| RESOURCES CONNECTION INC ITEM 1A RISK FACTORS You should carefully consider the risks described below before making a decision to buy shares of our common stock |
| The order of the risks is not an indication of their relative weight or importance |
| The risks and uncertainties described below are not the only ones facing us |
| Additional risks and uncertainties, including those risks set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may also adversely impact and impair our business |
| In that case, the trading price of our common stock could decline, and you might lose all or part of your investment |
| When determining whether to buy our common stock, you should also refer to the other information in this Report on Form 10-K, including our financial statements and the related notes |
| This Report on Form 10-K contains forward-looking statements based on our current expectations, assumptions, estimates and projections about our industry and us |
| These forward-looking statements involve risks and uncertainties |
| Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this Report on Form 10-K We do not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future |
| 16 ______________________________________________________________________ [44]Table of Contents We must provide our clients with highly qualified and experienced associates, and the loss of a significant number of our associates, or an inability to attract and retain new associates, could adversely affect our business and operating results |
| Our business involves the delivery of professional services, and our success depends on our ability to provide our clients with highly qualified and experienced associates who possess the skills and experience necessary to satisfy their needs |
| Such professionals are in great demand, particularly in certain geographic areas, and are likely to remain a limited resource for the foreseeable future |
| Our ability to attract and retain associates with the requisite experience and skills depends on several factors including, but not limited to, our ability to: • provide our associates with full-time employment; • obtain the type of challenging and high-quality projects that our associates seek; • pay competitive compensation and provide competitive benefits; and • provide our associates with flexibility as to hours worked and assignment of client engagements |
| We cannot assure you that we will be successful in accomplishing any of these factors 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 |
| Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees |
| We have historically used stock options as key components of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention and provide competitive compensation packages |
| As a result of our adoption of Statement of Financial Accounting Standards Nodtta 123 (revised), “Share-Based Payment” (“SFAS 123 (R)”) in the first quarter of fiscal 2007, the use of stock options and other stock-based awards to attract and retain employees could become more limited due to the possible impact on our results of operations |
| This development could make it more difficult to attract, retain and motivate employees |
| 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; • independent contractors; • 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 |
| During the downturn in the economy of the United States during fiscal 2002 and 2003, our business was adversely affected |
| As the general level of economic activity slowed, our clients delayed or cancelled plans that 17 ______________________________________________________________________ [45]Table of Contents involved professional services, particularly outsourced professional services |
| Consequently, we experienced fluctuations in the demand for our services |
| 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 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 a change in government regulatory requirements, or because of an economic downturn decreasing the demand for outsourced professional services, our business is likely to be materially adversely affected |
| New impediments to our ability to secure projects from clients may develop over time, such as the increasing use by large clients of in-house procurement groups that manage their relationship with service providers |
| 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 |
| Claims brought against us could have a serious negative effect on our reputation and on our business, financial condition and results of operations |
| Because we are in the business of placing our associates in the workplaces of other companies, we are subject to possible claims by our associates alleging discrimination, sexual harassment, negligence and other similar activities by our clients |
| We may also be subject to similar claims from our clients based on activities by our associates |
| The cost of defending such claims, even if groundless, could be substantial and the associated negative publicity could adversely affect our ability to attract and retain associates and clients |
| We grew rapidly from our inception in 1996 until 2001 by opening new offices and by increasing the volume of services we provide through existing offices |
| We experienced a decline in revenue in fiscal 2002, but revenue has increased in each subsequent fiscal year |
| However, there can be no assurance that we will be able to maintain or expand our market presence in our current locations or to successfully enter other markets or locations |
| A significant portion of growth during fiscal 2004 and 2005 emanated from clients’ demands related to compliance with certain sections of Sarbanes |
| As initial demand for Sarbanes related services slows, our ability to successfully grow our business will depend upon a number of factors, including our ability to: • grow our client base; • expand profitably into new cities; • provide additional professional services lines; • hire qualified and experienced associates; • maintain margins in the face of pricing pressures; • manage costs; and • maintain or grow revenues for both Sarbanes-related services as well as other service lines from clients who have initially engaged us for Sarbanes compliance |
| 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 18 ______________________________________________________________________ [46]Table of Contents administrative, financial, marketing and other resources |
| Failure to adequately respond to these new responsibilities and demands may adversely affect our business, financial condition and results of operation |
| The 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 face if we conducted our operations solely in the United States |
| These risks and expenses include: • difficulties in staffing and managing foreign offices as a result of, among other things, distance, language and cultural differences; • less flexible labor laws and regulations; • 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 United States’ 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 have acquired, and may continue to acquire, companies, and these acquisitions could disrupt our business |
| We have acquired several companies and may continue to acquire companies in the future |
| Entering into an acquisition entails many risks, any of which could harm our business, including: • diversion of management’s attention from other business concerns; • failure to integrate the acquired company with our existing business; • failure to motivate, or loss of, key employees from either our existing business or the acquired business; • 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 |
| Our business could suffer if we lose the services of one or more key members of our management |
| Our future success depends upon the continued employment of Donald B Murray, our chief executive officer, and Stephen J Giusto, our chief financial officer |
| The departure of Mr |
| Giusto or other members of our management team could significantly disrupt our operations |
| Key members of our senior management team also include Karen M Ferguson, an executive vice president, Anthony Cherbak, executive 19 ______________________________________________________________________ [47]Table of Contents vice president and chief operating officer, John D Bower, senior vice president, finance, and Kate W Duchene, chief legal officer and executive vice president of human relations |
| We do not have employment agreements with Mr |
| Cherbak, Mr |
| Bower or Ms |
| Our quarterly financial results may be subject to significant fluctuations that may increase the volatility of our stock price |
| Our results of operations could vary significantly from quarter to quarter |
| Factors that could affect our quarterly operating results include: • our ability to attract new clients and retain current clients; • the mix of client projects; • the announcement or introduction of new services by us or any of our competitors; • the expansion of the professional services offered by us or any of our competitors into new locations both nationally and internationally; • changes in the demand for our services by our clients; • the entry of new competitors into any of our markets; • the number of associates eligible for our offered benefits as the average length of employment with the Company increases; • 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; • the timing of acquisitions and related costs, such as compensation charges that fluctuate based on the market price of our common stock; and • the periodic fourth quarter consisting of 14 weeks |
| Due to these factors, we believe that quarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance |
| It is possible that in some future periods, our results of operations may be below the expectations of investors |
| If this occurs, the price of our common stock could decline |
| If our internal controls over financial reporting do not comply with the requirements of Sarbanes, our business and stock price could be adversely affected |
| Section 404 of Sarbanes requires us to evaluate periodically the effectiveness of our internal control over financial reporting, and to include a management report assessing the effectiveness of our internal controls as of the end of each fiscal year |
| Our management report on internal controls is contained in this Report on Form 10-K Section 404 also requires our independent registered public accountant to attest to, and report on, management’s assessment of our internal control over financial reporting |
| Our management does not expect that our internal control over financial reporting will prevent all errors or frauds |
| A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met |
| Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs |
| Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, involving us have been, or will be, detected |
| These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns 20 ______________________________________________________________________ [48]Table of Contents can occur because of simple errors or mistakes |
| Controls can also be circumvented by individual acts of a person, or by collusion among two or more people, or by management override of controls |
| The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions |
| Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures |
| Because of the inherent limitations in a cost-effective control system, misstatements due to errors or frauds may occur and not be detected |
| Although our management has determined, and our independent registered public accountant has attested, that internal control over financial reporting was effective as of May 31, 2006, we cannot assure you that we or our independent registered public accountant will not identify a material weakness in our internal controls in the future |
| A material weakness in our internal control over financial reporting would require management and our independent registered public accountant to evaluate our internal controls as ineffective |
| If our internal control over financial reporting is not considered adequate, we may experience a loss of public confidence, which could have an adverse effect on our business and our stock price |
| Additionally, if our internal controls over financial reporting otherwise fail to comply with the requirements of Sarbanes, our business and stock price could be adversely affected |
| We may be subject to laws and regulations that impose difficult and costly compliance requirements and subject us to potential liability and the loss of clients |
| In connection with providing services to clients in certain regulated industries, such as the gaming and energy industries, we are subject to industry-specific regulations, including licensing and reporting requirements |
| Complying with these requirements is costly and, if we fail to comply, we could be prevented from rendering services to clients in those industries in the future |
| Additionally, changes in these requirements, or in other laws applicable to us, in the future could increase our costs of compliance |
| 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 |
| These provisions: • authorize our board of directors to establish one or more series of undesignated preferred stock, the terms of which can be determined by the board of directors at the time of issuance; • divide our board of directors into three classes of directors, with each class serving a staggered three-year term |
| Because the classification of the board of directors generally increases the difficulty of replacing a majority of the directors, it may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us and may make it difficult to change the composition of the board of directors; • prohibit cumulative voting in the election of directors which, if not prohibited, could allow a minority stockholder holding a sufficient percentage of a class of shares to ensure the election of one or more directors; • require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing; • state that special meetings of our stockholders may be called only by the chairman of the board of directors, by 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 10prca of our outstanding voting stock; 21 ______________________________________________________________________ [49]Table of Contents • establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting; • provide that certain provisions of our certificate of incorporation can be amended only by supermajority vote of the outstanding shares and that our bylaws can be amended only by supermajority vote of the outstanding shares of our board of directors; • allow our directors, not our stockholders, to fill vacancies on our board of directors; and • provide that the authorized number of directors may be changed only by resolution of the board of directors |
| The Company’s board of directors has adopted a stockholder rights plan, which is described further in Note—10 Stockholders’ Equity of the “Notes to Consolidated Financial Statements” included in this Report on Form 10-K The existence of this rights plan may also have the effect of delaying, deferring or preventing a change of control of our Company or our management by deterring acquisitions of our stock not approved by our board of directors |
| Our clients may be confused by the change in our name to “Resources Global Professionals” |
| In January 2005, our operating company began doing business as Resources Global Professionals in order to better reflect our global capabilities and to avoid confusion with other companies using the name “Resources Connection” or some variation thereof |
| However, some clients and prospective clients may be confused by this name change or may be unaware that Resources Connection and Resources Global Professionals are the same company |
| While we believe that the name change enhances our brand identity, there is a risk that confusion over the name change could cause our financial results to suffer |
| Beginning with the first quarter of fiscal 2007 we are required to recognize compensation expense related to employee stock options and our employee stock purchase plan |
| There is no assurance that the expense that we are required to recognize measures accurately the value of our share-based payment awards, and the recognition of this expense could cause the trading price of our common stock to decline |
| Effective as of the beginning of the first quarter of fiscal 2007, we are required to adopt SFAS 123 (R), which requires the measurement and recognition of compensation expense for all stock-based compensation based on estimated fair values |
| As a result, starting with fiscal 2007, our operating results will contain a charge for stock-based compensation expense related to employee stock options and our employee stock purchase plan |
| The application of SFAS 123 (R) generally requires the use of an option-pricing model to determine the fair value of share-based payment awards |
| This determination of fair value is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables |
| These variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors |
| Option-pricing models were developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable |
| Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion the existing valuation models may not provide an accurate measure of the fair value of our employee stock options |
| Although the fair value of employee stock options is determined in accordance with SFAS 123(R) and Staff Accounting Bulletin Nodtta 107 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction |
| As a result of the adoption of SFAS 123 (R), our earnings will be lower than they would have been had we not been required to adopt SFAS 123 (R) |
| There may also be variability in our income after income tax provision due to the timing of the exercise of options that trigger disqualifying dispositions |
| This will continue to be the 22 ______________________________________________________________________ [50]Table of Contents case for future periods |
| We cannot predict the effect that this adverse impact on our reported operating results will have on the trading price of our common stock |
| 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 Global Professionals brand name is essential to our business |
| We have applied for United States and foreign registrations on this new service mark |
| We have previously obtained United States registrations on our Resources Connection service mark and puzzle piece logo, Registration Nodtta 2cmam516cmam522 registered December 11, 2001; Nodtta 2cmam524cmam226 registered January 1, 2002; and Nodtta 2cmam613cmam873, registered September 3, 2002 as well as certain foreign registrations |
| We had been aware from time to time of other companies using the name “Resources Connection” or some variation thereof and this contributed to our decision to adopt the new operating company name of Resources Global Professionals last year |
| However, our rights to this service mark are not currently protected by any United States or foreign registration, and there is no guarantee that any of our pending applications for such registration (or any appeals thereof or future applications) will be successful |
| Although we are not aware of other companies using the name “Resources Global Professionals” at this time, there could be potential trade name or service mark infringement claims brought against us by the users of these similar names and marks and those users may have service mark rights that are senior to ours |
| If these claims were successful, we could be forced to cease using the service mark “Resources Global Professionals” 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, service mark 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 were required to change our name |