RESOURCES CONNECTION INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For the quarterly period ended February 28, 2003

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 Incorporation or Organization)		(I.R.S. Employer Identification No.)

695 TOWN CENTER DRIVE, SUITE 600, COSTA MESA, CALIFORNIA 92626

(Address of Principal Executive Offices and Zip Code)

(714) 430-6400

(Registrant’s Telephone Number, Including Area Code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

As of April 4, 2003, 22,078,162 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.

RESOURCES CONNECTION, INC.

INDEX

Part I—Financial Information

Item 1.	Consolidated Financial Statements	3

	Consolidated Balance Sheets as of February 28, 2003 (Unaudited) and May 31, 2002	3

	Consolidated Statements of Income for the Three and Nine Months Ended February 28, 2003 and 2002 (Unaudited)	4

	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended February 28, 2003 and 2002 (Unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months Ended February 28, 2003 and 2002 (Unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	21
Part II—Other Information

Item 1.	Legal Proceedings	22

Item 2.	Changes in Securities and Use of Proceeds	22

Item 3.	Defaults upon Senior Securities	22

Item 4.	Submission of Matters to a Vote of Security Holders	22

Item 5.	Other Information	22

Item 6.	Exhibits and Reports on Form 8-K	22

Signatures and Certifications		23

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

RESOURCES CONNECTION, INC.

CONSOLIDATED BALANCE SHEETS

	February 28, 2003			May 31, 2002
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	49,543,000		$	31,745,000
Trade accounts receivable, net of allowance for doubtful accounts of $2,334,000 and $2,157,000 as of February 28, 2003 and May 31, 2002, respectively		24,549,000			19,961,000
Prepaid expenses and other current assets		1,914,000			1,607,000
Prepaid income taxes		882,000			3,505,000
Deferred income taxes		2,560,000			2,560,000

Total current assets		79,448,000			59,378,000
Investments in marketable securities		12,000,000			24,000,000
Intangible assets, net		49,042,000			41,372,000
Property and equipment, net		4,432,000			4,885,000
Other assets		1,784,000			1,842,000

Total assets	$	146,706,000		$	131,477,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,901,000		$	2,401,000
Accrued salaries and related obligations		14,159,000			13,152,000
Other liabilities		603,000			690,000

Total current liabilities		17,663,000			16,243,000
Deferred income taxes		1,763,000			1,763,000

Total liabilities		19,426,000			18,006,000

Commitments and contingencies
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; 22,138,000 and 21,661,000 shares issued and outstanding as of February 28, 2003 and May 31, 2002, respectively		221,000			216,000
Additional paid-in capital		84,848,000			79,991,000
Deferred stock compensation		(558,000	)		(909,000	)
Accumulated other comprehensive gain (loss)		38,000			(51,000	)
Notes receivable from stockholders		(55,000	)		(109,000	)
Retained earnings		42,787,000			34,334,000
Treasury stock at cost, 123,000 shares at February 28, 2003 and 101,000 shares at May 31, 2002		(1,000	)		(1,000	)

Total stockholders’ equity		127,280,000			113,471,000

Total liabilities and stockholders’ equity	$	146,706,000		$	131,477,000

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

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended						Nine Months Ended
	February 28, 2003			February 28, 2002			February 28, 2003			February 28, 2002
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue	$	49,237,000		$	42,988,000		$	142,974,000		$	138,427,000
Direct cost of services, primarily payroll and related taxes for professional services employees		30,153,000			26,150,000			86,363,000			83,123,000

Gross profit		19,084,000			16,838,000			56,611,000			55,304,000
Selling, general and administrative expenses		14,170,000			12,301,000			41,714,000			37,524,000
Amortization of intangible assets		298,000			31,000			455,000			93,000
Depreciation expense		328,000			316,000			955,000			860,000

Income from operations		4,288,000			4,190,000			13,487,000			16,827,000
Interest income		(231,000	)		(265,000	)		(839,000	)		(856,000	)

Income before provision for income taxes		4,519,000			4,455,000			14,326,000			17,683,000
Provision for income taxes		1,853,000			1,782,000			5,873,000			7,073,000

Net income	$	2,666,000		$	2,673,000		$	8,453,000		$	10,610,000

Net income per common share:
Basic	$	0.12		$	0.13		$	0.39		$	0.50

Diluted	$	0.12		$	0.12		$	0.37		$	0.47

Weighted average common shares outstanding:
Basic		21,934,000			21,367,000			21,764,000			21,141,000

Diluted		22,969,000			22,937,000			22,808,000			22,796,000

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

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Nine Months Ended
	February 28, 2003			February 28, 2002
	(unaudited)			(unaudited)
COMMON STOCK—SHARES:
Balance at beginning of period		21,661,000			20,735,000
Public offering of common stock					230,000
Exercise of stock options		275,000			516,000
Issuance of common stock for the acquisition of The Procurement Centre		116,000
Issuance of common stock under Employee Stock Purchase Plan		86,000			97,000

Balance at end of period		22,138,000			21,578,000


COMMON STOCK—PAR VALUE:
Balance at beginning of period	$	216,000		$	207,000
Public offering of common stock					2,000
Exercise of stock options		3,000			6,000
Issuance of common stock for the acquisition of The Procurement Centre		1,000
Issuance of common stock under Employee Stock Purchase Plan		1,000			1,000

Balance at end of period	$	221,000		$	216,000


ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period	$	79,991,000		$	66,507,000
Public offering of common stock					4,552,000
Cost of stock offering					(793,000	)
Exercise of stock options		1,666,000			3,200,000
Issuance of common stock for the acquisition of The Procurement Centre		1,503,000
Issuance of common stock under Employee Stock Purchase Plan		1,800,000			1,895,000
Forfeiture of restricted stock and stock options		(112,000	)		(198,000	)

Balance at end of period	$	84,848,000		$	75,163,000


DEFERRED STOCK COMPENSATION:
Balance at beginning of period	$	(909,000	)	$	(1,507,000	)
Forfeiture of restricted stock and stock options		112,000			198,000
Amortization of deferred stock compensation		239,000			309,000

Balance at end of period	$	(558,000	)	$	(1,000,000	)


ACCUMULATED OTHER COMPREHENSIVE GAIN (LOSS):
Balance at beginning of period	$	(51,000	)	$	(53,000	)
Translation adjustments		89,000			(23,000	)

Balance at end of period	$	38,000		$	(76,000	)


NOTES RECEIVABLE FROM STOCKHOLDERS:
Balance at beginning of period	$	(109,000	)	$	(164,000	)
Repayment of notes receivable		54,000			55,000

Balance at end of period	$	(55,000	)	$	(109,000	)


RETAINED EARNINGS:
Balance at beginning of period	$	34,334,000		$	21,043,000
Net income		8,453,000			10,610,000

Balance at end of period	$	42,787,000		$	31,653,000


TREASURY STOCK—SHARES:
Balance at beginning of period		(101,000	)		(48,000	)
Repurchase of shares		(22,000	)		(36,000	)

Balance at end of period		(123,000	)		(84,000	)


TREASURY STOCK—COST:
Balance at beginning of period	$	(1,000	)	$	(1,000	)

Repurchase of shares
Balance at end of period	$	(1,000	)	$	(1,000	)


COMPREHENSIVE INCOME:
Net income	$	8,453,000		$	10,610,000
Translation adjustments		89,000			(23,000	)

Total comprehensive income	$	8,542,000		$	10,587,000

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

RESOURCES CONNECTION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended
	February 28, 2003			February 28, 2002
	(unaudited)			(unaudited)
Cash flows from operating activities
Net income	$	8,453,000		$	10,610,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,410,000			953,000
Amortization of deferred stock compensation		239,000			309,000
Bad debt expense		783,000			679,000
Changes in operating assets and liabilities:
Trade accounts receivable		(3,728,000	)		2,507,000
Prepaid expenses and other current assets		(193,000	)		(707,000	)
Prepaid income taxes		2,623,000			(2,647,000	)
Other assets		147,000			48,000
Accounts payable and accrued expenses		209,000			(312,000	)
Accrued salaries and related obligations		806,000			(2,131,000	)
Other liabilities		(87,000	)		(390,000	)
Deferred income taxes					857,000

Net cash provided by operating activities		10,662,000			9,776,000

Cash flows from investing activities
Redemption of marketable securities		18,000,000
Purchase of marketable securities		(6,000,000	)		(18,000,000	)
Purchase of The Procurement Centre, net of cash acquired and including transaction costs		(7,957,000	)
Purchases of property and equipment		(431,000	)		(2,035,000	)

Net cash provided by (used in) investing activities		3,612,000			(20,035,000	)

Cash flows from financing activities
Proceeds from issuance of common stock					4,554,000
Stock offering costs					(793,000	)
Proceeds from exercise of stock options		1,669,000			2,919,000
Proceeds from issuance of common stock under Employee Stock Purchase Plan		1,801,000			1,896,000
Repayment of notes receivable from stockholders		54,000			55,000

Net cash provided by financing activities		3,524,000			8,631,000

Net increase (decrease) in cash		17,798,000			(1,628,000	)
Cash and cash equivalents at beginning of period		31,745,000			34,503,000

Cash and cash equivalents at end of period	$	49,543,000		$	32,875,000

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

ITEM 1. (CONTINUED)

RESOURCES CONNECTION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Nine months ended February 28, 2003 and 2002

1. Description of the Company and its Business

Resources Connection, Inc. (“Resources Connection”), formerly RC Transaction Corp., was incorporated on November 16, 1998. The Company provides professional services to a variety of industries and enterprises through its subsidiaries, Resources Connection LLC (“LLC”), RECN of Texas, LP (“Texas”), Resources Audit Solutions, LLC (“RAS”), Resources Consulting Group, LP (“RCG”), RECN Procurement Centre LP (“TPC”) and foreign subsidiaries (collectively the “Company”). Prior to its acquisition of LLC on April 1, 1999, Resources Connection had no substantial operations. LLC, which commenced operations in June 1996, and Texas, which was formed in May 2002, provide clients with experienced professionals who specialize in accounting, finance, information technology and human resources on a project basis. RAS commenced business formally in June 2002 and assists its clients with their internal audit and risk assessment needs on a project, co-sourced or outsourced basis. RCG, launched in June of 2002, expands our existing executive compensation consulting practice. TPC is a provider of supply chain management services to companies on a project basis (see Note 4). The Company operates in the United States, Canada, Hong Kong, Taiwan and the United Kingdom. Resources Connection is a Delaware corporation. LLC and RAS are Delaware limited liability companies. Texas, RCG and TPC are limited partnerships formed in Texas.

The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Saturday in May. For fiscal years of 53 weeks, such as fiscal 2003, the first three quarters consist of 13 weeks each and the fourth quarter consists of 14 weeks. The actual quarter end dates for the third quarter of fiscal 2003 and 2002 were February 22, 2003 and February 23, 2002, respectively. For convenience, all references herein to years or periods are to years or periods ended May 31 or February 28, respectively.

On August 13, 2001, the Securities and Exchange Commission, or “SEC”, declared the Company’s registration statement effective for a secondary offering of the Company’s common stock. Selling stockholders sold 3,332,591 shares of the Company’s common stock in the offering, but the Company did not receive any of the proceeds from the sale of those shares. The Company sold 200,000 shares in the offering for approximately $3.2 million (after underwriting discounts, commissions and other transaction-related expenses). On September 5, 2001, the underwriters exercised their over-allotment option for an additional 499,889 shares from the selling stockholders, but the Company did not receive any of the proceeds from the sale of those shares. The Company sold an additional 30,000 shares in the over-allotment for approximately $600,000. The Company has used the net proceeds from the offering for working capital and general corporate purposes.

2. Summary of Significant Accounting Policies

Interim Financial Information

The financial information for the nine months ended February 28, 2003 and 2002 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for those periods. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules or regulations; however, the Company believes the disclosures made are adequate to make the information presented not misleading.

The results of operations for the interim periods presented are not necessarily indicative of the results of operations to be expected for the fiscal year. These condensed interim financial statements should be read in conjunction with the audited financial statements for the year ended May 31, 2002, which are included in the Company’s Annual Report on Form 10-K for the year then ended (File No. 0-32113).

Investments in Marketable Securities

The Company accounts for its marketable securities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Accordingly, securities that the Company has the ability and positive intent to hold to maturity are carried at amortized cost. All held-to-maturity securities have remaining maturity dates greater than one year. To secure a slightly higher interest rate on its investment in government bonds, the $12 million in investments classified as long-term as of February 28, 2003 are callable at the discretion of the issuer although their stated maturity date is greater than one year from the balance sheet date.

Intangible Assets

The Company follows SFAS No. 142, “Goodwill and Other Intangible Assets,” which establishes standards for goodwill acquired in a business combination and other intangible assets, eliminates amortization of 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 measures such 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, based upon the current fair market value of its publicly traded common stock, that an impairment of goodwill has occurred.

Per Share Information

The Company follows SFAS No. 128, “Earnings Per Share,” which establishes standards for the computation, presentation and disclosure requirements for basic and diluted earnings per share for entities with publicly held common shares and potential common shares. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities, consisting solely of stock options.

Potential common shares totaling 1,569,000 and 209,000 were not included in the diluted earnings per share amounts for the nine months ended February 28, 2003 and 2002, respectively, as their effect would have been anti-dilutive. Potential common shares totaling 1,405,000 and 90,000 were not included in the diluted earnings per share amounts for the three months ended February 28, 2003 and 2002, respectively, as their effect would have been anti-dilutive. For the nine months ended February 28, 2003 and 2002, potentially dilutive securities consisted solely of stock options and resulted in potential common shares of 1,044,000 and 1,655,000, respectively. For the three months ended February 28, 2003 and 2002, potentially dilutive securities consisted solely of stock options and resulted in potential common shares of 1,035,000 and 1,570,000, respectively.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions are adequate, actual results could differ from the estimates and assumptions used.

3. Supplemental Disclosure Of Cash Flow Information

For the nine months ended February 28:

		2003			2002
Income taxes paid		$	3,299,000		$	9,510,000

4. Acquisition of The Procurement Centre

On October 11, 2002, the Company completed the acquisition of the assets of a Houston-based provider of supply chain management services to companies on a project basis. A separate subsidiary of the Company, RC Transaction Corp., purchased the assets of The Procurement Centre LLC (doing business as The Procurement Centre). The purchase price of the acquisition, excluding transaction costs of approximately $125,000, was approximately $9.3 million, including $400,000 paid during the third

quarter upon TPC meeting certain revenue goals. The purchase price may increase by up to an additional $2.3 million in cash if TPC achieves certain operating goals through October 2003. TPC contributed $2.4 million to revenue in the third quarter of fiscal 2003 and $4.0 million from the date of acquisition through the end of the third quarter.

The acquisition was accounted for as a purchase under SFAS No. 141, “Business Combinations”. In accordance with SFAS No. 141, the Company allocated the purchase price based on the fair value of the assets acquired and liabilities assumed. During the third quarter, the Company, with the assistance of an independent appraiser, completed the identification of intangible assets acquired in the transaction. The Company has assigned approximately $1.3 million of the purchase price to amortizable intangibles, consisting of contractually based customer relationships, non-competition agreements and the acquired database of potential TPC associates. These intangibles are being amortized over one to four years. The Company recognized approximately $220,000 in amortization expense related to the transaction in the third quarter of fiscal 2003 and will recognize $137,000 in amortization expense related to this transaction in the fourth quarter. Approximately $6.6 million has been allocated to goodwill.

5. Recent Accounting Pronouncements

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 the Company has adopted this statement effective June 1, 2002.

In April 2002, the Emerging Issues Task Force (“EITF”) 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 adopted Issue No. 01-14 effective March 1, 2002 and, as required in the Issue, has reclassified such reimbursements for all prior periods presented in the 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 the 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 the Company has adopted this statement effective June 1, 2002.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees Of Indebtedness Of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 relates to the accounting for and disclosure of guarantees and addresses (1) an obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur and (2) a contingent obligation to make future payments if those triggering events or conditions occur. FIN 45 excludes certain types of guarantees from its initial recognition and measurement, including guarantees accounted for as derivative instruments and hedging activities, guarantees relating to performance of non-financial assets that are owned by the guaranteed party (e.g., product warranties), guarantees issued in a business combination that represents contingent consideration, and others. These guarantees are subject to the disclosure requirements of FIN 45. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. The initial recognition and initial measurement provisions should be applied only on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor’s previous accounting for guarantees issued prior to the initial application date of FIN 45 should not be revised or restated to reflect the effect of the new recognition and measurement provisions. The Company does not believe that the adoption of FIN 45 will have a material impact on its consolidated financial statements.

On December 31, 2002, the FASB issued Statement No. 148 (“SFAS No. 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 allows for three methods of transition for those companies that adopt SFAS No. 123’s provisions for fair value recognition. SFAS No. 148’s transition guidance and provisions for annual disclosures are effective for fiscal years ending after December 15, 2002. The Company will not adopt fair value accounting for employee stock options under SFAS No. 123 and SFAS No. 148, but will continue to disclose the required pro-forma information in the notes to the consolidated financial statements.

ITEM 2.

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”, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to expectations concerning matters that are not historical facts. Such forward-looking statements may be identified by words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. These statements, and all phases of our operations, are subject to known and unknown risks, uncertainties and other factors, some of which are identified herein and in our report on Form 10-K for the year ended May 31, 2002 (File No. 0-32113). 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.

Overview

Resources Connection is an international professional services firm that provides experienced accounting and finance, risk management, human resources management, supply chain management and information technology professionals to clients on a project basis. We assist our clients with discrete projects requiring specialized expertise in accounting and finance, such as mergers and acquisitions due diligence, financial analyses (e.g., product costing and margin analyses), corporate reorganization 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 LLP, or 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, among others, an investor, Evercore Partners, Inc.

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. 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 focus primarily on providing internal audit services and executive compensation and corporate governance consulting. On October 11, 2002, we completed the acquisition of the assets of The Procurement Centre LLC, a Texas based provider of supply chain management services to companies on a project basis. In addition to The Procurement Centre’s office in Houston, Texas, we have also opened 7 offices during the first nine months of fiscal 2003. As of February 28, 2003, we served our clients through 50 offices in the United States and five offices abroad.

The Company’s fiscal year consists of 52 or 53 weeks, ending on the last Saturday in May. For fiscal years of 53 weeks, such as fiscal 2003, the first three quarters consist of 13 weeks each and the fourth quarter consists of 14 weeks. The actual quarter end dates were as follows: for fiscal 2003, August 24, 2002 (first quarter); November 23, 2002 (second quarter); February 22, 2003 (third quarter); and for fiscal 2002, August 25, 2001 (first quarter); November 24, 2001 (second quarter); February 23, 2002 (third quarter). For convenience, all references herein to years or periods are to years or periods ended May 31 or February 28, respectively.

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: (a) are the most important to the portrayal of our financial condition and results of operations and (b) involve 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 failure 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.

Three Months Ended February 28, 2003 Compared to Three Months Ended February 28, 2002

Revenue. Revenue increased $6.2 million, or 14.5%, to $49.2 million for the three months ended February 28, 2003 from $43.0 million for the three months ended February 28, 2002. The increase in revenues resulted from the increase in the total billable hours charged to our clients as compared to the prior year quarter, reflected in the increase in the number of associates on assignment from 1,003 at the end of the third quarter of fiscal 2002 to 1,181 at the end of the third quarter of fiscal 2003 (including 74 associates working for TPC as of February 28, 2003).

Although the third quarter of fiscal 2003 contained three paid holidays (Thanksgiving, Christmas and New Year’s Day) compared to two paid holidays in the prior year (when Thanksgiving fell in the second quarter), the information technology (IT) and human capital (HC) service lines experienced an increase in billable hours. These service lines also have a higher average billing rate per hour compared to the finance and accounting service line. Overall, average billing rates per hour in the third quarter of fiscal 2003 increased by 5.8% compared to the prior year quarter. Total billable hours, excluding hours of associates working for TPC, increased in the third quarter of fiscal 2003 as compared to fiscal 2002 even though there was one less billing day in fiscal 2003. However, the finance and accounting service line average billable hours in the quarter decreased as compared to the prior year quarter primarily due to the impact of the recession on our clients. TPC contributed $2.4 million to revenue during the third quarter. Overall, the Company billed approximately $4.1 million per week in non-holiday impacted weeks in the third quarter.

We operated 55 offices during the third quarter of fiscal 2003 and 46 offices during the third quarter of the previous fiscal year. We opened three new offices during the current quarter and opened one office in last year’s third fiscal quarter.

Direct Cost of Services. Direct cost of services increased $4.0 million, or 15.3%, to $30.2 million for the three months ended February 28, 2003 from $26.2 million for the three months ended February 28, 2002. The increase in direct cost of services was

attributable to an increase of 8.0% in the overall average pay rate per hour for our associates as well as the increase in total billable hours charged to our clients as compared to the prior year quarter. The direct cost of services as a percentage of revenue increased from 60.8% for the three months ended February 28, 2002 to 61.2% for the three months ended February 28, 2003. The increase in the direct cost of services percentage reflects a) the impact of three paid holidays in the current year third quarter (Thanksgiving, Christmas and New Year’s Day) compared with two paid holidays in the prior year third quarter (Christmas and New Year’s Day); and b) the incremental increase in pay rate per hour compared to bill rate per hour.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $1.9 million, or 15.2%, to $14.2 million for the three months ended February 28, 2003 from $12.3 million for the three months ended February 28, 2002. This increase was primarily attributable to the higher compensation and related benefit expenses from the change in management and administrative headcount from 305 at the end of the third quarter of fiscal 2002 to 341 at the end of the third quarter of fiscal 2003. The increase in headcount arose from the addition of internal personnel of TPC, the incremental hiring for the additional offices opened between the third quarter of fiscal 2002 and the third quarter of fiscal 2003 and the personnel added in the fourth quarter of fiscal 2002 from the acquisition of a practice of Ernst & Young LLP in the United Kingdom. Selling, general and administrative expenses increased slightly as a percentage of revenue from 28.6% for the three months ended February 28, 2002 to 28.8% for the three months ended February 28, 2003.

Amortization and Depreciation Expense. Amortization of intangible assets increased from $31,000 in the prior year’s third quarter to $298,000 for the three months ended February 28, 2003. In the current quarter, the Company completed the analysis of the allocation of the purchase price of TPC. The analysis allocated $1.3 million of the excess purchase price to amortizable intangibles, consisting of contractually based customer relationships, non-competition agreements and the acquired database of potential associates of TPC. The Company recognized approximately $220,000 in TPC–related amortization expense in the current quarter, including amortization for the period from the acquisition date through the end of the third quarter. The Company will recognize $136,000 in amortization expense related to this transaction in the fourth quarter of fiscal 2003. The Company is also amortizing an intangible asset related to the database acquired in the UK practice through May 2004 at a rate of $48,000 per quarter through May 2004. The amortization expense in the prior year’s third quarter was all related to the amortization of the cost ascribed to a non-compete agreement entered into when the Company acquired LLC. The remaining balance of $12,000 related to the non-compete agreement will be amortized in the fourth quarter of fiscal 2003.

The Company accounts for goodwill acquired in a business combination and other intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” 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, based on the current fair market value of its publicly traded stock, an impairment of goodwill has occurred.

Depreciation expense increased from $316,000 for the three months ended February 28, 2002 to $328,000 for the three months ended February 28, 2003. This increase reflects the investment in our United Kingdom offices, the other offices opened since February 2002 and our investment in information technology.

Interest Income. 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. In addition, as of February 28, 2003, the Company has $12 million in government-agency bonds with maturity dates in excess of one year from the balance sheet date. The bonds mature through January 2005 and have coupon rates ranging from 2.3% to 3.0%. These investments have been classified in the February 28, 2003 Consolidated Balance Sheet as “held-to-maturity” securities.

During the third quarter of fiscal 2003, the Company generated interest income of $231,000 compared to interest income of $265,000 in the quarter ended February 28, 2002. Although the average cash balance available for investment increased from the third quarter of fiscal 2002 to the third quarter of fiscal 2003, the lower interest rates year over year more than offset the cash balance increase. The Company earned approximately 1.6%, annualized, on its money market, commercial paper and marketable securities investments during the quarter.

Income Taxes. The provision for income taxes increased from $1.8 million for the three months ended February 28, 2002 to $1.9 million for the three months ended February 28, 2003 as a result of the slight increase in the Company’s pre-tax income and an increase in the effective tax rate in fiscal 2003. The effective tax rates were approximately 41.0% and 40.0% for the three months ended February 28, 2003 and 2002, respectively, which differs from the federal statutory rate primarily due to state taxes,

net of federal benefit. The Company’s tax rate increased slightly from fiscal 2002 to fiscal 2003 due to a shift in provision for state taxes toward states with higher tax rates. The Company is implementing tax-planning strategies aimed at reducing its tax burden. However, there can be no assurance that the Company’s effective tax rate will not increase in the future.

Nine Months Ended February 28, 2003 Compared to Nine Months Ended February 28, 2002

Revenue. Revenue increased $4.5 million, or 3.3%, to $143.0 million for the nine months ended February 28, 2003 from $138.4 million for the nine months ended February 28, 2002. The increase in revenues resulted from additional revenue from the TPC operation acquired in the second quarter as well as increases in the IT and HC billable hours charged to our clients as compared to the prior year’s first nine months. Associates in the IT and HC service lines also have a higher average billing rate per hour. The finance and accounting service line cumulative billable hours in fiscal 2003 were less than in the same period in the prior year, primarily due to the impact of the recession on our clients. Overall bill rates improved by 3.7% compared to the prior year average bill rate. We operated 55 offices during the first nine months of fiscal 2003 and 46 offices during the first nine months of the previous fiscal year.

Direct Cost of Services. Direct cost of services increased $3.2 million, or 3.9%, to $86.4 million for the nine months ended February 28, 2003 from $83.1 million for the nine months ended February 28, 2002. Although total billable hours for the first nine months of fiscal 2003 were less than in fiscal 2002, the direct cost of services increased because of the higher percentage of hours worked by associates in the IT and HC service lines that have a higher average pay rate per hour, as well as the overall average pay rate per hour increase of 6.6%, year over year. The direct cost of services as a percentage of revenue increased from 60.0% for the first nine months of fiscal 2002 to 60.4% for the first nine months of fiscal 2003. The net increase reflects the incremental increase in pay rate per hour compared to bill rate per hour and the decrease in conversion fees in the period compared to the prior year period.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $4.2 million or 11.2%, to $41.7 million for the nine months ended February 28, 2003 from $37.5 million for the nine months ended February 28, 2002. This increase was primarily attributable to the increase in management and administrative headcount from 305 at the end of the first nine months of fiscal 2002 to 341 at the end of the first nine months of fiscal 2003, causing an increase in compensation and related benefits expense. The increase in headcount arose from the addition of internal personnel of TPC, the incremental hiring for the additional offices opened between the third quarter of fiscal 2002 and the third quarter of fiscal 2003 and the personnel added in the fourth quarter of fiscal 2002 from the acquisition of a practice of Ernst & Young LLP in the United Kingdom. The increase was also attributable to an increase in occupancy costs from the addition of the new offices, an increase in insurance costs and an increase for costs related to the Company’s advertising campaign in targeted business publications that began in the fourth quarter of fiscal 2002. Selling, general and administrative expenses increased as a percentage of revenue from 27.1% for the nine months ended February 28, 2002 to 29.2% for the nine months ended February 28, 2003. This percentage increase resulted from the aforementioned increase in salary expense and related benefits, occupancy expenses and national advertising expenses.

Amortization and Depreciation Expense. Amortization of intangible assets increased from $93,000 for the nine months ended February 28, 2002 to $455,000 for the nine months ended February 28, 2003. The increase is attributable to the amortization of intangible assets in the current year related to the Company’s acquisition of TPC, as well as the purchase of the UK practice. The Company has recognized approximately $220,000 in amortization expense related to the TPC acquisition year-to-date and $144,000 related to the UK. In the prior year period, amortization expense related only to the amortization of the remaining balance paid for a non-compete agreement entered into when the Company acquired LLC.

Depreciation expense increased from $860,000 for the nine months ended February 28, 2002 to $955,000 for the nine months ended February 28, 2003. This increase reflects the investment in our United Kingdom offices, the other offices opened since February 2002 and our investment in information technology.

Interest Income. During the first nine months of fiscal 2003, the Company generated interest income of $839,000 compared to interest income of $856,000 in the first nine months of fiscal 2002. The Company had a higher average cash, cash equivalents and long-term marketable securities balance available for investment in fiscal 2003; however, the higher average balance available for investment was offset by the decline in rates experienced in 2003, resulting in the slight decline in interest income in the first nine months of fiscal 2003.

Income Taxes. The provision for income taxes decreased from $7.1 million for the nine months ended February 28, 2002 to $5.9 million for the nine months ended February 28, 2003 as a result of the decrease in the Company’s pre-tax income. The effective tax rates were approximately 41.0% and 40.0% for the nine months ended February 28, 2003 and 2002, respectively, which differs from the federal statutory rate primarily due to state taxes, net of federal benefit.

Comparability of Quarterly Results. Our quarterly results have fluctuated in the past and we believe they will continue to do so in the future. Certain factors that could affect our quarterly operating results are described below in the section of this report entitled “Risks Related to Our Business.” 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 our existing cash and cash equivalents, marketable securities, cash provided by our operations and, to the extent necessary, available commitments under our revolving line of credit. During fiscal 2002, we also completed a secondary public offering of stock that generated $3.8 million of cash (after underwriting discounts, commissions and other transaction related expenses).

In an agreement dated August 22, 2001, we entered into 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 February 28, 2003, we had no outstanding borrowings under the revolving credit facility.

Net cash provided by operating activities totaled $10.7 million for the nine months ended February 28, 2003 compared to $9.8 million for the nine months ended February 28, 2002. The net increase in cash provided by operations was caused primarily by 1) a reduced obligation for payments in fiscal 2003 under the Company’s incentive bonus plan for management as compared to the amount required in fiscal 2002; 2) a higher accrued salary balance at February 28, 2003 compared to the prior year as the Company’s revenue increased in fiscal 2003; and 3) the Company not making prepayments of federal and state income taxes in the first nine months of fiscal 2003 that were required in the prior year first nine months when the Company changed its tax year end from December 31 to May 31, in order to coincide with its financial statement year-end. These favorable operating cash flow activities were offset by the increase in the Company’s accounts receivable in fiscal 2003, triggered by the Company’s higher revenue in the fiscal 2003 third quarter. The Company’s working capital includes $49.5 million in cash and cash equivalents at February 28, 2003.

Net cash provided by investing activities was $3.6 million for the first nine months of fiscal 2003 compared to a use of cash of $20.0 million in the first nine months of fiscal 2002. The net increase in cash in fiscal 2003 was due to the redemption of $18 million in long-term investments. These investments, classified as long-term investments as of May 31, 2002, were obligations of various United States government programs that contained a “call” feature at the discretion of the issuer of the bonds. During the first nine months of fiscal 2003, the issuer redeemed the bonds. The $12 million in remaining long-term investments have coupon interest rates of 2.3% to 3.0%. The Company also used approximately $8.0 million in cash in fiscal 2003 to acquire TPC, including transaction costs. The Company spent approximately $1.6 million less on leasehold improvements, office equipment and information technology upgrades in the first nine months of fiscal 2003 as compared to the same period in fiscal 2002.

Net cash provided by financing activities totaled $3.5 million for the nine months ended February 28, 2003 compared to $8.6 million for the nine months ended February 28, 2002. In fiscal 2002, cash provided by financing activities benefited from the net proceeds of $3.8 million received from our secondary offering of common stock and a higher level of stock option exercise activity than was experienced in the first nine months of fiscal 2003.

Our ongoing operations and anticipated growth in the geographic markets we currently serve will require us to continue making investments in capital equipment, primarily technology hardware and software. In addition, we may consider making certain strategic acquisitions. We anticipate that our current cash, 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 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.

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. With limited exceptions, the covenants in our credit agreement limit our aggregate capital expenditures during each fiscal year. The aggregate amount of capital expenditures permitted by our credit agreement during fiscal 2003 is $5.0 million.

In October 2002, our board of directors approved a stock repurchase program, authorizing the repurchase of up to 1.5 million shares of our common stock. As of February 22, 2003, we had not repurchased any shares of our common stock under this program.

Recent Accounting Pronouncements

In April 2002, the Emerging Issues Task Force (“EITF”) 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 adopted this Issue effective March 1, 2002 and, as required in the Issue, has reclassified such reimbursements for all prior periods presented in the consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees Of Indebtedness Of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 relates to the accounting for and disclosure of guarantees and addresses (1) an obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur and (2) a contingent obligation to make future payments if those triggering events or conditions occur. FIN 45 excludes certain types of guarantees from its initial recognition and measurement, including guarantees accounted for as derivative instruments and hedging activities, guarantees relating to performance of non-financial assets that are owned by the guaranteed party (e.g., product warranties), guarantees issued in a business combination that represents contingent consideration, and others. These guarantees are subject to the disclosure requirements of FIN 45. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. The initial recognition and initial measurement provisions should be applied only on a prospective basis to guarantees issued or modified after December 31, 2002. The guarantor’s previous accounting for guarantees issued prior to the initial application date of FIN 45 should not be revised or restated to reflect the effect of the new recognition and measurement provisions. The Company does not believe that the adoption of FIN 45 will have a material impact on its consolidated financial statements.

RISKS RELATED TO OUR BUSINESS

This section highlights specific risks affecting our business, operating results and financial condition. The order in which the risks appear is not intended as an indication of their relative weight or importance.

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:

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provide our associates with full-time employment;

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

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pay competitive compensation and provide competitive benefits; and

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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:

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consulting firms;

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employees loaned by the Big Four accounting firms;

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staffing firms; and

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the in-house resources of our clients.

In addition, the non-competition agreement that we entered into with Deloitte & Touche in connection with the management buyout expired on April 1, 2003 and we may be adversely affected if Deloitte & Touche chooses to compete in a manner previously prohibited by the non-compete. We cannot assure you that we will be able to compete effectively against existing or future competitors. Many of our competitors have significantly greater financial resources, greater revenues and greater name recognition, which may afford them an advantage in attracting and retaining clients and associates. In addition, our competitors may be able to respond more quickly to changes in companies’ needs and developments in the professional services industry.

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

The U.S. economy has recently experienced an economic downturn, and our business has been significantly affected by the economic downturn. As the general level of economic activity has slowed, our clients have delayed or canceled 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-by-project basis could decline for non-economic reasons. In the event of a non-economic reduction in the demand for our associates, our financial results could suffer.

Our business depends upon our ability to secure new projects from clients and, therefore, we could be adversely affected if we fail to do so.

We do not have long-term agreements with our clients for the provision of services. The success of our business is dependent on our ability to secure new projects from clients. For example, if we are unable to secure new client projects because of improvements in our competitors’ service offerings or because of an economic downturn decreasing the demand for outsourced professional services, our business is likely to be materially adversely affected.

We may be unable to adequately protect our intellectual property rights, including our brand name. If we fail to adequately protect our intellectual property rights, the value of such rights may diminish and our results of operations and financial condition may be adversely affected.

We believe that establishing, maintaining and enhancing the Resources Connection brand name is essential to our business. We have 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 and No. 2,613,873, registered September 3, 2002. We have been aware from time to time of other companies using the name “Resources Connection” or some variation thereof. 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 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% compared to fiscal 2001. Although revenue has increased in the first nine months of fiscal 2003, there can be no assurance that we will continue to be able to maintain or expand our market presence in our current locations or to successfully enter other markets or locations. Our ability to successfully grow our business will depend upon a number of factors, including our ability to:

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grow our client base;

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expand profitably into new cities;

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provide additional professional services lines;

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maintain margins in the face of pricing pressures; and

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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:

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

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

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

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protectionist laws and business practices that favor local companies;

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political and economic instability in some international markets;

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multiple, conflicting and changing government laws and regulations;

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trade barriers;

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reduced protection for intellectual property rights in some countries; and

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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:

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diversion of management’s attention from other business concerns;

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failure to successfully integrate the acquired company with our existing business;

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

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potential impairment of relationships with our employees and clients;

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additional operating expenses not offset by additional revenue;

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incurrence of significant non-recurring charges;

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incurrence of additional debt with restrictive covenants or other limitations;

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

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assumption of liabilities of the acquired company.

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

Our future success depends upon the continued employment of Donald B. Murray, our chief executive officer, and Stephen J. Giusto, our chief financial officer. The departure of Mr. 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.

Our quarterly financial results may be subject to significant fluctuations.

Our quarterly financial 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:

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our ability to attract new clients and retain current clients;

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the mix of client projects;

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the announcement or introduction of new services by us or any of our competitors;

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the expansion of the professional services offered by us or any of our competitors into new locations both nationally and internationally;

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the entry of new competitors into any of our markets;

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changes in demand for our services by our clients;

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the number of associates eligible for our offered benefits as their average length of employment with us increases;

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

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

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

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

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

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

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:

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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;

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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;

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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 or our board of directors;

•

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

•

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

The Company’s board of directors has adopted a stockholder rights plan, which was described in the Company’s May 31, 2002 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. At the end of the third quarter of fiscal 2003, we had approximately $61.5 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 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-14(c). In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures.” Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the date of the evaluation, our disclosure controls and procedures were adequate to timely alert them of material information to be included in our periodic SEC filings.

Changes in internal controls

There were no significant changes in our internal controls, or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of our most recent evaluation.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any material legal proceedings.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits


99.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

99.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

*Filed herewith

b) Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


								RESOURCES CONNECTION, INC.

Date: April 8, 2003								/s/ DONALD B. MURRAY
								Donald B. Murray President and Chief Executive Officer

Date: April 8, 2003								/s/ STEPHEN J. GIUSTO
								Stephen J. Giusto Chief Financial Officer, Executive Vice President of Corporate Development and Secretary (Principal Financial Officer)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Donald B. Murray, certify that:

I have reviewed this quarterly report on Form 10-Q of Resources Connection, Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present, in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 8, 2003

/s/ DONALD B. MURRAY

Donald B. Murray

President and Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Stephen J. Giusto, certify that:

I have reviewed this quarterly report on Form 10-Q of Resources Connection, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: April 8, 2003

/s/ STEPHEN J. GIUSTO

Stephen J. Giusto

Chief Financial Officer and Executive Vice

President of Corporate Development

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