UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10245
RCM TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
Nevada 95-1480559
(State of Incorporation) (I.R.S. Employer Identification No.)
2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
(Address of Principal Executive Offices) (Zip Code)
(856) 486-1777
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of the Registrant's class of common
stock, as of the latest practicable date.
Common Stock,$0.05 par value,10,539,424 shares outstanding as of July 31, 2001.
2
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2001 (Unaudited)
and December 31, 2000 (Audited) 3
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Six-Month Periods Ended June 30, 2001 and 2000 5
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Three-Month Periods Ended June 30, 2001 and 2000 6
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Six-Month Period Ended June 30, 2001 7
Unaudited Consolidated Statements of Cash Flows for the Six-
Month Periods Ended June 30, 2001 and 2000 8
Notes to Unaudited Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 4 - Submission of Matters to a Vote of Security Holders 21
Item 6 - Exhibits and Reports on Form 8-K 21
Signatures 22
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2001 and December 31, 2000
ASSETS
June 30, December 31,
2001 2000
--------------- ---------------
(Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 6,743,580 $ 3,170,658
Accounts receivable, net of allowance for doubtful accounts
of $1,719,000 (June 30, 2001) and $1,875,000
(December 31, 2000), respectively 50,381,970 64,032,564
Income tax refund receivable 5,519,481 7,417,258
Prepaid expenses and other current assets 1,830,313 3,161,235
Deferred tax assets 1,483,649 1,449,518
--------------- ---------------
Total current assets 65,958,993 79,231,233
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 10,334,583 10,238,480
Less: accumulated depreciation and amortization 3,644,679 4,079,857
--------------- ---------------
6,689,904 6,158,623
--------------- ---------------
Other assets
Deposits 211,268 223,512
Intangible assets, net of accumulated amortization
of $11,245,000 (June 30, 2001) and $7,878,000
(December 31, 2000), respectively 96,291,089 88,655,460
-------------- ------------
96,502,357 88,878,972
--------------- ---------------
Total assets $169,151,254 $174,268,828
=============== ===============
3
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
June 30, 2001 and December 31, 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
2001 2000
--------------- ---------------
(Unaudited) (Audited)
Current liabilities
Accounts payable and accrued expenses $20,936,175 $13,610,547
Accrued payroll 7,062,978 7,691,258
Payroll and withheld taxes 271,978 1,311,828
Income taxes payable 75,640 108,996
--------------- ---------------
Total current liabilities 28,346,771 22,722,629
--------------- ---------------
Long-term liabilities
Note payable 34,900,000 47,300,000
Income taxes payable 1,433,831 2,183,873
--------------- ---------------
36,333,831 49,483,873
--------------- ---------------
Shareholders' equity
Preferred stock, $1.00 par value; 5,000,000 shares authorized;
no shares issued or outstanding
Common stock, $0.05 par value; 40,000,000 shares authorized; 10,539,424 and
10,499,651 shares issued and outstanding
at June 30, 2001 and December 31, 2000, respectively 526,971 524,982
Accumulated other comprehensive loss (461,604) (233,631)
Additional paid-in capital 93,647,330 93,516,080
Retained earnings 10,757,955 8,254,895
--------------- ---------------
104,470,652 102,062,326
--------------- ---------------
Total liabilities and shareholders' equity $169,151,254 $174,268,828
=============== ===============
4
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Six Months Ended June 30, 2001 and 2000
(Unaudited)
2001 2000
---------------- ---------------
Revenues $123,019,699 $150,935,386
Cost of services 88,469,679 112,292,497
---------------- ---------------
Gross profit 34,550,020 38,642,889
---------------- ---------------
Operating costs and expenses
Selling, general and administrative 23,680,387 27,964,904
Depreciation 493,670 591,252
Amortization 3,366,554 3,118,767
---------------- ---------------
27,540,611 31,674,923
---------------- ---------------
Operating income 7,009,409 6,967,966
---------------- ---------------
Other expenses
Interest expense, net of interest income 1,315,629 1,813,095
(Gain) Loss on foreign currency translation ( 10,149) 4,056
---------------- ---------------
1,305,480 1,817,151
----------------
Income before income taxes 5,703,929 5,150,815
Income taxes 3,200,869 2,752,410
---------------- ---------------
Net income 2,503,060 2,398,405
Other comprehensive loss
Foreign currency translation adjustment ( 227,973) ( 169,473)
---------------- ---------------
Comprehensive income $ 2,275,087 $ 2,228,932
================ ===============
Basic earnings per share $.24 $.23
===== ====
Weighted average number of common
shares outstanding 10,499,651 10,498,938
========== ==========
Diluted earnings per share $.23 $.22
==== ====
Weighted average number of common
and common equivalent shares outstanding 10,665,107 10,819,341
========== ==========
5
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended June 30, 2001 and 2000
(Unaudited)
2001 2000
---------------- ---------------
Revenues $58,365,909 $75,989,896
Cost of services 41,887,806 56,386,298
---------------- ---------------
Gross profit 16,478,103 19,603,598
---------------- ---------------
Operating costs and expenses
Selling, general and administrative 11,236,560 13,908,805
Depreciation 258,209 313,428
Amortization 1,323,064 1,601,727
---------------- ---------------
12,817,833 15,823,960
---------------- ---------------
Operating income 3,660,270 3,779,638
---------------- ---------------
Other expenses
Interest expense, net of interest income 573,809 964,175
(Gain) Loss on foreign currency translation ( 6,089) 6,942
---------------- ---------------
567,720 971,117
---------------- ---------------
Income before income taxes 3,092,550 2,808,521
Income taxes 1,740,434 1,468,006
---------------- ---------------
Net income 1,352,116 1,340,515
Other comprehensive loss
Foreign currency translation adjustment 156,740 169,473
---------------- ---------------
Comprehensive income $1,195,376 $1,171,042
================ ===============
Basic earnings per share $.13 $.13
==== ====
Weighted average number of common
shares outstanding 10,499,651 10,499,651
========== ==========
Diluted earnings per share $.13 $.13
==== ====
Weighted average number of common
and common equivalent shares outstanding 10,736,087 10,618,713
========== ==========
6
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six Months Ended June 30, 2001
(Unaudited)
Accumulated
Other
Common Stock Comprehensive Additional
------------ Paid-in Retained
Shares Amount Income (Loss) Capital Earnings
Balance, January 1, 2001 10,499,651 $524,982 ($233,631) $93,516,080 $8,254,895
Employee Stock Purchase Plan 39,773 1,989 131,250
Translation adjustment (227,973)
Net income _________ ________ _________ __________ 2,503,060
---- ---------
Balance, June 30, 2001 10,539,424 $526,971 ($461,604) $93,647,330 $10,757,955
========== ======== ========== =========== ===========
7
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2000
(Unaudited)
2001 2000
--------------- --------------
Cash flows from operating activities:
Net income $2,503,060 $2,398,405
--------------- --------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,860,224 3,710,019
Provision for losses on accounts receivable ( 156,000) 211,000
Changes in assets and liabilities:
Accounts receivable 13,806,594 ( 3,379,259)
Income tax refund receivable 1,897,777
Deferred tax asset ( 34,131)
Prepaid expenses and other current assets 1,330,922 ( 1,891,944)
Accounts payable and accrued expenses 709,342 7,374,040
Accrued payroll ( 628,280) 1,291,050
Payroll and withheld taxes ( 1,039,850) ( 48,156)
Income taxes payable ( 783,398) 1,465,892
--------------- --------------
Total adjustments 18,963,200 8,732,642
--------------- --------------
Net cash provided by operating activities $21,466,260 $11,131,047
--------------- --------------
8
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2001 and 2000 - (Continued)
(Unaudited)
2001 2000
--------------- --------------
Cash flows from investing activities:
Property and equipment acquired ( $1,103,777) ( $ 889,987)
Decrease in deposits 12,244 14,270
Purchase of acquired companies including
contingent consideration, net of cash acquired ( 4,307,071) ( 19,493,915)
--------------- --------------
Net cash used in investing activities ( 5,398,604) ( 20,369,632)
--------------- --------------
Cash flows from financing activities:
Employee stock purchase plan 133,239
Exercise of stock options 42,950
Borrowings of long-term debt ( 12,400,000) 9,300,000
--------------- --------------
Net cash provided by (used in) financing activities ( 12,266,761) 9,342,950
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents ( 227,973) ( 169,473)
--------------- --------------
Increase (decrease) in cash and cash equivalents 3,572,922 ( 65,108)
Cash and cash equivalents at beginning of period 3,170,658 4,025,808
--------------- --------------
Cash and cash equivalents at end of period $6,743,580 $3,960,700
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $1,366,420 $1,932,532
Income taxes $1,700,388 $1,562,086
9
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). This Quarterly Report on Form 10-Q should be
read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 2000. Certain information and footnote disclosures
which are normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to SEC rules and regulations. The information reflects all
normal and recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial position of the Company,
and its results of operations for the interim periods set forth herein. The
results for the six months ended June 30, 2001 are not necessarily
indicative of the results to be expected for the full year.
2. Goodwill
The net assets of businesses acquired, which are accounted for as
purchases, have been reflected at their fair values at dates of
acquisition. The excess of acquisition costs over such net assets
(goodwill) is reflected in the consolidated balance sheets as Intangible
Assets. Goodwill, net of amortization, at June 30, 2001 and December 31,
2000 was $96,291,000 and $88,655,000, respectively, and is being amortized
on a straight-line method over twenty years. Amortization expense for the
six months ended June 30, 2001 and 2000 was $3,367,000 and $3,119,000,
respectively.
It is the Company's policy to periodically review the net realizable value
of its intangible assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. Each business unit to
which these intangible assets relate is reviewed to determine whether
future cash flows over the remaining estimated useful lives of the assets
provide for recovery of the assets. In the event that assets are found to
be carried at amounts that are in excess of estimated undiscounted future
cash flows, then the intangible assets are adjusted for impairment to a
level commensurate with an undiscounted cash flow analysis of the
underlying assets.
3. Long Term Debt
The Company and its subsidiaries entered into an agreement with Mellon Bank
N.A., administrative agent for a syndicate of banks, which provides for a
$75.0 million Revolving Credit Facility (the "Revolving Credit Facility").
The Revolving Credit Facility was amended on September 18, 2000. Borrowings
under the Revolving Credit Facility bear interest at one of two alternative
rates, as selected by the Company. These alternatives are: LIBOR (London
Interbank Offered Rate), plus applicable margin, or the agent bank's prime
rate.
Borrowings under the Revolving Credit Facility are collateralized by all of
the assets of the Company and its subsidiaries and a pledge of all of the
stock of its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants, such as restrictions on the
Company's ability to pay dividends. The Revolving Credit Facility expires
August 2002. The weighted average interest rates at June 30, 2001 and
December 31, 2000 were 5.69% and 8.33%, respectively. The amounts
outstanding under the Revolving Credit Facility at June 30, 2001 and
December 31, 2000 were $34.9 million and $47.3 million, respectively.
4. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
Six Months Ended June 30, Three Months Ended June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Interest expense ($1,520,775) ($1,927,836) ($669,731) ($1,028,033)
Interest income 205,146 114,741 95,922 63,858
-------------- -------------- -------------- --------------
($1,315,629) ($1,813,095) ($573,809) ($ 964,175)
============ ============== ============== ==============
10
<page>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. Accounts Payable and Accrued Expenses
Accounts payable at June 30, 2001 and December 31, 2000 consists of the
following:
June 30, December 31,
2001 2000
-------------- ---------------
Accounts payable $9,718,448 $ 9,009,108
Funds due sellers (1) 11,217,727
4,601,439
-------------- ---------------
$20,936,175 $13,610,547
============== ===============
(1) Represents funds due to the shareholders of acquired companies.
6. Segment Information
The Company has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes
standards for companies to report information about operating segments,
geographic areas and major customers. The adoption of SFAS 131 has no
effect on the Company's consolidated financial position, consolidated
results of operations or liquidity.
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling, general
and administrative expenses directly attributable to that segment as well
as charges for allocating corporate costs to each of the operating
segments. The following tables reflect the results of the segments
consistent with the Company's management system (in thousands):
Six Months Ended Information Professional Commercial
June 30, 2001 Technology Engineering Services Corporate Total
--------------- ------------- -------------- ------------- -------------
Revenue $90,342 $20,249 $12,429 $ $123,020
Operating expenses 81,972 18,205 11,973 112,150
--------------- ------------- -------------- ------------- -------------
EBITDA (1) 8,370 2,044 456 10,870
Depreciation 369 102 23 494
Goodwill amortization 3,022 327 18 3,367
--------------- ------------- -------------- ------------- -------------
Operating income $ 4,979 $1,615 $ 415 $ $ 7,009
=============== ============= ============== ============= =============
Total assets $126,173 $17,346 $6,154 $ 19,478 $169,151
Capital expenditures $ 379 $ $ $ 725 $ 1,104
11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Segment Information - (Continued)
Six Months Ended Information Professional Commercial
June 30, 2000 Technology Engineering Services Corporate Total
--------------- ------------- -------------- ------------- -------------
Revenue $117,713 $19,859 $13,363 $ $150,935
Operating expenses 108,779 18,610 12,868 140,257
--------------- ------------- -------------- ------------- -------------
EBITDA (1) 8,934 1,249 495 10,678
Depreciation 438 133 20 591
Goodwill amortization 2,723 369 27 3,119
--------------- ------------- -------------- ------------- -------------
Operating income $ 5,773 $ 747 $ 488 $ $ 6,968
=============== ============= ============== ============= =============
Total assets $168,167 $17,641 $6,482 $13,317 $205,606
Capital expenditures $ 597 $ 75 $ 15 $ 213 $ 900
Three Months Ended Information Professional Commercial
June 30, 2001 Technology Engineering Services Corporate Total
--------------- ------------- -------------- ------------- -------------
Revenue $41,768 $10,328 $6,270 $ $58,366
Operating expenses 38,191 8,884 6,050 53,125
--------------- ------------- -------------- ------------- -------------
EBITDA (1) 3,577 1,444 220 5,241
Depreciation 191 54 13 258
Goodwill amortization 1,148 166 9 1,323
--------------- ------------- -------------- ------------- -------------
Operating income $ 2,238 $1,224 $ 199 $ 3,660
=============== ============= ============== ============= =============
Total assets $126,173 $17,346 $6,154 $ 19,478 $169,151
Capital expenditures $ 221 $ $ $ 499 $720
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Segment Information - (Continued)
Three Months Ended Information Professional Commercial
June 30, 2000 Technology Engineering Services Corporate Total
--------------- ------------- -------------- ------------- -------------
Revenue $58,890 $10,024 $7,076 $ $75,990
Operating expenses 53,971 9,474 6,850 70,295
--------------- ------------- -------------- ------------- -------------
EBITDA (1) 4,919 550 226 5,695
Depreciation 236 65 12 313
Goodwill amortization 1,382 203 17 1,602
--------------- ------------- -------------- ------------- -------------
Operating income $ 3,301 $ 282 $ 197 $ $ 3,780
=============== ============= ============== ============= =============
Total assets $168,167 $17,641 $6,482 $13,317 $205,606
Capital expenditures $ 217 $ 60 $ 7 $ 213 $ 505
<FN>
(1) EBITDA consists of earnings before interest income, interest expense, other
non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of a company's
performance or to cash flows from operating activities as a measure of
liquidity.
</FN>
7. Recent Accounting Pronouncements
On June 29, 2001, the Financial Accounting Standard Board (FASB) approved for
issuance Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. Major provisions of
these Statements are as follows: all business combinations initiated after June
30, 2001 must use the purchase method of accounting; the pooling of interest
method of accounting is prohibited except for transactions initiated before July
1, 2001; intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights or
are separable from the acquired entity and can be sold, transferred, licensed,
rented or exchanged, either individually or as part of a related contract, asset
or liability; goodwill and intangible assets with indefinite lives are not
amortized but are tested for impairment annually, except in certain
circumstances, and whenever there is an impairment indicator; all acquired
goodwill must be assigned to reporting units for purposes of impairment testing
and segment reporting; effective January 1, 2002, goodwill will no longer be
subject to amortization.
Upon adoption of SFAS 142, on January 1, 2002, the Company will no longer
amortize goodwill, thereby eliminating annual goodwill amortization of
approximately $5.7 million, based on anticipated amortization for 2002.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other Company reports and public
filings are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned that such forward-looking
statements, which may be identified by words such as "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," and similar
expressions, are only predictions and are subject to risks and uncertainties
that could cause the Company's actual results and financial position to differ
materially. Such risks and uncertainties include, without limitation: (i)
unemployment and general economic conditions associated with the provision of
information technology and engineering services and solutions and placement of
temporary staffing personnel; (ii) the Company's ability to continue to attract,
train and retain personnel qualified to meet the requirements of its clients;
(iii) the Company's ability to identify appropriate acquisition candidates,
complete such acquisitions and successfully integrate acquired businesses; (iv)
uncertainties regarding pro forma financial information and the underlying
assumptions relating to acquisitions and acquired businesses; (v) uncertainties
regarding amounts of deferred consideration and earnout payments to become
payable to former shareholders of acquired businesses; (vi) possible adverse
effects on the market price of the Company's Common Stock due to the resale into
the market of significant amounts of Common Stock; (vii) the potential adverse
effect a decrease in the trading price of the Company's Common Stock would have
upon the Company's ability to acquire businesses through the issuance of its
securities; (viii) the Company's ability to obtain financing on satisfactory
terms; (ix) the reliance of the Company upon the continued service of its
executive officers; (x) the Company's ability to remain competitive in the
markets which it serves; (xi) the Company's ability to maintain its unemployment
insurance premiums and workers compensation premiums; (xii) the risk of claims
being made against the Company associated with providing temporary staffing
services; (xiii) the Company's ability to manage significant amounts of
information, and periodically expand and upgrade its information processing
capabilities; (xiv) the Company's ability to remain in compliance with federal
and state wage and hour laws and regulations; (xv) predictions as to the future
need for the Company's services; (xvi) uncertainties relating to the allocation
of costs and expenses to each of the Company's operating segments; and (xvii)
other economic, competitive and governmental factors affecting the Company's
operations, markets, products and services. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publicly release the results
of any revision of these forward-looking statements to reflect these ends or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
14
<page>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview
RCM Technologies is a premier provider of business and technology solutions
designed to enhance and maximize the performance of its customers through the
adaptation and deployment of advanced information and engineering technologies.
RCM is an innovative leader in the design, development and delivery of
e-Business, Enterprise Management and Application Integration, Supply Chain and
Engineering services to multiple industries. RCM's offices are located in major
metropolitan centers throughout North America. The Company has grown its
information technology competencies in the areas of resource augmentation,
e-business, Supply Chain Management, Enterprise Application Integration ("EIA"),
network and infrastructure support and knowledge management. RCM's engineering
expertise is in the form of technical design, field engineering, field support,
procedures development and project and program management. The Company provides
its services to clients in banking and finance, healthcare, insurance,
pharmaceutical, telecommunications, utility, technology, manufacturing and
distribution and government sectors. The Company believes that the breadth of
services it can provide fosters long-term client relationships, affords
cross-selling opportunities and minimizes the Company's dependence on any single
technology or industry sector.
RCM sells and delivers its services through a network of branch offices located
in selected regions throughout North America. The Company has executed a
regional strategy to better leverage its consulting services offering. The
Company has also implemented a reorganization of its Solutions practices to
centralize management oversight and to expand the sales and marketing of those
services.
Many of the Company's clients are facing challenging economic times. This is
creating uncertainty in their ability to pursue technology projects which had
previously been considered a competitive imperative. Many clients are laying off
their own permanent staff and reducing the demand for consulting services in
attempts to maintain profitability. This has had a direct impact on RCM's
revenues.
Most companies have recognized the importance of the Internet and information
management technologies to competing in today's business climate. However, the
recessionary attitudes have curtailed companies motivation for rapid adoption of
many technological enhancements. The process of designing, developing and
implementing software solutions has become increasingly complex. Companies today
are focused on return on investment analysis in prioritizing the initiatives
they undertake. This has had the effect of delaying or totally negating the
spending on many emerging new solutions which were formally anticipated.
Nonetheless, IT managers must integrate and manage computing environments
consisting of multiple computing platforms, operating systems, databases and
networking protocols, and must implement packaged software applications to
support existing business objectives. Companies also need to continually keep
pace with new developments, which often render existing equipment and internal
skills obsolete. Consequently, business drivers cause IT managers to support
increasingly complex systems and applications of significant strategic value,
while working under budgetary, personnel and expertise constraints. This has
given rise to increasing demand for outsourcing. Clients are, more than ever
before, evaluating the potential for outsourcing business critical applications
and entire business functions. The Company is positioned to take advantage of
this accelerating trend.
The Company presently realizes revenues from client engagements that range from
the placement of contract and temporary technical consultants to project
assignments that entail the delivery of end to end solutions. These services are
primarily provided to the client at hourly rates that are established for each
of the Company's consultants, based upon their skill level and experience and
the type of work performed. The Company also provides project management and
consulting work which are billed either by agreed upon fee or hourly rates, or a
combination of both. The billing rates and profit margins for project management
and solution work are higher than those for professional services. The Company
is currently working to expand its sales of higher margin solution and project
management services.
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
A summary of operating results for the six months ended June 30, 2001 and 2000
is as follows (in thousands, except for earnings per share data):
2001 2000
--------------------- --------------------
% of % of
Amount Revenue Amount Revenue
-------- -------- -------- -------
Revenues $123,020 100.0% $150,935 100.0%
Cost of services 88,470 71.9 112,292 74.4
-------- ---- --------- ----
Gross profit 34,550 28.1 38,643 25.6
-------- ---- --------- ----
Selling, general and administrative 23,680 19.3 27,965 18.5
Depreciation 494 .4 591 .4
-------- ------ --------- ------
24,174 19.7 28,556 18.9
-------- ---- --------- ----
Operating income 10,376 8.4 10,087 6.7
Other expense ( 1,305 ) ( 1.1) ( 1,817) ( 1.2 )
------- --- -------- ---
Income before income taxes
and goodwill amortization 9,070 7.4 8,270 5.5
Income taxes 3,751 3.0 3,296 2.2
-------- --- --------- ---
Income before goodwill amortization 5,319 4.4 4,974 3.3
Goodwill amortization, net of income tax benefits 2,816 2.4 2,576 1.7
-------- --- --------- ---
Net income $ 2,503 2.0% $ 2,398 1.6%
======== === ========= ===
2001 2000
---------- ---------
Earnings per share:
Basic:
Income before goodwill amortization $.52 $.47
Goodwill amortization .28 .24
----- -----
Net income $.24 $.23
==== ====
Diluted:
Income before goodwill amortization $.51 $.46
Goodwill amortization .28 .24
----- -----
Net income $.23 $.22
==== ====
Revenues. Revenues decreased 18.5%, or $27.9 million, for the six months ended
June 30, 2001 as compared to the same period in the prior year (the "comparable
prior year period"). Revenue decline was primarily attributable to softness in
the Information Technology ("IT") sector.
Cost of Services. Cost of services decreased 21.2%, or $23.8 million, for the
six months ended June 30, 2001 as compared to the comparable prior year period.
This decrease was primarily due to a decrease in salaries and compensation
associated with decreased revenues experienced during the six months ended June
30, 2001. Cost of services as a percentage of revenues decreased to 71.9% for
the six months ended June 30, 2001 from 74.4% for the comparable prior year
period. This decline was primarily attributable to continuing efforts by the
Company to seek higher margin business.
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Six Months Ended June 30, 2001 Compared to Six Months Ended
June 30, 2000 - (Continued)
Selling, General and Administrative. Selling, general and administrative
expenses decreased 15.3%, or $4.3 million, for the six months ended June 30,
2001 as compared to the comparable prior year period. This decrease was
primarily attributable to a reduction in revenues, a corresponding reduction in
related variable costs, and cost cutting initiatives. Due to an economic
slowdown, the Company experienced, during the six months ended June 30, 2001,
bad debt expense of approximately $1.1 million, which was $500,000 in excess of
the amount in the comparative prior period.
Depreciation. Depreciation decreased 16.4%, or $97,000, for the six months ended
June 30, 2001 as compared to the comparable prior year period. This decrease was
primarily due to the write down of certain fixed assets to net realizable value
in the fiscal year ended December 31, 2000.
Other Expense. Other expense consists principally of interest expense, net of
interest income. For the six months ended June 30, 2001, actual interest expense
of $1.5 million was offset by $205,000 of interest income, which was earned from
the investment in interest bearing deposits. Interest expense, net decreased
$407,000 for the six months ended June 30, 2001 as compared to the comparable
prior year period. This decrease was primarily due to the increased cash derived
from operating activities which was used to reduce interest bearing debt.
Income Tax. Income tax expense increased 13.8%, or $455,000, for the six months
ended June 30, 2001 as compared to the comparable prior year period. This
increase was attributable to a higher level of income before taxes and goodwill
amortization for the six months ended June 30, 2001 compared to the comparable
prior year period.
Goodwill Amortization. Goodwill amortization for the six months ended June 30,
2001 and 2000 was net of income tax benefit of $550,000 and $543,000,
respectively. Goodwill increased 9.3%, or $240,000 for the six months ended June
30, 2001 as compared to the comparable prior year period. The increase was due
primarily to the acceleration of goodwill amortization related to the final
payment on a certain acquisition.
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
A summary of operating results for the three months ended June 30, 2001 and 2000
is as follows (in thousands, except for earnings per share data):
2001 2000
------------------------ -----------------------
% of % of
Amount Revenue Amount Revenue
-------- -------- -------- -------
Revenues $58,366 100.0% $ 75,990 100.0%
Cost of services 41,888 71.8 56,386 74.2
------ ---- --------- ----
Gross profit 16,478 28.2 19,604 25.8
------ ---- --------- ----
Selling, general and administrative 11,237 19.3 13,909 18.3
Depreciation 258 .4 313
-------- ----- ---
.4
11,495 19.7 14,222 18.7
------ ---- --------- ----
Operating income 4,983 8.5 5,382 7.1
Other expense ( 568) 1.0 ( 971) ( 1.3)
--------- --- -------- ----
Income before income taxes
and goodwill amortization 4,415 7.6 4,411 5.8
Income taxes 1,894 3.3 1,759 2.3
-------- --- --------- ----
Income before goodwill amortization 2,521 4.3 2,652 3.5
Goodwill amortization, net of income tax benefits 1,169 2.0 1,312 1.7
----- --- --------- ----
Net income $ 1,352 2.3% $ 1,340 1.8%
======== === ========= ====
2001 2000
--------- --------
Earnings per share:
Basic:
Income before goodwill amortization $.26 $.25
Goodwill amortization .13 .12
--- -----
Net income $.13 $.13
==== ====
Diluted:
Income before goodwill amortization $.25 $.25
Goodwill amortization .12 .12
--- -----
Net income $.13 $.13
==== ====
Revenues. Revenues decreased 23.2%, or $17.6 million, for the three months ended
June 30, 2001 as compared to the same period in the prior year (the "comparable
prior year period"). Revenue decline was primarily attributable to softness in
the Information Technology ("IT") sector.
Cost of Services. Cost of services decreased 25.7%, or $14.5 million, for the
three months ended June 30, 2001 as compared to the comparable prior year
period. This decrease was primarily due to a decrease in salaries and
compensation associated with decreased revenues experienced during the three
months ended June 30, 2001. Cost of services as a percentage of revenues
decreased to 71.8% for the three months ended June 30, 2001 from 74.2% for the
comparable prior year period. This decline was primarily attributable to
continuing efforts by the Company to seek higher margin business.
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended June 30, 2001 Compared to
Three Months Ended June 30, 2000 - (Continued)
Selling, General and Administrative. Selling, general and administrative
expenses decreased 19.2%, or $2.7 million, for the three months ended June 30,
2001 as compared to the comparable prior year period. This decrease was
primarily attributable to a reduction in revenues and a corresponding reduction
in the related variable costs and cost cutting initiatives. Due to an
economic slowdown, the Company experienced, during the three months ended June
30, 2001, bad debt expense of approximately $557,000, which was $150,000 in
excess of the amount in the comparative prior period.
Depreciation. Depreciation decreased 17.6%, or $55,000, for the three months
ended June 30, 2001 as compared to the comparable prior year period. This
decrease was primarily due to the write down of certain fixed assets to net
realizable value in the fiscal year ended December 31, 2000.
Other Expense. Other expense consists principally of interest expense, net of
interest income. For the three months ended June 30, 2001, actual interest
expense of $669,700 was offset by $96,000 of interest income, which was earned
from the investment in interest bearing deposits. Interest expense, net
decreased $390,000 for the three months ended June 30, 2001 as compared to the
comparable prior year period. This increase was primarily due to the increased
cash derived from operating activities which was used to reduce interest bearing
debt.
Income Tax. Income tax expense increased 7.7%, or $135,000, for the three months
ended June 30, 2001 as compared to the comparable prior year period. This
increase was attributable to an increase in taxable income derived from non U.S.
sources for the three months ended June 30, 2001 compared to the comparable
prior year period.
Goodwill Amortization. Goodwill amortization for the three months ended June 30,
2001 and 2000 was net of income tax benefit of $154,000 and $290,000,
respectively. Goodwill decreased 10.9%, or $143,000 for the three months ended
June 30, 2001 as compared to the comparable prior year period. The decrease was
due to the write-down of Intangible Assets prior to December 31, 2000 which was
offset by the amortization of earnout payments subsequent to December 2000.
Liquidity and Capital Resources
Operating activities provided $21.5 million of cash for the six months ended
June 30, 2001 as compared to operating activities providing $11.1 million of
cash for the six months ended June 30, 2000. The increase in cash provided by
operating activities was primarily attributable to decreases in accounts
receivable, income tax refund receivable, and prepaid expenses and other current
assets, and increases in accounts payable and accrued expenses and accrued
payroll, which was partially offset by decreases in accrued payroll, payroll and
withheld taxes and income taxes payable, and deferred tax assets and increased
levels of depreciation and amortization.
Investing activities used $5.4 million for the six months ended June 30, 2001 as
compared to $20.4 million for the comparable period. The reduction in the use of
cash for investing activities for the six months ended June 30, 2001 as compared
to the comparable period was primarily attributable to a reduction in
acquisition and deferred consideration payments.
Financing activities (principally debt reduction activities) used $12.3 million
for the six months ended June 30, 2001 as compared to financing activities
providing $9.3 million for the comparable period.
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources - (Continued)
The Company and its subsidiaries are parties to an agreement with Mellon Bank
N.A., administrative agent for a syndicate of banks, which provides for a $75.0
million Revolving Credit Facility (the "Revolving Credit Facility"). The
Revolving Credit Facility was amended on September 18, 2000. Borrowings under
the Revolving Credit Facility bear interest at one of two alternative rates, as
selected by the Company. These alternatives are: LIBOR (London Interbank Offered
Rate), plus applicable margin, or the agent bank's prime rate.
Borrowings under the Revolving Credit Facility are collateralized by all of the
assets of the Company and its subsidiaries and a pledge of all of the stock of
its subsidiaries. The Revolving Credit Facility also contains various financial
and non-financial covenants, such as restrictions on the Company's ability to
pay dividends. The Revolving Credit Facility expires August 2002. The weighted
average interest rates at June 30, 2001 and December 31, 2000 were 5.69% and
8.33%, respectively. The amounts outstanding under the Revolving Credit Facility
at June 30, 2001 and December 31, 2000 were $34.9 million and $47.3 million,
respectively.
The Company anticipates that its primary uses of capital in future periods will
be for working capital purposes. Funding for any future acquisitions will be
derived from one or more of the Revolving Credit Facility, funds generated
through operations, or future financing transactions.
The Company's business strategy is to achieve growth both internally through
operations and externally through strategic acquisitions. The Company from time
to time engages in discussions with potential acquisition candidates. As the
size of the Company and its financial resources increase, however, acquisition
opportunities requiring significant commitments of capital may arise. In order
to pursue such opportunities, the Company may be required to incur debt or issue
potentially dilutive securities in the future. No assurance can be given as to
the Company's future acquisition and expansion opportunities or how such
opportunities will be financed.
The Company does not currently have material commitments for capital
expenditures and does not anticipate entering into any such commitments during
the next twelve months. The Company's current commitments consist primarily of
lease obligations for office space. The Company believes that its capital
resources are sufficient to meet its present obligations and those to be
incurred in the normal course of business for the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's exposure to market risk
since its Annual Report on Form 10-K for the year ended December 31, 2000.
20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In its Annual Report on Form 10-K for the year ended December 31, 2001, the
Company disclosed that on November 6, 1998, two former officers filed suit
against the Company alleging wrongful termination of their employment, failure
to make severance payments and wrongful conduct by the Company in connection
with the grant and ultimate divestiture of Stock Options to the plaintiffs. The
complaint also alleges the Company wrongfully limited the number of shares of
Company stock that could be sold by the plaintiffs and makes various other
claims including a claim for punitive damages. In the suit, the plaintiffs seek
damages of approximately $480,000 plus other unspecified amounts. The claims
relating to wrongful termination of employment and wrongful conduct by the
Company in connection with the grant of Stock Options to the plaintiffs have
been submitted to binding arbitration; closing arguments in that proceeding have
been held and a decision by the arbitrator is expected before the end of the
third quarter of 2001. In addition, the court recently denied cross-motions for
summary judgment with respect to plaintiff's claims as to the Company allegedly
wrongful limiting the number of shares the plaintiffs could sell. The Company
expects discovery in the case to continue. Management believes the suit is
without merit and has defended the claims vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on June 21, 2001.
The following actions were taken:
1.) The following directors were elected to serve as Class B
directors on the Board of Directors, and shall serve terms
expiring at the Company's Annual Meeting in 2004, and until
their respective successors shall be elected and qualified.
Tabulated voting results were as follows:
Robert B. Kerr (Class B) (For 9,644,160; Withheld 487,050)
Woodrow B. Moats, Jr. (Class B) (For 9,644,160; Withheld 487,050)
Each of the Class A directors of the Company, Norman Berson
and Brian Delle Donne, will continue to serve on the Board of
Directors for a term expiring at the Company's Annual Meeting
in 2003, and until his successor has been elected and
qualified.
The Class C directors of the Company, Leon Kopyt and Stanton
Remer, will continue to serve on the Board of Directors for a
term expiring at the Company's Annual Meeting in 2002, and
until his successor has been elected and qualified.
2.) Approval of the adoption of the Company's 2001 Employee Stock Purchase Plan.
Votes For - 9,261,625; Votes Against - 547,914; Abstentions - 321,671
3.) Approval of the adoption of the Company's Nonqualified Deferred Compensation Plan.
Votes For - 9,035,856; Votes Against -766,642; Abstentions - 328,712
4.) Approval of Grant Thornton LLP as the independent auditing
firm for the Company for the fiscal year ending December 31,
2001.
Votes For - 9,646,600; Votes Against - 464,598; Abstentions - 20,012
21
<page>
PART II
OTHER INFORMATION - (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
22
RCM TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RCM Technologies, Inc.
Date: July 31, 2001 By:/s/ Stanton Remer
--- ------- -----
Stanton Remer
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the Registrant)
23