S-1 1 0001.txt REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on September 1, 2000 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 --------------- RESOURCES CONNECTION, INC. (Exact name of Registrant as specified in its charter) Delaware 8742 33-0832424 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation) Classification Code Number) Identification Number)
695 Town Center Drive, Suite 600 Costa Mesa, California 92626 (714) 430-6400 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Donald B. Murray Chief Executive Officer Resources Connection, Inc. 695 Town Center Drive, Suite 600 Costa Mesa, California 92626 (714) 430-6400 (Name, address, including zip code, and telephone number, including area code, of agents for service) Copies To: David A. Krinsky Patrick T. Seaver Charlotte L. Bischel Shayne Kennedy O'Melveny & Myers LLP Latham & Watkins 610 Newport Center Drive, Suite 1700 650 Town Center Drive, Suite 2000 Newport Beach, California 92660 Costa Mesa, California 92626-1918 (949) 760-9600 (714) 540-1235 Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act") check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ______________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ______________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ______________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] CALCULATION OF REGISTRATION FEE ================================================================================ Proposed Maximum Title of Securities Aggregate Offering Amount of To be Registered Price(1)(2) Registration Fee -------------------------------------------------------------------------------- Common Stock ($0.01 par value)........... $103,500,000 $27,324 ================================================================================ (1) Includes shares that the underwriters will have the option to purchase solely to cover over-allotments, if any. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(o) under the Securities Act. --------------- Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 2000 [ ] Shares [LOGO OF RESOURCES CONNECTION] Common Stock -------- Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $ and $ per share. We have applied to list our common stock on The Nasdaq Stock Market's National Market under the symbol "RECN". We are selling shares of our common stock and the selling stockholders are selling shares of our common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. The underwriters have an option to purchase a maximum of additional shares from the selling stockholders to cover over-allotments of shares. Investing in our common stock involves risks. See "Risk Factors" on page 8.
Underwriting Proceeds to Proceeds to Price to Discounts and Resources Selling Public Commissions Connection Stockholders ------------- ------------- ------------- ------------- Per Share.............. Total..................
Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Joint Lead and Book-Running Managers Credit Suisse First Boston Deutsche Banc Alex. Brown Robert W. Baird & Co. The date of this prospectus is , 2000. [inside front cover] [small logo] Resources Connection, Inc. is a leading professional services firm that provides experienced accounting and finance, human capital management and information technology professionals to clients on a project-by-project basis. [bar graph [bar graph showing showing revenue EBITDA in growth in fiscal 1997, fiscal 1997, 1998, 1999 1998, 1999 and 2000] and 2000] THE PROFESSIONAL SERVICES FIRM OF THE FUTURE [bar graph [bar graph showing showing associate location growth in growth in fiscal 1997, fiscal 1997, 1998, 1999 1998, 1999 and 2000] and 2000] ---------------- TABLE OF CONTENTS
Page Page ---- ---- Prospectus Summary.................... 3 Related-Party Transactions............ 45 Risk Factors.......................... 8 Principal and Selling Stockholders.... 47 Forward-Looking Statements............ 15 Description of Capital Stock.......... 49 Use of Proceeds....................... 16 Shares Eligible for Future Sale....... 52 Dividend Policy....................... 16 U.S. Federal Tax Considerations Capitalization........................ 17 for Non-U.S. Holders................. 54 Dilution.............................. 18 Underwriting.......................... 57 Selected Historical Consolidated Notice to Canadian Residents.......... 60 Financial Data....................... 19 Legal Matters......................... 61 Management's Discussion and Analysis Experts............................... 61 of Financial Condition and Results Additional Information................ 61 of Operations........................ 21 Index to Consolidated Financial Business.............................. 28 Statements...........................F-1 Management............................ 37
---------------- You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document. Dealer Prospectus Delivery Obligation Until (25 days after commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. i PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares in this offering. You should read the entire prospectus carefully. References in this prospectus to "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 closest to May 31st. Overview Resources Connection, Inc. is a leading professional services firm that provides experienced accounting and finance, human capital management and information technology professionals to clients on a project-by-project basis. We assist our clients with discrete projects requiring specialized professional expertise such as mergers and acquisitions due diligence, transitions of management information systems, financial analyses (e.g., product costing and margin analyses), tax-related projects, and compensation program design and implementation. We also assist our clients with periodic needs such as budgeting and forecasting, audit preparation and public reporting. We were founded in 1996 and operated as an independent subsidiary of Deloitte & Touche until April 1999, when we completed a management-led buyout. Since our inception, we have opened 35 offices in the United States and 3 offices abroad and have established a growing and diverse client base of over 1,500 clients, including 43 of the Fortune 100, 15 of the Fortune e50 Index and three of the Big Five accounting firms. We have grown revenues internally from $9.3 million in fiscal 1997 to $126.3 million in fiscal 2000, a three-year compounded annual growth rate, or CAGR, of 138%. Over the same period, we have increased our earnings before interest, income taxes, depreciation and amortization, or EBITDA, from $878,000 to $18.1 million. We have been profitable every year since our inception. Our management team, virtually all of whom have Big Five experience, has created a culture that combines the commitment to quality and client-service focus of a Big Five accounting firm with the entrepreneurial energy of an innovative, high-growth company. Because of this culture, we believe we have been able to attract and retain highly-qualified experienced associates, which, in turn, is a significant component of our success. We employ more than 1,050 associates on assignment, who have an average of 18 years of professional experience in a wide range of industries and functional areas; approximately 50% of our associates are CPAs and approximately 28% have MBAs. We offer our associates careers that combine many of the advantages of working for a traditional professional services firm with the flexibility of project-based work. 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 founders created Resources Connection to capitalize on the increasing demand for high-quality, outsourced professional services and to address the needs of companies that are not adequately met by traditional professional services providers. These providers, which include consulting firms, loaned employees of Big Five accounting firms, and traditional and Internet-based staffing firms, offer services which may require a company to make compromises in terms of quality, cost or internal resource allocation. We believe that we provide our clients with superior service and a value proposition which differentiates us from our competitors because we are able to combine all of the following: . a relationship-oriented approach to better assess our clients' project needs; . highly-qualified professionals with the requisite skills and experience; 3 . competitive rates on an hourly, instead of a per project, basis; and . greater client control over their projects. Market Opportunity The outsourcing of professionals, according to Staffing Industry Analysts, Inc., is one of the fastest growing segments of the industry for outsourcing employees, with revenues estimated to grow from $9.1 billion in 1999 to $14.4 billion in 2001, representing a CAGR of 25.8%. Accounting and finance professionals are estimated to account for approximately half of this segment. This growth is driven by the recognition that companies can strategically access specialized skills and expertise and increase labor flexibility by outsourcing their professional services. At the same time, we believe many professionals are embracing project-based careers because of the more flexible hours and work arrangements, and the opportunity for skill development that they provide. Resources Connection is positioned to capitalize on the confluence of these industry trends by providing clients with high-quality, project-based professional assistance and by offering professionals rewarding, flexible careers. Growth Strategy We believe we have significant opportunity for continued strong internal growth in our core business; however, we will also evaluate potential strategic acquisitions on an opportunistic basis. Our objective is to be the leading provider of project-based professional services by: . capturing more of our clients' total outsourced professional services expenditures; . adding additional clients in a broad range of industries; . expanding our presence both in the United States and internationally; and . providing additional professional services lines to meet our clients' project-based needs. Our Company Resources Connection was founded as a division of Deloitte & Touche in June 1996, and from January 1997 until April 1999, operated the company as Resources Connection LLC, a Delaware limited liability company and a wholly-owned subsidiary of Deloitte & Touche. In November 1998, our management formed RC Transaction Corp., a Delaware corporation, to raise capital for an intended management-led buyout of Resources Connection LLC. The management-led buyout was consummated in April 1999 and, since that time, RC Transaction Corp., renamed Resources Connection, Inc. in August 2000, has owned all of the membership units of Resources Connection LLC. Resources Connection is an independent company which is no longer affiliated with Deloitte & Touche. Our business is operated primarily through Resources Connection LLC. Our principal executive offices are located at 695 Town Center Drive, Suite 600, Costa Mesa, California 92626. Our telephone number is (714) 430-6400. Our website is http://www.resourcesconnection.com. We do not intend the information found on our website to be a part of this prospectus. 4 The Offering Common stock offered by: Resources Connection, Inc....................... shares Selling stockholders............................ shares Total....................................... shares Common stock to be outstanding after the offering.. shares Use of proceeds.................................... Repay senior and subordinated debt, fund growth, provide working capital and for other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol...................... RECN
Common stock to be outstanding after this offering is based on 15,630,000 shares of common stock outstanding as of August 26, 2000. It does not include: . 2,129,000 shares of common stock issuable on the exercise of stock options outstanding as of August 26, 2000; and . 211,000 shares of common stock reserved for issuance under the Resources Connection, Inc. 1999 Long-Term Incentive Plan, or the 1999 Long-Term Incentive Plan, as of August 26, 2000. Except as otherwise indicated, all of the information in this prospectus: . reflects the conversion of each outstanding share of Class B Common Stock and Class C Common Stock into 144,740 shares of Common Stock at the closing of this offering; and . assumes no exercise of the underwriters' over-allotment option. 5 Summary Consolidated Financial Information The following table summarizes our consolidated financial data. You should read the summary financial data below in conjunction with our consolidated financial statements and related notes beginning on page F-1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on page 21. Resources Connection commenced operations on June 1, 1996. The consolidated statements of income data for the years ended May 31, 1997 and 1998 were derived from the financial statements of our wholly-owned subsidiary, Resources Connection LLC. After forming Resources Connection, Inc. on November 16, 1998, we completed the acquisition of Resources Connection LLC on April 1, 1999. The information for the year ended May 31, 1999 presents the combined operating data of Resources Connection LLC for the period from June 1, 1998 to March 31, 1999 and Resources Connection, Inc. for the period from November 16, 1998 to May 31, 1999. Such information is presented in order to facilitate comparison of results between years. The historical results presented are not necessarily indicative of future results. The pro forma as adjusted balance sheet data reflect our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts, commissions and offering expenses.
Resources Connection, Inc. and Resources Connection Resources Resources Connection LLC LLC Combined Connection, Inc. ------------------------- ------------ ---------------- Year Ended Year Ended Year Ended Year Ended May 31, 1997 May 31, 1998 May 31, 1999 May 31, 2000 ------------ ------------ ------------ ---------------- (unaudited) (dollar amounts in thousands, except per share data) Consolidated Statements of Income Data: Revenue................. $9,331 $29,508 $70,822 $126,332 Direct cost of services............... 5,367 16,671 39,871 73,541 ------ ------- ------- -------- Gross profit............ 3,964 12,837 30,951 52,791 Selling, general and administrative expenses............... 3,086 9,035 21,345 34,649 Amortization of intangible assets...... -- -- 371 2,231 Depreciation expense.... 9 79 148 284 ------ ------- ------- -------- Income from operations.. 869 3,723 9,087 15,627 Interest expense........ -- -- 734 4,717 ------ ------- ------- -------- Income before provision for income taxes....... 869 3,723 8,353 10,910 Provision for income taxes (1).............. 348 1,489 3,363 4,364 ------ ------- ------- -------- Net income (1).......... $ 521 $ 2,234 $ 4,990 $ 6,546 ====== ======= ======= ======== Net income per share: Basic................. $ 0.42 ======== Diluted............... $ 0.42 ======== Number of shares used in computing net income per share: Basic................. 15,630 ======== Diluted............... 15,714 ======== Other Data: EBITDA (2).............. $ 878 $ 3,802 $ 9,606 $ 18,142 Number of offices open at end of year......... 9 18 28 35 Total number of associates on assignment at end of year................... 127 326 697 1,056
------- (1) As a limited liability company, income taxes on any income realized by Resources Connection LLC were the obligation of its members and, accordingly, no provision for income taxes was recorded by Resources Connection LLC. Pro forma net income has been computed for periods through May 31, 1999, as if Resources Connection LLC had been fully subject to federal and state income taxes as a C corporation. (2) "EBITDA" represents earnings before interest, income taxes, depreciation and amortization. EBITDA is presented here to provide additional information about our operations and should not be construed as a better indicator of operating performance than income from operations as determined in accordance with generally accepted accounting principles, or GAAP, or a better indicator of liquidity than cash flow from operating activities as determined in accordance with GAAP. 6
May 31, 2000 ------------------- Pro Forma Actual As Adjusted ------- ----------- Consolidated Balance Sheet Data: Cash and cash equivalents................................... $ 4,490 Working capital............................................. 9,932 Total assets................................................ 70,106 Long-term debt, including current portion................... 41,771 Stockholders' equity........................................ 17,185
7 RISK FACTORS You should carefully consider the risks described below before making a decision to buy our common stock. 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 prospectus, including our financial statements and the related notes. Risks Related to Our Business 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 which 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. We have not been in business during an economic downturn and our business may be significantly affected if there is an economic downturn in the future. If the general level of economic activity slows, our clients may 8 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. 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 trademark registration for "Resources Connection" and an application for service mark registration of our name and logo. We may be unable to secure either 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. 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. Our agreements with our clients typically contain provisions designed to limit our exposure to legal claims relating to our services, including limitations of liability and exclusions of express or implied warranties, consequential damages and other remedies. However, it is possible that some or all of these provisions may not protect us or may not be enforceable under some circumstances or under the laws of some jurisdictions. 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. 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 9 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: . compete with existing and future competitors; . expand work from our existing clients; . grow our client base; . expand profitably into new cities; . provide additional professional services lines; . maintain margins in the face of pricing pressures; . attract and retain qualified associates and management personnel; 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. 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 occur, 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; 10 . failure to motivate, or loss of, key employees from either our existing business or the acquired business; . 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 herein may not be indicative of our future financial condition and performance. The loss of our association with Deloitte & Touche could reduce our ability to attract and retain associates and clients and will require us to enhance our infrastructure and local networks. Our association with Deloitte & Touche, from our inception in June 1996 until April 1999, helped establish us as a high-quality professional services company and contributed to our ability to open, integrate, and establish a presence in new office locations. Apart from certain transition assistance, which ends no later than November 2000, and our joint venture with Deloitte & Touche Taiwan, which is not owned or controlled by Deloitte & Touche, since April 1999 our contact with Deloitte & Touche has been reduced to the services we provide it. The loss of our association with Deloitte & Touche may adversely affect our business and our ability to attract new clients, keep existing clients and hire and retain qualified associates. We face the challenges of developing a presence in areas where we establish new offices and integrating new office locations so that they are fully operational and functional without the infrastructure previously provided by Deloitte & Touche. Our business could suffer if we lose the services of a key member of our management. Our future success depends upon the continued employment of certain of our senior management professionals, particularly Donald B. Murray, our chief executive officer. While we have signed employment agreements with four of our six senior management professionals, including Mr. Murray, these agreements are terminable under certain circumstances. We do not have employment agreements with the other two members of our management team. The loss of the services of any of the members of our management team could have a material adverse effect upon our business, financial condition and results of operations. Our quarterly financial results may be subject to significant fluctuations which may increase the volatility of our stock price. Our results of operations could vary significantly from quarter to quarter. 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; 11 . 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 which 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. 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. We are subject to regulations applicable to businesses generally, such as employment laws and regulations. In addition, in connection with providing services to clients in certain regulated industries, we are subject to certain 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. Risks Related to this Offering Our securities have no prior market and our stock price is likely to be volatile, which could result in substantial losses for investors purchasing shares in this offering. Before this offering, there was no public market for our common stock. A consistent public market for our common stock may not develop or be sustained after this offering. Fluctuations in the market price of our common stock could occur in response to factors such as: . actual or anticipated variations in quarterly operating results; . loss of a significant client or group of clients; . changes in financial estimates by securities analysts; . failure to meet analyst predictions and projections; . changes in market valuations of professional services companies; . improvements in the professional services of our competitors; . announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors; . additions or departures of key personnel; and . sales of our common stock or other securities in the future. In addition, stock markets in general, and The Nasdaq National Market in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies listed on these markets. The trading prices and valuations of many companies' stocks are at or near historical highs, which are substantially above historical levels. These trading prices and valuations may not be sustainable. These broad market and industry factors may materially adversely affect the market price of our common stock, regardless of our actual operating performance. 12 Shares you purchase in this offering will be immediately and substantially diluted and may be further diluted in the future. The initial public offering price is substantially higher than the net tangible book value of our common stock. As a result, if you purchase shares in this offering, your ownership interest will be immediately and substantially diluted. The dilution is expected to be $ per share. If outstanding options to purchase shares of common stock are exercised, you will be further diluted. If additional capital is raised through the issuance of equity securities, you will experience further dilution. As a result of these dilutions, in the event of a liquidation, you may receive significantly less than the purchase price that you paid for your shares. In addition, any new equity securities may have rights, preferences or privileges senior to those of your shares. Potential sales of shares eligible for future sale after this offering could cause our stock price to decline. If our stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, in the public market following this offering, 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. The shares sold in this offering will be freely tradable immediately upon completion of this offering. In addition, on the 181st day after completion of this offering, approximately shares of our common stock held by existing stockholders will be freely tradable, subject in some instances to the volume and other limitations of Rule 144. Additionally, of the 2,129,000 shares of common stock that may be issued upon the exercise of options outstanding as of August 26, 2000, approximately 344,500 shares of common stock will be vested and eligible for sale 180 days after the date of this prospectus. Sales of these shares and other shares of common stock held by existing stockholders could cause the market price of our common stock to decline. For a further description of the eligibility of shares for sale into the public market following the offering, see "Shares Eligible for Future Sale." Our existing stockholders will continue to control us after this offering, and they may make decisions with which you disagree. Upon consummation of this offering, Evercore Partners Inc., and certain of its affiliates, will own approximately % of the outstanding shares of common stock, or % if the underwriters' over-allotment option is exercised in full, and our executive officers, directors and principal stockholders, including Evercore Partners Inc. and certain of its affiliates, will own approximately % of the outstanding shares of common stock, or % if the underwriters' over-allotment option is exercised in full. 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 concentration of ownership 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 amended and 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; 13 . divide our board of directors into three classes of directors, with each class serving a staggered three-year term. As 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 maintain the composition of the board of directors; . prohibit cumulative voting in the election of directors unless required by applicable law. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able 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 or 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. Management's use of the net proceeds from this offering may not increase our operating results or market value. Management plans to use approximately $41.8 million of our net proceeds from this offering to satisfy senior and subordinated debt obligations of the company as of May 31, 2000. The remaining proceeds, approximately $ million, will be used to fund growth, provide working capital and for general corporate purposes. Consequently, our management will have broad discretion with respect to the application of these net proceeds, and you will not have the opportunity, as part of your investment in our common stock, to assess whether the proceeds are being used appropriately. The offering proceeds may be used for purposes that do not increase our operating results or market value. Pending application of the proceeds, they might be placed in investments that do not produce income or that lose value. The selling stockholders will receive benefits from this offering which we will not share. The selling stockholders will receive $ million of net proceeds from this offering, excluding the underwriters' over-allotment option. We will not receive any of these proceeds. In addition, this offering will establish a public market for our common stock and provide increased liquidity to the selling stockholders for the shares they own after this offering. We do not plan to pay dividends in the future. We have not paid cash dividends in the past and do not plan to pay dividends in the foreseeable future. We currently intend to retain all earnings for the growth of our business. 14 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including "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 are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under "Risk Factors," that may cause our, or our industry's, actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward- looking statements. We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. This prospectus contains estimates made by independent parties relating to market size and growth. These estimates involve a number of assumptions and limitations. We cannot assure you that these estimates of market size are accurate or that projections of market growth will be achieved. Projections, assumptions and estimates of our future performance and the future performance of our industry are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors" and elsewhere in this prospectus. 15 USE OF PROCEEDS We estimate that the net proceeds from the sale of shares of common stock, offered by us at an assumed initial public offering price of $ per share, will be $ million, after deducting the estimated underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of shares by the selling stockholders. We intend: . to use approximately $16.5 million of the net proceeds to repay our senior debt obligations, bearing interest, at our option, at the prime rate plus 2% and a Eurodollar-based rate plus 3% and having a maturity date of April 2003, pursuant to our existing credit agreement as of May 31, 2000; . to use approximately $25.3 million of the net proceeds to redeem the balance due on our subordinated notes as of May 31, 2000, bearing 12% interest per annum and having a maturity date of April 15, 2004; and . to fund the growth of our business and for working capital and general corporate purposes. We may also use a portion of the net proceeds for acquisitions of businesses that complement our business. We currently have no commitments or agreements to make any acquisitions and may not make any acquisitions in the future. Pending these uses, we intend to invest the net proceeds in United States government securities and other short-term, investment-grade, interest-bearing instruments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for additional information regarding our sources and uses of capital. 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. 16 CAPITALIZATION The following table sets forth at May 31, 2000 our capitalization on an actual basis and a pro forma as adjusted basis to reflect the sale of shares of common stock in this offering at the initial public offering price of $ per share, the conversion of all authorized shares of Class B Common Stock and Class C Common Stock to Common Stock, and the use of approximately $16.5 million to repay our bank debt and approximately $25.3 million to redeem our subordinated notes. You should read this information together with the "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes contained elsewhere in this prospectus.
As of May 31, 2000 -------------------- Pro Forma Actual As Adjusted ------- ----------- (in thousands except share and per share data) Debt (including current maturities): Senior Secured Credit Facility.......................... $16,500 Subordinated Notes...................................... 25,271 ------- Total Debt............................................ 41,771 Stockholders' equity: Preferred Stock, $0.01 par value, 5,000,000 shares authorized; and no shares issued or outstanding, actual; 5,000,000 shares authorized and no shares issued and outstanding, pro forma as adjusted.......... Common Stock, $0.01 par value, 35,000,000 shares authorized, and 15,630,000 shares issued and outstanding, actual; 35,000,000 shares authorized, and issued and outstanding, pro forma as adjusted Common Stock, 25,000,000 shares designated, and 15,485,260 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma as adjusted.......................................... 155 Class B Common Stock, 3,000,000 shares designated, and 144,740 shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma as adjusted.......................................... 1 Class C Common Stock, 7,000,000 shares designated, and no shares issued and outstanding, actual; no shares designated, issued or outstanding, pro forma as adjusted............................................. Additional paid-in capital.............................. 10,222 Deferred stock compensation............................. (499) Accumulated other comprehensive loss.................... (32) Retained earnings ...................................... 7,338 ------- Total stockholders' equity............................ 17,185 ------- Total capitalization.................................. $58,956 ======= ---
This table excludes the following shares: . 2,129,000 shares of common stock issuable on the exercise of stock options outstanding as of August 26, 2000; and . 211,000 shares of common stock reserved for future grant or issuance under the 1999 Long-Term Incentive Plan as of August 26, 2000. 17 DILUTION Our net tangible book value at May 31, 2000 was $(24.4 million), or approximately $(1.56) per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving effect to the conversion of all Class B Common Stock and Class C Common Stock to Common Stock. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of our common stock immediately afterwards. After giving effect to our sale of shares of common stock offered by this prospectus and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at May 31, 2000 would have been approximately $ million, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to new stockholders purchasing shares of common stock in this offering. The following table illustrates this per share dilution. Assumed public offering price per share........................ $ --- Net tangible book value per share as of May 31, 2000......... $(1.56) ------ Increase per share attributable to new stockholders.......... ------ Pro forma as adjusted net tangible book value per share after the offering.................................................. --- Dilution per share to new stockholders......................... $ ===
The following table summarizes the difference between the existing stockholders and new stockholders with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid. The information is presented as of May 31, 2000, and is based on an assumed initial public offering price of $ per share, before deducting the underwriting discount and commissions and our estimated offering expenses.
Shares Purchased Total Consideration Average ------------------ ------------------- Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- --------- Existing stockholders....... 15,630,000 % $10,056,300 % $0.64 New stockholders............ % % $ ---------- --- ----------- --- Total..................... 100% $ 100% ========== === =========== ===
The foregoing discussion and tables assume no exercise of options to purchase 2,129,000 shares of common stock, at a weighted average exercise price of $4.01 per share outstanding as of August 26, 2000 and does not include 211,000 shares of common stock reserved for issuance under the 1999 Long-Term Incentive Plan. If any of these options are exercised, the new stockholders will be further diluted. For more information about these options, see "Management--1999 Long-Term Incentive Plan," "Description of Capital Stock" and Notes 10 and 14 to Resources Connection, Inc. Notes to Consolidated Financial Statements. 18 SELECTED HISTORICAL CONSOLIDATED 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 F-1 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing on page 21. The statement of income data for the year ended May 31, 1997, and the consolidated balance sheet data at May 31, 1997 were derived from the unaudited financial statements of Resources Connection LLC and are not included in this prospectus. 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, are included elsewhere in this prospectus. The consolidated statements of income data for the period from November 16, 1998 to May 31, 1999, and the year ended May 31, 2000, and the consolidated balance sheet data at May 31, 1999 and 2000 were derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers LLP and are included elsewhere in this prospectus. Historical results are not necessarily indicative of results that may be expected for any future periods.
Resources Connection LLC Resources Connection, Inc. ----------------------------------------- ------------------------------ Period from Period from Year Ended Year Ended June 1, 1998 to November 16, 1998 Year Ended May 31, 1997 May 31, 1998 March 31, 1999 to May 31, 1999 May 31, 2000 ------------ ------------ --------------- ----------------- ------------ (unaudited) (dollar amounts in thousands, except per share data) Consolidated Statements of Income Data: Revenue................. $9,331 $29,508 $55,438 $15,384 $126,332 Direct cost of services............... 5,367 16,671 31,253 8,618 73,541 ------ ------- ------- ------- -------- Gross profit............ 3,964 12,837 24,185 6,766 52,791 Selling, general and administrative expenses............... 3,086 9,035 17,071 4,274 34,649 Amortization of intangible assets...... -- -- -- 371 2,231 Depreciation expense.... 9 79 118 30 284 ------ ------- ------- ------- -------- Income from operations.. 869 3,723 6,996 2,091 15,627 Interest expense........ -- -- -- 734 4,717 ------ ------- ------- ------- -------- Income before provision for income taxes....... 869 3,723 6,996 1,357 10,910 Provision for income taxes.................. -- -- -- 565 4,364 ------ ------- ------- ------- -------- Net income.............. $ 869 $ 3,723 $ 6,996 $ 792 $ 6,546 ====== ======= ======= ======= ======== 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 share: Basic................. $ 0.09 $ 0.42 ======= ======== Diluted............... $ 0.09 $ 0.42 ======= ======== Number of shares used in computing net income per share: Basic................. 8,691 15,630 ======= ======== Diluted............... 8,691 15,714 ======= ======== Other Data: EBITDA (2).............. $ 878 $ 3,802 $ 7,114 $ 2,492 $ 18,142 Number of offices open at end of period....... 9 18 27 28 35 Total number of associates on assignment at end of period................. 127 326 675 697 1,056
19
Resources Resources Connection, Connection LLC Inc. ------------------ --------------- As of May 31, ---------------------------------- 1997 1998 1999 2000 ----------- ------ ------- ------- (unaudited) Consolidated Balance Sheet Data: Cash and cash equivalents................... $ -- $3,168 $ 876 $ 4,490 Working capital............................. 1,133 4,504 7,150 9,932 Total assets................................ 1,409 7,976 58,954 70,106 Long-term debt, including current portion... -- -- 42,531 41,771 Stockholders' equity........................ 1,205 4,928 10,610 17,185
-------- (1) As a limited liability company, income taxes on any income realized by Resources Connection LLC were the obligation of its members and, accordingly, no provision for income taxes was recorded by Resources Connection LLC. Pro forma net income has been computed for periods through May 31, 1999, as if Resources Connection LLC had been fully subject to federal and state income taxes as a C corporation. (2) "EBITDA" represents earnings before interest, income taxes, depreciation and amortization. EBITDA is presented here to provide additional information about our operations and should not be construed as a better indicator of operating performance than income from operations as determined in accordance with generally accepted accounting principles, or GAAP, or a better indicator of liquidity than cash flow from operating activities as determined in accordance with GAAP. 20 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 8 and elsewhere in this prospectus. Overview Resources Connection is a leading professional services firm that provides experienced accounting and finance, human capital management and information technology professionals to clients on a project-by-project basis. We assist our clients with discrete projects requiring specialized professional expertise such as mergers and acquisitions due diligence, transitions of management information systems, financial analyses (e.g., product costing and margin analyses), tax-related projects, and compensation program design and implementation. 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 previously co-located offices. Our general and administrative expenses for the first ten months of fiscal 1999 included charges for services supplied by Deloitte & Touche, as the parent of Resources Connection LLC. The charges for these services may not necessarily be at rates available from third parties. Pursuant to the transition services agreement, our general and administrative expenses for the last two months of fiscal 1999 and all of fiscal 2000 include charges for services provided by Deloitte & Touche. These transition services were negotiated at arms length. 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. In fiscal 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 capital management and also began operations in Toronto, Canada; Taipei, Taiwan; and Hong Kong, People's Republic of China. Our new service lines were introduced in a limited number of our offices. To date in fiscal 2001, we have established three domestic offices. As a result, we currently serve our clients through 35 offices in the United States and three 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. To a much lesser extent, we also earn revenue if a client hires an associate onto their permanent payroll. This type of revenue is recognized at the time our client completes the hiring process and represented less than 4% of our revenue in each of fiscal 1998, 1999 and 2000. 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. We generally pay associates only when working on client assignments, and therefore, direct cost of services tend to vary directly with the volume of revenue we earn. We expense the benefits we pay to our associates, which include paid vacation and holidays; referral bonus programs; 21 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 certain operating results for our company and in their geographic market. Results of Operations The following tables set forth, for the periods indicated, certain combined and consolidated statements of income data. The combined statements of income data of Resources Connection LLC for the period from June 1, 1998 to March 31, 1999 and Resources Connection, Inc. for the period from our date of inception, November 16, 1998, to May 31, 1999 is presented in order to facilitate management's discussion and analysis of financial results. These historical results are not necessarily indicative of future results.
Resources Connection, Inc. and Resources Resources Connection LLC Resources Connection LLC Combined Connection, Inc. -------------- --------------------- ---------------- Year Ended Year Ended Year Ended May 31, 1998 May 31, 1999 May 31, 2000 -------------- --------------------- ---------------- (in thousands) Consolidated Statements of Income Data: Revenue................. $29,508 $70,822 $126,332 Direct cost of services............... 16,671 39,871 73,541 ------- ------- -------- Gross profit............ 12,837 30,951 52,791 Selling, general and administrative expenses............... 9,035 21,345 34,649 Amortization of intangible assets...... -- 371 2,231 Depreciation expense.... 79 148 284 ------- ------- -------- Income from operations.. 3,723 9,087 15,627 Interest expense........ -- 734 4,717 ------- ------- -------- Income before provision for income taxes....... 3,723 8,353 10,910 Provision for income taxes(1)............... 1,489 3,363 4,364 ------- ------- -------- Net income(1)........... $ 2,234 $ 4,990 $ 6,546 ======= ======= ======== Our operating results for fiscal 1998, 1999 and 2000 are expressed as a percentage of revenue below. Year Ended May 31, ----------------------------------------------------- 1998 1999 2000 -------------- --------------------- ---------------- Revenue................. 100.0% 100.0% 100.0% Direct cost of services............... 56.6 56.4 58.2 ------- ------- -------- Gross profit............ 43.4 43.6 41.8 Selling, general and administrative expenses............... 30.5 30.1 27.4 Amortization of intangible assets...... -- 0.6 1.8 Depreciation expense.... 0.3 0.1 0.2 ------- ------- -------- Income from operations.. 12.6 12.8 12.4 Interest expense........ -- 1.0 3.7 ------- ------- -------- Income before provision for income taxes....... 12.6 11.8 8.7 Provision for income taxes(1)............... 5.0 4.7 3.5 ------- ------- -------- Net income(1)........... 7.6% 7.1% 5.2% ======= ======= ========
-------- (1) As a limited liability company, income taxes on any income realized by Resources Connection LLC were the obligation of its members and, accordingly, no provision for income taxes was recorded by Resources Connection LLC. Pro forma net income has been computed for periods through May 31, 1999, as if Resources Connection LLC had been fully subject to federal and state income taxes as a C corporation. 22 Fiscal 2000 compared to Fiscal 1999 Revenue. Revenue increased $55.5 million, or 78.4%, to $126.3 million in fiscal 2000 from $70.8 million in fiscal 1999. The increase in total revenues was primarily the result of the growth in the number of associates on assignment from 697 at the end of fiscal 1999 to 1,056 at the end of fiscal 2000 and a moderate increase in the average revenue per hour. During fiscal 2000, we opened seven new offices, introduced our human capital management service line to certain existing markets and expanded our recently introduced information technology service line in existing market places. These new offices and our new service line contributed $5.1 million to revenues during the year or 9.2% of our increase in revenue. Offices opened prior to fiscal 1999 had an annual average revenue growth rate of 64.7%. 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 fiscal 1999. This increase was the result of the growth in the number of associates on assignment from 697 at the end of fiscal 1999 to 1,056 at the end of fiscal 2000. In addition, we enriched certain of our benefit programs for associates during fiscal 2000 and more of our associates qualified for benefits. The direct cost of services as a percentage of revenue in fiscal 2000 was 58.2% as compared to 56.4% in fiscal 1999, reflecting primarily the impact of these enriched benefit programs. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $13.3 million, or 62.4%, to $34.6 million in fiscal 2000 from $21.3 million in fiscal 1999. This increase was attributable to the additional cost of operating and staffing the seven new offices opened in fiscal 2000, a full year of operation for the ten offices that had opened in fiscal 1999 and growth in offices opened prior to fiscal 1999. Selling, general and administrative expenses decreased as a percentage of revenue from 30.1% in fiscal 1999 to 27.4% in fiscal 2000, due to these expenses being spread over a larger revenue base. Amortization and Depreciation Expense. Amortization of intangible assets, which increased from $371,000 in fiscal 1999 to $2.2 million in fiscal 2000, was related to our acquisition of Resources Connection LLC. Fiscal 2000 results reflect a full year of amortization expense compared with only two months of expense in fiscal 1999. Depreciation expense increased from $148,000 in fiscal 1999 to $284,000 in fiscal 2000, reflecting the continuing growth in our number of offices, our investment in technology, and our expenditures for leasehold improvements and furniture for offices moved from co-located Deloitte & Touche office space. Interest Expense. Interest expense increased from $734,000 in fiscal 1999 to $4.7 million in fiscal 2000, related primarily to the debt incurred in connection with the acquisition of Resources Connection LLC. This debt was outstanding for all of fiscal 2000 compared to only two months in fiscal 1999. Income Taxes. The provision for income taxes increased to $4.4 million in fiscal 2000 from $3.4 million in fiscal 1999. The effective tax rate decreased from 40.3% in fiscal 1999 to 40.0% in fiscal 2000. The provision for Resources Connection LLC is shown on a pro forma basis. Resources Connection LLC operated as a limited liability company from January 1997 to April 1999. Income taxes on any income realized by Resources Connection LLC during this period were the obligation of its members and, accordingly, no provision for income taxes was recorded. Our effective rate differs from the federal statutory rate primarily due to state taxes, net of federal benefit. Fiscal 1999 compared to Fiscal 1998 Revenue. Revenue increased $41.3 million, or 140.0%, to $70.8 million in fiscal 1999 from $29.5 million in fiscal 1998. The increase in total revenues was primarily the result of the growth in the number of associates on assignment from 327 at the end of fiscal 1998 to 697 at the end of fiscal 1999 and a moderate increase in the average revenue per hour. During fiscal 1999, we opened ten new offices and introduced an information technology service line in certain existing markets. These new offices and our new service line contributed $9.8 million to revenues during the year or 23.7% of our increase in revenue. Offices opened prior to fiscal 1998 had an annual average revenue growth rate of 57.5%. 23 Direct Cost of Services. Direct cost of services increased $23.2 million, or 138.9%, to $39.9 million in fiscal 1999 from $16.7 million in fiscal 1998. This increase was the result of the growth in the number of associates on assignment from 327 at the end of fiscal 1998 to 697 at the end of fiscal 1999. The direct cost of services as a percentage of revenue was 56.4% in fiscal 1999 as compared to 56.6% in fiscal 1998. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $12.3 million, or 136.7%, to $21.3 million in fiscal 1999 from $9.0 million in fiscal 1998. This increase was attributable to the additional cost of operating and staffing the ten new offices opened in fiscal 1999, the full year of operations of the nine offices that had opened in fiscal 1998 and growth in offices opened prior to fiscal 1998. Selling, general and administrative expenses decreased as a percent of revenue from 30.5% in fiscal 1998 to 30.1% in fiscal 1999, due to these expenses being spread over a larger revenue base. Amortization and Depreciation Expense. Amortization of intangible assets, related to our acquisition of Resources Connection LLC, was $371,000 in fiscal 1999. There was no amortization of intangible assets in fiscal 1998. Depreciation expense increased from $79,000 in fiscal 1998 to $148,000 in fiscal 1999, reflecting the continuing growth in our number of offices and our investment in technology. Interest Expense. Interest expense in fiscal 1999 was $734,000, related to the debt incurred to provide financing for the acquisition of Resources Connection LLC. There was no interest expense incurred in fiscal 1998. Income Taxes. The pro forma provision for income taxes was $3.4 million, an effective rate of 40.3%, and $1.5 million, an effective rate of 40.0%, in fiscal 1999 and 1998, respectively. Our effective rate differs from the federal statutory rate primarily due to state taxes, net of federal benefit. 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, 2000. 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.
Quarter Ended --------------------------------------------------------------------- Aug. 31, Nov. 30, Feb. 28, May 31, Aug. 31, Nov. 30, Feb. 29, May 31, 1998 1998 1999 1999 1999 1999 2000 2000 -------- -------- -------- ------- -------- -------- -------- ------- (in thousands) Consolidated Statements of Income Data: Revenue................. $11,684 $15,354 $19,766 $24,018 $25,533 $28,581 $33,384 $38,834 Direct cost of services............... 6,475 8,608 11,369 13,419 14,491 16,626 19,765 22,659 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit............ 5,209 6,746 8,397 10,599 11,042 11,955 13,619 16,175 Selling, general and administrative expenses............... 3,692 4,963 6,031 6,659 6,813 8,050 9,365 10,421 Amortization of intangible assets...... -- -- -- 371 511 577 572 571 Depreciation expense.... 33 33 39 43 51 49 31 153 ------- ------- ------- ------- ------- ------- ------- ------- Income from operations.. 1,484 1,750 2,327 3,526 3,667 3,279 3,651 5,030 Interest expense........ -- -- -- 734 1,154 1,186 1,199 1,178 ------- ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes....... 1,484 1,750 2,327 2,792 2,513 2,093 2,452 3,852 Provision for income taxes(1)............... 594 700 931 1,138 1,006 835 981 1,542 ------- ------- ------- ------- ------- ------- ------- ------- Net income(1)........... $ 890 $ 1,050 $ 1,396 $ 1,654 $ 1,507 $ 1,258 $ 1,471 $ 2,310 ======= ======= ======= ======= ======= ======= ======= =======
-------- (1) As a limited liability company, income taxes on any income realized by Resources Connection LLC were the obligation of its members and, accordingly, no provision for income taxes was recorded by Resources Connection. Pro forma net income has been computed for periods through May 31, 1999, as if Resources Connection LLC had been fully subject to federal and state income taxes as a C corporation. 24 Our quarterly results have fluctuated in the past and we believe they will continue to do so in the future. 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; . 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 which 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. Deloitte & Touche provided operating capital and accounts receivable financing through March 1999; however, by the end of fiscal 1997, we generated positive cash flows from operations, and we continued to do so in fiscal years 1998, 1999 and 2000. In April 1999, in connection with the acquisition of Resources Connection LLC, we entered into a $28.0 million credit agreement with a group of banks which provides for an $18.0 million term loan facility and a $10.0 million revolving credit facility. Principal payments on the term loan are due quarterly and the credit agreement expires on October 1, 2003. At the end of fiscal 2000, the amount outstanding on the term loan was $16.5 million and we had no outstanding borrowings under the revolving credit facility. Borrowings under the credit agreement are secured by all of our assets. Our interest rate options under our credit agreement are prime rate plus 2% and a Eurodollar- based rate plus 3%. At the end of fiscal 2000, the term loan bore interest at 8.75%. Interest is payable on both the term loan and revolving credit facility at various intervals no less frequent than quarterly. Under the terms of the credit agreement, the term loan must be repaid upon consummation of this offering. In April 1999, we issued $22.0 million in 12% subordinated promissory notes to certain investors. The notes are subordinate to our bank facilities. Interest accrues on the notes at 12% and is payable on a quarterly basis; however, we may elect and have elected to defer payment of the interest and to add the balance due to the outstanding principal balance. All principal, including accrued interest, is due on April 15, 2004. At the end of fiscal 2000, the outstanding balance was $25.3 million. Net cash provided by operating activities totaled $10.5 million in fiscal 2000, $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) and $3.6 million in fiscal 1998. Cash provided by operations resulted primarily from the net earnings of the company partially offset by growth in working capital. 25 Net cash used in investing activities totaled $3.3 million in fiscal 2000, $51.1 million in fiscal 1999 and $431,000 in fiscal 1998. 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 used in financing activities totaled $3.6 million in fiscal 2000 and net cash generated by financing activities totaled $50.8 million in fiscal 1999. We had no financing activities in fiscal 1998. Net cash generated from financing activities in fiscal 1999 resulted from the issuance of common stock, the issuance of subordinated debt 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. 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. Our ongoing operations and anticipated growth in the geographic markets we serve 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, proceeds from this offering, 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. 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. Qualitative and Quantitative Disclosure About Market Risk Interest Rate Risk. At the end of fiscal 2000, we had $4.5 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. At the end of fiscal 2000, we had outstanding term debt totaling $16.5 million. We can select to accrue interest based on an index tied to the prime rate, or the Eurodollar, or a combination thereof. We have entered into an interest rate swap with a credit-worthy counterparty to fix the interest rate on $12.6 million of our term debt, but the remaining balance is subject to interest rate risk based on fluctuations in the base rate for our loan. A 100 basis point increase in interest rates, approximately 10% of our end of year interest rate on debt, affecting our financial instruments would have an immaterial effect on our results of operations, financial position or cash flows. 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. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board, or FASB, issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," which was later amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133 established standards for the accounting and reporting for derivative instruments, including 26 certain derivative instruments embedded in other contracts, and hedging activities. The statement generally requires recognition of gains and losses on hedging instruments, based on changes in fair value or the earnings effect of a forecasted transaction. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management does not believe that SFAS No. 133 or SFAS No. 137 will have a material impact on the consolidated financial statements of the company. 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 is effective July 1, 2000. We believe that the adoption of FIN 44 will not have a material impact on our financial position or results of operations. 27 BUSINESS Overview Resources Connection is a leading professional services firm that provides experienced accounting and finance, human capital management and information technology professionals to clients on a project-by-project basis. We assist our clients with discrete projects requiring specialized professional expertise such as mergers and acquisitions due diligence, transitions of management information systems, financial analyses (e.g., product costing and margin analyses), tax-related projects, and compensation program design and implementation. 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, who was then a senior partner with Deloitte & Touche. Our other founding members include our current Chief Financial Officer, then also a partner, and the current managing director of our New York area practice. Our founders created Resources Connection to capitalize on the increasing demand for high-quality, outsourced professional services and to address the needs of companies that are not adequately served by traditional professional services providers. 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 services to some of our clients. 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 August 26, 2000, we employed more than 1,050 professional service associates on assignment. Our associates have an average of 18 years of professional experience in a wide range of industries and functional areas; approximately 50% of our associates are CPAs and approximately 28% have MBAs. We offer our associates careers that combine many of the advantages of working for a traditional professional services firm with the flexibility of project- based work. We provide our associates 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. We have established a growing and diverse client base of over 1,500 clients, including 43 of the Fortune 100, 15 of the Fortune e50 Index and three of the Big Five accounting firms. We serve our clients through 35 offices in the United States and 3 offices abroad. We have grown revenues internally from $9.3 million in fiscal 1997 to $126.3 million in fiscal 2000, a three-year CAGR of 138%. Over the same period, we have increased our EBITDA from $878,000 to $18.1 million. 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 which we believe fosters in our associates a feeling of personal responsibility for, and pride in, client projects and enables us to deliver superior value to our clients. Industry Background Increasing Demand for Outsourced Professional Services The outsourcing of professionals, according to Staffing Industry Analysts, Inc., is one of the fastest growing segments of the industry for outsourcing employees, with revenues estimated to grow from $9.1 billion in 1999 28 to $14.4 billion in 2001, representing a CAGR of 25.8%. Accounting and finance professionals are estimated to account for approximately half of this segment. We believe 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. Thus, each of these alternatives for meeting project-based needs may require a company to make compromises in terms of quality, cost or internal resource allocation. Increasing Supply of Project Professionals Concurrent with the growth in demand for outsourced professional services, we believe 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 while maintaining 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 providing 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 that Resources Connection provides clients seeking project-based professional services a superior value proposition because we are able to combine all of the following: . a relationship-oriented approach to better 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 . greater client control of their projects. We believe that our ability to deliver the combination of these benefits to our clients provides us with a distinctive competitive position in the outsourced professional services industry. 29 Resources Connection Strategy Our Business Strategy We are dedicated to providing highly-qualified and experienced accounting and finance, human capital 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 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 superior service and value. 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 46 of our top 50 clients in fiscal 1999 remained clients in fiscal 2000. . Build the Resources Connection brand. We are establishing Resources Connection as the premier provider of high-quality, project-based professional services. Our primary means of building our brand is by consistently providing superior value-added services to our clients. We have also focused on building a significant referral network through our more than 1,050 associates on assignment and more than 150 management employees, most of whom have established relationships with a number of potential clients. In addition, we have ongoing national and local marketing efforts which reinforce the Resources Connection brand. 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 an opportunistic 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 1,500 clients we served in fiscal 2000. 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 that 30 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. In both fiscal 1999 and fiscal 2000, we increased our client base by over 500 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 capital 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 August 26, 2000, we employed over 1,050 associates on assignment. Our associates have an average of 18 years of professional experience in a wide range of industries and functional areas; approximately 50% of our associates are CPAs and approximately 28% have MBAs. 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, dental and life insurance programs each with a 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. In June 2000, we launched 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. Clients We provide our services to a diverse client base in a broad range of industries. Since the beginning of fiscal 2000, we have served over 1,500 clients, including 26 of the Fortune 50 companies, 43 of the Fortune 100, 15 of the Fortune e50 Index, seven of Fortune's 10 Most Admired Companies and three of the Big Five accounting firms. Our revenues are not concentrated with any particular client or clients, or within any particular industry. In fiscal 2000, no single client accounted for more than 4% of our revenues and the top 31 10 clients accounted for approximately 13% of our revenues. The following is a list of some representative clients we provided services to in fiscal 2000: Air BP, a subsidiary of BP Amoco Credit Suisse First Boston Corporation Aventis Pharmaceuticals Kaiser Permanente Insurance Company Banc of America Securities LLC Nordstrom CB Richard Ellis UCLA Medical Center
Services Our current professional services capabilities include accounting and finance, human capital management and information technology. Our engagements are project-based and often last three months or longer. Accounting and Finance In fiscal 2000, we generated $118.8 million in revenue from providing accounting and finance services, representing 94.1% of our total revenues in that fiscal year. Types of these 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 have 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 which 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. 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: Since March 2000, we have provided 53 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; 32 . 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 have 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 . 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 have 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 their 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; 33 . 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 Capital Management Our human capital management professional services group was formed in June 1999. These services are currently available in nine of our offices. In fiscal 2000, we generated $2.3 million in revenue from our human capital management service line, representing 1.8% of our total revenues in that fiscal year. Types of services include: . development of human capital management procedures, training and policies; . 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 eight of our offices. In fiscal 2000, we generated $5.2 million in revenue from our information technology service line, accounting for 4.1% of our total revenues. Types of these 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: Resources Connection 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. 34 Operations We generally provide our professional services to clients at a local level through our 38 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 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. Since our office directors are in the best position to understand the local and regional outsourced professional services market and 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 which 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 focusing on client development. Business Development Our business development initiatives are comprised 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 35 materials. We believe that our branding initiatives coupled with our superior 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. 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, comprised 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 August 26, 2000, we had a total of 1,753 employees, including 237 corporate and office-level employees and 1,516 professional services associates. None of our employees is covered by a collective bargaining agreement. Facilities We maintain 35 domestic offices in the following metropolitan areas: Phoenix, Arizona Atlanta, Georgia New York, New York Costa Mesa, California Honolulu, Hawaii Charlotte, North Carolina Los Angeles, California Boise, Idaho Cincinnati, Ohio Santa Clara, California Chicago, Illinois (2 locations) Cleveland, Ohio San Diego, California Boston, Massachusetts Portland, Oregon San Francisco, California Baltimore, Maryland Philadelphia, Pennsylvania Denver, Colorado Detroit, Michigan Pittsburgh, Pennsylvania Hartford, Connecticut Minneapolis, Minnesota Austin, Texas Stamford, Connecticut Las Vegas, Nevada Dallas, Texas Washington, D.C. Parsippany, New Jersey Houston, Texas (2 locations) Orlando, Florida Princeton, New Jersey Seattle, Washington
In addition to housing our Costa Mesa, California practice, our corporate offices are located in Costa Mesa, California in a 16,366 square foot facility under a lease expiring in April 2005. We maintain three offices abroad, including an office in Toronto, Canada; Taipei, Taiwan; and Hong Kong, People's Republic of China. 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. 36 MANAGEMENT Executive Officers and Directors The following table sets forth information about our executive officers and directors as of August 26, 2000:
Name Age Position ---- --- -------- Donald B. Murray........ 53 Chairman of the Board of Directors, Chief Executive Officer, President and Director Stephen J. Giusto....... 37 Chief Financial Officer, Executive Vice President of Corporate Development, Secretary and Director Karen M. Ferguson....... 36 Executive Vice President and Director Brent M. Longnecker..... 44 Executive Vice President John D. Bower........... 39 Vice President, Finance Kate W. Duchene......... 37 Chief Legal Officer, Executive Vice President of Human Relations and Assistant Secretary David G. Offensend...... 47 Director Ciara A. Burnham........ 33 Director Gerald Rosenfeld........ 53 Director Leonard Schutzman....... 53 Director John C. Shaw............ 66 Director C. Stephen Mansfield.... 60 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 Deloitte & Touche's Orange County, California office from 1988 to 1996. From 1984 to 1987, Mr. Murray was the Partner-In-Charge of the Touche Ross & Co. Woodland Hills office, an office he founded in 1984. Mr. Murray was admitted to the Deloitte & Touche partnership in 1983. 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 Deloitte & Touche's Orange County real estate practice 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, 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 Deloitte & Touche, 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. 37 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, 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 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 one of the founding principals 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 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. Ciara A. Burnham. Ms. Burnham is a director of Resources Connection, a position she has held since April 1999. Since July 1997, she has been a managing director of Evercore Capital Partners LLP. From March 1996 to July 1997, Ms. Burnham was an equity research analyst with Sanford C. Bernstein & Co., an investment banking firm. From 1993 to 1996, she was employed by McKinsey & Co. in various capacities, including engagement manager. Ms. Burnham also serves on the board of directors of Skyauction.com, Inc. 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, 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 from April to November 1998, and a Managing Director and head of Investment Banking of Lazard Freres & Co. LLC 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. From 1976 to 1993, he held several positions at Pepsi-Co., Inc., most recently as Senior Vice President and Treasurer. Mr. Schutzman also serves on the board of directors of BML Pharmaceutical, Inc. and SkyAuction.com, 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 as 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 Deloitte, Haskins & Sells Orange County office. Mr. Mansfield retired from Deloitte & Touche LLP in 1990, as a senior partner. Mr. Mansfield is also a director of PBOC Holdings, Inc. 38 Board Composition Upon the closing of this offering, in accordance with the terms of our amended and restated certificate of incorporation, the terms of office of our board of directors will be 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 will be Ms. Ferguson, Mr. Mansfield and Mr. Schutzman, our Class II directors will be Ms. Burnham, Mr. Giusto and Mr. Shaw, and our Class III directors will be Mr. Murray, Mr. Offensend and Mr. Rosenfeld. At each annual meeting of stockholders after the initial classification, 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. Board Committees At the time this offering closes, our board of directors will establish an audit committee. The audit committee will consist of Mr. Mansfield, Mr. Rosenfeld and Mr. Shaw. The audit committee will make recommendations to our board of directors regarding the selection of independent auditors, review the results and scope of the audit and other services provided by our independent auditors, and review and evaluate our audit and control functions. We do not have a compensation committee and our board of directors makes all decisions concerning executive compensation. At the time this offering closes, our board of directors will establish a compensation committee consisting of the following directors: Mr. Offensend, Mr. Rosenfeld and Mr. Shaw. The compensation committee will make recommendations regarding our equity compensation plans and make decisions concerning salaries and incentive compensation for our employees and consultants. 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. Director Compensation Our directors do not currently receive any cash compensation for services on our board of directors or any committee thereof, but directors have been reimbursed for expenses they incur in attending board and committee meetings. Mr. Shaw has participated in the 1999 Long-Term Incentive Plan. After this offering, our compensation package for our non-employee directors will include: . $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 may receive a flat fee of $300 per committee meeting attended as well. 39 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 by our Chief Executive Officer and the five other most highly compensated officers whose total salary and bonuses exceeded $100,000 in fiscal 2000. The individuals listed in the table below are collectively referred to as the named executive officers. Summary Compensation Table
Annual Compensation ---------------------------------------- Name and Principal Position Salary Bonus Other Total --------------------------- -------- -------- ------- -------- Donald B. Murray, Chief Executive Officer............................. $425,000 $212,500(1) $ 0 $637,500 Stephen J. Giusto, Chief Financial Officer............................. $250,000 $125,000(1) $ 0 $375,000 Karen M. Ferguson, Executive Vice President........................... $200,000 $130,000(2) $ 0 $330,000 Brent M. Longnecker, Executive Vice President........................... $300,000 $150,000(2) $50,000(3) $500,000 John D. Bower, Vice President, Finance............................. $ 99,039 $ 62,800(1) $ 0 $161,839 David L. Schnitt, former National Director of Information Technology Services(4)......................... $126,922 $ 64,000(2) $ 0 $190,922
-------- (1) Consists of bonuses earned in fiscal 2000 and paid in fiscal 2001. (2) Consists of bonuses earned in fiscal 2000 and paid in part in fiscal 2000 and in part in fiscal 2001. (3) 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. (4) Mr. Schnitt served as our National Director of Information Technology Services from April 1999 to April 2000. He is currently on an unpaid leave of absence from Resources Connection and is serving as the chief executive officer of Complete Backoffice.com, Inc. Stock Options and Long-Term Incentive Awards No options or long-term incentive awards were granted to named executive officers during fiscal 2000. Exercise of Options And Year-End Values No stock options have been exercised since our inception. 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 is filed hereto as an exhibit. 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 40 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 August 26, 2000, 5,630,000 shares had been acquired under the plan, of which 1,895,600 had become vested and 3,734,400 were not yet vested, 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. The plan was approved by our stockholders 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 is filed hereto as an exhibit. 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. Our board of directors has authorized our management to further increase the number of shares reserved for issuance under the plan to . 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; 41 . 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 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. 42 Certain Specific Awards. As of August 26, 2000, 2,129,000 shares of common stock were subject to outstanding options granted under the plan, 80,500 of which had vested and 2,048,500 of which were unvested, and 211,000 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 $5.00 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. 401(k) Plan Resources Connection has a defined contribution 401(k) plan 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 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 $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, Mr. Murray is entitled to an excise tax gross-up payment not to exceed $1.0 million. Mr. Giusto. Pursuant to his employment agreement, Mr. Giusto serves as our Chief Financial Officer and receives an annual base salary of $250,000. The employment 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 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 $300,000. The employment 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 we or the employee or Resources Connection elect not to extend the agreement. Termination Without Cause or Good Reason Resignation by Employee. In the event we do not renew the agreement or the employee is terminated other than for cause as 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, 43 or theft, or if the employee terminates his or her employment for "good reason" 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. Indemnification of Directors and Executive Officers and Limitation on Liability Our Amended and Restated Bylaws provide that we shall indemnify our directors and officers and may indemnify our other employees and agents to the fullest extent permitted by Delaware law, except with respect to proceedings initiated by these persons. We are also empowered under our bylaws to enter into indemnification contracts with our directors and officers and to purchase insurance on behalf of any person we are required or permitted to indemnify. 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; . under Section 174 of the Delaware General Corporation Law; or . for any transaction from which the director derives an improper personal benefit. 44 RELATED-PARTY 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. Pursuant to a Stockholders Agreement between the company and certain of our stockholders, if at any time after a public offering of our shares of common stock we propose to register our common stock under the Securities Act for our own account or the account of any of our stockholders or both, the stockholders party to the Stockholders Agreement are entitled to notice of the registration and to include registrable shares in that offering, provided that the underwriters of that offering have the right to limit the number of shares included in the registration. These registration rights will continue until the second anniversary of this offering. All holders with registration rights have agreed not to exercise their registration rights until 180 days following the date of this prospectus unless both Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. agree otherwise. After this offering, the following stockholders owning 5% or more of our outstanding shares, directors and officers will have these registration rights:
Number of Registrable Shares Name of Common Stock ---- ---------------------------- Donald B. Murray............................ 54,690 Stephen J. Giusto........................... 20,000 Brent M. Longnecker......................... 75,000 John D. Bower............................... 4,690 Gerald Rosenfeld............................ 185,010 Entities affiliated with Evercore Capital Partners L.L.C............................. 7,887,370
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. 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 45 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:
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 1, 2004, in an aggregate principal amount of $22.0 million to the same investors. We intend to use the proceeds of this offering 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:
Number of Shares Aggregate Number of Shares of Class B Principal Amount of of Common Stock Common Stock Subordinated 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
Options Granted to Our Chief Legal Officer and Executive Vice President, Human Relations In December 1999, we granted Ms. Duchene options to purchase up to 50,000 shares of our common stock at an exercise price of $3.00 per share. The options vest 25% each year on the anniversary date of the grant. At the initial offering price, the aggregate value of these options, less aggregate exercise price, is $ . Relationship Between Our Financial Printing Company and Our Chief Legal Officer/Executive Vice President, Human Relations. In connection with this offering, we have hired R.R. Donnelley Financial Printing, or Donnelley, to provide printing and related services. We estimate that the total amount we will pay to Donnelley for its services in connection with this offering will be $ . The spouse of Ms. Duchene is employed by Donnelley. We may engage Donnelley in the future to provide additional printing and related services. 46 PRINCIPAL AND SELLING STOCKHOLDERS The following table contains information about the beneficial ownership of our common stock before and after our initial public offering 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; . all directors, named executive officers and executive officers as a group; and . all selling stockholders. 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 table assumes no exercise of the underwriters' over-allotment option. If the underwriters' over-allotment option is exercised in full, the selling stockholders will sell up to an aggregate of additional shares of common stock on a pro rata basis. The percentage of beneficial ownership before the offering is based on 15,630,000 shares of common stock outstanding as of August 26, 2000. PRINCIPAL AND SELLING STOCKHOLDER TABLE
Percentage of Number of Shares Shares Beneficially Owned Outstanding ------------------- ----------------- Before After Before After Number of Shares to be Offering Offering Offering Offering Sold in Offering --------- --------- -------- -------- ---------------------- Donald B. Murray........ 1,505,290 1,505,290 9.63% -- Stephen J. Giusto....... 420,000 420,000 2.69% -- Karen M. Ferguson....... 355,000 355,000 2.27% -- Brent M. Longnecker..... 275,000 275,000 1.76% -- John D. Bower........... 74,690 74,690 * -- Kate W. Duchene......... 20,000 20,000 * -- David G. Offensend(1)... 7,887,370 7,887,370 50.46% -- Ciara A. Burnham(1)..... 7,887,370 7,887,370 50.46% -- Gerald Rosenfeld........ 185,010 1.18% -- Leonard Schutzman(1).... -- -- * -- John C. Shaw(2)......... 7,500 7,500 * -- C. Stephen Mansfield.... -- -- * -- David L. Schnitt(3)..... 276,250 276,250 1.77% -- Named Executive Officers, Executive Officers and Directors as a group (11 persons)........... 3,118,740 19.94% Evercore Partners L.L.C.(1).............. 7,887,370 50.46% DB Capital Investors, LP(4).................. 382,480 2.45% BancBoston Investments Inc.(5)................ 382,480 2.45% Mainz Holdings Ltd.(6).. 370,030 2.37% Richard D. Gersten(7)... 10,880 * Paul S. Lattanzio(8).... 87,070 *
-------- * Represents less than 1%. 47 (1) 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. 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. Ciara A. Burnham and Leonard Schutzman are director nominees and are executives of, or consultants to, Evercore Partners, Inc. Ms. Burnham and Mr. Schutzman disclaim beneficial ownership of any shares beneficially owned by Evercore Partners L.L.C., except to the extent of his or her pecuniary interest in the Evercore Investors or Evercore Partners L.L.C. The address for Evercore Partners L.L.C. is 65 East 55th Street, 33rd Floor, New York, New York 10022. The address for Mr. Offensend, Ms. Burnham and Mr. Schutzman is c/o Evercore Partners L.L.C. (2) Mr. Shaw has been a director of Resources Connection since June 1999. Mr. Shaw has 7,500 shares of common stock subject to options exercisable within 60 days of August 26, 2000. Mr. Shaw's address is The Shaw Group LLC, P.O. Box 3369, Newport Beach, California 92659. (3) Mr. Schnitt's address is c/o Ledgent, Inc., 1111 Knox Street, Torrance, California 90502. (4) DB Capital Investors, LP has been a stockholder of Resources Connection since April 1999 and acquired its shares in connection with the management- led buyout. The address for DB Capital Investors, LP is 130 Liberty Street, 25th Floor, New York, New York 10006. (5) BancBoston Investments Inc. has been a stockholder of Resources Connection since April 1999 and acquired its shares in connection with the management- led buyout. The address for BancBoston Investments Inc. is 175 Federal Street, Boston, Massachusetts 02110. (6) Mainz Holdings has been a stockholder of Resources Connection since April 1999 and acquired its shares in connection with the management-led buyout. The address for Mainz Holdings is UMS Universal Management Services, 6 Rue du Nant, P.O. Box 6184, 1211 Geneva 6, Switzerland. (7) Mr. Gersten has been a stockholder of Resources Connection since April 1999 and acquired his shares in connection with the management-led buyout. Mr. Gersten's address is c/o North Castle Partners, LLC, 60 Arch Street, Greenwich, Connecticut 06830. (8) Mr. Lattanzio has been a stockholder of Resources Connection since April 1999 and acquired his shares in connection with the management-led buyout. Mr. Lattanzio's address is c/o TD Capital, 31 W. 52nd Street, New York, New York 10019. 48 DESCRIPTION OF CAPITAL STOCK Prior to the closing of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock consists of 35,000,000 shares of common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, $0.01 par value per share. Our common stock is divided into three classes, Common Stock, of which there are 25,000,000 shares designated and 15,485,260 shares issued and outstanding; Class B Common Stock, of which there are 3,000,000 shares designated and 144,740 shares issued and outstanding; and Class C Common Stock, of which there are 7,000,000 shares designated and no shares issued and outstanding. We have issued options to purchase 2,129,000 shares of our Class C Common Stock. The rights of the holders of Common Stock and Class B Common Stock and Class C Common Stock are identical, except that each share of the Common Stock is entitled to one vote on all matters to be voted on by stockholders and each share of the Class B Common Stock and Class C Common Stock is non-voting. None of our authorized preferred stock has been designated and there are no shares of preferred stock issued and outstanding. At the closing of this offering, all outstanding shares of our Class B Common Stock and Class C Common Stock will automatically convert to shares of our Common Stock. Immediately following the closing of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 35,000,000 shares of common stock, $0.01 par value per share, and 5,000,000 shares of preferred stock, $0.01 par value per share. As of August 26, 2000, there were 15,630,000 shares of common stock outstanding, held of record by 118 stockholders, and options to purchase 2,129,000 shares of common stock. Common Stock Under the amended and restated certificate of incorporation, the holders of common stock are entitled to one vote per share on all matters to be voted on by the stockholders. After payment of any dividends due and owing to the holders of preferred stock, holders of common stock are entitled to receive dividends declared by the board of directors out of funds legally available for dividends. In the event of our liquidation, dissolution or winding up, holders of common stock are entitled to share in all assets remaining after payment of liabilities and liquidation preferences of outstanding shares of preferred stock. Holders of common stock have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. Preferred Stock Under the amended and restated certificate of incorporation, the board has the authority, without further action by stockholders, to issue up to 5,000,000 shares of preferred stock. The board may issue preferred stock in one or more series and may determine the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon the preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that common stockholders will receive dividend payments and payments upon liquidation. The issuance of preferred stock could also have the effect of decreasing the market price of the common stock and could delay, deter or prevent a change in control of our company. We have no present plans to issue any shares of preferred stock. The Notes In April 1999, Resources Connection issued notes in the aggregate amount of $22.0 million consisting of junior subordinated debt of Resources Connection, to certain investors. The notes consist of a general, unsecured promise by Resources Connection to pay the holder of the note the principal amount of the note plus interest which shall accrue at 12% per annum based on a 360-day year. The notes will mature on or about April 15, 2004. The interest is payable quarterly; however, Resources Connection may, at its option, add the 49 amount of interest payable to the unpaid principal amount of the notes. Our senior credit facility prohibits payment of interest on the notes while any amounts are outstanding under the senior credit facility and that interest on the notes is, in fact, only to be paid by adding the amount thereof to the principal amount of the notes. We intend to use the proceeds of this offering to pay the outstanding aggregate principal amount under our senior credit facility and to prepay $25.3 million outstanding under the Notes, which includes outstanding principal together with all accrued and unpaid interest on the notes. The notes are junior subordinated debt, which means that the holders of senior indebtedness have priority in terms of payment and other rights over the holders of the notes. If we have funds that are insufficient to pay the holders of the notes in full, each holder is entitled to receive a pro rata payment based upon the aggregate unpaid principal amount held by each holder. Registration Rights Pursuant to a Stockholders Agreement between the company and certain of our stockholders, if at any time after a public offering of our shares of common stock we propose to register our common stock under the Securities Act for our own account or the account of any of our stockholders or both, the stockholders party to the Stockholders Agreement are entitled to notice of the registration and to include registrable shares in that offering, provided that the underwriters of that offering do not limit the number of shares included in the registration. The Stockholders Agreement will terminate upon the closing of this offering, however, the registration rights will continue until the second anniversary of the termination of the Stockholders Agreement. All holders with registration rights have agreed not to exercise their registration rights until 180 days following the date of this prospectus unless both Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. agree otherwise. The stockholders with these registration rights hold an aggregate of shares, after deducting shares to be sold pursuant to this offering by selling stockholders. We are required to bear substantially all costs incurred in these registrations, other than underwriting discounts and commissions. The registration rights described above could result in future expenses for us and adversely affect any future equity or debt offerings. Anti-Takeover Provisions Delaware Law We are governed by the provisions of Section 203 of the Delaware Law. In general, Section 203 prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A"business combination" includes mergers, asset sales or other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the company's voting stock. The statute could delay, defer or prevent a change in control of our company. Certificate of Incorporation and Bylaw Provisions Various provisions contained in our amended and restated certificate of incorporation and bylaws could delay or discourage some transactions involving an actual or potential change in control of us or our management and may limit the ability of stockholders to remove current management or approve transactions that stockholders may deem to be in their best interests and could adversely affect the price of our common stock. 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; 50 . divide our board of directors into three classes of directors, with each class serving a staggered three-year term. As 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 maintain the composition of the board of directors; . prohibit cumulative voting in the election of directors unless required by applicable law. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able 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 or 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. The Nasdaq Stock Market's National Market We have applied to list our common stock on The Nasdaq Stock Market's National Market under the trading symbol RECN. Transfer Agent and Registrar The transfer agent and registrar for our common stock is American Stock Transfer & Trust. 51 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock, and we cannot assure you that a significant public market for our common stock will develop or be sustained after this offering. As described below, no shares currently outstanding will be available for sale immediately after this offering due to certain contractual and securities law restrictions on resale. Sales of substantial amounts of our common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding shares of common stock, assuming no exercise of the outstanding options to purchase 2,129,000 shares of our common stock. Of these shares, the shares offered for sale through the underwriters will be freely tradable without restriction under the Securities Act unless purchased by our affiliates or covered by a separate lock-up agreement with the underwriters. The remaining shares of common stock held by existing stockholders are restricted securities. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration described below under Rules 144, 144(k) or 701 promulgated under the Securities Act. As a result of the lock-up agreements described in "Underwriting" and the provisions of Rules 144, 144(k) and 701 described below, these restricted shares will be available for sale in the public market as follows: . no shares may be sold prior to 180 days from the date of this prospectus; . shares will have been held long enough to be sold under Rule 144 or Rule 701 beginning 181 days after the date of this prospectus; and . the remaining shares may be sold under Rule 144 or 144(k) once they have been held for the required time. Rule 144. In general, under Rule 144, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the number of shares of our common stock then outstanding that will equal approximately shares immediately after this offering; or . the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also limited by manner-of-sale provisions and notice requirements and to the availability of current public information about us. Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell these shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144 discussed above. Rule 701. In general, under Rule 701, any of our employees, consultants or advisors who purchase or receive shares from us under a compensatory stock purchase plan or option plan or other written agreement will be eligible to resell their shares beginning 90 days after the date of this prospectus, subject to the 180-day lockup agreements discussed in "Underwriting." Non- affiliates will be able to sell their shares subject only to the manner-of-sale provisions of Rule 144. Affiliates will be able to sell their shares without compliance with the holding period requirements of Rule 144. 52 Registration Rights. Upon completion of this offering, the holders of shares of our common stock will be entitled to rights with respect to the registration of their shares under the Securities Act. See "Description of Capital Stock--Registration Rights." Except for shares purchased by affiliates, registration of their shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. All holders with registration rights have agreed not to exercise their registration rights until 180 days following the date of this prospectus unless both Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. agree otherwise. Stock Options. Immediately after this offering, we intend to file a registration statement under the Securities Act covering the shares of common stock reserved for issuance upon exercise of outstanding options. The registration statement is expected to be filed and become effective as soon as practicable after the closing of this offering. Accordingly, shares registered under the registration statement will be available for sale in the open market beginning 180 days after the effective date of the registrant statement of which this prospectus is a part, except with respect to Rule 144 volume limitations that apply to our affiliates. 53 U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS The following is a general discussion of the principal U.S. federal income and estate tax consequences of the ownership and disposition of our common stock by a Non-U.S. Holder. As used in this prospectus, the term "Non-U.S. Holder" is a person that is not: . a citizen or individual resident of the United States for U.S. federal income tax purposes; . a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or of any political subdivision of the United States; . an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or . a trust, in general, if it is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons. An individual may, subject to some exceptions, be treated as a resident of the United States for U.S. federal income tax purposes, instead of a nonresident, by, among other things, being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year--counting for these purposes all of the days present in the current year, one-third of the days present in the immediately preceding year and one-sixth of the days present in the second preceding year. Residents are subject to U.S. federal taxes as if they were U.S. citizens. This discussion does not consider: . U.S. state and local or non-U.S. tax consequences; . specific facts and circumstances that may be relevant to a particular Non-U.S. Holder's tax position, including, if the Non-U.S. Holder is a partnership, that the U.S. tax consequences of holding and disposing of our common stock may be affected by determinations made at the partner level; . the tax consequences for the shareholders, partners or beneficiaries of a Non-U.S. Holder; . special tax rules that may apply to some Non-U.S. Holders, including without limitation, banks, insurance companies, dealers in securities and traders in securities; or . special tax rules that may apply to a Non-U.S. Holder that holds our common stock as part of a straddle, hedge or conversion transaction. The following discussion is based on provisions of the U.S. Internal Revenue Code of 1986, applicable Treasury regulations, and administrative and judicial interpretations, all as of the date of this prospectus, and all of which may change, retroactively or prospectively. The following summary is for general information. Accordingly, each Non-U.S. Holder should consult a tax advisor regarding the U.S. federal, state, local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock. Dividends We do not anticipate paying cash dividends on our common stock in the foreseeable future. In the event, however, that dividends are paid on shares of common stock, dividends paid to a Non-U.S. Holder of common stock generally will be subject to withholding of U.S. federal income tax at a 30% rate, or a lower rate as may be provided by an applicable income tax treaty. Canadian holders of the common stock, for example, will generally be subject to a reduced rate of 15% under the Canada-U.S. Income Tax Treaty. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty. Dividends that are effectively connected with a Non-U.S. Holder's conduct of a trade or business in the United States or, if an income tax treaty applies, attributable to a permanent establishment, or in the case of an 54 individual, a fixed base, in the United States, as provided in that treaty, referred to as U.S. trade or business income, are generally subject to U.S. federal income tax on a net income basis at regular graduated rates, but are not generally subject to the 30% withholding tax if the Non-U.S. Holder files the appropriate U.S. Internal Revenue Service form with the payor. Any U.S. trade or business income received by a Non-U.S. Holder that is a corporation may also, under some circumstances, be subject to an additional "branch profits tax" at a 30% rate or a lower rate as specified by an applicable income tax treaty. Dividends paid prior to 2001 to an address in a foreign country are presumed, absent actual knowledge to the contrary, to be paid to a resident of that country for purposes of the withholding discussed above and for purposes of determining the applicability of a tax treaty rate. For dividends paid after December 31, 2000: . a Non-U.S. Holder of common stock who claims the benefit of an applicable income tax treaty rate generally will be required to satisfy applicable certification and other requirements; . in the case of common stock held by a foreign partnership, the certificate requirement will generally be applied to the partners of the partnership and the partnership will be required to provide certain information, including a U.S. taxpayer identification number; and . look-through rules will apply for tiered partnerships. A Non-U.S. Holder of common stock that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS. Gain on Disposition of Common Stock A Non-U.S. Holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a disposition of common stock unless: . the gain is U.S. trade or business income, in which case, the branch profits tax described above may also apply to a corporate Non-U.S. Holder; . the Non-U.S. Holder is an individual who holds the common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code, is present in the United States for more than 182 days in the taxable year of the disposition and meets other requirements; . the Non-U.S. Holder is subject to tax pursuant to the provisions of the U.S. tax law applicable to some U.S. expatriates; or . we are or have been a "U.S. real property holding corporation" for U.S. federal income tax purposes at any time during the shorter of the five- year period ending on the date of disposition or period that the Non- U.S. Holder held our common stock. Generally, a corporation is a "U.S. real property holding corporation" if the fair market value of its "U.S. real property interests" equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in trade or business. We believe that we have not been, are not currently, and do not anticipate becoming, a "U.S. real property holding corporation," and thus we believe that the effects which could arise if we were ever a "U.S. real property holding corporation" will not apply to a Non-U.S. Holder. Even if we were, or were to become, a "U.S. real property holding corporation," no adverse tax consequences would apply to a Non-U.S. Holder whose holdings, direct and indirect, at all times during the applicable period, constituted 5% or less of our common stock, provided that our common stock was regularly traded on an established securities market. Federal Estate Tax Common stock owned or treated as owned by an individual who is a Non-U.S. Holder at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise and, therefore, may be subject to U.S. federal estate tax. 55 Information Reporting and Backup Withholding Tax We must report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to that holder and the tax withheld with respect to those dividends. Copies of the information returns reporting those dividends and withholding may also be made available to the tax authorities in the country in which the Non-U.S. Holder is a resident under the provisions of an applicable income tax treaty or agreement. Under some circumstances, U.S. Treasury Regulations require information reporting and backup withholding at a rate of 31% on certain payments on common stock. Under currently applicable law, Non-U.S. Holders of common stock generally will be exempt from these information reporting requirements and from backup withholding on dividends prior to 2001 to an address outside the United States. For dividends paid after December 31, 2000, however, a Non-U.S. Holder of common stock that fails to certify its Non-U.S. Holder status in accordance with applicable U.S. Treasury Regulations may be subject to backup withholding at a rate of 31% on payments of dividends. The payment of the proceeds of the disposition of common stock by a holder to or through the U.S. office of a broker through a non-U.S. branch of a U.S. broker generally will be subject to information reporting and backup withholding at a rate of 31% unless the holder either certifies its status as a Non-U.S. Holder under penalties of perjury or otherwise establishes an exemption. The payment of the proceeds of the disposition by a Non-U.S. Holder of common stock to or through a non-U.S. office of non-U.S. broker will not be subject to backup withholding or information reporting unless the non-U.S. broker is a "U.S. related person." In the case of the payment of proceeds from the disposition of common stock by or through a non-U.S. office of a broker that is a U.S. person or a "U.S. related person," information reporting, but currently not backup withholding, on the payment applies unless the broker receives a statement from the owner, signed under penalty of perjury, certifying its non-U.S. status or the broker has documentary evidence in its files that the holder is a Non-U.S. Holder and the broker has no actual knowledge to the contrary. For this purpose, a "U.S. related person" is: . a "controlled foreign corporation" for U.S. federal income tax purposes; . a foreign person, 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment, or for such part of the period that the broker has been in existence, is derived from activities that are effectively connected with the conduct of a U.S. trade or business; or . effective after December 31, 2000, a foreign partnership if, at any time during the taxable year, (A) at least 50% of the capital or profits interest in the partnership is owned by U.S. persons or (B) the partnership is engaged in a U.S. trade or business. Effective after December 31, 2000, backup withholding may apply to the payment of disposition proceeds by or through a non-U.S. office of a broker that is a U.S. person or a "U.S. related person" unless certification requirements are satisfied or an exemption is otherwise established and the broker has no actual knowledge that the holder is a U.S. person. Non-U.S. Holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them, including changes to these rules that will become effective after December 31, 2000. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be refunded, or credited against the holder's U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS. 56 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement dated , 2000, we and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc., as joint bookrunners, and Robert W. Baird & Co. Incorporated are acting as representatives, the following respective numbers of shares of common stock:
Number of Underwriter Shares ----------- ------ Credit Suisse First Boston Corporation................................ Deutsche Bank Securities Inc.......................................... Robert W. Baird & Co. Incorporated.................................... Total............................................................... ----
As joint bookrunners, Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. have equal responsibility for managing this offering. The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering, if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated. The selling stockholders have granted the underwriters a 30-day option to purchase from them on a pro rata basis up to additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of $ per share. The underwriters and the selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we and the selling stockholders will pay:
Per Share Total ------------------- ------------------- Without With Without With Over- Over- Over- Over- Allotment Allotment Allotment Allotment --------- --------- --------- --------- Underwriting Discounts and Commissions paid by us............. $ $ $ $ Underwriting Discounts and Commissions paid by the selling stockholders...................... $ $ $ $ Expenses payable by us.............. $ $ $ $
The representatives have informed us that the underwriters do not expect discretionary sales to exceed % of the shares of common stock being offered. DB Capital Investors, LP is one of the selling stockholders and an affiliate of Deutsche Bank Securities Inc. DB Capital Investors, LP intends to sell shares of our common stock, which constitutes more than 1% of the total shares offered in this offering. The offering therefore is being conducted in accordance with the applicable provisions of Rule 2710(c)(7)(C) of the National Association of Securities Dealers, Inc. Conduct Rules. Rule 2710(c)(7)(C) prohibits DB Capital Investors, LP from selling in this offering more than 1% of the securities offered unless the initial public offering price of the shares of common stock is not higher than that recommended by a "qualified independent underwriter" meeting certain standards. Accordingly, Credit Suisse 57 First Boston Corporation is assuming the responsibilities of acting as the qualified independent underwriter in pricing the offering and conducting due diligence. The initial public offering price of the shares of common stock is no higher than the price recommended by Credit Suisse First Boston Corporation. Credit Suisse First Boston Corporation will be paid a fee of $10,000 for its services as qualified independent underwriter. We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, unless both Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. agree otherwise, for a period of 180 days after the date of this prospectus, except issuances pursuant to the exercise of employee stock options outstanding on the date hereof. Our officers, directors and all of our stockholders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of common stock whether any of these transactions are to be settled by delivery of our common stock or other securities, in case or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any swap, hedge or other arrangement, unless, in each case, both Credit Suisse First Boston Corporation and Deutsche Bank Securities Inc. agree otherwise, for a period of 180 days after the date of this prospectus. The underwriters have reserved for sale, at the initial public offering price, up to shares of common stock for employees, directors, consultants and other persons associated with us who have expressed an interest in purchasing common stock in this offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares. We and the selling stockholders have agreed to indemnify the underwriters against liabilities under the Securities Act of 1933, or contribute to payments which the underwriters may be required to make in that respect. We have applied to have our common stock quoted on The Nasdaq Stock Market's National Market under the trading symbol RECN. Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiation between us and the underwriters. The principal factors to be considered in determining the public offering price include the following: . the information included in this prospectus and otherwise available to the representatives; . market conditions for initial public offerings; . the history and the prospects for the industry in which we will compete; . the ability of our management; . the prospects for our future earnings; . the present state of our development and our current financial condition; . the general condition of the securities markets at the time of this offering; and . the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies. 58 We cannot be sure that the initial public offering price will correspond to the price at which the common stock will trade in the public market following this offering or that an active trading market for the common stock will develop and continue after this offering. In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934. . Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. . Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-alloted by the underwriters is not greater than the number of shares that they may purchase in the over- allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market. . Syndicate covering transactions involve purchases of common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option--a naked short position--that position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely effect investors who purchase in the offering. . Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that would otherwise exist in the open market. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters participating in this offering. The representatives may agree to allocate a number of shares to underwriters for the sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make internet distributions on the same basis as other allocations. 59 NOTICE TO CANADIAN RESIDENTS Resale Restrictions The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we and the selling stockholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. Representations of Purchasers By purchasing common stock in Canada and accepting a purchase confirmation, a purchaser is representing to us, the selling stockholders and the dealer from whom the purchase confirmation is received that: . the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws, . where required by law, the purchaser is purchasing as principal and not as agent, and . the purchaser has reviewed the text above under "Resale Restrictions." Rights of Action (Ontario Purchasers) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the United States federal securities laws. Enforcement of Legal Rights All of the issuer's directors and officers as well as the experts named herein and the selling stockholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. Notice to British Columbia Residents A purchaser of common stock to whom the Securities Act (British Columbia) applies is advised that the purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by the purchaser pursuant to this offering. The report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one report must be filed for common stock acquired on the same date and under the same prospectus exemption. Taxation and Eligibility for Investment Canadian purchasers of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the common stock in their particular circumstances and about the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 60 LEGAL MATTERS The validity of the shares of common stock offered in this prospectus will be passed upon for us by O'Melveny & Myers, LLP, Newport Beach, California. Latham & Watkins, Costa Mesa, California, will pass upon certain legal matters in connection with this offering for the underwriters. EXPERTS The consolidated financial statements of Resources Connection, Inc. and its subsidiaries as of May 31, 1999 and 2000 and for the period from inception, November 16, 1998, through May 31, 1999, and for the year ended May 31, 2000, included in this prospectus have been included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Resources Connection LLC for the period June 1, 1998 through March 31, 1999, and for the year ended May 31, 1998, included in this prospectus have been included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act, with respect to the common stock offered by this prospectus. As permitted by the rules and regulations of the Commission, this prospectus, which is a part of the registration statement, omits certain information, exhibits, schedules and undertakings included in the registration statement. For further information pertaining to us and the common stock offered under this prospectus, reference is made to the registration statement and the attached exhibits and schedules. Although required material information has been presented in this prospectus, statements contained in this prospectus as to the contents or provisions of any contract or other document referred to in this prospectus may be summary in nature, and in each instance reference is made to the copy of this contract or other document filed as an exhibit to the registration statement, and each statement is qualified in all respects by this reference. A copy of the registration statement may be inspected without charge at the office of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission's offices upon the payment of the fees prescribed by the Securities and Exchange Commission. In addition, registration statements and certain other filings made with the commission through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system, including our registration statement and all exhibits and amendments to our registration statement, are publicly available through the commission's website at http://www.sec.gov. After this offering, we will have to provide the information and reports required by the Securities Exchange Act of 1934, as amended, and we will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. Upon approval of the common stock for listing on The Nasdaq Stock Market's National Market, these reports, proxy and information statements and other information may also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. 61 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- RESOURCES CONNECTION, INC. Report of Independent Accountants........................................ F-2 Consolidated Balance Sheets as of May 31, 1999 and 2000.................. F-3 Consolidated Statements of Income for the period from inception, November 16, 1998, through May 31, 1999 and for the year ended May 31, 2000.................................................................. F-4 Consolidated Statements of Stockholders' Equity for the period from inception, November 16, 1998, through May 31, 1999 and for the year ended May 31, 2000.................................................................. F-5 Consolidated Statements of Cash Flows for the period from inception, November 16, 1998, through May 31, 1999 and for the year ended May 31, 2000.................................................................. F-6 Notes to Consolidated Financial Statements............................... F-7 RESOURCES CONNECTION LLC Report of Independent Accountants........................................ F-18 Statements of Income for the year ended May 31, 1998 and for the period from June 1, 1998 through March 31, 1999................................................. F-19 Statements of Cash Flows for the year ended May 31, 1998 and for the period from June 1, 1998 through March 31, 1999................................................. F-20 Notes to Financial Statements............................................ F-21
F-1 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, 1999 and 2000, and the results of their operations and their cash flows for the period from inception, November 16, 1998 through May 31, 1999, and the year ended May 31, 2000 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 audits. We conducted our audits 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 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. PricewaterhouseCoopers LLP Costa Mesa, California July 17, 2000 F-2 RESOURCES CONNECTION, INC. CONSOLIDATED BALANCE SHEETS As of May 31, 1999 and 2000
1999 2000 ----------- ----------- ASSETS ------ Current assets: Cash and cash equivalents.......................... $ 875,836 $ 4,490,187 Trade accounts receivable, net of allowance for doubtful accounts of $907,070 in 1999 and $1,586,215 in 2000................................ 11,913,015 18,166,413 Deferred income taxes.............................. 852,507 1,300,210 Prepaid expenses and other current assets.......... 821,226 745,621 ----------- ----------- Total current assets............................. 14,462,584 24,702,431 Intangible assets, net............................. 43,859,369 41,582,699 Property and equipment, net........................ 459,683 3,196,185 Other assets....................................... 171,944 624,778 ----------- ----------- Total assets..................................... $58,953,580 $70,106,093 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable and accrued expenses.............. $ 2,502,772 $ 2,519,289 Accrued salaries and related obligations........... 2,728,409 7,450,190 Other liabilities.................................. 581,197 800,938 Current portion of term loan....................... 1,500,000 4,000,000 ----------- ----------- Total current liabilities........................ 7,312,378 14,770,417 Deferred income taxes.............................. 379,589 Term loan.......................................... 16,500,000 12,500,000 Revolving line of credit........................... 2,100,000 Subordinated notes payable......................... 22,430,834 25,270,750 ----------- ----------- Total liabilities................................ 48,343,212 52,920,756 ----------- ----------- 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 shares issued and outstanding...................................... 156,300 156,300 Additional paid-in capital........................ 9,698,754 10,221,589 Deferred stock compensation....................... (36,879) (499,074) Accumulated other comprehensive loss.............. (31,548) Retained earnings................................. 792,193 7,338,070 ----------- ----------- Total stockholders' equity....................... 10,610,368 17,185,337 ----------- ----------- Total liabilities and stockholders' equity....... $58,953,580 $70,106,093 =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 RESOURCES CONNECTION, INC. CONSOLIDATED STATEMENTS OF INCOME For The Period From Inception, November 16, 1998, Through May 31, 1999 And For The Year Ended May 31, 2000
For The Period From Inception, November 16, For The 1998, Through Year Ended May 31, 1999 May 31, 2000 --------------- ------------ Revenue........................................... $15,384,578 $126,332,155 Direct cost of services, primarily payroll and related taxes for professional services employees........................................ 8,618,234 73,541,194 ----------- ------------ Gross profit.................................... 6,766,344 52,790,961 Selling, general and administrative expenses...... 4,274,171 34,648,822 Amortization of intangible assets................. 370,661 2,230,633 Depreciation expense.............................. 30,029 284,737 ----------- ------------ Income from operations.......................... 2,091,483 15,626,769 Interest expense.................................. 733,903 4,716,974 ----------- ------------ Income before provision for income taxes........ 1,357,580 10,909,795 Provision for income taxes........................ 565,387 4,363,918 ----------- ------------ Net income...................................... $ 792,193 $ 6,545,877 =========== ============ Net income per common share: Basic........................................... $ 0.09 $ 0.42 =========== ============ Diluted......................................... $ 0.09 $ 0.42 =========== ============ Weighted average common shares outstanding: Basic........................................... 8,691,224 15,630,000 =========== ============ Diluted......................................... 8,691,224 15,714,241 =========== ============
The accompanying notes are an integral part of these financial statements. F-4 RESOURCES CONNECTION, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For The Period From Inception, November 16, 1998, Through May 31, 1999 And For The Year Ended May 31, 2000
Accumulated Common Stock Additional Deferred Other Total ------------------- Paid-In Stock Comprehensive Retained Stockholders' Shares Amount Capital Compensation Loss Earnings Equity ---------- -------- ----------- ------------ ------------- ---------- ------------- Issuance of common shares to founders for cash................... 5,630,000 $ 56,300 $ -- $ -- $ -- $ -- $ 56,300 Issuance of common shares for cash........ 9,855,260 98,553 9,756,707 9,855,260 Issuance of Class B common shares for cash................... 144,740 1,447 143,293 144,740 Issuance costs of common shares................. (238,125) (238,125) Deferred stock compensation........... 36,879 (36,879) Net income for the period from inception, November 16, 1998, through May 31, 1999... 792,193 792,193 ---------- -------- ----------- --------- -------- ---------- ----------- Balances as of May 31, 1999................... 15,630,000 156,300 9,698,754 (36,879) 792,193 10,610,368 Deferred stock compensation........... 522,835 (522,835) Amortization of deferred stock compensation..... 60,640 60,640 Comprehensive income: Currency translation adjustment, net of tax................... (31,548) (31,548) Net income for the year ended May 31, 2000.... 6,545,877 6,545,877 ----------- Total comprehensive income................. 6,514,329 ---------- -------- ----------- --------- -------- ---------- ----------- Balances as of May 31, 2000................... 15,630,000 $156,300 $10,221,589 $(499,074) $(31,548) $7,338,070 $17,185,337 ========== ======== =========== ========= ======== ========== ===========
The accompanying notes are an integral part of these financial statements. F-5 RESOURCES CONNECTION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For The Period From Inception, November 16, 1998, Through May 31, 1999 And For The Year Ended May 31, 2000
For The Period From Inception, November 16, For The Year 1998, Through Ended May 31, 1999 May 31, 2000 --------------- ------------ Cash flows from operating activities Net income...................................... $ 792,193 $ 6,545,877 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................. 400,690 2,515,370 Amortization of debt issuance costs........... 12,420 298,458 Amortization of deferred stock compensation... 60,640 Bad debt expense.............................. 200,000 1,048,502 Changes in operating assets and liabilities: Trade accounts receivable................... (1,217,009) (7,301,900) Prepaid expenses and other current assets... (509,473) 75,605 Other assets................................ (167,338) (484,382) Accounts payable and accrued expenses....... 768,763 35,096 Accrued salaries and related obligations.... (573,479) 4,721,781 Other liabilities........................... 311,716 219,741 Accrued interest payable portion of notes payable.................................... 430,834 2,839,916 Deferred income taxes....................... 559,288 (68,114) ------------ ----------- Net cash provided by operating activities............................... 1,008,605 10,506,590 ------------ ----------- Cash flows from investing activities Purchase of Resources Connection LLC, net of cash acquired and including transaction costs.. (50,866,539) (271,000) Purchases of property and equipment............. (21,066) (3,021,239) ------------ ----------- Net cash used in investing activities..... (50,887,605) (3,292,239) ------------ ----------- Cash flows from financing activities Proceeds from issuance of subordinated notes payable........................................ 22,000,000 Proceeds from term loan......................... 18,000,000 Payments on term loan........................... (1,500,000) Net borrowings (repayments) on revolving loan... 2,100,000 (2,100,000) Costs of debt issuances......................... (1,163,339) Issuance of common stock........................ 10,056,300 Costs of equity issuances....................... (238,125) ------------ ----------- Net cash provided by (used in) financing activities............................... 50,754,836 (3,600,000) ------------ ----------- Net increase in cash............................ 875,836 3,614,351 Cash and cash equivalents at beginning of period......................................... -- 875,836 ------------ ----------- Cash and cash equivalents at end of period...... $ 875,836 $ 4,490,187 ============ ===========
The accompanying notes are an integral part of these financial statements. F-6 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 31, 1999 And 2000 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, 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 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 year ending May 31, 2000 consists 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 when services are rendered by the Company's professionals. Conversion fees are recognized in certain circumstances when one of the Company's professionals accepts an offer of permanent employment from a client. Conversion fees 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 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. F-7 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Potential common shares totaling 750,500 were not included in the diluted earnings per share amounts for the period ended May 31, 2000 as their effect would have been anti-dilutive. For the year ended May 31, 2000, potentially dilutive securities consisted solely of stock options and resulted in potential common shares of 84,241. All share and per share amounts have been adjusted to give retroactive effect to the 10-for-1 stock split (see Note 10) for all periods presented. 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 are 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 $12,420 and $298,458 were amortized to interest expense for the period ended May 31, 1999 and the year ended May 31, 2000, respectively. The carrying value of intangible assets is periodically reviewed by management and impairment adjustments are recognized when the expected future operating cash flows to be derived from such intangible assets are less than their carrying value. The Company believes that no impairment of intangible assets has occurred. Interest Rate Swap The Company has 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 held an interest rate swap to fix the interest rate on $12.6 million of the debt under the term loan. Under this agreement, the Company will pay the counterparty interest at a fixed rate of 8.96% and the counterparty will pay the Company interest at a variable rate based upon the Eurodollar rate plus 3%. At May 31, 2000, the variable rate applicable to this agreement was 9.69%. Net payments or receipts under the agreement are recorded in interest expense on a current basis. The related amount payable to, or receivable from, the counterparty is included in interest payable on the consolidated balance sheet. At May 31, 2000, the interest rate swap agreement had a fair value of approximately $176,000 in assets based upon quoted market prices of comparable instruments. F-8 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-Based Compensation The Company has adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation." 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 June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was later amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133 established standards for the accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. This Statement generally requires recognition of gains and losses on hedging instruments, based on changes in fair value or the earnings effect of a forecasted transaction. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management does not believe that SFAS No. 133, as amended by SFAS No. 137, will have a material impact on the Company's consolidated financial statements. 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 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. F-9 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) This interpretation is effective July 1, 2000. Management believes that the adoption of FIN 44 will not have a material impact on the Company's consolidated financial statements. 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 the financial position and results that would have occurred if the Company had undertaken such transactions with third parties. At May 31, 1999 and 2000, the Company maintained 25 and 5 offices, respectively, within the seller's locations. The Company expects to have completed all relocations by August 31, 2000. 4. Property and Equipment Property and equipment consist of the following at May 31:
1999 2000 -------- ---------- Computers and equipment................................ $430,308 $2,440,297 Furniture.............................................. 16,490 547,321 Leasehold improvements................................. 42,914 523,333 -------- ---------- 489,712 3,510,951 Less accumulated depreciation and amortization......... (30,029) (314,766) -------- ---------- $459,683 $3,196,185 ======== ==========
F-10 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Intangible Assets Intangible assets consist of the following at May 31:
1999 2000 ----------- ----------- Noncompete agreement............................... $ 500,000 $ 500,000 Goodwill........................................... 42,579,111 42,831,532 Debt issuance costs................................ 1,163,339 1,163,339 ----------- ----------- 44,242,450 44,494,871 Less accumulated amortization...................... (383,081) (2,912,172) ----------- ----------- $43,859,369 $41,582,699 =========== ===========
6. Income Taxes The following table represents the current and deferred income tax provision for federal and state income taxes:
For The Period From Inception, November 16, 1998, For The Year Through Ended May 31, 1999 May 31, 2000 ------------------ ------------ Current Federal.................................... $ -- $3,569,500 State...................................... 6,099 862,532 -------- ---------- 6,099 4,432,032 -------- ---------- Deferred Federal.................................... 438,668 (83,303) State...................................... 120,620 15,189 -------- ---------- 559,288 (68,114) -------- ---------- $565,387 $4,363,918 ======== ==========
The components of the provision for deferred income taxes are as follows:
For The Period From Inception, November 16, 1998, For The Year Through Ended May 31, 1999 May 31, 2000 ------------------ ------------ Allowance for doubtful accounts.............. $ 20,252 $(276,170) Property and equipment....................... (417) 67,305 Goodwill and noncompete agreement............ 46,638 265,806 Accrued liabilities.......................... 535,898 4,034 State taxes.................................. (43,083) (129,089) -------- --------- Net deferred income tax provision............ $559,288 $ (68,114) ======== =========
F-11 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The provision for income taxes 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 Year Through Ended May 31, 1999 May 31, 2000 ------------------ ------------ Statutory tax rate........................... 34.0% 34.0% State taxes, net of federal benefit.......... 6.1% 5.4% Other, net................................... 1.5% 0.6% ---- ---- Effective tax rate........................... 41.6% 40.0% ==== ====
The components of the net deferred tax asset consist of the following as of May 31:
1999 2000 --------- --------- Deferred tax assets: Allowance for doubtful accounts...................... $ 380,969 $ 657,139 Accrued expenses..................................... 588,423 584,389 State taxes.......................................... 74,411 --------- --------- 969,392 1,315,939 --------- --------- Deferred tax liabilities: Property and equipment............................... (15,569) (82,874) Goodwill and noncompete agreement.................... (46,638) (312,444) State taxes.......................................... (54,678) --------- --------- (116,885) (395,318) --------- --------- Net deferred tax asset................................. $ 852,507 $ 920,621 ========= =========
7. Accrued Salaries and Related Obligations Accrued salaries and related obligations consist of the following as of May 31:
1999 2000 ---------- ---------- Accrued salaries, bonuses and related obligations.... $1,945,109 $5,837,762 Accrued vacation..................................... 783,300 1,612,428 ---------- ---------- $2,728,409 $7,450,190 ========== ==========
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 provides for an $18 million term loan facility and a $10 million revolving credit facility, including a standby letter of credit feature (the "Credit Agreement"). Principal payments on the term loan are due quarterly, and the Credit Agreement expires October 1, 2003. At May 31, 1999 and 2000, outstanding borrowings on the term loan are $18,000,000 and $16,500,000, respectively. At May 31, 1999 and 2000, outstanding borrowings on the revolving credit facility are $2,100,000 and zero, respectively. Borrowings under the Credit Agreement are collateralized by all of the Company's assets. Prime rate plus 2% and a Eurodollar-based rate plus 3% interest rate options are available for borrowing under the Credit Agreement. On May 31, 1999 and 2000, the term loan bore interest at 8% and 8.75%, F-12 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) respectively. The weighted average interest rate on the outstanding borrowings under the revolving credit facility was 9.35% at May 31, 1999. No amounts were outstanding under the revolving credit facility at May 31, 2000. Interest is payable on both facilities at various intervals no less frequent than quarterly. 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 shareholders, 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, 1999 and 2000. In April 1999, the Company issued $22,000,000 in 12% subordinated promissory notes (the "Notes") to certain investors. The Notes are subordinate to the facilities provided by the Credit Agreement. Interest accrues on the Notes at 12%. Interest is payable on the Notes on a quarterly basis; however, the Company may elect and has elected to defer payment of the interest and to add the balance due ($3,270,750 at May 31, 2000) to the outstanding principal balance. All principal, including accrued interest, is due on April 15, 2004. The fair values of the Notes and the Company's debt under the Credit Agreement approximate their carrying amounts and have been estimated based on current rates offered to the Company for debt of the same remaining maturities. Scheduled maturities of long-term obligations are as follows:
Years Ending May 31: -------------------- 2001.......................................................... $ 4,000,000 2002.......................................................... 4,750,000 2003.......................................................... 5,250,000 2004.......................................................... 27,770,750 ----------- $41,770,750 ===========
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 25,000,000 shares of common stock, in addition to 3,000,000 shares of Class B common stock and 7,000,000 shares of Class C common stock with a $0.01 par value. At May 31, 1999 and 2000, there are 15,485,260, 144,740 and zero shares outstanding of common stock, Class B common stock and Class C common stock, respectively. The 25,000,000 shares of common stock are voting while Class B and Class C common stock are nonvoting. Class B and Class C common stock are equal to the 25,000,000 shares of common stock with respect to all other rights and preferences. F-13 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 are outstanding at May 31, 1999 and 2000. The Company issued 5,630,000 shares of its common stock to founding shareholders 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 subordinate promissory note of $2.20 per unit (see Note 8). On March 9, 2000, the Company's Board of Directors authorized a 10-for-1 split of its shares of common stock and shares under options. All share and per share amounts in the accompanying consolidated financial statements have been adjusted to give retroactive effect to the stock split for all periods presented. 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 year ended May 31, 2000, the Company contributed approximately $101,000 and $427,000, respectively, to the plan. 12. Supplemental Disclosure Of Cash Flow Information For the period and year ended May 31:
1999 2000 ----------- ---------- Interest paid...................................... $ -- $1,824,051 Income taxes paid.................................. $ -- $4,155,900 Noncash investing and financing activities: Deferred stock compensation...................... $ 36,879 $ 522,835 Acquisition of LLC, net of $5,033,027 cash acquired and including transaction costs: Fair values of noncash tangible assets acquired.... $12,533,518 Liabilities assumed and incurred................... (4,746,090) Goodwill........................................... 42,579,111 Noncompete agreement............................... 500,000 ----------- Cash paid........................................ $50,866,539 ===========
During the year ended May 31, 2000, it was determined that the Company owed additional consideration of approximately $225,000 relating to the acquisition of LLC. Such amount has been allocated to the purchase price and is included in accrued expenses at May 31, 2000. F-14 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 13. Commitments and Contingencies Lease Commitments At May 31, 2000, the Company had operating leases, primarily for office premises, expiring at various dates. At May 31, 2000, the Company had no capital leases. Future minimum rental commitments under operating leases are as follows:
Years Ending May 31: -------------------- 2001.......................................................... $ 3,052,023 2002.......................................................... 2,992,504 2003.......................................................... 2,826,407 2004.......................................................... 2,796,750 2005.......................................................... 2,076,471 Thereafter.................................................... 1,116,393 ----------- Total....................................................... $14,860,548 ===========
Rent expense for the period ended May 31, 1999 and for the year ended May 31, 2000 totaled $305,749 and $2,368,187, 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. 14. Incentive Stock 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. Of such shares of common stock, 785,200 and 1,880,000, respectively, were vested as of May 31, 1999 and 2000. During May 1999 and the year ended May 31, 2000, repurchased unvested shares of common stock were sold to eligible employees pursuant to the terms of the 1998 Restricted Stock Purchase Plan. The amount of unearned compensation recognized for F-15 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) stock re-sold under the Purchase Plan totaled $36,879 during May 1999 and $375,981 during the year ended May 31, 2000. Related compensation expense totaled zero and $53,520 for the period and the year ended May 31, 1999 and 2000, respectively. The Company does not anticipate granting any additional awards under the Purchase Plan. 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 is 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 2,340,000. 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. 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............... 1,495,500 $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 =========
As of May 31, 2000, options outstanding have a range of per share exercise prices between $3.00 and $5.00 and a weighted average remaining contractual life of 9.67 years. As of May 31, 2000, the Company recorded deferred compensation related to options granted to employees of $146,854 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, $7,120 in amortization has been recognized during the year ended May 31, 2000. The Company amortizes deferred compensation over the related service period of the underlying options. F-16 RESOURCES CONNECTION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 amount indicated below:
1999 2000 -------- ---------- Net Income: As reported........................................... $792,193 $6,545,877 Pro forma............................................. $792,193 $5,947,457 Net Income Per Common Share--Basic and Diluted: As reported........................................... $ 0.09 $ 0.42 Pro forma............................................. $ 0.09 $ 0.38
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 ----------- ----------- Weighted-average expected life (years)............... 7 7 Annual dividend per share............................ None None Risk-free interest rate.............................. 6.47%-6.98% 6.47%-8.07% Expected volatility.................................. 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 4% of revenue during the period ended May 31, 1999 and for the year ended May 31, 2000. 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 year ended May 31, 2000, the first year the Company had foreign operations, foreign revenue 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, $150,000 of the receivable was outstanding. F-17 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 year ended May 31, 1998 and 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 audits. We conducted our audits 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 audits of these statements provide 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. PricewaterhouseCoopers LLP Costa Mesa, California August 6, 1999 F-18 RESOURCES CONNECTION LLC STATEMENTS OF INCOME For The Year Ended May 31, 1998 And For The Period June 1, 1998 Through March 31, 1999
For The For The Period Year Ended June 1, 1998 May 31, Through 1998 March 31, 1999 ----------- -------------- Revenue............................................ $29,507,588 $55,437,836 Direct cost of services, primarily payroll and related taxes for professional services employees......................................... 16,670,680 31,252,773 ----------- ----------- Gross profit..................................... 12,836,908 24,185,063 Selling, general and administrative expenses....... 9,034,986 17,070,808 Depreciation and amortization expense.............. 79,117 118,358 ----------- ----------- Net income....................................... $ 3,722,805 $ 6,995,897 =========== ===========
The accompanying notes are an integral part of these financial statements. F-19 RESOURCES CONNECTION LLC STATEMENTS OF CASH FLOWS For The Year Ended May 31, 1998 And For The Period June 1, 1998 Through March 31, 1999
For The Period For The Year June 1, 1998 Ended Through May 31, 1998 March 31, 1999 ------------ -------------- Cash flows from operating activities: Net income....................................... $ 3,722,805 $ 6,995,897 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 79,117 118,358 Bad debt expense............................... 278,760 533,000 Changes in operating assets and liabilities: Trade accounts receivable.................... (3,306,645) (6,736,505) Receivable from member....................... (2,500,000) (10,500,000) Payable to member............................ 4,325,023 8,540,750 Prepaids and other assets.................... (18,850) (297,509) Accounts payable and accrued expenses........ 257,344 869,284 Accrued salaries and related obligations..... 682,867 2,322,972 Other liabilities............................ 78,633 181,847 ----------- ------------ Net cash provided by operating activities.. 3,599,054 2,028,094 ----------- ------------ Cash flows from investing activities: Purchases of property and equipment.............. (431,014) (163,107) ----------- ------------ Net cash used in investing activities...... (431,014) (163,107) ----------- ------------ Net increase in cash....................... 3,168,040 1,864,987 Beginning cash balance............................. -- 3,168,040 ----------- ------------ Ending cash balance................................ $ 3,168,040 $ 5,033,027 =========== ============
The accompanying notes are an integral part of these financial statements. F-20 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 statements of income:
For The Period For The June 1, 1998 Year Ended Through May 31, 1998 March 31, 1999 ------------ -------------- Occupancy........................................ $344,000 $ 767,000 Computer charges................................. 80,000 155,000 Telephone........................................ 16,000 34,000 Administrative salaries.......................... 122,000 250,000 Other charges.................................... 153,000 203,000 -------- ---------- Total allocated charges........................ $715,000 $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 $3.1 million and $4.9 million for the year ended May 31, 1998 and for the approximate ten month period ended March 31, 1999, respectively. 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 years or periods are to years or periods ended May 31. The year ended May 31, 1998 was 52 weeks long and the period ended March 31, 1999 was 44 weeks long. F-21 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 our Company's professional staff accepts an offer of permanent employment from a client. Conversion fees were less than 4% of revenues for the year ended May 31, 1998 and 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. Reclassifications: Certain reclassifications have been made to the prior year financial statements to conform with the current period presentation. 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 $480,000 and $828,000 for the year ended May 31, 1998 and for the approximate ten month period ended March 31, 1999, respectively. 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 F-22 RESOURCES CONNECTION LLC NOTES TO FINANCIAL STATEMENTS--(Continued) contribute up to 15% of their annual salary up to the maximum allowed by statute. As defined in the plan 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 year ended May 31, 1998 and for the approximate ten month period ended March 31, 1999, the Company contributed approximately $35,000 and $98,000, respectively, 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. F-23 [inside back cover] [small logo] [map depicting office locations and professional services lines delivered at each office location] [colored dot] Finance and Accounting [colored dot] Finance and Accounting & Information Technology [colored dot] Finance and Accounting & Human Capital Management [colored dot] Finance and Accounting, Information Technology & Human Capital Management United States International Atlanta Costa Mesa Minneapolis San Diego Hong Kong Austin Dallas New York San Francisco Taipei Baltimore Denver Orlando Santa Clara Toronto Boise Detroit Parsippany Seattle Boston Hartford Philadelphia Stamford Charlotte Honolulu Phoenix Washington, D.C. Chicago (2) Houston (2) Pittsburgh Cincinnati Las Vegas Portland Cleveland Los Angeles Princeton [LOGO OF RESOURCES CONNECTION] PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth all expenses payable by the Resources Connection, Inc. (the "Registrant") in connection with the sale of the common stock being registered. All of the amounts shown are estimates, except for the SEC registration fee, the NASD filing fee and The Nasdaq National Market application fee.
Amount to Be Paid --------- Registration fee................................................... * NASD filing fee.................................................... * Nasdaq Stock Market Listing Application fee........................ * Blue sky qualification fees and expenses........................... * Printing and engraving expenses.................................... * Legal fees and expenses............................................ * Accounting fees and expenses....................................... * Transfer agent and registrar fees.................................. * Miscellaneous...................................................... * --- Total............................................................ $ * ===
-------- * Estimated. Item 14. Indemnification Of Officers And Directors Under Section 145 of the Delaware General Corporation Law, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Registrant's Second Restated Certificate of Incorporation and Amended and Restated Bylaws include provisions to (i) eliminate the personal liability of its directors and officers for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware (the "Delaware Law") and (ii) require the Registrant to indemnify its directors and officers to the fullest extent permitted by Section 145 of the Delaware Law, including circumstances in which indemnification is otherwise discretionary. Pursuant to Section 145 of the Delaware Law, a corporation generally has the power to indemnify its present and former directors, officers, employees and agents against expenses incurred by them in connection with any suit to which they are or are threatened to be made, a party by reason of their serving in such positions so long as they acted in good faith and in a manner they reasonably believed to be in or not opposed to, the best interests of the corporation and with respect to any criminal action, they had no reasonable cause to believe their conduct was unlawful. The Registrant believes that these provisions are necessary to attract and retain qualified persons as directors and officers. These provisions do not eliminate the directors' duty of care, and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non- monetary relief will remain available under Delaware Law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for acts or omissions that the director believes to be contrary to the best interests of the Registrant or its stockholders, for any transaction from which the director derived an improper personal benefit, for acts or omissions involving a reckless disregard for the director's duty to the Registrant or its stockholders when the director was aware or should have been aware of a risk of serious injury to the Registrant or its stockholders, for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its stockholders, for improper transactions between the director and the Registrant and for II-1 improper distributions to stockholders and loans to directors and officers. The provision also does not affect a director's responsibilities under any other law, such as the federal securities law or state or federal environmental laws. At present, there is no pending litigation or proceeding involving a director or officer of the Registrant as to which indemnification is being sought nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any officer or director. The Registrant has applied for an insurance policy covering the officers and directors of the Registrant with respect to certain liabilities, including liabilities arising under the Securities Act or otherwise. Item 15. Recent Sales Of Unregistered Securities Appropriate legends were affixed to the stock certificates issued in the transactions described below. All recipients had adequate access, through employment or other relationships, to information about the Registrant. (a) 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 to certain members of our management pursuant to the 1998 Employee Stock Purchase Plan for an aggregate purchase price of $52,430. Between January 1999 and February 1999, we issued and sold the remaining 387,000 shares of common stock to certain members of our management for an aggregate purchase price of $3,870. Between February 1999 and August 2000, pursuant to the terms of the 1998 Employee Stock Purchase Plan we reacquired 388,000 shares of our common stock from employees who employment was being terminated. We resold these reaquired shares to certain employees for an aggregate purchase price of $264,000. We relied on the exemption provided by Rule 701 of the General Regulations under the Securities Act of 1933, as amended. (b) On and around April 1, 1999, 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 for an aggregate purchase price of $10,000,000. Simultaneously, we issued and sold subordinated notes, bearing 12% interest per annum with a maturity date of April 15, 2004, in an aggregate principal amount of $22,000,000 to the same investors. We relied on the exemption provided by Section 4(2) under the Securities Act and Regulation D promulgated thereunder. The recipients of the above-described securities represented their intention to acquire the securities for investment only and not with a view to distribution thereof. (c) Between June 17, 1999 and August 26, 2000, we have granted stock options to certain of our employees pursuant to our 1999 Long-Term Incentive Plan. We relied on the exemption provided by Rule 701 of the General Regulations under the Securities Act of 1933, as amended. Item 16. Exhibits And Financial Statement Schedule (a) Exhibits.
Exhibit Number Description of Document ------- ----------------------- 1.1* Form of Underwriting Agreement. 3.1(a) Restated Certificate of Incorporation. 3.1(b) Amendment to Restated Certificate of Incorporation. 3.2 Form of Second Restated Certificate of Incorporation, to be filed and become effective upon the closing of this offering. 3.3 Bylaws, as currently in effect. 3.4 Form of Amended and Restated Bylaws, as amended, to become effective upon closing of this offering. 4.1 Stockholders Agreement, dated April 1, 1999, between Resources Connection, Inc. and certain stockholders of Resources Connection, Inc. 4.2* Specimen Stock Certificate.
II-2
Exhibit Number Description of Document ------- ----------------------- 5.1* Opinion of O'Melveny & Myers, LLP. 10.1 Resources Connection, Inc. 1998 Employee Stock Purchase Plan. 10.2 Resources Connection, Inc. 1999 Long-Term Incentive Plan. 10.3 Employment Agreement, dated April 1, 1999, between Resources Connection, Inc. and Donald B. Murray. 10.4 Employment Agreement, dated April 1, 1999, between Resources Connection, Inc. and Stephen J. Giusto. 10.5 Employment Agreement, dated April 1, 1999, between Resources Connection, Inc. and Karen M. Ferguson. 10.6 Employment Agreement, dated April 1, 1999, between Resources Connection, Inc. and Brent M. Longnecker. 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. 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. 10.9 Security Agreement, dated April 1, 1999, among Resources Connection, Inc., certain of its subsidiaries and Bankers Trust Company, as collateral agent. 10.10 Sublease, dated as of March 1, 2000, by and between Enterprise Profit Solutions Corporation and Resources Connection LLC. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 23.2 Consent of O'Melveny & Myers LLP. Reference is made to Exhibit 5.1. 24.1 Power of Attorney. Reference is made to page II-9. 27 Financial Data Schedule.
-------- * To be filed by amendment. (b) Financial Statement Schedules. Schedule II--Valuation and Qualifying Accounts. All other schedules are omitted because they are not required, are not applicable or the information is included in our financial statements or notes thereto. Item 17. Undertakings The Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Exchange Act of 1934, as amended (the "Exchange Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to provisions described in Item 14 or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Exchange Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in II-3 connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Exchange Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Exchange Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Exchange Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 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 17, 2000 appearing in this registration statement on Form S-1 also included an audit of the financial statement schedule listed in Item (16)(b) of this Form S-1. 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. PricewaterhouseCoopers LLP Costa Mesa, California July 17, 2000 II-5 RESOURCES CONNECTION, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Purchase of Beginning Charged to Write- Resources Ending Balance Operations offs Connection LLC Balance --------- ---------- --------- -------------- ---------- Allowance for Doubtful Accounts Period from November 16, 1998 (date of inception) to May 31, 1999................. $ -- $ 200,000 $(248,220) $955,290 $ 907,070 Year Ended May 31, 2000................. $907,070 $1,048,502 $(369,357) $ $1,586,215
II-6 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Members of Resources Connection LLC Our audits of the financial statements of Resources Connection LLC referred to in our report dated August 6, 1999 appearing in this registration statement on Form S-1 also included an audit of the financial statement schedule listed in Item (16)(b) of this Form S-1. 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. PricewaterhouseCoopers LLP Costa Mesa, California August 6, 1999 II-7 RESOURCES CONNECTION LLC SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Beginning Charged to Write- Ending Balance Operations offs Balance --------- ---------- --------- -------- Allowance for Doubtful Accounts Year Ended May 31, 1998............. $266,560 $278,760 $(123,030) $422,290 Period from June 1, 1998 to March 31, 1999........................... $422,290 $533,000 $ $955,290
II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newport Beach, County of Orange, State of California, on August 31, 2000. /s/ Donald B. Murray By: _________________________________ Donald B. Murray Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Donald B. Murray and Stephen J. Giusto, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments (including post- effective amendments, exhibits thereto and other documents in connection therewith) to this Registration Statement and any subsequent registration statement filed by the registrant pursuant to Rule 462(b) of the Securities Act of 1933, as amended, which relates to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement 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, August 31, 2000 _________________________________ President and Director Donald B. Murray (Principal Executive Officer) /s/ Stephen J. Giusto Chief Financial Officer, August 31, 2000 _________________________________ Executive Vice President of Stephen J. Giusto Corporate Development, Secretary and Director (Principal Financial Officer) /s/ Karen M. Ferguson Executive Vice President and August 31, 2000 _________________________________ Director Karen M. Ferguson /s/ David G. Offensend Director August 31, 2000 _________________________________ David G. Offensend /s/ Ciara A. Burnham Director August 31, 2000 _________________________________ Ciara A. Burnham /s/ Gerald Rosenfeld Director August 31, 2000 _________________________________ Gerald Rosenfeld /s/ Leonard Schutzman Director August 31, 2000 _________________________________ Leonard Schutzman /s/ John C. Shaw Director August 31, 2000 _________________________________ John C. Shaw /s/ C. Stephen Mansfield Director August 31, 2000 _________________________________ C. Stephen Mansfield
II-9 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- EXHIBITS to FORM S-1 ---------------- RESOURCES CONNECTION, INC. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- EXHIBIT INDEX
Exhibit Number Description of Document ------- ----------------------- 1.1* Form of Underwriting Agreement. 3.1(a) Restated Certificate of Incorporation. 3.1(b) Amendment to Restated Certificate of Incorporation. 3.2 Form of Second Restated Certificate of Incorporation, to be filed and become effective upon the closing of this offering. 3.3 Bylaws, as currently in effect. 3.4 Amended and Restated Bylaws, as amended, to be filed and become effective upon the closing of this offering. 4.1 Stockholders Agreement, dated April 1, 1999, between Resources Connection, Inc. and certain stockholders of Resources Connection, Inc. 4.2* Specimen Stock Certificate. 5.1* Opinion of O'Melveny & Myers LLP. 10.1 Resources Connection, Inc. 1998 Employee Stock Purchase Plan. 10.2 Resources Connection, Inc. 1999 Long-Term Incentive Plan. 10.3 Employment Agreement, dated April 1, 1999, between Resources Connection, Inc. and Donald B. Murray. 10.4 Employment Agreement, dated April 1, 1999, between Resources Connection, Inc. and Stephen J. Giusto. 10.5 Employment Agreement, dated April 1, 1999, between Resources Connection, Inc. and Karen M. Ferguson. 10.6 Employment Agreement, dated April 1, 1999, between Resources Connection, Inc. and Brent M. Longnecker. 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. 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. 10.9 Security Agreement, dated April 1, 1999, among Resources Connection, Inc., certain of its subsidiaries and Bankers Trust Company, as collateral agent. 10.10 Sublease, dated as of March 1, 2000, by and between Enterprise Profit Solutions Corporation and Resources Connection LLC. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 23.2 Consent of O'Melveny & Myers LLP. Reference is made to Exhibit 5.1. 24.1 Power of Attorney. Reference is made to page II-9. 27 Financial Data Schedule.
-------- * To be filed by amendment.