Prepared by R.R. Donnelley Financial -- Resources Connection Form 10-K

10-K 1 d10k.htm RESOURCES CONNECTION FORM 10-K Prepared by R.R. Donnelley Financial -- Resources Connection Form 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended May 31, 2002

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

For the transition period from to

Commission File Number: 0-32113

RESOURCES CONNECTION, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		33-0832424
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

695 Town Center Drive, Suite 600, Costa Mesa, California 92626

(Address of principal executive offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (714) 430-6400

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

None.

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

Title of each class

Common Stock, $0.01 par value

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

As of August 16, 2002, the approximate aggregate market value of voting stock held by non-affiliates of the registrant was $366,649,000 (based upon the closing price for shares of the Registrant’s common stock as reported by The Nasdaq National Market). As of August 16, 2002, there were approximately 21,662,412 shares of common stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

RESOURCES CONNECTION, INC.

TABLE OF CONTENTS

		Page No.

	PART I

ITEM 1.	BUSINESS	1

ITEM 2.	PROPERTIES	10

ITEM 3.	LEGAL PROCEEDINGS	10

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	10

	PART II

ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	11

ITEM 6.	SELECTED FINANCIAL DATA	11

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	29

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	48

	PART III

ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	48

ITEM 11.	EXECUTIVE COMPENSATION	48

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	48

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	48

	PART IV

ITEM 14.	EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K	49

In this Report on Form 10-K, “Resources Connection,” “company,” “we,” “us” and “our” refer to the business of Resources Connection LLC for all periods prior to the sale of Resources Connection LLC by Deloitte & Touche LLP, and to Resources Connection, Inc. and its subsidiaries for all periods after the sale. References to “Deloitte & Touche” refer to Deloitte & Touche LLP. References in this Report on Form 10-K to “fiscal,” “year” or “fiscal year” refer to our fiscal years that consist of the 52- or 53-week period ending on the Saturday in May closest to May 31.

This Report on Form 10-K, including information incorporated herein by reference, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. These

statements and all phases of our operations are subject to known and unknown risks, uncertainties and other factors, some of which are identified herein. Readers are cautioned not to place undue reliance on these forward-looking statements. Our actual results, levels of activity, performance or achievements and those of our industry may be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to update the forward-looking statements in this filing. References in this filing to “Resources Connection,” the “Company,” “we,” “us,” and “our” refer to Resources Connection, Inc. and its subsidiaries.

The Company’s principal executive offices are located at 695 Town Center Drive, Suite 600, Costa Mesa, California 92626. The Company’s telephone number is (714) 430-6400 and its web site address is http://www.resourcesconnection.com. The information set forth in the web site does not constitute part of this Report on Form 10-K.

PART I

ITEM 1. BUSINESS

Overview

Resources Connection is an international professional services firm that provides experienced accounting and finance, human resources management, risk management and information technology professionals to clients on a project basis. We assist our clients with discrete projects requiring specialized professional expertise in accounting and finance, such as mergers and acquisitions due diligence, financial analyses (e.g., product costing and margin analyses), corporate reorganizations and tax-related projects. In addition, we provide human resources management services, such as compensation program design and implementation, information technology services, such as transitions of management information systems, and internal audit services. We also assist our clients with periodic needs such as budgeting and forecasting, audit preparation and public reporting.

We were founded in June 1996 by a team at Deloitte & Touche, led by our current chief executive officer, Donald B. Murray, who was then a senior partner with Deloitte & Touche. Additional founding members include our current chief financial officer, Stephen J. Giusto, then also a partner, and Karen M. Ferguson, the current regional managing director of our Northeast practice offices. Our founders created Resources Connection to capitalize on the increasing demand for high quality outsourced professional services. We operated as a division of Deloitte & Touche from our inception in June 1996 until January 1997. From January 1997 until April 1999, we operated as a subsidiary of Deloitte & Touche. During these periods, due to regulatory constraints applicable to us as part of a Big Five accounting firm, we were unable to provide certain accounting services to audit clients of Deloitte & Touche. In April 1999, we completed a management-led buyout. Subsequent to the management-led buyout, we were able to expand the scope of services we provide to our clients.

Our business model combines the client service orientation and commitment to quality of a Big Five accounting firm with the entrepreneurial culture of an innovative, high-growth company. We are positioned to take advantage of what we believe are two converging trends in the outsourced professional services industry: increasing demand for outsourced professional services by corporate clients and increasing supply of professionals interested in working on an outsourced basis. We believe our business model allows us to offer challenging yet flexible career opportunities, attract highly qualified, experienced professionals and, in turn, attract clients.

As of May 31, 2002, we employed more than 1,050 professional service associates on assignment. Our associates have professional experience in a wide range of industries and functional areas. Based upon an internal, annual survey conducted in late calendar year 2001, to which approximately 76% of all active associates responded, 48% of respondents were CPAs, 41% had Masters degrees, and the average years of professional experience was 18. We offer our associates careers that combine the flexibility of project-based work with many of the advantages of working for a traditional professional services firm.

We have established a growing and diverse client base of over 1,400 clients, ranging from large corporations to mid-sized companies to small entrepreneurial entities, in a broad range of industries. For example, our clients include approximately half of the Fortune 100, which accounted for approximately 14.5% of our revenues in fiscal 2002, and three of the Big Five accounting firms. We serve our clients through 43 offices in the United States and four offices abroad. We have grown revenues internally from $9.3 million in fiscal 1997 to $181.7 million in fiscal 2002, a five-year compounded annual growth rate, or CAGR, of 81% and our income from operations over the same period has increased from $869,000 to $21.0 million, a five-year CAGR of 89%. 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 managing directors have Big Five experience and an equity interest in our company. This team has created a culture of professionalism that we believe fosters in our associates a feeling of personal responsibility for, and pride in, client projects and enables us to deliver high-quality service to our clients.

Industry Background

Increasing Demand for Outsourced Professional Services

According to a study by Staffing Industry Analysts, Inc., the market for outsourcing of professionals, including information technology, accounting and finance, technical/engineering, medical and legal professionals, is large and growing, with revenues estimated to grow from $40.1 billion in 1999 to $58.6 billion in 2002, representing a CAGR of 13.5%. Accounting and finance professionals, according to the same study, represent one of the fastest growing segments of this market, with revenues estimated to grow from $7.2 billion in 1999 to $13.6 billion in 2002, representing a CAGR of 23.6%. There has been no subsequent update of the information in this forecast, though we understand an update may be available in October 2002. We believe, based on discussions with our clients, this growth is driven by the recognition that by outsourcing professionals companies can:

•

strategically access specialized skills and expertise;

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effectively supplement internal resources;

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increase labor flexibility; and

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reduce their overall hiring and training costs.

Typically, companies use a variety of alternatives to fill their project professional services needs. Companies outsource entire projects to consulting firms; this provides them access to the expertise of the firm but often entails significant cost and less management control of the project. Companies also supplement their internal resources with employees from the Big Five accounting firms; however, these arrangements are on an ad hoc basis and have been increasingly limited by regulatory concerns. Companies use temporary employees from traditional and Internet-based staffing firms, who may be less experienced or less qualified than employees of professional services firms. Finally, some companies rely solely on their own employees who may lack the requisite time, experience or skills.

Increasing Supply of Project Professionals

Concurrent with the growth in demand for outsourced professional services, we believe, based on discussions with our associates, that the number of professionals seeking to work on a project basis has increased due to a desire for:

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more flexible hours and work arrangements, coupled with competitive wages and benefits and a professional culture;

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challenging engagements that advance their careers, develop their skills and add to their experience base; and

•

a work environment that provides a diversity of, and more control over, client engagements.

The employment alternatives historically available to professionals may fulfill some, but not all, of an individual’s career objectives. A professional working for a Big Five accounting firm or a consulting firm may receive challenging assignments and training, but may encounter a career path with less flexible hours and limited control over work engagements. Alternatively, a professional who works as an independent contractor faces the ongoing task of sourcing assignments and significant administrative burdens.

During the past year of turmoil in the economy and the accounting profession, particularly, we have experienced an increase in the supply of qualified finance and accounting professionals.

Resources Connection Solution

Resources Connection is positioned to capitalize on the confluence of these industry trends. We believe, based on discussions with our clients, that Resources Connection provides clients seeking outsourced professionals with high-quality services because we are able to combine all of the following:

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a relationship-oriented approach to assess our clients’ project needs;

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highly qualified professionals with the requisite skills and experience;

•

competitive rates on an hourly, instead of a per project, basis; and

•

significant client control of their projects.

Resources Connection Strategy

Our Business Strategy

We are dedicated to providing highly qualified and experienced accounting and finance, risk management, human resources management and information technology professionals to meet our clients’ project and interim professional services needs. Our objective is to be the leading provider of these outsourced professional services. We have developed the following business strategies to achieve this objective:

•

Hire and retain highly qualified, experienced associates. We believe our highly qualified, experienced associates provide us with a distinct competitive advantage. Therefore, one of our priorities is to continue to attract and retain high-caliber associates. We believe we have been successful in attracting and retaining qualified professionals by providing challenging work assignments, competitive compensation and benefits, and continuing education and training opportunities, while offering flexible work schedules and more control over choosing client engagements.

•

Maintain our distinctive culture. Our corporate culture is central to our business strategy and we believe has been a significant component of our success. Our senior management, virtually all of whom are Big Five alumni, has created a culture that combines the commitment to quality and the client service focus of a Big Five accounting firm with the entrepreneurial energy of an innovative, high-growth company. We seek associates and management with talent, integrity, enthusiasm and loyalty to strengthen our team and support our ability to provide clients with high-quality services. We believe that our culture has been instrumental to our success in hiring and retaining highly qualified associates and, in turn, attracting clients.

•

Build consultative relationships with clients. We emphasize a relationship-oriented approach to business rather than a transaction-oriented 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 48 of our largest 50 clients in fiscal 2001 remained clients in fiscal 2002.

•

Build the Resources Connection brand. Our objective is to establish Resources Connection as the premier provider of project-based professional services. Our primary means of building our brand is by consistently providing high-quality, value-added services to our clients. We have also focused on building a significant referral network through our more than 1,050 associates on assignment and 300 management employees, most of whom have established relationships with a number of potential clients. In addition, we have ongoing national and local marketing efforts that reinforce the Resources Connection brand. These efforts include an advertising campaign commenced in the fourth quarter of fiscal 2002 in targeted business publications.

Our Growth Strategy

Virtually all of our growth since inception has been internal. We believe we have significant opportunity for continued strong internal growth in our core business and will evaluate potential strategic acquisitions on a case-by-case basis. Key elements of our growth strategy include:

•

Expanding work from existing clients. A principal component of our strategy is to secure additional project work from the more than 1,400 clients we served in fiscal 2002. Prior to the management-led buyout, we were unable to provide certain services to some of our clients due to regulatory constraints applicable to us as part of a Big Five accounting firm. Subsequent to the management-led buyout, we were able to expand the scope of the services we provide to our clients. We believe, based on discussions with our clients, that the amount of revenue we currently receive from most of our clients represents a relatively small percentage of the amount they spend on outsourced professional services, and that, consistent with industry trends, they will continue to increase the amount they spend on these services. We believe that by continuing to deliver high-quality services and by further developing our relationships with our clients, we will capture a significantly larger share of our clients’ expenditures for outsourced professional services.

•

Growing our client base. We will continue to focus on attracting new clients. 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. During this past year, we have seen more growth within key, existing clients, as opposed to growing through the addition of new middle market clients. We anticipate that our growth efforts this year will continue to focus on identifying strategic target accounts that tend to be large companies.

•

Expanding geographically. We plan to expand geographically to meet the demand for outsourced professional services. We expect to add to our existing domestic office network with new offices strategically located to meet the needs of our existing clients and to create additional new client opportunities. We believe that there are also significant opportunities to grow our business internationally and, consequently, we intend to expand our international presence on a strategic and opportunistic basis.

•

Providing additional professional services lines. We will continue to explore, and consider entry into, new professional services lines. Since fiscal 1999, we have diversified our professional services lines by entering into the human resources management, (including executive compensation and corporate governance consulting), the information technology segments, and internal audit services. 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 five years has been our highly qualified and experienced associates. As of May 31, 2002, we employed over 1,050 associates on assignment. Our associates have professional experience in a wide range of industries and functional areas. We provide our associates with challenging work assignments, competitive compensation and benefits, and continuing education and training opportunities, while offering flexible work schedules and more control over choosing client engagements.

Our associates are employees of Resources Connection. We pay each associate an hourly rate, overtime premiums as required by law, and offer benefits, including paid vacation and holidays; referral bonus programs; group health and basic term life insurance programs, each with an approximate 50% contribution by the associate; a matching 401(k) retirement plan; and professional development and career training. Typically, an associate must work a threshold number of hours to be eligible for all of the benefits. We also have a long-term

incentive plan for our associates that affords them the opportunity to earn an annual cash bonus that vests over time. In addition, we offer our associates the ability to participate in the Company’s Employee Stock Purchase Plan. 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. In fiscal 2002, we served over 1,400 clients. Our revenues are not concentrated with any particular client or clients, or within any particular industry. In fiscal 2002, no single client accounted for more than 5% of our revenue and our 10 largest clients accounted for approximately 17.5% of our revenues.

The clients listed below represent the geographic and industry diversity of our client base in fiscal 2002.

Allied Waste		Laidlaw Education Services
Blue Shield of California		PepsiCo Inc.
CB Richard Ellis		Pharmacia Corporation
Credit Suisse First Boston Corporation		Siemens Corporation
El Paso Corporation		Southwest Airlines
Exelon Corporation		Toshiba America Electronic Components, Inc
Great West Life and Annuity Life Insurance Company		Toyota Motor Sales, USA, Inc.

Services

Our current professional services capabilities include accounting and finance, risk management, human resources management and information technology. At the end of fiscal 2002, we formed two new subsidiaries to expand our services in internal audit and executive compensation and corporate governance consulting. In fiscal 2002, our revenue from providing accounting and finance services accounted for a substantial majority of our revenue. Our engagements are project-based and often last three months or longer.

Accounting and Finance

Our accounting and finance services include:

Special Projects: Our accounting and finance associates work on a variety of special projects including:

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financial analyses, such as product costing and margin analyses;

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tax-related projects, such as tax compliance and analysis of tax liabilities resulting from acquisitions; and

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resolving complex accounting problems, such as large out-of-balance accounts and unreconciled balances.

Sample Engagement: We provided 36 associates over an 18-month period to assist the transition team of a large utility in their efforts to emerge from bankruptcy. Our associates were responsible for:

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performing special projects related to the bankruptcy;

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assisting with establishing proper cut-off related to the bankruptcy;

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assisting with the proof of claims process; and

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assisting with the integration of the proposed Plan of Reorganization.

Mergers and Acquisitions: Our accounting and finance associates have assisted with the following functions for clients involved in mergers and acquisitions:

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due diligence work;

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integration of financial reporting and accounting systems; and

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public reporting filings associated with the transaction.

Sample Engagement: We have provided more than 50 associates to assist with the post-acquisition integration of a multi-billion dollar solid waste management company. Our services were delivered through 19 of our offices with coordination provided by one of our offices. We assigned a specially designated project manager to oversee the delivery of our services, thereby facilitating project management and client control. Our associates were responsible for:

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performing controller responsibilities at various sites, including preparing internal financial statements, closing the general ledger and managing the accounting staff;

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restructuring the fixed asset reporting system;

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assisting with the transition of financial functions during the divestiture of solid waste facilities and closing of other facilities;

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assisting with converting the newly acquired facilities’ systems to the parent’s systems; and

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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:

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assist with the finance and accounting issues of system implementations; and

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maintain daily operations during the implementation and conversion process in order to minimize disruption to the organization.

Sample Engagement: We provided 15 associates over a 14-month period to assist one of the world’s largest energy production companies 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:

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documenting and preparing a flowchart of the accounting system and existing business processes, practices and workflows;

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reviewing internal controls and developing an operations manual;

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documenting the new accounting system processes and procedures;

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performing pre- and post-conversion testing;

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hiring and training new employees; and

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designing training programs.

Periodic Accounting and Finance Needs: Our associates help clients with periodic needs such as:

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interim senior financial management, including controller or accounting manager tasks;

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monthly/quarterly/year-end closings;

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audit preparation;

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public reporting; and

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budgeting and forecasting.

Sample Engagement: We provided 40 associates over a 19-month period to assist a multi-unit medical company with a comprehensive review and clean-up of the company’s consolidated balance sheet in preparation for its year-end audit. Our associates were responsible for:

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designing a work program and package format to be used by 23 associates in teams across six states;

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completing a detailed review of approximately 180 entities’ balance sheets, compiling documentation, and obtaining support for the entire trial balance; and

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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 in setting up the accounting function for a company that provides services to start-up companies. Our associates were responsible for:

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designing a scalable general ledger system to accommodate multiple entities;

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setting up the accounts payable system for all entities including check disbursements and wire transfers of funds;

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designing a system for processing semi-monthly payroll;

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developing cash receipts function including the performance of all treasury functions (collections, deposits, investments); and

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creating a model for projecting cash flows from individual entities.

Human Resources Management

Our human resources management professional services group was formed in June 1999. These services are currently available in 22 of our offices. Our human resources management services include:

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development of human resources management procedures, training and policies;

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compensation program design and implementation;

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interim senior human resources management; and

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assistance in complying with governmental employment regulations.

Sample Engagement: We provided an associate over a seven-month period to assist a global entertainment conglomerate with a number of projects. Our associate was responsible for:

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evaluating existing health and welfare plans;

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designing a plan of integration for employee benefit programs of various subsidiaries;

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developing a plan for early retirement programs associated with a merger; and

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researching ERISA compliance in various employer health and welfare plans.

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:

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evaluating the existing human resources information system, or HRIS;

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reviewing vendors and implementing a new HRIS system;

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updating human resources policies and procedures to reflect consistent corporate policies across numerous acquired companies; and

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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 18 of our offices. Our information technology services include:

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financial system/enterprise resource planning implementation and post implementation optimization

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HRIS implementation and integration; and

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supporting analytical systems such as consolidation and budgeting and planning tools.

Sample Engagement: We provided four associates over a six-month period to redesign the reporting process and re-implement Hyperion Enterprise for a diversified international manufacturing corporation. The challenge included managing the complexities of balancing United States financial accounting reporting, international financial accounting reporting and internal operational reporting while creating as little disruption as possible to the users. Our team included a project manager, a technical Enterprise expert and report writing specialists. Our associates were responsible for:

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creating new reports to satisfy statutory and operational requirements and streamlining and rationalizing 400 existing reports;

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re-implementing a chart of accounts to support reporting requirements of diverse operational segments;

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executing a communication plan to educate and create buy-in with the users; and

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completing other special projects such as legal entity rationalization.

Operations

We generally provide our professional services to clients at a local level through our 43 domestic offices and four international offices, with the oversight and consultation of our corporate management team located in our corporate service center and our regional managing directors. The managing director and client service director(s) 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 and regional managing directors are available to consult with the managing director with respect to client services.

Our offices are operated in a decentralized, entrepreneurial manner. The managing directors of our offices are given significant autonomy in the daily operations of their respective offices, and with respect to such offices, are responsible for overall guidance and supervision, budgeting and forecasting, sales and marketing, pricing and hiring. We believe that a substantial portion of the buying decisions made by our clients are made on a local or regional basis and that our offices most often compete with other professional services providers on a local or regional basis. Because our managing directors are in the best position to understand the local and regional outsourced professional services market and because clients often prefer local providers, we believe that a decentralized operating environment maximizes operating performance and contributes to employee and client satisfaction.

We believe that our ability to successfully deliver professional services to clients is dependent on our managing 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 managing directors, we have an incentive program for our office management that awards annual bonuses based on both the performance of the company and the performance of the director’s particular office. In addition, virtually all members of our office management own equity in our company. We also have a mentor program whereby each new managing director is trained by an experienced managing director, who is responsible for providing support to the new managing director on an ongoing basis.

From our corporate headquarters in Costa Mesa, California, we provide our offices with centralized administrative, marketing, finance and legal support. Our financial reporting is centralized in our corporate service center. This center also handles billing, accounts payable and accounts receivable, and administers human resources including employee compensation and benefits. In addition, we have a corporate networked information technology platform with centralized financial reporting capabilities and a front office client management system. These centralized functions minimize the administrative burdens on our office management and allow them to spend more time focused on client development.

Business Development

Our business development initiatives are composed of:

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local sales initiatives focused on existing clients and target companies;

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brand marketing activities; and

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national and local direct mail programs.

Our business development efforts are driven by the networking and sales efforts of our management. The managing directors and client service directors in our offices develop a list of targeted potential clients and key existing clients. During this past fiscal year, we have hired a small number of additional management professionals to assist the existing management teams with their business development efforts on a national basis. These business development professionals, teamed with the managing directors and client service group, are responsible for initiating and fostering relationships with the senior management of our targeted client 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, public relations efforts and advertising materials. We believe that our branding initiatives coupled with our high-quality client service differentiate us from our competitors and establish Resources Connection as a credible and reputable professional services firm.

Our national marketing group develops our direct mail campaigns to focus on our targeted client and associate populations. These campaigns are intended to support our branding, sales and marketing, and associate hiring initiatives.

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:

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consulting firms;

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loaned employees of the Big Five accounting firms;

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traditional and Internet-based staffing firms and their specialized divisions; and

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the in-house resources of our clients.

We compete for clients on the basis of the quality of professionals, the timely availability of professionals with requisite skills, the scope and price of services, and the geographic reach of services. We believe that our attractive value proposition, consisting of our highly qualified associates, relationship-oriented approach and professional culture, enables us to differentiate ourselves from our competitors. Although we believe we compete favorably with our competitors, many of our competitors have significantly greater financial resources, generate greater revenues and have greater name recognition than our company.

Employees

As of May 31, 2002, we had a total of 1,372 employees, including 312 corporate and office-level employees and 1,060 professional services associates. None of our employees is covered by a collective bargaining agreement.

ITEM 2. PROPERTIES

We maintain a total of 43 domestic offices, which are respectively located in the following metropolitan areas:

Phoenix, Arizona	Boise, Idaho	Cincinnati, Ohio
Costa Mesa, California	Chicago, Illinois (2 locations)	Cleveland, Ohio
Los Angeles, California	Indianapolis, Indiana	Portland, Oregon
Santa Clara, California	Kansas City, Kansas	Philadelphia, Pennsylvania
San Diego, California	Baltimore, Maryland	Pittsburgh, Pennsylvania
San Francisco, California	Boston, Massachusetts	Austin, Texas
Denver, Colorado	Detroit, Michigan	Dallas, Texas
Hartford, Connecticut	Minneapolis, Minnesota	Fort Worth, Texas
Stamford, Connecticut	St. Louis, Missouri	Houston, Texas (2 locations)
Jacksonville, Florida	Las Vegas, Nevada	San Antonio, Texas
Orlando, Florida	Parsippany, New Jersey	Seattle, Washington
Tampa, Florida	Princeton, New Jersey	Milwaukee, Wisconsin
Atlanta, Georgia	New York, New York	Washington, D.C.
Honolulu, Hawaii	Charlotte, North Carolina

Our corporate offices are located in the Costa Mesa, California office in a 19,048 square foot facility under a lease expiring in June 2007. We maintain four international offices: Toronto, Canada; London, England; Hong Kong, People’s Republic of China; and Taipei, Taiwan.

ITEM 3. LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings; however, we are a party to various legal proceedings arising in the ordinary course of our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock

Our common stock has traded on The Nasdaq National Market under the symbol “RECN” since December 15, 2000. Prior to that time, there was no public market for our common stock. The approximate number of holders of record of our common stock as of May 31, 2002 was 290.

The following table sets forth the range of high and low sales prices reported on The Nasdaq National Market for our common stock for the periods indicated.

	Price Range of Common Stock
	High		Low
Fiscal 2001:
Third Quarter (December 15, 2000 through February 24, 2001)	$	24.75	$	16.00
Fourth Quarter	$	33.30	$	17.13

Fiscal 2002:
First Quarter	$	31.88	$	19.50
Second Quarter	$	23.56	$	17.66
Third Quarter	$	27.90	$	20.64
Fourth Quarter	$	30.06	$	24.55

Fiscal 2003:
First Quarter (May 27, 2002 through August 16, 2002)	$	27.30	$	16.50

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to finance the growth and development of our business and do not anticipate paying any cash dividends in the foreseeable future. Our credit agreement currently prohibits us from declaring or paying any dividends or other distributions on any shares of our capital stock other than dividends payable solely in shares of capital or the stock of our subsidiaries. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, results of operations, capital requirements, general business condition, contractual restrictions contained in our credit agreement and other agreements, and other factors deemed relevant by our board of directors.

ITEM 6. SELECTED FINANCIAL DATA

You should read the following selected historical consolidated financial data in conjunction with our consolidated financial statements and related notes beginning on page 29 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing on page 13. 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 are not included in this Report on Form 10-K. The consolidated statements of income data for the period from November 16, 1998 to May 31, 1999 and the 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 not included in this Report on Form 10-K. The consolidated statements of income data for the years ended May 31, 2000, 2001 and 2002 and the consolidated balance sheet data at May 31, 2001 and 2002 were derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers LLP and are included elsewhere in this Report on Form 10-K. Historical results are not necessarily indicative of results that may be expected for any future periods.

	Resources Connection LLC				Resources Connection, Inc.
	Year Ended May 31, 1998		Period from June 1, 1998 to March 31, 1999		Period from November 16, 1998 to May 31, 1999		Year Ended May 31, 2000		Year Ended May 31, 2001			Year Ended May 31, 2002
	(dollar amounts in thousands, except per share data)
Consolidated Statements of Income Data (1):
Revenue	$	29,685	$	55,897	$	15,511	$	127,459	$	191,496		$	181,677
Direct cost of services		16,848		31,712		8,745		74,668		112,555			108,715

Gross profit		12,837		24,185		6,766		52,791		78,941			72,962
Selling, general and administrative expenses		9,035		17,071		4,274		34,648		49,964			50,688
Amortization of intangible assets		—		—		371		2,231		2,273			125
Depreciation expense		79		118		30		285		866			1,180

Income from operations		3,723		6,996		2,091		15,627		25,838			20,969
Interest income		—		—		—		—		(633	)		(1,183	)
Interest expense		—		—		734		4,717		2,676			—

Income before provision for income taxes and extraordinary charge		3,723		6,996		1,357		10,910		23,795			22,152
Provision for income taxes		—		—		565		4,364		9,518			8,861

Income before extraordinary charge		3,723		6,996		792		6,546		14,277			13,291
Extraordinary charge, net of tax effect of $381		—		—		—		—		572			—

Net income	$	3,723	$	6,996	$	792	$	6,546	$	13,705		$	13,291

Pro Forma Data (2):
Income before provision for income taxes	$	3,723	$	6,996
Pro forma provision for income taxes		1,489		2,798

Pro forma net income	$	2,234	$	4,198

Net income per common share:
Basic before extraordinary charge					$	0.09	$	0.42	$	0.80		$	0.63
Extraordinary charge						—		—		0.03			—

Basic					$	0.09	$	0.42	$	0.77		$	0.63

Diluted before extraordinary charge					$	0.09	$	0.42	$	0.74		$	0.58
Extraordinary charge						—		—		0.03			—

Diluted					$	0.09	$	0.42	$	0.71		$	0.58

Number of shares used in computing net income per share (in thousands):
Basic						8,691		15,630		17,864			21,241

Diluted						8,691		15,714		19,421			22,862

Other Data:
Number of offices open at end of period		18		27		28		35		44			47
Total number of associates on assignment at end of period		326		675		697		1,056		1,283			1,060
Consolidated Balance Sheet Data:
Cash, cash equivalents and long-term marketable securities	$	3,168			$	876	$	4,490	$	34,503		$	55,745
Working capital		4,504				7,150		7,664		42,965			43,135
Total assets		7,976				58,954		70,106		105,345			131,477
Long-term debt, including current portion		—				42,531		41,771		—			—
Stockholders’ equity		4,928				10,610		17,185		86,032			113,471

(1)

All revenue and direct cost of services for the periods presented have been reclassified to comply with the provisions of Emerging Issues Task Force (EITF) Issue No. 01-14 “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred”. This EITF, issued in April 2002, requires companies to account for reimbursements received for ‘out-of-pocket’ expenses as revenue. Previously, Resources Connection recorded such reimbursements as a reduction of direct cost of services. As a result of this new rule, revenue and direct cost of services each increased by $1,657, $1,744, $1,127, $127, $459 and $177, for the years ended May 31, 2002, 2001 and 2000, the period from November 16, 1998 through May 31, 1999, the period from June 1, 1998 through March 31, 1999, and the year ended May 31, 1998, respectively.

(2)

Because Resources Connection LLC is a limited liability company, income taxes on any income realized by Resources Connection LLC are the obligation of its members and, accordingly, Resources Connection LLC records no provision for income taxes. The pro forma net income for Resources Connection LLC for periods through March 31, 1999 have been computed as if Resources Connection LLC had been fully subject to federal and state income taxes as a C corporation.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in “Risk Factors” starting on page 23 and elsewhere in this Report on Form 10-K.

Overview

Resources Connection is an international professional services firm that provides experienced accounting and finance, risk management, human resources management, and information technology professionals to clients on a project basis. We assist our clients with discrete projects requiring specialized professional expertise in accounting and finance, such as mergers and acquisitions due diligence, financial analyses (e.g., product costing and margin analyses), corporate reorganizations and tax-related projects. In addition, we provide human resources management services, such as compensation program design and implementation, information technology services, such as transitions of management information systems, and internal audit services. 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 Evercore Partners, Inc., four of its affiliates and six other investors. In connection with the buyout, we entered into a transition services agreement with Deloitte & Touche, whereby Deloitte & Touche agreed to provide certain services to us at negotiated rates during the period that we maintained our offices within their locations. We have completed the transition of all of our offices previously located in Deloitte & Touche space. The financial statements of Resources Connection, Inc. for the years ended May 31, 2000 and 2001 include charges for services supplied by Deloitte & Touche. Although these transition services were negotiated at arms length, the charges for these services may not necessarily be indicative of rates available from third parties. Our management has been unable to determine the availability and the cost of similar services had they been provided by third parties.

Growth in revenue, to date, has generally been the result of establishing offices in major markets. We established nine offices during fiscal 1997, our initial fiscal year, all in the Western United States. In fiscal 1998, we established nine additional offices, which extended our geographic reach to the Midwest and Eastern United States. For the year ended May 31, 1999, we opened ten more offices and established a new service line in information technology. In fiscal 2000, we established four more domestic offices, established a new service line in human resources management and also began operations in Toronto, Canada; Taipei, Taiwan; and Hong Kong, People’s Republic of China. In fiscal 2001, we established nine additional domestic offices. In fiscal 2002, we began operations in London, England and opened two more domestic offices. In addition, we purchased an operating division of one of the Big Five accounting firms in the United Kingdom, specializing in the selection and recruitment of senior management and interim management capability. The information technology and human resources management service lines have been introduced in a limited number of our offices. At the end of fiscal 2002, we established two new operating entities that will focus primarily on providing internal audit services and executive compensation and corporate governance consulting. We currently serve our clients through 43 offices in the United States and four offices abroad.

We earn revenue primarily by charging our corporate clients on an hourly basis for the professional services of our associates. We recognize revenue once services have been rendered and typically invoice our clients on a weekly basis. Our clients are contractually obligated to pay us for all hours billed. To a much lesser extent, we also earn revenue if a client hires an associate onto its permanent payroll. This type of contractually

non-refundable revenue is recognized at the time our client completes the hiring process and represented less than 4%, 3% and 2% of our revenue for the years ended May 31, 2000, 2001 and 2002, respectively. We periodically review our outstanding accounts receivable balance and determine an estimate of the amount of those receivables we believe may prove uncollectible. Our provision for bad debts is included in our selling, general and administrative expenses.

The costs to pay our professional associates and all related benefit and incentive costs, including provisions for paid time off and other employee benefits, are included in direct cost of services. We pay our associates on an hourly basis for all hours worked on client engagements and, therefore, direct cost of services tends to vary directly with the volume of revenue we earn. We expense the benefits we pay to our associates as they are earned. These benefits include paid vacation and holidays; a bonus incentive plan; referral bonus programs; group health, dental and life insurance programs; a matching 401(k) retirement plan; the ability to participate in the Company’s Employee Stock Purchase 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 other 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 internal management as well as general and administrative, marketing and recruiting costs. Our sales and marketing efforts are led by our management team who are salaried employees and earn bonuses based on operating results for our company as a whole and within each manager’s geographic market.

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments 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.

The following represents a summary of our critical accounting policies, defined as those policies that we believe are: (a) the most important to the portrayal of our financial condition and results of operations and (b) inherently uncertain issues that require management’s most difficult, subjective or complex judgments.

Valuation of long-lived assets—We assess the potential impairment of long-lived tangible and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under the new accounting standard effective June 1, 2001, our goodwill and certain other intangible assets are no longer subject to periodic amortization over their estimated useful lives. These assets are now considered to have an indefinite life and their carrying values are required to be assessed by us for impairment at least annually. Depending on future market values, our operating performance and other factors, these assessments could potentially result in impairment reductions of these intangible assets in the future.

Allowance for doubtful accounts—We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments for services rendered. We estimate this allowance based upon our knowledge of the financial condition of our clients, review of historical receivable and reserve trends and other pertinent information. If the financial condition of our clients deteriorates or we note an unfavorable trend in aggregate receivable collections, additional allowances may be required.

Income taxes—In order to prepare our consolidated financial statements, we are required to make estimates of income taxes, if applicable, in each jurisdiction in which we operate. The process incorporates an

assessment of any current tax exposure together with temporary differences resulting from different treatment of transactions for tax and financial statement purposes. These differences result in deferred tax assets and liabilities that are included in our Consolidated Balance Sheets. The recovery of deferred tax assets from future taxable income must be assessed and, to the extent recovery is not likely, we will establish a valuation allowance. An increase in the valuation allowance results in recording additional tax expense. If the ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Income, additional tax expense may need to be recorded.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Results of Operations

The following tables set forth, for the periods indicated, our consolidated statements of income data. These historical results are not necessarily indicative of future results.

	Resources Connection, Inc.
	Year Ended May 31, 2000		Year Ended May 31, 2001		Year Ended May 31, 2002
	(amounts in thousands)
Revenue (1)	$	127,459	$	191,496	$	181,677
Direct cost of services (1)		74,668		112,555		108,715

Gross profit		52,791		78,941		72,962
Selling, general and administrative expenses		34,648		49,964		50,688
Amortization of intangible assets		2,231		2,273		125
Depreciation expense		285		866		1,180

Income from operations		15,627		25,838		20,969
Interest expense (income), net		4,717		2,043		(1,183	)

Income before provision for income taxes and extraordinary charge		10,910		23,795		22,152
Provision for income taxes		4,364		9,518		8,861

Income before extraordinary charge		6,546		14,277		13,291
Extraordinary charge, net of tax effect of $381		—		572		—

Net income	$	6,546	$	13,705	$	13,291

(1)

All revenue and direct cost of services for the periods presented have been reclassified to comply with the provisions of Emerging Issues Task Force (EITF) Issue No. 01-14 “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred”. This EITF, issued in April 2002, requires companies to account for reimbursements received for ‘out-of-pocket’ expenses as revenue. Previously, Resources Connection recorded such reimbursements as a reduction of direct cost of services. As a result of this new rule, revenue and direct cost of services each increased by $1,127, $1,744, and $1,657 for the years ended May 31, 2000, 2001 and 2002, respectively.

Our operating results for the periods indicated are expressed as a percentage of revenue below.

	Resources Connection, Inc.
	Year Ended May 31, 2000		Year Ended May 31, 2001		Year Ended May 31, 2002
Revenue	100.0	%	100.0	%	100.0	%
Direct cost of services	58.6		58.8		59.8

Gross profit	41.4		41.2		40.2
Selling, general and administrative expenses	27.2		26.1		27.9
Amortization of intangible assets	1.8		1.2		0.1
Depreciation expense	0.2		0.4		0.7

Income from operations	12.2		13.5		11.5
Interest expense (income), net	3.7		1.1		(0.7	)

Income before provision for income taxes and extraordinary charge	8.5		12.4		12.2
Provision for income taxes	3.4		4.9		4.9

Income before extraordinary charge	5.1		7.5		7.3
Extraordinary charge, net	—		0.3		—

Net income	5.1	%	7.2	%	7.3	%

Year Ended May 31, 2002 compared to Year Ended May 31, 2001

Revenue. Revenue decreased $9.8 million or 5.1% to $181.7 million for the year ended May 31, 2002 from $191.5 million for the year ended May 31, 2001. The decrease in revenues resulted from the decline in the total billable hours charged to our clients as compared to the prior year, reflected in the decrease in the number of associates on assignment from 1,283 at the end of fiscal 2001 to 1,060 at the end of fiscal 2002. The decrease in billable hours is primarily attributable to the impact of the recession on our clients, as clients opted to truncate certain assignments as compared to the prior year and have taken greater amounts of time to begin follow-on projects. The decrease is also attributable to the loss of middle market clients served during fiscal 2001 and the truncation of services by other middle market clients during fiscal 2002. The decrease in total revenue was offset by an increase in the proportion of hours generated by associates in the IT service line (with a higher average billing rate per hour) and a 4.5% increase in the overall average billing rate per hour. We operated 47 offices during the final quarter of fiscal 2002, compared to 44 offices in the last quarter of fiscal 2001. We intend to open four offices in the domestic United States in fiscal 2003.

Direct Cost of Services. Direct cost of services decreased $3.8 million or 3.4% to $108.7 million for the year ended May 31, 2002 from $112.6 million for the year ended May 31, 2001. The decrease in direct cost of services was attributable to the decrease in total billable hours charged to our clients as compared to the prior year. The number of associates on assignment declined from 1,283 at the end of fiscal 2001 to 1,060 at the end of fiscal 2002. The decrease in direct cost of services occurred despite a 2.7% increase in the average pay rate per hour between the two years. Direct cost of services increased as a percentage of revenue from 58.8% for fiscal year 2001 to 59.8% for fiscal year 2002. The net increase reflects the incremental increase in billing rate per hour compared to pay rate per hour, offset by the impact of our enriched benefit programs for associates and the decrease in conversion fees in the current year compared to the prior year.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $724,000 or 1.4% to $50.7 million for the year ended May 31, 2002 from $50.0 million for the year ended May 31, 2001. This increase reflects the cost of operating and staffing the three new offices opened during fiscal 2002 as well as a full year of operation for those offices opened in fiscal 2001. Management and administrative headcount increased from 290 at the end of fiscal 2001 to 312 at the end of fiscal 2002, causing an increase in

compensation and related benefits expense. The Company also embarked in the fourth quarter of fiscal 2002 on an advertising campaign in targeted business publications. This effort will continue at least into the second quarter of fiscal 2003. Selling, general and administrative expenses increased as a percentage of revenue from 26.1% for the year ended May 31, 2001 to 27.9% for the year ended May 31, 2002. This percentage increase resulted primarily from the lower revenue base in fiscal 2002 over which to spread selling, general and administrative expenses, including fixed operating costs, such as rent expense.

Amortization and Depreciation Expenses. Amortization of intangible assets decreased from $2.3 million for the year ended May 31, 2001 to $125,000 for the year ended May 31, 2002. Effective June 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which establishes new standards for goodwill acquired in a business combination and other intangible assets, eliminates amortization of existing goodwill balances, and requires annual evaluation of goodwill for impairment. The Company is required to evaluate goodwill for impairment by 1) determining the individual reporting units giving rise to the existing goodwill; 2) allocating a fair value to each of the individual reporting units via such measures as market capitalization and analysis of future cash flows; and 3) comparing such fair value amounts to the carrying values of the reporting units. An impairment loss is recognized if the carrying amount of the reporting unit exceeds its fair value. The Company does not believe that an impairment of goodwill has occurred.

The amortization expense in the current year is related to the amortization of the remaining balance paid for a non-compete agreement entered into when the Company acquired Resources Connection LLC (“LLC”).

Depreciation expense increased from $866,000 for the year ended May 31, 2001 to $1.2 million for the year ended May 31, 2002. This increase reflects the addition of offices since the prior year, a full year of depreciation of assets acquired during fiscal 2001 and our investment in information technology.

Interest (Income) Expense, Net. The repayment of the term loan and subordinated notes on December 20, 2000, effectively ended the Company’s interest expense obligations. The Company has invested available cash in money market and commercial paper investments that have been classified as cash equivalents due to the short maturities of these investments. During fiscal 2002, the Company purchased $24 million of government-agency bonds with remaining maturity dates in excess of one year from the balance sheet date. The bonds mature through May 2004 and have coupon rates ranging from 3.0% to 4.0%. These investments have been classified in the May 31, 2002 consolidated balance sheet as “held-to-maturity” securities.

During fiscal 2002, the Company generated interest income of $1.2 million compared to net interest expense of $2.0 million in the year ended May 31, 2001. The Company earned approximately 2.6%, annualized, on its money market, commercial paper and other marketable securities investments during the year.

Income Taxes. The provision for income taxes decreased from $9.5 million for the year ended May 31, 2001 to $8.9 million for the year ended May 31, 2002 due to the decrease in income from operations in fiscal 2002. The effective tax rate was approximately 40.0% for both years, which differs from the federal statutory rate primarily due to state taxes, net of federal benefit. Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the provision. There can be no assurance that the Company’s effective tax rate will not increase in the future.

Year Ended May 31, 2001 compared to Year Ended May 31, 2000

Revenue. Revenue increased $64.0 million or 50.2% to $191.5 million for the year ended May 31, 2001 from $127.5 million for the year ended May 31, 2000. The increase in total revenue was primarily due to the growth in total billable hours resulting from an increase in the number of associates on assignment from 1,056 at the end of fiscal 2000 to 1,283 at the end of fiscal 2001 and a 12% increase in the average billing rate per hour. Despite the increase in rates, the increase in revenue is primarily attributable to the increase in the number of associates. Revenue also increased from the contribution of the nine new offices during fiscal 2001.

Direct Cost of Services. Direct cost of services increased $37.9 million or 50.7% to $112.6 million for the year ended May 31, 2001 from $74.7 million for the year ended May 31, 2000. This increase was primarily the result of the growth in the number of associates on assignment during fiscal 2001 and a 1.0% increase in the average pay rate per hour between the two years. Direct cost of services increased slightly as a percentage of revenue from 58.6% for fiscal year 2000 to 58.8% for fiscal year 2001. This net increase reflects the impact of our enriched benefit programs for associates offset by the incremental increase in billing rate per hour compared to pay rate per hour.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $15.3 million or 44.2% to $50.0 million for the year ended May 31, 2001 from $34.6 million for the year ended May 31, 2000. This increase was attributable to the cost of operating and staffing the nine new offices opened during fiscal 2001 and the growth in operations at offices opened prior to fiscal 2001. Management and administrative headcount increased from 224 at the end of fiscal 2000 to 290 at the end of fiscal 2001. Selling, general and administrative expenses decreased as a percentage of revenue from 27.2% for the year ended May 31, 2000 to 26.1% for the year ended May 31, 2001. This percentage decrease resulted primarily from improved operating leverage experienced in offices that had been open more than one year.

Amortization and Depreciation Expenses. Amortization of intangible assets was relatively unchanged at $2.3 million for the year ended May 31, 2001 compared to $2.2 million for the year ended May 31, 2000. Effective June 1, 2001, the Company adopted SFAS No. 142, which, among other things, eliminated amortization of existing goodwill balances. During fiscal 2001, the Company determined that amortization expense under the previous accounting standards set by Accounting Principles Board (APB) Opinion No. 17, “Intangible Assets,” was $2.1 million for goodwill and $125,000 related to the balance paid for a non-compete agreement entered into when the Company acquired LLC.

Depreciation expense increased from $285,000 for the year ended May 31, 2000 to $866,000 for the year ended May 31, 2001. This increase reflects the impact of the completed moves out of our former parent’s office space into our own space resulting in additional investment in furniture and leasehold improvements, continuing growth in our number of offices and our investment in information technology.

Interest Expense, Net. Net interest expense decreased from $4.7 million for the year ended May 31, 2000 to $2.0 million for the year ended May 31, 2001. This decrease is the result of the repayment of our term loan and subordinated notes on December 20, 2000 using the proceeds from our initial public offering of our common stock. After the repayment, we had no outstanding long-term debt balances. The remaining net proceeds from the offering of approximately $15.3 million, as well as cash generated from operations, have been invested in money market funds and commercial paper and are classified as cash equivalents due to the short maturities of these investments. Interest income was $633,000 for the year ended May 31, 2001.

Income Taxes. The provision for income taxes increased from $4.4 million for the year ended May 31, 2000 to $9.5 million for the year ended May 31, 2001. The effective tax rate remained at 40% in both fiscal years. Our effective rate differs from the federal statutory rate primarily due to state taxes, net of federal benefit.

Extraordinary Charge. The extraordinary charge of $572,000 (net of tax effect of $381,000) is the result of the write-off of the net remaining balance of unamortized debt issuance costs associated with our term loan and subordinated debt. The approximately $38.8 million of debt was repaid in full on December 20, 2000 using a portion of the proceeds of our initial public offering of our common stock.

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, 2002. 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 document, 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 document. The operating results are not necessarily indicative of the results to be expected in any future period.

	Resources Connection, Inc. Quarter Ended
	Aug. 31, 2000			Nov. 30, 2000			Feb. 28, 2001			May 31, 2001			Aug. 31, 2001			Nov. 30, 2001			Feb. 28, 2002			May 31, 2002
	(in thousands)
Consolidated Statements of Income Data (1):
Revenue	$	39,510		$	45,470		$	50,304		$	56,212		$	49,340		$	46,099		$	42,988		$	43,250
Direct cost of services		23,104			26,411			29,931			33,109			29,257			27,716			26,150			25,592

Gross profit		16,406			19,059			20,373			23,103			20,083			18,383			16,838			17,658
Selling, general and administrative expenses		10,720			12,493			12,680			14,071			12,875			12,348			12,301			13,164
Amortization of intangible assets		578			565			565			565			31			31			31			32
Depreciation expense		192			216			227			231			257			287			316			320

Income from operations		4,916			5,785			6,901			8,236			6,920			5,717			4,190			4,142
Interest income		(19	)		(44	)		(251	)		(319	)		(282	)		(309	)		(265	)		(327	)
Interest expense		1,228			1,184			248			16			—			—			—			—

Income before provision for income taxes and extraordinary charge		3,707			4,645			6,904			8,539			7,202			6,026			4,455			4,469
Provision for income taxes		1,483			1,858			2,762			3,415			2,881			2,410			1,782			1,788

Income before extraordinary charge		2,224			2,787			4,142			5,124			4,321			3,616			2,673			2,681
Extraordinary charge, net of tax effect of $381		—			—			572			—			—			—			—			—

Net income	$	2,224		$	2,787		$	3,570		$	5,124		$	4,321		$	3,616		$	2,673		$	2,681

Net income per common share (2):
Basic	$	0.14		$	0.18		$	0.18		$	0.25		$	0.21		$	0.17		$	0.13		$	0.13

Diluted	$	0.13		$	0.16		$	0.17		$	0.23		$	0.19		$	0.16		$	0.12		$	0.12

(1)

All revenue and direct cost of services for the periods presented have been reclassified to comply with the provisions of EITF Issue No. 01-14 “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred”. This EITF, issued in April 2002, requires companies to account for reimbursements received for ‘out-of-pocket’ expenses as revenue. Previously, Resources Connection recorded such reimbursements as a reduction of direct cost of services. As a result of this new rule, revenue and direct cost of services each increased by $398, $353, $438, $468, $491, $474, $424,and $355, for the quarters ended May 31 and February 28, 2002, November 30, August 31, May 31 and February 28, 2001 and November 30 and August 31, 2000, respectively.

(2)

Net income per common share calculations for each of the quarters were based upon the weighted average number of shares outstanding for each period, and the sum of the quarters may not necessarily be equal to the full year net income per common share amount.

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;

•

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 Resources 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; and

•

the timing of acquisitions and related costs, such as compensation charges that fluctuate based on the market price of our common stock.

Due to these and other factors, we believe that quarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance.

Liquidity and Capital Resources

Our primary source of liquidity is cash provided by our operations and, to the extent necessary, available commitments under our revolving line of credit. We have generated positive cash flows from operations since inception, and we continued to do so during the year ended May 31, 2002.

In April 1999, in connection with the acquisition of Resources Connection LLC, we entered into a $28.0 million credit agreement with a consortium of banks that provided an $18.0 million term loan facility and a $10.0 million revolving credit facility. The remaining balance on the term loan facility was repaid in December 2000 using the proceeds from our initial public offering of common stock.

At May 31, 2002, the Company had operating leases, primarily for office premises, expiring at various dates. Future minimum rental commitments under operating leases are as follows:

Years Ending May 31:
2003	$	4,726,000
2004		4,678,000
2005		4,059,000
2006		2,625,000
2007		1,952,000
Thereafter		4,666,000

Total	$	22,706,000

On August 22, 2001, we replaced the original credit agreement with a $10.0 million unsecured revolving credit facility with Bank of America (the “Credit Agreement”). The credit agreement allows the Company to choose the interest rate applicable to advances. The interest rate options are Bank of America’s prime rate, a London Inter-Bank Offered (“LIBOR”) rate plus 1.5% or Bank of America’s Grand Cayman Banking Center (“IBOR”) rate plus 1.5%. Interest is payable on the Credit Agreement at various intervals no less frequently than quarterly. There is an annual facility fee of 0.25% payable on the unutilized portion of the Credit Agreement. The Credit Agreement expires September 1, 2003. As of May 31, 2002, the Company had no outstanding borrowings under the revolving credit facility.

Net cash provided by operating activities totaled $15.3 million in fiscal 2002 compared to $20.9 million in fiscal 2001. Cash provided by operations resulted primarily from the net earnings of the Company partially offset by growth in working capital. One of the primary components of the net decrease in cash provided by operations

was the payments made in fiscal 2002 under the Company’s incentive bonus plan for management triggered by achieving certain increases in revenue and net income during fiscal 2001 and payments made in fiscal 2002 for amounts earned by associates during fiscal 2001 under the Company’s associate incentive plan. The accrual for the management incentive bonus at the end of fiscal 2002 was significantly less than at the end of fiscal 2001 as the Company’s revenue and net income declined. In addition, accruals for salaries were 20% less at the end of fiscal 2002 than they were at the end of fiscal 2001 because of the reduction in the number of associates. A change in the Company tax year-end from December 31 to May 31 as well as estimated tax payments triggered prepayments of $3.5 million for federal and state income taxes. The Company’s working capital includes $31.7 million in cash and cash equivalents at May 31, 2002.

Net cash used in investing activities totaled $27.7 million for fiscal 2002 compared to $2.0 million for fiscal 2001. During fiscal 2002, the Company purchased $24 million of marketable securities and classified them as “held-to-maturity” securities since their remaining maturity dates are in excess of one year from the balance sheet date. These securities have coupon interest rates of 3.0% to 4.0%. The Company also acquired a practice of Ernst & Young LLP (E&Y) in the United Kingdom, specializing in the selection and recruitment of senior management teams and interim management capability. The purchase price was approximately $1.7 million, including transaction costs. An additional $225,000 was used in fiscal 2002 compared to fiscal 2001 for leasehold improvements, office equipment and information technology upgrades for existing offices and newly opened offices.

Net cash provided by financing activities totaled $9.6 million for the year ended May 31, 2002 compared to $11.1 million for the year ended May 31, 2001. The net cash provided by financing activities in fiscal 2002 reflects the net proceeds received from our secondary offering of common stock in addition to stock option exercises and purchases by employees through the Company’s Employee Stock Purchase Plan. Cash provided by financing activities in fiscal 2001 represents the net proceeds received from our initial public offering of common stock, offset by repayments in December 2000 of the outstanding balances of the Company’s term loan, revolving loan and subordinated debt.

Our ongoing operations and anticipated growth in the geographic markets we currently serve will require us to continue to make investments in capital equipment, primarily technology hardware and software. In addition, we may consider making certain strategic acquisitions. We anticipate that our current cash, existing availability under our revolving line of credit and the ongoing cash flows from our operations will be adequate to meet our working capital and capital expenditure needs for at least the next 12 months. 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.

Recent Accounting Pronouncements

In April 2002, the Emerging Issues Task Force issued EITF Issue No. 01-14 “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred”. This EITF requires all reimbursements received for ‘out-of-pocket’ expenses to be accounted for as revenue. Previously, the Company recorded such reimbursements as a reduction of direct cost of services. The Company has adopted this Issue effective March 1, 2002 and, as required in the Issue, has reclassified such reimbursements for all prior periods presented in comparative financial statements.

In July 2001, the FASB issued SFAS No. 141, “Business Combinations” which supersedes APB Opinion No. 16 (“APB 16”), “Business Combinations” and SFAS No. 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises”. SFAS No. 141 establishes new standards for accounting and reporting requirements

for business combinations and requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is prohibited. The Company has adopted this statement effective June 1, 2001.

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” which supersedes APB Opinion No. 17, “Intangible Assets”. SFAS No. 142 establishes new standards for accounting for goodwill acquired in a business combination and other intangible assets, eliminates amortization of existing goodwill balances, and requires annual evaluation of goodwill for impairment. The Company is required to evaluate goodwill for impairment by 1) determining the individual reporting units giving rise to the existing goodwill; 2) allocating a fair value to each of the individual reporting units via such measures as market capitalization and analysis of future cash flows; and 3) comparing such fair value amounts to the carrying values of the reporting units. An impairment loss is recognized if the carrying amount of the reporting unit exceeds its fair value. The Company has adopted this statement effective June 1, 2001 and does not believe, based upon the fair market value of its publicly traded common stock that an impairment of goodwill has occurred.

In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell and expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for all fiscal years beginning after December 15, 2001 and is therefore effective for the Company beginning with its fiscal quarter ending August 31, 2002. Management does not believe that it will have a material impact on the Company’s consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145 “Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections”. Among other matters, SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt” thereby eliminating the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in APB Opinion No. 30, “Reporting Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” will be used to classify those gains and losses. SFAS No. 145 is effective for financial statements for fiscal years beginning after May 15, 2002 and is therefore effective for the Company beginning with its fiscal quarter ending August 31, 2002. The Company anticipates that costs incurred in connection with the early extinguishment of debt in fiscal 2001 will be reclassified and included in interest expense with the related income tax benefit included as a component of the provision for income taxes.

RISK FACTORS

You should carefully consider the risks described below before making a decision to buy shares of our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including those risks set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may also adversely impact and impair our business. If any of the following risks actually occurs, our business could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. When determining whether to buy our common stock, you should also refer to the other information in this Report on Form 10-K, including our financial statements and the related notes.

This Report on Form 10-K contains forward-looking statements based on the current expectations, assumptions, estimates and projections about 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.

We must provide our clients with highly qualified and experienced associates, and the loss of a significant number of our associates, or an inability to attract and retain new associates, could adversely affect our business and operating results.

Our business involves the delivery of professional services, and our success depends on our ability to provide our clients with highly qualified and experienced associates who possess the skills and experience necessary to satisfy their needs. Such professionals are in great demand, particularly in certain geographic areas, and are likely to remain a limited resource for the foreseeable future. Our ability to attract and retain associates with the requisite experience and skills depends on several factors including, but not limited to, our ability to:

•

provide our associates with full-time employment;

•

obtain the type of challenging and high-quality projects that our associates seek;

•

pay competitive compensation and provide competitive benefits; and

•

provide our associates with flexibility as to hours worked and assignment of client engagements.

We cannot assure you that we will be successful in accomplishing each of these items and, even if we are, that we will be successful in attracting and retaining the number of highly qualified and experienced associates necessary to maintain and grow our business.

The market for professional services is highly competitive, and if we are unable to compete effectively against our competitors our business and operating results could be adversely affected.

We operate in a competitive, fragmented market, and we compete for clients and associates with a variety of organizations that offer similar services. The competition is likely to increase in the future due to the expected growth of the market and the relatively few barriers to entry. Our principal competitors include:

•

consulting firms;

•

employees loaned by the Big Five accounting firms;

•

traditional and Internet-based staffing firms; and

•

the in-house resources of our clients.

We cannot assure you that we will be able to compete effectively against existing or future competitors. Many of our competitors have significantly greater financial resources, greater revenues and greater name

recognition, which may afford them an advantage in attracting and retaining clients and associates. In addition, our competitors may be able to respond more quickly to changes in companies’ needs and developments in the professional services industry.

An economic downturn or change in the use of outsourced professional services associates may adversely affect our business.

Our business has been significantly affected when there has been an economic downturn. During a general level of economic slowing, our clients have delayed or cancelled plans that involve professional services, particularly outsourced professional services. Consequently, the demand for our associates has declined, resulting in a loss of revenues. In addition, the use of professional services associates on a 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 obtained U.S. registrations on our service mark and logo, Registration No. 2,516,522 registered December 11, 2001, and No. 2,524,226 registered January 1, 2002. We have been aware from time to time of other companies using the name “Resources Connection” or some variation thereof. Some of these companies provide outsourced services, or are otherwise engaged in businesses that could be similar to ours. One company has a web address that is nearly identical to ours, “www.resourceconnection.com”. 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 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, 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 are required to change our name.

Our clients may be confused by the presence of competitors and other companies that have names similar to our name.

We are aware of other companies using the name “Resources Connection” or some variation thereof. The existence of these companies may confuse our clients, thereby impeding our ability to build our brand identity.

We may be legally liable for damages resulting from the performance of projects by our associates or for our clients’ mistreatment of our associates.

Many of our engagements with our clients involve projects that are critical to our clients’ businesses. If we fail to meet our contractual obligations, we could be subject to legal liability or damage to our reputation, which

could adversely affect our business, operating results and financial condition. It is likely, because of the nature of our business, that we will be sued in the future. Claims brought against us could have a serious negative effect on our reputation and on our business, financial condition and results of operations.

Because we are in the business of placing our associates in the workplaces of other companies, we are subject to possible claims by our associates alleging discrimination, sexual harassment, negligence and other similar activities by our clients. We may also be subject to similar claims from our clients based on activities by our associates. The cost of defending such claims, even if groundless, could be substantial and the associated negative publicity could adversely affect our ability to attract and retain associates and clients.

We may not be able to grow our business, manage our growth or sustain our current business.

We 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. In 2002 our revenue declined by 5%. 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. 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;

•

maintain margins in the face of pricing pressures; and

•

manage costs.

Even if we are able to continue our growth, the growth will result in new and increased responsibilities for our management as well as increased demands on our internal systems, procedures and controls, and our administrative, financial, marketing and other resources. Failure to adequately respond to these new responsibilities and demands may adversely affect our business, financial condition and results of operation.

An increase in our international activities will expose us to additional operational challenges that we might not otherwise face.

As we increase our international activities, we will have to confront and manage a number of risks and expenses that we would not otherwise face if we conducted our operations solely in the United States. If any of these risks or expenses occurs, there could be a material negative effect on our operating results. These risks and expenses include:

•

difficulties in staffing and managing foreign offices as a result of, among other things, distance, language and cultural differences;

•

expenses associated with customizing our professional services for clients in foreign countries;

•

foreign currency exchange rate fluctuations, when we sell our professional services in denominations other than U.S. dollars;

•

protectionist laws and business practices that favor local companies;

•

political and economic instability in some international markets;

•

multiple, conflicting and changing government laws and regulations;

•

trade barriers;

•

reduced protection for intellectual property rights in some countries; and

•

potentially adverse tax consequences.

We may acquire companies in the future, and these acquisitions could disrupt our business.

We may acquire companies in the future. Entering into an acquisition entails many risks, any of which could harm our business, including:

•

diversion of management’s attention from other business concerns;

•

failure to integrate the acquired company with our existing business;

•

failure to motivate, or loss of, key employees from either our existing business or the acquired business;

•

potential impairment of relationships with our employees and clients;

•

additional operating expenses not offset by additional revenue;

•

incurrence of significant non-recurring charges;

•

incurrence of additional debt with restrictive covenants or other limitations;

•

dilution of our stock as a result of issuing equity securities; and

•

assumption of liabilities of the acquired company.

We have a limited operating history as an independent company.

We commenced operations in June 1996 as a division of Deloitte & Touche. From January 1997 through April 1999, we operated as a wholly owned subsidiary of Deloitte & Touche. In April 1999, we were sold by Deloitte & Touche. Therefore, our business as an independent company has a limited operating history. Consequently, the historical and pro forma information contained in this document may not be indicative of our future financial condition and performance.

The terms of our transition services agreement between Resources Connection and Deloitte & Touche may not have been on terms indicative of those available from an independent party.

As part of the management-led buyout in April 1999, we entered into a transition services agreement with Deloitte & Touche under which Deloitte & Touche agreed to provide certain services to us at negotiated rates until none of our offices remained in Deloitte & Touche office space, which occurred on August 31, 2000. The negotiated rates we agreed to pay to Deloitte & Touche under the transition services agreement may not be indicative of the rates that an independent third party would have charged us for providing the same services. Specifically, an independent third party may have charged us rates more or less favorable than those charged by Deloitte & Touche. If the terms of the transition services agreement, particularly the rates charged by Deloitte & Touche, were more favorable to us than those available from a third party, our general and administrative expenses will likely increase.

Our business could suffer if we lose the services of one or more key members of our management.

Our future success depends upon the continued employment of Donald B. Murray, our chief executive officer, and Stephen J. Giusto, our chief financial officer. The departure of Mr. Murray, Mr. Giusto or any of the other key members of our senior management team could significantly disrupt our operations. Key members of our senior management team include Karen M. Ferguson and Brent M. Longnecker, both of whom are executive vice presidents, John D. Bower, our vice president, finance, and Kate W. Duchene, our chief legal officer and executive vice president of human relations. We do not have employment agreements with Mr. Bower, Ms. Duchene or Mr. Longnecker.

Deloitte & Touche has agreed not to compete with us and we may be adversely affected when the noncompete expires.

In connection with the management buy-out, Deloitte & Touche agreed not to compete with us in a manner that replicates our business model for a period ending on the earlier of April 1, 2003 or the date that Deloitte & Touche enters into a significant business combination. The noncompete does not prohibit Deloitte & Touche from using their personnel in a loaned staff capacity or from allowing their personnel to work on a less than full time basis in accordance with the human resources policies of Deloitte & Touche. When the noncompete expires, we may be adversely affected if Deloitte & Touche chooses to compete in a manner previously prohibited by the noncompete.

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 holidays in a quarter, particularly the day of the week on which they occur;

•

changes in the pricing of our professional services or those of our competitors;

•

the amount and timing of operating costs and capital expenditures relating to management and expansion of our business; and

•

the timing of acquisitions and related costs, such as compensation charges that fluctuate based on the market price of our common stock.

Due to these factors, we believe that quarter-to-quarter comparisons of our results of operations are not meaningful indicators of future performance. It is possible that in some future periods, our results of operations may be below the expectations of investors. If this occurs, the price of our common stock could decline.

We may be subject to laws and regulations that impose difficult and costly compliance requirements and subject us to potential liability and the loss of clients.

In connection with providing services to clients in certain regulated industries, such as the gaming and energy industries, we are subject to industry-specific regulations, including licensing and reporting requirements. Complying with these requirements is costly and, if we fail to comply, we could be prevented from rendering services to clients in those industries in the future.

It may be difficult for a third party to acquire our company, and this could depress our stock price.

Delaware corporate law and our second restated certificate of incorporation and bylaws contain provisions that could delay, defer or prevent a change of control of our company or our management. These provisions could also discourage proxy contests and make it difficult for you and other stockholders to elect directors and

take other corporate actions. As a result, these provisions could limit the price that future investors are willing to pay for your shares. These provisions:

•

authorize our board of directors to establish one or more series of undesignated preferred stock, the terms of which can be determined by the board of directors at the time of issuance;

•

divide our board of directors into three classes of directors, with each class serving a staggered three-year term. Because the classification of the board of directors generally increases the difficulty of replacing a majority of the directors, it may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us and may make it difficult to change the composition of the board of directors;

•

prohibit cumulative voting in the election of directors which, if not prohibited, could allow a minority stockholder holding a sufficient percentage of a class of shares to ensure the election of one or more directors;

•

require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing;

•

state that special meetings of our stockholders may be called only by the chairman of the board of directors, our chief executive officer, by the board of directors after a resolution is adopted by a majority of the total number of authorized directors, or by the holders of not less than 10% of our outstanding voting stock;

•

establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting;

•

provide that certain provisions of our certificate of incorporation can be amended only by supermajority vote of the outstanding shares and that our bylaws can be amended only by supermajority vote of the outstanding shares of our board of directors;

•

allow our directors, not our stockholders, to fill vacancies on our board of directors; and

•

provide that the authorized number of directors may be changed only by resolution of the board of directors.

The Company’s board of directors has adopted a stockholder rights plan, which is described further in Note 10 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. At the end of fiscal 2002, we had approximately $55.7 million of cash, highly liquid short-term investments and long-term marketable securities. These investments are subject to changes in interest rates, and to the extent interest rates were to decline, it would reduce our interest income.

Foreign Currency Exchange Rate Risk. To date, our foreign operations have not been significant to our overall operations, and our exposure to foreign currency exchange rate risk has been low. However, as our strategy to continue expanding foreign operations progresses, we expect more of our revenues will be derived from foreign operations denominated in the currency of the applicable markets. As a result, our operating results could become subject to fluctuations based upon changes in the exchange rates of foreign currencies in relation to the U.S. dollar. Although we intend to monitor our exposure to foreign currency fluctuations, including the use of financial hedging techniques when we deem it appropriate, we cannot assure you that exchange rate fluctuations will not adversely affect our financial results in the future.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

RESOURCES CONNECTION, INC.

FINANCIAL STATEMENTS

		Page
Report of Independent Accountants		30
Consolidated Balance Sheets as of May 31, 2001 and 2002		31
Consolidated Statements of Income for each of the three years in the period ended May 31, 2002		32
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended May 31, 2002		33
Consolidated Statements of Cash Flows for each of the three years in the period ended May 31, 2002		34
Notes to Consolidated Financial Statements		35

FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants on Financial Statement Schedule		53
Schedule II—Valuation and Qualifying Accounts for each of the three years in the period ended May 31, 2002		54

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, 2001 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Orange County, California

July 9, 2002

RESOURCES CONNECTION, INC.

CONSOLIDATED BALANCE SHEETS

	May 31,
	2001			2002
ASSETS
Current assets:
Cash and cash equivalents	$	34,503,000		$	31,745,000
Trade accounts receivable, net of allowance for doubtful accounts of $2,450,000 and $2,157,000 as of May 31, 2001 and 2002, respectively		23,908,000			19,961,000
Prepaid expenses and other current assets		853,000			1,607,000
Prepaid income taxes					3,505,000
Deferred income taxes		2,349,000			2,560,000

Total current assets		61,613,000			59,378,000
Investments in marketable securities					24,000,000
Intangible assets, net		38,445,000			41,372,000
Property and equipment, net		4,085,000			4,885,000
Other assets		1,202,000			1,842,000

Total assets	$	105,345,000		$	131,477,000


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	2,479,000		$	2,401,000
Accrued salaries and related obligations		15,046,000			13,152,000
Other liabilities		1,123,000			690,000

Total current liabilities		18,648,000			16,243,000
Deferred income taxes		665,000			1,763,000

Total liabilities		19,313,000			18,006,000


Commitments and contingencies (Note 13)

Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized; zero shares issued and outstanding
Common stock, $0.01 par value, 35,000,000 shares authorized; 20,735,000 and 21,661,000 shares issued and outstanding as of May 31, 2001 and 2002, respectively		207,000			216,000
Additional paid-in capital		66,507,000			79,991,000
Deferred stock compensation		(1,507,000	)		(909,000	)
Accumulated other comprehensive loss		(53,000	)		(51,000	)
Notes receivable from stockholders		(164,000	)		(109,000	)
Retained earnings		21,043,000			34,334,000
Treasury stock, at cost, 48,000 and 101,000 shares at May 31, 2001 and 2002, respectively		(1,000	)		(1,000	)

Total stockholders’ equity		86,032,000			113,471,000

Total liabilities and stockholders’ equity	$	105,345,000		$	131,477,000

The accompanying notes are an integral part of these financial statements.

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF INCOME

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