---




SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-K





FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13


OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------




for the fiscal year ended December 30, 2001





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




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 of incorporation or
organization)

(I.R.S. Employer Identification No.)





2570 North First Street, Suite 400, San Jose, CA 95131


(Address of principal executive offices)





(408) 895-5200


(Registrants telephone number, including area code)





---




Securities registered pursuant to Section 12(b) of the Act:





None





Securities registered pursuant to Section 12(g) of the Act:





Common Stock, $0.001 par value per share





---




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) has been subject to such filing requirements for the past 90 days. Yes x     No  ̈





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ̈





As of March 20, 2002, there were outstanding 12,316,023 shares of the registrants Common
Stock. The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing price of the Common Stock as reported on the Nasdaq Stock Market (National Market System) on March 20, 2002, was approximately
$100,006,107.





Portions of the Registrants Proxy Statement for the annual meeting of shareholders to be held on May 8,
2002 are incorporated by reference in Part III. The Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4, 1997 is incorporated by reference in Part IV.





---



---




SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS





Some of the statements under Business, Risk Factors, Managements Discussion and Analysis of Financial Condition and
Results of Operations, Quantitative and Qualitative Disclosures about Market Risk and elsewhere in this report constitute forward-looking statements that involve substantial uncertainties. These statements include, among others,
statements concerning the following:





| |  |  | our business and growth strategies;
| | - |  | -----------------------------------




| |  |  | the markets we serve;
| | - |  | ---------------------




| |  |  | liquidity; and
| | - |  | --------------




| |  |  | our efforts to increase brand awareness.
| | - |  | ----------------------------------------




We have based these forward-looking statements on our current expectations and projections about future events. In some cases, you can identify forward-looking statements by terms such as may, hope, will,
should, expect, plan, anticipate, intend, believe, estimate, predict, potential or continue, the negative of these terms or other
comparable terminology. The forward-looking statements contained in this report involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, performance or achievements to be materially
different from any future trends, results, performance or achievements expressed or implied by these statements. These factors include, among others, the rate of hiring and productivity of sales and sales support personnel, the availability of
qualified information technology or IT professionals, changes in the general economic conditions of the North American markets, as well as the regional markets that the company operates in, changes in the relative mix between our
contract services and permanent placement services, changes in the pricing of our services, the timing and rate of entrance into new vertical and geographic markets and the addition of offices, the structure and timing of acquisitions, changes in
demand for IT professionals, and others listed under Risk Factors, elsewhere in this report, and in our other Securities and Exchange Commission filings.





We cannot guarantee future results, performance or achievements. We do not intend to update this report to conform any forward-looking statements to actual results. You should not place
undue reliance on these forward-looking statements, which apply only as of the date of this report.





PART I





Item 1.    Business





Overview of the
Company





Hall Kinion sources and delivers the most critical component of the technology industryhuman capital. As a
leading talent source for the technology industry, we provide specialized IT professionals on a short-term contract and permanent basis primarily to vendors and users of technology. 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 and users of technology and because we are successful at recruiting IT professionals with skills in leading edge technologies.
Our clients include industry leaders such as Compaq, AT&T Wireless and IBM.





We believe that our key competitive advantage
is our ability to successfully recruit the best and brightest IT professionals. We have developed this advantage by building client relationships with technology industry leaders and communicating these relationships to the IT professional
community. Our clients offer our IT professionals what we believe is their primary career objective: the opportunity to work on leading edge assignments in technology. 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.




2




---




Due to the economic conditions in 2001, the demand for our talent declined significantly in the
technology industry, especially in Internet-related businesses. We responded by focusing our efforts towards four new vertical markets where our technology staffing skills were in higher demand: government services, banking and finance, medical
technology and energy services. We have developed a scalable business model that helps us expand or contract in vertical or geographic markets, depending on our customers needs. The cornerstone of our model is the rapid delivery of talent to
our clients. We recognize that our clients operate in a time-sensitive environment in which their success is directly tied to their ability to bring their technology products and services to market ahead of their competition. We build strong, direct
relationships with our clients engineering managers in order to identify quickly their technology needs. We then actively network with the IT professional community and thoroughly search the Internet in order to identify the appropriate IT
talent quickly.





Our Solution





Our objective is to provide efficient, high quality contract and permanent IT professional services to our target markets and to become the agent of choice for IT professionals. To meet this objective we:





| |  |  | Target market our services to the vendors and users of technology.    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 professionals by directing our efforts toward serving technology providers and vendors of software and hardware, as well as technology users in
other vertical market sectors. We recognize that providing leading edge technology talent is critical to serving our target markets, 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 and assignments. 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Provide rapid fulfillment to our delivery-sensitive client assignments.    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: assignments that place importance on speed of response and quality of talent but are not particularly
price-sensitive.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Capitalize on our client base to attract and retain IT professionals.    Attracting and retaining qualified IT professionals is 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
technology. Conversely, we are able to meet the technology requirements of these companies, in great part, because we are able to attract the best and brightest IT talent. We also cater to the individual and family lifestyle demands of IT
professionals by providing work assignments that may allow flexible working hours and telecommuting opportunities. We offer our IT professional employees an attractive compensation program that includes stock options and the opportunity to
participate in benefit plans.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Build brand recognition.    We have implemented a strong brand recognition campaign asThe Talent Source, and adapted the campaign for various vertical markets with promotions designed to convey our image. Promotions have included live web casts and an
auto racing sponsorship. We believe that our branding campaign gives us a competitive advantage in soliciting clients and recruiting IT talent and sales and sales support employees.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3




---




| |  |  | 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 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, understanding, and
meeting the requirements of both our clients and IT professionals.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Our Growth Strategy





Currently, our growth strategy is focused on internal growth and expansion into new vertical markets and service offerings. Key elements of our strategy
include:





| |  |  | Internal growth.    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 constantly monitor the productivity of our offices and sales employees who are given incentives 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. We have been successful in recruiting and retaining sales and sales support personnel and have 357 sales and sales support employees at the end of 2001. Sales and sales support
professionals receive 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Diversifying into new vertical markets.    In 2001, we have focused our efforts into four new vertical markets where our technology services have
been well received. Government services, banking and finance, medical technology and energy services accounted for approximately 20% of our new placements in 2001.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Diversifying into new service offerings.    In 2001, we created the Accounting and Finance Division to offer new services to existing clients and new
companies outside our traditional markets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




As the economy improves, or as conditions warrant, we will
continue to employ our other growth strategies, including:





| |  |  | 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. At December 30, 2001, we have 31 offices in 22 geographic markets, including Silicon Valley, Austin, Texas and Tysons 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4




---




| |  |  | Acquiring complementary businesses.    We also have grown our business through selected acquisitions of complementary businesses. We continue to
explore additional acquisition opportunities, particularly those that provide us with new technology and technology practices and added strength in vertical market or service offerings and new geographic presences.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Our Operating & Sales Model





We
provide IT talent to our clients through our Contract Services group, that delivers IT professionals on a short-term contract basis, and through our Permanent Placement Services group that 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 30, 2001, we employed 230 sales and sales support employees, including branch managers, sales directors, and sales vice presidents, 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 as the economy stabilizes, there will be opportunities for additional growth in all of our geographic markets, and we anticipate continued hiring of qualified account managers to target additional 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 30, 2001, we employed 127 sales and sales support employees, including branch managers, sales directors, and sales vice presidents, 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 technology companies.





Branch Managers, Sales Directors, & Sales Vice Presidents





We employ branch managers, sales directors and
sales vice presidents, to oversee all sales activities. Our branch managers are responsible for managing daily production, coordinating the account manager/technical recruiting agent partnerships and recruiter relationships, as well as hiring and
developing sales teams. Branch




5




---

managers are given incentives 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 sales directors and vice presidents 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 sales vice presidents rely on sales budgets that are developed at the office level, and consolidated at the vice president levels. Sales
vice presidents are given incentives 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 sales vice presidents make decisions regarding the timing of expansion or contraction within their existing geographic markets and into new vertical and geographic markets.





Our Corporate Support Services





We provide
centralized sales training, management and financial reporting services, and information technology services at the corporate level to support our offices.





Corporate Training





We provide 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.





Management and Financial Reporting





Our financial operations are primarily supported by a PeopleSoft ERP package implemented in 1999. We use various modules of PeopleSoft to track weekly,
monthly, and quarterly performance at every level of operations. Our sales and sales support professionals, branch managers and vice presidents use information provided by PeopleSoft to assist in decisions on fine tuning operations. 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 our clients. In 2001, we implemented the WebPAS software application which is designed
to match candidates to open Hall Kinion customer job positions. WebPAS captures key information about a candidates skills and matches the candidates skills precisely to the customer job requirements thereby improving the accuracy of
matching while reducing the time it takes to place a suitable candidate with the customer. Through our subsidiary, ICPlanet, we are developing software to extend the functionality of WebPas to a public Internet site, permitting candidates to respond
to our customers job postings. 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 Headhunter.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.




6




---




Clients





Our target market is vendors and users of leading edge technologies. In 2001, 42% of our new assignments were with technology companies. We expanded into new vertical markets in 2001 and 20% of new assignments were
provided to clients in government services, banking and finance, medical technology and energy services.





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 2001, no client accounted for
more than 5% of our net revenues and our top ten clients and indirect clients accounted for approximately 17% of our net revenues. Our top ten clients to whom we directly provided services in 2001 were:





 Compaq Corporation  AT&T Wireless  Wells Fargo Bank  IBM Global Services  American Express

 Santa Clara Valley Water District  Alstom Esca  Dynegy  Dendrite International  Osram-Sylvania





In addition, in 2001, we subcontracted our services through other technical
staffing service companies to significant clients such as: Verizon, Hewlett Packard, LSI, Aspect, Maxtor, Synopsys and BEA.





Technologies Served





We traditionally have supplied a significant percentage of our talent to help our clients develop the next generation of
technology services and products. As a result, we have kept abreast of the latest technology trends and have been able to evolve the skill set of our IT professionals to meet the demands of our leading edge technology clients. The following
technologies are a representative sample of the software development skills that our IT professionals currently use in client assignments:





 UML

 .Net (C#) J2EE (Java)

 Open Source (Linux, Apache, etc.) Core Web Technologies (SOAP, XML, XML-RPC, XSLT, etc.)

 Web Application Servers (websphere, weblogic, etc.) Databases (Oracle, DB2, SQL Server, etc.)

 ERP/CRM/Analytics (Siebel, Oracle, Peoplesoft, SAP, etc.)





Employees





As of December 30, 2001, 833 of our IT professionals were providing contract services to our clients. This number included 696 employees and 137 subcontractors. Our sales, sales support and administrative and
accounting staff at December 30, 2001, consisted of 446 full-time employees, of whom 357 were sales and sales support personnel and 89 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




7




---

companies. Many of our current and potential competitors have longer operating histories, significantly greater financial and marketing resources, greater name recognition and a larger installed
base of IT professionals and clients than our company. In addition, many of these competitors may have certain distinct advantages. Our competitors that are smaller companies may be able to respond more quickly to customer requirements. Our
competitors that are larger companies may be able to devote greater resources to marketing their services. Because there are relatively low barriers to entry, we expect that competition will increase in the future. Increased competition could result
in price reductions, reduced margins or loss of market share, any of which could materially and adversely affect our business, operating results and financial condition. We may not be able to compete successfully against current and future
competitors, and competitive pressures that we face may have a material adverse effect on our business, operating results and financial condition. We believe that the principal factors relevant to competition in the IT staffing services industry are
the recruitment and retention of highly qualified IT professionals, rapid and accurate response to client requirements and, to a lesser extent, price. We believe that we compete favorably with respect to these factors.





The recruitment of qualified IT professionals is also highly competitive. We compete for IT professionals with other providers of technical staffing
services, system integrators, providers of outsourcing services, computer consultants, temporary personnel agencies and our clients. We may not be able to recruit and retain sufficient numbers of qualified IT professionals successfully.





Facilities





Our
principal executive offices are currently located in San Jose, California and occupy an aggregate of approximately 15,198 square feet of office space pursuant to a lease that expires in January 2005. We also lease or sublease office space for our
operations in Austin, Dallas and Houston, Texas; Capitola, Dublin, Larkspur, Mountain View, San Jose, San Mateo and Sacramento, California; Boston, Massachusetts; Chicago, Illinois; Denver and Boulder, Colorado; London, England; New York, New York;
Trumbull, Connecticut; Atlanta, Georgia; Phoenix, Arizona; Portland, Oregon; Raleigh, North Carolina; Salt Lake City, Utah; Iselin, New Jersey; Tysons Corner, Virginia; Minneapolis, Minnesota; Bellevue and Seattle, Washington; and Tokyo,
Japan. In addition, we own a training facility located in Park City, Utah.





Corporate History





We were incorporated in California in 1991. 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 31 offices in 22 geographic markets, as of December 30, 2001.




8




---




RISK FACTORS





You should consider these risk factors when you read forward-looking statements elsewhere in this report and before you make an investment decision on our stock. 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 qualified IT professionals with the extensive knowledge of hardware, software 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. 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 hardware, software and networking industries. In 2001, there was an economic slowdown which led to a slowdown in the rate of innovation in these industries or general reduction in demand for personnel with expertise in
leading hardware, software or networking technologies. It reduced the demand for our services. Reduction in demand for our services had a material negative impact on our business, operating results and financial condition in 2001. Our expenses for
salaried IT professionals are relatively fixed in the short term, and we generally cannot reduce expenses quickly in response to decreased demand for our services.





Our clients may also start to hire permanent employees rather than use our contract services if they believe that hiring permanent employees could be more effective than using our
contract services. If that were to happen, revenues from our Contract Services group could decline materially. A material revenue decline in our Contract Services group would negatively impact our business, operating results and financial condition.





Persons with expertise in hardware, software 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.




9




---




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 vertical or 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 vertical or geographic market;
| | - |  | -------------------------------------------------------------------------------------------------------




| |  |  | attract, hire, integrate and retain qualified sales and sales support employees; and
| | - |  | ------------------------------------------------------------------------------------




| |  |  | accurately assess the demand of a new market.
| | - |  | ---------------------------------------------




The addition of offices and entry into new geographic markets may not occur on a timely basis or achieve anticipated financial results. The addition of new offices and entry into new vertical or geographic markets
typically result in increases in operating expenses, primarily due to increased employee headcount. Expenses are incurred in advance of forecasted revenue, and there is typically a delay before our new employees reach full productivity.
Additionally, demand for our services in new markets that we enter might also be less than we anticipate. If we are unable to enter new vertical or 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. In 2001, we opened a location in Amsterdam, The Netherlands to expand in continental Europe. However, due to less than anticipated
results, we closed the office and terminated operations as part of a restructuring.





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 qualified IT professionals;
| | - |  | -----------------------------------------------




| |  |  | changes in the demand for IT professionals;
| | - |  | -------------------------------------------




| |  |  | the hiring rate and the productivity of our sales and sales support personnel;
| | - |  | ------------------------------------------------------------------------------




| |  |  | departures or temporary absences of key sales and sales support personnel;
| | - |  | --------------------------------------------------------------------------




| |  |  | 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 vertical or geographic markets and the addition or closure of offices in existing geographic markets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the structure and timing of acquisitions of complementary businesses; and
| | - |  | -------------------------------------------------------------------------




| |  |  | general economic factors.
| | - |  | -------------------------




In
addition, because we provide contract services on an assignment-by-assignment basis, which clients can terminate at any time, existing clients may not continue to use our services at historical levels. We also experience some seasonality in our
first quarter primarily due to the number of holidays and inclement weather in that quarter, which may reduce the number of days worked by IT professionals and sales and sales support employees. As a result, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. In the event our operations should fall below the expectations of public market analysts and investors, the
price of our common stock would likely decline.




10




---




Failure to manage growth properly could negatively affect our business and financial condition.





We have recently experienced a period of rapid decline in operations. We made corresponding reductions in headcount and offices to manage
costs. The reductions in headcount have placed and will continue to place significant demands upon our management and other resources. Our net revenues decreased 41.4% from $296.5 million in 2000 to $173.8 million in 2001 while sales and
administrative headcount decreased 51.5% from 920 employees at the end of 2000 to 446 employees at the end of 2001. 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. Our current personnel, systems, procedures and controls may not be adequate to support our future operations. 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 highly sensitive to changes in the employment rate, and a decline in our permanent placement business would cause a decline in our revenue, gross profit and net income.





Our permanent placement business has declined significantly in 2001 and can be expected to continue to fluctuate significantly in the future. We provide
permanent placement services on an assignment-by-assignment basis, which clients can terminate at any time, and existing clients may not continue to use our services at historical levels. A decline in our permanent placement business will result in
a decrease in our net revenues. More importantly, gross profit for our permanent placement services group is essentially equal to permanent placement net revenues, as there are no direct costs associated with such revenues. Therefore, a decline in
our permanent placement business would result in a decrease in our gross profit margins and net income.





Failure to manage and integrate acquisitions
properly could adversely affect our business, operating results and financial condition.





A component of our growth strategy
is the acquisition of complementary businesses. In order to implement this strategy successfully, we have to:





| |  |  | identify suitable acquisition candidates;
| | - |  | -----------------------------------------




| |  |  | obtain requisite financing;
| | - |  | ---------------------------




| |  |  | acquire the candidates on suitable terms; and
| | - |  | ---------------------------------------------




| |  |  | integrate their operations successfully with ours.
| | - |  | --------------------------------------------------




We may not be able to identify suitable acquisition candidates, and we may not be able to acquire candidates on suitable terms. Moreover, other providers of IT professional services are also competing for acquisition
candidates, which could result in an increase in the price of acquisition candidates and a diminished pool of candidates available for acquisition. Acquisitions also involve a number of other risks, including:





| |  |  | negative effects on our reported operating results from increases in interest and other acquisition-related expenses or impairment of goodwill;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the diversion of managements attention;
| | - |  | ----------------------------------------




| |  |  | the integration of any acquired business, which may result in significant integration-related expenses;
| | - |  | -------------------------------------------------------------------------------------------------------




| |  |  | the departure of key personnel at the acquired business; and
| | - |  | ------------------------------------------------------------




| |  |  | uncertainty that an acquired business will achieve anticipated revenues and earnings.
| | - |  | -------------------------------------------------------------------------------------




To the extent we seek to acquire complementary businesses for cash, we may be required to obtain additional financing. However, required financing with acceptable terms may not be
available, which would




11




---

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 revenue levels 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. Sales and sales support personnel headcount decreased 54.7% from 788 employees at the end of 2000 to 357 employees at the end of 2001. 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 may need to hire additional, productive sales and sales support personnel
in order to maintain revenue levels and increase 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
than us may be able to devote greater resources to marketing their services. In addition, recently a number of job sites have been established on the Internet. These sites allow IT professionals to find employment opportunities without using our
services, and therefore, demand for our services may decrease. Because there are relatively low barriers to entry, we expect that competition will increase in the future. Increased competition could result in price reductions, reduced margins or
loss of market share, any of which could materially and negatively affect our business, operating results and financial condition. We may not be able to compete successfully against current and future competitors, and competitive pressures that we
face may have a material negative effect on our business, operating results and financial condition.





We 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




12




---

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.





A small number of our
stockholders can exercise substantial influence over our company.





Our principal stockholders, Brenda C. Rhodes and Todd J.
Kinion, beneficially owned a total of approximately 13.5% of our outstanding shares of common stock at December 30, 2001. 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.





Item 2.    Properties





Our principal executive offices are currently located in San Jose, California and occupy an aggregate of approximately
15,198 square feet of office space pursuant to a lease that expires in January 2005. We also lease or sublease office space for our operations in Austin, Dallas and Houston, Texas; Capitola, Dublin, Mountain View, San Mateo, Larkspur and Sacramento,
California; Boston, Massachusetts; Chicago, Illinois; Denver and Boulder, Colorado; London, England; New York, New York; Trumbull, Connecticut; Atlanta, Georgia; Phoenix, Arizona; Portland, Oregon; Raleigh, North Carolina; Salt Lake City, Utah;
Iselin, New Jersey; Tysons Corner, Virginia; Minneapolis, Minnesota; Bellevue and Seattle, Washington; and Tokyo, Japan. In addition, we own a training facility located in Park City, Utah.





Item 3.    Legal Proceedings





We are from time to time
engaged in or threatened with litigation in the ordinary course of our business. We are not currently a party to any material litigation.





Item
4.    Submission of Matters to a Vote of Security Holders





None.




13




---




PART II





Item 5.    Market for Registrants Common Equity and Related Stockholder Matters





Our
Common Stock is listed for trading on the NASDAQ, National Market System under the symbol HAKI. On December 30, 2001, there were approximately 48 holders of record of the Common Stock.





The table below sets forth the high and low sales prices per share as reported on the NASDAQ (National Market System) for the fiscal years ended December 30, 2001 and December 31, 2000.





Sales PriceFiscal year ended December 30, 2001

High

Low4th quarter ended December 30, 2001

$
8.97

$
4.643rd quarter ended September 30, 2001

$
8.41

$
4.852nd quarter ended July 1, 2001

$
10.25

$
5.591st quarter ended April 1, 2001

$
21.00

$
5.50Fiscal year ended December 31, 2000

High

Low4th quarter ended December 31, 2000

$
29.88

$
16.003rd quarter ended September 24,2000

$
45.88

$
26.502nd quarter ended June 25, 2000

$
30.00

$
20.191st quarter ended March 26, 2000

$
30.00

$
16.88





No cash dividends were paid in 2001, 2000 or 1999. We, as we deem appropriate,
may continue to retain all earnings for use in our business or may consider paying a dividend in the future. We cannot currently issue dividends without acquiring bank consent prior to issuance.




14




---




Item 6.    Selected Financial Data





The following selected financial data has been derived from the audited Consolidated Financial Statements. The information set forth below is not necessarily indicative of result of
future operations and should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes thereto included elsewhere in this Form
10-K.





Fiscal Year2001


2000

1999


1998


1997(in thousands, except per share amounts)Consolidated Statement of Operations Data:Net revenues

$
173,836


$
296,491

$
180,749


$
124,132


$
92,831Cost of contract services


100,834



147,539


96,502



69,066



54,769Gross profit


73,002



148,952


84,247



55,066



38,062Operating Expenses:Selling, general and administrative expenses


96,820



125,493


70,732



47,284



33,689Impairment of goodwill and other intangible assets


26,736














Restructuring costs


17,048














Income (loss) from operations


(67,602
)


23,459


13,515



7,782



4,373Other income (expense), net


1,181



1,615


(477
)


(51
)


(127
)Income (loss) before income taxes


(66,421
)


25,074


13,038



7,731



4,246Income taxes (benefit)


(20,809
)


10,464


5,382



3,325



1,737Net income (loss)

$
(45,612
)

$
14,610

$
7,656


$
4,406


$
2,509Income (loss) per share:Basic

$
(3.48
)

$
1.18

$
0.75


$
0.47


$
0.34Diluted

$
(3.48
)

$
1.10

$
0.71


$
0.43


$
0.25Weighted Average Common Shares Outstanding:Basic


13,121



12,357


10,155



9,439



7,339Diluted


13,121



13,267


10,716



10,342



9,907Consolidated Balance Sheet Data:Working capital

$
36,721


$
64,819

$
15,560


$
7,808


$
19,390Total assets


89,459



139,821


76,554



55,976



42,440Long term liabilities


6,470



209


14,161



1,083



2,549Stockholders equity


64,781



110,762


43,969



37,902



31,530




15




---




Item 7.    Managements Discussion and Analysis of Financial Condition and Results of
Operations





The following discussion of our financial condition and results of operations should be read in conjunction with
our consolidated financial statements and the related notes included elsewhere in this report. The discussion in this section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from
those discussed in the forward-looking statements. Additional information relating to forward-looking statements is included in this report under the caption Special Note Regarding Forward-Looking Statements.





Overview





We source and deliver the most critical
component of the technology industryhuman capital. As a leading talent source for the technology industry, we provide specialized IT professionals on a short-term contract and permanent basis primarily to vendors and users of technology. We
have 31 offices located in 22 geographic markets. Our Contract Services group provides specialized IT professionals on a short-term contract basis and accounted for approximately 86.0% of our net revenues in 2001, 76.0% of our net revenues in
2000 and 80.5% in 1999. Our Permanent Placement Services group provides specialized IT professionals on a permanent basis and accounted for approximately 14.0% of our net revenues in 2001, 24.0% in 2000 and 19.5% in 1999.





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.





As a
result of current general economic slowdown, we reported a decrease in revenue, gross profit, and income in 2001. While no one customer represents greater than 5% of our total revenue, we do have a number of larger customers, some of which have
issued earnings warnings and delayed a number of their projects.





Due to these economic conditions, net revenues decreased to
$173.8 million in 2001 from $296.5 million in 2000, representing a 41.4% decrease. Over this same period, we decreased, through restructuring or attrition, the number of sales, sales support and administrative employees to 446 individuals in 22
geographic markets from 920 individuals in 25 geographic markets at the end of 2000, representing a 51.5% decrease in headcount. The number of revenue producing sales and sales support employees included in the overall headcount decreased to 357 at
the end of 2001 from 788 at the end of 2000, a 54.7% decrease. The restructuring of operations and the write-down due to impairment of goodwill and other intangible assets associated with a number of acquisitions resulted in substantial increases in
our operating expenses. If the economic conditions in the United States worsen or if a wider or global economic slowdown occurs, we may continue to experience a material adverse impact on our business, operating results, and financial condition.





Based on the results of our ongoing reviews, we decided in 2001 to close several offices, reduce our workforce, and restructure
the organizational management and operations. In 2001, a number of our customers experienced serious cash flow constraints, causing us concern regarding the collectability of our accounts receivable. Bankruptcies, company closures, and delinquencies
have resulted in a direct accounts receivable write off of $12.8 million, of which $10.7 million was considered to be in excess of our historical write-off levels. In addition, we increased our bad debt reserve by $1.8 million. Historically, bad
debt write-offs have generally not exceeded 1.25% of revenue and in 2000 and 1999 we recorded write-offs of $0.8 and $0.7 million, respectively.




16




---

While we believe that the remaining current balances are collectible, economic conditions are still a cause for concern and we will continue to analyze the collectability of our accounts
receivable.





In July 2001 we completed a Tender Offer to exchange outstanding options to purchase shares of common stock having
an exercise price per share of $15.00 or more for new options at current market price. Employee options to purchase 993,000 shares of common stock at an average price of $24.12 were cancelled as of July 19, 2001 and new option grants to purchase
768,000 shares, equivalent to 95% of the shares represented by the continuing options tendered, were issued at $8.21 per share on January 22, 2002.





Critical Accounting Policies





We have identified the following as critical accounting policies to our company:
reserves and estimates for adjustments to the timing and realization of permanent placement services revenue, allowances for doubtful accounts receivable, and the valuation of net deferred tax assets, and the impairment of property and equipment,
and goodwill.





Reserves and estimates for adjustments to the timing and realization of permanent placement services
revenueRevenues for permanent placement services are recognized upon the commencement of employment or upon the completion of services rendered based on contractual obligation. However, permanent placement revenue is subject to contractual
guarantees and commitments as to the acceptance by both the candidate and the client of employment terms and timing. Therefore, we establish reserves for potential guarantee issues, refunds or other adjustments that may arise. The estimates and
reserves are based on reported commencement dates and historical rates of adjustments and are reviewed for adequacy periodically. While management believes it can make reliable estimates for potential losses in revenue, permanent placement services
are highly sensitive to changes in the employment rate and other economic conditions. It is possible that these estimates will change in the near future and the actual amounts could vary materially from our estimates and significantly impact
revenues and operating results.





Allowances for doubtful accounts receivableWe establish allowances for estimated
losses resulting from the inability of customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. During
2001, we reported a direct accounts receivable write-off of $12.8 million resulting from bankruptcies, company closures and delinquencies of payment of accounts receivable.





Valuation of net deferred tax assetsThe carrying value of our net deferred tax assets assumes that the company will be able to generate sufficient future taxable income in
certain tax jurisdictions, based on estimates and assumptions. If these estimates and assumptions change in the future, additional taxes or valuation allowances may be required to adjust the carrying value, resulting in additional tax expense.
Management evaluates the realizability and net carrying value of the deferred tax assets quarterly.





Impairment of property
and equipment, and goodwillThe carrying value of property and equipment and the recoverability of goodwill are based on assumptions regarding estimated future cash flows and other factors. If these assumptions and estimates change in the
future, additional expense may be recorded to reflect the impairment of these assets. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we will be required to analyze goodwill for impairment issues by June 2002 and
on a periodic basis thereafter. During 2001, we reported reductions in carrying value of property and equipment of $4.0 million in connection with restructuring of operations and impairment of goodwill and other intangibles of $26.7 million.




17




---




Results of Operations





The following table sets forth, the results of operations as a percentage of net revenues for the periods shown (in millions, except for percentage amounts):





Fiscal Year Ended(1)2001


2000


1999Net revenues:Contract services

86.0
%

76.0
%

80.5
%Permanent placement services

14.0


24.0


19.5Total net revenues

100.0


100.0


100.0Cost of contract services

58.0


49.8


53.4Gross profit(2)

42.0


50.2


46.6Operating expenses:Selling, general and administrative expenses

55.7


42.3


39.1Impairment of goodwill and other intangible assets

15.4





Restructuring costs

9.8





Income (loss) from operations

(38.9
)

7.9


7.5Other income/(expenses)

.7


0.5


(0.3
)Income (loss) before taxes

(38.2
)

8.4


7.2Income tax provision (benefit)

(12.0
)

3.5


3.0Net income (loss)

(26.2
)%

4.9
%

4.2
%


---

|(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 32.6% in 2001, 34.5% in 2000 and 33.6% in 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------




Fiscal Year Ended December 30, 2001 Compared to Fiscal Year Ended December 31, 2000





Net Revenues.    Net revenues decreased 41.4% to $173.8 million in 2001 from $296.5 million in 2000. Net revenues from our Contract Services group decreased
33.6% to $149.5 million in 2001 from $225.3 million in 2000. Net revenues from our Permanent Placement Services group were $24.3 million in 2001 and $71.2 million in 2000, representing a decrease of 65.8%. The decrease in net revenues in 2001 was
due primarily to an economic slowdown. Our revenue producing sales and sales support employee headcount decreased throughout the year to 357 as of the end of 2001 from 788 as of the end of 2000, a 54.7% decrease. Our IT professional headcount
decreased to 833 at the end of 2001 from 1,397 at the end of 2000, a 40.4% decrease.





Gross
Profit.    Gross profit for our Contract Services group represents revenues less direct costs of services, which consist of direct payroll, payroll taxes, and insurance and benefit costs for IT professionals. Gross profit for
our Permanent Placement Services group is essentially equal to revenues as there are no direct costs associated with such revenues. Gross profit decreased by 51.0% to $73.0 million for 2001 from $149.0 million for 2000. This decrease was primarily
attributable to economic conditions which resulted in a decrease in demand for services, a decrease in the number of assignments, and a slight decrease in average billing rates. Gross profit as a percentage of net revenues decreased to 42.0% for
2001 from 50.2% for 2000. This decrease was due primarily to a decrease in the percentage of revenues from our Permanent Placement Services group. Gross profit as a percentage of net revenues from the Contract Services group, decreased slightly to
32.6% for 2001 from 34.5% for 2000. This decrease was primarily due to the economic pressure on pricing in our Contract Services group.





Operating Expenses.    Operating expenses consist primarily of employee costs, office leases, depreciation and amortization, advertising and marketing expenses, and in 2001, include impairment of goodwill and
other




18




---

assets related to acquisitions, restructuring costs, and write-off of accounts receivable in excess of historical write-off levels. Operating expenses increased by 12.0% to $140.6 million for
2001 compared to $125.5 million for 2000. Operating expenses as a percentage of net revenues increased to 80.9% for 2001, from 42.3% for 2000. The increases resulted primarily from restructuring costs, write-off of impaired goodwill and other assets
related to acquisitions, increased bad debt expense, offset by reductions in sales bonuses and commissions and related payroll taxes.





Other Expense.    Interest income decreased to $1.3 million for 2001 from $2.1 million for 2000. The decrease in interest income resulted primarily from a decline in cash and equivalents and short term investments
that were utilized to fund operations and to the decline in interest rates. Interest expense decreased to $24,000 for 2001 compared to $361,000 for 2000. The decrease in interest expense reflected the repayment of debt.





Income Taxes.    Our effective income tax rate was 31.3% for 2001 compared to 41.8% for 2000. Our income tax rate varies from
period to period due primarily to changes in nondeductible expenses.





Net Income (Loss).    The net
loss for 2001 was $45.6 million compared to net income of $14.6 million for 2000. Net income (loss) as a percentage of net revenues was (26.2)% for 2001 compared to 4.9% for 2000.





Fiscal Year Ended December 31, 2000 Compared to Fiscal Year Ended December 26, 1999





Net Revenues.    Net revenues increased 64.1% to $296.5 million in 2000 from $180.7 million in 1999. Net revenues from our Contract Services group increased 54.9% to $225.3 million in 2000 from $145.4 million in
1999. Net revenues from our Permanent Placement Services group were $71.2 million in 2000 and $35.3 million in 1999, representing an increase of 101.5%. The increase in net revenues in 2000 was due primarily to growth in existing offices and the
addition of new offices. Our revenue producing sales employee headcount increased throughout the year reaching 715 as of the end of 2000 from 558 as of the end of 1999, a 28.1% increase. Our IT professional headcount decreased to 1,397 at the end of
2000 from 1,427 at the end of 1999, a 2.1% decrease.





Gross Profit.    Gross profit for our Contract
Services group represents revenues less direct costs of services, which consist of direct payroll, payroll taxes, and insurance and benefit costs for IT professionals. Gross profit for our Permanent Placement Services group is essentially equal to
revenues as there are no direct costs associated with such revenues. Gross profit increased by 76.8% to $149.0 million for 2000 from $84.2 million for 1999. This increase was primarily attributable to an increase in the number of assignments, an
increase in average billing rates, and an increase in demand for services from our Permanent Placement Services group. The increase in average billing rates was primarily attributable to an increase in higher rate leading edge technology contract
services assignments. Gross profit as a percentage of net revenues increased to 50.2% for 2000 from 46.6% for 1999. This increase was due primarily to an increase in the percentage of revenues from our Permanent Placement Services group. Gross
profit as a percentage of net revenues from the Contract Services group, increased slightly to 34.5% for 2000 from 33.6% for 1999. This increase was primarily due to an aggressive pricing strategy in our Contract Services group.





Operating Expenses.    Operating expenses consist primarily of employee costs, recruiting expenses, marketing
expenses and amortization of intangible assets related to acquisitions. Operating expenses increased by 77.4% to $125.5 million for 2000 compared to $70.7 million for 1999. Operating expenses as a percentage of net revenues increased to 42.3% for
2000, from 39.1% for 1999. The increases resulted primarily from expenses associated with increased sales, sales support and administrative employee costs, opening new offices, facility costs, amortization and depreciation expense.





Other Expense.    Interest income increased to $2.1 million for 2000 from $263,000 for 1999. The increase in
interest income resulted primarily from interest on cash received from sale of common stock and to a lesser extent from interest related to loans made to some executive officers in 2000. Interest expense decreased to $361,000 for 2000 compared to
$723,000 for 1999. The decrease in interest expense reflected the repayment of debt.




19




---




Income Taxes.    Our effective income tax rate was 41.8% for 2000
compared to 41.3% for 1999. Our income tax rate varies from period to period due primarily to changes in nondeductible expenses.





Net Income.    Net income increased 90.8% to $14.6 million for 2000 from $7.7 million for 1999. Net income as a percentage of net revenues was 4.9% for 2000 compared to 4.2% for 1999.





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 used cash of $3.4 million in 2001 and
generated cash of $16.3 million in 2000. Cash used in our operating activities for 2001 was primarily due to operating losses offset by certain non-cash items, including restructuring costs and the impairment of intangibles.





The principal uses of cash for investing activities for 2001 were for investments, the purchase and earnout payments relating to business acquisitions,
and the purchase of property and equipment.





We have a $14 million revolving credit facility that expires in October 2002. As
discussed in Note 11 to the consolidated financial statements, we have no availability under the credit facility as of December 30, 2001.





Net cash used for financing activities for 2001 was $4.7 million, due primarily to the funds advanced for and repurchases of common stock, partially offset by the proceeds from the exercise of stock options.





At December 30, 2001 cash and cash equivalents were $15.5 million. We believe that our cash balances will be sufficient to meet
our cash requirements for at least twelve months.





Recently Issued Financial Accounting Standards





| |  |  | In June 1998, the Financial Accounting Standards Board (FASB) 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 was effective for our fiscal year ending in December 2000, and will not be applied retroactively to the financial statements of prior
periods. We have not engaged in any transactions requiring the use of SFAS No. 133, accordingly SFAS No. 133 has no effect on our financial statements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible
assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. We adopted SFAS No. 142 in fiscal year 2002 and ceased the
amortization of goodwill with a net carrying value of $15.5 million that resulted from business combinations completed prior to the adoption of SFAS No. 141. In respect to SFAS Nos.141 and 142, we have not yet performed the impairment test required
by the standard.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | In October 2001, the FASB issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and addresses financial accounting and reporting for the
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20




---

impairment or disposal of long-lived assets. We adopted SFAS No. 144 in fiscal year 2002. We have not completed the evaluation of the effects, if any, of adopting FAS 144.





Item 7.a.    Quantitative and Qualificative Disclosures about Market Risk





The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking
statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative purposes.





Interest Rate Risk.    As of December 30, 2001, we have $15.5 million in cash and cash equivalents and $8.2 million in other investments that are invested
in the highest rated commercial paper and money market funds. If short-term interest rates were to decrease 10 percent, the decrease would not have a material impact on our net income or cash flows. We do not hedge any interest rate exposures.
Historically, borrowings and repayments under our revolving line of credit facilities represented the most significant components of cash provided by or used for financing activities. However, we are not in compliance with all of the terms of the
agreement as of December 30, 2001. As a result, no borrowings are available.





Foreign Currency Exchange Rate
Risk.    The United Kingdom pound is the functional currency in our subsidiary in the United Kingdom and the Japanese yen is the functional currency in our branch office in Japan. We do not currently enter into foreign
exchange forward contracts to hedge the balance sheet exposures and intercompany balances against future movements in foreign exchange rates. However, we do maintain cash balances denominated in the United Kingdom pound and Japanese yen. If foreign
exchange rates were to weaken against the U.S. dollar immediately and uniformly by 10 percent from the exchange rate at December 30, 2001, the fair value of these foreign currency amounts would decline by an immaterial amount.




21




---




Item 8.    Financial Statements and Supplementary Data





HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


(in thousands, except per share amounts)





December 30, 2001


December 31, 2000ASSETSCurrent Assets:Cash and equivalents

$
15,488


$
42,692Short term investments


8,200



Accounts receivable, net of allowance for doubtful accounts of $3,176 in 2001 and $3,455 in 2000


12,705



43,143Prepaid expenses and other current assets


5,706



2,653Income taxes receivable


7,664



Deferred income taxes


5,166



3,675Total current assets


54,929



92,163Property and equipment, net


8,798



11,783Goodwill, net


15,478



35,096Deferred income taxes and other assets


10,254



779Total assets

$
89,459


$
139,821LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
3,125


$
7,314Accrued salaries, commissions and related payroll taxes


6,447



11,428Accrued liabilities


4,485



5,584Reserve for restructuring costs


4,151



Income taxes payable






3,018Total current liabilities


18,208



27,344Commitments and Contingencies (Note 11)Accrued compensation and deferred rent (Note 10)


1,310



209Deferred income taxes






1,506Reserve for non-current restructuring costs


5,160



Total liabilities


24,678



29,059Stockholders Equity:Common stock; $0.001 par value; 100,000 shares authorized; shares issued and outstanding: 200112,952;
200013,179


85,804



87,207Stockholder notes receivable


(1,200
)


(2,267
)Accumulated and other comprehensive loss


(105
)


(72
)Retained earnings (accumulated deficit)


(19,718
)


25,894Total stockholders equity


64,781



110,762Total liabilities and stockholders equity

$
89,459


$
139,821








See notes to consolidated financial statements.




22




---




HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share amounts)





Years EndedDecember 30, 2001


December 31, 2000


December 26, 1999Net revenues:Contract services

$
149,515


$
225,323


$
145,425Permanent placement


24,321



71,168



35,324Total net revenues


173,836



296,491



180,749Cost of contract services


100,834



147,539



96,502Gross profit


73,002



148,952



84,247Operating expenses:Selling, general and administrative expenses


96,820



125,493



70,732Impairment of goodwill and other intangible assets


26,736







Restructuring costs


17,048







Income (loss) from operations


(67,602
)


23,459



13,515Other income (expense):Interest income


1,300



2,116



263Interest expense and other


(119
)


(501
)


(740
)Total other income (expense), net


1,181



1,615



(477
)Income (loss) before income taxes


(66,421
)


25,074



13,038Income tax provision (benefit)


(20,809
)


10,464



5,382Net income (loss)

$
(45,612
)

$
14,610


$
7,656Net income (loss) per share:Basic

$
(3.48
)

$
1.18


$
0.75Diluted

$
(3.48
)

$
1.10


$
0.71





CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(in thousands)





Years EndedDecember 30, 2001


December 31, 2000


December 26, 1999Net income (loss)

$
(45,612
)

$
14,610


$
7,656Change in accumulated translation adjustment


(28
)


(73
)


(4
)Unrealized loss on investments, net of deferred taxes of $3


(5
)






Net comprehensive income (loss)

$
(45,645
)

$
14,537


$
7,652


|
|






















See notes to consolidated financial statements.




23




---




HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(in thousands)





Common Stock


Stockholder Notes Receivable


Accumulated and Other Comprehensive Income (Loss)


Retained Earnings (Accumulated Deficit)


TotalShares


AmountBALANCES as of December 27, 1998

9,536


$
34,269


$



$
5


$
3,628


$
37,902Exercise of stock options

930



3,457















3,457Tax benefit related to stock options





457















457Notes to stockholders









(5,274
)










(5,274
)Interest on stockholder notes receivable









(225
)










(225
)Accumulated translation adjustment













(4
)






(4
)Net income

















7,656



7,656BALANCES as of December 26, 1999

10,466



38,183



(5,499
)


1



11,284



43,969Exercise of stock options

725



4,724















4,724Secondary stock offering

1,988



39,079















39,079Tax benefit related to stock options





5,221















5,221Repayments of notes from stockholders









3,446











3,446Interest on stockholder notes receivable









(214
)










(214
)Accumulated translation adjustment













(73
)






(73
)Net income

















14,610



14,610BALANCES as of December 31, 2000

13,179



87,207



(2,267
)


(72
)


25,894



110,762Exercise of stock options

73



334















334Tax benefit related to stock options





98















98Repurchase of common stock

(300
)


(1,835
)














(1,835
)Forgiveness of stockholder note receivable









1,067











1,067Accumulated translation adjustment and other comprehensive income













(33
)






(33
)Net loss

















(45,612
)


(45,612
)Balances as of December 30, 2001

12,952


$
85,804


$
(1,200
)

$
(105
)

$
(19,718
)

$
64,781


|
|














































See notes to consolidated financial statements.




24




---




HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)





Years EndedDecember 30, 2001


December 31, 2000


December 26, 1999Cash flows from operating activities:Net income (loss)

$
(45,612
)

$
14,610


$
7,656Adjustments to reconcile to net cash provided by (used for) operating activities:Depreciation and amortization


4,868



4,588



2,905Deferred income taxes


(12,387
)


(1,910
)


262Interest on stockholder notes receivable






(145
)


(225
)Loss (gain) on sale of fixed assets


(8
)


255



42Impairment of goodwill and other intangible assets


26,736







Non-cash restructuring costs


3,973







Stockholders note receivable forgiveness


1,067







Changes in assets and liabilities:Accounts receivable


30,438



(15,156
)


(9,425
)Prepaid expenses and other


(32
)


(1,645
)


(509
)Accounts payable and accrued expenses


(1,830
)


10,120



2,133Income taxes payable (receivable)


(10,584
)


5,551



2,451Net cash provided by (used for) operating activities


(3,371
)


16,268



5,290Cash flows from investing activities:Sale of investments


25,581







Purchase of investments


(33,680
)






Purchase of property and equipment


(5,078
)


(5,757
)


(5,641
)Cash paid for business acquisitions


(3,032
)






(7,190
)Earnout payments related to business acquisitions


(2,883
)


(2,259
)


(753
)Net cash used for investing activities


(19,092
)


(8,016
)


(13,584
)Cash flows from financing activities:Borrowing on debt






15,548



18,349Repayments of debt






(29,548
)


(10,129
)Proceeds from sale of common stock, net






39,079



Proceeds from exercise of options


334



4,724



3,457Repurchase and cancellation of common stock, including $3,240 in transit at December 30, 2001


(5,075
)






Repayment (issuance) of stockholder notes receivable






3,446



(5,274
)Net cash provided by (used for) financing activities


(4,741
)


33,249



6,403Net increase (decrease) in cash and equivalents


(27,204
)


41,501



(1,891
)Cash and equivalents, beginning of period


42,692



1,191



3,082Cash and equivalents, end of period

$
15,488


$
42,692


$
1,191


|
|




See notes to consolidated financial statements.




25




---




HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND DECEMBER
26, 1999





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.





Fiscal Year.    The Companys fiscal year
ends on the Sunday closest to December 31. Fiscal years 2001 and 1999 consisted of 52 weeks. Fiscal year 2000 consisted of 53 weeks.





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 accounting principles generally accepted in the United States of America 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 and
restructuring costs. 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.





Investments.    Short term investments consist of corporate debt and equity securities. Corporate debt securities mature between three and twelve months. All
of our debt and marketable securities are classified as available-for-sale. Unrealized gains and losses on these investments are included as a separate component of accumulated other comprehensive income (loss), net of any related effect.





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, was
amortized on a straight-line basis over 30 to 40 years prior to December 30, 2001. For the years ended December 30, 2001, December 31, 2000 and December 26, 1999, amortization expense was $740,000, $1,080,000 and $930,000, respectively. The Company
evaluates the recoverability of goodwill on a quarterly basis based upon estimated future cash flows. In 2001, the Company considered certain goodwill to be impaired as explained in Note 3.




26




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







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 SFAS 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 (APB) No. 25, Accounting for Stock Issued to Employee, and its
related FASB interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation (an interpretation of APB Opinion No. 25 (FIN No. 44)).





Net Income (Loss) Per Share.    Basic net income (loss) per share excludes dilution and is computed by dividing net income (loss) attributable to common
stockholders by the weighted average of common shares outstanding for the period. Diluted net income (loss) 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 (in thousands):





Years EndedDecember 30, 2001

December 31, 2000

December 26, 1999Basic weighted average common shares outstanding

13,121

12,357

10,155Stock options



910

561Diluted weighted average shares outstanding

13,121

13,267

10,716





Reclassifications.    Certain prior year amounts have
been reclassified to conform to the current year presentation.





Recently Issued Financial Accounting Standards





SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The statement, as amended, was effective for our fiscal year ended December 30, 2001. We have not engaged in any transactions requiring the use of SFAS No. 133, accordingly SFAS No.
133 has no effect on our financial statements.





In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill
and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be
tested at least annually for impairment. The Company adopted SFAS No. 142 in fiscal year 2002 and ceased the amortization of goodwill with a net carrying value of $15.5 million that resulted from business combinations completed prior to the adoption
of SFAS No. 141. In respect to SFAS Nos.141 and 142, we have not yet performed the impairment test required by the standard.





In
October 2001, the FASB issued SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for




27




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Long-Lived Assets to be Disposed Of, and addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning
after December 15, 2001. Hall Kinion adopted SFAS No. 144 in fiscal year 2002. We have not completed the evaluation of the effects, if any, of adopting FAS 144.





Note 2.    Acquisitions





In February 2001, the Company acquired substantially all of the
assets of ICPlanet (ICP) for $5.0 million, including $3.0 million in cash and $2.0 million of liabilities assumed. The purchase price of $5.0 million was allocated to intangible assets of $3.0 million and goodwill of $2.0 million. Of the total
purchase price, $2.5 million was paid in cash and the remainder was placed in an escrow fund for one year. The acquisition was accounted for as a purchase. ICP is a software development company, based in Novato, California. The acquisition of
ICP had no material impact on the results of operations in 2001, except for the subsequent impairment of ICPs goodwill and intangible asset as explained in Note 3.





The Company has made a number of acquisitions in prior years, including TKI Acquisition Corporation, Huntington Acquisition Corporation, Interactive Acquisition Corporation, TKO
Personnel Inc., and Group-IPEX, Inc. In connection with these acquisitions, certain earn-out payments are being made for up to four years after acquisition upon the achievement of certain revenue, gross margin and operating income goals. Earnout
payments made in 2001, 2000 and 1999 were: $2,883,000, $2,259,000 and $753,000, respectively. There are no future contractual obligations to make earn-out payments in connection with these acquisitions.





Note 3.    Goodwill and Other Intangible Assets Impairment





During the first quarter of 2001, the Company recorded an impairment charge of approximately $26.7 million to recognize the impairment of goodwill and other intangible assets associated with various acquisitions.
The acquisitions that were written off were: TKI Acquisition Corporation, IC Planet Acquisition Corporation, Huntington Acquisition Corporation, TKO Personnel Inc., and Group-IPEX, Inc. Economic and legislative conditions have caused these companies
to experience a significant decrease in the demand for their services causing a decrease in revenues, cash flows, and expected future growth. In analyzing these significant changes, management performed an evaluation of the recoverability of the
goodwill and other long-lived assets related to these acquired companies in accordance with SFAS No. 121, Accounting for the Impairment of Long-lived Assets to be Disposed Of. Since the estimated future cash flows of the long-lived assets from each
of these acquisitions were less than the carrying value of the related long-lived assets, an impairment charge was recorded.





Note
4.    Short-Term Investments





Short-term investments consist of corporate debt and equity securities.
Corporate debt securities mature between three and twelve months. All of our debt and marketable equity securities are classified as available-for-sale. These securities are carried at fair value with unrealized gains and losses reported as a
component of shareholders equity. As of December 31, 2000, there were no short term investments.




28




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







As of December 30, 2001, short term investments consists of (in thousands):





Amortized Cost


Gross Unrealized Gain

Fair ValueCommercial paper

$
25,980


$
6

$
25,986Corporate equity securities


5






5Total available for sale investments


25,985



6


25,991Less amounts classified as cash equivalents


(17,791
)





(17,791
)Total short term investments

$
8,194


$
6

$
8,200





Note 5.    Property and Equipment





Property and equipment, net consists of (in thousands):





December 30, 2001


December 31, 2000Property and equipment

$
12,644


$
14,509Land and building


2,100



2,100Leasehold improvements


2,302



1,91617,046



18,525Accumulated depreciation and amortization


(8,248
)


(6,742
)$
8,798


$
11,783





Note 6.    Restructuring Costs





During the quarter ended April 1, 2001, the Company recorded $4,610,000 for charges associated with the Companys decision to restructure
operations. In the quarter ended July 1, 2001, the Company recorded an additional $816,000 for severance and other costs associated with the restructure of operations. In the quarter ended December 30, 2001, the Company recorded an additional
$11,622,000 for severance and other costs associated with the restructure of operations. The Company reviewed a number of factors including profitability, declining economic conditions and expected future cash flows. Based on the results of its
review, the Company decided to close several offices, reduce its current workforce and dispose of goodwill and other intangible assets. The remaining accrued restructuring costs are anticipated to be paid out during the fiscal year 2002, except for
the rental payments related to long-term facility leases of $5,160,000 that require settlement in 2003 and beyond and are reserved as non-current restructuring costs.





Restructuring Costs

Paid To Date

Remaining AccrualSeverance

$
3,614,000

$
2,350,000

$
1,264,000Lease terminations and other costs


9,461,000


1,414,000


8,047,000Total


13,075,000

$
3,764,000

$
9,311,000Impairment of property and equipment


3,973,000Total restructuring costs

$
17,048,000





Note 7.    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




29




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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 2001, 2000 and 1999.





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 was 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 was due and payable January 25, 2002. In January 2001, in connection with a revision of Ms. Rhodes employment agreement, the note was amended to extend the term to January 1, 2005 and to provide, annually, beginning on January
1, 2001, that 20% of the principal amount plus accrued interest shall be forgiven, so that on January 1, 2005, no amounts will be due or owing. The amended note is secured by 433,000 shares of the Companys Common Stock pledged by
Ms. Rhodes. Of the total amount, $1,067,000 was recorded as loan forgiveness in 2001, including principal of $400,000 and interest of $267,000 forgiven on January 1, 2001 and principal of $400,000 to be forgiven on January 1, 2002. The rate of
interest for the fiscal year ended December 30, 2001 was 6.7%.





On April 15, 1999, the Company made two loans for an aggregate
of $3,274,000 to Paul H. Bartlett, former 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
loans were repaid in June 2000.





Stock Options In July 2001 the Company completed a Tender Offer to exchange
outstanding options to purchase shares of common stock having an exercise price per share of $15.00 or more for new options at current market price. Employee options to purchase 993,000 shares of common stock at an average price of $24.12 were
cancelled as of July 19, 2001 and new option grants to purchase 768,000, equivalent to 95% of the shares represented by the continuing options tendered, were issued at $8.21 per share on January 22, 2002.





The Companys 1997 Stock Option Plan (the Plan), as amended, authorizes the issuance of up to 3,759,000 shares of common stock pursuant to
incentive or nonqualified stock options granted under the Plan to key employees, non-employees, directors and consultants who provide services to the Company. The Plan also allows an automatic annual authorization 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. Under the Plan, options generally are granted at fair market value at the date of grant as determined by the Board of Directors. Such options
vest over periods ranging from two to five years and expire up to ten years from the grant date.





The Companys IT
Professional Stock Option Plan (the IT Professional Plan) was adopted by the Board of Directors in May 1997. The Company has authorized 983,000 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 30, 2001, 774,000 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




30




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




no less than 85% of the fair market value of such shares on the grant date, however, to date, none have been granted. Options under the IT Professional Plan are generally vested based upon the
tenure of the IT Professional 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 30, 2001, the Company has not implemented the Purchase Plan.





The Companys 2000 Stock Option Plan (the 2000 Plan) adopted by the Board of Directors, authorizes the issuance of up to 1,000,000 shares of Common Stock pursuant to
nonqualified stock options granted under the 2000 Plan to key employees who provide services to the Company. Under the 2000 Plan, options generally are granted at fair market value at the date of the grant as determined by the Board of Directors.
Such options vest over five years and expire up to ten years from the grant date.





Activity under all stock option plans is as
follows:





Number of Shares


Weighted Average Exercise PriceBalance, December 27, 1998

2,418,000


$
6.54Granted (weighted average fair value* of $1.92 per share)

868,000


$
8.21Canceled

(252,000
)

$
9.35Exercised

(930,000
)

$
3.71Balance, December 26, 1999

2,104,000


$
8.12Granted (weighted average fair value* of $4.22 per share)

1,828,000


$
25.44Canceled

(320,000
)

$
12.92Exercised

(724,000
)

$
6.52Balance, December 31, 2000

2,888,000


$
18.95Granted (weighted average fair value* of $6.46 per share)

640,000


$
10.09Canceled

(1,783,000
)

$
21.47Exercised

(74,000
)

$
4.60Balance, December 30, 2001

1,671,000


$
13.48


---

|* |  | As computed under SFAS No. 123
|- |  | ------------------------------



31




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Additional information regarding options outstanding as of December 30, 2001 is as
follows:





Options Outstanding

Options ExercisableRange of Exercise Prices

Number Outstanding

Weighted Average Remaining Contractual Life (Years)

Weighted Average Exercise Price

Number Exercisable

Weighted Average Exercise Price$  0.300$  5.969

315,000

7.73

$
5.11

106,000

$
3.80$  6.000$10.000

639,000

7.39

$
7.67

323,000

$
8.01$10.500$19.750

170,000

7.80

$
15.82

82,000

$
14.24$19.813$23.984

498,000

8.10

$
23.68

224,000

$
23.54$24.063$34.188

44,000

8.48

$
29.82

17,000

$
28.01$41.125$41.125

5,000

8.55

$
41.13

1,000

$
41.13$  0.300$41.125

1,671,000

7.74

$
13.48

753,000

$
13.21





At December 30, 2001, 2,892,000 shares of common stock were available for future
option grants under all Plans. As of December 31, 2000 and December 26, 1999 the number of shares of common stock underlying exercisable options were 572,000 and 998,000, respectively, with a weighted average exercise price of $8.83 and $7.24 per
share, respectively.





Additional Stock Plan InformationAs discussed in Note 1, the Company continues to account for
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.





SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income and earnings per share. Under SFAS No. 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 was 15 months in 2001, 14 months in 2000 and 16
months in 1999; Volatility was 92.3% in 2001, 78.0% in 2000, and 61.9% in 1999; Risk free interest rates were 3.8% in 2001, 6.7% in 2000, and 5.5% in 1999. There were 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 2001, 2000 and 1999 awards had been amortized to expense over the vesting period of the awards, pro forma net income (loss) and pro forma diluted net income (loss) per share would have been $(59,455,000), $(4.53) per share, $8,313,000,
$0.63 per share and $3,278,000, $0.32 per share, in 2001, 2000, and 1999, respectively. The pro forma net loss in 2001 includes charges totaling $12,443,000 for the acceleration of the recognition of deferred compensation for unvested shares
cancelled due to the Tender Offer.




32




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 9.    Income Taxes





The provision (benefit) for income taxes consists of the following:





Years EndedDecember 30, 2001


December 31, 2000


December 26, 1999(in thousands)Current:Federal

$
(8,182
)

$
9,557


$
4,230State


(240
)


2,817



890(8,422
)


12,374



5,120Deferred:Federal


(9,947
)


(1,477
)


200State


(2,440
)


(433
)


62(12,387
)


(1,910
)


262$
(20,809
)

$
10,464


$
5,382





The Companys effective tax rate differs from the federal statutory rate as
follows:





2001


2000


1999Income tax expense at statutory rate

35.0
%

35.0
%

35.0
%State income tax taxes, net of federal benefit

2.6


6.1


6.1Amortization of impaired goodwill

(6.4
)




Other items, net

.1


0.7


.231.3
%

41.8
%

41.3
%





The components of deferred income taxes are as follows:





December 30, 2001


December 31, 2000(in thousands)Deferred tax assets:Allowance for doubtful accounts

$
1,026


$
1,356Accrued expenses


8,584



2,319Net operating loss and other credit carryforwards


5,163



Other


(217
)


Total deferred tax assets


14,556



3,675Deferred tax liabilities:Depreciation and amortization






841Accrued acquisition liabilities






665Total deferred tax liabilities






1,506Net deferred income taxes

$
14,556


$
2,169




33




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 10.    Accrued Compensation and Deferred Rent





Accrued compensation and deferred rent (in thousands):





December 30, 2001

December 31, 2000Accrued compensation

$
1,050

$
Deferred rent


260


209$
1,310

$
209





Accrued compensation represents amounts contractually obligated to be paid to
Brenda C. Rhodes, Chief Executive Officer, as described in her employment agreement.





Note 11.    Commitments and Contingencies





Credit FacilityThe Company has a $14 million revolving credit facility that expires in October 2002. No
amounts were outstanding under the credit facility as of December 30, 2001. The interest rate is the lower of the lenders prime rate (4.75% at December 30, 2001), or LIBOR plus 1.75% and borrowings are secured by substantially all of the
Companys assets. At December 30, 2001, the Company was not in compliance with all of the required ratios. As a result, no borrowings are available.





Lease CommitmentsThe Company leases its office facilities under various non-cancellable operating leases, which expire through 2007. Rent expense included in operating expenses for 2001, 2000 and 1999 was
approximately $5,155,000, $4,688,000 and $3,089,000, respectively. Future minimum payments under all operating leases are as follows:





Fiscal years ending (in thousands):2002

$
5,6302003


4,7722004


3,4732005


1,4142006


549Thereafter


298$
16,136





The Company has entered into sublease agreements for certain facilities. Expected
future sublease income is: 2002, $152,000; 2003, $157,000; 2004, $119,000; and 2005, $53,000.





ContingenciesThe
Company is party to various legal actions in the course of business. Although the ultimate outcome of these matters is not presently determinable, management believes that the resolution of all such pending matters will not have a material adverse
effect on the Companys financial position or results of operations.





Note 12.    Related Party Transactions





During 2001 the Company entered into a sponsorship agreement with BayPac Racing, Inc. BayPac Racing, Inc. owns three racing
automobiles and is owned by Ms. Rhodes husband. For the year ending December 30,




34




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




2001, the Company paid BayPac Racing, Inc. a total of $560,000. Of the consideration paid to BayPac Racing during fiscal year 2001, $250,000 was an installment payment for the continuation of the
sponsorship agreement through 2002. The remainder of $310,000 paid to BayPac Racing was in exchange for sponsorship of BayPac Racing in sixteen races that occurred throughout four states during 2001. The events are used by the Company as a marketing
vehicle to entertain existing and potential clients.





Note 13.    Supplemental Disclosure of Cash Flow Information





The following provides additional information concerning supplemental disclosures of cash flow activities:





Years EndedDecember 30, 2001


December 31, 2000

December 26, 1999(in thousands)Cash paid during the period for:Income taxes

$
2,348


$
6,759

$
2,083Interest


24



361


689Noncash investing and financing activities:Business acquisition:Goodwill


2,000






Liabilities


(2,000
)





Tax benefit related to stock options


98



5,221


457Accrued interest on debt









723




35




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 14.    Business Segment Reporting





The Companys operations were divided into two industry segments, Contract Services and Permanent Placement Services. Operations in the Contract
Services segment provide 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. The Company currently does not segregate the operations of its business segments by assets.





Management evaluates segment performance based primarily on segment revenues, cost of revenues, and gross profit. Continuing operations by business segment are as follows:





Net Revenues

Cost of Contract Services

Gross Profit(in thousands)Year ended December 30, 2001Contract Services

$
149,515

$
100,834

$
48,681Permanent Placement


24,321





24,321Total

$
173,836

$
100,834

$
73,002Year ended December 31, 2000Contract Services

$
225,323

$
147,539

$
77,784Permanent Placement


71,168





71,168Total

$
296,491

$
147,539

$
148,952Year ended December 26, 1999Contract Services

$
145,425

$
96,502

$
48,923Permanent Placement


35,324





35,324Total

$
180,749

$
96,502

$
84,247





Net revenues to unaffiliated customers by geographic area are as follows:





Years EndedDecember 30, 2001

December 31, 2000

December 26, 1999(in thousands)United States

$
171,388

$
293,045

$
178,791Other


2,448


3,446


1,958Total

$
173,836

$
296,491

$
180,749




36




---



HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Note 15.    Quarterly Financial Data (Unaudited)





The following tabulation shows
certain quarterly financial data for 2001 and 2000:





Quarter2001

1


2


3


4(in thousands, except per share amounts)Total net revenues

$
60,911


$
47,688


$
36,692


$
28,545Gross profit


28,242



20,819



13,719



10,222Loss before income taxes


(36,777
)


(1,974
)


(5,798
)


(21,872
)Net loss


(26,400
)


(1,204
)


(3,468
)


(14,540
)Net loss per shareBasic


(2.00
)


(0.09
)


(0.26
)


(1.13
)Net loss per shareDiluted


(2.00
)


(0.09
)


(0.26
)


(1.13
)





During 2001, operating results includes restructuring costs of: Quarter 1,
$4,610,000, Quarter 2, $816,000 and Quarter 4, $11,622,000.





Quarter2000

1

2

3

4(in thousands, except per share amounts)Total net revenues

$
61,580

$
77,644

$
79,263

$
78,004Gross profit


29,563


39,904


40,469


39,016Income before income taxes


4,537


6,493


7,339


6,705Net income


2,654


3,791


4,271


3,894Net income per shareBasic


0.25


0.30


0.33


0.30Net income per shareDiluted


0.23


0.28


0.30


0.29




37




---




INDEPENDENT AUDITORS REPORT





To the Board of Directors and Stockholders of
Hall, Kinion & Associates, Inc.





We have audited the accompanying consolidated balance sheets of Hall, Kinion &
Associates, Inc. and subsidiaries as of December 30, 2001 and December 31, 2000, and the related consolidated statements of operations, comprehensive income (loss), stockholders equity and cash flows for each of the three years in the period
ended December 30, 2001. 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 auditing standards generally accepted in the United States of America. 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 30, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2001 in conformity with
accounting principles generally accepted in the United States of America.





DELOITTE & TOUCHE, LLP





San Jose, California


February 1, 2002




38




---




Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





Not applicable.





PART III





The information required by Items 10 through 13 of Part III is incorporated by reference from the
registrants Proxy Statement, under the captions Nomination and Election of Directors, Beneficial Stock Ownership, Compensation of Directors, Compensation of Executive Officers and Compensation Committee Interlocks and Insider Participation of
Insider Participation and Certain Transactions, which Proxy Statement will be mailed to stockholders in connection with the registrants annual meeting of stockholders which is scheduled to be held on May 8, 2002.




39




---




PART IV





Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K





(a)  1.  Financial Statements





The following consolidated financial statements of the
Company and its subsidiaries are included in Item 8 of this report:





PageConsolidated balance sheets at December 30, 2001 and December 31, 2000

22Consolidated statements of operations for the years ended December 30, 2001, December 31, 2000 and December 26, 1999

23Consolidated statements of comprehensive income (loss) for the years ended December 30, 2001, December 31, 2000 and December 26,1999

23Consolidated statements of stockholders equity for the years ended December 30, 2001, December 31, 2000 and December 26,1999

24Consolidated statements of cash flows for the years ended December 30, 2001, December 31, 2000 and December 26,1999

25Notes to consolidated financial statements

26Selected quarterly financial data for the years ended December 30, 2001 and December 31, 2000 are set forth in Note 15Quarterly Financial Data (Unaudited) included in Item 8 of this report

37Independent Auditors Report

38





(a)  2.  Financial Statement Schedules





Independent Auditors Report on Financial Statement Schedule





Schedule II: Valuation and Qualifying Accounts





(a)  3.  Exhibits





3.1(1)

Amended and Restated Certificate of Incorporation of the Registrant filed August 8, 1997.4.2(1)

Investors Rights Agreement, dated January 26, 1996, among the Registrant, certain stockholders and investors named therein.4.3(1)

Specimen Common Stock certificate.10.1(1)

Form of Indemnification Agreement entered into between the Registrant and each of its directors and certain officers.10.2(1)

The Registrants 1997 Stock Option Plan.10.3(1)

The Registrants Employee Stock Purchase Plan.10.4

Credit Agreement, Revolving Line of Credit Note and Term Note, dated August 11, 1999, between the Registrant and Wells Fargo Bank, National Association; Modification to
Credit Agreement and Revolving Line of Credit Note, dated September 15, 2001.10.5(1)

Promissory Note Secured by Deed of Trust, dated August 5, 1996, made by Rita S. Hazell and Quentin D. Hazell in favor of the Registrant.10.6(2)

Employment Agreement dated January 1, 2001 between Registrant and Brenda Rhodes.10.7(2)

Promissory Note dated January 25, 1999 made by Brenda Rhodes in favor of the registrant.10.8(3)

The Registrants 2000 Stock Option Plan.




40




---

10.9(4)

The Registrants E2 Equity Edge Cash Equity Plan.21.1(2)

Subsidiaries of Registrant.23.1

Independent Auditors Consent.


---

|(1) |  | Incorporated by reference to the Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4,
1997(File No. 333-28365).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by Reference to the Registrants Report on Form 10-Q, filed August 15, 2001 (File No. 000-22869).
|--- |  | --------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the Registrants Registration Statement on Form S-8, declared effective by the Securities and Exchange Commission on June 9, 2000 (File No.
333-39026).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the Registrants Report on Form 10-K, filed March 27, 2001 (File No. 000-22869).
|--- |  | -------------------------------------------------------------------------------------------------------------




(b)  Reports on Form 8-K.





During the
quarter ended December 30, 2001, the Registrant filed a Current Report on Form 8-K dated December 21, 2001 reporting under Items 5 and 7 the Registrants preliminary fourth quarter financial results for the quarter ended December 30, 2001 and
the Registrant filed a Current Report on Form 8-K dated November 1, 2001, reporting under Items 5 and 7 the Registrants third quarter financial results for the quarter ended September 30, 2001.





(c)  Exhibits.





See Item 14(a)(3)
above.




41




---




INDEPENDENT AUDITORS REPORT ON SCHEDULE





To the Board of Directors and Stockholders of Hall, Kinion & Associates, Inc:





We have audited the consolidated financial statements of Hall, Kinion & Associates, Inc. and subsidiaries as of December 30, 2001 and December 31,
2000, and for each of the three years in the period ended December 30, 2001, and have issued our report thereon dated February 1, 2002 included elsewhere in this Annual Report on Form 10-K. Our audits also included the consolidated financial
statement schedule of Hall, Kinion & Associates, Inc. listed in Item 14(a)(2) of this Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Companys management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.





DELOITTE & TOUCHE LLP





San Jose, California


February 1, 2002




42




---




SCHEDULE II





HALL, KINION & ASSOCIATES, INC. AND SUBSIDIARIES


VALUATION AND QUALIFYING ACCOUNTS


(in thousands)





Additions

DeductionsBalance at Beginning of Period

Charged to Costs and Expenses

Charged to Other Accounts

Write-off of Uncollectible Accounts


Balance at End of PeriodAllowance for Doubtful Accounts:Year ended December 26, 1999

$
1,083

$
1,106



$
(689
)

$
1,500Year ended December 31, 2000


1,500


2,725




(770
)


3,455Year ended December 30, 2001


3,455


12,492




(12,771
)


3,176




43




---




SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.





HALL, KINION & ASSOCIATES, INC.By:

/S/    MARTIN A. KROPELNICKIMartin A. Kropelnicki Vice President and Chief FinancialOfficer and
Corporate Secretary(Principal Financial Officer)





Date: March 25, 2002





Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.





Date:

March 25, 2002

By:

/s/    BRENDA C. RHODESChairman of the Board, Chief Executive Officer and a Director (Principal Executive Officer)Date:

March 25, 2002

By:

/s/    JON H. ROWBERRYDirectorDate:

March 25, 2002

By:

/s/    TODD J . KINIONDirectorDate:

March 25, 2002

By:

/s/    JACK F. JENKINS-STARKDirectorDate:

March 25, 2002

By:

/s/    HERBERT I. FINKELMANDirectorDate:

March 25, 2002

By:

/s/    MICHAEL S. STEINDirectorDate:

March 25, 2002

By:

/s/    MARTIN A. KROPELNICKIVice President, Chief Financial Officer and Secretary (Principal Financial Officer)




44




---




EXHIBIT INDEX





Exhibits





3.1(1)

Amended and Restated Certificate of Incorporation of the Registrant filed August 8, 1997.4.2(1)

Investors Rights Agreement, dated January 26, 1996, among the Registrant, certain stockholders and investors named therein.4.3(1)

Specimen Common Stock certificate.10.1(1)

Form of Indemnification Agreement entered into between the Registrant and each of its directors and certain officers.10.2(1)

The Registrants 1997 Stock Option Plan.10.3(1)

The Registrants Employee Stock Purchase Plan.10.4

Credit Agreement, Revolving Line of Credit Note and Term Note, dated August 11, 1999, between the Registrant and Wells Fargo Bank, National Association; Modification to
Credit Agreement and Revolving Line of Credit Note, dated September 15, 2001.10.5(1)

Promissory Note Secured by Deed of Trust, dated August 5, 1996, made by Rita S. Hazell and Quentin D. Hazell in favor of the Registrant.10.6(2)

Employment Agreement dated January 1, 2001 between Registrant and Brenda Rhodes.10.7(2)

Promissory Note dated January 25, 1999 made by Brenda Rhodes in favor of the registrant.10.8(3)

The Registrants 2000 Stock Option Plan.10.9(4)

The Registrants E2 Equity Edge Cash Equity Plan.21.1(2)

Subsidiaries of Registrant.23.1

Independent Auditors Consent.


---

|(1) |  | Incorporated by reference to the Registrants Registration Statement on Form S-1, as amended, declared effective by the Securities and Exchange Commission on August 4,
1997 (File No. 333-28365).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by Reference to the Registrants Report on Form 10-Q, filed August 15, 2001 (File No. 000-22869).
|--- |  | --------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to the Registrants Registration Statement on Form S-8, declared effective by the Securities and Exchange Commission on June 9, 2000 (File No.
333-39026).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to the Registrants Report on Form 10-K, filed March 27, 2001 (File No. 000-22869).
|--- |  | -------------------------------------------------------------------------------------------------------------