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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 27, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
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COMMISSION FILE NUMBER 0-22869
HALL, KINION & ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0337705
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
China Basin Landing - 185 Berry Street 94107
Suite 6440 (zip code)
San Francisco, California
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 974-1300
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) had been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of August 4, 1999:
10,377,802 shares of common stock.
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HALL, KINION & ASSOCIATES, INC.
FORM 10-Q
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION................................................................................... 3
Item 1. Financial Statements.................................................................................... 3
Condensed Consolidated Balance Sheets at June 27, 1999 and December 27, 1998 ........................... 3
Condensed Consolidated Statements of Income for the three and six months ended June
27, 1999 and June 28, 1998.............................................................................. 4
Condensed Consolidated Statements of Cash Flows for the six months ended June 27,
1999 and June 28, 1998.................................................................................. 5
Notes to Condensed Consolidated Financial Statements.................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................................. 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................................ 15
SIGNATURES ........................................................................................................ 16
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 27, December 27,
1999 1998
------------------------------------
(Unaudited)
ASSETS
Current Assets:
Cash and equivalents.................................................................. $ - $ 3,082
Investments........................................................................... 16 15
Accounts receivable, net of allowance for doubtful accounts of
$1,301 at June 27, 1999 and $1,083 at December 27,1998........................... 28,655 18,158
Prepaid expenses and other current assets............................................. 797 613
Receivable from stockholder........................................................... 3,000 -
Deferred income taxes................................................................. 2,115 1,726
-------- --------
Total current assets............................................................. 34,583 23,594
-------- --------
Property and equipment, net............................................................. 6,981 5,909
Goodwill, net........................................................................... 26,280 25,982
Other assets............................................................................ 462 491
-------- --------
Total assets..................................................................... $ 68,306 $ 55,976
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit....................................................................... - $1,000
Accounts payable..................................................................... 2,806 3,547
Accrued salaries, commissions, and related payroll taxes............................. 5,562 4,935
Accrued liabilities.................................................................. 5,198 2,662
Income taxes payable................................................................. 1,604 514
Current portion of long-term debt.................................................... - 3,128
-------- --------
Total current liabilities........................................................ 15,170 15,786
Long-term obligations................................................................... 12,516 1,083
Deferred income taxes................................................................... 1,413 1,205
-------- --------
Total liabilities................................................................ 29,099 18,074
-------- --------
Stockholders' Equity:
Common stock, (par value $0.001 per share; 100,000,000 shares
authorized; outstanding: 10,370,000 shares at June 27, 1999 and
9,536,000 shares at December 27, 1998).............................................. 37,592 34,269
Stockholder note receivable............................................................. (5,056) -
Accumulated translation adjustment...................................................... 5 5
Retained earnings....................................................................... 6,666 3,628
-------- --------
Total stockholders' equity......................................................... 39,207 37,902
-------- --------
Total liabilities and stockholders' equity......................................... $ 68,306 $ 55,976
======== ========
See notes to condensed consolidated financial statements.
3
HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share and share amounts)
(Unaudited)
Three Months Ended Six Months Ended
------------------ ----------------
June 27, 1999 June 28, 1998 June 27, 1999 June 28, 1998
------------- ------------- ------------- --------------
Net Revenues:
Contract services..................................... $34,566 $24,287 $64,833 $47,002
Permanent placement................................... 8,318 4,262 13,911 8,382
------- ------- ------- -------
Total net revenues...................................... 42,884 28,549 78,744 55,384
Cost of contract services............................... 22,755 15,712 43,222 30,456
------ ------ ------ ------
Gross profit............................................ 20,129 12,837 35,522 24,928
Operating expenses...................................... 17,185 11,185 30,247 21,620
------ ------ ------ ------
Income from operations.................................. 2,944 1,652 5,275 3,308
Other expense, net...................................... 29 15 128 15
-- -- --- --
Income before income taxes.............................. 2,915 1,637 5,147 3,293
Income taxes............................................ 1,195 704 2,110 1,416
------- ------ ------- ------
Net income.............................................. $1,720 $ 933 $ 3,037 $1,877
====== ====== ======= ======
Net income per share:
Basic................................................. $ 0.17 $ 0.10 $ 0.31 0.20
Diluted............................................... $ 0.16 $ 0.09 $ 0.29 $ 0.18
Shares used in per share computation:
Basic................................................. 10,219,000 9,443,000 9,894,000 9,376,000
Diluted............................................... 10,562,000 10,407,000 10,352,000 10,437,000
See notes to condensed consolidated financial statements.
4
HALL, KINION & ASSOCIATES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six months ended
June 27, June 28,
1999 1998
----------------------------
Cash flows from operating activities:
Net income $ 3,037 $ 1,877
Adjustments to reconcile net income to net cash provided by (used for)
operating activities: 1,186 934
Depreciation and amortization.................................
Deferred income taxes......................................... (180) 254
Other...................................................................... - 17
Changes in assets and liabilities:
Accounts receivable.................................... (10,497) (202)
Prepaid expenses and other assets...................... (172) 235
Prepaid income taxes................................... - 394
Accounts payable and accrued expenses.................. 2,440 (1,499)
Income taxes payable................................... 1,329 (69)
----- -----
Net cash provided by (used for) operating activities (2,857) 1,941
----- -----
Cash flows from investing activities:
Purchase of property and equipment................................... (1,840) (552)
Investments.......................................................... (1) 5,800
Acquisition of IPEX.................................................. (700) (6,160)
--- -----
Net cash used for investing activities..................... (2,541) (912)
----- ---
Cash flows from financing activities:
Line of credit, net.................................................. (1,000) (1,451)
Borrowing on debt 9,416 -
Notes payable repayments............................................. (1,128) (2,591)
Proceeds from exercise of options.................................... 84 417
Proceeds from repayment of stockholder note receivable............... - 6
Stockholders notes receivable. (5,056) -
----- -----
Net cash provided by (used for) financing activities. 2,316 (3,619)
----- -----
Net increase (decrease) in cash and equivalents............................ (3,082) (2,590)
Cash and equivalents, beginning of period.................................. 3,082 4,310
----- -----
Cash and equivalents, end of period........................................ $ - $ 1,720
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for
Income taxes $ 874 $1,062
Interest $ 223 $ 149
Noncash investing and financing activities
Issuance of stock for acquisition of IPEX.............................. - $ 914
Income tax benefit from employee stock transaction..................... $ 240 $ 365
See notes to condensed consolidated financial statements.
5
HALL, KINION & ASSOCIATES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation. The Condensed Consolidated Financial Statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in management's opinion, include all
adjustments necessary for a fair statement of results for such interim periods.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules or regulations; however,
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
The interim results for the three and six months ended June 27, 1999 are not
necessarily indicative of results for the full year. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's 10-K for the fiscal year ending December
27, 1998.
The unaudited interim financial information as of June 27, 1999 and for the
three and six months ended June 27 ,1999 and June 28, 1998, have been prepared
on the same basis as the audited financial statements. In the opinion of
management, such unaudited information includes all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of this
information. Operating results for the three and six months ended June 27,
1999, are not necessarily indicative of the results that may be expected for the
year ending January 2, 2000.
2. Comprehensive Income. In January 1998, the Company adopted Statement of
Financial Accounting Standards 130, Reporting Comprehensive Income, which
requires reporting by major components and as a single total, the change in
its net assets during the period from nonowner sources. For the six months
ended June 27, 1999 and June 28, 1998, the change in net assets from nonowner
sources was $0 and $3,000, respectively, for the change in the accumulated
translation adjustment, and comprehensive income was $3,037,000 and
$1,880,000 respectively.
3. Stockholders' Equity. On April 15, 1999, Paul Bartlett, President, exercised
750,000 options at $4.00 per share for $3,000,000. The company made two loans
to Mr. Bartlett for the aggregate amount of $3,000,000. The first loan has a
principal amount of $1,782,000, which is secured by 750,000 shares of the
Company's Common Stock, and the second loan has a principal amount of
$1,218,000, which is secured by Mr. Bartlett's personal assets, including a
second deed of trust on his principal residence. Both loans bear interest
rate of the Company's cost to borrowing plus 1/8% per annum, compounded
monthly. The principal balance of this note, together with interest accrued
is due and payable June 26, 2002. On June 28, 1999, Mr. Bartlett transferred
the funds back to the Company to complete the transaction.
4. Claims, Lawsuits, and Other Contingencies. In June 1999, three class action
lawsuits were filed against the Company and various of its officers,
underwriters and venture capital investors, alleging violation of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The lawsuits were filed by Milberg, Weiss, Bershad, Hynes &
Lerach, LLP on June 16, 1999 for Parnes complainant, on June 17, 1999, for
Mulanax complainant, and Finkelstein & Krinsk, on June 29, 1999, Gabos
complainant, both of San Diego, California. The allegations of the complaints
focus on two general areas. First, the complaints allege that the Company and
certain of the individual defendants made false and misleading statements
regarding forecasted revenue and earnings per share and the Company's
projected growth rate. Second, the complaints allege that the Company and
certain of the defendants sold stock at inflated prices while in possession
of adverse non-public information regarding the revenue and earning forecasts
and projected growth rate for the Company. The class period in all three
actions is from early August 1997 to mid-June 1998, the date when the Company
publicly disclosed that earnings per share growth would be lower than
previously forecast. The actions are pending in the United States District
Court for the Northern District of California. It is expected that all
actions will be consolidated into a single action, and an amended complaint
filed. By stipulations of the parties, the defendants are not required to
respond to the complaints in any of the actions until a consolidated amended
complaint is filed. The Company believes these actions are without merit and
intends vigorously to defend them.
6
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The statements contained in this Form 10-Q that are not purely historical are
forward looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's expectations,
beliefs, hopes, intentions or strategies regarding the future. All forward
looking statements in this Form 10-Q are based upon information available to the
Company as of the date hereof, and the Company assumes no obligation to update
any such forward looking statements. Actual results could differ materially
from the Company's current expectations. Factors that could cause or contribute
to such differences include, but are not limited to, the ability of the Company
to obtain additional financing, regulatory changes, uncertainty relating to the
performance of the United States economy, competition, demand for the Company's
services, litigation or other claims against the Company, the hiring, training
and retention of key employees and other factors and risks discussed in "Risk
Factors" as well as those discussed elsewhere in this Form 10-Q and the risks
discussed in the Company's filings with the Securities and Exchange
Commission.
OVERVIEW
Hall, Kinion & Associates, Inc. (the "Company" or "Hall Kinion") is a leading
provider of high-end information technology ("IT") professionals on a contract
and permanent basis, with more than 28 offices in 18 domestic markets and
London, England to serve the technology services industry. To meet the
specialized needs of its clients, the Company provides its services through
distinct technology practice groups ("Practice Groups") organized around
specific technology (such as Windows, Unix, or CAD). The Company is organized
into two divisions: Contract Services and Permanent Placement. The Contract
Services division ("Contract Services") provides supplemental IT professionals
to research and development ("R&D") departments of high technology companies and
to information systems ("IS") departments of corporate clients. The Permanent
Placement division ("Permanent Placement") places IT professionals in permanent
positions with high-technology companies and other corporate clients. The
Company's customers include an extensive group of global high technology
companies, including Inprise, Cisco Systems, IBM, Microsoft, Motorola, Oracle
and numerous emerging growth companies, such as The Gap, Magellan
Communications, Inc., Net Frame Systems, Exodus Communications, Inc., Resumix
and Remedy Corporation.
The high technology industry continues to experience substantial growth and
rapid rates of innovation. These trends, combined with intense competition,
have placed pressure on high technology companies to shorten product life cycles
and the time-to-market of new products. The development of next generation
products, however, often requires significant and highly specialized technical
talent, which may not be available internally. Furthermore, as new technologies
and systems are introduced, businesses, which rely on them for mission-critical
functions, must implement these systems within their already complex computing
environments. Consequently, IS departments are faced with the challenge of
finding qualified IT professionals to design, develop deploy and maintain their
systems. To address these demands for contract and permanent IT professionals,
both the R&D departments of high technology companies and the IS departments of
large corporations are turning to IT professional service companies to augment
their existing operations.
The Company's objective is to provide efficient and high quality contract and
permanent IT professionals to R&D departments of high technology clients and IS
departments of corporate clients to become the "agent of choice" for IT
professionals. To achieve this objective, the Company: (i) focuses on
technology driven clients that typically require IT professionals with more
highly specialized skill sets than traditional supplemental IT personnel; (ii)
provides specialized IT services through distinct Practice Groups that are
focused on specific technologies and that operate relatively autonomously with
their own sales and recruiting personnel; (iii) pursues cross-selling
opportunities between permanent placement and contract services; (iv) seeks to
attract and retain qualified IT professionals, and (v) provides strong corporate
support to its 18domestic markets and in London, England.
7
For the three months ended June 27, 1999 and June 28, 1998, the Contract
Services Division represented 80.6% and 85.1% of the Company's net revenues,
respectively. For the same periods, the Permanent Placement Division
represented 19.4% and 14.9% of the Company's net revenues, respectively. For
the six months ended June 27, 1999 the Contract Services Division represented
82.3% and 84.9% of the Company's net revenues, respectively. For the same
period the Permanent Placement Division represented 17.7% and 15.1% of the
Company's net revenues respectively.
The Company's net revenues are derived from hourly billings of IT
professionals performing contract assignments and from fees received for
permanent placements. For contract services, assignments generally last from
three to nine months and revenues are recognized as services are provided.
Because the Company only derives revenues when its consultants are actually
working, its operating results may be adversely affected when client facilities
are closed due to holidays or inclement weather. In particular, the Company
experiences a certain amount of seasonality in its first fiscal quarter. For
its Permanent Placement of IT professionals, the Company receives a fee upon
placement of the candidate. The fee is typically structured as a percentage of
the placed IT professional's first-year annual compensation. Permanent
Placement revenues from fees are recognized when the IT professional commences
employment.
The Company has experienced growth by the addition of sales and recruiting
employees, the development of new Practice Groups, the acquisition of
complementary businesses and the entrance into new regional markets. As of June
27, 1999, the Company had 469 revenue producing employees in 18 domestic markets
and in London, England. As of June 28, 1998, the Company had 332 revenue
producing employees in 13 domestic markets and London, England. For the six
months ended June 28, 1998 compared to June 27, 1999, net revenues increased
from $55.4 million to $78.7 million or 42.2%. Overall headcount for the
comparable period increased by 51.8%. The Company attributes this to increased
productivity of current employees and the addition of employees as a result of
acquisitions of complementary businesses.
8
Results of Operations for the Three and Six Months Ended June 27, 1999 and June
28, 1998
Contract Services revenues were $34.6 million and $24.3 million for the three
months ended June 27, 1999 and June 28, 1998, respectively, increasing by 42.3%
during the three months ended June 27, 1999 compared to the same period in 1998.
Contract Services revenues were $64.8 million and $47.0 million for the six
months ended June 27, 1999 and June 28, 1998, respectively, increasing by 37.9%
during the six months ended June 27, 1999 compared to the same period in 1998.
Permanent placement revenues were $8.3 million and $4.3 million for the three
months ended June 27, 1999 and June 28, 1998, respectively, increasing by 95.2%
during the three months ended June 27, 1999 compared to the same period in 1998.
Permanent placement revenues were $13.9 million and $8.4 million for the six
months ended June 27, 1999 and June 28, 1998, respectively, increasing by 66.0%
during the six months ended June 27, 1999 compared to the same period in 1998.
Overall revenue increases were due primarily to the addition of new offices that
have begun to generate revenue and to a lesser extent increased billing rates.
During the first six months of 1999 revenue producing headcount increased. The
increase in revenues was partially offset due to the delay of new employees
reaching full productivity.
Gross Profit
Gross profit dollars from the Company's Contract Services represent revenues
less direct costs of services, which consists of payroll, payroll taxes and
insurance costs for contract employees. Gross profit dollars from permanent
placement services are equal to revenues, as there are no direct costs
associated with such revenues. Gross profit dollars for the Company's Contract
Services were $11.8 million and $21.6 million for the three and six months ended
June 27, 1999, respectively, compared to $8.6 million and $16.5 million for the
comparable periods in 1998, increasing by 37.8% and 30.6% for the three and six
months ended June 27, 1999, respectively. The Company believes this increase
was due to the increased demand for the Company's services and to a lesser
extent increased billing rates. Gross Profit for the Company's Permanent
Placement Division was $8.3 million and $13.9 million for the three and six
months ended June 27, 1999, respectively, compared to $4.3 million and $8.4
million for the comparable periods in 1998, increasing 95.2% and 66.0% for the
three and six months ended June 27, 1999, respectively. This increase was
primarily due to an increase in demand for the Company's Permanent Placement
services.
Operating Expenses
Operating expenses were $17.2 million and $30.2 million for the three and six
months ended June 27, 1999, compared to $11.2 million and $21.6 million, for the
three and six months ended June 28, 1998, respectively. Operating expenses as a
percentage of revenues were 40.1% and 38.4% for the three and six months ended
June 27, 1999, compared to 39.2% and 39.0% for the same periods in 1998.
Operating expenses consist primarily of staff compensation, training, occupancy,
telephone, advertising and public company costs, most of which generally follow
changes in revenue. Overall, the increase in operating expenses was primarily
due to increased headcount and training costs for existing and new offices. As
a percentage of revenue, operating expenses remained consistent due to stable
productivity of revenue generating headcount.
Other Expense, Net
Interest income for the three months ended June 27, 1999 and June 28, 1998 was
$72,000 and $74,000 respectively, while interest expense for the three months
ended June 27, 1999 and June 28, 1998 was $132,000 and $75,000 respectively.
Interest income for the six months ended June 27, 1999 and June 28, 1998 was
$76,000 and $162,000 respectively, while interest expense for the six months
ended June 27, 1999 and June 28, 1998 was $224,000 and $193,000 respectively.
The changes reflect a decrease in cash and cash equivalents and an increase in
outstanding indebtedness. Also included is a nominal amount relating to rental
income and expenses and various nonrecurring charges which amount to income of
$31,000 and $20,000 for the three and six months ended June 27, 1999 and
expenses of $14,000 and income of $16,000 for the same periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The change in the Company's liquidity during the six months ended June 27,
1999 is the net effect of funds generated by operations and the funds used for
the personnel services acquisitions, capital expenditures and principal payments
on outstanding liabilities. For the six months ended June 27, 1999, the Company
used $2.9 million from operations, $2.5 million for investing activities and
generated $2.3 million from financing activities.
9
The Company's working capital at June 27, 1999 included no cash and
equivalents. The Company has a revolving line of credit facility enabling the
Company to borrow a stated percentage of eligible accounts receivable up to a
maximum of $20.0 million. While there can be no assurances in this regard, the
Company expects that internally generated cash plus the bank revolving line of
credit will be sufficient to support the working capital needs of the Company,
the fixed payments and other obligations for the next year. As of June 27,
1999, the Company had no material capital commitments.
In November 1998, the Company acquired the assets of Alexander, Bohemer, &
Tomasco, LLC, doing business as Huntington Group ("HG") and Interactive
Technologies Consultants ("ITC"), for an aggregate of $8.9 million consisting of
a cash payment of $8.1 million and assumed net liabilities of $800,000. The
Huntington Group is a retainer-based executive research firm while ITC is a
provider of IT professionals on a contract basis. Both companies are located in
Trumbull, Connecticut.
Had the acquisitions of Huntington and ITC been completed at the beginning of
1998, the Company's unaudited pro forma revenues, net income and basic and
diluted earnings per share for 1998 would have been approximately $130,400,000,
$4,652,000, $0.49, and $0.45, pro forma adjustments reflect interest on the cash
paid in the acquisition and the amortization of goodwill.
In August 1998, the Company acquired substantially all of the assets of TKO
Personnel, Inc for $913,000 consisting of a cash payment of $228,000 and assumed
net liabilities of $685,000. TKO Personnel, Inc. based in San Jose, California,
is an international permanent placement recruiting organization for IT research
and development professionals focusing recruiting primarily in Japan, but also
from China and Korea.
In January 1998, the Company acquired Group-IPEX for $7.3 million consisting
of a cash payment of $6.2 million, the issuance of 46,000 shares of Company
common stock valued at $914,000 and $300,000 of costs related to the
acquisition. Group-IPEX, based in Lafayette, California, is an international
recruiting organization for IT research and development professionals focusing
on recruiting primarily from India, but also from Russia and China. During the
quarter the Company made an earnout payment of $700,000.
Year 2000 Issues
The Company is continuing its assessments of its computer information systems
and is continuing to take the necessary steps to determine the nature and extent
of the work required to make its systems Year 2000 compliant, where necessary.
These steps will require the Company to modify, upgrade or replace some of its
internal financial and operational systems. The Company continues to evaluate
the estimated costs of bringing all internal systems, equipment and operations
into Year 2000 compliance, but has not finished determining the total cost of
these compliance efforts. While these efforts may involve additional costs,
the Company believes, based upon currently available information, that these
costs will not have a material adverse effect on the business, financial
condition or results of operations of the Company. However, if these efforts
are not completed on time, or if the cost of updating or replacing the Company's
information systems, if necessary, exceeds the current estimates, the Year 2000
issue could have a material effect on the Company's business, financial
condition or result of operations of the Company.
The Company is still in the process of implementing a new ERP suite that is
Year 2000 compliant. In addition, the Company has identified a non-financial
system used by the Company for management of contract resumes that might not be
Year 2000 compliant. The Company is reviewing the impact, if any, that such
non-compliance could have on its business, and intends to bring such system into
compliance, or implement a new Year 2000 compliant system as soon as possible.
The Company's failure to fix its current system, or to implement a new system,
is likely to result in the implementation of a manual process of tracking
resumes which could cause management to spend time and resources implementing
such a system, which in turn, have an adverse effect on the Company's business,
financial condition or results of operations.
10
The Company also intends to determine the extent to which it may be vulnerable
to any failures by its major partners and service providers to remedy their own
Year 2000 issues, and is in the process of initiating formal communications with
these parties. At this time the Company is unable to estimate the nature or
extent of any potential adverse impact resulting from the failure of third
parties to achieve year 2000 compliance; however, there can be no assurance that
these third parties will not experience Year 2000 problems or that any problems
would not have a material effect on the Company's business financial condition
or results of operations. To date, the Company has contacted all major
suppliers and obtained confirmation that they have addressed the Year 2000
problem.
RISK FACTORS
Ability to Attract and Retain Qualified IT Professionals
The Company's success depends on its ability to attract and retain qualified
IT professionals with the technical skills and experience necessary to meet its
clients' requirements for technical personnel. Competition for individuals with
proven technical skills, particularly in Windows, Unix, CAD and other technology
environments for which the Company provides services, is intense, and the
Company expects that competition for IT professionals will increase in the
future. Furthermore, IT professionals typically provide services on an
assignment-by-assignment basis and can terminate an assignment with the Company
at any time. The Company competes for such individuals with other providers of
technical staffing services, system integrators, providers of outsourcing
services, computer consultants and temporary personnel agencies. Many of the IT
professionals who work for the Company also work with the Company's competitors,
and there can be no assurance that IT professionals currently working on
projects for the Company will not choose to work for competitors in future
assignments. There also can be no assurance that the Company will be able to
attract and retain qualified IT professionals in sufficient numbers in the
future. The Company's net revenues in any period are related, among other
factors, to the number of IT professionals it has on staff and engaged on
assignments. If the Company were unable to hire or retain such personnel, the
Company's business, operating results and financial condition would be
materially adversely affected.
Risks Inherent in Addition of Practice Groups and Expansion Into New Markets
The Company's growth depends on its ability to successfully expand existing
Practice Groups, add additional Practice Groups within its existing regional
markets and enter new regional markets. This expansion is dependent on a number
of factors, including the Company's ability to: attract, hire, integrate and
retain qualified revenue generating employees; develop, recruit and maintain a
base of qualified IT professionals within a regional market; accurately assess
the demand of a new market; and initiate, develop and sustain corporate client
relationships in each new regional market. There can be no assurance that the
addition of Practice Groups and entrance into new regional markets will occur on
a timely basis or achieve anticipated financial results. For example, in April
1998 the Company consolidated its Orlando and Tampa offices because revenue in
these offices was lower than management's expectations. The addition of new
Practice Groups and entrance into new regional markets typically results in
increases in operating expenses, primarily due to increased headcount. Expenses
are incurred in advance of forecasted revenue, and there is typically a delay
before the Company's new recruiting personnel and sales employees reach full
productivity. If the Company is unable to add Practice Groups or enter new
regional markets in a cost-effective manner or if those Practice Groups and
regional markets do not achieve anticipated financial results, the Company's
business, operating results and financial condition could be materially
adversely affected.
Fluctuations in Quarterly Results, Seasonality; Volatility of Stock Price.
The Company's quarterly operating results have in the past and may in the
future fluctuate significantly depending on a number of factors, including but
not limited to: the rate of hiring and the productivity of revenue-generating
personnel; the availability of qualified IT professionals; changes in the
relative mix between the Company's contract services and permanent placement
services; changes in the pricing of the Company's services; the timing and rate
of entrance into new regional markets and the addition of Practice Groups;
departures or temporary absences of key revenue-generating personnel; the
structure and timing of acquisitions; changes in the demand for IT
professionals; and general economic factors. Because the Company provides
services on an assignment -by-assignment basis, which clients can terminate at
any time, there can be no assurance that existing clients will continue to use
the Company's services at historical levels. Accordingly, although the Company
has experienced substantial revenue growth in recent years, there can be no
assurance that, in the future, the Company will sustain revenue growth or
profitability on a quarterly or annual basis at historical levels. In addition,
although the impact of seasonal factors will vary, the Company experiences a
certain amount of seasonality in its first quarter due primarily to the number
of holidays and the number of internal training and incentive programs in the
first quarter, which may reduce the number of days worked by IT professionals
and revenue-generating employees during such quarter. For these reasons, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as any indication
of future performance. In the event the Company's operating results fall below
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the expectations of public market analysts and investors, the price of the
Company's Common Stock would likely be materially adversely affected.
The market price of the shares of Common Stock may be volatile and could be
subject to wide fluctuations. The stock markets, and in particular the Nasdaq
National Market, have experienced extreme price and volume fluctuations that
often are unrelated or disproportionate to the operating performance of the
companies whose shares are traded in such market. Accordingly, broad market
factors may adversely affect the market price of the Company's Common Stock.
These market fluctuations, as well as general economic, political and market
conditions such as recessions, interest rates or international currency
fluctuations, may adversely affect the market price of the Common Stock. In the
past, following periods of volatility in the market price of a company's
securities class action litigation has often been instituted against such
company. Such litigation if instituted, could result in substantial costs and a
diversion of management's attention and resources, which would have a material
adverse effect on the Company's business, results of operations and financial
condition.
Dependence on Key Personnel
The Company's future business and operating results depend in significant part
upon the continued contributions of its key employees and senior management
personnel, many of whom would be difficult to replace. The loss or temporary
absence of any of the company's senior management, significant revenue
generating employees, other key personnel and, in particular, Brenda C. Rhodes,
its Chief Executive Officer and Paul H. Bartlett, its President, or the
inability to attract and retain key employees or management personnel in the
future, could have a material adverse effect of the Company's business,
operating results and financial condition.
Management of Growth
The Company has recently experienced a period of rapid growth that has placed
and will continue to place significant demands upon its management and other
resources. The Company's ability to effectively manage future growth will
require the Company to expand its operational, financial and other internal
systems. Implementing a new or expanded financial and management information
system can be time-consuming and expensive and require significant management
resources. There can be no assurance that the Company's current personnel,
systems, procedures and controls will be adequate to support the Company's
future operations or that any new system can be implemented effectively. Any
failure to manage its growth effectively could have a material adverse effect on
the Company's business, operating results and financial condition. In addition,
the Company believes that its future success will depend upon its ability to
identify, attract, hire, train, motivate and retain other revenue-generating
personnel. Competition for such personnel is intense. There can be no
assurance that the Company will be successful in attracting, assimilating or
retaining the necessary personnel, and the failure to do so could have a
material adverse effect on the company's business, results of operations and
financial condition.
Risks of Acquisition
A component of the Company's growth strategy is the acquisition of
complementary businesses. The successful implementation of this strategy is
dependent upon the Company's ability to identify suitable acquisition
candidates, obtain requisite financing, acquire such companies on suitable terms
and integrate their operations successfully with those of the Company. There
can be no assurance that the Company will be able to identify suitable
acquisition candidates or that the Company will be able to acquire such
candidates on favorable terms.
Moreover, other providers of IT professional services are also competing for
acquisition candidates, which could result in an increase in the price of
acquisition targets and a diminished pool of companies available for
acquisition. Acquisitions also involve a number of other risks, including
adverse effects of the Company's reported operating results from increases in
goodwill amortization and interest expense, the diversion of management
attention and the subsequent integration of the acquired business.
To the extent the Company seeks to acquire complementary businesses for cash,
the Company may be required to obtain additional financing and there can be no
assurance such financing will be available on favorable terms, if at all. Due
to all of the foregoing, acquisitions may have a material adverse effect on the
Company's business operating results and financial condition. In addition, if
the Company issues stock to complete any future acquisitions, existing
stockholders will experience ownership dilution.
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For example, in 1998 the Company acquired four companies: Group-IPEX, TKO,
Huntington and ITC, each of which is located and conducts business in multiple
states. All of these companies are operating as independent subsidiaries. The
integration of these companies, their clients, IT professionals, and employees
has required a significant amount of management's time and attention, and has
resulted in significant integration-related expenses, including expenses
associated with training their employees and contractors.
Industry and Geographic Concentration
The Company's business is dependent on the trends prevalent in, and the
continued growth and rate of change of, the high technology industry. In 1999
and 1998, substantially all of the Company's net revenues were derived by
providing services to clients in the high technology industry. In addition,
approximately 43% and 47% of the Company's net revenues in 1998 and 1997
respectively, were derived from services provided to clients in Silicon Valley.
Substantial deterioration in general economic conditions in Silicon Valley or in
the high technology industry as a whole would materially and adversely affect
the Company's business, financial condition and operating results.
Highly Competitive Market
The IT staffing industry is highly competitive and fragmented and has low
barriers to entry. The Company competes for potential clients with providers of
outsourcing services, system integrators, and computer systems consultants,
other providers of IT services and temporary personnel agencies. Many of the
Company's current and potential competitors have longer operating histories,
significantly greater financial and marketing resources, greater name
recognition and a larger installed base of IT professionals and clients than the
Company. In addition, many of these competitors, including numerous smaller
privately held companies, may be able to respond more quickly to customer
requirements and to devote greater resources to the marketing of services than
the Company. Because there are relatively low barriers to entry, the Company
expects that competition will increase in the future. Increased competition
could result in price reductions, reduced margins or loss of market share, any
of which could materially and adversely affect the Company's business, operating
results and financial condition. Further, there can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not have a
material adverse effect on its business, operating results and financial
condition.
Governmental Regulation of Immigration
Certain of the Company's IT professionals are foreign nationals working in the
United States under H-1B permits. Accordingly, both the Company and these
foreign nationals must comply with the United States immigration laws. The
inability of the Company to obtain H-1B permits for certain of its employees in
sufficient quantities or at a sufficient rate could have a material adverse
effect on the Company's business, operating results and financial condition.
Furthermore, Congress and administrative agencies with jurisdiction over
immigration matters have periodically expressed concerns over the levels of
legal and illegal immigration into the U.S. These concerns have often resulted
in proposed legislation, rules and regulations aimed at reducing the number of
work permits that may be issued. For example, in 1997 the maximum number of
permitted H-1B permits available for 1997 were issued during the third quarter
of 1997, resulting in an inability of applicants to obtain additional permits
for the balance of the year. Any changes in such laws making it more difficult
to hire foreign nationals or limiting the ability of the company to obtain
foreign employees could require the Company to incur additional unexpected labor
costs and expense. Further, any such restrictions or limitations on hiring
practices could have a material adverse effect on business, operating results
and financial condition.
Concentration of Ownership by Principal Stockholders
The company's principal stockholders, Brenda C. Rhodes and Todd Kinion
beneficially owned approximately 30% of the Company's outstanding shares of
Common Stock at June 27, 1999. As a result, these stockholders as a group will
be able to exercise control over almost all matters requiring a stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership could have the effect
of making it difficult for a third party to acquire control of the Company and
may discourage third parties from attempting to do so.
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Liability Risks
The Company is exposed to liability with respect to actions taken by its IT
professionals while on assignment, such as damages caused by errors of IT
professionals, misuse of client proprietary information or theft of client
property. The Company often indemnifies its clients from the foregoing.
Although the Company maintains insurance coverage, due to the nature of the
Company's assignments, and in particular the access of IT professionals to
client information systems and confidential information, and the potential
liability with respect thereto, there can be no assurance that such insurance
coverage will continue to be available on reasonable terms or that it will be
adequate to cover any such liability. The Company may be exposed to
discrimination and harassment claims or other similar claims as a result of
inappropriate actions allegedly taken against IT professionals by corporate
clients. As an employer, the Company is also exposed to possible claims of
wrongful discharge and violations of immigration laws. Employment related
claims might result in negative publicity, litigation and liability for monetary
damages and fines.
Effect of Certain Charter provisions; Anti-Takeover Effects or Certificate of
Incorporation, Bylaws, Delaware Law
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") and Bylaws and Delaware law contain provisions that could have
the effect of delaying, deferring or preventing an unsolicited change in control
of the Company, which may adversely affect the market price of the Common Stock
or the ability of stockholders to participate in a transaction in which they
might otherwise receive a premium for their shares over the then current market
price. Such provisions also may have the effect of preventing changes in the
management of the Company. These provisions provide that all stockholder action
must be taken at an annual or special meeting of stockholders, that only the
Board of Directors may call special meetings of the stockholders and that the
Board of Directors be divided into three classes to serve for staggered three-
year terms. In addition, the Certificate authorizes the Board of Directors to
issue up to 10,000,000 shares of preferred stock ("Preferred Stock") without
stockholder approval and on such terms as the Board of Directors may determine.
Although no shares of Preferred Stock are outstanding as of June 27, 1999, and
the Company has no plans to issue any shares of Preferred Stock, the holders of
Common Stock will be subject to, and may be adversely affected by, the right of
any Preferred Stock that may be issued in the future. In addition, the Company
is subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation law, which could have the effect of delaying or preventing a
change of control of the Company.
Risks of Litigation.
In June 1999, three class action lawsuits were filed against the Company and
various of its officers, underwriters and venture capital investors, alleging
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. The lawsuits were filed by Milberg, Weiss, Bershad,
Hynes & Lerach, LLP on June 16, 1999 for Parnes complainant, on June 17, 1999
for Mulanax complainant and Finkelstein & Krinsk, on June 29, 1999, for Gabos
complainant, both of San Diego, California. The allegations of the complaints
focus on two general areas. First, the complaints allege that the Company and
certain of the individual defendants made false and misleading statements
regarding forecasted revenue earnings per share and the Company's projected
growth rate. Second, the complaints allege that the Company and certain of the
defendants sold stock at inflated prices while in possession of adverse non-
public information regarding the revenue and earning forecasts and projected
growth rate for the Company. The class period in all three actions is from
early August 1997 to mid-June 1998, the date when the Company publicly disclosed
that earnings per share growth would be lower than previously forecast. The
actions are pending in the United States District Court for the Northern
District of Northern California. It is expected that all actions will be
consolidated into a single action, and an amended complaint filed. By
stipulation of the parties, the defendants are not required to respond to the
complaints in any of the actions until a consolidated amended complaint is
filed. While the Company believes these actions are without merit and intends
vigorously to defend them, and believes that the insurance policies will
adequately cover the pending litigation, and adverse judgement could be reached
that might materially adversely affect the financial statements.
Impact of Year 2000 Issue
The Year 2000 issue results from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, among other things, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities.
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The Company is continuing to conduct its assessments of its computer
information systems and is continuing to take the necessary steps to determine
the nature and extent of the work required to make its systems Year 2000
compliant, where necessary. These steps will require the Company to modify,
upgrade or replace some of its internal financial and operational systems,
equipment and operational systems. The Company continues to evaluate the
estimated cost of bringing all internal systems, equipment and operations into
Year 2000 compliance, but has not finished determining the total cost of these
compliance efforts. While these efforts may involve additional costs, the
Company believes, based upon currently available information, that these costs
will not have a material adverse effect on the business, financial condition, or
results of operations of the Company. However, if these efforts are not
completed on time, or if the cost of updating or replacing the Company's
information systems, if necessary, exceeds current estimates, the Year 2000
issue could have a material adverse impact on the business, financial condition
or results of operations of the Company.
The Company is still in the process of implementing a new financial ERP suite
that is Year 2000 compliant. In addition, the Company has identified a non-
financial system used by the Company for management of contractor resumes that
might not be Year 2000 compliant. The Company is reviewing the impact, if any,
that such non compliance could have on its business, and intends to bring such
system into compliance, or implement a new, Year 2000 compliant system as soon
as possible. The Company's failure to fix its current system, or to implement a
new system, is likely to result in implementation of a manual process of
tracking resumes which could, in turn, have an adverse effect o the Company's
business, financial condition or results of operations.
The Company also intends to determine the extent to which it may be vulnerable
to any failures by its major partners and service providers to remedy their own
Year 2000 issues, and is in the process of initiating formal communications with
these parties. At this time the Company is unable to estimate the nature or
extent of any potential adverse impact resulting from the failure of third
parties to achieve Year 2000 compliance; however, there can be no assurance that
these third parties will not experience Year 2000 problems or that any problems
would not have a material effect on the Company's business, financial condition
or results of operations. The Company has contacted all major suppliers and
obtained confirmation that they have addressed the Year 2000 problems.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In June 1999, three class action lawsuits were filed against the Company and
various of its officers, underwriters and venture capital investors, alleging
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. The lawsuits were filed by Milberg, Weiss, Bershad,
Hynes & Lerach, LLP on June 16, 1999 for Parnes complainant, on June 17, 1999
for Mulanax complainant and Finkelstein & Krinsk, on June 29, 1999, for Gabos
complainant, both of San Diego, California. The allegations of the complaints
focus on two general areas. First, the complaints allege that the Company and
certain of the individual defendants made false and misleading statements
regarding forecasted revenue earnings per share and the Company's projected
growth rate. Second, the complaints allege that the Company and certain of the
defendants sold stock at inflated prices while in possession of adverse non-
public information regarding the revenue and earning forecasts and projected
growth rate for the Company. The class period in all three actions is from
early August 1997 to mid-June 1998, the date when the Company publicly disclosed
that earnings per share growth would be lower than previously forecast. The
actions are pending in the United States District Court for the Northern
District of Northern California. It is expected that all actions will be
consolidated into a single action, and an amended complaint filed. By
stipulation of the parties, the defendants are not required to respond to the
complaints in any of the actions until a consolidated amended complaint is
filed. The Company believes these actions are without merit and intends
vigorously to defend them.
Item 4. Submission of Matters to a Vote of Security Holders
On May 14, 1999 the Company held its annual stockholders meeting. The
stockholders voted on two items; the election of the Class II directors of the
Board of Directors to serve until 2002 or until their successors have been duly
elected, and the ratification of Deloitte & Touche, LLP as auditors of the
Company. The election resulted in the reelection of the Class II Directors of
the Board and Deloitte & Touche was ratified as auditors of the Company. On or
about April 20, 1999, the Company furnished to its stockholders of record as of
the close of business on March 29, 1999, proxy soliciting material containing
information relating to the matters to be submitted to a vote by such
stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALL, KINION & ASSOCIATES, INC.
Date: August 10, 1999
By: /s/ Martin A. Kropelnicki
_____________________________
Martin A. Kropelnicki
Vice President, and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
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