SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or
15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
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 IRS Employer Identification No.
2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
Address of principal executive offices
Registrant's telephone number, including area code: (856) 486-1777
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO__
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
YES NO X
---- --
The aggregate market value of Common Stock held by non-affiliates of
the Registrant on March 17, 2004 was approximately $41,750,000 based upon the
closing price of the Common Stock on June 30, 2003 on The Nasdaq National Market
of $3.90. The information provided shall in no way be construed as an admission
that any person whose holdings are excluded from the figure is an affiliate or
that any person whose holdings are included is not an affiliate and any such
admission is hereby disclaimed. The information provided is included solely for
record keeping purposes of the Securities and Exchange Commission.
The number of shares of Registrant's Common Stock (par value $0.05 per
share) outstanding as of March 17, 2004: 11,300,529.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 2004 Annual
Meeting of Stockholders (the "2004 Proxy Statement") are incorporated by
reference into Items 10,11,12, 13 and 14 in Part III of this Annual Report on
Form 10-K. If the 2004 Proxy Statement is not filed by April 29, 2004, an
amendment to this Annual Report on Form 10-K setting forth this information will
be duly filed with the Securities and Exchange Commission.
RCM Technologies, Inc.
FORM 10-K
TABLE OF CONTENTS
PART I........................................................................................................ 1
Item 1. Business....................................................................................... 2
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings............................................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders........................................... 11
PART II ............................................................................................... 12
Item 5. Market for Registrant's Common Equity and Related Stock Holder Matters......................... 12
Item 6. Selected Consolidated Financial Data........................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..................................... 27
Item 8. Financial Statements and Supplementary Data.................................................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting Financial Disclosure............... 27
Item 9A. Controls and Procedures........................................................................ 27
PART III ............................................................................................... 28
Item 10. Directors and Executive Officers of the Registrant............................................. 28
Item 11. Executive Compensation......................................................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 28
Item 13. Certain Relationships and Related Transactions................................................. 28
Item 14. Principal Accountant Fees and Services......................................................... 28
PART IV ............................................................................................... 29
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 29
Signatures............................................................................................... 31
PART I
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings made
by RCM Technologies, Inc. ("RCM" or the "Company") 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, the use by businesses of
outsourced solutions, such as those offered by the Company, in connection with
such adoption, the outcome of litigation (at both the trial and appellate
levels) involving the Company and the impact on the Company of its exchange
offer relating to its outstanding stock options. 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 that 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) uncertainties in 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 trends or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
1
ITEM 1. BUSINESS
General
RCM Technologies is a premier provider of business and technology solutions
designed to enhance and maximize the operational performance of its
customers through the adaptation and deployment of advanced information
technology and engineering services. RCM has been an innovative leader in
the design, development and delivery of these services to commercial and
government sectors for more than 30 years. The Company provides a
diversified and extensive range of service offerings and deliverables. Its
portfolio of Information Technology services includes e-Business,
Enterprise Management and Enterprise Application Integration. RCM's
portfolio of Professional Engineering services focuses 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 the banking and finance,
healthcare, insurance, aerospace, pharmaceutical, telecommunications,
utility, technology, manufacturing, distribution and government sectors.
The Company believes it offers a range of services that fosters long-term
client relationships, affords cross-selling opportunities and minimizes the
Company's dependence on any single technology or industry sector.
During the year ended December 31, 2003, approximately 49% of RCM's total
revenues were derived from IT services, 42% from Engineering services and
the remaining 9% from Commercial Services. The Company has executed a
regional strategy to better leverage its consulting services offering. RCM
sells and delivers its services through a network of 37 branch offices
located in selected regions throughout North America.
Demand for IT consulting services has continued the decline that commenced
in early 2001 after several years of rapid growth. The decline in sales
along with a decline in operating income of certain branch offices resulted
in goodwill impairment charges for the years ended December 31, 2002 and
2001.
The Company's financial performance is related to economic growth levels
and subsequent changes in temporary and full-time hiring levels. A slower
than expected economic recovery could jeopardize the Company's earnings
growth.
Industry Overview
Businesses today face intense competition, the challenge of constant
technological change, and the ongoing need for business process
optimization. Companies are turning to IT solutions to address these issues
and to compete more effectively. As a result, the ability of an
organization to integrate and align information technologies with new
business objectives has become critical.
Although many companies have recognized the importance of optimizing IT
systems and products to support business processes in competing in today's
challenging climate, the process of designing, developing and implementing
IT solutions has become increasingly complex. With the prevailing economic
conditions, many customers have nonetheless elected to defer, redefine or
actually cancel investments in new systems or software. Many companies are
focusing now on making the most effective use of existing investments they
have already made in software and technology solutions. 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 reduced the demand for
consulting services in attempts to maintain profitability. This has a
direct impact on RCM's revenues.
The current economic environment has further challenged many companies to
evaluate investment or funding choices and business critical applications.
IT managers must integrate and manage computing environments consisting of
multiple computing platforms, operating systems, databases and networking
protocols and off-the-shelf software applications to support business
objectives. Companies also need to keep pace with new developments in
technology, which often render existing equipment and internal skills
obsolete. At the same time, external economic factors have caused many
organizations to focus on core competencies and trim workforces in the IT
management area. Accordingly, these organizations often lack the quantity,
quality and variety of IT skills necessary to design and support IT
solutions. IT managers are charged with supporting increasingly complex
systems and applications of significant strategic value, while working
under budgetary, personnel and expertise constraints within their own
organizations.
2
ITEM 1. BUSINESS (CONTINUED)
Industry Overview (Continued)
The Company believes the strongest demand for IT services is among
middle-market companies, which typically lack the time and technical
resources to satisfy all of their IT needs internally. These companies
typically require sophisticated, experienced IT assistance to achieve their
business objectives. These companies often rely on IT service providers to
help implement and manage their systems. However, many middle-market
companies rely on multiple providers for their IT needs. Generally, the
Company believes that this reliance on multiple providers results from the
fact that larger IT service providers do not target these companies, while
smaller IT service providers lack sufficient breadth of services or
industry knowledge to satisfy all of these companies' needs. The Company
believes this reliance on multiple service providers creates multiple
relationships that are more difficult and less cost-effective to manage
than a single relationship would be and can adversely impact the quality
and compatibility of IT solutions. RCM is structured to provide
middle-market companies an objective, single source for their IT needs.
Business Strategy
RCM is dedicated to providing solutions to meet its clients' business needs
by delivering information technology and professional engineering services.
The Company's objective is to be a recognized leader of specialty
professional consulting services and solutions in major markets throughout
North America. The Company has developed operating strategies to achieve
this objective. Key elements of its growth and operating strategies are as
follows:
Growth Strategy
Full Life Cycle Solution. The Company is building a Full Life Cycle
Solution capability. The goal of the full life cycle strategy is to fully
address a client's project implementation cycle at each stage of its
development. This entails the Company working with its clients from the
initial conceptualization of a project through its design and project
execution, and extending into ongoing management and support of the
delivered product. RCM's strategy is to selectively build projects and
solutions offerings which utilize its extensive resource base. The Company
believes that the effective execution of this strategy will generate
improved margins on the existing resources. The completion of this
service-offering continuum will afford the Company the opportunity to
strengthen long-term client relationships that will further contribute to
the quality of earnings.
In addition to building a Full Life Cycle Solution offering, the Company
will continue to focus on transitioning into higher value oriented services
to increase its margins on its various service lines. The Company will seek
to accomplish these measures through expansion of its client relationships
while at the same time pursuing strategic alliances and partnerships.
Promote Internal Growth. The Company continues to evolve its internal
growth strategies. Several initiatives were launched during 2003. National
and regional sales management programs were designed and implemented to
segregate clients into priority accounts. This process is improving
account coordination so clients can benefit from the wider
array of services offered throughout the Company's service area.
During 2003, RCM continued a company-wide training initiative in which
sales managers and professionals received advanced sales training. The
purpose of the training, which is a multi-semester program, is to enhance
sales skills and to further assist the sales force in identifying,
developing and closing solution sales.
RCM has adopted an industry-centric approach to sales and marketing. This
initiative recognizes that clients within the same industry sectors tend to
have common business challenges. It therefore allows the Company to present
and deliver enhanced value to those clients in the industrial sectors in
which RCM has assembled the greatest work experience. RCM's consultants
continue to acquire project experience that offers differentiated awareness
of the business challenges that clients in that industry are facing. This
alignment also facilitates and creates additional cross-selling
opportunities. The Company believes its strategy will lead to greater
account penetration and enhanced client relationships.
3
ITEM 1. BUSINESS (CONTINUED)
Growth Strategy (Continued)
Operational strategies contributing to RCM's internal productivity include
the delineation of certain new technical practice areas in markets where
its clients had historically known the Company as a contract service
provider. The formation of these practice areas will facilitate the flow of
project opportunities and the delivery of project-based solutions.
Continue Selective Strategic Acquisitions. The industry for the Company's
services continues to be highly fragmented, and the Company plans to
continue to selectively assess opportunities to make strategic acquisitions
as such opportunities are presented to the Company. The Company's past
acquisition strategy was designed to broaden the scope of services and
technical competencies and grow its Full Life Cycle Solution capabilities,
and the Company would continue to consider such goals in any future
acquisitions. In considering acquisitions, the Company focuses principally
on companies with (i) technologies RCM has targeted for strategic value
enhancement, (ii) margins that will not dilute the margins now being
delivered, (iii) experienced management personnel, (iv) substantial growth
prospects and (v) sellers who desire to join the Company's management team.
To retain and provide incentives for management of its acquired companies,
the Company has generally structured a significant portion of the
acquisition price in the form of multi-tiered consideration based on growth
of operating profitability of the acquired company over a two to three-year
period.
Operating Strategy
Foster a Decentralized Entrepreneurial Environment. A key element of the
Company's operating strategy is to foster a decentralized, entrepreneurial
environment for its employees. The Company fosters this environment by
continuing to build on local market knowledge of each branch's reputation,
customer relationships and expertise. The Company believes an
entrepreneurial business atmosphere allows its branch offices to quickly
and creatively respond to local market demands and enhances the Company's
ability to motivate, attract and retain managers and to maximize growth and
profitability.
Develop and Maintain Strong Customer Relationships. The Company seeks to
develop and maintain strong interactive customer relationships by
anticipating and focusing on its customers' needs. The Company emphasizes a
relationship-oriented approach to business, rather than the transaction or
assignment-oriented approach that the Company believes is used by many of
its competitors. The industry-centric strategy is facilitating RCM to
further expand its relationships with clients in RCM's targeted sectors.
To develop close customer relationships, the Company's practice managers
regularly meet with both existing and prospective clients to help design
solutions and identify the resources needed to execute their strategies.
The Company's managers also maintain close communications with their
customers during each project and on an ongoing basis after its completion.
The Company believes that this relationship-oriented approach can result in
greater customer satisfaction and reduce business development expense.
Additionally, the Company believes that by partnering with its customers in
designing business solutions, it can generate new opportunities to
cross-sell additional services that the Company has to offer. The Company
focuses on providing customers with qualified individuals or teams of
experts compatible with the business needs of our customers and makes a
concerted effort to follow the progress of such relationships to ensure
their continued success.
Attract and Retain Highly Qualified Consultants and Technical Resources.
The Company believes it has been successful in attracting and retaining
qualified consultants and contractors by (i) providing stimulating and
challenging work assignments, (ii) offering competitive wages, (iii)
effectively communicating with its candidates, (iv) providing training to
maintain and upgrade skills and (v) aligning the needs of its customers
with the appropriately skilled personnel. The Company believes it has been
successful in retaining these personnel due in part to its use of practice
managers or "ombudsmen" who are dedicated to maintaining contact with, and
monitoring the satisfaction levels of, the Company's consultants while
they are on assignment.
4
ITEM 1. BUSINESS (CONTINUED)
Operating Strategy (Continued)
Centralize Administrative Functions. The Company continues to improve its
operational efficiencies by integrating general and administrative
functions at the corporate or regional level, and reducing or eliminating
redundant functions formerly performed at smaller branch offices. This
enables the Company to quickly realize savings and synergies and to
efficiently control and monitor its operations. It also allows local
branches to focus more on growing their sales.
To accomplish this, the Company is centralized on an SAP operating system
into which it integrated all of its operating units. The software is
configured to perform all back office functions, including payroll, project
management, project cost accounting, billing, human resource administration
and all financial consolidation and reporting functions. The Company
believes that this system provides a robust and highly scalable platform
from which to manage daily operations, and that this system has the
capacity to accommodate increased usage. During 2003, the Company completed
the implementation of a unified "front end" system, which manages work
orders, and client contacts in a web based system. This application puts
all RCM locations on a common database. The results continue to indicate
improved efficiencies and greater cooperation in support of key vertical
industry sector requirements.
Information Technology
The Company's Information Technology Group offers responsive, timely and
comprehensive business and information technology consulting and solutions
to support the entire systems applications development and implementation
process. The Company's information technology professionals have expertise
in a variety of technical disciplines, including e-business development,
application integration, network communications, knowledge management and
support of client applications.
The Company has a wide array of service offerings and deliverables within
this spectrum. Within its e-business offering, RCM delivers web strategies,
web enablement of client applications, e-commerce solutions, Intranet
solutions, corporate portals and complete web sites. Within its business
intelligence practice, RCM provides data architecture design, data
warehousing, knowledge management, customer relationship management and
supply chain management solutions. In its enterprise applications area, RCM
delivers software sales for certain applications, implementation services,
infrastructure support, integration services, and an array of
post-implementation support services. In its enterprise application
integration work, the Company integrates diverse but related enterprise
applications into unified cohesive operating environments. The Company
believes that its ability to deliver information technology solutions
across a wide range of technical platforms provides an important
competitive advantage.
The Company also ensures that its consultants have the expertise and skills
needed to keep pace with rapidly evolving information technologies. The
Company's strategy is to maintain expertise and acquire knowledge in
multiple technologies so it can offer its clients non-biased solutions best
suited to their business needs.
The Company provides its IT services through a number of delivery methods.
These include management consulting engagements, project management of
client efforts, project implementation of client initiatives, outsourcing,
both on and off site, and a full complement of resourcing alternatives.
As of December 31, 2003, the Company had assigned approximately 800
information technology employees and consultants to its customers.
5
ITEM 1. BUSINESS (CONTINUED)
Professional Engineering
The Company's Professional Engineering Group provides personnel to perform
project engineering, computer aided design, and other managed task
technical services either at the site of the customer or, less frequently,
at the Company's own facilities. Representative services include utilities
process and control, electrical engineering design, system engineering
design and analysis, mechanical engineering design, procurement
engineering, civil structural engineering design, computer aided design and
code compliance. The Professional Engineering Group has developed an
expertise in providing engineering, design and technical services to many
customers in the aeronautical, paper products manufacturing and nuclear
power, fossil fuel and electric utilities industries.
The Company believes that the deregulation of the utilities industry and
the aging of nuclear power plants offer the Company an opportunity to
capture a greater share of professional staffing and project management
requirements of the utilities industry both in professional engineering
services and through cross-selling of its information technology services.
Heightened competition, deregulation and rapid technological advances are
forcing the utilities industry to make fundamental changes in its business
process. These pressures have compelled the utilities industry to focus on
internal operations and maintenance activities and to increasingly
outsource their personnel requirements. Additionally, the Company believes
that increased performance demands from deregulation should increase the
importance of information technology to this industry. The Company believes
that its expertise and strong relationships with certain customers within
the utilities industry position the Company to be a leading provider of
professional services to the utilities industry.
The Company provides its engineering services through a number of delivery
methods. These include managed tasks and resources, complete project
services, outsourcing, both on and off-site, and a full complement of
resourcing alternatives.
As of December 31, 2003, the Company had assigned approximately 560
engineering and technical employees and consultants to its customers.
Commercial Services
The Company's Commercial Services Group consists of Specialty Health Care
and General Support Services.
The Company's Specialty Health Care Group provides skilled, licensed
healthcare professionals, primarily physical therapists, occupational
therapists, speech language pathologists and trauma nurses. The Specialty
Health Care Group provides services to hospitals, nursing homes,
pre-schools and lower schools, sports medicine facilities and private
practices. Services include in-patient, outpatient, sub-acute and acute
care, multilingual speech pathology, rehabilitation, and geriatric,
pediatric and adult day care. The Specialty Health Care Group does not
provide general nursing or home healthcare services. Typical engagements
range either from three to six months or are on a day-to-day shift basis.
The Company's General Support Services Group provides contract and
temporary services, as well as permanent placement services, for full time
and part time personnel in a variety of functional areas, including office,
clerical, data entry, secretarial, light industrial, shipping and receiving
and general warehouse. Contract and temporary assignments range in length
from less than one day to several weeks or months.
As of December 31, 2003, the Company had assigned approximately 870
commercial services personnel to its customers.
6
ITEM 1. BUSINESS (CONTINUED)
Branch Offices
The Company's organization consists of five operating regions with 37
branch offices located in 12 states and Canada. The regions and services
provided by each of the branch offices are set forth in the table below.
NUMBER OF
REGION OFFICES SERVICES PROVIDED(1)
EAST
Connecticut................................... 2 PE
Maryland...................................... 1 IT
Massachusetts................................. 1 IT
New Jersey.................................... 2 IT, PE
New York...................................... 3 IT, PE, CS
Pennsylvania.................................. 2 IT, PE
Vermont....................................... 1 PE
-
12
--
GREAT LAKES
Michigan...................................... 5 IT, PE
Minnesota..................................... 1 IT
Wisconsin..................................... 3 IT, PE
-
9
-
CENTRAL
Texas......................................... 2 IT
-
2
-
WEST
Northern California........................... 1 IT
Southern California........................... 6 IT, CS
-
7
-
CANADA.......................................... 7 IT, PE
-
(1) Services provided are abbreviated as follows: IT - Information
Technology PE - Professional Engineering CS - Commercial Services
Branch offices are primarily located in regions that the Company believes
have strong growth prospects for information technology and engineering
services. The Company's branches are operated in a decentralized,
entrepreneurial manner with most branch offices operating as independent
profit centers. The Company's branch managers are given significant
autonomy in the daily operations of their respective offices and, with
respect to such offices, are responsible for overall guidance and
supervision, budgeting and forecasting, sales and marketing strategies,
pricing, hiring and training. Branch managers are paid on a
performance-based compensation system designed to motivate the managers to
maximize growth and profitability.
7
ITEM 1. BUSINESS (CONTINUED)
Branch Offices (Continued)
The Company believes that substantial portions of the buying decisions made
by users of the Company's services are made on a local or regional basis
and that the Company's branch offices most often compete with local and
regional providers. Since the Company's branch managers are in the best
position to understand their local markets, and customers often prefer
local providers, the Company believes that a decentralized operating
environment enhances operating performance and contributes to employee and
customer satisfaction.
From its headquarter locations in New Jersey, the Company provides its
branch offices with centralized administrative, marketing, finance, MIS,
human resources and legal support. Centralized administrative functions
minimize the administrative burdens on branch office managers and allow
them to spend more time focusing on sales and marketing and practice
development activities.
Our principal sales offices have one General Manager, one sales manager,
three to six sales people, several technical delivery or practice managers
and several recruiters. The General Managers report to Regional Managers
who are responsible for ensuring that performance goals are achieved. The
Company's branch managers meet frequently to discuss "best practices" and
ways to increase the Company's cross selling of its professional services.
The Company's practice managers meet periodically to strategize, maintain
continuity, and identify developmental needs and cross-selling
opportunities.
Sales and Marketing
Sales and marketing efforts are conducted at the local and regional level
through the Company's network of branch offices. The Company emphasizes
long-term personal relationships with customers that are developed through
regular assessment of customer requirements and proactive monitoring of
personnel performance. The Company's sales personnel make regular visits to
existing and prospective customers. New customers are obtained through
active sales programs and referrals. The Company encourages its employees
to participate in national and regional trade associations, local chambers
of commerce and other civic associations. The Company seeks to develop
strategic partnering relationships with its customers by providing
comprehensive solutions for all aspects of a customer's information
technology, engineering and other professional services needs. The Company
concentrates on providing carefully screened professionals with the
appropriate skills in a timely manner and at competitive prices. The
Company regularly monitors the quality of the services provided by its
personnel and obtains feedback from its customers as to their satisfaction
with the services provided.
The Company has elevated the importance of working with and developing its
partner alliances with technology firms. Partner programs are in place with
firms RCM has identified as strategically important to the completeness of
the service offering of the Company. Relations have been established with
firms such as Microsoft, QAD, Mercury, IBM, and Oracle among
others. The partner programs may be managed either at a national level from
RCM's corporate offices or at a regional level from its branch offices.
Some of the Company's larger representative customers include 3M, ADP,
Bristol Myers Squibb, Bruce Power L.P, Entergy, FlightSafety International,
IBM, MSC Industrial Supply, Ontario Power Generation, Schering Plough,
Target, United Technologies, U.S. Treasury and Wells Fargo. The Company
serves Fortune 1000 companies and many middle market clients. The Company's
relationships with these customers are typically formed at the local or
regional level or, when appropriate, at the corporate level for national
accounts.
During 2003, the Company's only customer with sales greater than 10% of
total sales was Bruce Power LP which accounted for 22% of the Company's
revenues. The Company's five and ten largest customers accounted for
approximately 42% and 52%, respectively, of the Company's revenues for
2003. However, of the $45.1 million in revenues from the Company's largest
customer, $24.1 million represented "Pass-Through" revenues where the
Company acted as a general contractor and subcontracted $24.1 million of
business at a gross margin of approximately 1.2%. If the Company adjusted
for these pass-through revenues, its largest customer would have accounted
for 11.5% of total revenues. Similarly, the Company's five and ten largest
customers would have accounted for 34.5% and 45.6%, respectively.
8
ITEM 1. BUSINESS (CONTINUED)
Recruiting and Training
The Company devotes a significant amount of time and resources, primarily
at the branch level, to locating, training and retaining its professional
personnel. Full-time recruiters utilize the Company's proprietary databases
of available personnel, which are cross-indexed by competency and skill to
match potential candidates with the specific project requirements of the
customer. The qualified personnel in the databases are identified through
numerous activities, including networking, referrals, trade shows, job
fairs, schools, newspaper and trade journal advertising, Internet
recruiting services and the Company's website.
The Company believes that a significant element to the Company's success in
retaining qualified consultants and contract personnel is the Company's use
of Consultant Relationship Managers ("CRM") and technical practice
managers. CRM are qualified Company personnel dedicated to maintaining
on-site contact with, and monitoring the satisfaction levels of, the
Company's consultants and contract personnel while they are on assignment.
Practice managers are consulting managers responsible for the technical
development and career development of the Company's technical personnel
within the defined practice areas. The Company employs various methods of
technical training and skills development including sending consultants to
application vendor provided courses, the use of computer-based training
tools and on-the-job training through mentoring programs.
Information Systems
The Company has invested, and intends to continue to invest, in the SAP R/3
software that it has installed. This system is deployed on clustered Compaq
servers and is running on a SQL 7.0 database. The branch offices of the
Company are networked to the corporate offices so the SAP application is
accessed at all operational locations. This system supports Company-wide
operations such as payroll, billing, human resources, project systems,
accounts receivable, accounts payable, all general ledger accounting and
consolidation reporting functionality. In addition to SAP, the Company has
implemented a unified front end system that manages the consultant
information in a skills based database, work order flows, customer contacts
and sales reporting on a national basis. The web based system, provided by
Main Sequence, Inc., was heavily customized and is hosted and maintained by
the Company's headquarters. Each of the service groups maintains databases
to permit efficient tracking of available personnel on a local basis. This
system facilitates efficient matching of customers' requirements with
available technical personnel and provides contact management functionality
for the sales force.
Competition
The market for IT and engineering services includes a large number of
competitors, is subject to rapid change and is highly competitive. As the
market demand has shifted, many software companies have adopted tactics to
pursue services and consulting offerings making them direct competitors
when in the past they may have been alliance partners. Primary competitors
include participants from a variety of market segments, including publicly
and privately held firms, systems consulting and implementation firms,
application software firms, service groups of computer equipment companies,
facilities management companies, general management consulting firms and
staffing companies. In addition, the Company competes with its clients'
internal resources, particularly where these resources represent a fixed
cost to the client. Such competition may impose additional pricing
pressures on the Company.
The Company believes its principal competitive advantages in the IT and
professional engineering services market include: breadth of services
offered, technical expertise, knowledge and experience in the industry,
quality of service, responsiveness to client needs and speed in delivering
IT solutions.
Additionally, the Company competes for suitable acquisition candidates
based on its differentiated acquisition model, its entrepreneurial and
decentralized operating philosophy, its strong corporate-level support and
resources, its status as a public company and its ability to offer
management of the acquired companies an opportunity to join and participate
in the expansion of a growing provider of information technology and other
engineering services.
9
ITEM 1. BUSINESS (CONTINUED)
Employees
As of December 31, 2003, the Company employed an administrative staff of
approximately 250 people, including certified IT specialists and licensed
professional engineers who, from time to time, participate in IT and
engineering design projects undertaken by the Company. As of December 31,
2003, there were approximately 800 information technology and 560
engineering and technical employees and consultants assigned by the Company
to work on client projects for various periods. As of December 31, 2003,
there were approximately 870 commercial services employees. None of the
Company's employees are represented by a collective bargaining agreement.
The Company considers its relationship with its employees to be good.
Access to Company Information
RCM Technologies, Inc. electronically files its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports with the Securities and Exchange Commission
(SEC). The public may read and copy any of the reports that are filed with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site (http://www.sec.gov) that contains reports,
proxy, information statements, and other information regarding issuers that
file electronically.
RCM Technologies, Inc. makes available, free of charge, through its website
or by responding to requests addressed to the Company's Corporate
Secretary, its annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports filed by
the Company with the SEC pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act, as amended. These reports are available as soon as
reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. The Company's website
is http://www.rcmt.com. The information contained on the Company's website,
or on other websites linked to the Company's website, is not part of this
document. Reference herein to the Company's website is in an inactive text
reference only.
The Company is a Nevada corporation organized in 1971. The address of its
principal executive office is 2500 McClellan Avenue, Suite 350, Pennsauken,
NJ 08109-4613.
ITEM 2. PROPERTIES
The Company provides specialty professional consulting services,
principally performed at various client locations, through 37 offices in 12
states and Canada. The Company's administrative and sales offices typically
consist of 1,000 to 3,000 square feet and are leased by the Company for
terms of one to three years. Offices in larger or smaller markets may vary
in size from the typical office. The Company does not expect that it will
be difficult to maintain or find suitable lease space at reasonable rates
in its markets or in areas where the Company contemplates expansion.
The Company's executive office is located at 2500 McClellan Avenue, Suite
350, Pennsauken, New Jersey 08109-4613. These premises consist of
approximately 9,100 square feet and are leased at a rate of $13.25 per
square foot per annum for a term ending on January 31, 2006.
The Company's operational office is located at 20 Waterview Boulevard, 4th
Floor, Parsippany, NJ 07054-1271. These premises consist of approximately
28,000 square feet and are leased at a rate of $25.00 per square foot per
annum for a term ending on June 30, 2012.
10
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a lawsuit from persons from whom the Company acquired
stock in an acquisition that occurred in the year 1998. The lawsuit arises from
allegations of wrongful termination and/or failure of the Company to pay
deferred consideration under the relevant acquisition agreement. The range of
possible loss for the aforementioned lawsuit, is from $-0- to approximately
$825,000. In the opinion of management and based upon the advice of counsel, the
Company has meritorious defenses to the lawsuit that should serve to defeat or
diminish the Company's potential liability.
In 1998, two shareholders, who were formerly officers and 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. The 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 underlying
acquisition transaction pursuant to which the plaintiffs became shareholders of
the Company. The 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 the 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 of both plaintiffs concerning the grant of stock
options were resolved in binding arbitration in early 2003. A trial on the
remaining claims commenced on December 2, 2002 and a verdict was returned on
January 24, 2003. On the claims by both plaintiffs, concerning the alleged
wrongful limiting of the number of shares that they could sell during the
12-month period ended March 11, 1999, a verdict awarding damages of $7.6 million
against the Company was returned. On June 23, 2003, the trial judge denied the
Company's post-trial motions that challenged the jury's verdict and the trial
judge also upheld the jury's verdict. On August 4, 2003, the trial judge entered
a judgment in favor of the plaintiffs for $7.6 million in damages and awarded
plaintiffs $172,000 in post-verdict prejudgment interest. Post-judgment interest
will continue to accrue on the damages portion of the judgment after August 4,
2003 (at the rate of 5% per annum until December 31, 2003 and at the rate of 4%
per annum in 2004). The Company has appealed to the Appellate Division of the
Superior Court of New Jersey from, and obtained a stay pending appeal of, that
judgment. In order to secure the stay, the Company made a cash deposit in lieu
of bond of $8.3 million with the Trust Fund of the Superior Court of New Jersey.
This deposit is recorded as restricted cash on the consolidated balance sheet
and earns interest at a rate that approximates the daily federal funds rate. The
plaintiffs have cross-appealed from the Court's denial of pre-verdict
prejudgment interest on the damages portion of the August 4, 2003 judgment and
from the Court's refusal to grant judgment as a matter of law to one of the
plaintiffs on his claim for severance pay in the amount of $240,000 plus
interest. The briefing phase of the appeal is scheduled to be concluded in April
2004. The timing of a ruling on the appeal cannot be predicted at this time.
In connection with this litigation, the Company accrued $9.7 million of
litigation charges at December 31, 2002, which includes the jury award of $7.6
million, professional fees of $1.1 million and an estimate of $1.0 million for
attorney fees and pre-judgment interest. During fiscal 2003, the Company paid
$1.3 million in fees. As of December 31, 2003, the accrued litigation reserve
was $8.4 million.
In addition, in November, 2002, the Company brought suit in the Superior Court
of New Jersey, Law Division on professional liability claims against the
attorneys who served as its counsel in the acquisition transaction and in its
subsequent dealings with the plaintiffs concerning their various relationships
with the Company resulting from that transaction. In its lawsuit against the
former counsel, the Company is seeking complete indemnification (1) for its
costs and counsel fees incurred in defending itself against the claims of the
plaintiffs; (2) for any sums for which the Company is ultimately determined to
be liable to the plaintiffs; and (3) for its costs and counsel fees incurred in
the prosecution of the legal malpractice action itself. That lawsuit has been
temporarily stayed in the Law Division at the request of the defendants until at
least May 10, 2004 while the appeal of the underlying action goes forward in the
Appellate Division of the Superior Court.
11
<page>
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
The Company is also subject to other pending legal proceedings and claims that
arise from time to time in the ordinary course of its business, which may or may
not be covered by insurance.
The litigation and other claims previously noted are subject to inherent
uncertainties and management's view of these matters may change in the future.
Were an unfavorable final outcome to occur, there exists the possibility of a
material adverse impact on our financial position and the results of operations
for the period in which the effect becomes reasonably estimable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under
the Symbol "RCMT". The following table sets forth approximate high and low
sales prices for the two years in the period ended December 31, 2003 as
reported by The Nasdaq National Market:
Common Stock
--------------------------------
Fiscal 2002 High Low
------ -----
First Quarter.................................. $5.34 $4.41
Second Quarter................................. 5.25 4.10
Third Quarter.................................. 5.14 3.73
Fourth Quarter................................. $4.94 $3.70
Fiscal 2003
First Quarter.................................. $4.08 $2.52
Second Quarter................................. 3.98 2.10
Third Quarter.................................. 5.50 3.39
Fourth Quarter................................. $7.69 $4.81
Holders
As of March 1, 2004, the approximate number of holders of record of the
Company's Common Stock was 686. Based upon the requests for proxy
information in connection with the Company's most recent Annual Meeting of
Stockholders, the Company believes the number of beneficial owners of its
Common Stock is approximately 2,625.
Dividends
The Company has never declared or paid a cash dividend on the Common Stock
and does not anticipate paying any cash dividends in the foreseeable
future. It is the current policy of the Company's Board of Directors to
retain all earnings to finance the development and expansion of the
Company's business. Any future payment of dividends will be at the
discretion of the Board of Directors and will depend upon, among other
things, the Company's earnings, financial condition, capital requirements,
level of indebtedness, contractual restrictions and other factors that the
Board of Directors deems relevant. The Revolving Credit Facility (as
defined in Item 7 hereof) prohibits the payment of dividends or
distributions on account of the Company's capital stock without the prior
consent of the majority of the Company's lenders.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data was derived from the
Company's Consolidated Financial Statements. The selected historical
consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company, and
notes thereto, included elsewhere herein.
Years Ended Two Months Year Ended
Ended
----------------------------------------------------------------------------------------------
December 31, December 31, October 31,
----------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1999
-------------------------------- -------------------------------------------- ----------------
Income Statement
Revenues $206,605,188 $186,650,616 $234,739,066 $305,444,247 $51,119,860 $311,412,892
Gross profit 44,594,686 46,664,861 62,575,740 78,045,164 13,163,458 76,274,494
Income before the charges
listed below 6,812,107 8,005,135 9,407,072 11,058,650 2,489,434 17,237,944
Amortization, net of tax (18,000) (12,000) (5,385,000) (4,390,000) (450,000) (2,410,000)
Goodwill impairment, net of tax (24,748,000) (22,758,000) ( 26,534,000)
Unusual items, net of tax (6,414,000) (2,083,000)
Equity compensation, net of tax (4,014,954)
Income (loss) from continuing
operations 2,779,153 (23,168,865) 18,735,928) ( 21,948,350) 2,039,434 14,827,944
(Loss) gain from discontinued
operations (967,065) (20,041) 51,964 11,559 120,304
Net income (loss) $2,779,153 ($24,135,930) ($ 18,755,969) ($ 21,896,386) $2,050,993 $14,948,248
Earnings Per Share (1)
Income (loss) from continuing
Operations $.26 ($2.19) ($1.78) ($2.09) $.19 $1.36
(Loss) gain from discontinued
Operations (.09) .01
Net income (loss) $.26 ($2.28) ($1.78) ($2.09) $.19 $1.37
Net income (loss)(basic
and diluted) $.26 ($2.28) ($1.78) ($2.09) $.20 $1.43
December 31, December 31, October 31,
----------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999 1999
---------------- --------------- ------------------------------------------------ ------------
Balance Sheet
Working capital $23,881,579 $16,516,062 $10,977,131 $56,508,604 $61,383,437 54,866,477
Total assets 99,703,589 88,439,784 131,155,945 174,268,828 183,950,884 184,047,546
Long term liabilities 49,483,873 47,300,000 40,800,000
Total liabilities 32,533,493 29,193,630 47,866,145 72,206,502 59,854,255 62,045,376
Shareholders' equity $67,170,096 $59,246,154 $83,289,800 $102,062,326 $124,096,629 $122,002,170
(1) Shares used in computing
earnings per share:
Basic 10,716,179 10,585,503 10,519,701 10,499,305 10,496,225 10,484,764
Diluted 10,896,305 10,585,503 10,519,701 10,499,305 10,951,447 10,942,146
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
RCM participates in a market that is cyclical in nature and extremely
sensitive to economic changes. As a result, the impact of economic changes
on revenues and operations can be volatile. The Company's consolidated
revenues have declined 32.4% or $98.8 million from a peak of $305 million
in year 2000. RCM had established significant personnel and infrastructures
to support a high-growth strategy through broad-based market penetration
and acquisitions. The dramatic slowdown in the United States economy, which
began during 2000, prompted management to reconsider its strategy. In that
regard, the Company initiated non-strategic reductions in its staff
personnel and office requirements in response to the decrease in sales
volume in year 2001. Since that time, management has continued to monitor
its operating cost structure in order to maintain a cost benefit
relationship with revenues. In addition, there has been an ongoing focus on
working capital management and cash flows. These efforts have resulted in
an improvement in accounts receivable collections, debt reduction and
improved cash flows. Furthermore, the Company has improved discipline in
its marketing and sales strategies and now focuses on growth in targeted
vertical markets and in service offerings providing greater opportunities
to maximize returns.
In addition, 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.
The Company believes that most companies have recognized the importance of
the Internet and information management technologies to compete 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. The Company 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 a demand for outsourcing. The Company
believes that its clients, and future prospective clients, are continuing
to evaluate the potential for outsourcing business critical applications
and entire business functions.
The Company 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
solutions and project management services. The Company also 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.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Overview (Continued)
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 insurance. 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 corporate marketing, administrative and reporting
responsibilities and acquisition program. The Company records these
expenses when incurred. Depreciation relates primarily to the fixed assets
of the Company. Amortization relates to a covenant not to compete resulting
from one of the Company's acquisitions. Acquisitions have been accounted
for under the purchase method of accounting for financial reporting
purposes and have created goodwill.
Critical Accounting Policies
The financial statements were prepared in accordance with generally
accepted accounting principles, which require management to make subjective
decisions, assessments, and estimates about the effect of matters that are
inherently uncertain. As the number of variables and assumptions affecting
the judgments increases, such judgments become even more subjective. While
management believes that its assumptions are reasonable and appropriate,
actual results may be materially different than estimated. The Company has
identified certain critical accounting policies, described below, that
require significant judgment to be exercised by management.
Revenue Recognition
The Company derives its revenues from several sources. All of the Company's
segments perform staffing services. The Company's Professional Engineering
Services and Information Technology Services segments also perform project
services. The Information Technology Services segment also derives revenue
from permanent placement fees.
Project Services - Project services are generally provided on a
cost-plus-fixed-fee or time-and-material basis. Typically, a customer will
outsource a discrete project or activity and the Company assumes
responsibility for performance of the function or project. The Company
recognizes revenues and associated costs on a gross basis as services are
performed and costs are incurred using its employees. In instances where
project services are provided on a fixed-price basis and the contract will
extend beyond a 12-month period, revenue is recorded in accordance with the
terms of each contract. In some instances, revenue is billed and recorded
at the time certain milestones are reached, as defined in the contract. In
other instances, revenue is billed and recorded based upon contractual
rates per hour. In addition, some contracts contain "Performance Fees"
(bonuses) for completing a contract under budget. Performance Fees, if any,
are recorded when the contract is completed and the revenue is reasonably
certain of collection. Some contracts also limit revenues and billings to
maximum amounts. Expenses related to contracts that extend beyond a
12-month period are charged to Cost of Services as incurred.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenue Recognition (Continued)
Staffing Services - Revenues derived from staffing services are recorded on
a gross basis as services are performed and associated costs have been
incurred using employees of the Company. In these circumstances, the
Company assumes the risk of acceptability of its employees to its
customers. In certain cases, the Company may utilize other companies and
their employees to fulfill customer requirements. In these cases, the
Company receives an administrative fee for arranging for, billing for and
collecting the billings related to these companies. The customer is
typically responsible for assessing the work of these companies who have
responsibility for acceptability of their personnel to the customer. Under
these circumstances, the Company's reported revenues are net of associated
costs (effectively the administrative fee).
Permanent Placement Fees - The Company earns permanent placement fees. Fees
for placements are recognized at the time the candidate commences
employment. The Company guarantees its permanent placements for 90 days. In
the event a candidate is not retained for the 90 day period, the Company
will provide a suitable replacement candidate. In the event a replacement
candidate cannot be located, the Company will provide a refund to the
client. An allowance for refunds, based upon the Company's historical
experience, is recorded in the financial statements. Revenues are recorded
on a gross basis as a component of revenue.
Accounts Receivable
The Company's accounts receivable are due from various types of companies.
Credit is extended based on evaluation of customers' financial condition
and, generally, collateral is not required. Accounts receivable payment
terms vary and are stated in the financial statements at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding
longer than the payment terms are considered past due. The Company
determines its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, the Company's
previous loss history, the customer's current ability to pay its obligation
to the Company, and the condition of the general economy and the industry
as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
Goodwill and Intangibles
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and
Other Intangible Assets." Accordingly, the Company discontinued amortizing
goodwill and began applying the specific guidance contained in that
Statement to evaluate the carrying value and recoverability of its goodwill
by evaluating the fair market value of the reporting units within which
goodwill resides. The process of estimating fair value, in part, relies on
the use of forecasts to estimate future cash flows expected from a
reporting unit. The estimation of future cash flows, based on reasonable
and supportable assumptions and projections, requires management's
subjective judgments. The time periods for estimating future cash flows are
lengthy, which increases the risk that actual future results could
significantly deviate from estimates. The Company compared the fair value
of each of its reporting units to their respective carrying values,
including related goodwill, which resulted in an impairment loss of
approximately $30 million for the year ended December 31, 2002. There were
no impairment losses for the year ended December 31, 2003. Changes in
future market conditions, the Company's strategy, or other factors could
impact upon the future values of these reporting units, which could result
in future impairment charges.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Accounting for Stock Options
The Company has used stock options to attract, retain, and reward employees
for long-term service. Generally accepted accounting principles allow
alternative methods of accounting for these awards. The Company has chosen
to account for its stock plans (including stock option plans) under APB
Opinion 25, "Accounting for Stock Issued to Employees." Since option
exercise prices reflect the market value per share of the Company's stock
upon grant, no compensation expense related to stock options is reflected
in the Company's income statement. SFAS 123, "Accounting for Stock-Based
Compensation," prescribes the alternative method of accounting for stock
options. Had SFAS 123 been adopted, the Company would have recorded
additional pre-tax costs of approximately $650,000 for the year ended
December 31, 2003. The pro-forma compensation cost was calculated using the
Black-Scholes Options Pricing Model, which includes estimates based on
assumptions for the risk-free interest rate, life of options and stock
price volatility. Changes in the underlying assumptions could impact the
pro-forma compensation cost.
Accounting for Income Taxes
In establishing the provision for income taxes and deferred income tax
assets and liabilities, and valuation allowances against deferred tax
assets, the Company makes judgments and interpretations based on enacted
tax laws, published tax guidance, as well as estimates of future earnings.
As of December 31, 2003, the Company has total net deferred tax assets of
$4.6 million. This includes $936,000, which relates primarily to federal
and state net operating loss carry forwards. Realization of deferred tax
assets is dependent upon the likelihood that future taxable income will be
sufficient to realize these benefits over time, and the effectiveness of
tax planning strategies in the relevant tax jurisdictions. In the event
that actual results differ from these estimates and assessments, additional
valuation allowances may be required.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (In thousands, except for earnings per share data)
Year Ended Year Ended Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
------------------------ ------------------------ -------------------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
---------- ------------ ----------- ------------ ----------- -------------
Revenues $206,605 100.0 $186,651 100.0 $234,739 100.0
Cost of services 162,010 78.4 139,986 75.0 172,163 73.3
---------- ------------ ----------- ------------ ----------- -------------
Gross profit 44,595 21.6 46,665 25.0 62,576 26.7
Selling, general and administrative 32,558 15.8 33,320 17.9 42,840 18.3
Depreciation and amortization 1,223 .6 1,258 .7 7,418 3.2
Compensation for stock tender offer 6,692 3.2
Litigation charge 9,718 5.2
Impairment of goodwill 29,990 16.1 34,993 14.9
Other expense 182 .1 156 .1 2,269 1.0
Income (loss) from continuing
operations before income taxes 3,940 1.9 (27,797) (15.0) (24,944) (10.6)
Income taxes (benefit) 1,161 .6 (4,608) (2.5) (6,208) (2.6)
Income (loss) from continuing operations 2,779 1.3 (23,169) (12.5) (18,736) (8.0)
Loss from discontinued operations, net
of taxes (967) (.5) (20)
---------- ------------ ----------- ------------ ----------- -------------
Net income (loss) $2,779 1.3 ($24,136) (13.0) ($18,756) (8.0)
========== ============ =========== ============ =========== =============
Earnings per share
Basic and Diluted:
Income (loss) from continuing operations $.26 ($2.19) ($1.78)
Discontinued operations ( .09)
---------- ----------- -----------
Net income (loss) $.26 ($2.28) ($1.78)
========== =========== ===========
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues. Revenues increased 10.7%, or $20.0 million, for 2003 as compared to
2002. The revenue increase was primarily attributable to increased revenues in
the Professional Engineering segment. Management attributes this increase
primarily to an increase in subcontracted revenues on a major project with
respect to which RCM is the general contractor. Subcontracted revenues
recognized by RCM for 2003 were approximately $24.2 million as compared to $4.7
million for 2002. RCM, as general contractor on this major project, subcontracts
certain tasks outside of RCM's core competencies as agreed upon with RCM's
customer.
Cost of Services. Cost of services increased 15.7%, or $22.0 million, for 2003
as compared to 2002. This increase was primarily due to an increase in
subcontractor costs associated with increased subcontracted revenues experienced
during 2003. Cost of services as a percentage of revenues increased to 78.4% for
2003 from 75.0% for 2002. 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.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
(Continued)
Selling, General and Administrative. Selling, general and administrative
("SGA") expenses decreased 2.3%, or $762,000 for 2003 as compared to 2002.
This decrease was primarily attributable to ongoing cost cutting and cost
containment initiatives. SGA expenses as a percentage of revenues were
15.8% for 2003 as compared to 17.9% for 2002.
Depreciation and Amortization. Depreciation and amortization decreased
2.8%, or $35,000, for 2003 as compared to 2002. This decrease was primarily
due to write down of impaired fixed assets prior to 2003.
Other Expense. Other expense consists of interest expense, net of interest
income and gains on foreign currency transactions. For 2003, actual
interest expense of $382,600 was offset by $68,100 of interest income,
which was principally earned from short-term money market deposits. For
2002, actual interest expense of $770,000 was offset by $599,000 of
interest income, which was principally earned from an income tax refund
claim with the Internal Revenue Service. The reduction of actual interest
expense of $387,800 was attributable to lower interest rates as well as
reduced need for average borrowings in 2003. The reduction in interest
expense was mitigated by interest on a post judgment verdict of $7.6
million (see note 17). Gains on foreign currency transactions increased
$115,300 because of the strengthening of the Canadian Dollar as compared to
the U.S. Dollar.
Income Tax. Income tax expense increased 125.2%, or $5.8 million, for
fiscal 2003 as compared to fiscal 2002. This increase was attributable to
the increased level of income before taxes for fiscal 2003 as compared to
fiscal 2002. The effective tax rate was 29.5%, for fiscal 2003 as compared
to an effective refund rate of 16.6% for fiscal 2002. The increase was
attributable to a reduction of tax deductible amortization of intangibles
in 2003.
Compensation Expense for Stock Option Tender. In order to enhance long-term
value for the shareholders of the Company, reduce the number of options
outstanding and improve the Company's ability to retain and provide
incentives to employees and directors, on September 30, 2003, the Company
made a tender offer to exchange stock options with a strike price of $7.00
or greater for shares of restricted stock and cash.
Upon expiration of the tender offer on November 14, 2003, option holders
participating in the tender offer received 607,777 shares of restricted
stock having an aggregate value of $3.8 million ($6.30 per share) as well
as cash consideration of $2.6 million, which was equal to 67% of the value
of the restricted common stock. Participants surrendered 1,327,973 stock
options, which represented 100% of all options eligible to be surrendered.
The Company recorded a charge of $6.7 million ($4.0 million after-tax) to
equity compensation expense in the fourth quarter of 2003 due to the tender
offer. Provided the Company has positive U.S. Federal taxable income in
future periods, the exchange offer will be approximately cash flow neutral
to the Company as the combined tax benefits (both the restricted common
stock issued and the cash consideration paid are tax deductible expenses)
will be approximately equal the actual cash consideration paid to employees
and directors.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
(Continued)
Litigation Charge. In 1998, two shareholders, who were formerly officers
and 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. The 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 underlying acquisition
transaction pursuant to which the plaintiffs became shareholders of the
Company. The 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 the
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 of both plaintiffs concerning the grant of
stock options were resolved in binding arbitration in early 2003. A trial
on the remaining claims commenced on December 2, 2002 and a verdict was
returned on January 24, 2003. On the claims by both plaintiffs, concerning
the alleged wrongful limiting of the number of shares that they could sell
during the 12-month period ended March 11, 1999, a verdict awarding damages
of $7.6 million against the Company was returned. On June 23, 2003, the
trial judge denied the Company's post-trial motions that challenged the
jury's verdict and the trial judge also upheld the jury's verdict. On
August 4, 2003, the trial judge entered a judgment in favor of the
plaintiffs for $7.6 million in damages and awarded plaintiffs $172,000 in
post-verdict prejudgment interest. Post-judgment interest will continue to
accrue on the damages portion of the judgment after August 4, 2003 (at the
rate of 5% per annum until December 31, 2003 and at the rate of 4% per
annum in 2004). The Company has appealed from, and obtained a stay pending
appeal of, that judgment. In order to secure the stay, the Company made a
cash deposit in lieu of bond of $8.3 million with the Trust Fund of the
Superior Court of New Jersey. This deposit is recorded as restricted cash
on the consolidated balance sheet and earns interest at a rate that
approximates the daily federal funds rate. The plaintiffs have
cross-appealed from the Court's denial of pre-verdict prejudgment interest
on the damages portion of the August 4, 2003 judgment and from the Court's
refusal to grant judgment as a matter of law to one of the plaintiffs on
his claim for severance pay in the amount of $240,000 plus interest. The
briefing phase of the appeal is scheduled to be concluded in April 2004.
The timing of a ruling on the appeal cannot be predicted at this time. As
of December 31, 2003, the accrued litigation reserve was $8.4 million.
In connection with this litigation, the Company accrued $9.7 million of
litigation charges at December 31, 2002, which includes the jury award of
$7.6 million, professional fees of $1.1 million and an estimate of $1.0
million for attorney fees and pre-judgment interest. The after tax effect
(on 2002 earnings) of the litigation is $6.4 million.
Goodwill Impairment. The Company performed an impairment review in
accordance with the requirements of SFAS No. 142 for the calendar years
2003 and 2002. During the fourth quarter of calendar 2002 the review
indicated that there was an impairment of value, which resulted in a $30.0
million ($24.7 million net of income tax benefit of $5.2 million) charge to
expense for the year ended December 31, 2002 in order to properly reflect
the appropriate carrying value of goodwill. The results of the 2003
impairment testing indicated no further impairment to goodwill. There can
be no assurance that future goodwill tests will not result in further
impairment charges.
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 ($967,000 net of income tax
benefit of $644,000) for fiscal 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 fiscal 2002. The tax effected operating results of the reporting
unit sold were losses of $29,000 for fiscal 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.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
(Continued)
Segment Discussion (See Footnote 15)
Information Technology ("IT")
IT revenues of $101 million decreased $10.4 million in 2003 or 9.3%
compared to 2002. The decline was principally attributable to a softening
of demand for information technology services, the weak economy, offshore
competition and widespread pricing pressures. The IT segment earnings
before interest, taxes,compensation expense for stock tender offer,
depreciation and amortization ("EBITDA") was $7.8 million or 7.7% of
revenues for 2003 as compared to $8.1 million or 7.3% of revenues for 2002.
The EBITDA margin percentage improvement was due to ongoing cost
containment efforts.
Professional Engineering ("PE")
PE revenues of $86.7 million in 2003 increased $30.7 million or 54.9%
compared to 2002. A significant reason for the increase was the revenues
generated from engineering services provided to an electric utility plant
in Canada. The PE segment EBITDA was $3.9 million, or 4.5% of revenues for
2003 as compared to $4.7 million or 8.4% of revenues for 2002. The decline
was attributable to subcontracted revenues recognized by RCM for 2003 of
approximately $24.2 million as compared to $4.7 million for 2002. RCM, as
general contractor on this major project, subcontracts certain tasks for
which RCM accepts lower margins.
Commercial Services ("CS")
CS revenues of $19.0 million in 2003 decreased $365,000 or 1.9% compared to
2002. This modest decline was principally attributable to a weak economy.
The CS segment EBITDA was $423,000 or 2.2% of revenues as compared to
$561,000 or 2.8% of revenues for 2002. The overall decline is principally
attributable to competitive pricing pressures and an unfavorable worker's
compensation rating market in California.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Revenues decreased 20.5%, or $48.1 million, for 2002 as compared
to 2001. The revenue decline was primarily attributable to softness in the
IT sector. Management attributes this softness to overall economic
conditions as well as hesitancy by customers to launch new capital spending
programs.
Cost of Services. Cost of services decreased 18.7%, or $32.2 million, for
2002 as compared to 2001. This decrease was primarily due to a decrease in
salaries and compensation associated with the decreased revenues
experienced during 2002. Cost of services as a percentage of revenues
increased to 75.0% for fiscal 2002 from 73.3% for 2001. This increase was
primarily attributable to an increase in the Company's revenues being
derived from Professional Engineering Services, which have historically had
lower gross profit margins and a decline in revenues derived from
Information Technology services which have historically higher gross
margins.
Selling, General and Administrative. SGA expenses decreased 22.2%, or $9.5
million, for 2002 as compared to 2001. This decrease was primarily
attributable to a reduction in the related variable costs corresponding to
reduction in revenues and cost cutting initiatives. SGA expenses, as a
percentage of revenues, were 17.9% for 2002 as compared to 18.3% for 2001.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
(Continued)
Depreciation and Amortization. Depreciation and amortization decreased
83.0%, or $6.2 million, for fiscal 2002 as compared to fiscal 2001. This
decrease was primarily due to a decrease in amortization of intangibles of
$6.3 million resulting from the Financial Accounting Standards Board (FASB)
issuance of Statement of Financial Accounting Standards (SFAS) 142,
Goodwill and Intangible Assets on July 20, 2001. SFAS 142 was effective for
all fiscal periods beginning after December 15, 2001. In accordance with
SFAS 142, for fiscal 2002, all previously recognized goodwill and
intangible assets with indefinite lives were no longer subject to
amortization. If SFAS 142 had been in effect on January 1, 2001, net loss
per share would have been $1.27 per share for fiscal 2001 as compared to a
net loss per share of $2.28 for 2002.
Other Expense. Other expense consists principally of interest expense, net
of interest income. For 2001, actual interest expense of $770,000 was
offset by $599,000 of interest income, which was principally earned from an
income tax refund claim with the Internal Revenue Service. Interest
expense, net, decreased $2.1 million, or 93%, for fiscal 2002 as compared
to fiscal 2001. 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 and the effect of lower interest rates on borrowed funds.
Income Tax. Income tax expense decreased 43.4%, or $3.0 million, for fiscal
2002 as compared to fiscal 2001. This decrease was attributable to a lower
level of income before taxes for fiscal 2002 as compared to fiscal 2001.
The effective tax refund rate was 16.6% for fiscal 2002 as compared to
24.9% for fiscal 2001. The reduction was attributable to tax deductible
amortization of intangibles in 2002.
Goodwill Impairment. As a result of the softness experienced in the IT
sector and the resultant revenue decline, management had been closely
monitoring the operating results of its IT branches throughout the year,
instituting significant reductions in selling, general and administrative
expenses and increasing efforts to revitalize sales levels. However, during
the fourth quarter of 2002, given the current economic environment and
continued reduction of capital spending on technology, management
determined that operating performance of certain of its branches indicated
that the possibility of impairment of goodwill arising at acquisition might
be impaired. The Company performed its annual impairment test as of
November 30, 2002 in accordance with SFAS No. 142. The Company determined
the fair value of its reporting units using 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. The analysis revealed that goodwill, amounting to approximately
$30.0 million ($24.7 million after taxes), had been impaired and,
therefore, would not be recoverable through future profitable operations
of these branches.
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 ($967,000 net of income tax
benefit of $644,000) for fiscal 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 fiscal 2002. The tax effected operating results of the reporting
unit sold were losses of $29,000 for fiscal 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.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
(Continued)
Segment Discussion (See Footnote 15)
Information Technology
IT revenues of $111.3 million decreased $54.3 million in 2002 or 32.8%
compared to 2001. The decline was principally attributable to a drastic
downturn in demand for information technology services, a weakening
economy, offshore competition and widespread pricing pressures. The IT
segment earnings before interest, taxes,compensation expense for stock
tender offer, depreciation and amortization ("EBITDA") was $8.1 million
or 7.3% of revenues for 2002 as compared to $13.6 million or 8.2% of
revenues for 2001. The EBITDA decrease was the result of significantly
lower revenues and pricing pressures in an overall weak market in 2002.
Professional Engineering
PE revenues of $56 million in 2002 increased $8.9 million or 18.8%
compared to 2001. The principal reason for the increase was the revenue
generated from engineering services provided to an electric utility plant
in Canada as well as an improving market for engineering services in the
power systems field. The PE segment EBITDA was $4.7 million, or 8.4% of
revenues for 2002 as compared to $5.5 million or 11.6% of revenues for
2001. The decline was attributable to subcontracted revenues recognized by
RCM for 2002 of approximately $4.7 million as compared to none for 2001.
RCM, as general contractor on this major project, subcontracts certain
tasks for which RCM accepts lower margins.
Commercial Services
CS revenues of $19.4 million in 2002 decreased $2.7 million or 12.0%
compared to 2001. This decline was principally attributable to a softening
economy and the planned exit of low margin contracts. The CS segment EBITDA
was $561,000 or 2.8% of revenues for 2002 as compared to $651,000 or 3.0%
of revenues for 2001. The overall decline is principally attributable to
competitive pricing pressures and an unfavorable worker's compensation
rating market in California.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Operating activities provided $2.9 million of cash in fiscal 2003 as
compared to operating activities providing $30.5 million of cash in fiscal
2002. The decrease in cash provided by operating activities was primarily
attributable to an increase in accounts receivable and restricted cash
which was partially offset by an increase in accrued payroll, accounts
payable and accrued expenses and an increase in income taxes payable and a
decrease in income tax refund receivable, deferred tax asset and prepaid
expenses and other current assets. The Company in 2003 used $8.3 million of
operating cash to secure a cash deposit in lieu of bond in connection with
certain litigation as described in Footnote 17 (Contingencies) to the
financial statements.
Investing activities used $1.8 million in fiscal 2003 as compared to $6.0
million for the comparable 2002 period. The reduction in the use of cash
for investing activities for fiscal 2003 as compared to the comparable 2002
period was primarily attributable to a reduction in property and equipment
expenditures and acquisition and deferred consideration payments.
Financing activities principally consisted of debt reduction of $120,000 in
fiscal 2003 as compared to financing activities using $24.1 million for
debt reduction for the comparable 2002 period. The Company incurred $6.8
million of borrowed funds to finance an aforementioned cash deposit in lieu
of bond.
The Company and its subsidiaries entered into an amended and restated loan
agreement on May 31, 2002, (further amended on October 1, 2003) with
Citizens Bank of Pennsylvania, administrative agent for a syndicate of
banks, which provides for a $25.0 million Revolving Credit Facility (the
"Revolving Credit 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. As cash flow permits and depending
on interest rate movements, the Company may, from time to time and subject
to a nominal prepayment fee, apply available cash flows to reduce the
Revolving Credit Facility.
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 Company is currently evaluating an extension or
replacement of its Revolving Credit Facility after August 2004. The
weighted average interest rates for fiscal 2003 and 2002 were 3.67% and
6.49%, respectively. The amounts outstanding under the Revolving Credit
Facility at December 31, 2003 and December 31, 2002 were $7.3 million and
$7.4 million, respectively. At December 31, 2003, the Company had
availability (including amounts outstanding) under the Revolving Credit
Facility of $17.7 million.
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 litigation as described in Footnote 17 (Contingencies) to
the financial statements. The outcome of litigation is subject to inherent
uncertainties and management's view of these matters may change in the
future. Were an unfavorable final outcome to occur, there exists the
possibility of a material adverse impact on our financial position,
liquidity, and the results of operations for the period in which the effect
becomes reasonably estimable.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
The Company anticipates that if the plaintiffs in the litigation matter,
which is currently being appealed by the Company, are successful in their
appeal of the damages, it would need to borrow funds under its Revolving
Credit Facility in order to satisfy payment of the additional damages. The
Company believes that its borrowing base is sufficient to allow this
additional borrowing.
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 currently 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.
At December 31, 2003, the Company has a current deferred tax asset of $4.6
million, primarily representing the tax effect of the net operating loss
carry forwards, and the litigation reserve. The Company expects to utilize
the deferred tax asset during the year ended December 31, 2004.
Summarized below are the Company's obligations and commitments to make
future payments under lease agreements and debt obligations as of December
31, 2003 (in thousands):
Payments Due by Period
--------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
------------- ------------ ------------ ------------ --------------
Long-Term Obligation Capital
(Finance) Lease Obligations
Note Payable (1) $7,300 $7,300
Operating Lease Obligations 10,081 $2,421 $2,876 $1,956 $2,828
Purchase Obligations
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet Under GAAP
------------- ------------ ------------ ------------ --------------
Total $17,381 $9,721 $2,876 $1,956 $2,828
============= ============ ============ ============ ==============
<FN>
(1) The Revolving Credit Facility agreement expires in August 2004.
</FN>
Seasonal Variations
The timing of certain holidays, weather conditions and seasonal vacation
patterns can cause the Company's results of operations to fluctuate. The
Company generally expects to realize higher revenues, operating income and
net income during the second and third quarters and relatively lower
revenues, operating income and net income during the first and fourth
quarters.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Impact of Inflation
Staffing and project services are priced generally based on mark-ups on
prevailing rates of pay, and as a result are able to generally maintain
their relationship to direct labor costs. Permanent placement services are
priced as a function of salary levels of the job candidates. In 2002,
employee benefit costs, primarily health care costs, rose due to an
increase in the Company's health insurance premiums. After the significant
rise in insurance costs during 2002, the Company implemented a plan to
control these costs through higher co-pays and pricing adjustments during
2003. This strategy allowed the Company to offset a portion of these costs.
The Company is continuing to review its options to further reduce these
costs, which the Company does not believe are representative of general
inflationary trends. Otherwise, inflation has not been a meaningful factor
in the Company's operations.
Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146 (SFAS 146) - "Accounting for Costs
Associated with Exit or Disposal Activities", which supersedes EITF
No.94-3, "Liability Recognition for Certain Employees Termination Benefits
and Other Costs to Exit and Activity (Including Certain Costs Incurred in a
Restructuring)". SFAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred, rather than at the
date of a commitment to an exit or disposal plan as required by EITF No.
94-3. SFAS 146 is effective for restructuring activities initiated after
December 31, 2002. This statement does not require companies to adjust
restructuring reserves recorded before 2003. The Company will apply SFAS
146 to future restructurings, if applicable. Currently, there is no
intention to initiate such action.
Effective December 15, 2002, the Company adopted FIN No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The Company has assessed
this interpretation and has provided the necessary disclosures in Note 11.
In December 2002, the FASB issued SFAS 148 (SFAS 148), "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS
123 "Accounting for Stock-Based Compensation" to provide alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS 148 is effective for fiscal
years beginning after December 15, 2002. The expanded annual disclosure
requirements and the transition provisions are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The adoption of SFAS 148 did not
have a material effect on the Company's consolidated financial position,
results of operations, or cash flows.
In January 2003, the Financial Accounting Standards Board ("FASB") released
Interpretation No. 46 Consolidation of Variable Interest Entities ("FIN
46") which requires that all primary beneficiaries of Variable Interest
Entities (VIE) consolidate that entity. FIN 46 is effective immediately for
VIE created after January 31, 2003 and to VIE in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003 to VIE in which an enterprise
holds a variable interest it acquired before February 1, 2003. In December
2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some
of the provisions of the interpretation and to defer the effective date of
implementation for certain entities. Under the guidance of FIN 46R,
entities that do not have interests in structures that are commonly
referred to as special purpose entities are required to apply the
provisions of the interpretation in financials statements for periods
ending after March 14, 2004. The Company does not have interests in special
purpose entities and does not anticipate that the adoption of FIN 46R will
have a material impact on the Company's consolidated financial position,
results of operations, or cash flows.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS 150 established standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS
150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. This statement did not
have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and debt instruments, which
primarily consist of its line of credit. The Company does not have any
derivative financial instruments in its portfolio. The Company places its
investments in instruments that meet high credit quality standards. The
Company is adverse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk
and reinvestment risk. As of December 31, 2003, the Company's investments
consisted of cash and money market funds. The Company does not use interest
rate derivative instruments to manage its exposure to interest rate
changes. Presently the impact of a 10% (approximately 28 basis points)
increase in interest rates on its variable debt (using average debt
balances during the year ended December 31, 2003 and average interest
rates) would have a relatively nominal impact on the Company's results of
operations. The Company does not expect any material loss with respect to
its investment portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements, together with the report of the Company's
independent auditors, begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company has conducted an evaluation of the effectiveness of its
disclosure controls and procedures (as defined in Rule 13A-15(e) under the
Securities Exchange Act of 1934) under the supervision of its Chief
Executive Officer and its Chief Financial Officer within 90 days of the
filing of this annual report on Form 10-K. Based on this evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures provide reasonable assurance
that information required to be disclosed by the Company in reports filed
under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported upon in such reports within time periods specified
for their filing. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or
submits under the Securities Exchange Act of 1934 is accumulated and
communicated to the issuer's management, including its principal executive
and principal financial officers, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure.
It should be noted that the design of any system of controls is based in
part on certain assumptions about the likelihood of future events. A
control system, no matter how well designed and implemented, can provide
only reasonable, not absolute assurance, that the objectives of the control
system will be met.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the 2004 Proxy Statement beginning immediately following
the caption "ELECTION OF DIRECTORS" to, but not including, the caption
"EXECUTIVE COMPENSATION" and the additional information in the 2004 Proxy
Statement beginning immediately following the caption "COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT" to, but not including, the caption
"BOARD MEETINGS AND COMMITTEES" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 2004 Proxy Statement beginning immediately following
the caption "EXECUTIVE COMPENSATION" to, but not including, the caption
"COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS" and the additional
information in the 2004 Proxy Statement beginning immediately following the
caption "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" to,
but not including, the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 2004 Proxy Statement beginning immediately following
the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
MANAGEMENT" to, but not including, the caption "ELECTION OF DIRECTORS" is
incorporated herein by reference.
The table below presents certain information concerning securities issuable
in connection with equity compensation plans that have been approved by the
Company's shareholders and that have not been approved by the Company's
shareholders.
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average exercise issuance under equity
issued upon exercise of price of outstanding compensation plans,
outstanding options, options, warrants and excluding securities
Plan category warrants and rights rights reflected in column (a)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans 1,214,916 $3.71 1,074,287
approved by security
holders...............
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security
holders...............
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
1,214,916 $3.71 1,074,287
...................Total
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 2004 Proxy Statement beginning immediately following
the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information in the 2004 Proxy Statement beginning immediately
following the caption "PRINCIPAL ACCOUNTANT FEES AND SERVICES" is
incorporated herein by reference.
28
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statement Schedules -- See "Index to Financial
Statements and Schedules" on F-1.
3. See Item (c) below.
(b) Reports on Form 8-K
None
(c) Exhibits
(3)(a) Articles of Incorporation, as amended; incorporated by reference
to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1994.
(3)(b) Bylaws, as amended; incorporated by reference to Exhibit 3 to
the Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1996.
(4)(a) Rights Agreement dated as of March 14, 1996, between RCM
Technologies, Inc. and American Stock Transfer & Trust Company, as
Rights Agent; incorporated by reference to Exhibit 4 to the
Registrant's Current Report on Form 8-K dated March 21, 1996.
* (10)(a) RCM Technologies, Inc. 1992 Incentive Stock Option Plan;
incorporated by reference to Exhibit A of the Registrant's Proxy
Statement dated April 23, 1992, filed with the Commission on March
9, 1992.
(10)(b) RCM Technologies, Inc. 1994 Non-employee Director Stock Option
Plan; incorporated by reference to Exhibit A of the Registrant's
Proxy Statement dated May 19, 1994, filed with the Commission on
June 22, 1994.
* (10)(c) RCM Technologies, Inc. 1996 Executive Stock Option Plan
dated August 15, 1996; incorporated by reference to Exhibit 10(l)
to the Registrant's Annual Report on Form 10-K for the year ended
October 31, 1996 (the "1996 10-K").
* (10)(d) Second Amended and Restated Termination Benefits Agreement
dated March 18, 1997 between the Registrant and Leon Kopyt;
incorporated by reference to Exhibit 10(g) to the Registrant's
Registration Statement on Form S-1 dated March 21, 1997
(Commission File No. 333-23753).
* (10)(e) Amended and Restated Employment Agreement dated November
30, 1996 between the Registrant, Intertec Design, Inc. and Leon
Kopyt; incorporated by reference to Exhibit 10(g) to the 1996
10-K.
(10)(f) Registration Rights Agreement dated March 11, 1996 by and between
RCM Technologies, Inc. and the former shareholders of The
Consortium; incorporated by reference to Exhibit (c)(2) to the
Registrant's Current Report on Form 8-K dated March 19, 1996.
* (10)(g) RCM Technologies, Inc. 2002 Employee Stock Incentive Plan;
incorporated by reference to Exhibit A to the Registrant's Proxy
Statement dated March 3, 2002, filed with the Commission on
February 28, 2001.
(10)(h) Amended and Restated Loan and Security Agreement dated May 31,
2002 between RCM Technologies, Inc. and All of its Subsidiaries
with Citizens Bank of Pennsylvania, as Administrative Agent and
Arranger.
*(10)(i) Severance Agreement dated June 10, 2002 between RCM Technologies,
Inc. and Leon Kopyt.
29
PART IV (CONTINUED)
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K (CONTINUED)
(c) Exhibits (Continued)
* (10)(j) Exhibit A To Severance Agreement General Release.
(10)(k) Amendment And Modification to Amended And Restated Loan and
Security Agreement dated December 30, 2002, between RCM
Technologies, Inc. and all of its Subsidiaries and Citizens Bank
of Pennsylvania as Administrative Agent and Arranger.
(10)(l) Second Amendment And Modification to Amended And Restated Loan and
Security Agreement dated February 26, 2003, between RCM
Technologies, Inc. and all of its Subsidiaries and Citizens Bank
of Pennsylvania as Administrative Agent and Arranger.
(10)(m) Third Amendment And Modification to Amended And Restated Loan and
Security Agreement dated October 1, 2003, between RCM
Technologies, Inc. and all of its Subsidiaries and Citizens Bank
of Pennsylvania as Administrative Agent and Arranger.
(11) Computation of Earnings (loss) share.
(21) Subsidiaries of the Registrant.
(23) Consent of Grant Thornton LLP.
31.1 Certifications of Chief Executive Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certifications of Chief Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 Certifications of Chief Executive Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended.
(This exhibit shall not be deemed "filed" for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.)
32.2 Certifications of Chief Financial Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended.
(This exhibit shall not be deemed "filed" for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.)
* Constitutes a management contract or compensatory plan or arrangement.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 4, 2004 By:/s/ Leon Kopyt
-------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer and
Director
Date: March 4, 2004 By:/s/ Stanton Remer
-----------------------------
Stanton Remer
Chief Financial Officer, Treasurer, Secretary and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated have signed this report below.
Date: March 4, 2004 /s/ Leon Kopyt
--------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: March 4, 2004 /s/ Stanton Remer
-------------------------------
Stanton Remer
Chief Financial Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer) and
Director
Date: March 4, 2004 /s/ Norman S. Berson
----------------------------
Norman S. Berson
Director
Date: March 4, 2004 /s/ Robert B. Kerr
-------------------------------
Robert B. Kerr
Director
Date: March 4, 2004 /s/ David Gilfor
-----------------------------
David Gilfor
Director
31
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Consolidated Balance Sheets, December 31, 2003 and 2002 F-2
Consolidated Statements of Operations,
Years Ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Changes in Shareholders' Equity and
Consolidated Statements of Comprehensive Income (Loss),
Years Ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows,
Years Ended December 31, 2003, 2002 and 2001 F-7
Notes to Consolidated Financial Statements F-9
Report of Independent Certified Public Accountants F-32
Schedules I and II F-33
F-1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
ASSETS
2003 2002
--------------- ---------------
Current assets
Cash and cash equivalents $5,152,499 $2,845,154
Accounts receivable, net of allowance for doubtful accounts
of $1,854,000 and $1,549,000 in 2003
and 2002, respectively 36,269,369 31,753,934
Income tax refund receivable 3,766,585
Restricted cash 8,295,625
Prepaid expenses and other current assets 2,099,206 2,635,304
Deferred tax assets 4,598,373 4,708,715
--------------- ---------------
Total current assets 56,415,072 45,709,692
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 9,564,939 9,708,344
Less: accumulated depreciation and amortization 4,435,164 3,818,092
--------------- ---------------
5,129,775 5,890,252
--------------- ---------------
Other assets
Deposits 82,958 86,590
Goodwill 38,007,233 36,653,595
Intangible assets, net of accumulated amortization
of $242,249 and $211,000 in 2003
and 2002, respectively 68,551 99,655
--------------- ---------------
38,158,742 36,839,840
--------------- ---------------
Total assets $99,703,589 $88,439,784
=============== ===============
F-2
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2003 and 2002
LIABILITIES AND SHAREHOLDERS' EQUITY
2003 2002
--------------- ---------------
Current liabilities
Line of credit $7,300,000 $7,420,000
Accounts payable and accrued expenses 15,574,036 14,728,729
Accrued payroll 5,456,330 4,363,024
Payroll and withheld taxes 177,030 193,850
Income taxes payable 4,026,097 2,488,027
--------------- ---------------
Total current liabilities 32,533,493 29,193,630
--------------- ---------------
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; 11,285,279 and
10,626,076 shares issued and outstanding in
2003 and 2002, respectively 564,264 531,304
Accumulated other comprehensive income (loss) 556,795 (584,084)
Additional paid-in capital 97,906,888 93,935,938
Accumulated deficit (31,857,851) (34,637,004)
--------------- ---------------
67,170,096 59,246,154
--------------- ---------------
Total liabilities and shareholders' equity $99,703,589 $88,439,784
=============== ===============
F-3
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
--------------- -------------- ---------------
Revenues $206,605,188 $186,650,616 $234,739,066
Cost of services 162,010,502 139,985,755 172,163,326
--------------- -------------- ---------------
Gross profit 44,594,686 46,664,861 62,575,740
--------------- -------------- ---------------
Operating costs and expenses
Selling, general and administrative 32,557,953 33,320,034 42,840,489
Depreciation 1,192,293 1,258,323 1,124,601
Amortization 31,104 20,720 6,292,942
Compensation expense for stock option tender offer 6,691,590
Impairment of goodwill 29,990,099 34,993,435
Litigation charge 9,717,663
--------------- -------------- ---------------
40,472,940 74,306,839 85,251,467
--------------- -------------- ---------------
Operating income (loss) 4,121,746 (27,641,978 ) (22,675,727 )
--------------- -------------- ---------------
Other (expenses) income
Interest expense, net of interest income (314,491 ) (171,900 ) (2,289,096 )
Gain on foreign currency transactions 132,296 16,967 20,837
--------------- -------------- ---------------
(182,195 ) (154,933 ) (2,268,259 )
--------------- -------------- ---------------
Income (loss) from continuing operations
before income taxes 3,939,551 (27,796,911 ) (24,943,986 )
Income tax expense (benefit) 1,160,398 (4,628,046 ) (6,208,058 )
--------------- -------------- ---------------
Income (loss) from continuing operations 2,779,153 (23,168,865 ) (18,735,928 )
Loss from discontinued operations
net of taxes of $644,000 (2002)
and $13,400 (2001) (967,065 ) (20,041 )
--------------- -------------- ---------------
Net income (loss) $2,779,153 ($24,135,930 ) ($ 18,755,969 )
========== ============= ==============
F-4
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------- -------------- --------------
Basic earnings (loss) per share
Income (loss) from continuing operations $.26 ($2.19 ) ($1.78 )
Loss from discontinued operations ( .09 )
----- ---------- -----
Net income (loss) $.26 ($2.28 ) ($1.78 )
==== ====== =====
Weighted average number of common shares
outstanding 10,716,179 10,585,503 10,519,701
Diluted earnings (loss) per share
Income (loss) from continuing operations $.26 ($2.19 ) ($1.78 )
Loss from discontinued operations ( .09 )
----- ---------- -----
Net income (loss) $.26 ($2.28 ) ($1.78 )
==== ====== =====
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to
options of 180,126 in 2003). 10,896,305 10,585,503 10,519,701
F-5
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
Accumulated Retained
Other Additional Earnings
Common Stock Comprehensive Paid-in (Accumulated
------------
Shares Amount Income (Loss) Capital Deficit)
------ ------ ------------- -------- --------
Balance, December 31, 2000 10,499,651 $524,982 ($233,631) $93,516,080 $8,254,895
Issuance of stock under employee
stock purchase plan 72,110 3,606 230,489
Translation adjustment (250,652)
Net loss (18,755,969)
------------- -------------- ----------------- ---------------- --------------
Balance, December 31, 2001 10,571,761 528,588 (484,283) 93,746,569 (10,501,074)
Issuance of stock under employee
stock purchase plan 53,410 2,671 187,885
Exercise of stock options 905 45 1,484
Translation adjustment (99,801)
Net loss (24,135,930)
------------- -------------- ----------------- ---------------- --------------
Balance, December 31, 2002 10,626,076 531,304 (584,084) 93,935,938 (34,637,004)
Issuance of stock under employee
stock purchase plan 39,926 1,996 129,419
Exercise of stock options 11,500 575 42,925
Issuance of restricted shares
pursuant to stock option tender offer 607,777 30,389 3,798,606
Translation adjustment 1,140,879
Net income 2,779,153
------------- -------------- ----------------- ---------------- -------------
Balance, December 31, 2003 11,285,279 $564,264 $556,795 $97,906,888 ($31,857,851)
============= ============== ================= ================ ==============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 2003, 2002 and 2001
2002
2003 2001
--------------- --------------- ------------------
Net income (loss) $2,779,153 ($24,135,930 ) ($18,755,969 )
Foreign currency translation
adjustment 1,140,879 (99,801 ) (250,652 )
--------------- --------------- ------------------
Comprehensive income (loss) $3,920,032 ($24,235,731 ) ($19,006,621 )
=============== =============== ==================
F-6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
-------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $2,779,153 ($24,135,930 ) ($18,755,969 )
-------------- -------------- --------------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Loss on discontinued operations 967,065 20,041
Depreciation and amortization 1,223,397 1,279,043 7,417,543
Provision for allowances on accounts
receivable 305,000 (246,000 ) (80,000 )
Recognition of noncash portion of
compensation expense for stock
tender offer 3,828,995
Goodwill impairment 29,990,099 34,993,435
Deferred tax 110,342 2,022,694 (6,819,295 )
Changes in assets and liabilities:
Accounts receivable (4,820,435 ) 9,666,894 22,937,736
Income tax refund receivable 3,766,585 3,043,508 607,165
Restricted cash (8,295,625 )
Prepaid expenses and other current )
assets 536,098 (774,602 192,627
Accounts payable and accrued expenses 845,307 6,074,855 (6,999,251 )
Accrued payroll 1,093,306 (774,314 ) (2,553,922 )
Payroll and withheld taxes (16,820 ) (181,934 ) (936,044 )
Income taxes payable 1,538,070 3,578,189 (93,720 )
-------------- -------------- --------------
Total adjustments 114,220 54,645,497 48,686,315
-------------- -------------- --------------
Net cash provided by operating activities $2,893,373 $30,509,567 $29,930,346
-------------- -------------- --------------
F-7
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
--------------- -------------- --------------
Cash flows from investing activities:
Proceeds on sale of reporting unit $ 100,000
Property and equipment acquired ($431,816 ) (626,978 ) ($1,819,593 )
Decrease in deposits 3,632 89,101 47,821
Contingent consideration (1,353,638 ) (5,528,563 ) (13,222,932 )
--------------- -------------- --------------
Net cash used in investing activities (1,781,822 ) (5,966,440 ) (14,994,704 )
--------------- -------------- --------------
Cash flows from financing activities:
Net repayments of line of credit (120,000 ) (24,080,000 ) (15,800,000 )
Sale of stock for employee stock purchase plan 131,415 190,556 234,095
Exercise of stock options 43,500 1,529
--------------- -------------- --------------
Net cash provided by (used in) financing
activities 54,915 (23,887,915 ) (15,565,905 )
--------------- -------------- --------------
Effect of exchange rate changes on cash
and cash equivalents 1,140,879 (99,801 ) (250,652 )
--------------- -------------- --------------
Net increase (decrease) in cash
and cash equivalents 2,307,345 555,411 (880,915 )
Cash and cash equivalents at beginning of year 2,845,154 2,289,743 3,170,658
--------------- -------------- --------------
Cash and cash equivalents at end of year $5,152,499 $2,845,154 $2,289,743
=============== ============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $244,727 $835,221 $2,645,404
Income taxes (refund) (3,951,320 ) (12,164,528 ) 793,591
Acquisitions:
Fair value of assets acquired, including
contingent consideration payments 1,353,638 5,528,563 13,222,932
--------------- -------------- --------------
Cash paid, net of cash acquired $1,353,638 $5,528,563 $13,222,932
=============== ============== ==============
F-8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
RCM Technologies is a premier provider of business and technology solutions
designed to enhance and maximize the operational performance of its
customers through the adaptation and deployment of advanced information
technology and engineering services. RCM's offices are located in major
metropolitan centers throughout North America.
The consolidated financial statements are comprised of the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of the
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Fiscal Periods
The reporting period for the Company is the Saturday closest to the last
day in December. Fiscal years 2001, 2002 and 2003 represented the 52 weeks
ended December 29, 2001, December 28, 2002 and December 27, 2003,
respectively. The Company's consolidated financial statements have
historically referred to fiscal years as ending on December 31. Differences
between the Company's fiscal year and a calendar year have been immaterial.
References to years in this annual report relate to fiscal years rather
than calendar years.
Cash and Cash Equivalents
The Company considers its holdings of highly liquid money-market
instruments to be cash equivalents if the securities mature within 90 days
from the date of acquisition. These investments are carried at cost, which
approximates fair value.
Fair Value of Financial Instruments
The Company's carrying value of financial instruments approximates fair
value because of the nature and characteristics of its financial
instruments. The Company does not have any off-balance sheet financial
instruments. The Company does not have derivative products in place to
manage risks related to foreign currency fluctuations for its foreign
operations or for interest rate changes.
Allowance for Doubtful Accounts
The Company's accounts receivable are due from various types of companies.
Credit is extended based on evaluation of customers' financial condition
and, generally, collateral is not required. Accounts receivable payment
terms vary and are stated in the financial statements at amounts due from
customers net of an allowance for doubtful accounts. Accounts outstanding
longer than the payment terms are considered past due. The Company
determines its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, the Company's
previous loss history, the customer's current ability to pay its obligation
to the Company, and the condition of the general economy and the industry
as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
F-9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line method at rates calculated to provide for retirement of
assets at the end of their estimated useful lives. The annual rates are 20%
for computer hardware and software as well as furniture and office
equipment. Leasehold improvements are amortized over the shorter of the
estimated life of the asset or the lease term.
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 is
reflected in the consolidated balance sheets as goodwill. Goodwill at
December 31, 2003 and 2002 was $38,007,000 and $36,654,000, respectively,
and was being amortized on a straight-line method over twenty years through
December 31, 2001. Effective January 1, 2002, all previously recognized
goodwill and intangible assets with indefinite lives was no longer subject
to amortization. Amortization expense for the years ended December 31,
2003, 2002 and 2001 was $-0-, $-0- and $6,293,000, respectively.
The Company performed an impairment review in accordance with the
requirements of SFAS No. 142 for the calendar years 2003 and 2002 and in
accordance with SFAS No. 121 for calendar year 2001. During the fourth
quarter of calendar 2002 and 2001, the reviews indicated that there was an
impairment of value, which resulted in a $30.0 million and $35.0 million
charge to expense for the years ended December 31, 2002 and 2001,
respectively, in order to properly reflect the appropriate carrying value
of goodwill. The results of the 2003 impairment testing indicated no
further impairment of goodwill.
Software
In accordance with Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use," certain
costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software.
During the years ended December 31, 2003, 2002 and 2001, the Company
capitalized approximately $114,000, $287,000 and $176,000, respectively, of
software costs in conformity with SOP 98-1.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes", which
requires an asset and liability approach of accounting for income taxes.
SFAS 109 requires assessment of the likelihood of realizing benefits
associated with deferred tax assets for purposes of determining whether a
valuation allowance is needed for such deferred tax assets. The Company and
its wholly owned U.S. subsidiaries file a consolidated federal income tax
return.
Revenue Recognition
The Company derives its revenues from several sources. All of the Company's
segments perform staffing services. The Company's Professional Engineering
Services and Information Technology Services segments also perform project
services. The Information Technology Services segment also derives revenue
from permanent placement fees.
F-10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Project Services - Project services are generally provided on a
cost-plus-fixed-fee or time-and-material basis. Typically, a customer will
outsource a discrete project or activity and the Company assumes
responsibility for performance of the function or project. The Company
recognizes revenues and associated costs on a gross basis as services are
performed and costs are incurred using its employees. In instances where
project services are provided on a fixed-price basis and the contract will
extend beyond a 12-month period, revenue is recorded in accordance with the
terms of each contract. In some instances, revenue is billed and recorded
at the time certain milestones are reached, as defined in the contract. In
other instances, revenue is billed and recorded based upon contractual
rates per hour. In addition, some contracts contain "Performance Fees"
(bonuses) for completing a contract under budget. Performance Fees, if any,
are recorded when the contract is completed and the revenue is reasonably
certain of collection. Some contracts also limit revenues and billings to
maximum amounts. Expenses related to contracts that extend beyond a
12-month period are charged to Cost of Services as incurred.
Staffing Services - Revenues derived from staffing services are recorded on
a gross basis as services are performed and associated costs have been
incurred using employees of the Company. In these circumstances, the
Company assumes the risk of acceptability of its employees to its
customers. In certain cases, the Company may utilize other companies and
their employees to fulfill customer requirements. In these cases, the
Company receives an administrative fee for arranging for, billing for and
collecting the billings related to these companies. The customer is
typically responsible for assessing the work of these companies who have
responsibility for acceptability of their personnel to the customer. Under
these circumstances, the Company's reported revenues are net of associated
costs (effectively the administrative fee).
Permanent Placement Fees - The Company earns permanent placement fees. Fees
for placements are recognized at the time the candidate commences
employment. The Company guarantees its permanent placements for ninety
days. In the event a candidate is not retained for the ninety-day period,
the Company will provide a suitable replacement candidate. In the event a
replacement candidate cannot be located, the Company will provide a refund
to the client. An allowance for refunds, based upon the Company's
historical experience, is recorded in the financial statements. Revenues
are recorded on a gross basis as a component of revenue.
Concentration
During 2003, the Company's largest customer accounted for 22% of the
Company's revenues. The Company's five and ten largest customers accounted
for approximately 42% and 52%, respectively, of the Company's revenues for
2003. However, of the $45.1 million in revenues from the Company's largest
customer, $24.1 million represented "Pass-Through" revenues where the
Company acted as a general contractor and subcontracted $24.1 million of
business at a gross margin of approximately 1.2%. If the Company adjusted
for these pass-through revenues, its largest customer would have accounted
for 11.5% of total revenues. Similarly, the Company's five and ten largest
customers would have accounted for 34.5% and 45.6%, respectively.
Foreign Currency Translation
The Company's foreign subsidiary uses Canadian currency as the functional
currency. Net assets are translated at year-end rates while revenues and
expenses are translated at average exchange rates. Adjustments resulting
from these translations are reflected in "Accumulated Other Comprehensive
Income (Loss)" in shareholders' equity. Gains and losses arising from
foreign currency transactions are reflected in the consolidated statements
of operations.
F-11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income(Loss)
Comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustments.
Per Share Data
Basic net income per share is calculated using the weighted-average number
of common shares outstanding during the period. Diluted net income per
share is calculated using the weighted-average number of common shares plus
dilutive potential common shares outstanding during the period. Potential
common shares consist of stock options that are computed 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.
Because of the Company's capital structure, all reported earnings pertain
to common shareholders and no other assumed adjustments are necessary.
The number of common shares used to calculate basic and diluted earnings
per share for 2003, 2002 and 2001 was determined as follows:
Year Ended Year Ended Year Ended
December 31, December December
2003 31, 2002 31, 2001
--------------- ------------- -------------
Basic average shares outstanding 10,716,179 10,585,503 10,519,701
Dilutive effect of stock options 180,126
--------------- ------------- -------------
Dilutive shares 10,896,305 10,585,503 10,519,701
=============== ============= =============
Options to purchase 1,214,916 shares of common stock at prices ranging from
$3.00 to $11.93 per share were outstanding as of December 31, 2003. There
were 428,000 options not included in the calculation of common stock
equivalents because the exercise price of the options exceeded the average
market price for the year ended December 31, 2003.
Options to purchase 2,474,214 shares of common stock at prices ranging from
$3.00 to $15.31 per share were outstanding as of December 31, 2002, but
were not included in the computation of diluted EPS because of net loss
incurred in 2002.
Options to purchase 2,415,780 shares of common stock at prices ranging from
$3.00 to $15.31 per share were outstanding as of December 31, 2001, but
were not included in the computation of diluted EPS because of net loss
incurred in 2001.
Stock Based Compensation
The Company accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair
value-based method for valuing stock-based compensation, that measures
compensation cost at the grant date based on the fair value of the award.
Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to
continue accounting for employee stock options and similar equity
instruments under Accounting Principles Board (APB) Opinion 25, Accounting
for Stock Issued to Employees. Entities that continue to account for stock
options using APB Opinion 25 are required to make pro forma disclosures of
net income and earnings per share, as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied.
F-12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation (Continued)
At December 31, 2003, the Company has four stock-based employee
compensation plans. The Company accounts for the plans under the
recognition and measurement principles of APB No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Stock-based employee
compensation costs are not reflected in net earnings, as all options
granted under the plan had an exercise price equal to the market value of
the underlying common stock on the date of grant. The following table
illustrates the effect on net earnings and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123
to stock-based employee compensation (in thousands, except per share
amounts).
December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ ------------
Net income (loss), as reported $2,779 ($24,135 ) ($18,756 )
Less: stock-based compensation costs
determined under fair value based
method for all awards, net of
related tax 500 898 3,013
Net income (loss), pro forma $2,279 ($25,033 ) ($21,769 )
Income (loss) per share of common stock-basic:
As reported $.26 ($2.28 ) ($1.78 )
Pro forma $.21 ($2.36 ) ($2.07 )
Income (loss) per share of common stock-diluted:
As reported $.26 ($2.28 ) ($1.78 )
Pro forma $.21 ($2.36 ) ($2.07 )
The pro-forma compensation cost using the fair value-based method under
SFAS No. 123 includes valuations related to stock options granted since
January 1, 1995 using the Black-Scholes Option Pricing Model. The proforma
stock based compensation cost for 2002 has been adjusted. The weighted
average fair value of options granted using Black-Scholes Option Pricing
Model during 2003, 2002, and 2001 has been estimated using the following
assumptions:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
---------------- ---------------------------------
Risk-free interest rate 3.18% 4.06% 5.91%
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 66% 49% 70%
Expected dividend yield - - -
Weighted-average per share
value granted $2.29 $2.18 $4.66
F-13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
Advertising costs are expensed as incurred. Total advertising expense was
$595,000, $576,000, and $722,000 for the years ended December 31, 2003,
2002 and 2001, respectively.
Use of Estimates and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses and disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
The Company has risk participation arrangements with respect to workers
compensation and health care insurance. The amounts included in the
Company's costs related to this risk participation are estimated and can
vary based on changes in assumptions, the Company's claims experience or
the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty
relating to the performance of the U.S. economy, competition, demand for
the Company's services, adverse litigation and claims and the hiring,
training and retention of key employees.
New Accounting Standards
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 146 (SFAS 146) - "Accounting for Costs
Associated with Exit or Disposal Activities", which supersedes EITF
No.94-3, "Liability Recognition for Certain Employees Termination Benefits
and Other Costs to Exit and Activity (Including Certain Costs Incurred in a
Restructuring)". SFAS 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred, rather than at the
date of a commitment to an exit or disposal plan as required by EITF No.
94-3. SFAS 146 is effective for restructuring activities initiated after
December 31, 2002. This statement does not require companies to adjust
restructuring reserves recorded before 2003. The Company will apply SFAS
146 to future restructurings, if applicable. Currently, there is no
intention to initiate such action.
Effective December 15, 2002, the Company adopted FIN No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee.
In December 2002, the FASB issued SFAS 148 (SFAS 148), "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS
123 "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS 148 is effective for fiscal
years beginning after December 15, 2002. The expanded annual disclosure
requirements and the transition provisions are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The adoption of SFAS 148 did not
have a material effect on the Company's consolidated financial position,
results of operations, or cash flows.
F-14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards (Continued)
In January 2003, the Financial Accounting Standards Board ("FASB") released
Interpretation No. 46 Consolidation of Variable Interest Entities ("FIN
46") which requires that all primary beneficiaries of Variable Interest
Entities (VIE) consolidate that entity. FIN 46 is effective immediately for
VIE created after January 31, 2003 and to VIE in which an enterprise
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003 to VIE in which an enterprise
holds a variable interest it acquired before February 1, 2003. In December
2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some
of the provisions of the interpretation and to defer the effective date of
implementation for certain entities. Under the guidance of FIN 46R,
entities that do not have interests in structures that are commonly
referred to as special purpose entities are required to apply the
provisions of the interpretation in financials statements for periods
ending after March 14, 2004. The Company does not have interests in special
purpose entities and does not anticipate that the adoption of FIN 46R will
have a material impact on the Company's consolidated financial position,
results of operations, or cash flows.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS 150 established standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS
150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. This statement did not
have a material impact on the Company's consolidated financial position,
results of operations or cash flows.
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 ($967,000 net of income tax benefit of $644,000) for the year ended
December 31, 2002, or $.09 per share and $33,400 ($20,000 net of income tax
benefit of $13,400) for the year ended December 31, 2001, or $0.0 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 operations for each of the two years in the period ended
December 31, 2002. The Company has not discontinued its commercial services
business segment. The financial statements for the comparative periods have
been reclassified for comparative purposes.
F-15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
3. ACQUISITIONS
Prior to January 1, 2001, the Company completed certain acquisitions, which
have been accounted for as purchases and, accordingly, the results of
operations of the acquired companies have been included in the consolidated
results of operations of the Company from the respective acquisition dates.
In connection with certain acquisitions, the Company was obligated to pay
contingent consideration to the selling shareholders upon the acquired
businesses achieving certain earnings targets over periods ranging from 2-3
years. The Deferred Consideration and Earnouts, when paid, were recorded as
additional purchase consideration and added to goodwill on the consolidated
balance sheet. The deferred consideration and earnout payments made for
businesses acquired before 2001 were made in years following the year in
which the acquisitions occurred. Cash used in investing activities in the
Consolidated Statements of Cash Flows reflects the year in which the cash
outlay occurred.
As of December 31, 2003, the Company does not have any future contingent
obligations for earnout consideration.
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
December 31,
----------------------------------
2003 2002
--------------- ----------------
Equipment and furniture $2,154,422 $2,370,922
Computers and systems 6,843,934 6,767,050
Leasehold improvements 566,583 570,372
--------------- ----------------
9,564,939 9,708,344
Less: accumulated depreciation and
amortization 4,435,164 3,818,092
--------------- ----------------
$5,129,775 $5,890,252
=============== ================
F-16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
5. GOODWILL AND OTHER INTANGIBLES
SFAS 142 requires the Company to perform a goodwill impairment test on at
least an annual basis. For purposes of its 2003 and 2002 annual impairment
testing, the Company determined the fair value of its reporting units using
relative market multiples for comparable businesses, as of November 30,
2003 and 2002, respectively. The analysis revealed that goodwill, amounting
to approximately $30.0 million ($24.7 million after taxes) had been
impaired for the year ended December 31 2002 and therefore, would not be
recoverable through future profitable operations. The results of the 2003
impairment testing indicated no further impairment to goodwill. There can
be no assurance that future goodwill impairment tests will not result in
further impairment charges.
For the year ended December 31, 2001, the Company performed an impairment
review in accordance with SFAS No. 121 which resulted in a $35.0 million
($22.8 million after taxes) charge to operations.
The changes in the carrying amount of goodwill for the years ended December
31, 2003 and 2002 are as follows (in thousands):
Information Professional Commercial
Technology Engineering Services Total
-------------- ------------- ------------- -------------
Balance as of December 31, 2001 $56,430 $4,685 $1,384 $62,499
Goodwill acquired during the year 2,686 2,843 5,529
Goodwill impairment losses (29,990 ) (29,990 )
Goodwill written off related to
sale of business unit (1,384 ) (1,384 )
-------------- ------------- ------------- -------------
Balance as of December 31, 2002 29,126 7,528 36,654
Goodwill acquired during the year 1,353 1,353
-------------- ------------- ------------- -------------
Balance as of December 31, 2003 $30,479 $7,528 $ $38,007
============== ============= ============= =============
The following table reflects the components of intangible assets, excluding
Goodwill (in thousands):
December 31, 2003 December 31, 2002
-------------------------------- ---------------------------------
Gross Accumulated Gross Accumulated
Carrying Carrying
Amount Amortization Amount Amortization
Amortized intangible assets
Non-compete agreement $311 $242 $311 $211
==== ==== ==== ====
Estimated amortization expense on intangible assets for each of the next
five years is approximately $31,000.
F-17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
5. GOODWILL AND OTHER INTANGIBLES (CONTINUED)
Reported net income (loss), exclusive of goodwill amortization that is
related to goodwill that is no longer amortized, would have been (in
thousands):
Year Ended December 31,
----------------------------------------------
2003 2002 2001
------------ ------------ -------------
Reported net income (loss) $2,779 ($24,136 ) ($18,756 )
Add back: goodwill amortization,
net of tax 5,385
------------ ------------ -------------
Adjusted net income (loss) $2,779 ($24,136 ) ($13,371 )
============ ============ =============
Basic earnings (loss) per common share:
Reported net income (loss) $.26 ($2.28 ) ($1.78 )
Goodwill amortization .51
------------ ------------ -------------
Adjusted net income (loss) $.26 ($2.28 ) ($1.27 )
============ ============ =============
Diluted earnings (loss) per common share:
Reported net income (loss) $.26 ($2.28 ) ($1.78 )
Goodwill amortization .51
------------ ------------ -------------
Adjusted net income (loss) $.26 ($2.28 ) ($1.27 )
============ ============ =============
6. ACCOUNTS PAYABLE
Accounts payable and accrued expenses consist of the following at December
31, 2003 and 2002.
2003 2002
--------------- ---------------
Accounts payable - trade $7,216,885 $5,056,539
Due to sellers 1,072,190
Reserve for litigation 8,357,151 8,600,000
--------------- ---------------
Total $15,574,036 $14,728,729
=============== ===============
7. LINE OF CREDIT
On May 31, 2002, the Company and its subsidiaries entered into an amended
and restated loan agreement, which was further amended on October 1, 2003,
with Citizens Bank of Pennsylvania, administrative agent for a syndicate of
banks, which provides for a $25.0 million Revolving Credit Facility (the
"Revolving Credit 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 at
each incremental borrowing. These alternatives are: (i) LIBOR (London
Interbank Offered Rate), plus applicable margin, or (ii) the agent bank's
prime rate.
F-18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
7. LINE OF CREDIT (CONTINUED)
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 for the year ended
December 31, 2003 and 2002 were 3.67% and 4.06%, respectively. The amounts
outstanding under the Revolving Credit Facility at December 31, 2003 and
2002 were $7.3 million and $7.4 million, respectively. At December 31,
2003, the Company had availability, after considering amounts outstanding
under the Revolving Credit Facility, of $17.7 million.
8. SHAREHOLDERS' EQUITY
Common Shares Reserved
Shares of unissued common stock were reserved for the following purposes:
December 31,
------------------------------
2003 2002
------------- --------------
Exercise of options outstanding 1,214,916 2,474,214
Future grants of options 1,074,287 713,031
------------- --------------
Total 2,289,203 3,187,245
============= ==============
Incentive Stock Option Plans
During 2003, the Company completed an offer to exchange all of the
outstanding stock options held by the employees and directors with a strike
price of $7.00 or greater for shares of restricted stock and cash. See Note
9.
1992 Incentive Stock Option Plan (the 1992 Plan)
The 1992 Plan, approved by the Company's stockholders in April 1992, and
amended in April 1998, provides for the issuance of up to 500,000 shares of
common stock per individual to officers, directors and key employees of the
Company and its subsidiaries, through February 13, 2002, at which time the
1992 Plan expired. The options issued are intended to be incentive stock
options pursuant to Section 422A of the Internal Revenue Code. The option
terms cannot exceed ten years and the exercise price cannot be less than
100% of the fair market value of the shares at the time of grant. The
Compensation Committee of the Board of Directors determines the vesting
period at the time of grant for each of these options. As of December 31,
2003, options to purchase 103,155 shares of common stock were outstanding.
1994 Non-employee Directors Stock Option Plan (the 1994 Plan)
The 1994 Plan, approved by the Company's stockholders in May 1994, and
amended in April 1998, provides for issuance of up to 110,000 shares of
common stock to non-employee directors of the Company through February 19,
2004. Options are granted at fair market value at the date of grant, and
the exercise of options is contingent upon service as a director for a
period of one year. Options granted terminate when an optionee ceases to be
a Director of the Company. At December 31, 2003, options to purchase 70,000
shares of common stock were outstanding.
F-19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
8. SHAREHOLDERS' EQUITY (CONTINUED)
Incentive Stock Option Plans (Continued)
1996 Executive Stock Option Plan (the 1996 Plan)
The 1996 Plan, approved by the Company's stockholders in August 1996 and
amended in April 1999, provides for issuance of up to 1,250,000 shares of
common stock to officers and key employees of the Company and its
subsidiaries through January 1, 2006. Options are generally granted at fair
market value at the date of grant. The Compensation Committee of the Board
of Directors determines the vesting period at the time of grant. At
December 31, 2003, options to purchase 1,033,980 shares of common stock are
available for future grants, and options to purchase 155,845 shares of
common stock were outstanding.
2000 Employee Stock Incentive Plan (the 2000 Plan)
The 2000 Plan, approved by the Company's stockholders in April 2001,
provides for issuance of up to 1,500,000 shares of the Company's common
stock to officers and key employees of the Company and its subsidiaries or
to consultants and advisors utilized by the Company. The Compensation
Committee of the Board of Directors may award incentive stock options or
non-qualified stock options, as well as stock appreciation rights, and
determines the vesting period at the time of grant. At December 31, 2003,
options to purchase 307 shares of common stock are available for future
grants, and options to purchase 885,916 shares of common stock were
outstanding.
Transactions related to all stock options are as follows:
Year Weighted- Year Weighted- Year Weighted-
Ended Average Ended Average Ended Average
December 31, Exercise December 31, Exercise December 31, Exercise
2003 Price 2002 Price 2001 Price
--------------- ------------- --------------- ------------ --------------- -------------
Outstanding options
At beginning of year 2,474,214 $7.15 2,415,780 $7.53 2,039,539 $8.85
Granted 220,000 3.91 325,500 4.57 593,999 3.08
Cancellations (1,467,798 ) 9.51 (266,161 ) 6.82 (217,758 ) 7.59
Exercised (11,500 ) 6.93 (905 ) 3.06
--------------- --------------- ---------------
Outstanding options 1,214,916 $3.85 2,474,214 $7.15
At end of year 2,415,780 $7.53
=============== =============== ===============
Exercisable options
At end of year 432,500 1,663,715 1,580,565
=============== =============== ===============
Option grant price $3.00 $3.00
Per share $3.00
to $11.93 to $15.31 to $15.31
The following table summarizes information about stock options outstanding
at December 31, 2003:
--------------- -----------------------------------------------------------------------------------
Weighted-Average
Range of Number of Remaining Weighted-Average
Exercise Outstanding Options Contractual Life Exercise Price
Prices
--------------- --------------------------------------------------------- -------------------------
$ 3.00 - $ 3.95 786,216 7.9 years $ 3.34
$ 4.70 - $ 5.15 428,400 7.3 years $ 4.78
$11.93 - $11.93 300 6.3 years $11.93
F-20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
8. SHAREHOLDERS' EQUITY (CONTINUED)
Employee Stock Purchase Plan
The Company implemented an Employee Stock Purchase Plan (the "Purchase
Plan") with shareholder approval, effective January 1, 2002. Under the
Purchase Plan, employees meeting certain specific employment qualifications
are eligible to participate and can purchase shares of Common Stock
semi-annually through payroll deductions at the lower of 85% of the fair
market value of the stock at the commencement or end of the offering
period. The purchase plan permits eligible employees to purchase common
stock through payroll deductions for up to 10% of qualified compensation.
During the year ended December 31, 2003, there were 39,926 shares issued
under the Purchase Plan for net proceeds of $131,415. As of December 31,
2003, there were 335,006 shares available for issuance under the Purchase
Plan.
9. STOCK OPTION TENDER OFFER
In order to enhance long-term value for the shareholders of the Company,
reduce the number of options outstanding and improve the Company's ability
to retain and provide incentives to employees and directors, on September
30, 2003, the Company made a tender offer to exchange stock options with a
strike price of $7.00 or greater for shares of restricted stock and cash.
Upon expiration of the tender offer on November 14, 2003, option holders
participating in the tender offer received 607,777 shares of restricted
stock having an aggregate value of $3.8 million ($6.30 per share) as well
as cash consideration of $2.6 million, which was equal to 67% of the value
of the restricted common stock. Participants surrendered 1,327,973 stock
options, which represented 100% of all options eligible to be surrendered.
The Company recorded a charge of $6.7 million ($4.0 million after-tax) to
compensation expense in the fourth quarter of 2003 due to the tender offer.
Provided the Company has U.S. Federal taxable income in future periods, the
exchange offer will be approximately cash flow neutral to the Company as
the combined tax benefits (both the value of the restricted common stock
issued and the cash consideration paid are tax deductible expenses) will be
approximately equal the actual cash consideration paid to employees and
directors.
All shares of restricted stock issued pursuant to the tender offer were
fully vested on the stock grant date, but are subject to transfer
restrictions. The transfer restrictions will lapse (i) on the first
anniversary of the stock grant date, November 14, 2004, or (ii) earlier if
the Company experiences a change in control, subject to any subsequent
applicable restrictions and policies regarding restrictions on the shares
of common stock.
10. RETIREMENT PLANS
Profit Sharing Plan
The Company maintains a 401(k) profit sharing plan for the benefit of
eligible employees. The 401(k) plan includes a cash or deferred arrangement
pursuant to Section 401(k) of the Internal Revenue Code sponsored by the
Company to provide eligible employees an opportunity to defer compensation
and have such deferred amounts contributed to the 401(k) plan on a pre-tax
basis, subject to certain limitations. The Company may, at the discretion
of the Board of Directors, make contributions of cash to match deferrals of
compensation by participants. Contributions charged to operations by the
Company for years ended December 31, 2003, 2002 and 2001 were $0, $0 and
$457,000, respectively.
F-21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
10. RETIREMENT PLANS (Continued)
Nonqualified Defined Compensation Plan
The Company implemented with shareholder approval a nonqualified deferred
compensation plan, effective January 1, 2002 for officers and certain other
management employees. The plan allows for compensation deferrals for its
participants and a discretionary company contribution, subject to approval
of the Board of Directors. As of December 31, 2003, the fair value of the
assets held in trust under the deferred compensation plan was $681.847.
11. COMMITMENTS
Termination Benefits Agreement
The Company is party to a Termination Benefits Agreement with its Chief
Executive Officer, Leon Kopyt ("Mr. Kopyt") amended and restated as of
March 18, 1997 (the "Benefits Agreement"). Pursuant to the Benefits
Agreement, following a Change in Control (as defined therein), the
remaining term of Mr. Kopyt's employment is extended for five years (the
"Extended Term"). If Mr. Kopyt's employment is terminated thereafter by the
Company other than for cause, or by Mr. Kopyt for good reason (including,
among other things, a material change in Mr. Kopyt's salary, title,
reporting responsibilities or a change in office location which requires
Mr. Kopyt to relocate), then the following provisions take effect: the
Company is obligated to pay Mr. Kopyt a lump sum equal to his salary and
bonus for the remainder of the Extended Term; and the Company shall be
obligated to pay to Mr. Kopyt the amount of any excise tax associated with
the benefits provided to Mr. Kopyt under the Benefits Agreement. If such a
termination had taken place as of December 31, 2003, Mr. Kopyt would have
been entitled to cash payments of approximately $3.2 million (representing
salary and excise tax payments).
Severance Agreement
The Company is party to a Severance Agreement with Mr. Kopyt, dated June
10, 2002, (the "Severance Agreement"). 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 December 31,
2003, 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 $1.5 million, inclusive of employee benefits.
F-22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
11. COMMITMENTS (CONTINUED)
Operating Leases
The Company leases office facilities and various equipment under
non-cancelable leases expiring at various dates through June 2012. Certain
leases are subject to escalation clauses based upon changes in various
factors. The minimum future annual operating lease commitments for leases
with non-cancelable terms in excess of one year, exclusive of escalation,
are as follows:
Year ending December 31, Amount
----------------------------- -----------------
2004 $2,421,000
2005 1,558,000
2006 1,318,000
2007 1,141,000
2008 815,000
Thereafter 2,828,000
-----------------
Total $10,081,000
=================
Rent expense for the years ended December 31, 2003, 2002 and 2001 was
$2,666,000, $3,245,000 and $2,633,000, respectively.
The Company subleases space at various office locations under
non-cancelable lease agreements. During fiscal 2003, 2002 and 2001 revenues
of approximately $279,000, $105,000 and $0, respectively, were recognized
under these leasing arrangements.
12. RELATED PARTY TRANSACTIONS
A director of the Company is a shareholder in a law firm that rendered
various legal services to the Company. Fees paid to the law firm have not
been significant.
F-23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
13. INCOME TAXES
The components of income tax expense (credit) are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
----------------- ----------------- ----------------
Current
Federal ($1,913,315)
State and local 323,650
Foreign $1,050,056 $974,073 2,187,502
----------------- ----------------- ----------------
1,050,056 974,073 597,837
----------------- ----------------- ----------------
Deferred
Federal 93,791 (6,246,119) (6,456,915)
State and local 16,551 (362,380)
Foreign
----------------- ----------------- ----------------
110,342 (6,246,119) (6,819,295)
----------------- ----------------- ----------------
Total $1,160,398 ($5,272,046) ($6,221,458)
================= ================= ================
The income tax provisions reconciled to the tax computed at the statutory
Federal rate was:
2003 2002 2001
---------------- ----------------- ---------------
Tax at statutory rate (credit) 34.0% (34.0)% (34.0)%
State income taxes, net of Federal
income tax benefit (1.7)
Foreign income tax effect .5 3.3 8.7
Deductible amortization (5.9)
Non-deductible unusual charges 15.7 4.0
Other, net .9 (2.9) (1.9)
---------------- ----------------- ---------------
Total income tax expense 29.5% (17.9)% (24.9)%
================ ================= ===============
At December 31, 2003 and 2002, deferred tax assets and liabilities consist
of the following:
Deferred tax assets: 2003 2002
---------------- ----------------
Net operating loss carryforward $936,611 $1,482,308
Allowance for doubtful accounts 701,330 691,600
Reserves and accruals 211,762 195,153
Litigation reserve 3,450,000 3,400,000
---------------- ----------------
5,299,703 5,769,061
Deferred tax liability:
Goodwill (368,746)
---------------- -----------------
5,299,703 5,400,315
Less: valuation allowance (701,330) (691,600)
---------------- -----------------
$4,598,373 $4,708,715
================ =================
F-24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
13. INCOME TAXES (CONTINUED)
At December 31, 2003, the Company had a net operating loss carryforward
("NOL") for U.S. Federal Income Tax purposes of approximately $10.9
million. The Company can utilize the NOL to offset future U.S. consolidated
federal taxable income. The NOL amounts, if unused, would expire in the
year 2022 ($3.7 million) and in the year 2023 ($7.2 million).
14. INTEREST EXPENSE, NET OF INTEREST INCOME
Interest expense, net of interest income consisted of the following:
Year Ended December 31,
--------------------------------------------
2003 2002 2001
------------- -------------- --------------
Interest expense ($382,568) ($770,404) ($2,586,473)
Interest income 68,077 598,504 297,377
------------- -------------- --------------
($314,491) ($171,900) ($2,289,096)
============= ============== ==============
15. SEGMENT INFORMATION
The Company 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 accounting policies of each segment are the
same as those described in the summary of significant accounting policies
(see Note 1).
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):
F-25
<page>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
15. SEGMENT INFORMATION (CONTINUED)
Information Professional Commercial
Fiscal 2003 Technology Engineering Services Corporate Total
--------------- ------------- -------------- ------------ ------------ --
Revenue $100,872 $86,696 $19,037 $206,605
Operating expenses (1) 93,116 82,838 18,614 194,568
--------------- ------------- -------------- ------------ ------------
EBITDA (1) (2) 7,756 3,858 423 12,037
Compensation expense
for stock option tender offer 500 486 89 5,617 6,692
Depreciation 595 526 71 1,192
Amortization of intangibles 13 15 3 31
--------------- ------------- -------------- ------------ ------------
Operating income 6,648 2,831 260 (5,617 ) 4,122
Interest expense, net of
interest income 153 132 29 314
Gain on foreign currency
transactions (132 ) (132 )
Income taxes (benefit) 1,914 834 68 (1,615 ) 1,160
--------------- ------------- -------------- ------------ ------------
Net income $4,581 $1,997 $163 ($3,962 ) $2,779
=============== ============= ============== ============ ============
Total assets $49,866 $21,330 $5,749 $22,759 $99,704
Capital expenditures $110 $156 $25 $141 $432
F-26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
15. SEGMENT INFORMATION (CONTINUED)
Information Professional Commercial
Fiscal 2002 Technology Engineering Services Corporate Total
------------- ------------- -------------- ------------ ------------ --
Revenue $111,270 $55,979 $19,402 $186,651
Operating expenses (1) 103,190 51,275 18,841 173,306
------------- ------------- -------------- ------------ ------------ --
EBITDA (1) (2) 8,080 4,704 561 13,345
Unusual charges 29,990 9,718 39,708
Depreciation 793 393 72 1,258
Amortization of
intangibles 17 4 21
------------- ------------- -------------- ------------ ------------
Operating income (loss)
(1) (3) (22,720 ) 4,307 489 (9,718 ) (27,642 )
Interest expense, net
of interest income 102 52 18 172
Gain on foreign
currency transactions (17 ) (17 )
Loss on discontinued
operations 967 967
Income taxes (benefit) (2,848 ) 1,708 (184 ) (3,304 ) (4,628 )
------------- ------------- -------------- ------------ ------------
Net income ($19,974 ) $2,564 ($312 ) ($6,414 ) ($24,136 )
============= ============= ============== ============ ============
Total assets $46,375 $19,929 $4,913 $17,223 $88,440
Capital expenditures $101 $162 $364 $627
F-27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
15. SEGMENT INFORMATION (CONTINUED)
Information Professional Commercial
Fiscal 2001 Technology Engineering Services Corporate Total
Revenue $165,568 $47,119 $22,052 $234,739
Operating expenses (1) 151,955 41,648 21,401 215,004
-------------- ------------- ------------- ------------ -----------
EBITDA (1) (2) 13,613 5,471 651 19,735
Impairment of
goodwill 34,993 34,993
Depreciation 794 276 55 1,125
Amortization of intangibles
5,587 672 34 6,293
-------------- ------------- ------------- ------------ -----------
Operating income (loss) (1) (3) (27,761 ) 4,523 562 (22,676 )
Interest expense, net of
interest income 1,615 459 215 2,289
Gain on foreign currency
transactions (21 ) (21 )
Loss from discontinued
operations 20 20
Income taxes (benefit) (7,973 ) 1,634 131 (6,208 )
-------------- ------------- ------------- ------------ -----------
Net income (loss) ($21,403 ) $2,451 $196 ($18,756 )
Total assets $85,306 $15,999 $5,489 $24,362 $131,156
Capital expenditures $426 $173 $1,201 $1,800
<FN>
(1) Operating expenses excludes depreciation and amortization.
(2) EBITDA means earnings before interest income, interest expense,
depreciation, amortization, income taxes, other non-operating income
and expense, and compensation expense for stock tender offer. We
believe that EBITDA, as presented, represents a useful measure of
assessing the performance of our operating activities, as it reflects
our earnings trends without the impact of certain non-cash and unusual
charges or income. EBITDA is also used by our creditors in assessing
debt covenant compliance. We understand that, although security
analysts frequently use EBITDA in the evaluation of companies, it is
not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of
calculation. EBITDA is not intended as an alternative to cash flow
provided by operating activities as a measure of liquidity, as an
alternative to net income as an indicator of our operating performance,
nor as an alternative to any other measure of performance in conformity
with generally accepted accounting principles.
(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.
</FN>
F-28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
15. SEGMENT INFORMATION (CONTINUED)
The following reconciles consolidated operating loss to the Company's
pretax loss (in thousands):
Year Ended December 31,
--------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
Consolidated operating income (loss) $4,121 ($27,642) ($22,676)
Interest expense, net of interest income (314) (172) (2,289)
Gain on foreign currency transactions 132 17 21
---------------- ---------------- ----------------
Consolidated pretax loss from
continuing operations $3,939 ($27,797) ($24,944)
================ ================ ================
The Company derives a majority of its revenue from companies headquartered
in the United States. In calendar year 2001, no single customer exceeded 6%
of the Company's revenue. In calendar year 2002, two customers accounted
for 12.2% and 6.6%, respectively, of the Company's revenues. During 2003,
the Company's largest customer accounted for 22% of the Company's revenues.
However, of the $45.1 million in revenues from the Company's largest
customer, $24.1 million represented "Pass-Through" revenues where the
Company acted as a general contractor. If the Company adjusted for
these pass-through revenues, its largest customer would have accounted
for 11.5% of total revenues. Revenues from Canadian operations for the
years ended December 31, 2003, 2002 and 2001 were $55.9 million, $27.8
million and $24.2 million, respectively.
The Company is domiciled in the United States and its segments operate in
the United States and Canada. Revenues and fixed assets by geographic area
for the years ended December 31, 2003, 2002, and 2001 are as follows (in
thousands):
2003 2002 2001
---------------- ---------------- ----------------
Revenues
United States $150,245 $155,586 $199,413
Canada 56,360 31,065 35,326
---------------- ---------------- ----------------
$206,605 $186,651 $234,739
================ ================ ================
Fixed Assets
United States $4,788 $5,403 $6,330
Canada 342 487 519
---------------- ---------------- ----------------
$5,130 $5,890 $6,849
================ ================ ================
F-29
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
16. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended December 31, 2003
Diluted
Gross Net Net Income (Loss)
Sales Profit Income (Loss) Per Share (a)
------------------- ----------------- ------------------- --------------------
1st Quarter $50,650,469 $10,805,060 $1,353,948 $.13
2nd Quarter 55,218,914 11,393,816 1,935,458 .18
3rd Quarter 55,224,390 11,544,524 1,816,652 .17
4th Quarter 45,511,415 10,851,286 (2,326,905 ) (.21)
------------------- ----------------- ------------------- --------------------
Total $206,605,188 $44,594,686 $2,779,153 $.26
=================== ================= =================== ====================
Year Ended December 31, 2002
Diluted
Gross Net Net Income (Loss)
Sales Profit Income (Loss) Per Share (a)
------------------- ----------------- ------------------- --------------------
1st Quarter $47,774,202 $12,461,021 $2,144,587 $.20
2nd Quarter 47,305,894 11,738,910 2,113,487 .20
3rd Quarter 46,227,581 11,866,082 966,274 .09
4th Quarter 45,342,939 10,598,848 (29,360,278 ) (2.77)
------------------- ----------------- ------------------- --------------------
Total $186,650,616 $46,664,861 ($24,135,930 ) ($2.28)
=================== ================= =================== ====================
<FN>
(a) Each quarterly amount is based on separate calculations of weighted
average shares outstanding.
</FN>
17. CONTINGENCIES
The Company is a party to a lawsuit from persons from whom the Company acquired
stock in an acquisition that occurred in the year 1998. The lawsuit arises from
allegations of wrongful termination and/or failure of the Company to pay
deferred consideration under the relevant acquisition agreement. The range of
possible loss for the aforementioned lawsuit, is from $-0- to approximately
$825,000. In the opinion of management and based upon the advice of counsel, the
Company has meritorious defenses to the lawsuit that should serve to defeat or
diminish the Company's potential liability.
In 1998, two shareholders, who were formerly officers and 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. The 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 underlying
acquisition transaction pursuant to which the plaintiffs became shareholders of
the Company. The 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 the plaintiffs sold
their shares during that period and thereafter.
F-30
<page>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
17. CONTINGENCIES (CONTINUED)
The claim relating to the wrongful termination of the employment of one of the
plaintiffs and the claims of both plaintiffs concerning the grant of stock
options were resolved in binding arbitration in early 2003. A trial on the
remaining claims commenced on December 2, 2002 and a verdict was returned on
January 24, 2003. On the claims by both plaintiffs, concerning the alleged
wrongful limiting of the number of shares that they could sell during the
12-month period ended March 11, 1999, a verdict awarding damages of $7.6 million
against the Company was returned. On June 23, 2003, the trial judge denied the
Company's post-trial motions that challenged the jury's verdict and the trial
judge also upheld the jury's verdict. On August 4, 2003, the trial judge entered
a judgment in favor of the plaintiffs for $7.6 million in damages and awarded
plaintiffs $172,000 in post-verdict prejudgment interest. Post-judgment interest
will continue to accrue on the damages portion of the judgment after August 4,
2003 (at the rate of 5% per annum until December 31, 2003 and at the rate of 4%
per annum in 2004). The Company has appealed to the Appellate Division of the
Superior Court of New Jersey from, and obtained a stay pending appeal of, that
judgment. In order to secure the stay, the Company made a cash deposit in lieu
of bond of $8.3 million with the Trust Fund of the Superior Court of New Jersey.
This deposit is recorded as restricted cash on the consolidated balance sheet
and earns interest at a rate that approximates the daily federal funds rate. The
plaintiffs have cross-appealed from the Court's denial of pre-verdict
prejudgment interest on the damages portion of the August 4, 2003 judgment and
from the Court's refusal to grant judgment as a matter of law to one of the
plaintiffs on his claim for severance pay in the amount of $240,000 plus
interest. The briefing phase of the appeal is scheduled to be concluded in April
2004. The timing of a ruling on the appeal cannot be predicted at this time.
In connection with this litigation, the Company accrued $9.7 million of
litigation charges at December 31, 2002, which includes the jury award of $7.6
million, professional fees of $1.1 million and an estimate of $1.0 million for
attorney fees and pre-judgment interest. During fiscal 2003, the Company paid
$1.3 million in fees. As of December 31, 2003, the accrued litigation reserve
was $8.4 million.
In addition, in November, 2002, the Company brought suit in the Superior Court
of New Jersey, Law Division on professional liability claims against the
attorneys who served as its counsel in the acquisition transaction and in its
subsequent dealings with the plaintiffs concerning their various relationships
with the Company resulting from that transaction. In its lawsuit against the
former counsel, the Company is seeking complete indemnification (1) for its
costs and counsel fees incurred in defending itself against the claims of the
plaintiffs; (2) for any sums for which the Company is ultimately determined to
be liable to the plaintiffs; and (3) for its costs and counsel fees incurred in
the prosecution of the legal malpractice action itself. That lawsuit has been
temporarily stayed in the Law Division at the request of the defendants until at
least May 10, 2004 while the appeal of the underlying action goes forward in the
Appellate Division of the Superior Court.
The Company is also subject to other pending legal proceedings and claims that
arise from time to time in the ordinary course of its business, which may or may
not be covered by insurance.
The litigation and other claims previously noted are subject to inherent
uncertainties and management's view of these matters may change in the future.
Were an unfavorable final outcome to occur, there exists the possibility of a
material adverse impact on our financial position and the results of operations
for the period in which the effect becomes reasonably estimable.
F-31
REPORT OF INDEPENDENT CERTFIED PUBLIC ACCOUNTANTS
Board of Directors
RCM Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of RCM
Technologies, Inc. (a Nevada corporation) and Subsidiaries as of December 31,
2003 and 2002 and the related consolidated statements of operations, changes in
shareholders' equity, comprehensive income (loss) and cash flows for each of the
years in the three year period ended December 31, 2003. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
RCM Technologies, Inc. and Subsidiaries as of December 31, 2003 and 2002 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three year period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 5 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002.
We have also audited Schedules I and II of RCM Technologies, Inc. and
Subsidiaries as of December 31, 2003 and 2002 and for each of the years in the
three year period ended December 31, 2003. In our opinion, these schedules
present fairly, in all material respects, the information required to be set
forth therein.
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
February 13, 2004
F-32
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
December 31, 2003 and 2002
ASSETS
2003 2002
--------------- ----------------
Current assets
Prepaid expenses and other assets $29,165 $ 6,509
--------------- ----------------
Other assets
Long-term receivables from affiliates 67,235,411 59,519,789
--------------- ----------------
Total assets $67,264,576 $59,526,298
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
2003 2002
--------------- ----------------
Current liabilities
Accounts payable and accrued expenses $94,480 $ 280,144
--------------- ----------------
Shareholders' equity
Common stock 564,264 531,304
Foreign currency translation adjustment 556,795 (584,084)
Additional paid in capital 97,906,888 93,935,938
Accumulated deficit (31,857,851) (34,637,004)
--------------- ----------------
Total shareholders' equity 67,170,096 59,246,154
--------------- ----------------
Total liabilities and shareholders' equity $67,264,576 $59,526,298
=============== ================
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-33
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
Years Ended December 31, 2003, 2002 and 2001
Year Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------- ---------------- ---------------
Operating expenses
Administrative $464,424 $1,753,587 $ 807,699
--------------- ---------------- ---------------
Operating loss (464,424) (1,753,587) (807,699)
Management fee income 464,424 1,753,587 807,699
--------------- ---------------- ---------------
Income before income (loss) in subsidiaries
Equity in earnings (shares in loss) of
subsidiaries 2,779,153 (24,135,930) (18,755,969)
--------------- ---------------- ---------------
Net income (loss) $2,779,153 ($24,135,930) ($18,755,969)
=============== ================ ===============
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-34
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
Year Ended December 31,
-------------------------------------------------------------
2003 2002 2001
----------------- ---------------- ----------------
Cash flows from operating activities:
Net income (loss) $2,779,153 ($24,135,930) ($18,755,969)
----------------- ---------------- ----------------
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Recognition of equity compensation 3,828,995
(Equity in) share in deficiency in assets
of subsidiaries (2,779,153) 24,135,930 18,755,969
Changes in operating assets and liabilities:
Prepaid expenses and other assets (22,656) (3,539) 59,470
Accounts payable and accrued expenses (185,665) 229,572 (1,828)
----------------- ---------------- ----------------
841,521 24,361,963 18,813,611
----------------- ---------------- ----------------
Net cash provided by operating activities 3,620,674 226,033 57,642
----------------- ---------------- ----------------
Cash flows from investing activities:
Decrease in deposits 5,695
Increase in long-term
receivables from subsidiaries (4,936,468) (318,317) (46,780)
----------------- ---------------- ----------------
Net cash used in investing activities (4,936,468) (318,317) (41,085)
----------------- ---------------- ----------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 131,415 190,556 234,095
Exercise of stock options 43,500 1,529
----------------- ---------------- ----------------
Net cash provided by financing activities 174,915 192,085 234,095
----------------- ---------------- ----------------
Effect of exchange rate changes on cash and
cash equivalents 1,140,879 (99,801) (250,652)
----------------- ---------------- ----------------
Net increase in cash and equivalents
Cash and equivalents at beginning of year
----------------- ---------------- ----------------
Cash and equivalents at end of year $ $ $
================= ================ ================
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-35
SCHEDULE II
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 2003, 2002 and 2001
Column A Column B Column C Column D Column E
- -------------------------------------------- ------------- ------------------------------- ------------- -------------
Additions
-------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deduction Period
- -------------------------------------------- ------------- -------------- ------------- ------------- -------------
Year Ended December 31, 2003
Allowance for doubtful
accounts on trade
receivables $1,549,000 $692,000 $387,000 $1,854,000
Year Ended December 31, 2002
Allowance for doubtful
accounts on trade
receivables $1,795,000 $1,941,000 $2,187,000 $1,549,000
Year Ended December 31, 2001
Allowance for doubtful
accounts on trade
receivables $1,875,000 $989,000 $1,069,000 $1,795,000
F-35
EXHIBIT INDEX
(11) Computation of Earnings (Loss) Per Share.
(21) Subsidiaries of the Registrant.
(23) Consent of Grant Thornton LLP.
31.1 Certifications of Chief Executive Officer Required by Rule 13a-14(b) of
the Securities Exchange Act of 1934, as amended.
31.2 Certifications of Chief Financial Officer Required by Rule 13a-14(b) of
the Securities Exchange Act of 1934, as amended.
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2003.
32.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2003.
EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
--------------- -------------- --------------
Diluted earnings (loss)
Net income (loss) applicable to common
stock $2,779,153 ($24,135,930 ) ($18,755,969 )
=============== ============== ==============
Shares
Weighted average number of common
shares outstanding 10,716,179 10,585,503 10,519,701
Common stock equivalents 180,126
--------------- -------------- --------------
Total 10,896,305 10,585,503 10,519,701
=============== ============== ==============
Diluted earnings (loss) per common share $.26 ($2.28 ) ($1.78 )
=============== ============== ==============
Basic
Net income (loss) applicable to common
stock $2,779,153 ($24,135,930 ) ($18,755,969 )
=============== ============== ==============
Shares
Weighted average number of common
shares outstanding 10,716,179 10,585,503 10,519,701
=============== ============== ==============
Basic earnings (loss) per common share $.26 ($2.28 ) ($1.78 )
=============== ============== ==============
EXHIBIT 21
SUBSIDIARIES
Business Support Group of Michigan, Inc.
Cataract, Inc.
Programming Alternatives of Minnesota, Inc.
RCMT Delaware, Inc.
RCM Technologies (USA), Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
RCM Technologies, Inc.
We have issued our report dated February 13, 2004, accompanying the consolidated
financial statements and schedules included in the Annual Report of RCM
Technologes, Inc. and Subsidiaries on Form 10-K for the year ended December 31,
2003. We hereby consent to the incorporation by reference of said report in the
Registration Statements of RCM Technologies, Inc. on Forms S-8, (File No.
33-61306, effective April 21, 1993, File No. 33-80590, effective June 22, 1994,
File No. 333-52206, effective December 19, 2000 and File No. 333-52480,
effective December 21, 2000.)
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
March 16, 2004
Exhibit 31.1
CERTIFICATION
I, Leon Kopyt, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting; and
Date: March 18, 2004
/s/ Leon Kopyt
---------------
Leon Kopyt
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Stanton Remer, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting; and
Date: March 18, 2004
/s/ Stanton Remer
--------------------------
Stanton Remer
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the
"Company") for the year ended December 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Leon Kopyt, President
& Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to
my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 (15 U.S.C. section 78m(a)); and (2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/ Leon Kopyt
----------------------
Leon Kopyt
Chief Executive Officer
March 18, 2004
A signed original of this written statement required by Section 906 has been
provided to RCM Technologies, Inc. and will be retained by RCM Technologies,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the
"Company") for the year ended December 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Stanton Remer, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 (15 U.S.C. section 78m(a)); and (2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/ Stanton Remer
----------------------
Stanton Remer
Chief Financial Officer
March 18, 2004
A signed original of this written statement required by Section 906 has been
provided to RCM Technologies, Inc. and will be retained by RCM Technologies,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.