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 September 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 common stock, as
of the latest practicable date.
Common Stock, $0.05 par value, 10,539,424 shares outstanding as
of October 30, 2001.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (Unaudited)
and December 31, 2000 3
Unaudited Consolidated Statements of Operations and Comprehensive Income
for the Nine-Month Periods Ended September 30, 2001 and 2000 5
Unaudited Consolidated Statements of Operations and Comprehensive Income
for the Three-Month Periods Ended September 30, 2001 and 2000 6
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Nine-Month Period Ended September 30, 2001 7
Unaudited Consolidated Statements of Cash Flows for the Nine-
Month Periods Ended September 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 15
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and December 31, 2000
ASSETS
September 30, December 31,
2001 2000
--------------- ---------------
(Unaudited)
Current assets
Cash and cash equivalents $ 7,730,524 $ 3,170,658
Accounts receivable, net of allowance for doubtful accounts
of $1,890,000 and $1,875,000, respectively 48,970,674 64,032,564
Income tax refund receivable 1,963,149 7,417,258
Prepaid expenses and other current assets 2,608,551 3,161,235
Deferred tax assets 1,485,009 1,449,518
--------------- ---------------
Total current assets 62,757,907 79,231,233
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 10,850,808 10,238,480
Less: accumulated depreciation and amortization 3,961,034 4,079,857
--------------- ---------------
6,889,774 6,158,623
--------------- ---------------
Other assets
Deposits 184,463 223,512
Intangible assets, net of accumulated amortization
of $12,694,000 and $7,878,000, respectively
Goodwill 95,515,271 88,655,460
--------------- ---------------
95,699,734 88,878,972
--------------- ---------------
Total assets $165,347,415 $174,268,828
=============== ===============
3
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
September 30, 2001 and December 31, 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2001 2000
--------------- ---------------
(Unaudited)
Current liabilities
Note payable $37,400,000 $
Accounts payable and accrued expenses 13,088,906 13,610,547
Accrued payroll 8,127,595 7,691,258
Payroll and withheld taxes 719,714 1,311,828
Income taxes payable 108,996
--------------- ---------------
Total current liabilities 59,336,215 22,722,629
--------------- ---------------
Long-term liabilities
Note payable 47,300,000
Income taxes payable 727,957 2,183,873
--------------- ---------------
727,957 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 issued and outstanding, respectively 526,971 524,982
Accumulated other comprehensive loss ( 379,317) ( 233,631)
Additional paid-in capital 93,618,838 93,516,080
Retained earnings 11,516,751 8,254,895
--------------- ---------------
105,283,243 102,062,326
--------------- ---------------
Total liabilities and shareholders' equity $165,347,415 $174,268,828
=============== ===============
4
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
2001 2000
---------------- ---------------
Revenues $176,070,965 $224,591,729
Cost of services 126,872,351 165,725,034
---------------- ---------------
Gross profit 49,198,614 58,866,695
---------------- ---------------
Operating costs and expenses
Selling, general and administrative 33,763,320 41,587,387
Depreciation 799,200 889,282
Amortization 4,815,996 4,282,124
Unusual items
Restructuring charge 36,706,712
Non recurring 2,100,000
---------------- ---------------
39,378,516 85,565,505
---------------- ---------------
Operating income (loss) 9,820,098 ( 26,698,810)
---------------- ---------------
Other (expenses) income
Interest expense, net of interest income ( 1,828,386) ( 2,846,213)
Gain (loss) on foreign currency transactions 15,023 ( 4,087)
---------------- ---------------
( 1,813,363) ( 2,850,300)
---------------- ---------------
Income (loss) before income taxes 8,006,735 ( 29,549,110)
Income taxes (credit) 4,744,879 ( 5,530,461)
---------------- ---------------
Net income (loss) 3,261,856 ( 24,018,649)
Other comprehensive loss
Foreign currency translation adjustment ( 145,686) ( 211,897)
---------------- ---------------
Comprehensive income (loss) $ 3,116,170 ( $24,230,546)
================ ===============
Basic earnings (loss) per share $.31 ($2.29)
==== =====
Weighted average number of common
shares outstanding 10,513,054 10,499,188
========== ==========
Diluted earnings (loss) per share $.30 ($2.29)
==== =====
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to
options of 186,298 and 0 in 2001 and 2000, respectively) 10,699,352 10,499,188
========== ==========
5
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended September 30, 2001 and 2000
(Unaudited)
2001 2000
--------------- --------------
Revenues $53,051,269 $73,656,343
Cost of services 38,402,675 53,432,537
--------------- --------------
Gross profit 14,648,594 20,223,806
--------------- --------------
Operating costs and expenses
Selling, general and administrative 10,082,933 13,622,483
Depreciation 305,530 298,030
Amortization 1,449,442 1,163,357
Unusual items
Restructuring charge 36,706,712
Non recurring 2,100,000
--------------- --------------
11,837,905 53,890,582
--------------- --------------
Operating income (loss) 2,810,689 ( 33,666,776)
--------------- --------------
Other (expenses) income
Interest expense, net of interest income ( 512,757) ( 1,033,118)
Gain (loss) on foreign currency transactions 4,874 ( 31)
--------------- --------------
( 507,883) ( 1,033,149)
--------------- --------------
Income (loss) before income taxes 2,302,806 ( 34,699,925)
Income taxes (credit) 1,544,010 ( 8,282,871)
--------------- --------------
Net income (loss) 758,796 ( 26,417,054)
Other comprehensive income (loss)
Foreign currency translation adjustment 82,287 ( 42,424)
--------------- --------------
Comprehensive income (loss) $ 841,083 ( $26,459,478)
=============== ==============
Basic earnings (loss) per share $.07 ($2.52)
==== =====
Weighted average number of common
shares outstanding 10,539,675 10,499,651
========== ==========
Diluted earnings (loss) per share $.07 ($2.52)
==== =====
Weighted average number of common
and common equivalent shares outstanding and common equivalent
shares outstanding (includes dilutive securities relating to
options of 330,000 and 0 in 2001 and 2000, respectively) 10,869,675 10,499,651
========== ==========
6
The accompanying notes are an integral part of these financial statements.
<page>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 2001
(Unaudited)
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Retained
------------
Shares Amount Income (Loss) Capital Earnings Total
------ ------ ------------- ------- -------- -----
Balance, January 1, 2001 10,499,651 $524,982 ($233,631) $93,516,080 $8,254,895 $102,062,326
Employee Stock Purchase Plan 39,773 1,989 102,758
104,747
Translation adjustment (145,686)
(145,686)
Net income _________ ________ _________ __________ 3,261,856 3,261,856
------------- --------------
Balance, September 30, 2001 10,539,424 $526,971 ($379,317) $93,618,838 $11,516,751 $105,283,243
========== ======== ========== =========== =========== ============
7
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2001 and 2000
(Unaudited)
2001 2000
--------------- --------------
Cash flows from operating activities:
Net income (loss) $3,261,856 ( $24,018,649)
--------------- --------------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 5,615,196 5,171,406
Provision for losses on accounts receivable 15,000 752,000
Restructuring and unusual charge 38,806,712
Changes in assets and liabilities:
Accounts receivable 15,046,890 ( 4,319,877)
Income tax refund receivable 4,481,633 ( 5,281,241)
Deferred tax asset ( 35,491) ( 2,169,233)
Prepaid expenses and other current assets 552,684 ( 2,005,121)
Accounts payable and accrued expenses ( 3,511,834) 7,695,249
Accrued payroll 436,337 4,499,311
Payroll and withheld taxes ( 592,114) 323,606
Income taxes payable ( 592,436) 496,870
--------------- --------------
Total adjustments 21,415,865 43,969,682
--------------- --------------
Net cash provided by operating activities 24,677,721 19,951,033
--------------- --------------
8
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2001 and 2000 - (Continued)
(Unaudited)
2001 2000
--------------- --------------
Cash flows from investing activities:
Property and equipment acquired ( $1,620,002) ( $1,461,122)
Decrease in deposits 39,049 6,720
Purchase of acquired companies including
contingent consideration, net of cash acquired ( 8,595,963) ( 21,105,140)
--------------- --------------
Net cash used in investing activities ( 10,176,916) ( 22,559,542)
--------------- --------------
Cash flows from financing activities:
Employee Stock Purchase Plan 104,747
Exercise of stock options 42,950
Borrowings (repayments) of note payable ( 9,900,000) 5,400,000
--------------- --------------
Net cash provided by (used in) financing activities ( 9,795,253) 5,442,950
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents ( 145,686) ( 211,897)
--------------- --------------
Increase in cash and cash equivalents 4,559,866 2,622,544
Cash and cash equivalents at beginning of period 3,170,658 4,025,808
--------------- --------------
Cash and cash equivalents at end of period $7,730,524 $6,648,352
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $1,918,626 $3,079,129
Income taxes $2,399,761 $2,958,615
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 nine months ended September 30, 2001 are not necessarily
indicative of the results to be expected for the full year.
2. Unusual Items
In the third quarter of 2000, the Company recorded the following unusual
items:
In Millions
Impairment of goodwill $ 35.3
Restructuring charge 1.4
Other non recurring charges 2.1
-------
$38.8
The income before income taxes, net income and earnings per share on a
diluted basis, exclusive of common stock equivalents, for the nine months
ended September 30, 2000 without the unusual items and its related tax
effect would have been $9.3 million, $4.6 million and $.44 per share,
respectively.
The income before income taxes, net income and earnings per share on a
diluted basis, exclusive of common stock equivalents, for the three months
ended September 30, 2000 without the unusual items and their related tax
effect would have been $4.1 million, $2.2 million and $.21 per share,
respectively.
Impairment of Goodwill
During the third quarter of 2000, the Company performed an impairment
review of goodwill in accordance with the requirements of SFAS No. 121.
This review indicated that there was an impairment of value, which
resulted in $35.3 million charge to expense in order to properly reflect
the appropriate carrying value of goodwill.
Restructuring Charge
The restructuring charge during 2000 of $1.4 million consists of
expenses associated with the consolidation of certain offices
principally lease obligations for vacated offices as well as a write
down of leasehold improvements and office equipment to its net
realizable value for closed offices.
Other non recurring charges
The non recurring charge during 2000 of $2.1 million consists of
expenses associated with integration of employee benefit plans and
vacation plans which were assumed in connection with the Company's
previous completed acquisitions.
10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. 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 September 30, 2001 and December
31, 2000 was $95,515,000 and $88,655,000, respectively, and is being
amortized on a straight-line method over twenty years. Amortization expense
for the nine months ended September 30, 2001 and 2000 was $4,816,000 and
$4,282,000, respectively. Amortization expense for the three months ended
September 30, 2001 and 2000 was $1,449,000 and $1,163,000, 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.
4. Note Payable
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
in August 2002. Management of the Company anticipates commencing
negotiations for renewal or replacement of the Revolving Credit Facility in
early 2002. The weighted average interest rates at September 30, 2001 and
December 31, 2000 were 5.18% and 8.33%, respectively. The amounts
outstanding under the Revolving Credit Facility at September 30, 2001 and
December 31, 2000 were $37.4 million and $47.3 million, respectively.
5. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- --------------- -------------- --------------
Interest expense ($2,095,981) ($3,057,579) ($ 575,206) ($1,129,746)
Interest income
267,595 211,366 62,449 96,628
-------------- --------------- -------------- --------------
($1,828,386) ($2,846,213) ($ 512,757) ($1,033,118)
============== =============== ============== ==============
11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Computation of Earnings Per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding for the periods presented. Diluted earnings per share is
based on the weighted average number of common shares outstanding and
includes the dilutive effect of stock options using the treasury stock
method. Dilutive securities have not been included in the weighted average
shares used for the calculation of earnings per share in periods of net
loss because the effect of such securities would be anti-dilutive.
7. 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):
Nine Months Ended Information Professional Commercial
September 30, 2001 Technology Engineering Services Corporate Total
--------------- -------------- -------------- ------------- -------------
Revenue $126,395 $31,684 $17,991 $176,070
Operating expenses (1) 115,634 27,687 17,314 160,635
------- ------ ------ -------
EBITDA (1) (2) 10,761 3,997 677 15,435
Depreciation 580 181 38 799
Goodwill amortization 4,292 499 25 4,816
----- --- -- -----
Operating income (1) $5,889 $3,317 $614 $9,820
====== ====== ==== ======
Total assets $123,360 $17,767 $6,359 $17,861 $165,347
Capital expenditures $421 $173 $1,026 $1,620
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Information - Continued
Nine Months Ended Information Professional Commercial
September 30, 2000 Technology Engineering Services Corporate Total
--------------- -------------- -------------- ------------- -------------
Revenue $174,380 $29,629 $20,583 $224,592
Operating expenses (1) 159,685 27,933 19,695 207,313
------- ------ ------ -------
EBITDA (1) (2) 14,695 1,696 888 17,279
Depreciation 653 214 22 889
Goodwill amortization 3,743 504 35 4,282
----- ----- ---- -----
Operating income (1) $ 10,299 $ 978 $ 831 $ 12,108
======== ===== ===== ========
Total assets $133,329 $17,641 $6,482 $21,937 $179,389
Capital expenditures $793 $165 $45 $458 $1,461
Three Months Ended Information Professional Commercial
September 30, 2001 Technology Engineering Services Corporate Total
--------------- -------------- -------------- -------------- ------------
Revenue $36,053 $11,435 $5,563 $53,051
Operating expenses (1) 33,663 9,481 5,341 48,485
------ ----- ----- ------
EBITDA (1) (2) 2,390 1,954 222 4,566
Depreciation 210 80 16 306
Goodwill amortization 1,270 171 8 1,449
----- --- - -----
Operating income (1) $910 $1,703 $198 $2,811
==== ====== ==== ======
Total assets $123,360 $17,767 $6,359 $17,861 $165,347
Capital expenditures $42 $173 $301 $516
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Information - Continued
Three Months Ended Information Professional Commercial
September 30, 2000 Technology Engineering Services Corporate Total
--------------- -------------- -------------- -------------- ------------
Revenue $56,668 $ 9,769 $ 7,219 $73,656
Operating expenses (1) 50,907 9,321 6,827 67,055
------ ----- ----- ------
EBITDA (1) (2) 5,761 448 392 6,601
Depreciation 215 81 2 298
Goodwill amortization 1,020 135 8 1,163
-- ----- --- --- ------ - -- -----
Operating income (1) $ 4,526 $232 $382 $5,140
======= ==== ==== ======
Total assets $133,329 $17,641 $6,482 $21,937 $179,389
Capital expenditures $196 $90 $30 $255 $571
<FN>
(1) Operating expenses, EBITDA and operating income are exclusive of unusual
items during 2000 in the amount of $38.8 million (see note 2).
(2) 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>
8. 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.
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2. 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.
15
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 technology and engineering
services. RCM is an innovative leader in the design, development and delivery of
these services to various industries. RCM's offices are located in major
metropolitan centers throughout North America. The Company provides a
diversified and extensive range of service offerings and deliverables. Its
portfolio of Information Technology services includes e-Business, Enterprise
Management, Enterprise Application Integration and Supply Chain. RCM's
Engineering services focus on Engineering Design, Technical Support, and Project
Management and Implementation. The Company provides its services to clients in
banking and finance, healthcare, insurance, aerospace, pharmaceutical,
telecommunications, utility, technology, manufacturing and distribution and
government sectors. The Company believes that the breadth of services 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
uncertain economic environment 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 increasingly
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.
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
A summary of operating results for the nine months ended September 30, 2001 and
2000 is as follows (in thousands, except for earnings per share data):
2001 2000
------------------------- ------------------------
% of % of
Amount Revenue Amount Revenue
-------- -------- -------- -------
Revenues $ 176,071 100.0% $ 224,592 100.0%
Cost of services 126,872 72.1 165,725 73.8
---------- ---- ---------- ----
Gross profit 49,199 27.9 58,867 26.2
---------- ---- ---------- ----
Selling, general and administrative 33,763 19.2 41,587 18.5
Depreciation 799 .4 889 .4
---------- ------ ---------- ------
34,562 19.6 42,476 18.9
---------- ---- ---------- ----
Income before other (expense) income,
income taxes, goodwill amortization, and
unusual charges 14,637 8.3 16,391 7.3
Other expense ( 1,814 ) ( 1.0) ( 2,850) ( 1.3)
--------- ---- --------- ----
Income before income taxes
and goodwill amortization 12,823 7.3 13,541 6.0
Income taxes 5,361 3.0 5,583 2.5
---------- --- ---------- ----
Income before goodwill amortization 7,462 4.3 7,958 3.5
Goodwill amortization, net of income tax benefits ( 4,200 ) ( 2.4) ( 3,360) ( 1.5)
Restructuring and unusual charges, net of tax
income tax benefits x.x ( 28,617) (12.7)
---------- --- --------- ----
Net income (loss) $ 3,262 1.9% ($ 24,019) (10.7%)
========== === ========= =====
2001 2000
--------- --------
Earnings per share:
Basic:
Income before goodwill amortization $ .71 $ .76
Goodwill amortization ( .40 ) ( .32)
Restructuring and unusual charges ( 2.73)
------ ------
Net income (loss) $ .31 ($2.29)
====== =====
Diluted:
Income before goodwill amortization $ .69 $ .76
Goodwill amortization ( .39 ) ( .32)
Restructuring and unusual charges ( 2.73)
------ -----
Net income (loss) $ .30 ($2.29)
====== =====
Revenues. Revenues decreased 21.6%, or $48.5 million, for the nine months ended
September 30, 2001 as compared to the same period in the prior year (the
"comparable prior year period"). The revenue decline was primarily attributable
to softness in the Information Technology ("IT") sector.
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000 - (Continued)
Cost of Services. Cost of services decreased 23.4%, or $38.9 million, for the
nine months ended September 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 nine
months ended September 30, 2001. Cost of services as a percentage of revenues
decreased to 72.1% for the nine months ended September 30, 2001 from 73.8% for
the comparable prior year period. This decline was primarily attributable to
continuing efforts by the Company to seek higher margin business.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 18.8%, or $7.8 million, for the nine months ended September
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 nine months ended September 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 10.1%, or $90,000, for the nine months
ended September 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 nine months ended September 30, 2001, actual interest
expense of $2.1 million was offset by $268,000 of interest income, which was
earned from the investment in interest bearing deposits. Interest expense, net
decreased $1.0 million for the nine months ended September 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 decreased 4.0%, or $222,000, for the nine months
ended September 30, 2001 as compared to the comparable prior year period. This
decrease was attributable to a lower level of income before taxes and goodwill
amortization for the nine months ended September 30, 2001 compared to the
comparable prior year period.
Goodwill Amortization. Goodwill amortization for the nine months ended September
30, 2001 and 2000 was net of income tax benefit of $616,000 and $922,000,
respectively. Goodwill amortization, net of income tax benefits increased 25.0%,
or $840,000 for the nine months ended September 30, 2001 as compared to the
comparable prior year period. The increase was due primarily to the shortened
amortization period related to contingent consideration paid on a certain
acquisition.
Restructuring and Non Recurring Charges. In the third quarter of 2000, the
Company recorded an impairment of goodwill in connection with a review of the
carrying value of its goodwill, a restructuring charge associated with the
consolidation of certain offices and certain non recurring items associated with
the integration of employee benefit plans and vacation plans in the amounts of
$35.3 million, $1.4 million and $2.1 million, respectively. Restructuring and
non recurring charges reduced income before the related tax benefits for the
nine months ended September 30, 2000 by $38.8 million and $28.6 million after
the related tax benefits.
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended September 30, 2001 Compared to Three Months
Ended September 30, 2000
A summary of operating results for the three months ended September 30, 2001 and
2000 is as follows (in thousands, except for earnings per share data):
2001 2000
------------------------- ------------------------
% of % of
Amount Revenue Amount Revenue
-------- -------- -------- -------
Revenues $ 53,051 100.0% $ 73,656 100.0%
Cost of services 38,402 72.4 53,433 72.5
-------- ---- --------- ----
Gross profit 14,649 27.6 20,223 27.5
-------- ---- --------- ----
Selling, general and administrative 10,083 19.0 13,622 18.5
Depreciation 306 .6 298 .4
-------- ------ --------- ------
10,389 19.6 13,920 18.9
-------- ---- --------- ----
Income before other expense, income taxes,
goodwill amortization, and unusual charges 4,260 8.0 6,303 8.6
Other (expense) income ( 508 ) 1.0 ( 1,033) 1.4
------- ----- -------- ----
Income before income taxes
and goodwill amortization 3,752 7.0 5,270 7.2
Income taxes 1,609 3.0 2,286 3.1
-------- ----- --------- ----
Income before goodwill amortization 2,143 4.0 2,984 4.1
Goodwill amortization, net of income tax benefits ( 1,384 ) ( 2.6) ( 784) ( 1.1)
Restructuring and unusual charges, net of tax
income tax benefits x.x ( 28,617) (38.9)
-------- --- -------- ----
Net income (loss) $ 759 1.4% ($ 26,417) (35.9%)
======== ===== ======== =====
2001 2000
--------- --------
Earnings per share:
-----
Basic:
Income before goodwill amortization $ .20 $ .28
Goodwill amortization ( .13) ( .07)
Restructuring and unusual charges ( 2.73)
------ -----
Net income (loss) $ .07 ($2.52)
====== =====
Diluted:
Income before goodwill amortization $ .20 $ .28
Goodwill amortization ( .13) ( .07)
Restructuring and unusual charges ( 2.73)
------ ------
Net income (loss) $ .07 ($2.52)
====== =====
Revenues. Revenues decreased 28.0%, or $20.6 million, for the three months ended
September 30, 2001 as compared to the comparable prior year periods. The revenue
decline was primarily attributable to softness in the ("IT") sector.
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended September 30, 2001 Compared to Three Months
Ended September 30, 2000 - (Continued)
Cost of Services. Cost of services decreased 28.1%, or $15.0 million, for the
three months ended September 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 September 30, 2001. Cost of services as a percentage of revenues
decreased to 72.4% for the three months ended September 30, 2001 from 72.5% for
the comparable prior year period. This decline was primarily attributable to
continuing efforts by the Company to seek higher margin business.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 26.0%, or $3.5 million, for the three months ended September
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.
Depreciation. Depreciation increased 2.7%, or $8,000, for the three months ended
September 30, 2001 as compared to the comparable prior year period. This
increase was primarily due to depreciation of equipment related to a corporate
relocation.
Other Expense. Other expense consists principally of interest expense, net of
interest income. For the three months ended September 30, 2001, actual interest
expense of $575,200 was offset by $62,400 of interest income, which was earned
from the investment in interest bearing deposits. Interest expense, net
decreased $520,400 for the three months ended September 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 decreased 29.6%, or $677,000, for the three
months ended September 30, 2001 as compared to the comparable prior year period.
This decrease was attributable to a decrease in taxable income for the three
months ended September 30, 2001 compared to the comparable prior year period.
Goodwill Amortization. Goodwill amortization for the three months ended
September 30, 2001 and 2000 was net of income tax benefit of $65,000 and
$379,000, respectively. Goodwill amortization, net of income tax benefits
increased 76.5%, or $600,000 for the three months ended September 30, 2001 as
compared to the comparable prior year period. The increase was due to the
amortization of earnout payments subsequent to September 30, 2000.
Restructuring and Non Recurring Charges. In the third quarter of 2000, the
Company recorded an impairment of goodwill in connection with a review of the
carrying value of its goodwill, a restructuring charge associated with the
consolidation of certain offices and certain non recurring items associated with
the integration of employee benefit plans and vacation plans in the amounts of
$35.3 million, $1.4 million and $2.1 million, respectively. Restructuring and
non recurring charges reduced income before the related tax benefits for the
three months ended September 30, 2001 by $38.8 million and $28.6 million after
the related tax benefits.
Liquidity and Capital Resources
Operating activities provided $24.7 million of cash for the nine months ended
September 30, 2001 as compared to operating activities providing $20.0 million
of cash for the nine months ended September 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 payroll and withheld
taxes and income taxes payable, and deferred tax assets and increased levels of
depreciation and amortization.
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources - (Continued)
Investing activities used $10.2 million for the nine months ended September 30,
2001 as compared to $22.6 million for the comparable period. The reduction in
the use of cash for investing activities for the nine months ended September 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 $9.8 million
for the nine months ended September 30, 2001 as compared to financing activities
providing $5.4 million for the comparable period.
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"). 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 in August 2002. Management
of the Company anticipates commencing negotiations for renewal or replacement of
the Revolving Credit Facility in early 2002. The weighted average interest rates
at September 30, 2001 and December 31, 2000 were 5.18% and 8.33%, respectively.
The amounts outstanding under the Revolving Credit Facility at September 30,
2001 and December 31, 2000 were $37.4 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.
21
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In its Annual Report on Form 10-K for the year ended December 31, 2000, 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
fourth quarter of 2001. The Company expects discovery in the litigation to
continue. Management believes the suit is without merit and has defended the
claims vigorously.
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: October 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
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