," "intend," "believe," "estimate," "predict," "potential"
or "continue," the negative of these terms or other comparable terminology.
These forward-looking statements are only predictions. They are subject to a
number of risks and uncertainties, including the risks described in this
section and those described in "Special Note Regarding Forward-Looking
Statements."
An inability to hire and retain a sufficient number of IT professionals with
the extensive knowledge of Internet, computer and networking technologies
required by our clients would negatively impact our business, operating results
and financial condition.
Our future success depends on our ability to attract and retain qualified IT
professionals with the technical skills and experience necessary to meet our
clients' requirements for technical personnel. Competition for individuals with
proven technical expertise, particularly in the Internet, computer and
networking and other technology environments for which we provide services, is
intense, and we expect that competition for IT professionals will increase in
the future. We may not be able to attract and retain qualified IT professionals
in sufficient numbers in the future. Furthermore, IT professionals typically
provide services on an assignment-by-assignment basis and can terminate an
assignment with us at any time. We compete for these individuals with other
providers of technical staffing services, system integrators, providers of
outsourcing services, computer consultants, temporary personnel agencies and
our clients. Many of the IT professionals who work with us also work with our
competitors from time to time. IT professionals currently working on projects
for us may choose to work for competitors on future assignments. Our net
revenues in any period are related, among other factors, to the number of IT
professionals we have on staff and engaged on assignments. If we were unable to
hire or retain a sufficient number of such personnel, our business, operating
results and financial condition would be materially adversely affected.
Any decrease in demand for our services would have a material negative impact
on our business, operating results and financial condition.
We have derived most of our revenues from projects involving the Internet,
computer and networking industries. These industries are experiencing rapid
rates of change and innovation which have resulted in an intense demand for the
IT professionals that we offer. Any slowdown in the rate of innovation in these
industries or any general reduction in demand for personnel with expertise in
leading Internet, computer or networking technologies could reduce the demand
for our services. Reduction in demand for our services could have a material
negative impact on our business, operating results and financial condition. Our
expenses for salaried IT professionals are relatively fixed in the short term,
and we generally cannot reduce expenses quickly in response to decreased demand
for our services.
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Our clients may also start to hire permanent employees rather than use our
contract services if they believe that hiring permanent employees could be more
effective than using our contract services. If that were to happen, revenues
from our Contract Services group could decline materially. A material revenue
decline in our Contract Services group would negatively impact our business,
operating results and financial condition.
Persons with expertise in Internet, computer and networking technologies
that would otherwise use our services may increasingly contract directly with
technology companies. The proliferation of job sites on the Internet may allow
these individuals to find employment opportunities without using our services.
Demand for our services may not increase or remain at historical levels. Any
decrease in demand for our services would have a material negative impact on
our business, operating results and financial condition.
Our business, operating results and financial condition could be negatively
impacted if demand for our services in any new geographic markets we enter is
less than we anticipate, if our new offices are not profitable in a timely
manner or if we fail to hire qualified employees.
Our growth depends in part on our ability to enter new geographic markets
successfully. This expansion is dependent on a number of factors, including our
ability to:
. develop, recruit and maintain a base of qualified IT professionals within a
new geographic market;
. initiate, develop and sustain corporate client relationships in each new
geographic market;
. attract, hire, integrate and retain qualified sales and sales support
employees; and
. accurately assess the demand of a new geographic market.
The addition of offices and entry into new geographic markets may not occur
on a timely basis or achieve anticipated financial results. The addition of new
offices and entry into new geographic markets typically result in increases in
operating expenses, primarily due to increased employee headcount. Expenses are
incurred in advance of forecasted revenue, and there is typically a delay
before our new employees reach full productivity. Additionally, demand for our
services in new markets that we enter might be less than we anticipate. If we
are unable to enter new geographic markets in a cost-effective manner or if
demand for our services in new markets does not meet or exceed our forecasts,
our business, operating results and financial condition could be negatively
impacted.
Our quarterly operating results may fluctuate, which could cause the price of
our stock to decline.
Our quarterly operating results have in the past and may in the future
fluctuate significantly depending on a number of factors, including, but not
limited to:
. the availability of IT professionals;
. changes in the demand for IT professionals;
. the hiring rate and the productivity of our sales and sales support
personnel;
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. departures or temporary absences of key sales and sales support personnel;
. the availability of H-1B work permits for foreign national IT professionals
who wish to work in the United States;
. changes in the relative mix between our contract services revenues and our
permanent placement services revenues;
. changes in the prices we are able to charge for our services;
. the timing and rate of entry into new geographic markets and the addition of
offices in existing geographic markets;
. the structure and timing of acquisitions of complementary businesses; and
. general economic factors.
In addition, because we provide contract services on an assignment-by-
assignment basis, which clients can terminate at any time, existing clients may
not continue to use our services at historical levels. We also experience some
seasonality in our first quarter primarily due to the number of holidays and
inclement weather in that quarter, which may reduce the number of days worked
by IT professionals and sales and sales support employees. As a result, we
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance. In the event our operations should fall below the expectations of
public market analysts and investors, the price of our common stock would
likely decline.
Failure to manage growth properly could negatively affect our business and
financial condition.
We have recently experienced a period of rapid growth that has placed and
will continue to place significant demands upon our management and other
resources. Our net revenues increased 45.6% to $180.7 million in 1999 from
$124.1 million in 1998, and increased 33.7% from $92.8 million in 1997 while
headcount increased to approximately 678 employees in 1999 from approximately
471 employees in 1998. Our ability to manage future growth effectively will
require us to hire additional management personnel and expand our operational,
financial and other internal systems. We may not be able to hire additional
qualified management personnel. Furthermore, implementing a new or expanded
financial and management information system can be time-consuming and expensive
and require significant management resources. Our current personnel, systems,
procedures and controls may not be adequate to support our future operations,
and we may not be able to implement any new systems effectively. A failure to
manage our growth effectively could have a material negative effect on our
business, operating results and financial condition.
Our permanent placement business is difficult to forecast and is cyclical, and
a decline in our permanent placement business would cause a decline in our net
revenues, gross profit and net income.
Our permanent placement business has fluctuated significantly in the past
and can be expected to continue to fluctuate significantly in the future. We
provide permanent placement services on an assignment-by-assignment basis,
which clients can terminate at any time, and existing clients may not continue
to use our services at historical levels. A decline in our permanent placement
business will result
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in a decrease in our net revenues. More importantly, gross profit for our
permanent placement services group is essentially equal to permanent placement
net revenues as there are no direct costs associated with such revenues.
Therefore, a decline in our permanent placement business would result in a
decrease in our gross profit margins and net income.
Failure to manage and integrate acquisitions properly could adversely affect
our business, operating results and financial condition.
A component of our growth strategy is the acquisition of complementary
businesses. In order to implement this strategy successfully, we have to:
. identify suitable acquisition candidates;
. obtain requisite financing;
. acquire the candidates on suitable terms; and
. integrate their operations successfully with ours.
We may not be able to identify suitable acquisition candidates, and we may
not be able to acquire candidates on suitable terms. Moreover, other providers
of IT professional services are also competing for acquisition candidates,
which could result in an increase in the price of acquisition candidates and a
diminished pool of candidates available for acquisition. Acquisitions also
involve a number of other risks, including:
. negative effects on our reported operating results from increases in
goodwill amortization and interest and other acquisition-related expenses;
. diversion of management's attention;
. the integration of any acquired business, which may result in significant
integration-related expenses;
. the departure of key personnel at the acquired business; and
. uncertainty that an acquired business will achieve anticipated revenues and
earnings.
To the extent we seek to acquire complementary businesses for cash, we may
be required to obtain additional financing. However, required financing with
acceptable terms may not be available, which would prevent us from making cash
acquisitions. Due to all of the foregoing, acquisitions may have a material
negative effect on our business, operating results and financial condition. In
addition, if we issue stock to complete any future acquisitions, existing
stockholders will experience ownership dilution.
We are dependent on our sales and sales support personnel to maintain and
increase our revenue growth.
We generate our net revenues when our sales and sales support personnel
successfully match our IT professionals with our clients' needs. The qualified
sales and sales support personnel we require are in
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high demand and are likely to remain a limited resource for the foreseeable
future. Experienced sales and sales support personnel have left our company in
the past. In the future, we expect departures of experienced sales and sales
support personnel from time to time. We will need to hire additional,
productive sales and sales support personnel in order to maintain our revenue
growth. We may not be able to attract or retain productive sales and sales
support personnel. If we are unable to attract and retain productive sales and
sales support personnel in a cost-effective manner, it could negatively impact
our net revenues and profitability.
We could lose market share or suffer declining profit margins due to intense
competition.
The IT staffing industry is highly competitive and fragmented and has low
barriers to entry. In our Contract Services group, we compete for potential
clients with providers of IT staffing services and, to a lesser extent,
computer systems consultants, providers of outsourcing services, systems
integrators and temporary personnel agencies. In our Permanent Placement
Services group, we compete primarily against local and regional recruiting
companies. Many of our current and potential competitors have longer operating
histories, significantly greater financial and marketing resources, greater
name recognition and a larger installed base of IT professionals and clients
than our company. Our competitors that are smaller companies may be able to
respond more quickly to customer requirements. Our competitors that are larger
companies may be able to devote greater resources to marketing their services.
In addition, recently a number of job sites have been established on the
Internet. These sites allow IT professionals to find employment opportunities
without using our services, and therefore, demand for our services may
decrease. Because there are relatively low barriers to entry, we expect that
competition will increase in the future. Increased competition could result in
price reductions, reduced margins or loss of market share, any of which could
materially and negatively affect our business, operating results and financial
condition. We may not be able to compete successfully against current and
future competitors, and competitive pressures that we face may have a material
negative effect on our business, operating results and financial condition.
We may be unable to obtain a sufficient number of government permits to place
employees from foreign countries in the United States.
Some of our IT professionals are foreign nationals working in the United
States under H-1B work permits. Accordingly, both we and these foreign
nationals must comply with the United States immigration laws. Our inability to
obtain H-1B permits for these employees in sufficient quantities or at a
sufficient rate could have a material negative effect on our business,
operating results and financial condition. Furthermore, Congress and
administrative agencies with jurisdiction over immigration matters have
periodically expressed concerns over the levels of immigration into the United
States. These concerns have often resulted in proposed legislation, rules and
regulations aimed at reducing the number of work permits that may be issued. In
recent years, the maximum number of H-1B permits allocated for a given year has
been reached very soon after permits became available. Therefore, we attempt to
hire our anticipated annual requirement of foreign national IT professionals
whenever H-1Bs are available, in anticipation of a shortage of H-1Bs permits
later in the year. If we are not able to place these IT professionals in a
timely manner, we will have incurred costs and expenses that we may not be able
to offset with revenues. Any changes in laws making it more difficult to hire
foreign nationals or limiting our ability to obtain foreign employees could
require us to incur additional unexpected labor costs and
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expenses. Further, restrictions or limitations on hiring practices could have a
material adverse effect on our business, operating results and financial
condition.
We are dependent upon the services of our key personnel.
Our future business and operating results depend in significant part upon
the continued contributions of our key employees and senior management
personnel, many of whom would be difficult to replace. The loss or temporary
absence of any of our senior management, significant sales and sales support
employees, other key personnel and, in particular, Brenda C. Rhodes, our Chief
Executive Officer, could have a material negative effect on our business,
operating results and financial condition.
We could become involved in litigation with our clients and IT professionals
regarding intellectual property ownership or performance of our services.
We are exposed to liability with respect to the services our IT
professionals perform while on assignment, such as damages caused by errors of
IT professionals, misuse of client proprietary information or theft of client
property. We agree to indemnify our clients from these damages. We have
purchased insurance coverage to protect us from this liability. However, due to
the nature of our assignments, and in particular the access by our IT
professionals to client information systems and confidential information, our
insurance coverage may not be adequate to cover our potential liability.
Additionally, we may not be able to renew our existing insurance on reasonable
terms or at adequate levels. We may be exposed to discrimination and harassment
claims or other similar claims as a result of inappropriate actions allegedly
taken against IT professionals by corporate clients. As an employer, we are
also exposed to possible claims of wrongful discharge and violations of
immigration laws. Employment related claims might result in negative publicity,
litigation and liability for monetary damages and fines. Finally, we engage
subcontractors in our business and are therefore exposed to potential claims by
the Internal Revenue Service alleging that these subcontractors were our
employees.
We generally assign intellectual property ownership to our clients. Issues
relating to ownership of and rights to use intellectual property can be
complicated. We may become involved in disputes where we could incur
substantial costs and diversion of management resources.
An unfavorable judgment in our pending class action lawsuit could negatively
impact our business, operating results and financial condition.
In June 1999, we and certain of our directors and officers were named as
defendants in three putative class actions filed in the United States District
Court for the Northern District of California, alleging violations of Section
10(b) of the Securities and Exchange Act of 1934. Pursuant to court order,
those cases have been consolidated, and a consolidated amended complaint was
filed on January 24, 2000. The action arises out of our announcement that
revenues and earnings for the quarter ending June 1998 would fall below
analysts' expectations. The action purports to be brought on behalf of all
purchasers of our common stock between August 5, 1997, the date of our initial
public offering, and June 18, 1998, when we pre-announced this shortfall. The
complaint generally alleges that we misstated our future prospects in various
press releases and communications with analysts, and failed to disclose alleged
internal problems with the integration of certain acquired businesses. The
complaint also alleges that insiders sold material amounts of stock while in
possession of material nonpublic information. While we believe that the claims
are without merit, and that our directors and officers liability insurance
10
<PAGE>
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 39.8% of our outstanding
shares of common stock at March 24, 2000. We expect that they will continue to
beneficially own approximately 20.2% upon completion of the offering. As a
result, these stockholders as a group will be able to exercise substantial
control over matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. This
concentration of ownership could have the effect of making it difficult for a
third party to acquire control of our company and may discourage third parties
from attempting to do so.
Our charter and bylaws may delay or prevent a transaction that our stockholders
would view as favorable.
Our charter and bylaws, and Delaware law, contain provisions that could have
the effect of delaying, deferring or preventing an unsolicited change in
control of our company, which may negatively affect the market price of the
common stock or the ability of stockholders to participate in a transaction in
which they might otherwise receive a premium for their shares over the then
current market price. These provisions also may have the effect of preventing
changes in our management. These provisions provide that all stockholder action
must be taken at an annual meeting of stockholders, that only our board of
directors may call special meetings of the stockholders and that our board of
directors be divided into three classes to serve for staggered three-year
terms. In addition, our charter authorizes our board of directors to issue up
to 10,000,000 shares of preferred stock without stockholder approval on such
terms as our board of directors may determine. Although no shares of our
preferred stock are outstanding, and we have no plans to issue any shares of
preferred stock, the holders of common stock will be subject to, and may be
negatively affected by, the right of any preferred stock that may be issued in
the future. In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation law, which could have the
effect of delaying or preventing a change of control of our company.
"Year 2000" problems could involve us in litigation.
Many existing computer systems worldwide are programmed to process dates
using only two digits for the year of the date rather than four digits (e.g.,
"99" for 1999). Computer systems which process dates in this manner began
recording transactions on and after January 1, 2000 with the year "00." These
systems may encounter significant processing inaccuracies and potentially
system failure. We rely on numerous computer systems for our day-to-day
operations and may be adversely affected by the year 2000 situation.
Substantially all of our clients are similarly dependent on computer systems
and they also may be adversely affected by the year 2000 situation. Although
neither we nor any client known to us has experienced any material year 2000
problems to date, some experts have warned of the possibility of lingering year
2000 problems that may not become apparent until later in the year 2000 or
beyond.
We continue to believe that the year 2000 problem will not pose significant
problems for our business and operations on a going forward basis. However, the
year 2000 problem could pose significant operational problems or have a
material adverse effect on our business, financial condition and results of
operations in the future.
11
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere in this prospectus constitute forward-
looking statements that involve substantial uncertainties. These statements
include, among others, statements concerning the following:
. our business and growth strategies;
. the markets we serve;
. liquidity;
. use of proceeds; and
. our efforts to increase brand awareness.
We have based these forward-looking statements on our current expectations
and projections about future events. In some cases, you can identify forward-
looking statements by terms such as "may," "hope," "will," "should," "expect,"
"plan," "anticipate," "intend," "believe," "estimate," "predict," "potential"
or "continue," the negative of these terms or other comparable terminology. The
forward-looking statements contained in this prospectus involve known and
unknown risks, uncertainties and other factors that may cause industry trends
or our actual results, performance or achievements to be materially different
from any future trends, results, performance or achievements expressed or
implied by these statements. These factors include, among others, the rate of
hiring and productivity of sales and sales support personnel, the availability
of qualified IT professionals, changes in the relative mix between contract
services and permanent placement services, changes in the pricing of our
services, the timing and rate of entrance into new geographic markets and the
addition of offices, the structure and timing of acquisitions, changes in
demand for IT professionals, general economic factors, and others listed under
"Risk Factors," elsewhere in this prospectus, and in our Securities and
Exchange Commission filings.
In addition, this prospectus includes data relating to the number of
worldwide users of the Internet, e-commerce, venture capital funding and the
Internet services industry. Some of these data were obtained from industry
publications and reports, such as reports by Forrester Research, Dataquest and
PricewaterhouseCoopers. These reports assume certain events, trends and
activities will occur and they project information based on those assumptions.
We have not independently verified these data or the underlying assumptions.
We cannot guarantee future results, performance or achievements. We do not
intend to update this prospectus to conform any forward-looking statements to
actual results. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 1,800,000 shares of common stock
offered by us are estimated to be approximately $35.4 million, based on a
public offering price of $21.00 per share, after deducting the underwriting
discount and estimated offering expenses payable by us. We expect to use a
portion of the net proceeds to repay all of the outstanding indebtedness under
our revolving credit facility. Outstanding indebtedness on the revolving credit
facility bears interest at the lower of the bank's prime interest rate (9.00%
at March 24, 2000) or LIBOR. Approximately $15.7 million was outstanding under
our revolving credit facility as of March 24, 2000. We intend to use the
remaining net proceeds for working capital and other corporate purposes,
including the expansion of our business domestically and internationally,
continued investment in our infrastructure and the possible acquisition of
complementary businesses. Pending such uses, we plan to invest the net proceeds
in investment grade interest-bearing securities.
We will not receive any proceeds from the sale of shares of common stock by
the selling stockholders. However, we expect that a portion of the proceeds
received by two of the selling stockholders will be used to repay indebtedness
of these stockholders to us.
DIVIDEND POLICY
We have never declared or paid a cash dividend on our common stock. We
currently intend to retain all available funds for use in our business and do
not anticipate paying cash dividends in the foreseeable future. Any future
determination relating to dividend policy will be made at the discretion of our
board of directors and will depend on a number of factors, including any future
earnings, capital requirements, financial conditions and future prospects and
other factors the board of directors may deem relevant. In addition, our credit
agreement currently restricts our ability to pay cash dividends without the
bank's consent.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data, which
should be read in conjunction with our consolidated financial statements and
notes thereto included elsewhere in this prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated statement of income data for the years ended December 28,
1997, December 27, 1998 and December 26, 1999 and the consolidated balance
sheet data as of December 27, 1998 and December 26, 1999 are derived from our
consolidated financial statements included in this prospectus, which have been
audited by Deloitte & Touche LLP, independent auditors. The selected
consolidated statement of income data for the years ended December 30, 1995 and
December 29, 1996 and the consolidated balance sheet data as of December 30,
1995, December 29, 1996 and December 28, 1997 are derived from our audited
financial statements which are not included in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Net revenues................... $29,385 $50,571 $92,831 $124,132 $180,749
Cost of contract services...... 19,209 30,342 54,769 69,066 96,502
------- ------- ------- -------- --------
Gross profit................... 10,176 20,229 38,062 55,066 84,247
Operating expenses............. 8,869 18,233 33,689 47,284 70,732
------- ------- ------- -------- --------
Income from operations......... 1,307 1,996 4,373 7,782 13,515
Other income (expense), net.... (156) 369 (127) (51) (477)
------- ------- ------- -------- --------
Income before income taxes..... 1,151 2,365 4,246 7,731 13,038
Income taxes................... 469 1,004 1,737 3,325 5,382
------- ------- ------- -------- --------
Net income..................... $ 682 $ 1,361 $ 2,509 $ 4,406 $ 7,656
======= ======= ======= ======== ========
Income per share:
Basic........................ $ 0.11 $ 0.22 $ 0.34 $ 0.47 $ 0.75
Diluted...................... $ 0.11 $ 0.16 $ 0.25 $ 0.43 $ 0.71
Weighted Average Common Shares
Outstanding:
Basic........................ 6,282 6,282 7,339 9,439 10,155
Diluted...................... 6,311 8,350 9,907 10,342 10,716
Consolidated Balance Sheet
Data:
Working capital (deficit)...... $ (114) $ 189 $19,390 $ 7,808 $ 15,560
Total assets................... 5,680 22,994 42,440 55,976 76,554
Long term debt and other
obligations................... -- 6,738 2,549 1,083 14,161
Redeemable convertible
preferred stock............... -- 9,900 -- -- --
Stockholders' equity
(deficit)..................... 941 (2,748) 31,530 37,902 43,969
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus. The
discussion in this section contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed in the forward-looking statements. Additional information relating to
forward-looking statements is included in this prospectus under the caption
"Special Note Regarding Forward-Looking Statements."
Overview
We source and deliver the most critical component of the Internet economy--
human capital. As a leading talent source for the growing Internet economy, we
provide specialized IT professionals on a short-term contract and permanent
basis primarily to vendors of Internet technologies and, to a lesser extent, to
users of intranets and extranets. We have 35 offices located in 21 geographic
markets. Our Contract Services group provides specialized IT professionals on a
short-term contract basis and accounted for 80.5% of our net revenues in 1999,
85.5% in 1998 and 86.5% in 1997. Our Permanent Placement Services group
provides specialized IT professionals on a permanent basis and accounted for
19.5% of our net revenues in 1999, 14.5% in 1998 and 13.5% in 1997.
Our net revenues are derived principally from the hourly billings of our IT
professionals on contract assignments and from fees received for permanent
placements. Contract services assignments typically last four to six months,
and revenues are recognized as services are provided. We derive contract
services revenues when our consultants are working, and therefore our operating
results may be adversely affected when client facilities are closed due to
holidays or inclement weather. As a result, we typically experience relatively
lower net revenues in our first fiscal quarter compared to our other fiscal
quarters. We derive permanent placement revenues upon permanent placement of
each IT professional candidate. The fee is typically structured as a percentage
of the placed IT professional's first-year annual compensation. Permanent
placement revenues are recognized when an IT professional commences employment
or, in the case of retained searches, upon completion of our contractual
obligations.
We have experienced growth by:
. expanding our pool of IT professionals;
. entering new geographic markets;
. adding sales and recruiting employees;
. opening new offices in existing geographic markets; and
. acquiring complementary businesses.
Net revenues increased to $180.7 million in 1999 from $124.1 million in
1998, representing a 45.6% increase. Over this same period, we increased our
number of sales, sales support and administrative employees to approximately
678 individuals in 21 geographic markets from approximately 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
15
<PAGE>
approximately 558 in 1999 from approximately 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.
Results of Operations
The following table sets forth our results of operations as a percentage of
net revenues for the periods shown:
<TABLE>
<CAPTION>
Fiscal year ended
(1)
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net revenues:
Contract services........................................ 86.5% 85.5% 80.5%
Permanent placement services............................. 13.5 14.5 19.5
----- ----- -----
Total net revenues..................................... 100.0 100.0 100.0
Cost of contract services.................................. 59.0 55.6 53.4
----- ----- -----
Gross profit (2)........................................... 41.0 44.4 46.6
Operating expenses......................................... 36.3 38.1 39.1
----- ----- -----
Income from operations..................................... 4.7 6.3 7.5
Other expenses, net........................................ 0.1 0.1 0.3
----- ----- -----
Income before taxes........................................ 4.6 6.2 7.2
Income taxes............................................... 1.9 2.7 3.0
----- ----- -----
Net income................................................. 2.7% 3.5% 4.2%
===== ===== =====
</TABLE>
- --------
(1) Our fiscal year ends on the last Sunday of December.
(2) Gross profit for contract services as a percentage of net contract service
revenues was 33.6% in 1999, 34.9% in 1998 and 31.8% in 1997.
Fiscal Year Ended December 26, 1999 Compared to Fiscal Year Ended December 27,
1998
Net Revenues. Net revenues increased 45.6% to $180.7 million in 1999 from
$124.1 million in 1998. Net revenues from our Contract Services group increased
37.0% to $145.4 million in 1999 from $106.1 million in 1998. Net revenues from
our Permanent Placement Services group were $35.3 million in 1999 and $18.0
million in 1998, representing an increase of 96.2%. The increase in net
revenues in 1999 was primarily due to growth in existing offices, addition of
new offices and, to a lesser extent, acquisitions of complementary businesses.
Our revenue producing sales and sales support employee headcount increased
throughout the year reaching approximately 558 as of the end of 1999 from
approximately 397 as of the end of 1998, a 40.6% increase. Our IT professional
headcount increased to approximately 1,427 at the end of 1999 from
approximately 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
16
<PAGE>
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 contract services
assignments. Gross profit as a percentage of net revenues increased to 46.6%
for 1999 from 44.4% for 1998. This increase was primarily due to an increase in
the percentage of revenues from our Permanent Placement Services group. Gross
profit as a percentage of net revenues from the Contract Services group, while
within our historical range, decreased slightly to 33.6% for 1999 from 34.9%
for 1998. This decrease was primarily attributable to our customers' Y2K
concerns. During the latter half of 1999, many companies chose not to make
system changes due to Y2K concerns. Therefore, we experienced an increase in
non-billable time in some of our Contract Services group offices.
Operating Expenses. Operating expenses primarily consist of employee costs,
recruiting expenses, marketing expenses and amortization of intangible assets
related to acquisitions. Operating expenses increased by 49.6% to $70.7 million
for 1999 compared to $47.3 million for 1998. Operating expenses as a percentage
of net revenues increased to 39.1% for 1999 from 38.1% for 1998. The increases
resulted primarily from expenses associated with increased sales, sales support
and administrative employee costs, facility costs, amortization and
depreciation expense and costs for a new marketing campaign.
Other Expense. Interest income increased to $263,000 for 1999 from $215,000
for 1998. The increase in interest income resulted from interest related to
loans made to some executive officers in 1999. Interest expense increased to
$723,000 for 1999 compared to $255,000 for 1998. The increase in interest
expense primarily reflected debt incurred in connection with acquisitions and
an overall increase in interest rates.
Income Taxes. Our effective income tax rate was 41.3% for 1999 compared to
43.0% for 1998. Our income tax rate varies from period to period primarily due
to changes in nondeductible expenses.
Net Income. Net income increased 73.8% to $7.7 million for 1999 from $4.4
million for 1998. Net income as a percentage of net revenues was 4.2% for 1999
compared to 3.5% for 1998.
Fiscal Year Ended December 27, 1998 Compared to Fiscal Year Ended December 28,
1997
Net Revenues. Net revenues increased 33.7% to $124.1 million in 1998 from
$92.8 million in 1997. Net revenues from our Contract Services group increased
32.2% to $106.1 million in 1998 from $80.3 million in 1997. Net revenues from
our Permanent Placement Services group were $18.0 million in 1998 and $12.6
million in 1997, representing an increase of 43.2%. The increase in net
revenues in 1998 was due primarily to growth in existing offices, addition of
new offices and, to a lesser extent, acquisitions of complementary businesses.
Our revenue producing sales and sales support employee headcount increased to
approximately 397 as of the end of 1998 from approximately 348 as of the end of
1997, representing a 14.1% increase, with increases occurring throughout the
year. Our IT professional headcount increased to approximately 1,159 at the end
of 1998 from approximately 1,040 at the end of 1997, an increase of 11.4%.
17
<PAGE>
Gross Profit. Gross profit increased by 44.7% to $55.1 million for 1998 from
$38.1 million for 1997. This increase was primarily attributable to an increase
in the IT professional headcount, an increase in average billing rates, and an
increase in demand for services from our Permanent Placement Services group.
The increase in average billing rates was primarily attributable to an increase
in higher rate leading edge technology contract services assignments. Gross
profit as a percentage of net revenues increased to 44.4% for 1998 from 41.0%
for 1997. The increase was primarily due to an increase in the percentage of
revenues from our Permanent Placement Services group. Gross profit as a
percentage of net revenues from the Contract Services group increased to 34.9%
in 1998 from 31.8% in 1997. This increase was primarily attributable to
acquisitions of complementary businesses, an emphasis on expansion of higher
margin business in existing markets and cross selling of higher margin
services.
Operating Expenses. Operating expenses increased by 40.4% to $47.3 million
for 1998 compared to $33.7 million for 1997. The increase resulted primarily
from increased sales, sales support and administrative employee costs, facility
costs, and increased amortization and depreciation costs. Operating expenses as
a percentage of net revenues increased to 38.1% for 1998 from 36.3% for 1997,
as we continued to increase our sales and administrative employee headcount and
enhance our infrastructure. Operating expenses were incurred in advance of
associated revenue because there was a delay before our revenue generating
personnel reached full productivity.
Other Expense. Interest income decreased to $215,000 for 1998 from $485,000
for 1997. The decrease in interest income resulted from repayment in 1997 of
loans made to some directors and executive officers. Interest expense decreased
to $255,000 in 1998 from $581,000 in 1997. The decrease in interest expense
primarily reflected the partial repayment of debt in connection with our
initial public offering in August 1997 and an overall decrease in interest
rates.
Income Taxes. Our effective income tax rate was 43.0% for 1998 compared to
40.9% for 1997. Our income taxes as a percentage of income before taxes varies
from period to period primarily due to changes in nondeductible expenses.
Net Income. Net income increased 75.6% to $4.4 million for 1998 from $2.5
million for 1997. Net income as a percentage of net revenues was 3.5% for 1998
compared to 2.7% for 1997.
Liquidity and Capital Resources
We generally fund our operations and working capital needs through cash
generated from operations, periodically supplemented by borrowings under our
revolving line of credit with a commercial bank. Our operating activities
generated cash of approximately $5.3 million in 1999 and $5.1 million in 1998,
and used cash of approximately $0.5 million in 1997. Cash provided from our
operating activities for 1999 increased primarily due to improved operating
margins, partially offset by an increase in accounts receivable.
The principal uses of cash for investing activities for 1999 were for a
business acquisition and the purchase of property and equipment. Purchases of
property and equipment included the implementation of a new enterprise resource
system and upgrading our network and other technology systems.
In November 1999, we refinanced our $20 million revolving credit facility
with a new $30 million credit facility. The new $30 million credit facility is
comprised of a $20 million revolving credit facility
18
<PAGE>
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.
Net cash provided by financing activities for 1999 was $6.4 million,
primarily due to borrowings under our revolving credit facility. Net cash used
in financing activities during 1999 was attributable to the lending of $5.3
million to some executive officers of our company which was partially offset by
$3.3 million provided by the exercise of stock options from an executive
officer and $0.2 million from other employees.
We believe that our cash flow from operations and amounts available under
our credit facility will be sufficient to meet our cash requirements for at
least twelve months.
Recently Issued Financial Accounting Standard
In June 1998, the Financial Accounting Standard Board adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The statement is effective for our company's
fiscal year ending in December 2001, and will not be applied retroactively to
the financial statements of prior periods. We are currently evaluating the
impact of SFAS No. 133 on our financial statements and related disclosures.
Year 2000
Many existing computer systems worldwide are programmed to process dates
using only two digits for the year of the date rather than four digits (e.g.,
"99" for 1999). Computer systems which process dates in this manner began
recording transactions on and after January 1, 2000 with the year "00". These
systems may encounter significant processing inaccuracies and potentially even
system failure. We rely on numerous computer systems for our day-to-day
operations and may be adversely affected by the year 2000 situation. Our costs
in connection with year 2000 remediation and preparations totaled approximately
$0.2 million, with substantially all of such costs occurring in 1999.
Substantially all of our clients are similarly dependent on computer systems
and they also may be adversely affected by the year 2000 situation. Although
neither we have nor any clients known to us have experienced any material year
2000 problems to date, some experts have warned of the possibility of lingering
year 2000 problems that may not become apparent until later in the year 2000 or
beyond. We continue to believe that the year 2000 problem will not pose
significant operational problems for our business and operations on a going
forward basis.
19
<PAGE>
BUSINESS
Overview
We source and deliver the most critical component of the Internet economy--
human capital. As a leading talent source for the growing Internet economy, we
provide specialized IT professionals on a short-term contract and permanent
basis primarily to vendors of Internet technologies and, to a lesser extent, to
users of intranets and extranets. We believe we are well qualified to identify,
screen and deliver the specific IT talent demanded by our clients because we
have built thorough, long-term relationships with the vendors of Internet
technologies and because we are successful at recruiting IT professionals with
skills in leading edge technologies. Our clients include industry leaders such
as IBM, Cisco Systems and Netscape Communications as well as innovative start-
ups such as E*Trade, Priceline.com and E-Stamp.
We believe that our key competitive advantage is our ability to recruit the
best and brightest IT professionals. We have developed this advantage by
building client relationships with technology industry leaders and
communicating these relationships to the IT professional community. Our clients
offer our IT professionals what we believe is their primary career objective:
the opportunity to work on leading edge assignments in the Internet world. We
have leveraged our competitive advantage to expand our business geographically.
We began our company in Silicon Valley and have expanded our offices to
additional markets with high concentrations of technology companies--the
Silicon Valleys of the world.
We have developed a scalable business model which helps us expand into new
geographic markets. The cornerstone of our model is the rapid delivery of
talent to our clients. We recognize that our clients operate in a time-
sensitive environment in which their success is directly tied to their ability
to bring their technology products and services to market ahead of their
competition. We build strong, direct relationships with our clients'
engineering managers in order to identify quickly their technology needs. We
then actively network with the IT professional community and thoroughly search
the Internet in order to identify and recruit the appropriate IT talent
quickly.
Industry Background
The explosive growth of the Internet has transformed the high technology
industry with unprecedented speed. Established technology companies such as Sun
Microsystems, Cisco Systems and Hewlett Packard have responded to Internet
growth by redirecting their resources to develop products to meet the demands
of the Internet economy. Additionally, relatively new companies such as
Netscape Communications and Excite have built their businesses around and
continue to focus on providing the building blocks of the Internet. The
technology industry has evolved in response to the growth trends of the
Internet economy. Forrester Research projects that the market for business-to-
consumer e-commerce will grow from $39 billion in 2000 to $185 billion in 2004,
and the market for business-to-business e-commerce will grow from $406 billion
in 2000 to $2.7 trillion in 2004.
A significant influx of capital has become available to fund the development
of new technologies for the Internet. According to PricewaterhouseCoopers, over
4,000 technology companies received venture capital funding during the first
three quarters of 1998, and this number increased to over 13,000 during
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<PAGE>
the same period in 1999. PricewaterhouseCoopers also reported that the total
amount of venture capital invested for this period rose from $3.8 billion in
1998 to $9.0 billion in 1999.
We believe that the large sums of venture capital currently available in the
high technology sector, combined with the significant resources of existing
high technology companies, have created a great demand for highly skilled IT
professionals needed to support the velocity of change in the technology
marketplace. We find that talented professionals with skills in leading edge
technologies are in particularly high demand as established developers of next-
generation technologies compete with Internet technology start-ups for the
human capital that is critical to their businesses.
To help meet their need for leading edge IT professionals, organizations are
turning to third party providers of technology talent to support their existing
IT resources. Dataquest estimates that the size of the global IT services
market in 1997 was $326.8 billion, and that this market will grow to
approximately $630.4 billion by 2002. In order to succeed in this market,
providers of IT professionals must deliver leading edge IT talent at a speed
commensurate with the demands of a rapidly changing technology environment.
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<PAGE>
Our Solution
Our objective is to provide efficient, high quality contract and permanent
IT professional services to our target market and to become the agent of choice
for IT professionals. To meet this objective we:
. Target market our services to the vendors of Internet technologies. We
believe that we will stay at the forefront of technological change, and that
we can continue to build on our already established reputation as a provider
of leading edge technology assignments by directing our efforts toward
serving Internet technology providers and vendors of software and hardware
for Internet applications. We recognize that providing leading edge
technology talent is critical to serving our target market, and that our
best means of attracting talented IT professionals is to offer assignments
that use their state-of-the-art talents at leading technology companies.
As a result, we focus our marketing efforts on clients that have the highest
sensitivity to product lifecycle and use leading edge technologies, which
provides us with the opportunity for the greatest gross profit margins. To
assist us in directing our marketing efforts, we have segmented the market
for Internet technology talent into four categories:
<TABLE>
<CAPTION>
Our Focus on
Segment Description Critical Drivers this Segment
------- ----------- ---------------- ------------
<C> <S> <C> <C>
Core Companies who develop . Leading edge . Very high.
technology technologies and technology Strategically
providers services specifically important, but
aimed at increasing the a limited
effectiveness of the number of
Internet. These potential
technologies are clients
intended to change the
way the Internet
functions
. Highest sensitivity to . Approximately
timing of product 3% of our
release fourth quarter
1999
assignments
Hardware and Companies, such as Cisco . High sensitivity to . High. This is
software Systems, IBM and Hewlett timing of product our
vendors Packard, which develop release. Short product traditional
products that enable lifecycles market
users of the Internet to
extract value
. Leading edge research . Approximately
and development 43% of our
fourth quarter
1999
assignments
Intranet and Fortune 1000 companies . Largest demand for . This is not
extranet that use the Internet to talent our primary
companies conduct internal and market
external business
processes
. One step removed from . Less than 1%
leading edge of our fourth
assignments quarter 1999
assignment
. Less sensitivity to
timing of product
releases
E-commerce and Any company developing . Moderate technology . Our fastest
mass media web e-commerce and requirements growing
companies communication with segment
customers via the
Internet
. Client stock option . Approximately
awards make this 21% of our
segment a desirable fourth quarter
sector for permanent 1999
employees assignments
. Heavily venture
capital funded
</TABLE>
22
<PAGE>
. 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
assignments. We provide leading edge technology assignments that match our
IT professionals' abilities, because we have focused on serving the vendors
and users of Internet technologies. Conversely, we are able to meet the
technology requirements of these companies, in great part, because we are
able to attract the best and brightest IT talent. We cater to the individual
and family lifestyle demands of IT professionals by providing assignments
that may allow flexible working hours and telecommuting opportunities. We
offer our IT professional employees an attractive compensation program that
includes stock options and the opportunity to participate in benefit plans
equivalent to those available to their full time counterparts.
. Build brand recognition. We have implemented a strong brand recognition
campaign as The talent source for the Internet economy(TM) with marketing
promotions designed to convey an Internet image. This campaign is directed
toward the Generation X market that includes a large segment of our IT
professionals. Branding efforts have included a new corporate logo that
conveys an Internet theme and use of the slogan "The place where speed and
talent come together on the Internet." Promotions have included live web
casts and an auto racing sponsorship. We believe that our branding campaign
gives us a competitive advantage in soliciting technology clients and
recruiting IT talent and sales and sales support employees.
. Create a corporate culture that attracts and retains sales and sales support
employees. We spend a great deal of time, energy and money recruiting our
sales and sales support employees. We have created a performance-based
culture, with an attitude of "celebration" that our employees find appealing
and energizing. Our culture is embodied in our ongoing performance-rewarding
traditions as well as our annual business planning convention and national
awards trip, the highlight of the sales year at Hall, Kinion. We believe
that our culture has played a significant role in our ability to recruit and
retain sales and sales support employees.
. Deliver solid corporate support to our offices. We deliver extensive
training, detailed performance reporting and IT support to each of our
offices in order to promote a high level of service and consistency among
our offices. Our support reaches every sales and sales support professional
and provides them with the tools they need to increase productivity by
communicating with, and understanding and meeting the requirements of, both
our clients and IT professionals.
23
<PAGE>
Our Growth Strategy
We have followed a growth strategy focused on strong internal growth,
including new office openings, augmented by strategic acquisitions. Key
elements of our strategy include:
. Hiring, training and developing additional sales and sales support
employees. Our sales and sales support employees, who are our key contacts
with our clients and IT professionals, directly impact our ability to
generate revenues. We have been successful recruiting and retaining sales
and sales support personnel and have grown to approximately 558 sales and
sales support employees at the end of 1999 from approximately 348 at the end
of 1997. Sales and sales support professionals receive extensive sales
training and targeted technology training during their initial orientation
and throughout their careers with Hall, Kinion. As our employees are
promoted, they receive additional training in these areas, as well as in
management and budgeting.
. Opening additional offices in our current geographic markets. We believe
that by growing our presence in current geographic markets we substantially
increase our opportunities for successful pairing of our IT talent with our
clients' technology needs. As a result, new offices in existing geographic
markets typically reach profitability earlier than the initial office we
build in new markets. We also believe that the addition of new offices
enhances the growth of existing offices in the same geographic market. We
believe that there are opportunities for additional growth in each of our
existing geographic markets.
. Opening additional offices in the Silicon Valleys of the world. Our
geographic growth is focused on markets where there is a large concentration
of high technology companies and skilled IT professionals. Over the last six
years, we have added 34 offices in 20 geographic markets, including Silicon
Valley, Austin, Texas and Tysons Corner, Virginia. We believe that by
focusing our geographic growth on the Silicon Valleys of the world, we are
able to rapidly build our new offices to the "critical mass" required to
achieve profitability in a new market. We intend to open offices in Atlanta,
Georgia, and Tokyo, Japan during the first half of 2000 and plan to enter
additional geographic markets with a high concentration of technology
oriented businesses.
. Expanding international recruiting capabilities. We have successfully placed
a significant number of international recruits with our domestic clients and
plan to continue expanding our international recruiting capabilities. In
1998, we acquired Group-IPEX and its expertise in using the H-1B visa system
to bring foreign national IT professionals into the United States in order
to meet our need for highly skilled IT professionals.
. Acquiring complementary businesses. We also have grown our business through
selected acquisitions of complementary businesses. We grew in size and
gained a national presence with our acquisition of Team Alliance. We
acquired Group-IPEX and TKO Personnel to provide us with an international
presence for recruiting, to expand our permanent placement presence and to
give us a foothold for future international expansion. We developed our
executive retained search operations and strengthened our contract services
offerings with the simultaneous acquisition of Huntington Group and ITC.
Finally, through our most recent acquisition, TKI Consulting, we acquired
project-based software development and integration capabilities. We continue
to explore additional acquisition opportunities, particularly those that
provide us with new technology practices, new geographic markets, additional
international recruiting capabilities or executive retained search
businesses.
24
<PAGE>
Our Operating and Sales Model
We provide IT talent to our clients through our Contract Services group,
which delivers IT professionals on a short-term contract basis, and through our
Permanent Placement Services group, which sources, qualifies, and delivers IT
professionals for direct hire by our clients.
Contract Services Group
Our Contract Services group employs two types of sales and sales support
employees that have complementary roles in the rapid and high quality delivery
of our contract services: account managers and technical recruiting agents. As
of December 26, 1999, we employed approximately 277 sales and sales support
employees, including branch managers and directors, in the Contract Services
group.
Account Managers. Our account managers are responsible for marketing our
contract services. Account managers build and manage relationships with our
clients. We provide them with training in the latest technologies so that they
can understand our clients' rapidly changing technology needs and identify
opportunities for assignments that utilize the expertise of our IT
professionals. We believe that there are opportunities for additional growth in
all of our geographic markets, and anticipate continued hiring of qualified
account managers to target additional leading edge technology companies.
Technical Recruiting Agents. Our technical recruiting agents are responsible
for sourcing, qualifying, and representing our IT professionals. Our technical
recruiting agents build relationships with our IT professionals and understand
their technical expertise. A technical recruiting agent's success depends upon
his or her ability to source qualified IT professionals quickly as client
assignments arise. By participating in technology user groups, continually
searching the Internet for qualified IT professionals, and building a database
of IT professionals, our technical recruiting agents can match IT professionals
to leading edge technology assignments for our clients. By acting as the
advocate for the IT professional, our technical recruiting agents are
continually assisting us in growing and maintaining a high quality talent pool
of technical candidates.
Permanent Placement Services Group
Our Permanent Placement Services group employs sales and sales support
personnel whose primary role is the rapid and high quality delivery of
permanent placement IT professionals. As of December 26, 1999, we employed
approximately 281 sales and sales support employees, including branch managers
and directors, in the Permanent Placement Services group.
Recruiters. Our recruiters are responsible for marketing our permanent
placement services to our target market, and sourcing, qualifying and placing
IT professionals for direct hire by our clients. Our recruiters also build and
manage relationships with our clients and receive training to provide them with
the skills necessary to assess our clients' rapidly changing technology needs.
We task our recruiters with sourcing IT professionals and matching their skills
and career objectives with employment opportunities at leading edge technology
companies.
Branch Managers and Director Level Management
We employ branch managers and director level managers in both our Contract
Services and Permanent Placement Services groups. Our branch managers are
responsible for managing daily
25
<PAGE>
production, coordinating the account manager/technical recruiting agent
partnerships and recruiter relationships, as well as hiring and developing
sales teams. Branch managers are incentivized to meet revenue and gross profit
objectives within pricing guidelines determined at the executive level. Branch
managers also solicit and develop client opportunities, such as pursuing
regional and national accounts. We primarily promote our branch managers from
within the company, providing an established career path for our sales and
sales support employees.
Our directors manage all branch managers in their geographic territory. They
implement and actively support our corporate culture of performance,
achievement and the celebration of individual and team successes. Branch
managers and directors rely on sales budgets that are developed at the office
level, and consolidated at the director and service group levels. Directors are
incentivized to provide year-over-year and sequential quarterly revenue growth,
and to perform to their budget at the revenue, gross profit and earnings before
interest and income taxes levels. Our budget provides statistical metrics that
help our branch managers and directors make decisions regarding the timing of
expansion within their existing geographic markets and into new geographic
markets.
Our Corporate Support Services
We provide sales training, accounting and financial services, and
information technology services at the corporate level to support our offices.
Corporate Training
We provide regularly scheduled training courses to our sales and sales
support personnel and their managers to foster a strong sales environment and
to promote successful sales and management practices. Training includes
curricula in sales and marketing, management, evolving technologies and
budgeting and financial planning. In addition, periodic courses in best
practice theories are presented at each office.
Accounting and Financial Services
Our financial operations are primarily supported by a new PeopleSoft ERP
package implemented in 1999. We use ten modules of PeopleSoft to track weekly,
monthly, and quarterly performance at every level of operations. Our sales and
sales support professionals, branch managers and directors use information
provided by PeopleSoft to assist in decisions on fine tuning operations and
adding employees and offices. We believe that our decentralized business model
coupled with these performance metrics provides a sound framework for making
daily operating decisions. We also regularly produce market analyses
highlighting trends in our performance and our market place to help guide our
company-wide strategic decision making.
Information Technology Services
We provide the tools necessary for our employees to deliver our services
with the speed demanded by the Internet economy. IT talent sourcing and
communication with clients and among offices via the Internet are critical to
our business model. In addition, we utilize several other Internet-related
tools and encourage employees to use the latest Internet applications, such as
Monster.com and Dice.com, to better serve our clients. At the core of our
connectivity strategy is independent Internet access for all employees, a
corporate wide intranet and shared access to our proprietary database of IT
talent.
26
<PAGE>
Clients
In the fourth quarter of 1999, 67% of our overall assignments were with
technology companies working on Internet-related projects. We divide our
Internet-related clients into four segments, as depicted in the following
graphic:
[GRAPHIC] Picture of four concentric circles that are labeled, starting with
the innermost circle and moving outward, as follows: (1) Core Technology
Providers, (2) Hardware and Software Vendors, (3) Internet and Extranet
Companies, and (4) E-Commerce and Mass Media Web Companies. Under the heading
for each circle is a list of representative companies.
Although our target market is vendors of Internet technologies, a
significant portion of our assignments comes from services provided to clients
in high technology product research and development industries whose products
are not directly Internet-related. In the fourth quarter of 1999, these
services accounted for 33% of our overall assignments and remain an important
component of our business.
We focus on companies requiring IT professionals for leading edge technology
applications. Our assignments typically place an individual or a small group of
skilled professionals and, as a result, we have minimal client concentration.
In 1999, no client accounted for more than 5% of our net revenues and our top
ten clients accounted for less than 15% of our net revenues. Our top ten
clients in 1999 were:
<TABLE>
<S> <C>
. IBM Corporation . Oracle
. Motorola . The Gap
. AT&T Wireless . McKinsey & Co.
. ISP Channel . Network Associates
. Apex PC Solutions . Regence Blue Shield/Blue Cross
</TABLE>
27
<PAGE>
Technologies Served
We traditionally have supplied a significant percentage of our talent to
help our clients develop next generation technology services and products. As a
result, we have kept abreast of the latest technology trends and have been able
to evolve the skill set of our IT professionals to meet the demands of our
leading edge technology clients. The following technologies are a
representative sample of the e-commerce and software development skills that
our IT professionals currently use in client assignments:
<TABLE>
<S> <C>
. Java . Broadvision
. Cold Fusion . COM and DCOM
. XML . EJB
. Corba . ERWin
. ASP . UML
</TABLE>
Employees
As of December 26, 1999, approximately 1,427 of our IT professionals were
providing contract services to our clients. This number included approximately
1,112 employees and approximately 315 subcontractors. Our corporate staff at
December 26, 1999, consisted of approximately 678 full-time employees, of whom
approximately 558 were sales and sales support personnel and approximately 120
were administrative and accounting personnel. We are not a party to any
collective bargaining agreements covering any employees, have never experienced
any material labor disruption and are unaware of any current efforts or plans
to organize our employees. We consider our relationship with our employees to
be good.
Competition
The IT staffing industry is highly competitive and fragmented and has low
barriers to entry. In our Contract Services group, we compete for potential
clients with providers of IT staffing services and, to a lesser extent,
computer systems consultants, providers of outsourcing services, systems
integrators and temporary personnel agencies. In our Permanent Placement
Services group, we compete primarily against local and regional recruiting
companies. Many of our current and potential competitors have longer operating
histories, significantly greater financial and marketing resources, greater
name recognition and a larger installed base of IT professionals and clients
than our company. In addition, many of these competitors may have certain
distinct advantages. Our competitors that are smaller companies may be able to
respond more quickly to customer requirements. Our competitors that are larger
companies may be able to devote greater resources to marketing their services.
Because there are relatively low barriers to entry, we expect that competition
will increase in the future. Increased competition could result in price
reductions, reduced margins or loss of market share, any of which could
materially and adversely affect our business, operating results and financial
condition. We may not be able to compete successfully against current and
future competitors, and competitive pressures we face may have a material
adverse effect on our business, operating results and financial condition. We
believe that the principal factors relevant to competition in the IT staffing
services industry are the recruitment and retention of highly qualified IT
professionals, rapid and accurate response to client requirements and, to a
lesser extent, price. We believe that we compete favorably with respect to
these factors.
28
<PAGE>
The recruitment of IT professionals also is highly competitive. We compete
for IT professionals with other providers of technical staffing services,
system integrators, providers of outsourcing services, computer consultants,
temporary personnel agencies and our clients. We may not be able to recruit and
retain sufficient numbers of IT professionals successfully.
Facilities
Our principal executive offices are currently located in San Francisco,
California and occupy an aggregate of approximately 9,000 square feet of office
space pursuant to a lease that expires in December 2003. We also lease or
sublease office space for our operations in Austin, Dallas and Houston, Texas;
Capitola, Fremont, Mountain View, San Mateo, Lafayette, San Jose, Sacramento
and Cupertino, California; Boston, Massachusetts; Chicago and Schaumburg,
Illinois; Denver and Boulder, Colorado; London, England; New York, New York;
Trumbull, Connecticut; Tampa and Orlando, Florida; Phoenix, Arizona; Portland,
Oregon; Raleigh, North Carolina; Salt Lake City, Utah; Iselin, New Jersey;
McLean, Virginia; Minneapolis, Minnesota; Bellevue and Seattle, Washington; and
New Delhi, India. In addition, we own a training facility located in Park City,
Utah.
Corporate History
We were incorporated in California in 1991. During 1994, we began to expand
our West Coast presence, and in 1996, we developed a national presence by
acquiring Team Alliance, Inc. We reincorporated in Delaware in June 1997 and
completed the initial public offering of our common stock in August 1997. We
have grown from a single office in 1993 to 35 offices in 21 geographic markets,
as of December 26, 1999.
29
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information, as of March 24, 2000 except
where noted, with respect to the beneficial ownership of our Common Stock by:
. each selling stockholder;
. each person known to Hall, Kinion to beneficially own more than 5% of the
outstanding shares of our Common Stock;
. each director of Hall, Kinion and each executive officer named in the
Summary Compensation Table of our proxy statement for our 1999 Annual
Meeting of Stockholders; and
. all directors and executive officers as a group.
Under the rules of the Securities and Exchange Commission, a person is
deemed to beneficially own any shares that he or she has the power to vote or
the power to sell. In addition, under these rules a person is deemed to
beneficially own any shares that he or she has the right to acquire within 60
days. As a result, the percentage of outstanding shares of any person shown in
the following table does not necessarily reflect the person's actual voting
power at any particular date.
Unless otherwise indicated, to our knowledge each stockholder has sole
voting and investment power with respect to his or her securities and each
stockholder has the same address as Hall, Kinion.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Owned After
Offering Number of Offering
-------------------- Shares Being --------------------
Name and Address Number Percent(1) Offered Number Percent(1)
- ---------------- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Brenda C. Rhodes (2).... 1,574,453 15.0% 574,453 1,000,000 7.9%
Chief Executive Officer
and Chairman of the
Board
Todd J. Kinion (3)...... 1,632,984 15.6% 820,447 812,537 6.4%
Director
Paul H. Bartlett (4).... 974,209 9.3% 224,000 750,209 5.9%
President and Director
Martin A. Kropelnicki
(5).................... 183,333 1.7% 99,000 84,333 *
Vice President, Chief
Financial Officer and
Secretary
Rita S. Hazell (6)...... 91,747 * 24,000 67,747 *
Senior Vice President
of Contract Services
Craig J. Silverman (7).. 69,417 * 20,000 49,417 *
Senior Vice President
of Recruiting
Jon H. Rowberry (8)..... 27,500 * -- 27,500 *
Director
Will Herman (5)......... 17,500 * -- 17,500 *
Director
Other selling
stockholders (9)....... 70,232 * 38,100 32,132 *
Executive officers and
directors as a group (8
persons) (10).......... 4,571,143 43.5% -- 2,809,243 22.2%
SAFECO Corp. (11)....... 1,081,800 10.3% 1,081,800 8.5%
SAFECO Plaza
Seattle, WA 98185
</TABLE>
- --------
* Less than 1%
30
<PAGE>
(1) Percentage calculations assume no exercise of the underwriters'
overallotment option and are based on 10,500,950 shares of common stock
outstanding on March 24, 2000.
(2) Includes 78,612 shares held by Ms. Rhodes' and her spouse's children.
(3) Includes 102,900 shares held by Mr. Kinion's children.
(4) Includes 224,000 shares subject to stock options. Mr. Bartlett has
resigned his positions as President and Director effective March 15, 2000.
(5) Represents shares subject to stock options.
(6) Includes 67,247 shares subject to stock options.
(7) Includes 57,417 shares subject to stock options.
(8) Includes 25,000 shares subject to stock options.
(9) Represents shares subject to stock options that are currently exercisable
by employees, who are non-executive officers of Hall, Kinion.
(10) Includes 574,497 shares subject to stock options.
(11) Includes shares beneficially owned by SAFECO Asset Management Company and
SAFECO Common Stock Trust, which are affiliates. This information is
derived from SAFECO's Amendment No. 4 to Schedule 13G, filed with the
Securities and Exchange Commission on March 10, 2000.
31
<PAGE>
UNDERWRITING
Under an underwriting agreement dated April 3, 2000, we and the selling
stockholders have agreed to sell to the underwriters named below, the indicated
number of shares of our common stock:
<TABLE>
<CAPTION>
Number
Underwriters of shares
------------ ---------
<S> <C>
Robert W. Baird & Co. Incorporated................................. 1,400,000
First Union Securities, Inc........................................ 700,000
Legg Mason Wood Walker, Incorporated............................... 700,000
The Robinson-Humphrey Company, LLC................................. 700,000
George K. Baum & Company........................................... 100,000
---------
Total............................................................ 3,600,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of our common stock offered in this offering if any
are purchased, other than those shares covered by the over-allotment option we
describe below. The underwriting agreement also provides that if an underwriter
defaults, the purchase commitments of non-defaulting underwriters may be
increased or this offering of our common stock may be terminated.
Hall, Kinion and one of the selling stockholders have granted to the
underwriters a 30-day option to purchase up to 540,000 shares at the public
offering price less the underwriting discounts and commissions. This option may
be exercised only to cover over-allotments of our common stock.
The underwriters propose to offer our common stock initially at the public
offering price on the cover page of this prospectus and to the selling group
members at that price less a selling concession of $.60 per share. The
underwriters and the selling group members may allow a discount of $.10 per
share on sales to other broker/dealers. After the offering, the public offering
price and selling concession and discount to dealers may be changed by the
representatives. As used in this section,
. Underwriters are securities broker/dealers that are parties to the
underwriting agreement and will have a contractual commitment to purchase
shares of our common stock from us, and the representatives are the five
firms acting on behalf of the underwriters.
. Selling group members are securities broker/dealers to whom the underwriters
may sell shares of common stock at the public offering price less the
selling concession above, but who do not have a contractual commitment to
purchase shares from us.
. Broker/dealers are firms registered under applicable securities laws to sell
securities to the public.
. The syndicate consists of the underwriters and the selling group members.
The following table summarizes the compensation and estimated expenses that
we will pay. The compensation we will pay to the underwriters will consist
solely of the underwriting discount, which is equal to the public offering
price per share of common stock less the amount the underwriters pay to us per
share of common stock. The underwriters have not received and will not receive
from us any other item of compensation or expense in connection with this
offering considered by the National Association of Securities Dealers, Inc. to
be underwriting compensation under its rules of fair practice.
32
<PAGE>
<TABLE>
<CAPTION>
Per share Total
----------------------------- -----------------------------
Without With Without With
over-allotment over-allotment over-allotment over-allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us in cash............. $1.05 $1.05 $1,890,000 $2,199,875
Estimated expenses
payable by us.......... $0.15 $0.13 $ 525,000 $ 525,000
Underwriting discounts
and commissions paid by
the selling
stockholders........... $1.05 $1.05 $1,890,000 $2,147,125
</TABLE>
We have agreed to pay all of the expenses in connection with this offering,
except the underwriting discounts and commissions on the shares sold by the
selling stockholders and costs incurred directly by any selling stockholder.
The principal components of the offering expenses payable by us will include
the fees and expenses of our accountants and attorneys, the fees of our
registrar and transfer agent, the cost of printing this prospectus, The Nasdaq
Stock Market listing fees and filing fees paid to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc.
We, our officers, our directors, and the selling stockholders have agreed
not to offer or transfer, or file with the Securities and Exchange Commission a
registration statement under the Securities Act relating to any additional
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock without the prior written
consent of Robert W. Baird & Co. Incorporated for a period of 90 days after the
date of this prospectus, except in our case for grants of employee stock
options under our stock incentive plans in effect on the date hereof and
issuances of securities as a result of the exercise of any options outstanding
on the date hereof.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
The shares of our common stock are traded on The Nasdaq Stock Market's
National Market under the symbol "HAKI."
The representatives may engage in over-allotment, stabilizing transactions
and syndicate covering transactions in accordance with Regulation M under the
Securities Exchange Act of 1934. Over-allotment involves syndicate sales in
excess of the size of this offering, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the shares of our common stock
so long as the stabilizing bids do not exceed a specified maximum. Syndicate
covering transactions involve purchases of our common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. The representatives may, at their discretion, reclaim a selling
concession from any syndicate member that appears to have permitted its
customers to purchase shares in the public offering and then promptly resell
all or a portion of such shares to such syndicate member. However, the
underwriters do not have any agreements with any potential purchasers of shares
of common stock in this offering that would restrict their transfer of such
shares following this offering.
Such stabilizing transactions and syndicate covering transactions may cause
the price of our common stock to be higher than it would otherwise be in the
absence of such transactions. These transactions may be effected on The Nasdaq
Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
33
<PAGE>
LEGAL MATTERS
The validity of the shares of Hall, Kinion Common Stock covered by this
Prospectus will be passed upon by Gibson, Dunn & Crutcher LLP, Palo Alto,
California. The underwriters have been represented by Foley & Lardner,
Milwaukee, Wisconsin.
EXPERTS
The financial statements included in this prospectus and incorporated in
this prospectus by reference from our Annual Report on Form 10-K/A for the year
ended December 26, 1999, and the related financial statement schedule included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
incorporated by reference herein and elsewhere in the registration statement,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
ABOUT HALL, KINION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-3 under the Securities Act that registers the securities
covered by this prospectus. The registration statement, including the attached
exhibits and schedules, contains additional relevant information about us and
our common stock. The rules and regulations of the SEC allow us to omit certain
information included in the registration statement from this prospectus and
this prospectus does not contain all of the information set forth in the
registration statement. You should read the registration statement for further
information about us and our common stock.
In addition, we file reports, proxy statements and other information with
the SEC under the Securities Exchange Act of 1934. You may read and copy this
information at the following locations of the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates.
The SEC also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, like us, who
file electronically with the SEC. The address of that site is
http://www.sec.gov.
34
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this
prospectus, except for any information that is superseded by information that
is included directly in this document.
This prospectus incorporates by reference the documents listed below that we
have previously filed with the SEC. They contain important information about us
and our financial results.
<TABLE>
<CAPTION>
Our SEC Filings Period
- --------------- ------
<S> <C>
Annual Report on Form 10-K/A..................... Year ended December 26, 1999
The description of our common stock set forth in
our Registration Statement on Form 8-A.......... Filed: July 22, 1997
</TABLE>
We also incorporate by reference any documents that we may file with the SEC
after the date of this prospectus until such time as all the shares of common
stock covered by this prospectus have been sold. These documents could include
periodic reports, such as Quarterly Reports on Form 10-Q, and Current Reports
on Form 8-K, as well as proxy statements.
You can obtain any of the documents incorporated by reference in this
document through us or from the SEC through the SEC's web site at the address
described above. Documents incorporated by reference are available from us
without charge, excluding any exhibits to those documents unless the exhibit is
specifically incorporated by reference as an exhibit in this prospectus. You
can obtain documents incorporated by reference in this prospectus by requesting
them from us in writing or by telephone at the following address:
Hall, Kinion & Associates, Inc.
Investor Relations
185 Berry Street, China Basin Landing, Suite 6440
San Francisco, California 94107
Telephone: (415) 974-1300
If you request any incorporated documents from us, we will mail them to you
by first class mail, or another equally prompt means, within one business day
after we receive your request.
We have not authorized anyone to give any information or make any
representation about Hall, Kinion that is different from, or in addition to,
that contained in this prospectus or in any of the materials that we've
incorporated into this document. Therefore, if anyone does give you information
of this sort, you should not rely on it. If you are in a jurisdiction where
offers to sell, or solicitations of offers to purchase, the securities offered
by this document or the solicitation of proxies is unlawful, or if you are a
person to whom it is unlawful to direct these types of activities, then the
offer presented in this document does not extend to you. The information
contained in this document speaks only as of the date of this document unless
the information specifically indicates that another date applies.
35
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets--December 26, 1999 and December 27, 1998...... F-3
Consolidated Statements of Income--Years Ended December 26, 1999,
December 27, 1998 and December 28, 1997.................................. F-4
Consolidated Statements of Comprehensive Income--Years Ended December 26,
1999,
December 27, 1998 and December 28, 1997.................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)--Years Ended
December 26, 1999, December 27, 1998 and December 28, 1997............... F-5
Consolidated Statements of Cash Flows--Years Ended December 26, 1999,
December 27, 1998 and December 28, 1997.................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Hall, Kinion & Associates, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hall, Kinion
& Associates, Inc. and Subsidiaries as of December 26, 1999 and December 27,
1998, and the related consolidated statements of income, comprehensive income,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 26, 1999. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Hall, Kinion & Associates,
Inc. and Subsidiaries as of December 26, 1999 and December 27, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 26, 1999 in conformity with general accepted
accounting principles.
Deloitte & Touche LLP
San Jose, California
January 24, 2000
F-2
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents............................... $ 1,191 $ 3,082
Accounts receivable, net of allowance for doubtful
accounts of $1,500 in 1999 and $1,083 in 1998..... 27,987 18,158
Prepaid expenses and other current assets.......... 1,437 628
Deferred income taxes.............................. 1,814 1,726
------- -------
Total current assets............................. 32,429 23,594
Property and equipment, net.......................... 9,789 5,909
Goodwill, net........................................ 33,917 25,982
Other assets......................................... 419 491
------- -------
Total assets..................................... $76,554 $55,976
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit..................................... $ -- $ 1,000
Accounts payable................................... 5,145 3,547
Accrued salaries, commissions and related payroll
taxes............................................. 7,322 4,935
Accrued liabilities................................ 1,714 2,662
Income taxes payable............................... 2,688 514
Current portion of long term debt.................. -- 3,128
------- -------
Total current liabilities........................ 16,869 15,786
Long term debt and other obligations................. 14,161 1,083
Deferred income taxes................................ 1,555 1,205
------- -------
Total liabilities................................ 32,585 18,074
------- -------
Stockholders' Equity:
Common stock; $0.001 par value; 100,000 shares
authorized; issued and outstanding: 1999--10,466;
1998--9,536 ...................................... 38,183 34,269
Stockholders' notes receivable..................... (5,499) --
Accumulated translation adjustment................. 1 5
Retained earnings.................................. 11,284 3,628
------- -------
Total stockholders' equity....................... 43,969 37,902
------- -------
Total liabilities and stockholders' equity........... $76,554 $55,976
======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues:
Contract services.................... $145,425 $106,127 $80,260
Permanent placement.................. 35,324 18,005 12,571
-------- -------- -------
Total net revenues................. 180,749 124,132 92,831
Cost of contract services.............. 96,502 69,066 54,769
-------- -------- -------
Gross profit........................... 84,247 55,066 38,062
Operating expenses..................... 70,732 47,284 33,689
-------- -------- -------
Income from operations................. 13,515 7,782 4,373
-------- -------- -------
Other income (expense):
Interest income...................... 263 215 485
Interest expense..................... (723) (255) (581)
Other expense, net................... (17) (11) (31)
-------- -------- -------
Total other expense, net........... (477) (51) (127)
-------- -------- -------
Income before income taxes............. 13,038 7,731 4,246
Income taxes........................... 5,382 3,325 1,737
-------- -------- -------
Net income............................. $ 7,656 $ 4,406 $ 2,509
======== ======== =======
Net income per share:
Basic................................ $ 0.75 $ 0.47 $ 0.34
Diluted.............................. $ 0.71 $ 0.43 $ 0.25
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income............................. $ 7,656 $ 4,406 $ 2,509
Change in accumulated translation
adjustment............................ (4) 3 5
-------- -------- -------
Net comprehensive income............... $ 7,652 $ 4,409 $ 2,514
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Common Stock Stockholder Accumulated
--------------- Notes Translation Retained
Shares Amount Receivable Adjustment Earnings Total
------ ------- ----------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES as of December
29, 1996............... 6,339 $ 357 $(5,323) $(3) $ 2,221 $(2,748)
Issuance of common
stock, upon initial
public offering, net of
issuance costs of
$1,767................. 1,667 21,458 -- -- -- 21,458
Conversion of redeemable
convertible preferred
stock to common stock.. 1,600 9,900 -- -- -- 9,900
Repayment of stockholder
notes receivable....... (800) (10) 5,518 -- (5,508) --
Interest on stockholder
notes receivable....... -- -- (201) -- -- (201)
Exercise of stock
options................ 204 457 -- -- -- 457
Issuance of common
stock.................. 15 150 -- -- -- 150
Accumulated translation
adjustment............. -- -- -- 5 -- 5
Net income.............. -- -- -- -- 2,509 2,509
------ ------- ------- --- ------- -------
BALANCES as of December
28, 1997............... 9,025 32,312 (6) 2 (778) 31,530
Net exercise of warrants
into common stock...... 250 -- -- -- -- --
Exercise of stock
options................ 215 639 -- -- -- 639
Tax benefit related to
stock options.......... -- 404 -- -- -- 404
Issuance of common
stock.................. 46 914 -- -- -- 914
Repayment of stockholder
note receivable........ -- -- 6 -- -- 6
Accumulated translation
adjustment............. -- -- -- 3 -- 3
Net income.............. -- -- -- -- 4,406 4,406
------ ------- ------- --- ------- -------
BALANCES as of December
27, 1998............... 9,536 34,269 -- 5 3,628 37,902
Exercise of stock
options................ 930 3,457 -- -- -- 3,457
Tax benefit related to
stock options.......... -- 457 -- -- -- 457
Notes to stockholders... -- -- (5,274) -- -- (5,274)
Interest on stockholder
notes receivable....... -- -- (225) -- -- (225)
Accumulated translation
adjustment............. -- -- -- (4) -- (4)
Net income.............. -- -- -- -- 7,656 7,656
------ ------- ------- --- ------- -------
BALANCES as of December
26, 1999............... 10,466 $38,183 $(5,499) $ 1 $11,284 $43,969
====== ======= ======= === ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 7,656 $ 4,406 $ 2,509
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization......... 2,905 1,945 1,289
Deferred income taxes................. 262 (666) (70)
Interest on stockholder notes
receivable........................... (225) -- (201)
Loss on sale of fixed assets.......... 42 5 10
Discount on early repayment of debt... -- 13 --
Changes in assets and liabilities:
Accounts receivable.................. (9,425) (3,113) (5,153)
Prepaid expenses and other assets.... (509) (211) (124)
Prepaid income taxes................. -- 407 379
Accounts payable and accrued
expenses............................ 2,133 1,863 844
Income taxes payable................. 2,451 485 --
-------- -------- --------
Net cash provided by (used for)
operating activities............... 5,290 5,134 (517)
-------- -------- --------
Cash flows from investing activities:
Sales (purchases) of investments....... -- 9,578 (9,120)
Purchase of property and equipment..... (5,641) (1,705) (1,936)
Cash paid for business acquisitions.... (7,190) (14,074) --
Earnout payments related to business
acquisitions.......................... (753) -- --
-------- -------- --------
Net cash used for investing
activities......................... (13,584) (6,201) (11,056)
-------- -------- --------
Cash flows from financing activities:
Cash overdraft, net.................... -- -- (1,229)
Line of credit, net.................... (1,000) (810) 832
Borrowing on debt...................... 18,349 3,000 --
Repayments of debt..................... (9,129) (2,996) (5,691)
Proceeds from sale of common stock, net
of issuance costs..................... -- -- 21,458
Proceeds from exercise of options...... 3,457 639 457
Stockholder notes receivable........... (5,274) 6 --
-------- -------- --------
Net cash provided by (used for)
financing activities............... 6,403 (161) 15,827
-------- -------- --------
Net increase (decrease) in cash and
equivalents........................... (1,891) (1,228) 4,254
Cash and equivalents, beginning of
period................................ 3,082 4,310 56
-------- -------- --------
Cash and equivalents, end of period.... $ 1,191 $ 3,082 $ 4,310
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998 AND DECEMBER 28, 1997
Note 1. Business and Significant Accounting Policies
Business. Hall, Kinion & Associates, Inc. ("the Company") is an information
technology staffing company specializing in placing high technology personnel
on both a contract and permanent basis. In August 1999, the Company acquired
substantially all of the assets of TKI Consulting, Inc. ("TKI"). During 1998,
the Company acquired all of the outstanding capital stock of Group-IPEX, Inc.
and TKO Personnel, Inc. ("TKO"), and substantially of the assets from
Alexander, Bohemer & Tomasco, dba, The Huntington Group, ("Huntington") and
Interactive Technology Consultants, LLC, ("ITC").
Initial Public Offering. In August 1997, the Company completed its initial
public offering of its common stock. Of the 2,892,250 shares of common stock
offered, 1,666,667 shares were sold by the Company and 1,225,583 shares were
sold by selling stockholders. The Company received proceeds of approximately
$21.5 million of cash, net of underwriting discounts and commissions, and other
expenses. Simultaneously with the initial public offering, all outstanding
shares of preferred stock were automatically converted in the accordance with
their terms into an equal number of shares of common stock.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Certain Significant Risks and Uncertainties. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such management estimates
include the allowance for doubtful accounts receivable and certain accruals.
Actual results could differ from those estimates.
The Company operates in a dynamic industry, and accordingly, can be affected
by a variety of factors. For example, management of the Company believes that
changes in any of the following areas could have a negative effect on the
Company in terms of its future financial position and results of operations:
ability to obtain additional financing, regulatory changes, uncertainty
relating to the performance of the U.S. economy, competition, demand for the
Company's services, litigation or other claims against the Company, and the
hiring, training and retention of key employees.
The Company's financial instruments that are exposed to credit risk are
primarily cash and equivalents and accounts receivable. The Company places its
cash with what it believes are high credit quality financial institutions. In
granting credit, the Company routinely evaluates the financial strength of its
customers.
Cash and Equivalents. The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
equivalents, consisting primarily of money market funds and bank accounts, are
stated at a cost which approximates fair value.
F-7
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment. Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets, generally three to twenty-five years. Leasehold improvements are
amortized over the shorter of the estimated life of the asset or the lease
term.
Goodwill. Goodwill, representing the cost in excess of the fair value of net
assets acquired in acquisitions, is being amortized on a straight-line basis
over 30 to 40 years. For the years ended December 26, 1999, December 27, 1998,
and December 28, 1997 amortization expense was $930,000, $561,000, and $304,000
respectively. The Company evaluates the recoverability of goodwill on a
quarterly basis based upon estimated future cash flows.
Revenue Recognition. Revenue from contract placements is recognized as
services are performed. Revenue from permanent placement contracts is
recognized either upon commencement of employment or upon completion of
services rendered based on contractual obligation.
Income Taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which requires an asset and liability approach of accounting for income
taxes.
Stock-Based Compensation. The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees.
Net Income Per Share. Basic net income per share excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted net
income per share reflects the potential dilution that could occur if
convertible securities and contracts to issue common stock were converted or
exercised into common stock.
A reconciliation of basic weighted average common stock shares to diluted
weighted average common shares follows:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Basic weighted average common
shares outstanding................ 10,155 9,439 7,339
Preferred stock.................... -- -- 958
Warrants........................... -- 10 250
Stock options...................... 561 893 1,360
------ ------ -----
Diluted weighted average shares
outstanding....................... 10,716 10,342 9,907
====== ====== =====
</TABLE>
Fiscal Year. The Company's fiscal year ends on the Sunday closest to
December 31. Fiscal years 1999, 1998, and 1997 all consisted of 52 weeks.
F-8
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recently Issued Financial Accounting Standard
In June 1998, the Financial Accounting Standard Board adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The statement is effective for the Company's
fiscal year ending in December 2001, and will not be applied retroactively to
the financial statements of prior period. The Company is currently evaluating
the impact of SFAS No. 133 on its financial statements and related disclosures.
Note 2. Acquisitions
In August 1999, the Company acquired substantially all of the assets of TKI
Consulting Inc., ("TKI") for $7.2 million in cash. The acquisition was
accounted for as a purchase. TKI is an IT consulting and training firm,
specializing in client/server, e-commerce and internet-based consulting
applications. TKI delivers full project consulting services that solve business
issues and saves companies time and money. TKI is based in Minneapolis,
Minnesota. The purchase price exceeded the fair value of the net liabilities
assumed by $8.1 million which was recorded as goodwill and is being amortized
over 40 years. If certain revenue targets set forth in the agreement providing
for such acquisition are achieved, the Company has agreed to pay the seller an
aggregate of $2.5 million that will be recorded as additional purchase price.
The payments will be made in four future installments of $625,000 each over the
next four years payable by March 15 of the following year.
In November 1998, the Company acquired substantially all of the assets of
Alexander, Boehmer, Tomasco, LLC, doing business as Huntington Group (HG) and
Interactive Technologies Consultants (ITC), for $8.1 million in cash. The
acquisitions were accounted for as a purchase. The Huntington Group is a
retained search firm, while ITC is a provider of IT professionals on a contract
basis. Both companies are located in Trumbull, Connecticut. The purchase price
exceeded the fair value of the net liabilities assumed by $8.9 million which
was recorded as goodwill and is being amortized over 30 to 40 years. If certain
revenue and earnings targets as set forth in the agreement providing for such
acquisition are achieved, the Company has agreed to pay the sellers an
aggregate of $3.6 million which will be recorded as additional purchase price.
The payments will be made in installments of $600,000, $1,800,000 and
$1,200,000, over the next three years. These payments are payable by January
31, of the following year. The 1999 targets were substantially met and a
$600,000 payment was made in January 2000.
In August 1998, the Company purchased all of the outstanding capital stock
of TKO Personnel, Inc. for $228,000 in cash. The acquisition was accounted for
as a purchase. TKO Personnel is based in San Jose, California, is an
international permanent placement recruiting organization for IT research and
development professionals focusing on recruiting primarily from Japan, but also
from China and Korea. The purchase price exceeded the fair value of the net
liabilities assumed by $912,000 which was recorded as goodwill and is being
amortized over 40 years. If certain revenue targets as set forth in the
agreement
F-9
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
providing for such acquisition are achieved, the Company has agreed to pay the
sellers an aggregate of $350,000 that will be recorded as additional purchase
price. The payments will be made semi-annually in installments of $58,833 over
the next three years. The first target was substantially met and the
corresponding payment of $53,000 was paid in September 1999. The second target
was substantially met and the corresponding payment will be due in February
2000.
In January 1998, the Company purchased all of the outstanding capital stock
of Group-IPEX, Inc. (Group-IPEX). Group-IPEX is an international recruiting
organization for information technology IT research and development
professionals. Group IPEX focuses on recruiting international IT professionals
primarily from India but also from Russia and China. The acquisition was
accounted for as a purchase. Total consideration for this purchase was $7.3
million including approximately $250,000 of costs attributable to the
acquisition. The consideration was paid in the form of a cash payment of $6.2
million at the date of acquisition and the issuance of 46,000 shares of the
Company's Common stock valued at $914,000. The purchase price exceeded the fair
value of the net liabilities assumed by $7.7 million which was recorded as
goodwill and is being amortized over 40 years. In addition, if certain earnings
targets set forth in the agreement providing for such acquisition are achieved,
the Company has agreed to pay the seller an aggregate up to $3,375,000 that
will be recorded as additional purchase price. These payments will be made over
the next three years payable by February 10 of the following year. The 1998
targets were substantially met and the corresponding payment of $700,000 was
paid in 1999. The 1999 targets have been substantially met and the
corresponding payment of $1,550,000 will be made on February 10, 2000.
The following summarized unaudited pro forma financial information assumes
that each acquisition disclosed above had occurred as of the first day of the
fiscal year of the acquisition and of the preceding fiscal year (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro Forma Information (unaudited):
Total net revenues............................... $185,188 $137,428 $106,057
Net income....................................... 7,281 3,789 2,227
Net income per share:
Basis.......................................... 0.72 0.40 0.30
Diluted........................................ 0.68 0.37 0.22
</TABLE>
The pro forma information is for information purposes only and may not
necessarily reflect the results of operations of the Company had the acquired
businesses operated as a part of the Company for the fiscal years presented.
The pro forma adjustments consist primarily of goodwill amortization and
additional interest for debt incurred in connection with the acquisitions.
F-10
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Property and Equipment
Property and equipment consists of (in thousands):
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------ ------------
<S> <C> <C>
Property and equipment............................. $11,716 $ 6,510
Land and building.................................. 2,100 2,047
Leasehold improvements............................. 1,121 586
------- -------
14,937 9,143
Accumulated depreciation and amortization.......... (5,148) (3,234)
------- -------
$ 9,789 $ 5,909
======= =======
</TABLE>
Note 4. Debt
The Company has a $30 million credit facility. The credit facility is
comprised of a $20 million long term revolving credit facility and a $10
million term loan facility. The interest rate on both facilities is the lower
of the lender's prime rate (8.5% at December 26, 1999), or LIBOR. Both these
facilities terminate July 15, 2002. Borrowings under both facilities are
secured by substantially all of the Company's assets. The facilities contain
covenants requiring the Company to maintain minimum levels of profitability and
net worth and specific ratios of working capital and debt to operating cash
flow. The Company is also required to obtain the bank's consent prior to paying
cash dividends. The Company was in compliance with all of those ratios as of
December 26, 1999.
Debt consists of (in thousands):
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------ ------------
<S> <C> <C>
Long term revolving credit facility................ $14,000 $ 3,000
Mortgage note payable.............................. -- 1,128
Deferred rent...................................... 161 83
------- -------
14,161 4,211
Current portion of debt............................ -- (3,128)
------- -------
Long term debt and other obligations............... $14,161 $ 1,083
======= =======
</TABLE>
A future principal payment of $14,000,000 is due July 15, 2002.
Note 5. Employee Benefit Plans
The Company has a 401(k) profit-sharing plan covering substantially all
employees with at least 90 days of continuous service. Employees may contribute
up to 15% of their eligible compensation to the maximum amount allowed by the
Internal Revenue Code. At the discretion of the Board of Directors, the Company
may match employee contributions. In February 1998, the Board of Directors
approved a nonqualified deferred compensation plan for officers and key
employees. At the discretion of the Board of Directors, the Company may match
contributions. The Company did not make any matching contributions in 1999,
1998 and 1997.
F-11
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Lease Commitments
The Company leases its office facilities under various noncancellable
operating leases which expire through 2005. Rent expense included in operating
expenses for 1999, 1998 and 1997 was approximately $3,089,000, $2,385,000 and
$1,797,000 respectively. Future minimum payments under all operating leases are
as follows:
<TABLE>
<CAPTION>
Years Ending
------------
(in thousands)
<S> <C>
2000.......................................................... $3,307
2001.......................................................... 2,500
2002.......................................................... 1,923
2003.......................................................... 1,149
2004.......................................................... 481
Thereafter.................................................... 52
------
Total....................................................... $9,412
======
</TABLE>
Note 7. Redeemable Convertible Preferred Stock
In August 1997, all of the outstanding shares of Series A redeemable
preferred stock were converted in accordance with their terms into 1,600,000
shares of common stock.
Note 8. Stockholders' Equity
Capital Stock--The Company is authorized to issue 110,000,000 shares of
capital stock consisting of 100,000,000 shares of common stock and 10,000,000
shares of preferred stock.
Stockholder Notes Receivable--In January 1999, the Company loaned Brenda C.
Rhodes, Chief Executive Officer, $2,000,000, which bears interest at the
Company's incremental rate of borrowing plus 1/8% per annum, compounded
monthly. This loan is secured by 1,000,000 shares of the Company's Common Stock
pledged by Ms. Rhodes. The principal balance of this note, together with
accrued interest is due and payable January 25, 2002. The rate of interest for
the fiscal year ended December 26, 1999 was 6.70%.
On April 15, 1999, the Company made two loans for an aggregate of $3,274,000
to Paul H. Bartlett, President, to enable Mr. Bartlett to pay the exercise
price and income taxes associated with his exercise of an option to purchase
750,000 shares of common stock at an exercise price of $4.00 per share. The
first loan has a principal amount of $1,781,000, and is secured by 750,000
shares of the Company's Common Stock, and the second loan has a principal
amount of $1,493,000, and is secured by Mr. Bartlett's personal assets,
including a second deed of trust on his principal residence. Both loans bear
interest at the Company's incremental rate of borrowing plus 1/8% per annum,
compounded monthly. The principal balance of these notes, together with
interest accrued is due and payable June 26, 2002. The rate of interest for the
fiscal year ended December 26, 1999 was 5.88%.
F-12
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 1997, in connection with the initial public offering, the two
principal common stockholders tendered an aggregate of 800,000 shares of Common
Stock as full payment of principal and interest due on the promissory notes
that were executed in 1996 for an aggregate amount of $5,000,000.
Stock Options--The Company's 1997 Stock Option Plan (the Plan), as amended,
authorizes the issuance of up to 3,049,000 shares of common stock pursuant to
incentive or nonqualified stock options granted under the Plan to key
employees, nonemployees, directors and consultants who provide services to the
Company. The Plan also allows for an additional number of shares equal to 3.0%
of the number of shares of Common Stock outstanding on the first day of each
calendar year is automatically added to this authorization each year pursuant
to the terms of the 1997 Stock Options Plan. Under the Plan, options generally
are granted at fair market value at the date of grant as determined by the
Board of Directors. Such options vest over periods ranging from two to five
years and expire up to ten years from the grant date.
In 1996, the Company issued an option to purchase 974,000 shares of common
stock outside of the Plan to an officer, of which was 50% vested at year ended
December 29, 1996 with the remaining 50% vesting ratably over 24 months
commencing January 1998 with acceleration clauses. These options fully vested
in January 2000.
The Company's IT Professional Stock Plan (the "IT Professional Plan") was
adopted by the Board of Directors in May 1997. The Company has authorized
628,000 shares of Common Stock for issuance under the IT Professional Plan, and
an additional number of shares equal to 1.5% of the number of shares of Common
Stock outstanding on the first day of each calendar year is automatically added
to this authorization each year pursuant to the terms of the IT Professional
Plan. At December 26, 1999, 535,000 shares of Common Stock were available for
issuance under the IT Professional Plan. Under the IT Professional Plan,
independent consultants may, at the discretion of the plan administrator, be
granted options to purchase shares of Common Stock at an exercise price no less
than 85% of the fair market value of such shares on the grant date. Options
under the IT Professional Plan are generally vested when granted and expire ten
years from grant date.
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors in May 23, 1997. A total of 150,000 shares of Common
Stock have been reserved for issuance under the Purchase Plan. Employees will
be eligible to participate if they are employed by the Company for more than 20
hours per week and have been employed for at least ninety days. The Purchase
Plan permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 10% of an employee's cash compensation, nor
more than 1,000 shares per participant on any purchase date. The purchase price
of stock under the Purchase Plan will be 85% of the lower of the fair market
value of the Common Stock at the beginning of the six-month offering period or
on the purchase date. The Board may amend or terminate the Purchase Plan
immediately after the close of any purchase date. As of December 26, 1999, the
Company has not implemented the Purchase Plan.
Common Stock Warrants--Common stock warrants to purchase 250,000 shares at
$0.01 per share were issued in conjunction with the issuance of preferred stock
in January 1996. In January 1998, these warrants were exercised.
F-13
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity under all stock option plans is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance, December 29, 1996....................... 2,201,000 $ 3.35
Granted (weighted average fair value* of $3.49
per share)...................................... 596,000 $12.42
Canceled......................................... (238,000) $ 4.43
Exercised........................................ (210,000) $ 2.28
---------
Balanced, December 28, 1997...................... 2,349,000 $ 5.63
Granted (weighted average fair value* of $1.92
per share)...................................... 550,000 $10.50
Canceled......................................... (272,000) $ 9.47
Exercised........................................ (209,000) $ 2.95
---------
Balance, December 27, 1998....................... 2,418,000 $ 6.54
Granted (weighted average fair value* of $4.22
per share)...................................... 868,000 $ 8.21
Canceled......................................... (252,000) $ 9.35
Exercised........................................ (930,000) $ 3.71
---------
Balance, December 26, 1999....................... 2,104,000 $ 8.12
=========
</TABLE>
- --------
* As computed under SFAS No. 123
Additional information regarding options outstanding as of December 26, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighed
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.300 54,000 5.64 $ 0.30 34,000 $ 0.30
$ 1.500--$ 4.000 398,000 6.69 $ 3.76 398,000 $ 3.76
$ 5.100--$10.000 1,271,000 8.66 $ 7.53 416,000 $ 8.32
$10.500--$19.250 289,000 8.69 $14.11 109,000 $12.80
$19.375--$21.875 92,000 7.86 $20.92 41,000 $20.97
--------- -------
$ 0.300--$21.875 2,104,000 8.18 $ 8.12 998,000 $ 7.24
========= =======
</TABLE>
At December 26, 1999, 1,193,000 shares of common stock were available for
future option grants. As of December 27, 1998 and December 28, 1997 the number
of shares of common stock underlying exercisable options were 1,366,000 and
2,092,000, respectively with a weighted average exercise price of $5.28 and
$5.00 per share, respectively.
Additional Stock Plan Information--As discussed in Note 1, the Company
continues to account for all its stock-based awards using the intrinsic value
method in accordance with APB 25, Accounting for Stock Issued to Employees and
its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements, as the
options exercise price is not less than the fair market value of the underlying
common stock at date of grant.
F-14
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, (SFAS 123) requires the disclosure of pro forma net income
and earnings per share had the Company adopted the fair value method as of the
beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option price models, even though
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which affect the calculated values.
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions: expected life following
vesting, 16 months in 1999 and 12 months in 1998 and 1997; volatility, 61.9% in
1999, 37.2% from the initial public offering on August 4, 1997 through December
27, 1998 and zero before that date; risk free interest rates, 5.5% in 1999,
6.5% in 1998 and 6.2% in 1997; and no dividends during the expected term.
The Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. If the computed fair value of the
1999, 1998 and 1997 awards had been amortized to expense over the vesting
period of the awards, pro forma not income and pro forma diluted net income per
share would have been $6,421,000, $0.62 per share, $3,278,000, $0.32 per share
and $1,764,000, $0.18 per share, in 1999, 1998 and 1997, respectively.
Note 9. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal......................... $4,230 $3,124 $1,391
State........................... 890 867 416
------ ------ ------
5,120 3,991 1,807
------ ------ ------
Deferred:
Federal......................... 200 (533) (94)
State........................... 62 (133) 24
------ ------ ------
262 (666) (70)
------ ------ ------
$5,382 $3,325 $1,737
====== ====== ======
The Company's effective tax rate differs from the federal statutory rate as
follows:
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income tax expense at statutory
rate............................. 35.0% 35.0% 35.0%
State income tax taxes, net of
federal benefit.................. 6.1 6.1 5.7
Other items, net.................. 0.2 1.9 0.2
------ ------ ------
41.3% 43.0% 40.9%
====== ====== ======
</TABLE>
F-15
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 26, December 27,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................ $ 664 $ 469
Accrued expenses............................... 1,150 1,257
------ ------
Total deferred tax assets.................... 1,814 1,726
------ ------
Deferred tax liabilities:
Depreciation and amortization.................. 887 611
Other accrued liabilities...................... 668 594
------ ------
Total deferred tax liabilities............... 1,555 1,205
------ ------
Net deferred income taxes.................. $ 259 $ 521
====== ======
</TABLE>
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable by $457,000, $404,000 and $0 for 1999, 1998,
and 1997, respectively.
Note 10. Contingencies
The Company is party to various legal actions in the course of business. The
Company and certain of its directors and officers were named as defendants in a
putative class actions filed in the United States District Court for Northern
California, alleging violations of Section 10(b) of the Securities and Exchange
Act of 1934. Although the ultimate outcome of these matters is not presently
determinable, management believes that the resolution of all such pending
matters will not have a material adverse effect on the Company's financial
position or results of operations.
F-16
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Supplemental Disclosure of Cash Flow Information
The following provides additional information concerning supplemental
disclosures of cash flow activities:
<TABLE>
<CAPTION>
Years Ended
--------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Cash paid during the period for:
Income taxes...................... $ 2,083 $ 3,097 $ 1,531
Interest.......................... 689 320 536
Noncash investing and financing
activities:
Conversion of preferred stock to
common stock..................... -- -- 9,900
Tax benefit related to stock
options.......................... 457 404 --
Payment of stockholder loan by
stock............................ -- -- 5,518
Common stock issued in settlement
agreement........................ -- -- 150
Accrued interest on debt.......... 723 -- 116
</TABLE>
<TABLE>
<CAPTION>
Years Ended
-------------------------
December 26, December 27,
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
Effect of business acquisitions:
Current assets acquired........................ $ 690 $ 2,933
Intangible assets and equipment acquired....... 8,361 17,700
Liabilities assumed............................ (1,647) (5,045)
Common stock issued............................ -- (914)
Accrued expenses in connection with
acquisitions.................................. (214) (600)
------- -------
Cash paid for business acquisitions.......... $ 7,190 $14,074
======= =======
</TABLE>
Note 12. Business Segment Reporting
In 1998, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. The statement requires that an enterprise's
operating segments be determined in the manner in which management operates the
business. Specifically, financial information is to be reported on the basis
that is used internally by the chief operating decision maker in making
decisions related to resource allocation and segment performance. The Company's
reportable segments are operated and managed as strategic business units and
are organized based on types of services performed.
Under SFAS 131, the Company's operations were divided into two industry
segments, Contract Services and Permanent Placement Services. Operations in the
Contract Services segment provides supplemental IT professionals on a contract
basis. In a typical R&D contract, an IT professional is contracted to a high
technology client, usually in connection with a specific application or
project. The Permanent Placement segment provides professionals for permanent
placement with its corporate clients.
F-17
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Management evaluates segment performance based primarily on segment
revenues, cost of revenues, and gross profit. Continuing operations by business
segment are as follows:
<TABLE>
<CAPTION>
Net Revenues Cost of Revenues Gross Profit
------------ ---------------- ------------
(in thousands)
<S> <C> <C> <C>
Year ended December 26,
1999.......................
Contract Services......... $145,425 $96,502 $48,923
Permanent Placement....... 35,324 -- 35,324
-------- -------- -------
Total................... $180,749 $96,502 $84,247
======== ======== =======
Year ended December 27,
1998.......................
Contract Services......... $106,127 $69,066 $37,061
Permanent Placement....... 18,005 -- 18,005
-------- -------- -------
Total................... $124,132 $69,066 $55,066
======== ======== =======
Year ended December 28,
1997.......................
Contract Services......... $ 80,260 $54,769 $25,491
Permanent Placement....... 12,571 -- 12,571
-------- -------- -------
Total................... $ 92,831 $54,769 $38,062
======== ======== =======
Net revenues to unaffiliated customers by geographic area are as follows:
<CAPTION>
Years Ended
------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
------------ ---------------- ------------
(in thousands)
<S> <C> <C> <C>
United States............... $178,791 $122,953 $91,910
Europe...................... 1,958 1,179 921
-------- -------- -------
Total..................... $180,749 $124,132 $92,831
======== ======== =======
</TABLE>
The Company currently does not segregate the operations of its business
segments by assets.
F-18
<PAGE>
HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 13. Quarterly Financial Data (Unaudited)
The following tabulation shows certain quarterly financial data for 1999 and
1998:
<TABLE>
<CAPTION>
Quarter
-------------------------------------------
1999 1 2 3 4
---- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total net revenues........... $35,860 $42,884 $49,324 $52,681
Gross profit................. 15,393 20,129 23,647 25,078
Income before income taxes... 2,232 2,915 3,629 4,262
Net income................... 1,317 1,720 2,123 2,496
Net income per share--Basic.. 0.14 0.17 0.20 0.24
Net income per share--
Diluted..................... 0.13 0.16 0.20 0.22
<CAPTION>
Quarter
-------------------------------------------
1998 1 2 3 4
---- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total net revenues........... $26,834 $28,549 $34,065 $34,684
Gross profit................. 12,091 12,837 14,722 15,416
Income before income taxes... 1,656 1,637 2,081 2,357
Net income................... 944 933 1,186 1,343
Net income per share--Basic.. 0.10 0.10 0.13 0.14
Net income per share--
Diluted..................... 0.09 0.09 0.12 0.13
</TABLE>
F-19
<PAGE>
DESCRIPTION OF ARTWORK
Picture of four concentric circles that are labeled, starting with the innermost
circle and moving outward, as follows: (1) Core Technology Providers, (2)
Hardware and Software Vendors, (3) Internet and Extranet Companies, and (4) E-
Commerce and Mass Media Web Companies. Across the middle of the page is the
following sentence: Hall Kinion supplies technical talent for these segments of
the Internet economy. Across the bottom of the page are four standing persons.
<PAGE>
[LOGO OF HALL KINION]
