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, 2002 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, 10,598,614 shares outstanding as of October 30, 2002. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION Page Item 1 - Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 2002 (Unaudited) and December 31, 2001 3 Unaudited Consolidated Statements of Income and Comprehensive Income for the Nine-Month Periods Ended September 30, 2002 and 2001 5 Unaudited Consolidated Statements of Income and Comprehensive Income for the Three-Month Periods Ended September 30, 2002 and 2001 7 Unaudited Consolidated Statement of Changes in Shareholders' Equity for the Nine-Month Period Ended September 30, 2002 9 Unaudited Consolidated Statements of Cash Flows for the Nine- Month Periods Ended September 30, 2002 and 2001 10 Notes to Unaudited Consolidated Financial Statements 12 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 28 Item 4 - Controls and Procedures 28 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 29 Item 6 - Exhibits and Reports on Form 8-K 29 Certification 30 Signatures 32 2 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2002 and December 31, 2001 ASSETS September 30, December 31, 2002 2001 --------------- --------------- (Unaudited) Current assets Cash and cash equivalents $ 4,547,403 $ 2,289,743 Accounts receivable, net of allowance for doubtful accounts of $1,601,000 and $1,795,000, respectively 34,759,669 41,174,828 Income tax refund receivable 6,810,093 Prepaid expenses and other current assets 3,076,992 2,968,612 Deferred tax assets 533,201 5,600,000 --------------- --------------- Total current assets 42,917,265 58,843,276 --------------- --------------- Property and equipment, at cost Equipment and leasehold improvements 10,636,150 11,131,750 Less: accumulated depreciation and amortization 4,299,444 4,282,985 --------------- --------------- 6,336,706 6,848,765 --------------- --------------- Other assets Deposits 110,648 175,691 Goodwill, net of accumulated amortization of $10,090,500 and $10,478,600 respectively 66,256,608 62,499,000 Intangible assets, net of accumulated amortization of $206,000 and $190,400 respectively 104,832 120,400 Deferred tax assets 2,668,813 --------------- --------------- 66,472,088 65,463,904 --------------- --------------- Total assets $115,726,059 $131,155,945 =============== =============== 3 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - (CONTINUED) September 30, 2002 and December 31, 2001 LIABILITIES AND SHAREHOLDERS' EQUITY September 30, December 31, 2002 2001 ---------------- --------------- (Unaudited) Current liabilities Note payable $ 9,230,000 $31,500,000 Accounts payable and accrued expenses 7,450,374 8,653,876 Accrued payroll 6,504,449 5,137,336 Payroll and withheld taxes 399,571 375,784 Income taxes payable 3,539,273 2,199,149 ---------------- --------------- Total current liabilities 27,123,667 47,866,145 ---------------- --------------- 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; 10,598,614 and 10,571,761 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively 529,931 528,588 Accumulated other comprehensive loss ( 496,950) ( 484,283) Additional paid-in capital 93,846,137 93,746,569 Accumulated deficit ( 5,276,726) ( 10,501,074) ---------------- --------------- Total shareholders' equity 88,602,392 83,289,800 ---------------- --------------- Total liabilities and shareholders' equity $115,726,059 $131,155,945 ================ =============== 4 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Nine Months Ended September 30, 2002 and 2001 (Unaudited) 2002 2001 ---------------- --------------- Revenues $133,014,345 $175,190,426 Cost of services 96,948,334 126,179,122 ---------------- --------------- Gross profit 36,066,011 49,011,304 ---------------- --------------- Operating costs and expenses Selling, general and administrative 25,064,045 33,578,024 Depreciation 927,046 799,200 Amortization 15,543 4,815,996 ---------------- --------------- 26,006,634 39,193,220 ---------------- --------------- Operating income 10,059,377 9,818,084 ---------------- --------------- Other expenses (income) Interest expense, net of interest income 69,625 1,828,386 (Gain) loss on foreign currency transactions 34,780 ( 15,023) ---------------- --------------- 104,405 1,813,363 ---------------- --------------- Income from continuing operations before income taxes 9,954,972 8,004,721 Income taxes 3,766,212 4,744,079 ---------------- --------------- Income from continuing operations 6,188,760 3,260,642 Gain (loss) from discontinued operations, net of taxes of $643,000 and $800, respectively ( 964,412) 1,214 ---------------- --------------- Net income 5,224,348 3,261,856 Other comprehensive loss Foreign currency translation adjustment ( 12,667) ( 145,686) ---------------- --------------- Comprehensive income $ 5,211,681 $ 3,116,170 ================ =============== 5 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED) Nine Months Ended September 30, 2002 and 2001 (Unaudited) 2002 2001 ---------------- --------------- Basic earnings per share Income from continuing operations $.58 $.31 Loss from discontinued operations .09 -- --- ---- Basic earnings per share $.49 $.31 ==== ==== Weighted average number of common shares outstanding 10,581,084 10,513,054 ========== ========== Diluted earnings per share Income from continuing operations $.57 $.30 Loss from discontinued operations .09 -- --- ---- Diluted earnings per share $.48 $.30 ==== ==== Weighted average number of common and common equivalent shares outstanding (includes dilutive securities relating to options of 213,636 and 186,298 in 2002 and 2001, respectively) 10,794,720 10,699,352 ========== ========== 6 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 September 30, 2002 and 2001 (Unaudited) 2002 2001 --------------- -------------- Revenues $43,743,213 $52,837,991 Cost of services 31,877,131 38,222,734 --------------- -------------- Gross profit 11,866,082 14,615,257 --------------- -------------- Operating costs and expenses Selling, general and administrative 8,296,441 10,026,514 Depreciation 317,531 305,530 Amortization 5,181 1,449,442 --------------- -------------- 8,619,153 11,781,486 --------------- -------------- Operating income 3,246,929 2,833,771 --------------- -------------- Other expenses (income) Interest expense, net of interest income 100,721 512,757 (Gain) loss on foreign currency transactions 39,887 ( 4,874) --------------- -------------- 140,608 507,883 --------------- -------------- Income from continuing operations before income taxes 3,106,321 2,325,888 Income taxes 1,191,857 1,553,210 --------------- -------------- Income from continuing operations 1,914,464 772,678 Loss from discontinued operations, net of taxes of $632,000 and $9,200, respectively 948,190 13,882 --------------- -------------- Net income 966,274 758,796 Other comprehensive income Foreign currency translation adjustment 24,864 82,287 --------------- -------------- Comprehensive income $ 991,138 $ 841,083 =============== ============== 7 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED) Three Months Ended September 30, 2002 and 2001 (Unaudited) 2002 2001 --------------- -------------- Basic earnings per share Income from continuing operations $.18 $.07 Loss from discontinued operations .09 --- ---- Basic earnings per share $.09 $.07 ==== ==== Weighted average number of common shares outstanding 10,581,600 10,539,675 ========== ========== Diluted earnings per share Income from continuing operations $.18 $.07 Loss from discontinued operations .09 --- ---- Diluted earnings per share $.09 $.07 ==== ==== Weighted average number of common and common equivalent shares outstanding and common equivalent shares outstanding (includes dilutive securities relating to options of 182,720 and 330,000 in 2002 and 2001, respectively) 10,764,321 10,869,675 ========== ========== 8 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Nine Months Ended September 30, 2002 (Unaudited) Accumulated Other Additional Common Stock Comprehensive Paid-in Retained ------------ Loss Capital Earnings Total Shares Amount Balance, January 1, 2002 10,571,761 $528,588 ($484,283) $93,746,569 ($10,501,074) $83,289,800 Issuance of stock under stock purchase plan 25,948 1,297 98,084 99,381 Exercise of stock options 905 46 1,484 1,530 Translation adjustment ( 12,667) ( 12,667) Net income 5,224,348 5,224,348 ---------- -------- ---------- ----------- ------------- -- --------- Balance, September 30, 2002 10,598,614 $529,931 ($496,950) $93,846,137 ($5,276,726) $88,602,392 ========== ======== ========== =========== =========== =========== 9 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, 2002 and 2001 (Unaudited) 2002 2001 --------------- -------------- Cash flows from operating activities: Income from continuing operations $6,188,760 $3,260,642 --------------- -------------- Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on discontinued operations 964,412 ( 1,212) Depreciation and amortization 942,589 5,615,196 Provision for losses on accounts receivable ( 194,000) 15,000 Changes in assets and liabilities: Accounts receivable 6,609,159 15,046,890 Income tax refund receivable 6,810,092 4,481,633 Deferred tax asset 7,735,613 ( 35,491) Prepaid expenses and other current assets ( 1,216,287) 552,684 Accounts payable and accrued expenses ( 2,137,402) ( 3,511,834) Accrued payroll 1,367,113 436,337 Payroll and withheld taxes 23,787 ( 592,114) Income taxes payable 2,077,631 ( 590,010) --------------- -------------- Total adjustments 22,982,707 21,417,079 --------------- -------------- Net cash provided by operating activities 29,171,467 24,677,721 --------------- -------------- 10 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, 2002 and 2001 - (Continued) (Unaudited) 2002 2001 --------------- -------------- Cash flows from investing activities: Proceeds on sale of reporting unit 100,000 Property and equipment acquired ( $ 442,347) ( $1,620,002) Decrease in deposits 65,043 39,049 Purchase of acquired companies including contingent consideration, net of cash acquired ( 4,454,747) ( 8,595,963) --------------- -------------- Net cash used in investing activities ( 4,732,051) ( 10,176,916) --------------- -------------- Cash flows from financing activities: Sale of stock for employee stock purchase plan 99,381 104,747 Exercise of stock options 1,530 Repayments of note payable ( 22,270,000) ( 9,900,000) --------------- -------------- Net cash used in financing activities ( 22,169,089) ( 9,795,253) --------------- -------------- Effect of exchange rate changes on cash and cash equivalents ( 12,667) ( 145,686) --------------- -------------- Increase in cash and cash equivalents 2,257,660 4,559,866 Cash and cash equivalents at beginning of period 2,289,743 3,170,658 --------------- -------------- Cash and cash equivalents at end of period $4,547,403 $7,730,524 =============== ============== Supplemental cash flow information: Cash paid for: Interest expense $726,973 $1,918,626 Income taxes (refund) ( $12,762,617) $2,399,761 11 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, 2001. 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, 2002 are not necessarily indicative of the results to be expected for the full year. 2. Discontinued Operations In August 2002, the Company sold a reporting unit in the commercial services business segment for $100,000, which resulted in a loss of $1.6 million ($964,000 net of income tax benefit of $643,000) for the nine months ended September 30, 2002, or $.09 per share and $948,000 net of income tax benefit of $632,000 for the three months ended September 30, 2002 or $.09 per share. In accordance with Statement of Financial Accounting Standards (SFAS) 144, the loss is presented as a loss from discontinued operations in the statements of income for the nine months and three months ended September 30, 2002. The tax effected operating results of the reporting unit sold were losses of $29,000 and $12,800 for the nine months and the three months ended September 30, 2002, respectively and are excluded from income from continuing operations. The Company has not discontinued its commercial services business segment. The financial statements for the comparative periods have been reclassified for comparative purposes. 3. Recent Accounting Pronouncements On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows: (1) 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, (2) 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, (3) goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives is no longer subject to amortization, (4) effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator, (5) all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. The adoption of SFAS No. 142 had a significant impact on the results of operations of the Company for the nine months and three months ended September 30, 2002 by eliminating amortization of goodwill. Under the provisions of SFAS No. 142, the Company is required to perform a transitional goodwill impairment test within six months of adopting the new standard and to test for impairment on at least an annual basis thereafter. For purposes of transitional impairment testing, the Company determined the fair value of its reporting units using discounted cash flow models and relative market multiples for comparable businesses. The Company compared the fair value of each of its reporting units to their respective carrying values, including related goodwill, which resulted in no impairment loss being recognized. 12 <page> RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3. Recent Accounting Pronouncements - (Continued) In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement Obligations. SFAS 143 applies to all entities, including rate-regulated entities, that have legal obligations associated with the retirement of a tangible long-lived asset that result from acquisition, construction or development and (or) normal operations of the long-lived asset. The application of SFAS 143 is not limited to certain specialized industries, such as the extractive or nuclear industries. A liability for an asset retirement obligation should be recognized if the obligation meets the definition of a liability and can be reasonably estimated. The initial recording should be at fair value. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company has not yet adopted SFAS 143. The provisions of SFAS 143 are not expected to have a material impact on the financial condition or results of operations of the Company. In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, SFAS 144 makes changes to the scope and certain measurement requirements of existing accounting guidance. SFAS 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The adoption of this Statement had the effect of including a loss of $964,000 in Discontinued Operations on the Consolidated Statement of Income and Comprehensive Income for the nine month and three month periods ended September 30, 2002, respectively relating to the sale of a reporting unit. This amount would have been included in income from continuing operations prior to the adoption of SFAS 144. In April 2002, Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections" (SFAS No. 145) was issued. This standard changes the accounting principles governing extraordinary items by, among other things, providing more definitive criteria for extraordinary items by clarifying and, to some extent, modifying the existing definition and criteria, specifying disclosure for extraordinary items and specifying disclosure requirements for other unusual or infrequently occurring events and transactions that are not extraordinary items. SFAS 145 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The provisions of the Statement are not expected to have a material impact on the financial condition or results of operations of the Company. 4. Note Payable The Company and its subsidiaries entered into an amended and restated loan agreement on May 31, 2002 with Citizens Bank (successor to Mellon Bank N.A.), administrative agent for a syndicate of banks, which provides for a $40.0 million Revolving Credit Facility (the "Revolving Credit Facility") and a $7.5 million Term Loan Facility (the "Term Loan Facility"). The $7.5 million outstanding balance under the Term Loan Facility was repaid on July 2, 2002, thereby canceling the Term Loan Facility. Availability under the Revolving Credit Facility is based on 80% of the aggregate amount of accounts receivable as to which not more than ninety days have elapsed since the date of the original invoice. 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. All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge 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 2004. The weighted average interest rates under the Revolving Credit Facility and Term Loan Facility for the nine months ended September 30, 2002 and 2001 were 3.78% and 5.69%, respectively. The amounts outstanding under the Revolving Credit Facility at September 30, 2002 and December 31, 2001 were $9.2 million and $31.5 million, respectively. 13 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5. Interest (Expense) Income, Net Interest (expense) income, net consisted of the following: Nine Months Ended Three Months Ended September 30, September 30, ------------------------------- ------------------------------- 2002 2001 2002 2001 -------------- --------------- -------------- -------------- Interest expense ($653,079) ($2,095,981) ($114,997) ($575,206) Interest income 583,454 267,595 14,276 62,449 -------------- --------------- -------------- -------------- ($ 69,625) ($1,828,386) ($100,721) ($512,757) ============== =============== ============== ============== 14 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 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): Nine Months Ended Information Professional Commercial September 30, 2002 Technology Engineering Services Corporate Total ------------- -------------- --------------- ------------- ------------- Revenue $80,186 $37,781 $15,047 $133,014 Operating expenses (1) 73,441 33,987 14,584 122,012 ------ ------ ------ ------- EBITDA (2) 6,745 3,794 463 11,002 Depreciation 586 289 52 927 Amortization of intangibles 13 3 16 -- - -- Operating income (3) $6,146 $3,502 411 $10,059 ====== ====== === ======= Total assets $83,287 $15,227 $5,481 $11,731 $115,726 Capital expenditures $442 $442 Nine Months Ended Information Professional Commercial September 30, 2001 Technology Engineering Services Corporate Total ------------ -------------- -------------- ------------- ------------- Revenue $126,395 $31,684 $17,111 $175,190 Operating expenses (1) 115,634 27,687 16,436 159,757 ------- ------ ------ ------- EBITDA (2) 10,761 3,997 675 15,433 Depreciation 580 181 38 799 Amortization of intangibles 4,292 499 25 4,816 ----- --- -- ----- Operating income $5,889 $3,317 $612 $9,818 ====== ====== ==== ====== Total assets $123,360 $17,767 $6,359 $17,861 $165,347 Capital expenditures $421 $173 $1,026 $1,620 15 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. Segment Information - (Continued) Three Months Ended Information Professional Commercial September 30, 2002 Technology Engineering Services Corporate Total -------------- -------------- -------------- ------------- ------------ Revenue $24,718 $14,285 $4,740 $43,743 Operating expenses (1) 23,083 12,524 4,566 40,173 ------ ------ ----- ------ EBITDA (2) 1,635 1,761 174 3,570 Depreciation 199 100 19 318 Amortization of intangibles 4 1 5 - - - Operating income (3) 1,432 1,660 155 3,247 ===== ===== === ===== Total assets $83,287 $15,227 $5,481 $11,731 $115,726 Capital expenditures $104 $104 Three Months Ended Information Professional Commercial September 30, 2001 Technology Engineering Services Corporate Total ------------ -------------- --------------- ------------ ----------- Revenue $36,053 $11,435 $5,350 $52,838 Operating expenses (1) 33,663 9,481 5,105 48,249 ------ ----- ----- ------ EBITDA (2) 2,390 1,954 245 4,589 Depreciation 210 80 16 306 Amortization of intangibles 1,270 171 8 1,449 ----- --- - ----- Operating income $910 $1,703 $221 $2,834 ==== ====== ==== ====== Total assets $123,360 $17,767 $6,359 $17,861 $165,347 Capital expenditures $42 $173 $301 $516 (1) Operating expenses excludes depreciation and amortization. (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. (3)The operating results of a reporting unit sold in August 2002, are excluded from operating income of the Commercial Services Business Segment for all periods presented. 16 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7. Commitment On June 10, 2002, the Company entered into a Severance Agreement (the "Severance Agreement") with its Chief Executive Officer, Leon Kopyt. The agreement provides for certain payments to be made to Mr. Kopyt and for the continuation of Mr. Kopyt's employee benefits for a specified time after his service with the Company is terminated other than for Cause, as defined in the Severance Agreement. Amounts payable to Mr. Kopyt under the Severance Agreement would be offset and reduced by any amounts received by Mr. Kopyt after his termination of employment under his current employment and termination benefits agreements, which are supplemented and not superseded by the Severance Agreement. If Mr. Kopyt had been terminated as of September 30, 2002, then under the terms of the Severance Agreement, and after offsetting any amounts that would have been received under his current employment and termination benefits agreements, he would have been entitled to cash payments of approximately $1.2 million, inclusive of employee benefits. 8. Contingencies The Company is a party to two lawsuits and two claims from various persons from whom the Company acquired stock or assets in four separate acquisitions that occurred in the years 1998 through 2000. The lawsuits and claims are not related to one another. The lawsuits and claims relate to allegations of wrongful termination and failure of the Company to pay deferred consideration under the relevant acquisition agreements. In the opinion of management and based upon the advice of counsel, the Company has meritorious defenses to the lawsuits and claims. However, if material adverse determinations on either the lawsuits or claims were to be rendered, such determinations will have a material adverse impact on the results of operations in the period of the respective charges as well as a material adverse impact on the financial position and liquidity of the Company. In addition, in 1998, two shareholders, who are former officers and former directors of the Company, filed suit against the Company alleging wrongful termination of their employment, failure to make required severance payments, wrongful conduct by the Company in connection with the grant of stock options, and wrongful conduct by the Company resulting in the non-vestiture of their option grants. Their complaint also alleged that the Company wrongfully limited the number of shares of the Company's common stock that could have been sold by the plaintiffs under a Registration Rights Agreement entered into in connection with the acquisition transaction. The complaint sought damages of approximately $480,000 in severance pay (exclusive of interest). The damages alleged on their other claims were unliquidated; claims for punitive damages were also asserted in several counts of the complaint. The most significant compensatory damages claim, under the Registration Rights Agreement, sought the difference between the amount for which plaintiffs could have sold their RCM shares during the 12-month period ended March 11, 1999, but for the alleged wrongful limitation on their sales,and the amount for which plaintiffs sold their shares during that period and thereafter. The claim relating to the wrongful termination of the employment of one of the plaintiffs and the claims concerning the grant of stock options were resolved in binding arbitration in early 2002. A trial on the remaining claims has been scheduled for December 2, 2002. The claims to be adjudicated at the trial include (i) the claims by both plaintiffs concerning the alleged wrongful limiting of the number of shares that plaintiffs could sell during the 12-month period ended March 11, 1999; (ii) the claim for the alleged wrongful termination of one of the plaintiffs; (iii) that same plaintiff's claim of entitlement to severance pay of $240,000 under his employment agreement, plus interest; and (iv) the claims by both plaintiffs for the alleged wrongful prevention of stock option vestiture, on which $357,500, plus interest, is sought. The Company's motion to strike all claims for punitive damages is pending before the court. Management believes, based upon the advice of counsel, that the suit is without merit and will continue to defend the claims vigorously. If material adverse determinations were to be rendered in this litigation, a substantial charge will have to be recorded in the financial statements, which will have a material adverse impact on the results of operations in the period of the charge as well as a material adverse impact on the financial position and liquidity of the Company. 17 <page> RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 9. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Such estimates include the Company's estimates of reserves such as the allowance for doubtful accounts receivable. 18 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. These forward-looking statements include, without limitation, statements regarding the adoption by businesses of new technology solutions and the use by businesses of outsourced solutions, such as those offered by the Company, in connection with such adoption. Readers are cautioned that such forward-looking statements, as well as others made by the Company, 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; (xvii) the costs of conducting and the outcome of litigation involving the Company, and (xviii) 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. 19 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 throughout North America, including many major metropolitan centers. 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's Commercial Services business unit provides Healthcare contract professionals as well as Clerical and Light Industrial temporary personnel. The Company provides its services to clients in banking and finance, healthcare, insurance, aerospace, pharmaceutical, telecommunications, utility, technology, manufacturing, 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 centrally manages its Solutions practices to maximize the potential for 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 have laid off portions of their own permanent staff and greatly reduced the demand for consulting services in attempts to maintain profitability. This has had a direct impact on RCM's revenues. Management believes that 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 has curtailed many companies' motivation for rapid adoption of many technological enhancements. The process of designing, developing and implementing software solutions has become increasingly complex. Management believes that many 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 spending on many emerging new solutions, which management formerly 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. The Company believes that its clients, as well as entities that may be potential clients, are increasingly evaluating the potential for outsourcing business critical applications and entire business functions. 20 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Overview - (Continued) 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, experience and the type of work performed. The Company also provides project management and consulting work which are billed either by an agreed upon fixed fee or hourly rates, or a combination of both. The billing rates and profit margins for project management and solutions work are higher than those for professional consulting services. The Company generally endeavors to expand its sales of higher margin solution and project management services. The majority of the Company's services are provided under purchase orders. Contracts are utilized on more of the complex assignments where the engagements are for longer terms or where precise documentation on the nature and scope of the assignment is necessary. Contracts, although they normally relate to longer-term and more complex engagements, generally do not obligate the customer to purchase a minimum level of services and are generally terminable by the customer on 60 to 90 days' notice. Revenues are recognized when services are provided. Costs of services consist primarily of salaries and compensation-related expenses for billable consultants, including payroll taxes, employee benefits and insurances. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities, including the Company's acquisition program and corporate marketing, administrative and reporting responsibilities. The Company records these expenses when incurred. Depreciation relates primarily to the fixed assets of the Company. Amortization in 2002 relates principally to the amortization of intangibles resulting from the Company's acquisitions. These acquisitions have been accounted for under the purchase method of accounting for financial reporting purposes and have created goodwill. See Footnote 3 to financial statements. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company's financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company believes that its critical accounting policies include those described below. Accounts Receivable The Company performs ongoing credit evaluations of its customers and adjusts credit limits based on payment history and the customer's current credit worthiness, as determined by a review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based on historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within the Company's expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates that it has in the past. 21 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Goodwill and intangibles Pursuant to the adoption of SFAS 142, the Company changed its accounting policy related to goodwill and intangible assets, effective January 1, 2002. Goodwill and indefinite-lived intangible assets are no longer amortized but are subject to periodic impairment assessment. The transitional impairment testing for such assets was completed during the second quarter of 2002 and as of December 31, 2001, the transition date, there was no impairment to such assets. In accordance with SFAS 142, the Company will be subject to a 2002 annual impairment test, as well as, impairment tests each year thereafter. The Company cannot guarantee that there will not be impairments in the fourth quarter of 2002 or in subsequent years. In addition, the Company recognizes contingent consideration from past acquisitions, which are based on earn-out agreements, as additional goodwill when earned. The Company cannot guarantee that earn-out provisions will be met. Revenue Recognition on Long-Term Contracts When the performance of a contract will extend beyond a 12-month period, revenue and related costs are recognized on the percentage-of-completion method of accounting. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs at completion of the contract. These estimates are reviewed periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Estimated losses on long-term contracts are recorded in the period in which the losses become known. If the Company does not accurately estimate the total sales and related costs on such contracts, or if the Company is unsuccessful in the ultimate collection of associated contract claims, the estimated gross margins may be impacted or losses may need to be recognized in future periods. Any such resulting reductions in margins or contract losses could be material to the Company's results of operations and financial position. 22 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 A summary of operating results for the nine months ended September 30, 2002 and 2001 is as follows (in thousands, except for earnings per share data): 2002 2001 ------------------------- ------------------------ % of % of Amount Revenue Amount Revenue Revenues $ 133,014 100.0% $ 175,190 100.0 % Cost of services 96,948 72.9 126,179 72.0 ---------- ---- ---------- ---- Gross profit 36,066 27.1 49,011 28.0 ---------- ---- ---------- ---- Selling, general and administrative 25,064 18.9 33,578 19.2 Depreciation 927 .7 799 .4 ---------- ------ ---------- ------ 25,991 19.6 34,377 19.6 ---------- ---- ---------- ---- Income before other expense, income taxes, and amortization of intangibles 10,075 7.5 14,634 8.4 Other expense 104 .1 1,814 1.0 ---------- --- ---------- ---- - Income from continuing operations and before income taxes and amortization of intangibles 9,971 7.4 12,820 7.3 Income taxes 3,773 2.8 5,359 3.0 ---------- ----- ---------- ----- Income from continuing operations and before amortization of intangibles 6,198 4.6 7,461 4.3 Gain (loss) from discontinued operations, net of taxes ( 964 ) .7 1 Amortization of intangibles, net of income tax benefits 10 4,200 2.4 ---------- ----- ---------- ----- Net income $ 5,224 3.9% $ 3,262 1.9 % ========== ===== ========== ======= 2002 2001 --------- -------- Earnings per share: Basic: Income from continuing operations and before amortization $ .58 $ .71 Loss from discontinued operations .09 Amortization of intangibles .40 ------ ------ Net income $ .49 $ .31 ====== ====== Diluted: Income from continuing operations and before amortization $ .57 $ .69 Loss from discontinued operations .09 Amortization of intangibles .39 ------ ------ Net income $ .48 $ .30 ====== ====== Revenues. Revenues decreased 24.1%, or $42.4 million, for the nine months ended September 30, 2002 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. Management attributes this softness to overall economic conditions as well as hesitancy by customers to launch new capital spending programs. 23 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 - (Continued) Cost of Services. Cost of services decreased 23.2%, or $29.2 million, for the nine months ended September 30, 2002 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, 2002. Cost of services as a percentage of revenues increased to 72.9% for the nine months ended September 30, 2002 from 72.0% for the comparable prior year period. This increase was primarily attributable to an increase of the Company's revenues being derived from Professional Engineering services, which have historically had lower gross profit margins. Selling, General and Administrative. Selling, general and administrative expenses decreased 25.2%, or $8.5 million, for the nine months ended September 30, 2002 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. SGA expenses as a percentage of revenues were 18.9% for the nine months ended September 30, 2002 as compared to 19.2% for the comparable prior year period. Depreciation. Depreciation increased 16.0%, or $128,000, for the nine months ended September 30, 2002 as compared to the comparable prior year period. This increase was primarily due to the depreciation and amortization of infrastructure and leasehold improvements incurred since September 30, 2001. Other Expense. Other expense consists principally of interest expense, net of interest income. For the nine months ended September 30, 2002, actual interest expense of $653,000 was offset by $583,000 of interest income, which was principally earned from an income tax refund claim with the Internal Revenue Service. Interest expense, net decreased $1.8 million for the nine months ended September 30, 2002 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 as well as the aforementioned interest income earned on the income tax refund. Income Tax. Income tax expense decreased 30.0%, or $1.6 million, for the nine months ended September 30, 2002 as compared to the comparable prior year period. This decrease was attributable to a lower level of income before taxes for the nine months ended September 30, 2002 compared to the comparable prior year period. The effective tax rate was 37.8%, for the nine months ended September 30, 2002 as compared to 41.8% for the comparable prior year period. The reduction was attributable to tax deductible amortization of intangibles in 2002. Loss from Discontinued Operations. In August 2002, the Company sold a reporting unit in the commercial services business segment for $100,000, which resulted in a loss of $1.6 million ($964,000 net of income tax benefit of $643,000) for the nine months ended September 30, 2002, or $.09 per share. In accordance with Statement of Financial Accounting Standards (SFAS) 144, the loss is presented as a loss from discontinued operations in the statements of income for the nine months ended September 30, 2002. The tax effected operating results of the reporting unit sold were losses of $29,000 for the nine months ended September 30, 2002 and are excluded from income from continuing operations. The Company has not discontinued its commercial services business segment. The financial statements for the comparative periods have been reclassified for comparative purposes Amortization of Intangibles. Amortization of intangibles for the nine months ended September 30, 2002 and 2001 was net of income tax benefit of $5,500 and $616,000, respectively. Amortization of intangibles decreased 99.8%, or $4.2 million, for the nine months ended September 30, 2002 as compared to the comparable prior year period. On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets. SFAS 142 is effective for all fiscal periods beginning after December 15, 2001. In accordance with SFAS 142, for the nine months ended September 30, 2002, all previously recognized goodwill and intangible assets with indefinite lives was no longer subject to amortization. If SFAS 142 had been in effect on January 1, 2001, net earnings per share (diluted) would have been $.69 per share for the nine months ended September 30, 2001 as compared to $.48 per share (diluted) for the comparable period in 2002. 24 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 A summary of operating results for the three months ended September 30, 2002 and 2001 is as follows (in thousands, except for earnings per share data): 2002 2001 ------------------------- ------------------------ % of % of Amount Revenue Amount Revenue Revenues $ 43,743 100.0% $ 52,838 100.0 % Cost of services 31,877 72.9 38,223 72.3 -------- ---- --------- ---- Gross profit 11,866 27.1 14,615 27.7 -------- ---- --------- ---- Selling, general and administrative 8,296 19.0 10,027 19.0 Depreciation 317 .7 306 .6 -------- ------ --------- ------ 8,613 19.7 10,333 19.6 -------- ---- --------- ---- Income before other expense, income taxes, and amortization of intangibles 3,253 7.4 4,282 8.1 Other expense 141 .3 508 1.0 -------- ---- --------- ----- Income from continuing operations and before income taxes and amortization of intangibles 3,112 7.1 3,774 7.1 Income taxes 1,195 2.7 1,617 3.1 -------- ----- --------- ----- Income from continuing operations and before amortization of intangibles 1,917 4.4 2,157 4.0 Loss from discontinued operations, net of tax benefit 948 2.2 14 Amortization of intangibles, net of income tax benefits 3 1,384 2.6 -------- --------- ----- Net income $ 966 2.2% $ 759 1.4 % ======== ===== ========= ======= 2002 2001 --------- -------- Earnings per share: Basic: Income from continuing operations and before amortization $ .18 $ .20 Loss from discontinued operations .09 Amortization of intangibles .13 ------ -------- Net income $ .09 $ .07 ====== ====== Diluted: Income from continuing operations and before amortization $ .18 $ .20 Loss from discontinued operations .09 Amortization of intangibles .13 ------ ------ Net income $ .09 $ .07 ====== ====== Revenues. Revenues decreased 18.8%, or $10.1 million, for the three months ended September 30, 2002 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. Management attributes this softness to overall economic conditions as well as hesitancy by customers to launch new capital spending programs. 25 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 - (Continued) Cost of Services. Cost of services decreased 16.6%, or $6.3 million, for the three months ended September 30, 2002 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, 2002. Cost of services as a percentage of revenues increased to 72.9% for the three months ended September 30, 2002 from 72.3% for the comparable prior year period. This increase was primarily attributable to an increase of the Company's revenues being derived from Professional Engineering services. Selling, General and Administrative. Selling, general and administrative expenses decreased 16.3%, or $1.6 million, for the three months ended September 30, 2002 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. SGA expenses, as a percentage of revenues was 19.2% for the three months ended September 30, 2002 as compared to 19.0% for the comparable prior year period. Depreciation. Depreciation increased 3.6%, or $11,000, for the three months ended September 30, 2002 as compared to the comparable prior year period. This increase was primarily due to the depreciation and amortization infrastructure and leasehold improvements incurred since September 30, 2001. Other Expense. Other expense consists principally of interest expense, net of interest income. For the three months ended September 30, 2002, actual interest expense of $115,000 was offset by $14,200 of interest income. Interest expense, net decreased $412,000 for the three months ended September 30, 2002 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 26.1%, or $422,000, for the three months ended September 30, 2002 as compared to the comparable prior year period. This decrease was attributable to a lower level of income before taxes for the three months ended September 30, 2002 compared to the comparable prior year period. The effective tax rate was 38.4%, for the three months ended September 30, 2002 as compared to 42.8% for the comparable prior year period. The reduction was attributable to tax deductible amortization of intangibles in 2002. Loss from Discontinued Operations. In August 2002, the Company sold a reporting unit in the commercial services business segment for $100,000, which resulted in a loss of $1.6 million ($948,000 net of income tax benefit of $632,000) for the three months ended September 30, 2002, or $.09 per share. In accordance with Statement of Financial Accounting Standards (SFAS) 144, the loss is presented as a loss from discontinued operations in the statements of income for the nine months ended September 30, 2002. The tax effected operating results of the reporting unit sold were losses of $12,800 for the three months ended September 30, 2002 and are excluded from income from continuing operations. The Company has not discontinued its commercial services business segment. The financial statements for the comparative periods have been reclassified for comparative purposes Amortization of Intangibles. Amortization of intangibles for the three months ended September 30, 2002 and 2001 was net of income tax benefit of $2,200 and $65,400, respectively. Amortization of intangibles decreased 99.7%, or $1.4 million for the three months ended September 30, 2002 as compared to the comparable prior year period. On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets. SFAS 142 is effective for all fiscal periods beginning after December 15, 2001. In accordance with SFAS 142, for the three months ended September 30, 2002, all previously recognized goodwill and intangible assets with indefinite lives was no longer subject to amortization. If SFAS 142 had been in effect on January 1, 2001, net earnings per share (diluted) would have been $.20 per share for the three months ended September 30, 2001 as compared to $.09 per share (diluted) for the comparable period in 2002. 26 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources Operating activities provided $29.2 million of cash for the nine months ended September 30, 2002 as compared to operating activities providing $24.7 million of cash for the nine months ended September 30, 2001. The increase in cash provided by operating activities was primarily attributable to the increased cash collections from accounts receivable and the income tax refund receivable. Investing activities used $4.7 million for the nine months ended September 30, 2002 as compared to $10.2 million for the comparable period. The reduction in the use of cash for investing activities for the nine months ended September 30, 2002 as compared to the comparable period was primarily attributable to a reduction in property and equipment expenditures and acquisition and deferred consideration payments. Financing activities (principally debt reduction activities from income tax refunds received) used $22.2 million for the nine months ended September 30, 2002 as compared to financing activities using $9.8 million for the comparable period. The Company and its subsidiaries entered into an amended and restated loan agreement on May 31, 2002 with Citizens Bank (successor to Mellon Bank N.A.), administrative agent for a syndicate of banks, which provides for a $40.0 million Revolving Credit Facility (the "Revolving Credit Facility") and a $7.5 million Term Loan Facility ("Term Loan Facility"). The $7.5 million outstanding balance under the Term Loan Facility was repaid on July 2, 2002, thereby canceling the Term Loan Facility. Availability under the Revolving Credit Facility is based on 80% of the aggregate amount of accounts receivable as to which not more than ninety days have elapsed since the date of the original invoice. 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. All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge 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 2004. The weighted average interest rates for the nine months ended September 30, 2002 and 2001 were 3.78% and 5.69%, respectively. The amounts outstanding under the Revolving Credit Facility at September 30, 2002 and December 31, 2001 were $9.2 million and $31.5 million, respectively. (Note 4) 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 is involved in litigations as described in Footnote 8 (Contingencies) to the financial statements. If material adverse determinations on either the lawsuits or claims were to be rendered, such determinations will have a material adverse impact on the results of operations in the period of the respective charges as well as a material adverse impact on the financial position and liquidity of the Company. 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. 27 <page> RCM TECHNOLOGIES, INC. AND SUBSIDIARIES 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, 2001. ITEM 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on an evaluation conducted within 90 days prior to the filing date of this Quarterly Report on Form 10-Q, that the Company's disclosure controls and procedures have functioned effectively so as to provide those officers the information necessary to evaluate whether: (i) this Quarterly Report on Form 10-Q contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report on Form 10-Q, and (ii)the financial statements, and other financial information included in this Quarterly Report on Form 10-Q, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Quarterly Report on Form 10-Q. There have been no significant changes in the Company's internal controls or in other factors since the date of the Chief Executive Officer's and Chief Financial Officer's evaluation that could significantly affect these internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 28 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to two lawsuits and two claims from various persons from whom the Company acquired stock or assets in four separate acquisitions that occurred in the years 1998 through 2000. The lawsuits and claims are not related to one another. The lawsuits and claims relate to allegations of wrongful termination and failure of the Company to pay deferred consideration under the relevant acquisition agreements. In the opinion of management and based upon the advice of counsel, the Company has meritorious defenses to the lawsuits and claims. However, if material adverse determinations on either the lawsuits or claims were to be rendered, such determinations will have a material adverse impact on the results of operations in the period of the respective charges as well as a material adverse impact on the financial position and liquidity of the Company. In addition, in 1998, two shareholders, who are former officers and former directors of the Company, filed suit against the Company alleging wrongful termination of their employment, failure to make required severance payments, wrongful conduct by the Company in connection with the grant of stock options, and wrongful conduct by the Company resulting in the non-vestiture of their option grants. Their complaint also alleged that the Company wrongfully limited the number of shares of the Company's common stock that could have been sold by the plaintiffs under a Registration Rights Agreement entered into in connection with the acquisition transaction. The complaint sought damages of approximately $480,000 in severance pay (exclusive of interest). The damages alleged on their other claims were unliquidated; claims for punitive damages were also asserted in several counts of the complaint. The most significant compensatory damages claim, under the Registration Rights Agreement, sought the difference between the amount for which plaintiffs could have sold their RCM shares during the 12-month period ended March 11, 1999, but for the alleged wrongful limitation on their sales,and the amount for which plaintiffs sold their shares during that period and thereafter. The claim relating to the wrongful termination of the employment of one of the plaintiffs and the claims concerning the grant of stock options were resolved in binding arbitration in early 2002. A trial on the remaining claims has been scheduled for December 2, 2002. The claims to be adjudicated at the trial include (i) the claims by both plaintiffs concerning the alleged wrongful limiting of the number of shares that plaintiffs could sell during the 12-month period ended March 11, 1999; (ii) the claim for the alleged wrongful termination of one of the plaintiffs; (iii) that same plaintiff's claim of entitlement to severance pay of $240,000 under his employment agreement, plus interest; and (iv) the claims by both plaintiffs for the alleged wrongful prevention of stock option vestiture, on which $357,500, plus interest, is sought. The Company's motion to strike all claims for punitive damages is pending before the court. Management believes, based upon the advice of counsel, that the suit is without merit and will continue to defend the claims vigorously. If material adverse determinations were to be rendered in this litigation, a substantial charge will have to be recorded in the financial statements, which will have a material adverse impact on the results of operations in the period of the charge as well as a material adverse impact on the financial position and liquidity of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. (b) Reports on Form 8-K None. 29 CERTIFICATION I, Leon Kopyt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc. (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 30, 2002 /s/ Leon Kopyt ------------------------------- Leon Kopyt Chief Executive Officer 30 CERTIFICATION I, Stanton Remer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc. (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons fulfilling the equivalent function): (a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: October 30, 2002 /s/ Stanton Remer ------------------------------ Stanton Remer Chief Financial Officer 31 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 30, 2002 By:/s/ Stanton Remer --- ------- ----- Stanton Remer Chief Financial Officer, Treasurer, Secretary and Director (Principal Financial Officer and Duly Authorized Officer of the Registrant) 32