RESOURCES CONNECTION, INC. - Annual Report: 2003 (Form 10-K)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

Commission File Number: 0-32113

RESOURCES CONNECTION, INC.

(Exact Name of Registrant as Specified in Its Charter)

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.  ¨

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

As of November 22, 2002, the approximate aggregate market value of common stock held by non-affiliates of the Registrant was $360,175,000 (based upon the closing price for shares of the Registrant’s common stock as reported by The Nasdaq National Market). As of August 22, 2003, there were approximately 22,409,304 shares of common stock, $.01 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant’s definitive Proxy Statement for the 2003 Annual Meeting of Stockholders, is incorporated by reference in Part III of this Form 10-K to the extent stated herein.

RESOURCES CONNECTION, INC.

TABLE OF CONTENTS

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

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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.

Available Information

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. We file our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”) electronically. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

A free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports may be obtained as soon as reasonably practicable after we file such reports with the SEC on our website at http://www.resourcesconnection.com.

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PART I

ITEM 1.    BUSINESS

Overview

Resources Connection is an international professional services firm that provides experienced accounting and finance, risk management and internal audit, information technology, human resources and procurement (supply chain) management 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, such as documenting internal controls. We also assist our clients with periodic needs such as budgeting and forecasting, audit preparation, public reporting and assisting clients with their compliance efforts under the Sarbanes-Oxley Act of 2002 (“Sarbanes”).

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 Deloitte & Touche 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 Four 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 Four 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 with varying professional needs.

As of May 31, 2003, we employed more than 1,175 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 2002, to which approximately 56% of all active associates responded, 51% of respondents were CPAs, 40% had Masters degrees, and the average years of professional experience was about 17. 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 diverse client base of over 1,200 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% and 15.2% of our revenues in fiscal 2002 and 2003, respectively, and all of the Big Four accounting firms. As of May 31, 2003, we served our clients through 50 offices in the United States and five offices abroad. We have grown revenues internally from $29.7 million in fiscal 1998 to $202.0 million in fiscal 2003, a five-year compounded annual growth rate, or CAGR, of 46.8% and our income from operations over the same period has increased from $3.7 million to $20.2 million, a five-year CAGR of 40.4%. We have been profitable every year since our inception.

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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. Many of our senior management and office managing directors have Big Four 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.

Subsequent to our fiscal year-end of May 31, 2003, we completed three transactions to enhance our international presence as well as our ability to deliver internal audit services. The largest of the three was the all cash acquisition for $29.4 million of the outstanding capital shares of Ernst & Young’s subsidiary, Executive Temporary Management BV (“ETM”) in the Netherlands on July 15, 2003. ETM is considered a market leader in the interim management industry in the Netherlands. This acquisition provides a foundation in continental Europe and will allow us to market to our current and prospective multinational clients seeking an alternative to Big Four audit firms, particularly in light of current concerns about auditor independence. ETM has seven offices in the Netherlands and contracted with, or employed, over 300 professional service associates on assignment as of March 31, 2003. ETM reported revenues for the nine months ended March 31, 2003 of $45.4 million and revenues of $72 million for the year ended June 30, 2002. Upon completion of this transaction, we renamed ETM Resources Connection. NL B.V.

In addition to the international expansion driven by the acquisition in the Netherlands, we also acquired the assets of Deloitte Re:sources Pty Ltd. from Deloitte Touche Tohmatsu in Australia in an all cash deal for $1 million on June 1, 2003. The subsidiary, now renamed Resources Connection Australia Pty. Ltd., was originally launched in 1998 by us on behalf of the Deloitte Australia firm. The acquisition presented the opportunity to expand our Asia Pacific presence.

Finally, on July 30, 2003, we announced the acquisition of the company that developed policyIQ^TM, a web-based solution for internal controls documentation and content management. The purchase includes cash of $2 million and a provision for contingent payments based on sales volume. policyIQ^TM is a tool that clients of our subsidiary, Resources Audit Solutions (“RAS”), can use to assist in complying with Sarbanes. RAS specializes in conducting internal audits, assisting clients in establishing and documenting efficient internal controls, assessing risk management practices and complying with the myriad of new regulations associated with Sarbanes.

Industry Background

Demand for Project Professional Services

Resources Connection’s services address a range of professional areas, with a substantial majority of revenues derived from accounting and finance services. The market for professional services is broad, and independent data on the size of the market is fragmented. For instance, past studies in 2002 by Staffing Industry Analysts, Inc. put the size of the professional sector of the staffing industry at $58.6 billion in 2002, but this is just a measure of the staffing component of professional services. Other components include, but are not limited to, CPA services and consulting services, each of which address multibillion dollar markets. Because of the corporate scandals documented in the media over the last few years, we believe the market for professional services is changing rapidly and that companies may be willing to choose alternatives to traditional professional service providers. We believe Resources Connection is a viable alternative to traditional accounting and consulting firms in numerous instances because, by using project professionals, companies can:

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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 Four 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.

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:

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 Four 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 two years 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

We believe that 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 project professionals with high-quality services because we are able to combine all of the following:

Resources Connection Strategy

Our Business Strategy

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

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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 have completed a few strategic acquisitions. In both our core and acquired businesses, key elements of our growth strategy include:

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Associates

We believe that an important component of our success over the past six years has been our highly qualified and experienced associates. As of May 31, 2003, we employed 1,175 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 primarily employees of Resources Connection. We typically pay each associate an hourly rate, overtime premiums as required by law, and offer benefits, including paid vacation and holidays; referral bonus programs; group medical, dental and vision programs, each with an approximate 50% contribution by the associate; a basic term life insurance program; a matching 401(k) retirement plan; and professional development and career training. Typically, an associate must work a threshold number of hours to be eligible for all of the benefits. We also have a long-term incentive plan for our associates, which affords them the opportunity to earn an annual cash bonus vesting 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 2003, we served over 1,200 clients. Our revenues are not concentrated with any particular client or clients, or within any particular industry. In fiscal 2003, no single client accounted for more than 4% of our revenue and our 10 largest clients accounted for approximately 19% of our revenues.

The clients listed below represent the geographic and industry diversity of our client base in fiscal 2003.

Services

Our current professional services capabilities include accounting and finance, risk management and internal audit, information technology, human resources and procurement (supply chain) management. In fiscal 2003, 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.

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Accounting and Finance

Our accounting and finance services include:

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

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:

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

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:

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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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:

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

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:

Human Resources Management

Our human resources management professional services group was formed in June 1999. Our human resources management services include:

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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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:

Information Technology

Our information technology professional services group was formed in June 1998. Our information technology services include:

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:

Internal Audit Services

Our internal audit services subsidiary, RAS, was formed in June 2002 and provides the following services:

Sample Engagement:    We provided 45 associates to assist with a Sarbanes Section 404 compliance project for a multi-billion dollar solid waste management company. Our associates visited 15 client locations and utilized the content management tool, policyIQ^TM, to assist management with gathering support for their assessment of the internal control environment. Our associates were responsible for:

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Procurement Management

We purchased The Procurement Centre (“TPC”) in October 2002. Our procurement services include:

Sample Engagements:    We provided seven associates over an eight-month period to assist a Fortune 500 company’s procurement organization on a variety of projects. Our associates were responsible for:

Operations

We generally provide our professional services to clients at a local level through our 50 domestic offices and five 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, identifying 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.

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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, many 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:

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. In addition, the directors are assisted by a few management professionals focused on 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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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, 2003, we had a total of 1,519 employees, including 344 corporate and office-level employees and 1,175 professional services associates. None of our employees is covered by a collective bargaining agreement.

ITEM 2.    PROPERTIES

As of May 31, 2003, we maintain a total of 50 domestic offices, a few with multiple office locations in the same city, which are located in the following metropolitan areas:

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 five international offices: Toronto, Canada; Birmingham, England; 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 2003.

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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, 2003 was 314.

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

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.

Issuances of Unregistered Securities

On October 11, 2002, the Company entered into an Asset Purchase Agreement (the “Agreement”), with RC Transaction Corp., a wholly owned subsidiary of the Company (“RC”), The Procurement Centre, LLC (the “Seller”), and certain members of the Seller, pursuant to which RC acquired certain assets and liabilities of the Seller. As part of the consideration, on October 11, 2002, the Company issued 116,000 shares of its common stock to the Seller. The Agreement valued such shares at approximately $1,504,000.

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The issuance of the common stock by the Company to the Seller was a transaction not involving a public offering, and is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The facts relied on to make this exemption available include, without limitation, the following: (i) the offering did not involve any general solicitation or advertising; (ii) the offering was made to the Seller solely in connection with the acquisition of the assets of the Seller; (iii) the Company obtained representations from the members of the Seller regarding, among other things, investment intent, status as accredited investors, and access to information.

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 32 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing on page 15. The statements of income data for the period from June 1, 1998 to March 31, 1999, 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, 2000 and the consolidated balance sheet data at May 31, 1999, 2000 and 2001 were derived from our consolidated financial statements that have been audited by 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, 2001, 2002 and 2003 and the consolidated balance sheet data at May 31, 2002 and 2003 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.

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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 26 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 and internal audit, information technology, human resources and procurement (supply chain) management 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 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, such as documenting internal controls. We also assist our clients with periodic needs such as budgeting and forecasting, audit preparation, public reporting and assisting clients with their compliance efforts under the Sarbanes-Oxley Act of 2002 (“Sarbanes”).

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 the management-led buyout in partnership with, among others, an investor, Evercore Partners, Inc. In December 2000, we completed our initial public offering of common stock and began trading on the Nasdaq National Market.

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 Four accounting firms in the United Kingdom, specializing in the selection and recruitment of senior management teams 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 focus primarily on providing internal audit services (Resources Audit Solutions, LLC (“RAS”)) and executive compensation and corporate governance consulting (Resources Consulting Group, LP).

On October 11, 2002, we completed the acquisition of The Procurement Centre, LLC (“TPC”), a Texas based provider of supply chain management services to companies on a project basis. In addition to TPC’s office in Houston, Texas, we have also opened six offices domestically during fiscal 2003 and an office in Birmingham, England.

As of May 31, 2003, we served our clients through 50 offices in the United States and five offices abroad.

Subsequent to the end of our fiscal year, we completed three transactions to enhance our international presence as well as our ability to deliver services through RAS. The largest of the three was the all cash

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acquisition for $29.4 million of the outstanding capital shares of Ernst & Young’s subsidiary, Executive Temporary Management BV (“ETM”) in the Netherlands on July 15, 2003. ETM is considered a market leader in the interim management industry in the Netherlands. We believe this acquisition will provide a foundation in continental Europe and will allow us to market to our current and prospective multinational clients seeking an alternative to Big Four audit firms, particularly in light of current concerns about auditor independence. ETM has seven offices in the Netherlands and contracted with, or employed, over 300 professional service associates on assignment as of March 31, 2003. ETM reported revenues for the nine months ended March 31, 2003 of $45.4 million and revenues of $72 million for the year ended June 30, 2002.

In addition to the international expansion driven by the acquisition of ETM, we also acquired the assets of Deloitte Re:sources Pty Ltd. from Deloitte Touche Tohmatsu in Australia in an all cash deal for $1 million on June 1, 2003. The subsidiary, now renamed Resources Connection Australia Pty. Ltd., was originally launched in 1998 by us on behalf of the Deloitte Australia firm. The acquisition presented the opportunity to expand our Asia Pacific presence.

Finally, on July 30, 2003, we announced the acquisition of the company that developed policyIQ^TM, a web-based solution for internal controls documentation and content management. The purchase price was $2 million and a provision for contingent payments based on sales volume. policyIQ^TM is a tool that clients of our subsidiary, RAS, can use to assist in complying with Sarbanes. RAS specializes in conducting internal audits, assisting clients in establishing and documenting efficient internal controls, assessing risk management practices and complying with the myriad of new regulations associated with Sarbanes.

We earn revenue primarily by charging our 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 3%, 2% and 1% of our revenue for the years ended May 31, 2001, 2002 and 2003, 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.

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 fiscal 2003 and 2002 were as follows: for fiscal 2003, August 24, 2002 (first quarter); November 23, 2002 (second quarter); February 22, 2003 (third quarter); and May 31, 2003 (fourth quarter); and for fiscal 2002, August 25, 2001 (first quarter); November 24, 2001 (second quarter);

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February 23, 2002 (third quarter); and May 25, 2002 (fourth quarter). For convenience, all references herein to years or periods are to years or periods ended May 31.

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.

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.

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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.

Year Ended May 31, 2003 Compared to Year Ended May 31, 2002

Revenue.    Revenue increased $20.3 million or 11.2% to $202.0 million for the year ended May 31, 2003 from $181.7 million for the year ended May 31, 2002. Growth in revenues resulted primarily from continued expansion of our scope of services resulting in more billable hours for our associates and an improvement in rate per hour. Our scope of services expanded by increasing marketing awareness of our ability to do information technology, human capital and internal audit-related engagements. We also added TPC operations. These measures partially offset the effects of the negative economy. To a lesser extent, revenue benefited from the fifty-third week of activity in fiscal 2003. Overall bill rates improved by 4.9% compared to the prior year average bill rate. The increase in revenue for the year is also reflected by the increase in the number of associates on assignment from 1,060 at the end of fiscal 2002 to 1,175 at the end of fiscal 2003. We operated 55 offices during the final quarter of fiscal 2003, compared to 47 offices in the last quarter of fiscal 2002.

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Direct Cost of Services.    Direct cost of services increased $12.9 million or 11.9% to $121.6 million for the year ended May 31, 2003 from $108.7 million for the year ended May 31, 2002. The increase in direct cost of services was attributable to the previously described expansion of the scope of services resulting in more chargeable hours for our associates at higher average pay rates. Overall, the average pay rate per hour increased by 6.8% year-over-year. The number of associates on assignment increased from 1,060 at the end of fiscal 2002 to 1,175 at the end of fiscal 2003. The direct cost of services increased as a percentage of revenue from 59.8% for fiscal year 2002 to 60.2% for fiscal year 2003. The net increase primarily reflects the incremental increase in pay rate per hour compared to bill rate per hour 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 $7.6 million or 14.9% to $58.2 million for the year ended May 31, 2003 from $50.7 million for the year ended May 31, 2002. This increase was primarily attributable to the increase in management and administrative headcount from 312 at the end of fiscal 2002 to 344 at the end 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 seven additional offices opened during fiscal 2003, as well as the full year of operation for those offices opened in fiscal 2002. The Company also continued throughout fiscal 2003 the advertising campaign in targeted business publications begun in the fourth quarter of fiscal 2002. The increase was also attributable to an increase in occupancy costs from the addition of the new offices, an increase in bonus expense from the Company’s improved revenue results and an increase in insurance costs. Selling, general and administrative expenses increased as a percentage of revenue from 27.9% for the year ended May 31, 2002 to 28.8% for the year ended May 31, 2003. This percentage increase resulted from the aforementioned increase in salary expense and related benefits, occupancy expenses and national advertising expenses.

Amortization and Depreciation Expenses.    Amortization of intangible assets increased from $125,000 for the year ended May 31, 2002 to $655,000 for the year ended May 31, 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 a United Kingdom (“UK”) practice in fiscal 2002. The Company recognized approximately $356,000 in amortization expense on non-compete agreements and candidate, prospect and client databases related to the TPC acquisition and $193,000 related to the UK practice. In the prior year, amortization expense related only to the amortization of the non-compete agreement entered into when the Company acquired Resources Connection LLC (“LLC”) on April 1, 1999. The balance of $106,000 remaining for that non-compete agreement at the end of fiscal 2002 was fully amortized in fiscal 2003.

Depreciation expense increased from $1.2 million for the year ended May 31, 2002 to $1.3 million for the year ended May 31, 2003. This increase reflects the investment in our UK offices as well as the TPC acquisition, the other offices opened since the beginning of fiscal 2003, a full year of depreciation of assets acquired during fiscal 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. As of May 31, 2003, the Company has $20 million of government-agency bonds with remaining maturity dates in excess of one year from the balance sheet date. The bonds mature through 2005 and have coupon rates ranging from 1.8% to 3.0%. These investments have been classified in the May 31, 2003 consolidated balance sheet as “held-to-maturity” securities.

During fiscal 2003, the Company generated interest income of $1.1 million compared to interest income of $1.2 million in the year ended May 31, 2002. Although the average cash balance for investment increased from fiscal 2002 to fiscal 2003, the lower interest rates year-over-year more than offset the cash balance increase. The Company earned approximately 1.7%, annualized, on its money market, commercial paper and other marketable securities investments during the year.

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Income Taxes.    The provision for income taxes decreased from $8.9 million for the year ended May 31, 2002 to $8.7 million for the year ended May 31, 2003 due to the decrease in income from operations in fiscal 2003. The decrease in income from operations was offset by the increase in the effective tax rate in fiscal 2003 to 41.0% from approximately 40.0% in fiscal 2002. The increase is primarily due to an increase in the federal statutory rate of 1.0%, which resulted from applying a 35.0% federal tax rate in fiscal 2003 as opposed to a 34.0% tax rate as in prior years. Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the provision. 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.

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.

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. 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

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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 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 $3.0 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 $9.1 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.

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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, 2003. 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.

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 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, 2003.

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At May 31, 2003, the Company had operating leases, primarily for office premises, expiring at various dates. At May 31, 2003, the Company had no capital leases. Future minimum rental commitments under operating leases are as follows:

On 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, originally set to expire on September 1, 2003, has been extended to December 1, 2003 and the Company is negotiating to extend the agreement for an additional two years. As of May 31, 2003, the Company had no outstanding borrowings under the revolving credit facility.

Net cash provided by operating activities totaled $17.0 million in fiscal 2003 compared to $15.3 million in fiscal 2002. 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 increase in cash provided by operations was the increase in the accrual for management incentive bonus as well as the profit sharing plan for associates as of May 31, 2003 compared to May 31, 2002, as the Company’s revenue increased. In addition, accruals for salaries were up over 150% as of May 31, 2003 compared to May 31, 2002. This was the result of two weeks of accrued salary owed to associates as of May 31, 2003 compared to one week at the end of May 31, 2002 and, to a lesser extent, the higher number of associates on active assignment at the end of fiscal 2003 compared to fiscal 2002. In the current year, the Company was also able to utilize some of the prepayments of income taxes triggered by the Company’s change in tax year-end from December 31 to May 31 in calendar 2001. These favorable operating cash flow activities were offset by the increase in the Company’s accounts receivable balance in fiscal 2003, triggered by the Company’s higher revenue in the fourth quarter of fiscal 2003 as compared to the fourth quarter of fiscal 2002. The Company’s had $48.1 million in cash and cash equivalents and $20 million of long-term marketable securities at May 31, 2003.

Net cash used in investing activities totaled $4.7 million for fiscal 2003 compared to $27.7 million for fiscal 2002. 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 ranging from 1.8% to 3.0% as of May 31, 2003.

Subsequent to May 31, 2003, the Company completed three separate acquisitions using a total of $32.4 million in cash. After these transactions and anticipated sources and uses of cash during the quarter, the Company expects cash balances available for operating purposes to exceed $30 million as of the end of the first quarter of fiscal 2004.

Net cash provided by financing activities totaled $4.2 million for the year ended May 31, 2003 compared to $9.6 million for the year ended May 31, 2002. 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

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exercises and purchases by employees through the Company’s Employee Stock Purchase Plan. There was no secondary offering of common stock and the volume of stock option exercises declined in fiscal 2003.

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 additional 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 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 Accounting Principles Board (“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. The Company adopted SFAS No. 145 effective June 1, 2002 and has reclassified the costs incurred in connection with the early extinguishment of debt in fiscal 2001 as interest expense with the related income tax benefit included as a component of the provision for income taxes. Refer to the “Interest Expense” accounting policy in Note 2 of the “Notes to Consolidated Financial Statements” included in this Report on Form 10-K with respect to such reclassification.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”, which had required a liability for an exit cost be recognized at the date of a company’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, and requires that a liability for an exit cost be recognized when incurred. This statement also requires that the initial measurement of this liability be at fair value. Should we have a restructuring activity in the future, this statement would primarily impact the timing of the recognition of the expense. The Company adopted SFAS No. 146 effective January 1, 2003. The adoption of this statement did not have a material impact on its financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. This interpretation provides for additional disclosures to be made by a guarantor in its interim and annual financial statements about obligations that it has. This interpretation is effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the disclosure provision of this interpretation effective March 1, 2003. The adoption of this statement did not have a material impact on the Company’s financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for an entity that voluntarily changes to the fair

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value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosure in both the annual and interim financial statements about the method of accounting and the effect on reported net income of an entity s accounting policy decisions with respect to stock-based employee compensation. The Company adopted the disclosure provisions of this statement effective March 1, 2003. The adoption did not have a material impact on the Company’s financial position or results of operations, as it will continue to account for stock-based compensation under APB No. 25.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement is effective for contracts entered into or modified after June 30, 2003. The Company does not believe the adoption of this statement will have a material impact on its financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of SFAS 150 will have a material impact to its consolidated financial position, results of operations or cash flows.

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RISK FACTORS

You should carefully consider the risks described below before making a decision to buy shares of our common stock. The order of the risks is not an indication of their relative weight or importance. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including those risks set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may also adversely impact and impair our business. 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:

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:

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.

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

The U.S. economy has experienced an economic downturn and our business has been significantly affected by the 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 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%. Although revenue has increased in fiscal 2003 as compared to fiscal 2002 by 11%, 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: