Overview
Resources Global is an international professional services firm that provides experienced finance, accounting, risk management and internal audit, information management, human capital, supply chain management and legal services professionals in support of client-led projects and initiatives. We assist our clients with discrete projects requiring specialized expertise in:
• finance and accounting services, such as corporate restructurings/reorganizations, financial analyses (e.g., product costing and margin analyses), budgeting and forecasting, audit preparation, public-entity reporting, tax-related projects, mergers and acquisitions due diligence, initial public offering assistance and assistance in the preparation or restatement of financial statements;

• information management services, such as financial system/enterprise resource planning implementation and post implementation optimization;

• risk management and internal audit services (provided via our subsidiary Resources Audit Solutions), including compliance reviews, internal audit co-sourcing and assisting clients with their compliance efforts under the Sarbanes-Oxley Act of 2002 ("Sarbanes");

• supply chain management services, such as strategic sourcing efforts, contracts negotiations and purchasing strategy;

• actuarial services for pension and life insurance companies;

• human capital services, such as change management and compensation program design and implementation; and

• legal and regulatory services, such as providing attorneys, paralegals and contract managers to assist clients (including law firms) with project-based or peak period needs.

We were founded in June 1996 as a division of Deloitte & Touche and operated as Resources Connection, LLC, 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 several investors. In December 2000, we completed our initial public offering of common stock and began trading on the NASDAQ Stock Market. We currently trade on the NASDAQ Global Select Market. In January 2005, we announced the change of our operating entity name to Resources Global Professionals to better reflect the Company's international capabilities. We operated solely in the United States until fiscal year 2000, when we began to expand geographically to meet the demand for project professional services across the world and opened our first three international offices. Our most significant international transaction was the acquisition of our Netherlands practice in fiscal year 2004. As of August 29, 2009, the Company served clients through 52 offices in the United States and 30 offices abroad. 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 periodically or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our goodwill and certain other intangible assets are not subject to periodic amortization. These assets are 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 of our stock, our operating performance and other factors, these assessments could potentially result in impairment reductions of these intangible assets in the future and this adjustment may materially affect the Company's future financial results.

Allowance for doubtful accounts - We maintain an allowance for doubtful accounts for estimated losses resulting from our clients failing 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. While such losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our clients could cause unfavorable trends in receivable collections and additional allowances may be required. These additional allowances could materially affect the Company's future financial results. 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 and any such adjustment may materially affect the Company's future financial result. If the ultimate tax liability differs from the amount of tax expense we have reflected in the Consolidated Statements of Income, an adjustment of tax expense may need to be recorded and this adjustment may materially affect the Company's future financial results.
Revenue recognition - We primarily charge our clients on an hourly basis for the professional services of our consultants. We recognize revenue once services have been rendered and invoice the majority of our clients in the United States on a weekly basis. Some of our clients served by our international operations are billed on a monthly 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 one of our consultants. This type of contractually non-refundable revenue is recognized at the time our client completes the hiring process.
Stock-based compensation - Under our 2004 Performance Incentive Plan, officers, employees, and outside directors have received or may receive grants of restricted stock, stock units, options to purchase common stock or other stock or stock-based awards. Under our ESPP, eligible officers and employees may purchase our common stock in accordance with the terms of the plan. Effective May 28, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 (revised), "Share-Based Payment," as codified in FASB ASC topic 718- Compensation - Stock Compensation (ASC 718), using the modified prospective transition method; accordingly, prior periods have not been restated. Under the previously accepted accounting standards, there was no stock-based compensation expense related to employee stock options and employee stock purchases recognized during prior periods.
The accounting required by ASC 718 requires that the Company estimate a value for employee stock options on the date of grant using an option-pricing model. We have elected to use the Black-Scholes option-pricing model which takes into account assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Additional variables to be considered are the expected term and risk-free interest rate over the expected term of our employee stock options. In addition, because stock-based compensation expense recognized in the Statement of Income is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience. If facts and circumstances change and we employ different assumptions in the application of ASC 718 in future periods, the compensation expense recorded may differ materially from the amount recorded in the current period.
The weighted average estimated value per share of employee stock options granted during the three months ended August 29, 2009 was $7.44 using the Black-Scholes model with the following assumptions:

                                             Three months ended
                                              August 29, 2009
                  Expected volatility                       45.0 %
                  Risk-free interest rate                   2.51 %
                  Expected dividends                         0.0 %
                  Expected life                        5.1 years

The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. The dividend yield assumption is based on our previous history of not paying dividends and our expectation that the special dividend paid in August 2007 was an isolated event and not the commencement of a regular dividend. The Company's historical expected life of stock option grants this quarter is approximately 5.1 years for non-officers. There were no grants to officers during the first quarter. As permitted under Staff Accounting Bulletin No. 107 ("SAB No. 107"), the Company uses its historical volatility over the expected life of the stock option award to estimate the expected volatility of the price of its common stock. 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 August 29, 2009 Compared to Three Months Ended August 30, 2008
Computations of percentage change period over period are based upon our results, as rounded and presented herein.
Revenue. Revenue decreased $89.0 million, or 42.9%, to $118.3 million for the three months ended August 29, 2009 from $207.3 million for the three months ended August 30, 2008. Our revenue was adversely affected by a decline in the number of hours worked by our consultants, and to a lesser extent, a decrease in the average bill rate per hour in comparison to the prior year comparable quarter. We believe the primary cause of the decrease in hours worked by our consultants is client uncertainty about the global economic environment, which is causing our clients to approach their business more cautiously and to either defer, downsize or eliminate projects.
The number of hours worked in the first quarter of fiscal 2010 declined about 40.0% from the comparable period in the prior year, while average bill rates decreased by 7.2% compared to the prior year. The number of consultants on assignment as of August 29, 2009 was 1,945 compared to the 3,166 consultants engaged as of August 30, 2008. Although we believe we have improved the awareness of our service offerings with clients and prospective clients through our previously completed engagements (including Sarbanes or related internal accounting control services), and that the significant changes taking place in the capital markets may present new opportunities going forward, there can be no assurance about the timing of such opportunities or whether we can successfully capitalize on them, especially given the current uncertain economic climate in the United States and international markets.
We operated 82 and 89 offices as of August 29, 2009 and August 30, 2008, respectively. Our clients do not sign long-term contracts with us. As such, there can be no assurance as to future demand levels for the services that we provide or that future results can be reliably predicted by considering past trends.
Revenue for the Company's major practice areas across the globe consisted of the following (in thousands):

Revenue for the Three

                           Months Ended                                    % of Total
                    August 29,       August 30,         %          August 29,       August 30,
                       2009             2008         Change           2009             2008
   North America   $     90,327     $    149,839       (39.7 %)           76.4 %           72.3 %
   Europe                21,468           45,549       (52.9 %)           18.1 %           22.0 %
   Asia Pacific           6,468           11,917       (45.7 %)            5.5 %            5.7 %

   Total           $    118,263     $    207,305       (43.0 %)          100.0 %          100.0 %

Our financial results are subject to fluctuations in the exchange rates of foreign currencies in relation to the United States dollar. Revenues denominated in foreign currencies are translated into United States dollars at the monthly average exchange rates in effect during the quarter. Thus, as the value of the United States dollar fluctuates relative to the currencies in our non-U.S. based operations, our revenue can be impacted. Using the comparable fiscal 2009 and fiscal 2008 conversion rates, international revenues would have been higher than reported under GAAP by $2.8 million in the first quarter of fiscal 2010 but lower than reported under GAAP by $4.4 million in the first quarter of fiscal 2009.
We believe our revenues in the near-term will continue to be impacted by the global economic environment which has reduced our clients demand for the services we provide.

Direct Cost of Services. Direct cost of services decreased $53.4 million, or 42.2%, to $73.1 million for the three months ended August 29, 2009 from $126.5 million for the three months ended August 30, 2008. Direct cost of services declined because of a 40.0% decrease in hours worked compared to the prior year first quarter and a 7.1% decrease in the average pay rate to our consultants. The direct cost of services as a percentage of revenue (the "direct cost of services percentage") was 61.8% and 61.0% for the three months ended August 29, 2009 and August 30, 2008, respectively. The increase in the direct cost of services percentage results from deleveraging of certain consultant benefit costs, such as health care. This trend may continue if revenues remain at current levels or decline.
The cost of compensation and related benefits offered to the consultants of our international offices has been greater as a percentage of revenue than our domestic operations. In addition, international offices use independent contractors more extensively. Thus, the direct cost of services percentage of our international offices has slightly exceeded our domestic operation's targeted direct cost of services percentage of 60%.
Selling, General and Administrative Expenses. Selling, general and administrative expenses ("S, G & A") as a percentage of revenue was 43.6% and 27.3% for the quarters ended August 29, 2009 and August 30, 2008, respectively. S, G &A decreased $4.9 million, or 8.7%, to $51.6 million for the three months ended August 29, 2009 from $56.5 million for the three months ended August 30, 2008. Management and administrative headcount decreased from 876 at the end of the first quarter of fiscal 2009 to 757 at the end of the first quarter of fiscal 2010.
During the first quarter of fiscal 2010, two senior executives resigned from the Company. In connection with those resignations, the Company's S, G & A of $51.6 million includes $4.8 million in severance costs and $2.2 million of compensation expense related to accelerated vesting of certain stock option grants. The decrease in S, G & A quarter-over-quarter was primarily the result of the restructuring actions taken by the Company in the fourth quarter of fiscal 2009, including the termination of 77 management and administrative personnel and the closing of seven offices. S, G & A decreases in the first quarter of fiscal 2010 also included: a reduction in marketing expenses; a reduction in recruiting and related expenses; reductions in salary, benefit and related costs (primarily related to the actions taken in the fourth quarter); a reduction in bonus expense (the Company's bonus program is tied to revenue levels); and a reduction in stock based compensation expense. The Company also did not increase its allowance for doubtful accounts after an evaluation of the Company's client base and receivable balances in the first quarter of fiscal 2010 whereas there was a provision of $653,000 in the prior year's first quarter.
Amortization and Depreciation Expense. Amortization of intangible assets increased to $393,000 in the first quarter of fiscal 2010 compared to $382,000 in the prior year's first quarter as a result of amortization related to identifiable intangible assets of the Compliance Solutions (UK) Ltd. and Domenica acquisitions made in fiscal 2008 and amounts related to the fiscal 2009 acquisitions of Limbus and Kompetensslussen. Based upon unamortized identified intangible assets recorded at August 29, 2009, the Company anticipates amortization expense related to identified intangible assets to be approximately $1.5 million during the fiscal year ending May 29, 2010.
Depreciation expense decreased slightly from $2.3 million for the three months ended August 30, 2008 to $2.2 million for the three months ended August 29, 2009.
Interest Income. Interest income was $179,000 in the first quarter of fiscal 2010 compared to $516,000 in the first quarter of fiscal 2009. The decrease in interest income in the first quarter of fiscal 2010 is primarily the result of declining interest rates as compared to the prior year's first quarter. The Company has invested available cash in certificates of deposit, money market investments and government-agency bonds that have been classified as cash equivalents due to the short maturities of these investments. As of August 29, 2009, the Company also has $23.3 million of investments in commercial paper, government-agency bonds and certificates of deposit with maturity dates between three months and one year from the balance sheet date classified as short-term investments and considered "held-to-maturity" securities.
Income Taxes. The provision for income taxes decreased from $9.6 million for the three months ended August 30, 2008 to a benefit of $1.7 million for the three months ended August 29, 2009. The Company recorded a benefit in the first quarter of fiscal 2010 as a result of the pretax loss incurred during the quarter. The effective tax rate was 43.4% for the first quarter of fiscal 2009 and 19.1% for the first quarter of fiscal 2010.

The statutory tax rates in several of our foreign jurisdictions are significantly lower than our historical U.S. combined federal and state rates. Therefore, the overall tax benefit on worldwide losses in the first quarter of fiscal 2010 is significantly lower than our historical rate. This will continue to make our tax rate volatile.
In addition, under current accounting rules, the Company cannot recognize a tax benefit for the stock compensation expense related to certain incentive stock options ("ISOs") unless and until the holder exercises his or her option and then sells the shares within a certain period of time. In addition, the Company can only recognize a potential tax benefit for employees' acquisition and subsequent sale of shares purchased through the ESPP if the sale occurs within a certain defined period. As a result, the Company's provision for income taxes is likely to fluctuate from historical rates for the foreseeable future. Further, those tax benefits associated with ISO grants fully vested at the date of adoption of current accounting rules for stock based compensation will be recognized as additions to paid-in capital when and if those options are exercised and not as a reduction to the Company's tax provision. The Company recognized a benefit of approximately $1.5 million and $1.3 million related to stock-based compensation for nonqualified stock options expensed and for eligible disqualifying ISO exercises during the first quarter of fiscal 2010 and 2009, respectively. The timing and amount of eligible disqualifying ISO exercises cannot be predicted. The Company predominantly grants nonqualified stock options to employees in the United States.
Periodically, the Company reviews the components of both book and taxable income to analyze the adequacy of the tax provision. There can be no assurance, particularly because of the unpredictability of timing and amount of eligible disqualifying ISO exercises, that the Company's effective tax rate will remain constant in the future.
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 in Part II, Item 1A - Risk Factors. Due to these and other factors, we believe that quarter-to-quarter comparisons of our results of operations may not be meaningful indicators of future performance. Liquidity and Capital Resources
Our primary source of liquidity is cash provided by our operations. On an annual basis, we have generated positive cash flows from operations since inception. The Company has a $3.0 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 rate ("LIBOR") plus 1.5% or Bank of America's Grand Cayman Banking Center rate ("IBOR") plus 1.5%. Interest, if any, is payable monthly. There is an annual facility fee of 0.25% payable on the unutilized portion of the Credit Agreement. The Credit Agreement expires December 1, 2009 and the Company believes it will renew the agreement under similar terms. As of August 29, 2009, the Company had $2.4 million available under the terms of the Credit Agreement as Bank of America has issued $600,000 of outstanding letters of credit in favor of third parties related to operating leases. As of August 29, 2009, the Company was in compliance with all covenants included in the Credit Agreement.
Operating activities used $10.6 million in cash for the three months ended August 29, 2009 compared to cash provided of $10.1 million for the three months ended August 30, 2008. Cash used in operations in the first three months of fiscal 2010 resulted from a net loss of $7.2 million, offset by favorable non-cash items of $5.3 million, less net cash changes in operating assets and liabilities of $8.7 million. In the first three months of fiscal 2009, cash provided by operations resulted from net income of $12.5 million, increased by non-cash items of $7.5 million, less net cash used by changes in operating assets and liabilities of $9.9 million. The primary cause of the unfavorable change in operating cash flows between the two quarters was the Company's net loss in the first quarter of fiscal 2010. Non-cash items include expense for stock-based compensation; these charges do not reflect an actual cash outflow from the Company but are an estimate of the fair value of the services provided by employees and directors in exchange for stock option grants and purchase of stock through the Company's ESPP. As of August 29, 2009, the Company had $156.8 million of cash, cash equivalents and short-term investments.
Net cash used in investing activities was $3.2 million for the first three months of fiscal 2010 compared to net cash provided by investing activities of $3.5 million in the first three months of fiscal 2009. Cash received from the redemption of short-term investments (primarily commercial paper and government agency bonds), net of cash used to purchase short-term investments, resulted in a net use of $2.8 million in the first three months of fiscal 2010 compared to a net source from the redemption of short-term investments of $6.0 million in the first three months of fiscal 2009. The Company spent approximately $2.1 million less on property and equipment in the first three months of fiscal 2010 compared to the first three months of fiscal 2009.

Net cash provided by financing activities totaled $3.3 million for the first three months ended August 29, 2009, compared to $8.7 million for the three months ended August 30, 2008. Cash provided by financing activities declined . . .