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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________to___________
Commission File No.: 0-32113
RESOURCES CONNECTION, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0832424
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
695 Town Center Drive, Suite 600 92626
Costa Mesa, California (Zip Code)
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (714) 430-6400
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par Value
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(Title of Class)
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 July 16, 2001, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $329,459,551 (based upon the
closing price for shares of the Registrant's common stock as reported by The
Nasdaq National Market). As of July 16, 2001, there were approximately
20,893,305 shares of common stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Page
----
PART I
Item
----
1. Business...................................................................... 1
2. Properties.................................................................... 10
3. Legal Proceedings............................................................. 10
4. Submission of Matters to a Vote of Security Holders........................... 10
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters............................................... 11
6. Selected Financial Data....................................................... 11
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 13
7A. Quantitative and Qualitative Disclosures about Market Risk.................... 25
8. Financial Statements and Supplementary Data................................... 26
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 51
PART III
10. Directors and Executive Officers of the Registrant............................ 52
11. Executive Compensation........................................................ 54
12. Security Ownership of Certain Beneficial Owners and Management................ 62
13. Certain Relationships and Related Transactions................................ 63
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 67
In this Report on Form 10-K, "Resources Connection," "company," "we," "us"
and "our" refer to the business of Resources Connection LLC for all periods
prior to the sale of Resources Connection LLC by Deloitte & Touche LLP, and to
Resources Connection, Inc. and its subsidiaries for all periods after the sale.
References to "Deloitte & Touche" refer to Deloitte & Touche LLP. References in
this prospectus to "fiscal," "year" or "fiscal year" refer to our fiscal years
that consist of the 52- or 53-week period ending on the Saturday in May closest
to May 31.
This Report on Form 10-K, including information incorporated herein by
reference, contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements relate to expectations
concerning matters that are not historical facts. Such forward-looking
statements may be identified by words such as "anticipates," "believes," "can,"
"continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "predicts," "should," or "will" or the negative of these terms or
other comparable terminology. These statements and all phases of our operations
are subject to known and unknown risks, uncertainties and other factors, some of
which are identified herein and in our Form S-1 filed with the Securities and
Exchange Commission on July 17, 2001 (File No. 333-65272). Readers are cautioned
not to place undue reliance on these forward-looking statements. Our actual
results, levels of activity, performance or achievements and those of our
industry may be materially different from any future results, levels of
activity, performance or achievements expressed or implied by these forward-
looking statements. We undertake no obligation to update the forward-looking
statements in this filing. References in this filing to "Resources Connection,"
the "Company," "we," "us," and "our" refer to Resources Connection, Inc. and its
subsidiaries.
The Company's principal executive offices are located at 695 Town Center
Drive, Suite 600, Costa Mesa, California 92626. The Company's telephone number
is (714) 430-6400 and its web site address is
http://www.resourcesconnection.com. The information set forth in the web site
does not constitute part of this Report on Form 10-K.
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PART I
Item 1. Business
Overview
Resources Connection is a professional services firm that provides
experienced accounting and finance, human resources management and information
technology professionals to clients on a project-by-project basis. We assist
our clients with discrete projects requiring specialized professional expertise
in accounting and finance, such as mergers and acquisitions due diligence,
financial analyses (e.g., product costing and margin analyses) and corporate
reorganization and tax-related projects. In addition, we provide human
resources management services, such as compensation program design and
implementation, and information technology services, such as transitions of
management information systems. We also assist our clients with periodic needs
such as budgeting and forecasting, audit preparation and public reporting.
We were founded in June 1996 by a team at Deloitte & Touche, led by our
current chief executive officer, Donald B. Murray, who was then a senior partner
with Deloitte & Touche. Our other founding members include our current chief
financial officer, Stephen J. Giusto, then also a partner, Karen M. Ferguson,
the current managing director of our New York area practice, and David L.
Schnitt, our former national director of information technology services. Our
founders created Resources Connection to capitalize on the increasing demand for
high-quality, outsourced professional services. We operated as a division of
Deloitte & Touche from our inception in June 1996 until January 1997. From
January 1997 until April 1999, we operated as an independent subsidiary of
Deloitte & Touche. During these periods due to regulatory constraints
applicable to us as part of a Big Five accounting firm, we were unable to
provide certain accounting services to audit clients of Deloitte & Touche. In
April 1999, we completed a management-led buyout. Subsequent to the management-
led buyout, we were able to expand the scope of services we provide to our
clients.
Our business model combines the client service orientation and commitment
to quality of a Big Five accounting firm with the entrepreneurial culture of an
innovative, high-growth company. We are positioned to take advantage of what we
believe are two converging trends in the outsourced professional services
industry: increasing demand for outsourced professional services by corporate
clients and increasing supply of professionals interested in working on an
outsourced basis. We believe our business model allows us to offer challenging
yet flexible career opportunities, attract highly qualified, experienced
professionals and, in turn, attract clients.
As of May 31, 2001, we employed more than 1,250 professional service
associates on assignment. Our associates have professional experience in a wide
range of industries and functional areas. Based upon an internal, annual survey
conducted in late calendar year 2000, to which approximately 53% of all active
associates responded, 52% of respondents were CPAs, 35% had MBAs, and the
average years of professional experience was 20. We offer our associates careers
that combine the flexibility of project-based work with many of the advantages
of working for a traditional professional services firm.
We have established a growing and diverse client base of over 1,800
clients, ranging from large corporations to mid-sized companies to small
entrepreneurial entities, in a broad range of industries. For example, our
clients include more than half of the Fortune 100, which accounted for
approximately 10.9% of our revenues in fiscal 2001, and all of the Big Five
accounting firms. We serve our clients through 41 offices in the United States
and four offices abroad. We have grown revenues internally from $9.3 million in
fiscal 1997 to $189.8 million in fiscal 2001, a four-year CAGR of 112% and our
income from operations over the same period has increased from $869,000 to $25.8
million, a four-year CAGR of 134%. We have been profitable every year since our
inception.
We believe our distinctive culture is a valuable asset and is in large part
due to our management team, which has extensive experience in the professional
services industry. Virtually all of our senior management and office directors
have Big Five experience and all of our management has an equity interest in our
company. This team has created a culture of professionalism that we believe
fosters in our associates a feeling of personal responsibility for, and pride
in, client projects and enables us to deliver high-quality service to our
clients.
-1-
Industry Background
Increasing Demand for Outsourced Professional Services
According to a study by Staffing Industry Analysts, Inc., the market for
outsourcing of professionals, including information technology, accounting and
finance, technical/engineering, medical and legal professionals, is large and
growing, with revenues estimated to grow from $40.1 billion in 1999 to $58.6
billion in 2002, representing a CAGR of 13.5%. Accounting and finance
professionals, according to the same study, represent one of the fastest growing
segments of this market, with revenues estimated to grow from $7.2 billion in
1999 to $13.6 billion in 2002, representing a CAGR of 23.6%. We believe, based
on discussions with our clients, this growth is driven by the recognition that
by outsourcing professionals companies can:
. strategically access specialized skills and expertise;
. effectively supplement internal resources;
. increase labor flexibility; and
. reduce their overall hiring and training costs.
Typically, companies use a variety of alternatives to fill their project-
based professional services needs. Companies outsource entire projects to
consulting firms, which provides access to the expertise of the firm but often
entails significant cost and less management control of the project. Companies
also supplement their internal resources with employees from the Big Five
accounting firms; however, these arrangements are on an ad hoc basis and have
been increasingly limited by regulatory concerns. Companies use temporary
employees from traditional and Internet-based staffing firms, who may be less
experienced or less qualified than employees of professional services firms.
Finally, some companies rely solely on their own employees who may lack the
requisite time, experience or skills.
Increasing Supply of Project Professionals
Concurrent with the growth in demand for outsourced professional services,
we believe, based on discussions with our associates, that the number of
professionals seeking to work on a project basis has increased due to a desire
for:
. more flexible hours and work arrangements, coupled with competitive
wages and benefits and a professional culture;
. challenging engagements that advance their careers, develop their
skills and add to their experience base; and
. a work environment that provides a diversity of, and more control
over, client engagements.
The employment alternatives historically available to professionals may
fulfill some, but not all, of an individual's career objectives. A professional
working for a Big Five accounting firm or a consulting firm may receive
challenging assignments and training, but may encounter a career path with less
flexible hours and limited control over work engagements. Alternatively, a
professional who works as an independent contractor faces the ongoing task of
sourcing assignments and significant administrative burdens.
Resources Connection Solution
Resources Connection is positioned to capitalize on the confluence of these
industry trends. We believe, based on discussions with our clients, that
Resources Connection provides clients seeking outsourced professionals with
high-quality services because we are able to combine all of the following:
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. a relationship-oriented approach to assess our clients' project needs;
. highly qualified professionals with the requisite skills and
experience;
. competitive rates on an hourly, instead of a per project, basis; and
. significant client control of their projects.
Resources Connection Strategy
Our Business Strategy
We are dedicated to providing highly qualified and experienced accounting
and finance, human resources management and information technology professionals
to meet our clients' project-based and interim professional services needs. Our
objective is to be the leading provider of these outsourced professional
services. We have developed the following business strategies to achieve this
objective:
. Hire and retain highly qualified, experienced associates. We believe
our highly qualified, experienced associates provide us with a
distinct competitive advantage. Therefore, one of our priorities is to
continue to attract and retain high-caliber associates. We believe we
have been successful in attracting and retaining qualified
professionals by providing challenging work assignments, competitive
compensation and benefits, and continuing education and training
opportunities, while offering flexible work schedules and more control
over choosing client engagements.
. Maintain our distinctive culture. Our corporate culture is central to
our business strategy and we believe has been a significant component
of our success. Our senior management, virtually all of whom are Big
Five alumni, has created a culture that combines the commitment to
quality and the client service focus of a Big Five accounting firm
with the entrepreneurial energy of an innovative, high-growth company.
We seek associates and management with talent, integrity, enthusiasm
and loyalty to strengthen our team and support our ability to provide
clients with high-quality services. We believe that our culture has
been instrumental to our success in hiring and retaining highly
qualified associates and, in turn, attracting clients.
. Build consultative relationships with clients. We emphasize a
relationship-oriented approach to business rather than a transaction-
or assignment-oriented approach. We believe the professional services
experience of our management and associates enables us to understand
the needs of our clients and to deliver an integrated, relationship-
oriented approach to meeting their professional services needs. We
regularly meet with our existing and prospective clients to understand
their businesses and help them define their project needs. Once a
project is defined, we identify associates with the appropriate skills
and experience to meet the client's needs. We believe that by
partnering with our clients to solve their professional services
needs, we can generate new opportunities to serve them. The strength
of our client relationships is demonstrated by the fact that 47 of our
top 50 clients in fiscal 2000 remained clients in fiscal 2001.
. Build the Resources Connection brand. Our objective is to establish
Resources Connection as the premier provider of project-based
professional services. Our primary means of building our brand is by
consistently providing high-quality, value-added services to our
clients. We have also focused on building a significant referral
network through our more than 1,250 associates on assignment and 290
management employees, most of whom have established relationships with
a number of potential clients. In addition, we have ongoing national
and local marketing efforts that reinforce the Resources Connection
brand.
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Our Growth Strategy
All of our growth since inception has been internal. We believe we have
significant opportunity for continued strong internal growth in our core
business and will evaluate potential strategic acquisitions on a case-by-case
basis. Key elements of our growth strategy include:
. Expanding work from existing clients. A principal component of our
strategy is to secure additional project work from the more than
1,800 clients we served in fiscal 2001. Prior to the management-led
buyout, we were unable to provide certain services to some of our
clients due to regulatory constraints applicable to us as part of a
Big Five accounting firm. Subsequent to the management-led buyout, we
were able to expand the scope of the services we provide to our
clients. We believe, based on discussions with our clients, that the
amount of revenue we currently receive from most of our clients
represents a relatively small percentage of the amount they spend on
outsourced professional services, and that, consistent with industry
trends, they will continue to increase the amount they spend on these
services. We believe that by continuing to deliver high-quality
services and by further developing our relationships with our clients,
we will capture a significantly larger share of our clients'
expenditures for outsourced professional services.
. Growing our client base. We will continue to focus on attracting new
clients. Since fiscal 1999, we increased our client base by more than
600 new clients. We plan to develop new client relationships
primarily by leveraging the significant contact networks of our
management and associates and through referrals from existing clients.
In addition, we believe we will attract new clients by building our
brand name and reputation and through our national and local marketing
efforts.
. Expanding geographically. We plan to expand geographically to meet the
demand for outsourced professional services. We expect to add to our
existing domestic office network with new offices strategically
located to meet the needs of our existing clients and to create
additional new client opportunities. We believe that there are also
significant opportunities to grow our business internationally and,
consequently, we intend to expand our international presence on a
strategic and opportunistic basis.
. Providing additional professional services lines. We will continue to
explore, and consider entry into, new professional services lines.
Since fiscal 1999, we have diversified our professional services lines
by entering into the human resources management and the information
technology segments. Our considerations when evaluating new
professional services lines include growth potential, profitability,
cross-marketing opportunities and competition.
Associates
We believe that an important component of our success over the past four
years has been our highly qualified and experienced associates. As of May 31,
2001, we employed over 1,250 associates on assignment. Our associates have
professional experience in a wide range of industries and functional areas. We
provide our associates with challenging work assignments, competitive
compensation and benefits, and continuing education and training opportunities,
while offering flexible work schedules and more control over choosing client
engagements.
Our associates are employees of Resources Connection. We pay each
associate an hourly rate, pay overtime, and offer benefits, including paid
vacation and holidays; referral bonus programs; group health and basic term
life insurance programs, each with an approximate 50% contribution by the
associate; a matching 401(k) retirement plan; and professional development and
career training. Typically, an associate must work a threshold number of hours
to be eligible for all of the benefits. We also have a long-term incentive plan
for our associates, which affords them the opportunity to earn an annual cash
bonus that vests over time. We intend to maintain competitive compensation and
benefit programs.
4
Clients
We provide our services to a diverse client base in a broad range of
industries. In fiscal 2001, we served over 1,800 clients. Our revenues are not
concentrated with any particular client or clients, or within any particular
industry. In fiscal 2001, no single client accounted for more than 3% of our
revenue and the top 10 clients accounted for approximately 15.4% of our
revenues.
The clients listed below represent the geographic and industry diversity of
our client base in fiscal 2001.
Air BP, a subsidiary of BP Amoco Kaiser Permanente Insurance Company
Allied Waste The LTV Corporation
Aventis Pharmaceuticals Nordstrom
Banc of America Securities LLC PepsiCo Inc.
Blue Shield of California Pharmacia Corporation
CB Richard Ellis Southwest Airlines
Credit Suisse First Boston Corporation Toshiba America Electronic Components, Inc.
Exelon Corporation Toyota Motor Sales, USA, Inc.
Great West Life and Annuity Life Insurance Company UCLA Medical Center
Services
Our current professional services capabilities include accounting and
finance, human resources management and information technology. In fiscal 2001,
our revenue from providing accounting and finance services accounted for a
substantial majority of our revenue. Our engagements are project-based and often
last three months or longer.
Accounting and Finance
Our accounting and finance services include:
Special Projects: Our accounting and finance associates work on a variety
of special projects including:
. financial analyses, such as product costing and margin analyses;
. tax-related projects, such as tax compliance and analysis of tax
liabilities resulting from acquisitions; and
. resolving complex accounting problems, such as large out-of-balance
accounts and unreconciled balances.
Sample Engagement: We provided two associates over a 14-month period
to assist the global operations and finance group of a major bank in
establishing a cash management system that would be used to monitor its
daily cash needs in U.S. dollars and various foreign currencies. Our
associates were responsible for:
. reviewing the daily trades of foreign securities and projecting the
surplus/shortfall for the various currencies resulting from these
trades;
. recommending transfers, purchases of foreign currencies and
borrowings; and
. redesigning and testing systems to accurately report foreign currency
activities.
5
Mergers and Acquisitions: Our accounting and finance associates have
assisted with the following functions for clients involved in mergers and
acquisitions:
. due diligence work;
. integration of financial reporting and accounting systems; and
. public reporting filings associated with the transaction.
Sample Engagement: We have provided more than 50 associates to assist
with the post-acquisition integration of a multi-billion dollar solid waste
management company. Our services were delivered through 19 of our offices
with coordination provided by one of our offices. We assigned a specially
designated project manager to oversee the delivery of our services, thereby
facilitating project management and client control. Our associates were
responsible for:
. performing controller responsibilities at various sites,
including preparing internal financial statements, closing the
general ledger and managing the accounting staff;
. restructuring the fixed asset reporting system;
. assisting with the transition of financial functions during the
divestiture of solid waste facilities and closing of other
facilities;
. assisting with converting the newly acquired facilities' systems
to the parent's systems; and
. preparing fuel tax returns and related tax schedules.
Finance and Accounting System Implementation and Conversion: When a
company implements a new system, the conversion often entails additional work
that burdens management's time. To address this problem, we provide associates
that:
. assist with the finance and accounting issues of system
implementations; and
. maintain daily operations during the implementation and conversion
process in order to minimize disruption to the organization.
Sample Engagement: We provided 15 associates over a 14-month period
to assist one of the world's largest energy groups in converting to a new
proprietary accounting software system through operations worldwide,
developing the relevant required software documentation and relocating its
accounting and commercial services departments between two metropolitan
areas. Our associates were responsible for:
. documenting and preparing a flowchart of the accounting system
and existing business processes, practices and workflows;
. reviewing internal controls and developing an operations manual;
. documenting the new accounting system processes and procedures;
. performing pre- and post-conversion testing;
. hiring and training new employees; and
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. designing training programs.
Periodic Accounting and Finance Needs: Our associates help clients with
periodic needs such as:
. interim senior financial management, including controller or
accounting manager tasks;
. monthly/quarterly/year-end closings;
. audit preparation;
. public reporting; and
. budgeting and forecasting.
Sample Engagement: We provided 40 associates over a 19-month period
to assist a multi-unit medical company, currently under reorganization,
with a comprehensive review and clean-up of the company's consolidated
balance sheet in preparation for its year-end audit. Our associates were
responsible for:
. designing a work program and package format to be used by 23
associates in teams across six states;
. completing a detailed review of approximately 180 entities'
balance sheets, compiling documentation, and obtaining support
for the entire trial balance; and
. proposing adjusting entries and recommending subsequent internal
accounting control system and procedure changes.
Assist Start-Ups: We provide accounting and finance professional services
to start-up companies who do not yet have the appropriate management or staff to
support their accounting and finance functions.
Sample Engagement: We have provided two associates over a nine-month
period to assist an Internet incubator that provides services to start-up
companies in setting up its accounting function. Our associates were
responsible for:
. designing a scalable general ledger system to accommodate
multiple entities;
. setting up the accounts payable system for all entities including
check disbursements and wire transfers of funds;
. designing a system for processing semi-monthly payroll;
. developing cash receipts function including the performance of
all treasury functions (collections, deposits, investments); and
. creating a model for projecting cash flows from individual
entities.
Human Resources Management
Our human resources management professional services group was formed in
June 1999. These services are currently available in 19 of our offices. Our
human resources management services include:
. development of human resources management procedures, training and
policies;
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. compensation program design and implementation;
. interim senior human resources management; and
. assistance in complying with governmental employment regulations.
Sample Engagement: We have provided three associates over a three-
month period to assist a leading provider of business information and
related products and services with a number of projects. Our associates
were responsible for:
. evaluating the existing human resources information system, or
HRIS;
. reviewing vendors and implementing a new HRIS system;
. updating human resources policies and procedures to reflect
consistent corporate policies across numerous acquired companies;
and
. evaluating the various retirement benefits for each of the
multiple subsidiaries and acquired companies.
Information Technology
Our information technology professional services group was formed in June
1998. These services are currently available in 16 of our offices. Our
information technology services include:
. providing interim information technology management such as interim
chief technology officers and chief information officers;
. leading systems selection process; and
. assisting with project management of information systems
implementations, conversions and upgrades.
Sample Engagement: We provided an interim chief information officer
with significant foodservice operations/restaurant experience over a 21-
month period to support a rapidly growing chain of upscale restaurants with
106 locations in 22 states. Our associate was responsible for:
. designing technology initiatives;
. establishing and maintaining an information technology department
capable of supporting and delivering technology solutions;
. monitoring and guiding multiple project teams;
. communicating with various business units; and
. prioritizing projects and resources.
Operations
We generally provide our professional services to clients at a local level
through our 41 domestic offices and four international offices, with the
oversight and consultation of our corporate management team located in our
corporate service center. The office director and client service manager in
each office are responsible for initiating client relationships, providing
associates specifically skilled to perform client projects, ensuring client
satisfaction
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throughout engagements and maintaining client relationships post-engagement.
Throughout this process, the corporate management team is available to consult
with the office director with respect to client services.
Our offices are operated in a decentralized, entrepreneurial manner. Our
office directors are given significant autonomy in the daily operations of their
respective offices, and with respect to such offices, are responsible for
overall guidance and supervision, budgeting and forecasting, sales and
marketing, pricing and hiring. We believe that a substantial portion of the
buying decisions made by our clients are made on a local or regional basis and
that our offices most often compete with other professional services providers
on a local or regional basis. Because our office directors are in the best
position to understand the local and regional outsourced professional services
market and because clients often prefer local providers, we believe that a
decentralized operating environment maximizes operating performance and
contributes to employee and client satisfaction.
We believe that our ability to successfully deliver professional services
to clients is dependent on our office directors working together as a collegial
and collaborative team, at times working jointly on client projects. To build a
sense of team effort and increase camaraderie among our office directors, we
have an incentive program for our office management that awards annual bonuses
based on both the performance of the company and the performance of the
manager's particular office. In addition, each member of our office management
owns equity in our company. We also have a management mentor program whereby
each new office director is trained by an experienced office director, who is
responsible for providing support to the new office director on an ongoing
basis.
From our corporate headquarters in Costa Mesa, California, we provide our
offices with centralized administrative, marketing, finance and legal support.
Our financial reporting is centralized in our corporate service center. This
center also handles billing, accounts payable and accounts receivable, and
administers human resources including employee compensation and benefits. In
addition, we have a corporate networked information technology platform with
centralized financial reporting capabilities and a front office client
management system. These centralized functions minimize the administrative
burdens on our office management and allow them to spend more time focused on
client development.
Business Development
Our business development initiatives are composed of:
. local sales initiatives focused on existing clients and target
companies;
. brand marketing activities; and
. national and local direct mail programs.
Our business development efforts are driven by the networking and sales
efforts of our management. The office director and client service manager in
each of our offices develop a list of targeted potential clients and key
existing clients. They are responsible for initiating and fostering
relationships with the senior management of these companies. These local
efforts are supplemented with national marketing assistance. We have a national
business development director who, with our top executives, assists with major
client opportunities. We believe that these efforts have been effective in
generating incremental revenues from existing clients and developing new client
relationships.
Our brand marketing initiatives help develop Resources Connection's image
in the markets we serve. Our brand is reinforced by our professionally designed
website, brochures and pamphlets, direct mail and advertising materials. We
believe that our branding initiatives coupled with our high-quality client
service differentiate us from our competitors and establish Resources Connection
as a credible and reputable professional services firm.
Our national marketing group develops our direct mail campaigns to focus on
our targeted client and associate populations. These campaigns are intended to
support our branding, sales and marketing, and associate hiring initiatives.
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Competition
We operate in a competitive, fragmented market and compete for clients and
associates with a variety of organizations that offer similar services. Our
principal competitors include:
. consulting firms;
. loaned employees of the Big Five accounting firms;
. traditional and Internet-based staffing firms; and
. the in-house resources of our clients.
We compete for clients on the basis of the quality of professionals, the
timely availability of professionals with requisite skills, the scope and price
of services, and the geographic reach of services. We believe that our
attractive value proposition, consisting of our highly qualified associates,
relationship-oriented approach and professional culture, enables us to
differentiate ourselves from our competitors. Although we believe we compete
favorably with our competitors, many of our competitors have significantly
greater financial resources, generate greater revenues and have greater name
recognition than our company.
Employees
As of May 31, 2001, we had a total of 1,573 employees, including 290
corporate and office-level employees and 1,283 professional services associates.
None of our employees is covered by a collective bargaining agreement.
Item 2. Properties
We maintain a total of 41 domestic offices, which are respectively located
in the following metropolitan areas:
Phoenix, Arizona Boise, Idaho Cincinnati, Ohio
Costa Mesa, California Chicago, Illinois (2 locations) Cleveland, Ohio
Los Angeles, California Indianapolis, Indiana Portland, Oregon
Santa Clara, California Boston, Massachusetts Philadelphia, Pennsylvania
San Diego, California Baltimore, Maryland Pittsburgh, Pennsylvania
San Francisco, California Detroit, Michigan Austin, Texas
Denver, Colorado Minneapolis, Minnesota Dallas, Texas
Hartford, Connecticut St. Louis, Missouri Fort Worth, Texas
Stamford, Connecticut Las Vegas, Nevada Houston, Texas (2 locations)
Orlando, Florida Parsippany, New Jersey San Antonio, Texas
Tampa, Florida Princeton, New Jersey Seattle, Washington
Atlanta, Georgia New York, New York Milwaukee, Wisconsin
Honolulu, Hawaii Charlotte, North Carolina Washington, D.C.
Our corporate offices are located in the Costa Mesa, California office in a
16,366 square foot facility under a lease expiring in June 2007. We maintain
four international offices: Toronto, Canada; London, England; Taipei, Taiwan;
and Hong Kong, People's Republic of China.
Item 3. Legal Proceedings
We are not currently subject to any material legal proceedings; however, we
may from time to time become a party to various legal proceedings arising in the
ordinary course of our business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2001.
10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
Our common stock has traded on The Nasdaq National Market under the symbol
"RECN" since December 15, 2000. Prior to that time, there was no public market
for our common stock. The approximate number of holders of record of our common
stock as of May 31, 2001 was 202.
The following table sets forth the range of high and low sales prices
reported on The Nasdaq National Market for our common stock for the periods
indicated.
Price Range of Common Stock
----------------------------------
High Low
--------------- -----------------
Fiscal 2001:
Third Quarter (December 15, 2000 through February 24, 2001) $25.375 $13.437
Fourth Quarter $33.800 $16.625
Fiscal 2002:
First Quarter (through July 16, 2001) $34.250 $22.875
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and do not anticipate paying any cash dividends in
the foreseeable future. Our credit agreement currently prohibits us from
declaring or paying any dividends or other distributions on any shares of our
capital stock other than dividends payable solely in shares of capital or the
stock of our subsidiaries. Any future determination to pay cash dividends will
be at the discretion of our board of directors and will depend upon our
financial condition, results of operations, capital requirements, general
business condition, contractual restrictions contained in our credit agreement
and other agreements, and other factors deemed relevant by our board of
directors.
Item 6. Selected Financial Data
You should read the following selected historical consolidated financial
data in conjunction with our consolidated financial statements and related notes
beginning on page 26 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on page 13. The statement of
income data for the year ended May 31, 1997, and the balance sheet data at May
31, 1997 were derived from the unaudited financial statements of Resources
Connection LLC and are not included in this Report on Form 10-K. The statements
of income data for the year ended May 31, 1998, and the period from June 1, 1998
to March 31, 1999, and the balance sheet data at May 31, 1998 were derived from
the financial statements of Resources Connection LLC that have been audited by
PricewaterhouseCoopers LLP, independent accountants, and, with respect to the
statement of income data for the period from June 1, 1998 to March 31, 1999, is
included elsewhere in this Report on Form 10-K. The consolidated statements of
income data for the period from November 16, 1998 to May 31, 1999, and the years
ended May 31, 2000 and 2001, and the consolidated balance sheet data at May 31,
1999, 2000 and 2001 were derived from our consolidated financial statements that
have been audited by
11
PricewaterhouseCoopers LLP and, with respect to the consolidated statements of
income data, and the consolidated balance sheet data at May 31, 2000 and 2001,
are included elsewhere in this Report on Form 10-K. Historical results are not
necessarily indicative of results that may be expected for any future periods.
Resources Connection LLC
--------------------------------------------------
Period from
Year Ended Year Ended June 1, 1998 to
May 31, 1997 May 31, 1998 March 31, 1999
-------------- ------------ ---------------
(unaudited)
(dollar amounts in thousands, except per share data)
Consolidated Statements of Income Data:
Revenue..................................................... $9,331 $29,508 $55,438
Direct cost of services..................................... 5,367 16,671 31,253
------ ------- -------
Gross profit................................................ 3,964 12,837 24,185
Selling, general and administrative expenses................ 3,086 9,035 17,071
Amortization of intangible assets........................... -- -- --
Depreciation expense........................................ 9 79 118
------ ------- -------
Income from operations...................................... 869 3,723 6,996
Interest income............................................. -- -- --
Interest expense............................................ -- -- --
------ ------- -------
Income before provision for income taxes and extraordinary
charge..................................................... 869 3,723 6,996
Provision for income taxes.................................. -- -- --
------ ------- -------
Income before extraordinary charge.......................... 869 3,723 6,996
Extraordinary charge, net of tax effect of $381............. -- -- --
------ ------- -------
Net income.................................................. $ 869 $ 3,723 $ 6,996
====== ======= =======
Pro Forma Data(1):
Income before provision for income taxes.................... $ 869 $ 3,723 $ 6,996
Pro forma provision for income taxes........................ 348 1,489 2,798
------ ------- -------
Pro forma net income........................................ $ 521 $ 2,234 $ 4,198
====== ======= =======
Net income per common share:
Basic before extraordinary charge.........................
Extraordinary charge......................................
Basic.....................................................
Diluted before extraordinary charge.......................
Extraordinary charge......................................
Diluted...................................................
Number of shares used in computing net income per share
(in thousands):
Basic.....................................................
Diluted...................................................
Other Data:
Number of offices open at end of period..................... 9 18 27
Total number of associates on assignment at end of period... 127 326 675
Resources Connection, Inc.
------------------------------------------------------
Period from
November 16, 1998 Year Ended Year Ended
to May 31, 1999 May 31, 2000 May 31, 2001
---------------- -------------- -------------
(dollar amounts in thousands, except per share data)
Consolidated Statements of Income Data:
Revenue..................................................... $15,384 $126,332 $189,752
Direct cost of services..................................... 8,618 73,541 110,811
------- -------- --------
Gross profit................................................ 6,766 52,791 78,941
Selling, general and administrative expenses................ 4,274 34,648 49,964
Amortization of intangible assets........................... 371 2,231 2,273
Depreciation expense........................................ 30 285 866
------- -------- --------
Income from operations...................................... 2,091 15,627 25,838
Interest income............................................. -- -- (633)
Interest expense............................................ 734 4,717 2,676
------- -------- --------
Income before provision for income taxes and extraordinary
charge..................................................... 1,357 10,910 23,795
Provision for income taxes.................................. 565 4,364 9,518
------- -------- --------
Income before extraordinary charge.......................... 792 6,546 14,277
Extraordinary charge, net of tax effect of $381............. -- -- 572
------- -------- --------
Net income.................................................. $ 792 $ 6,546 $ 13,705
======= ======== ========
Pro Forma Data(1):
Income before provision for income taxes....................
Pro forma provision for income taxes........................
Pro forma net income........................................
Net income per common share:
Basic before extraordinary charge......................... $ 0.09 $ 0.42 $ 0.80
Extraordinary charge...................................... -- -- 0.03
------- -------- --------
Basic..................................................... $ 0.09 $ 0.42 $ 0.77
======= ======== ========
Diluted before extraordinary charge....................... $ 0.09 $ 0.42 $ 0.74
Extraordinary charge...................................... -- -- 0.03
------- -------- --------
Diluted................................................... $ 0.09 $ 0.42 $ 0.71
======= ======== ========
Number of shares used in computing net income per share
(in thousands):
Basic..................................................... 8,691 15,630 17,864
======= ======== ========
Diluted................................................... 8,691 15,714 19,421
======= ======== ========
Other Data:
Number of offices open at end of period..................... 28 35 44
Total number of associates on assignment at end of period... 697 1,056 1,283
Resources Resources
Connection LLC Connection, Inc.
-------------------- --------------------------
May 31, May 31,
------- -------
1997 1998 1999 2000 2001
------- ------ ------- ------- -------
(unaudited)
Consolidated Balance Sheet Data:
Cash and cash equivalents....................................... $ -- $3,168 $ 876 $ 4,490 $ 34,503
Working capital................................................. 1,133 4,504 7,150 7,664 42,965
Total assets.................................................... 1,409 7,976 58,954 70,106 105,345
Long-term debt, including current portion....................... -- -- 42,531 41,771 --
Stockholders' equity............................................ 1,205 4,928 10,610 17,185 86,032
________________
(1) Because Resources Connection LLC is a limited liability company, income
taxes on any income realized by Resources Connection LLC are the
obligation of its members and, accordingly, Resources Connection LLC
records no provision for income taxes. The pro forma net income for
Resources Connection LLC for periods through March 31, 1999 have been
computed as if Resources Connection LLC had been fully subject to federal
and state income taxes as a C corporation.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes. This discussion and analysis contains forward-
looking statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors including, but not limited to, those
discussed in "Risk Factors" starting on page 21 and elsewhere in this Report on
Form 10-K.
Overview
Resources Connection is a professional services firm that provides
experienced accounting and finance, human resources management and information
technology professionals to clients on a project-by-project basis. We assist
our clients with discrete projects requiring specialized professional expertise
in accounting and finance, such as mergers and acquisitions due diligence,
financial analyses (e.g., product costing and margin analyses) and corporate
reorganization and tax-related projects. In addition, we provide human resources
management services, such as compensation program design and implementation, and
information technology services, such as transitions of management information
systems. We also assist our clients with periodic needs such as budgeting and
forecasting, audit preparation and public reporting.
We began operations in June 1996 as a division of Deloitte & Touche and
operated as a wholly owned subsidiary of Deloitte & Touche from January 1997
until April 1999. In November 1998, our management formed RC Transaction Corp.,
renamed Resources Connection, Inc., to raise capital for an intended management-
led buyout. In April 1999, we completed a management-led buyout in partnership
with our investor Evercore Partners, Inc., four of its affiliates and six other
investors. In connection with the buyout, we entered into a transition services
agreement with Deloitte & Touche, whereby Deloitte & Touche agreed to provide
certain services to us at negotiated rates during the period that we maintained
our offices within their locations. We have completed the transition of all of
our offices previously located in Deloitte & Touche space. The financial
statements of Resources Connection LLC for the period from June 1, 1998 to March
31, 1999, and financial statements of Resources Connection, Inc. for all periods
thereafter, include charges for services supplied by Deloitte & Touche.
Although these transition services were negotiated at arms length, the charges
for these services may not necessarily be indicative of rates available from
third parties. Our management has been unable to determine the availability and
the cost of similar services had they been provided by third parties.
Growth in revenue, to date, has generally been the result of establishing
offices in major markets throughout the United States. We established nine
offices during fiscal 1997, our initial fiscal year, all in the Western United
States. In fiscal 1998, we established nine additional offices, which extended
our geographic reach to the Midwest and Eastern United States. For the year
ended May 31, 1999, we opened ten more offices and established a new service
line in information technology. In fiscal 2000, we established four more
domestic offices, established a new service line in human resources management
and also began operations in Toronto, Canada; Taipei, Taiwan; and Hong Kong,
People's Republic of China. In fiscal 2001, we established nine additional
domestic offices. In the first quarter of fiscal 2002, we have begun operations
in London, England. Our new service lines were introduced in a limited number of
our offices. As a result, we currently serve our clients through 41 offices in
the United States and four offices abroad.
We earn revenue primarily by charging our corporate clients on an hourly
basis for the professional services of our associates. We recognize revenue
once services have been rendered and invoice our clients on a weekly basis. Our
clients are contractually obligated to pay us for all hours billed. To a much
lesser extent, we also earn revenue if a client hires an associate onto its
permanent payroll. This type of contractually non-refundable revenue is
recognized at the time our client completes the hiring process and represented
less than 4% of our revenue in each of the following the periods: June 1, 1998
to March 31, 1999, April 1, 1999 to May 31, 1999 and fiscal 2000. In fiscal
2001, this type of revenue represented less than 3% of our revenue. We
periodically review our outstanding accounts receivable balance and determine an
estimate of the amount of those receivables we believe may prove uncollectible.
Our provision for bad debts is included in our selling, general and
administrative expenses.
13
The costs to pay our professional associates and all related benefit and
incentive costs, including provisions for paid time off and other employee
benefits, are included in direct cost of services. We pay our associates on an
hourly basis for all hours worked on client engagements and, therefore, direct
cost of services tends to vary directly with the volume of revenue we earn. We
expense the benefits we pay to our associates as they are earned. These
benefits include paid vacation and holidays; a bonus incentive plan; referral
bonus programs; group health, dental and life insurance programs; a matching
401(k) retirement plan; and professional development and career training. In
addition, we pay the related costs of employment, including state and federal
payroll taxes, workers' compensation insurance, unemployment insurance and
associated costs. Typically, an associate must work a threshold number of hours
to be eligible for all of the benefits. We recognize direct cost of services
when incurred.
Selling, general and administrative expenses include the payroll and
related costs of our national and local management as well as general and
administrative, marketing and recruiting costs. Our sales and marketing efforts
are led by our management team who are paid a salary and earn bonuses based on
operating results for our company as a whole and within each manager's
geographic market.
Results of Operations
The following tables set forth, for the periods indicated, our consolidated
statements of income data. These historical results are not necessarily
indicative of future results.
Resources Connection LLC Resources Connection, Inc.
-------------------------- -------------------------------------------------
Period from Period from
June 1, 1998 to November 16, 1998 to Year Ended Year Ended
March 31, 1999 May 31, 1999 May 31, 2000 May 31, 2001
---------------- -------------------- ------------- ------------
(amounts in thousands)
Revenue ......................................... $55,438 $15,384 $126,332 $189,752
Direct cost of services ......................... 31,253 8,618 73,541 110,811
------- ------- -------- --------
Gross profit .................................... 24,185 6,766 52,791 78,941
Selling, general and administrative expenses .... 17,071 4,274 34,648 49,964
Amortization of intangible assets ............... -- 371 2,231 2,273
Depreciation expense ............................ 118 30 285 866
------- ------- -------- --------
Income from operations .......................... 6,996 2,091 15,627 25,838
Interest expense, net ........................... -- 734 4,717 2,043
------- ------- -------- --------
Income before provision for income taxes and
extraordinary charge............................. 6,996 1,357 10,910 23,795
Provision for income taxes(1) ................... -- 565 4,364 9,518
------- ------- -------- --------
Income before extraordinary charge................ 6,996 792 6,546 14,277
Extraordinary charge, net of tax effect of $381... -- -- -- 572
------- ------- -------- --------
Net income(1) ................................. $ 6,996 $ 792 $ 6,546 $ 13,705
======= ======= ======== ========
Our operating results for the periods indicated are expressed as a
percentage of revenue below.
Resources Connection LLC Resources Connection, Inc.
------------------------ ---------------------------------------------
Period from Period from
June 1, 1998 to November 16, 1998 to Year Ended Year Ended
March 31, 1999 May 31, 1999 May 31, 2000 May 31, 2001
-------------- ------------ ------------- ------------
Revenue ............................................ 100.0% 100.0% 100.0% 100.0%
Direct cost of services ............................ 56.4 56.0 58.2 58.4
----- ----- ----- -----
Gross profit ....................................... 43.6 44.0 41.8 41.6
Selling, general and administrative expenses ........ 30.8 27.8 27.4 26.3
Amortization of intangible assets .................. -- 2.4 1.8 1.2
Depreciation expense ............................... 0.2 0.2 0.2 0.5
----- ----- ----- -----
Income from operations ............................. 12.6 13.6 12.4 13.6
Interest expense, net ............................. -- 4.8 3.7 1.1
----- ----- ----- -----
Income before provision for income
taxes and extraordinary charge .................... 12.6 8.8 8.7 12.5
Provision for income taxes(1) ...................... -- 3.7 3.5 5.0
----- ----- ----- -----
Income before extraordinary charge................... 12.6 5.1 5.2 7.5
Extraordinary charge, net of tax effect of $381...... -- -- -- 0.3
----- ----- ----- -----
Net income(1) .................................... 12.6% 5.1% 5.2% 7.2%
===== ===== ===== =====
14
_____________
(1) Because Resources Connection LLC is a limited liability company, income
taxes on any income realized by Resources Connection LLC are the obligation
of its members and, accordingly, Resources Connection LLC records no
provision for income taxes.
Year Ended May 31, 2001 compared to Year Ended May 31, 2000
Revenue. Revenue increased $63.4 million or 50.2% to $189.8 million for
the year ended May 31, 2001 from $126.3 million for the year ended May 31, 2000.
The increase in total revenue was primarily due to the growth in total billable
hours resulting from an increase in the number of associates on assignment from
1,056 at the end of fiscal 2000 to 1,283 at the end of fiscal 2001 and a 12%
increase in the average billing rate per hour. Despite the increase in rates,
the increase in revenue is primarily attributable to the increase in the number
of associates. Revenue also increased from the contribution of the nine new
offices during fiscal 2001.
Direct Cost of Services. Direct cost of services increased $37.3 million
or 50.7% to $110.8 million for the year ended May 31, 2001 from $73.5 million
for the year ended May 31, 2000. This increase was primarily the result of the
growth in the number of associates on assignment during fiscal 2001 and a 1.0%
increase in the average pay rate per hour between the two years. Direct cost of
services increased slightly as a percentage of revenue from 58.2% for fiscal
year 2000 to 58.4% for fiscal year 2001. This net increase reflects the impact
of our enriched benefit programs for associates offset by the incremental
increase in billing rate per hour compared to pay rate per hour.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $15.3 million or 44.2% to $50.0 million for
the year ended May 31, 2001 from $34.6 million for the year ended May 31, 2000.
This increase was attributable to the cost of operating and staffing the nine
new offices opened during fiscal 2001 and the growth in operations at offices
opened prior to fiscal 2001. Management and administrative headcount increased
from 224 at the end of fiscal 2000 to 290 at the end of fiscal 2001. Selling,
general and administrative expenses decreased as a percentage of revenue from
27.4% for the year ended May 31, 2000 to 26.3% for the year ended May 31, 2001.
This percentage decrease resulted primarily from improved operating leverage
experienced in offices that had been open more than one year.
Amortization and Depreciation Expenses. Amortization of intangible assets
was relatively unchanged at $2.3 million for the year ended May 31, 2001
compared to $2.2 million for the year ended May 31, 2000. In June 2001, the
Financial Accounting Standards Board, or FASB, approved SFAS No. 142, "Goodwill
and Other Intangible Assets," which supersedes APB Opinion No. 17, "Intangible
Assets". The FASB is currently finalizing this statement with an expected
issuance in July 2001. Under its proposed changes, SFAS No. 142 establishes new
standards for goodwill acquired in a business combination and eliminates
amortization of goodwill and instead sets forth methods to periodically evaluate
goodwill for impairment. We expect to adopt this statement during the first
quarter of fiscal 2002. During the year ended May 31, 2001, goodwill
amortization totaled $2.1 million.
Depreciation expense increased from $285,000 for the year ended May 31,
2000 to $866,000 for the year ended May 31, 2001. This increase reflects the
impact of the completed moves out of our former parent's office space into our
own space resulting in additional investment in furniture and leasehold
improvements, continuing growth in our number of offices and our investment in
information technology.
Interest Expense, Net. Net interest expense decreased from $4.7 million
for the year ended May 31, 2000 to $2.0 million for the year ended May 31, 2001.
This decrease is the result of the repayment of our term loan and subordinated
notes on December 20, 2000 using the proceeds from our initial public offering
of our common stock. After the repayment, we had no outstanding long-term debt
balances. The remaining net proceeds from the offering of approximately $15.3
million, as well as cash generated from operations, have been invested in money
market funds and commercial paper and are classified as cash equivalents due to
the short maturities of these investments. Interest income was $633,000 for the
year ended May 31, 2001.
15
Income Taxes. The provision for income taxes increased from $4.4 million
for the year ended May 31, 2000 to $9.5 million for the year ended May 31, 2001.
The effective tax rate remained at 40% in both fiscal years. Our effective rate
differs from the federal statutory rate primarily due to state taxes, net of
federal benefit.
Extraordinary Charge. The extraordinary charge of $572,000 (net of tax
effect of $381,000) is the result of the write-off of the net remaining balance
of unamortized debt issuance costs associated with our term loan and
subordinated debt. The approximately $38.8 million of debt was repaid in full
on December 20, 2000 using a portion of the proceeds of our initial public
offering of our common stock.
Year Ended May 31, 2000 compared to the period from November 16, 1998 to May 31,
1999
Revenue. Revenue increased $110.9 million or 720.1% to $126.3 million for
the year ended May 31, 2000 from $15.4 million for the period from November 16,
1998 to May 31, 1999. The increase in total revenue was the result of the
comparison of a full year of operations in fiscal 2000, compared to only two
months of operations following the acquisition on April 1, 1999. Prior to April
1, 1999, Resources Connection, Inc. had no substantial operations.
Direct Cost of Services. Direct cost of services increased $64.9 million
or 754.7% to $73.5 million for the year ended May 31, 2000 from $8.6 million for
the period from November 16, 1998 to May 31, 1999. The increase in direct cost
of services was primarily the result of the comparison of a full year of
operations compared to only two months of operations following the acquisition.
Direct cost of services increased as a percentage of revenue from 56.0% for the
period from November 16, 1998 to May 31, 1999 to 58.2% for the year ended May
31, 2000. During the year ended May 31, 2000, we enriched our benefit programs
for associates and more associates qualified for benefits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $30.3 million or 704.7% to $34.6 million for
the year ended May 31, 2000 from $4.3 million for the period from November 16,
1998 to May 31, 1999. The increase in selling, general and administrative
expenses was primarily the result of the comparison of a full year of operations
compared to only two months of operations following the acquisition and
partially the result of an increase in number of offices from 28 at May 31, 1999
to 35 at May 31, 2000. Selling, general and administrative expenses decreased
as a percentage of revenue from 27.8% for the period from November 16, 1998 to
May 31, 1999 to 27.4% for the year ended May 31, 2000 due to these expenses
being spread over a larger revenue base.
Amortization and Depreciation Expenses. Amortization of intangible assets
increased from $371,000 for the period from November 16, 1998 to May 31, 1999 to
$2.2 million for the year ended May 31, 2000. The increase was related to our
acquisition of Resources Connection LLC. Results for the year ended May 31,
2000 reflect a full year of amortization expense compared with only two months
subsequent to the acquisition in the period from November 16, 1998 to May 31,
1999.
Depreciation expense increased from $30,000 for the period from November
16, 1998 to May 31, 1999 to $285,000 for the year ended May 31, 2000. The
increase in depreciation expense was primarily the result of the comparison of a
full year of operations compared to only two months of operations in the period
from November 16, 1998 to May 31, 1999.
Interest Expense. Interest expense increased from $734,000 for the period
from November 16, 1998 to May 31, 1999 to $4.7 million for the year ended May
31, 2000, related primarily to debt incurred in connection with the acquisition
of Resources Connection LLC. From May 31, 1999 to May 31, 2000, the term loan
portion of the acquisition debt was reduced from $18.0 million to $16.5 million.
The balance due on the subordinated notes increased from $22.4 million as of May
31, 1999 to $25.3 million as of May 31, 2000 as we deferred interest payments
due on the subordinated debt. The outstanding balance due on the revolver as of
May 31, 1999 of $2.1 million was repaid during the first quarter of fiscal 2000;
the revolver has not been utilized since January 2000.
Income Taxes. The provision for income taxes increased from $565,000 for
the period from November 16, 1998 to May 31, 1999 to $4.4 million for the year
ended May 31, 2000. The effective tax rate decreased from
16
41.6% for the period from November 16, 1998 to May 31, 1999 to 40.0% for the
year ended May 31, 2000. Our effective rate differs from the federal statutory
rate primarily due to state taxes, net of federal benefit.
Fiscal 2000 compared to Pro Forma Fiscal 1999 (Revenue and Direct Cost of
Services)
The following paragraphs compare the revenue and direct cost of services of
Resources Connection, Inc. for fiscal 2000 to the pro forma revenue and direct
cost of service for Resources Connection, Inc. for the period from November 1,
1998 to May 31, 1999 as if our acquisition of Resources Connection LLC had
occurred on June 1, 1998.
Pro Forma Revenue. Revenue increased $55.5 million, or 78.4%, to $126.3
million in fiscal 2000 from $70.8 million in pro forma fiscal 1999. The
increase in total revenues was primarily due to the growth in the total billable
hours resulting from the increase in the number of associates on assignment from
697 at the end of pro forma fiscal 1999 to 1,056 at the end of fiscal 2000 and
an increase of 6.3% in the average billing rate per hour. Substantially all of
the increase in revenues is attributable to the increase in the number of
associates. During fiscal 2000, we opened seven new offices, introduced our
human resources management service line to certain existing markets and expanded
our recently introduced information technology service line in existing market
places. Our new service line contributed $2.3 million to revenues during the
year or 1.8% of our increase in revenue.
Pro Forma Direct Cost of Services. Direct cost of services increased $33.7
million, or 84.5%, to $73.5 million in fiscal 2000 from $39.9 million in pro
forma fiscal 1999. This increase was the result of the growth in the number of
associates on assignment from 697 at the end of pro forma fiscal 1999 to 1,056
at the end of fiscal 2000 and an increase of 5.7% in the average pay rate per
hour. Substantially all of the increase in direct cost of services is
attributable to the increase in the number of associates. In addition, we
enriched certain of our benefit programs for associates during fiscal 2000 and
more of our associates qualified for benefits. Direct cost of services as a
percentage of revenue in fiscal 2000 was 58.2% as compared to 56.4% in pro forma
fiscal 1999, reflecting primarily the impact of these enriched benefit programs.
Quarterly Results
The following table sets forth our unaudited quarterly consolidated
statements of income data for each of the eight quarters in the two-year period
ended May 31, 2001. In the opinion of management, this data has been prepared
on a basis substantially consistent with our audited consolidated financial
statements appearing elsewhere in this prospectus, and reflect and include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the data. The quarterly data should be read together with our
consolidated financial statements and related notes appearing elsewhere in this
prospectus. The operating results are not necessarily indicative of the results
to be expected in any future period.
Resources Connection, Inc.
---------------------------------------------------------------------------------
Quarter Ended
---------------------------------------------------------------------------------
Aug. 31, Nov. 30, Feb. 29, May 31, Aug. 31, Nov. 30, Feb. 28, May 31,
1999 1999 2000 2000 2000 2000 2001 2001
------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
Consolidated Statements of
Income Data:
Revenue ......................................... $25,533 $28,581 $33,384 $38,834 $39,155 $45,046 $49,830 $55,721
Direct cost of services ......................... 14,491 16,626 19,765 22,659 22,749 25,987 29,457 32,618
------- ------- ------- ------- ------- ------- ------- -------
Gross profit .................................... 11,042 11,955 13,619 16,175 16,406 19,059 20,373 23,103
Selling, general and administrative
expenses ....................................... 6,813 8,050 9,365 10,420 10,720 12,493 12,680 14,071
Amortization of intangible
assets ......................................... 511 577 572 571 578 565 565 565
Depreciation expense ............................ 51 49 31 154 192 216 227 231
------- ------- ------- ------- ------- ------- ------- -------
Income from operations .......................... 3,667 3,279 3,651 5,030 4,916 5,785 6,901 8,236
Interest income................................... -- -- -- -- (19) (44) (251) (319)
Interest expense ................................ 1,154 1,186 1,199 1,178 1,228 1,184 248 16
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes and extraordinary charge .......... 2,513 2,093 2,452 3,852 3,707 4,645 6,904 8,539
Provision for income taxes ...................... 1,006 835 981 1,542 1,483 1,858 2,762 3,415
------- ------- ------- ------- ------- ------- ------- -------
Income before extraordinary charge................ 1,507 1,258 1,471 2,310 2,224 2,787 4,142 5,124
Extraordinary charge, net of tax effect of $381... -- -- -- -- -- -- 572 --
------- ------- ------- ------- ------- ------- ------- -------
Net income ...................................... $ 1,507 $ 1,258 $ 1,471 $ 2,310 $ 2,224 $ 2,787 $ 3,570 $ 5,124
======= ======= ======= ======= ======= ======= ======= =======
Net income per common share (1):
Basic............................................ $ 0.10 $ 0.08 $ 0.09 $ 0.15 $ 0.14 $ 0.18 $ 0.18 $ 0.25
======= ======= ======= ======= ======= ======= ======= =======
Diluted.......................................... $ 0.10 $ 0.08 $ 0.09 $ 0.15 $ 0.13 $ 0.16 $ 0.17 $ 0.23
======= ======= ======= ======= ======= ======= ======= =======
- -------------
(1) Net income per common share calculations for each of the quarters were based
upon the weighted average number of shares outstanding for each period, and
the sum of the quarters may not necessarily be equal to the full year net
income per common share amount.
17
Our quarterly results have fluctuated in the past and we believe they will
continue to do so in the future. We anticipate that revenues in the first
quarter of fiscal 2002 will be no more than and will likely be less than in the
quarter ended May 31, 2001. Factors that could affect our quarterly operating
results include:
. our ability to attract new clients and retain current clients;
. the mix of client projects;
. the announcement or introduction of new services by us or any of our
competitors;
. the expansion of the professional services offered by us or any of our
competitors into new locations both nationally and internationally;
. changes in the demand for our services by our clients;
. the entry of new competitors into any of our markets;
. the number of holidays in a quarter, particularly the day of
the week on which they occur;
. changes in the pricing of our professional services or those of our
competitors;
. the amount and timing of operating costs and capital expenditures
relating to management and expansion of our business; and
. the timing of acquisitions and related costs, such as compensation
charges that fluctuate based on the market price of our common stock.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our results of operations are not meaningful indicators of future
performance.
Liquidity and Capital Resources
Our primary source of liquidity is cash provided by our operations and, to
the extent necessary, available commitments under our revolving line of credit.
We have generated positive cash flows from operations since inception, and we
continued to do so during the year ended May 31, 2001.
In April 1999, in connection with the acquisition of Resources Connection
LLC, we entered into a $28.0 million credit agreement with Bankers Trust
Company, an affiliate of Deutsche Banc Alex. Brown Inc., U.S. Bank National
Association and BankBoston, N.A., which provides for an $18.0 million term loan
facility and a $10.0 million revolving credit facility. On December 20, 2000,
we repaid the remaining balance on the term loan of $11.9 million using the
proceeds from our initial public offering of common stock. The credit agreement
expires on October 1, 2003. As of May 31, 2001, we had no outstanding
borrowings under the revolving credit facility. Borrowings under the credit
agreement are collateralized by all of our assets. Our interest rate options
under our
18
credit agreement are prime rate plus 0.5% to 1.5% and a Eurodollar-based rate
plus 1.5% to 2.5%. Interest is payable on the revolving credit facility at
various intervals no less frequent than quarterly.
In April 1999, we issued $22.0 million of 12% subordinated promissory notes
to certain investors. Interest accrued on the notes at 12% and was payable on a
quarterly basis; however, we could elect and did elect to defer payment of the
interest and to add the balance due to the outstanding principal balance. On
December 20, 2000, we used approximately $26.9 million of the net proceeds from
our initial public offering to retire the then outstanding balance on these
subordinated promissory notes.
Net cash provided by operating activities totaled $20.9 million in fiscal
2001, $10.5 million in fiscal 2000, and $3.0 million in fiscal 1999 on a pro
forma combined basis (including $5.0 million in cash acquired in connection with
our acquisition of Resources Connection LLC). Cash provided by operations
resulted primarily from the net earnings of the company partially offset by
growth in working capital.
Net cash used in investing activities totaled $2.0 million in fiscal 2001,
$3.3 million in fiscal 2000 and $51.1 million in fiscal 1999 on a pro forma
combined basis. Other than in fiscal 1999, when we used cash to purchase
Resources Connection LLC, cash used in investing activities was a result of
purchases of property and equipment.
Net cash provided by financing activities was $11.1 million in fiscal 2001
and $50.8 million in fiscal 1999 on a pro forma combined basis, while cash used
in financing activities was $3.6 million in fiscal 2000. The net cash provided
by financing activities in fiscal 2001 reflects the payment required under our
term debt agreement following the completion of our initial public offering of
common stock, and retirement of our subordinated promissory notes, offset by the
remaining proceeds of the offering. Cash used in financing activities during
fiscal 2000 resulted from the repayment of our term debt and the net decrease in
borrowings under our revolving line of credit. Net cash generated from financing
activities in fiscal 1999 resulted from the issuance of common stock, the
issuance of subordinated promissory notes and proceeds from bank debt associated
with the purchase of Resources Connection LLC and the resultant financing of the
ongoing operations of our company thereafter.
Our ongoing operations and anticipated growth will require us to continue
making investments in capital equipment, primarily technology, hardware and
software. In addition, we may consider making certain strategic acquisitions.
We anticipate that our current cash, existing availability under our revolving
line of credit and the ongoing cash flows from our operations will be adequate
to meet our working capital and capital expenditure needs for at least the next
12 months. Our longer-term plans for expanding our business anticipate that
these sources of liquidity will be sufficient for the foreseeable future. If we
require additional capital resources to grow our business, either internally or
through acquisition, we may seek to sell additional equity securities or to
secure additional debt financing. The sale of additional equity securities or
the addition of new debt financing could result in additional dilution to our
stockholders. We may not be able to obtain financing arrangements in amounts or
on terms acceptable to us in the future. In the event we are unable to obtain
additional financing when needed, we may be compelled to delay or curtail our
plans to develop our business, which could have a material adverse affect on our
operations, market position and competitiveness.
19
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101) entitled "Revenue Recognition," which outlines the basic criteria that must
be met to recognize revenue and provides guidance for the presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC. The adoption of SAB 101 did not have a material
impact on our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, entitled
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board No. 25, or APB 25. This
interpretation clarifies:
. the definition of an employee for purposes of applying APB 25;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
. the accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and
. the accounting for an exchange of stock compensation awards in a
business combination.
This interpretation was effective July 1, 2000. The adoption of FIN 44 did
not have a material impact on our financial position or results of operations.
In June 2001, the FASB approved SFAS No. 141, "Business Combinations" and
is currently finalizing this statement with an expected issuance in July 2001.
Under its proposed changes, SFAS No. 141 establishes new standards for
accounting and reporting requirements for business combinations and will require
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method will be
prohibited. The Company expects to adopt this statement during the first
quarter of fiscal 2002. Management does not believe that SFAS No. 141 will have
a material impact on the Company's consolidated financial statements.
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other
Intangible Assets," which supersedes APB Opinion No. 17, "Intangible Assets".
The FASB is currently finalizing this statement with an expected issuance in
July 2001. Under its proposed changes, SFAS No. 142 establishes new standards
for goodwill acquired in a business combination and eliminates amortization of
goodwill and instead sets forth methods to periodically evaluate goodwill for
impairment. The Company expects to adopt this statement during the first quarter
of fiscal 2002. During the year ended May 31, 2001, goodwill amortization
totaled $2.1 million.
20
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy shares of our common stock. The risks and uncertainties
described below are not the only ones facing us. Additional risks and
uncertainties, including those risks set forth in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", may also adversely
impact and impair our business. If any of the following risks actually occurs,
our business could be harmed. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. When
determining whether to buy our common stock, you should also refer to the other
information in this Report on Form 10-K, including our financial statements and
the related notes.
This Report on Form 10-K contains forward-looking statements based on the
current expectations, assumptions, estimates and projections about us and our
industry. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those discussed in these
forward-looking statements as a result of certain factors, as more fully
described in this section and elsewhere in this Report on Form 10-K. We do not
undertake to update publicly any forward-looking statements for any reason, even
if new information becomes available or other events occur in the future.
We must provide our clients with highly qualified and experienced associates,
and the loss of a significant number of our associates, or an inability to
attract and retain new associates, could adversely affect our business and
operating results.
Our business involves the delivery of professional services, and our
success depends on our ability to provide our clients with highly qualified and
experienced associates who possess the skills and experience necessary to
satisfy their needs. Such professionals are in great demand, particularly in
certain geographic areas, and are likely to remain a limited resource for the
foreseeable future. Our ability to attract and retain associates with the
requisite experience and skills depends on several factors including, but not
limited to, our ability to:
. provide our associates with full-time employment;
. obtain the type of challenging and high-quality projects that our
associates seek;
. pay competitive compensation and provide competitive benefits; and
. provide our associates with flexibility as to hours worked and
assignment of client engagements.
We cannot assure you that we will be successful in accomplishing each of
these items and, even if we are, that we will be successful in attracting and
retaining the number of highly qualified and experienced associates necessary to
maintain and grow our business.
The market for professional services is highly competitive, and if we are unable
to compete effectively against our competitors our business and operating
results could be adversely affected.
We operate in a competitive, fragmented market, and we compete for clients
and associates with a variety of organizations that offer similar services. The
competition is likely to increase in the future due to the expected growth of
the market and the relatively few barriers to entry. Our principal competitors
include:
. consulting firms;
. employees loaned by the Big Five accounting firms;
. traditional and Internet-based staffing firms; and
. the in-house resources of our clients.
We cannot assure you that we will be able to compete effectively against
existing or future competitors. Many of our competitors have significantly
greater financial resources, greater revenues and greater name recognition,
which may afford them an advantage in attracting and retaining clients and
associates. In addition, our competitors may be able to respond more quickly to
changes in companies' needs and developments in the professional services
industry.
An economic downturn or change in the use of outsourced professional services
associates could adversely affect our business.
Our business may be significantly affected if there is an economic
downturn. If the general level of economic activity slows, our clients may
delay or cancel plans that involve professional services, particularly
outsourced professional services. Consequently, the demand for our associates
could decline, resulting in a loss of revenues. In addition, the use of
professional services associates on a project-by-project basis could decline for
non-economic reasons. In the event of a non-economic reduction in the demand
for our associates, our financial results could suffer.
21
Our business depends upon our ability to secure new projects from clients and,
therefore, we could be adversely affected if we fail to do so.
We do not have long-term agreements with our clients for the provision of
services. The success of our business is dependent on our ability to secure new
projects from clients. For example, if we are unable to secure new client
projects because of improvements in our competitors' service offerings or
because of an economic downturn decreasing the demand for outsourced
professional services, our business is likely to be materially adversely
affected.
We may be unable to adequately protect our intellectual property rights,
including our brand name. If we fail to adequately protect our intellectual
property rights, the value of such rights may diminish and our results of
operations and financial condition may be adversely affected.
We believe that establishing, maintaining and enhancing the Resources
Connection brand name is essential to our business. We have filed an
application for a United States service mark registration of our name and logo.
We may be unable to secure this registration. We are aware of other
companies using the name "Resources Connection" or some variation thereof.
There could be potential trade name or trademark infringement claims brought
against us by the users of these similar names or trademarks, and those users
may have trademark rights that are senior to ours. If an infringement suit were
to be brought against us, the cost of defending such a suit could be
substantial. If the suit were successful, we could be forced to cease using the
service mark "Resources Connection". Even if an infringement claim is not
brought against us, it is also possible that our competitors or others will
adopt service names similar to ours or that our clients will be confused by
another company using a name or trademark similar to ours, thereby impeding our
ability to build brand identity. We cannot assure you that our business would
not be adversely affected if confusion did occur or if we are required to change
our name.
Our clients may be confused by the presence of competitors and other companies
that have names similar to our name.
We are aware of other companies using the name "Resources Connection" or
some variation thereof. Some of these companies provide outsourced services, or
are otherwise engaged in businesses that could be similar to ours. One company
has a web address that is nearly identical to ours,
"www.resourceconnection.com". The existence of these companies may confuse our
clients, thereby impeding our ability to build our brand identity.
We may be legally liable for damages resulting from the performance of projects
by our associates or for our clients' mistreatment of our associates.
Many of our engagements with our clients involve projects that are critical
to our clients' businesses. If we fail to meet our contractual obligations, we
could be subject to legal liability or damage to our reputation, which could
adversely affect our business, operating results and financial condition. It is
likely, because of the nature of our business, that we will be sued in the
future. Claims brought against us could have a serious negative effect on our
reputation and on our business, financial condition and results of operations.
Because we are in the business of placing our associates in the workplaces
of other companies, we are subject to possible claims by our associates alleging
discrimination, sexual harassment, negligence and other similar activities by
our clients. We may also be subject to similar claims from our clients based on
activities by our associates. The cost of defending such claims, even if
groundless, could be substantial and the associated negative publicity could
adversely affect our ability to attract and retain associates and clients.
We may not be able to grow our business, manage our growth or sustain our
current business.
We have grown rapidly since our inception in 1996 by opening new offices
and by increasing the volume of services we provide through existing offices.
There can be no assurance that we will continue to be able to maintain or expand
our market presence in our current locations or to successfully enter other
markets or locations. Our ability to successfully grow our business will depend
upon a number of factors, including our ability to:
22
. grow our client base;
. expand profitably into new cities;
. provide additional professional services lines;
. maintain margins in the face of pricing pressures; and
. manage costs.
Even if we are able to continue our growth, the growth will result in new
and increased responsibilities for our management as well as increased demands
on our internal systems, procedures and controls, and our administrative,
financial, marketing and other resources. Failure to adequately respond to
these new responsibilities and demands may adversely affect our business,
financial condition and results of operation.
An increase in our international activities will expose us to additional
operational challenges that we might not otherwise face.
As we increase our international activities, we will have to confront and
manage a number of risks and expenses that we would not otherwise face if we
conducted our operations solely in the United States. If any of these risks or
expenses occurs, there could be a material negative effect on our operating
results. These risks and expenses include:
. difficulties in staffing and managing foreign offices as a result of,
among other things, distance, language and cultural differences;
. expenses associated with customizing our professional services for
clients in foreign countries;
. foreign currency exchange rate fluctuations, when we sell our
professional services in denominations other than U.S. dollars;
. protectionist laws and business practices that favor local companies;
. political and economic instability in some international markets;
. multiple, conflicting and changing government laws and regulations;
. trade barriers;
. reduced protection for intellectual property rights in some countries;
and
. potentially adverse tax consequences.
We may acquire companies in the future, and these acquisitions could disrupt our
business.
We may acquire companies in the future. Entering into an acquisition
entails many risks, any of which could harm our business, including:
. diversion of management's attention from other business concerns;
. failure to integrate the acquired company with our existing business;
. failure to motivate, or loss of, key employees from either our
existing business or the acquired business;
23
. potential impairment of relationships with our employees and clients;
. additional operating expenses not offset by additional revenue;
. incurrence of significant non-recurring charges;
. incurrence of additional debt with restrictive covenants or other
limitations;
. dilution of our stock as a result of issuing equity securities; and
. assumption of liabilities of the acquired company.
We have a limited operating history as an independent company.
We commenced operations in June 1996 as a division of Deloitte & Touche.
From January 1997 through April 1999, we operated as a wholly owned subsidiary
of Deloitte & Touche. In April 1999, we were sold by Deloitte & Touche.
Therefore, our business as an independent company has a limited operating
history. Consequently, the historical and pro forma information contained in
this prospectus may not be indicative of our future financial condition and
performance.
The terms of our transition services agreement between Resources Connection and
Deloitte & Touche may not have been on terms indicative of those available from
an independent party.
As part of the management-led buyout in April 1999, we entered into a
transition services agreement with Deloitte & Touche under which Deloitte &
Touche agreed to provide certain services to us at negotiated rates until none
of our offices remained in Deloitte & Touche office space, which occurred on
August 31, 2000. The negotiated rates we agreed to pay to Deloitte & Touche
under the transition services agreement may not be indicative of the rates that
an independent third party would have charged us for providing the same
services. Specifically, an independent third party may have charged us rates
more or less favorable than those charged by Deloitte & Touche. If the terms of
the transition services agreement, particularly the rates charged by Deloitte &
Touche, were more favorable to us than those available from a third party, our
general and administrative expenses will likely increase.
Our business could suffer if we lose the services of one or more key members of
our management.
Our future success depends upon the continued employment of Donald B.
Murray, our chief executive officer, and Stephen J. Giusto, our chief financial
officer. The departure of Mr. Murray, Mr. Giusto or any of the other key
members of our senior management team could significantly disrupt our
operations. Key members of our senior management team include Karen M. Ferguson
and Brent M. Longnecker, both of whom are executive vice presidents, John D.
Bower, our vice president, finance, and Kate W. Duchene, our chief legal officer
and executive vice president of human relations. We do not have employment
agreements with Mr. Bower or Ms. Duchene.
Deloitte & Touche has agreed not to compete with us and we may be adversely
affected when the noncompete expires.
In connection with the management buy-out, Deloitte & Touche agreed not to
compete with us in a manner that replicates our business model for a period
ending on the earlier of April 1, 2003 or the date that Deloitte & Touche enters
into a significant business combination. The noncompete does not prohibit
Deloitte & Touche from using their personnel in a loaned staff capacity or from
allowing their personnel to work on a less than full time basis in accordance
with the human resources policies of Deloitte & Touche. When the noncompete
expires, we may be adversely affected if Deloitte & Touche chooses to compete in
a manner previously prohibited by the noncompete.
24
Our quarterly financial results may be subject to significant fluctuations that
may increase the volatility of our stock price.
Our results of operations could vary significantly from quarter to quarter.
We anticipate that revenues in the first quarter of fiscal 2002 will be no more
than and will likely be less than in the quarter ended May 31, 2001. Factors
that could affect our quarterly operating results include:
. our ability to attract new clients and retain current clients;
. the mix of client projects;
. the announcement or introduction of new services by us or any of our
competitors;
. the expansion of the professional services offered by us or any of our
competitors into new locations both nationally and internationally;
. changes in the demand for our services by our clients;
. the entry of new competitors into any of our markets;
. the number of holidays in a quarter, particularly the day of
the week on which they occur;
. changes in the pricing of our professional services or those of our
competitors;
. the amount and timing of operating costs and capital expenditures
relating to management and expansion of our business; and
. the timing of acquisitions and related costs, such as compensation
charges that fluctuate based on the market price of our common stock.
Due to these factors, we believe that quarter-to-quarter comparisons of our
results of operations are not meaningful indicators of future performance. It is
possible that in some future periods, our results of operations may be below the
expectations of investors. If this occurs, the price of our common stock could
decline.
We may be subject to laws and regulations that impose difficult and costly
compliance requirements and subject us to potential liability and the loss of
clients.
In connection with providing services to clients in certain regulated
industries, such as the gaming and energy industries, we are subject to
industry-specific regulations, including licensing and reporting requirements.
Complying with these requirements is costly and, if we fail to comply, we could
be prevented from rendering services to clients in those industries in the
future.
Our stock price has been volatile, and you may lose all or substantially all of
your investment.
The market price of our common stock has fluctuated widely in the past and
is likely to continue to fluctuate in the future. Fluctuations in the market
price of our common stock could occur in response to factors such as:
. loss of a significant client or group of clients;
. changes in market valuations of professional services companies;
. improvements in the outsourcing of professionals by our competitors;
and
. the introduction of new competitors in the market for outsourced
professionals.
In addition to these specific factors, companies listed on the Nasdaq Stock
Market's National Market have recently experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of companies listed on these markets. Our common stock is listed on
The Nasdaq Stock Market's National Market and therefore has and will be subject
to this volatility. The volatility of the market may materially adversely affect
the market price of our common stock, regardless of our actual operating
performance.
Substantial sales of our common stock by our existing investors could cause our
stock price to decline.
We have 20,792,080 shares of common stock outstanding, assuming no exercise
of options after June 30, 2001. Of this amount 8,075,990 shares are freely
tradable as of June 30, 2001, without restriction in the public market unless
purchased by "affiliates" of ours as that term is defined in Rule 144 under the
Securities Act.
If our existing stockholders sell substantial amounts of our common stock,
including shares issued upon the exercise of outstanding options, in the
public market, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a time and price that we deem appropriate.
Certain of our existing stockholders have the ability to exercise control over
us, and they may make decisions with which you disagree.
Under a stockholders agreement entered into prior to our initial public
offering, certain entities affiliated with Evercore Partners, L.L.C., or the
Evercore Partners, have agreed to vote their shares in favor of board nominees
designated by some of our management stockholders -- Donald B. Murray, Stephen
J. Giusto, Karen M. Ferguson and Brent M. Longnecker -- and these management
stockholders have agreed to vote their shares in favor of board nominees
designated by the Evercore Partners. Collectively, the Evercore Partners and the
management stockholders have designated five of our nine current directors. In
addition, the Evercore Partners, together with our executive officers, directors
and principal stockholders, collectively own approximately 40.8% of the
outstanding shares of our common stock. As a result, Evercore Partners Inc.
and/or these other stockholders will be able to control us and direct our
affairs, including the election of directors and approval of significant
corporate transactions. This control of our board of directors also may delay,
defer or even prevent a change in control of our company, and make some
transactions more difficult or impossible without the support of these
stockholders. These transactions might include proxy contests, tender offers,
mergers or other purchases of common stock that could give you the opportunity
to realize a premium over the then-prevailing market price for shares of our
common stock.
It may be difficult for a third party to acquire our company, and this could
depress our stock price.
Delaware corporate law and our second restated certificate of incorporation
and bylaws contain provisions that could delay, defer or prevent a change of
control of our company or our management. These provisions could also discourage
proxy contests and make it difficult for you and other stockholders to elect
directors and take other corporate actions. As a result, these provisions could
limit the price that future investors are willing to pay for your shares. These
provisions:
. authorize our board of directors to establish one or more series of
undesignated preferred stock, the terms of which can be determined by
the board of directors at the time of issuance;
. divide our board of directors into three classes of directors, with
each class serving a staggered three-year term. Because the
classification of the board of directors generally increases the
difficulty of replacing a majority of the directors, it may tend to
discourage a third party from making a tender offer or otherwise
attempting to obtain control of us and may make it difficult to change
the composition of the board of directors;
. prohibit cumulative voting in the election of directors which, if not
prohibited, could allow a minority stockholder holding a sufficient
percentage of a class of shares to ensure the election of one or more
directors;
. require that any action required or permitted to be taken by our
stockholders must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in
writing;
. state that special meetings of our stockholders may be called only by
the chairman of the board of directors, our chief executive officer,
by the board of directors after a resolution is adopted by a majority
of the total number of authorized directors, or by the holders of not
less than 10% of our outstanding voting stock;
. establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that
can be acted upon by stockholders at a meeting;
. provide that certain provisions of our certificate of incorporation
can be amended only by supermajority vote of the outstanding shares
and that our bylaws can be amended only by supermajority vote of the
outstanding shares of our board of directors;
. allow our directors, not our stockholders, to fill vacancies on our
board of directors; and
. provide that the authorized number of directors may be changed only
by resolution of the board of directors.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. At the end of fiscal 2001, we had approximately $34.5
million of cash and highly liquid short-term investments. These investments are
subject to changes in interest rates, and to the extent interest rates were to
decline, it would reduce our interest income.
Foreign Currency Exchange Rate Risk. To date, our foreign operations have
not been significant to our overall operations, and our exposure to foreign
currency exchange rate risk has been low. However, as our strategy to continue
expanding foreign operations progresses, we expect more of our revenues will be
derived from foreign operations denominated in the currency of the applicable
markets. As a result, our operating results could become subject to
fluctuations based upon changes in the exchange rates of foreign currencies in
relation to the U.S. dollar. Although we intend to monitor our exposure to
foreign currency fluctuations, including the use of financial hedging techniques
when we deem it appropriate, we cannot assure you that exchange rate
fluctuations will not adversely affect our financial results in the future.
25
Item 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
Page
----
RESOURCES CONNECTION, INC.
Report of Independent Accountants........................................ 27
Consolidated Balance Sheets as of May 31, 2000 and 2001.................. 28
Consolidated Statements of Income for the period from inception, November
16, 1998, through May 31, 1999 and for each of the two years in the
period ended May 31, 2001............................................... 29
Consolidated Statements of Stockholders' Equity for the period from
inception, November 16, 1998, through May 31, 1999 and for each of the
two years in the period ended May 31, 2001.............................. 30
Consolidated Statements of Cash Flows for the period from inception,
November 16, 1998, through May 31, 1999 and for each of the two years in
the period ended May 31, 2001........................................... 31
Notes to Consolidated Financial Statements............................... 32
RESOURCES CONNECTION LLC
Report of Independent Accountants........................................ 45
Statement of Income for the period from June 1, 1998 through March 31,
1999.................................................................... 46
Statement of Cash Flows for the period from June 1, 1998 through March
31, 1999................................................................ 47
Notes to Financial Statements............................................ 48
SCHEDULES
RESOURCES CONNECTION, INC.
Report of Independent Accountants on Financial Statement Schedule........ 71
Schedule II -- Valuation and Qualifying Accounts for the period from
inception, November 16, 1998, through May 31, 1999 and for each of the
two years in the period ended May 31, 2001.............................. 72
RESOURCES CONNECTION LLC
Report of Independent Accountants on Financial Statement Schedule........ 73
Schedule II -- Valuation and Qualifying Accounts for the period from
June 1, 1998, through March 31, 1999.................................... 74
26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors
of Resources Connection, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Resources
Connection, Inc., formerly RC Transaction Corp., and its subsidiaries at May
31, 2000 and 2001, and the results of their operations and their cash flows for
the period from inception, November 16, 1998 through May 31, 1999, and the
years ended May 31, 2000 and 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Orange County, California
July 2, 2001
27
RESOURCES CONNECTION, INC.
CONSOLIDATED BALANCE SHEETS
May 31,
-------------------------
2000 2001
----------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents......................... $ 4,490,000 $ 34,503,000
Trade accounts receivable, net of allowance for
doubtful accounts of $1,586,000 and $2,450,000 as
of May 31, 2000 and 2001, respectively........... 18,166,000 23,908,000
Deferred income taxes............................. 1,300,000 2,349,000
Prepaid expenses and other current assets......... 746,000 853,000
----------- ------------
Total current assets............................ 24,702,000 61,613,000
Intangible assets, net............................ 41,583,000 38,445,000
Property and equipment, net....................... 3,196,000 4,085,000
Other assets...................................... 625,000 1,202,000
----------- ------------
Total assets.................................... $70,106,000 $105,345,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses............. $ 2,519,000 $ 2,479,000
Accrued salaries and related obligations.......... 7,450,000 15,046,000
Other liabilities................................. 801,000 1,123,000
Current portion of term loan...................... 6,268,000
----------- ------------
Total current liabilities....................... 17,038,000 18,648,000
Deferred income taxes............................. 380,000 665,000
Term loan......................................... 10,232,000
Subordinated notes payable........................ 25,271,000
----------- ------------
Total liabilities............................... 52,921,000 19,313,000
----------- ------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000
shares authorized;
zero shares issued and outstanding..............
Common stock, $0.01 par value, 35,000,000 shares
authorized; 15,630,000 and 20,735,000 shares
issued and outstanding as of May 31, 2000 and
2001, respectively.............................. 156,000 207,000
Additional paid-in capital....................... 10,222,000 66,507,000
Deferred stock compensation...................... (499,000) (1,507,000)
Accumulated other comprehensive loss............. (32,000) (53,000)
Notes receivable from stockholders............... (164,000)
Retained earnings................................ 7,338,000 21,043,000
Treasury stock, at cost, zero shares at May 31,
2000 and 48,000 shares at May 31, 2001.......... (1,000)
----------- ------------
Total stockholders' equity...................... 17,185,000 86,032,000
----------- ------------
Total liabilities and stockholders' equity...... $70,106,000 $105,345,000
=========== ============
The accompanying notes are an integral part of these financial statements.
28
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF INCOME
For The Period
From Inception,
November 16, For The Year Ended
1998, Through -------------------------
May 31, May 31, May 31,
1999 2000 2001
--------------- ------------ ------------
Revenue............................. $15,384,000 $126,332,000 $189,752,000
Direct cost of services, primarily
payroll and related taxes for
professional services employees.... 8,618,000 73,541,000 110,811,000
----------- ------------ ------------
Gross profit...................... 6,766,000 52,791,000 78,941,000
Selling, general and administrative
expenses........................... 4,274,000 34,648,000 49,964,000
Amortization of intangible assets... 371,000 2,231,000 2,273,000
Depreciation expense................ 30,000 285,000 866,000
----------- ------------ ------------
Income from operations............ 2,091,000 15,627,000 25,838,000
Interest income..................... (633,000)
Interest expense.................... 734,000 4,717,000 2,676,000
----------- ------------ ------------
Income before provision for income
taxes and extraordinary charge... 1,357,000 10,910,000 23,795,000
Provision for income taxes.......... 565,000 4,364,000 9,518,000
----------- ------------ ------------
Income before extraordinary
charge........................... 792,000 6,546,000 14,277,000
Extraordinary charge, net of tax
effect of $381,000................. 572,000
----------- ------------ ------------
Net income........................ $ 792,000 $ 6,546,000 $ 13,705,000
=========== ============ ============
Net income per common share:
Basic before extraordinary
charge........................... $ 0.09 $ 0.42 $ 0.80
Extraordinary charge.............. 0.03
----------- ------------ ------------
Basic............................. $ 0.09 $ 0.42 $ 0.77
=========== ============ ============
Diluted before extraordinary
charge........................... $ 0.09 $ 0.42 $ 0.74
Extraordinary charge.............. 0.03
----------- ------------ ------------
Diluted........................... $ 0.09 $ 0.42 $ 0.71
=========== ============ ============
Weighted average common shares
outstanding:
Basic............................. 8,691,000 15,630,000 17,864,000
=========== ============ ============
Diluted........................... 8,691,000 15,714,000 19,421,000
=========== ============ ============
The accompanying notes are an integral part of these financial statements.
29
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Notes Accumulated
Common Stock Additional Deferred Treasury Stock Receivable Other
------------------- Paid-In Stock ----------------- from Comprehensive Retained
Shares Amount Capital Compensation Shares Amount Stockholders Loss Earnings
---------- -------- ----------- ------------ ------- -------- ------------ ------------- -----------
Issuance of
common shares to
founders for
cash............. 5,630,000 $ 56,000 $ -- $ -- -- $ -- $ -- $ -- $ --
Issuance of
common shares for
cash............. 9,855,000 99,000 9,757,000
Issuance of Class
B common shares
for cash......... 145,000 1,000 143,000
Issuance costs of
common shares.... (238,000)
Deferred stock
compensation..... 37,000 (37,000)
Net income for
the period from
inception,
November 16,
1998, through May
31, 1999......... 792,000
---------- -------- ----------- ----------- ------- -------- --------- -------- -----------
Balances as of
May 31, 1999..... 15,630,000 156,000 9,699,000 (37,000) 792,000
Deferred stock
compensation..... 523,000 (523,000)
Amortization of
deferred stock
compensation..... 61,000
Comprehensive
income:
Currency
translation
adjustment, net
of tax ......... (32,000)
Net income for
the year ended
May 31, 2000 ... 6,546,000
Total
comprehensive
income...........
---------- -------- ----------- ----------- ------- -------- --------- -------- -----------
Balances as of
May 31, 2000..... 15,630,000 156,000 10,222,000 (499,000) (32,000) 7,338,000
Initial public
offering of
common stock..... 5,000,000 50,000 55,750,000
Costs related to
stock offering... (1,690,000)
Exercise of stock
options.......... 105,000 1,000 369,000
Repurchase of
treasury stock... 123,000 (45,000)
Reissuance of
treasury stock... 469,000 (75,000) 44,000 (164,000)
Deferred stock
compensation..... 1,387,000 (1,387,000)
Amortization of
deferred stock
compensation..... 379,000
Comprehensive
income:
Currency
translation
adjustment, net
of tax.......... (21,000)
Net income for
the year ended
May 31, 2001.... 13,705,000
Total
comprehensive
income...........
---------- -------- ----------- ----------- ------- -------- --------- -------- -----------
Balances as of
May 31, 2001..... 20,735,000 $207,000 $66,507,000 $(1,507,000) 48,000 $ (1,000) $(164,000) $(53,000) $21,043,000
========== ======== =========== =========== ======= ======== ========= ======== ===========
Total
Stockholders'
Equity
-------------
Issuance of
common shares to
founders for
cash............. $ 56,000
Issuance of
common shares for
cash............. 9,856,000
Issuance of Class
B common shares
for cash......... 144,000
Issuance costs of
common shares.... (238,000)
Deferred stock
compensation.....
Net income for
the period from
inception,
November 16,
1998, through May
31, 1999......... 792,000
-------------
Balances as of
May 31, 1999..... 10,610,000
Deferred stock
compensation.....
Amortization of
deferred stock
compensation..... 61,000
Comprehensive
income:
Currency
translation
adjustment, net
of tax ......... (32,000)
Net income for
the year ended
May 31, 2000 ... 6,546,000
-------------
Total
comprehensive
income........... 6,514,000
-------------
Balances as of
May 31, 2000..... 17,185,000
Initial public
offering of
common stock..... 55,800,000
Costs related to
stock offering... (1,690,000)
Exercise of stock
options.......... 370,000
Repurchase of
treasury stock... (45,000)
Reissuance of
treasury stock... 349,000
Deferred stock
compensation.....
Amortization of
deferred stock
compensation..... 379,000
Comprehensive
income:
Currency
translation
adjustment, net
of tax.......... (21,000)
Net income for
the year ended
May 31, 2001.... 13,705,000
-------------
Total
comprehensive
income........... 13,684,000
-------------
Balances as of
May 31, 2001..... $86,032,000
=============
The accompanying notes are an integral part of these financial statements.
30
RESOURCES CONNECTION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Period
From Inception, For the
November 16, Year Ended May 31,
1998, Through -------------------------
May 31, 1999 2000 2001
--------------- ----------- ------------
Cash flows from operating activities
Net income........................ $ 792,000 $ 6,546,000 $ 13,705,000
Adjustments to reconcile net
income to net cash provided by
operating activities, net of
effects of acquisition of
Resources Connection LLC in
April, 1999:
Depreciation and amortization... 401,000 2,516,000 3,139,000
Amortization of debt issuance
costs.......................... 12,000 298,000 130,000
Amortization of deferred stock
compensation................... 61,000 379,000
Bad debt expense................ 200,000 1,048,000 2,110,000
Extraordinary charge............ 953,000
Changes in operating assets and
liabilities:
Trade accounts receivable..... (1,217,000) (7,302,000) (7,852,000)
Prepaid expenses and other
current assets............... (509,000) 75,000 144,000
Other assets.................. (167,000) (484,000) (598,000)
Accounts payable and accrued
expenses..................... 768,000 35,000 (33,000)
Accrued salaries and related
obligations.................. (573,000) 4,722,000 7,596,000
Other liabilities............. 312,000 219,000 322,000
Accrued interest payable
portion of notes payable..... 431,000 2,840,000 1,680,000
Deferred income taxes......... 559,000 (68,000) (764,000)
------------ ----------- ------------
Net cash provided by
operating activities....... 1,009,000 10,506,000 20,911,000
------------ ----------- ------------
Cash flows from investing activities
Purchase of Resources Connection
LLC, net of cash acquired and
including transaction costs...... (50,867,000) (271,000) (225,000)
Purchases of property and
equipment........................ (21,000) (3,021,000) (1,755,000)
------------ ----------- ------------
Net cash used in investing
activities................. (50,888,000) (3,292,000) (1,980,000)
------------ ----------- ------------
Cash flows from financing activities
Proceeds from initial public
offering of common stock......... 55,800,000
Initial public offering costs..... (1,690,000)
Proceeds from exercise of stock
options.......................... 370,000
Proceeds from reissuance of
treasury stock................... 98,000
Purchases of treasury stock....... (45,000)
Proceeds from issuance of
subordinated notes payable....... 22,000,000
Proceeds from term loan........... 18,000,000
Payments on term loan............. (1,500,000) (16,500,000)
Payment on subordinated notes..... (26,951,000)
Net borrowings (repayments) on
revolving loan................... 2,100,000 (2,100,000)
Costs of debt issuances........... (1,163,000)
Issuance of common stock.......... 10,056,000
Costs of equity issuances......... (238,000)
------------ ----------- ------------
Net cash provided by (used
in) financing activities... 50,755,000 (3,600,000) 11,082,000
------------ ----------- ------------
Net increase in cash.............. 876,000 3,614,000 30,013,000
Cash and cash equivalents at
beginning of period.............. -- 876,000 4,490,000
------------ ----------- ------------
Cash and cash equivalents at end
of period........................ $ 876,000 $ 4,490,000 $ 34,503,000
============ =========== ============
The accompanying notes are an integral part of these financial statements.
31
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and its Business
Resources Connection, Inc., formerly RC Transaction Corp., was incorporated
on November 16, 1998. The Company provides professional services to a variety
of industries and enterprises through its subsidiary, Resources Connection LLC
("LLC"), and foreign subsidiaries (collectively the "Company"). Prior to its
acquisition of LLC on April 1, 1999 (see Note 3), Resources Connection, Inc.
had no substantial operations. LLC, which commenced operations in June 1996,
provides clients with experienced professionals who specialize in accounting,
finance, tax, information technology and human resources on a project-by-
project basis. The Company operates in the United States, Canada, Hong Kong and
Taiwan. The Company is a Delaware corporation. LLC is a Delaware organized
limited liability company.
The Company's fiscal year consists of 52 or 53 weeks, ending on the Saturday
in May nearest the last day of May in each year. For convenience, all
references herein to years or periods are to years or periods ended May 31. The
period ended May 31, 1999 consists of 28 weeks, which includes 8 weeks of
operations of LLC. The fiscal years ended May 31, 2000 and 2001 consist of 52
weeks.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Revenue Recognition
Revenues are recognized and billed when services are rendered by the
Company's professionals. Non-refundable conversion fees are recognized when one
of the Company's professionals accepts an offer of permanent employment from a
client. Conversion fees were less than 3% of revenue for the year ended May 31,
2001 and were less than 4% of revenue for the period ended May 31, 1999 and for
the year ended May 31, 2000. All costs of compensating the Company's
professionals are the responsibility of the Company and are included in direct
cost of services.
Foreign Currency Translation
The financial statements of subsidiaries outside the United States are
generally measured using the local currency as the functional currency. Assets
and liabilities of these subsidiaries are translated at current exchange rates,
income and expense items are translated at average exchange rates prevailing
during the period and the related translation adjustments are recorded as a
component of comprehensive income or loss within stockholders' equity. Gains
and losses from foreign currency transactions are included in the consolidated
statements of income.
Per Share Information
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share," which establishes standards for the computation,
presentation and disclosure requirements for basic and diluted earnings per
share for entities with publicly held common shares and potential common
shares. Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding. In computing diluted
earnings per share, the weighted average number of shares outstanding is
adjusted to reflect the effect of potentially dilutive securities.
32
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Potential common shares totaling 751,000 were not included in the diluted
earnings per share amounts for the year ended May 31, 2000 as their effect
would have been anti-dilutive. For the years ended May 31, 2000 and 2001,
potentially dilutive securities consisted solely of stock options and resulted
in potential common shares of 84,000 and 1,557,000, respectively.
Cash and Cash Equivalents
The Company considers cash on hand, deposits in banks, and short-term
investments purchased with an original maturity date of three months or less to
be cash and cash equivalents. The carrying amounts reflected in the
consolidated balance sheets for cash and cash equivalents approximate the fair
values due to the short maturities of these instruments.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the related assets which range from 3
to 10 years. Leasehold improvements are amortized using the straight-line
method over the estimated useful life of the asset or the term of the lease,
whichever is shorter. Costs for normal repairs and maintenance are expensed to
operations as incurred, while renewals and major refurbishments are
capitalized.
Assessments of whether there has been a permanent impairment in the value of
property and equipment are periodically performed by considering factors such
as expected future operating income, trends and prospects, as well as the
effects of demand, competition and other economic factors. Management believes
no permanent impairment has occurred.
Intangible Assets
Goodwill represents the purchase price of LLC in excess of the fair market
value of its net tangible assets at acquisition date, and is being amortized on
a straight-line basis over 20 years. A noncompete agreement is stated at cost
and amortized on a straight-line basis over the four-year life of the
agreement. The costs related to the issuance of debt were capitalized and
amortized to interest expense on a straight-line basis over the 4.5 year life
of the related debt. Debt issuance costs of $12,000, $298,000 and $130,000 were
amortized to interest expense for the period ended May 31, 1999 and the years
ended May 31, 2000 and 2001, respectively.
During the quarter ended February 28, 2001, the Company repaid the
outstanding balance of its term loan and subordinated debt of approximately
$38.8 million using a portion of the proceeds of the Company's initial public
offering of its common stock; consequently, the remaining balance of
unamortized debt issuance costs associated with the Company's term loan and
subordinated debt were written off, resulting in an extraordinary charge of
$572,000 (net of income tax effect of $381,000).
The carrying value of intangible assets is periodically reviewed by
management and impairment adjustments are recognized when the expected
undiscounted future operating cash flows to be derived from such intangible
assets are less than their carrying value. If such assets are considered to be
impaired the impairment to be recognized is measured by the amount by which the
carrying value of the assets exceeds the expected discounted future operating
cash flows arising from the asset. The Company believes that no impairment of
intangible assets has occurred (see Recent Accounting Pronouncements for
information on SFAS No. 142 "Goodwill and Other Intangibles" and its impact on
goodwill amortization).
33
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest Rate Swap
During fiscal 1999, the Company entered into an interest rate swap to manage
its term loan debt with the objective of minimizing the volatility of the
Company's borrowing cost. At May 31, 2000, the Company fixed the interest rate
on a notional amount of $12.6 million. Net payments or receipts under the
agreement were recorded in interest expense on a current basis. As a result of
the repayment of the term loan debt on December 20, 2000, the interest rate
swap agreement was terminated. The Company recognized interest expense upon the
termination of the agreement of approximately $218,000 during the year ended
May 31, 2001.
Stock-Based Compensation
The Company has adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation" for measurement and recognition of
employee stock-based transactions. SFAS No. 123 defines a fair value based
method of accounting for stock based compensation. Fair value of the stock
based awards is determined considering factors such as the exercise price, the
expected life of the award, the current price of the underlying stock and its
volatility, expected dividends on the stock, and the risk-free interest rate
for the expected term of the award. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period.
The Company continues to measure compensation cost under the intrinsic value
method provided by Accounting Principles Board Opinion No. 25 ("APB 25") and to
include the required pro forma disclosures. Under the intrinsic value method,
compensation cost is measured at the grant date as the difference between the
estimated market value of the underlying stock and the exercise price.
Compensation cost is recognized ratably over the service period.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this method, deferred income taxes are
recognized for the estimated tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end based on enacted tax laws and statutory rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established to reduce deferred tax
assets to the amount expected to be realized when, in management's opinion, it
is more likely than not that some portion of the deferred tax assets will not
be realized. The provision for income taxes represents current taxes payable
net of the change during the period in deferred tax assets and liabilities.
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101)
entitled "Revenue Recognition," which outlines the basic criteria that must be
met to recognize revenue and provides guidance for the presentation of revenue
and for disclosure related to revenue recognition policies in financial
statements filed with the SEC. The adoption of SAB 101 did not have a material
impact on the Company's consolidated financial statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44 ("FIN 44"), entitled "Accounting for Certain Transactions
Involving Stock Compensation," which is an interpretation of APB 25. This
interpretation clarifies:
. the definition of an employee for purposes of applying APB 25;
. the criteria for determining whether a plan qualifies as a
noncompensatory plan;
34
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. the accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and
. the accounting for an exchange of stock compensation awards in a
business combination.
This interpretation was effective July 1, 2000. Management believes that the
adoption of FIN 44 did not have a material impact on the Company's consolidated
financial statements.
In June 2001, the FASB approved SFAS No. 141, "Business Combinations" and is
currently finalizing this statement with an expected issuance in July 2001.
Under its proposed changes, SFAS No. 141 establishes new standards for
accounting and reporting requirements for business combinations and will
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method will be prohibited. The Company expects to adopt this statement during
the first quarter of fiscal 2002. Management does not believe that SFAS No. 141
will have a material impact on the Company's consolidated financial statements.
In June 2001, the FASB approved SFAS No. 142, "Goodwill and Other Intangible
Assets," which supercedes APB Opinion No. 17, "Intangible Assets". The FASB is
currently finalizing this statement with an expected issuance in July 2001.
Under its proposed changes, SFAS No. 142 establishes new standards for goodwill
acquired in a business combination and eliminates amortization of goodwill and
instead sets forth methods to periodically evaluate goodwill for impairment.
The Company expects to adopt this statement during the first quarter of fiscal
2002. During the year ended May 31, 2001, goodwill amortization totaled
$2.1 million.
Reclassifications
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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. Although management believes these estimates and assumptions
are adequate, actual results could differ from the estimates and assumptions
used.
3. Resources Connection LLC Acquisition
On April 1, 1999, the Company completed the acquisition of all of the
outstanding membership interests of LLC for approximately $55 million in cash,
excluding cash acquired and transaction costs. The Company has accounted for
this transaction under the purchase method of accounting. The purchase price
exceeded the estimated fair value of LLC's net tangible assets by approximately
$43.3 million, which was allocated to intangible assets, consisting of goodwill
of $42.8 and a noncompete agreement of $500,000. The results of operations of
LLC are included in the consolidated statements of income from the date of
acquisition.
In connection with this acquisition, the Company entered into a transition
services agreement ("Agreement") with the seller whereby the seller agreed to
provide certain services (as defined in the Agreement) to the Company at
negotiated terms during the period the Company maintained offices within the
seller's locations. The use of the services may not necessarily have been
provided at terms available from third parties. Therefore, the accompanying
financial statements of the Company may not necessarily be indicative of
35
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the financial position and results that would have occurred if the Company had
undertaken such transactions with third parties. The Company's management was
unable to determine the availability and the cost of similar services had they
been provided by third parties. Total expenses under the Agreement were
approximately $300,000, $1.3 million and $64,000 for the period from November
16, 1998 to May 31, 1999 and the years ended May 31, 2000 and 2001,
respectively. At May 31, 1999 and 2000, the Company maintained 25 and
5 offices, respectively, within the seller's locations. The Company completed
all relocations by August 31, 2000.
4. Property and Equipment
Property and equipment consist of the following at May 31:
2000 2001
----------- ----------
Computers and equipment............................. $ 2,440,000 $3,458,000
Furniture........................................... 548,000 1,142,000
Leasehold improvements.............................. 523,000 666,000
----------- ----------
3,511,000 5,266,000
Less accumulated depreciation and amortization...... (315,000) (1,181,000)
----------- ----------
$ 3,196,000 $4,085,000
=========== ==========
5. Intangible Assets
Intangible assets consist of the following at May 31:
2000 2001
------------ -----------
Noncompete agreement.............................. $ 500,000 $ 500,000
Goodwill.......................................... 42,832,000 42,832,000
Debt issuance costs............................... 1,163,000
------------ -----------
44,495,000 43,332,000
Less accumulated amortization..................... (2,912,000) (4,887,000)
------------ -----------
$ 41,583,000 $38,445,000
============ ===========
36
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
The following table represents the current and deferred income tax provision
for federal and state income taxes attributable to operations:
For The Period
From Inception,
November 16, 1998, For The Year For The
Through Ended Year Ended
May 31, 1999 May 31, 2000 May 31, 2001
------------------ ------------ ------------
Current
Federal...................... $ -- $3,570,000 $ 8,428,000
State........................ 6,000 862,000 1,854,000
-------- ---------- -----------
6,000 4,432,000 10,282,000
-------- ---------- -----------
Deferred
Federal...................... 439,000 (83,000) (610,000)
State........................ 120,000 15,000 (154,000)
-------- ---------- -----------
559,000 (68,000) (764,000)
-------- ---------- -----------
$565,000 $4,364,000 $ 9,518,000
======== ========== ===========
The components of the provision for deferred income taxes are as follows:
For The Period
From Inception,
November 16, 1998, For The Year For The Year
Through Ended Ended
May 31, 1999 May 31, 2000 May 31, 2001
------------------ ------------ ------------
Allowance for doubtful
accounts..................... $ 20,000 $(276,000) $(376,000)
Property and equipment........ (1,000) 67,000 58,000
Goodwill and noncompete
agreement.................... 47,000 266,000 259,000
Accrued liabilities........... 536,000 4,000 (673,000)
State taxes................... (43,000) (129,000) (32,000)
-------- --------- ---------
Net deferred income tax
provision.................... $559,000 $ (68,000) $(764,000)
======== ========= =========
The provision for income taxes from operations differs from the amount that
would result from applying the federal statutory rate as follows:
For The Period
From Inception,
November 16, 1998, For The For The
Through Year Ended Year Ended
May 31, 1999 May 31, 2000 May 31, 2001
------------------ ------------ ------------
Statutory tax rate............ 34.0% 34.0% 34.0%
State taxes, net of federal
benefit...................... 6.1% 5.4% 5.5%
Other, net.................... 1.5% 0.6% 0.5%
---- ---- ----
Effective tax rate............ 41.6% 40.0% 40.0%
==== ==== ====
37
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the net deferred tax asset consist of the following as of
May 31:
2000 2001
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts................. $ 657,000 $1,033,000
Accrued expenses................................ 583,000 1,257,000
State taxes..................................... 75,000 106,000
---------- ----------
1,315,000 2,396,000
---------- ----------
Deferred tax liabilities:
Property and equipment.......................... (83,000) (141,000)
Goodwill and noncompete agreement............... (312,000) (571,000)
---------- ----------
(395,000) (712,000)
---------- ----------
Net deferred tax asset............................ $ 920,000 $1,684,000
========== ==========
Current taxes payable were $282,000 and $328,000 at May 31, 2000 and 2001,
respectively, and is included as a component of other liabilities.
7. Accrued Salaries and Related Obligations
Accrued salaries and related obligations consist of the following as of May
31:
2000 2001
---------- -----------
Accrued salaries, bonuses and related
obligations.................................... $5,838,000 $12,507,000
Accrued vacation................................ 1,612,000 2,539,000
---------- -----------
$7,450,000 $15,046,000
========== ===========
8. Long-Term Obligations (Term Loan, Revolving Credit and Subordinated Notes
Payable)
In April 1999, in connection with the acquisition of LLC, the Company
entered into a $28 million credit agreement with a group of banks which
provided for an $18 million term loan facility and a $10 million revolving
credit facility, including a standby letter of credit feature (the "Credit
Agreement"). The Credit Agreement expires October 1, 2003. On December 20,
2000, the $11.9 million remaining balance on the term loan was repaid using a
portion of the proceeds from the Company's initial offering of its common stock.
Per the terms of the Credit Agreement, the term loan facility was terminated
upon the repayment. There were no outstanding borrowings on the revolving credit
facility at May 31, 2000 and 2001. Borrowings under the Credit Agreement are
collateralized by all of the Company's assets.
In November 2000, the Company and the group of participating banks amended
the Credit Agreement to provide for a reduction in the interest rate charged on
borrowings under the revolving credit facility. The amendment provides a range
of interest rates from the bank's Prime rate plus 0.5% to 1.5% or a
Eurodollar-based rate plus 1.5% to 2.5% dependent upon the Company's leverage
ratio, as defined, at the date of borrowing. Since the effective date of the
amendment, there have been no borrowings under the revolving credit facility.
In addition, an annual facility fee of 0.05% is payable on the unutilized
portion of the $10 million revolving credit facility.
The Credit Agreement contains certain financial and other restrictive
covenants. These covenants include, but are not limited to, a restriction on
the amount of dividends that may be distributed to stockholders, and
maintaining defined levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), a debt leverage ratio and an interest coverage ratio.
The Company was in compliance with these covenants as of May 31, 2000 and 2001.
38
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To facilitate the acquisition of LLC in April 1999, the Company issued
$22,000,000 in 12% subordinated promissory notes (the "Notes") to certain
investors. The Notes and interest deferred under the terms of the Notes were
repaid on December 20, 2000 using a portion of the proceeds from the Company's
initial offering of its common stock.
9. Concentrations of Credit Risk
The Company maintains cash and cash equivalent balances with a high credit
quality financial institution. At times, such balances are in excess of
federally insured limits.
Financial instruments which potentially subject the Company to concentration
of credit risk consist primarily of trade receivables. However, concentrations
of credit risk are limited due to the large number of customers comprising the
Company's customer base and their dispersion across different business and
geographic areas. The Company monitors its exposure to credit losses and
maintains an allowance for anticipated losses. To reduce credit risk, the
Company performs credit checks on certain customers.
10. Stockholders' Equity
The Company has authorized for issuance 35,000,000 shares of common stock
with a $0.01 par value. At May 31, 2000 and 2001, there were 15,630,000, and
20,735,000 shares outstanding of common stock, respectively, all of which are
voting.
The Company has authorized for issuance 5,000,000 shares of preferred stock
with a $0.01 par value. The Board of Directors has the authority to issue
preferred stock in one or more series and to determine the related rights and
preferences. No shares of preferred stock were outstanding at May 31, 2000 and
2001.
The Company issued 5,630,000 shares of its common stock to founding
stockholders at a price of $0.01 per share (see Note 14).
In April 1999, the Company issued 10,000,000 units at a price of $3.20 per
unit, each unit consisting of one share of common stock at $1.00 per unit and a
subordinated promissory note of $2.20 per unit (see Note 8).
On December 14, 2000, the SEC declared the Company's registration statement
effective. On December 20, 2000, the Company received the proceeds from its
initial public offering of 5,000,000 shares of the Company's common stock at
$12 per share. The net proceeds of the offering (after underwriting discounts,
commissions and other transaction related expenses) were $54.1 million. Selling
stockholders sold 2,475,000 shares of the Company's common stock (including the
exercise of the underwriter's overallotment of 975,000 shares), but the Company
did not receive any of the proceeds from the sale of those shares.
During fiscal 2001, pursuant to the terms of the 1998 Employee Stock
Purchase Plan, the Company reacquired 123,000 shares of its common stock from
former employees. The Company subsequently resold 75,000 shares of common stock
for an aggregate purchase price of approximately $513,000 to certain employees
and consultants of the Company, of which $164,000 was financed by the Company
in exchange for promissory notes from the employees, bearing interest at 4.0%
with annual aggregate principal payments of approximately $55,000 through June
30, 2003.
39
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Benefit Plan
The Company established a defined contribution 401(k) plan ("the plan") on
April 1, 1999, which covers all employees who have completed three months of
service and are age 21 or older. Participants may contribute up to 15% of their
annual salary up to the maximum amount allowed by statute. As defined in the
plan agreement, the Company may make matching contributions in such amount, if
any, up to a maximum of 6% of individual employees' annual salaries. The
Company, in its sole discretion, determines the matching contribution made from
year to year. To receive matching contributions, the employee must be employed
on the last day of the fiscal year. For the period from inception, November 16,
1998, through May 31, 1999 and the years ended May 31, 2000 and 2001, the
Company contributed approximately $101,000, $427,000 and $805,000 respectively,
to the plan.
12. Supplemental Disclosure Of Cash Flow Information
For the period and years ended May 31:
1999 2000 2001
------- ---------- -----------
Interest paid.............................. $ -- $1,824,000 $ 5,825,000
Income taxes paid.......................... $ -- $4,156,000 $ 9,853,000
Noncash investing and financing activities:
Deferred stock compensation.............. $37,000 $ 523,000 $ 1,387,000
Reissuance of treasury shares for notes
outstanding............................. $ -- $ -- $ 164,000
Acquisition of LLC, net of $5,033,000 cash acquired and including transaction costs:
1999
-----------
Fair values of noncash tangible assets acquired............... $12,534,000
Liabilities assumed and incurred.............................. (4,746,000)
Goodwill...................................................... 42,579,000
Noncompete agreement.......................................... 500,000
-----------
Cash paid..................................................... $50,867,000
===========
During the year ended May 31, 2001, the Company paid $225,000 of additional
consideration relating to the acquisition of LLC which was allocated to the
purchase price and was included in accrued liabilities at May 31, 2000.
During the year ended May 31, 2000, the Company paid $271,000 in transaction
costs related to the acquisition of LLC, of which $244,000 had been included in
accrued liabilities at May 31, 1999.
40
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Commitments and Contingencies
Lease Commitments
At May 31, 2001, the Company had operating leases, primarily for office
premises, expiring at various dates. At May 31, 2001, the Company had no
capital leases. Future minimum rental commitments under operating leases are as
follows:
Years Ending May 31:
--------------------
2002............................................................. $ 4,424,000
2003............................................................. 4,353,000
2004............................................................. 4,339,000
2005............................................................. 3,629,000
2006............................................................. 2,239,000
Thereafter....................................................... 4,816,000
-----------
Total........................................................ $23,800,000
===========
Rent expense for the period ended May 31, 1999 and for the years ended May
31, 2000 and 2001 totaled $306,000, $2,368,000 and $3,444,000, respectively.
Employment Agreements
The Company has employment agreements with certain key members of management
expiring between 2002 and 2004. These agreements provide the employees with a
specified severance amount depending on whether the employee is terminated with
or without good cause as defined in the agreement.
Registration Rights
The Company has entered into a stockholders agreement with certain
affiliates and management stockholders whereby the affiliates and management
stockholders each have three demand registration rights. The Company has the
right to postpone a demand registration under certain circumstances. The
Company has agreed to pay for two demand registrations of each of the
affiliates and the management stockholders up to an aggregate $500,000 for each
group.
14. Stock Based Compensation Plans
1998 Restricted Stock Purchase Plan
Under the terms of the Resources Connection, Inc. 1998 Restricted Stock
Purchase Plan (the "Purchase Plan"), a total of 5,630,000 shares of common
stock may be issued. The Purchase Plan gives the administrator authority to
grant awards to management-based employees at a price of at least 85% of the
fair market value of the stock (100% of the fair market value of the stock in
the case of an individual possessing more than 10% of the total outstanding
stock of the Company) on the date the related award was granted. An award under
the Purchase Plan gives the participant the right to acquire a specified number
of shares of common stock, at a specified price, for a limited period of time.
Awards under the Purchase Plan are generally nontransferable. The stock
purchased upon exercise of an award generally vests over five years. If the
participant's employment terminates before the participant's stock is fully
vested, the Company may repurchase the unvested stock for the price initially
paid by the participant. The administrator may accelerate the vesting of stock
acquired under the Purchase Plan in the event of a change in control.
In November 1998, management formed Resources Connection, Inc. (formerly RC
Transaction Corp.). In December 1998, 5,243,000 awards were granted and
exercised pursuant to the Purchase Plan at a price of $0.01 per share. In
January 1999 and February 1999, 297,000 and 90,000 awards, respectively, were
granted and exercised pursuant to the Purchase Plan at a price of $0.01 per
share. As of May 31, 2000, 1,880,000 of such shares of common stock were vested.
As of May 31, 2001, of the 5,630,000 shares granted and exercised under the
Purchase Plan: 3,104,000 shares were vested; 1,677,000 were unvested; 484,000
shares were sold; 317,000 were fully vested and controlled by terminated
employees and 48,000 shares had been repurchased from terminated employees and
were held as treasury shares. During the years ended May 31, 2000 and 2001,
repurchased unvested shares of common stock were sold to eligible employees
pursuant to the
41
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
terms of the 1998 Restricted Stock Purchase Plan. The per share weighted
average grant date fair values of the unvested awards granted during the period
from inception, November 16, 1998 through May 31, 1999, and for the years ended
May 31, 2000 and 2001 were $0.02, $2.44 and $4.00, respectively. The amount of
unearned compensation recognized for stock re-sold under the Purchase Plan
totaled $37,000, $376,000 and $514,000 during the period ended May 1999 and the
years ended May 31, 2000 and 2001, respectively. Related compensation expense
totaled zero, $54,000 and $160,000 for the period ended May 1999 and the years
ended May 31, 2000 and 2001, respectively. The Company does not anticipate
granting any additional awards under the Purchase Plan.
Employee Stock Purchase Plan
In October 2000, the Company's board of directors adopted the Resources
Connection, Inc. Employee Stock Purchase Plan ("ESPP"), which was approved by
the Company's stockholders in October 2000. Under the terms of the ESPP, a
total of 1,200,000 shares of common stock may be issued. The ESPP allows for
qualified employees (as defined) to participate in the purchase of designated
shares of the Company's common stock at a price equal to the lesser of 85% of
the fair market value of common stock at the beginning or end of each semi-
annual stock purchase period. The Company had not issued any shares of common
stock pursuant to this plan during the year ended May 31, 2001.
1999 Long-Term Incentive Plan
Under the terms of the Resources Connection, Inc. 1999 Long-Term Incentive
Plan (the "Incentive Plan"), the Company is authorized to grant restricted
stock awards, incentive stock options ("ISOs"), nonqualified stock options
("NQSOs"), stock appreciation rights and bonus awards to directors, officers,
key employees, consultants and other agents. Under the terms of the Incentive
Plan, the option price for the ISOs and NQSOs shall not be less than the fair
market value of the shares of the Company's stock on the date of the grant. For
ISOs, the exercise price per share may not be less than 110% of the fair market
value of a share of common stock on the grant date for any individual
possessing more than 10% of the total outstanding stock of the Company.
Management's estimate of the fair market value of the shares of the Company's
common stock prior to December 15, 2000, was based upon a valuation of the
Company obtained from an independent appraisal firm. The maximum number of
shares of common stock available for grant is 5,040,000. Stock options granted
under the Incentive Plan become exercisable generally over periods of one to
five years and expire within a period of not more than ten years from the date
of grant. There were no options exercisable at May 31, 1999 and 2000. There
were 335,000 options exercisable at May 31, 2001 at a weighted-average exercise
price of $3.66 per share.
A summary of the option activity under the Incentive Plan is as follows:
Number of Weighted Weighted
Shares Average Average
Under Exercise Fair
Option Price Value
--------- -------- --------
Options outstanding at May 31, 1999............. -- $ -- $ --
Granted, above fair market value.............. 1,498,500 $ 4.01 $ 3.11
Granted, below fair market value.............. 330,000 $ 3.00 $ 3.44
---------
Options outstanding at May 31, 2000............. 1,828,500 $ 3.82
Granted, above fair market value.............. 112,000 $ 5.00 $ 4.50
Granted, at fair market value................. 1,356,600 $15.24 $15.24
Granted, below fair market value.............. 235,500 $ 4.87 $10.17
Exercised..................................... (104,605) $ 3.54
Cancelled..................................... (375,500) $ 5.15
---------
Options outstanding at May 31, 2001............. 3,052,495 $ 8.87
=========
42
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes significant option groups outstanding as of
May 31, 2001 and related weighted average price and life information:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- --------------------------------
Number Weighted Average Number
Range of Exercise Outstanding Weighted Average Remaining Life Exercisable Weighted Average
Price Per Share at May 31, 2001 Exercise Price (Years) at May 31, 2001 Exercise Price
------------------- --------------- ---------------- ---------------- --------------- ----------------
$3.00 to $6.11.......... 1,806,895 $ 4.08 8.65 335,020 $3.66
$12.00 to $17.63........ 1,132,100 $15.16 9.53
$22.31 to $22.50........ 113,500 $22.35 9.84
--------- -------
3,052,495 $ 8.87 9.02 335,020 $3.66
========= =======
As of May 31, 2000 and 2001, the Company recorded deferred compensation
related to options granted to employees of $147,000 and $873,000, respectively,
representing the difference between the deemed fair market value of the common
stock, as determined for accounting purposes, and the exercise price of the
options at the date of grant. Of this amount, $7,000 and $219,000 in
amortization was recognized during the years ended May 31, 2000 and 2001,
respectively. The Company amortizes deferred compensation over the related
service period of the underlying options.
The Company has adopted the disclosure-only provisions of SFAS No 123. Had
compensation cost for the Company's Incentive Plan been determined based on the
fair value at the grant date for awards and consistent with the provisions of
SFAS No. 123, the Company's net income for the periods ended May 31, would have
been adjusted to the pro forma amounts indicated below:
1999 2000 2001
-------- ---------- -----------
Net Income:
As reported............................... $792,000 $6,546,000 $13,705,000
Pro forma................................. $792,000 $6,272,000 $10,827,000
Net Income Per Common Share--Diluted:
As reported............................... $ 0.09 $ 0.42 $ 0.71
Pro forma................................. $ 0.09 $ 0.40 $ 0.61
For purposes of computing the pro forma amounts, the fair value of stock-
based compensation was estimated using the Black-Scholes option-pricing model
with the following assumptions:
1999 2000 2001
----------- ----------- -----------
Weighted-average expected life
(years).............................. 7 7 7
Annual dividend per share............. None None None
Risk-free interest rate............... 6.47%-6.98% 6.47%-8.07% 4.98%-6.59%
Expected volatility................... 75% 75% 75%
Because the determination of the fair value of all options granted includes
the factors described in the preceding paragraph, and because additional option
grants are expected to be made each year, the above pro forma disclosures are
not likely to be representative of the pro forma effect on reported net income
for future years.
15.Segment Information and Enterprise Reporting
No single customer accounted for more than 3% of revenue during the year
ended May 31, 2001 and no more than 4% for the period ended May 31, 1999 and
for the year ended May 31, 2000.
43
RESOURCES CONNECTION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company operates in one reportable
segment as it provides experienced accounting and finance, human capital
management and information technology professionals to clients on a project-by-
project basis. Substantially all of the Company's assets are located within the
United States. For the years ended May 31, 2000, the first year the Company
commenced foreign operations, and May 31, 2001, revenue from the Company's
foreign operations comprised less than 1% of the Company's consolidated
revenue.
16.Related Party Transactions
In April 1999, the Company issued $22,000,000 in 12% subordinated promissory
notes to certain investors (see Note 8).
On May 1, 1999, a member of management received a loan of $200,000 from the
Company. The loan is interest free and matures on April 1, 2007. During the
year ended May 31, 2000, $50,000 of this loan was forgiven. At May 31, 2000 and
2001, $150,000 of the receivable was outstanding.
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members
of Resources Connection LLC
In our opinion, the accompanying statements of income and of cash flows of
Resources Connection LLC present fairly, in all material respects, the results
of its operations and its cash flows for the period from June 1, 1998 through
March 31, 1999, in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether these statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in these statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audit of
these statements provides a reasonable basis for the opinion expressed above.
As discussed in Notes 1, 2, and 3 to these financial statements, the Company
entered into significant related party transactions with its member, Deloitte &
Touche LLP. The accompanying historical financial statements of the Company may
not necessarily be indicative of the results that would have occurred if the
Company had undertaken such transactions with an unrelated third party.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
August 6, 1999
45
RESOURCES CONNECTION LLC
STATEMENT OF INCOME
For The Period June 1, 1998 Through March 31, 1999
Net revenues....................................................... $55,438,000
Cost of revenues................................................... 31,253,000
-----------
Gross profit..................................................... 24,185,000
Selling, general and administrative expenses....................... 17,071,000
Depreciation and amortization expense.............................. 118,000
-----------
Net income....................................................... $ 6,996,000
===========
The accompanying notes are an integral part of these financial statements.
46
RESOURCES CONNECTION LLC
STATEMENT OF CASH FLOWS
For The Period June 1, 1998 Through March 31, 1999
Cash flows from operating activities:
Net income..................................................... $ 6,996,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 118,000
Bad debt expense............................................. 533,000
Changes in operating assets and liabilities:
Accounts receivable........................................ (6,737,000)
Receivable from member..................................... (10,500,000)
Payable to member.......................................... 8,541,000
Prepaids and other assets.................................. (297,000)
Accounts payable and accrued expenses...................... 869,000
Accrued salaries and related obligations................... 2,323,000
Other liabilities.......................................... 182,000
------------
Net cash provided by operating activities................ 2,028,000
------------
Cash flows from investing activities:
Purchases of property and equipment............................ (163,000)
------------
Net cash used in investing activities.................... (163,000)
------------
Net increase in cash..................................... 1,865,000
Cash and cash equivalents at beginning of year................... 3,168,000
------------
Cash and cash equivalents at end of year......................... $ 5,033,000
============
The accompanying notes are an integral part of these financial statements.
47
RESOURCES CONNECTION LLC
NOTES TO FINANCIAL STATEMENTS
1. Description Of The Company And Its Business:
Resources Connection LLC (the "Company") is a Delaware organized limited
liability company and provides high-end professional services to a variety of
industries and enterprises throughout the United States. The Company provides
clients with experienced professionals in accounting, finance, tax and
information technology on a project-by project-basis.
The Company was formed in September 1996. The Company is 99% owned by
Deloitte & Touche LLP ("D&T") and 1% owned by Deloitte & Touche Acquisition
Company LLC (collectively referred to as the "Members"). The Members do not
have any liability for the obligations or liabilities of the Company except to
the extent provided for in the Delaware Limited Liability Company Act (the
"Act"). The Company will dissolve upon the first to occur of, among others, the
following: (a) the written consent of the Members; (b) the resignation,
expulsion, bankruptcy or dissolution of a Member or the occurrence of any other
event under the Act which terminates the continued membership of a Member in
the Company, unless the remaining Member agrees in writing within 90 days to
continue the business of the Company; or (c) December 31, 2095.
In the normal course of business, the Company has been supplied with a
variety of services by D&T as well as having supplied a variety of services to
D&T that are substantial in amount. The accompanying financial statements have
been prepared from the separate records maintained by the Company; however, the
services supplied by and to D&T may not necessarily have been provided at terms
available from unrelated entities. Therefore, the accompanying financial
statements of the Company may not necessarily be indicative of the conditions
that would have existed if the Company had operated as an independent entity.
The following table summarizes the approximate amount of services and
related allocated expenses charged to the Company for services provided by D&T.
Charges for such services are included in selling, general and administrative
expenses in the accompanying statement of income:
For The Period
June 1, 1998
Through
March 31, 1999
--------------
Occupancy.................................................... $ 767,000
Computer charges............................................. 155,000
Telephone.................................................... 34,000
Administrative salaries...................................... 250,000
Other charges................................................ 203,000
----------
Total allocated charges.................................... $1,409,000
==========
The financial statements include all necessary personnel costs and pro rata
allocations of overhead from D&T on a basis which management believes
represents a reasonable allocation of such costs.
D&T processes and pays the Company's accounts payable, which obligation is
offset by periodic sweeps of the Company's separately maintained bank account,
resulting in a net receivable due from D&T and a net payable due to D&T.
Interest is not charged for any such amounts due to or from D&T.
Revenue includes fees charged for services provided directly to D&T of
approximately $4.9 million for the approximate ten-month period ended March 31,
1999.
The Company's fiscal year consists of 52 or 53 weeks, ending on the Saturday
nearest the last day of May in each year. For convenience, all references
herein to periods are to periods ended May 31. The period ended March 31, 1999
was 44 weeks long.
48
RESOURCES CONNECTION LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Summary Of Significant Accounting Policies:
Revenue Recognition:
Revenues are recognized when services are rendered by the Company's
professional staff. Conversion fees are recognized in certain circumstances
when one of the Company's professional staff accepts an offer of permanent
employment from a client. Conversion fees were less than 4% of revenues for the
period ended March 31, 1999. All costs of compensating the Company's
professional staff are the responsibility of the Company and are included in
direct cost of services.
Depreciation And Amortization:
Depreciation and amortization is computed using the straight-line method
over the estimated useful lives of the related assets which range from 3 to 10
years. Leasehold improvements are amortized using the straight-line method over
the estimated useful life of the asset or the term of the lease, whichever is
shorter. Costs for normal repairs and maintenance are expensed to operations as
incurred, while renewals and major refurbishments are capitalized.
Taxes:
As a limited liability company, income taxes on any income or losses
realized by the Company are the obligation of its Members and, accordingly, no
provision for income taxes has been recorded in the financial statements.
Use Of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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. Although management believes these estimates and assumptions
are adequate, actual results could differ from the estimates and assumptions
used.
3. Related Party Transactions:
Lease Arrangements:
Specific amendments to D&T lease agreements were negotiated for separate
office space in two of the Company's locations. The Company reimburses D&T for
the rent incurred under these amended lease agreements. D&T allocates rent to
the Company for all other locations, which may not necessarily reflect terms
available from unrelated parties. Total rent expense, including allocations as
included in Note 1, was approximately $828,000 for the approximate ten-month
period ended March 31, 1999.
Retirement Plan:
The Company participates in D&T's defined contribution 401(k) plan ("the
plan"), which covers administrative employees who have completed one year of
service and are age 21 or older. Participants may contribute up to 15% of their
annual salary up to the maximum allowed by statute. As defined in the plan
49
RESOURCES CONNECTION LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
agreement, the Company is obligated to match 10% of employee contributions to a
maximum of 6% of individual employees' annual salaries; the Company may, at its
discretion, match up to an additional 15% of employee contributions to a
maximum of 6% of individual employees' annual salaries. For the approximate
ten-month period ended March 31, 1999, the Company contributed approximately
$98,000 to the plan.
Other:
The Company has entered into other significant related party transactions
with its Member, D&T. See Note 1 for further detail.
4. Subsequent Events:
On April 1, 1999, D&T sold the Company to management of the Company and a
group of investors. All of the outstanding membership interests of the Company
were sold for approximately $55 million in cash, excluding cash acquired and
transaction costs.
50
PART II - (continued)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
51
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers and Directors
The following table sets forth information about our executive officers and
directors as of June 30, 2001:
Name Age Position
---- --- --------
Donald B. Murray.......... 54 Chairman of the Board of Directors, Chief
Executive Officer, President and Director
Stephen J. Giusto......... 38 Chief Financial Officer, Executive Vice
President of Corporate Development,
Secretary and Director
Karen M. Ferguson......... 37 Executive Vice President and Director
Brent M. Longnecker....... 45 Executive Vice President
John D. Bower............. 40 Vice President, Finance
Kate W. Duchene........... 37 Chief Legal Officer, Executive Vice
President of Human Relations and Assistant
Secretary
David G. Offensend........ 48 Director
Gerald Rosenfeld.......... 54 Director
Leonard Schutzman......... 54 Director
John C. Shaw.............. 67 Director
C. Stephen Mansfield...... 61 Director
Donald B. Murray. Mr. Murray co-founded Resources Connection in June 1996
and served as our Managing Director from inception until April 1999. Mr. Murray
has served as our Chairman, Chief Executive Officer and President since the
management buyout in April 1999. Prior to founding Resources Connection, Mr.
Murray was Partner-In-Charge of Accounting and Assurance Services for the Orange
County, California office of Deloitte & Touche, a professional services firm,
from 1988 to 1996. From 1984 to 1987, Mr. Murray was the Partner-In-Charge of
the Woodland Hills office of Touche Ross & Co., a predecessor firm to Deloitte &
Touche, a professional services firm, an office he founded in 1984. Mr. Murray
was admitted to the Deloitte & Touche partnership in 1983. Mr. Murray also
serves on the board of Ledgent, Inc.
Stephen J. Giusto. Mr. Giusto co-founded Resources Connection in June 1996
and served as our National Director of Operations from inception until April
1999. Mr. Giusto has served as our Chief Financial Officer, Executive Vice
President of Corporate Development and Secretary since April 1999. Mr. Giusto
is also a director of Resources Connection, a position he has held since April
1999. Prior to founding Resources Connection, Mr. Giusto was in the Orange
County real estate practice of Deloitte & Touche, a professional services firm,
from 1992 to 1996. He also previously served for two years in the Deloitte &
Touche national office in the Office of the Managing Partner. Mr. Giusto was
admitted to the Deloitte & Touche partnership in 1996.
Karen M. Ferguson. Ms. Ferguson co-founded Resources Connection in June
1996. From inception to August 1998, Ms. Ferguson served as Managing Director
of our Northern California practice. She currently serves as the Managing
Director of our New York area practice and as an Executive Vice President,
positions she has held since August 1998 and April 1999, respectively. Ms.
Ferguson is also a director of Resources Connection, a position she has held
since April 1999. Prior to joining us, Ms. Ferguson was a director with
Accounting Solutions, a regional Northern California contract staffing firm from
1994 to 1995. From 1985 to 1994 Ms. Ferguson was in the San Francisco office of
Deloitte & Touche, a professional services firm, most recently as a Senior
Manager.
Brent M. Longnecker. Mr. Longnecker is as an Executive Vice President of
Resources Connection, a position he has held since June 1999. From 1985 to
1999, Mr. Longnecker held various positions at KPMG and
52
Deloitte & Touche, both of which are professional services firms, most recently
as Partner-In-Charge of the performance management and compensation consulting
practices at Deloitte & Touche. Mr. Longnecker also serves on the faculty of
Certified Professional Education, Inc. and as a director of the Strategy
Factory, Inc. and SkyAuction.com, Inc.
John D. Bower. Mr. Bower is our Vice President, Finance, a position he has
held since April 1999. Mr. Bower served as our Director of Financial Reporting
and Controller from January 1998 to April 1999. Mr. Bower served as Vice
President, Finance of Mossimo, Inc., a clothing manufacturing company, from
January 1997 to November 1997 and as Director, Finance for FHP International
Corporation, a health maintenance organization, from June 1992 to January 1997.
From 1982 through 1992, Mr. Bower worked in the Orange County, California office
of Deloitte & Touche, a professional services firm, most recently as a Senior
Manager.
Kate W. Duchene. Ms. Duchene is our Chief Legal Officer, a position she
has held since December 1999. Ms. Duchene is also our Assistant Secretary and
Executive Vice President, Human Relations, positions she has held since August
2000. Prior to joining Resources Connection, Ms. Duchene practiced law with
O'Melveny & Myers LLP, a law firm, in Los Angeles, California, specializing in
labor and employment matters. Ms. Duchene was with O'Melveny & Myers LLP from
October 1990 through December 1999, most recently as a Special Counsel.
David G. Offensend. Mr. Offensend is a director of Resources Connection, a
position he has held since April 1999. Mr. Offensend is the Vice Chairman of
Evercore Partners and a managing member of the general partner of Evercore
Capital Partners L.P. Prior to founding Evercore Partners in 1995, Mr. Offensend
was Vice President of Keystone Inc., the investment organization of Robert M.
Bass. Prior to joining Keystone in 1990, Mr. Offensend was a Managing Director
of Lehman Brothers, an investment bank, where he was President and Chief
Executive Officer of the Lehman Brothers Merchant Banking Partnerships. Mr.
Offensend is also a director of Specialty Products & Insulation Co.
Gerald Rosenfeld. Mr. Rosenfeld is a director of Resources Connection, a
position he has held since April 1999. Mr. Rosenfeld is the Chief Executive
Officer of Rothschild North America, an investment banking firm, a position he
has held since January 2000. Previously, from November 1998 to January 2000, he
was the Managing Member of G. Rosenfeld & Co. LLC, an investment banking and
consulting firm. Prior to that time, Mr. Rosenfeld was Senior Managing Director
of NationsBanc Montgomery Securities LLC, an investment banking firm, from April
to November 1998, and a Managing Director and head of Investment Banking of
Lazard Freres & Co. LLC, an investment banking firm, from 1992 to 1998. Mr.
Rosenfeld is also a director of ContiGroup, Inc.
Leonard Schutzman. Mr. Schutzman is a director of Resources Connection, a
position he has held since April 1999. From April 1999 to November 1999, Mr.
Schutzman was a member of Venture Marketing Group LLC, a venture marketing firm.
From 1976 to 1993, he held several positions at Pepsi-Co., Inc., a company
involved in the snack food, soft drink and juice businesses, most recently as
Senior Vice President and Treasurer. Mr. Schutzman also serves on the board of
directors of BML Pharmaceutical, Inc., SkyAuction.com, Inc. and TwinLab and
currently serves as Chairman of the Board of INNX, Inc. He is a member of the
board of advisors of Evercore Capital Partners LLP.
John C. Shaw. Mr. Shaw is a director of Resources Connection, a position
he has held since June 1999. Mr. Shaw currently also serves as a partner of The
Shaw Group LLC, a general management and consulting company he founded in
February 1997. From February 1997 to December 1999, Mr. Shaw served as the Dean
of the Peter F. Drucker Graduate School of Management at Claremont Graduate
University. In addition, from November 1994 to February 1997, Mr. Shaw served
in the Office of the Chairman of Wellpoint Health Networks, Inc., a managed
health care company.
C. Stephen Mansfield. Mr. Mansfield is a director of Resources Connection,
a position he has held since August 2000. Mr. Mansfield is a lecturer at
California Polytechnic State University, San Luis Obispo, a position he has held
since 1999. From 1983 to 1989, Mr. Mansfield was the Partner-In-Charge of the
Orange County office of Deloitte, Haskins & Sells, a professional services firm
which was a predecessor firm to Deloitte & Touche. Mr. Mansfield retired from
Deloitte & Touche LLP in 1990, as a senior partner.
53
Board Composition
In accordance with the terms of our second restated certificate of
incorporation, the terms of office of our board of directors are divided into
three classes:
. Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2001;
. Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2002; and
. Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2003.
Our Class I directors are Ms. Ferguson, Mr. Mansfield and Mr. Schutzman,
our Class II directors are Mr. Giusto and Mr. Shaw, and our Class III directors
are Mr. Murray, Mr. Offensend and Mr. Rosenfeld. At each annual meeting of
stockholders, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election. Any additional directorships resulting from
an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of our board of directors may have the effect
of delaying or preventing changes in control or management of our company.
Pursuant to a stockholders agreement between the company and certain entities
affiliated with the Evercore Partners, Donald B. Murray, Stephen J. Giusto,
Karen M. Ferguson and Brent M. Longnecker, the company has agreed to nominate,
and the stockholders party to that agreement have agreed to vote their shares in
favor of, board nominees designated by the Evercore Partners and the management
stockholders.
Board Committees
Our board of directors has established an audit committee. The audit
committee consists of Mr. Mansfield, Mr. Rosenfeld and Mr. Shaw. The audit
committee, which is composed solely of independent directors, makes
recommendations to our board of directors regarding the selection of independent
auditors, reviews the results and scope of the audit and other services provided
by our independent auditors, and reviews and evaluates our audit and control
functions.
Our board of directors has established a compensation committee consisting
of the following directors: Mr. Offensend, Mr. Rosenfeld and Mr. Shaw. The
compensation committee oversees our equity compensation plans and makes
decisions concerning salaries and incentive compensation for our employees and
consultants.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our executive officers and directors, and persons who own more than 10% of our
Common Stock, to file an initial report of securities ownership on Form 3 and
reports of changes in securities ownership on Forms 4 and 5 with the Securities
and Exchange Commission. We are required to disclose any failure of these
executive officers, directors and 10% stockholders to file these reports by the
required deadlines. Based solely on our review of the copies of such forms
received by us, or written representations from certain reporting persons that
no report on Form 5 was required for such persons, we believe that, for the
reporting period from December 14, 2000 (the date of our initial public
offering) to the end of our 2001 fiscal year, our executive officers and
directors complied with all their reporting requirements under Section 16(a) for
such fiscal year, except that (i) Mr. Murray failed to timely report on Form 4
his January 10, 2001 option grant for 40,000 shares, (ii) each of Mr. Bower, Ms.
Duchene, Ms. Ferguson, Mr. Giusto and Mr. Longnecker failed to timely report on
Form 4 their respective January 10, 2001 option grants for 20,000 shares, (iii)
Mr. Bower failed to report on his initial Form 3, which was timely filed, 900
shares acquired by Mr. Bower in the initial public offering, and (iv) Ms.
Ferguson failed to report on her initial Form 3, which was timely filed, 250
shares acquired by Ms. Ferguson in the initial public offering. On July 6,
2001, each of Messrs. Murray, Bower, Giusto and Longnecker and Ms. Duchene and
Ms. Ferguson filed a report on Form 4 to report their January 10, 2001 option
grants. On the same date, Mr. Bower and Ms. Ferguson filed a corrected Form 3
to report the shares they acquired in the initial public offering.
Item 11. Executive Compensation
Director Compensation
As compensation for their services on our board of directors, our non-
employee directors receive:
. $12,000 per year to be paid in cash or discounted stock options;
. a one-time grant of 5,000 shares at the time a director joins the
board;
. discretionary stock option grants; and
. reimbursement for expenses they incur in attending board and committee
meetings.
Directors who serve on committees receive a flat fee of $300 per committee
meeting attended as well.
54
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee of our board of directors
is an officer or employee of our company. No executive officer of our company
serves as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving on our compensation
committee.
Executive Compensation
Summary of Compensation
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services rendered to us in all capacities
during fiscal 2000 and fiscal 2001 by our Chief Executive Officer and the four
other most highly compensated officers whose total salary and bonuses exceeded
$100,000 in fiscal 2001. The individuals listed in the table below are
collectively referred to as the named executive officers.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------- -----------------
All Other
Annual Securities
Compensation Underlying
Name and Principal Position Year Salary($) Bonus($) ($) Options(#)
--------------------------- ---- ----------- ---------- ---------------- -----------------
Donald B. Murray, Chief Executive Officer....... 2001 447,665(4) 300,518(1) 0 40,000
2000 425,000 212,500(2) 0 0
Stephen J. Giusto, Chief Financial Officer...... 2001 267,038(4) 136,404(1) 0 20,000
2000 250,000 125,000(2) 0 0
Karen M. Ferguson, Executive Vice President..... 2001 259,023(4) 136,404(1) 1,118(5) 20,000
2000 200,000 130,000(3) 0 0
Brent M. Longnecker, Executive Vice President... 2001 318,646(4) 156,600(1) 0 20,000
2000 300,000 150,000(2) 50,000(6) 0
Kate W. Duchene, Chief Legal Officer............ 2001 174,423 79,335(1) 0 20,000
2000 86,538 27,800(2) 0 50,000
____________
(1) Consists of bonuses earned in fiscal 2001 and paid in fiscal 2002.
(2) Consists of bonuses earned in fiscal 2000 and paid in fiscal 2001.
(3) Consists of bonuses earned in fiscal 2000 and paid in part in fiscal 2000
and in part in fiscal 2001.
(4) Includes an automobile allowance of $9,000.
(5) Consists of a matching contribution under the terms of Resources' defined
contribution 401(k) plan.
(6) In May 1999, Mr. Longnecker received a loan in the amount of $200,000 from
the company. On January 1, 2000, Resources Connection forgave $50,000 of
the loan.
55
Stock Options and Long-Term Incentive Awards in Fiscal 2001
The table below sets forth the options granted to named executive officers
during fiscal 2001. No restricted stock awards were granted to named executive
officers in fiscal 2001.
Individual Grants
-------------------------------------------------------------- Potential Realizable
% of Total Value at Assumed Annual
Number of Options Rate of Stock Price
Securities Granted Exercise Appreciation for Option
Underlying to Employees Price Term
Options in Fiscal per Share Expiration -------------------------
Granted 2001 ($/Share) Date 5% ($) 10% ($)
------- ---- --------- ---- ------ -------
Donald B. Murray 40,000 2.35% 17.63 1/10/11 443,600 1,124,000
Stephen J. Giusto 20,000 1.17% 17.63 1/10/11 221,800 562,000
Karen M. Ferguson 20,000 1.17% 17.63 1/10/11 221,800 562,000
Brent M. Longnecker 20,000 1.17% 17.63 1/10/11 221,800 562,000
Kate W. Duchene 20,000 1.17% 17.63 1/10/11 221,800 562,000
Each option vests in equal annual installments over the four-year period
commencing on the grant date and has a maximum term of 10 years, subject to
earlier termination upon the optionee's cessation of service with Resources
Connection.
The potential realizable values are based on an assumption that the stock
price of our common stock will appreciate at the annual rate shown (compounded
annually) from the date of grant until the end of the option term. These values
do not take into account amounts required to be paid as income taxes under the
Internal Revenue Code and any applicable state laws or option provisions
providing for termination of an option following termination of employment, non-
transferability or vesting. These amounts are calculated based on the
requirements promulgated by the Securities and Exchange Commission and do not
reflect our estimate of future stock price growth of the shares of our common
stock.
Exercise of Options and Year-End Values
No stock options have been exercised by any named executive officer since
our inception. The following table provides summary information regarding the
number of shares of our common stock represented by outstanding stock options
held by each of our named executive officers as of May 31, 2001.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at May 31, 2001 May 31, 2001
Shares Acquired Value ---------------------------- ---------------------------------
on Exercise Realized Exercisable Unexercisable Exercisable($) Unexercisable($)
--------------- -------- ----------- ------------- -------------- ----------------
Donald B. Murray.......... - - - 40,000 - 626,800
Stephen J. Giusto......... - - - 20,000 - 313,400
Karen M. Ferguson......... - - - 20,000 - 313,400
Brent M. Longnecker....... - - - 20,000 - 313,400
Kate W. Duchene........... - - 12,500 57,500 378,750 1,449,650
Dollar values in the table shown above are calculated by taking the fair
market value of our common stock on May 25, 2001 (the last trading day prior to
our fiscal year end), subtracting the per share exercise price of the options,
and multiplying the result by the number of shares.
56
Employee Benefit Plans
1998 Employee Stock Purchase Plan
In December 1998, we adopted the Resources Connection, Inc. 1998 Employee
Stock Purchase Plan, or the 1998 Employee Stock Purchase Plan, to provide an
additional means to attract, motivate, reward and retain officers and
management-level employees. The plan gives the administrator the authority to
grant awards to select participants. We do not, however, anticipate granting
any additional awards under the 1998 Employee Stock Purchase Plan. The
following summary is qualified by reference to the complete plan, which was
filed as an exhibit to our Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on September 1, 2000.
Share Limits. A total of 5,630,000 shares of our common stock may be
issued under the plan (not including shares that are repurchased by us which
upon repurchase become again available for issuance). This share limit and the
number of shares subject to each award under the plan is subject to adjustment
for certain changes in our capital structure, reorganizations and other
extraordinary events.
Awards. An award under the plan gives the participant the right to acquire
a specified number of shares of our common stock, at a specified price, for a
limited period of time. Officers and management-level employees of Resources
Connection, Inc. may be selected to receive awards under the plan. The purchase
price for each share of stock acquired under the plan must be at least 85% (100%
in the case of an owner of 10% or more of the voting stock of Resources
Connection, Inc.) of the fair market value of the stock on the date the related
award was granted. Awards under the plan generally are nontransferable. The
stock purchased on exercise of an award generally will be subject to a vesting
schedule--20% of the shares of stock purchased on exercise of the award
generally will vest each year following the exercise of the award and the shares
will fully vest on the fifth anniversary of the participant's hire date with
Resources Connection. If the participant's employment terminates before his or
her stock is fully vested, we generally may repurchase the unvested stock for
the price that participant paid to acquire the stock. The administrator may
accelerate the vesting of stock acquired under the plan in the event of a change
in control.
Administration. A committee of one or more directors appointed by the
board will administer the plan. The administrator of the plan has broad
authority to approve awards and determine the specific terms and conditions of
awards, and construe and interpret the plan. Our board of directors may amend,
suspend or discontinue the plan at any time. Plan amendments will generally not
be submitted to stockholders for their approval unless applicable law requires
such approval.
Certain Specific Awards. As of June 30, 2001, 5,630,000 shares had been
acquired under the plan, of which 3,156,693 had become vested, 1,574,350 were
not yet vested, 483,557 had been sold and 367,720 were fully vested and held by
terminated employees and 47,680 shares had been repurchased from terminated
employees and were held as treasury shares. No shares were subject to
outstanding but unexercised awards, and no shares remained available for award
purposes under the plan.
1999 Long-Term Incentive Plan
In June 1999, our board of directors adopted the 1999 Long-Term Incentive
Plan to provide an additional means to attract, motivate, reward and retain key
personnel. Our stockholders approved the plan on June 17, 1999. The plan gives
our board of directors, or a committee appointed by our board of directors, the
authority to determine who may participate in the plan and to grant different
types of stock incentive awards. Employees, officers, directors, and
consultants of Resources Connection or one of our subsidiaries may be selected
to receive awards under the plan. The following summary is qualified by
reference to the complete plan, which was filed as an exhibit to our
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on September 1, 2000.
57
Share Limits. We initially reserved a total of 2,340,000 shares of our
common stock for issuance under the plan. In August 2000, we increased this
number to 5,040,000 shares. The aggregate number of shares subject to stock
options and stock appreciation rights granted under the plan to any one person
in a calendar year cannot exceed 200,000 shares.
Awards. Awards under the plan may be in the form of nonqualified stock
options, incentive stock options, stock appreciation rights, or SARs, limited
stock appreciation rights or SARs limited to specific events, such as in a
change in control or other special circumstances, restricted stock, performance
share awards, or stock bonuses. Awards under the plan generally will be
nontransferable.
Nonqualified stock options and other awards may be granted at prices below
the fair market value of the common stock on the date of grant. Restricted
stock awards can be issued for nominal or the minimum lawful consideration.
Incentive stock options must have an exercise price that is at least equal to
the fair market value of the common stock, or 110% of fair market value of the
common stock for any 10% owners of our common stock, on the date of grant.
These and other awards may also be issued solely or in part for services.
Administration. Our board of directors, or a committee of directors
appointed by the board, has the authority to administer the plan. The
administrator of the plan has broad authority to:
. designate recipients of awards;
. determine or modify, subject to any required consent, the terms and
provisions of awards, including the price, vesting provisions, terms
of exercise and expiration dates;
. approve the form of award agreements;
. determine specific objectives and performance criteria with respect to
performance awards;
. construe and interpret the plan; and
. reprice, accelerate and extend the exercisability or term, and
establish the events of termination or reversion of outstanding
awards.
Change in Control. Upon a change in control event, the compensation
committee may provide that each option and stock appreciation right will become
immediately vested and exercisable, each award of restricted stock will
immediately vest free of restrictions, and each performance share award will
become payable to the holder of the award. Generally speaking, a change in
control event will be triggered under the plan:
. upon stockholder approval of our dissolution or liquidation;
. upon stockholder approval of the sale of all or substantially all of
our assets to an entity that is not an affiliate;
. upon stockholder approval of a merger, consolidation, reorganization,
or sale of all or substantially all of our assets in which any person
becomes the beneficial owner of 50% or more of our outstanding common
stock.
Plan Amendment, Termination and Term. Our board of directors may amend,
suspend or discontinue the plan at any time, but no such action will affect any
outstanding award in any manner materially adverse to a participant without the
consent of the participant. Plan amendments will be submitted to stockholders
for their approval as required by applicable law.
The plan will terminate on June 16, 2009; however, the committee will
retain its authority until all outstanding awards are exercised or terminated.
The maximum term of options, SARs and other rights to acquire
58
common stock under the plan is ten years after the initial date of the award,
subject to provisions for further deferred payment in certain circumstances.
Payment for Shares. The exercise price of options or other awards may
generally be paid in cash or, subject to certain restrictions, shares of our
common stock. Subject to any applicable limits, we may finance or offset shares
to cover any minimum withholding taxes due in connection with an award.
Federal Tax Consequences. The current federal income tax consequences of
awards authorized under the plan follow certain basic patterns. Generally,
awards under the plan that are includable in the income of the recipient at the
time of exercise, vesting or payment (such as nonqualified stock options, stock
appreciation rights, restricted stock and performance awards), are deductible by
Resources Connection, and awards that are not required to be included in the
income of the recipient (such as incentive stock options) are not deductible by
Resources Connection.
Generally speaking, Section 162(m) of the Internal Revenue Code provides
that a public company may not deduct compensation (except for certain
compensation that is commission or performance-based) paid to its chief
executive officer or to any of its four other highest compensated officers to
the extent that the compensation paid to such person exceeds $1,000,000 in a tax
year. The regulations exclude from these limits compensation that is paid
pursuant to a plan in effect prior to the time that a company is publicly held.
We expect that compensation paid under the plan will not be subject to Section
162(m) in reliance on this transition rule, as long as such compensation is paid
(or stock options, stock appreciation rights, and/or restricted stock awards are
granted) before the earlier of a material amendment to the plan or the annual
stockholders meeting in the year 2004.
In addition, we may not be able to deduct certain compensation attributable
to the acceleration of payment and/or vesting of awards in connection with a
change in control event should that compensation exceed certain threshold limits
under Section 280G of the Internal Revenue Code of 1986, as amended, or the
Internal Revenue Code.
Certain Specific Awards. As of June 30, 2001, 3,210,445 shares of common
stock were subject to outstanding options granted under the plan, 442,820 of
which had vested and 2,767,625 of which were unvested, and 1,686,950 shares of
common stock remained available for grant purposes under the plan. The
outstanding options were granted for 10-year terms and at exercise prices
between $3.00 and $23.78 per share. The shares covered by currently outstanding
options represent the 10-year stock option grants authorized by our board of
directors on June 17, 1999.
Employee Stock Purchase Plan
On October 17, 2000, our board of directors adopted our Employee Stock
Purchase Plan to provide certain of our employees (and the employees of certain
of our participating subsidiaries) with an incentive to advance the best
interests of the company by providing a method whereby they may voluntarily
purchase our common stock at a favorable price and upon favorable terms. Our
stockholders approved this plan on October 17, 2000. Generally, all of our
officers and employees who have been employed by us for at least 90 days, who
are regularly scheduled to work more than 10 hours per week, and who are
customarily employed more than five months per year are eligible to participate
in the plan. The plan became effective upon the consummation of our initial
public offering.
Operation. The plan generally operates in successive six-month periods, or
offering periods, commencing on each January 1 and July 1. The first offering
period under the plan commenced on March 19, 2001.
On the first day of each offering period, or grant date, each employee
eligible to participate in the plan who has timely filed a valid election to
participate for that offering period will be granted an option to purchase
shares of our common stock. A participant must designate in his or her election
the percentage of his or her compensation (subject to certain limits in the plan
and limits under the Internal Revenue Code) to be withheld from his or her pay
during that offering period on an after-tax basis and credited to a bookkeeping
account maintained under the plan in his or her name.
59
Each option granted with respect to an offering period will automatically
be exercised on the last day of that offering period, or the exercise date. The
number of shares of our common stock acquired by the holder of the option will
be determined by dividing the participant's plan account balance as of the
exercise date by the option price.
Generally, a participant's plan participation will terminate during an
offering period, and his or her plan account balance will be paid to him or her
in cash, if the participant elects a withdrawal of his of her contributions or
if the participant's employment by us or one of our participating subsidiaries
terminates.
Authorized Shares; Limits on Contributions. The maximum aggregate number
of shares of our common stock available under the plan is 1,200,000. As
required by the Internal Revenue Code, a participant cannot purchase more than
$25,000 of stock (valued at the start of the applicable offering period) under
the plan in any one calendar year. In the event of a merger, consolidation,
recapitalization, stock split, stock dividend, combination of shares, or other
change affecting our common stock, a proportionate and equitable adjustment will
be made to the number of shares subject to the plan and outstanding plan
options.
Administration. The plan will be administered by our board of directors or
a committee appointed by our board of directors. The plan administrator is
currently the compensation committee of our board of directors. The plan will
not limit the authority of our board of directors or the compensation committee
to grant awards or authorize any other compensation, with or without reference
to our common stock, under any other plan or authority.
Amendment or Termination of the Employee Stock Purchase Plan. Our board of
directors may amend, modify or terminate the plan at any time and in any manner,
provided that the existing rights of participants are not materially adversely
affected thereby. Stockholder approval for any amendment will only be required
to the extent necessary to meet the requirements of Section 423 of the Internal
Revenue Code or to the extent otherwise required by law. Unless previously
terminated by our board of directors, no new offering periods will commence on
or after October 16, 2010 or, if earlier, when no shares remain available for
options under the plan.
Federal Tax Consequences. Participant contributions to the plan are made
on an after-tax basis. Generally, no taxable income will be recognized by a
participant as of either the grant date or the exercise date of an option. A
participant will generally recognize income (or loss) upon a sale or disposition
of the shares acquired under the plan. The company generally will not be
entitled to a federal income tax deduction with respect to any shares that are
acquired under the Employee Stock Purchase Plan.
401(k) Plan
Resources Connection has a defined contribution 401(k) plan that covers all
employees who have completed three months of service and are age 21 or older.
Participants may contribute up to 15% of their annual salary or the maximum
allowed by statute. As defined in the plan agreement, the company may make
matching contributions in such amount, if any, up to 6% of employees' annual
salaries. We may, at our sole discretion, determine the matching contribution
made from year to year. To receive a matching contribution, an employee must be
employed by us on the last day of the fiscal year.
Employment Agreements
We have entered into employment agreements with Mr. Murray, Mr. Giusto, Ms.
Ferguson and Mr. Longnecker. Certain aspects of these employment agreements are
specific to the agreement:
Mr. Murray. Pursuant to his employment agreement, Mr. Murray serves as our
Chief Executive Officer and receives an annual base salary of $442,000,
increased in September 2000 from an initial annual base salary of $425,000. The
employment agreement has an initial term ending on March 31, 2004. If any
payment Mr. Murray receives pursuant to his employment agreement is deemed to
constitute "excess parachute payment" under Section 280G of the Internal Revenue
Code, or compensation subject to excise tax under Section 4999 of the Internal
Revenue Code, Mr. Murray is entitled to an excise tax gross-up payment not to
exceed $1.0 million.
60
Mr. Giusto. Pursuant to his employment agreement, Mr. Giusto serves as our
Chief Financial Officer and receives an annual base salary of $260,000,
increased in September 2000 from an initial annual base salary of $250,000. The
employment agreement has an initial term ending on March 31, 2002.
Ms. Ferguson. Pursuant to her employment agreement, Ms. Ferguson serves as
an Executive Vice President and receives an annual base salary of $250,000,
increased in June 2000 from an initial annual base salary of $200,000. The
employment agreement has an initial term ending on March 31, 2002. If Ms.
Ferguson is terminated without cause, in addition to the severance payment
described below, she will also receive reimbursement for her relocation
expenses up to $100,000.
Mr. Longnecker. Pursuant to his employment agreement, Mr. Longnecker
serves as an Executive Vice President and receives an annual base salary of
$312,000, increased in September 2000 from an initial annual base salary of
$300,000. The employment agreement has an initial term ending on April 30, 2002.
If any payment Mr. Longnecker receives pursuant to his employment agreement is
deemed to constitute "excess parachute payment" under Section 280G of the
Internal Revenue Code, Mr. Longnecker is entitled to an excise tax gross-up
payment not to exceed $750,000. Pursuant to his employment agreement, on May 1,
1999, we loaned $200,000 to Mr. Longnecker as further described in "Related-
Party Transactions".
Each of the above-described employment agreements has the following uniform
terms:
Automatic Renewal. Upon termination of the initial term of the employment
agreement, the agreement will automatically renew for one-year periods unless
the employee or we elect not to extend the agreement.
Termination by Us Without Cause or by Employee for Good Reason. In the
event we do not renew the agreement or the employee is terminated other than for
"cause" (which is defined in the agreement to include, among other things,
conviction of a felony, fraudulent conduct, failure to perform duties or observe
covenants of the agreement, or theft) or if the employee terminates his or her
employment for "good reason" (which is defined in the agreement to include,
among other reasons, a change in control) the employee will receive severance
pay which includes:
. any accrued but unpaid base salary as of the date of the employee's
termination;
. the earned but unpaid annual bonus, if any;
. the target annual incentive compensation, if any, that the employee
would have been entitled to receive pursuant to the employment
agreement in respect of the fiscal year in which the termination
occurs; and
. the employee's then current base salary multiplied by the greater of
either (1) two, for Mr. Giusto and Ms. Ferguson, or three, for Mr.
Murray and Mr. Longnecker, and (2) the number of years (including
fractions) remaining in the initial term of the agreement.
The employment agreements also provide that the employee shall be entitled
to receive employee benefits to which the employee may be entitled under the
employee benefit plans and continued participation in our group health insurance
plans at our expense until the earlier of three years from the date of
termination or the employee's eligibility for participation in the group health
plan of a subsequent employer.
In addition, our amended and restated bylaws provide that our directors
will not be personally liable to us or our stockholders for monetary damages for
any breach of fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
61
. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derives an improper
personal benefit.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table contains information about the beneficial ownership of
our common stock as of June 30, 2001 for:
. each person who beneficially owns more than five percent of the common
stock;
. each of our directors;
. each named executive officer and each executive officer; and
. all directors, named executive officers and executive officers as a
group.
Unless otherwise indicated, the address for each person or entity named
below is c/o Resources Connection, Inc., 695 Town Center Drive, Suite 600, Costa
Mesa, California 92626.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and except
for community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership is based on 20,792,080 shares of common stock outstanding as of June
30, 2001.
Number of Shares Percentage of
Beneficially Owned Shares Outstanding
------------------------ ------------------
Directors and Officers(1)
Donald B. Murray(2)............................. 1,421,083 6.8%
Stephen J. Giusto(3)............................ 387,456 1.9%
Karen M. Ferguson............................... 335,250 1.6%
Brent M. Longnecker............................. 240,994 1.2%
John D. Bower................................... 75,627 *
Kate W. Duchene(4).............................. 32,500 *
David G. Offensend(5)........................... -- *
Gerald Rosenfeld(6)............................. 136,882 *
Leonard Schutzman(5)............................ -- *
John C. Shaw(7)................................. 16,000 *
C. Stephen Mansfield............................ 750 *
Named Executive Officers,
Executive Officers and Directors as a
group (11 persons)............................. 2,646,542 12.7%
Five Percent Stockholders
Evercore Partners L.L.C (8)..................... 5,835,580 28.1%
62
- ------------
* Represents less than 1%.
(1) Since June 30, 2001, Mr. Murray, Mr. Giusto, Ms. Ferguson, Mr. Longnecker,
Mr. Bower and Ms. Duchene have sold 36,000, 15,000, 40,000, 55,000, 20,000,
and 4,000 shares, respectively.
(2) Includes shares owned by Mr. Murray and shares beneficially owned by Mr.
Murray in The Murray Family Trust, Donald B. Murray, Trustee; Murray Fam
Income TR312000 Shimizu Ronald J Ttee; Patrick Murray, Sr. as Custodian for
Patrick Murray, Jr. until age 21 under the CUTMA; and Brian Murray.
(3) Includes shares owned by Mr. Giusto, beneficially owned by Mr. Giusto in
The Giusto Family Income Trust dated 9/12/2000, Michael J. Giusto, trustee
and 1,000 shares owned by Susan P. Giusto, the spouse of Mr. Giusto.
(4) Ms. Duchene has 12,500 shares of common stock subject to options
exercisable within 60 days of June 30, 2001.
(5) David G. Offensend, a managing member of Evercore Partners L.L.C., may be
deemed to share beneficial ownership of any shares beneficially owned by
Evercore Partners L.L.C., but hereby disclaims such beneficial ownership,
except to the extent of his pecuniary interest in the Evercore Investors or
Evercore Partners L.L.C. Leonard Schutzman is a director and is an
executive of, or consultants to, Evercore Partners, Inc. Mr. Schutzman may
be deemed to share beneficial ownership of any shares beneficially owned by
Evercore Partners L.L.C., but hereby disclaims beneficial ownership of any
shares beneficially owned by Evercore Partners L.L.C., except to the extent
of his pecuniary interest in the Evercore Investors or Evercore Partners
L.L.C. The address for Mr. Offensend and Mr. Schutzman is c/o Evercore
Partners L.L.C., 65 East 55th Street, 33rd Floor, New York, New York 10022.
(6) Includes shares owned by Mr. Rosenfeld and shares beneficially owned by Mr.
Rosenfeld in the Rosenfeld August 2000 GRAT. Mr. Rosenfeld's address is
c/o Rothschild Inc., 1251 Avenue of the Americas, New York, New York 10020.
(7) Mr. Shaw has been a director of Resources Connection since June 1999. Mr.
Shaw has 15,000 shares of common stock subject to options exercisable
within 60 days of June 30, 2001. Mr. Shaw's address is The Shaw Group LLC,
P.O. Box 3369, Newport Beach, California 92659.
(8) Shares shown as owned by Evercore Partners L.L.C. are the aggregate number
of shares owned of record by Evercore Capital Partners L.P., Evercore
Capital Partners (NQ) L.P., Evercore Capital Offshore Partners L.P. and
Evercore Co-Investment Partnership L.P., or, collectively, the Evercore
Investors. Evercore Partners L.L.C. is directly or indirectly the general
Partner of each of the Evercore Investors. The address for Evercore
Partners L.L.C. is 65 East 55th Street 33rd Floor, New York, New York
10022.
Item 13. Certain Relationships and Related Transactions
The following is a description of transactions:
. to which we have been a party during the last three years;
. in which the amount involved exceeds $60,000; and
. in which any director, executive officer or holder of more than 5% of
our capital stock had or will have a direct or indirect material
interest.
You should also review certain arrangements with our executive officers
that are described under "Management."
Registration Rights and Board Representation of Evercore and Management
Pursuant to a Stockholders Agreement between the company and certain
entities affiliated with Evercore Partners L.L.C., or Evercore Partners, Donald
B. Murray, Stephen J. Giusto, Karen M. Ferguson and Brent M. Longnecker, the
stockholders party to this agreement have agreed to vote their shares in favor
of board nominees
63
assigned by each of Evercore Partners and the management stockholders. As
Evercore Partners' percentage ownership in the company decreases, so does the
number of director nominees it can designate. As the management
stockholders' percentage ownership in the company decreases, so does the number
of director nominees they can designate. The rights of either Evercore
Partners or the management stockholders will terminate when that group owns less
than 7.5% of the outstanding shares of common stock of the company. The company
has agreed to take such action as may be required to cause the board to consist
of the number of directors specified in the Stockholders Agreement.
Pursuant to the Stockholders Agreement, Evercore Partners and the
management stockholders each have the right to demand that the company register
their shares of common stock of the company three times; provided that
the board of directors of the company has the right to postpone a demand
registration in certain circumstances. The company has agreed to pay for two
demand registrations of each of Evercore Partners and the management
stockholders.
In addition, if we propose to register our common stock under the
Securities Act, Evercore Partners, Richard Gersten, Paul Lattanzio, Gerald
Rosenfeld, Mainz Holdings Ltd., DB Capital Investors, LP, BancBoston Investments
Inc., certain management stockholders and certain employee stockholders are
entitled to notice of the registration and to include a pro rata number of their
shares of our common stock in that offering. In an underwritten offering, the
underwriters have the right to limit the number of shares included in the
registration in their discretion.
As of June 30, 2001, the following directors, officers and holders of 5% or
more of our outstanding shares have registration rights with respect to the
shares identified below:
Number of Registrable Shares
Name of Common Stock
---- ----------------------------
Donald B. Murray.............................................. 1,421,083
Stephen J. Giusto............................................. 387,456
Karen Ferguson................................................ 335,250
Brent Longnecker.............................................. 240,994
John Bower.................................................... 4,690
Gerald Rosenfeld.............................................. 136,882
Entities affiliated with Evercore Capital Partners L.L.C...... 5,835,580
Longnecker Loan
Pursuant to our employment agreement with Mr. Longnecker, on May 1, 1999,
we loaned $200,000 to Mr. Longnecker. The loan is interest-free and matures on
April 1, 2007. On January 1, 2000, $50,000 of the loan was forgiven as a
portion of Mr. Longnecker's compensation. As of May 31, 2001, the outstanding
balance of the loan was $150,000. Additional amounts may be forgiven at the
discretion of our chief executive officer. If Mr. Longnecker is terminated for
cause, as defined in his employment agreement, or terminates his employment
without good reason, as defined in his employment agreement, all remaining loan
amounts owed will be due and payable.
Sale of Shares Pursuant to the 1998 Employee Stock Purchase Plan
In November 1998, we formed RC Transaction Corp., renamed Resources
Connection, Inc. In December 1998, we issued 5,243,000 shares of our common
stock pursuant to the 1998 Employee Stock Purchase Plan to certain members of
our management for an aggregate purchase price of $52,430. Between January and
February 1999, we issued and sold the remaining 387,000 shares of our common
stock to certain members of our management for an aggregate purchase price of
$3,870. Directors and officers who participated in these transactions include:
64
Number of Shares
of Common Stock
Name Acquired
---- ----------------
Donald B. Murray.................................. 1,450,600
Stephen J. Giusto................................. 400,000
Karen M. Ferguson................................. 355,000
Brent M. Longnecker............................... 200,000
John D. Bower..................................... 70,000
Kate W. Duchene................................... 20,000
Management-led Buyout
In April 1999, we entered into a series of transactions pursuant to which
we purchased all of the membership units of Resources Connection LLC from
Deloitte & Touche. We financed the purchase in part with capital provided by
our management and an investor group led by Evercore Capital Partners L.L.C. and
certain of its affiliates. We issued and sold 9,855,260 shares of our Common
Stock and 144,740 shares of our Class B Common Stock to 22 accredited investors
and 30 additional investors. Simultaneously, we issued and sold subordinated
notes, bearing 12% annual interest with a maturity date of April 15, 2004, in an
aggregate principal amount of $22.0 million to the same investors. After the
close of our initial public offering in December 2000, we used a portion of the
proceeds to prepay the outstanding principal and all accrued and unpaid interest
on the notes. Stockholders owning 5% or more of our outstanding shares,
directors and officers who participated in these transactions include:
Aggregate
Number of Principal Amount
Shares of
Number of Shares of Class B Subordinated
of Common Stock Common Stock Notes
Name Acquired Acquired Acquired ($)
---- ---------------- --------------- -----------------
Donald B. Murray.................................... 54,690 0 120,318
Stephen J. Giusto................................... 20,000 0 44,000
Brent M. Longnecker................................. 75,000 0 165,000
John D. Bower....................................... 4,690 0 10,318
Gerald Rosenfeld.................................... 185,010 0 239,990
Entities affiliated with Evercore Capital
Partners L.L.C............................... 7,742,630 144,740 17,889,654
Joint Marketing Agreement with and Investment in Ledgent
In September 2000, we entered into a Joint Marketing Agreement with
Complete BackOffice.com, Inc., later renamed Ledgent, Inc. Ledgent is a
privately held corporation engaged in the business of outsourcing complete
accounting and human resources functions over the Internet. Our agreement with
Ledgent is to cooperate in the promotion of each party's services to both new
and existing customers. To that end, we have agreed to provide our customer
list and marketing databases to Ledgent in exchange for its customer list and
marketing databases. We have also agreed to provide the Ledgent sales staff
with office space and administrative staff and support for one year from the
date of the agreement at no cost to Ledgent. In addition, both parties agree
not to compete with the business of the other party during the term of the
agreement, the initial term of which is two years. The agreement also
contemplates a referral service whereby we receive 1% of the gross profits
generated by Ledgent during the first year of a client relationship that results
from one of our leads, and Ledgent receives 1% of the gross profits generated by
us during the first year of a client relationship that results from one of its
leads.
We and several of our stockholders, including some members of our
management team, own collectively, a 13.4% indirect interest in Ledgent through
our majority-owned subsidiary, which we control. We own 57% of the subsidiary,
Donald B. Murray, our chief executive officer, owns 4.9% of the subsidiary and
our executive officers, other than Mr. Murray, collectively own 3.5% of the
subsidiary. Entities affiliated with Evercore Partners L.L.C. collectively have
a right to acquire 25.7% of the subsidiary.
Our subsidiary has the right to designate one director to serve on the
board of directors of Ledgent. Donald B. Murray, our chief executive officer,
is currently serving as the designee.
65
Relationship Between Our Financial Printing Company and Our Chief Legal Officer
and Executive Vice President, Human Relations
In connection with our initial public offering, we hired R.R. Donnelley
Financial Printing, or Donnelley, to provide certain printing and related
services. We estimate that the total amount we paid to Donnelley for its
services in connection with that offering was approximately $ 400,000. The
-------
spouse of Ms. Duchene is employed by Donnelley. We may engage Donnelley in the
future to provide additional printing and related services.
66
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial Statements and Financial Statement Schedule.
These documents are included in the response to Item 8 of this report on
Form 10-K. See the index on page 26.
3. Exhibits. The Exhibits filed as part of this Report on Form 10-K are listed
in Item 14(c) of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
None.
(c) Exhibits.
The following exhibits are filed as part of, or are incorporated by
reference in, this Report on Form 10-K:
67
EXHIBITS TO FORM 10-K
Exhibit
- -------
Number Description of Document
- ------ -----------------------
3.1 Second Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended November 30, 2000).
3.2 Amended and Restated Bylaws, as amended (incorporated by reference
to Exhibit 3.4 to the Registrant's Registration Statement on Form
S-1 filed on September 1, 2000 (File No. 333-45000)).
4.1 Stockholders Agreement, dated April 1, 1999, between Resources
Connection, Inc. and certain stockholders of Resources Connection,
Inc. (incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
4.2 Stockholders Agreement, dated December 11, 2000, between Resources
Connection, Inc. and certain stockholders of Resources Connection,
Inc. (incorporated by reference to Exhibit 4.2 to the Registrant's
Amendment No. 7 to the Registrant's Registration Statement on Form
S-1 filed on December 12, 2000 (File No. 333-45000)).
4.3 Specimen Stock Certificate (incorporated by reference to Exhibit
4.3 to the Registrant's Amendment No.7 to the Registrant's
Registration Statement on Form S-1 filed on December 12, 2000 (File
No. 333-45000)).
10.1 Resources Connection, Inc. 1998 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
10.2 Resources Connection, Inc. 1999 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
10.3 Employment Agreement, dated April 1, 1999, between Resources
Connection, Inc. and Donald B. Murray (incorporated by reference to
Exhibit 10.3 to the Registrant's Registration Statement on Form S-1
filed on September 1, 2000 (File No. 333-45000)).
10.4 Employment Agreement, dated April 1, 1999, between Resources
Connection, Inc. and Stephen J. Giusto (incorporated by reference to
Exhibit 10.4 to the Registrant's Registration Statement on Form S-1
filed on September 1, 2000 (File No. 333-45000)).
10.5 Employment Agreement, dated April 1, 1999, between Resources
Connection, Inc. and Karen M. Ferguson (incorporated by reference to
Exhibit 10.5 to the Registrant's Registration Statement on Form S-1
filed on September 1, 2000 (File No. 333-45000)).
10.6 Employment Agreement, dated April 1, 1999, between Resources
Connection, Inc. and Brent M. Longnecker (incorporated by reference
to Exhibit 10.6 to the Registrant's Registration Statement on Form
S-1 filed on September 1, 2000 (File No. 333-45000)).
10.7 Credit Agreement, dated April 1, 1999, by and among Resources
Connection, Inc., RCLLC Acquisition Corp., Resources Connection LLC,
Bankers Trust Company, as collateral agent (incorporated by
reference to Exhibit 10.7 to the Registrant's Registration Statement
on Form S-1 filed on September 1, 2000 (File No. 333-45000)).
10.8 Pledge Agreement, dated as of April 1, 1999, made by each of
Resources Connection, Inc., RCLLC Acquisition Corp. and Resources
Connection LLC to Bankers Trust Company, as collateral agent
(incorporated by reference to Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
10.9 Security Agreement, dated April 1, 1999, among Resources Connection,
Inc., certain of its subsidiaries and Bankers Trust Company, as
collateral agent (incorporated by reference to Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1 filed on September
1, 2000 (File No. 333-45000)).
68
Exhibit
- -------
Number Description of Document
- ------ -----------------------
10.10 Form of 12.0% Junior Subordinated Promissory Note (incorporated by
reference to Exhibit 4.4 to Amendment No. 2 to the Registrant's
Registration Statement filed on November 13, 2000 (File No. 333-
45000)).
10.11 Sublease, dated as of March 1, 2000, by and between Enterprise
Profit Solutions Corporation and Resources Connection LLC
(incorporated by reference to the Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
10.12 Resources Connection, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.11 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 filed on
November 13, 2000 (File No. 333-45000)).
10.13 Purchase Agreement, dated April 1, 1999, between Deloitte & Touche
LLP, Deloitte & Touche Acquisitions Company LLC, Resources
Connection LLC and Resources Connection, Inc. (incorporated by
reference to Exhibit 10.12 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 filed on November 13, 2000 (File
No. 333-45000)).
10.14 Investment Agreement, dated April 1, 1999, between Resources
Connection, Inc., certain entities affiliated with Evercore
Partners, L.L.C. and certain other investors (incorporated by
reference to Exhibit 10.13 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 filed on November 13, 2000 (File
No. 333-45000)).
10.15 Transition Services Agreement, dated April 1, 1999, between Deloitte
& Touche LLP, Resources Connection, Inc. and Resources Connection
LLC (incorporated by reference to Exhibit 10.14 to Amendment No. 2
to the Registrant's Registration Statement on Form S-1 filed on
November 13, 2000 (File No. 333-45000)).
10.16 Agreement of Lease, dated October 23, 2000, between 500-512 Seventh
Avenue Limited Partnership and Resources Connection LLC
(incorporated by reference to Exhibit 10.16 to the Registrant's
Registration Statement on Form S-1 filed on July 17, 2001 (File No.
333-65272)).
10.17 Lease, dated January 1, 2001, between One Town Center Associates and
Resources Connection LLC (incorporated by reference to Exhibit 10.17
to the Registrant's Registration Statement on Form S-1 filed on July
17, 2001 (File No. 333-65272)).
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants.
(d) Financial Statement Schedule:
The financial statement schedules for Resources Connection, Inc. and
Resources Connection LLC are included in the response to Item 8 of this Report
on Form 10-K. See the index on page 26.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Costa Mesa, State of California, on the 17th day of July, 2001.
By: /s/ Stephen J. Giusto
--------------------------------
Stephen J. Giusto
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, as amended,
this Annual Report on Form 10-K has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Donald B. Murray Chief Executive Officer, President and Director July 17, 2001
- ----------------------------------- (Principal Executive Officer)
Donald B. Murray
Chief Financial Officer, Executive Vice President July 17, 2001
/s/ Stephen J. Guisto of Corporate Development, Secretary and Director
- ------------------------------------ (Principal Financial Officer and Principal Accounting
Stephen J. Giusto Officer)
/s/ Karen M. Ferguson Executive Vice President and Director July 17, 2001
- ------------------------------------
Karen M. Ferguson
/s/ David G. Offensend Director July 17, 2001
- ----------------------------------
David G. Offensend
Director
- ----------------------------------
Gerald Rosenfeld
/s/ Leonard Schutzman Director July 17, 2001
- ----------------------------------
Leonard Schutzman
/s/ John C. Shaw Director July 17, 2001
- ----------------------------------
John C. Shaw
/s/ C. Stephen Mansfield Director July 17, 2001
- -----------------------------------
C. Stephen Mansfield
70
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and the Board of Directors of Resources Connection, Inc.
Our audits of the consolidated financial statements of Resources Connection,
Inc. referred to in our report dated July 2, 2001 appearing in this Annual
Report on Form 10-K also included an audit of the financial statement schedule
listed in Item 14(a)(2) of this Report on Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Orange County, California
July 2, 2001
71
RESOURCES CONNECTION, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Purchase of
Beginning Charged to Resources Ending
Balance Operations Write-offs Connection LLC Balance
---------- ---------- ----------- -------------- ----------
Allowance for Doubtful
Accounts
Period from November
16, 1998 (date of
inception) to May 31,
1999................. $ -- $ 200,000 $ (248,000) $955,000 $ 907,000
Year Ended May 31,
2000................. $ 907,000 $1,048,000 $ (369,000) $ -- $1,586,000
Year Ended May 31,
2001................. $1,586,000 $2,110,000 $(1,246,000) $ -- $2,450,000
72
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Members of Resources Connection LLC
Our audit of the financial statements of Resources Connection LLC referred
to in our report dated August 6, 1999 appearing in this Annual Report on Form
10-K also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Report on Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial statements.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
August 6, 1999
73
RESOURCES CONNECTION LLC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Beginning Charged to Ending
Balance Operations Write-offs Balance
--------- ---------- ---------- --------
Allowance for Doubtful Accounts
Period from June 1, 1998 to March
31, 1999........................... $422,000 $533,000 $ -- $955,000
74
EXHIBITS TO FORM 10-K
Exhibit
- -------
Number Description of Document
- ------ -----------------------
3.1 Second Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended November 30, 2000).
3.2 Amended and Restated Bylaws, as amended (incorporated by reference
to Exhibit 3.4 to the Registrant's Registration Statement on Form
S-1 filed on September 1, 2000 (File No. 333-45000)).
4.1 Stockholders Agreement, dated April 1, 1999, between Resources
Connection, Inc. and certain stockholders of Resources Connection,
Inc. (incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
4.2 Stockholders Agreement, dated December 11, 2000, between Resources
Connection, Inc. and certain stockholders of Resources Connection,
Inc. (incorporated by reference to Exhibit 4.2 to the Registrant's
Amendment No. 7 to the Registrant's Registration Statement on Form
S-1 filed on December 12, 2000 (File No. 333-45000)).
4.3 Specimen Stock Certificate (incorporated by reference to Exhibit
4.3 to the Registrant's Amendment No.7 to the Registrant's
Registration Statement on Form S-1 filed on December 12, 2000 (File
No. 333-45000)).
10.1 Resources Connection, Inc. 1998 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
10.2 Resources Connection, Inc. 1999 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
10.3 Employment Agreement, dated April 1, 1999, between Resources
Connection, Inc. and Donald B. Murray (incorporated by reference to
Exhibit 10.3 to the Registrant's Registration Statement on Form S-1
filed on September 1, 2000 (File No. 333-45000)).
10.4 Employment Agreement, dated April 1, 1999, between Resources
Connection, Inc. and Stephen J. Giusto (incorporated by reference to
Exhibit 10.4 to the Registrant's Registration Statement on Form S-1
filed on September 1, 2000 (File No. 333-45000)).
10.5 Employment Agreement, dated April 1, 1999, between Resources
Connection, Inc. and Karen M. Ferguson (incorporated by reference to
Exhibit 10.5 to the Registrant's Registration Statement on Form S-1
filed on September 1, 2000 (File No. 333-45000)).
10.6 Employment Agreement, dated April 1, 1999, between Resources
Connection, Inc. and Brent M. Longnecker (incorporated by reference
to Exhibit 10.6 to the Registrant's Registration Statement on Form
S-1 filed on September 1, 2000 (File No. 333-45000)).
10.7 Credit Agreement, dated April 1, 1999, by and among Resources
Connection, Inc., RCLLC Acquisition Corp., Resources Connection LLC,
Bankers Trust Company, as collateral agent (incorporated by
reference to Exhibit 10.7 to the Registrant's Registration Statement
on Form S-1 filed on September 1, 2000 (File No. 333-45000)).
10.8 Pledge Agreement, dated as of April 1, 1999, made by each of
Resources Connection, Inc., RCLLC Acquisition Corp. and Resources
Connection LLC to Bankers Trust Company, as collateral agent
(incorporated by reference to Exhibit 10.8 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
10.9 Security Agreement, dated April 1, 1999, among Resources Connection,
Inc., certain of its subsidiaries and Bankers Trust Company, as
collateral agent (incorporated by reference to Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1 filed on September
1, 2000 (File No. 333-45000)).
10.10 Form of 12.0% Junior Subordinated Promissory Note (incorporated by
reference to Exhibit 4.4 to Amendment No. 2 to the Registrant's
Registration Statement filed on November 13, 2000 (File No. 333-
45000)).
10.11 Sublease, dated as of March 1, 2000, by and between Enterprise
Profit Solutions Corporation and Resources Connection LLC
(incorporated by reference to the Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1 filed on September 1, 2000 (File
No. 333-45000)).
10.12 Resources Connection, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.11 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 filed on
November 13, 2000 (File No. 333-45000)).
10.13 Purchase Agreement, dated April 1, 1999, between Deloitte & Touche
LLP, Deloitte & Touche Acquisitions Company LLC, Resources
Connection LLC and Resources Connection, Inc. (incorporated by
reference to Exhibit 10.12 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 filed on November 13, 2000 (File
No. 333-45000)).
10.14 Investment Agreement, dated April 1, 1999, between Resources
Connection, Inc., certain entities affiliated with Evercore
Partners, L.L.C. and certain other investors (incorporated by
reference to Exhibit 10.13 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 filed on November 13, 2000 (File
No. 333-45000)).
10.15 Transition Services Agreement, dated April 1, 1999, between Deloitte
& Touche LLP, Resources Connection, Inc. and Resources Connection
LLC (incorporated by reference to Exhibit 10.14 to Amendment No. 2
to the Registrant's Registration Statement on Form S-1 filed on
November 13, 2000 (File No. 333-45000)).
10.16 Agreement of Lease, dated October 23, 2000, between 500-512 Seventh
Avenue Limited Partnership and Resources Connection LLC
(incorporated by reference to Exhibit 10.16 to the Registrant's
Registration Statement on Form S-1 filed on July 17, 2001 (File No.
333-65272)).
10.17 Lease, dated January 1, 2001, between One Town Center Associates and
Resources Connection LLC (incorporated by reference to Exhibit 10.17
to the Registrant's Registration Statement on Form S-1 filed on July
17, 2001 (File No. 333-65272)).
21.1 List of Subsidiaries.
23.1 Consent of Independent Accountants.